UCPB General Insurance Co., Inc. vs. Asgard Corrugated Box Manufacturing Corporation

An insurer is not liable for loss caused by the willful act of a co-insured who retains insurable interest in the insured property at the time of the loss, pursuant to Section 89 of the Insurance Code, and the Malicious Damage Endorsement in an all-risk policy is merely an extension of the Riot and Strike Endorsement requiring the existence of a strike or riot for coverage to apply.

Asgard Corrugated Box Manufacturing Corporation and Milestone Paper Products, Inc. were business partners under a Toll Manufacturing Agreement (TMA) executed on February 1, 2006, under which Asgard performed toll-manufacturing of paper products for Milestone at Asgard's plant in Novaliches, Quezon City. In 2007, the parties further agreed that Milestone would modify Asgard's corrugating machines by replacing vital parts with parts owned by Milestone. On August 7, 2009, after Asgard's petition for corporate rehabilitation was denied, the parties jointly obtained Industrial All Risk Policy No. HOF09FD-FAR087915 from UCPB General Insurance Co., Inc. covering Asgard's machinery and equipment for P500,000,000.00, naming Milestone and/or Market Link and/or Nova Baile and/or Asgard as insureds for the period August 1, 2009 to August 1, 2010.

On February 1, 2006, Asgard Corrugated Box Manufacturing Corporation and Milestone Paper Products, Inc. entered into a Toll Manufacturing Agreement (TMA) under which Asgard undertook to perform toll-manufacturing of paper products for Milestone at Asgard's plant in Novaliches, Quezon City. The TMA was effective until January 31, 2008, unless earlier terminated by either party upon 60-day prior written notice. It contained an automatic renewal clause providing that if no new agreement was executed after its expiry, the TMA would be deemed extended on a month-to-month basis, with all provisions continuing to govern the parties' relationship. Under the TMA, Milestone would source materials and supplies and deliver them to Asgard's plant, where Asgard would manufacture products according to Milestone's specifications, with purchase orders submitted monthly at least 15 days in advance of the desired delivery date.

Asgard needed additional capital for new equipment and invited Milestone to invest in the company. Instead of investing immediately, Milestone proposed to take over management and operations of Asgard to assess the business's viability. Milestone installed new equipment for the manufacturing plant and paper mill, and after months of managing the business, accepted Asgard's invitation by contributing the installed equipment and infusing capital as necessary for operations.

Sometime in 2007, the parties further agreed that Milestone would convert paper products into corrugated carton boxes using corrugating machines owned by Asgard. This arrangement included modifying Asgard's corrugating machines by replacing their vital parts with parts owned by Milestone. As a result, all vital parts of Asgard's corrugating machines were detached and replaced with Milestone's parts.

On December 22, 2007, due to financial difficulties, Asgard filed an Amended Petition for Corporate Rehabilitation with the RTC of Quezon City, Branch 90, submitting an Amended Rehabilitation Plan stating that Milestone would contribute P150,000,000.00 worth of machinery and equipment. The rehabilitation court disapproved the plan in its Order dated June 9, 2009, finding it vague, unrealistic, and not feasible, noting Asgard's paid-up capital of only P12,500,000.00 and negative retained earnings of P168,341,292.51.

On August 7, 2009, after the denial of the rehabilitation petition, Asgard and Milestone jointly obtained an insurance policy from UCPB General Insurance Co., Inc. Upon payment of premium, UCPB Insurance issued Industrial All Risk Policy No. HOF09FD-FAR087915 to Milestone and/or Market Link and/or Nova Baile and/or Asgard, insuring Asgard's machinery and equipment of every kind and description at Novaliches, Quezon City for P500,000,000.00, covering the period August 1, 2009 to August 1, 2010. The Policy included a Malicious Damage Endorsement extending the Riot and Strike Endorsement to cover loss of or damage to the property insured directly caused by the malicious act of any person.

On July 15, 2010, Milestone pulled out its stocks, machinery, and equipment from Asgard's plant for relocation to its own premises in Laguna. In the course of the pullout, Milestone caused damage to Asgard's complete line of Isowa corrugating machine and accessories as well as its printer-slotter-stacker. A physical inventory conducted by the staff of Paul Uy Ong showed that Isowa corrugating machines such as Single Facer "A" and "B" Flutes, "Lechida" Single Facer "A" Flute, "Ishikawa" Single Facer "E" Flute, and other accessories were dismantled and dumped at the rear portion of the warehouse; the Isowa dual backer conveyor heater, slitter station, cut-off station, and Akebono Tsusho Printer Slotter Machine were welded to unstable steel poles; and other machine parts were unaccounted for.

Asgard notified UCPB Insurance about the loss and filed an insurance claim under the Policy based on the Malicious Damage Endorsement provision. UCPB Insurance denied the claim, explaining that the Policy had no cross liability cover and that the malicious damage was committed by Milestone, one of the named insured, and not by a third party. Asgard moved for reconsideration, but UCPB Insurance denied it, contending that Milestone's infliction of damage fell under Section 87 (now Section 89) of the Insurance Code, which exempts the insurer from liability for loss caused by the willful act of the insured.

Asgard thereupon filed a complaint for sum of money with application for writ of preliminary attachment, praying for actual damages of P147,000,000.00 plus legal interest. Asgard alleged that it solely owned the damaged corrugating machine and Milestone had no insurable interest therein, rendering Section 89 inapplicable. Asgard further contended that UCPB Insurance's consolidation of the building, various machineries, equipment, and stocks—which were owned by different entities occupying one compound—into a single policy was done for convenience and did not reflect the actual and separate ownership thereof. Asgard claimed the damaged machine could be repaired for P147,000,000.00, which was paid by Asgard's sister company, Diamond Packaging Industrial Corporation, through 98 Philippine Business Bank checks issued as payment to Taiphil Machinery and Equipment Sales Services.

• Insurable Interest at Time of Loss: Petitioner argued that Milestone had insurable interest over the corrugating machines at the time of the loss because both Asgard and Milestone were named insured under the Policy, and the TMA remained in effect by virtue of its automatic month-to-month renewal clause, no written notice of termination having been served.
• Unauthorized Withdrawal: Petitioner maintained that the withdrawal by Milestone of the parts installed on the corrugating machines was unauthorized and could not divest Milestone of insurable interest, since under Section 22 of the TMA, Asgard shall only allow withdrawal of materials and supplies provided by Milestone in the event of termination. The performance of an unauthorized act could not render Milestone's insurable interest inexistent.
• Section 89 Applicability: Petitioner argued that since Milestone had insurable interest both at the beginning of the Policy and at the time of loss, Section 89 of the Insurance Code applied, and UCPB Insurance should be exonerated from liability because Milestone, one of the insured, caused the malicious damage.
• Malicious Damage Endorsement as Extension: Petitioner contended that the Malicious Damage Endorsement was a mere extension of the Riot and Strike Endorsement and could not exist independently of it. The endorsement sought to cover malicious damage caused by any person during a strike or lock-out, and removing the strike or lock-out requirement would allow recovery in any event of malicious damage, increasing the possibility of connivance with the insured.
• Burden of Proof: Petitioner maintained that since Asgard raised the issue of the non-existence of Milestone's insurable interest, the burden of proving that allegation lay with Asgard, a burden which it failed to discharge.

• Lack of Insurable Interest: Respondent asserted that the CA correctly ruled that Milestone did not have any insurable interest over the corrugating machines at the time of the loss, and thus Milestone could not be deemed an insured under the Policy. Paragraph 20 of the TMA used the word "may" and did not limit the means by which the agreement could be terminated. When Milestone left Asgard's premises and removed its own equipment, the business relationship was effectively terminated.
• Malicious Damage Coverage: Respondent argued that the Policy covered loss of or damage to the property insured directly caused by the malicious act of any person, and Milestone, lacking insurable interest at the time of the loss, was included in the phrase "any person" and not as an "insured," making UCPB Insurance liable.
• All-Risk Policy Burden: Respondent contended that as an all-risk policy, it was incumbent upon UCPB Insurance to prove that the loss was caused by an excepted risk. Having failed to show that the loss was caused by an excepted risk, UCPB Insurance was liable to pay Asgard's insurance claim.
• Procedural Bar on New Arguments: Respondent claimed that UCPB Insurance's argument that the Malicious Damage Endorsement referred only to strikes and lock-outs could not be considered for the first time on appeal.

• Insurable Interest: Whether Milestone had insurable interest over Asgard's corrugating machines at the time of the loss on July 15, 2010.
• Section 89 Applicability: Whether Section 89 of the Insurance Code applies to relieve the insurer from liability for loss caused by the willful act of a co-insured.
• Malicious Damage Endorsement: Whether the Malicious Damage Endorsement independently covers the loss or is merely an extension of the Riot and Strike Endorsement requiring the existence of a strike or lock-out.
• Proof of Loss: Whether Asgard sufficiently proved the extent and amount of its claimed damages to justify the grant of its insurance claim.

• Insurable Interest: Yes. Milestone retained insurable interest over the corrugating machines at the time of the loss because the TMA was not validly terminated—no written notice of termination was served as required by paragraphs 19 and 20, and none of the causes for termination under paragraph 20 applied.
• Section 89 Applicability: Yes. Section 89 of the Insurance Code applies because Milestone was a co-insured with insurable interest, and the damage was caused by its willful act, relieving the insurer from liability.
• Malicious Damage Endorsement: No. The endorsement does not independently apply; it is a mere extension of the Riot and Strike Endorsement requiring the existence of a strike or riot, and malicious damage is not an independent risk covered under the Policy.
• Proof of Loss: No. Asgard failed to adequately prove the extent and amount of actual loss, presenting only a quotation and checks without explaining the nature and extent of the damage to the machines.

• Insurable Interest: The TMA provided that it would be effective until January 31, 2008, and would be automatically extended on a month-to-month basis if no new agreement was executed. Termination required written notice—60 days prior for termination without cause under paragraph 19, or immediate written notice for cause under paragraph 20. No such written notice was ever served by either party. None of the causes for termination under paragraph 20 applied: paragraph 20(a) on liquidation did not apply because the Policy was obtained on August 7, 2009, after the rehabilitation court denied Asgard's petition on June 9, 2009, meaning the business relationship continued despite the denial; paragraph 20(b) on material breach did not apply because the removal of equipment related to the parties' respective obligations under the TMA, not a substantial breach contemplated by the provision; and paragraph 20(c) did not apply because no assets passed under the control of a competitor. The TMA continued to govern the parties' relationship on a month-to-month basis. Since the TMA was not validly terminated, Milestone retained an actual and real interest in the preservation of the corrugating machines, as non-preservation would render it liable for breach of contract—no corrugated carton boxes could be manufactured under the TMA. Under Section 13 of the Insurance Code, insurable interest exists when a contemplated peril might directly damnify the insured. Insurable interest does not necessarily imply property interest, lien, or possession; it is sufficient that the insured would suffer loss from the property's destruction. The principle of mutuality of contracts under Article 1308 of the Civil Code likewise barred unilateral termination of the TMA.

• Section 89 Applicability: Since Milestone had insurable interest at the time of the loss and was a named insured under the Policy, Section 89 of the Insurance Code applied. The insurer is not liable for a loss caused by the willful act or through the connivance of the insured. The damage caused by Milestone was willful and intentional, as even Asgard described the act as malicious. The Policy itself contained an exclusion clause stating the insurer shall not be liable for "loss or damage arising out of the willful act or gross negligence of the insured or of his representatives." Additionally, the Industrial All Risk Cover provision indemnified the insured only for "accidental physical loss or damage to the property"—since the act was malicious and intentional, it was not accidental. Permitting recovery for a loss caused by the willful act of the insured would be contrary to public policy against indemnification for intentional misconduct, consistent with the policy objective of denying any economic benefit to the insured whose intentional misconduct causes a loss.

• Malicious Damage Endorsement: The Malicious Damage Endorsement was merely an extension of the Riot and Strike Endorsement, not an independent risk. The endorsement's language expressly stated that the insurance "under the said Riot and Strike endorsement shall extend to include MALICIOUS DAMAGE." The risks covered under the Policy were: (1) Fire and Lightning; (2) Extended Coverage Endorsement; (3) Earthquake, Fire and Shock Endorsement; (4) Flood Endorsement; (5) Riot and Strike Endorsement; and (6) Typhoon Endorsement. Malicious damage was not listed as an independent risk. Since the malicious damage to Asgard's corrugating machines was not committed during a strike or riot, the endorsement found no application. Moreover, Milestone as a co-insured did not fall within the term "any person" in the endorsement.

• Proof of Loss: Asgard bore the burden of proving its claim by a preponderance of evidence. Actual damages are not presumed and must be proven with a reasonable degree of certainty premised upon competent proof and the best evidence obtainable. Asgard presented only a quotation from Taiphil, 98 Philippine Business Bank checks, and pictures of the damaged machines. It failed to explain the extent of the damage—whether the damaged machines were integral parts of the equipment pulled out by Milestone, whether they could operate independently without Milestone's parts, or whether the parts installed by Milestone were detachable without causing damage. A mere quotation is not reliable and competent evidence of the actual loss sustained. The pieces of evidence presented did not convincingly and substantially prove the exact damage or actual loss sustained by Asgard's corrugating machines.

• Insurable Interest in Property — Under Section 13 of the Insurance Code, insurable interest is "every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured." Under Section 14, insurable interest in property may consist in: (a) an existing interest, like that of an owner or lienholder; (b) an inchoate interest founded on existing interest, like that of a stockholder in corporate property; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. Insurable interest does not necessarily imply a property interest in, a lien upon, or possession of the subject matter of the insurance. It is sufficient that the insured is so situated with reference to the property that he would be liable to loss should it be injured or destroyed. The Court applied this by holding that Milestone retained insurable interest because the TMA was not terminated and non-preservation of the machines would render Milestone liable for breach of contract.

• Willful Act Exclusion (Section 89, Insurance Code) — An insurer is not liable for a loss caused by the willful act or through the connivance of the insured; but the insurer is not exonerated by the negligence of the insured, or of the insurance agents or others. The exclusion is based on public policy prohibiting indemnification for intentional misconduct and preventing the encouragement of willful tortious acts. The law is deemed written into every insurance contract. The Court applied this by holding that since Milestone was a co-insured with insurable interest and its damage to the machines was willful, the insurer was relieved from liability.

• Mutuality of Contracts — A contract binds both contracting parties; its validity cannot be left to the will of one of them (Article 1308, Civil Code). The Court applied this by holding that Milestone could not unilaterally terminate the TMA other than through the procedures specified in the agreement, and the TMA continued to bind both parties on a month-to-month basis.

• Burden of Proof for Actual Damages in Insurance Claims — The party who alleges a fact has the burden of proving it. In civil cases, the burden rests upon the plaintiff to establish his case by preponderance of evidence. Actual damages are not presumed; the claimant must prove the actual amount of loss with a reasonable degree of certainty premised upon competent proof and on the best evidence obtainable. Specific facts that could afford a basis for measuring compensatory or actual damages must be pointed out. The Court applied this by holding that Asgard failed to adequately prove the extent and amount of its claimed damages, presenting only a quotation and checks without explaining the nature and scope of the damage.

• "A contract binds both contracting parties; its validity cannot be left to the will of one of them." — This articulates the mutuality of contracts principle applied to bar Milestone from unilaterally terminating the TMA, which was central to the Court's finding that insurable interest subsisted.

• "Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction." — This provides the canonical formulation of insurable interest applied to hold that Milestone retained insurable interest in Asgard's corrugating machines because the TMA was still in effect.

• "To permit Asgard to recover from the Policy for a loss caused by the willful act of the insured is contrary to public policy, i.e., denying liability for willful wrongs." — This states the public policy rationale underlying Section 89 of the Insurance Code and the Policy's exclusion clause, forming the basis for denying Asgard's claim.

• "Actual damages are not presumed. The claimant must prove the actual amount of loss with a reasonable degree of certainty premised upon competent proof and on the best evidence obtainable." — This states the standard for proving actual damages in insurance claims, which Asgard failed to satisfy.

• Gaisano Cagayan, Inc. vs. Insurance Company of North America, 523 Phil. 677 (2006) — Cited for the exception to the rule that CA factual findings are conclusive on the Supreme Court (when the CA manifestly overlooked relevant facts not disputed by the parties), and for the definition of insurable interest as not requiring title or beneficial interest.
• The Insular Life Assurance Company, Ltd. vs. Court of Appeals, 472 Phil. 11 (2004) — Cited for the exception to conclusiveness of CA factual findings in Rule 45 petitions.
• Alpha Insurance and Surety Co. vs. Castor, 717 Phil. 132 (2013) — Cited for the rule that when the words of a contract are plain and readily understood, there is no room for construction, applied to the TMA's termination provisions.
• Quesada vs. Bonanza Restaurants, Inc., 799 Phil. 498 (2016) — Cited for the principle of mutuality of contracts under Article 1308 of the Civil Code.
• Heirs of San Miguel vs. Court of Appeals, 416 Phil. 943 (2001) — Cited for the principle that positive law regulating contracts is deemed written therein and shall limit and govern the relations between the parties.
• Loadstar Shipping Co. vs. Malayan Insurance Co. Inc., 748 Phil. 569 (2014) — Cited for the standard that actual damages are not presumed and must be proven with a reasonable degree of certainty.
• Sps. De Leon vs. Bank of the Philippines, 721 Phil. 839 (2013) — Cited for the definition of burden of proof under Section 1, Rule 131 of the Rules of Court.

• Section 13, Insurance Code — Defines insurable interest as "every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured." Applied to determine that Milestone retained insurable interest because it would suffer loss from the destruction of the corrugating machines while the TMA was in effect.
• Section 14, Insurance Code — Enumerates the types of insurable interest in property: (a) an existing interest, (b) an inchoate interest founded on existing interest, or (c) an expectancy coupled with an existing interest. Applied to support the broad scope of insurable interest beyond ownership.
• Section 89, Insurance Code (formerly Section 87) — Provides that an insurer is not liable for a loss caused by the willful act or through the connivance of the insured, but is not exonerated by the negligence of the insured. Applied to relieve UCPB Insurance from liability because Milestone, a co-insured with insurable interest, willfully caused the damage.
• Article 1308, Civil Code — Provides that a contract binds both contracting parties and its validity cannot be left to the will of one of them. Applied to hold that Milestone could not unilaterally terminate the TMA.
• Section 1, Rule 131, Rules of Court — Defines burden of proof as the duty of a party to present evidence on the facts in issue necessary to establish his claim or defense. Applied to hold that Asgard, as claimant, bore the burden of proving its damages.

Peralta, C.J., Caguioa, Zalameda, and Gaerlan, JJ. concurred.