54 SUPREME COURT REPORTS ANNOTATED

Pan Malayan Insurance Corporation vs. Court of Appeals

*
G.R. No. 81026. April 3, 1990.

PAN MALAYAN INSURANCE CORPORATION, petitioner, vs.

COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN
DRIVER, respondents.

Civil Law; Insurance; Subrogation; Payment by the insurer to the

assured operates as equitable assignment.—Article 2207 of the Civil Code
is founded on the well-settled principle of subrogation. If the insured
property is destroyed or damaged through the fault or negligence of a party
other than the assured, then the insurer, upon payment to the assured, will be
subrogated to the rights of the assured to recover from the wrongdoer to the
extent that the insurer has been obligated to pay. Payment by the insurer to
the assured operates as an equitable assignment to the former of all remedies
which the latter may have against the third party whose negligence or
wrongful act caused the loss. The right of subrogation is not dependent
upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance claim
by the insurer [Compania Maritima v. Insurance Company of North
America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213; Fireman’s
Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427,
April 7, 1976, 70 SCRA 323].
Same; Same; Same; No right of subrogation in voluntary payment for
loss not covered by the policy.—There are a few recognized exceptions to
this rule. For instance, if the assured by his own act releases the wrongdoer
or third party liable for the loss or damage, from liability, the insurer’s right
of subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western
Transport Co., 117 US 312, 29 L. Ed. 873 (1886); Insurance Company of
North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705
(1956)]. Similarly, where the insurer pays the assured the value of the lost
goods without notifying the carrier who has in good faith settled the
assured’s claim for loss, the settlement is binding on both the assured and
the insurer, and the latter cannot bring an action against the carrier on his
right of subrogation [McCarthy v. Barber Steamship Lines, Inc., 45 Phil.
488 (1923)]. And where the insurer pays the assured for a loss which is not
a risk covered by the policy, thereby effecting “voluntary payment”, the
former has no right of subrogation against the third party liable for the loss
[Sveriges Angfartygs Assurans Forening v. Qua Chee Gan,

_______________

* THIRD DIVISION.

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Pan Malayan Insurance Corporation vs. Court of Appeals

G.R. No. L-22146, September 5, 1967, 21 SCRA 12].

Same; Same; Same; Interpretation of contracts; Courts will intervene
only when the terms of the policy are ambiguous, equivocal or uncertain.—
It is a basic rule in the interpretation of contracts that the terms of a contract
are to be construed according to the sense and meaning of the terms which
the parties thereto have used. In the case of property insurance policies, the
evident intention of the contracting parties, i.e., the insurer and the assured,
determine the import of the various terms and provisions embodied in the
policy. It is only when the terms of the policy are ambiguous, equivocal or
uncertain, such that the parties themselves disagree about the meaning of
particular provisions, that the courts will intervene. In such an event, the
policy will be construed by the courts liberally in favor of the assured and
strictly against the insurer [Union Manufacturing Co., Inc. v. Philippine
Guaranty Co., Inc., G.R. No. L-27932, October 30, 1972, 47 SCRA 271;
National Power Corporation v. Court of Appeals, G.R. No. L-43706,
November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court
of Appeals, G.R. No. L-41014, November 28, 1988, 168 SCRA 1. Also
Articles 1370-1378 of the Civil Code].
Same; Same; Same; “Accident” or “accidental” as used in insurance
contracts means that which takes place without one’s foresight or
expectation.—It cannot be said that the meaning given by PANMALAY and
CANLUBANG to the phrase “by accidental collision or overturning” found
in the first part of subparagraph (a) is untenable. Although the terms
“accident” or “accidental” as used in insurance contracts have not acquired a
technical meaning, the Court has on several occasions defined these terms to
mean that which takes place “without one’s foresight or expectation, an
event that proceeds from an unknown cause, or is an unusual effect of a
known cause and, therefore, not expected” [De la Cruz v. The Capital
Insurance & Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA
559; Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No.
85141, No-vember 28, 1989]. Certainly, it cannot be inferred from
jurisprudence that these terms, without qualification, exclude events
resulting in damage or loss due to the fault, recklessness or negligence of
third parties. The concept of “accident” is not necessarily synonymous with
the concept of “no fault”. It may be utilized simply to distinguish intentional
or malicious acts from negligent or careless acts of man. Same; Same;
Same; Insurer who has no right of subrogation may recover from the third
party responsible.—For even if under the above circumstances
PANMALAY could not be deemed subrogated to the

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56 SUPREME COURT REPORTS ANNOTATED

Pan Malayan Insurance Corporation vs. Court of Appeals

rights of its assured under Article 2207 of the Civil Code, PANMALAY
would still have a cause of action against private respondents. In the
pertinent case of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan,
supra., the Court ruled that the insurer who may have no rights of
subrogation due to “voluntary” payment may nevertheless recover from the
third party responsible for the damage to the insured property under Article
1236 of the Civil Code.

PETITION to review the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Regulus E. Cabote & Associates for petitioner.
Benito P. Fabie for private respondents.

CORTÉS, J.:

Petitioner Pan Malayan Insurance Company (PANMALAY) seeks

the reversal of a decision of the Court of Appeals which upheld an
order of the trial court dismissing for no cause of action
PANMALAY’s complaint for damages against private respondents
Erlinda Fabie and her driver.
The principal issue presented for resolution before this Court is
whether or not the insurer PANMALAY may institute an action to
recover the amount it had paid its assured in settlement of an
insurance claim against private respondents as the parties allegedly
responsible for the damage caused to the insured vehicle.
On December 10, 1985, PANMALAY filed a complaint for
damages with the RTC of Makati against private respondents
Erlinda Fabie and her driver. PANMALAY averred the following:
that it insured a Mitsubishi Colt Lancer car with plate No. DDZ-431
and registered in the name of Canlubang Automotive Resources
Corporation [CANLUBANG]; that on May 26, 1985, due to the
“carelessness, recklessness, and imprudence” of the unknown driver
of a pick-up with plate no. PCR-220, the insured car was hit and
suffered damages in the amount of P42,052.00; that PANMALAY
defrayed the cost of repair of the insured car and, therefore, was
subrogated to the rights of CANLUBANG against the driver of the
pick-up and his employer, Erlinda Fabie; and that, despite repeated
demands, defendants, failed and refused to pay the claim of
PANMALAY.

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Pan Malayan Insurance Corporation vs. Court of Appeals

Private respondents, thereafter, filed a Motion for Bill of Particulars

and a supplemental motion thereto. In compliance therewith,
PANMALAY clarified, among others, that the damage caused to the
insured car was settled under the “own damage” coverage of the
insurance policy, and that the driver of the insured car was, at the
time of the accident, an authorized driver duly licensed to drive the
vehicle. PANMALAY also submitted a copy of the insurance policy
and the Release of Claim and Subrogation Receipt executed by
CANLUBANG in favor of PANMALAY.
On February 12, 1986, private respondents filed a Motion to
Dismiss alleging that PANMALAY had no cause of action against
them. They argued that payment under the “own damage” clause of
the insurance policy precluded subrogation under Article 2207 of the
Civil Code, since indemnification thereunder was made on the
assumption that there was no wrongdoer or no third party at fault.
After hearings conducted on the motion, opposition thereto, reply
and rejoinder, the RTC issued an order dated June 16, 1986
dismissing PANMALAY’s complaint for no cause of action. On
August 19, 1986, the RTC denied PANMALAY’s motion for
reconsideration.
On appeal taken by PANMALAY, these orders were upheld by
the Court of Appeals on November 27, 1987. Consequently,
PANMALAY filed the present petition for review.
After private respondents filed its comment to the petition, and
petitioner filed its reply, the Court considered the issues joined and
the case submitted for decision.
Deliberating on the various arguments adduced in the pleadings,
the Court finds merit in the petition.
PANMALAY alleged in its complaint that, pursuant to a motor
vehicle insurance policy, it had indemnified CANLUBANG for the
damage to the insured car resulting from a traffic accident allegedly
caused by the negligence of the driver of private respondent, Erlinda
Fabie. PANMALAY contended, therefore, that its cause of action
against private respondents was anchored upon Article 2207 of the
Civil Code, which reads:
If the plaintiff’s property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising

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58 SUPREME COURT REPORTS ANNOTATED

Pan Malayan Insurance Corporation vs. Court of Appeals

out of the wrong or breach of contract complained of, the insurance

company shall be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract. . . .

PANMALAY is correct.
Article 2207 of the Civil Code is founded on the well-settled
principle of subrogation. If the insured property is destroyed or
damaged through the fault or negligence of a party other than the
assured, then the insurer, upon payment to the assured, will be
subrogated to the rights of the assured to recover from the
wrongdoer to the extent that the insurer has been obligated to pay.
Payment by the insurer to the assured operates as an equitable
assignment to the former of all remedies which the latter may have
against the third party whose negligence or wrongful act caused the
loss. The right of subrogation is not dependent upon, nor does it
grow out of, any privity of contract or upon written assignment of
claim. It accrues simply upon payment of the insurance claim by the
insurer [Compania Maritima v. Insurance Company of North
America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213;
Fireman’s Fund Insurance Company v. Jamilla & Company, Inc.,
G.R. No. L-27427, April 7, 1976, 70 SCRA 323].
There are a few recognized exceptions to this rule. For instance,
if the assured by his own act releases the wrongdoer or third party
liable for the loss or damage, from liability, the insurer’s right of
subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie &
Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886);
Insurance Company of North America v. Elgin, Joliet & Eastern
Railway Co., 229 F 2d 705 (1956)]. Similarly, where the insurer
pays the assured the value of the lost goods without notifying the
carrier who has in good faith settled the assured’s claim for loss, the
settlement is binding on both the assured and the insurer, and the
latter cannot bring an action against the carrier on his right of
subrogation [McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488
(1923)]. And where the insurer pays the assured for a loss which is
not a risk covered by the policy, thereby effecting “voluntary
payment”, the former has no right of subrogation against the third
party liable for the loss [Sveriges Angfartygs Assurans Forening v.
Qua Chee Gan, G.R. No. L-22146, September 5, 1967, 21 SCRA

59
 VOL. 184, APRIL 3, 1990 59
Pan Malayan Insurance Corporation vs. Court of Appeals

12].
None of the exceptions are availing in the present case.
The lower court and Court of Appeals, however, were of the
opinion that PANMALAY was not legally subrogated under Article
2207 of the Civil Code to the rights of CANLUBANG, and therefore
did not have any cause of action against private respondents. On the
one hand, the trial court held that payment by PANMALAY of
CANLUBANG’s claim under the “own damage” clause of the
insurance policy was an admission by the insurer that the damage
was caused by the assured and/or its representatives. On the other
hand, the Court of Appeals in applying the ejusdem generis rule held
that Section III-1 of the policy, which was the basis for settlement of
CANLUBANG’s claim, did not cover damage arising from collision
or overturning due to the negligence of third parties as one of the
insurable risks. Both tribunals concluded that PANMALAY could
not now invoke Article 2207 and claim reimbursement from private
respondents as alleged wrongdoers or parties responsible for the
damage.
The above conclusion is without merit.
It must be emphasized that the lower court’s ruling that the “own
damage” coverage under the policy implies damage to the insured
car caused by the assured itself, instead of third parties, proceeds
from an incorrect comprehension of the phrase “own damage” as
used by the insurer. When PANMALAY utilized the phrase “own
damage”—a phrase which, incidentally, is not found in the insurance
policy—to define the basis for its settlement of CANLUBANG’s
claim under the policy, it simply meant that it had assumed to
reimburse the costs for repairing the damage to the insured vehicle
[See PANMALAY’s Compliance with Supplementary Motion for
Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-
called “own damage” coverage under Section III of the insurance
policy is differentiated from Sections I and IV-1 which refer to
“Third Party Liability” coverage (liabilities arising from the death
of, or bodily injuries suffered by, third parties) and from Section IV-
2 which refer to “Property Damage” coverage (liabilities arising
from damage caused by the insured vehicle to the properties of third
parties).
Neither is there merit in the Court of Appeals’ ruling that the
coverage of insured risks under Section III-1 of the policy does

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Pan Malayan Insurance Corporation vs. Court of Appeals
not include damage to the insured vehicle arising from collision or
overturning due to the negligent acts of a third party. Not only does
it stem from an erroneous interpretation of the provisions of the
section, but it also violates a fundamental rule on the interpretation
of property insurance contracts.
It is a basic rule in the interpretation of contracts that the terms of
a contract are to be construed according to the sense and meaning of
the terms which the parties thereto have used. In the case of property
insurance policies, the evident intention of the contracting parties,
i.e., the insurer and the assured, determine the import of the various
terms and provisions embodied in the policy. It is only when the
terms of the policy are ambiguous, equivocal or uncertain, such that
the parties themselves disagree about the meaning of particular
provisions, that the courts will intervene. In such an event, the policy
will be construed by the courts liberally in favor of the assured and
strictly against the insurer [Union Manufacturing Co., Inc. v.
Philippine Guaranty Co., Inc., G.R. No. L-27932, October 30, 1972,
47 SCRA 271; National Power Corporation v. Court of Appeals,
G.R. No. L-43706, November 14, 1986, 145 SCRA 533; Pacific
Banking Corporation v. Court of Appeals, G.R. No. L-41014,
November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the
Civil Code].
Section III-1 of the insurance policy which refers to the
conditions under which the insurer PANMALAY is liable to
indemnify the assured CANLUBANG against damage to or loss of
the insured vehicle, reads as follows:

SECTION III—LOSS OR DAMAGE

1. The Company will, subject to the Limits of Liability, indemnify the

Insured against loss of or damage to the Scheduled Vehicle and its
accessories and spare parts whilst thereon:—

(a) by accidental collision or overturning, or collision or overturning

consequent upon mechanical breakdown or consequent upon wear
and tear;
(b) by fire, external explosion, self ignition or lightning or burglary,
housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the processes of loading and unloading)
incidental to such transit by road, rail, inland, water-

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Pan Malayan Insurance Corporation vs. Court of Appeals

way, lift or elevator.

 xxx
[Annex “A-1” of PANMALAY’s Compliance with Supplementary
Motion for Bill of Particulars; Record, p. 34; Italics supplied].

PANMALAY contends that the coverage of insured risks under the

above section, specifically Section III-1(a), is comprehensive
enough to include damage to the insured vehicle arising from
collision or overturning due to the fault or negligence of a third
party. CANLUBANG is apparently of the same understanding.
Based on a police report wherein the driver of the insured car
reported that after the vehicle was sideswiped by a pick-up, the
driver thereof fled the scene [Record, p. 20], CANLUBANG filed its
claim with PANMALAY for indemnification of the damage caused
to its car. It then accepted payment from PANMALAY, and executed
a Release of Claim and Subrogation Receipt in favor of latter.
Considering that the very parties to the policy were not shown to
be in disagreement regarding the meaning and coverage of Section
III-1, specifically sub-paragraph (a) thereof, it was improper for the
appellate court to indulge in contract construction, to apply the
ejusdem generis rule, and to ascribe meaning contrary to the clear
intention and understanding of these parties.
It cannot be said that the meaning given by PANMALAY and
CANLUBANG to the phrase “by accidental collision or over-
turning” found in the first part of sub-paragraph (a) is untenable.
Although the terms “accident” or “accidental” as used in insurance
contracts have not acquired a technical meaning, the Court has on
several occasions defined these terms to mean that which takes place
“without one’s foresight or expectation, an event that proceeds from
an unknown cause, or is an unusual effect of a known cause and,
therefore, not expected” [De la Cruz v. The Capital Insurance &
Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559;
Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R.
No. 85141, November 28, 1989]. Certainly, it cannot be inferred
from jurisprudence that these terms, without qualification, exclude
events resulting in damage or loss due to the fault, recklessness or
negligence of third parties. The concept “accident” is not necessarily

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Pan Malayan Insurance Corporation vs. Court of Appeals

synonymous with the concept of “no fault”. It may be utilized

simply to distinguish intentional or malicious acts from negligent or
careless acts of man.
Moreover, a perusal of the provisions of the insurance policy
reveals that damage to, or loss of, the insured vehicle due to
negligent or careless acts of third parties is not listed under the
general and specific exceptions to the coverage of insured risks
which are enumerated in detail in the insurance policy itself [See
Annex “A-1” of PANMALAY’s Compliance with Supplementary
Motion for Bill of Particulars, supra.]
The Court, furthermore, finds it noteworthy that the meaning
advanced by PANMALAY regarding the coverage of Section III-
1(a) of the policy is undeniably more beneficial to CANLUBANG
than that insisted upon by respondents herein. By arguing that this
section covers losses or damages due not only to malicious, but also
to negligent acts of third parties, PANMALAY in effect advocates
for a more comprehensive coverage of insured risks. And this, in the
final analysis, is more in keeping with the rationale behind the
various rules on the interpretation of insurance contracts favoring
the assured or beneficiary so as to effect the dominant purpose of
indemnity or payment [See Calanoc v. Court of Appeals, 98 Phil. 79
(1955); Del Rosario v. The Equitable Insurance and Casualty Co.,
Inc., G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v.
Court of Appeals, G.R. No. L-35529, July 16, 1984, 130 SCRA
327]. Parenthetically, even assuming for the sake of argument that
Section III-1(a) of the insurance policy does not cover damage to the
insured vehicle caused by negligent acts of third parties, and that
PANMALAY’s settlement of CANLUBANG’s claim for damages
allegedly arising from a collision due to private respondents’
negligence would amount to unwarranted or “voluntary payment”,
dismissal of PANMALAY’s complaint against private respondents
for no cause of action would still be a grave error of law.
For even if under the above circumstances PANMALAY could
not be deemed subrogated to the rights of its assured under Article
2207 of the Civil Code, PANMALAY would still have a cause of
action against private respondents. In the pertinent case of Sveriges
Angfartygs Assurans Forening v. Qua Chee Gan, supra., the Court
ruled that the insurer who may have no

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Pan Malayan Insurance Corporation vs. Court of Appeals

rights of subrogation due to “voluntary” payment may nevertheless

recover from the third party responsible for the damage to the
insured property under Article 1236 of the Civil Code.
In conclusion, it must be reiterated that in this present case, the
insurer PANMALAY as subrogee merely prays that it be allowed to
institute an action to recover from third parties who allegedly caused
damage to the insured vehicle, the amount which it had paid its
assured under the insurance policy. Having thus shown from the
above discussion that PANMALAY has a cause of action against
third parties whose negligence may have caused damage to
 CANLUBANG’s car, the Court holds that there is no legal obstacle
to the filing by PANMALAY of a complaint for damages against
private respondents as the third parties allegedly responsible for the
damage. Respondent Court of Appeals therefore committed
reversible error in sustaining the lower court’s order which
dismissed PANMALAY’s complaint against private respondents for
no cause of action. Hence, it is now for the trial court to determine if
in fact the damage caused to the insured vehicle was due to the
“carelessness, recklessness and imprudence” of the driver of private
respondent Erlinda Fabie.
WHEREFORE, in view of the foregoing, the present petition is
GRANTED. Petitioner’s complaint for damages against private
respondents is hereby REINSTATED. Let the case be remanded to
the lower court for trial on the merits.
SO ORDERED.

Fernan (C.J.), Gutierrez, Jr., Feliciano and Bidin, JJ.,

concur.

Petition granted. Case remanded to lower court for trial on the

merits.

Note.—An open policy is one in which the value of the thing

insured is not agreed upon and is left to be ascertained in case of
loss. (Development Insurance Corporation vs. Intermediate
Appellate Court, 143 SCRA 62.)

———o0o———

64

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