ORIENTAL ASSURANCE CORPORATION, PETITIONER, VS. COURT OF APPEALS AND PANAMA SAW MILL CO., INC., RESPONDENTS.

An action to recover on a marine insurance policy, issued by
petitioner in favor of private respondent, arising from the loss of a shipment
of apitong logs from Palawan
to Manila.

The facts relevant to the present review disclose that sometime
in January 1986, private respondent Panama Sawmill Co., Inc. (Panama) bought,
in Palawan, 1,208 pieces of apitong
logs, with a total volume of 2,000 cubic meters.  It hired Transpacific Towage, Inc., to
transport the logs by sea to Manila and insured it against loss for P1M with
petitioner Oriental Assurance Corporation (Oriental Assurance).  There is a claim by Panama, however, that the
insurance coverage should have been for P3M were it not for the fraudulent act
of one Benito Sy Yee Long to whom it had entrusted
the amount of P6,000.00 for the payment of the premium for a P3M policy.

Oriental Assurance issued Marine Insurance Policy No.
OAC-M-86/002, which stipulated, among others:

“Name of Insured:

Panama Sawmill, Inc.

Karuhatan, Valenzuela

Metro Manila

“Vessel:

MT. ‘Seminole’

Barge PCT 7,000 – 1,000
cubic meter apitong Logs

Barge Transpac
1,000 – 1,000 cubic meter apitong Logs

“Voyage or Period of Insurance:

From   :  Palawan
– ETD:  January 16, 1986

To        : 
Manila

“Subject matter Insured:

2,000 cubic meters apitongs
Logs

“Agreed Value

–

“Amount Insured Hereunder:

Pesos: 
One Million Only (P1,000,000.00)
Philippine Currency

“Premium   
–       P2,500.00                    rate –    0.250%

“Doc. stamps           187.50                     Invoice
No. 157862

“1 % P/tax                   25.00

Total                   P2,712.50

========

“CLAUSES, ENDORSEMENTS, SPECIAL
CONDITIONS and WARRANTIES

“Warranted that this Insurance is
against TOTAL LOSS ONLY.  Subject to the
following clauses:

– Civil Code Article 1250
Waiver clause

– Typhoon warranty clause

– Omnibus clause.”

The logs were loaded on two (2) barges:  (1) on barge PCT-7000, 610 pieces of logs
with a volume of 1,000 cubic
meters; and (2) on Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000 cubic meters.

On 28 January 1986,
the two barges were towed by one tugboat, the MT “Seminole.” But, as
fate would have it, during the voyage, rough seas and strong winds caused
damage to Barge TPAC-1000 resulting in the loss of 497 pieces of logs out of the 598 pieces loaded thereon.

Panama  demanded payment for the loss but Oriental
Assurance refused on the ground that its contracted liability was for
“TOTAL LOSS ONLY.” The rejection was upon the recommendation of the
Tan Gatue Adjustment Company.

Unable to convince Oriental Assurance to pay its claim.  Panama filed a Complaint for Damages against Ever Insurance Agency-
(allegedly, also liable),  Benito Sy Lee Yong and Oriental Assurance, before the Regional
Trial Court, Kalookan, Branch 123, docketed as Civil Case No. C-12601.

After trial on the merits, the RTC^[1]
rendered its Decision, with the following dispositive
portion:

“WHEREFORE, upon all the foregoing premises, judgment is hereby rendered:

“1.  Ordering the defendant Oriental Assurance
Corporation to pay plaintiff Panama Saw Mill Inc. the amount of P415,000.00 as
insurance indemnity with interest at the rate of 12% per annum computed from
the date of the filing of the complaint;

“2.  Ordering Panama
Saw Mill to pay defendant Ever Insurance Agency or Antonio Sy
Lee Yong, owner thereof, (Ever being a single proprietorship) for the amount of
P20,000.00 as attorney’s fee and
another amount of P20,000.00 as moral
damages.

“3.  Dismissing the complaint against defendant
Benito Sy Lee Yong.

“SO ORDERED.”

On appeal by both parties, respondent Appellate Court^[2]
affirmed the lower Court judgment in all respects except for the rate of
interest, which was reduced from twelve (12%) to six (6%) per annum.

Both Courts shared the view that the insurance contract should be
liberally construed in order to avoid a denial of substantial justice; and that
the logs loaded in the two barges should be treated separately such that the
loss sustained by the shipment in one of them may be considered as
“constructive total loss” and correspondingly compensable.

In this Petition for Review on
Certiorari, Oriental Assurance challenges the aforesaid
dispositions.  In its Comment,
Panama, in turn,
maintains that the constructive total loss should be based on a policy value of
P3M and not P1M, and prays that the award to Ever
Insurance Agency or Antonio Sy Lee Yong of damages and attorney’s fees be set
aside.

The question for determination
is whether or not Oriental Assurance can be held liable under its marine
insurance policy based on the theory of a divisible contract of insurance and,
consequently, a constructive total
loss.

Our considered opinion is that no liability attaches.

The terms of the contract constitute the measure of the insurer’s
liability and compliance therewith is a condition precedent to the insured’s
right to recovery from the insurer (Perla Compania de Seguros, Inc. v.
Court of Appeals, G.R. No. 78860, May 28,
1990, 185 SCRA 741).  Whether a contract
is entire or severable is a
question of intention to be determined by the language employed by the
parties.  The policy in question shows that the subject
matter insured was the entire
shipment of 2,000 cubic meters
of apitong logs. 
The fact that the logs were loaded on two different barges did not make the contract several and
divisible as to the items insured.  The
logs on the two barges were not separately valued or separately insured.  Only one premium was paid for the entire shipment, making for only one cause or
consideration.  The insurance contract
must, therefore, be considered indivisible.

More importantly, the insurer’s liability was for “total
loss only.” A total loss may be either actual or constructive (Sec. 129, Insurance Code).  An actual total loss is caused by:

“(a) A total destruction of the thing insured;

“(b) The
irretrievable loss of the thing by sinking, or by being broken up;

“(c) Any damage to
the thing which renders it valueless to the owner for the purpose for which he
held it; or

“(d) Any other event
which effectively deprives the owner of the possession, at the port of
destination, of the thing insured.” (Section 130, Insurance Code).

A constructive total loss is one which gives to a person insured
a right to abandon, under Section 139 of the Insurance Code.  This provision reads:

“SECTION 139.  A person
insured by a contract of marine insurance may abandon the thing insured, or any
particular portion thereof separately valued by the policy, otherwise
separately insured, and recover for a total loss thereof, when the cause of
the loss is a peril insured against.

“(a) If more than
three-fourths thereof in value is actually lost, or would have to be expended
to recover it from the peril;

“(b) If it is injured to such an extent as to reduce its value more than
three-fourths;

“x x x             x x x                 x x x“

(Emphasis ours)

Respondent Appellate Court treated the loss as a constructive
total loss, and for the purpose of computing the more than three-fourths value
of the logs actually lost, considered the cargo in one barge as separate from
the logs in the other.  Thus, it concluded
that the loss of 497 pieces of
logs from barge TPAC-1000, mathematically speaking, is more than three-fourths
(3/4) of the 598 pieces of logs loaded in that barge and may, therefore, be
considered as constructive total loss.

The basis thus used is, in our opinion, reversible error.  The requirements for the application of
Section 139 of the Insurance Code, quoted above, have not been met.  The logs involved, although placed in two
barges, were not separately valued by the policy, nor separately insured.  Resultantly, the logs lost in barge TPAC-1000
in relation to the total number of logs loaded on the same barge can not be
made the basis for determining constructive total loss.  The logs having been insured as one
inseparable unit, the correct basis for determining the existence of
constructive total loss is the totality of the shipment of logs.  Of the entirety of 1,208 pieces of logs, only
497 pieces thereof were lost or 41.45 % of the entire shipment.  Since the cost of those 497 pieces does not
exceed 75% of the value of all 1,208 pieces of logs, the shipment can not be
said to have sustained a
constructive total loss under Section 139(a) of the Insurance Code.

In the absence of either actual or constructive total loss, there
can be no recovery by the insured Panama
against the insurer, Oriental Assurance.

By reason of the
conclusions arrived at, Panama’s
asseverations in its Comment need
no longer be passed upon, besides the fact that no review, in proper form, has
been sought by it.

WHEREFORE, the judgment under review is hereby SET ASIDE
and petitioner, Oriental Assurance Corporation, is hereby ABSOLVED from
liability under its marine insurance policy
No. OAC-M-86/002.  No costs.

SO ORDERED.

Paras, Padilla, Sarmiento,
and Regalado,
JJ., concur.

^[1]
Presided over by Judge Mauro T. Allarde

^[2]
Special Eighth Division, composed of Justice Felipe B. Kalalo,
Acting Chairman and ponente; and Justices Luis
D. Victor and Abelardo M. Dayrit,
Members.