UNION MANUFACTURING CO., INC. AND THE REPUBLIC BANK, PLAINTIFFS, REPUBLIC BANK, PLAINTIFF-APPELLANT, VS. PHILIPPINE GUARANTY CO., INC., DEFENDANT-APPELLEE.

Union Manufacturing versus Philippine Guaranty

The Case

This is a suit on a fire insurance policy. Union Manufacturing Company borrowed from Republic Bank and mortgaged its properties as security. When Union Manufacturing failed to insure the mortgaged properties as it had promised, Republic Bank itself procured fire insurance from Philippine Guaranty Company, with a cover note stating that loss or damage is payable to Republic Bank as its interest may appear. A fire destroyed the properties, and the insurer refused to pay. Republic Bank sued as the payee of the policy. The case matters because it fixes the rule that a breach of a warranty in a fire policy voids the policy even against a mortgagee who paid the premiums and whose interest the policy was meant to protect.

Procedural History

Union Manufacturing and Republic Bank sued Philippine Guaranty in the Court of First Instance to recover on the fire policy. The trial court ruled for the insurer, holding the policy null and void because the insured had breached the warranty against other insurance. Republic Bank, as the sole appellant, appealed to the Supreme Court. The Supreme Court affirmed the decision of the lower court.

Facts

On January 12, 1962, Union Manufacturing obtained loans, overdrafts, and other credit accommodations from Republic Bank totaling 415,000 pesos, secured by real and chattel mortgages. As an additional condition of the mortgage, Union Manufacturing undertook to insure the mortgaged properties for the same amount, distributed among buildings, machineries, and merchandise inventory. Union Manufacturing failed to do so despite reminders to its general manager, so Republic Bank procured fire insurance from Philippine Guaranty for 500,000 pesos, with a cover note dated September 25, 1962, annotated that loss or damage is payable to Republic Bank as its interest may appear, subject to the printed conditions of the insurer's fire policy form. The policy was issued two days later, and the premium was paid by Republic Bank, though for the account of Union Manufacturing. The policy was renewed upon its expiration in September 1963, again with the premium paid by the bank for the account of the insured.

Unknown to the insurer, the properties were already covered by other fire policies when the Philippine Guaranty policy was issued, and after that policy took effect, Union Manufacturing obtained still more insurance over the same properties without the insurer's consent. The cover note and the policy both carried the warranty, "Co-Insurance Declared: Nil," meaning that no other insurance was declared.

On September 6, 1964, a fire occurred in the premises of Union Manufacturing. Its fire claim was denied by the insurer on two grounds: the violation of the other insurance clause, because the other insurances were never endorsed on the policy, and the failure to submit the required documents and proofs of loss. The trial court found that the insured had violated the condition requiring disclosure of other insurance and had represented that there were none, and that while the policy was in force it secured other fire policies without the insurer's written consent. It concluded that neither Republic Bank nor Union Manufacturing could recover, because the policy is null and void.

Issues

• Whether or not the fire insurance policy is null and void because the insured violated the warranty against other insurance by failing to disclose existing policies and by obtaining additional insurance without the insurer's consent.
• Whether or not Republic Bank, as mortgagee and payee of the loss under the cover note, may recover on the policy despite that violation.

Applicable Provisions

The decision applies the other insurance clause of the policy, which the insured breached, and the warranty appearing on the face of the policy, which reads:

Co-Insurance Declared: Nil.

This warranty is a representation that no other insurance exists over the property, and its violation entitles the insurer to rescind.

The decision also refers to Section 69 of the Insurance Act, which provides:

Section 69. A violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other party to rescind.

This provision supplies the remedy of rescission for the breach of the warranty against other insurance.

Ruling

On the first issue, the Court held that the policy is null and void. The insured violated the condition requiring disclosure of other insurance, represented that there were no other policies when the warranty said "Co-Insurance Declared: Nil," and later obtained additional insurance without the insurer's written consent endorsed on the policy. The Court relied on its own precedents. In Santa Ana versus Commercial Union Assurance Company, it held that in the absolute absence of the required notice of other insurance, the policy is null and void. In Ang Giok Chip versus Springfield Fire and Marine Insurance Company, it held that the insured who accepts a policy without objection is bound by its terms and cannot claim he did not read it. In Young versus Midland Textile Insurance Company, it held that compliance with the terms of the policy is a condition precedent to recovery, and that courts enforce the contract as made. In General Insurance and Surety Corporation versus Ng Hua, it held that the annotation is a warranty that the property was not insured by any other policy, and that violation entitles the insurer to rescind. In Misamis Lumber Corporation versus Capital Insurance and Surety Company, it held that a one-sided insurance contract does not justify abrogating its express terms, which are the law between the parties.

On the second issue, the Court held that Republic Bank cannot recover as payee. Its right under the cover note is subject to the terms, conditions, clauses, and warranties of the policy. Since the insured's breach made the policy null and void, the bank's claim as mortgagee fails with it. The defect is legally incurable.

Doctrine

A fire insurance policy containing a warranty that no other insurance exists is void when the insured fails to disclose existing policies or obtains additional insurance without the insurer's consent. The insured who accepts the policy without objection is bound by its terms and is presumed to have read them. Compliance with the terms of the policy is a condition precedent to recovery, and courts enforce the contract as written even if its terms are onerous. A mortgagee named as payee of the loss takes the policy subject to its terms, conditions, and warranties, so a breach by the insured voids the policy against the mortgagee as well.

Disposition

The Supreme Court affirmed the decision of the lower court, and Philippine Guaranty Company won; Republic Bank recovered nothing on the policy.

Remember This

Memorize this line: a breach of the warranty against other insurance voids the fire policy, and the mortgagee payee takes subject to that warranty. Examiners use this case to test the other insurance clause, the binding effect of policy terms on the insured, and whether a mortgagee's interest survives the insured's breach.