Rizal Surety & Insurance Company vs. Court of Appeals and Transworld Knitting Mills, Inc.

A fire insurance policy covering goods stored in premises "forming part of the buildings" described therein extends to goods stored in a permanent adjoining and intercommunicating structure that is an integral part of the insured building, and any ambiguity in the policy's coverage stipulation must be construed against the insurer who drafted it.

Rizal Surety & Insurance Company (Rizal Insurance) is an insurer that issued a fire insurance policy in favor of Transworld Knitting Mills, Inc. (Transworld), a business engaged in hosiery mills, garment and lingerie manufacturing, transistor-stereo assembly, and related operations. The same properties insured with Rizal Insurance were also insured with New India Assurance Company, Ltd. (New India), making both insurers concurrent coverage providers for Transworld's compound in Barrio Ugong, Pasig, Metro Manila. The fire insurance policy at issue was issued on March 13, 1980, initially for ₱1,000,000.00 and later increased to ₱1,500,000.00, covering the period from August 14, 1980 to March 13, 1981.

On March 13, 1980, Rizal Surety & Insurance Company issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc., initially for ₱1,000,000.00 and eventually increased to ₱1,500,000.00, covering the period from August 14, 1980 to March 13, 1981. The policy covered stocks of finished and/or unfinished products, raw materials, and supplies of every kind stored in the premises occupied by Transworld, forming part of the buildings situated within its own compound at Magdalo Street, Barrio Ugong, Pasig, Metro Manila, Block No. 601. The policy described the insured building as a four-span lofty one-storey structure with mezzanine portions, constructed of reinforced concrete and hollow blocks under a galvanized iron roof, occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly plant, offices, warehouse, and caretaker's quarters. The same pieces of property were also insured with New India Assurance Company, Ltd.

On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion of the four-span building and partly gutting the left and right sections. A two-storey building located behind the four-span building, where fun and amusement machines and spare parts were stored, was also destroyed by the fire. Transworld filed insurance claims with both Rizal Insurance and New India, but neither paid.

On May 26, 1982, Transworld filed an action for collection of sum of money and damages before the then Court of First Instance of Rizal, docketed as Civil Case No. 46106, praying for judgment ordering both insurers to pay ₱2,747,867.00 plus legal interest, ₱400,000.00 as attorney's fees, exemplary damages, ₱50,000.00 as expenses of litigation, and costs of suit. Rizal Insurance countered that its policy covered only the contents of the four-span building, which was partly burned, and not the damage to the two-storey annex building. Transworld, for its part, maintained that the so-called "annex" was not a separate annex but an integral part of the four-span building, and therefore the goods stored therein were covered by the same policy.

Both the trial court and the Court of Appeals found that the two-storey building was not a separate annex but an integral and inseparable part of the four-span building described in the policy. The letter-report of the Manila Adjusters and Surveyor's Company, which Rizal Insurance itself cited, described the two-storey building as adjoining and intercommunicating with the first right span of the lofty storey building. The two-storey structure had been constructed sometime in 1978, already existing when the policy was issued. The Court of Appeals adjudged Rizal Insurance liable for ₱470,328.67, representing Transworld's total loss and damage for which Rizal Insurance was responsible, with legal interest from May 26, 1982 until payment.

• Policy Coverage: Petitioner argued that the fire insurance policy covered only the contents of the main four-span building and did not include goods stored in the two-storey annex building, where the bulk of the burned properties were located.
• Extent of Damage: Petitioner maintained that photographs taken immediately after the fire clearly showed that the premises occupied by Transworld, where the insured properties were located, sustained only partial damage, and that the Court of Appeals erred in not considering this evidence.
• Bad Faith of Respondent: Petitioner contended that Transworld had acted in palpable bad faith and with malice in filing a clearly unfounded civil action, and that the Court of Appeals should have ordered Transworld to pay moral and punitive damages under Article 2205 of the Civil Code, plus attorney's fees and expenses of litigation under Article 2208, paragraphs 4 and 11, of the Civil Code.

• Integral Part of Building: Respondent countered that the so-called "annex" was not a separate annex building but was actually an integral part of the four-span building described in the policy, and therefore the goods and items stored therein were covered by the same fire insurance policy.

• Policy Coverage: Whether the two-storey building where the bulk of the burned properties were stored was included in the coverage of the fire insurance policy issued by Rizal Insurance to Transworld.
• Factual Findings: Whether the photographs taken after the fire, showing only partial damage to the premises, should have been considered to limit the insurer's liability.
• Insurable Interest: Whether Transworld had an insurable interest in the fun and amusement machines and spare parts stored in the two-storey building, entitling it to indemnification.
• Bad Faith and Damages: Whether Transworld acted in palpable bad faith and with malice in filing the civil action, warranting an award of moral and punitive damages, attorney's fees, and expenses of litigation in favor of Rizal Insurance.

• Policy Coverage: Yes. The two-storey building was an integral and inseparable part of the four-span building described in the policy, meeting the two requisites for compensability: the properties were stored in areas occupied by Transworld, and those areas formed part of the building described in the policy.
• Factual Findings: No. The factual findings of the Court of Appeals, affirming those of the trial court, are conclusive on the parties and not reviewable by the Supreme Court, and carry even more weight when the appellate court affirmed the lower court's findings.
• Insurable Interest: Yes. Transworld's insurable interest in the fun and amusement machines and spare parts had already been adjudicated and sustained with finality by the Supreme Court in G.R. No. L-111118, precluding relitigation under the rule on conclusiveness of judgment.
• Bad Faith and Damages: No. The Court found no basis for disturbing the lower courts' findings and affirmed the Court of Appeals' adjudication of liability, with no pronouncement for moral, punitive, or exemplary damages in favor of the petitioner.

• Policy Coverage: The policy stipulation covering goods "contained and/or stored during the currency of this Policy in the premises occupied by them forming part of the buildings situate within own Compound" did not limit coverage to the four-span building alone. The trial court identified two requisites for compensability: first, the properties must be stored in areas occupied by Transworld, and second, those areas must form part of the building described in the policy. The two-storey building, a permanent structure adjoining and intercommunicating with the first right span of the four-span building, satisfied both requisites. Because the two-storey building already existed when the policy was issued in 1981, having been constructed in 1978, Rizal Insurance should have specifically excluded it from coverage if it intended to do so. Having failed to do so, and having instead provided coverage for goods stored within the premises forming part of the building, the insurer is bound. Any doubt arising from the ambiguous coverage stipulation must be resolved against the insurer under Article 1377 of the Civil Code, which provides that the interpretation of obscure stipulations shall not favor the party who caused the obscurity. As the drafter of the policy, Rizal Insurance bears the burden of any ambiguity.
• Factual Findings: The well-entrenched doctrine that factual findings by the Court of Appeals are conclusive on the parties and not reviewable by the Supreme Court applies, with even greater force where the Court of Appeals affirmed the trial court's findings. Both lower courts found the two-storey building to be an integral part of the four-span building, and the Supreme Court found no basis to disturb those findings.
• Insurable Interest: The issue of Transworld's insurable interest in the fun and amusement machines and spare parts had been settled with finality in G.R. No. L-111118, where the Supreme Court denied New India's appeal on February 2, 1994. Under the rule on conclusiveness of judgment, a particular fact or issue already adjudicated between the same parties cannot be relitigated in another action, even on a different claim or cause of action. The prior judgment is conclusive only as to matters actually and directly controverted and determined. Applying this rule, as illustrated in Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, where the issue of a vessel's negligence was held conclusive in a subsequent case between the same parties on the same factual circumstances, Rizal Insurance is bound by the prior adjudication that Transworld has an insurable interest in the machines and spare parts and should be indemnified for their loss.
• Bad Faith and Damages: The Court found no basis for disturbing the lower courts' findings and concluded that the Court of Appeals did not err in holding Rizal Insurance liable. The petitioner's claim for moral and punitive damages, attorney's fees, and expenses of litigation was accordingly rejected, as the Court affirmed the appellate court's adjudication of liability without additional pronouncement.

• Contra Proferentem in Insurance Contracts — Ambiguous, equivocal, or uncertain terms in an insurance policy are construed strictly and most strongly against the insurer and liberally in favor of the insured, to effect the dominant purpose of indemnity. The reason is that the insured usually has no voice in the selection or arrangement of the words employed, while the language is selected by experts acting exclusively in the interest of the insurance company. In this case, the ambiguity in the policy's coverage stipulation regarding which buildings were covered was resolved against Rizal Insurance, the drafter of the policy.
• Contracts of Adhesion — Insurance policies are contracts of adherence, prepared by the insurer and presented to the insured on a "take it or leave it" basis. Courts must apply greater strictness and vigilance to protect the weaker party from abuses and imposition, preventing such contracts from becoming traps for the unwary. This principle reinforced the Court's resolution of the coverage ambiguity against Rizal Insurance.
• Conclusiveness of Judgment — A judgment in a prior action operates as estoppel only as to those matters in issue or points controverted upon which the finding or judgment was rendered. The previous judgment is conclusive in a second case only as to matters actually and directly controverted and determined, not as to matters merely involved therein. Applied here, the prior final adjudication in G.R. No. L-111118 that Transworld had an insurable interest in the fun and amusement machines and spare parts precluded Rizal Insurance from relitigating that issue.
• Conclusiveness of Appellate Factual Findings — Factual findings by the Court of Appeals are conclusive on the parties and not reviewable by the Supreme Court, and carry even more weight when the Court of Appeals has affirmed the trial court's findings of fact. This doctrine barred the petitioner from challenging the lower courts' factual determination that the two-storey building was an integral part of the four-span building.

• "The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity" — This quotation of Article 1377 of the Civil Code anchors the Court's application of contra proferentem against the insurer who drafted the ambiguous policy, a principle frequently cited in insurance contract disputes.
• "terms in an insurance policy, which are ambiguous, equivocal, or uncertain x x x are to be construed strictly and most strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where forfeiture is involved" — This passage, quoted from Landicho vs. Government Service Insurance System, articulates the canonical formulation of the rule on construction of insurance policy ambiguities, central to the Court's resolution of the coverage issue.
• "the judgment in the prior action operates as estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or judgment was rendered. In fine, the previous judgment is conclusive in the second case, only as those matters actually and directly controverted and determined and not as to matters merely involved therein." — This defines the scope and limits of the rule on conclusiveness of judgment, which the Court applied to bar relitigation of Transworld's insurable interest.

• Landicho vs. Government Service Insurance System, 44 SCRA 7 — Followed. Cited for the doctrine that ambiguous terms in insurance policies are construed strictly against the insurer and liberally in favor of the insured, particularly where the insurer drafted the policy language.
• Fieldmen's Insurance Company, Inc. vs. Vda. De Songco, 25 SCRA 70 — Followed. Cited for the principle that insurance policies are contracts of adhesion requiring greater strictness and vigilance from courts to protect the weaker party from abuses and imposition.
• Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, 197 SCRA 201 — Followed. Cited as directly analogous authority for the application of the rule on conclusiveness of judgment, where an issue previously adjudicated between the same parties on the same factual circumstances could no longer be relitigated.
• New India Assurance Company, Ltd. vs. Court of Appeals, G.R. No. L-111118 — Controlling. The Supreme Court's February 2, 1994 resolution denying New India's appeal with finality settled the issue of Transworld's insurable interest in the fun and amusement machines and spare parts, precluding relitigation in the present case.
• Borromeo vs. Court of Appeals, G.R. No. 75908, October 22, 1999 — Followed. Cited for the doctrine that factual findings of the Court of Appeals are conclusive and not reviewable by the Supreme Court, especially when affirming the trial court's findings.

• Article 1377, Civil Code — Provides that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. Applied to resolve the ambiguity in the fire insurance policy's coverage stipulation against Rizal Insurance, which drafted the policy.
• Article 24, Civil Code — Cited in connection with the doctrine on contracts of adhesion, requiring courts to protect the weaker party from abuses and imposition, particularly in insurance contracts prepared by the insurer.
• Article 2205, Civil Code — Invoked by petitioner as basis for claiming moral and punitive damages against Transworld for allegedly filing a clearly unfounded action in bad faith. The Court did not sustain this claim.
• Article 2208, paragraphs 4 and 11, Civil Code — Invoked by petitioner as basis for claiming attorney's fees and expenses of litigation. The Court did not sustain this claim.

Melo (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concurred.