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[G.R. No. L-4611. December 17, 1955. ]

QUA CHEE GAN, Plaintiff-Appellee, v. LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER, BARNES AND CO., LTD., Defendant-Appellant.

Delgado, Flores & Macapagal for Appellant.

Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile & Contreras for Appellee.


1. INSURANCE; BREACH OF WARRANTY; WHEN INSURER BARRED FROM CLAIMING POLICIES VOID "AB INITIO." — The insurer is barred by estoppel to claim violation of the so-called fire hydrant warranty where, knowing fully well that the number of hydrants demanded in the warranty never existed from the very beginning, it nevertheless issued the policies subject to such warranty, and received the corresponding premiums.

2. ID.; ID.; EVIDENCE; PAROL EVIDENCE RULE NOT APPLICABLE. — The parol evidence rule is not applicable to the present case. It is not a question here whether or not the parties may vary a written contract by oral evidence; but whether testimony is receivable so that a party may be, by reason of inequitable contract shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured.

3. ID.; AMBIGUITIES IN THE TERMS OF THE CONTRACT, HOW CONSTRUED. — The contract of insurance is one of perfect good faith (uberrimae fidei) not for the insured alone, but equally so for the insurer; in fact, it is more so for the latter, since its dominant bargaining position carries with it stricter responsibility. By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, the ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).

4. ID.; ID.; WARRANTY AGAINST STORAGE OF GASOLINE. — In the present case, gasoline is not specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The clause relied upon by the insurer speaks of "oils" and is decidedly ambiguous and uncertain; for in ordinary parlance, "oils" mean "lubricants" and not gasoline or kerosene. Besides, the gasoline kept by the insured was only incidental to his business, being no more than a customary 2 days supply for the five or six motor vehicles used for transporting of the stored merchandise, and it is well settled rule that the keeping of inflammable oils on the premises, through prohibited by the policy, does not void it if such keeping is incidental to the business. (Bachrach v. British American Ass. Co., 17 Phil. 555, 660.)

5. ID.; FALSE CLAIMS THAT AVOIDS THE POLICY. — The rule is that to avoid a policy, the claim filed by the insured must contain false and fraudulent statements with intent to defraud the insurer.

6. CRIMINAL PROCEDURE; ACQUITTAL OF INSURED IN ARSON CASE EFFECT ON CIVIL ACTION. — While the acquittal of the insured in the arson is not res judicata on the present civil action, the insurer’s evidence, to judge from the decision in the criminal case, is practically identical in both cases and must lead to the same result, since the proof to establish the defense if connivance at the fire in order to defraud the insurer "cannot be materially less convincing than that required in order to convict the insured of the crime of arson" (Bachrach v. British American Assurance Co., 17 Phil. 536).


REYES, J. B. L., J.:

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of said province, seeking to recover the proceeds of certain fire insurance policies totalling P370,000, issued by the Law Union & Rock Insurance Co., Ltd., through its agent, Warner, Barnes & Co., Ltd., upon certain bodegas and merchandise of the insured that were burned on June 21, 1940. The records of the original case were destroyed during the liberation of the region, and were reconstituted in 1946. After a trial that lasted several years, the Court of First Instance rendered a decision in favor of the plaintiff, the dispositive part whereof reads as follows:jgc:chanrobles.com.ph

"Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the latter to pay the former —

(a) Under the first cause of action, the sum of P146,394.48;

(b) Under the second cause of action, the sum of P150,000;

(c) Under the third cause of action, the sum of P5,000;

(d) Under the fourth cause of action, the sum of P15,000; and

(e) Under the fifth cause of action, the sum of P40,000;

all of which shall bear interest at the rate of 80% per annum in accordance with Section 91 (b) of the Insurance Act from September 26, 1940, until each is paid, with costs against the defendant.

The complaint in intervention of the Philippine National Bank is dismissed without costs." (Record on Appeal, 166-167.)

From the decision, the defendant Insurance Company appealed directly to this Court.

The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas (designated as Bodegas nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of stocks of copra and of hemp, baled and loose, in which the appellee dealt extensively. They had been, with their contents, insured with the defendant Company since 1937, and the lose made payable to the Philippine National Bank as mortgage of the hemp and copra, to the extent of its interest. On June, 1940, the insurance stood as follows:chanrob1es virtual 1aw library

Policy No. Property Insured Amount

2637164 (Exhibit "LL") Bodega No. 1 (Building) P15,000.00

2637165 (Exhibit "JJ") Bodega No. 2 (Building) 10,000.00

Bodega No. 3 (Building) 25,000.00

Bodega No. 4 (Building) 10,000.00

Hemp Press — moved by

steam engine 5,000.00

2637345 (Exhibit "X") Merchandise contents

(copra and empty sacks of

Bodega No. 1) 150,000.00

2637346 (Exhibit "Y") Merchandise contents

(hemp) of Bodega No. 3 150,000.00

2637067 (Exhibit "GG") Merchandise contents

(loose hemp) of Bodega

No. 4 5,000.00


Total P370,000.00

Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost one week, gutted and completely destroyed Bodegas Nos. 1, 3 and 4, with the merchandise stored therein. Plaintiff-appellee informed the insurer by telegram on the same date; and on the next day, the fire adjusters engaged by appellant insurance company arrived and proceeded to examine and photograph the premises, pored over the books of the insured and conducted an extensive investigation. The plaintiff having submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of the insurance, P370,000), the Insurance Company resisted payment, claiming violation of warranties and conditions, filing of fraudulent claims, and that the fire had been deliberately caused by the insured or by other persons in connivance with him.

With counsel for the insurance company acting as private prosecutor, Qua Chee Gan, with his brother, Qua Chee Pao, and some employees of his, were indicted and tried in 1940 for the crime of arson, it being claimed that they had set fire to the destroyed warehouses to collect the insurance. They were, however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit WW). Thereafter, the civil suit to collect the insurance money proceeded to its trial and termination in the Court below, with the result noted at the start of this opinion. The Philippine National Bank’s complaint in intervention was dismissed because the appellee had managed to pay his indebtedness to the Bank during the pendency of the suit, and despite the fire losses.

In its first assignment of error, the insurance company alleges that the trial Court should have held that the policies were avoided for breach of warranty, specifically the one appearing on a rider pasted (with other similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders were attached for the first time in 1939, and the pertinent portions read as follows:jgc:chanrobles.com.ph

"Memo. of Warranty. — The undernoted Appliances for the extinction of fire being kept on the premises insured hereby, and it being declared and understood that there is an ample end constant water supply with sufficient pressure available at all seasons for the same, it is hereby warranted that the said appliances shall be maintained in efficient working order during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed on the premium chargeable under this policy.

Hydrants in the compound, not less in number than one for each 150 feet of external wall measurement of buildings, protected, with not less than 100 feet of hose piping and nozzles for every two hydrants kept under cover in convenient places, the hydrants being supplied with water pressure by a pumping engine, or from some other source, capable of discharging at the rate of not less than 200 gallons of water per minute into the upper story of the highest building protected, and a trained brigade of not less than 20 men to work the same.’"

It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the appellee should have eleven (11) fire hydrants in the compound, and that he actually had only two (2), with a further pair nearby, belonging to the municipality of Tabaco.

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so- called fire hydrants warranty, for the reason that knowing fully all that the number of hydrants demanded therein never existed from the very beginning, the appellant nevertheless issued the policies in question subject to such warranty, and received the corresponding premiums. It would be perilously close to conniving at fraud upon the insured to allow appellant to claims now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire hydrants installed by Qua Chee Gan and two others nearby, owned by the municipality of Tabaco, contrary to the requirements of the warranty in question. Such fact appears from positive testimony for the insured that appellant’s agents inspected the premises; and the simple denials of appellant’s representative (Jamiczon) can not overcome that proof. That such inspection was made is moreover rendered probable by its being a prerequisite for the fixing of the discount on the premium to which the insured was entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available (See "Scale of Allowances" to which the policies were expressly made subject). The law, supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:jgc:chanrobles.com.ph

"It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if insisted on, would invalidate the contract from its very inception, each knowledge constitutes a waiver of conditions in the contract inconsistent with the known facts, and the insurer is stopped thereafter from asserting the breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary, that an insurance company intends to execute a valid contract in return for the premium received; and when the policy contains a condition which renders it voidable at its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken his money without consideration." (29 Am. Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

"The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one’s money for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to be abhorrent to fairminded men. It would be to allow the company to treat the policy as valid long enough to get the premium on it, and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy expressed the true intention of the company would be to indict it, for fraudulent purposes and designs which we cannot believe it to be guilty of" (Wilson v. Commercial Union Assurance Co., 96 Atl. 540, 543-544).

The inequitableness of the conduct observed by the insurance company in this case is heightened by the fact that after the insured had incurred the expense of installing the two hydrants, the company collected the premiums and issued him a policy so worded that it gave the insured a discount much smaller than that he was normally entitled to. According to the "Scale of Allowances," a policy subject to a warranty of the existence of one fire hydrant for every 150 feet of external wall entitled the insured to a discount of 7 1/2 per cent of the premium; while the existence of "hydrants, in compound" (regardless of number) reduced the allowance on the premium to a mere 2 1/2 per cent. This schedule was logical, since a greater number of hydrants and fire fighting appliances reduced the risk of loss. But the appellant company, in the particular case now before us, so worded the policies that while exacting the greater number of fire hydrants and appliances, it kept the premium discount at the minimum of 2 1/2 per cent, thereby giving the insurance company a double benefit. No reason is shown why appellant’s premises, that had been insured with appellant for several years past, suddenly should be regarded in 1939 as so hazardous as to be accorded a treatment beyond the limits of appellant’s own scale of allowances. Such abnormal treatment of the insured strongly points at an abuse of the insurance company’s selection of the words and terms of the contract, over which it had absolute control.

These considerations lead us to regard the parol evidence rule, invoked by the appellant as not applicable to the present case. It is not a question here whether or not the parties may vary a written contract by oral evidence; but whether testimony is receivable so that a party may be, by reason of inequitable conduct shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured.

"Receipt of Premiums or Assessments after Cause for Forfeiture Other than Nonpayment. — It is a well settled rule of law that an insurer which with knowledge of facts entitling it to treat a policy as no longer in force, receives and accepts a premium on the policy, estopped to take advantage of the forfeiture. It cannot treat the policy as void for the purpose of defense to an action to recover for a loss thereafter occurring and at the same time treat it as valid for the purpose of earning and collecting further premiums." (29 Am. Jur., 653, p. 657.)

"It would be unconscionable to permit a company to issue a policy under circumstances which it knew rendered the policy void and then to accept and retain premiums under such a void policy. Neither law nor good morals would justify such conduct and the doctrine of equitable estoppel is peculiarly applicable to the situation." (McGuire v. Home Life Ins. Co. 94 Pa. Super Ct. 457.)

Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly interpreted against the party that caused them, 1 the "memo of warranty" invoked by appellant bars the latter from questioning the existence of the appliances called for in the insured premises, since its initial expression, "the undernoted appliances for the extinction of fire being kept on the premises insured hereby, . . . it is hereby warranted . . .", admits of interpretation as an admission of the existence of such appliances which appellant cannot now contradict, should the parol evidence rule apply.

The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally rejected, since the appellant’s argument thereon is based on the assumption that the insured was bound to maintain no less than eleven hydrants (one per 150 feet of wall), which requirement appellant is estopped from enforcing. The supposed breach of the water pressure condition is made to rest on the testimony of witness Serra, that the water supply could fill a 5-gallon can in 3 seconds; appellant thereupon inferring that the maximum quantity obtainable from the hydrants was 100 gallons a minute, when the warranty called for 200 gallons a minute. The transcript shows, however, that Serra repeatedly refused and professed inability to estimate the rate of discharge of the water, and only gave the "5-gallon per 3-second" rate because the insistence of appellant’s counsel forced the witness to hazard a guess. Obviously, the testimony is worthless and insufficient to establish the violation claimed, specially since the burden of its proof lay on Appellant.

As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was organized, and drilled, from time to give, altho not maintained as a permanently separate unit, which the warranty did not require. Anyway, it would be unreasonable to expect the insured to maintain for his compound alone a fire fighting force that many municipalities in the Islands do not even possess. There is no merit in appellant’s claim that subordinate membership of the business manager (Co Cuan) in the fire brigade, while its direction was entrusted to a minor employee, renders the testimony improbable. A business manager is not necessarily adept at fire fighting, the qualities required being different for both activities.

Under the second assignment of error, appellant insurance company avers that the insured violated the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline, since appellee admitted that there were 36 cans (latas) of gasoline in the building designed as "Bodega No. 2" that was a separate structure not affected by the fire. It is well to note that gasoline is not specifically mentioned among the prohibited articles listed in the so- called "hemp warranty." The cause relied upon by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid products having a flash point below 300
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