Yu Ban Chuan vs. Fieldmen's Insurance Co., Inc.

Submission of false or fraudulent proofs of loss vitiates the insurer's liability under a fire insurance policy, and an inventory prepared unilaterally by the insured without the insurer's intervention is not binding upon the latter as proof of the existence of insured goods at the time of loss.

Yu Ban Chuan, a Chinese national who came to the Philippines in 1948, operated a wholesale business in general merchandise and school supplies under the name "CMC Trading." He insured his stock of merchandise against fire with two separate insurers — Fieldmen's Insurance Co., Inc. and Paramount Surety & Insurance Co., Inc. — under open policies with liability limits of P200,000 and P140,000, respectively. Both insurers acknowledged their co-insurance with each other and agreed to transfer coverage to the insured's new business premises at 680 Muelle de Binondo, Manila. The dispute arose when, after the total destruction of the premises by fire on 31 January 1960, the insured submitted proof of loss that the insurers rejected, prompting the collection suit below.

Sometime in the latter part of March 1959, Yu Ban Chuan commenced a business enterprise under the name "CMC Trading," engaged in the wholesale dealing in general merchandise and school supplies, initially located at 612 Nueva Street, Manila. While at this address, he insured his stock of merchandise against fire with Fieldmen's Insurance Co., Inc., which issued on 14 December 1959 an open policy limiting the insurer's liability to P200,000 for a period of one year. On 7 January 1960, he again insured the same stock of merchandise against fire with Paramount Surety & Insurance Co., Inc., which issued an open policy limiting liability to P140,000, likewise for a one-year period. On 14 January 1960, Fieldmen's agreed to transfer the coverage of its policy to the insured's new store at 680 Muelle de Binondo, Manila, to which Yu Ban Chuan had transferred his business establishment on 15 or 16 January 1960. On 21 January 1960, Paramount likewise agreed to transfer its coverage to the same new premises and acknowledged the existence of its co-insurance with Fieldmen's; on 23 January 1960, Fieldmen's reciprocally acknowledged its co-insurance with Paramount.

On 31 January 1960, while both insurance policies were in full force and effect, the insured's business establishment at 680 Muelle de Binondo was totally destroyed by fire. The following day, Yu Ban Chuan verbally notified the respective agents of both insurers of the incident, and on the same day, 1 February 1960, he and the adjusters of both insurers — H. H. Bayne Adjustment Co. for Fieldmen's and Manila Adjustment Co. for Paramount — executed "non-waiver" agreements to determine the circumstances of the fire and the value of the loss. The adjusters thereafter required the submission of certain papers and documents. On 8 February 1960, Yu Ban Chuan gave written notice of the fire to the defendants, and on 24 February 1960, he submitted his separate formal fire claims with some supporting papers. An exchange of communications followed regarding additional documents demanded by the adjusters, until the defendants ultimately rejected the claims and denied liability, upon their adjusters' recommendations.

Yu Ban Chuan commenced suit in the Court of First Instance of Manila. The defendants answered with identical special defenses: (1) the insured's failure to prove the loss claimed; (2) false and fraudulent claim; and (3) arson or causes not independent of the will of the insured — together with counterclaims for annulment of the policies. After trial, the court below upheld the plaintiff's claim but refused to award damages or interest beyond the legal rate. Both parties appealed.

In proving the value of his loss, the plaintiff relied upon a merchandise inventory as of 31 December 1959, allegedly submitted on 15 January 1960 to the Bureau of Internal Revenue, reflecting total stock value of P328,202.67. He claimed purchases for January 1960 of P34,505.08 and sales of P12,000, yielding an estimated balance of stocks allegedly burned at P350,707.75. The trial court accepted the fact of the inventory's filing as true, finding no evidence to the contrary, but erred in accepting as true the actual existence at the burned premises of the stocks mentioned therein. Six of the many invoices submitted by the plaintiff to the adjusters revealed a clear case of fraud and misrepresentation, inflating the supposed stocks by P248,370.00. These included a fictitious invoice from Western Pacific Industrial Development Co. for P76,525.00 — a logging concession operator that would not deal in powder puffs and rubber bands — and invoices from Victoria Commercial Corporation (P33,800.00), MJC Trading Enterprise (P37,176.00), Cosmopolitan Commercial Enterprises (P37,800.00), and Nelina Trading (P63,069.00), all of which were found to be non-existent at their stated addresses, unregistered with the Securities and Exchange Commission, or no longer in business at the time of the purported purchases. Several invoices from Standard Manufacturing Company bore dates prior to the transfer of CMC Trading to its new address, yet already showed the new address as the purchaser's location. The plaintiff's uniform explanation — that he bought from unnamed agents who brought goods to him, that the originals were burned, and that he obtained true copies from agents met casually in the streets after the fire whose names and whereabouts he did not know — was deemed incredible. The inventory, having been prepared without the insurers' intervention and prior to the fire, was held not binding on the defendants and insufficient to prove the existence of the goods at the store when the fire occurred.

• Inventory as Proof of Loss: Plaintiff relied upon the merchandise inventory as of 31 December 1959 as the immaculate basis for the actual worth of stocks that were burned, on the ground that it was made from actual count and in compliance with law.
• Section 82 of the Insurance Act: Plaintiff asserted that in submitting his proof of loss he was "not bound to give such proof as would be necessary in a court of justice," invoking Section 82 of the Insurance Act.
• Collection Suits as Corroboration: Plaintiff pointed to collection suits for unpaid purchases filed against him as evidence that the goods allegedly delivered were at the store when the fire occurred.
• Damages: Plaintiff appealed the lower court's refusal to award damages or interest beyond the legal rate.

• Failure to Prove Loss: Defendants contended that the insured failed to prove the loss claimed under the policies.
• False and Fraudulent Claim: Defendants asserted that the plaintiff's claim was false and fraudulent, supported by fictitious and inflated invoices.
• Arson: Defendants alleged that the fire was caused by arson or causes not independent of the will of the insured.
• Annulment of Policies: Defendants counterclaimed for the annulment of the insurance policies.

• Fraudulent Proof of Loss: Whether the submission of fictitious and fraudulent invoices as proof of loss vitiates the insurers' liability under the fire insurance policies.
• Binding Effect of Inventory: Whether the inventory prepared unilaterally by the insured, without the insurers' intervention, is binding upon the insurers as proof of the existence of the insured goods at the time of loss.
• Sufficiency of Proof Under Section 82: Whether the insured's invocation of Section 82 of the Insurance Act — that he was not bound to give such proof as would be necessary in a court of justice — justifies the submission of false proofs.

• Fraudulent Proof of Loss: Yes. The submission of false and fraudulent invoices as proof of loss avoids the insurers' liability as per condition No. 13 of the respective policies, the falsity of the proofs being the best evidence of the fraudulent character of the claim.
• Binding Effect of Inventory: No. The inventory prepared by the insured without the insurers' intervention is not binding on the defendants, and being made prior to the fire, it is no proof of the existence of the goods at the store when the fire occurred.
• Sufficiency of Proof Under Section 82: No. While the assertion that the insured is not bound to give such proof as would be necessary in a court of justice is correct, it does not justify the submission of false proofs; the falsity thereof is the best evidence of the fraudulent character and unmeritoriousness of the claim.

• Fraudulent Proof of Loss: Six of the invoices submitted by the plaintiff to the adjusters disclosed a clear case of fraud and misrepresentation, inflating the supposed stocks by P248,370.00. The invoice from Western Pacific Industrial Development Co. for P76,525.00 was denounced as fake by its former manager, who denied the signature thereon and testified that the company — a forest concession operator — did not deal in powder puffs, ballpen fillers, rubber bands, or ballpen plastic bodies. The invoices from Victoria Commercial Corporation (P33,800.00) and MJC Trading Enterprise (P37,176.00) were shown to be from non-existent entities, as no such companies were registered with the Securities and Exchange Commission or located at their stated addresses. The invoice from Cosmopolitan Commercial Enterprises (P37,800.00) was denied by the husband of the owner, who testified that the enterprise was not engaged in the merchandise purportedly sold and that the signature was not genuine. The two invoices from Nelina Trading (P63,069.00 aggregate) were fictitious because the company had gone out of business on 13 April 1959, before the purported purchases. Several invoices from Standard Manufacturing Company bore dates before the transfer of CMC Trading to its new address yet already showed the new address, an impossibility that the plaintiff could not satisfactorily explain. The plaintiff's uniform explanation — that he bought from unnamed agents met casually in the streets after the fire — was too uniform to be believed. These false proofs avoided the insurers' liability under condition No. 13 of both policies.

• Binding Effect of Inventory: The inventory relied upon by the plaintiff was prepared without the intervention of the defendants and was therefore not binding upon them. The plaintiff had every reason to show that the value of his stock exceeded the amount of insurance he carried, and the inventory, having been made prior to the fire, was no proof of the existence of the goods at the store when the fire occurred. While some merchandise was actually destroyed by fire, the Court held that when fraud is conceived, what is true is subtly hidden by the schemer beneath proper and legal appearances, including the preparation of the inventory.

• Sufficiency of Proof Under Section 82: The plaintiff's invocation of Section 82 of the Insurance Act was correctly stated but did not aid his cause. While the insured is not bound to give such proof as would be necessary in a court of justice, this relaxation of evidentiary standards does not legitimize the submission of false proofs. The falsity of the submitted documents was itself the best evidence of the fraudulent character and unmeritoriousness of the claim. The collection suits for unpaid purchases filed against the plaintiff, however valid, did not legitimize his fraudulent claim against the insurers nor prove that the goods were at the store when the fire occurred. The plaintiff's own circumstances — a combined income of only P10,000 from 1956 through 1958, yet claiming to run a business worth almost half a million pesos funded by unsecured loans of P224,000 — further undermined the credibility of his claims.

• Fraud in Insurance Claims — The submission of false or fraudulent proofs of loss vitiates the insurer's liability under a fire insurance policy. The falsity of the proofs submitted is itself the best evidence of the fraudulent character and unmeritoriousness of the claim. The Court applied this principle by examining six invoices found to be fictitious — from non-existent companies, forged signatures, or entities that had ceased business before the purported transactions — and holding that they inflated the supposed stocks by P248,370.00, thereby avoiding the insurers' liability under condition No. 13 of the policies.

• Non-Binding Effect of Unilateral Inventory — An inventory prepared by the insured without the insurer's intervention is not binding upon the latter as proof of the existence of insured goods at the time of loss. The Court held that the inventory, having been made prior to the fire, was no proof that the goods existed at the store when the fire occurred, and that the insured had every reason to inflate the value of his stock beyond the amount of insurance carried.

• Section 82 of the Insurance Act — Scope and Limitation — While the insured is not bound to give such proof of loss as would be necessary in a court of justice, this relaxation does not justify the submission of false proofs. The Court recognized the correctness of the legal proposition but denied it any justificatory force where the proofs themselves are fraudulent.

• "The fact of the filing of the inventory as of 15 January 1960 should be considered as true, since there is no evidence to the contrary." — The Court accepted the fact of filing but distinguished it from the truth of the inventory's contents, laying the groundwork for finding that the inventory did not prove the actual existence of the goods at the time of the fire.

• "Their falsity is the best evidence of the fraudulent character and the unmeritoriousness of plaintiff's claim." — This passage articulates the ratio decidendi: that the falsity of the submitted proofs of loss itself establishes the fraud that avoids the insurers' liability, regardless of the insured's invocation of Section 82 of the Insurance Act.

• "But when fraud is conceived, what is true is subtly hidden by the schemer beneath proper and legal appearances, including the preparation of the inventory." — The Court's characterization of how fraud operates through outward compliance with legal forms, explaining why the inventory — though prepared in compliance with law — could not be accepted as proof of the goods' existence at the time of loss.

• Condition No. 13, Policy No. 15 HO 7756 (Fieldmen's) and Policy No. 3164 (Paramount) — The policy condition providing that fraud or misrepresentation by the insured avoids the insurers' liability. The Court applied this condition to hold that the six fictitious invoices, inflating the supposed stocks by P248,370.00, constituted fraud and misrepresentation that discharged the insurers from liability.

• Section 82, Insurance Act — Provides that the insured is not bound to give such proof of loss as would be necessary in a court of justice. The Court acknowledged the correctness of this proposition but held that it does not justify the submission of false proofs of loss.

Bengzon, C.J., Bautista Angelo, Concepcion, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concurred. Barrera, J., was on leave.