SANTOS B. AREOLA AND LYDIA D. AREOLA, PETITIONERS-APPELLANTS, VS. COURT OF APPEALS AND PRUDENTIAL GUARANTEE AND ASSURANCE, INC., RESPONDENTS-APPELLEES.

On June 29, 1985, seven months after the issuance of petitioner
Santos Areola’s Personal Accident Insurance Policy No. PA-20015, respondent
insurance company unilaterally cancelled the same since company records
revealed that petitioner-insured failed to pay his premiums.

On August 3, 1985, respondent insurance company offered to
reinstate same policy it had previously cancelled and even proposed to extend
its lifetime to December 17, 1985, upon a finding that the cancellation was
erroneous and that the premiums were paid in full by petitioner-insured but
were not remitted by Teofilo M. Malapit, respondent insurance company’s branch
manager.

These, in brief, are the material facts that gave rise to the
action for damages due to breach of contract instituted by petitioner-insured
before Branch 40 RTC, Dagupan City against respondent insurance company.

There are two issues for resolution in this case:

(1) Did the erroneous act
of cancelling subject insurance policy entitle petitioner-insured to payment of
damages?

(2) Did the subsequent act
of reinstating the wrongfully cancelled insurance policy by respondent
insurance company, in an effort to rectify such error, obliterate whatever
liability for damages it may have to bear, thus absolving it therefrom?

From the factual findings of the trial court, it appears that petitioner-insured,
Santos Areola, a lawyer from Dagupan City, bought, through the Baguio City
branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as
Prudential), a personal accident insurance policy covering the one-year period
between noon of November 28, 1984 and noon of November 28, 1985.^[1]
Under the terms of the statement of account issued by respondent insurance
company, petitioner-insured was supposed to pay the total amount of P1,609.65
which included the premium of P1,470.00, documentary stamp of P110.25 and 2%
premium tax of P29.40.^[2] At
the lower left-hand corner of the statement of account, the following is
legibly printed:

“This Statement of Account must not be considered a
receipt. Official Receipt will be
issued to you upon payment of this account.

If payment is made to our representative, demand for a Provisional
Receipt and if our Official Receipts is (sic) not received by you within 7 days
please notify us.

If payment is made to our
office, demand for an OFFICIAL RECEIPT.”

On December 17, 1984, respondent insurance company issued
collector’s provisional receipt No. 9300 to petitioner-insured for the amount
of P1,609.65.^[3]
On the lower portion of the receipt the following is written in capital
letters:

“Note: This
collector’s provisional receipt will be confirmed by our official receipt. If our official receipt is not received by
you within 7 days, please notify
us.”^[4]

On June 29, 1985, respondent insurance company, through its
Baguio City manager, Teofilo M. Malapit, sent petitioner-insured Endorsement
No. BG-002/85 which “cancelled flat” Policy No. PA BG-20015 “for
non-payment of premium effective as of inception dated.”^[5]
The same endorsement also credited “a return premium of P1,609.65 plus
documentary stamps and premium tax” to the account of the insured.

Shocked by the cancellation of the policy, petitioner-insured confronted
Carlito Ang, agent of respondent insurance company, and demanded the issuance
of an official receipt. Ang told
petitioner-insured that the cancellation of the policy was a mistake but he
would personally see to its rectification. However, petitioner-insured failed to receive any official receipt from
Prudential.

Hence, on July 15, 1985, petitioner-insured sent respondent
insurance company a letter demanding that he be insured under the same terms
and conditions as those contained in Policy No. PA-BG-20015 commencing upon its
receipt of his letter, or that the current commercial rate of increase on the
payment he had made under provisional receipt No. 9300 be returned within five
days.^[6]
Areola also warned that should his demands be unsatisfied, he would sue for
damages.

On July 17, 1985, he received a letter from production manager
Malapit informing him that the “partial payment” of P1,000.00 he had
made on the policy had been “exhausted pursuant to the provisions of the
Short Period Rate Scale” printed at the back of the policy. Malapit warned Areola that should he fail to
pay the balance, the company’s liability would cease to operate.^[7]

In reply to the petitioner-insured’s letter of July 15, 1985,
respondent insurance company, through its Assistant Vice-President Mariano M.
Ampil III, wrote Areola a letter dated July 25, 1985 stating that the company
was verifying whether the payment had in fact been remitted to said company and
why no official receipt had been issued therefor. Ampil emphasized that the official receipt should have been
issued seven days from the issuance of the provisional receipt but because no
official receipt had been issued in Areola’s name, there was reason to believe
that no payment had been made. Apologizing for the inconvenience, Ampil expressed the company’s concern
by agreeing “to hold you cover (sic) under the terms of the referenced
policy until such time that this matter is cleared.”^[8]

On August 3, 1985, Ampil wrote Areola another letter confirming
that the amount of P1,609.65 covered by provisional receipt No. 9300 was in
fact received by Prudential on December 17, 1984. Hence, Ampil informed Areola that Prudential was “amenable
to extending PGA-PA-BG-20015 up to December 17, 1985 or one year from the date
when payment was received.” Apologizing again for the inconvenience caused
Areola, Ampil exhorted him to indicate his conformity to the proposal by
signing on the space provided for in the letter.^[9]

The letter was personally delivered by Carlito Ang to Areola on
August 13, 1985^[10]
but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had
filed a complaint for breach of contract with damages before the lower court.

In its Answer, respondent insurance company admitted that the
cancellation of petitioner-insured’s policy was due to the failure of Malapit
to turn over the premiums collected, for which reason no official receipt was
issued to him. However, it argued that,
by acknowledging the inconvenience caused on petitioner-insured and after
taking steps to rectify its omission by reinstating the cancelled policy prior
to the filing of the complaint, respondent insurance company had complied with
its obligation under the contract. Hence, it concluded that petitioner-insured no longer has a cause of
action against it. It insists that it
cannot be held liable for damages arising from breach of contract, having
demonstrated fully well its fulfillment of its obligation.

The trial court, on June 30, 1987, rendered a judgment in favor
of petitioner-insured, ordering respondent insurance company to pay the former
the following:

“a) P1,703.65 as actual damages;

b) P200,000.00 as moral
damages; and

c) P50,000.00 as exemplary
damages;

2. To pay to the plaintiff, as and for attorney’s fees the amount
of P10,000.00; and

3. To pay the costs.”

In its decision, the court below declared that respondent
insurance company acted in bad faith in unilaterally cancelling subject
insurance policy, having done so only after seven months from the time that it
had taken force and effect and despite the fact of full payment of premiums and
other charges on the issued insurance policy. Cancellation from the date of the policy’s inception, explained the
lower court, meant that the protection sought by petitioner-insured from the
risks insured against was never extended by respondent insurance company. Had the insured met an accident at the time,
the insurance company would certainly have disclaimed any liability because
technically, the petitioner could not have been considered insured. Consequently, the trial court held that
there was breach of contract on the part of respondent insurance company,
entitling petitioner-insured to an award of the damages prayed for.

This ruling was challenged on appeal by respondent insurance
company, denying bad faith on its part in unilaterally cancelling subject insurance
policy.

After consideration of the appeal, the appellate court issued a
reversal of the decision of the trial court, convinced that the latter had
erred in finding respondent insurance company in bad faith for the cancellation
of petitioner-insured’s policy. According to the Court of Appeals, respondent insurance company was not
motivated by negligence, malice or bad faith in cancelling subject policy. Rather, the cancellation of the insurance
policy was based on what the existing records showed, i.e., absence of an
official receipt issued to petitioner-insured confirming payment of
premiums. Bad faith, said the Court of
Appeals, is some motive of self-interest or ill-will; a furtive design or
ulterior purpose, proof of which must be established convincingly. On the contrary, it further observed, the
following acts indicate that respondent insurance company did not act
precipitately or willfully to inflict a wrong on petitioner-insured: (a) the investigation conducted by Alfredo
Bustamante to verify if petitioner-insured had indeed paid the premium; (b) the
letter of August 3, 1985 confirming that the premium had been paid on December
17, 1984; (c) the reinstatement of the policy with a proposal to extend its
effective period to December 17, 1985; and (d) respondent insurance company’s
apologies for the “inconvenience” caused upon
petitioner-insured. The appellate court
added that respondent insurance company even relieved Malapit, its Baguio City manager,
of his job by forcing him to resign.

Petitioner-insured moved for the reconsideration of the said
decision which the Court of Appeals denied. Hence, this petition for review on certiorari anchored on these
arguments:

“I

Respondent Court of Appeals is guilty of grave abuse of discretion
and committed a serious and reversible error in not holding Respondent
Prudential liable for the cancellation of the insurance contract which was
admittedly caused by the fraudulent acts and bad faith of its own officers.

II

Respondent Court of Appeals committed serious and reversible error
and abused its discretion in ruling that the defenses of good faith and honest
mistake can co-exist with the admitted fraudulent acts and evident bad faith.

III

Respondent Court of Appeals committed a reversible error in not
finding that even without considering the fraudulent acts of its own officer in
misappropriating the premium payment, the act itself in cancelling the
insurance policy was done with bad faith and/or gross negligence and wanton
attitude amounting to bad faith, because among others, it was Mr. Malapit – the
person who committed the fraud – who sent and signed the notice of
cancellation.

IV

Respondent Court of Appeals has decided a question of substance
contrary to law and applicable decision of the Supreme Court when it refused to
award damages in favor of herein Petitioner-Appellants.”

It is
petitioner-insured’s submission that the fraudulent act of Malapit, manager of
respondent insurance company’s branch office in Baguio, in misappropriating his
premium payments is the proximate cause of the cancellation of the insurance
policy. Petitioner-insured theorized
that Malapit’s act of signing and even sending the notice of cancellation
himself, notwithstanding his personal knowledge of petitioner-insured’s full
payment of premiums, further reinforces the allegation of bad faith. Such fraudulent act committed by Malapit,
argued petitioner-insured, is attributable to respondent insurance company, an
artificial corporate being which can act only through its officers or employees. Malapit’s actuation, concludes
petitioner-insured, is therefore not separate and distinct from that of
respondent-insurance company, contrary to the view held by the Court of
Appeals. It must, therefore, bear the consequences
of the erroneous cancellation of subject insurance policy caused by the
non-remittance by its own employee of the premiums paid. Subsequent reinstatement, according to
petitioner-insured, could not possibly absolve respondent insurance company
from liability, there being an obvious breach of contract. After all, reasoned out petitioner-insured,
damage had already been inflicted on him and no amount of rectification could
remedy the same.

Respondent insurance company, on the other hand, argues that
where reinstatement, the equitable relief sought by petitioner-insured was
granted at an opportune moment i.e. prior to the filing of the complaint,
petitioner-insured is left without a cause of action on which to predicate his
claim for damages. Reinstatement, it
further explained, effectively restored petitioner-insured to all his rights
under the policy. Hence, whatever cause
of action there might have been against it, no longer exists and the consequent
award of damages ordered by the lower court is unsustainable.

We uphold petitioner-insured’s
submission. Malapit’s fraudulent act of
misappropriating the premiums paid by petitioner-insured is beyond doubt
directly imputable to respondent insurance company. A corporation, such as respondent insurance company, acts solely
thru its employees. The latters’ acts
are considered as its own for which it can be held to account.^[11]
The facts are clear as to the relationship between private respondent insurance
company and Malapit. As admitted by
private respondent insurance company in its answer,^[12]
Malapit was the manager of its Baguio branch. It is beyond doubt that he represented its interests and acted in its
behalf. His act of receiving the
premiums collected is well within the province of his authority. Thus, his receipt of said premiums is
receipt by private respondent insurance company who, by provision of law,
particularly under Article 1910 of the Civil Code, is bound by the acts of its
agent.

Article 1910 thus reads:

“ART. 1910. The
principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the
principal is not bound except when he ratifies it expressly or tacitly.”

Malapit’s failure to remit the premiums he received cannot
constitute a defense for private respondent insurance company; no exoneration
from liability could result therefrom. The fact that private respondent insurance company was itself defrauded
due to the anomalies that took place in its Baguio branch office, such as the
non-accrual of said premiums to its account, does not free the same from its
obligation to petitioner Areola. As
held in Prudential Bank v. Court of Appeals^[13]
citing the ruling in McIntosh v. Dakota Trust Co.:^[14]

“A bank is liable
for wrongful acts of its officers done in the interests of the bank or in the
course of dealings of the officers in their representative capacity but not for
acts outside the scope of their authority. A bank holding out its officers and agent as worthy of confidence will
not be permitted to profit by the frauds they may thus be enabled to perpetrate
in the apparent scope of their employment; nor will it be permitted to shirk
its responsibility for such frauds, even though no benefit may accrue to the
bank therefrom. Accordingly, a banking
corporation is liable to innocent third persons where the representation is
made in the course of its business by an agent acting within the general scope
of his authority even though, in the particular case, the agent is secretly
abusing his authority and attempting to perpetrate a fraud upon his principal
or some other person, for his own ultimate benefit.”

Consequently, respondent insurance company is liable by way of
damages for the fraudulent acts committed by Malapit that gave occasion to the
erroneous cancellation of subject insurance policy. Its earlier act of reinstating the insurance policy can not
obliterate the injury inflicted on petitioner-insured. Respondent company should be reminded that a
contract of insurance creates reciprocal obligations for both insurer and
insured. Reciprocal obligations are
those which arise from the same cause and in which each party is both a debtor
and a creditor of the other, such that the obligation of one is dependent upon
the obligation of the other.^[15]

Under the circumstances of instant case, the relationship as
creditor and debtor between the parties arose from a common cause: i.e., by reason of their agreement to enter
into a contract of insurance under whose terms, respondent insurance company
promised to extend protection to petitioner-insured against the risk insured
for a consideration in the form of premiums to be paid by the latter. Under the law governing reciprocal obligations,
particularly the second paragraph of Article 1191,^[16]
the injured party, petitioner-insured in this case, is given a choice between
fulfillment or rescission of the obligation in case one of the obligors, such
as respondent insurance company, fails to comply with what is incumbent upon
him. However, said article entitles the
injured party to payment of damages, regardless of whether he demands
fulfillment or rescission of the obligation. Untenable then is respondent insurance company’s argument, namely, that
reinstatement being equivalent to fulfillment of its obligation, divests
petitioner-insured of a rightful claim for payment of damages. Such a claim finds no support in our laws on
obligations and contracts.

The nature of damages to be awarded, however, would be in the
form of nominal damages^[17]
contrary to that granted by the court below. Although the erroneous cancellation of the insurance policy constituted
a breach of contract, private respondent insurance company, within a reasonable
time took steps to rectify the wrong committed by reinstating the insurance
policy of petitioner. Moreover, no
actual or substantial damage or injury was inflicted on petitioner Areola at
the time the insurance policy was cancelled. Nominal damages are “recoverable where a legal right is technically
violated and must be vindicated against an invasion that has produced no actual
present loss of any kind, or where there has been a breach of contract and no
substantial injury or actual damages whatsoever have been or can be
shown.”^[18]

WHEREFORE, the petition for review on certiorari
is hereby GRANTED and the
decision of the Court of Appeals in CA-GR. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40, RTC Dagupan City, in Civil Case No.
D-7972 rendered on June 30, 1987 is hereby REINSTATED subject to the following modifications: (a) that nominal damages amounting to
P30,000.00 be awarded petitioner in lieu of the damages adjudicated by court a
quo; and (b) that in the satisfaction of the damages awarded therein,
respondent insurance company is ORDERED to
pay the legal rate of interest computed from date of filing of complaint until
final payment thereof.

SO ORDERED.

Feliciano, J., (Chairman), concur.

Melo and Vitug, JJ., in the result.

Bidin, J., on leave.

^[1]
Exh. “A.”

^[2]
Exh. “B.”

^[3]
Exh. “C.”

^[4] Exh.
“2.”

^[5]
Exh. “D.”

^[6]
Exh. “F.”

^[7]
Exh. “E.”

^[8]
Exh. “G.”

^[9]
Exh. “H.”

^[10]
Notation on upper right hand corner of
Exh. “H.”

^[11]
Radio Communications of the Philippines
v. Court of Appeals, et al., No. L-44748, August 29, 1986, 143 SCRA 657.

^[12]
Rollo, p. 35.

^[13]
G.R. No. 108957, June 14, 1993, 223
SCRA 350.

^[14]
52 ND 752, 204 NW 818, 40 ALR
1021.

^[15]
Tolentino, Arturo, Civil Code of the Philippines
Commentaries and Jurisprudence, Vol. IV, p. 175.

^[16]
ART. 1191. The power to rescind
obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.

The injured party may choose
between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

The court shall decree the
rescission claimed, unless there be just cause authorizing the fixing of a
period.

This is understood to be without
prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

^[17]
Article 2221 (Civil Code) – Nominal damages are adjudicated in order that a
right of the plaintiff, which has been violated or invaded by the defendant,
may be vindicated or recognized and not for the purpose of indemnifying the
plaintiff for any loss suffered by him.

^[18]
Algarra v. Sandejas, No. 8385, March 24, 1914, 27 Phil. 284.