Pan Malayan Insurance Corporation vs. Court of Appeals

An actual total loss in marine insurance exists where the cargo, by the process of decomposition or other chemical agency, no longer remains the same kind of thing as before, even if some materials still exist; upon such actual total loss, the insured is entitled to payment of the full insurance without notice of abandonment.

Private respondent The Food and Agricultural Organization of the United Nations (FAO) is an autonomous intergovernmental organization created by treaty, which arranged to ship 1,500 metric tons of IR-36 certified rice seeds to Kampuchea for seedling purposes to alleviate an acute rice shortage. The rice seeds were of a fragile nature, treated and marked "TREATED, UNFIT FOR FOOD," with a tendency to germinate upon mere contact with water. Petitioner Pan Malayan Insurance Corporation issued Marine Cargo Policy No. B-11474A covering the shipment for P5,250,000.00. The shipment was loaded aboard LUZTEVECO Barge No. LC-3000, towed by a tugboat, under Bill of Lading No. 01 issued by Luzon Stevedoring Corporation (LUZTEVECO).

On May 22, 1980, FAO received a formal offer from Luzon Stevedoring Corporation (LUZTEVECO) to ship FAO's cargo of 3,000 metric tons of IR-36 certified rice seeds to Vung Tau, Vietnam, for freight fees of $55.50/MT. FAO formally accepted the offer on May 28, 1980, in respect of one lot of 1,500 metric tons, the subject of the present action. The cargo consisted of 34,122 bags of rice seeds purchased by FAO from the Bureau of Plant Industry for P4,602,270.00. Loading was completed on June 12, 1980, and LUZTEVECO issued Bill of Lading No. 01 in favor of FAO. FAO then secured insurance coverage in the amount of P5,250,000.00 from petitioner Pan Malayan Insurance Corporation, as evidenced by Marine Cargo Policy No. B-11474A dated June 16, 1980, with the premium paid the same day.

On June 16, 1980, FAO instructed LUZTEVECO to depart for Vung Tau, Vietnam, noting that the cargo could not withstand delay due to inherent risks of germination and spoilage. On June 23, 1980, FAO was informed that the tugboat and barge had returned to Manila after initially leaving on June 16, and that the shipment had again departed on June 21, 1980 with a different tugboat towing the barge. FAO demanded an explanation for this unauthorized deviation on June 25, 1980. The following day, FAO was advised that the barge had sunk in the China Sea, and it promptly notified petitioner and later formally filed its claim under the marine insurance policy on July 9, 1980.

On July 29, 1980, FAO was informed by LUZTEVECO of the recovery of the lost shipment, and it filed a claim with LUZTEVECO for compensation of damage to the cargo. Despite repeated demands, LUZTEVECO failed and refused to replace the shipment or pay its value, and petitioner likewise failed to pay FAO's insurance claim. Petitioner had engaged Pan Asiatic Adjustment and Marine Surveying Corporation, whose surveyor J.A. Barroso, Jr. reported on August 4, 1980 that 9,629 bags were in good order, 23,510 bags sustained wetting damage of 10% to 15%, and 983 bags were shortlanded or missing. Barroso recommended denial of FAO's claim on the ground that partial damage was not compensable under the policy, and petitioner denied the claim accordingly. A subsequent survey by Conrado Catalan, Jr. of Manila Adjusters & Surveyors Company on September 26, 27, and 29, 1980 found only 6,200 bags in good order, the 23,510 bad order bags having already been sold by LUZTEVECO at public auction. FAO signified willingness to abandon the proceeds of the sale and the remaining good order bags, but petitioner rejected the proposed abandonment on October 6, 1980.

FAO instituted Civil Case No. 41716 against LUZTEVECO and petitioner before the Regional Trial Court of Pasig, Metro Manila. The trial court found that there was total loss of the shipment, crediting the testimony of FAO's witness Fritz Keiner that no replacement or payment was ever made by either defendant, and that the rice seeds, marked "TREATED, UNFIT FOR FOOD," would germinate upon contact with water. Of the 34,122 bags originally loaded, 27,922 were determined to be lost or damaged, leaving only approximately 6,200 bags in the warehouse. The Court of Appeals affirmed this factual finding, and petitioner appealed to the Supreme Court on the ground that only 78% of the shipment was lost, which did not constitute total loss.

• Partial Loss, Not Total Loss: Petitioner argued that the Court of Appeals erred in ruling that there was total loss of the shipment, since only 27,922 bags out of 34,122 bags were rendered valueless to FAO and the shipment sustained only a loss of 78%, which should be classified as partial rather than total loss.
• Insufficiency of Evidence: Petitioner maintained that the findings of the trial court, as affirmed by the Court of Appeals, were contrary to the evidence on record, pointing to survey reports showing that a substantial number of bags remained in good order condition.

• Actual Total Loss: FAO countered that for all intents and purposes it had practically lost its entire shipment, inclusive of expenses and premium fees, despite the alleged recovery by LUZTEVECO, and that no replacement or payment was ever made by either defendant.
• Valuelessness for Purpose Held: FAO claimed actual total loss under paragraphs (c) and (d) of Section 130 of the Insurance Code, arguing that the wetting of the treated rice seeds activated their tendency to germinate, rendering them valueless for the planting or seeding purposes for which they were held.

• Actual Total Loss: Whether the Court of Appeals committed reversible error in holding that the trial court was correct in finding a total loss of the shipment.
• Liability for Full Insured Value: Whether the Court of Appeals committed reversible error in affirming the trial court's order directing petitioner to pay FAO the amount of P5,250,000.00 representing the full insured value of the rice seeds.

• Actual Total Loss: Yes. The sinking of Barge LC-3000 and the resulting damage to the rice seeds constituted an actual total loss under paragraphs (c) and (d) of Section 130 of the Insurance Code, because the cargo no longer remained the same kind of thing as before and FAO was effectively deprived of possession at the port of destination.
• Liability for Full Insured Value: Yes. Upon an actual total loss, the insured is entitled to payment of the full insurance without notice of abandonment, pursuant to Section 135 of the Insurance Code.

• Actual Total Loss: The Court found abundant evidence supporting the conclusion that an actual total loss occurred. The sinking of Barge LC-3000 was established through unrebutted testimony, letters from LUZTEVECO, a marine protest executed by the tugboat master, and LUZTEVECO's own answer admitting the sinking. The rice seeds were treated and marked "TREATED, UNFIT FOR FOOD," and possessed a tendency to germinate upon mere contact with water. Of the 34,122 bags loaded, 23,510 were found to be bad order bags with wet portions that had germinated or sprouted, 983 were shortlanded or missing, and an additional 2,682 of the remaining 9,629 presumed good order bags were found damaged or wetted upon sorting. The 23,510 bad order bags were sold at public auction by LUZTEVECO without authorization from FAO. The Court applied the rule that where cargo, by the process of decomposition or other chemical agency, no longer remains the same kind of thing as before, an actual total loss has been suffered, even though complete physical destruction is not essential. The loss fell under Section 130(c) — damage rendering the thing valueless to the owner for the purpose for which he held it — and Section 130(d) — any event effectively depriving the owner of possession at the port of destination. The Court noted it could review the appellate court's factual findings because they were alleged to be without citation of specific evidence, but found the evidence abundant and sufficient.

• Liability for Full Insured Value: Having determined that an actual total loss occurred, the Court found it unnecessary to pass upon the validity of the abandonment made by FAO. Section 135 of the Insurance Code provides that upon an actual total loss, the insured is entitled to payment without notice of abandonment. This is a statutory adoption of the longstanding maritime insurance doctrine that the right of the insured to claim the whole insurance is absolute upon actual total loss. Since no replacement or payment was ever made to FAO by either petitioner or LUZTEVECO, FAO was entitled to the full insured value of P5,250,000.00.

• Actual Total Loss in Marine Insurance — An actual total loss exists where the cargo, by the process of decomposition or other chemical agency, no longer remains the same kind of thing as before, even though complete physical destruction of the subject matter is not essential and the materials of which it consisted still exist. The Court applied this doctrine to the treated rice seeds, which germinated upon contact with water, rendering them valueless for their intended seeding purpose in Kampuchea.
• Right to Full Payment Without Abandonment — Upon an actual total loss, the insured is entitled to payment of the whole insurance without need of notice of abandonment. This principle, codified in Section 135 of the Insurance Code, dispenses with the requirement of abandonment proceedings where the loss is actual rather than constructive.

• "However, the complete physical destruction of the subject matter is not essential to constitute an actual total loss. Such a loss may exist where the form and specie of the thing is destroyed, although the materials of which it consisted still exist (Great Western Ins. Co. vs. Fogarty, N.Y., 19 Wall 640, 22 L. Ed. 216), as where the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before (Williams vs. Cole, 16 Me. 207)." — This passage articulates the controlling rule for determining actual total loss without requiring complete physical destruction, the ratio decidendi for classifying the rice seed damage as total loss.
• "(u)pon an actual total loss, a person insured is entitled to payment without notice of abandonment." — This quotation of Section 135 of the Insurance Code establishes the statutory basis for the insured's absolute right to full payment upon actual total loss, rendering the abandonment issue moot.

• Great Western Ins. Co. vs. Fogarty, N.Y., 19 Wall 640, 22 L. Ed. 216 — Cited as authority for the proposition that an actual total loss may exist where the form and specie of the thing is destroyed, even though the materials still exist.
• Williams vs. Cole, 16 Me. 207 — Cited as authority for the rule that where cargo, by the process of decomposition or other chemical agency, no longer remains the same kind of thing as before, an actual total loss has been suffered.
• Air France vs. Court of Appeals, 171 SCRA 399 (1989) — Cited for the exception that while the Supreme Court is not a trier of facts, it may review the Court of Appeals' findings when they are alleged to be without citation of specific evidence on which they are based.
• Gordon vs. Insurance Co., 2 Pick (Mass.) 249 (1824) — Cited through Martin's Commentaries as the longstanding doctrinal origin of the rule that in case of actual total loss, the right of the insured to claim the whole insurance is absolute without notice of abandonment.

• Section 130, Insurance Code — Defines actual total loss as caused by: (a) total destruction of the thing insured; (b) irretrievable loss by sinking or being broken up; (c) any damage rendering the thing valueless to the owner for the purpose for which he held it; or (d) any other event effectively depriving the owner of possession at the port of destination. The Court found the loss fell under paragraphs (c) and (d), as the germinated rice seeds were valueless for seeding purposes and FAO was deprived of possession at the port of destination.
• Section 135, Insurance Code — Provides that upon an actual total loss, the insured is entitled to payment without notice of abandonment. The Court applied this provision to dispense with the need for FAO to effect a valid abandonment before claiming the full insured value.
• Sections 129 and 131, Insurance Code — Referenced by the trial court as classifying total loss into actual or absolute and constructive or technical, providing the statutory framework within which the loss was analyzed.

Melencio-Herrera (Chairperson), Paras, and Padilla, JJ., concurred. Sarmiento, J., was on leave.