Malayan Insurance Company, Inc. vs. PAP Co., Ltd. (Phil. Branch)

An insurer is entitled to rescind a fire insurance contract when the insured, without the insurer's consent, transfers the insured properties to a location different from that stipulated in the policy, and the transfer increases the risk of loss, provided the policy contains a condition requiring the insurer's sanction for any removal of insured property to another location.

PAP Co., Ltd. owned machineries and equipment that were mortgaged to Rizal Commercial Banking Corporation (RCBC). To protect RCBC's interest as mortgagee, PAP procured a fire insurance policy from Malayan Insurance Company, Inc., with the insurance proceeds payable to RCBC. RCBC referred PAP to Malayan for fire insurance coverage, though no written referral agreement existed between the two entities, and RCBC was not Malayan's authorized agent. The insurance relationship was governed by the Insurance Code of the Philippines, particularly provisions on concealment, misrepresentation, warranty, and alteration of risk.

On May 13, 1996, Malayan Insurance Company, Inc. issued Fire Insurance Policy No. F-00227-000073 to PAP Co., Ltd., covering the latter's machineries and equipment located at the Sanyo Precision Phils. Building, Phase III, Lot 4, Block 15, PEZA, Rosario, Cavite. The insurance was for ₱15,000,000.00, effective for one year, and was procured by PAP for RCBC, the mortgagee of the insured properties. Before the policy's expiration, PAP renewed the policy on an "as is" basis. Pursuant to the renewal, Malayan issued Fire Insurance Policy No. F-00227-000079 for the period May 13, 1997 to May 13, 1998. The renewal policy expressly stated that the insured properties were located at the Sanyo Building and contained Condition No. 9(c), which provided that the insurance ceases to attach as regards the property affected if the insured property be removed to any building or place other than that stated in the policy, unless the insurer's sanction was obtained by endorsement upon the policy.

Sometime in September 1996 — or, according to PAP's own witness, after the renewal — PAP transferred the insured machineries and equipment from the Sanyo Building to the Pace Pacific Building, Lot 14, Block 14, Phase III, PEZA, Rosario, Cavite. PAP claimed it notified RCBC of the transfer and that RCBC conducted an inspection of the machinery at the new location. PAP also claimed, through the hearsay testimony of its branch manager Katsumi Yoneda, that its secretary Dory Ramos had informed Malayan of the transfer, though Yoneda had no personal knowledge of whether such notice was actually given. Malayan's witness, Alexander Barrera, its Administrative Assistant, denied that PAP notified Malayan about the transfer before the renewal policy was issued, and testified that PAP, through Maricar Jardiniano, informed him only that the fire insurance would be renewed on an "as is basis." It was also established during the November 9, 2006 hearing that Malayan's authorized insurance agent, Rodolfo Talusan, procured the original policy — not RCBC — and that RCBC merely referred fire insurance clients to Malayan without any written referral agreement.

On October 12, 1997, during the effectivity of the renewal policy, a fire broke out at the Pace Factory and totally destroyed the insured properties. PAP filed a fire insurance claim with Malayan in the insured amount. By letter dated December 15, 1997, Malayan denied the claim on the ground that the insured machineries had been transferred to a location different from that indicated in the policy. PAP contested the denial, arguing that Malayan was informed of the transfer by RCBC, but Malayan reiterated its denial. PAP then filed a complaint against Malayan. The RTC found Malayan liable, holding that Malayan failed to prove the transfer increased the risk under Article 169 of the Insurance Code and that PAP's notice to RCBC sufficed. The CA affirmed with modification, deleting attorney's fees but sustaining the indemnity award and the 12% interest, reasoning that Malayan failed to cite specific policy provisions on transfer restrictions, that the transfer occurred during the original policy's term so Malayan should have been aware of it at renewal, and that no increase in risk was demonstrated.

• Concealment, Misrepresentation, and Breach of Warranty: Malayan argued that PAP committed concealment under Section 27, misrepresentation under Section 45, and breach of an affirmative warranty under Section 74 of the Insurance Code when it failed to inform Malayan of the actual and new location of the insured properties, contrary to the affirmation in the renewal policy that the properties were located at the Sanyo Building. Before issuance of the renewal policy, PAP even informed Malayan that there would be no changes.
• Lack of Consent to Transfer: Malayan maintained that PAP failed to prove that the transfer of the insured properties was made with Malayan's knowledge and consent. Notice to RCBC was irrelevant and did not bind Malayan, as RCBC is a corporation with a separate and distinct juridical personality and did not act as Malayan's representative or agent.
• Increase of Risk: Malayan insisted that the transfer from the Sanyo Factory to the Pace Factory increased the risk, as the Sanyo Factory was occupied as a factory of automotive/computer parts with a tariff rate of 0.449%, while the Pace Factory was occupied as a factory that repacked silicone sealant to plastic cylinders with a higher tariff rate of 0.657%, and this evidence was unrebutted by PAP.
• Impropriety of Interest Award: Malayan argued that liability under an insurance policy is not a loan or forbearance of money entitling the plaintiff to 12% interest, and that Sections 234 and 244 of the Insurance Code should not apply because there was a legitimate dispute on whether PAP committed concealment, misrepresentation, and breach of warranty, not an unjustifiable refusal or withholding of proceeds.
• Proceeds Payable to Mortgagee: Malayan contended that the proceeds of the insurance contract were payable to PAP despite the existence of a mortgagee clause in the policy.
• Interpretation Against Insurer: Malayan argued that the CA erred in adopting the interpretation most favorable to the insured.

• No Misrepresentation or Concealment: PAP countered that there was no evidence of any misrepresentation, concealment, or deception on its part and that its claim was not fraudulent.
• Right to Sue Despite Mortgagee Clause: PAP insisted that it could still sue to protect its rights and interest on the policy notwithstanding the fact that the proceeds were payable to RCBC, as it remained a party to the insurance contract.
• Entitlement to Interest: PAP argued that it could collect interest at the rate of 12% per annum on the proceeds of the policy because its claim for indemnity was unduly delayed without legal justification.

• Policy Condition on Transfer: Whether the renewal policy contained a condition requiring the insurer's consent before the insured properties could be transferred to a different location, and whether the insured's unauthorized transfer relieved the insurer of liability.
• Notice to Insurer: Whether PAP effectively notified Malayan of the transfer of the insured properties, and whether notice to RCBC could be imputed to Malayan.
• Increase of Risk: Whether the transfer of the insured properties from the Sanyo Factory to the Pace Factory increased the risk of loss.
• Right to Rescind: Whether Malayan was entitled to rescind the insurance contract on grounds of concealment, misrepresentation, and breach of a material warranty.
• Award of Interest: Whether the CA correctly imposed 12% interest per annum from the time of loss until fully paid.
• Entitlement to Proceeds: Whether the proceeds of the insurance contract were payable to PAP despite the existence of a mortgagee clause.
• Interpretation of Policy: Whether the interpretation most favorable to the insured should be adopted.

• Policy Condition on Transfer: Yes. Condition No. 9(c) of the renewal policy expressly provided that the insurance ceases to attach if the insured property is removed to any building or place other than that stated in the policy, unless the insurer's sanction is obtained by endorsement upon the policy.
• Notice to Insurer: No. The records contained no convincing evidence that Malayan was notified of the transfer. Notice to RCBC did not bind Malayan, as RCBC was not Malayan's agent; PAP's own counsel stipulated that Malayan's authorized insurance agent Rodolfo Talusan procured the original policy, not RCBC. PAP's evidence on notice consisted of hearsay testimony from its branch manager, who had no personal knowledge of whether notice was actually given.
• Increase of Risk: Yes. The transfer from the Sanyo Factory to the Pace Factory increased the hazard, as shown by the increase in tariff rate from 0.449% to 0.657%, placing the properties at greater risk of loss and entailing a higher premium. PAP failed to rebut this evidence.
• Right to Rescind: Yes. All five requisites for rescission under Section 168 of the Insurance Code were present: the policy limited the location of the insured properties, there was an alteration in location, the alteration was without the insurer's consent, it was made by means within the insured's control, and it increased the risk of loss. PAP also committed concealment under Section 26, entitling rescission under Section 27.
• Award of Interest: N/A. The Court reversed the CA decision in full and declared Malayan not liable, rendering the issue of interest moot.
• Entitlement to Proceeds: N/A. The Court did not reach this issue separately, having resolved that Malayan was not liable under the policy at all.
• Interpretation of Policy: N/A. The Court did not rely on the principle of interpreting ambiguities against the insurer, as the policy condition was clear and express.

• Policy Condition on Transfer: The renewal policy was issued on an "as is" basis, meaning it carried the same stipulations and limitations as the original policy. Condition No. 9(c) clearly and expressly provided that insurance coverage ceases to attach if the insured property is removed to any building or place other than that stated in the policy, unless the insurer's sanction is obtained by endorsement. The insured properties were totally burned at the Pace Factory, which was not the location stipulated in the renewal policy. The loss adjuster Cunningham Toplis Philippines, Inc., which investigated the fire, opined that the policy would not respond to the claim because the location of risk covered was not the location affected. The unconsented transfer was therefore at PAP's own risk.

• Notice to Insurer: The Court combed the records and found nothing showing Malayan was duly notified of the transfer. PAP's attempt to prove notice rested on the testimony of branch manager Katsumi Yoneda, who testified that he instructed his secretary Dory Ramos to inform Malayan, and that Ramos reported back that she had done so. This testimony was hearsay — Yoneda had no personal knowledge of whether notice was actually given. PAP should have presented Ramos and Maricar Jardiniano as witnesses but did not. Moreover, Malayan's witness Alexander Barrera denied that PAP notified Malayan before the renewal policy was issued. Notice to RCBC was insufficient because RCBC was not Malayan's agent; PAP's own counsel stipulated that Malayan's authorized insurance agent Rodolfo Talusan procured the original policy, and Barrera testified that RCBC merely referred clients to Malayan without any written referral agreement. Although Malayan and RCBC may have been sister companies, that fact did not make one an agent of the other.

• Increase of Risk: The Court agreed with Malayan that the transfer exposed the properties to a more hazardous environment. The Sanyo Factory was occupied as a factory of automotive/computer parts with a tariff rate of 0.449% under classification 6.1.2 A, while the Pace Factory was occupied as a factory that repacked silicone sealant to plastic cylinders with a higher tariff rate of 0.657% under the same classification. The increase in tariff rate put the properties at greater risk of loss and would have necessitated a higher premium. PAP remained completely silent on this point and failed to rebut Malayan's evidence.

• Right to Rescind: Because the transfer was made without notice and without Malayan's consent, PAP committed concealment, misrepresentation, and breach of a material warranty. Section 26 of the Insurance Code defines concealment as a neglect to communicate that which a party knows and ought to communicate. Section 27 provides that concealment entitles the injured party to rescind. Section 168 (cited as Section 68 in the decision, evidently a typographical error) provides that an alteration in the use or condition of the thing insured from that to which it is limited by the policy, made without the consent of the insurer, by means within the control of the insured, and increasing the risk, entitles the insurer to rescind a contract of fire insurance. All five requisites were present: the policy limited the location, there was an alteration, it was without consent, it was within the insured's control, and it increased the risk. Additionally, Yoneda admitted that the transfer occurred after the renewal, which further undermined PAP's position that Malayan should have known of the transfer at the time of renewal.

• Concealment in Insurance (Section 26, Insurance Code) — Concealment is the neglect to communicate that which a party knows and ought to communicate. A concealment, whether intentional or unintentional, entitles the injured party to rescind a contract of insurance (Section 27). In this case, PAP's failure to inform Malayan of the transfer of the insured properties to a different location constituted concealment, entitling Malayan to rescind.

• Rescission for Alteration of Risk in Fire Insurance (Section 168, Insurance Code) — An alteration in the use or condition of the thing insured from that to which it is limited by the policy, made without the consent of the insurer, by means within the control of the insured, and increasing the risk, entitles the insurer to rescind a contract of fire insurance. The five requisites are: (1) the policy limits the use or condition of the thing insured; (2) there is an alteration in said use or condition; (3) the alteration is without the consent of the insurer; (4) the alteration is made by means within the insured's control; and (5) the alteration increases the risk of loss. All five were satisfied here.

• Breach of Warranty (Section 74, Insurance Code) — The violation of a material warranty or other material provision of a policy entitles the other party to rescind. PAP's affirmation in the renewal policy that the properties were at the Sanyo Building, when they had already been transferred to the Pace Factory, constituted a breach of warranty.

• Misrepresentation (Section 45, Insurance Code) — If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time when the representation becomes false. PAP's representation that there would be no changes in the renewal policy was false in a material point.

• Separate Juridical Personality of Corporations — Notice to a corporation (RCBC) does not bind another corporation (Malayan) merely because they are sister companies. Absent evidence of an agency relationship, one corporation's knowledge or receipt of notice cannot be imputed to the other.

• "Evidently, by the clear and express condition in the renewal policy, the removal of the insured property to any building or place required the consent of Malayan. Any transfer effected by the insured, without the insurer's consent, would free the latter from any liability." — This passage articulates the Court's reading of Condition No. 9(c) and establishes the contractual basis for absolving the insurer.

• "The testimony of Mr. Yoneda consisted of hearsay matters. He obviously had no personal knowledge of the notice to either Malayan or RCBC. PAP should have presented his secretaries, Dory Ramos and Maricar Jardiniano, at the witness stand. His testimony alone was unreliable." — This passage explains why the insured's evidence of notice failed and underscores the evidentiary requirement of personal knowledge in proving notice to the insurer.

• "An alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance." — This is the Court's quotation of Section 168 of the Insurance Code, the controlling statutory provision for rescission based on alteration of risk.

• "Given that the location of risk covered under the policy is not the location affected, the policy will, therefore, not respond to this loss/claim." — This is the opinion of the loss adjuster Cunningham Toplis Philippines, Inc., which the Court adopted as consistent with its ruling that the policy did not cover the loss at the Pace Factory.

• Rodriguez, The Insurance Code of the Philippines Annotated, Fifth Edition — Cited as the source for the five-part test for rescission under Section 168 of the Insurance Code, enumerating the requisites an insurer must establish to rescind a fire insurance contract based on alteration of risk.

• Section 26, Insurance Code of the Philippines — Defines concealment as the neglect to communicate that which a party knows and ought to communicate. Applied to hold that PAP's failure to inform Malayan of the transfer constituted concealment.
• Section 27, Insurance Code of the Philippines — Provides that concealment, whether intentional or unintentional, entitles the injured party to rescind a contract of insurance. Applied to entitle Malayan to rescind.
• Section 45, Insurance Code of the Philippines — Provides that a false representation on a material point entitles the injured party to rescind. Applied to PAP's false representation that there would be no changes in the renewal policy.
• Section 74, Insurance Code of the Philippines — Provides that violation of a material warranty or material provision entitles the other party to rescind. Applied to PAP's breach of the warranty that the properties were at the Sanyo Building.
• Section 168, Insurance Code of the Philippines — Provides that an alteration in the use or condition of the thing insured, made without the insurer's consent, by means within the insured's control, and increasing the risk, entitles the insurer to rescind a fire insurance contract. Applied as the primary statutory basis for rescission, with all five requisites found present.
• Sections 234 and 244, Insurance Code of the Philippines — Cited by Malayan in arguing against the imposition of 12% interest, on the ground that there was a legitimate dispute rather than an unjustifiable refusal to pay. The Court did not reach these provisions, having reversed the CA decision entirely.

Chief Justice Maria Lourdes P. A. Sereno, Associate Justice Presbitero J. Velasco, Jr., Associate Justice Diosdado M. Peralta, and Associate Justice Marvic Mario Victor F. Leonen concurred. No separate concurring opinions were written.