Malayan Insurance Corporation vs. Court of Appeals

When the F.C. & S. Clause is deleted from a marine insurance policy, the Institute War Clauses (Cargo) are deemed incorporated, and all risks previously excluded by the F.C. & S. Clause—including arrest by ordinary judicial process—become covered risks under the policy. Any ambiguity resulting from the deletion and incorporation is construed against the insurer, the policy being a contract of adhesion prepared solely by the insurer.

TKC Marketing Corporation was the owner and consignee of approximately 3,189.171 metric tons of soya bean meal loaded on board the MV Al Kaziemah for carriage from Rio del Grande, Brazil, to Manila. Malayan Insurance Corporation insured the cargo against risk of loss under two Marine Cargo policies (Nos. M/LP 97800305 for ₱18,986,902.45 and M/LP 97800306 for ₱1,195,005.45), both dated September 1989. The policies contained a standard "Perils" clause and Clause 12, the "Free from Capture & Seizure Clause" (F.C. & S. Clause), which was deleted from the policies, triggering the automatic incorporation of the Institute War Clauses (Cargo).

TKC Marketing Corporation was the owner and consignee of approximately 3,189.171 metric tons of soya bean meal loaded on board the MV Al Kaziemah on or about September 8, 1989, for carriage from the port of Rio del Grande, Brazil, to the port of Manila. The cargo was insured against risk of loss by Malayan Insurance Corporation under two marine cargo policies—No. M/LP 97800305 for ₱18,986,902.45 and No. M/LP 97800306 for ₱1,195,005.45—both dated September 1989. The policies contained a standard "Perils" clause enumerating covered risks, including "Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation, Condition, or quality soever," and Clause 12, the "Free from Capture & Seizure Clause" (F.C. & S. Clause), which warranted the policy free of capture, seizure, arrest, restraint, or detainment and the consequences thereof. The F.C. & S. Clause was deleted from the policies, and the policies stipulated that upon such deletion the relevant current Institute War Clauses would be deemed to form part of the insurance.

While the vessel was docked in Durban, South Africa, on September 11, 1989, en route to Manila, civil authorities arrested and detained it because of a lawsuit on a question of ownership and possession. Private respondent notified petitioner on October 4, 1989, of the arrest and made a formal claim for US$916,886.66, representing the dollar equivalent of the policies, for non-delivery of the cargo, and sought petitioner's assistance on what to do with the cargo. Petitioner replied that the arrest by civil authority was not a peril covered by the policies. Private respondent then advised petitioner that it might tranship the cargo and requested an extension of insurance coverage until actual transhipment. The extension was approved upon payment of additional premium, under the same terms and conditions of the original policies, covering the period October 4 to December 19, 1989.

On December 11, 1989, the cargo was sold in Durban for US$154.40 per metric ton, totaling ₱10,304,231.75, due to its perishable nature, which could no longer withstand a twenty-day voyage to Manila and another twenty days for discharge. On January 5, 1990, private respondent reduced its claim to US$448,806.09 (or ₱9,879,928.89 at the exchange rate of ₱22.0138 per US$1.00), representing the loss after deducting the sale proceeds from the original claim of US$916,886.66 (or ₱20,184,159.55). Petitioner maintained its position that the arrest was an excepted risk, prompting private respondent to file a complaint for damages, seeking reimbursement of legal expenses of ₱128,770.88, loan interest of ₱942,269.30, moral damages of ₱200,000.00, exemplary damages of ₱200,000.00, and attorney's fees equivalent to 30% of the award. The trial court found for private respondent, and the Court of Appeals affirmed, ruling that the deletion of Clause 12 caused the Institute War Clauses (Cargo) to be incorporated, thereby covering the arrest by judicial process.

• Coverage of Arrest Risk: Petitioner argued that arrest by civil authority is not compensable because the term "arrest" refers to "political or executive acts" and does not include loss caused by riot or ordinary judicial process, as in this case. It maintained that the deletion of the F.C. & S. Clause left the assured covered solely for the perils specified by the wording of the policy itself, and that the rationale for excluding arrests pursuant to judicial authorities is to eliminate collusion between unscrupulous assured and civil authorities.
• Nature of Loss: Petitioner submitted that any loss private respondent incurred was in the nature of unrecovered acquisition value brought about by a voluntary sacrifice sale, not by arrest, detention, or seizure of the ship.
• Good Faith: Petitioner alleged that its rejection of the claim resulted from an honest belief that the arrest was not a compensable risk, noting that it had accommodated private respondent's request for an extension of coverage despite being under no legal obligation to do so.
• Exemplary Damages and Factual Inquiry: Petitioner raised for the first time before the Supreme Court that the Court of Appeals erred in awarding exemplary damages and in ruling based on facts requiring inquiry into evidence.

• Procedural Bar: Respondent argued that petitioner did not raise the award of exemplary damages as an issue before the Court of Appeals and could not do so for the first time before the Supreme Court. It likewise contended that petitioner could not submit for the first time on appeal arguments based on facts requiring evidentiary inquiry.
• Contra Proferentem: Respondent argued that as petitioner was the sole author of the policies, "arrests" should be strictly interpreted against it under the rule that any ambiguity is taken contra proferentem. Risk policies should be construed reasonably to effectuate the intentions and expectations of the parties.
• Non-Delivery Coverage: Respondent maintained that the policies clearly stipulated coverage for risks of non-delivery of an entire package, and that petitioner itself invited and granted the extensions and collected premiums thereon.

• Coverage of Arrest by Civil Authority: Whether the arrest of the vessel by civil authorities on a question of ownership and possession was a risk covered under the subject insurance policies.
• Constructive Total Loss: Whether there was constructive total loss over the cargo.
• Bad Faith: Whether petitioner was in bad faith in declining private respondent's claim.
• Strict Construction Against Insurer: Whether the Court of Appeals gave undue reliance to the doctrine that insurance policies are strictly construed against the insurer.

• Coverage of Arrest by Civil Authority: Yes. The deletion of the F.C. & S. Clause automatically incorporated subsection 1.1 of Section 1 of the Institute War Clauses (Cargo), which covers all risks previously excluded by the F.C. & S. Clause, including arrest occasioned by ordinary judicial process.
• Constructive Total Loss: N/A. The Court found no need to discuss this issue in view of its ruling on coverage.
• Bad Faith: N/A. The Court found no need to discuss this issue.
• Strict Construction Against Insurer: N/A. The Court found no need to discuss this issue, although its reasoning on coverage applied the principle that ambiguities in insurance contracts are construed against the insurer.

• Coverage of Arrest by Civil Authority: The resolution hinged on the interpretation of the "Perils" clause in relation to the excluded risks under Clause 12 (the F.C. & S. Clause). The F.C. & S. Clause warranted the policy free of "capture, seizure, arrest, restraint or detainment, and the consequences thereof." Jurisprudence established that "arrests" caused by ordinary judicial process were among the risks excluded by the F.C. & S. Clause. Because the F.C. & S. Clause was deleted from the policies, subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) was deemed incorporated, providing that the insurance "covers the risks excluded from the Standard Form of English Marine Policy by the clause 'Warranted free of capture, seizure, arrest, etc.'" Logically, since arrest by ordinary judicial process was excluded by the F.C. & S. Clause, it became a covered risk upon the clause's deletion and the consequent incorporation of the Institute War Clauses. Petitioner's contrary interpretation—that the Institute War Clauses applied exclusively to warlike operations—was internally inconsistent, as petitioner itself admitted that the deletion was intended to include "arrest, etc. even if [it] were not a result of hostilities or warlike operations." The Court found petitioner's interpretation strained and unnatural, leading to an absurd conclusion. The deletion of the F.C. & S. Clause gave rise to ambiguity; under well-established doctrine, exceptions to general coverage are construed most strongly against the insurer, and a contract of insurance, being a contract of adhesion, must be construed liberally in favor of the insured and strictly against the insurer. Because the risk of arrest by ordinary judicial process was not expressly indicated as an exception in the policies, the ambiguity was resolved against petitioner.

• Contra Proferentem in Insurance Contracts — A contract of insurance is a contract of adhesion par excellence, prepared solely by the insurer and accepted by the insured in the form written. Any ambiguity therein must be resolved against the insurer and construed liberally in favor of the insured. Limitations of liability should be regarded with extreme jealousy and construed to preclude the insurer from noncompliance with its obligations. The Court applied this doctrine to resolve the ambiguity created by the deletion of the F.C. & S. Clause and the consequent incorporation of the Institute War Clauses, holding that the ambiguity was construed against petitioner as the sole author of the policies.
• Strict Construction of Exceptions Against the Insurer — Exceptions to general coverage in an insurance policy are construed most strongly against the company. Even an express exception is construed against the underwriters by whom the policy is framed and for whose benefit the exception is introduced. If the insurer desires to limit or restrict the operation of the general provisions of its contract by special proviso, exception, or exemption, it must express such limitation in clear and unmistakable language. The Court relied on this doctrine to hold that because the risk of arrest by ordinary judicial process was not expressly indicated as an exception after deletion of the F.C. & S. Clause, the exception could not operate to exclude coverage.
• Avoidance of Strained Interpretation — A strained interpretation that is unnatural and forced, leading to an absurd conclusion or rendering the policy nonsensical, must be avoided. Any construction of a marine policy rendering it void should likewise be avoided; such policies are construed strictly against the company to avoid forfeiture unless no other result is possible from the language used. The Court invoked this principle to reject petitioner's internally inconsistent reading of the F.C. & S. Clause and the Institute War Clauses.

• "With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this Court agrees with the Court of Appeals and the private respondent that 'arrest' caused by ordinary judicial process is deemed included among the covered risks." — This passage states the ratio decidendi: deletion of the F.C. & S. Clause and incorporation of the Institute War Clauses brought arrest by ordinary judicial process within coverage.
• "A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations." — This is the canonical formulation of the contra proferentem doctrine as applied to insurance contracts of adhesion in Philippine jurisprudence, frequently cited in subsequent cases.
• "Obviously, the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial process was expressly indicated as an exception in the subject policies, there would have been no controversy with respect to the interpretation of the subject clauses." — This passage identifies the source of the ambiguity and explains why the insurer bore the consequence of failing to expressly exclude the risk.

• Fortune Insurance and Surety Co., Inc. vs. Court of Appeals, 244 SCRA 308 (1995) — Cited as controlling authority for the doctrine that a contract of insurance is a contract of adhesion par excellence, and any ambiguity should be resolved against the insurer, with limitations of liability construed jealously against the insurer.
• Williams vs. Cole, 16 Me. 207 — Cited by the Court of Appeals for the proposition that failure to deliver consigned goods at the port of destination is a loss compensable under the Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies, as read in relation to Section 130 of the Insurance Code.
• Blaine Richards & Co. vs. Marine Indem. Ins. Co., 653 F. 2d 1051 (1980) — Cited for the proposition that although the F.C. & S. Clause may have originally been inserted in marine policies to protect against risks of war, its interpretation in recent years to include seizure or detention by civil authorities is consistent with the general purposes of the clause.

• Section 130, Insurance Code — Cited by the Court of Appeals in relation to the Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies, supporting the proposition that failure to deliver consigned goods at the port of destination is a compensable loss.
• Institute War Clauses (Cargo), subsection 1.1 of Section 1 — Deemed incorporated upon deletion of the F.C. & S. Clause; provides that the insurance covers the risks excluded from the Standard Form of English Marine Policy by the clause warranted free of capture, seizure, arrest, restraint, or detainment. The Court held that this provision brought arrest by ordinary judicial process within coverage.
• F.C. & S. Clause (Clause 12) — The "Free from Capture & Seizure Clause" warranted the policy free of capture, seizure, arrest, restraint, or detainment and the consequences thereof. Its deletion from the policies triggered the automatic incorporation of the Institute War Clauses (Cargo), converting previously excluded risks into covered risks.

Regalado, Puno, Mendoza, and Torres, Jr., JJ., concurred.