Malayan Insurance Co., Inc. vs. Court of Appeals

An insurer under a third-party liability indemnity policy is directly liable to the injured third party but is not solidarily liable with the insured and other tortfeasors, because the insurer's obligation arises from contract while the tortfeasors' liability arises from quasi-delict; upon payment, the insurer is subrogated to the insured's rights against co-tortfeasors and may seek reimbursement regardless of privity of contract.

Malayan Insurance Co., Inc. issued Private Car Comprehensive Policy No. MRO/PV-15753 in favor of Sio Choy, covering a Willys jeep for "own damage" not exceeding P600.00 and "third-party liability" in the amount of P20,000.00, effective from 18 April 1967 to 18 April 1968. The driver of the insured vehicle at the time of the accident, Juan P. Campollo, was not Sio Choy's employee but an employee of San Leon Rice Mill, Inc., performing duties within the scope of his assigned task. The legal framework governing the dispute includes Article 2180 (employer's liability for quasi-delicts of employees), Article 2184 (owner's solidary liability in motor vehicle mishaps), and Article 2194 (solidary liability of quasi-delict tortfeasors) of the Civil Code, as well as the principles of subrogation in indemnity insurance.

On 29 March 1967, Malayan Insurance Co., Inc. issued Private Car Comprehensive Policy No. MRO/PV-15753 in favor of Sio Choy, effective from 18 April 1967 to 18 April 1968, covering a Willys jeep with Motor No. ET-03023, Serial No. 351672, and Plate No. J-21536. The policy provided coverage for "own damage" not exceeding P600.00 and "third-party liability" in the amount of P20,000.00.

On 19 December 1967, at about 3:30 in the afternoon, the insured jeep, driven by Juan P. Campollo — an employee of San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task — collided with a passenger bus belonging to Pangasinan Transportation Co., Inc. (PANTRANCO) on the national highway in Barrio San Pedro, Rosales, Pangasinan. The collision caused damage to the insured vehicle and injuries to both the driver, Campollo, and Martin C. Vallejos, who was riding in the jeep.

Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc., and PANTRANCO before the Court of First Instance of Pangasinan, docketed as Civil Case No. U-2021, praying that the defendants be ordered to pay him jointly and severally P15,000.00 as reimbursement for medical and hospital expenses, P6,000.00 for lost income, P51,000.00 as actual, moral, and compensatory damages, and P5,000.00 for attorney's fees. PANTRANCO answered claiming the jeep was speeding and had bumped its bus, which had moved to the shoulder to avoid the jeep, and that it had observed the diligence of a good father of a family. Sio Choy and the insurer likewise denied liability, attributing fault solely to PANTRANCO.

Sio Choy later filed a separate answer with a cross-claim against the insurer, alleging he had already paid Vallejos P5,000.00 for hospitalization and other expenses, and that the insurer had obligated itself to indemnify him for damage to his vehicle as well as for any liability to third persons arising from any accident during the policy's effectivity. The insurer, in turn, sought and was granted leave to file a third-party complaint against San Leon Rice Mill, Inc., on the ground that the driver was its employee and that, pursuant to Article 2180 of the Civil Code, it should be liable for the acts of its employee.

After trial, the CFI rendered judgment holding Sio Choy, Malayan Insurance Co., Inc., and San Leon Rice Mill, Inc. jointly and severally liable to Vallejos for P4,103.00 as actual damages, P18,000.00 for unearned income for three years, P5,000.00 as moral damages, and P2,000.00 as attorney's fees, totaling P29,103.00, with the insurer's liability capped at P20,000.00. On appeal, the Court of Appeals affirmed but ruled that San Leon Rice Mill, Inc. had no obligation to reimburse the insurer, since it was not a privy to the insurance contract.

• Reversal of Solidary Liability: Petitioner argued that it should not have been held solidarily liable with Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos, because its liability arises from the insurance contract and is limited to P20,000.00, whereas the tortfeasors' liability arises from quasi-delict.
• Entitlement to Reimbursement: Petitioner prayed, in the alternative, that San Leon Rice Mill, Inc. be ordered to reimburse it for any amount in excess of one-half of the entire damages it may be ordered to pay jointly and severally with Sio Choy, invoking the principle of subrogation.

• No Privity of Contract: Respondent San Leon Rice Mill, Inc. countered, as upheld by the Court of Appeals, that it has no obligation to indemnify or reimburse the insurer because it is not a privy to the contract of insurance between Sio Choy and Malayan Insurance Co., Inc.

• Solidary Liability of Insurer: Whether the trial court, as upheld by the Court of Appeals, was correct in holding the insurer solidarily liable with the tortfeasors Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos.
• Reimbursement via Subrogation: Whether the insurer is entitled to be reimbursed by San Leon Rice Mill, Inc. for whatever amount it has been adjudged to pay Vallejos on its insurance policy.

• Solidary Liability of Insurer: No. The insurer is directly liable to the injured third party under the indemnity contract but is not solidarily liable with the tortfeasors, its obligation arising from contract rather than quasi-delict, and its exposure being limited to the P20,000.00 policy amount.
• Reimbursement via Subrogation: Yes. Upon payment to Vallejos, the insurer becomes the subrogee of Sio Choy and is entitled to reimbursement from San Leon Rice Mill, Inc. for the latter's corresponding share, the right of subrogation being independent of privity of contract.

• Solidary Liability of Insurer: The liability of Sio Choy as owner of the jeep is based on Article 2184 of the Civil Code, which makes the owner solidarily liable with the driver in motor vehicle mishaps. The liability of San Leon Rice Mill, Inc. as employer of the driver is based on Article 2180, which holds employers liable for damages caused by employees acting within the scope of their assigned tasks. Under Article 2194, the responsibility of two or more persons liable for a quasi-delict is solidary. These two respondents are thus the principal tortfeasors, primarily and solidarily liable to Vallejos. The insurer's liability, by contrast, is based on its insurance contract with Sio Choy under the third-party liability clause. While a third party may directly sue the insurer under an indemnity contract against third-party liability, this direct liability does not equate to solidary liability with the insured and other tortfeasors. In a solidary obligation, the creditor may enforce the entire obligation against any one solidary debtor; yet the insurer's exposure is capped at P20,000.00 under the policy, while the total award is P29,103.00. Holding the insurer solidarily liable would violate both the concept of solidary obligation and the nature of insurance contracts, which undertake to indemnify only up to the agreed amount. The trial court's qualification that the insurer's liability is limited to P20,000.00 is itself inconsistent with the concept of solidary obligation, under which a debtor may be compelled to pay the entire obligation.

• Reimbursement via Subrogation: The Court of Appeals denied reimbursement on the ground that San Leon Rice Mill, Inc. is not a privy to the insurance contract. This overlooks the principle of subrogation in indemnity insurance. Subrogation is a normal incident of indemnity insurance; upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action the insured may have against the third person whose negligence caused the loss. The right of subrogation is of the highest equity and operates as an equitable assignment to the insurer of all remedies the insured may have for recovery, without need of any formal assignment or express stipulation. Critically, that right is not dependent upon, nor does it grow out of, any privity of contract. Upon paying Vallejos up to P20,000.00, the insurer becomes the subrogee of Sio Choy and is subrogated to whatever rights Sio Choy has against San Leon Rice Mill, Inc. Under Article 1217 of the Civil Code, a solidary debtor who has paid the entire obligation may claim from co-debtors only the share corresponding to each. Accordingly, the insurer, as subrogee of Sio Choy, is entitled to reimbursement from San Leon Rice Mill, Inc. in the amount of P14,551.50, representing one-half of P29,103.00.

• Nature of Insurer's Liability Under Third-Party Liability Indemnity Contracts — While a third party may directly sue the insurer under an indemnity contract against third-party liability, the insurer's direct liability does not make it solidarily liable with the insured and other tortfeasors. The insurer's obligation is contractual and limited to the policy amount; the tortfeasors' liability is quasi-delictual and potentially covers the entire award. Conflating the two violates the principles underlying both solidary obligations and insurance contracts.

• Subrogation in Indemnity Insurance — Subrogation is a normal incident of indemnity insurance. Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action the insured may have against the third person whose negligence or wrongful act caused the loss. The right operates as an equitable assignment without need of formal assignment or express stipulation in the policy. It is not dependent upon, nor does it grow out of, any privity of contract. Payment to the insured makes the insurer an assignee in equity.

• Solidary Liability of Quasi-Delict Tortfeasors — Under Article 2194 of the Civil Code, the responsibility of two or more persons who are liable for a quasi-delict is solidary. The vehicle owner under Article 2184 and the employer of the driver under Article 2180 are principal tortfeasors who are solidarily liable to the injured party.

• "While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, however, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort." — This passage articulates the ratio decidendi distinguishing the insurer's contractual liability from the tortfeasors' quasi-delictual liability, the foundational basis for excluding the insurer from solidary liability.

• "That right is not dependent upon, nor does it grow out of any privity of contract or upon written assignment of claim, and payment to the insured makes the insurer assignee in equity." — This formulation of the subrogation doctrine, quoted from American jurisprudence as adopted by the Court, establishes that the insurer's right of subrogation arises by operation of equity upon payment, independent of any contractual privity with the third person whose wrongful act caused the loss.

• Guingon vs. Del Monte, G.R. No. L-22042, August 17, 1967, 20 SCRA 1043 — Followed. In a damage suit against the driver, owner, and insurer of a jeepney at fault, only the owner and driver were held solidarily liable to the heirs of the victim, while the insurer was sentenced to pay a fixed amount as partial satisfaction of the judgment. This precedent supported the distinction between solidary tort liability and the insurer's contractual obligation.

• Coquia vs. Fieldman's Insurance Co., Inc., G.R. No. L-23276, November 29, 1968, 26 SCRA 178 — Cited for the proposition that where an insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer.

• The Imperial Insurance, Inc. vs. David, G.R. No. L-32425, November 21, 1984, 133 SCRA 317 — Cited for the principle that in a solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors.

• Fireman's Fund Insurance Company vs. Jamila & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323 — Cited for the doctrine of subrogation, including the principle that the right of subrogation is not dependent upon privity of contract and that payment to the insured makes the insurer an assignee in equity.

• Article 2180, Civil Code — Imposes liability on employers for damages caused by their employees acting within the scope of their assigned tasks; the responsibility ceases when the employer proves observance of the diligence of a good father of a family to prevent damage. Applied as the basis for San Leon Rice Mill, Inc.'s liability as employer of the driver Campollo.

• Article 2184, Civil Code — In motor vehicle mishaps, the owner is solidarily liable with the driver if the owner, who was in the vehicle, could have prevented the misfortune by due diligence; if the owner was not in the vehicle, Article 2180 applies. Applied as the basis for Sio Choy's solidary liability as owner of the jeep.

• Article 2194, Civil Code — Provides that the responsibility of two or more persons who are liable for a quasi-delict is solidary. Applied to establish that Sio Choy and San Leon Rice Mill, Inc., as quasi-delict tortfeasors, are solidarily liable to Vallejos.

• Article 1217, Civil Code — Provides that payment made by one solidary debtor extinguishes the obligation, and the debtor who made payment may claim from co-debtors only the share corresponding to each, with interest. Applied to entitle the insurer, as subrogee of Sio Choy upon payment, to reimbursement from San Leon Rice Mill, Inc. for the latter's corresponding share.

Melencio-Herrera (Chairperson), Paras, Sarmiento, and Regalado, JJ., concurred.