IIAP Compilation of Supreme Court-

Decided Cases on Non-Life Insurance

Volume Four

OTHER NON-LIFE INSURANCE CASES

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 CONTENTS

I. Administrative Case
A. Go vs Office of the Ombudsman, 2003

II. Burglary, Robbery and Theft Insurance

A. Fortune Insurance and Surety Co., Inc. vs. Court of Appeals, 1995

III. Fraudulent act

A. Areola vs. Court of Appeals, 1994

IV. Personal Accident Insurance

A. Finman General Assurance Corp. vs. Court of Appeals, 1992
B. Vda. de Gabriel vs. Court of Appeals, 1996

V. Protection & Indemnity Agreement

A. Pandiman Philippines Inc. vs Marine Manning Management Corp., 2005

VI. Receivership
A. Pioneer and Surety Insurance Corp. vs. Fortun, 1987

VII. Security Deposit

A. Republic vs. Del Monte Motors, Inc., 2006

VIII. Surety Bond

A. Pioneer Insurance vs. Court of Appeals and Border Machinery & Heavy Equipment
Inc., 1989
B. Finman General Assurance Corp. vs. Inocencio, 1989
C. Philippine Pryce Assurance Corp. vs. Court of Appeals, 1994
D. Country Bankers Insurance Corp. vs. Lagman, 2011

IX. Suretyship
A. Prudential Guarantee and Assurance, Inc. vs. Equinox Land Corporation, 2007
B. Intra-Strata Assurance Corp. vs. Republic, 2008

X. Tax Exemptions
A. Commissioner of Internal Revenue vs. Philippine American Accident Insurance Co.,
Inc., 2005

XI. Unpaid Insurance Claims

A. Tio Khe Chio vs. Court of Appeals and Eastern Assurance and Surety Corp., 1991

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I. ADMINISTRATIVE CASE

Go vs Office of the Ombudsman, G.R. No. 131399 October 17, 2003

public interest and public policy demand the speedy and inexpensive disposition of
administrative cases.

----------

SECOND DIVISION

G.R. No. 131399 October 17, 2003

ANGELITA AMPARO GO, petitioner,

vs.
OFFICE OF THE OMBUDSMAN, INSURANCE COMMISSIONER EDUARDO T. MALINIS and
NORBERTO F. CASTRO, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Angelita Amparo Go
seeks the reversal of the Resolution of the Office of the Ombudsman in OMB-0-96-2225 dismissing her
charges against Insurance Commissioner Eduardo T. Malinis and Hearing Officer Norberto F. Castro for
Violation of Section 3 [e] of Republic Act No. 3019, otherwise known as Anti-Graft and Corrupt Practices
Act, which provides:

Sec. 3. Corrupt practices of public officers. -- In addition to acts omissions of public

officers already penalized by existing law, the following shall constitute corrupt practices
of any public officer and are hereby declared to be unlawful:

...

(e) Causing any undue injury to any party, including the Government, or giving any
private party any unwarranted benefits, advantage or preference in the discharge of his
official, administrative or judicial functions through manifest partiality, evident bad faith or
gross inexcusable negligence. This provision shall apply to officers and employees of
offices or government corporations charged with the grant of licenses or permits or other
concessions.

The facts of the case are as follows:

Petitioner is the Treasurer and Vice-President of Wear Me Garment Manufacturing Inc. whose business
and factory are located in Nadurata St., Grace Park, Caloocan City. Due to a fire on July 12, 1993 that
gutted down Wear Me Garments factory as well as its machineries and stocks, petitioner filed separate
insurance claims against each of the following 14 insurance companies:

(1) Prudential Guarantee & Assurance Inc. P 5,000,000.00

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 (2) Oriental Assutance Corporation P 3,500,000.00

(3) Cibeles Insurance Corporation P 1,000,000.00

(4) Pioneer Asia Insurance Corporation P 1,500,000.00

(5) Western Guaranty Corp. P 2,500,000.00

(6) Liberty Insurance Corporation P 4,000,000.00

(7) Filipino Merchants Insurance Co. P 1,000,000.00

(8) Reliance Surety & Insurance Co., Inc. P 500,000.00

(9) Central Surety & Insurance Co. P 2,000,000.00

(10) Phil. British Assurance Corporation P 1,500,000.00

(11) Philippine First Insurance Co., Inc. P 1,500,000.00

(12) Blue Cross Insurance Co., Inc. P 2,500,000.00

(13) Commonwealth Insurance Co. P 2,000,000.00

(14) Imperial Insurance Co. Inc. P 1,278,000.00

which total P29,778,000.00.

Feeling that the resolutions of her claims have been unduly delayed, petitioner sought the assistance of
the Insurance Commission (Commission for brevity) through her letter dated January 18, 1994. 1 Acting on
said letter, the Public Assistance & Information Division of the Commission held a conference on
February 15, 1994 wherein petitioner and the insurance companies respective representatives met. The
insurers manifested their official stance to deny the claims of petitioner.2 As a result, the conference was
3
terminated without prejudice to petitioners option to pursue other legal remedies.

Petitioner then sought the intercession of several members and committees of the Legislature, such as,
then Senate President Edgardo Angara,4 Senator Heherson Alvarez and the Senate Blue Ribbon
Committee5 and the House Committee on Banks and Financial Intermediaries,6 accusing the Commission
of acting in conspiracy with the insurance companies in denying and delaying her claims. 7 The legislators
and the committees sent communications to the Commission regarding petitioners claims. 8 Acting on the
matter, the Commission conducted several meetings with petitioner and the insurance companies in order
to settle the claims. The Commission apprised the legislators and their committees of the actions taken by
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the Commission and vehemently denied petitioners accusations.

On June 20, 1994, petitioner filed with the Commission a complaint for Revocation and/or Suspension of
Licenses against the fourteen insurance companies, docketed as Adm. Case No. RD-156, based on
alleged violation by the insurance companies and their respective adjusters of Section 241 (b), (c), (d)
and (e) of the Insurance Code, as amended, to wit:

SEC. 241. (1) 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, nor shall any such company engage in unfair claim settlement practices. Any of

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 the following acts by an insurance company, if committed without just cause and
performed with such frequency as to indicate a general business practice, shall constitute
unfair claim settlement practices:

...

(b) Failing to acknowledge with reasonable promptness pertinent communications with

respect to claims arising under its policies;

(c) Failing to adopt and implement reasonable standards for the the prompt investigation
of claims arising under its policies;

(d) Not attempting in good faith to effectuate prompt, fair and equitable settlement of
claims submitted in which liability has become reasonably clear; or

(e) Compelling policyholders to institute suits to recover amounts due under its policies
by offering without justifiable reason substantially less than the amount ultimately
recovered in suits brought by them.

mandating prompt investigation and settlement of claims.10

Consequently, the Commission informed the concerned legislative bodies that they could not mediate any
longer petitioners claims against the insurers because to do so will conflict with its position to maintain
strict impartiality in the adjudication of Adm. Case No. RD-156.11

Preliminary hearings were conducted in Adm. Case No. RD-156.12 On November 24, 1994, the complaint
was amended including therein several adjusters as party-defendants.13 Petitioner also filed a Joint
Affidavit, together with her husband,14 and a Motion to Admit Amended Complaint and Affidavit in Lieu of
15
Direct Testimony.

On February 27, 1995, while Adm. Case No. RD-156 is pending before the Commission, petitioner filed
with the Regional Trial Court of Quezon City (Branch 222) a civil case for Specific Performance with
Damages, docketed as Civil Case No. Q-95-23135, against the same defendants in Adm. Case No. RD-
156.16 The complaint prayed that defendants be ordered to perform their respective obligations as
insurers under the insurance policies and to pay damages and attorneys fees.17

On March 28, 1995, the pre-trial in Adm. Case No. RD-156 was terminated and consolidated hearings on
the case ensued.18 In its Order dated May 17, 1995, the Commission admitted petitioners Amended
Complaint and Joint Affidavit.19 Consolidated/joint hearings on the case then proceeded.20

On motion to dismiss by two of the insurers, the Commission ordered the suspension of Adm. Case No.
RD-156 until final determination of Civil Case No. Q-95-23135.21 The Commission was of the opinion that
the administrative case for revocation/suspension of license of respondents and the civil case for specific
performance with the Regional Trial Court involve the same set of parties, facts and circumstances; and
that the determination by the Commission of the validity of the claims might conflict with that of the court,
22
or vice-versa.

Aggrieved, petitioner filed with the Office of the Ombudsman a Complaint-Affidavit against Commissioner
Malinis and Hearing Officer Castro of the Regulation Division, charging them of Violation of Section 3 [e]
of Rep. Act No. 3019, as herein quoted earlier.

In a gist, petitioner alleges in her Complaint-Affidavit, as follows:

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Some time in March 1994, petitioner went to the office of respondent Commissioner Malinis to discuss her
claims and he informed her that he can settle the claims. However, because respondent Malinis did not
fulfill his promise, she decided to file Adm. Case No. RD-156, which was raffled to respondent Castro.
Petitioner again visited respondent Malinis on May 20, 1994, and the latter told her that he will settle the
claims if she gives him 50% of it. In order for petitioner to accede to respondent Malinis demand, he
ordered Castro to conduct separate hearings on the claims. Castro admitted to petitioner that it was
respondent Malinis who instructed him to conduct separate hearings. Petitioner asked respondent Malinis
to consolidate the hearings but instead, Malinis again propositioned that he will settle her claims if
petitioner gives him 50%. Respondent Malinis then ordered the suspension of Adm. Case No. RD-156 in
his Order dated August 29, 1995, which is patently void since he was not the hearing officer, and the
order violates E.O. No. 26 and Insurance Circular Memorandum 1-93 on the early disposition of
insurance claims.23

In his Counter-Affidavit, respondent Malinis denies petitioners allegations. 24 He contends that the
Commission attended to petitioners claims as early as January 1994 and that despite the fact that it was
beyond the jurisdiction of the Commission and the insurance companies refused to grant the claims, he
25
nevertheless exerted efforts to mediate the dispute.

Respondent Castro also denies petitioners accusations. He maintains that he did not tell petitioner that
the holding of separate hearings was upon the instructions of Commissioner Malinis, as in fact, records
show that joint hearings were held in Adm. Case No. RD-156; and, that the suspension of Adm. Case No.
RD-156 was based on a motion to dismiss filed by the insurance companies, after due hearing on the
motion.26

Graft Investigation Officer Ginez-Jabalde recommended the dismissal of the charges against respondents
per Resolution dated January 13, 1997. However, Ombudsman Desierto ordered further clarificatory
hearings.27 On March 18, 1997, a clarificatory hearing was held wherein respondent Castro explained that
although he scheduled separate hearings, it was because the situation called for it as there were various
insurance companies, adjusters and issues involved in the claims. 28

Thereafter, the Ombudsman approved the recommendation of the Graft Investigation Officer to dismiss
the charges against respondents.29 Upon denial by the Ombudsman of her motion for reconsideration, 30
petitioner filed the present petition for review on certiorari.

Petitioner raises the following issues:

CAN AN ADMINISTRATIVE CASE PENDING BEFORE AN ADMINISTRATIVE TRIBUNAL BE

PURSUED UNABATED AND INDEPENDENTLY DESPITE SUBSEQUENT FILING OF A CIVIL CASE IN
A REGULAR COURT OF JUSTICE WHEREIN IN BOTH CASES, IT (sic) INVOLVE THE SAME
PARTIES AND RELATIVELY INVOLVE THE SAME INCIDENT?

WHETHER THE CONDUCT OF A (sic) SEPARATE HEARINGS FOR EACH RESPONDENTS (sic)
CONSISTING OF FOURTEEN (14) INSURANCE COMPANIES AND SIX (6) ADJUSTMENT
COMPANIES ON THE ONE HAND AND ONE (1) COMPLAINANT ON THE OTHER HAND, RESORTED
BY THE HEARING OFFICER IN AN ADMINISTRATIVE CASE PREDICATED ON THE SAME ISSUE
AND THE SAME SET OF FACTS AND CIRCUMSTANCES, AND THE SUBSEQUENT SUSPENSION
OF THE PROCEEDINGS THEREON VIOLATES SECTION 16, ARTICLE IV OF THE CONSTITUTION
AS WELL AS EXECUTIVE ORDER NO. 26 AND INSURANCE MEMORANDUM CIRCULAR 1-93
31
MANDATING THE SPEEDY DISPOSITION OF ADMINISTRATIVE CASES.

The Court finds the petition devoid of merit. The Ombudsman did not commit any grave abuse of
discretion when it found no probable cause and dismissed the Complaint-Affidavit against respondents.

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The Ombudsman resolved to dismiss the charges against respondents as the latter were able to
satisfactorily explain the reason for the holding of separate hearings, i.e., expediency, and the
Commission is allowed under its rules of procedure to order the suspension of Adm. Case No. RD-156.
The Ombudsman concluded:

The conduct of separate hearings and issuance of the Order were all done in the regular performance of
duties by the respondents Insurance Commissioner and Hearing Officer respetively (sic). Moreover, they
were done within the purview of the rules of procedure governing the functions of the Insurance
Commission.

Finally, complainant failed to substantiate her charge with any concrete evidence, thus we can simply
regard the charge against respondent Eduardo T. Malinis and Norberto F. Castro as if it does not exist at
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all.

Petitioner insists that the filing of Civil Case No. Q-95-23135 before the regular court does not abate or
suspend the proceedings in Adm. Case No. RD-156. Petitioner argues further that the holding of separate
hearings violates her constitutional right to the speedy disposition of her case.

It has been the Courts policy to refrain from interfering with the Ombudsmans exercise of its
investigatory and prosecutory powers, unless there are good and compelling reasons to rule otherwise. 33
We find no cogent reason that justifies the reversal of the dismissal of the charges against respondents.

In her Affidavits, petitioner alleges that respondent Malinis act of demanding 50% of the insurance
claims, instructing respondent Castro to conduct separate hearings, and suspending Adm. Case No. RD-
156, caused her undue injury and gave the insurance companies unwarranted benefits, advantage and
preference.34 Aside from such bare allegations, there is nothing on record proving that respondent Malinis
in fact demanded such 50%, or that the holding of the separate hearings and the suspension of the
proceedings were done in order to coerce petitioner into acceding to Malinis demand.

Petitioner argues that respondent Malinis did not deny her accusations and failed to answer the charges
against him, indicating therefore the truth of her allegations.35 Indeed, the general rule is that failure to
deny allegations in the complaint results in admission thereof. 36 Such rule, however, is not absolute and
admits of exceptions.37 In Florentino Atillo III vs. Court of Appeals, Amancor, Inc. and Michell Lhuillier,38
we held that in spite of the presence of judicial admissions in a partys pleading, the trial court is still given
leeway to consider other evidence presented;39 or, as in the present case, the absence of evidence for
the petitioner to prove her claim.

It is fundamental that upon him who alleges rests the burden of proof; 40 hence, it is incumbent upon
petitioner to prove her allegations with competent evidence.41 She cannot simply rely on respondent
Malinis failure to specifically deny her allegations to prove that there was such an illegal proposition.
Respondents may not be indicted on mere presumptions.

A review of the records shows that petitioner failed to prove her claim such that respondents may not be
indicted for the acts complained of. As aptly found by the Ombudsman, there was no concrete evidence
presented by petitioner to substantiate her charge.42

To establish probable cause for Violation of Section 3[e] of R.A. 3019, the following elements must be
present:

(1) The accused is a public officer or a private person charged in conspiracy with the
former;

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 (2) The said public officer commits the prohibited acts during the performance of his or
her official duties or in relation to his or her public positions;

(3) That he or she causes undue injury to any party, whether the government or a private
party;

(4) Such undue injury is caused by giving unwarranted benefits, advantage or preference
to such parties; and

(5) That the public officer has acted with manifest partiality, evident bad faith or gross
inexcusable negligence.43

The causing of undue injury or the giving of any unwarranted benefits, advantage or preference through
manifest partiality, evident bad faith or gross inexcusable negligence constitutes the very act punished
under the foregoing section.44

Petitioner complains that she found it "difficult and burdensome to prosecute her case against the
insurers not to mention that she had been rendered despondent by the loss of her business due to
conflagration."45 Such difficulty and burden, however, do not, per se, constitute the undue injury
contemplated by law.

Jurisprudence has consistently interpreted the term "undue injury" as synonymous to "actual damage."46
In Llorente, Jr. vs. Sandiganbayan,47 we explained the concept of "undue injury" as an element of the
offense punishable under Section 3 [e] of Rep. Act No. 3019, to wit:

Undue has been defined as "more than necessary, not proper, [or] illegal;" and injury
as "any wrong or damage done to another, either in his person, rights, reputation or
property[;] [that is, the] invasion of any legally protected interest of another." Actual
damage, in the context of these definitions, is akin to that in civil law.

Petitioner may have been fraught with attending and litigating her claims against each of the fourteen
insurers as well as the insurance adjusters, individually, but inconvenience is certainly not constitutive of
undue injury.48

Moreover, petitioner failed to show that the conduct of separate hearings was done by respondents
through manifest partiality, evident bad faith or gross inexcusable negligence.

Records show that as early as January 1994, when petitioner first brought the matter of the delay in her
insurance claims to the Commission, respondent Malinis, upon the request of petitioner, exerted efforts to
mediate between her and the insurance companies in order to amicably settle the claims notwithstanding
the fact that it was beyond the jurisdictional amount cognizable by the Commission under the Insurance
Code, as amended.

Paragraph 1, Section 416 of the Code provides that the Insurance Commissioner shall have the power to
adjudicate claims and complaints involving any loss, damage or liability for which an insurer may be
answerable under any kind of policy or contract of insurance where the amount of any such loss, damage
or liability does not exceed in any single claim one hundred thousand pesos. When the insurance
companies made known their official position to deny the claims, respondent Malinis persisted in holding
meetings between the parties. It was only after petitioner formally filed a complaint for Revocation and/or
Suspension of Licenses with the Commission that settlement discussions were discontinued as it may
compromise the Commissions impartiality.49 These clearly are not indicative of evident bad faith, manifest

8
partiality or gross inexcusable negligence on respondents part. Thus, respondent Malinis cannot be
faulted for attempting to mediate among the parties.

Records also show that the separate hearings on the case were held only during the early part of the
proceedings in Adm. Case No. RD-156, particularly on August 15, 16, 17, 1994, and September 6, 7, 8,
50
9, 12, 13, 14, 16, 19, 20, 21, 22, 23, 1994. During the clarificatory hearing held before the Office of the
Ombudsman, respondent Castro explained that the conduct of separate hearings was necessary
because petitioners claims involved several insurance companies, adjusters and peculiar issues for each
of the companies.51 What petitioner conveniently omitted to add is that consolidated/joint hearings were in
52
fact held on August 25, 29, 1994, April 6, 1995, May 12, 1995, June 5, 1995, and July 3, 1995. This
negates petitioners allegation that respondents were deliberately holding separate hearings to her
prejudice. Notably, it was during the hearing of July 3, 1995 that the motion to dismiss the Amended
Complaint was heard and argued before respondent Castro who eventually decided to order the
53
suspension of the proceedings.

The fact that the Commission suspended the proceedings due to the pendency of Civil Case No. Q-95-
23135 does not constitute an indictable offense under Section 3 [e] of R.A. No. 3019.

In Almendras Mining Corporation vs. Office of the Insurance Commission, 54 the Court expounded on the
two-fold powers of the Insurance Commission under the Insurance Code, as amended, 55 to wit:

. . . the Office of the Insurance Commission is an administrative agency vested with

regulatory power as well as with adjudicatory authority. Among the several regulatory or
non-quasi-judicial duties of the Insurance Commissioner under the Insurance Code is the
authority to issue, or refuse issuance of, a Certificate of Authority to a person or entity
desirous of engaging in insurance business in the Philippines, and to revoke or suspend
such Certificate of Authority upon a finding of the existence of statutory grounds for such
revocation or suspension. The grounds for revocation or suspension of an insurer's
Certificate of Authority are set out in Section 241 and in Section 247 of the Insurance
Code as amended. The general regulatory authority of the Insurance Commissioner is
described in Section 414 of the Insurance Code, as amended, in the following terms:

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 adjudicatory authority of the Insurance Commissioner is generally described in Section 416 of the
Insurance Code, as amended, which reads as follows:

Sec. 416. The Commissioner shall have the power to adjudicate claims and complaints
involving any loss, damage or liability for which an insurer may be answerable under any
kind of policy or contract of insurance, or for which such insurer may be liable under a
contract of suretyship, or for which a reinsurer may be sued under any contract or
reinsurance it may have entered into, or for which a mutual benefit association may be
held liable under the membership certificates it has issued to its members, where the
amount of any such loss, damage or liability, excluding interests, cost and attorney's
fees, being claimed or sued upon any kind of insurance, bond, reinsurance contract, or

9
 membership certificate does not exceed in any single claim one hundred thousand
pesos. (Emphasis supplied)

Under its adjudicatory authority, the Insurance Commission has the original jurisdiction to adjudicate and
settle insurance claims and complaints where the amount being claimed does not exceed in any single
claim one hundred thousand pesos, as provided in Section 416 of the Code. Such original jurisdiction is
concurrent with that of the Metropolitan Trial Courts, the Municipal Trial Courts and the Municipal Circuit
56
Trial Courts.

In addition to such adjudicatory power, the Commissioner has the regulatory authority to revoke or
suspend the certificate or authority of an insurance company upon finding the legal grounds for such
revocation or suspension under Sections 241 and 247 of the Insurance Code. Section 241 is quoted in
the early part of herein Decision. Section 247 provides:

SEC. 247. If the Commissioner is of the opinion upon examination or other evidence that
any domestic or foreign insurance company is in an unsound condition, or that it has
failed to comply with the provisions of law or regulations obligatory upon it, or that its
condition or methods of business is such as to render its proceedings hazardous to the
public or to its policyholders, or that its paid-up capital stock, in the case of a domestic
stock company, or its available cash assets, in the case of domestic mutual company, or
its security deposits, in the case of a foreign company, is impaired or deficient, or that the
margin of solvency required of such company is deficient, the Commissioner is
authorized to suspend or revoke all certificates of authority granted to such insurance
company, its officers and agents, and no new business shall thereafter be done by such
company or for such company by its agent in the Philippines while such suspension,
revocation or disability continues or until its authority to do business is restored by the
Commission. Before restoring such authority, the Commissioner shall required the
company concerned to subject to him a business plan showing the companys estimated
receipts and disbursements, as well as the basis therefore, for the next succeeding three
years. (As amended by P.D. No. 1455)

Petitioner pursued her fire insurance claims through the regular courts when she filed Civil Case No. Q-
95-23135 for Specific Performance with Damages with the RTC-Quezon City (Branch 222), her claims
being beyond the jurisdiction of the Commission. In resolving petitioners claims, the trial court must
therefore determine whether there was unreasonable denial or withholding of the claims by the insurance
companies.

On the other hand, in Adm. Case No. RD-156 pending before the Insurance Commission, the
Commissioner is called upon to determine whether there was unreasonable delay or withholding of the
claims, as petitioners action is one for the Revocation and/or Suspension of Licenses on grounds of
alleged violations of Section 241 (b), (c), (d) and (e) of the Insurance Code, as amended, on prompt
investigation and settlement of claims. The jurisdiction of the Commission in this case is one that calls for
the exercise of its regulatory or non-quasi-judicial duty, i.e., the authority to revoke or suspend an
57
insurers certificate of authority. Aside from the revocation/suspension of license, the Insurance
Commissioner also has the discretion to impose upon the erring insurance companies and its directors,
officers and agents, fines and penalties, as set out in Section 415, viz.:

SEC. 415. In addition to the administrative sanction provided elsewhere in this Code, the
Insurance Commissioner is hereby authorized, at his discretion, to impose upon
insurance companies, their directors and/or officers and/or agents, for any willful failure or
refusal to comply with, or violation of any provision of this Code, or any order, instruction,
regulation or ruling of the Insurance Commissioner, or any commission of irregularities,
and/or conducting business in an unsafe or unsound manner as may be determined by
the Insurance Commissioner, the following:

10
 (a) Fines not in excess of five hundred pesos a day; and

(b) Suspension, or after due hearing, removal of directors and/or officers and/or agents.

The findings of the trial court will not necessarily foreclose the administrative case before the
Commission, or vice versa. True, the parties are the same, and both actions are predicated on the same
set of facts, and will require identical evidence. But the issues to be resolved, the quantum of evidence,
the procedure to be followed and the reliefs to be adjudged by these two bodies are different.

Petitioners causes of action in Civil Case No. Q-95-23135 are predicated on the insurers refusal to pay
her fire insurance claims despite notice, proofs of losses and other supporting documents. Thus,
petitioner prays in her complaint that the insurers be ordered to pay the full-insured value of the losses, as
embodied in their respective policies.58 Petitioner also sought payment of interests and damages in her
59
favor caused by the alleged delay and refusal of the insurers to pay her claims. The principal issue then
that must be resolved by the trial court is whether or not petitioner is entitled to the payment of her
insurance claims and damages. The matter of whether or not there is unreasonable delay or denial of the
claims is merely an incident to be resolved by the trial court, necessary to ascertain petitioners right to
claim damages, as prescribed by Section 244 of the Insurance Code.

On the other hand, the core, if not the sole bone of contention in Adm. Case No. RD-156, is the issue of
whether or not there was unreasonable delay or denial of the claims of petitioner, and if in the affirmative,
whether or not that would justify the suspension or revocation of the insurers licenses.

Moreover, in Civil Case No. Q-95-23135, petitioner must establish her case by a preponderance of
evidence, or simply put, such evidence that is of greater weight, or more convincing than that which is
offered in opposition to it.60 In Adm. Case No. RD-156, the degree of proof required of petitioner to
establish her claim is substantial evidence, which has been defined as that amount of relevant evidence
that a reasonable mind might accept as adequate to justify the conclusion.61

In addition, the procedure to be followed by the trial court is governed by the Rules of Court, 62 while the
Commission has its own set of rules63 and it is not bound by the rigidities of technical rules of procedure. 64
These two bodies conduct independent means of ascertaining the ultimate facts of their respective cases
that will serve as basis for their respective decisions.

If, for example, the trial court finds that there was no unreasonable delay or denial of her claims, it does
not automatically mean that there was in fact no such unreasonable delay or denial that would justify the
revocation or suspension of the licenses of the concerned insurance companies. It only means that
petitioner failed to prove by preponderance of evidence that she is entitled to damages. Such finding
would not restrain the Insurance Commission, in the exercise of its regulatory power, from making its own
finding of unreasonable delay or denial as long as it is supported by substantial evidence.

While the possibility that these two bodies will come up with conflicting resolutions on the same issue is
not far-fetched, the finding or conclusion of one would not necessarily be binding on the other given the
difference in the issues involved, the quantum of evidence required and the procedure to be followed.

Moreover, public interest and public policy demand the speedy and inexpensive disposition of
administrative cases.65

Hence, Adm. Case No. RD-156 may proceed alongside Civil Case No. Q-95-23135.

The suspension of Adm. Case No. RD-156 by respondents, albeit erroneous, is not sufficient indicia of
evident bad faith, manifest partiality or gross inexcusable negligence. Respondents mistaken sense of
prudence and judgment, dictated the suspension of the proceedings. To hold respondents responsible for

11
such error would be nothing short of harassment. For no one called upon to try the facts or interpret the
law in the process of administering justice can be infallible in his judgment. 66

WHEREFORE, the instant petition for review on certiorari is hereby DENIED for lack of merit. However, in
the interest of orderly administration of justice, the Insurance Commission is directed to proceed with
immediate dispatch in conducting the hearings of Adm. Case No. RD-156 to determine whether or not the
licenses of the insurance companies and adjusters may be revoked or suspended as prayed for by
petitioner.

No costs.

SO ORDERED.

Bellosillo, (Chairman), Quisumbing, Callejo, Sr., and Tinga, JJ., concur.

Footnotes
1
Records, p. 46.
2
Id., p. 47.
3
Ibid.
4
Id., p. 50.
5
Id., p. 69.
6
Id., p. 72.
7
Id., pp. 66, 72.
8
Id., pp. 50, 69, 72.
9
Id., pp. 65, 68, 70-71, 73.
10
Annex "B," Records, pp. 9-14.
11
Records, pp. 70-71, 73.
12
Id., pp. 78-83, 93, 98-113.
13
Id., pp. 114-119, Annex "26".
14
Id., pp. 121-129, Annex "27".
15
Id., pp. 130-133, Annex "28".
16
Rollo, pp. 69-79, Annex "F".
17
Id., pp. 77-78.
18
Id., p. 94.
19
Id., pp. 96-97.
20
Id., pp. 84, 87-89, 90-92.
21
Order dated August 29, 1995, Records, pp. 134-139.
22
Id., pp. 138-139.
23
Records, pp. 3-5.
24
Id., p. 44.
25
Ibid.
26
Id., pp. 75-76.
27
Id., p. 235.
28
Id., p. 243.
29
Id., p. 244.
30
Id., p. 258.
31
Rollo, p. 12.
32
Records, p. 244.
33
Presidential Ad Hoc Fact-Finding Committee on Behest Loans vs. Desierto, G.R. No. 135482, August 14,
2001, 415 Phil. 135, 151; General Bank and Trust Co. vs. Ombudsman, G.R. No. 125440, January 31, 2000, 324
SCRA 113, 125.
34
Records, pp. 3-6, Complaint-Affidavit; 143-144, Reply-Affidavit.
35
Id., p. 144.
36
National Power Corporation vs. Court of Appeals, G.R. No. 113103, June 13 1997, 273 SCRA 419, 445.
37
Ibid.
38
G.R. No. 119053, January 23, 1997; 266 SCRA 596, 605.
39
Ibid.
40
People vs. Villar, G.R. No. 127572, January 19, 2000, 322 SCRA 393, 403.
41
Ibid.

12
42
Records, p. 244.
43
Baylon vs. Office of the Ombudsman, G.R. No. 142738, December 14, 2001, 372 SCRA 437, 450; Olairez vs.
Desierto, G.R. No. 142889, September 21, 2001, 365 SCRA 587, 591.
44
Llorente, Jr. vs. Sandiganbayan, G.R. No. 122166, March 11, 1998, 287 SCRA 382, 399.
45
Rollo, p. 24.
46
Arroyo vs. Alcantara, A.M. No. P-01-1518, November 14, 2001, 368 SCRA 567, 573.
47
Llorente case, supra, Note 44.
48
Ibid.
49
Records, p. 70.
50
Id., pp. 151-168; Annexes "A" to "R."
51
Id., p. 243.
52
Id., pp. 78-113, Annexes "1" to "26"; Annex "30," pp. 132-133.
53
Id., p. 138.
54
G.R. No. L-72878, April 15, 1988, 160 SCRA 656, 661-663.
55
In 1978, all insurance laws were consolidated and codified by P.D. No. 1460 into a single code known as the
Insurance Code of 1978. Basically, P.D. No. 1460 reenacted P.D. 612, as amended. P.D. No. 1460 was later
amended by P.D. No. 1814 and B.P. Blg. 874.
56
Batas Pambansa Blg. 129, as amended by Republic Act No. 7691, increased the jurisdictional amount
cognizable by the regular courts of competent jurisdiction. As it now stands, Regional Trial Courts shall exercise
exclusive original jurisdiction in cases in which the demand, exclusive of interest, damages of whatever kind,
attorneys fees litigation expenses, and costs or the value of the property in controversy exceeds One hundred
thousand pesos (P100,000.00) or, in such other cases in Metro Manila, where the demand, exclusive of the
above-mentioned items exceeds Two hundred thousand pesos (P200,000.00). Meanwhile, Metropolitan Trial
Courts, Municipal Trial Courts and Municipal Circuit Trial Courts shall exercise exclusive original jurisdiction over
civil actions and probate proceedings testate and intestate, including the grant of provisional remedies in proper
cases, where the value of the personal property, estate, or amount of the demand does not exceed One hundred
thousand pesos (P100,000.00), or in Metro Manila where such personal property, estate or amount of the
demand does not exceed Two Hundred Thousand Pesos (P200,000.00), exclusive of interest, damages of
whatever kind, attorneys fees, litigation expenses, and costs (Emphasis supplied)
57
Almendras case, supra, Note 54.
58
Rollo, pp. 77-78.
59
Ibid.
60
Rule 133, Section 1, Rules of Court; Mico Metals Corporation vs. Court of Appeals, G.R. No. 117914, February
1, 2002, 375 SCRA 579, 590; Go vs. Court of Appeals, G.R. No. 112550, February 5, 2001, 351 SCRA 145, 152.
61
Rule 133, Section 5, Rules of Court; Tapiador vs. Ombudsman, G.R. No. 129124, March 15, 2002; Perpetual
Help Credit Cooperative, Inc. vs. Faburada, G.R. No. 121948; October 8, 2001, 419 Phil. 147, 155; Villanueva
vs. Court of Appeals, G.R. No. 99357, January 27, 1992, 205 SCRA 537, 545.
62
Rule 1, Sections 2 and 3, Rules of Court.
63
Insurance Memorandum Circular No. 1-93, Rules of Procedure Governing Administrative Cases Before the
Insurance Commission, dated December 3, 1992.
64
Garcia vs. National Labor Relations Commission, G.R. No. L-67825, September 4, 1987, 153 SCRA 639, 653-
654.
65
Executive Order No. 26, Prescribing Procedures and Sanctions to Ensure Speedy Disposition of
Administrative Cases, dated October 7, 1992, and signed by President Fidel V. Ramos.
66
Bacar vs. De Guzman, Jr., A.M. No. RTJ-96-1349, April 18, 1997, 271 SCRA 328, 338.

13
II. BURGLARY, ROBBERY AND THEFT INSURANCE

Fortune Insurance and Surety Co., Inc. vs. Court of Appeals, G.R. No. 115278 May 23, 1995

It has been aptly observed that in burglary, robbery, and theft insurance, the opportunity to
defraud the insurer the moral hazard is so great that insurers have found it necessary to fill
up their policies with countless restrictions, many designed to reduce this hazard. Seldom does
the insurer assume the risk of all losses due to the hazards insured against. Persons frequently
excluded under such provisions are those in the insured's service and employment. The purpose
of the exception is to guard against liability should the theft be committed by one having
unrestricted access to the property. In such cases, the terms specifying the excluded classes are
to be given their meaning as understood in common speech. The terms "service" and
employment are generally associated with the idea of selection, control, and compensation.

----------

FIRST DIVISION

G.R. No. 115278 May 23, 1995

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,

vs.
COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is liable
under the Money, Security, and Payroll Robbery policy it issued to the private respondent or whether
recovery thereunder is precluded under the general exceptions clause thereof. Both the trial court and the
Court of Appeals held that there should be recovery. The petitioner contends otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by private
respondent Producers Bank of the Philippines (hereinafter Producers) against petitioner Fortune
Insurance and Surety Co., Inc. (hereinafter Fortune) of a complaint for recovery of the sum of
P725,000.00 under the policy issued by Fortune. The sum was allegedly lost during a robbery of
Producer's armored vehicle while it was in transit to transfer the money from its Pasay City Branch to its
head office in Makati. The case was docketed as Civil Case No. 1817 and assigned to Branch 146
thereof.

After joinder of issues, the parties asked the trial court to render judgment based on the following
stipulation of facts:

1. The plaintiff was insured by the defendants and an insurance policy was issued, the
duplicate original of which is hereto attached as Exhibit "A";

2. An armored car of the plaintiff, while in the process of transferring cash in the sum of
P725,000.00 under the custody of its teller, Maribeth Alampay, from its Pasay Branch to
its Head Office at 8737 Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was

14
 robbed of the said cash. The robbery took place while the armored car was traveling
along Taft Avenue in Pasay City;

3. The said armored car was driven by Benjamin Magalong Y de Vera, escorted by
Security Guard Saturnino Atiga Y Rosete. Driver Magalong was assigned by PRC
Management Systems with the plaintiff by virtue of an Agreement executed on August 7,
1983, a duplicate original copy of which is hereto attached as Exhibit "B";

4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the
plaintiff by virtue of a contract of Security Service executed on October 25, 1982, a
duplicate original copy of which is hereto attached as Exhibit "C";

5. After an investigation conducted by the Pasay police authorities, the driver Magalong
and guard Atiga were charged, together with Edelmer Bantigue Y Eulalio, Reynaldo
Aquino and John Doe, with violation of P.D. 532 (Anti-Highway Robbery Law) before the
Fiscal of Pasay City. A copy of the complaint is hereto attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging the aforesaid persons with
the said crime before Branch 112 of the Regional Trial Court of Pasay City. A copy of the
said information is hereto attached as Exhibit "E." The case is still being tried as of this
date;

7. Demands were made by the plaintiff upon the defendant to pay the amount of the loss
of P725,000.00, but the latter refused to pay as the loss is excluded from the coverage of
the insurance policy, attached hereto as Exhibit "A," specifically under page 1 thereof,
"General Exceptions" Section (b), which is marked as Exhibit "A-1," and which reads as
follows:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in report of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with
others. . . .

8. The plaintiff opposes the contention of the defendant and contends that Atiga and
Magalong are not its "officer, employee, . . . trustee or authorized representative . . . at
the time of the robbery. 1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion
thereof reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and against defendant,
and

(a) orders defendant to pay plaintiff the net amount of P540,000.00 as

liability under Policy No. 0207 (as mitigated by the P40,000.00 special
clause deduction and by the recovered sum of P145,000.00), with
interest thereon at the legal rate, until fully paid;

15
 (b) orders defendant to pay plaintiff the sum of P30,000.00 as and for
attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

2
SO ORDERED.

The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It
Said:

The Court is satisfied that plaintiff may not be said to have selected and engaged
Magalong and Atiga, their services as armored car driver and as security guard having
been merely offered by PRC Management and by Unicorn Security and which latter firms
assigned them to plaintiff. The wages and salaries of both Magalong and Atiga are
presumably paid by their respective firms, which alone wields the power to dismiss them.
Magalong and Atiga are assigned to plaintiff in fulfillment of agreements to provide driving
services and property protection as such in a context which does not impress the
Court as translating into plaintiff's power to control the conduct of any assigned driver or
security guard, beyond perhaps entitling plaintiff to request are replacement for such
driver guard. The finding is accordingly compelled that neither Magalong nor Atiga were
plaintiff's "employees" in avoidance of defendant's liability under the policy, particularly
the general exceptions therein embodied.

Neither is the Court prepared to accept the proposition that driver Magalong and guard
Atiga were the "authorized representatives" of plaintiff. They were merely an assigned
armored car driver and security guard, respectively, for the June 29, 1987 money transfer
from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly it was teller
Maribeth Alampay who had "custody" of the P725,000.00 cash being transferred along a
specified money route, and hence plaintiff's then designated "messenger" adverted to in
the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No.
32946. In its decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.

The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were neither
employees nor authorized representatives of Producers and ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the insured and

strictly against the insurance company (New Life Enterprises vs. Court of Appeals, 207
SCRA 669; Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA 554). 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 (New Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs. Court of
Appeals, 195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is plain,

ordinary and simple. No other interpretation is necessary. The word "employee" must be
taken to mean in the ordinary sense.

16
 The Labor Code is a special law specifically dealing with/and specifically designed to
protect labor and therefore its definition as to employer-employee relationships insofar as
the application/enforcement of said Code is concerned must necessarily be inapplicable
to an insurance contract which defendant-appellant itself had formulated. Had it intended
to apply the Labor Code in defining what the word "employee" refers to, it must/should
have so stated expressly in the insurance policy.

Said driver and security guard cannot be considered as employees of plaintiff-appellee

bank because it has no power to hire or to dismiss said driver and security guard under
the contracts (Exhs. 8 and C) except only to ask for their replacements from the
contractors. 5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and the
Court of Appeals erred in holding it liable under the insurance policy because the loss falls within the
general exceptions clause considering that driver Magalong and security guard Atiga were Producers'
authorized representatives or employees in the transfer of the money and payroll from its branch office in
Pasay City to its head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from one
branch to another, they effectively and necessarily became its authorized representatives in the care and
custody of the money. Assuming that they could not be considered authorized representatives, they were,
nevertheless, employees of Producers. It asserts that the existence of an employer-employee relationship
"is determined by law and being such, it cannot be the subject of agreement." Thus, if there was in reality
an employer-employee relationship between Producers, on the one hand, and Magalong and Atiga, on
the other, the provisions in the contracts of Producers with PRC Management System for Magalong and
with Unicorn Security Services for Atiga which state that Producers is not their employer and that it is
absolved from any liability as an employer, would not obliterate the relationship.

Fortune points out that an employer-employee relationship depends upon four standards: (1) the manner
of selection and engagement of the putative employee; (2) the mode of payment of wages; (3) the
presence or absence of a power to dismiss; and (4) the presence and absence of a power to control the
putative employee's conduct. Of the four, the right-of-control test has been held to be the decisive factor. 6
It asserts that the power of control over Magalong and Atiga was vested in and exercised by Producers.
Fortune further insists that PRC Management System and Unicorn Security Services are but "labor-only"
contractors under Article 106 of the Labor Code which provides:

Art. 106. Contractor or subcontractor. There is "labor-only" contracting where the

person supplying workers to an employer does not have substantial capital or investment
in the form of tools, equipment, machineries, work premises, among others, and the
workers recruited and placed by such persons are performing activities which are directly
related to the principal business of such employer. In such cases, the person or
intermediary shall be considered merely as an agent of the employer who shall be
responsible to the workers in the same manner and extent as if the latter were directly
employed by him.

Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling in
International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is
equivalent to a finding that there is an employer-employee relationship between the owner of the project
and the employees of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its employees since it had
nothing to do with their selection and engagement, the payment of their wages, their dismissal, and the
control of their conduct. Producers argued that the rule in International Timber Corp. is not applicable to
all cases but only when it becomes necessary to prevent any violation or circumvention of the Labor

17
Code, a social legislation whose provisions may set aside contracts entered into by parties in order to
give protection to the working man.

Producers further asseverates that what should be applied is the rule in American President Lines vs.
8
Clave, to wit:

In determining the existence of employer-employee relationship, the following elements

are generally considered, namely: (1) the selection and engagement of the employee; (2)
the payment of wages; (3) the power of dismissal; and (4) the power to control the
employee's conduct.

Since under Producers' contract with PRC Management Systems it is the latter which assigned Magalong
as the driver of Producers' armored car and was responsible for his faithful discharge of his duties and
responsibilities, and since Producers paid the monthly compensation of P1,400.00 per driver to PRC
Management Systems and not to Magalong, it is clear that Magalong was not Producers' employee. As to
Atiga, Producers relies on the provision of its contract with Unicorn Security Services which provides that
the guards of the latter "are in no sense employees of the CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance
policy which is a form of casualty insurance. Section 174 of the Insurance Code provides:

Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident
or mishap, excluding certain types of loss which by law or custom are considered as
falling exclusively within the scope of insurance such as fire or marine. It includes, but is
not limited to, employer's liability insurance, public liability insurance, motor vehicle
liability insurance, plate glass insurance, burglary and theft insurance, personal accident
and health insurance as written by non-life insurance companies, and other substantially
similar kinds of insurance. (emphases supplied)

Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance or to robbery insurance in particular. These contracts are,
therefore, governed by the general provisions applicable to all types of insurance. Outside of these, the
rights and obligations of the parties must be determined by the terms of their contract, taking into
consideration its purpose and always in accordance with the general principles of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud the
insurer the moral hazard is so great that insurers have found it necessary to fill up their policies with
countless restrictions, many designed to reduce this hazard. Seldom does the insurer assume the risk of
all losses due to the hazards insured against." 10 Persons frequently excluded under such provisions are
11
those in the insured's service and employment. The purpose of the exception is to guard against liability
12
should the theft be committed by one having unrestricted access to the property. In such cases, the
terms specifying the excluded classes are to be given their meaning as understood in common speech. 13
The terms "service" and "employment" are generally associated with the idea of selection, control, and
compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against
the insurer, 15 or it should be construed liberally in favor of the insured and strictly against the insurer. 16
Limitations of liability should be regarded with extreme jealousy and must be construed
17
in such a way, as to preclude the insurer from non-compliance with its obligation. It goes without saying
then that if the terms of the contract are clear and unambiguous, there is no room for construction and
such terms cannot be enlarged or diminished by judicial construction. 18

18
An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It is
settled that the terms of the policy constitute the measure of the insurer's liability. 20 In the absence of
statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit their
liability and to impose whatever conditions they deem best upon their obligations not inconsistent with
public policy.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as
employees or authorized representatives of Producers under paragraph (b) of the general exceptions
clause of the policy which, for easy reference, is again quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with
others. . . . (emphases supplied)

There is marked disagreement between the parties on the correct meaning of the terms "employee" and
"authorized representatives."

It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from
protection and coverage losses arising from dishonest, fraudulent, or criminal acts of persons granted or
having unrestricted access to Producers' money or payroll. When it used then the term "employee," it
must have had in mind any person who qualifies as such as generally and universally understood, or
jurisprudentially established in the light of the four standards in the determination of the employer-
employee relationship, 21 or as statutorily declared even in a limited sense as in the case of Article 106 of
the Labor Code which considers the employees under a "labor-only" contract as employees of the party
employing them and not of the party who supplied them to the employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security Services
are "labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the employer of Magalong.
Notwithstanding such express assumption of PRC Management Systems and Unicorn Security
Services that the drivers and the security guards each shall supply to Producers are not the
latter's employees, it may, in fact, be that it is because the contracts are, indeed, "labor-only"
contracts. Whether they are is, in the light of the criteria provided for in Article 106 of the Labor
Code, a question of fact. Since the parties opted to submit the case for judgment on the basis of
their stipulation of facts which are strictly limited to the insurance policy, the contracts with PRC
Management Systems and Unicorn Security Services, the complaint for violation of P.D. No. 532,
and the information therefor filed by the City Fiscal of Pasay City, there is a paucity of evidence
as to whether the contracts between Producers and PRC Management Systems and Unicorn
Security Services are "labor-only" contracts.

But even granting for the sake of argument that these contracts were not "labor-only" contracts, and PRC
Management Systems and Unicorn Security Services were truly independent contractors, we are satisfied
that Magalong and Atiga were, in respect of the transfer of Producer's money from its Pasay City branch
to its head office in Makati, its "authorized representatives" who served as such with its teller Maribeth
Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to safely transfer the
money to its head office, with Alampay to be responsible for its custody in transit; Magalong to drive the

19
armored vehicle which would carry the money; and Atiga to provide the needed security for the money,
the vehicle, and his two other companions. In short, for these particular tasks, the three acted as agents
of Producers. A "representative" is defined as one who represents or stands in the place of another; one
who represents others or another in a special capacity, as an agent, and is interchangeable with "agent."
23

In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the
insurance policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R.
CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court of Makati in
Civil Case No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No. 1817 is
DISMISSED.

No pronouncement as to costs.

SO ORDERED.

Bellosillo and Kapunan, JJ., concur.

Padilla, J., took no part.

Quiason, J., is on leave.

Footnotes
1 Rollo, 46-47 (emphases supplied).
2 Id., 8.
3 Rollo, 10-11.
4 Annex "A" of Petition; Id., 45-53. Per Austria-Martinez, A., J., with Marigomen, A. and Reyes, R., JJ.,
concurring.
5 Rollo, 51-52.
6 Citing in the Petition, Broadway Motors, Inc. vs. NLRC, 156 SCRA 522 [1987], and in the Memorandum,
Vallum Security Services vs. NLRC, 224 SCRA 781 [1993].
7 169 SCRA 341 [1989].
8 114 SCRA 832 [1982].
9 MARIA CLARA M. CAMPOS, Insurance, 1983 ed., 199.
10 WILLIAM B. VANCE, Handbook on the Law of Insurance, 3rd ed. by Buist M. Andersen [1951], 1014.
11 Bowling vs. Hamblen County Motor Co., 66 S.W. 2d 229, 16 Tenn. App. 52.
12 Barret vs. Commercial Standard Ins. Co., Tex. Civ. App., 145 S.W. 2d 315.
13 Ledvinka vs. Home Ins. Co. of New York, 115 A. 596, 139 Md. 434, 19 A.L.R. 167.
14 Id.; Gulf Finance & Securities Co. vs. National Fire Ins. Co., 7 La. App. 8.
15 CAMPOS, op. cit., 22.
16 Verendia vs. Court of Appeals, 217 SCRA 417 [1993].
17 CAMPOS, op. cit., 13.
18 43 Am Jur 2d Insurance 271 [1982].
19 Stokes vs. Malayan Insurance, 127 SCRA 766 [1984].
20 Paramount Insurance Corp. vs. Japzon, 211 SCRA 879 [1992].
21 See Broadway Motors, Inc. vs. NLRC, supra note 6; Canlubang Security Agency Corp. vs. NLRC, 216 SCRA
280 [1992]; Vallum Security Services vs. NLRC, supra note 6; and Villuga vs. NLRC, 225 SCRA 537 [1993].
22 See International Timber Corp. vs. NLRC, supra note 7; Baguio vs. NLRC, 202 SCRA 465 [1965].
23 Black's Law Dictionary, Fifth ed., 1170.

20
III. FRAUDULENT ACT

Areola vs. Court of Appeals, G.R. No. 95641 September 22, 1994

a contract of insurance creates reciprocal obligations for both insurer and insured. Reciprocal
obligations are those which arise from the same cause and in which each party is both a debtor
and a creditor of the other, such that the obligation of one is dependent upon the obligation of the
other.

----------

THIRD DIVISION

G.R. No. 95641 September 22, 1994

SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants,

vs.
COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents-
appellees.

Gutierrez, Cortes & Gonzales for petitioners.

Bengzon, Bengzon, Baraan & Fernandez Law Offices for private respondent.

DECISION

ROMERO, J.:

On June 29, 1985, seven months after the issuance of petitioner Santos Areola's Personal Accident
Insurance Policy No. PA-20015, respondent insurance company unilaterally cancelled the same since
company records revealed that petitioner-insured failed to pay his premiums.

On August 3, 1985, respondent insurance company offered to reinstate same policy it had previously
cancelled and even proposed to extend its lifetime to December 17, 1985, upon a finding that the
cancellation was erroneous and that the premiums were paid in full by petitioner-insured but were not
remitted by Teofilo M. Malapit, respondent insurance company's branch manager.

These, in brief, are the material facts that gave rise to the action for damages due to breach of contract
instituted by petitioner-insured before
Branch 40 RTC, Dagupan City against respondent insurance company.

There are two issues for resolution in this case:

(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to payment of
damages?

(2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent
insurance company, in an effort to rectify such error, obliterate whatever liability for damages it may have
to bear, thus absolving it therefrom?

From the factual findings of the trial court, it appears that petitioner-insured, Santos Areola, a lawyer from
Dagupan City, bought, through the Baguio City branch of Prudential Guarantee and Assurance, Inc.

21
(hereinafter referred to as Prudential), a personal accident insurance policy covering the one-year period
between noon of November 28, 1984 and noon of November 28, 1985. 1 Under the terms of the
statement of account issued by respondent insurance company, petitioner-insured was supposed to pay
the total amount of P1,609.65 which included the premium of P1,470.00, documentary stamp of P110.25
and 2% premium tax of P29.40. 2 At the lower left-hand corner of the statement of account, the following
is legibly printed:

This Statement of Account must not be considered a receipt. Official Receipt will be
issued to you upon payment of this account.

If payment is made to our representative, demand for a Provisional Receipt and if our
Official Receipts is (sic) not received by you within 7 days please notify us.

If payment is made to our office, demand for an OFFICIAL RECEIPT.

On December 17, 1984, respondent insurance company issued collector's provisional receipt No. 9300 to
petitioner-insured for the amount of P1,609.65 3 On the lower portion of the receipt the following is written
in capital letters:

Note: This collector's provisional receipt will be confirmed by our official receipt. If our
official receipt is not received by you within 7 days, please notify us. 4

On June 29, 1985, respondent insurance company, through its Baguio City manager, Teofilo M. Malapit,
sent petitioner-insured Endorsement
No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of premium effective as
of inception dated." 5 The same endorsement also credited "a return premium of P1,609.65 plus
documentary stamps and premium tax" to the account of the insured.

Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang, agent of respondent
insurance company, and demanded the issuance of an official receipt. Ang told petitioner-insured that the
cancellation of the policy was a mistake but he would personally see to its rectification. However,
petitioner-insured failed to receive any official receipt from Prudential.

Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a letter demanding that
he be insured under the same terms and conditions as those contained in Policy No. PA-BG-20015
commencing upon its receipt of his letter, or that the current commercial rate of increase on the payment
he had made under provisional receipt No. 9300 be returned within five days. 6 Areola also warned that
should his demands be unsatisfied, he would sue for damages.

On July 17, 1985, he received a letter from production manager Malapit informing him that the "partial
payment" of P1,000.00 he had made on the policy had been "exhausted pursuant to the provisions of the
Short Period Rate Scale" printed at the back of the policy. Malapit warned Areola that should be fail to
pay the balance, the company's liability would cease to operate. 7

In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance company, through its
Assistant Vice-President Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985 stating that the
company was verifying whether the payment had in fact been issued therefor. Ampil emphasized that the
official receipt should have been issued seven days from the issuance of the provisional receipt but
because no official receipt had been issued in Areola's name, there was reason to believe that no
payment had been made. Apologizing for the inconvenience, Ampil expressed the company's concern by
agreeing "to hold you cover (sic) under the terms of the referenced policy until such time that this matter
is cleared." 8

22
On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of P1,609.65 covered by
provisional receipt No. 9300 was in fact received by Prudential on December 17, 1984. Hence, Ampil
informed
Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to December 17, 1985 or one
year from the date when payment was received." Apologizing again for the inconvenience caused Areola,
Ampil exhorted him to indicate his conformity to the proposal by signing on the space provided for in the
9
letter.

The letter was personally delivered by Carlito Ang to Areola on

August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had filed a
complaint for breach of contract with damages before the lower court.

In its Answer, respondent insurance company admitted that the cancellation of petitioner-insured's policy
was due to the failure of Malapit to turn over the premiums collected, for which reason no official receipt
was issued to him. However, it argued that, by acknowledging the inconvenience caused on petitioner-
insured and after taking steps to rectify its omission by reinstating the cancelled policy prior to the filing of
the complaint, respondent insurance company had complied with its obligation under the contract. Hence,
it concluded that petitioner-insured no longer has a cause of action against it. It insists that it cannot be
held liable for damages arising from breach of contract, having demonstrated fully well its fulfillment of its
obligation.

The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured, ordering respondent
insurance company to pay the former the following:

a) P1,703.65 as actual damages;

b) P200,000.00 as moral damages; and

c) P50,000.00 as exemplary damages;

2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and

3. To pay the costs.

In its decision, the court below declared that respondent insurance company acted in bad faith in
unilaterally cancelling subject insurance policy, having done so only after seven months from the time that
it had taken force and effect and despite the fact of full payment of premiums and other charges on the
issued insurance policy. Cancellation from the date of the policy's inception, explained the lower court,
meant that the protection sought by petitioner-insured from the risks insured against was never extended
by respondent insurance company. Had the insured met an accident at the time, the insurance company
would certainly have disclaimed any liability because technically, the petitioner could not have been
considered insured. Consequently, the trial court held that there was breach of contract on the part of
respondent insurance company, entitling petitioner-insured to an award of the damages prayed for.

This ruling was challenged on appeal by respondent insurance company, denying bad faith on its part in
unilaterally cancelling subject insurance policy.

After consideration of the appeal, the appellate court issued a reversal of the decision of the trial court,
convinced that the latter had erred in finding respondent insurance company in bad faith for the
cancellation of petitioner-insured's policy. According to the Court of Appeals, respondent insurance
company was not motivated by negligence, malice or bad faith in cancelling subject policy. Rather, the
cancellation of the insurance policy was based on what the existing records showed, i.e., absence of an
official receipt issued to petitioner-insured confirming payment of premiums. Bad faith, said the Court of

23
Appeals, is some motive of self-interest or ill-will; a furtive design of ulterior purpose, proof of which must
be established convincingly. On the contrary, it further observed, the following acts indicate that
respondent insurance company did not act precipitately or willfully to inflict a wrong on petitioner-insured:
(a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid the
premium; (b) the letter of August 3, 1985 confirming that the premium had been paid on December 17,
1984; (c) the reinstatement of the policy with a proposal to extend its effective period to December 17,
1985; and (d) respondent insurance company's apologies for the "inconvenience" caused upon petitioner-
insured. The appellate court added that respondent insurance company even relieved Malapit, its Baguio
City manager, of his job by forcing him to resign.

Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals denied.
Hence, this petition for review on certiorari anchored on these arguments:

Respondent Court of Appeals is guilty of grave abuse of discretion and committed a

serious and reversible error in not holding Respondent Prudential liable for the
cancellation of the insurance contract which was admittedly caused by the fraudulent acts
and bad faith of its own officers.

II

Respondent Court of Appeals committed serious and reversible error and abused its
discretion in ruling that the defenses of good faith and honest mistake can co-exist with
the admitted fraudulent acts and evident bad faith.

III

Respondent Court of Appeals committed a reversible error in not finding that even
without considering the fraudulent acts of its own officer in misappropriating the premium
payment, the act itself in cancelling the insurance policy was done with bad faith and/or
gross negligence and wanton attitude amounting to bad faith, because among others, it
was Mr. Malapit the person who committed the fraud who sent and signed the
notice of cancellation.

IV

Respondent Court of Appeals has decided a question of substance contrary to law and
applicable decision of the Supreme Court when it refused to award damages in favor of
herein Petitioner-Appellants.

It is petitioner-insured's submission that the fraudulent act of Malapit, manager of respondent insurance
company's branch office in Baguio, in misappropriating his premium payments is the proximate cause of
the cancellation of the insurance policy. Petitioner-insured theorized that Malapit's act of signing and even
sending the notice of cancellation himself, notwithstanding his personal knowledge of petitioner-insured's
full payment of premiums, further reinforces the allegation of bad faith. Such fraudulent act committed by
Malapit, argued petitioner-insured, is attributable to respondent insurance company, an artificial corporate
being which can act only through its officers or employees. Malapit's actuation, concludes petitioner-
insured, is therefore not separate and distinct from that of respondent-insurance company, contrary to the
view held by the Court of Appeals. It must, therefore, bear the consequences of the erroneous
cancellation of subject insurance policy caused by the non-remittance by its own employee of the
premiums paid. Subsequent reinstatement, according to petitioner-insured, could not possibly absolve
respondent insurance company from liability, there being an obvious breach of contract. After all,

24
reasoned out petitioner-insured, damage had already been inflicted on him and no amount of rectification
could remedy the same.

Respondent insurance company, on the other hand, argues that where reinstatement, the equitable relief
sought by petitioner-insured was granted at an opportune moment, i.e. prior to the filing of the complaint,
petitioner-insured is left without a cause of action on which to predicate his claim for damages.
Reinstatement, it further explained, effectively restored petitioner-insured to all his rights under the policy.
Hence, whatever cause of action there might have been against it, no longer exists and the consequent
award of damages ordered by the lower court in unsustainable.

We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the premiums

paid by petitioner-insured is beyond doubt directly imputable to respondent insurance company. A
corporation, such as respondent insurance company, acts solely thru its employees. The latters' acts are
considered as its own for which it can be held to account. 11 The facts are clear as to the relationship
between private respondent insurance company and Malapit. As admitted by private respondent
12
insurance company in its answer, Malapit was the manager of its Baguio branch. It is beyond doubt that
he represented its interest and acted in its behalf. His act of receiving the premiums collected is well
within the province of his authority. Thus, his receipt of said premiums is receipt by private respondent
insurance company who, by provision of law, particularly under Article 1910 of the Civil Code, is bound by
the acts of its agent.

Article 1910 thus reads:

Art. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.

Malapit's failure to remit the premiums he received cannot constitute a defense for private respondent
insurance company; no exoneration from liability could result therefrom. The fact that private respondent
insurance company was itself defrauded due to the anomalies that took place in its Baguio branch office,
such as the non-accrual of said premiums to its account, does not free the same from its obligation to
petitioner Areola. As held in Prudential Bank v. Court of Appeals 13 citing the ruling in McIntosh v. Dakota
Trust Co.: 14

A bank is liable for wrongful acts of its officers done in the interests of the bank or in the
course of dealings of the officers in their representative capacity but not for acts outside
the scope of their authority. A bank holding out its officers and agent as worthy of
confidence will not be permitted to profit by the frauds they may thus be enabled to
perpetrate in the apparent scope of their employment; nor will it be permitted to shirk its
responsibility for such frauds, even though no benefit may accrue to the bank therefrom.
Accordingly, a banking corporation is liable to innocent third persons where the
representation is made in the course of its business by an agent acting within the general
scope of his authority even though, in the particular case, the agent is secretly abusing
his authority and attempting to perpetrate a fraud upon his principal or some other
person, for his own ultimate benefit.

Consequently, respondent insurance company is liable by way of damages for the fraudulent acts
committed by Malapit that gave occasion to the erroneous cancellation of subject insurance policy. Its
earlier act of reinstating the insurance policy can not obliterate the injury inflicted on petitioner-insured.
Respondent company should be reminded that a contract of insurance creates reciprocal obligations for
both insurer and insured. Reciprocal obligations are those which arise from the same cause and in which

25
each party is both a debtor and a creditor of the other, such that the obligation of one is dependent upon
15
the obligation of the other.

Under the circumstances of instant case, the relationship as creditor and debtor between the parties
arose from a common cause: i.e., by reason of their agreement to enter into a contract of insurance under
whose terms, respondent insurance company promised to extend protection to petitioner-insured against
the risk insured for a consideration in the form of premiums to be paid by the latter. Under the law
16
governing reciprocal obligations, particularly the second paragraph of Article 1191, the injured party,
petitioner-insured in this case, is given a choice between fulfillment or rescission of the obligation in case
one of the obligors, such as respondent insurance company, fails to comply with what is incumbent upon
him. However, said article entitles the injured party to payment of damages, regardless of whether he
demands fulfillment or rescission of the obligation. Untenable then is reinstatement insurance company's
argument, namely, that reinstatement being equivalent to fulfillment of its obligation, divests petitioner-
insured of a rightful claim for payment of damages. Such a claim finds no support in our laws on
obligations and contracts.
17
The nature of damages to be awarded, however, would be in the form of nominal damages contrary to
that granted by the court below. Although the erroneous cancellation of the insurance policy constituted a
breach of contract, private respondent insurance company, within a reasonable time took steps to rectify
the wrong committed by reinstating the insurance policy of petitioner. Moreover, no actual or substantial
damage or injury was inflicted on petitioner Areola at the time the insurance policy was cancelled.
Nominal damages are "recoverable where a legal right is technically violated and must be vindicated
against an invasion that has produced no actual present loss of any kind, or where there has been a
breach of contract and no substantial injury or actual damages whatsoever have been or can be shown.
18

WHEREFORE, the petition for review on certiorari is hereby GRANTED and the decision of the Court of
Appeals in CA-G.R. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40, RTC Dagupan
City, in Civil Case No. D-7972 rendered on June 30, 1987 is hereby REINSTATED subject to the
following modifications: (a) that nominal damages amounting to P30,000.00 be awarded petitioner in lieu
of the damages adjudicated by court a quo; and (b) that in the satisfaction of the damages awarded
therein, respondent insurance company is ORDERED to pay the legal rate of interest computed from date
of filing of complaint until final payment thereof.

SO ORDERED.

Feliciano, Melo and Vitug, JJ., concur.

Bidin, J., is on leave.

Footnotes
1 Exh. "A."
2 Exh. "B."
3 Exh. "C."
4 Exh. "2."
5 Exh. "D."
6 Exh. "F."
7 Exh. "E."
8 Exh. "G."
9 Exh. "H."
10 Notation on upper right hand corner of Exh. "H."
11 Radio Communications of the Philippines v. Court of Appeals, et al., No. L-44748, August 29, 1986, 143
SCRA 657.
12 Rollo, p. 35.
13 G.R. No. 108957, June 14, 1993, 223 SCRA 350.
14 52 ND 752, 204 NW 818, 40 ALR 1021.

26
15 Tolentino, Arturo, Civil Code of the Philippines Commentaries and Jurisprudence, Vol. IV, p. 175.
16 Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have the thing, in accordance with
articles 1385 and 1388 and the Mortgage Law.
17 Article 2221 (Civil Code) Nominal damages are adjudicated in order that a right of the plaintiff, which has
been violated or invaded by the defendant, may be vindicated or recognized and not for the purpose of
indemnifying the plaintiff for any loss suffered by him.
18 Algarra v. Sandejas, No. 8385, March 24, 1914, 27 Phil. 284.

27
IV. PERSONAL ACCIDENT INSURANCE

Finman General Assurance Corp. vs. Court of Appeals, G.R. No. 100970 September 2,
1992
Vda. de Gabriel vs. Court of Appeals, G.R. No. 103883 November 14, 1996

There is no accident when a deliberate act is performed unless some additional, unexpected,
independent, and unforeseen happening occurs which produces or brings about the result of
injury or death. In other words, where the death or injury is not the natural or probable result of
the insured's voluntary act, or if something unforeseen occurs in the doing of the act which
produces the injury, the resulting death is within the protection of the policies insuring against
death or injury from accident.

An accident insurance is not thus to be likened to an ordinary life insurance where the insured's
death, regardless of the cause thereof, would normally be compensable.

----------

SECOND DIVISION

G.R. No. 100970 September 2, 1992

FINMAN GENERAL ASSURANCE CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and JULIA SURPOSA, respondents.

Aquino and Associates for petitioner.

Public Attorney's Office for private respondent.

DECISION

NOCON, J.:

This is a petition for certiorari with a prayer for the issuance of a restraining order and preliminary
mandatory injunction to annul and set aside the decision of the Court of Appeals dated July 11, 1991, 1
affirming the decision dated March 20, 1990 of the Insurance Commission 2 in ordering petitioner Finman
General Assurance Corporation to pay private respondent Julia Surposa the proceeds of the personal
accident Insurance policy with interest.

It appears on record that on October 22, 1986, deceased, Carlie Surposa was insured with petitioner
Finman General Assurance Corporation under Finman General Teachers Protection Plan Master Policy
No. 2005 and Individual Policy No. 08924 with his parents, spouses Julia and Carlos Surposa, and
brothers Christopher, Charles, Chester and Clifton, all surnamed, Surposa, as beneficiaries. 3

While said insurance policy was in full force and effect, the insured, Carlie Surposa, died on October 18,
1988 as a result of a stab wound inflicted by one of the three (3) unidentified men without provocation and
warning on the part of the former as he and his cousin, Winston Surposa, were waiting for a ride on their
way home along Rizal-Locsin Streets, Bacolod City after attending the celebration of the "Maskarra
Annual Festival."

28
Thereafter, private respondent and the other beneficiaries of said insurance policy filed a written notice of
claim with the petitioner insurance company which denied said claim contending that murder and assault
are not within the scope of the coverage of the insurance policy.

On February 24, 1989, private respondent filed a complaint with the Insurance Commission which
subsequently rendered a decision, the pertinent portion of which reads:

In the light of the foregoing. we find respondent liable to pay complainant the sum of
P15,000.00 representing the proceeds of the policy with interest. As no evidence was
submitted to prove the claim for mortuary aid in the sum of P1,000.00, the same cannot
be entertained.

WHEREFORE, judgment is hereby rendered ordering respondent to pay complainant the

sum of P15,000.00 with legal interest from the date of the filing of the complaint until fully
4
satisfied. With costs.

On July 11, 1991, the appellate court affirmed said decision.

Hence, petitioner filed this petition alleging grove abuse of discretion on the part of the appellate court in
applying the principle of "expresso unius exclusio alterius" in a personal accident insurance policy since
death resulting from murder and/or assault are impliedly excluded in said insurance policy considering
that the cause of death of the insured was not accidental but rather a deliberate and intentional act of the
assailant in killing the former as indicated by the location of the lone stab wound on the insured.
Therefore, said death was committed with deliberate intent which, by the very nature of a personal
accident insurance policy, cannot be indemnified.

We do not agree.

The terms "accident" and "accidental" as used in insurance contracts have not acquired
any technical meaning, and are construed by the courts in their ordinary and common
acceptation. Thus, the terms have been taken to mean that which happen by chance or
fortuitously, without intention and design, and which is unexpected, unusual, and
unforeseen. An accident is an event that takes place without one's foresight or
expectation an event that proceeds from an unknown cause, or is an unusual effect of
a known cause and, therefore, not expected.

. . . The generally accepted rule is that, death or injury does not result from accident or
accidental means within the terms of an accident-policy if it is the natural result of the
insured's voluntary act, unaccompanied by anything unforeseen except the death or
injury. There is no accident when a deliberate act is performed unless some additional,
unexpected, independent, and unforeseen happening occurs which produces or brings
about the result of injury or death. In other words, where the death or injury is not the
natural or probable result of the insured's voluntary act, or if something unforeseen
occurs in the doing of the act which produces the injury, the resulting death is within the
protection of the policies insuring against death or injury from accident. 5

As correctly pointed out by the respondent appellate court in its decision:

In the case at bar, it cannot be pretended that Carlie Surposa died in the course of an
assault or murder as a result of his voluntary act considering the very nature of these
crimes. In the first place, the insured and his companion were on their way home from
attending a festival. They were confronted by unidentified persons. The record is barren
of any circumstance showing how the stab wound was inflicted. Nor can it be pretended
that the malefactor aimed at the insured precisely because the killer wanted to take his

29
 life. In any event, while the act may not exempt the unknown perpetrator from criminal
liability, the fact remains that the happening was a pure accident on the part of the victim.
The insured died from an event that took place without his foresight or expectation, an
event that proceeded from an unusual effect of a known cause and, therefore, not
expected. Neither can it be said that where was a capricious desire on the part of the
accused to expose his life to danger considering that he was just going home after
6
attending a festival.

Furthermore, the personal accident insurance policy involved herein specifically enumerated only ten (10)
circumstances wherein no liability attaches to petitioner insurance company for any injury, disability or
loss suffered by the insured as a result of any of the stimulated causes. The principle of " expresso unius
exclusio alterius" the mention of one thing implies the exclusion of another thing is therefore
applicable in the instant case since murder and assault, not having been expressly included in the
enumeration of the circumstances that would negate liability in said insurance policy cannot be
considered by implication to discharge the petitioner insurance company from liability for, any injury,
disability or loss suffered by the insured. Thus, the failure of the petitioner insurance company to include
death resulting from murder or assault among the prohibited risks leads inevitably to the conclusion that it
did not intend to limit or exempt itself from liability for such death.

Article 1377 of the Civil Code of the Philippines provides that:

The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.

Moreover,

it is well settled that contracts of insurance are to be construed liberally in favor of the
insured and strictly against the insurer. Thus ambiguity in the words of an insurance
contract should be interpreted in favor of its beneficiary. 7

WHEREFORE, finding no irreversible error in the decision of the respondent Court of Appeals, the
petition for certiorari with restraining order and preliminary injunction is hereby DENIED for lack of merit.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Melo, JJ., concur.

Footnotes
1 Rollo, pp. 12-17. Ponente: Justice Luis L. Victor with the concurrence of Justice Santiago M. Kapunan and
Justice Segundino G. Chua.
2 Original Record, pp. 50-54. Penned by Insurance Commissioner Adelita A. Vergel de Dios.
3 Id., at pp. 2-5.
4 Id.. at p. 50.
5 De la Cruz vs. Capital Insurance & Surety Co., Inc., 17 SCRA 559 [1966].
6 Rollo, pp. 15-16.
7 National Power Corporation vs. Court of Appeals, 145 SCRA 533 [1986].

----------

FIRST DIVISION

30
G.R. No. 103883 November 14, 1996

JACQUELINE JIMENEZ VDA. DE GABRIEL, petitioner,

vs.
HON. COURT OF APPEALS and FORTUNE INSURANCE & SURETY COMPANY, INC., respondents.

DECISION

VITUG, J.:

The petition for review on certiorari in this case seeks the reversal of the decision 1 of the Court of
Appeals setting aside the judgment of the Regional Trial Court of Manila, Branch 55, which has ordered
private respondent Fortune Insurance & Surety Company, Inc., to pay petitioner Jacqueline Jimenez vda.
de Gabriel, the surviving spouse and beneficiary in an accident (group) insurance of her deceased
husband, the amount of P100,000.00, plus legal interest.

Marcelino Gabriel, the insured, was employed by Emerald Construction & Development Corporation
("ECDC") at its construction project in Iraq. He was covered by a personal accident insurance in the
amount of P100,000.00 under a group policy 2 procured from private respondent by ECDC for its
overseas workers. The insured risk was for "(b)odily injury caused by violent accidental external and
visible means which injury (would) solely and independently of any other cause" 3 result in death or
disability.

On 22 May 1982, within the life of the policy, Gabriel died in Iraq. A year later, or on 12 July 1983, ECDC
reported Gabriel's death to private respondent by telephone. 4 Among the documents thereafter submitted
to private respondent were a copy of the death certificate 5 issued by the Ministry of Health of the
Republic of Iraq which stated

6
REASON OF DEATH: UNDER EXAMINATION NOW NOT YET KNOWN

and an autopsy report 7 of the National Bureau of Investigation ("NBI") to the effect that "(d)ue to
advanced state of postmortem decomposition, cause of death (could) not be determined." 8
Private respondent referred the insurance claim to Mission Adjustment Service, Inc.

Following a series of communications between petitioner and private respondent, the latter, on 22
September 1983, ultimately denied the claim of ECDC on the ground of prescription. 9 Petitioner went to
the Regional Trial Court of Manila. In her complaint against ECDC and private respondent, she averred
that her husband died of electrocution while in the performance of his work and prayed for the recovery of
P100,000.00 for insurance indemnification and of various other sums by way of actual, moral, and
exemplary damages, plus attorney's fees and costs of suit.

Private respondent filed its answer, which was not verified, admitting the genuineness and due execution
of the insurance policy; it alleged, however, that since both the death certificate issued by the Iraqi
Ministry of Health and the autopsy report of the NBI failed to disclose the cause of Gabriel's death, it
denied liability under the policy. In addition, private respondent raised the defense of "prescription,"
invoking Section 384 10 of the Insurance Code. Later, private respondent filed an amended answer, still
unverified, reiterating its original defenses but, this time, additionally putting up a counterclaim and a
crossclaim.

The trial court dismissed the case against ECDC for the failure of petitioner to take steps to cause the
service of the fourth alias summons on ECDC. The dismissal was without prejudice.

31
The case proceeded against private respondent alone. On 28 May 1987, the trial court rendered its
decision 11 in favor (partly) of petitioner's claim. In arriving at its conclusion, the trial court held that private
respondent was deemed to have waived the defense, i.e., that the cause of Gabriel's death was not
covered by the policy, when the latter failed to impugn by evidence petitioner's averment on the matter.
With regard to the defense of prescription, the court considered the complaint to have been timely filed or
within one (1) year from private respondent's denial of the claim.

Petitioner and private respondent both appealed to the Court of Appeals. Petitioner contended that the
lower court should have awarded all the claims she had asked for. Private respondent asserted, on its
part, that the lower court erred in ruling (a) that the insurer had waived the defense that Gabriel's death
was not caused by the insured peril ("violent accidental external and visible means") specified in the
policy and (b) that the cause of action had not prescribed.

The Court of Appeals, on 18 September 1991, reversed the decision of the lower court. The appellate
court held that petitioner had failed to substantiate her allegation that her husband's death was caused by
a risk insured against. The appellate court observed that the only evidence presented by petitioner, in her
attempt to show the circumstances that led to the death of the insured, were her own affidavit and a letter
allegedly written by a co-worker of the deceased in Iraq which, unfortunately for her, were held to be both
hearsay. 12

13
The motion for reconsideration was denied.

Petitioner's recourse to this Court must also fail.

On the issue of "prescription," private respondent correctly invoked Section 384 of the Insurance Code;
viz:

Sec. 384. Any person having any claim upon the policy issued pursuant to this chapter
shall, without any unnecessary delay, present to the insurance company concerned a
written notice of claim setting forth the nature, extent and duration of the injuries
sustained as certified by a duly licensed physician. Notice of claim must be filed within six
months from date of the accident, otherwise, the claim shall be deemed waived. Action or
suit for recovery of damage due to loss or injury must be brought, in proper cases, with
the Commissioner or the Courts within one year from denial of the claim, otherwise, the
claimant's right of action shall prescribe.

The notice of death was given to private respondent, concededly, more than a year after the
death of petitioner's husband. Private respondent, in invoking prescription, was not referring to
the one-year period from the denial of the claim within which to file an action against an insurer
but obviously to the written notice of claim that had to be submitted within six months from the
time of the accident.

Petitioner argues that private respondent must be deemed to have waived its right to controvert the claim,
that is, to show that the cause of death is an excepted peril, by failing to have its answers (to the Request
for Admission sent by petitioner) duly verified. It is true that a matter of which a written request for
admission is made shall be deemed impliedly admitted "unless, within a period designated in the request,
which shall not be less than ten (10) days after service thereof, or within such further time as the court
may allow on motion and notice, the party to whom the request is directed serves upon the party
requesting the admission a sworn statement either denying specifically the matters of which an admission
is requested or setting forth in detail the reasons why he cannot truthfully either admit or deny those
matters;" 14 however, the verification, like in most cases required by the rules of procedure, is a formal,
not jurisdictional, requirement, and mainly intended to secure an assurance that matters which are
alleged are done in good faith or are true and correct and not of mere speculation. When circumstances
warrant, the court may simply order the correction of unverified pleadings or act on it and waive strict

32
compliance with the rules in order that the ends of justice may thereby be served. 15 In the case of
answers to written requests for admission particularly, the court can allow the party making the admission,
whether made expressly or deemed to have been made impliedly, "to withdraw or amend it upon such
16
terms as may be just."

The appellate court acted neither erroneously nor with grave abuse of discretion when it seconded the
court a quo and ruled:

As to the allegation of the plaintiff-appellant that the matters requested by her to be

admitted by the defendant-appellant under the Request for Admission were already
deemed admitted by the latter for its failure to answer it under oath, has already been
properly laid to rest when the lower court in its Order of May 28, 1987 correctly ruled:

At the outset, it must be stressed that the defendant indeed filed a written
answer to the request for admission, sans verification. The case of Motor
Service Co., Inc. vs. Yellow Taxicab Co., Inc., et al. may not therefore be
controlling, or actually opposite. In said case, there was an absolute
failure on the part of the defendant to answer the request for admission,
and thus the court was justified in rendering a summary judgment. Here,
however, as clearly intimated elsewhere above, the defendant answered
in writing practically every question posed in the request for admission.
The Court believes, under the peculiar circumstance, that the more
controlling jurisprudence on the mater would be those cited by the
defendant in its memorandum, particularly the case of Quimpo vs. de la
Victoria, 46 SCRA 139.

Prescinding from the foregoing, there is absolutely no basis in fact and in law for the
lower court to hold that the appellant insurance company was deemed to have waived
the defense, that the death of plaintiff-appellant's husband was not caused by violent
accidental external and visible means' as contemplated in the insurance policy. The
Death Certificate (Exh. 9) and the Autopsy Report (Exh. 10), more than controverted the
allegation of the plaintiff-appellant as to the cause of death of her husband. 17

The insurance policy expressly provided that to be compensable, the injury or death should be caused by
"violent accidental external and visible means." In attempting to prove the cause of her husband's death,
all that petitioner could submit were a letter sent to her by her husband's co-worker, stating that Gabriel
died when he tried to haul water out of a tank while its submerged motor was still functioning, 18 and
petitioner's sinumpaang salaysay 19 which merely confirmed the receipt and stated contents of the letter.
Said the appellate court in this regard:

. . . . It must be noted that the only evidence presented by her to prove the circumstances
surrounding her husband's death were her purported affidavit and the letter allegedly
written by the deceased co-worker in Iraq. The said affidavit however suffers from
procedural infirmity as it was not even testified to or identified by the affiant (plaintiff-
appellant) herself. This self-serving affidavit therefore is a mere hearsay under the rules, .
...

xxx xxx xxx

In like manner, the letter allegedly written by the deceased's co-worker which was never
identified to in court by the supposed author, suffers from the same defect as the affidavit
20
of the plaintiff-appellant.

33
 Not one of the other documents submitted, to wit, the POEA decision, dated 06 June 1984, 21 the
death certificate issued by the Ministry of Health of Iraq and the NBI autopsy report, 22 could give
any probative value to petitioner's claim. The POEA decision did not make any categorical
holding on the specific cause of Gabriel's death. Neither did the death certificate issued by the
health authorities in Iraq nor the NBI autopsy report provide any clue on the cause of death. All
that appeared to be clear was the fact of Gabriel's demise on 22 May 1982 in Iraq.

Evidence, in fine, is utterly wanting to establish that the insured suffered from an accidental death, the risk
covered by the policy. In an accident insurance, the insured's beneficiary has the burden of proof in
demonstrating that the cause of death is due to the covered peril. Once that fact is established, the
burden then shifts to the insurer to show any excepted peril that may have been stipulated by the parties.
An "accident insurance" is not thus to be likened to an ordinary life insurance where the insured's death,
regardless of the cause thereof, would normally be compensable. The latter is akin in property insurance
to an "all risk" coverage where the insured, on the aspect of burden of proof, has merely to show the
condition of the property insured when the policy attaches and the fact of loss or damage during the
period of the policy and where, thereafter, the burden would be on the insurer to show any "excluded
peril." When, however, the insured risk is specified, like in the case before us, it lies with the claimant of
the insurance proceeds to initially prove that the loss is caused by the covered peril.

While petitioner did fail in substantiating her allegation that the death of her husband was due to an
accident, considering, however, the uncertainty on the real cause of death, private respondent might find
its way clear into still taking a second look on the matter and perhaps help ease the load of petitioner's
loss.

WHEREFORE, the decision appealed from is AFFIRMED. No costs.

SO ORDERED.

Padilla, Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.

Footnotes
1 Penned by Associate Justice Bonifacio A. Cacdac, Jr. and concurred in by Associate Justices Nathanael P. de
Pano, Jr. and Fortunato A. Vailoces.
2 Policy No. PA 11644, Exh. 7, Rollo, p. 76.
3 Ibid., 76.
4 TSN, October 19, 1987, p. 4.
5 Rollo, p. 77.
6 Exh. 9-A, Rollo, p. 77.
7 Autopsy Report No. N-82-1157, Exh. 10, Rollo, p. 78.
8 Exh. 10-A, Rollo, p. 78.
9 Exh. 4, Record, p. 188.
10 Infra.
11 Penned by Judge Hermogenes R. Liwag.
12 CA Decision, p. 7, Rollo, p. 29.
13 Penned by Associate Justice Fortunato A. Vailoces and concurred in by Associate Justices Nathanael P. de
Pano, Jr. and Asaali S. Isnani.
14 Sec. 2, Rule 26, Revised Rules of Court.
15 Sy vs. Habacon-Garayblas, 228 SCRA 644, citing the Minute Resolution in Villarica vs. Court of Appeals,
G.R. No. 96085, March 16, 1992.
16 See Section 4, Rule 26, Revised Rules of Court.
17 Rollo, p. 84.
18 Exh. I-1, Record, p. 224.
19 Exh. I; Record, p. 223.
20 Rollo, p. 85.
21 Exh. L, Record, pp. 230-233
22 Which petitioner herself likewise offered in evidence.

34
V. PROTECTION & INDEMNITY AGREEMENT

35
 Pandiman Philippines Inc. vs Marine Manning Management Corp., G.R. No. 143313. June
21, 2005

In this protection and indemnity agreement, which is actually an insurance contract, the
provisions of the Insurance Code (P.D. 1460, as amended) is the governing law. In the subject
insurance contract, the P&I Club (OMMIAL) is the insurer, the shipowner (Sun Richie Five
Bulkers S.A.) is the insured, and herein respondent Rosita Singhid as widow and heir of a crew
on board the insured vessel like Benito, is a beneficiary.

----------

THIRD DIVISION

G.R. No. 143313. June 21, 2005

PANDIMAN PHILIPPINES, INC., Petitioner,

vs.
MARINE MANNING MANAGEMENT CORPORATION and ROSITA D.R. SINGHID, Respondents.

DECISION

GARCIA, J.:

Before the Court is this petition for review on certiorari under Rule 45 of the Rules of Court to nullify and
set aside the following issuances of the Court of Appeals in CA-G.R. SP No. 53648, to wit:

1) Decision[1]dated February 17, 2000, affirming the decision of the National Labor Relations
Commission in NLRC CN-OFW (M) 98-07-0815 CA No. 017712-99, which set aside an earlier decision of
the Labor Arbiter in a claim for death benefits thereat commenced by respondent Rosita Singhid against
respondent Marine Manning Management Corporation and the herein petitioner, among others; and

2) Resolution[2]dated May 16, 2000, denying petitioner's motion for reconsideration.

As summarized by the Court of Appeals, the case unfolded as follows:

Respondent Rosita Singhid's deceased husband Benito Singhid (Benito) was hired by Fullwin Maritime
Limited (Fullwin), through its local agent, respondent Marine Manning and Management Corporation
(MMMC), as chief cook on board the vessel MV Sun Richie Five for a term of twelve (12) months.

The vessel and its crew were insured with Ocean Marine Mutual Insurance Association Limited
(OMMIAL), a Protection and Indemnity Club (P&I Club) of which the Sun Richie Five Bulkers S.A., owner
of the vessel Sun Richie Five, is a member. OMMIAL transacted business in the Philippines through its
local correspondent, herein petitioner Pandiman Philippines, Inc. (PPI).

While the vessel was on its way to Shanghai, China from Ho Chih Minh City, Vietnam Benito suffered a
heart attack, and subsequently died on June 24, 1997. His remains were flown back to the Philippines.

After Benito's remains were interred, his widow Rosita filed a claim for death benefits with MMMC, which,
however, referred her to herein petitioner PPI. Upon Rosita's submission of all the required documents,

36
petitioner approved the claim and recommended payment thereof in the amount of US$79,000.00. But,
despite said recommendation, Rosita's death claims remained unpaid.

Hence, Rosita filed with theLabor Arbiter a complaint for recovery of death benefits, moral and exemplary
damages and attorney's fees. Named respondents in the complaint are MMMC, Fullwin, petitioner PPI and
OMMIAL.

In a decision dated 16 November 1998,[3] the Labor Arbiter dismissed the complaint insofar as petitioner
is concerned. More specifically, the decision dispositively reads:

WHEREFORE, premises considered, judgment is hereby rendered ordering the

respondents jointly and severally to pay complainant's claims as hereunder stated:

1. US$50,000.00 representing death benefits resulting from the death of her late husband
Benito Singhid;

2. US$28,000.00 representing additional benefits for her four (4) children who are below
twenty one (21) years old;

3. US$1,000.00 for burial expenses of the late Benito Singhid;

4. 10% of the recoverable award in this case for reasonable attorney's fees;

5. The claim for moral and exemplary damages is hereby dismissed for lack of merit.

The claim against respondent Pandiman Philippines, Inc. should be as it is hereby dismissed
for lack of merit (Emphasis ours).

SO ORDERED.

On MMMC's appeal to the National Labor Relations Commission (NLRC), the latter, in its decision of 8
April 1999,[4] set aside that of the Labor Arbiter, absolved respondent MMMC from any liability and
instead held petitioner and OMMIAL liable for Rosita's claim, thus:

WHEREFORE, the appealed decision dated November 15, 1998 is hereby SET ASIDE.
A new one is hereby entered absolving Marine Manning and Management Corporation
from any liability in this case; respondents Pandiman Philippines Inc. and Ocean Marine
Mutual Insurance Association Ltd. are in its stead, hereby directed to pay jointly and
severally the complainant and her four (4) minor children US$78,000.00 representing the
death benefits due them for the death of complainant's husband Benito Singhid on June
24, 1997.

SO ORDERED.

Therefrom, petitioner went to the Court of Appeals on a petition for certiorari, thereat docketed as CA-
G.R. SP No. 53648.

In the herein assailed decision dated 17 February 2000,[5] the appellate court dismissed the petition 'for
lack of merit and accordingly affirmed the challenged decision of the NLRC, to wit:

WHEREFORE, the instant petition is DISMISSED for lack of merit and the decision of the
National Labor Relations Commission is AFFIRMED.

37
 SO ORDERED.

With its motion for reconsideration having been denied by the same court in its resolution of May 16,
2000,[6] petitioner PPI is now with us on the following assigned errors:

FIRSTLY, a mere agent of an insurance company cannot be held liable for the face value of any
coverage or policy its principal may have issued;

SECOND, the findings of fact of the NLRC are clearly gratuitous and even outright erroneous, such that
the same should be corrected;

THIRD, the decision of the NLRC which the Court of Appeals refused to traverse and reverse deprived
the petitioner of due process; and

FINALLY, it was error to have excluded MMMC and its foreign principal from liability, considering that
their participation and liability is clear cut under the facts and applicable law and jurisprudence.

We initially note that in the decision subject hereof, the Court of Appeals refused to traverse and reverse
the factual conclusions commonly arrived at by both the Labor Arbiter and the NLRC in this wise:

It must be noted that both the Labor Arbiter and the National Labor Relations Commission in their
decision concluded that vessel MV Sun Richie Five and its crew were insured with Ocean Marine Mutual
Insurance Association Limited[7], whose local agent is Pandiman, Philippines, Inc. In this respect, it is
worth mentioning that the Supreme Court has consistently held that findings of fact of administrative
agencies and quasi judicial bodies which have acquired expertise because their jurisdiction is confined to
specific matters are generally accorded not only respect but even finality and are binding upon this Court
unless there is grave abuse of discretion or where it is clearly shown that they were arrived at arbitrarily or
in disregard of the evidence on record.[8]Petitioner in the case at bench failed to convince us that we
should depart from this time-honored rule, thus, the National Labor Relations Commission's findings
stand.

In petitions for review on certiorari like the instant case, the Court invariably sustains the unanimous
factual findings of the Labor Arbiter, the NLRC and the Court of Appeals, specially when such findings are
supported by substantial evidence and there is no cogent basis to reverse the same, as in this case.

The very recent case of Gallera De Guison Hermanos, Inc. vs. Cruz[9]reiterates the Court's consistent
ruling on the matter:

xxx time and again the much-repeated but not so well-heeded rule that findings of fact of
the Court of Appeals, particularly where it is in absolute agreement with that of the NLRC
and the Labor Arbiter, as in this case, are accorded not only respect but even finality and
are deemed binding upon this Courtso long as they are supported by substantial
evidence xxx.

This decision, therefore, shall be just limited to the legal issues of: (1) whether or not petitioner PPI may
be held liable for Rosita's claim for death benefits as Benito's widow; and (2) whether or not respondent
MMMC and its foreign principal Fullwin with whom unquestionably the late Benito had an employment
contract, should be absolved from death claim liabilities in this case.

We find merit in the petition.

MV Sun Richie Five Bulkers S.A., owner of the vessel Sun Richie Five, was a member of a P&I Club,
which is 'an association composed of shipowners in general who band together for the specific purpose of

38
providing insurance cover on a mutual basis against liabilities incidental to shipowning that the members
incur in favor of third parties.[10] The vessel and its crew were covered by a 'Class 1 ' Protection and
Indemnity agreement beginning noon of February 20, 1997 up to February 20, 1998 as embodied in the
Certificate of Entry[11]issued by OMMIAL.

In this protection and indemnity agreement, which is actually an insurance contract, the provisions of the
Insurance Code (P.D. 1460, as amended) is the governing law. In the subject insurance contract, the P&I
Club (OMMIAL) is the insurer, the shipowner (Sun Richie Five Bulkers S.A.) is the insured, and herein
respondent Rosita Singhid as widow and heir of a crew on board the insured vessel like Benito, is a
beneficiary.

In the decision under review, the Court of Appeals held petitioner PPI liable for Rosita's death claims
under the said contract of insurance, on the postulate that petitioner is an insurance agent, a term defined
and understood under Section 300 of the Insurance Code, as follows:

Section 300. Any person who for compensation solicits or obtains insurance on behalf of
any insurance company transmits for a person other than himself an application for a
policy or contract of insurance to or from such company or offers or assumes to act in the
negotiating of such insurance shall be an insurance agent within the intent of this section
and shall thereby become liable to all the duties, requirements, liabilities and penalties to
which an insurance agent is subject.

Petitioner PPI, however, claims that it is not an insurance agent but a mere local correspondent[12]of the
P&I Club. Thus, petitioner maintains that even if OMMIAL (the P&I Club), as insurer of Sun Richie Five, is
held principally liable to Rosita for her husband's death benefits, petitioner cannot be held solidarily liable
together with said insurer.

We have carefully gone over the records, and truly, as claimed by petitioner, there is nothing therein to
show that an insurance contract in this case was in fact negotiated between the insured Sun Richie Five
and the insurer OMMIAL, through petitioner as insurance agent which will make petitioner an insurance
agent under the aforequoted Section 300 of the Insurance Code. As it is, the NLRC, in its decision,
merely relied on petitioner's reference to OMMIAL as its 'principal instead of its 'client. Such reference',
however, will not and cannot vary the definition of what an insurance agent actually is under the
aforecited law, nor can it automatically turn petitioner into one, thereby becoming correspondingly liable to
all the duties, requirements, liabilities and penalties to which an insurance agent is subject to. We,
therefore, hold that petitioner PPI is not an insurance agent under the obtaining circumstances.

In any event, payment for claims arising from the peril insured against, to which the insurer is liable, is
definitely not one of the liabilities of an insurance agent. Thus, there is no legal basis whatsoever for
holding petitioner solidarily liable with insurer OMMIAL for Rosita's claim for death benefits on account of
her husband's demise while under the employ of MMMC's principal, Fullwin.

Besides, even under the principle of 'relativity of contracts', petitioner PPI cannot be held liable for the
same death benefits claims. The insurance contract between the insurer and the insured, under Article
1311 of the Civil Code, is binding only upon the parties (and their assigns and heirs) who execute the
same. With the reality, as borne by the records, that petitioner PPI is not a party to the insurance contract
in question, no liability or obligation arising therefrom, may be imposed upon it.

Anent the second issue, the Court agrees with petitioner's contention that the appellate court erred in
affirming the NLRC's decision which absolved Fullwin and its manning agent, respondent MMMC, of their
joint and solidary liability arising from Benito's employment contract with Fullwin.

It is undisputed that Benito was employed by Fullwin through its manning agency, MMMC. Neither is it
disputed that Benito died during the effectivity of their employment contract while on board the vessel MV

39
Sun Richie Five. Fullwin, Benito's principal employer is, therefore, liable under the same employment
contract. For its part, MMMC is bound by its undertaking pursuant to the Rules and Regulations
Governing Overseas Employment (1991)[13]that the manning applicants:

xxx xxx xxx

(3) Shall assume joint and solidary liability with the employer for all claims and liabilities
which may arise in connection with the implementation of the contract, including but not
limited to payment of wages, health and disability compensation and repatriation;

xxx xxx xxx

By reason of the foregoing undertaking, respondent MMMC is jointly and solidarily liable with its foreign
principal Fullwin, for whatever death benefits Benito's widow is entitled to under Benito's employment
contract.

In fine, the Court of Appeals gravely erred in affirming the NLRC's decision absolving Fullwin and MMMC,
the parties with whom the late Benito Singhid had a contract of employment at the time of his death.
Accordingly, we rule and so hold that Fullwin and MMMC are jointly and solidarily liable for Benito's death
benefits, pursuant to the parties' overseas employment contract in this case. NLRC's ruling as to
OMMIAL's liability, as insurer is, however, affirmed.

WHEREFORE, the instant petition is GRANTED and the assailed decision and resolution of the Court of
Appeals REVERSED and SET ASIDE. The decision of the Labor Arbiter dated November 16, 1998 in
NLRC-NCR-OFW (M) 98-07-0815 is hereby REINSTATED.

No pronouncement as to costs.

SO ORDERED.

Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

Footnotes
[1]Penned by Associate Justice Eugenio S. Labitoria and concurred in by Associate Justices Rodrigo V. Cosico
and Elvi John Asuncion; Rollo, pp. 50-56.
[2]Rollo, p. 58.
[3]Rollo, pp. 114-122.
[4]Rollo, pp. 89-103.
[5]Rollo, pp. 50-56.
[6]Rollo, p. 58.
[7]Citing NLRC Decision, p. 3 (Rollo, p. 91); and Labor Arbiter's Decision, p. 2 (Rollo, p. 115).
[8]Citing the case of Maya Farms Employees Organization vs. NLRC, 239 SCRA 508 (1994).
[9]G.R. No. 159390, June 10, 2004, per Tinga, J., ponente.
[10]Hyopsung Maritime Co., Ltd. vs. Court of Appeals, G.R. No. L-77369, August 31, 1988.
[11]Rollo, p. 145-146.
[12]Reply letter of petitioner PPI dated July 23, 1998; Rollo, p. 147.
[13]Book II, Rule II, Section 1, paragraph (f).

VI. RECEIVERSHIP

40
 Pioneer and Surety Insurance Corp. vs. Fortun, G.R. No. L-44959 April 15, 1987

The receiver or the liquidator, as the case may be, designated under the provisions of this title,
shall not be subject to any action, claim or demand by, or liability to, any person in respect to
anything done or omitted to be done in good faith in the exercise, or in connection with the
exercise, of the powers conferred on such receiver or liquidator.

----------

FIRST DIVISION

G.R. No. L-44959 April 15, 1987

PIONEER INSURANCE AND SURETY CORPORATION, petitioner,

vs.
THE HONORABLE WILLELMO C. FORTUN, PRESIDING JUDGE, COURT OF FIRST INSTANCE OF
PANGASINAN, LINGAYEN BRANCH I, ASUNCION TORIO ONG AND BEN ONG, respondents.

NARVASA, J.:

Petitioner seeks a review of the decision of the respondent Judge rendered on August 19, 1976 in Civil
Case No. 15176 of his Court, as modified by his order dated August 24, 1976. The basic issue concerns
the nature and extent of the liability of a statutory receiver appointed for an insurance corporation under
the Insurance Code, as regards policies issued by the corporation.

The facts are not in dispute.

On October 16, 1973, the Spouses Ong, private respondents herein, owners of the discount Restaurant
in Lingayen, Pangasinan, insured themselves with petitioner Overseas Insurance Corporation (OIC)
against any liability, not exceeding P15,000.00 per employee, that might be adjudged against them by the
Workmen's Compensation by reason of injury and/or death of any of their employees in said
establishment. To that end, OIC issued to them Policy No. WC-1714 effective from October 16, 1973 to
October 16, 1974. 1 The policy provided, among other things, that:

If at any time during the Period of Insurance any Employee shall sustain personal injury
by accident arising out of and in the course of his employment by the Insured in the
Business or shall contract any illness or disease caused by such employment or as the
result of the nature of such employment and if the Insured shall be liable to pay
compensation or damages for such illness or disease under the Laws set out in the
Schedule then subject to the terms exceptions conditions and Limits of Liability contained
herein or endorsed hereon the Company will indemnify the Insured against all sums for
which the Insured shall be so liable and win in addition be responsible for all costs and
expenses incurred with its consent in defending any claim for such compensation or
2
damages.

On May 18, 1973, the policy being then in force, Soledad Saura, a waitress employed by the Ongs in the
discount Restaurant and covered by the policy, died of illness. Her heirs filed against the Ongs and OIC a
compensation claim for her death with the Department of Labor, Regional Office No. 1 in Dagupan City.
That Office, through the Chief, Workmen's Compensation Unit, found that Soledad had died from an

41
illness contracted in the course of her employment, and on July 23, 1974 handed down an award of
P6,000.00 in favor of her heirs, and P61.00 payable to the Workmen's Compensation Commission in
fees. 3

OIC having refused, despite demand, to pay the amounts awarded, the Spouses Ong sued it in the Court
of First Instance to compel payment and to recover moral damages, attorney's fees and costs allegedly
4
consequent upon that refusal to pay. OIC's answer alleged in the main that the complaint stated no
cause of action because the plaintiff's, the Ongs, had not yet paid the award to the deceased employee's
heirs, and hence had sustained no loss; and that when the complaint was filed, OIC was already under
receivership, with Pioneer In. insurance and Surety Corporation (petitioner herein) as the statutory
receiver, appointed by the Insurance Commissioner pursuant to the Insurance Code (PD 612). 5

The Ongs thereafter amended their complaint to include Pioneer Insurance and Surety Corporation
6
(hereafter simply, Pioneer) as additional defendant.

On August 19, 1976, the respondent Judge rendered judgment, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs, ordering defendant

OIC to pay to plaintiffs the sum of P6,000.00 as adjudged by the WCC to pay plaintiffs'
liabilities to the heirs of the deceased Soledad Saura, plus the sum of P61.00 as payment
to WCC, plus P1,000.00 as attorney's fees, and costs of suit. Defendant PISC is
absolved from liability. 7

Five days later, on August 24, 1976, apparently, and for all that the record shows, motu proprio, the
Judge issued an order declaring that he had erred in absolving Pioneer from liability and modifying the
judgment thus:

WHEREFORE, the dispositive portion of said Decision of August 19, 1976, is hereby
amended to read as follows:

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

ordering defendant OIC to pay to plaintiffs the sums of P6,000.00 as
adjudged by the WCC to pay plaintiffs' liabilities to the heirs of the
deceased Soledad Saura, plus the sum of P61.00 as payment to WCC,
plus P1,000.00 as attorney's fees, and costs of suit. Defendant PISC,
Statutory Receiver of OIC, is ordered to pay to plaintiffs said amounts in
the event that OIC fails to make such payments. 8

From this decision, as modified, Pioneer seasonably perfected an appeal, purely on questions of law; and
in this Court, it ascribes two errors to the respondent Judge, namely: (1) in pronouncing it subsidiarily
liable for the Ongs' claim for payment on their insurance policy; and (2) in not dismissing the Ongs'
amended complaint on the ground that, as receiver appointed under the Insurance Code, it is exempted
by Section 251 thereof from "any action, claim or demand by, or liability to, any person in respect to
anything done or omitted to be done in good faith in the exercise, or in connection with the exercise, of
the powers conferred upon it.

It is immediately evident, without having to distinguish, as petitioner does, between a statutory

receivership under the Insurance Code and one judicially instituted under Rule 59 of the Rules of Court,
that the first error assigned by petitioner Pioneer is well taken. The fact is that the event giving rise to the
Ongs' claim against OIC the requirement by the Workmen's Compensation Commission that they (the
Ongs) pay death benefits to the heirs of Soledad Saura-antedated the appointment of petitioner as OIC's
receiver by almost a year. 9 Plainly then, petitioner was a complete stranger to this award of death
benefits, or the insurance contract insuring the Ongs' liability therefor, or any of the events giving rise to

42
the Ongs' claim against OIC. Petitioner cannot therefore be held liable upon such a claim, even in a
subsidiary capacity.

Res inter alios acta alteri nocere non debet

Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by nature,
or by stipulation or by provision of law. The heir is not hable beyond the value of the
property he received from the decedent. 10

Since the amended judgment clearly makes petitioner liable, on its own account, for the Ongs' claim
under the policy issued to it by OIC in the event that the latter fail to pay the same, it is to that extent
erroneous and must be reversed.

Upon the other assigned error, this Court is of the view that the provisions of the Insurance Code to the
effect that:

The receiver or the liquidator, as the case may be, designated under the provisions of
this title, shall not be subject to any action, claim or demand by, or liability to, any person
in respect to anything done or omitted to be done in good faith in the exercise, or in
connection with the exercise, of the powers conferred on such receiver or liquidator. 11

cannot be construed to prohibit suits being brought against a receiver in his or its representative capacity,
as custodian and manager of the funds and property of the person or firm under receivership. To do so
would work inequity and injustice upon parties with just claims against the latter and leave them without
remedy to pursue and recover on their claims. Correctly read, the exemption applies only with reference
to acts done or left undone in good faith by the receiver in the discharge of the receivership. It does not
apply to actions brought upon claims against the person or property under receivership and not, in any
event upon claims which matured before the receivership was established. The petitioner was, therefore,
properly impleaded; otherwise, the private respondents could not recover upon their claim while the
receivership existed.

Shorn of the objectionable amendment, but with petitioner remaining in the action in a representative
capacity, or as receiver of the real party in interest, Overseas Insurance Corporation, the judgment may
be satisfied from any available funds or assets of the latter under the custody and control of the petitioner.

WHEREFORE, the petition is granted. The questioned order of August 24, 1976 of the respondent Judge
is set aside, and the earlier decision of August 19, 1976 that it purports to amend is reinstated in toto.
Said decision may be satisfied from any available assets of OIC in the custody of Pioneer as receiver. No
pronouncement as to costs.

SO ORDERED.

Yap (Chairman), Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.

Footnotes
1 P. 88, Rollo.
2 P. 93, Rollo.
3 Rollo, pp. 88-89.
4 Annex A, petition.
5 Annex B, petition.
6 Annexes D, H, I and N, petition: Rollo, pp. 41-45, 53-58, 61- 70, and 78.
7 Rollo, p. 93.
8 Rollo, p. 94.

43
 9 Petitioner was named receiver on April 18, 1975 (Exh. 1, rollo, p. 81; the award of death benefits by the WCC
was made on July 23, 1974 (See footnote 3, supra).
10 Art. 131 1, first paragraph, Civil Code.
11 Sec. 251, P.D. No. 612, consolidated into the Insurance Code of 1978 by P.D. No. 1460.

VII. SECURITY DEPOSIT

44
 Republic vs. Del Monte Motors, Inc., G.R. No. 156956 October 9, 2006

"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."

----------

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
1
Before us is a Petition for Review 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.

45
 "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 of P11,835.50 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

46
 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-five per 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

47
 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
14
never exist. 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.

48
Powers of the Commissioner

The Insurance Code has vested the Office of the Insurance Commission with both regulatory and
15
adjudicatory authority over insurance matters.

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
20
trust is created by the law for the benefit of all claimants under subsisting insurance contracts issued by
21
the insurance company.

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.

49
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
22
interpretation of the provisions of the law carries great weight and consideration, 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.

Footnotes
1
Rollo, pp. 20-50.
2
Id. at 70-71. Penned by Judge (now Court of Appeals Justice) Noel G. Tijam.
3
Id. at 54-69.
4
January 16, 2003 Order; rollo, pp. 70-71.
5
December 18, 2002 Resolution, pp. 15-16; rollo, pp. 68-69.
6
The case was deemed submitted for decision on February 8, 2005, upon receipt by this Court of petitioner's
Memorandum signed by Assistant Solicitor General Karl B. Miranda and Solicitor Marsha C. Recon.
Respondent's Memorandum, signed by Atty. Eduardo E. Francisco, was received by the Court on November 26,
2004.
7
Petitioner's Memorandum, p. 11. Uppercase in the original.
8
AFP Mutual Benefit Association, Inc. v. NLRC, 334 Phil. 712, January 28, 1997, citing Insular Life Assurance
Co., Ltd. v. NLRC, 179 SCRA 459, November 15, 1989.
9
ABS-CBN Broadcasting Corporation v. Commission on Elections, 380 Phil. 780, January 28, 2000; Gonzales v.
Chavez, 205 SCRA 816, February 4, 1992.
10
Maria Clara L. Campos, in her commentary on the Insurance Code of the Philippines, traces the history of the
present Insurance Code as follows:
"The forerunner of this [Insurance] Code was the Insurance Act which took effect on July 1, 1915, and which was
copied almost verbatim from the California Insurance Act, with the exception of a few provisions which were
adopted from the New York Law. x x x. The first Insurance Code took effect on December 18, 1974 and besides
incorporating most of the provisions of the Insurance Act with a few changes, it contained many new provisions
mostly regulatory in nature. After a number of these new provisions were rendered obsolete by subsequent
amendments, the Insurance Code of 1978 was promulgated by Presidential Decree No. 1460, incorporating not
only such amendments but also additional changes deemed necessary in order to keep pace with the changing
needs and demands of the insurance industry. However, the substantive provisions governing the contract of
insurance itself remain for the most part as they were under the Insurance Act." (Campos, Insurance, [1983], pp.
8-9.)
The Court has held that rulings and general principles on insurance recognized in the state of California have
persuasive authority in the Philippines. (Ang Giok Chip v. Springfield Fire and Marine Insurance Co., 56 Phil.
375, December 31, 1931 and Gercio v. Sun Life Assurance Co. of Canada, 48 Phil. 53, September 28, 1925).

50
 11
153 Cal. 183, March 9, 1908, per curiam (citing San Francisco Savings Union v. Long, 123 Cal. 107,
December 20, 1898, per Temple, J.).
12
Id.
13
The United Harbor Pilots' Association of the Philippines v. Association of International Shipping Lines, Inc.,
440 Phil. 188, November 13, 2002.
14
See J.L.T. Agro, Inc. v. Balansag, 453 SCRA 211, March 11, 2005.
15
Go v. Office of the Ombudsman, 413 SCRA 608, October 17, 2003; Almendras Mining Corporation v. Office of
the Insurance Commission, 160 SCRA 656, April 15, 1988.
16
Insurance Code, Secs. 186-187; see Almendras Mining Corporation v. Office of the Insurance Commission,
supra.
17
Id., Secs. 241 and 247.
18
Id., Sec. 415.
19
"Sec. 191. No insurance company organized or existing under the government or laws other than those of the
Philippines shall engage in business in the Philippines unless possessed of paid-up unimpaired capital or assets
and reserve not less than that herein required of domestic insurance companies, nor until it shall have deposited
with the Commissioner for the benefit and security of the policyholders and creditors of such company in the
Philippines, securities satisfactory to the Commissioner consisting of good securities of the Philippines, including
new issued of stock of 'registered enterprises,' as this term is defined in Republic Act No. 5186, otherwise known
as the Investment Incentives Act, as amended, to the actual market value of not less than the minimum paid-up
capital required of domestic insurance companies: Provided, That at least fifty per centum of such securities shall
consist of bonds or other evidences of debt of the Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or controlled corporations and entities, including the Central Bank. x x
x."
20
Articles 1440 and 1441 of the Civil Code provide thus:
"Art. 1440. A person who establishes a trust is called a trustor; one in whom confidence is reposed as regards
property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has
been created is referred to as the beneficiary.
"Art. 1441 Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the
parties. Implied trusts come into being by operation of law."
21
Cesario P. Topiangco raises the issue of actual ownership and discusses the effects of placing security
deposits in the custody of the Insurance Commissioner as follows:
"Doubt has arisen as to whether the government securities, particularly Central Bank Certificates of
Indebtedness, now in the possession of insurance companies as part of their investment portfolio are really
owned by such companies. Placing these securities in the custody of the Insurance Commissioner would
minimize, if not entirely, erase such doubt. Besides, an insurance company in the verge of insolvency would find
it difficult to dispose of such securities." (Topiangco, Commentaries and Jurisprudence on the Insurance Code of
the Philippines, [1992], p. 167).
22
The United Harbor Pilots' Association of the Philippines v. Association of International Shipping Lines, Inc.,
supra note 13 at 202.
23
Union Bank of the Philippines v. Securities and Exchange Commission, 411 Phil. 94, June 6, 2001; Nestle
Philippines, Inc. v. Court of Appeals, 203 SCRA 504, November 13, 1991; Asturias Sugar Central, Inc. v.
Commissioner of Customs, 140 Phil. 20, 1969.
24
Factoran, Jr. v. Court of Appeals, 378, Phil. 282, December 13, 1999.

VIII. SURETY BOND

51
 Pioneer Insurance vs. Court of Appeals and Border Machinery & Heavy Equipment
Inc., G.R. No. 84197 July 28, 1989
Finman General Assurance Corp. vs. Inocencio, G.R. No. 90273-75 November 15, 1989
Philippine Pryce Assurance Corp. vs. Court of Appeals, G.R. No. 107062 February 21,
1994
Country Bankers Insurance Corp. vs. Lagman, G.R. No. 165487 July 13, 2011

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.

----------

THIRD DIVISION

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and
CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

DECISION

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV
No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No.
66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R.
No. 84197) was dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

52
 WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to
pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.

It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S.
Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half
and Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary damages in the
amount of P184,878.84 with interest from the filing of the cross-complaints until the
amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00 for
each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and

another P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff
is required to indemnify the defendants Bormaheco and the Cervanteses the amount of
P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with
legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of

P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in
good faith. The fact that the properties of the Bormaheco and the Cervanteses were
attached and that they were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to protect his rights, he should
not be saddled with moral or exemplary damages. Furthermore, the rights exercised were
provided for in the Rules of Court, and it was the court that ordered it, in the exercise of
its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party

defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in the
insurance business. No further claim or counter-claim for or against anybody is declared
by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-
operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a
sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of
necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3
Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.

53
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal,
Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed
some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be
their contributions to a new corporation proposed by Lim to expand his airline business. They executed
two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by
Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity
agreements stipulated that the indemnitors principally agree and bind themselves jointly and severally to
indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs,
damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur
in consequence of having become surety upon the bond/note and to pay, reimburse and make good to
Pioneer, its successors and assigns, all sums and amounts of money which it or its representatives
should or may pay or cause to be paid or become liable to pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as
deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated
therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly
registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff
of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-
owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that
they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for
being exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase
of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED

THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD
ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN
FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO

54
 RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS
DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured
its risk of liability under the surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation
to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the
amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the
real party in interest to institute the instant action as it does not stand to be benefited or
injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount
from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not
even present any evidence that it is the attorney-in-fact of the reinsurance company,
authorized to institute an action for and in behalf of the latter. To qualify a person to be a
real party in interest in whose name an action must be prosecuted, he must appear to be
the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on
the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the
party who would be benefited or injured by the judgment or the party entitled to the avails
of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in
interest is meant a present substantial interest as distinguished from a mere expectancy
or a future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil.
27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v.
Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party
in interest as it has already been paid by the reinsurer the sum of P295,000.00 the
bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes
and its spare engine, realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance
amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess
of P298,666.28 would be tantamount to unjust enrichment as it has already been paid by
the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant
Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New Civil Code).
(Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was
paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties
herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo,
p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had
any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer
pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is
entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment
is not applicable considering that whatever amount he would recover from the co-indemnitor will be paid
to the reinsurer.

55
The records belie the petitioner's contention that the issue on the reinsurance money was never raised by
the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim
against defendants, considering the amount it has realized from the sale of the
mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the
said surety bond, it is plain that on this score it no longer has any right to collect to the
extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of
action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance &
Surety Corporation is representing the reinsurers to recover the amount.' In other words,
insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their
attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is
suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of
all, Pioneer has no right to institute and maintain in its own name an action for the benefit
of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own
name instead of that of the principal will not prosper, and this is so even where the name
of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action
must be prosecuted in the name of the real party in interest.' This
provision is mandatory. The real party in interest is the party who would
be benefitted or injured by the judgment or is the party entitled to the
avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real
party in interest, that there is no law permitting an action to be brought by
an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial
Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-
714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the
difference between the two amounts, or P3,666.28. This is the amount for which Pioneer

56
 may sue defendants, assuming that the indemnity agreement is still valid and effective.
But since the amount realized from the sale of the mortgaged chattels are P35,000.00 for
one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer
is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against
defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering
this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers
to the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the
reinsurance contract as this is strictly between the petitioner as insured and the reinsuring company
pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as

are acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v.
Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to
actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55
S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

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

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101
Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v.
Court of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it
is provided in said article that the insurer is deemed subrogated to the rights of the
insured against the wrongdoer and if the amount paid by the insurer does not fully cover
the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently,
under this legal provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint
as against the respondents for the reason that the petitioner was not the real party in interest in the
complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have
been dismissed on the premise that the evidence on record shows that it is entitled to recover from the
counter indemnitors. It does not, however, cite any grounds except its allegation that respondent
"Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

57
On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its
finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and
effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,
agreed to issue the bond provided that the same would be mortgaged to it, but this was
not possible because the planes were still in Japan and could not be mortgaged here in
the Philippines. As soon as the aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have

impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other security
for the claim sought to be enforced by this action, which necessarily means that the
indemnity agreement had ceased to have any force and effect at the time this action was
instituted. Sec 2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the
planes and spare parts, no longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The indemnity agreement was
ipso jure extinguished upon the foreclosure of the chattel mortgage. These defendants,
as indemnitors, would be entitled to be subrogated to the right of Pioneer should they
make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of

foreclosure precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and
Pioneer as surety having made of the payments to JDA, the alternative remedies open to
Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the purchaser to recover any
unpaid balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas
Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention
that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising
the rights of JDA as vendor, having subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground that these defendants and defendant

58
Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal Motors
Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of the
maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru
novations thus discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three months
interval installments, the first of which shall be due and payable 25
August 1965, the remainder of which ... shall be due and payable on the
26th day x x x of each succeeding three months and the last of which
shall be due and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or
Lim and JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month
interval installments the first of which shall be due and payable 4
September 1965, the remainder of which ... shall be due and payable on
the 4th day ... of each succeeding months and the last of which shall be
due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity
dates different from that fixed in the aforesaid memorandum; the due date of the first
installment appears as October 15, 1965, and those of the rest of the installments, the
15th of each succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice,
were done without the knowledge, much less, would have it believed that these
defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed
that these defendants and defendant Maglana knew of and consented to the modification
of the obligations. But if that were so, there would have been the corresponding
documents in the form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this was the
extinguishment of the obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable by analogy are the rulings of
the Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563,
and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty The mere failure on
the part of the creditor to demand payment after the debt has become
due does not of itself constitute any extension time referred to herein,
(New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd.,
v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to Pioneer within ten days from default
of Lim or SAL on every installment, released Pioneer from liability from the claim.

59
 Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to

reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and
its surety by reason of the filing of the instant case against them and the attachment and
garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff
drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo
of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to
do business through the corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest? How are the losses to be treated in situations where
their contributions to the intended 'corporation' were invested not through the corporate
form? This Petition presents these fundamental questions which we believe were
resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto
partnership among them was created, and that as a consequence of such relationship all must share in
the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in
the total amount of P184,878.74 as correctly found by the trial court, with interest from
the filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay
one-half of the said amount to Bormaheco and the Cervanteses and the other one-half to
defendant Maglana. It is established in the records that defendant Lim had duly received
the amount of Pl51,000.00 from defendants Bormaheco and Maglana representing the
latter's participation in the ownership of the subject airplanes and spare parts (Exhibit 58).
In addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum of
P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter and the
laws of the state relating thereto and not by the rules governing partners (Cannon v.
Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that
persons who attempt, but fail, to form a corporation and who carry on business under the
corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229,

60
 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves
together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corporation within the statute,
they become in legal effect partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized (Smith v. Schoodoc Pond
Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain
persons associated themselves as a corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation, and two of them contracted to pay
a third the difference in the proportionate value of the land conveyed by him, and no
stock was ever issued in the corporation, it was treated as a trustee for the associates in
an action between them for an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed among them in proportion to the
value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However,
such a relation does not necessarily exist, for ordinarily persons cannot be made to
assume the relation of partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S.
461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice
between the parties; thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not become a partner with other
subscribers who engage in business under the name of the pretended corporation, so as
to be liable as such in an action for settlement of the alleged partnership and contribution
(Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders
and other stockholders, who were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris
Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear
during the pretrial despite notification. In his answer, the petitioner denied having received any amount
from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court,
however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing
the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru
the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the respondents
despite his representations to them. This gives credence to the cross-claims of the respondents to the
effect that they were induced and lured by the petitioner to make contributions to a proposed corporation
which was never formed because the petitioner reneged on their agreement. Maglana alleged in his
cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana
to expand his airline business. Lim was to procure two DC-3's from Japan and secure the
necessary certificates of public convenience and necessity as well as the required
permits for the operation thereof. Maglana sometime in May 1965, gave Cervantes his
share of P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged
receipt thereof. Cervantes, likewise, delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9,1965, promised to incorporate his airline in
accordance with their agreement and proceeded to acquire the planes on his own
account. Since then up to the filing of this answer, Lim has refused, failed and still refuses
to set up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-
338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim
and third party complaint:

61
 Sometime in April 1965, defendant Lim lured and induced the answering defendants to
purchase two airplanes and spare parts from Japan which the latter considered as their
lawful contribution and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim. Down payments
were advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana
(Exh. E- 1). Contrary to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged chattel mortgage and
surety bond agreement in his personal capacity as the alleged proprietor of the SAL. The
answering defendants learned for the first time of this trickery and misrepresentation of
the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed
by defendant Lim, thereby forcing them to file an adverse claim in the form of third party
claim. Notwithstanding repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession of the two planes and their
accessories and or return the amount advanced by the former amounting to an aggregate
sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted
and refused to comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own
and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare
parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.

Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., took no part.

----------

THIRD DIVISION

G.R. No. 90273-75 November 15, 1989

FINMAN GENERAL ASSURANCE CORP., petitioner,

vs.
WILLIAM INOCENCIO, ET AL. AND EDWIN CARDONES, THE ADMINISTRATOR, PHILIPPINE
OVERSEAS AND EMPLOYMENT ADMINISTRATION, THE SECRETARY OF LABOR AND
EMPLOYMENT, respondents.

David I. Unay, Jr. for petitioner.

RESOLUTION

FELICIANO, J.:

62
Pan Pacific Overseas Recruiting Services, Inc. ("Pan Pacific") is a private, fee-charging, recruitment and
employment agency. T in accordance with the requirements of Section 4, Rule II, Book II of the Rules and
Regulations of the Philippine Overseas Employment Administration (POEA), Pan Pacific posted a surety
bond issued by petitioner Finman General Assurance Corporation ("Finman") and was granted a license
to operate by the POEA.

Private respondents William Inocencio, Perfecto Palero, Jr., Edwin Cardones and one Edwin Hernandez
filed with the POEA separate complaints against Pan Pacific for violation of Articles 32 and 34 (a) of the
Labor Code, as amended and for refund of placement fees paid to Pan Pacific. The complainants alleged
that Pan Pacific charged and collected such fees from them but did not secure employment for them.

Acting on the complaints, the POEA Administrator motu proprio impleaded petitioner Finman as party
respondent in its capacity as surety for Pan Pacific. Separate summonses were served upon Finman and
Pan Pacific. The return of the summons served on Pan Pacific at its official address registered in the
POEA records, showed that Pan Pacific had moved out therefrom; no prior notice of transfer or change of
address was furnished by Pan Pacific to the POEA as required under POEA rules. The POEA considered
that constructive service of the complaints had been effected upon Pan Pacific and proceeded
accordingly.

For its part, petitioner Finman filed an answer denying liability and pleading, by way of special and
affirmative defenses, that: (1) the POEA had no "jurisdiction over surety bonds," that jurisdiction being
vested in the Insurance Commission or the regular courts; (2) it (Finman) had not violated Articles 32 and
34 (a) of the Labor Code and complainants' claims had accrued during the suspension of the principal
obligor, Pan Pacific; (3) complainants had no cause of action against Finman, since it was not privy to the
transactions between them and Pan Pacific and had not received any moneys from them; and (4) the
amounts claimed by complainants had been paid by them as deposits and not as placement fees.

A hearing was held by the POEA on 14 April 1988, at which time complainants presented their evidence.
Petitioner Finman, though notified of this hearing, did not appear.

On 30 May 1989, the POEA Administrator issued an Order which, in its dispositive portion, said:

WHEREFORE, premises considered, respondents are hereby ordered to pay jointly and
severally complainants' claims as follows:

1. William Inocencio P6,000 .00

2. Perfecto Palero, Sr. P5,500 .00

3. Edwin Cardones P2,000 .00

Respondent agency is ordered to release Cardones' passport, the expenses or obtaining

the same of which (sic) shall be deducted from the amount of P2,000.00 as it appears
that it was respondent agency who applied for the processing thereof. The claim of Edwin
Hernandez is dismissed without prejudice.

For the established violations respondent agency is hereby imposed a penalty fine in the
amount of P60,000.00. Further, the ban earlier imposed upon it is herein reiterated.

SO ORDERED.

Petitioner Finman went on appeal to the Secretary of Labor insisting that: (1) the POEA had no authority
to implead petitioner as party respondent in the proceedings before the POEA; and that (2) the POEA had

63
no authority to enforce directly the surety bond against petitioner. In an Order dated 3 August 1989, the
Secretary of Labor upheld the POEA Order appealed from and denied the appeal for lack of merit.

Petitioner Finman now comes before this Court on a Petition for certiorari with prayer for preliminary
injunction or temporary restraining order, raising much the same issues it had already ventilated before
the POEA and the Secretary of Labor. It is contended once again by petitioner Finman that the POEA had
no authority to implead petitioner in the proceedings commenced by private respondents: and that the
POEA was not authorized to require, in those same proceedings, petitioner to pay private respondents'
claims for refund against Pan Pacific on the basis of the surety bond issued by petitioner.

Petitioner's contentions are interrelated and will be dealt with together. They are, however, quite bereft of
merit and must be rejected.

Petitioner cannot seriously dispute the direct and solidary nature of its obligations under its own surety
bond. Under Section 176 of the Insurance Code, as amended, the liability of a surety in a surety bond is
joint and several with the principal obligor. Petitioner's bond was posted by Pan Pacific in compliance with
the requirements of Article 31 of the Labor Code, which states that

Art. 31. Bonds. All applicants for license or authority shall post such cash and surety
bonds as determined by the Secretary of Labor to guarantee compliance with prescribed
recruitment procedures, rules and regulations, and terms and, conditions of employment
as appropriate.

The Secretary of Labor shall have the exclusive power to determine, decide, order or
direct payment from, or application of, the cash and surety bond for any claim or injury
covered and guaranteed by the bonds. (Emphasis supplied).

The tenor and scope of petitioner Finman's obligations under the bond it issued are set out in broad
ranging terms by Section 4, Rule II, Book I of the POEA Rules and Regulations:

Section 4. Payment of Fees and Posting of Bonds. Upon approval of the application by
the Minister, the applicant shall pay an annual license fee of P6,000.00. It shall also post
a cash bond of P100,000.00 and a surety bond of P150,000.00 from a bonding company
acceptable to the Administration duly accredited by the Office of the Insurance
Commission. The bonds shall answer for all valid and legal claims arising from violations
of the conditions for the grant and use of the license or authority and contracts of
employment. The bonds shall likewise guarantee compliance with the provisions of the
Labor Code and its implementing rules and regulations relating to recruitment and
placement, the rules of the Administration and relevant issuances of the Ministry and all
liabilities which the Administration may impose. The surety bonds shall include the
condition that notice of garnishment to the principal is notice to the surety. 1 (Emphasis
supplied).

While petitioner Finman has refrained from attaching a copy of the bond it had issued to its Petition for
Certiorari, there can be no question that the conditions of the Finman surety bond Pan Pacific had posted
with the POEA include the italicized portions of Section 4, Rule 11, Book I quoted above. It is settled
doctrine that the conditions of a bond specified and required in the provisions of the statute or regulation
providing for the submission of the bond, are incorporated or built into all bonds tendered under that
statute or regulation, even though not there set out in printer's ink. 2

In the case at bar, the POEA held, and the Secretary of Labor affirmed, that Pan Pacific had violated
Article 32 of the Labor Code, as amended

64
 Article 32. Fees to be paid by workers. Any person applying with a private fee charging
employment agency for employment assistance shall not be charged any fee until he has
obtained employment through its efforts or has actually commenced employment. Such
fee shall be always covered with the approved receipt clearly showing the amount paid.
The Secretary of Labor shall promulgate a schedule of allowable fees. (Emphasis
supplied).

as well as Article 34 (a) of the same Code:

Article 34. Prohibited practices. It shall be unlawful for any individual, entity, licensee,
or holder of authority:

(a) To charge or accept, directly or indirectly, any amount than that specified in the
schedule of allowable fees prescribed by the Secretary of Labor, or to make a worker pay
any amount greater than actually received by him as a loan or advance. (Emphasis
supplied)

There is, hence, no question that, both under the Labor Code 3 and the POEA Rules and Regulations, 4
Pan Pacific had violated at least one of the conditions for the grant and continued use of the recruitment
license granted to it. There can, similarly, be no question that the POEA Administrator and the Secretary
of Labor are authorized to require Pan Pacific to refund the placement fees it had charged private
respondents without securing employment for them and to impose the fine of P60,000.00 upon Pan
Pacific. Article 36 of the Labor Code authorizes the Secretary of Labor "to restrict and regulate" the
recruitment and placement activities of agencies like Pan Pacific and "to issue orders and promulgate
rules and regulations to carry out the objectives and implement the provisions of [Title I on "Recruitment
and Placement of Workers]," including of course, Article 32 on "Fees to be paid by workers," quoted
earlier. Upon the other hand, Section 13 of Rule VI, Book I of the POEA Rules and Regulations expressly
authorize the POEA Administrator or the Secretary of Labor to impose fines "in addition to or in lieu of the
penalties of suspension or cancellation" of the violator recruitment agency's license.

If Pan Pacific is liable to private respondents for the refunds claimed by them and to the POEA for the fine
of P60,000.00, and if petitioner Finman is solidarily liable with Pan Pacific under the operative terms of
the bond, it must follow that Finman is liable both to the private respondents and to the POEA. Petitioner
Finman asserts, however, that the POEA had no authority to implead it in the proceedings against Pan
Pacific.

We are not persuaded by this assertion. Clearly, petitioner Finman is a party-in-interest in, certainly a
proper party to, the proceedings private respondents had initiated against Pan Pacific the principal
obligor. Since Pan Pacific had thoughtfully refrained from notifying the POEA of its new address and from
responding to the complaints, petitioner Finman may well I be regarded as an indispensable party to the
proceedings before the POEA. Whether Finman was an indepensable or merely a proper party to the
proceedings, we believe and so hold that the POEA could properly implead it as party respondent either
upon the request of the private respondents or, as it happened, motu propio. Such is the situation under
5
the Revised Rules of Court and the application thereof, directly or by analogy, by the POEA can
certainly not be regarded as arbitrary, oppressive or capricious.

The fundamental argument of Finman is that its liability under its own bond must be determined and
enforced, not by the POEA or the Secretary of Labor, but rather by the Insurance Commission or by the
regular courts. Once more, we are not moved by petitioner's argument.

There appears nothing so special or unique about the determination of a surety's liability under its bond
as to restrict that determination to the Office of the Insurance Commissioner and to the regular courts of
justice exclusively. The exact opposite is strongly stressed by the second paragraph of Article 31 of the
Labor Code:

65
 Art. 31. Bonds. ... ...

The secretary of Labor shall have the exclusive power to determine, decide, order or
direct payment from, or application of, the cash or surety bond for any claim or injury
covered and guaranteed by the bonds. (Emphasis supplied)

We believe and so hold that to compel the POEA and private respondents the beneficiaries of Finman's
bond-to go to the Insurance Commissioner or to a regular court of law to enforce that bond, would be to
collide with the public policy which requires prompt resolution of claims against private recruitment and
placement agencies. The Court will take judicial notice of the appealing frequency with which some,
perhaps many, of such agencies have cheated workers avid for overseas employment by, e.g., collecting
placement fees without securing employment for them at all, extracting exorbitant fees or "kickbacks"
from those for whom employment is actually obtained, abandoning hapless and unlettered workers to
exploitative foreign principals, and so on. Cash and surety bonds are required by the POEA and its
predecessor agencies from recruitment and employment companies precisely as a means of ensuring
prompt and effective recourse against such companies when held liable for applicants or workers' claims.
Clearly that public policy will be effectively negated if POEA and the Department of Labor and
Employment were held powerless to compel a surety company to make good on its solidary undertaking
in the same quasi-judicial proceeding where the liability of the principal obligor, the recruitment or
employment agency, is determined and fixed and where the surety is given reasonable opportunity to
present any defenses it or the principal obligor may be entitled to set up. Petitioner surety whose liability
to private respondents and the POEA is neither more nor less than that of Pan Pacific, is not entitled to
another or different procedure for determination or fixing of that liability than that which Pan Pacific is
entitled and subject to.

WHEREFORE, the Petition for certiorari with prayer for preliminary injunction or temporary restraining
order is hereby DISMISSED for lack of merit. Costs against petitioner. This Resolution is immediately
executory.

Fernan, C.J., Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Footnotes
1 See also Section 4, Rule V, Book I of the Omnibus Rules Implementing the Labor Code.
2 Thomas Yang v. Hon. Marcelino Valdez, et al., G.R. No. 73317, promulgated August 31,1989; and Luzon T.J.
Company v. Quebral, 127 SCRA 295 (1984).
3 Art 35. Suspension and/or Cancellation of License or Authority. The Secretary of Labor shall have the power
to suspend or cancel any license or authority to recruit employees for overseas employment for violation of rules
and regulations issued by the Minister of Labor, the Overseas Employment Development Board, and the
National Seamen Board, or for violations of the provisions of this and other applicable laws, General Orders and
Letters of Instructions.
4 Section 1, (d) (2) and (5), Rule II, Book II:
Section 1. Requirements for Issuance of License and Authority. Every applicant for license or authority to
operate a private employment agency, private recruitment entity or manning agency shall submit a written
application together with the following requirements:
xxxxxxxxx
(d) A verified undertaking stating that the applicant:
xxxxxxxxx
(2) shall assume full and complete responsibility for all claims and liabilities which may arise in connection with
the use of license;
xxxxxxxxx
(5) shall assume full and complete responsibility for all acts of its officials, employees and representatives done
in connection with recruitment and placement.
Also: Section 2, Rule VI, Book II:
Section 2. Grounds for Suspension, Cancellation or Revocation. A license or authority shall be cancelled,
suspended or revoked on any of the following grounds, among others:
(a) Imposing or accepting directly or indirectly any amount of money, goods or services, or any fee or bond in
excess of what is prescribed by the Administration;

66
 xxxxxxxxx
(w) Violation of other pertinent provisions of the Labor Code and other relevant laws, rules and regulations."
5 See Sections 6, 7, 8 and 11, Rule 3, Revised Rules of Court.

----------

SECOND DIVISION

G.R. No. 107062 February 21, 1994

PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents.

Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for petitioner.
A.M. Sison, Jr. & Associates for private respondent.

DECISION

NOCON, J.:

Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get a favorable
decision from the Regional Trial Court and then again in the Court of Appeals. 1 These are non-
appearance during the pre-trial despite due notice, and non-payment of docket fees upon filing of its third-
party complaint. Just how strict should these rules be applied is a crucial issue in this present dispute.

Petitioner, Interworld Assurance Corporation (the company now carries the corporate name Philippine
Pryce Assurance Corporation), was the butt of the complaint for collection of sum of money, filed on May
13, 1988 by respondent, Gegroco, Inc. before the Makati Regional Trial Court, Branch 138. The complaint
alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated
October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED THOUSAND
(P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS, respectively.

On June 16, 1988, summons, together with the copy of the complaint, was served on petitioner. Within
the reglementary period, two successive motions were filed by petitioner praying for a total of thirty (30)
days extention within which to file a responsible pleading.

In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted having executed
the said bonds, but denied liability because allegedly 1) the checks which were to pay for the premiums
bounced and were dishonored hence there is no contract to speak of between petitioner and its supposed
principal; and 2) that the bonds were merely to guarantee payment of its principal's obligation, thus,
excussion is necessary. After the issues had been joined, the case was set for pre-trial conference on
September 29, 1988. the petitioner received its notice on September 9, 1988, while the notice addressed
to its counsel was returned to the trial court with the notation "Return to Sender, Unclaimed." 2

On the scheduled date for pre-trial conference, only the counsel for petitioner appeared while both the
representative of respondent and its counsel were present. The counsel for petitioner manifested that he
was unable to contract the Vice-President for operations of petitioner, although his client intended to file a
third party complaint against its principal. Hence, the pre-trial was re-set to October 14, 1988. 3

On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party Complaint" with the Third-
Party Complaint attached. On this same day, in the presence of the representative for both petitioner and

67
respondent and their counsel, the pre-trial conference was re-set to December 1, 1988. Meanwhile on
November 29, 1988, the court admitted the Third Party Complaint and ordered service of summons on
third party defendants. 4

On scheduled conference in December, petitioner and its counsel did not appear notwithstanding their
notice in open court. 5 The pre-trial was nevertheless re-set to February 1, 1989. However, when the case
was called for pre-trial conference on February 1, 1989, petitioner was again nor presented by its officer
or its counsel, despite being duly notified. Hence, upon motion of respondent, petitioner was considered
as in default and respondent was allowed to present evidence ex-parte, which was calendared on
February 24, 1989. 6 Petitioner received a copy of the Order of Default and a copy of the Order setting the
reception of respondent's evidence ex-parte, both dated February 1, 1989, on February 16, 1989. 7

On March 6, 1989, a decision was rendered by the trial court, the dispositive portion reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant Interworld Assurance Corporation to pay the amount of P1,500,000.00
representing the principal of the amount due, plus legal interest thereon from April 7,
8
1988, until date of payment; and P20,000.00 as and for attorney's fees.

Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having been denied it
elevated its case to the Court of Appeals which however, affirmed the decision of the trial court as well as
the latter's order denying petitioner's motion for reconsideration.

Before us, petitioner assigns as errors the following:

I. The respondent Court of Appeals gravely erred in declaring that the case was already
ripe for pre-trial conference when the trial court set it for the holding thereof.

II. The respondent Court of Appeals gravely erred in affirming the decision of the trial
court by relying on the ruling laid down by this Honorable Court in the case of Manchester
Development Corporation v. Court of Appeals, 149 SCRA 562, and disregarding the
doctrine laid down in the case of Sun Insurance Office, Ltd. (SIOL) v. Asuncion, 170
SCRA 274.

III. The respondent Court of Appeals gravely erred in declaring that it would be useless
and a waste of time to remand the case for further proceedings as defendant-appellant
has no meritorious defense.

We do not find any reversible error in the conclusion reached by the court a quo.

Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that since the last pleading, which
was supposed to be the third-party defendant's answer has not been filed, the case is not yet ripe for pre-
trial. This argument must fail on three points. First, the trial court asserted, and we agree, that no answer
to the third party complaint is forthcoming as petitioner never initiated the service of summons on the third
party defendant. The court further said:

. . . Defendant's claim that it was not aware of the Order admitting the third-party
complaint is preposterous. Sec. 8, Rule 13 of the Rules, provides:

Completeness of service . . . Service by registered mail is complete

upon actual receipt by the addressee, but if he fails to claim his mail from
the post office within five (5) days from the date of first notice of the
postmaster, service shall take effect at the expiration of such time. 9

68
Moreover, we observed that all copies of notices and orders issued by the court for petitioner's counsel
were returned with the notation "Return to Sender, Unclaimed." Yet when he chose to, he would appear in
court despite supposed lack of notice.

Second, in the regular course of events, the third-party defendant's answer would have been regarded as
the last pleading referred to in Sec. 1, Rule 20. However, petitioner cannot just disregard the court's order
to be present during the pre-trial and give a flimsy excuse, such as that the answer has yet to be filed.

The pre-trial is mandatory in any action, the main objective being to simplify, abbreviate and expedite trial,
if not to fully dispense with it. Hence, consistent with its mandatory character the Rules oblige not only the
10
lawyers but the parties as well to appear for this purpose before the Court and when a party fails to
appear at a pre-trial conference he may be non-suited or considered as in default. 11

Records show that even at the very start, petitioner could have been declared as in default since it was
not properly presented during the first scheduled pre-trial on September 29, 1988. Nothing in the record is
attached which would show that petitioner's counsel had a special authority to act in behalf of his client
other than as its lawyer.

We have said that in those instances where a party may not himself be present at the pre-trial, and
another person substitutes for him, or his lawyer undertakes to appear not only as an attorney but in
substitution of the client's person, it is imperative for that representative or the lawyer to have "special
authority" to enter into agreements which otherwise only the client has the capacity to make. 12

Third, the court of Appeals properly considered the third-party complaint as a mere scrap of paper due to
petitioner's failure to pay the requisite docket fees. Said the court a quo:

A third-party complaint is one of the pleadings for which Clerks of court of Regional Trial
Courts are mandated to collect docket fees pursuant to Section 5, Rule 141 of the Rules
of Court. The record is bereft of any showing tha(t) the appellant paid the corresponding
docket fees on its third-party complaint. Unless and until the corresponding docket fees
are paid, the trial court would not acquire jurisdiction over the third-party complaint
(Manchester Development Corporation vs. Court of Appeals, 149 SCRA 562). The third-
party complaint was thus reduced to a mere scrap of paper not worthy of the trial court's
attention. Hence, the trial court can and correctly set the case for pre-trial on the basis of
the complaint, the answer and the answer to the counterclaim. 13

It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd. (SIOL) v. Asuncion
14 15
or that in Manchester Development Corp. v. C.A. was applied. Sun Insurance and Manchester are
mere reiteration of old jurisprudential pronouncements on the effect of non-payment of docket fees. 16 In
previous cases, we have consistently ruled that the court cannot acquire jurisdiction over the subject
matter of a case, unless the docket fees are paid.

Moreover, the principle laid down in Manchester could have very well been applied in Sun Insurance. We
then said:

The principle in Manchester [Manchester Development Corp. v. C.A., 149 SCRA 562
(1987)] could very well be applied in the present case. The pattern and the intent to
defraud the government of the docket fee due it is obvious not only in the filing of the
original complaint but also in the filing of the second amended complaint.

xxx xxx xxx

69
 In the present case, a more liberal interpretation of the rules is called for considering that,
unlike Manchester, private respondent demonstrated his willingness to abide by the rules
by paying the additional docket fees as required. The promulgation of the decision in
Manchester must have had that sobering influence on private respondent who thus paid
the additional docket fee as ordered by the respondent court. It triggered his change of
stance by manifesting his willingness to pay such additional docket fees as may be
17
ordered.

Thus, we laid down the rules as follows:

1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the
payment of the prescribed docket fee, that vests a trial court with jurisdiction over the
subject-matter or nature of the action. Where the filing of the initiatory pleading is not
accompanied by payment of the docket fee, the court may allow payment of the fee
within a reasonable time, but in no case beyond the applicable prescriptive or
reglamentary period.

2. The same rule applies to permissive counterclaims, third-party claims and similar
pleadings, which shall not be considered filed until and unless the filing fee prescribed
therefor is paid. The court may also allow payment of said fee within a prescriptive or
reglementary period.

3. Where the trial court acquires jurisdiction over a claim by the filing of the appropriate
pleading and payment of the prescribed filing fee, but subsequently, the judgment awards
a claim nor specified in the pleading, or if specified the same has not been left for
determination by the court, the additional filing fee therefor shall constitute a lien on the
judgment. It shall be the responsibility of the clerk of court or his duly authorized deputy
to enforce said lien and assess and collect the additional
fee. 18

It should be remembered that both in Manchester and Sun Insurance plaintiffs therein paid docket fees
upon filing of their respective pleadings, although the amount tendered were found to be insufficient
considering the amounts of the reliefs sought in their complaints. In the present case, petitioner did not
and never attempted to pay the requisite docket fee. Neither is there any showing that petitioner even
manifested to be given time to pay the requisite docket fee, as in fact it was not present during the
scheduled pre-trial on December 1, 1988 and then again on February 1, 1989. Perforce, it is as if the
third-party complaint was never filed.

Finally, there is reason to believe that partitioner does not really have a good defense. Petitioner hinges
its defense on two arguments, namely: a) that the checks issued by its principal which were supposed to
pay for the premiums, bounced, hence there is no contract of surety to speak of; and 2) that as early as
1986 and covering the time of the Surety Bond, Interworld Assurance Company (now Phil. Pryce) was not
yet authorized by the insurance Commission to issue such bonds.

The Insurance Code states that:

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. . . . (emphasis added)

70
The above provision outrightly negates petitioner's first defense. In a desperate attempt to escape liability,
petitioner further asserts that the above provision is not applicable because the respondent allegedly had
not accepted the surety bond, hence could not have delivered the goods to Sagum Enterprises. This
statement clearly intends to muddle the facts as found by the trial court and which are on record.

In the first place, petitioner, in its answer, admitted to have issued the bonds subject matter of the original
19
action. Secondly, the testimony of Mr. Leonardo T. Guzman, witness for the respondent, reveals the
following:

Q. What are the conditions and terms of sales you extended to Sagum General
Merchandise?

A. First, we required him to submit to us Surety Bond to guaranty payment of the spare
parts to be purchased. Then we sell to them on 90 days credit. Also, we required them to
issue post-dated checks.

Q. Did Sagum General merchandise comply with your surety bond requirement?

A. Yes. They submitted to us and which we have accepted two surety bonds.

Q Will you please present to us the aforesaid surety bonds?

A. Interworld Assurance Corp. Surety Bond No. 0029 for P500,000 dated July 24, 1987
and Interworld Assurance Corp. Surety Bond No. 0037 for P1,000.000 dated October 7,
1987. 20

Likewise attached to the record are exhibits C to C-18 21 consisting of delivery invoices addressed to
Sagum General Merchandise proving that parts were purchased, delivered and received.

On the other hand, petitioner's defense that it did not have authority to issue a Surety Bond when it did is
an admission of fraud committed against respondent. No person can claim benefit from the wrong he
himself committed. A representation made is rendered conclusive upon the person making it and cannot
be denied or disproved as against the person relying thereon. 22

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dismissing the petition
before them and affirming the decision of the trial court and its order denying petitioner's Motion for
Reconsideration are hereby AFFIRMED. The present petition is DISMISSED for lack of merit.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

Footnotes
1 Gegroco, Inc. v. Phil. Pryce Assurance Corp., CA-G.R. CV No. 25539, Justice Eduardo R. Bengzon, ponente.
Justices Lorna Lombos-de la Fuente and Quirino Abad Santos, Jr., concurring.
2 see attached notice on p. 29, Original Record.
3 Order of the Court dated September 29, 1988, p. 33 of the Original Record.
4 Original Record, p. 45.
5 Id., p. 43.
6 Id., p. 52.
7 see attached return slip on p. 52, Original Record.
8 Original Record, p. 108.
9 Order of the Court dated September 29, 1989, Original Record, p. 120.
10 Sec. 1, Rule 20, Rules of Court.

71
 11 Development Bank of the Philippines v. Court of Appeals, G.R. No. 49410, 169 SCRA 409 (1989).
12 Home Insurance Co. v. U.S. Lines Co., G.R. No. L-25593, 21 SCRA 863; Barrera v. Militante, G.R. No. L-
54681, 114 SCRA 323.
13 Rollo, p. 27.
14 G.R. No. 79937, 170 SCRA 274 (1989).
15 G.R. No. L-75919, 149 SCRA 562 (1987).
16 Lazaro v. Endencia and Andres, 51 Phil. 552 (1932); Lee v. Republic, 10 SCRA 65 (1964); Malimit v.
Degamo, 12 SCRA 450 (1964); Garcia v. Vasquez, 28 SCRA 330 (1969); Magaspi v. Ramolete, 115 SCRA 193
(1982).
17 sun Insurance Office, Ltd. (SIOL) v. Hon. Maximiano Asuncion, G.R. No. 79937-38, 170 SCRA 274 (1989).
18 Sun Insurance, supra, at p. 285.
19 Rollo, p. 68.
20 TSN of February 24, 1989, p. 2, Original Record, p. 55.
21 Original Record, pp. 67-85.
22 Article 1431, New Civil Code.

----------

SECOND DIVISION

G.R. No. 165487 July 13, 2011

COUNTRY BANKERS INSURANCE CORPORATION, Petitioner,

vs.
ANTONIO LAGMAN, Respondent.

DECISION

PEREZ, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, assailing the
Decision1 and Resolution2 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 palay valued at P5,250,000.00 in his warehouse at
Barangay Malacampa, Camiling, Tarlac. Under Act No. 3893 or the General Bonded Warehouse Act, as
3
amended, 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.
033044 for P1,749,825.00 on 5 November 1989 and Warehouse Bond No. 023555 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 Agreements6 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

72
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

8
Santos then secured a loan using his warehouse receipts as collateral. 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 pay
10
P1,166,750.37.

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
15
severally liable to pay Country Bankers the amount of P2,400,499.87. The dispositive portion of the
16
RTC Decision 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
18
execution of the bonds.

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

73
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.

21
Country Bankers sought reconsideration which was denied in a Resolution dated 24 September 2004.

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.

74
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:

75
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
24
plaintiff.

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
28
follows: existence, execution, loss, and contents.

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

76
 29
the NFA in Tarlac, the third is with Country Bankers and the fourth was in his possession. 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
33
must be extinguished; and 4) There must be a valid new contract.

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 the new
contract, the old contract is not extinguished.

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.

77
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
35
the instance of the undersigned or anyone of them.

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. 361awphil

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

78
 TERESITA J. LEONARDO DE CASTRO* MARTIN S. VILLARAMA, JR.**
Associate Justice Associate Justice

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 T. CARPIO
Associate Justice
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.

RENATO C. CORONA
Chief Justice

Footnotes
*
Per Special Order No. 1043.
**
Penned by Associate Justice Magdangal M. De Leon with Associate Justices Roberto A. Barrios and Mariano
C. Del Castillo (now Supreme Court Associate Justice) concurring. Rollo, pp. 29-36.
1
Per Special Order No. 1006.
2
Id. at 37(a)-38.
3
As amended by Republic Act No. 247 (An Act to Amend Act No. 3893), Presidential Decree No. 4 (Creating the
National Grain Authority) and Presidential Decree No. 1770 (Creating the National Food Authority).
4
Records, p. 6.
5
Id. at 7.
6
Id. at 8-11.
7
Rollo, p. 57.
8
Santos obtained a loan from Far East Bank and Trust Co. and which was guaranteed by Quedan Rural Credit
Guarantee Corporation (Quedancor). He obtained a P4 Million loan, as evidenced by two (2) Promissory Notes
under the Quedan Financing For Grain Stocks program which matures on 29 January 1991. Santos executed a
Pledge Agreement using his Quedan Warehouse Receipts covering the sacks of palay to guarantee payment of
said loans. Quedancor then issued a Certificate of Guarantee Coverage upon request of FEBTC. Records, pp.
214-219 and 225.
9
Id. at 223.
10
The NFA, acting in behalf of Quedancor, proceeded against the surety bonds issued by Country Bankers
which, in turn, partially paid P1,166,750.37 to Quedancor and left a balance of P1,233,749.50. Id. at 233-234.
11
Answer with Affirmative and Special Defenses and Counterclaim. Rollo, pp. 61-63.
12
Records, p. 22.
13
Order dated 18 September 1995. Id. at 51.
14
Id. at 47.
15
See note 10.
16
Presided by Judge Zenaida R. Daguna. Rollo, pp. 81-86.
17
Id. at 86.
18
Id. at 84.

79
19
Brief for Antonio Lagman. CA rollo, pp. 21-24.
20
Rollo, pp. 29-36.
21
Id. at 37(a)-38.
22
Id. at 14.
23
Records, p. 174.
24
Id. at 281.
25
Herrera, REMEDIAL LAW, Vol. V (1999 ed.), p. 166.
26
See Consolidated Bank and Trust Corporation (SOLIDBANK) v. Del Monte Motor Works, Inc., G.R. No.
143338, 29 July 2005, 465 SCRA 117, 130-131.
27
Lee v. Tambago, A.C. No. 5281, 12 February 2008, 544 SCRA 393, 404.
28
Citibank, N.A. Mastercard v. Teodoro, 458 Phil. 480, 489 (2003) citing De Vera v. Aguilar, G.R. No. 83377, 9
February 1993, 218 SCRA 602, 606.
29
Testimony of Antonio Lagman. TSN, 29 April 1997, pp. 12-13.
30
Heirs of Teofilo Gabatan v. Court of Appeals, G.R. No. 150206, 13 March 2009, 581 SCRA 70, 87-88 citing
Department of Education, Culture and Sports v. Del Rosario, 490 Phil. 193, 204 (2005).
31
Citibank, N.A. Mastercard v. Teodoro, supra note 27 at 490 citing Herrera, REMEDIAL LAW, Vol. V (1999 ed.),
p. 178 citing further 5 Moran 88 (1980 ed.) and Peaks v. Cobb, 192 77 N.E. 881.
32
Rollo, p. 43.
33
Adriatico Consortium, Inc. v. LandBank of the Philippines, G.R. No. 187838, 23 December 2009, 609 SCRA
403, 421 citing Valenzuela v. Kalayaan Development & Industrial Corporation, G.R. No. 163244, 22 June 2009,
590 SCRA 380, 390-391; Security Bank and Trust Company, Inc. v. Cuenca, 396 Phil. 108, 122 (2000); Reyes v.
Court of Appeals, G.R. No. 120817, 4 November 1996, 264 SCRA 35, 43.
34
Salazar v. J.Y. Brothers Marketing Corporation, G.R. No. 171998, 20 October 2010; Foundation Specialists,
Inc. v. Betonval Ready Concrete, Inc., G.R. No. 170674, 24 August 2009, 596 SCRA 697, 707 citing Iloilo
Traders Finance, Inc. v. Heirs of Sps. Soriano, Jr., 452 Phil. 82, 89-90 (2003); Aquintey v. Tibong, G.R. No.
166704, 20 December 2006, 511 SCRA 414, 435-436.
35
Records, pp. 175-177.
36
Id.

80
IX. SURETYSHIP

Prudential Guarantee and Assurance, Inc. vs. Equinox Land Corporation, G.R. Nos.
152505-06 September 13, 2007
Intra-Strata Assurance Corp. vs. Republic, G.R. No. 156571 July 9, 2008

A suretyship as "a contract or agreement whereby a party, called the suretyship, 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, as amended." Corollarily, Article 2047 of the Civil Code
provides that suretyship arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling an obligation.

.while a contract of surety is secondary only to a valid principal obligation, the suretys liability
to the creditor is said to be direct, primary, and absolute. In other words, the surety is directly and
equally bound with the principal.

----------

FIRST DIVISION

G.R. Nos. 152505-06 September 13, 2007

PRUDENTIAL GUARANTEE and ASSURANCE, INC., petitioner,

vs.
EQUINOX LAND CORPORATION, respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

Before us for resolution is the instant Petition for Review on Certiorari assailing the Decision1 of the Court
of Appeals (Third Division) dated November 23, 2001 in CA-G.R. SP No. 56491 and CA-G.R. SP No.
57335.

The undisputed facts of the case, as established by the Construction Industry Arbitration Commission
(CIAC) and affirmed by the Court of Appeals, are:

Sometime in 1996, Equinox Land Corporation (Equinox), respondent, decided to construct five (5)
additional floors to its existing building, the Eastgate Centre, located at 169 EDSA, Mandaluyong City. It
then sent invitations to bid to various building contractors. Four (4) building contractors, including JMarc
Construction & Development Corporation (JMarc), responded.

81
Finding the bid of JMarc to be the most advantageous, Equinox offered the construction project to it. On
February 22, 1997, JMarc accepted the offer. Two days later, Equinox formally awarded to JMarc the
contract to build the extension for a consideration of P37,000,000.00.

On February 24, 1997, JMarc submitted to Equinox two (2) bonds, namely: (1) a surety bond issued by
Prudential Guarantee and Assurance, Inc. (Prudential), herein petitioner, in the amount of P9,250,000.00
to guarantee the unliquidated portion of the advance payment payable to JMarc; and (2) a performance
bond likewise issued by Prudential in the amount of P7,400,000.00 to guarantee JMarcs faithful
performance of its obligations under the construction agreement.

On March 17, 1997, Equinox and JMarc signed the contract and related documents. Under the terms of
the contract, JMarc would supply all the labor, materials, tools, equipment, and supervision required to
complete the project.

In accordance with the terms of the contract, Equinox paid JMarc a downpayment of P9,250,000.00
equivalent to 25% of the contract price.

JMarc did not adhere to the terms of the contract. It failed to submit the required monthly progress
billings for the months of March and April 1997. Its workers neglected to cover the drainpipes, hence, they
were clogged by wet cement. This delayed the work on the project.

On May 23, 1997, JMarc requested an unscheduled cash advance of P300,000.00 from Equinox,
explaining it had encountered cash problems. Equinox granted JMarcs request to prevent delay.

On May 31, 1997, JMarc submitted its first progress billing showing that it had accomplished only
7.3825% of the construction work estimated at P2,731,535.00. After deducting the advanced payments,
the net amount payable to JMarc was only P1,285,959.12. Of this amount, Equinox paid JMarc only
P697,005.12 because the former paid EXAN P588,954.00 for concrete mix.

Shortly after Equinox paid JMarc based on its first progress billing, the latter again requested an
advanced payment of P150,000.00. Again Equinox paid JMarc this amount. Eventually, Equinox found
that the amount owing to JMarcs laborers was only P121,000.00, not P150,000.00.

In June 1997, EXAN refused to deliver concrete mix to the project site due to JMarcs recurring failure to
pay on time. Faced with a looming delay in the project schedule, Equinox acceded to EXANs request that
payments for the concrete mix should be remitted to it directly.

On June 30, 1997, JMarc submitted its second progress billing showing that it accomplished only
16.0435% of the project after 4 months of construction work. Based on the contract and its own schedule,
JMarc should have accomplished at least 37.70%.

Faced with the problem of delay, Equinox formally gave JMarc one final chance to take remedial steps in
order to finish the project on time. However, JMarc failed to undertake any corrective measure.
Consequently, on July 10, 1997, Equinox terminated its contract with JMarc and took over the project. On
the same date, Equinox sent Prudential a letter claiming relief from JMarcs violations of the contract.

On July 11, 1997, the work on the project stopped. The personnel of both Equinox and JMarc jointly
conducted an inventory of all materials, tools, equipment, and supplies at the construction site. They also
measured and recorded the amount of work actually accomplished. As of July 11, 1997, JMarc
accomplished only 19.0573% of the work or a shortage of 21.565% in violation of the contract.

The cost of JMarcs accomplishment was only P7,051,201.00. In other words, Equinox overpaid JMarc in
the sum of P3,974,300.25 inclusive of the 10% retention on the first progress billing amounting to

82
P273,152.50. In addition, Equinox also paid the wages of JMarcs laborers, the billings for unpaid
supplies, and the amounts owing to subcontractors of JMarc in the total sum of P664,998.09.

On August 25, 1997, Equinox filed with the Regional Trial Court (RTC), Branch 214, Mandaluyong City a
complaint for sum of money and damages against JMarc and Prudential. Equinox prayed that JMarc be
ordered to reimburse the amounts corresponding to its (Equinox) advanced payments and unliquidated
portion of its downpayment; and to pay damages. Equinox also prayed that Prudential be ordered to pay
its liability under the bonds.

In its answer, JMarc alleged that Equinox has no valid ground for terminating their contract. For its part,
Prudential denied Equinoxs claims and instituted a cross-claim against JMarc for any judgment that
might be rendered against its bonds.

During the hearing, Prudential filed a motion to dismiss the complaint on the ground that pursuant to
Executive Order No. 1008, it is the CIAC which has jurisdiction over it.

On February 12, 1999, the trial court granted Prudentials motion and dismissed the case.

On May 19, 1999, Equinox filed with the CIAC a request for arbitration, docketed as CIAC Case No. 17-
99. Prudential submitted a position paper contending that the CIAC has no jurisdiction over it since it is
not a privy to the construction contract between Equinox and JMarc; and that its surety and performance
bonds are not construction agreements, thus, any action thereon lies exclusively with the proper court.

On December 21, 1999, the CIAC rendered its Decision in favor of Equinox and against JMarc and
Prudential, thus:

AWARD

After considering the evidence and the arguments of the parties, we find that:

1. JMarc has been duly notified of the filing and pendency of the arbitration proceeding
commenced by Equinox against JMarc and that CIAC has acquired jurisdiction over JMarc;

2. The construction Contract was validly terminated by Equinox due to JMarcs failure to provide
a timely supply of adequate labor, materials, tools, equipment, and technical services and to
remedy its inability to comply with the construction schedule;

3. Equinox is not entitled to claim liquidated damages, although under the circumstances, in the
absence of adequate proof of actual and compensatory damages, we award to Equinox nominal
or temperate damages in the amount of P500,000.00;

4. The percentage of accomplishment of JMarc at the time of the termination of the Contract was
19.0573% of the work valued at P7,051,201.00. This amount should be credited to JMarc. On the
other hand, Equinox [i] had paid JMarc 25% of the contract price as down or advance payment,
[ii] had paid JMarc its first progress billing, [iii] had made advances for payroll of the workers, and
for unpaid supplies and the works of JMarcs subcontractors, all in the total sum of
P11,690,483.34. Deducting the value of JMarcs accomplishment from these advances and
payment, there is due from JMarc to Equinox the amount of P4,639,285.34. We hold JMarc
liable to pay Equinox this amount of P4,639,285.34.

5. If JMarc had billed Equinox for its accomplishment as of July 11, 1997, 25% of the
P7,051,201.00 would have been recouped as partial payment of the advanced or down payment.
This would have resulted in reducing Prudentials liability on the Surety Bond from P8,250,000.00

83
 to P7,487,199.80. We, therefore, find that Prudential is liable to Equinox on its Surety Bond the
amount of P7,487,199.80;

6. Prudential is furthermore liable on its Performance Bond for the following amounts: the
advances made by Equinox on behalf of JMarc to the workers, suppliers, and subcontractors
amounting to P664,985.09, the nominal damages of P500,000.00 and attorneys fees of
P100,000.00 or a total amount of P1,264,985.00;

7. All other claims and counterclaims are denied;

8. JMarc shall pay the cost of arbitration and shall indemnify Equinox the total amount paid by
Equinox as expenses of arbitration;

9. The total liability of JMarc to Equinox is determined to be P5,139,285.34 plus attorneys fees of
P100,000.00. The suretys liability cannot exceed that of the principal debtor [Art. 2054, Civil
Code}. We hold that, notwithstanding our finding in Nos. 5 and 6 of this Award, Prudential is liable
to Equinox on the Surety Bond and Performance Bond an amount not to exceed P5,239,285.34.
The cost of arbitration shall be paid by JMarc alone.

The amount of P5,239,285.34 shall be paid by respondent JMarc and respondent Prudential,
jointly and severally, with interest at six percent [6%] per annum from promulgation of this award.
This amount, including accrued interest, shall earn interest at the rate of 12% per annum from the
time this decision becomes final and executory until the entire amount is fully paid or judgment
fully satisfied. The expenses of arbitration, which shall be paid by JMarc alone, shall likewise
earn interest at 6% per annum from the date of promulgation of the award, and 12% from the
date the award becomes final until this amount including accrued interest is fully paid.

SO ORDERED.

Thereupon, Prudential filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No.
56491. Prudential alleged that the CIAC erred in ruling that it is bound by the terms of the construction
contract between Equinox and JMarc and that it is solidarily liable with JMarc under its bonds.

Equinox filed a motion for reconsideration on the ground that there is an error in the computation of its
claim for unliquidated damages; and that it is entitled to an award of liquidated damages.

On February 2, 2000, the CIAC amended its Award by reducing the total liability of JMarc to Equinox to
P4,060,780.21, plus attorneys fees of P100,000 or P4,160,780.21, and holding that Prudentials liability
to Equinox on the surety and performance bonds should not exceed the said amount of P4,160,780.21,
payable by JMarc and Prudential jointly and severally.

Dissatisfied, Equinox filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No.
57335. This case was consolidated with CA-G.R. SP No. 56491 filed by Prudential.

On November 23, 2001, the Court of Appeals rendered its Decision in CA-G.R. SP No. 57335 and CA-
G.R. SP No. 56491, the dispositive portion of which reads:

WHEREFORE, the Amended Decision dated February 2, 2000 is AFFIRMED with

MODIFICATION in paragraph 4 in the Award by holding JMarc liable for unliquidated damages to
Equinox in the amount of P5,358,167.09 and in paragraph 9 thereof by increasing the total liability
of JMarc to Equinox to P5,958,167.09 (in view of the additional award of P500,000.00 as nominal
and temperate damages and P100,000.00 in attorneys fees), and AFFIRMED in all other
respects.

84
 SO ORDERED.

Prudential seasonably filed a motion for reconsideration but it was denied by the Court of Appeals.

The issue raised before us is whether the Court of Appeals erred in (1) upholding the jurisdiction of the
CIAC over the case; and (2) finding Prudential solidarily liable with JMarc for damages.

On the first issue, basic is the rule that administrative agencies are tribunals of limited jurisdiction and as
such, can only wield such powers as are specifically granted to them by their enabling statutes.2

3
Section 4 of Executive Order No. 1008, provides:

SEC. 4. Jurisdiction. The CIAC shall have original and exclusive jurisdiction over disputes
arising from, or connected with contracts entered into by parties involved in construction in the
Philippines, whether the dispute arises before or after the completion of the contract, or after the
abandonment or breach thereof. These disputes may involve government or private contracts.
For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to
voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of specifications for
materials and workmanship, violation of the terms of agreement, interpretation and/or application
of contractual time and delays, maintenance and defects, payment, default of employer or
contractor and changes in contract cost.

Excluded from the coverage of the law are disputes arising from employer-employee relationships
which continue to be covered by the Labor Code of the Philippines.

In David v. Construction Industry and Arbitration Commission,4 we ruled that Section 4 vests upon the
CIAC original and exclusive jurisdiction over disputes arising from or connected with construction
contracts entered into by parties who have agreed to submit their case for voluntary arbitration.

As earlier mentioned, when Equinox lodged with the RTC its complaint for a sum of money against JMarc
and Prudential, the latter filed a motion to dismiss on the ground of lack of jurisdiction, contending that
since the case involves a construction dispute, jurisdiction lies with CIAC. Prudentials motion was
granted. However, after the CIAC assumed jurisdiction over the case, Prudential again moved for its
dismissal, alleging that it is not a party to the construction contract between Equinox and JMarc; and that
the surety and performance bonds it issued are not construction agreements.

After having voluntarily invoked before the RTC the jurisdiction of CIAC, Prudential is estopped to
question its jurisdiction. As we held in Lapanday Agricultural & Development Corporation v. Estita,5 the
active participation of a party in a case pending against him before a court or a quasi-judicial body is
tantamount to a recognition of that courts or quasi-judicial bodys jurisdiction and a willingness to abide
by the resolution of the case and will bar said party from later on impugning the courts or quasi-judicial
bodys jurisdiction.

Moreover, in its Reply to Equinoxs Opposition to the Motion to Dismiss before the RTC, Prudential, citing
Philippine National Bank v. Pineda6 and Finman General Assurance Corporation v. Salik,7 argued that as
a surety, it is considered under the law to be the same party as the obligor in relation to whatever is
adjudged regarding the latters obligation. Therefore, it is the CIAC which has jurisdiction over the case
involving a construction contract between Equinox and JMarc. Such an admission by Prudential binds it
and it cannot now claim otherwise.

85
Anent the second issue, it is not disputed that Prudential entered into a suretyship contract with JMarc.
Section 175 of the Insurance Code defines a suretyship as "a contract or agreement whereby a party,
called the suretyship, 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,
8
stipulations, bonds, or undertakings issued under Act 536 , as amended." Corollarily, Article 2047 of the
Civil Code provides that suretyship arises upon the solidary binding of a person deemed the surety with
the principal debtor for the purpose of fulfilling an obligation.

In Castellvi de Higgins and Higgins v. Seliner,9 we held that while a surety and a guarantor are alike in
that each promises to answer for the debt or default of another, the surety assumes liability as a
regular party to the undertaking and hence its obligation is primary.

In Security Pacific Assurance Corporation v. Tria-Infante,10 we reiterated the rule that while a contract of
surety is secondary only to a valid principal obligation, the suretys liability to the creditor is said to be
direct, primary, and absolute. In other words, the surety is directly and equally bound with the principal.
Thus, Prudential is barred from disclaiming that its liability with JMarc is solidary.

WHEREFORE, we DENY the petition. The assailed Decision of the Court of Appeals (Third Division)
dated November 23, 2001 in CA-G.R. SP No. 56491 and CA-G.R. SP No. 57355 is AFFIRMED in toto.
Costs against petitioner.

SO ORDERED.

Puno, C.J., Chairperson, Corona, Garcia, JJ., concur.

Azcuna*, J., no part.

Footnotes
*
Former counsel of Prudential Guarantee and Assurance, Inc.
1
Rollo, pp. 96-109. Per Associate Justice Marina L. Buzon and concurred in by Associate Justice Buenaventura
J. Guerrero and Associate Justice Alicia L. Santos (both retired).
2
Sumndad v. Harrigan, G.R. No. 132358, April 12, 2002, 381 SCRA 8.
3
Entitled Creating An Arbitration Machinery In The Construction Industry of the Philippines or more popularly
known as the Construction Industry Arbitration Law.
4
G.R. No. 159795, July 30, 2004, 435 SCRA 654.
5
G.R. No. 162109, January 21, 2005, 449 SCRA 240, citing Alcantara v. Commission on Settlement of Land
Problems, 361 SCRA 664 (2001).
6
G.R. No. 46658, May 13, 1991, 197 SCRA 1.
7
G.R. No. 84084, August 20, 1990, 188 SCRA 740.
8
AN ACT RELATIVE TO RECOGNIZANCES, STIPULATIONS, BONDS, AND UNDERTAKINGS, AND TO
ALLOW CERTAIN CORPORATIONS TO BE ACCEPTED AS SURETY THEREON.
9
41 Phil. 142 (1920).
10
G.R. No. 144740, August 31, 2005, 468 SCRA 526.

----------

SECOND DIVISION

G.R. No. 156571 July 9, 2008

INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME ASSURANCE

CORPORATION, Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF CUSTOMS, Respondent.

86
 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 Appeals1 (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
4
Tariff and Customs Code (Code), 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) 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;

(2) 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;

(3) the forfeiture of all the General Warehousing Bonds executed by Intra-Strata and PhilHome;
and

(4) all the defendants to pay the costs of suit.

87
 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

2. 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 COURTS RULING

We find no merit in the petition and consequently affirm the CA decision.

Nature of the Suretys 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
10
necessary in interpreting the provisions of a contract of suretyship." 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 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 latters obligations and
12
does not receive any benefit therefrom.

The Bonds Under Consideration

88
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 obligors obligation.

89
The second element to consider in a suretyship agreement relates to the terms of the bonds themselves,
14
under the rule that the terms of the suretyship are determined by the suretyship contract itself. The
15
General Warehousing Bond 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 lawfully withdrawn 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 principals 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

90
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 debtors default. The creditor in this latter relationship accepts the
18
suretys solidary undertaking to pay if the debtor does not pay. Such acceptance, however, does not
change in any material way the creditors 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 one-way 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 debtors 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
20 21
undertaking. Under these terms, the surety is not entitled as a rule to a separate notice of default, nor

91
 22 23
to the benefit of excussion, and may be sued separately or together with the principal debtor. The
words of this Court in Palmares v. CA24 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
principals 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 principals
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 creditors 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 principals default.

The petitioners reliance on Visayan Surety and Insurance Corporation v. Pascual 25 and Aguasin v.
26
Velasquez 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 Bureaus 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.lawphi1 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.

92
WHEREFORE, premises considered, we hereby DENY the petition and AFFIRM the Decision of the
Court of Appeals. Costs against the petitioners.

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

*
DANTE O. TINGA RUBEN T. REYES
Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO**

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

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

Footnotes
*
Designated as additional member of the Second Division per Special Order No. 504 dated May 15, 2008.
**
Designated as additional member of the Second Division per Special Order No. 505 dated May 15, 2008.
1
In CA G.R. CV. No. 54346, penned by Associate Justice Elvi John Asuncion (dismissed) with Associate
Justices Conrado Vasquez and Sergio Pestao, concurring; rollo, pp. 24-30.
2
Id., pp. 31-44.
3
Id., p. 44.
4
Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehousing Bonds. After articles
declared in the entry for warehousing 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
nineteen hundred eight of this Code and for payment of any duties, taxes and other charges to which the articles
shall be then subject and upon compliance with all legal requirements regarding their importation.

93
5
Fully quoted at pages 7 and 8; infra, at note 15.
6
Rollo, p. 25.
7
Id, p. 44.
8
Id., p. 11.
9
Supra, at note 4.
10
INSURANCE CODE, Section 178.
11
CIVIL CODE, Article 2047.
12
Garcia v. CA and Lasal Development Corporation, G.R. No. 80201, November 20, 1990, 191 SCRA 493.
13
Maritime Company of the Philippines v. Reparations Commission, G.R. No. L-29203, July 26, 1971, 40 SCRA
70.
14
Umali v. Court of Appeals, G.R. No. 89561, September 13, 1960, 189 SCRA 529.
15
OIC Bond No. C (12) 00563, Exh. "W" of the Plaintiff, Record, p. 484.
16
NASSCO v. Torrento, G.R. No. L-21109, June 26, 1967, 20 SCRA 427.
17
Par. 20 of the Petitioners Memorandum; rollo, p. 142.
18
See: Government v. Marcelino Tizon, et al., G.R. No. L-22108, August 30, 1967, 20 SCRA 1182.
19
De Leon, H., Comments and Cases on Credit Transaction, 2002 ed., p. 234.
20
CIVIL CODE, Article 1216.
21
74 Am. Jur. 35.
22
Manila Surety & Fidelity Co, Inc. v. Batu Construction & Co., 101 Phil. 494 (1957).
23
Supra, notes 16 and 20.
24
G.R. No. 126490, March 31, 1998, 288 SCRA 422, 439.
25
85 Phil. 779 (1950).
26
88 Phil. 357 (1951).
27
PhilHome Bond No. 7415378, Exhibit "1" of Defendant, Record, p. 555; OIC Bond No. C(12)-00563, Exhibit
"W" of Plaintiff, Record, p. 484.
28
Republic of the Philippines v. Heirs of Felix Caballero, G.R. No. L-27473, September 30, 1977, 208 SCRA
726.
29
Caltex Philippines v. COA, G.R. No. 92585, May 8, 1992, 208 SCRA 726.
30
G.R. No. 106611, July 21, 1994, 243 SCRA 348.

94
X. TAX EXEMPTIONS

Commissioner of Internal Revenue vs. Philippine American Accident Insurance Co., G. R.

No. 141658. March 18, 2005

The separate provisions on lending investors and insurance companies demonstrate an

intention to treat these businesses differently. If Congress intended insurance companies to be
taxed as lending investors, there would be no need for Section 182(A)(3)(gg). Section
182(A)(3)(dd) would have been sufficient. That insurance companies were included with banks,
finance and investment companies also supports the CTAs conclusion that insurance
companies had more in common with the latter enterprises than with lending investors. As the
CTA pointed out, banks also regularly lend money at interest, but are not taxable as lending
investors.

----------

FIRST DIVISION
G. R. No. 141658. March 18, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., THE PHILIPPINE
AMERICAN ASSURANCE COMPANY, INC., and THE PHILIPPINE AMERICAN GENERAL
INSURANCE CO., INC., respondents.

DECISION
CARPIO, J.:

The Case

[1] [2]
Before the Court is a petition for review assailing the Decision of 7 January 2000 of the Court of
Appeals in CA-G.R. SP No. 36816. The Court of Appeals affirmed the Decision[3] of 5 January 1995 of
the Court of Tax Appeals (CTA) in CTA Cases Nos. 2514, 2515 and 2516. The CTA ordered the
Commissioner of Internal Revenue (petitioner) to refund a total of P29,575.02 to respondent
companies (respondents).

Antecedent Facts

Respondents are domestic corporations licensed to transact insurance business in the country. From
August 1971 to September 1972, respondents paid the Bureau of Internal Revenue under protest the
[4]
3% tax imposed on lending investors by Section 195-A of Commonwealth Act No. 466 (CA 466), as
amended by Republic Act No. 6110 (RA 6110) and other laws. CA 466 was the National Internal
Revenue Code (NIRC) applicable at the time.

95
Respondents paid the following amounts: P7,985.25 from Philippine American (PHILAM) Accident
Insurance Company; P7,047.80 from PHILAM Assurance Company; and P14,541.97 from PHILAM
General Insurance Company. These amounts represented 3% of each companys interest income from
mortgage and other loans. Respondents also paid the taxes required of insurance companies under CA
466.
On 31 January 1973, respondents sent a letter-claim to petitioner seeking a refund of the taxes paid
under protest. When respondents did not receive a response, each respondent filed on 26 April 1973 a
petition for review with the CTA. These three petitions, which were later consolidated, argued that
respondents were not lending investors and as such were not subject to the 3% lending investors tax
under Section 195-A.
The CTA archived respondents case for several years while another case with a similar issue was
pending before the higher courts. When respondents case was reinstated, the CTA ruled that
respondents were entitled to their refund.

The Ruling of the Court of Tax Appeals

The CTA held that respondents are not taxable as lending investors because the term lending
investors does not embrace insurance companies. The CTA traced the history of the tax on lending
investors, as follows:
Originally, a person who was engaged in lending money at interest was taxed as a money lender.
[Sec. 1464(x), Rev. Adm. Code] The term money lenders was defined as including all persons
who make a practice of lending money for themselves or others at interest. [Sec. 1465(v), id.]
Under this law, an insurance company was not considered a money lender and was not taxable as
such. To quote from an old BIR Ruling:
The lending of money at interest by insurance companies constitutes a necessary incident of
their regular business. For this reason, insurance companies are not liable to tax as money
lenders or real estate brokers for making or negotiating loans secured by real property.
(Ruling, February 28, 1920; BIR 135.2) (The Internal Revenue Law, Annotated, 2nd ed.,
1929, by B.L. Meer, page 143)
The same rule has been applied to banks.
For making investments on salary loans, banks will not be required to pay the money lenders
tax imposed by this subsection, for the reason that money lending is considered a mere
incident of the banking business. [See Ruling No. 43, (October 8, 1926) 25 Off. Gaz. 1326)
(The Internal Revenue Law, Annotated, id.)
The term money lenders was later changed to lending investors but the definition of the term
remains the same. [Sec. 1464(x), Rev. Adm. Code, as finally amended by Com. Act No. 215, and
Sec. 1465(v) of the same Code, as finally amended by Act No. 3963] The same law is embodied in
the present National Internal Revenue Code (Com. Act No. 466) without change, except in the
amount of the tax. [See Secs. 182(A) (3) (dd) and 194(u), National Internal Revenue Code.]
It is a well-settled rule that an administrative interpretation of a law which has been followed and
applied for a long time, and thereafter the law is re-enacted without substantial change, such
administrative interpretation is deemed to have received legislative approval. In short, the
administrative interpretation becomes part of the law as it is presumed to carry out the legislative
[5]
purpose.
The CTA held that the practice of lending money at interest is part of the insurance business. CA 466
already taxes the insurance business. The CTA pointed out that the law recognizes and even regulates
this practice of lending money by insurance companies.

96
The CTA observed that CA 466 also treated differently insurance companies from lending investors in
regard to fixed taxes. Under Section 182(A)(3)(gg), insurance companies were subject to the same
fixed tax as banks and finance companies. The CTA reasoned that insurance companies were grouped
with banks and finance companies because the latters lending activities were also integral to their
business. In contrast, lending investors were taxed at a different fixed tax under Section 182(A)(3)(dd)
of CA 466. The CTA stated that insurance companies xxx had never been required by respondent
[6]
[CIR] to pay the fixed tax imposed on lending investors xxx.
The dispositive portion of the Decision of 5 January 1995 of the Court of Tax Appeals (CTA Decision)
reads:
WHEREFORE, premises considered, petitioners Philippine American Accident Insurance Co.,
Philippine American Assurance Co., and Philippine American General Insurance Co., Inc. are not
taxable on their lending transactions independently of their insurance business. Accordingly,
respondent is hereby ordered to refund to petitioner[s] the sum of P7,985.25, P7,047.80 and
P14,541.97 in CTA Cases No. 2514, 2515 and 2516, respectively representing the fixed and
percentage taxes when (sic) paid by petitioners as lending investor from August 1971 to
September 1972.
No pronouncement as to cost.
SO ORDERED.[7]
Dissatisfied, petitioner elevated the matter to the Court of Appeals.[8]

The Ruling of the Court of Appeals

The Court of Appeals ruled that respondents are not taxable as lending investors. In its Decision of 7
January 2000 (CA Decision), the Court of Appeals affirmed the ruling of the CTA, thus:
WHEREFORE, premises considered, the petition is DISMISSED, hereby AFFIRMING the
decision, dated January 5, 1995, of the Court of Tax Appeals in CTA Cases Nos. 2514, 2515 and
2516.
SO ORDERED.[9]
Petitioner appealed the CA Decision to this Court.

The Issues

Petitioner raises the sole issue:

WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO THE 3%
PERCENTAGE TAX AS LENDING INVESTORS UNDER SECTIONS 182(A)(3)(DD) AND 195-A,
RESPECTIVELY IN RELATION TO SECTION 194(U), ALL OF THE NIRC. [10]

The Ruling of the Court

The petition lacks merit.

On the Additional Issue Raised by Petitioner

97
Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on lending investors, depending on their
[11]
location. The sole question before the CTA was whether respondents were subject to the
percentage tax on lending investors under Section 195-A. Petitioner raised for the first time the issue
[12]
of the fixed tax in the Petition for Review petitioner filed before the Court of Appeals.
[13]
Ordinarily, a party cannot raise for the first time on appeal an issue not raised in the trial court. The
Court of Appeals should not have taken cognizance of the issue on respondents supposed liability
under Section 182(A)(3)(dd). However, we cannot entirely fault the Court of Appeals or petitioner. Even
if the percentage tax on lending investors was the sole issue before it, the CTA ordered petitioner to
refund to the PHILAM companies the fixed and percentage taxes [t]hen paid by petitioners as lending
[14]
investor. Although the amounts for refund consisted only of what respondents paid as percentage
taxes, the CTA Decision also ordered the refund to respondents of the fixed tax on lending investors.
Respondents in their pleadings deny any liability under Section 182(A)(3)(dd), on the same ground that
they are not lending investors.
The question of whether respondents should pay the fixed tax under Section 182(A)(3)(dd) revolves
around the same issue of whether respondents are taxable as lending investors. In similar
circumstances, the Court has held that an appellate court may consider an unassigned error if it is
closely related to an error that was properly assigned.[15] This rule properly applies to the present case.
Thus, we shall consider and rule on the issue of whether respondents are subject to the fixed tax under
Section 182(A)(3)(dd).

Whether Insurance Companies are

Taxable as Lending Investors

Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section 194(u) of CA 466, petitioner argues
that insurance companies are subject to two fixed taxes and two percentage taxes. Petitioner alleges
that:
As a lending investor, an insurance company is subject to an annual fixed tax of P500.00 and
another P500.00 under Section 182 (A)(3)(dd) and (gg) of the Tax Code. As an underwriter, an
insurance company is subject to the 3% tax of the total premiums collected and another 3% on the
gross receipts as a lending investor under Sections 255 and 195-A, respectively of the same
Code. xxx[16]
Petitioner also contends that the refund granted to respondents is in the nature of a tax exemption, and
cannot be allowed unless granted explicitly and categorically.
The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the
taxpayer is clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly,
expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.[17] Where there is doubt, tax laws must be construed strictly against the
government and in favor of the taxpayer.[18] This is because taxes are burdens on the taxpayer, and
[19]
should not be unduly imposed or presumed beyond what the statutes expressly and clearly import.
Section 182(A)(3)(dd) of CA 466 also provides:
Sec. 182. Fixed taxes. (A) On business xxx
xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount
stated being for the whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;

98
 3. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-
five pesos; Provided, That lending investors who do business as such in more than
one province shall pay a tax of five hundred pesos.
Section 195-A of CA 466 provides:
Sec. 195-A. Percentage tax on dealers in securities; lending investors. Dealers in
securities and lending investors shall pay a tax equivalent to three per centum on their gross
income.
Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies. Section 182(A)(3)(dd)
provides for the taxation of lending investors in different localities. Section 195-A refers to dealers in
securities and lending investors. The burden is thus on petitioner to show that insurance companies are
lending investors for purposes of taxation.
In this case, petitioner does not dispute that respondents are in the insurance business. Petitioner merely
alleges that the definition of lending investors under CA 466 is broad enough to encompass insurance
companies. Petitioner insists that because of Section 194(u), the two principal activities of the insurance
[20]
business, namely, underwriting and investment, are separately taxable.
Section 194(u) of CA 466 states:
(u) Lending investor includes all persons who make a practice of lending money for
themselves or others at interest.
xxx
As can be seen, Section 194(u) does not tax the practice of lending per se. It merely defines what lending
investors are. The question is whether the lending activities of insurance companies make them lending
investors for purposes of taxation.
We agree with the CTA and Court of Appeals that it does not. Insurance companies cannot be considered
lending investors under CA 466, as amended.

Definition of Lending Investors under CA 466 Does

Not Include Insurance Companies.
The definition in Section 194(u) of CA 466 is not broad enough to include the business of insurance
companies. The Insurance Code of 1978[21] is very clear on what constitutes an insurance company. It
provides that an insurer or insurance company shall include all individuals, partnerships, associations or
corporations xxx engaged as principals in the insurance business, excepting mutual benefit
associations.[22] More specifically, respondents fall under the category of insurance corporations as
defined in Section 185 of the Insurance Code, thus:
SECTION 185. Corporations formed or organized to save any person or persons or other
corporations harmless from loss, damage, or liability arising from any unknown or future or
contingent event, or to indemnify or to compensate any person or persons or other corporations
for any such loss, damage, or liability, or to guarantee the performance of or compliance with
contractual obligations or the payment of debts of others shall be known as insurance
corporations.
Plainly, insurance companies and lending investors are different enterprises in the eyes of the law.
Lending investors cannot, for a consideration, hold anyone harmless from loss, damage or liability, nor
provide compensation or indemnity for loss. The underwriting of risks is the prerogative of insurers, the
great majority of which are incorporated insurance companies[23] like respondents.

Granting of Mortgage and other Loans are Investment

99
Practices that are Part of the Insurance Business.
True, respondents granted mortgage and other kinds of loans. However, this was not done independently
of respondents insurance business. The granting of certain loans is one of several means of investment
allowed to insurance companies. No less than the Insurance Code mandates and regulates this
[24]
practice.
Unlike the practice of lending investors, the lending activities of insurance companies are circumscribed
and strictly regulated by the State. Insurance companies cannot freely lend to themselves or others as
[25]
lending investors can, nor can insurance companies grant simply any kind of loan. Even prior to 1978,
the Insurance Code prescribed strict rules for the granting of loans by insurance companies.[26] These
provisions on mortgage, collateral and policy loans were reiterated in the Insurance Code of 1978 and are
still in force today.
Petitioner concedes that respondents investment practices are as much a part of the insurance business
as the task of underwriting. Nevertheless, petitioner argues that such investment practices are separately
taxable under CA 466.
The CTA and the Court of Appeals found that the investment of premiums and other funds received by
respondents through the granting of mortgage and other loans was necessary to respondents
business and hence, should not be taxed separately.
Insurance companies are required by law to possess and maintain substantial legal reserves to meet their
obligations to policyholders.[27] This obviously cannot be accomplished through the collection of premiums
alone, as the legal reserves and capital and surplus insurance companies are obligated to maintain run
into millions of pesos. As such, the creation of investment income has long been held to be generally, if
not necessarily, essential to the business of insurance.[28]
The creation of investment income in the manner sanctioned by the laws on insurance is thus part of the
business of insurance, and the fruits of these investments are essentially income from the insurance
business. This is particularly true if the invested assets are held either as reserved funds to provide for
policy obligations or as capital and surplus to provide an extra margin of safety which will be attractive to
[29]
insurance buyers.
The Court has also held that when a company is taxed on its main business, it is no longer taxable further
for engaging in an activity or work which is merely a part of, incidental to and is necessary to its main
business.[30] Respondents already paid percentage and fixed taxes on their insurance business. To
require them to pay percentage and fixed taxes again for an activity which is necessarily a part of the
same business, the law must expressly require such additional payment of tax. There is, however, no
provision of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to pay double
percentage and fixed taxes. They merely tax lending investors, not lending activities. Respondents were
not transformed into lending investors by the mere fact that they granted loans, as these investments
were part of, incidental and necessary to their insurance business.

Different Tax Treatment of Insurance Companies and

Lending Investors.

Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors and insurance
companies. The relevant portions of Section 182 state:
Sec. 182. Fixed taxes. (A) On business xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount
stated being for the whole year, when not otherwise specified;
xxx

100
 (dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one hundred and
twenty-five pesos; Provided, That lending investors who do business as such
in more than one province shall pay a tax of five hundred pesos.
xxx
(gg) Banks, insurance companies, finance and investment companies doing business in
the Philippines and franchise grantees, five hundred pesos.
xxx (Emphasis supplied.)
The separate provisions on lending investors and insurance companies demonstrate an intention to treat
these businesses differently. If Congress intended insurance companies to be taxed as lending investors,
there would be no need for Section 182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient. That
insurance companies were included with banks, finance and investment companies also supports the
CTAs conclusion that insurance companies had more in common with the latter enterprises than with
lending investors. As the CTA pointed out, banks also regularly lend money at interest, but are not
taxable as lending investors.
We find no merit in petitioners contention that Congress intended to subject respondents to two
percentage taxes and two fixed taxes. Petitioners argument goes against the doctrine of strict
interpretation of tax impositions.
Petitioners argument is likewise not in accord with existing jurisprudence. In Commissioner of Internal
Revenue v. Michel J. Lhuillier Pawnshop, Inc.,[31] the Court ruled that the different tax treatment
accorded to pawnshops and lending investors in the NIRC of 1977 and the NIRC of 1986 showed the
intent of Congress to deal with both subjects differently. The same reasoning applies squarely to the
present case.
Even the current tax law does not treat insurance companies as lending investors. Under Section
108(A)[32] of the NIRC of 1997, lending investors and non-life insurance companies, except for their crop
insurances, are subject to value-added tax (VAT). Life insurance companies are exempt from VAT, but
are subject to percentage tax under Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention insurance companies
already implies the latters exclusion from the coverage of these provisions. When a statute enumerates
the things upon which it is to operate, everything else by implication must be excluded from its operation
and effect.[33]

Definition of Lending Investors

in CA 466 is Not New.

Petitioner does not dispute that it issued a ruling in 1920 to the effect that the lending of money at interest
was a necessary incident of the insurance business, and that insurance companies were thus not subject
to the tax on money lenders. Petitioner argues only that the 1920 ruling does not apply to the instant case
because RA 6110 introduced the definition of lending investors to CA 466 only in 1969.
The subject definition was actually introduced much earlier, at a time when lending investors were still
referred to as money lenders. Sections 45 and 46 of the Internal Revenue Law of 1914[34] (1914 Tax
Code) state:
SECTION 45. Amount of Tax on Business. Fixed taxes on business shall be collected
as follows, the amount stated being for the whole year, when not otherwise specified:
xxx
(x) Money lenders, eighty pesos;

101
 xxx
SECTION 46. Words and Phrases Defined. In applying the provisions of the preceding
section words and phrases shall be taken in the sense and extension indicated below:
xxx
Money lender includes all persons who make a practice of lending money for
themselves or others at interest. (Emphasis supplied)
As can be seen, the definitions of money lender under the 1914 Tax Code and lending investor under
CA 466 are identical. The term money lender was merely changed to lending investor when Act No.
3963 amended the Revised Administrative Code in 1932.[35] This same definition of lending investor has
since appeared in Section 194(u) of CA 466 and later tax laws.
Note that insurance companies were not included among the businesses subject to an annual fixed tax
[36]
under the 1914 Tax Code. That Congress later saw the need to introduce Section 182(A)(3)(gg) in CA
466 bolsters our view that there was no legislative intent to tax insurance companies as lending investors.
If insurance companies were already taxed as lending investors, there would have been no need for a
separate provision specifically requiring insurance companies to pay fixed taxes.
The Court Accords Great Weight
to the Factual Findings of the CTA.

Dedicated exclusively to the study and consideration of tax problems, the CTA has necessarily developed
an expertise in the subject of taxation that this Court has recognized time and again. For this reason, the
findings of fact of the CTA, particularly when affirmed by the Court of Appeals, are generally conclusive
on this Court absent grave abuse of discretion or palpable error,[37] which are not present in this case.
WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7 January 2000 of the
Court of Appeals in CA-G.R. SP No. 36816.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

Footnotes
[1]
Under Rule 45 of the Rules of Civil Procedure.
[2]
Rollo, pp. 20-30. Penned by Associate Justice Ramon Mabutas, Jr. with Associate Justices Artemio G.
Tuquero and Mercedes Gozo Dadole concurring.
[3]
Ibid., pp. 32-43. Penned by Associate Judge Manuel K. Gruba with Presiding Judge Ernesto D. Acosta and
Associate Judge Ramon O. De Veyra concurring.
[4]
Section 195-A was added to CA 466 by RA 6110. It states: Sec. 195-A. Percentage tax on dealers in
securities; lending investors. Dealers in securities and lending investors shall pay a tax equivalent to three per
centum on their gross income.
[5]
Rollo, pp. 34-35.
[6]
Ibid., p. 39.
[7]
Ibid., p. 42.
[8]
Note that under Republic Act No. 9282, decisions of the CTA are now appealable to the Supreme Court via a
verified petition for review on certiorari.
[9]
Rollo, p. 30.
[10]
Ibid., p. 10.
[11]
Sec. 182. Fixed taxes. (A) On business xxx
xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount stated being for the
whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five pesos; Provided,
That lending investors who do business as such in more than one province shall pay a tax of five hundred pesos.

102
[12]
CA Rollo, pp. 7-18.
[13]
Lim v. Queensland Tokyo Commodities, Inc., 424 Phil. 35 (2002).
[14]
Rollo, p. 42.
[15]
Garrido v. Court of Appeals, G.R. No. 101262, 14 September 1994, 236 SCRA 450. See also F.F. Maacop
Construction Co., Inc. v. Court of Appeals, G.R. No. 122196, 15 January 1997, 266 SCRA 235.
[16]
Rollo, p. 112.
[17]
CIR v. CA, 338 Phil. 322 (1997).
[18]
Lincoln Philippine Life Insurance Co., Inc. v. CA, 354 Phil. 896 (1998); CIR v. CA, supra.
[19]
Ibid.
[20]
Rollo, pp. 12-13.
[21]
Presidential Decree No. 1460 (1978), as amended.
[22]
Section 184, ibid.
[23]
Maria Clara L. Campos, Insurance 7 (University of the Philippines Law Center 1983); 43 Am Jur 2d,
Insurance, 188.
[24]
See Sections 198 to 203 of Presidential Decree No. 1460. Loans are not even the chief means of investment.
According to the Insurance Commission, loans accounted for only 16.61% of the investments made by the
insurance industry in 2002. Compare this with the industrys investment in bonds and government securities,
which amounted to 45.75% (http://www.ic.gov.ph/main.asp?pages=statper2002).
[25]
In fact, pursuant to Insurance Circular Letter No. 064-60 (1960), reiterated in the Insurance Circular Letter of
20 May 1985, no insurance company could grant a loan to any of its officers or directors without the prior
approval of the Insurance Commissioner.
[26]
Presidential Decree No. 612 (1974) provided:
Sec. 198. No insurance company shall loan any of its money or deposits to any person, corporation or
association, except upon first mortgage or deeds of trust of unencumbered, improved or unimproved real estate,
including condominiums, in cities and centers of population of municipalities in the Philippines when the amount
of such loan is not in excess of seventy per centum of the market value of such real estate; or upon the security
of first mortgages or deeds of trust of actually cultivated, improved and unencumbered agricultural lands in the
Philippines when the amount of such loan is not in excess of forty per centum of the market value of such land;
or upon the purchase money mortgages or like securities received by it upon the sale or exchange of real
property acquired pursuant to sections two hundred and two hundred two; or upon bonds or other evidences of
debt of the Government of the Philippines or its political subdivisions authorized by law to issue bonds, or upon
bonds or other evidences of debt of government-owned or controlled corporations and instrumentalities including
the Central Bank or upon obligations issued or guaranteed by the International Bank for Reconstruction and
Development; or upon stocks, bonds or other evidences of debt as are specified in section two hundred.
A life insurance company, however, may lend to any of its policyholders upon the security of the value of its
policy such sum as may be determined pursuant to the provisions of the policy.
Loans granted upon the security of real estate for a period longer than five years shall be amortized in monthly,
quarterly, semi-annual or annual installments; Provided, That no such loans shall have a maturity in excess of
twenty years.
The phrase improved real estate used above is hereby defined to mean land with permanent building or
buildings erected or being erected thereon. Except as otherwise approved by the Commissioner, in case the
building or buildings on land do not belong to the owner of the latter, no loan shall be granted on the security of
the real estate in question unless both the owner of the building or buildings and the owner of the land sign the
deed of mortgage, and unless the owner of the land is the Government of the Philippines or one of its political
subdivisions, in which event the owner is not required to sign the deed of mortgage.
Sec. 199. No loan by any insurance company on the security of real estate shall be made unless the title to such
real estate shall have first been registered in accordance with the existing Land Registration Act, or shall be a
titulo real duly registered, or have been previously registered under the provisions of the existing Mortgage Law.
These provisions were carried over in the Insurance Code of 1978.
[27]
Spouses Tibay v. CA, 326 Phil. 931 (1996). See also Sections 194, 210 to 214 of Presidential Decree No.
1460.
[28]
Bowers v. Lawyers Mortg. Co., 285 U.S. 182 (1932).
[29] nd
Justice Jose C. Vitug and Justice Ernesto D. Acosta, Tax Law and Jurisprudence, 2 ed., 256, citing
Commissioner of Internal Revenue v. Court of Tax Appeals, CA-G.R. SP No. 39511 to 39513, 30 September
1996. This CA decision was never appealed to this Court.
[30]
Standard-Vacuum Oil Co. v. Antigua, etc., et al., 96 Phil. 909 (1955).
[31]
G.R. No. 150947, 15 July 2003, 406 SCRA 178.
[32]
The relevant portion of Sec. 108(A) states:
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of
properties.

103
The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration, including those performed or rendered by xxx lending
investors; xxx services of banks, non-bank financial intermediaries and finance companies; and non-life
insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding
companies; xxx. (Emphasis supplied)
[33]
Applying the maxim expressio unius est exclusio alterius. See Commissioner of Internal Revenue v. Michel J.
Lhuillier Pawnshop, Inc., supra note 31.
[34]
Act No. 2339 (1914).
[35]
Act No. 3963 (1932) provides:
Sec. 2 Paragraph (v) of section fourteen hundred and sixty-five of the Revised Administrative Code is hereby
amended so as to read as follows:
(v) Lending investor includes all persons who make a practice of lending money for themselves or others at
interest. xxx
[36]
The receipts of insurance companies were instead subject to internal revenue taxes under Sec. 21(e) of the
1914 Tax Code.
[37]
Supra note 17.

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XI. UNPAID INSURANCE CLAIMS

Tio Khe Chio vs. Court of Appeals and Eastern Assurance and Surety Corp., G.R. No.
76101-02 September 30, 1991

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If the obligation consists in the payment of a sum of money and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest
agreed upon, and in the absence of stipulation, the legal interest which is six per cent per
annum.

THIRD DIVISION

G.R. No. 76101-02 September 30, 1991

TIO KHE CHIO, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and EASTERN ASSURANCE AND SURETY
CORPORATION, respondents.

Rodolfo M. Morelos for petitioner.

Ferrer, Mariano, Sangalang & Gatdula for private respondent.

FERNAN, C.J.:p

The issue in this petition for certiorari and prohibition is the legal rate of interest to be imposed in actions
for damages arising from unpaid insurance claims. Petitioner Tio Khe Chio claims that it should be twelve
(12%) per cent pursuant to Articles 243 and 244 of the Insurance Code while private respondent Eastern
Assurance and Surety Corporation (EASCO) claims that it should be six (6%) per cent under Article 2209
of the Civil Code.

The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported one thousand (1,000)
bags of fishmeal valued at $36,000.30 from Agro Impex, U.S.A. Dallas, Texas, U.S.A. The goods were
insured with respondent EASCO and shipped on board the M/V Peskov, a vessel owned by Far Eastern
Shipping Company. When the goods reached Manila on January 28, 1979, they were found to have been
damaged by sea water which rendered the fishmeal useless. Petitioner filed a claim with EASCO and Far
Eastern Shipping. Both refused to pay. Whereupon, petitioner sued them before the then Court of First
Instance of Cebu, Branch II for damages. EASCO, as the insurer, filed a counterclaim against the
petitioner for the recovery of P18,387.86 representing the unpaid insurance premiums.

On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern Shipping to pay
petitioner solidarily the sum of P105,986.68 less the amount of P18,387.86 for unpaid premiums with
interest at the legal rate from the filing of the complaint, the sum of P15,000.00 as attorney's fees and the
costs. 1

The judgment became final as to EASCO but the shipping company appealed to the Court of Appeals
and was absolved from liability by the said court in AC-G.R. No. 00161, entitled "Tio Khe Chio vs. Eastern
Assurance and Surety Corporation."

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The trial court, upon motion by petitioner, issued a writ of execution against EASCO. The sheriff enforcing
the writ reportedly fixed the legal rate of interest at twelve (12%). Respondent EASCO moved to quash
the writ alleging that the legal interest to be computed should be six (6%) per cent per annum in
accordance with Article 2209 of the Civil Code and not twelve (12%) per cent as insisted upon by
petitioner's counsel. In its order of July 30, 1986, the trial court denied EASCO's motion. EASCO then
filed a petition for certiorari and prohibition before the Court of Appeals.

On July 30, 1986, the Appellate Court rendered the assailed judgment, the dispositive part of which
states:

WHEREFORE, the order dated July 30, 1986 is hereby SET ASIDE in so far as it fixes
the interest at 12% on the principal amount of P87,598.82 from the date of filing of the
complaint until the full payment of the amount, and the interest that the private
respondent is entitled to collect from the petitioner is hereby reduced to 6% per annum.

2
No pronouncement as to costs.

In disputing the aforesaid decision of the Court of Appeals, petitioner maintains that not only is it unjust
and unfair but it is also contrary to the correct interpretation of the fixing of interest rates under Sections
243 and 244 of the Insurance Code. And since petitioner's claims is based on an insurance contract, then
it is the Insurance Code which must govern and not the Civil Code.

We rule for respondent EASCO. The legal rate of interest in the case at bar is six (6%) per annum as
correctly held by the Appellate Court.

Section 243 of the Insurance Code provides:

The amount of any loss or damage for which an insurer may be liable, under any policy
other than life insurance policy, shall be paid within thirty days after proof of loss is
received by the insurer and ascertainment of the loss or damage is made either by
agreement between the insured and the insurer or by arbitration; but if such
ascertainment is not had or made within sixty days after such receipt by the insurer of the
proof of loss, then the loss or damage shall be paid within ninety days after such receipt.
Refusal or failure to pay the loss or damage within the time prescribed herein will entitle
the assured to collect interest on the proceeds of the policy for the duration of the delay
at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or
refusal to pay is based on the ground that the claim is fraudulent.

Section 244 of the aforementioned Code also provides:

In case of any litigation for the enforcement of any policy or contract of insurance, it shall
be the duty of the Commissioner or the Court, as the case may be, to make a finding as
to whether the payment of the claim of the insured has been unreasonably denied or
withheld; and in the affirmative case, the insurance company shall be adjudged to pay
damages which shall consist of attorney's fees and other expenses incurred by the
insured person by reason of such undeniable denial or withholding of payment plus
interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim
due the insured, from the date following the time prescribed in section two hundred forty-
two or in section two hundred forty-three, as the case may be, until the claim is fully
satisfied; Provided, That the failure to pay any such claim within the time prescribed in
said sections shall be considered prima facie evidence of unreasonable delay in
payment.

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In the case at bar, the Court of Appeals made no finding that there was an unjustified refusal or
withholding of payment on petitioner's claim. In fact, respondent court had this to say on EASCO's refusal
to settle the claim of petitioner:

... EASCO's refusal to settle the claim to Tio Khe Chio was based on some ground which,
while not sufficient to free it from liability under its policy, nevertheless is sufficient to
negate any assertion that in refusing to pay, it acted unjustifiably.

xxx xxx xxx

The case posed some genuine issues of interpretation of the terms of the policy as to
which persons may honestly differ. This is the reason the trial court did not say EASCO's
refusal was unjustified. 3

Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant case. They apply
only when the court finds an unreasonable delay or refusal in the payment of the claims.

Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974 pursuant to
Presidential Decree No. 116 (Usury Law) which raised the legal rate of interest from six (6%) to twelve
(12%) per cent apply to the case at bar as by the petitioner. The adjusted rate mentioned in the circular
refers only to loans or forbearances of money, goods or credits and court judgments thereon but not to
court judgments for damages arising from injury to persons and loss of property which does not involve a
4
loan.

In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986, 143 SCRA 158,
the Court declared that the legal rate of interest is six (6%) per cent per annum, and not twelve (12%) per
cent, where a judgment award is based on an action for damages for personal injury, not use or
forbearance of money, goods or credit. In the same vein, the Court held in GSIS vs. Court of Appeals,
G.R. No. 52478, October 30, 1986, 145 SCRA 311, that the rates under the Usury Law (amended by P.D.
116) are applicable only to interest by way of compensation for the use or forbearance of money, interest
by way of damages is governed by Article 2209 of the Civil Code.

Clearly, the applicable law is Article 2209 of the Civil Code which reads:

If the obligation consists in the payment of a sum of money and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of interest agreed upon, and in the absence of stipulation, the legal interest
which is six per cent per annum.

And in the light of the fact that the contending parties did not allege the rate of interest stipulated in the
insurance contract, the legal interest was properly pegged by the Appellate Court at six (6%) per cent.

WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.

Footnotes
1 Rollo, p. 45.
2 Rollo, p. 11.
3 Rollo, pp. 9, 11.
4 Reformina vs. Tomol, Jr., G.R. No. 59096, October 11, 1985, 139-SCRA 260.

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