G.R. No. and Date: G.R. No. L-8405, February 10, 1915

FACTS:
Francisco Galian insured his household effects under an open fire insurance policy with The State Assurance Company, Ltd., for P3,000 on January 25, 1912. A fire occurred on March 24, 1912. The following day, Galian submitted an itemized claim stating the total value of the goods in the house was P4,512. The loss was not total; some salvaged property was later sold at public auction for P120.40. Galian filed an action to recover the policy amount minus two-thirds of the auction proceeds, or P2,919.74.

The insurance company defended by alleging the policy was forfeited due to a fraudulent claim. It contended that (a) the insured falsely alleged a total loss, (b) not all listed articles were in the house during the fire, and (c) the values attributed to the articles were grossly exaggerated.

During trial, Galian testified he prepared the list from memory with his brother’s help. The defendant presented three witnesses who made rough estimates of the loss, ranging from P1,000 to P1,500, based on a superficial inspection. The trial court rejected the testimonies of both parties’ witnesses on value. Instead, it based its judgment on an unobjected-to offer of compromise for P1,500 made by the defendant to the plaintiff, rendering judgment for that amount. Both parties appealed.

ISSUE:
1. What is the correct valuation of the insured property for the purpose of determining the loss payable under the policy?
2. Is the “average clause” (or pro rata clause) in the insurance policy valid and applicable?

RULING:
The Supreme Court modified the trial court’s decision.

1. On the Valuation of Property: The Court found the trial court erred in disregarding the plaintiff’s testimony on value and in relying solely on the compromise offer. The plaintiff and his brother were competent to testify on the value of ordinary household effects, which are within the common knowledge of persons of ordinary education and refinement. The defendant’s expert testimony was rejected as superficial and unreliable, given that some items were completely destroyed or badly damaged. The Court accepted the plaintiff’s itemized list as substantially correct in both quantity and value, finding no satisfactory evidence of fraud. The total sound value of the property was established at P4,512.

2. On the Application of the Average Clause: The insurance policy contained a standard “average clause” (clause 17), which provides that if the property is insured for less than its actual value, the insured shall be considered his own insurer for the difference and shall bear a proportionate share of the loss. Applying this clause, the Court computed the recoverable amount as follows:
Insured Value: P3,000
Actual Sound Value: P4,512
Amount of Loss (P4,512 less salvage value of P120.40): P4,391.60
Recoverable Amount = (Insured Value / Sound Value) x Loss
* Recoverable Amount = (P3,000 / P4,512) x P4,391.60 = P2,919.74

DISPOSITIVE PORTION:
The judgment of the lower court was reversed. Judgment was rendered in favor of plaintiff Francisco Galian for the sum of P2,919.74, with legal interest from the date of the filing of the complaint. Costs were taxed against the defendant-appellant.

NOTE: The decision includes a concurring opinion by Justice Moreland, who, while applying the average clause as settled law, expressed strong criticism of its fairness, arguing it deceives the ordinary insured and creates an inequitable result where the insured effectively becomes an insurer for the company’s benefit. Justice Johnson noted a brief dissent without elaboration.