Saura Import & Export Co., Inc. vs. Philippine International Surety Co., Inc.

Actual personal notice of cancellation to the insured is a condition precedent to effective cancellation of an insurance policy by the insurer; notice of cancellation sent only to the mortgagee or lienholder, and not to the insured, is ineffective as a cancellation of the policy as to the owner of the property.

Saura Import & Export Co., Inc. was the owner of a parcel of land in Davao covered by T.C.T. No. 40445, on which stood a building of strong materials. Saura had mortgaged the property to the Philippine National Bank (PNB) to secure promissory notes totaling ₱37,000.00, and the mortgage contract required Saura to insure the mortgaged property against fire and earthquake with a company satisfactory to the mortgagee, endorsing the corresponding policies to the bank. Pursuant to this requirement, Saura obtained fire insurance from Philippine International Surety Co., Inc. for ₱29,000.00, with the standard mortgagee clause providing that loss, if any, was payable to PNB as its interest might appear. The policy was delivered to the bank by Saura as required.

On December 26, 1952, Saura Import & Export Co., Inc. mortgaged a parcel of land in Davao covered by T.C.T. No. 40445 to the Philippine National Bank to secure a promissory note of ₱27,000.00. On April 30, 1953, the mortgage was amended to guarantee an increased amount, bringing the total mortgaged debt to ₱37,000.00. The mortgage contract required Saura to insure the mortgaged property at all times against fire and earthquake, with a company satisfactory to the mortgagee, and to endorse the corresponding policies to the bank. Erected on the mortgaged land was a building of strong materials owned by Saura, which had maintained insurance coverage on the building for many years prior to the mortgage contract.

Pursuant to the mortgage requirement, Saura insured the building and its contents with Philippine International Surety Co., Inc. — a firm acceptable to PNB — for ₱29,000.00 against fire, for a period of one year from October 2, 1954. As required, the insurance policy was endorsed to the mortgagee bank through a memorandum stating: "Loss if any, payable to the Philippine National Bank as their interest may appear, subject to the terms, conditions and warranties of this policy." The policy was delivered to PNB by Saura.

On October 15, 1954, barely thirteen days after the policy was issued, the insurer cancelled it, effective as of the date of issue. Notice of the cancellation was given in writing by registered mail, personally addressed to Fortunato Domingo, Branch Manager of PNB's Davao Branch, and was received by the bank on November 8, 1954. Neither the insurer nor the mortgagee bank informed Saura of the cancellation. On April 6, 1955, the building and its contents, worth ₱40,685.69, were destroyed by fire. On April 11, 1955, Saura filed a claim with both the insurer and the mortgagee bank. Upon presenting the notice of loss to PNB, Saura learned for the first time that the policy had been cancelled, when Saura's folder in the bank's files was opened and the notice of cancellation sent by the insurer to the bank was discovered.

After the insurer refused to pay the insurance proceeds, Saura filed Civil Case No. 26847 with the Manila CFI against the insurer, and PNB was later included as a party defendant after it refused to prosecute the case jointly with Saura. At trial, it was established that neither the insurer nor the mortgagee bank had informed Saura of the cancellation of the policy. The case was submitted on stipulation of facts. The lower court dismissed the complaint, absolving both the insurer and the bank from liability, and denied Saura's motion for reconsideration. The case was then certified by the Court of Appeals to the Supreme Court as involving purely questions of law.

• Correctness of the Dismissal: Petitioner Saura argued that the lower court erred in dismissing the complaint and absolving both the insurance company and the bank from liability, maintaining that the policy was still in force at the time of the fire because no effective notice of cancellation had been given to the insured.
• Liability of the Bank: The assigned errors were directed principally against the appellee bank, but in essence sought a reversal of the entire decision of dismissal, with the ultimate purpose of establishing liability under the policy.

• Substantial Compliance Through Notice to Mortgagee: Respondent insurer contended that it gave notice of cancellation to the defendant-appellee bank as mortgagee of the property, and that this constituted substantial compliance with its duty to notify the insured of the cancellation of the policy.

• Effectiveness of Cancellation: Whether notice of cancellation sent only to the mortgagee bank, and not to the insured, constitutes an effective cancellation of the fire insurance policy as against the insured.
• Appellate Review of Unassigned Errors: Whether the Supreme Court may hold the insurer liable when no error was specifically assigned against it in the appellant's brief.

• Effectiveness of Cancellation: No. Notice of cancellation to the mortgagee alone is ineffective as a cancellation of the policy as to the insured; actual personal notice to the insured is a condition precedent to effective cancellation by the insurer.
• Appellate Review of Unassigned Errors: Yes. The Court has broad discretionary power to consider unassigned errors closely related to errors properly assigned, or upon which determination of the assigned errors is dependent, when necessary for a just decision.

• Effectiveness of Cancellation: The policy in question did not contain any provision prescribing the form or period of notice of cancellation, and the Insurance Law (Act No. 2427) likewise did not provide for such notice. In the absence of a statutory or contractual provision, generally accepted principles of insurance law govern. Under these principles, actual personal notice to the insured is essential to cancellation by the insurer; actual receipt by the insured of a notice of cancellation is universally recognized as a condition precedent to effective cancellation. A notice mailed but not received by the insured is ineffective. The purpose of requiring notice is to give the insured ample opportunity to negotiate for other insurance in its stead. In this case, the insurer sent the notice of cancellation only to PNB as mortgagee, not to Saura as the insured with whom the insurer had direct dealings. Neither the insurer nor the bank informed Saura of the cancellation. Applying the rule that where a mortgage or lien exists and the policy contains a clause making loss payable to the mortgagee as its interest may appear, notice of cancellation to the mortgagee alone is ineffective as a cancellation of the policy to the owner of the property, the policy remained in force when the building burned on April 6, 1955 — within the policy period of October 2, 1954 to October 2, 1955. The insurer's liability under the policy therefore attached.

• Appellate Review of Unassigned Errors: Although no error was specifically assigned against the insurance company in the appellant's brief, the main object of the appeal was to secure a reversal of the lower court's judgment of dismissal, which necessarily required a determination of liability under the policy. The Court is clothed with authority to review matters not assigned as errors when their consideration is necessary to arrive at a just decision. An unassigned error closely related to an error properly assigned, or upon which the determination of the question raised by the properly assigned error is dependent, may be considered notwithstanding the failure to assign it. The insurer's liability was found to be the principal issue, as its failure to give notice of cancellation to the insured was the decisive factor. Because the Court found liability attached principally to the insurance company, it found it unnecessary to discuss the errors assigned against the appellee bank.

• Actual Notice of Cancellation as Condition Precedent — Actual personal notice of cancellation to the insured is a condition precedent to effective cancellation of an insurance policy by the insurer. The notice must positively and unequivocally indicate the insurer's intention that the policy shall cease to be binding. It should be personal to the insured and not to or through any unauthorized person. In the absence of a statutory or policy provision prescribing the form or period of notice, a reasonable notice and opportunity to obtain other insurance must be given. The purpose is to prevent cancellation without allowing the insured ample opportunity to negotiate for other insurance. The Court applied this doctrine to hold that the insurer's cancellation was ineffective because it sent notice only to the mortgagee bank, not to the insured.

• Notice to Mortgagee Alone Is Ineffective — Where a mortgage or lien exists against insured property and the policy contains a clause stating that loss, if any, shall be payable to the mortgagee or lienholder as its interest may appear, notice of cancellation to the mortgagee or lienholder alone is ineffective as a cancellation of the policy to the owner of the property. The Court relied on this principle, citing Connecticut Ins. Co. vs. Caumisar, to hold that notice to PNB as mortgagee did not constitute effective notice to Saura as the insured property owner.

• Appellate Review of Unassigned Errors — An appellate court has broad discretionary power to waive the lack of proper assignment of errors and consider errors not assigned, particularly where an unassigned error is closely related to an error properly assigned, or upon which the determination of the question raised by the properly assigned error is dependent. The Court applied this principle to hold the insurer liable despite no error being specifically assigned against it, because the insurer's liability was the principal question upon which the reversal of the dismissal depended.

• "The actual receipt by the insured of a notice of cancellation is universally recognized as a condition precedent to a cancellation of the policy by the insurer, and consequently a letter containing notice of cancellation which is mailed by the insurer but not received by the insured, is ineffective as cancellation" — This passage states the ratio decidendi: the fundamental requirement that the insured must actually receive notice of cancellation for it to be effective, grounding the Court's reversal of the lower court.

• "If a mortgage or lien exists against the property insured, and the policy contains a clause stating that loss, if any, shall be payable to such mortgagee or the holder of such lien as interest may appear, notice of cancellation to the mortgagee or lienholder alone is ineffective as a cancellation of the policy to the owner of the property." — This passage articulates the controlling rule applied to the facts: that notice to the mortgagee bank alone does not cancel the policy as to the insured owner, directly establishing the insurer's liability.

• "An unassigned error closely related to an error properly assigned, or upon which the determination of the question raised by the error properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as error." — This passage defines the Court's discretionary authority to review unassigned errors, invoked to hold the insurer liable despite the absence of a specific assignment of error against it.

• Connecticut Ins. Co. vs. Caumisar, 218 Ky. 378, 391 SW 776 — Cited as controlling authority for the proposition that notice of cancellation to the mortgagee or lienholder alone is ineffective as a cancellation of the policy to the owner of the property. The Court relied upon this case to establish the insurer's liability.
• Hernandez vs. Andal, 78 Phil. 198-199 — Cited as authority for the principle that an appellate court may consider unassigned errors closely related to assigned errors, or upon which the determination of assigned errors is dependent. The Court applied this doctrine to justify reviewing and holding the insurer liable despite no error being specifically assigned against it.

• Insurance Law, Act No. 2427 — The Court noted that the Insurance Law did not provide for the form, sufficiency, or period of notice of cancellation of a policy by the insurer. In the absence of such statutory provision, the Court applied generally accepted principles of insurance law regarding cancellation, drawing from American jurisprudence (29 Am. Jur. pp. 732-741).

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Dizon, Regala, and Makalintal, JJ., concurred.