)[G.R. No. 112360. July 18, 2000.
]
RIZAL SURETY & INSURANCE COMPANY, petitioner, vs . COURT OF APPEALS and TRANSWORLD KNITTING MILLS,
INC., respondents.
Doubts shall be strictly construed against the insurer and liberally in favor of the insured.
-A four span building with an adjoining 2 storey building at the back was insured with petitioner Rizal surety. A
fire broke out damaging a portion of the four span bldg. as well as a 2 storey adjoining bldg. at the back.
Transworld claimed indemnification for the four span and also of the 2 storey building but rizal surety
contended that it was not part of the insurance agreement. The stipulation as to which part of the property was
insured was not clear from the insurance contract where it provided that all the insurance covers properties
contained and or stored in the areas occupied by Transworld forming part of the building within the compound.
The Court ruled that the annex building is included in the coverage. That doubts should be resolved in favor of
the person who did not create an ambiguity in the contract. This is because insurance contracts are contracts of
adhesion where the terms are drafted by the insurance company and the insured has no hand in preparing them
but only has to take such policy or not.
Facts:
(Petitioner insured properties of private respondent but contended that the annex bldg. does not form part of the
insurance coverage. Court ruled that insurance contracts should be interpreted liberally in favor of the insured as
mostly contracts are prepared by the insurer where the insured party has no hand in the drafting of such contracts)
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance Policy No. 45727 in
favor of Transworld Knitting Mills, Inc. (Transworld), initially for One Million (P1,000,000.00) Pesos and eventually
increased to One Million Five Hundred Thousand (P1,500,000.00) Pesos, covering the period from August 14, 1980
to March 13, 1981. Pertinent portions of subject policy on the buildings insured, and location thereof, read:
"'On stocks of finished and/or unfinished products, raw materials and supplies of every kind and description, … in
the premises occupied by them forming part of the buildings situate (sic) within own Compound at MAGDALO
STREET, BARRIO UGONG, PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601.' '
Said building of four-span lofty one storey in height with mezzanine portions is constructed of reinforced concrete
and hollow blocks and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie
factory, transistor-stereo assembly plant, oces, warehouse and caretaker's quarters.
The same pieces of property insured with the petitioner were also insured with New India Assurance Company,
Ltd., (New India). On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion of
its four-span building and partly gutting the left and right sections thereof. A two-storey building (behind said four-
span building) where fun and amusement machines and spare parts were stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance Company and New India Assurance Company
but to no avail.
Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the contents of the four-
span building, which was partly burned, and not the damage caused by the fire on the two-storey annex building.
CONTENTIONS:
It is petitioner's submission that the fire insurance policy litigated upon protected only the contents of the main
building (four-span), 12 and did not include those stored in the two-storey annex building. On the other hand, the
private respondent theorized that the so called "annex" was not an annex but was actually an integral part of the
four-span building 13 and therefore, the goods and items stored therein were covered by the same fire insurance
policy.
Issue: Whether said annex building form part of the insurance coverage.
Ruling/Ratio:
Resolution of the issues posited here hinges on the proper interpretation of the stipulation in subject fire insurance
policy regarding its coverage, which reads: ". . . contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic) within own Compound . . ."
Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit its coverage to what
were stored in the four-span building. As opined by the trial court of origin, two requirements must concur in order
that the said fun and amusement machines and spare parts would be deemed protected by the fire insurance
policy under scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas occupied by Transworld and second, said areas
must form part of the building described in the policy . . ." 14 In the case under consideration, both the trial court
and the Court of Appeals found that the so called "annex " was not an annex building but an integral and
inseparable part of the four-span building described in the policy and consequently, the machines and spare parts
stored therein were covered by the fire insurance in dispute.
Verily, the two-storey building involved, a permanent structure which adjoins and intercommunicates with the
"first right span of the lofty storey building," 17 formed part thereof, and meets the requisites for compensability
under the fire insurance policy sued upon.
So also, considering that the two-storey building aforementioned was already existing when subject fire insurance
policy contract was entered into on January 12, 1981, having been constructed sometime in 1978, 18 petitioner
should have specifically excluded the said two-storey building from the coverage of the fire insurance if minded to
exclude the same but it did not, and instead, went on to provide that such fire insurance policy covers the
products, raw materials and supplies stored within the premises of respondent Transworld which was an integral
part of the four-span building occupied by Transworld, knowing fully well the existence of such building adjoining
and intercommunicating with the right section of the four-span building.
Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has created a doubt
regarding the portions of the building insured thereby. Article 1377 of the New Civil Code provides: "Art. 1377. The
interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity."
Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal Surety Insurance
Company, whose lawyer or managers drafted the fire insurance policy contract under scrutiny. Citing the
aforecited provision of law in point, the Court in Landicho vs. Government Service Insurance System, 19 ruled:
"This is particularly true as regards insurance policies, in respect of which it is settled that the 'terms in an
insurance policy, which are ambiguous, equivocal, or uncertain . . . are to be construed strictly and most strongly
against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or
payment to the insured, especially where forfeiture is involved' (29 Am. Jur., 181), and the reason for this is that
the 'insured usually has no voice in the selection or arrangement of the words employed and that the language
of the contract is selected with great care and deliberation by experts and legal advisers employed by, and
acting exclusively in the interest of, the insurance company.' (44 C.J.S., p. 1174) ."
in Fieldmen's Insurance Company, Inc. vs. Vda. De Songco, 21 to wit: "'This rigid application of the rule on
ambiguities has become necessary in view of current business practices. The courts cannot ignore that nowadays
monopolies, cartels and concentration of capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared 'agreements' that the weaker party may not change
one whit, his participation in the 'agreement' being reduced to the alternative to 'take it or leave it' labelled since
Raymond Saleilles 'contracts by adherence' (contrats [sic] d'adhesion), in contrast to these entered into by parties
bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are
prime example) obviously call for greater strictness and vigilance on the part of courts of justice with a view to
protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwary (New
Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.) "'
