If the whole foundation of the contract fails, the risk does not attach and the policy never becomes a contract between the parties. Representations of facts are the foundation of the contract and if the foundation does not exist, the superstructure does not arise.
Paramount Shirt Mfg. Co., a shirt factory, had a fire insurance policy (open policy) with Oriental Assurance Corporation for an amount not exceeding P61k. Pacific Banking was Paramount’s creditor for P800k. The goods covered by the insurance were held in trust by Paramount for the benefit of Pacific under a trust receipt. Paramount endorsed the policy to Pacific as mortgagor/trustor with Oriental’s consent. The endorsement stated: “loss if any under this policy is payable to the Pacific Banking Corporation.” The goods insured were then totally destroyed by fire. Pacific demanded indemnity from Oriental. The latter refused on ground that, according to its adjuster, Pacific was yet to file a formal claim with it and submit proof of loss. Pacific then informed the adjuster to verify the loss with the Bureau of Customs, and again demanded payment from Oriental which remained unheeded.
Pacific filed an action for a sum of money against Oriental.
As defense, Oriental raised the following: 1) lack of formal claim by Pacific; 2) premature filing of the action, since Pacific had not yet filed proof of loss which will be used in the determination of Oriental’s liability. During trial, it was found that Paramount (original insured) also failed to disclose other insurances taken over the same goods covered by the insurance with Oriental, allegedly in violation of Condition No. 3 (Other Insurance Clause) thereon.
The CFI ruled in favor of Pacific. The CA reversed. The SC affirmed.
(a) Whether the unrevealed co-insurances taken by Paramount are a violation of the policy Condition No. 3?
The fact of non-disclosure was undisputed, and Paramount’s failure to do so constitutes false declaration; a clear misrepresentation and a vital one because where the insured had been asked to reveal but did not, that was deception. Had Oriental known that of the co-insurers, it might have affected its decision to accept Paramount’s application.
Concrete evidence of fraud or false declaration by the insured was furnished by Pacific itself when the facts alleged in the policy under clauses “Co-Insurances Declared” and “Other Insurance Clause” are materially different from the actual number of co-insurances taken over the subject property. This fraudulent declaration avoided that whole insurance contract: “the whole foundation of the contract fails, the risk does not attach and the policy never becomes a contract between the parties.”
The status of the contract is VOID or INEXISTENT. Citing Tolentino, the SC said: Representations of facts are the foundation of the contract and if the foundation does not exist, the superstructure does not arise. Falsehood in such representations is not shown to vary or add to the contract, or to terminate a contract which has once been made, but to show that no contract has ever existed.
The policy itself expressly required the insured to give the insurer a notice of its co-insurers (Condition 3). The said notice shall be made in writing (Condition 20). Failure to give such notice nullifies the policy.
The Mortgage Clause provides: “Loss, if any, under this policy, shall be payable to the PACIFIC BANKING CORPORATION Manila mortgagee/trustor, as its interest may appear, it being hereby understood and agreed that this insurance as to the interest of the mortgagee/trustor only herein, shall not be invalidated by any act or neglect—except fraud or misrepresentation, or arson—of the mortgagor or owner/trustee of the property insured; provided, that in case the mortgagor or owner/trustee neglects or refuses to pay any premium, the mortgagee/trustor shall, on demand pay the same.”
Concealment of the co-insurances can easily be fraud, or in the very least, misrepresentation, which falls within the exception for which the mortgagee’s (Pacific) right to recover may be defeated. Furthermore, Pacific was merely claiming as indorsee of Paramount [i.e. Pacific merely steps into the shoes of Paramount], thus the former cannot be entitled to such proceeds.
The cause of action on the policy accrues when the loss occurs. But when the policy provides that no action shall be brought unless the claim is first presented extrajudicially in the manner provided in the policy, the cause of action will accrue from the time the insurer finally rejects the claim for payment.
Here, 24 days after the fire, Pacific merely wrote letters to Oriental to serve as a notice of loss, thereafter, the former did not furnish the latter whatever pertinent documents were necessary to prove and estimate its loss. Pacific even intended to shift the burden to Oriental by saying that necessary information may be obtained from the Bureau of Customs. Oriental and its adjuster also informed Pacific of the need for the notice yet the latter still failed to comply.
Compliance with condition No. 11 (filing of formal claim and proof of loss) is a requirement sine qua non to the right to maintain an action as prior thereto no violation of Pacific’s right can be attributable to Oriental. Before Oriental’s rejection, there is no need to file the suit.
Hence, it appearing that Paramount has violated or failed to perform the conditions under No. 3 (disclosure of co-insurers) and 11 (filing of formal claim and proof of loss) of the contract, and such violation or want of performance has not been waived by the Oriental, Paramount cannot recover, much less the Pacific.
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