G.R. No.

L-15895

November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiffappellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Jose A. Espiritu for appellant.
Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:
This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer
to recover from the defendant life insurance company the sum of pesos 6,000 paid by the deceased
for a life annuity. The trial court gave judgment for the defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the
Sun Life Assurance Company of Canada through its office in Manila for a life annuity. Two days later
he paid the sum of P6,000 to the manager of the company's Manila office and was given a receipt
reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia
solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina
Central de la Compaia.
The application was immediately forwarded to the head office of the company at Montreal, Canada.
On November 26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on
the same day the cable was received notice was sent by the Manila office of Herrer that the
application had been accepted, is a disputed point, which will be discussed later.) On December 4,
1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to
the Manila office of the company stating that Herrer desired to withdraw his application. The
following day the local office replied to Mr. Torres, stating that the policy had been issued, and called
attention to the notification of November 26, 1917. This letter was received by Mr. Torres on the
morning of December 21, 1917. Mr. Herrer died on December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of
acceptance of his application. To resolve this question, we propose to go directly to the evidence of
record.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the
trial testified that he prepared the letter introduced in evidence as Exhibit 3, of date November 26,
1917, and handed it to the local manager, Mr. E. E. White, for signature. The witness admitted on
cross-examination that after preparing the letter and giving it to he manager, he new nothing of what
became of it. The local manager, Mr. White, testified to having received the cablegram accepting the
application of Mr. Herrer from the home office on November 26, 1917. He said that on the same day
he signed a letter notifying Mr. Herrer of this acceptance. The witness further said that letters, after
being signed, were sent to the chief clerk and placed on the mailing desk for transmission. The
witness could not tell if the letter had every actually been placed in the mails. Mr. Tuason, who was
the chief clerk, on November 26, 1917, was not called as a witness. For the defense, attorney
Manuel Torres testified to having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr.
Herrer mentioned his application for a life annuity, and that he said that the only document relating to
the transaction in his possession was the provisional receipt. Rafael Enriquez, the administrator of
the estate, testified that he had gone through the effects of the deceased and had found no letter of
notification from the insurance company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the letter of November 26, 1917,
notifying Mr. Herrer that his application had been accepted, was prepared and signed in the local

office of the insurance company, was placed in the ordinary channels for transmission, but as far as
we know, was never actually mailed and thus was never received by the applicant.
Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should
be applied to the facts. In order to reach our legal goal, the obvious signposts along the way must be
noticed.
Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the
Code of Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title
VIII of Book III and Section III of Title III of Book III, which dealt with insurance contracts. In the Civil
Code there formerly existed and presumably still exist, Chapters II and IV, entitled insurance
contracts and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915, there was,
however, in force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and health
insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of Book III of the
code of Commerce. The law of insurance is consequently now found in the Insurance Act and the
Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be
followed in order that there may be a contract of insurance. On the other hand, the Civil Code, in
article 1802, not only describes a contact of life annuity markedly similar to the one we are
considering, but in two other articles, gives strong clues as to the proper disposition of the case. For
instance, article 16 of the Civil Code provides that "In matters which are governed by special laws,
any deficiency of the latter shall be supplied by the provisions of this Code." On the supposition,
therefore, which is incontestable, that the special law on the subject of insurance is deficient in
enunciating the principles governing acceptance, the subject-matter of the Civil code, if there be any,
would be controlling. In the Civil Code is found article 1262 providing that "Consent is shown by the
concurrence of offer and acceptance with respect to the thing and the consideration which are to
constitute the contract. An acceptance made by letter shall not bind the person making the offer
except from the time it came to his knowledge. The contract, in such case, is presumed to have been
entered into at the place where the offer was made." This latter article is in opposition to the
provisions of article 54 of the Code of Commerce.
If no mistake has been made in announcing the successive steps by which we reach a conclusion,
then the only duty remaining is for the court to apply the law as it is found. The legislature in its
wisdom having enacted a new law on insurance, and expressly repealed the provisions in the Code
of Commerce on the same subject, and having thus left a void in the commercial law, it would seem
logical to make use of the only pertinent provision of law found in the Civil code, closely related to
the chapter concerning life annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only
from the date it came to his knowledge, may not be the best expression of modern commercial
usage. Still it must be admitted that its enforcement avoids uncertainty and tends to security. Not
only this, but in order that the principle may not be taken too lightly, let it be noticed that it is identical
with the principles announced by a considerable number of respectable courts in the United States.
The courts who take this view have expressly held that an acceptance of an offer of insurance not
actually or constructively communicated to the proposer does not make a contract. Only the mailing
of acceptance, it has been said, completes the contract of insurance, as the locus poenitentiae is
ended when the acceptance has passed beyond the control of the party. (I Joyce, The Law of
Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be the second paragraph of article
1262 of the Civil Code providing that an acceptance made by letter shall not bind the person making
the offer except from the time it came to his knowledge. The pertinent fact is, that according to the
provisional receipt, three things had to be accomplished by the insurance company before there was
a contract: (1) There had to be a medical examination of the applicant; (2) there had to be approval
of the application by the head office of the company; and (3) this approval had in some way to be
communicated by the company to the applicant. The further admitted facts are that the head office in
Montreal did accept the application, did cable the Manila office to that effect, did actually issue the
policy and did, through its agent in Manila, actually write the letter of notification and place it in the
usual channels for transmission to the addressee. The fact as to the letter of notification thus fails to
concur with the essential elements of the general rule pertaining to the mailing and delivery of mail
matter as announced by the American courts, namely, when a letter or other mail matter is
addressed and mailed with postage prepaid there is a rebuttable presumption of fact that it was
received by the addressee as soon as it could have been transmitted to him in the ordinary course of

the mails. But if any one of these elemental facts fails to appear, it is fatal to the presumption. For
instance, a letter will not be presumed to have been received by the addressee unless it is shown
that it was deposited in the post-office, properly addressed and stamped. (See 22 C.J., 96, and 49 L.
R. A. [N. S.], pp. 458, et seq., notes.)
We hold that the contract for a life annuity in the case at bar was not perfected because it has not
been proved satisfactorily that the acceptance of the application ever came to the knowledge of the
applicant.
lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000
with legal interest from November 20, 1918, until paid, without special finding as to costs in either
instance. So ordered.
Mapa, C.J., Araullo, Avancea and Villamor, JJ., concur.
Johnson, J., dissents.

G.R. No. L-1669

August 31, 1950

PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,

vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-1670

August 31, 1950

AGUSTINA PERALTA, plaintiff-appellant,

vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
Mariano Lozada for appellant Constantino.
Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.
BENGZON, J.:
These two cases, appealed from the Court of First Instance of Manila, call for decision of the
question whether the beneficiary in a life insurance policy may recover the amount thereof although
the insured died after repeatedly failing to pay the stipulated premiums, such failure having been
caused by the last war in the Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia Life
Insurance Company (a foreign corporation incorporated under the laws of Delaware, U.S.A.), issued
on September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life of Arcadio
Constantino for a term of twenty years. The first premium covered the period up to September 26,
1942. The plaintiff Paz Lopez de Constantino was regularly appointed beneficiary. The policy
contained these stipulations, among others:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application here for a copy of which is attached hereto and is hereby made a part hereof
made a part hereof, and of the payment in advance during the lifetime and good health of the
Insured of the annual premium of One Hundred fifty-eight and 4/100 pesos Philippine
currency1 and of the payment of a like amount upon each twenty-seventh day of September
hereafter during the term of Twenty years or until the prior death of the Insured. (Emphasis
supplied.)
xxx

xxx

xxx

All premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of 31 days.)
After that first payment, no further premiums were paid. The insured died on September 22, 1944.
It is admitted that the defendant, being an American corporation , had to close its branch office in
Manila by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No.
78145 (Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of
the spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The annual premium
stipulated in the policy was regularly paid from August 1, 1938, up to and including September 30,
1941. Effective August 1, 1941, the mode of payment of premiums was changed from annual to
quarterly, so that quarterly premiums were paid, the last having been delivered on November 18,
1941, said payment covering the period up to January 31, 1942. No further payments were handed
to the insurer. Upon the Japanese occupation, the insured and the insurer became separated by the
lines of war, and it was impossible and illegal for them to deal with each other. Because the insured

had borrowed on the policy an mount of P234.00 in January, 1941, the cash surrender value of the
policy was sufficient to maintain the policy in force only up to September 7, 1942. Tomas Ruiz died
on February 16, 1945. The plaintiff Agustina Peralta is his beneficiary. Her demand for payment met
with defendant's refusal, grounded on non-payment of the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application herefor, a copy of which is attached hereto and is hereby made apart hereof, and
of the payment in advance during the life time and good health of the Insured of the annual
premium of Two hundred and 43/100 pesos Philippine currency and of the payment of a like
amount upon each first day of August hereafter during the term of Twenty years or until the
prior death of either of the Insured. (Emphasis supplied.)
xxx

xxx

xxx

All premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies
minus all sums due for premiums in arrears. They allege that non-payment of the premiums was
caused by the closing of defendant's offices in Manila during the Japanese occupation and the
impossible circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in
accordance with the contract of the parties and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction. Fortunately, this court has had
the benefit of extensive and exhaustive memoranda including those of amici curiae. The matter has
received careful consideration, inasmuch as it affects the interest of thousands of policy-holders and
the obligations of many insurance companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and
the Civil Code.2Act No. 2427 was largely copied from the Civil Code of California. 3 And this court has
heretofore announced its intention to supplement the statutory laws with general principles prevailing
on the subject in the United State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance are
contracts of indemnity upon the terms and conditions specified in the policy. The parties have a right
to impose such reasonable conditions at the time of the making of the contract as they may deem
wise and necessary. The rate of premium is measured by the character of the risk assumed. The
insurance company, for a comparatively small consideration, undertakes to guarantee the insured
against loss or damage, upon the terms and conditions agreed upon, and upon no other, and when
called upon to pay, in case of loss, the insurer, therefore, may justly insists upon a fulfillment of these
terms. If the insured cannot bring himself within the conditions of the policy, he is not entitled for the
loss. The terms of the policy constitute the measure of the insurer's liability, and in order to recover
the insured must show himself within those terms; and if it appears that the contract has been
terminated by a violation, on the part of the insured, of its conditions, then there can be no right of
recovery. The compliance of the insured with the terms of the contract is a condition precedent to the
right of recovery."
Recall of the above pronouncements is appropriate because the policies in question stipulate that
"all premium payments are due in advance and any unpunctuality in making any such payment shall
cause this policy to lapse." Wherefore, it would seem that pursuant to the express terms of the
policy, non-payment of premium produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in a policy, are binding
upon the parties and should be enforced by the courts, if the evidence brings the case
clearly within their meaning and intent. It tends to bring the law itself into disrepute when, by
astute and subtle distinctions, a plain case is attempted to be taken without the operation of

a clear, reasonable and material obligation of the contract. Mack vs.Rochester German Ins.
Co., 106 N.Y., 560, 564. (Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided because
the premium had not been paid within the time fixed, since by its express terms, non-payment of any
premium when due or within the thirty-day period of grace, ipso facto caused the policy to lapse. This
goes to show that although we take the view that insurance policies should be conserved 5 and
should not lightly be thrown out, still we do not hesitate to enforce the agreement of the parties.
Forfeitures of insurance policies are not favored, but courts cannot for that reason alone
refuse to enforce an insurance contract according to its meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the
consequence of war, it should be excused and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of
non-payment of premiums occasioned by war, the American cases may be divided into three groups,
according as they support the so-called Connecticut Rule, the New York Rule, or the United States
Rule.
The first holds the view that "there are two elements in the consideration for which the annual
premium is paid First, the mere protection for the year, and second, the privilege of renewing the
contract for each succeeding year by paying the premium for that year at the time agreed upon.
According to this view of the contract, the payment of premiums is a condition precedent, the nonperformance would be illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold that "war between
states in which the parties reside merely suspends the contracts of the life insurance, and that, upon
tender of all premiums due by the insured or his representatives after the war has terminated, the
contract revives and becomes fully operative."
The United States rule declares that the contract is not merely suspended, but is abrogated by
reason of non-payments is peculiarly of the essence of the contract. It additionally holds that it would
be unjust to allow the insurer to retain the reserve value of the policy, which is the excess of the
premiums paid over the actual risk carried during the years when the policy had been in force. This
rule was announced in the well-known Statham6 case which, in the opinion of Professor Vance, is
the correct rule.7
The appellants and some amici curiae contend that the New York rule should be applied here. The
appellee and other amici curiae contend that the United States doctrine is the orthodox view.
We have read and re-read the principal cases upholding the different theories. Besides the respect
and high regard we have always entertained for decisions of the Supreme Court of the United
States, we cannot resist the conviction that the reasons expounded in its decision of the Statham
case are logically and judicially sound. Like the instant case, the policy involved in the Statham
decision specifies that non-payment on time shall cause the policy to cease and determine.
Reasoning out that punctual payments were essential, the court said:
. . . it must be conceded that promptness of payment is essential in the business of life
insurance. All the calculations of the insurance company are based on the hypothesis of
prompt payments. They not only calculate on the receipt of the premiums when due, but on
compounding interest upon them. It is on this basis that they are enabled to offer assurance
at the favorable rates they do. Forfeiture for non-payment is an necessary means of
protecting themselves from embarrassment. Unless it were enforceable, the business would
be thrown into confusion. It is like the forfeiture of shares in mining enterprises, and all other
hazardous undertakings. There must be power to cut-off unprofitable members, or the
success of the whole scheme is endangered. The insured parties are associates in a great
scheme. This associated relation exists whether the company be a mutual one or not. Each
is interested in the engagements of all; for out of the co-existence of many risks arises the
law of average, which underlies the whole business. An essential feature of this scheme is
the mathematical calculations referred to, on which the premiums and amounts assured are
based. And these calculations, again, are based on the assumption of average mortality, and
of prompt payments and compound interest thereon. Delinquency cannot be tolerated nor

redeemed, except at the option of the company. This has always been the understanding
and the practice in this department of business. Some companies, it is true, accord a grace
of thirty days, or other fixed period, within which the premium in arrear may be paid, on
certain conditions of continued good health, etc. But this is a matter of stipulation, or of
discretion, on the part of the particular company. When no stipulation exists, it is the general
understanding that time is material, and that the forfeiture is absolute if the premium be not
paid. The extraordinary and even desperate efforts sometimes made, when an insured
person is in extremes to meet a premium coming due, demonstrates the common view of
this matter.
The case, therefore, is one in which time is material and of the essence and of the essence
of the contract. Non-payment at the day involves absolute forfeiture if such be the terms of
the contract, as is the case here. Courts cannot with safety vary the stipulation of the parties
by introducing equities for the relief of the insured against their own negligence.
In another part of the decision, the United States Supreme Court considers and rejects what is, in
effect, the New York theory in the following words and phrases:
The truth is, that the doctrine of the revival of contracts suspended during the war is one
based on considerations of equity and justice, and cannot be invoked to revive a contract
which it would be unjust or inequitable to revive.
In the case of Life insurance, besides the materiality of time in the performance of the
contract, another strong reason exists why the policy should not be revived. The parties do
not stand on equal ground in reference to such a revival. It would operate most unjustly
against the company. The business of insurance is founded on the law of average; that of life
insurance eminently so. The average rate of mortality is the basis on which it rests. By
spreading their risks over a large number of cases, the companies calculate on this average
with reasonable certainty and safety. Anything that interferes with it deranges the security of
the business. If every policy lapsed by reason of the war should be revived, and all the back
premiums should be paid, the companies would have the benefit of this average amount of
risk. But the good risks are never heard from; only the bar are sought to be revived, where
the person insured is either dead or dying. Those in health can get the new policies cheaper
than to pay arrearages on the old. To enforce a revival of the bad cases, whilst the company
necessarily lose the cases which are desirable, would be manifestly unjust. An insured
person, as before stated, does not stand isolated and alone. His case is connected with and
co-related to the cases of all others insured by the same company. The nature of the
business, as a whole, must be looked at to understand the general equities of the parties.
The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if,
as alleged, the consequences of war should not prejudice the insured, neither should they bear
down on the insurer.
Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the
insured to pay premiums was excused during the war owing to impossibility of performance, and that
consequently no unfavorable consequences should follow from such failure.
The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after
the first, is not anobligation of the insured, so much so that it is not a debt enforceable by action of
the insurer.
Under an Oklahoma decision, the annual premium due is not a debt. It is not an obligation
upon which the insurer can maintain an action against insured; nor is its settlement governed
by the strict rule controlling payments of debts. So, the court in a Kentucky case declares, in
the opinion, that it is not a debt. . . . The fact that it is payable annually or semi-annually, or at
any other stipulated time, does not of itself constitute a promise to pay, either express or
implied. In case of non-payment the policy is forfeited, except so far as the forfeiture may be
saved by agreement, by waiver, estoppel, or by statute. The payment of the premium is
entirely optional, while a debt may be enforced at law, and the fact that the premium is
agreed to be paid is without force, in the absence of an unqualified and absolute agreement
to pay a specified sum at some certain time. In the ordinary policy there is no promise to pay,
but it is optional with the insured whether he will continue the policy or forfeit it. (3 Couch,
Cyc. on Insurance, Sec. 623, p. 1996.)

It is well settled that a contract of insurance is sui generis. While the insured by an
observance of the conditions may hold the insurer to his contract, the latter has not the
power or right to compel the insured to maintain the contract relation with it longer than he
chooses. Whether the insured will continue it or not is optional with him. There being no
obligation to pay for the premium, they did not constitute a debt. (Noble vs.Southern States
M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis ours.)
It should be noted that the parties contracted not only for peacetime conditions but also for times of
war, because the policies contained provisions applicable expressly to wartime days. The logical
inference, therefore, is that the parties contemplated uninterrupted operation of the contract even if
armed conflict should ensue.
For the plaintiffs, it is again argued that in view of the enormous growth of insurance business since
the Statham decision, it could now be relaxed and even disregarded. It is stated "that the relaxation
of rules relating to insurance is in direct proportion to the growth of the business. If there were only
100 men, for example, insured by a Company or a mutual Association, the death of one will
distribute the insurance proceeds among the remaining 99 policy-holders. Because the loss which
each survivor will bear will be relatively great, death from certain agreed or specified causes may be
deemed not a compensable loss. But if the policy-holders of the Company or Association should be
1,000,000 individuals, it is clear that the death of one of them will not seriously prejudice each one of
the 999,999 surviving insured. The loss to be borne by each individual will be relatively small."
The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be
considered will not be the death of one but the death of ten thousand, since the proportion of 1 to
100 should be maintained. And certainly such losses for 10,000 deaths will not be "relatively small."
After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is such
a vital defense of insurance companies that since the very beginning, said Act no. 2427 expressly
preserved it, by providing that after the policy shall have been in force for two years, it shall become
incontestable (i.e. the insurer shall have no defense) except for fraud, non-payment of premiums,
and military or naval service in time of war (sec. 184 [b], Insurance Act). And when Congress
recently amended this section (Rep. Act No. 171), the defense of fraud was eliminated, while the
defense of nonpayment of premiums was preserved. Thus the fundamental character of the
undertaking to pay premiums and the high importance of the defense of non-payment thereof, was
specifically recognized.
In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is
in effect a variation of the Connecticut rule for the sake of equity. In this connection, it appears that
the first policy had no reserve value, and that the equitable values of the second had been practically
returned to the insured in the form of loan and advance for premium.
For all the foregoing, the lower court's decision absolving the defendant from all liability on the
policies in question, is hereby affirmed, without costs.
Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes, JJ., concur.

G.R. No. 112329

January 28, 2000

VIRGINIA A. PEREZ, petitioner,

vs.
COURT OF APPEALS and BF LIFEMAN INSURANCE CORPORATION, respondents.
YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts, must be assented to by both parties, either in person
or through their agents and so long as an application for insurance has not been either accepted or
rejected, it is merely a proposal or an offer to make a contract.
Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9, 1993 in
CA-G.R. CV 35529 entitled, "BF Lifeman Insurance Corporations; Plaintiff-Appellant versus Virginia
A. Perez. Defendant-Appellee," which declared Insurance Policy 056300 for P50,000.00 issued by
private respondent corporation in favor of the deceased Primitivo B. Perez, null and void and
rescinded, thereby reversing the decision rendered by the Regional Trial Court of Manila, Branch
XVI.
The facts of the case as summarized by respondent Court of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980 for
P20,000.00. Sometime in October 1987, an agent of the insurance corporation, Rodolfo Lalog,
visited Perez in Guinayangan, Quezon and convinced him to apply for additional insurance coverage
of P50,000.00, to avail of the ongoing promotional discount of P400.00 if the premium were paid
annually.
1wphi1.nt

On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional
insurance coverage of P50,000.00. On the same day, petitioner Virginia A. Perez, Primitivo's wife,
paid P2,075.00 to Lalog. The receipt issued by Lalog indicated the amount received was a
"deposit."1 Unfortunately, Lalog lost the application form accomplished by Perez and so on October
28, 1987, he asked the latter to fill up another application form. 2 On November 1, 1987, Perez was
made to undergo the required medical examination, which he passed. 3
Pursuant to the established procedure of the company, Lalog forwarded the application for additional
insurance of Perez, together with all its supporting papers, to the office of BF Lifeman Insurance
Corporation at Gumaca, Quezon which office was supposed to forward the papers to the Manila
office.
On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during
a storm. At the time of his death, his application papers for the additional insurance of P50,000.00
were still with the Gumaca office. Lalog testified that when he went to follow up the papers, he found
them still in the Gumaca office and so he personally brought the papers to the Manila office of BF
Lifeman Insurance Corporation. It was only on November 27, 1987 that said papers were received in
Manila.
Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation
approved the application and issued the corresponding policy for the P50,000.00 on December 2,
1987.4
Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the
deceased. She was paid P40,000.00 under the first insurance policy for P20,000.00 (double
indemnity in case of accident) but the insurance company refused to pay the claim under the
additional policy coverage of P50,000.00, the proceeds of which amount to P150,000.00 in view of a
triple indemnity rider on the insurance policy. In its letter' of January 29, 1988 to Virginia A. Perez,
the insurance company maintained that the insurance for P50,000.00 had not been perfected at the
time of the death of Primitivo Perez. Consequently, the insurance company refunded the amount of
P2,075.00 which Virginia Perez had paid.
On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint
against Virginia A. Perez seeking the rescission and declaration of nullity of the insurance contract in
question.

Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his
prestations under the contract and all the elements of a valid contract are present. She then filed a
counterclaim against private respondent for the collection of P150,000.00 as actual damages,
P100,000.00 as exemplary damages, P30,000.00 as attorney's fees and P10,000.00 as expenses
for litigation.
On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive portion
of which reads as follows:
WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of
defendant Virginia A. Perez, ordering the plaintiff BF Lifeman Insurance Corporation to pay to
her the face value of BF Lifeman Insurance Policy No. 056300, plus double indemnity under
the SARDI or in the total amount of P150,000.00 (any refund made and/or premium
deficiency to be deducted therefrom).
SO ORDERED.5
The trial court, in ruling for petitioner, held that the premium for the additional insurance of
P50,000.00 had been fully paid and even if the sum of P2,075.00 were to be considered merely as
partial payment, the same does not affect the validity of the policy. The trial court further stated that
the deceased had fully complied with the requirements of the insurance company. He paid, signed
the application form and passed the medical examination. He should not be made to suffer the
subsequent delay in the transmittal of his application form to private respondent's head office since
these were no longer within his control.
The Court of Appeals, however, reversed the decision of the trial court saying that the insurance
contract for P50,000.00 could not have been perfected since at the time that the policy was issued,
Primitivo was already dead.6Citing the provision in the application form signed by Primitivo which
states that:
. . . there shall be no contract of insurance unless and until a policy is issued on this
application and that the policy shall not take effect until the first premium has been paid and
the policy has been delivered to and accepted by me/us in person while I/we, am/are in good
health
the Court of Appeals held that the contract of insurance had to be assented to by both parties and so
long as the application for insurance has not been either accepted or rejected, it is merely an offer or
proposal to make a contract.
Petitioner's motion for reconsideration having been denied by respondent court, the instant petition
for certiorari was filed on the ground that there was a consummated contract of insurance between
the deceased and BF Lifeman Insurance Corporation and that the condition that the policy issued by
the corporation be delivered and received by the applicant in good health, is potestative, being
dependent upon the will of the insurance company, and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate
the other for loss on a specified subject by specified perils.7 A contract, on the other hand, is a
meeting of the minds between two persons whereby one binds himself, with respect to the other to
give something or to render some service.8 Under Article 1318 of the Civil Code, there is no contract
unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance absolute.

When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his
medical examination, his application was subject to the acceptance of private respondent BF
Lifeman Insurance Corporation. The perfection of the contract of insurance between the deceased
and respondent corporation was further conditioned upon compliance with the following requisites
stated in the application form:
there shall be no contract of insurance unless and until a policy is issued on this application
and that the said policy shall not take effect until the premium has been paid and the policy
delivered to and accepted by me/us in person while I/We, am/are in good health. 9
The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it
merely received the application form and all the requisite supporting papers of the applicant. Its
assent was given when it issues a corresponding policy to the applicant. Under the abovementioned
provision, it is only when the applicant pays the premium and receives and accepts the policy while
he is in good health that the contract of insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers
for additional insurance coverage were still with the branch office of respondent corporation in
Gumaca and it was only two days later, or on November 27, 1987, when Lalog personally delivered
the application papers to the head office in Manila. Consequently, there was absolutely no way the
acceptance of the application could have been communicated to the applicant for the latter to accept
inasmuch as the applicant at the time was already dead. In the case of Enriquez vs.Sun Life
Assurance Co. of Canada,10 recovery on the life insurance of the deceased was disallowed on the
ground that the contract for annuity was not perfected since it had not been proved satisfactorily that
the acceptance of the application ever reached the knowledge of the applicant.
Petitioner insists that the condition imposed by respondent corporation that a policy must have been
delivered to and accepted by the proposed insured in good health is potestative being dependent
upon the will of the corporation and is therefore null and void.
We do not agree.
A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is
considered void. Article 1182 of the New Civil Code states: When the fulfillment of the condition
depends upon the sole will the debtor, the conditional obligation shall be void.
In the case at bar, the following conditions were imposed by the respondent company for the
perfection of the contract of insurance:
(a) a policy must have been issued;
(b) the premiums paid; and
(c) the policy must have been delivered to and accepted by the applicant while he is in good
health.
The condition imposed by the corporation that the policy must have been delivered to and accepted
by the applicant while he is in good health can hardly be considered as a potestative or facultative
condition. On the contrary, the health of the applicant at the time of the delivery of the policy is
beyond the control or will of the insurance company. Rather, the condition is a suspensive one
whereby the acquisition of rights depends upon the happening of an event which constitutes the
condition. In this case, the suspensive condition was the policy must have been delivered and
accepted by the applicant while he is in good health. There was non-fulfillment of the condition,
however, inasmuch as the applicant was already dead at the time the policy was issued. Hence, the
non-fulfillment of the condition resulted in the non-perfection of the contract.
As stated above, a contract of insurance, like other contracts, must be assented to by both parties
either in person or by their agents. So long as an application for insurance has not been either
accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding
from the date of application, must have been a completed contract, one that leaves nothing to be
done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect.
There can be no contract of insurance unless the minds of the parties have met in agreement. 11

Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It
should be noted that an application is a mere offer which requires the overt act of the insurer for it to
ripen into a contract. Delay in acting on the application does not constitute acceptance even though
the insured has forwarded his first premium with his application. The corporation may not be
penalized for the delay in the processing of the application papers. Moreover, while it may have
taken some time for the application papers to reach the main office, in the case at bar, the same was
acted upon less than a week after it was received. The processing of applications by respondent
corporation normally takes two to three weeks, the longest being a month. 12 In this case, however,
the requisite medical examination was undergone by the deceased on November 1, 1987; the
application papers were forwarded to the head office on November 27, 1987; and the policy was
issued on December 2, 1987. Under these circumstances, we hold that the delay could not be
deemed unreasonable so as to constitute gross negligence.
A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy
056300 for P50,000.00 null and void and rescinded. The Court of Appeals corrected this in its
Resolution of the motion for reconsideration filed by petitioner, thus:
Anent the appearance of the word "rescinded" in the dispositive portion of the decision, to
which defendant-appellee attaches undue significance and makes capital of, it is clear that
the use of the words "and rescinded" is, as it is hereby declared, a superfluity. It is apparent
from the context of the decision that the insurance policy in question was found null and void,
and did not have to be "rescinded".13
True, rescission presupposes the existence of a valid contract. A contract which is null and void is no
contract at all and hence could not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is
AFFIRMED insofar as it declared Insurance Policy No. 056300 for P50,000.00 issued by BF Lifeman
Insurance Corporation of no force and effect and hence null and void. No costs.
1wphi1.nt

SO ORDERED.
Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., concur.

G.R. No. L-16138

April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
FIRST NATIONAL SURETY & ASSURANCE CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16139

April 29, 1961.

DIOSDADO C. TY, plaintiff-appellant,

vs.
ASSOCIATED INSURANCE & SURETY CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16140

April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
UNITED INSURANCE CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16141

April 29, 1961.

DIOSDADO C. TY. plaintiff-appellant,

vs.
PHILIPPINE SURETY & INSURANCE CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16142

April 29, 1961.

DIOSDADO C. TY, plaintiff-appellant,

vs.
RELIANCE SURETY & INSURANCE CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16143

April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
FAR EASTERN SURETY & INSURANCE CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16144

April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
CAPITAL INSURANCE & SURETY CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16145

April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
CAPITAL INSURANCE & SURETY CO., INC., defendant-appellee.

V. B. Gesunundo for plaintiff-appellant.

M. Perez Cardenas for defendant-appellee.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Gregorio S. Narvasa,
presiding, dismissing the actions filed in the above-entitled cases.
The facts found by the trial court, which are not disputed in this appeal, are as follows:
At different times within a period of two months prior to December 24, 1953, the plaintiff
herein Diosdado C. Ty, employed as operator mechanic foreman in the Broadway Cotton
Factory, in Grace Park, Caloocan, Rizal, at a monthly salary of P185.00, insured himself in
18 local insurance companies, among which being the eight above named defendants,
which issued to him personal accident policies, upon payment of the premium of P8.12 for
each policy. Plaintiff's beneficiary was his employer, Broadway Cotton Factory, which paid
the insurance premiums.
On December 24, 1953, a fire broke out which totally destroyed the Broadway Cotton
Factory. Fighting his way out of the factory, plaintiff was injured on the left hand by a heavy
object. He was brought to the Manila Central University hospital, and after receiving first aid
there, he went to the National Orthopedic Hospital for treatment of his injuries which were as
follows:
1. Fracture, simple, proximal phalanx index finger, left;
2. Fracture, compound, comminuted, proximal phalanx, middle finger, left and 2nd phalanx,
simple;
3. Fracture, compound, comminute phalanx, 4th finger, left;
4. Fracture, simple, middle phalanx, middle finger, left;
5. Lacerated wound, sutured, volar aspect, small finger, left;
6. Fracture, simple, chip, head, 1st phalanx, 5th digit, left. He underwent medical treatment in
the Orthopedic Hospital from December 26, 1953 to February 8, 1954. The above-described
physical injuries have caused temporary total disability of plaintiff's left hand. Plaintiff filed the
corresponding notice of accident and notice of claim with all of the abovenamed defendants
to recover indemnity under Part II of the policy, which is similarly worded in all of the policies,
and which reads pertinently as follows:
INDEMNITY FOR TOTAL OR PARTIAL DISABILITY
If the Insured sustains any Bodily Injury which is effected solely through violent, external,
visible and accidental means, and which shall not prove fatal but shall result, independently
of all other causes and within sixty (60) days from the occurrence thereof, in Total or Partial
Disability of the Insured, the Company shall pay, subject to the exceptions as provided for
hereinafter, the amount set opposite such injury:
PARTIAL DISABILITY
LOSS OF:
xxx

xxx

xxx

Either hand ............................................................................ P650.00

xxx

xxx

xxx

... The loss of a hand shall mean the loss by amputation through the bones of the wrist....

Defendants rejected plaintiff's claim for indemnity for the reason that there being no
severance of amputation of the left hand, the disability suffered by him was not covered by
his policy. Hence, plaintiff sued the defendants in the Municipal Court of this City, and from
the decision of said Court dismissing his complaints, plaintiff appealed to this Court.
(Decision of the Court of First Instance of Manila, pp. 223-226, Records).
In view of its finding, the court absolved the defendants from the complaints. Hence this appeal.
The main contention of appellant in these cases is that in order that he may recover on the
insurance policies issued him for the loss of his left hand, it is not necessary that there should be an
amputation thereof, but that it is sufficient if the injuries prevent him from performing his work or labor
necessary in the pursuance of his occupation or business. Authorities are cited to the effect that
"total disability" in relation to one's occupation means that the condition of the insurance is such that
common prudence requires him to desist from transacting his business or renders him incapable of
working. (46 C.J.S., 970). It is also argued that obscure words or stipulations should be interpreted
against the person who caused the obscurity, and the ones which caused the obscurity in the cases
at bar are the defendant insurance companies.
While we sympathize with the plaintiff or his employer, for whose benefit the policies were issued, we
can not go beyond the clear and express conditions of the insurance policies, all of which define
partial disability as loss of either hand by amputation through the bones of the wrist." There was no
such amputation in the case at bar. All that was found by the trial court, which is not disputed on
appeal, was that the physical injuries "caused temporary total disability of plaintiff's left hand." Note
that the disability of plaintiff's hand was merely temporary, having been caused by fracture of the
index, the middle and the fourth fingers of the left hand.
We might add that the agreement contained in the insurance policies is the law between the parties.
As the terms of the policies are clear, express and specific that only amputation of the left hand
should be considered as a loss thereof, an interpretation that would include the mere fracture or
other temporary disability not covered by the policies would certainly be unwarranted.
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the plaintiffappellant.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes and Dizon,
JJ., concur.

G.R. No. L-21574

June 30, 1966

SIMON DE LA CRUZ, plaintiff and appellee,

vs.
THE CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.
Achacoso, Nera and Ocampo for defendant and appellant.
Agustin M. Gramata for plaintiff and appellee.
BARRERA, J.:
This is an appeal by the Capital Insurance & Surety Company, Inc., from the decision of the Court of
First Instance of Pangasinan (in Civ Case No. U-265), ordering it to indemnify therein plaintiff Simon
de la Cruz for the death of the latter's son, to pay the burial expenses, and attorney's fees.
Eduardo de la Cruz, employed as a mucker in the Itogon-Suyoc Mines, Inc. in Baguio, was the
holder of an accident insurance policy (No. ITO-BFE-170) underwritten by the Capital Insurance &
Surety Co., Inc., for the period beginning November 13, 1956 to November 12, 1957. On January 1,
1957, in connection with the celebration of the New Year, the Itogon-Suyoc Mines, Inc. sponsored a
boxing contest for general entertainment wherein the insured Eduardo de la Cruz, a nonprofessional boxer participated. In the course of his bout with another person, likewise a nonprofessional, of the same height, weight, and size, Eduardo slipped and was hit by his opponent on
the left part of the back of the head, causing Eduardo to fall, with his head hitting the rope of the ring.
He was brought to the Baguio General Hospital the following day. The cause of death was reported
as hemorrhage, intracranial, left.
Simon de la Cruz, the father of the insured and who was named beneficiary under the policy,
thereupon filed a claim with the insurance company for payment of the indemnity under the
insurance policy. As the claim was denied, De la Cruz instituted the action in the Court of First
Instance of Pangasinan for specific performance. Defendant insurer set up the defense that the
death of the insured, caused by his participation in a boxing contest, was not accidental and,
therefore, not covered by insurance. After due hearing the court rendered the decision in favor of the
plaintiff which is the subject of the present appeal.
It is not disputed that during the ring fight with another non-professional boxer, Eduardo slipped,
which was unintentional. At this opportunity, his opponent landed on Eduardo's head a blow, which
sent the latter to the ropes. That must have caused the cranial injury that led to his death. Eduardo
was insured "against death or disability caused by accidental means". Appellant insurer now
contends that while the death of the insured was due to head injury, said injury was sustained
because of his voluntary participation in the contest. It is claimed that the participation in the boxing
contest was the "means" that produced the injury which, in turn, caused the death of the insured.
And, since his inclusion in the boxing card was voluntary on the part of the insured, he cannot be
considered to have met his death by "accidental means".
1wph1.t

The terms "accident" and "accidental", as used in insurance contracts, have not acquired any
technical meaning, and are construed by the courts in their ordinary and common acceptation. Thus,
the terms have been taken to mean that which happen by chance or fortuitously, without intention
and design, and which is unexpected, unusual, and unforeseen. An accident is an event that takes
place without one's foresight or expectation an event that proceeds from an unknown cause, or is
an unusual effect of a known cause and, therefore, not expected. 1
Appellant however, would like to make a distinction between "accident or accidental" and "accidental
means", which is the term used in the insurance policy involved here. It is argued that to be
considered within the protection of the policy, what is required to be accidental is the means that
caused or brought the death and not the death itself. It may be mentioned in this connection, that the
tendency of court decisions in the United States in recent years is to eliminate the fine distinction
between the terms "accidental" and "accidental means" and to consider them as legally
synonymous.2 But, even if we take appellant's theory, the death of the insured in the case at bar
would still be entitled to indemnification under the policy. The generally accepted rule is that, death
or injury does not result from accident or accidental means within the terms of an
accident-policy if it is the natural result of the insured's voluntary act, unaccompanied by anything
unforeseen except the death or injury.3 There is no accident when a deliberate act is performed
unless some additional, unexpected, independent, and unforeseen happening occurs which
produces or brings about the result of injury or death.4 In other words, where the death or injury is

not the natural or probable result of the insured's voluntary act, or if something unforeseen occurs in
the doing of the act which produces the injury, the resulting death is within the protection of policies
insuring against death or injury from accident.
In the present case, while the participation of the insured in the boxing contest is voluntary, the injury
was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw
him to the ropes of the ring. Without this unfortunate incident, that is, the unintentional slipping of the
deceased, perhaps he could not have received that blow in the head and would not have died. The
fact that boxing is attended with some risks of external injuries does not make any injuries received
in the course of the game not accidental. In boxing as in other equally physically rigorous sports,
such as basketball or baseball, death is not ordinarily anticipated to result. If, therefore, it ever does,
the injury or death can only be accidental or produced by some unforeseen happening or event as
what occurred in this case.
Furthermore, the policy involved herein specifically excluded from its coverage
(e) Death or disablement consequent upon the Insured engaging in football, hunting,
pigsticking, steeplechasing, polo-playing, racing of any kind, mountaineering, or
motorcycling.
Death or disablement resulting from engagement in boxing contests was not declared outside of the
protection of the insurance contract. Failure of the defendant insurance company to include death
resulting from a boxing match or other sports among the prohibitive risks leads inevitably to the
conclusion that it did not intend to limit or exempt itself from liability for such death. 5
Wherefore, in view of the foregoing considerations, the decision appealed from is hereby affirmed,
with costs against appellant. so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez,
JJ., concur.

G.R. No. 115278 May 23, 1995

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,
vs.
COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is
liable under the Money, Security, and Payroll Robbery policy it issued to the private respondent or
whether recovery thereunder is precluded under the general exceptions clause thereof. Both the trial
court and the Court of Appeals held that there should be recovery. The petitioner contends
otherwise.
This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by
private respondent Producers Bank of the Philippines (hereinafter Producers) against petitioner
Fortune Insurance and Surety Co., Inc. (hereinafter Fortune) of a complaint for recovery of the sum
of P725,000.00 under the policy issued by Fortune. The sum was allegedly lost during a robbery of
Producer's armored vehicle while it was in transit to transfer the money from its Pasay City Branch to
its head office in Makati. The case was docketed as Civil Case No. 1817 and assigned to Branch
146 thereof.
After joinder of issues, the parties asked the trial court to render judgment based on the following
stipulation of facts:
1. The plaintiff was insured by the defendants and an insurance
policy was issued, the duplicate original of which is hereto attached
as Exhibit "A";
2. An armored car of the plaintiff, while in the process of transferring
cash in the sum of P725,000.00 under the custody of its teller,
Maribeth Alampay, from its Pasay Branch to its Head Office at 8737
Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was
robbed of the said cash. The robbery took place while the armored
car was traveling along Taft Avenue in Pasay City;
3. The said armored car was driven by Benjamin Magalong Y de
Vera, escorted by Security Guard Saturnino Atiga Y Rosete. Driver
Magalong was assigned by PRC Management Systems with the
plaintiff by virtue of an Agreement executed on August 7, 1983, a
duplicate original copy of which is hereto attached as Exhibit "B";
4. The Security Guard Atiga was assigned by Unicorn Security
Services, Inc. with the plaintiff by virtue of a contract of Security
Service executed on October 25, 1982, a duplicate original copy of
which is hereto attached as Exhibit "C";
5. After an investigation conducted by the Pasay police authorities,
the driver Magalong and guard Atiga were charged, together with
Edelmer Bantigue Y Eulalio, Reynaldo Aquino and John Doe, with
violation of P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of
Pasay City. A copy of the complaint is hereto attached as Exhibit "D";
6. The Fiscal of Pasay City then filed an information charging the
aforesaid persons with the said crime before Branch 112 of the
Regional Trial Court of Pasay City. A copy of the said information is
hereto attached as Exhibit "E." The case is still being tried as of this
date;
7. Demands were made by the plaintiff upon the defendant to pay the
amount of the loss of P725,000.00, but the latter refused to pay as

the loss is excluded from the coverage of the insurance policy,

attached hereto as Exhibit "A," specifically under page 1 thereof,
"General Exceptions" Section (b), which is marked as Exhibit "A-1,"
and which reads as follows:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in report of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent or
criminal act of the insured or any officer, employee,
partner, director, trustee or authorized
representative of the Insured whether acting alone or
in conjunction with others. . . .
8. The plaintiff opposes the contention of the defendant and contends
that Atiga and Magalong are not its "officer, employee, . . . trustee or
authorized representative . . . at the time of the robbery. 1
On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion
thereof reads as follows:
WHEREFORE, premises considered, the Court finds for plaintiff and against
defendant, and
(a) orders defendant to pay plaintiff the net amount of
P540,000.00 as liability under Policy No. 0207 (as
mitigated by the P40,000.00 special clause deduction
and by the recovered sum of P145,000.00), with
interest thereon at the legal rate, until fully paid;
(b) orders defendant to pay plaintiff the sum of
P30,000.00 as and for attorney's fees; and
(c) orders defendant to pay costs of suit.
All other claims and counterclaims are accordingly dismissed forthwith.
SO ORDERED. 2
The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It
Said:
The Court is satisfied that plaintiff may not be said to have selected and engaged
Magalong and Atiga, their services as armored car driver and as security guard
having been merely offered by PRC Management and by Unicorn Security and which
latter firms assigned them to plaintiff. The wages and salaries of both Magalong and
Atiga are presumably paid by their respective firms, which alone wields the power to
dismiss them. Magalong and Atiga are assigned to plaintiff in fulfillment of
agreements to provide driving services and property protection as such in a
context which does not impress the Court as translating into plaintiff's power to
control the conduct of any assigned driver or security guard, beyond perhaps entitling
plaintiff to request are replacement for such driver guard. The finding is accordingly
compelled that neither Magalong nor Atiga were plaintiff's "employees" in avoidance
of defendant's liability under the policy, particularly the general exceptions therein
embodied.
Neither is the Court prepared to accept the proposition that driver Magalong and
guard Atiga were the "authorized representatives" of plaintiff. They were merely an
assigned armored car driver and security guard, respectively, for the June 29, 1987
money transfer from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly

 it was teller Maribeth Alampay who had "custody" of the P725,000.00 cash being
transferred along a specified money route, and hence plaintiff's then designated
"messenger" adverted to in the policy. 3
Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No.
32946. In its decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.
The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were
neither employees nor authorized representatives of Producers and ratiocinated as follows:
A policy or contract of insurance is to be construed liberally in favor of the insured
and strictly against the insurance company (New Life Enterprises vs. Court of
Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA
554). Contracts of insurance, like other contracts, are to be construed according to
the sense and meaning of the terms which the parties themselves have used. If such
terms are clear and unambiguous, they must be taken and understood in their plain,
ordinary and popular sense (New Life Enterprises Case, supra, p. 676; Sun
Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193).
The language used by defendant-appellant in the above quoted stipulation is plain,
ordinary and simple. No other interpretation is necessary. The word "employee" must
be taken to mean in the ordinary sense.
The Labor Code is a special law specifically dealing with/and specifically designed to
protect labor and therefore its definition as to employer-employee relationships
insofar as the application/enforcement of said Code is concerned must necessarily
be inapplicable to an insurance contract which defendant-appellant itself had
formulated. Had it intended to apply the Labor Code in defining what the word
"employee" refers to, it must/should have so stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees of plaintiffappellee bank because it has no power to hire or to dismiss said driver and security
guard under the contracts (Exhs. 8 and C) except only to ask for their replacements
from the contractors. 5
On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and
the Court of Appeals erred in holding it liable under the insurance policy because the loss falls within
the general exceptions clause considering that driver Magalong and security guard Atiga were
Producers' authorized representatives or employees in the transfer of the money and payroll from its
branch office in Pasay City to its head office in Makati.
According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from
one branch to another, they effectively and necessarily became its authorized representatives in the
care and custody of the money. Assuming that they could not be considered authorized
representatives, they were, nevertheless, employees of Producers. It asserts that the existence of an
employer-employee relationship "is determined by law and being such, it cannot be the subject of
agreement." Thus, if there was in reality an employer-employee relationship between Producers, on
the one hand, and Magalong and Atiga, on the other, the provisions in the contracts of Producers
with PRC Management System for Magalong and with Unicorn Security Services for Atiga which
state that Producers is not their employer and that it is absolved from any liability as an employer,
would not obliterate the relationship.
Fortune points out that an employer-employee relationship depends upon four standards: (1) the
manner of selection and engagement of the putative employee; (2) the mode of payment of wages;
(3) the presence or absence of a power to dismiss; and (4) the presence and absence of a power to
control the putative employee's conduct. Of the four, the right-of-control test has been held to be the
decisive factor. 6 It asserts that the power of control over Magalong and Atiga was vested in and
exercised by Producers. Fortune further insists that PRC Management System and Unicorn Security
Services are but "labor-only" contractors under Article 106 of the Labor Code which provides:
Art. 106. Contractor or subcontractor. There is "labor-only" contracting where the
person supplying workers to an employer does not have substantial capital or
investment in the form of tools, equipment, machineries, work premises, among

others, and the workers recruited and placed by such persons are performing
activities which are directly related to the principal business of such employer. In
such cases, the person or intermediary shall be considered merely as an agent of the
employer who shall be responsible to the workers in the same manner and extent as
if the latter were directly employed by him.
Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling
in International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is
equivalent to a finding that there is an employer-employee relationship between the owner of the project
and the employees of the "labor-only" contractor.
On the other hand, Producers contends that Magalong and Atiga were not its employees since it had
nothing to do with their selection and engagement, the payment of their wages, their dismissal, and
the control of their conduct. Producers argued that the rule in International Timber Corp. is not
applicable to all cases but only when it becomes necessary to prevent any violation or circumvention
of the Labor Code, a social legislation whose provisions may set aside contracts entered into by
parties in order to give protection to the working man.
Producers further asseverates that what should be applied is the rule in American President Lines
vs. Clave, 8 to wit:
In determining the existence of employer-employee relationship, the following
elements are generally considered, namely: (1) the selection and engagement of the
employee; (2) the payment of wages; (3) the power of dismissal; and (4) the power to
control the employee's conduct.
Since under Producers' contract with PRC Management Systems it is the latter which assigned
Magalong as the driver of Producers' armored car and was responsible for his faithful discharge of
his duties and responsibilities, and since Producers paid the monthly compensation of P1,400.00 per
driver to PRC Management Systems and not to Magalong, it is clear that Magalong was not
Producers' employee. As to Atiga, Producers relies on the provision of its contract with Unicorn
Security Services which provides that the guards of the latter "are in no sense employees of the
CLIENT."
There is merit in this petition.
It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance
policy which is a form of casualty insurance. Section 174 of the Insurance Code provides:
Sec. 174. Casualty insurance is insurance covering loss or liability arising from
accident or mishap, excluding certain types of loss which by law or custom are
considered as falling exclusively within the scope of insurance such as fire or marine.
It includes, but is not limited to, employer's liability insurance, public liability
insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft
insurance, personal accident and health insurance as written by non-life insurance
companies, and other substantially similar kinds of insurance. (emphases supplied)
Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance or to robbery insurance in particular. These
contracts are, therefore, governed by the general provisions applicable to all types of insurance.
Outside of these, the rights and obligations of the parties must be determined by the terms of their
contract, taking into consideration its purpose and always in accordance with the general principles
of insurance law. 9
It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud
the insurer the moral hazard is so great that insurers have found it necessary to fill up their
policies with countless restrictions, many designed to reduce this hazard. Seldom does the insurer
assume the risk of all losses due to the hazards insured against." 10 Persons frequently excluded
under such provisions are those in the insured's service and employment. 11 The purpose of the exception
is to guard against liability should the theft be committed by one having unrestricted access to the
property. 12 In such cases, the terms specifying the excluded classes are to be given their meaning as
understood in common speech. 13 The terms "service" and "employment" are generally associated with
the idea of selection, control, and compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved
against the insurer,15 or it should be construed liberally in favor of the insured and strictly against the
insurer. 16 Limitations of liability should be regarded with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It goes without saying
then that if the terms of the contract are clear and unambiguous, there is no room for construction and
such terms cannot be enlarged or diminished by judicial construction. 18
An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It
is settled that the terms of the policy constitute the measure of the insurer's liability. 20 In the absence of
statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit their
liability and to impose whatever conditions they deem best upon their obligations not inconsistent with
public policy.
With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as
employees or authorized representatives of Producers under paragraph (b) of the general
exceptions clause of the policy which, for easy reference, is again quoted:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or
authorized representative of the Insured whether acting alone or in
conjunction with others. . . . (emphases supplied)
There is marked disagreement between the parties on the correct meaning of the terms "employee"
and "authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from
protection and coverage losses arising from dishonest, fraudulent, or criminal acts of persons
granted or having unrestricted access to Producers' money or payroll. When it used then the term
"employee," it must have had in mind any person who qualifies as such as generally and universally
understood, or jurisprudentially established in the light of the four standards in the determination of
the employer-employee relationship, 21 or as statutorily declared even in a limited sense as in the case
of Article 106 of the Labor Code which considers the employees under a "labor-only" contract as
employees of the party employing them and not of the party who supplied them to the employer. 22
Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security
Services are "labor-only" contracts.
Producers, however, insists that by the express terms thereof, it is not the employer of
Magalong. Notwithstanding such express assumption of PRC Management Systems and
Unicorn Security Services that the drivers and the security guards each shall supply to
Producers are not the latter's employees, it may, in fact, be that it is because the contracts
are, indeed, "labor-only" contracts. Whether they are is, in the light of the criteria provided for
in Article 106 of the Labor Code, a question of fact. Since the parties opted to submit the
case for judgment on the basis of their stipulation of facts which are strictly limited to the
insurance policy, the contracts with PRC Management Systems and Unicorn Security
Services, the complaint for violation of P.D. No. 532, and the information therefor filed by the
City Fiscal of Pasay City, there is a paucity of evidence as to whether the contracts between
Producers and PRC Management Systems and Unicorn Security Services are "labor-only"
contracts.
But even granting for the sake of argument that these contracts were not "labor-only" contracts, and
PRC Management Systems and Unicorn Security Services were truly independent contractors, we
are satisfied that Magalong and Atiga were, in respect of the transfer of Producer's money from its
Pasay City branch to its head office in Makati, its "authorized representatives" who served as such
with its teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific
duty to safely transfer the money to its head office, with Alampay to be responsible for its custody in
transit; Magalong to drive the armored vehicle which would carry the money; and Atiga to provide the
needed security for the money, the vehicle, and his two other companions. In short, for these

particular tasks, the three acted as agents of Producers. A "representative" is defined as one who
represents or stands in the place of another; one who represents others or another in a special
capacity, as an agent, and is interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the
insurance policy.
WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court
of Makati in Civil Case No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No.
1817 is DISMISSED.
No pronouncement as to costs.
SO ORDERED.

[G.R. No. 154514. July 28, 2005]

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER

INSURANCE AND SURETY CORPORATION AND THE
STEAMSHIP
MUTUAL
UNDERWRITING
ASSOCIATION
(BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the Court of
Appeals in CA-G.R. SP No. 60144, affirming theDecision[2] dated May 3, 2000 of the
Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there
was no violation of the Insurance Code and the respondents do not need license as
insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity
coverage for its vessels from The Steamship Mutual Underwriting Association
(Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety
Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and
Acceptance.[3] Pioneer also issued receipts evidencing payments for the coverage.
When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew
the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of
money to recover the latters unpaid balance. White Gold on the other hand, filed a
complaint before the Insurance Commission claiming that Steamship Mutual violated
Sections 186[4] and 187[5] of the Insurance Code, while Pioneer violated Sections 299,
[6]
300[7] and 301[8] in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need
for Steamship Mutual to secure a license because it was not engaged in the insurance
business. It explained that Steamship Mutual was a Protection and Indemnity Club (P &
I Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a
broker for Steamship Mutual because Steamship Mutual was not engaged in the
insurance business. Moreover, Pioneer was already licensed, hence, a separate license
solely as agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its
decision, the appellate court distinguished between P & I Clubs vis--vis conventional
insurance. The appellate court also held that Pioneer merely acted as a collection agent
of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the
appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT
STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE
GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS

AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A

LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT
OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN
INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER
NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN
AGENT/BROKER OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF
RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND
DIRECTORS OF RESPONDENT PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club,
engaged in the insurance business in the Philippines? (2) Does Pioneer need a license
as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it
does not have a license to do business in the Philippines although Pioneer is its
resident agent. This relationship is reflected in the certifications issued by the Insurance
Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance
business. To buttress its assertion, it cites the definition of a P & I Club in Hyopsung
Maritime Co., Ltd. v. Court of Appeals [10] as an association composed of shipowners in
general who band together for the specific purpose of providing insurance cover on a
mutual basis against liabilities incidental to shipowning that the members incur in favor
of third parties. It stresses that as a P & I Club, Steamship Mutuals primary purpose is
to solicit and provide protection and indemnity coverage and for this purpose, it has
engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not
engaged in the insurance business in the Philippines. It is merely an association of
vessel owners who have come together to provide mutual protection against liabilities
incidental to shipowning.[11]Respondents aver Hyopsung is inapplicable in this case
because the issue in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an
insurance business or transacting an insurance business. These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a

vocation and not as merely incidental to any other legitimate business or
activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the
meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is derived from the making
of insurance contracts, agreements or transactions, or that no separate or direct
consideration is received therefor, shall not preclude the existence of an insurance
business.[12]
The test to determine if a contract is an insurance contract or not, depends on the
nature of the promise, the act required to be performed, and the exact nature of the
agreement in the light of the occurrence, contingency, or circumstances under which the
performance becomes requisite. It is not by what it is called. [13]
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.[14]
In particular, a marine insurance undertakes to indemnify the assured against
marine losses, such as the losses incident to a marine adventure. [15] Section 99[16] of the
Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the
members are both the insurer and insured. In it, the members all contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses and
liabilities are paid, and where the profits are divided among themselves, in proportion to
their interest.[17] Additionally, mutual insurance associations, or clubs, provide three
types of coverage, namely, protection and indemnity, war risks, and defense costs. [18]
A P & I Club is a form of insurance against third party liability, where the third party
is anyone other than the P & I Club and the members. [19] By definition then, Steamship
Mutual as a P & I Club is a mutual insurance association engaged in the marine
insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without
the requisite certificate of authority mandated by Section 187 [20] of the Insurance Code.
It maintains a resident agent in the Philippines to solicit insurance and to collect
payments in its behalf. We note that Steamship Mutual even renewed its P & I Club
cover until it was cancelled due to non-payment of the calls. Thus, to continue doing
business here, Steamship Mutual or through its agent Pioneer, must secure a license
from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is
necessary. Thus, no insurer or insurance company is allowed to engage in the
insurance business without a license or a certificate of authority from the Insurance
Commission.[21]

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of
registration[22] issued by the Insurance Commission. It has been licensed to do or
transact insurance business by virtue of the certificate of authority [23] issued by the same
agency. However, a Certification from the Commission states that Pioneer does not
have a separate license to be an agent/broker of Steamship Mutual. [24]
Although Pioneer is already licensed as an insurance company, it needs a separate
license to act as insurance agent for Steamship Mutual. Section 299 of the Insurance
Code clearly states:

SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation
or procurement of applications for insurance, or receive for services in obtaining
insurance, any commission or other compensation from any insurance company doing
business in the Philippines or any agent thereof, without first procuring a license so to
act from the Commissioner, which must be renewed annually on the first day of
January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority and removal
of its directors and officers. Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30,
2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance
Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual
Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety
Corporation are ORDERED to obtain licenses and to secure proper authorizations to do
business as insurer and insurance agent, respectively. The petitioners prayer for the
revocation of Pioneers Certificate of Authority and removal of its directors and officers,
is DENIED. Costs against respondents.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

BLUE CROSS HEALTH CARE, G.R. No. 169737

INC.,
Petitioner, Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
NEOMI* and DANILO OLIVARES,
Respondents. Promulgated:
February 12, 2008
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
CORONA, J.:

This is a petition for review on certiorari[1] of a decision[2] and resolution[3] of the

Court of Appeals (CA) dated July 29, 2005 and September 21, 2005, respectively,
in CA-G.R. SP No. 84163 which affirmed the decision of the Regional Trial Court
(RTC), Makati City, Branch 61 dated February 2, 2004 in Civil Case No. 03-1153,
[4]

which in turn reversed the decision of the Metropolitan Trial Court (MeTC),

Makati City, Branch 66 dated August 5, 2003 in Civil Case No. 80867.[5]
Respondent Neomi T. Olivares applied for a health care program with petitioner
Blue Cross Health Care, Inc., a health maintenance firm. For the period October
16, 2002 to October 15, 2003,[6] she paid the amount of P11,117. For the same
period, she also availed of the additional service of limitless consultations for an
additional amount of P1,000. She paid these amounts in full on October 17, 2002.
The application was approved on October 22, 2002. In the health care agreement,
ailments due to pre-existing conditions were excluded from the coverage.[7]
On November 30, 2002, or barely 38 days from the effectivity of her health
insurance, respondent Neomi suffered a stroke and was admitted at the Medical
City which was one of the hospitals accredited by petitioner. During her

confinement, she underwent several laboratory tests. On December 2, 2002, her

attending physician, Dr. Edmundo Saniel,[8] informed her that she could be
discharged from the hospital. She incurred hospital expenses amounting
to P34,217.20. Consequently, she requested from the representative of petitioner at
Medical City a letter of authorization in order to settle her medical bills. But
petitioner refused to issue the letter and suspended payment pending the
submission of a certification from her attending physician that the stroke she
suffered was not caused by a pre-existing condition.[9]
She was discharged from the hospital on December 3, 2002. On December
5, 2002, she demanded that petitioner pay her medical bill. When petitioner still
refused, she and her husband, respondent Danilo Olivares, were constrained to
settle the bill.[10]They thereafter filed a complaint for collection of sum of money
against petitioner in the MeTC on January 8, 2003. [11] In its answer dated January
24, 2003, petitioner maintained that it had not yet denied respondents' claim as it
was still awaiting Dr. Saniel's report.
In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:
This is in response to your letter dated February 13, 2003. [Respondent]
Neomi T. Olivares called by phone on January 29, 2003. She stated that
she is invoking patient-physician confidentiality. That she no longer has
any relationship with [petitioner]. And that I should not release any
medical information concerning her neurologic status to anyone without
her approval. Hence, the same day I instructed my secretary to inform
your office thru Ms. Bernie regarding [respondent's] wishes.
xxx xxx xxx[12]

In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of
cause of action. It held:
xxx the best person to determine whether or not the stroke she suffered
was not caused by pre-existing conditions is her attending physician Dr.
Saniel who treated her and conducted the test during her confinement.
xxx But since the evidence on record reveals that it was no less than
[respondent Neomi] herself who prevented her attending physician from
issuing the required certification, petitioner cannot be faulted from
suspending payment of her claim, for until and unless it can be shown
from the findings made by her attending physician that the stroke she

suffered was not due to pre-existing conditions could she demand

entitlement to the benefits of her policy.[13]

On appeal, the RTC, in a decision dated February 2, 2004, reversed the

ruling of the MeTC and ordered petitioner to pay respondents the following
amounts: (1) P34,217.20 representing the medical bill in Medical City and P1,000
as reimbursement for consultation fees, with legal interest from the filing of the
complaint until fully paid; (2) P20,000 as moral damages; (3) P20,000 as
exemplary damages; (4) P20,000 as attorney's fees and (5) costs of suit.[14] The
RTC held that it was the burden of petitioner to prove that the stroke of respondent
Neomi was excluded from the coverage of the health care program for being
caused by a pre-existing condition. It was not able to discharge that burden.[15]
Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of
Court in the CA. In a decision promulgated on July 29, 2005, the CA affirmed the
decision of the RTC. It denied reconsideration in a resolution promulgated on
September 21, 2005. Hence this petition which raises the following issues: (1)
whether petitioner was able to prove that respondent Neomi's stroke was caused by
a pre-existing condition and therefore was excluded from the coverage of the
health care agreement and (2) whether it was liable for moral and exemplary
damages and attorney's fees.
The health care agreement defined a pre-existing condition as:
x x x a disability which existed before the commencement date of
membership whose natural history can be clinically determined, whether
or not the Member was aware of such illness or condition. Such
conditions also include disabilities existing prior to reinstatement date in
the case of lapse of an Agreement. Notwithstanding, the following
disabilities but not to the exclusion of others are considered pre-existing
conditions including their complications when occurring during the first
year of a Members coverage:
I.
II.
III.
IV.
V.
VI.
VII.

Tumor of Internal Organs

Hemorrhoids/Anal Fistula
Diseased tonsils and sinus conditions requiring surgery
Cataract/Glaucoma
Pathological Abnormalities of nasal septum or turbinates
Goiter and other thyroid disorders
Hernia/Benign prostatic hypertrophy

VIII.
IX.
X.
XI.
XII.
XIII.
XIV.
XV.
XVI.
XVII.
XVIII.
XIX.
XX.

Endometriosis
Asthma/Chronic Obstructive Lung disease
Epilepsy
Scholiosis/Herniated disc and other Spinal column
abnormalities
Tuberculosis
Cholecysitis
Gastric or Duodenal ulcer
Hallux valgus
Hypertension and other Cardiovascular diseases
Calculi
Tumors of skin, muscular tissue, bone or any form of
blood dyscracias
Diabetes Mellitus
Collagen/Auto-Immune disease

After the Member has been continuously covered for 12 months, this
pre-existing provision shall no longer be applicable except for illnesses
specifically excluded by an endorsement and made part of this
Agreement.[16]

Under this provision, disabilities which existed before the commencement of

the agreement are excluded from its coverage if they become manifest within one
year from its effectivity. Stated otherwise, petitioner is not liable for pre-existing
conditions if they occur within one year from the time the agreement takes effect.
Petitioner argues that respondents prevented Dr. Saniel from submitting his
report regarding the medical condition of Neomi. Hence, it contends that the
presumption that evidence willfully suppressed would be adverse if produced
should apply in its favor.[17]
Respondents counter that the burden was on petitioner to prove that Neomi's
stroke was excluded from the coverage of their agreement because it was due to a
pre-existing condition. It failed to prove this.[18]
We agree with respondents.
In Philamcare Health Systems, Inc. v. CA,[19] we ruled that a health care
agreement is in the nature of a non-life insurance. [20]It is an established rule in
insurance contracts that when their terms contain limitations on liability, they
should be construed strictly against the insurer. These are contracts of adhesion the

terms of which must be interpreted and enforced stringently against the insurer
which prepared the contract. This doctrine is equally applicable to health care
agreements.[21]
Petitioner never presented any evidence to prove that respondent Neomi's stroke
was due to a pre-existing condition. It merely speculated that Dr. Saniel's report
would be adverse to Neomi, based on her invocation of the doctor-patient
privilege. This was a disputable presumption at best.
Section 3 (e), Rule 131 of the Rules of Court states:
Sec. 3. Disputable presumptions. The following presumptions are
satisfactory if uncontradicted, but may be contradicted and overcome by
other evidence:
xxx xxx xxx
(e) That evidence willfully suppressed would be adverse if produced.

Suffice it to say that this presumption does not apply if (a) the evidence is at the
disposal of both parties; (b) the suppression was not willful; (c) it is merely
corroborative or cumulative and (d) the suppression is an exercise of a privilege.
[22]

Here, respondents' refusal to present or allow the presentation of Dr. Saniel's

report was justified. It was privileged communication between physician and

patient.
Furthermore, as already stated, limitations of liability on the part of the insurer or
health care provider must be construed in such a way as to preclude it from
evading its obligations. Accordingly, they should be scrutinized by the courts
with extreme jealousy[23] andcare and with a jaundiced eye.[24] Since petitioner
had the burden of proving exception to liability, it should have made its own
assessment of whether respondent Neomi had a pre-existing condition when it
failed to obtain the attending physician's report. It could not just passively wait for
Dr. Saniel's report to bail it out. The mere reliance on a disputable presumption
does not meet the strict standard required under our jurisprudence.

Next, petitioner argues that it should not be held liable for moral and
exemplary damages, and attorney's fees since it did not act in bad faith in denying
respondent Neomi's claim. It insists that it waited in good faith for Dr. Saniel's
report and that, based on general medical findings, it had reasonable ground to
believe that her stroke was due to a pre-existing condition, considering it occurred
only 38 days after the coverage took effect.[25]
We disagree.
The RTC and CA found that there was a factual basis for the damages
adjudged against petitioner. They found that it was guilty of bad faith in denying a
claim based merely on its own perception that there was a pre-existing condition:
[Respondents] have sufficiently shown that [they] were forced to engage
in a dispute with [petitioner] over a legitimate claim while [respondent
Neomi was] still experiencing the effects of a stroke and forced to pay
for her medical bills during and after her hospitalization despite being
covered by [petitioners] health care program, thereby suffering in the
process extreme mental anguish, shock, serious anxiety and great
stress. [They] have shown that because of the refusal of [petitioner] to
issue a letter of authorization and to pay [respondent Neomi's] hospital
bills, [they had] to engage the services of counsel for a fee
of P20,000.00. Finally, the refusal of petitioner to pay respondent
Neomi's bills smacks of bad faith, as its refusal [was] merely based on
its own perception that a stroke is a pre-existing condition. (emphasis
supplied)

This is a factual matter binding and conclusive on this Court.[26] We see no

reason to disturb these findings.
WHEREFORE, the petition is hereby DENIED. The July 29, 2005
decision and September 21, 2005 resolution of the Court of Appeals in CA-G.R. SP
No. 84163 are AFFIRMED.
Treble costs against petitioner.
SO ORDERED.

G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the
people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women, and children. The State shall endeavor to provide free medical care to paupers. 1
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated
July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers,
Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance organization
to take care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.
xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount
of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax
Code xxxx
xxx

xxx

xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act
on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of
25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully

paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioners health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement
was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and
20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code,
until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx

xxx

xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We
held that petitioners health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioners contention that
it is a health maintenance organization (HMO) and not an insurance company is irrelevant because
contracts between companies like petitioner and the beneficiaries under their plans are treated as
insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental
motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on
a company engaged in the business of fidelity bonds and other insurance policies. Petitioner,
as an HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect
the CAs disposition that health care services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are not
those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health insurance, health
insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in
Section 185.

(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered
moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda
on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807(also known as the "Tax Amnesty Act of 2007") by fully paying the amount
of P5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005. 8
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange Commission
on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals
who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual membership fee. Membership is on a
year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians,i.e. those directly employed
by it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as
room and board accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the
participating physicians and other health care providers for the services rendered, at pre-agreed
rates.14
To avail of petitioners health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision of
the health care services. The same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except
for the curative aspect of the medical service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15
Petitioner, however, submits that it is of critical importance to characterize the business it is engaged
in, that is, to determine whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for DST on its health care
agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of
petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business
of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing
the validity or legality of any bond or other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such person, company
or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each
four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute its every
word.18
From the language of Section 185, it is evident that two requisites must concur before the DST can
apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of
indemnity and (2) the maker should be transacting the business of accident, fidelity, employers
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"),
an HMO is "an entity that provides, offers or arranges for coverage of designated health services
needed by plan members for a fixed prepaid premium."19 The payments do not vary with the extent,
frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they have
applied is whether the assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization or whether they are
merely incidental to its business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal purpose, then the business is
not insurance.
Applying the "principal object and purpose test,"22 there is significant American case law supporting
the argument that a corporation (such as an HMO, whether or not organized for profit), whose main

object is to provide the members of a group with health services, is not engaged in the insurance
business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health Association should not be considered as engaged
in insurance activities since it was created primarily for the distribution of health care services rather
than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating security against
loss from illness or accident more truly they constitute the quantity purchase of well-rounded,
continuous medical service by its members. xxx The functions of such an organization are not
identical with those of insurance or indemnity companies. The latter are concerned primarily, if
not exclusively, with risk and the consequences of its descent, not with service, or its extension in
kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made possible by quantity purchasing
and economies in operation. Its primary purpose is to reduce the cost rather than the risk of
medical care; to broaden the service to the individual in kind and quantity; to enlarge the
number receiving it; to regularize it as an everyday incident of living, like purchasing food
and clothing or oil and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is,
in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the regularization of service as well
as payment, the substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the indemnification
for cost after the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial difference between
contracting in this way for the rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and
other types of legal arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or services on contingency. But obviously it
was not the purpose of the insurance statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf practically all contracts, particularly
conditional sales and contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it. The question turns,
not on whether risk is involved or assumed, but on whether that or something else to which it
is related in the particular plan is its principal object purpose.24 (Emphasis supplied)
In California Physicians Service v. Garrison,25 the California court felt that, after scrutinizing the plan
of operation as a whole of the corporation, it was service rather than indemnity which stood as its
principal purpose.
There is another and more compelling reason for holding that the service is not engaged in the
insurance business.Absence or presence of assumption of risk or peril is not the sole test to
be applied in determining its status. The question, more broadly, is whether, looking at the
plan of operation as a whole, service rather than indemnity is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not indemnity.26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only undertake
to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained
in the policy.
xxx

xxx

xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide

physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporations plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected would
be provided, but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering itself subject to the
more stringent financial requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in return for
which the health service corporation agrees to make payment directly to the participating
provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made directly to the provider of these
services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case of
emergency by non-participating health providers would still be incidental to petitioners purpose of
providing and arranging for health care services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is required to set up a system and the
facilities for the delivery of such medical services. This indubitably shows that indemnification is not
its sole object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases. 30 As an HMO, it
is its obligation to maintain the good health of its members. Accordingly, its health care programs
are designed to prevent or to minimize thepossibility of any assumption of risk on its
part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to provide the health and medical
services needed to prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioners business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted
U.S. cases, we are not saying that petitioners operations are identical in every respect to those of
the HMOs or health providers which were parties to those cases. What we are stating is that, for the
purpose of determining what "doing an insurance business" means, we have to scrutinize the
operations of the business as a whole and not its mere components. This is of course only prudent
and appropriate, taking into account the burdensome and strict laws, rules and regulations
applicable to insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular HMOs to be
actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident
from the fact that it is not supervised by the Insurance Commission but by the Department of
Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of the commissioner must be
accorded great weight. It is well-settled that the interpretation of an administrative agency which is
tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of

laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of
Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and
satisfying those needs; it also relates to the accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a particular statute. In Asturias
Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that executive officials are
presumed to have familiarized themselves with all the considerations pertinent to the meaning and
purpose of the law, and to have formed an independent, conscientious and competent expert opinion
thereon. The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed judgment, and
the fact that they frequently are the drafters of the law they interpret. 36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance or obligations of the nature of
indemnity for loss, damage, or liability." In our decision dated June 12, 2008, we ruled that
petitioners health care agreements are contracts of indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of physicians). The term "loss or damage"
is broad enough to cover the monetary expense or liability a member will incur in case of illness or
injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the
member in case of sickness, injury or emergency or his availment of so-called "out-patient services"
(including physical examination, x-ray and laboratory tests, medical consultations, vaccine
administration and family planning counseling) is the contingent event which gives rise to liability on
the part of the member. In case of exposure of the member to liability, he would be entitled to
indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses
to be incurred by each member cannot be predicted beforehand, if they can be predicted at all.
Petitioner assumes the risk of paying for the costs of the services even if they are significantly and
substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of persons bearing a similar risk, that is, among
all the other members of the health care program. This is insurance. 37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of their
property for the support of the government.39 Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However,
those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of
a health service provider to a member under the terms of their health care agreement. Such
contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly

against the HMO. For this reason, we reconsider our ruling that Blue Cross andPhilamcare are
applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium. 41
Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its primary purpose is the rendering of service,
it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned
above would be an insurance contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the insurance business. Its
contracts are simply for the purpose of rendering personal services. On the other hand, a contract by
which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance. Unlike the lawyers retainer contract, the
essential purpose of such a contract is not to render personal services, but to indemnify against loss
and damage resulting from the defense of actions for malpractice. 42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioners
agreements. To begin with, there is no loss, damage or liability on the part of the member that should
be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioners physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the member merely avails
of medical services to be paid or already paid in advance at a pre-agreed price under the
agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril, loss
or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from
a non-participating physician or hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health
care contracts called for the defendant to partially reimburse a subscriber for treatment received
from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court
determined that "the primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services."44 Since indemnity of the insured was
not the focal point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always
bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services:
the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured. 45
However, assuming that petitioners commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not
qualify as an insurance contract because petitioners objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us to conclude that it is
not an insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioners health
care agreements under Section 185 of the NIRC of 1997 is the provisions legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No.
1189 (otherwise known as the "Internal Revenue Law of 1904") 46enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a
verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment, or
paper upon which such instrument, matters, or things or any of them shall be written or printed by
any person or persons who shall make, sign, or issue the same, on and after January first, nineteen
hundred and five, the several taxes following:
xxx

xxx

xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employers liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116,
Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917,

the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939),
which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40
on October 1, 1946, the DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158
(NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October
10, 1984 respectively, the DST rate was again increased.
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Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was
renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to
the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of
1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to
the DST provisions were introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early
as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2 million. 49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been
the intent of the legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe
to say that health care agreements were never, at any time, recognized as insurance contracts or
deemed engaged in the business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is to pay it. 51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52
Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its
net worth ofP259 million.54 Respondent never disputed these assertions. Given the realities on the
ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government ought to encourage private
enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." 58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable consequence but killing the business of an
entity is another matter and should not be allowed. It is counter-productive and ultimately subversive
of the nations thrust towards a better economy which will ultimately benefit the majority of our
people.59
Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paidP5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA
9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. 61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under
the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this
case as discussed above, respondent concedes that such tax amnesty extinguishes the tax
liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62 (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioners liability for DST
for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty
under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is
bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of
Philamcare Health Systems is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has already become final. 67 When a
minute resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. BaierNickel,70 the Court noted that a previous case,CIR v. Baier-Nickel71 involving the same parties and
the same issues, was previously disposed of by the Court thru a minute resolution dated February
17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled thatthe previous case "ha(d)
no bearing" on the latter case because the two cases involved different subject matters as they
were concerned with the taxable income of different taxable years. 72
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed clearly

and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices, unlike a decision. It does not require the certification
of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. 73Indeed, as
a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for
DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot
successfully invoke the minute resolution in that case (which is not even binding precedent) in its
favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from
the fact that petitioners health care agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185 of the
NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the
same should not be arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate medical services
at a cost which the average wage earner can afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. 74 Its imposition
will elevate the cost of health care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent
is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.