G.R. No. 95641 September 22, 1994
SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants, vs. COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents-appellees.

FACTS

Petitioner Santos B. Areola purchased a one-year Personal Accident Insurance Policy (No. PA-20015) from respondent Prudential Guarantee and Assurance, Inc., effective from November 28, 1984 to November 28, 1985. On December 17, 1984, he paid the full premium amount of P1,609.65 and was issued a collector’s provisional receipt, which noted that an official receipt would follow within seven days. No official receipt was issued. On June 29, 1985, respondent’s branch manager, Teofilo M. Malapit, sent an endorsement cancelling the policy flat for “non-payment of premium,” effective from its inception date, and credited a return premium to the insured. Upon confrontation by Areola, the company’s agent acknowledged the cancellation was a mistake. Areola sent a demand letter on July 15, 1985. Respondent, through its Assistant Vice-President, investigated and confirmed by August 3, 1985, that the premium had indeed been received but was not remitted by Malapit. Respondent offered to reinstate and extend the policy to December 17, 1985, apologizing for the inconvenience. However, on August 6, 1985, before receiving the offer, Areola and his wife filed a complaint for breach of contract with damages. The trial court ruled in favor of Areola, awarding actual, moral, and exemplary damages. The Court of Appeals reversed, finding no bad faith in the cancellation. Petitioners appealed to the Supreme Court.

ISSUE

1. Did the erroneous cancellation of the insurance policy entitle petitioner-insured to payment of damages?
2. Did the subsequent reinstatement of the wrongfully cancelled policy by respondent insurance company absolve it from liability for damages?

RULING

The Supreme Court GRANTED the petition, REVERSED the Court of Appeals decision, and REINSTATED the trial court’s decision with modifications.
1. Yes, the erroneous cancellation entitled the petitioner to damages. The cancellation, based on the company’s own error and the fraudulent act of its branch manager in misappropriating the premium, constituted a breach of contract. The act of cancellation itself, done without valid cause, violated the insured’s legal right to the security and protection of the insurance contract for the entire period covered by the paid premium.
2. No, the subsequent reinstatement did not obliterate the liability for damages arising from the breach. The breach occurred at the moment of wrongful cancellation. While the reinstatement may have cured the lack of insurance coverage prospectively, it did not repair the invasion of the petitioner’s contractual right or the distress and anxiety caused by the cancellation. The respondent’s liability for damages remained.
The Court held that the respondent was liable for nominal damages. The award of moral and exemplary damages by the trial court was set aside, as the breach was not attended by fraud or bad faith but by negligence. Nominal damages of P30,000.00 were awarded to vindicate the petitioner’s violated right, with legal interest from the filing of the complaint until final payment.