G.R. No. L-5717 - Scottish Union and National Insurance Company, London and Scottish Assurance Corporation Ltd., and St. Paul Fire and Marine Insurance Company vs. Higinio B. Macadaeg

Case Digest (G.R. No. L-5717)
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Facts:

Parties and context of the controversy

Petitioners Scottish Union & National Insurance Company, London and Scottish Assurance Corporation Ltd., and St. Paul Fire & Marine Insurance Company were foreign insurance companies.
Respondent Hon. Higinio B. Macadaeg was then the Judge of the Court of First Instance of Manila.
Yu Hun & Company was the policyholder-claimant that sued to recover on fire policies issued by petitioners.
Yu Hun & Company sued to recover on fire policies issued by petitioners.
A fire had occurred, but petitioners denied liability.
While the court case was pending decision, petitioners sought to withdraw from the Philippines.

Petitioners’ communications and posture of the Insurance Commissioner

Petitioners, through counsel, wrote a letter to the Insurance Commissioner and enclosed a copy of a Supreme Court decision.
Petitioners expressed the opinion that the decision approved a review of the Insurance Commissioner’s administrative acts.
Petitioners invited the Insurance Commissioner to “appraise” the Supreme Court’s interpretation of Rep. Act No. 447.
Petitioners submitted to the Insurance Commissioner questions already touched upon in the Supreme Court’s decision.
The Court described that the Insurance Commissioner could have declined to answer the inquiries on grounds that:

The matters were sub judice.
The Insurance Commissioner did not want to appear as taking sides in a judicial controversy between policyholders and insurers.
The core controversy involved execution of a court judgment, a subject peculiarly within the jurisdiction of courts.

The Court further described alternative lawful attitudes the Insurance Commissioner could have adopted:

Treating incidental pronouncements on Rep. Act No. 447’s workings as not binding because the Commissioner had not been a party to the litigation.

The Court found that, given the Commissioner’s position and the stated risk of prejudicing a policyholder by allowing a defendant insurer to withdraw its securities notwithstanding court proceedings, the Commissioner’s acts amounted to an attempt to seek judicial confirmation that his interpretation was “according to law.”

Petitioners’ pending litigation and their application to withdraw

Yu Hun & Company sued to recover under fire policies issued by petitioners.
During the pendency of the suit, the insurers applied for permission to withdraw.
The withdrawal was sought under sections 202-A to 202-E of the Insurance Act as amended by Rep. Act No. 447.
The Insurance Commissioner believed withdrawal could be granted if the petitioners caused another insurance company doing business in the Philippines to assume whatever liabilities the withdrawing petitioners had in the pending suits.

The legal basis invoked by the Insurance Commissioner

The Insurance Commissioner relied on Sec. 202-C of Rep. Act No. 447.
Sec. 202-C provided that:

Every foreign insurance company withdrawing shall, prior to such withdrawal, discharge liabilities to policyholders and creditors in the Philippines.
For policies insuring residents of the Philippines, it shall cause the primary liabilities under such policies to be re-insured and assumed by another insurance company authorized to transact business in the Philippines.
For policies subject to cancellation by the withdrawing company, it may cancel such policies in lieu of reinsurance and assumption of liabilities.

The Court described the dispute over the meaning of “liabilities,” and whether pending fire claims are covered by the reinsurance mechanism contemplated by Sec. 202-C.

The Supreme Court’s examination of pending liabilities versus contingent risks

The Court treated the situation of petitioners and Yu Hun & Company as governed by the first part of Sec. 202-C, which speaks of liabilities to policyholders and creditors.
The Court held that the second and third parts of Sec. 202-C pertain to policies where:

The risk insured against had not yet happened, and
No claim had yet arisen.

The Court reasoned that the third part on cancellation contemplated outstanding policies on which the risk had not yet occurred, because an insurer cannot cancel a policy once a claim had already accrued by the occurrence of the insured risk.

The Court’s characterization of “reinsurance” under Sec. 202-C and debtor-creditor consent

The Court discussed two senses of “reinsurance”:

Under the Insurance Act definition, reinsurance is insurance procured by an insurer against loss or liability by reason of the original insurance (Sec. 88).
In a broader sense, reinsurance can mean a contract between two insurers where the second assumes the risks of the first and becomes substituted to the contracts, releasing the original insurer upon the assent of the original policyholders.

The Court stated that Sec. 202-C’s second part contemplates the latter kind of reinsurance that frees the original insurer from liability.
The Court reasoned that, in such substitution, policyholder assent was essential.
The Court rejected a construction that would allow the foreign insurer to transfer accrued liabilities without consent of the policyholder.
The Court cited civil law principles that a debtor cannot substitute another person for the debtor without the consent of the creditor (Art. 1205 Civ. Code; Art. 1293 New Civ. Code).
The Court noted that constitutional impairment issues might be asserted if such substitution were allowed without consent.

Consequences of allowing withdrawals based on substituted “reinsurance” of accrued liabilities

The Court held that Rep. Act No. 447 should not be interpreted to allow foreign insurers to evade pending actions by withdrawing after securing the Commissioner’s sanction.
The Court stated that such a reading would give the Commissioner discretion to frustrate court orders and to liberate foreign insurers from local claims of policyholders.
The Court emphasized the Insurance Commissioner’s supervision is meant to protect policyholders.
The Court noted it previously refused pleas for preference of resident policyholders against foreign insurers in litigation (Constantino v. Asia Life).
The Court nonetheless stated that it would not permit foreign insurers to evade or frustrate local collection efforts in Philippine courts.

Legislative intent stated in the explanatory note

The Court relied on the explanatory note of House Bill No. 165, enacted into Rep. Act No. 447.
The explanatory note stated that Philippine policyholders would be greatly inconvenienced in executing a favorable judgment if claims were taken to court.
The note explained that execution might require intervention of the Philippine Government through diplom...(Subscriber-Only)

Issues:

Whether the Insurance Commissioner could permit foreign insurers to withdraw under sections 202-A to 202-E of the Insurance Act as amended by Rep. Act No. 447 when there were pending court suits on accrued liabilities

Whether withdrawal could be allowed on the theory that the insurer’s accrued liabilities in pending suits could be “reinsured” through another insurer assuming liabilities, without requiring that the foreign insurer discharge liabilities to the policyholder and creditors.

Proper construction of Sec. 202-D and Sec. 202-C of Rep. Act No. 447

Whether Sec. 202-D required the Commissioner to find that the withdrawing foreign insurer “has no outstanding liabilities to residents of the Philippines.”
Whether pending lawsuits on already occurred insured events constituted “outstanding liabilities” within the meaning of Sec. 202-D.
Whether Sec. 202-C permitted transfer or substitution of accrued liabilities through reinsurance without the consent of the polic...(Subscriber-Only)

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