ZENITH INSURANCE CORPORATION, PETITIONER, VS. COURT OF APPEALS AND LAWRENCE FERNANDEZ, RESPONDENTS.

Zenith Insurance versus Fernandez

The Case

This is a petition for review brought by Zenith Insurance Corporation against Lawrence Fernandez, the insured, and the Court of Appeals. Fernandez sued Zenith for a sum of money and damages after the insurer refused to pay his own-damage claim on an insured car that figured in an accident. The case matters because it fixes the measure of damages an insurer owes when it unreasonably delays or withholds payment of a claim, and it draws the line between the damages the Insurance Code authorizes and the moral and exemplary damages the Civil Code governs.

Procedural History

Fernandez filed a complaint for sum of money and damages before the Regional Trial Court of Cebu. During trial, Zenith failed to appear, without justifiable reason, on the day scheduled for the presentation of its evidence, and the trial court submitted the case for decision without Zenith's evidence. Zenith challenged that order by a petition for certiorari before the Court of Appeals, which denied the petition due course. The trial court then rendered judgment in favor of Fernandez, and, upon his motion and before the period to appeal expired, ordered execution pending appeal. Zenith assailed that order in another petition for certiorari before the Court of Appeals, which was dismissed. Zenith then appealed the judgment, and the Court of Appeals affirmed the trial court in all respects. Its motion for reconsideration having been denied, Zenith filed the present petition before the Supreme Court.

Facts

On January 25, 1983, Lawrence Fernandez insured his car for own damage under a private car policy issued by Zenith Insurance Corporation. On July 6, 1983, the car figured in an accident and suffered actual damages amounting to 3,640 pesos.

After allegedly being given a run-around by Zenith for two months, Fernandez filed a complaint for sum of money and damages. Aside from actual damages and interest, he prayed for 10,000 pesos in moral damages, 5,000 pesos in exemplary damages, 3,000 pesos in attorney's fees, and 3,000 pesos in litigation expenses. Zenith answered that it had offered to pay pursuant to the terms and conditions of the contract, which Fernandez rejected.

After trial, the trial court ordered Zenith to pay 3,640 pesos as actual damages plus interest at twice the prevailing interest rate, 20,000 pesos as moral damages, 20,000 pesos as exemplary damages, 5,000 pesos as attorney's fees, 3,000 pesos as litigation expenses, and costs. The Court of Appeals affirmed in all respects, and the Supreme Court took up Zenith's petition.

Issues

• Whether or not the Court of Appeals erred in awarding moral damages, exemplary damages, and attorney's fees in amounts greater than those prayed for in the complaint.
• Whether or not the actual damages should be 3,640 pesos rather than 1,927 pesos and 50 centavos, arrived at after deducting a franchise and depreciation on parts allegedly agreed upon in the insurance contract.

Applicable Provisions

Section 244 of the Insurance Code governs the award of damages for unreasonable delay in paying insurance claims:

Section 244. In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been unreasonably denied or withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attorney's fees and other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in section two hundred forty-two or in section two hundred forty-three, as the case may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie evidence of unreasonable delay in payment.

This provision supplies the specific damages for an unreasonable denial or withholding of an insurance claim, and it is the basis for the award of interest at twice the Monetary Board ceiling.

Article 2216 of the New Civil Code governs the assessment of moral damages:

Article 2216. No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or compensatory damages may be adjudicated, the assessment of which is left to the discretion of the court according to the circumstances of each case.

This provision explains why moral damages may be awarded without proof of pecuniary loss, though the Court still requires a showing of wanton or bad-faith breach in contract cases.

Article 2229 of the New Civil Code governs exemplary damages:

Article 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.

This provision frames exemplary damages as corrective rather than compensatory, which is why they require a wanton, oppressive, or malevolent act.

Ruling

On the first issue, the Court held that the Insurance Code limits the damages for unreasonable delay to attorney's fees, other expenses incurred by the insured, interest at twice the Monetary Board ceiling, and the amount of the claim. Moral and exemplary damages are governed by the Civil Code. The Court found that the two-month delay, while the basis for the Insurance Code damages, was not so wanton or malevolent as to justify 20,000 pesos in moral damages, especially since the actual damage was only 3,640 pesos and the parties simply could not agree on the amount. It reduced moral damages to the 10,000 pesos prayed for. It deleted the exemplary damages entirely, since Zenith had not acted in a wanton, oppressive, or malevolent manner. It sustained the 5,000 pesos in attorney's fees, considering the other petitions Fernandez had to defend.

On the second issue, the Court held that the 3,640 pesos in actual damages had been established before the trial court and affirmed by the appellate court. The claimed deductions of 250 pesos as deductible franchise and 274 pesos as depreciation on parts had no basis, because the policy did not mention any deductible franchise.

Doctrine

In a litigation to enforce an insurance policy, the court must first find whether payment was unreasonably denied or withheld. If it was, the insurer is liable for attorney's fees, other expenses incurred by the insured, interest at twice the Monetary Board ceiling on the claim, and the amount of the claim itself, as Section 244 of the Insurance Code provides. Moral damages for breach of contract require a showing that the breach was wanton and deliberately injurious, or that the insurer acted fraudulently or in bad faith. Exemplary damages require a wanton, oppressive, or malevolent act. A mere delay in settling a claim, where the parties could not agree on the amount, does not meet that standard.

Disposition

The Court modified the appealed decision, reducing moral damages to 10,000 pesos and deleting the exemplary damages, while sustaining the actual damages, attorney's fees, litigation expenses, and costs.

Remember This

Memorize this line: unreasonable delay in paying an insurance claim entitles the insured to attorney's fees, expenses, double-ceiling interest, and the claim itself, but moral and exemplary damages still require wanton or bad-faith conduct. Examiners use this case to test the interplay between Section 244 of the Insurance Code and the Civil Code rules on moral and exemplary damages.