Zenith Insurance Corporation vs. Court of Appeals

In cases of unreasonable delay in the payment of insurance claims, moral damages may be awarded under the Civil Code only upon a showing that the breach was wanton and deliberately injurious or that the insurer acted fraudulently or in bad faith; exemplary damages require a showing of wanton, oppressive, or malevolent conduct. A mere two-month delay arising from a genuine dispute over the amount of actual damage, without total disclaimer of liability, does not justify awards of moral damages beyond the amount prayed for or any award of exemplary damages.

Zenith Insurance Corporation issued private car Policy No. 50459 to Lawrence Fernandez, covering his car for "own damage." When the car was involved in an accident, the dispute centered on Zenith's refusal to pay the claimed amount and the propriety of the damages awarded by the lower courts. The case required the application of Section 244 of the Philippine Insurance Code governing damages for unreasonable delay in payment of insurance claims, alongside the Civil Code provisions on moral and exemplary damages.

On January 25, 1983, Lawrence Fernandez insured his car for "own damage" under private car Policy No. 50459 with Zenith Insurance Corporation. On July 6, 1983, the car figured in an accident and suffered actual damages in the amount of ₱3,640.00. After allegedly being given a "run-around" by Zenith for two months, Fernandez filed a complaint with the Regional Trial Court of Cebu for sum of money and damages, docketed as Civil Case No. CEB-1215. Aside from actual damages and interests, he prayed for moral damages of ₱10,000.00, exemplary damages of ₱5,000.00, attorney's fees of ₱3,000.00, and litigation expenses of ₱3,000.00.

On September 28, 1983, Zenith filed an answer alleging that it had offered to pay Fernandez's claim pursuant to the terms and conditions of the contract, which offer Fernandez rejected. After the issues were joined, pre-trial was initially scheduled on October 17, 1983 but was moved to November 4, 1983 upon petitioner's motion, allegedly to explore settlement possibilities at an amount lower than private respondent's claim. On November 14, 1983, the trial court terminated the pre-trial. Fernandez thereafter presented his evidence. Zenith, however, failed to present its evidence due to its failure to appear in court, without justifiable reason, on the scheduled date. The trial court issued an order on August 23, 1984 submitting the case for decision without Zenith's evidence.

Zenith filed a petition for certiorari with the Court of Appeals assailing the trial court's order, docketed as C.A.-G.R. No. 04644, but the petition was denied due course on April 29, 1986. On June 4, 1986, the trial court rendered judgment in favor of Fernandez, awarding ₱3,640.00 as actual damages with interest at twice the prevailing rate, ₱20,000.00 as moral damages, ₱20,000.00 as exemplary damages, ₱5,000.00 as attorney's fees, and ₱3,000.00 as litigation expenses. Upon Fernandez's motion and before the expiration of the period to appeal, the trial court on June 20, 1986 ordered execution pending appeal. Zenith's certiorari petition assailing this order (C.A. G.R. No. 10420) was dismissed on December 24, 1986.

Zenith filed a notice of appeal on June 10, 1986, which was granted. On August 17, 1988, the Court of Appeals affirmed in toto the trial court's decision, ruling further that the matter of the trial court's denial of Zenith's right to adduce evidence was a closed matter in view of its earlier ruling in C.A.-G.R. No. 04644. Zenith's motion for reconsideration was denied on September 29, 1988. The pre-trial record showed that there was no total disclaimer of liability by Zenith; the reason for the failure to indemnify within the two-month period was that the parties could not agree on the amount of actual damage on the car.

• Excessive Moral Damages: Petitioner contended that while the complaint prayed for ₱10,000.00 in moral damages, the lower court awarded twice that amount — ₱20,000.00 — without factual or legal basis.
• Excessive Exemplary Damages: Petitioner argued that while private respondent prayed for ₱5,000.00 in exemplary damages, the trial court awarded ₱20,000.00, again exceeding the amount prayed for.
• Excessive Attorney's Fees: Petitioner pointed out that while private respondent prayed for ₱3,000.00 in attorney's fees, the trial court awarded ₱5,000.00.
• Incorrect Computation of Actual Damages: Petitioner maintained that the recoverable amount should have been only ₱1,927.50, arrived at after deducting ₱250.00 as deductible franchise and ₱274.00 for 20% depreciation on parts, as allegedly agreed upon in the contract of insurance, from the ₱3,640.00 claim.

• Moral Damages: Whether the award of moral damages in an amount (₱20,000.00) exceeding that prayed for in the complaint (₱10,000.00) is proper given the circumstances of the case.
• Exemplary Damages: Whether the award of exemplary damages is proper in light of the insurer's conduct.
• Attorney's Fees: Whether the award of attorney's fees in an amount exceeding that prayed for is justified.
• Actual Damages Computation: Whether the actual damages should be reduced by the deductible franchise and 20% depreciation on parts claimed by petitioner.

• Moral Damages: Reduced. The award of moral damages was reduced from ₱20,000.00 to ₱10,000.00, the amount prayed for, because the two-month delay did not constitute the wanton, deliberately injurious, fraudulent, or bad-faith conduct required for moral damages in breach of contract cases.
• Exemplary Damages: Deleted. Exemplary damages were deleted because Zenith had not acted in a wanton, oppressive, or malevolent manner; there was no total disclaimer of liability, only a disagreement on the amount of actual damage.
• Attorney's Fees: Sustained. The award of ₱5,000.00 as attorney's fees was justified considering that there were other petitions filed and defended by private respondent in connection with the case.
• Actual Damages Computation: Sustained at ₱3,640.00. The deductions for deductible franchise and 20% depreciation had no basis, as the insurance policy did not mention any deductible franchise.

• Moral Damages: Under the Civil Code, moral damages in breach of contract cases require a showing that the breach was wanton and deliberately injurious or that the responsible party acted fraudulently or in bad faith. While no proof of pecuniary loss is necessary and the assessment is left to the court's discretion (Article 2216, Civil Code), the two-month delay in payment — though constituting unreasonable delay under the Insurance Code — could not be considered so wanton or malevolent as to justify ₱20,000.00 in moral damages, especially given that the actual damage to the car was only ₱3,640.00. The pre-trial record showed no total disclaimer of liability; the delay arose from the parties' inability to agree on the amount of actual damage. The amount of ₱10,000.00 prayed for was deemed equitable.

• Exemplary Damages: Exemplary or corrective damages are imposed by way of example or correction for the public good (Article 2229, Civil Code). In Noda vs. Cruz-Arnaldo, exemplary damages were not awarded because the insurance company had not acted in a wanton, oppressive, or malevolent manner. The same reasoning applied here: Zenith's conduct, while constituting unreasonable delay, did not rise to the level of wanton, oppressive, or malevolent behavior necessary to sustain an exemplary damages award.

• Attorney's Fees: The award of ₱5,000.00 as attorney's fees was justified under the circumstances, considering that private respondent had to file and defend other petitions in connection with the case — specifically the certiorari proceedings before the Court of Appeals assailing the submission of the case without Zenith's evidence and the order of execution pending appeal.

• Actual Damages Computation: The Court of Appeals correctly ruled that the deductions of ₱250.00 as deductible franchise and ₱274.00 for 20% depreciation on parts had no basis, because the insurance policy (Exhibit G) did not mention any deductible franchise. The amount of ₱3,640.00 had been established before the trial court and affirmed by the appellate court.

• Damages for Unreasonable Delay in Insurance Claims (Section 244, Philippine Insurance Code) — In case of unreasonable delay in the payment of insurance claims, the damages awardable are: (1) attorney's fees; (2) other expenses incurred by the insured by reason of the unreasonable denial or withholding of payment; (3) interest at twice the ceiling prescribed by the Monetary Board on the amount of the claim due, computed from the date following the time prescribed in Sections 242 or 243 until the claim is fully satisfied; and (4) the amount of the claim. Failure to pay within the prescribed time is prima facie evidence of unreasonable delay. The Court applied this provision to sustain the award of attorney's fees and the interest at twice the Monetary Board ceiling, while clarifying that moral and exemplary damages are governed not by the Insurance Code but by the Civil Code.

• Moral Damages in Breach of Contract — Moral damages in breach of contract cases require a showing that the breach was wanton and deliberately injurious or that the responsible party acted fraudulently or in bad faith. The purpose of moral damages is indemnity or reparation, not punishment or enrichment. The Court applied this doctrine by finding that a two-month delay arising from a genuine dispute over the amount of damage, without total disclaimer of liability, was not sufficiently wanton or malevolent to justify moral damages beyond the amount prayed for.

• Exemplary Damages — Exemplary or corrective damages are imposed by way of example or correction for the public good (Article 2229, Civil Code) and require a showing of wanton, oppressive, or malevolent conduct. The Court applied this by deleting the exemplary damages award, following Noda vs. Cruz-Arnaldo, where exemplary damages were denied because the insurer had not acted in a wanton, oppressive, or malevolent manner.

• "In awarding moral damages in case of breach of contract, there must be a showing that the breach was wanton and deliberately injurious or the one responsible acted fraudently or in bad faith." — This passage states the controlling standard for moral damages in breach of contract cases, distinguishing it from the lower threshold for tort-based moral damages, and is the ratio decidendi for reducing the moral damages award.

• "The act of petitioner of delaying payment for two months cannot be considered as so wanton or malevolent to justify an award of P20,000.00 as moral damages, taking into consideration also the fact that the actual damage on the car was only P3,460." — This passage applies the moral damages standard to the facts, anchoring the reduction to ₱10,000.00 in the proportionality between the insurer's conduct and the actual loss.

• "The policy (Exhibit G, pp. 4-9, Record), does not mntion any deductible franchise." — This passage, quoted from the Court of Appeals, establishes the factual basis for sustaining the full actual damages award and rejecting petitioner's claimed deductions.

• R and B Surety & Insurance Co., Inc. vs. IAC, G.R. No. 64515, June 22, 1984; 129 SCRA 745 — Cited for the principle that moral damages are not intended to enrich a complainant but to alleviate moral suffering, and that assessment is left to the court's discretion.
• Perez vs. Court of Appeals, G.R. No. L-20238, January 30, 1965; 13 SCRA 137 — Cited for the requirement that moral damages in breach of contract require a showing of wanton, deliberately injurious, fraudulent, or bad-faith conduct.
• Solis vs. Salvador, G.R. No. L-17022, August 14, 1965; 14 SCRA 887 — Cited alongside Perez for the same proposition on moral damages in breach of contract.
• Noda vs. Cruz-Arnaldo, G.R. No. 57322, June 22, 1987; 151 SCRA 227 — Cited as controlling analogy for denying exemplary damages where the insurer had not acted in a wanton, oppressive, or malevolent manner; the Court found the same rationale applicable here.

• Section 244, Philippine Insurance Code — Governs damages for unreasonable delay in payment of insurance claims, specifying attorney's fees, other expenses, interest at twice the Monetary Board ceiling, and the amount of the claim. Failure to pay within the prescribed period is prima facie evidence of unreasonable delay. Applied to sustain the award of attorney's fees and the doubled interest, while the Court clarified that moral and exemplary damages fall under the Civil Code.
• Article 2216, Civil Code of the Philippines — Provides that no proof of pecuniary loss is necessary for moral damages and that assessment is left to the court's discretion according to the circumstances of each case. Applied but qualified by the requirement of wanton or bad-faith conduct in breach of contract cases.
• Article 2229, Civil Code of the Philippines — Defines exemplary or corrective damages as imposed by way of example or correction for the public good. Applied to test whether Zenith's conduct warranted exemplary damages; the Court found it did not.

Narvasa, Cruz, and Griño-Aquino, JJ., concurred. Gancayco, J., was on leave.