G.R. No. 151890, 20 June 2006, 491 SCRA 411

FACTS:

Trans Asia is the owner of the vessel M/V Asia Korea. Prudential Guarantee and Assurance Inc. insured said vessel for loss/damage of the hull and machinery arising from perils of fire and explosion beginning from the period of July 1, 1993 until July 1, 1994. While the policy was in force, a fire broke out. Trans Asia file its notice of claim for damages sustained by the vessel. It also reserved its right to subsequently notify Prudential as to the full amount of the claim upon final survey and determination by the average adjuster Richard Hogg International of the damage sustained by the reason of fire. Trans Asia executed a document denominated “Loan and Trust Receipt” amounting to Php 3,000,000. Prudential Guarantee and Assurance Inc. denied the former’s claim and requested for the return of the said amount. The insurance company contends that there was a breach in the policy conditions, specifically, “Warranted Vessel Classed and Class Maintained”.
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of payment of premiums, defendant [PRUDENTIAL] insured M/V Asia Korea for loss/damage of the hull and machinery arising from perils, inter alia, of fire and explosion for the sum of P40 Million, beginning [from] the period [of] July 1, 1993 up to July 1, 1994. This is evidenced by Marine Policy No. MH93/1363 (Exhibits A to A-11). On October 25, 1993, while the policy was in force, a fire broke out while [M/V Asia Korea was] undergoing repairs at the port of Cebu. Trans Asia file its notice of claim for damages sustained by the vessel. It also reserved its right to subsequently notify Prudential as to the full amount of the claim upon final survey and determination by the average adjuster Richard Hogg International of the damage sustained by the reason of fire. Trans Asia executed a document denominated “Loan and Trust Receipt” amounting to Php 3,000,000. Prudential Guarantee and Assurance Inc. denied the former’s claim and requested for the return of the said amount. The insurance company contends that there was a breach in the policy conditions, specifically, “Warranted Vessel Classed and Class Maintained”.
The trial court held that Trans Asia failed to prove its compliance with the terms of the warranty. It further explained that the concealment made by Trans Asia is sufficient to avoid the policy. Prudential, as the injured party, is entitled to rescind to rescind the contract. The trial court dismissed the complaint and directed Trans Asia to return the “loan” extended by Prudential.
The Court of Appeals reversed the decision of the trial court. It contends that Prudential had the burden to show that there was a breach in the warranty and which it failed to do so. The Court considered Prudential’s admission that, at the time the insurance contract was entered into, the vessel was properly classed by the Bureau Veritas, a classification recognized by the industry. It further contends that then subject warranty was in a form of a rider, hence, such contract should be construed against Prudential. Finally, it interpreted the transaction between the parties as one of subrogation, instead of a loan. Thus, the amount given to Trans Asia was considered to be a partial payment to its claim under the policy.

ISSUE:

1. WON there was a breach in the warranty of the contract.
2. WON such contract partakes the nature of a loan.

HELD:

1. Prudential failed to establish that Trans Asia had violated and breached the policy condition provided in the insurance contract. The latter was able to establish proof of loss and coverage of the loss. Prudential also made a categorical admission at the time of the procurement of the insurance contract that the vessel was properly classified by the Bureau Veritas.
Assuming that there was a breach in the policy, the renewal of the insurance policy for two consecutive years after the loss is deemed as a waiver on the part of Prudential. Breach of a warranty or of a condition renders the contract defeasible at the option of the insurer; but if he so elects, he may waive his privilege and power to rescind by the mere expression of an intention so to do.
2. The amount granted by Prudential to Trans Asia, evidenced by a document denominated as a “Loan and Trust Receipt”, constituted partial payment on the policy. Under said agreement, Prudential is obligated to hand over to Trans Asia “whatever recovery the latter may make” and the latter to deliver to the former “all document necessary to prove its interest in the said property.” Prudential was given the right of subrogation to whatever net recovery Trans Asia may obtain from third parties resulting from the fire.

*Case digest by Russel Vincent T. Saracho, LLB-IV, Andres Bonifacio College Law School, SY 2018-2019