MALAYAN INSURANCE CORPORATION, PETITIONER, VS. THE HON. COURT OF APPEALS AND TKC MARKETING CORPORATION, RESPONDENTS.

Malayan Insurance versus TKC Marketing

The Case

This is a petition for review on certiorari brought by Malayan Insurance Corporation against TKC Marketing Corporation and the Court of Appeals. TKC Marketing, the owner and consignee of a shipment of soya bean meal insured by Malayan Insurance, claimed indemnity when the carrying vessel was arrested at an intermediate port by civil authorities and the cargo was later sold there to avoid total loss. Malayan Insurance refused to pay, insisting that the arrest was an excepted risk. The case matters because it fixes the rule on how marine cargo policies are read after the Free from Capture and Seizure Clause is deleted and the Institute War Clauses are incorporated, and because it restates the settled doctrine that an ambiguous insurance contract, being a contract of adhesion, is construed strictly against the insurer and liberally in favor of the insured.

Procedural History

TKC Marketing filed a complaint for damages before the Regional Trial Court of Cebu, Branch 15. The trial court decided in favor of TKC Marketing, ordering Malayan Insurance to pay the insurance claim plus consequential and liquidated damages, exemplary damages, attorney's fees, and the costs of suit. On TKC Marketing's motion for reconsideration, the trial court further required Malayan Insurance to pay interest at twelve percent per annum on all amounts due, counted from the inception of the case until full payment. Malayan Insurance appealed to the Court of Appeals, which affirmed the trial court's decision with a slight modification. Malayan Insurance then came to the Supreme Court by petition for review on certiorari.

Facts

TKC Marketing owned and consigned some 3,189.171 metric tons of soya bean meal, loaded on board the vessel MV Al Kaziemah on or about September 8, 1989, for carriage from the port of Rio del Grande, Brazil, to the port of Manila. Malayan Insurance insured the cargo against loss and issued two marine cargo policies, both dated September 1989.

While the vessel was docked in Durban, South Africa, on September 11, 1989, en route to Manila, civil authorities arrested and detained it because of a lawsuit on a question of ownership and possession. TKC Marketing notified Malayan Insurance of the arrest and made a formal claim for non-delivery of the cargo. Malayan Insurance replied that the arrest by civil authority was not a peril covered by the policies. TKC Marketing then advised that it might tranship the cargo and asked for an extension of the coverage until actual transhipment. The extension was approved upon payment of additional premium, under the same terms and conditions as the original policies, covering the period from October 4 to December 19, 1989.

On December 11, 1989, the cargo was sold in Durban for 154.40 dollars per metric ton, or a total of 10,304,231.75 pesos, because its perishable nature could no longer withstand a voyage of twenty days to Manila and another twenty days for discharge. TKC Marketing then reduced its claim to 448,806.09 dollars, representing its loss after the proceeds of the sale were deducted from the original claim. Malayan Insurance maintained that the arrest was an excepted risk, prompting the complaint for damages.

Issues

• Whether or not the arrest of the vessel by civil authorities on a question of ownership is a risk covered under the subject insurance policies.
• Whether or not there was a constructive total loss over the cargo.
• Whether or not Malayan Insurance was in bad faith in declining the claim.
• Whether or not the Court of Appeals erred in relying on the doctrine that insurance policies are strictly construed against the insurer.

Applicable Provisions

The Perils clause of the policies, which the Court quotes, provides:

Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and to take upon them in this voyage; they are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea, Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation, condition, or quality soever, Barratry of the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt, detriment, or damage of the said goods and merchandise or any part thereof.

This clause is the general grant of coverage, and the question is whether the arrest falls within it or within an exception.

Clause 12, the Free from Capture and Seizure Clause, which was deleted from the policies, reads:

Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any attempt thereat; also from the consequences of hostilities and warlike operations, whether there be a declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of a collision, any other vessel involved therein is performing) by a hostile act by or against a belligerent power and for the purpose of this warranty power includes any authorities maintaining naval, military or air forces in association with power. Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike arising therefrom or piracy. Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form part of this insurance.

Because this clause was deleted, its last sentence brought the Institute War Clauses into the contract.

Subsection 1.1 of Section 1 of the Institute War Clauses, Cargo, provides:

This insurance covers the risks excluded from the standard form of English Marine Policy by the clause warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof of hostilities or warlike operations, whether there be a declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the nature on voyage or service which the vessel concerned or, in the case of a collision any other vessel involved therein is performing) by a hostile act by or against a belligerent power; and for the purpose of this warranty power includes any authority maintaining naval, military or air forces in association with a power. Further warranted free from the consequences of civil war, revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy.

This clause is decisive, because it restores as covered risks whatever the deleted clause had excluded.

Ruling

On the first issue, the Court held that the arrest of the vessel by civil authorities is a covered risk. The Court reasoned that the Free from Capture and Seizure Clause excluded arrest caused by ordinary judicial process, and that with its deletion, subsection 1.1 of Section 1 of the Institute War Clauses deemed such arrest a covered risk, regardless of whether it occurred in a state of war. The Court rejected the argument that the heading Institute War Clauses confined the coverage to hostilities, noting that Malayan Insurance itself had admitted that the clause included arrest even if not a result of hostilities or warlike operations. The Court found that Malayan Insurance was straining the policy to avoid liability, and declared that a strained interpretation which is unnatural and forced, leading to an absurd conclusion or rendering the policy nonsensical, should by all means be avoided.

On the second issue, the Court upheld the finding of constructive total loss. Since the vessel was prevented at an intermediate port from completing the voyage by its seizure, a peril insured against, the insurer's liability continued until the goods could have been transhipped. Because the goods were perishable, they had to be sold promptly to minimize loss, and the sale being reasonable and justified, it did not discharge the insurer from its contractual liability.

On the third issue, the Court found it unnecessary to pass upon bad faith, since the petition was resolved on the interpretation of the policy.

On the fourth issue, the Court affirmed the rule of strict construction against the insurer. It held that where restrictive provisions are open to two interpretations, that which is most favorable to the insured is adopted, and that limitations of liability should be regarded with extreme jealousy and construed so as to preclude the insurer from noncompliance with its obligations. The Court stressed that if a marine insurer desires to limit the general provisions of its contract by special proviso, exception, or exemption, it should express such limitation in clear and unmistakable language.

Doctrine

First, when the Free from Capture and Seizure Clause is deleted from a marine cargo policy and the Institute War Clauses are incorporated, the risks formerly excluded by that clause, including arrest by ordinary judicial process, become covered risks, whether or not there is a state of war.

Second, a contract of insurance is a contract of adhesion, and any ambiguity therein is resolved against the insurer and liberally in favor of the insured. Exceptions to the general coverage are construed most strongly against the company.

Third, a strained interpretation that leads to an absurd conclusion or renders the policy nonsensical must be avoided, and the policy is read to carry out its purpose, which is to insure against risks of loss or damage to the goods.

Disposition

The petition was denied and the decision of the Court of Appeals was affirmed, so TKC Marketing prevailed and Malayan Insurance was held liable under the policies.

Remember This

Memorize this line: the deletion of the Free from Capture and Seizure Clause and the incorporation of the Institute War Clauses make arrest by ordinary judicial process a covered risk, and any ambiguity is construed strictly against the insurer. Examiners use this case on marine insurance coverage and on the contract of adhesion rule in insurance.