COUNTRY BANKERS INSURANCE CORPORATION, PETITIONER, VS. LIANGA BAY AND COMMUNITY MULTI-PURPOSE COOPERATIVE, INC., RESPONDENT.

Country Bankers Insurance versus Lianga Bay and Community Multi-Purpose Cooperative

The Case

This is a petition for review on certiorari brought by Country Bankers Insurance Corporation against Lianga Bay and Community Multi-Purpose Cooperative, Incorporated. The respondent cooperative sued to recover on a fire insurance policy after its building and stocks-in-trade were destroyed by fire, and the insurer resisted on the ground that the loss fell within an excepted risk, namely that the fire was set by rebels. The case matters for two reasons a bar candidate must hold onto: it fixes who carries the burden of proof when an insurer invokes an exception clause in a policy, and it applies the hearsay rule and the official records exception to the police spot report and sworn statements an insurer typically relies upon. It is also a clean illustration of the Eastern Shipping Lines guidelines on interest and of the rule that damages and attorney's fees must be proved, not presumed.

Procedural History

The respondent cooperative filed a complaint for recovery of loss, damage or liability in the Regional Trial Court of Lianga, Surigao del Sur, Branch 28. The trial court ruled in favor of the cooperative, ordering the insurer to pay the full face value of the policy with twelve percent interest per annum from the filing of the complaint, plus actual damages, exemplary damages, litigation expenses, attorney's fees, and the costs of suit. The insurer appealed to the Court of Appeals, which affirmed the trial court's decision in its entirety. The insurer then came to the Supreme Court by petition for review on certiorari, assigning three errors: that the appellate court failed to give credence to the spot report and sworn statement showing the fire was caused by rebels, that it erred in imposing twelve percent interest, and that it erred in awarding actual and exemplary damages, litigation expenses, attorney's fees, and costs.

Facts

Sometime in 1989, Country Bankers Insurance Corporation and the cooperative entered into a contract of fire insurance. Under Fire Insurance Policy Number F-1397, the insurer insured the cooperative's stocks-in-trade against fire loss for Two Hundred Thousand Pesos, for the period starting from June 20, 1989 at four o'clock in the afternoon to June 20, 1990 at four o'clock in the afternoon.

On July 1, 1989, at about twelve forty in the morning, the cooperative's building at Barangay Diatagon, Lianga, Surigao del Sur was gutted by fire and reduced to ashes, resulting in the total loss of its stocks-in-trade, furniture, fixtures, equipment, and records. The cooperative filed an insurance claim, submitting a spot report of a police investigator dated July 1, 1989, and the sworn statements of Jose Lomocso and Ernesto Urbiztondo.

The insurer denied the claim, asserting that, based on the submitted documents, the building was set on fire by two rebels of the New People's Army who wanted canned goods, rice, and medicines as provisions, and that such loss was an excepted risk under the policy conditions. The cooperative then sued. At trial, the police investigator took the witness stand, but Jose Lomocso and Ernesto Urbiztondo did not, and so could not be cross-examined.

Issues

• Whether or not the insurer proved, by a preponderance of evidence, that the loss fell within the excepted risk of the fire insurance policy, so as to defeat the claim.
• Whether or not the Court of Appeals erred in imposing twelve percent interest per annum on the face value of the policy from the filing of the complaint.
• Whether or not the Court of Appeals erred in awarding actual damages, exemplary damages, litigation expenses, attorney's fees, and the costs of suit.

Applicable Provisions

Section 1 of Rule 131 of the Revised Rules of Court, on the burden of proof, provides:

Each party must prove his own affirmative allegations by the amount of evidence required by law.

This fixes the burden on the insurer, which set up the exception as an affirmative defense.

Section 36 of Rule 130 of the Revised Rules of Court, on the witness's personal knowledge, provides:

A witness can testify only to those facts which he knows of his personal knowledge, which means those facts which are derived from his perception.

This is the basis for excluding the sworn statements of persons who never took the witness stand.

Section 44 of Rule 130 of the Revised Rules of Court, on entries in official records, provides:

Entries in official records made in the performance of his duty by a public officer of the Philippines, or by a person in the performance of a duty specially enjoined by law, are prima facie evidence of the facts therein stated.

This governs whether the police spot report may be received to prove the truth of the rebel-attribution it recites.

Article 2229 of the New Civil Code, on exemplary damages, provides that exemplary damages may be imposed by way of example or correction for the public good. It bears on the third issue, since such damages cannot be recovered as a matter of right.

Article 2208 of the New Civil Code, on attorney's fees and expenses of litigation, provides that, in the absence of stipulation, they cannot be recovered except in the instances it enumerates, and that in all cases they must be reasonable. It bears on whether the awards of litigation expenses and attorney's fees may stand.

Ruling

On the first issue, the Court held that the insurer failed to discharge its burden. Where a risk is excepted by the terms of a policy, loss from such a risk is a defense the insurer may urge, and an insurer seeking to defeat a claim because of an exception or limitation in the policy has the burden of proving that the loss comes within the purview of the exception. The insurer relied on the sworn statements of Jose Lomocso and Ernesto Urbiztondo and on the spot report of the police investigator. The Court held the sworn statements inadmissible as hearsay, since the declarants did not take the witness stand and could not be cross-examined. As to the spot report, the Court held that the requisites for the official records exception were not met, because no investigation independent of the statements gathered from Jose Lomocso was conducted by the investigator; the report was based on the personal knowledge of the caretaker. The report was admissible only insofar as it formed part of the investigator's own testimony, and the portion reciting the caretaker's statement could be admitted only as an independently relevant statement, not to prove its truth. The insurer's evidence was therefore sadly wanting.

On the second issue, the Court held that the insurance claim is not a loan or forbearance of money, and so the interest rate should be fixed at six percent per annum computed from the date of filing of the complaint, not twelve percent. The Court applied its guidelines in Eastern Shipping Lines, which provide:

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.

On the third issue, the Court deleted the awards. Actual, compensatory, and consequential damages must be proved and cannot be presumed, and no evidence supported the award of Fifty Thousand Pesos as actual damages. Exemplary damages cannot be recovered as a matter of right and rest entirely on the discretion of the court, and the Court found no cogent reason to award them. As to litigation expenses and attorney's fees, the Court held that the award is the exception rather than the general rule, that it is necessary for the court to make findings of fact and law bringing the case within the exception, and that no such findings existed here.

Doctrine

First, when an insurer defends on the ground of non-coverage and relies on an exception or limitation clause in the policy, it bears the burden of proving the facts bringing the loss within the excepted risk, by a preponderance of evidence, because it has not assumed that risk.

Second, sworn statements of persons who do not take the witness stand are hearsay and inadmissible to prove the truth of their contents, and a police spot report that merely relays such statements does not qualify under the official records exception absent an independent investigation by the officer.

Third, an insurance claim is not a loan or forbearance of money, so interest on the amount awarded is six percent per annum from the filing of the complaint, consistent with the Eastern Shipping Lines guidelines.

Fourth, actual damages must be proved and cannot be presumed; exemplary damages are discretionary and not demandable as a matter of right under Article 2229; and attorney's fees and litigation expenses are the exception, recoverable only upon findings bringing the case within Article 2208.

Disposition

The insurer was held liable on the policy for Two Hundred Thousand Pesos, but the appealed decision was modified: interest was reduced to six percent per annum from the filing of the complaint, and the awards of actual damages, exemplary damages, litigation expenses, and attorney's fees were deleted, with costs against the insurer.

Remember This

The single line worth memorizing is that the insurer invoking an exception clause carries the burden of proving the excepted risk, and it cannot do so through hearsay sworn statements or a spot report that merely repeats them. Examiners like to use this case on the burden of proof in insurance, on the hearsay rule and the official records exception, and on the six percent interest and the strict proof required for damages and attorney's fees.