G.R. No.
L-2294 May 25, 1951 The present action was filed on August 6, 1946, in the Court of First Instance of Manila for
FILIPINAS COMPAIA DE SEGUROS, petitioner, vs. CHRISTERN, HUENEFELD and CO.,
INC., respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after
payment of corresponding premium, obtained from the petitioner ,Filipinas Cia. de
Seguros, fire policy No. 29333 in the sum of P1000,000, covering merchandise contained
in a building located at No. 711 Roman Street, Binondo Manila. On February 27, 1942, or
during the Japanese military occupation, the building and insured merchandise were
burned. In due time the respondent submitted to the petitioner its claim under the policy.
The salvage goods were sold at public auction and, after deducting their value, the total
loss suffered by the respondent was fixed at
P92,650. The petitioner refused to pay the claim on the ground that the policy in favor of
the respondent had ceased to be in force on the date the United States declared war
against Germany, the respondent Corporation (though organized under and by virtue of
the laws of the Philippines) being controlled by the German subjects and the petitioner
being a company under American jurisdiction when said policy was issued on October 1,
1941. The petitioner, however, in pursuance of the order of the Director of Bureau of
Financing, Philippine Executive Commission, dated April 9, 1943, paid to the respondent
the sum of P92,650 on April 19, 1943.
the purpose of recovering from the respondent the sum of P92,650 above mentioned.
The theory of the petitioner is that the insured merchandise were burned up after the
policy issued in 1941 in favor of the respondent corporation has ceased to be effective
because of the outbreak of the war between the United States and Germany on
December 10, 1941, and that the payment made by the petitioner to the respondent
corporation during the Japanese military occupation was under pressure. After trial, the
Court of First Instance of Manila dismissed the action without pronouncement as to costs.
Upon appeal to the Court of Appeals, the judgment of the Court of First Instance of
Manila was affirmed, with costs. The case is now before us on appeal by certiorari from
the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent
corporation became an enemy when the United States declared war against Germany,
relying on English and American cases which held that a corporation is a citizen of the
country or state by and under the laws of which it was created or organized. It rejected
the theory that nationality of private corporation is determine by the character or
citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation
were German subjects. This being so, we have to rule that said respondent became an
enemy corporation upon the outbreak of the war between the United States and
Germany. The English and American cases relied upon by the Court of Appeals have lost
their force in view of the latest decision of the Supreme Court of the United States in
Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed.
Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In
"Enemy Corporation" by Martin Domke, a paper presented to the Second International
Conference of the Legal Profession held at the Hague (Netherlands) in August. 1948 the
following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations has been
discussion in many countries, belligerent and neutral. A corporation was subject to enemy
legislation when it was controlled by enemies, namely managed under the influence of
individuals or corporations, themselves considered as enemies. It was the English courts
which first the Daimler case applied this new concept of "piercing the corporate veil,"
which was adopted by the peace of Treaties of 1919 and the Mixed Arbitral established
after the First World War.
The United States of America did not adopt the control test during the First World War.
Courts refused to recognized the concept whereby American-registered corporations
could be considered as enemies and thus subject to domestic legislation and
administrative measures regarding enemy property.
World War II revived the problem again. It was known that German and other enemy
interests were cloaked by domestic corporation structure. It was not only by legal
ownership of shares that a material influence could be exercised on the management of
the corporation but also by long term loans and other factual situations. For that reason,
legislation on enemy property enacted in various countries during World War II adopted
by statutory provisions to the control test and determined, to various degrees, the
incidents of control. Court decisions were rendered on the basis of such newly enacted
statutory provisions in determining enemy character of domestic corporation.
The United States did not, in the amendments of the Trading with the Enemy Act during
the last war, include as did other legislations the applications of the control test and
again, as in World War I, courts refused to apply this concept whereby the enemy
character of an American or neutral-registered corporation is determined by the enemy
nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and other
administrative practice in the treatment of foreign-owned property in the United States
allowed to large degree the determination of enemy interest in domestic corporations
and thus the application of the control test. Court decisions sanctioned such
administrative practice enacted under the First War Powers Act of 1941, and more
recently, on December 8, 1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G., dealing
with a Swiss corporation allegedly controlled by German interest, the Court: "The
property of all foreign interest was placed within the reach of the vesting power (of the
Alien Property Custodian) not to appropriate friendly or neutral assets but to reach
enemy interest which masqueraded under those innocent fronts. . . . The power of seizure
and vesting was extended to all property of any foreign country or national so that no
innocent appearing device could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in support
of the appealed decision. However, we may add that, in Haw Pia vs. China Banking
Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held that China Banking Corporation
came within the meaning of the word "enemy" as used in the Trading with the Enemy
Acts of civilized countries not only because it was incorporated under the laws of an
enemy country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that
"anyone except a public enemy may be insured." It stands to reason that an insurance
policy ceases to be allowable as soon as an insured becomes a public enemy.
Effect of war, generally. All intercourse between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by the law of nations. Such prohibition
includes all negotiations, commerce, or trading with the enemy; all acts which will
increase, or tend to increase, its income or resources; all acts of voluntary submission to
it; or receiving its protection; also all acts concerning the transmission of money or goods;
and all contracts relating thereto are thereby nullified. It further prohibits insurance upon
trade with or by the enemy, upon the life or lives of aliens engaged in service with the
enemy; this for the reason that the subjects of one country cannot be permitted to lend
their assistance to protect by insurance the commerce or property of belligerent, alien
subjects, or to do anything detrimental too their country's interest. The purpose of war is
to cripple the power and exhaust the resources of the enemy, and it is inconsistent that
one country should destroy its enemy's property and repay in insurance the value of what
has been so destroyed, or that it should in such manner increase the resources of the
enemy, or render it aid, and the commencement of war determines, for like reasons, all
trading intercourse with the enemy, which prior thereto may have been lawful. All
individuals therefore, who compose the belligerent powers, exist, as to each other, in a
state of utter exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-
5353.)
In the case of an ordinary fire policy, which grants insurance only from year, or for some Wherefore, the appealed decision is hereby reversed and the respondent corporation is
other specified term it is plain that when the parties become alien enemies, the ordered to pay to the petitioner the sum of P77,208.33, Philippine currency, less the
contractual tie is broken and the contractual rights of the parties, so far as not vested. amount of the premium, in Philippine currency, that should be returned by the petitioner
lost. (Vance, the Law on Insurance, Sec. 44, p. 112.) for the unexpired term of the policy in question, beginning December 11, 1941. Without
costs. So ordered.
The respondent having become an enemy corporation on December 10, 1941, the
insurance policy issued in its favor on October 1, 1941, by the petitioner (a Philippine
corporation) had ceased to be valid and enforcible, and since the insured goods were
burned after December 10, 1941, and during the war, the respondent was not entitled to
any indemnity under said policy from the petitioner. However, elementary rules of justice
(in the absence of specific provision in the Insurance Law) require that the premium paid
by the respondent for the period covered by its policy from December 11, 1941, should be
returned by the petitioner.

The Court of Appeals, in deciding the case, stated that the main issue hinges on the
question of whether the policy in question became null and void upon the declaration of
war between the United States and Germany on December 10, 1941, and its judgment in
favor of the respondent corporation was predicated on its conclusion that the policy did
not cease to be in force. The Court of Appeals necessarily assumed that, even if the
payment by the petitioner to the respondent was involuntary, its action is not tenable in
view of the ruling on the validity of the policy. As a matter of fact, the Court of Appeals
held that "any intimidation resorted to by the appellee was not unjust but the exercise of
its lawful right to claim for and received the payment of the insurance policy," and that
the ruling of the Bureau of Financing to the effect that "the appellee was entitled to
payment from the appellant was, well founded." Factually, there can be no doubt that the
Director of the Bureau of Financing, in ordering the petitioner to pay the claim of the
respondent, merely obeyed the instruction of the Japanese Military Administration, as
may be seen from the following: "In view of the findings and conclusion of this office
contained in its decision on Administrative Case dated February 9, 1943 copy of which
was sent to your office and the concurrence therein of the Financial Department of the
Japanese Military Administration, and following the instruction of said authority, you are
hereby ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment
of said claim, however, should be made by means of crossed check." (Emphasis supplied.)

It results that the petitioner is entitled to recover what paid to the respondent under the
circumstances on this case. However, the petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943, in accordance
with the rate fixed in the Ballantyne scale.
G.R. No. L-2910 June 29, 1951
THE MANUFACTURERS LIFE INSURANCE CO., plaintiff-appellant, vs. BIBIANO L. MEER, in
the capacity as Collector of Internal Revenue, defendant-appellee.
BENGZON, J.:
Appeal from a decision of the Honorable Buenaventura Ocampo, then judge of the Manila
court of first instance, dismissing plaintiff's complaint to recover money paid under
protest for taxes. The case was submitted upon a stipulation of facts, supplemented by
documentary evidence.
The plaintiff, the Manufacturer Life Insurance Company in a corporation duly organized in
Canada with head office at Toronto. It is duly registered and licensed to engage in life
insurance business in the Philippines, and maintains a branch office in Manila. It was
engaged in such business in the Philippines for more than five years before and including
the year 1941. But due to the exigencies of the war it closed the branch office at Manila
during 1942 up to September 1945.
In the course of its operations before the war, plaintiff issued a number of life insurance
policies in the Philippines containing stipulations referred to as non-forfeiture clauses, as
follows:
'8. Automatic Premium Loan. This Policy shall not lapse for non-payment of any
premium after it has been three full years in force, if, at the due date of such premium,
the Cash Value of this Policy and of any bonus additions and dividends left on
accumulation (after deducting any indebtedness to the Company and the interest accrued
thereon) shall exceed the amount of said premium. In which event the company will,
without further request, treat the premium then due as paid, and the amount of such
premium, with interest from its actual due date at six per cent per annum, compounded
yearly, and one per cent, compounded yearly, for expenses, shall be a first lien on this
Policy in the Company's favour in priority to the claim of any assignee or any other
person. The accumulated lien may at any time, while the Policy is in force, be paid in
whole or in part.
"When the premium falls due and is not paid in cash within the month's grace, if the Cash
Value of this policy and of any bonus addition and dividends left on accumulation (after
deducting any accumulated indebtedness) be less than the premium then due, the
Company will, without further requests, continue this insurance in force for a period .. . .
"10. Cash and Paid-Up Insurance Values. At the end of the third policy year or
thereafter, upon the legal surrender of this Policy to the Company while there is no
default in premium payments or within two months after the due date of the premium in
default, the Company will (1) grant a cash value as specified in Column (A) increased by
the cash value of any bonus additions and dividends left on accumulation, which have
been alloted to this Policy, less all indebtedness to the Company on this Policy on the date
of such surrender, or (2) endorse this Policy as a Non-Participating Paid-up Policy for the
amount as specified in Column (B) of the Table of Guaranteed Values . . ..
"11. Extended Insurance. After the premiums for three or more full years have been
paid hereunder in cash, if any subsequent premium is not paid when due, and there is no
indebtness to the Company, on the written request of the Insured . . ..
From January 1, 1942 to December 31, 1946 for failure of the insured under the above
policies to pay the corresponding premiums for one or more years, the plaintiff's head
office of Toronto, applied the provision of the automatic premium loan clauses; and the
net amount of premiums so advanced or loaned totalled P1,069,254.98. On this sum the
defendant Collector of Internal Revenue assessed P17,917.12 which plaintiff
paid supra protest . The assessment was made pursuant to section 255 of the National
Internal Revenue Code as amended. which partly provides:
SEC. 255. Taxes on insurance premiums. There shall be collected from every person,
company, or corporation (except purely cooperative companies or associations) doing
business of any sort in the Philippines a tax of one per centum of the total premiums
collected .. whether such premiums are paid in money, notes credits, or any substitute for
money but premiums refunded within six months after payment on account of rejection
of risk or returned for other reason to person insured shall not be included in the taxable
receipts . . ..
It is the plaintiff's contention that when it made premium loans or premium advances, as
above stated, by virtue of the non-forfeiture clauses, it did not collect premiums within
the meaning of the above sections of the law, and therefore it is not amendable to the tax
therein provided.
The plaintiff conveniently divides that issue into five minor issues, to wit:
(a) Whether or not premium advances made by plaintiff-appellant under the automatic
premium loan clause of its policies are "premium collected" by the Company subject to
tax;
(b) Whether or not, in the application of the automatic premium loan clause of plaintiff-
appellant's policies, there is "payment in money, notes, credit, or any substitutes for
money";
(c) Whether or not the collection of the alleged deficiency premium taxes constitutes
double taxation;
(d) Whether the making of premium advances, granting for the sake of argument that it
amounted to collection of premiums, were done in Toronto, Canada, or in the Philippines;
and
(e) Whether or not the fact that plaintiff-appellant was not doing business in the
Philippines during the period from January 1, 1942 to September 30, 1945, inclusive,
exempts it from payment of premium taxes corresponding to said period.
These points will be considered in their order. The first two may best taken up together in
the light of a practical illustration offered by appellant:
"Suppose that "A" years of age, secures a 20-years endowment policy for P5,000 from
plaintiff-appellant Company and pays an annual premium of P250. 'A' pays the first ten
yearly premiums amounting to P2,500 and on this amount plaintiff-appellant pays the
corresponding taxes under section 255 of the National Internal Revenue Code. Suppose
also that the cash value of said policy after the payment of the 10th annual premium
amounts to P1,000." When on the eleventh year the annual premium fell due and the
insured remitted no money within the months grace, the insurer treated the premium
then over due as paid from the cash value, the amount being loan to the
policyholder1 who could discharged it at anytime with interest at 6 per cent. The
insurance contract, therefore, continued in force for the eleventh year.
Under the circumstances described, did the insurer collect the amount of P250 as the
annual premium for the eleventh year on the said policy? The plaintiff says no; but the
defendant and the lower court say yes. The latter have, in our opinion, the correct view.
In effect the Manufacturers Life Insurance Co. loaned to "A" on the eleventh year, the
sum of P250 and the latter in turn paid with that sum the annual premium on his policy.
The Company therefore collected the premium for the eleventh year.
"How could there be such a collection "plaintiff argues "when as a result thereof, insurer
becomes a creditor, acquires a lien on the policy and is entitled to collect interest on the
amount of the unpaid premiums?".
Wittingly, the "premium" and the "loan" have been interchanged in the argument. The
insurer "became a creditor" of the loan, but not of the premium that had already been
paid. And it is entitled to collect interest on the loan, not on the premium.
In other words, "A" paid the premium for the eleventh; but in turn he became a debtor of
the company for the sum of P250. This debt he could repay either by later remitting the
money to the insurer or by letting the cash value compensate for it. The debt may also be
deducted form the amount of the policy should "A" die thereafter during the continuance
of the policy.
Proceeding along the same line of argument counsel for plaintiff observes "that there is
no change, much less an increase, in the amount of the assets of plaintiff-appellant after
the application of the automatic premium loan clause. Its assets remain exactly the same
after making the advances in question. It being so, there could have been no collection of
premium . . .. "We cannot assent to this view, because there was an increase. There was
thenew credit for the advances made. True, the plaintiff could not sue the insured to
enforce that credit. But it has means of satisfaction out of the cash surrender value.
Here again it may be urged that if the credit is paid out of the cash surrender value, there
were no new funds added to the company's assets. Cash surrender value "as applied to
life insurance policy, is the amount of money the company agrees to pay to the holder of
the policy if he surrenders it and releases his claims upon it. The more premiums the
insured has paid the greater will be the surrender value; but the surrender value is always
a lesser sum than the total amount of premiums paid." (Cyclopedia Law Dictionary 3d. ed.
1077.)
The cash value or cash surrender value is therefore an amount which the insurance
company holds in trust2 for the insured to be delivered to him upon demand. It is
therefore a liability of the company to the insured. Now then, when the company's credit
for advances is paid out of the cash value or cash surrender value, that value and the
company's liability is thereby dismissed pro tanto. Consequently, the net assets of the
insurance company increasedcorresponding; for it is plain mathematics that the decrease
of a person's liabilities means a corresponding increase in his net assets.
Nevertheless let us grant for the nonce that the operation of the automatic loan provision
contributed no additional cash to the funds of the insurer. Yet it must be admitted that
the insurer agreed to consider the premium paid on the strength of the automatic loan.
The premium was therefore paid by means of a "note" or "credit" or "other substitute for
money" and the taxis due because section 255 above quoted levies taxes according to the
total premiums collected by the insurer "whether such premiums are paid in
money, notes, credits or any substitutes for money.
In connection with the third issue, appellant refers to its example about "A" who failed to
pay the premium on the eleventh year and the insurer advanced P250 from the cash
value. Then it reasons out that "if the amount P250 is deducted from the cash value of
P1,000 of the policy, then taxing this P250 anew as premium collected, as was done in the
present case, will amount to double taxation since taxes had already been collected on
the cash value of P1,000 as part of the P2,500 collected as premiums for the first ten
years." The trouble with the argument is that it assumes all advances are necessarily
repaid from the cash value. That is true in some cases. In others the insured
subsequently remits the money to repay the advance and to keep unimpaired the cash
reserve of his policy.
As to a matter of fact of the total amount advanced (P1,069,254.998) P158,666.63 had
actually been repaid at the time of assessment notice. Besides, the premiums paid and on
which taxes had already been collected, were those for the ten years. The tax demanded
is on the premium for the eleventh year.
In any event there is no constitutional prohibition against double taxation.
On the fourth issue the appellant takes the position that as advances of premiums were
made in Toronto, such premiums are deemed to have been paid there not in the
Philippines and therefore those payments are not subject to local taxation. The thesis
overlooks the actual fact that the loans are made to policyholders in the Philippines, who
in turn pay therewith the premium to the insurer thru the Manila branch. Approval of
appellants position will enable foreign insurers to evade the tax by contriving to require
that premium payments shall be made at their head offices. What is important, the law
does not contemplate premiums collected in the Philippines. It is enough that the insurer
is doing insurance business in the Philippines, irrespective of the place of its organization
or establishment.
This brings forth the appellant's last contention that it was "engaged in business" in the
Philippines during the years 1942 to September 1945, and that as section 255 applies only
to companies "doing insurance business in the Philippines" this tax was improperly
demanded.
It is our opinion that although during those years the appellant was not open for new
business because its branch office was closed, still it was practically and legally, operating
in this country by collecting premiums on its outstanding policies, incurring the risks
and/or enjoying the benefits consequent thereto, without having previously taken any
steps indicating withdrawal in good faith field of economic activity3.
As a matter of fact, in objecting to the payment of the tax, plaintiff-appellant never
insisted, before the Bureau of Internal Revenue, that it was not engaged in business in
this country during those years. Wherefore, finding no prejudicial error in the appealed
decisions, we hereby affirm it with costs.
G.R. No. L-15184 May 31, 1963
SAURA IMPORT & EXPORT CO., INC., plaintiff-appellant, vs. PHILIPPINE INTERNATIONAL
SURETY CO., INC., and PHILIPPINE NATIONAL BANK, defendants-appellees.
PAREDES, J.:
Instant case was certified by the Court of Appeals to Us, it appearing that the issues
involved are purely of law.
On December 26, 1952, the Saura Import & Export Co Inc., mortgaged to the Phil.
National Bank, a parcel of land covered by T.C.T. No. 40445 of the Registry of Deeds of
Davao, issued in its name, to secure the payment of promissory note of P27,000.00 (Exhs.
P, B-2). On April 30, 1953, the mortgage was amended to guarantee an increased amount,
bringing the total mortgaged debt to P37,000.00 (Exhs. P-2, B-3). The provisions of the
mortgaged contact, pertinent to the resolution of the present case, provide as follows
2. . . . he shall insure the mortgaged property at all times against fire and earthquake for
an amount and with such company satisfactory to the Mortgagee, indorsing to the latter
the corresponding policies; he shall keep the mortgaged property in good condition,
making repairs and protecting walls that may be necessary; . . .
xxx xxx xxx
Erected on the land mortgaged, was a building of strong materials owned by the
mortgagor Saura Import & Export Co., Inc., which had always been covered by insurance,
many years prior to the mortgage contract. Pursuant to the requirement, Saura insured
the building and its contents with the Philippine International Surety, an insurance firm
acceptable to mortgagee Bank, for P29,000.00 against fire for the period of one year from
October 2, 1954. As required therefor, the insurance policy was endorsed to the
mortgagee PNB, in a Memo which states
Loss if any, payable to the Philippine National Bank as their interest may appear, subject
to the terms, conditions and warranties of this policy (Exh. A).
The policy was delivered to the mortgagee Bank by Saura. On October 15, 1954, barely
thirteen (13) days after the issuance of the fire insurance policy (October 2, 1954), the
insurer cancelled the same, effective as of the date of issue (Exh. A-2). Notice of the
cancellation was given to appellee bank in writing, sent by Registered Mail and personally
addressed to Fortunato Domingo, Branch Manager of the appellee Bank's Davao Branch,
and was received by the Bank on November 8, 1954. On April 6, 1955, the building and its
contents, worth P40,685.69 were burned. On April 11, 1955, Saura filed a claim with the
Insurer and mortgagee Bank. Upon the presentation of notice of loss with the PNB, Saura
learned for the first time that the policy had previously been cancelled on October 2,
1954, by the insurer, when Saura's folder in the Bank's filed was opened and the notice of
cancellation (original and duplicate) sent by the Insurer to the Bank, was found. Upon
refusal of the Insurer Philippine International Surety to pay the amount of the insurance,
Civil Case No. 26847 was filed with the Manila CFI against the Insurer, and the PNB was
later included as party defendant, after it had refused to prosecute the case jointly with
Saura Import & Export Co., Inc.
At the trial, it was established that neither the Insurer nor the mortgagee Bank informed
the plaintiff Saura of the cancellation of the policy. On April 30, 1957, the court a
quo rendered the following judgment
. . . IN VIEW WHEREOF, complaint dismissed; costs against the plaintiff; but as there is no
proof on the counterclaim of the Philippines International Surety, the same is also
dismissed.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of
facts. 1wph1.t by the insurer to the insured, so that the latter might be given an opportunity to obtain
A motion to reconsider the above judgment, seasonably presented on May 14, 1957, was
subsequently denied. The decision rendered and the resolution denying the motion for
reconsideration constitute the subject of the instant appeal by plaintiff Saura on the three
alleged errors, which converge on the correctness of the ruling, wholly dismissing the
complaint absolving both the insurance company and the bank from liability.
In the determination of liabilities of the parties herein, let us look into the general
principles of insurance, in matters of cancellations of policy by the insurer. Fire insurance
policies and other contracts of insurance upon property, in addition to the common
provision for cancellation of the policy upon request of the insured, generally provide for
cancellation by the insurer by notice to the insured for a prescribed period, which is
usually 5 days, and the return of the unearned portion of the premium paid by the
insured, such provision for cancellation upon notice being authorized by statutes in some
jurisdiction, either specifically or as a provision of an adopted standard form of policy. The
purpose of provisions or stipulations for notice to the insured, is to prevent the
cancellation of the policy, without allowing the insured ample opportunity to negotiate
for other insurance in its stead. The form and sufficiency of a notice of cancellation is
determined by policy provisions. In order to form the basis for the cancellation of a policy,
notice to the insured n not be in any particular form, in the absence of a statute or policy
provision prescribing such form, and it is sufficient, so long as it positively and
unequivocally indicates to the insured, that it is the intention of the company that the
policy shall cease to be binding. Where the policy contains no provisions that a certain
number of days notice shall be given, a reasonable notice and opportunity to obtain other
insurance must be given. Actual personal notice to the insured is essential to a
cancellation under a provision for cancellation by notice. The actual receipt by the insured
of a notice of cancellation is universally recognized as a condition precedent to a
cancellation of the policy by the insurer, and consequently a letter containing notice of
cancellation which is mailed by the insurer but not received by the insured, is ineffective
as cancellation (29 Am. Jur. pp. 732-741).
The policy in question (Exh. A), does not provide for the notice, its form or period. The
Insurance Law, Act No. 2427, does not likewise provide for such notice. This being the
case, it devolves upon the Court to apply the generally accepted principles of insurance,
regarding cancellation of the insurance policy by the insurer. From what has been
heretofore stated, actual notice of cancellation in a clear and unequivocal manner,
preferably in writing, in view of the importance of an insurance contract, should be given
other insurance for his own protection. The notice should be personal to the insured and
not to and/or through any unauthorized person by the policy. In the case at bar, the
defendant insurance company, must have realized the paramount importance of sending
a notice of cancellation, when it sent the notice of cancellation of the policy to the
defendant bank (as mortgagee), but not to the insured with which it (insurance company)
had direct dealing. It was the primary duty of the defendant-appellee insurance company
to notify the insured, but it did not. It should be stated that the house and its contents
were burned on April 6, 1955, at the time when the policy was enforced (October 2, 1954
to October 2, 1955); and that under the facts, as found by the trial court, to which We are
bound, it is evident that both the insurance company and the appellee bank failed,
wittingly or unwittingly, to notify the insured appellant Saura of the cancellation made.
Of course, the defendant insurance company contends that it gave notice to the
defendant-appellee bank as mortgagee of the property, and that was already a
substantial compliance with its duty to notify the insured of the cancellation of the policy.
But notice to the bank, as far appellant herein is concerned, is not effective notice.
If a mortgage or lien exists against the property insured, and the policy contains a clause
stating that loss, if any, shall be payable to such mortgagee or the holder of such lien as
interest may appear, notice of cancellation to the mortgagee or lienholder alone is
ineffective as a cancellation of the policy to the owner of the property. (Connecticut Ins.
Co. v. Caumisar, 218 Ky. 378, 391 SW 776, cited in 29 Am. Jur. p. 743).
Upon authority of the above case, therefore, the liability of the insurance company
becomes a fact.
It may be argued that in the appeal brief of appellant, no error has been assigned against
the insurance company and no prayer is found therein asking that it be made liable. It
must be noted, however, that the case was dismissed the lower court and the main object
of the appeal is to secure a reversal of the said judgment. This Court is clothed with ample
authority to review matters, even if they are not assigned as errors in the appeal, if it finds
that their consideration is necessary in arriving at a just decision of the case. Thus it was
held:

While an assignment of error which is required by law or rule of court has been held
essential to appellate review, only those assigned will be considered, there are a number
of cases which appear to accord to the appellate court a broad discretionary power to
waive the lack of proper assignment of errors and consider errors not assigned. And an
unassigned error closely related to an error properly assigned, or upon which the
determination of the question raised by the error properly assigned is dependent, will be
considered by the appellate court notwithstanding the failure to assign it as error.
(Hernandez v. Andal, 78 Phil. 198-199).

Although assigned errors apparently appear to be directed against the appellee bank
alone, they in essence, seek a reversal of the decision on dismissal, entered by the lower
court, which in the main has for its purpose the finding of liability on the policy. In the
course of our examination of the records of the case, the decision and the errors
assigned, We found that liability attached principally the insurance company, for its
failure to give notice of the cancellation of the policy to herein appellant itself.

Because of the conclusions reached, We find it unnecessary to discuss the errors assigned
against appellee bank.

WHEREFORE, the decision appealed from is hereby reversed, and another is entered,
condemning the defendant-appellee Philippine International Surety Co., Inc., to pay Saura
Import & Export Co., Inc., appellant herein, the sum of P29,000.00, the amount involved
in Policy No. 429, subject-matter of the instant case. Without costs.
G.R. No. 76452 July 26, 1994
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS
REYES, petitioners, vs. HON. ARMANDO ANSALDO, in his capacity as Insurance
Commissioner, and RAMON MONTILLA PATERNO, JR., respondents.
QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court,
with preliminary injunction or temporary restraining order, to annul and set aside the
Order dated November 6, 1986 of the Insurance Commissioner and the entire
proceedings taken in I.C. Special Case No. 1-86.
We grant the petition.
The instant case arose from a letter-complaint of private respondent Ramon M. Paterno,
Jr. dated April 17, 1986, to respondent Commissioner, alleging certain problems
encountered by agents, supervisors, managers and public consumers of the Philippine
American Life Insurance Company (Philamlife) as a result of certain practices by said
company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo
de los Reyes, in his capacity as Philamlife's president, to comment on respondent
Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes
suggested that private respondent "submit some sort of a 'bill of particulars' listing and
citing actual cases, facts, dates, figures, provisions of law, rules and regulations, and all
other pertinent data which are necessary to enable him to prepare an intelligent reply"
(Rollo, p. 37). A copy of this letter was sent by the Insurance Commissioner to private
respondent for his comments thereon.
On May 16, 1986, respondent Commissioner received a letter from private respondent
maintaining that his letter-complaint of April 17, 1986 was sufficient in form and
substance, and requested that a hearing thereon be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986,
reiterated his claim that private respondent's letter of May 16, 1986 did not supply the
information he needed to enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent Commissioner on
the validity of the Contract of Agency complained of by private respondent.
In said hearing, private respondent was required by respondent Commissioner to specify
the provisions of the agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent
Commissioner dated July 31, 1986, reiterating his letter of April 17, 1986 and praying that
the provisions on charges and fees stated in the Contract of Agency executed between
Philamlife and its agents, as well as the implementing provisions as published in the
agents' handbook, agency bulletins and circulars, be declared as null and void. He also
asked that the amounts of such charges and fees already deducted and collected by
Philamlife in connection therewith be reimbursed to the agents, with interest at the
prevailing rate reckoned from the date when they were deducted.
Respondent Commissioner furnished petitioner De los Reyes with a copy of private
respondent's letter of July 31, 1986, and requested his answer thereto.
Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter
alia that:
(1) Private respondent's letter of August 11, 1986 does not contain any of the particular
information which Philamlife was seeking from him and which he promised to submit.
(2) That since the Commission's quasi-judicial power was being invoked with regard to the
complaint, private respondent must file a verified formal complaint before any further
proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption of the
hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April 17,
1986, and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant Vice-
President and Executive Assistant to the President, asked that respondent Commission
first rule on the questions of the jurisdiction of the Insurance Commissioner over the
subject matter of the letters-complaint and the legal standing of private respondent.
On October 27, respondent Commissioner notified both parties of the hearing of the case
on November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the
following grounds;
1. The Subpoena/Notice has no legal basis and is premature because:
(1) No complaint sufficient in form and contents has been filed;
(2) No summons has been issued nor received by the respondent De los Reyes, and hence,
no jurisdiction has been acquired over his person;
(3) No answer has been filed, and hence, the hearing scheduled on November 5, 1986 in
the Subpoena/Notice, and wherein the respondent is required to appear, is premature
and lacks legal basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action; and
(2) over the parties involved (Rollo, p. 102).
In the Order dated November 6, 1986, respondent Commissioner denied the Motion to
Quash. The dispositive portion of said Order reads:
NOW, THEREFORE, finding the position of complainant thru counsel tenable and
considering the fact that the instant case is an informal administrative litigation falling
outside the operation of the aforecited memorandum circular but cognizable by this
Commission, the hearing officer, in open session ruled as it is hereby ruled to deny the
Motion to Quash Subpoena/Notice for lack of merit (Rollo, p. 109).
Hence, this petition.
II. The main issue to be resolved is whether or not the resolution of the legality of the
Contract of Agency falls within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to take
cognizance of the complaint in the exercise of its quasi-judicial powers. The Solicitor
General, upholding the jurisdiction of the Insurance Commissioner, claims that under
Sections 414 and 415 of the Insurance Code, the Commissioner has authority to nullify the
alleged illegal provisions of the Contract of Agency.
III. The general regulatory authority of the Insurance Commissioner is described in Section
414 of the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all laws relating to insurance,
insurance companies and other insurance matters, mutual benefit associations and trusts
for charitable uses are faithfully executed and to perform the duties imposed upon him by
this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in this Code, the Insurance
Commissioner is hereby authorized, at his discretion, to impose upon insurance
companies, their directors and/or officers and/or agents, for any willful failure or refusal
to comply with, or violation of any provision of this Code, or any order, instruction,
regulation or ruling of the Insurance Commissioner, or any commission of irregularities,
and/or conducting business in an unsafe and unsound manner as may be determined by
the the Insurance Commissioner, the following:
(a) fines not in excess of five hundred pesos a day; and
(b) suspension, or after due hearing, removal of directors and/or officers and/or agents.
A plain reading of the above-quoted provisions show that the Insurance Commissioner
has the authority to regulate the business of insurance, which is defined as follows:
(2) The term "doing an insurance business" or "transacting an insurance business," within
the meaning of this Code, shall include
(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. (Insurance Code, Sec. 2[2];
Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not
included within the meaning of an insurance business, Section 2 of the Insurance Code
cannot be invoked to give jurisdiction over the same to the Insurance
Commissioner. Expressio unius est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the
Insurance Commissioner under Section 416 of the Insurance Code applies in his case, we
likewise rule in the negative. Section 416 of the Code in pertinent part, provides:
The Commissioner shall have the power to adjudicate claims and complaints involving any
loss, damage or liability for which an insurer may be answerable under any kind of policy
or contract of insurance, or for which such insurer may be liable under a contract of
suretyship, or for which a reinsurer may be used under any contract or reinsurance it may
have entered into, or for which a mutual benefit association may be held liable under the
membership certificates it has issued to its members, where the amount of any such loss,
damage or liability, excluding interest, costs and attorney's fees, being claimed or sued
upon any kind of insurance, bond, reinsurance contract, or membership certificate does
not exceed in any single claim one hundred thousand pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance
Commissioner is limited by law "to claims and complaints involving any loss, damage or
liability for which an insurer may be answerable under any kind of policy or contract of
insurance, . . ." Hence, this power does not cover the relationship affecting the insurance
company and its agents but is limited to adjudicating claims and complaints filed by the
insured against the insurance company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of
the Insurance Code, the provisions of said Chapter speak only of the licensing
requirements and limitations imposed on insurance agents and brokers.
The Insurance Code does not have provisions governing the relations between insurance
companies and their agents. It follows that the Insurance Commissioner cannot, in the
exercise of its quasi-judicial powers, assume jurisdiction over controversies between the
insurance companies and their agents.
We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA
445 (1989), and Investment Planning Corporation of the Philippines v. Social Security
Commission, 21 SCRA 904 (1962), that an insurance company may have two classes of
agents who sell its insurance policies: (1) salaried employees who keep definite hours and
work under the control and supervision of the company; and (2) registered
representatives, who work on commission basis.
Under the first category, the relationship between the insurance company and its agents
is governed by the Contract of Employment and the provisions of the Labor Code, while
under the second category, the same is governed by the Contract of Agency and the
provisions of the Civil Code on the Agency. Disputes involving the latter are cognizable by
the regular courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the
Insurance Commission is SET ASIDE.
SO ORDERED.
G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner, vs. COURT OF APPEALS AND
MEDARDA V. LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the Decision 1 dated
May 17, 1993, of the Court of Appeals and its Resolution 2 dated January 4, 1994 in CA-
G.R. CV No. 18341. The appellate court affirmed in toto the judgment of the Misamis
Oriental Regional Trial Court, Branch 18, in an insurance claim filed by private respondent
against Great Pacific Life Assurance Co. The dispositive portion of the trial court's decision
reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX
THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for damages,
attorney's fees and litigation expenses in the complaint and counterclaim, with costs
against the defendant and dismissing the complaint in respect to the plaintiffs, other than
the widow-beneficiary, for lack of cause of action. 3
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life
Assurance Corporation (hereinafter Grepalife) and Development Bank of the Philippines
(hereinafter DBP). Grepalife agreed to insure the lives of eligible housing loan mortgagors
of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP
applied for membership in the group life insurance plan. In an application form, Dr.
Leuterio answered questions concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure,
cancer, diabetes, lung; kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [x] Yes [ ] NO. 4
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of
Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting to eighty-six
thousand, two hundred (P86,200.00) pesos.1wphi1.nt
On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage."
Consequently, DBP submitted a death claim to Grepalife. Grepalife denied the claim
alleging that Dr. Leuterio was not physically healthy when he applied for an insurance
coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did not disclose he
had been suffering from hypertension, which caused his death. Allegedly, such non-
disclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V.
Leuterio, filed a complaint with the Regional Trial Court of Misamis Oriental, Branch 18,
against Grepalife for "Specific Performance with Damages." 5During the trial, Dr.
Hernando Mejia, who issued the death certificate, was called to testify. Dr. Mejia's
findings, based partly from the information given by the respondent widow, stated that
Dr. Leuterio complained of headaches presumably due to high blood pressure. The
inference was not conclusive because Dr. Leuterio was not autopsied, hence, other causes
were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow
and against Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court's
decision. Hence, the present petition. Petitioners interposed the following assigned
errors:
1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE CASE
FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION INSURANCE ON THE
LIFE OF PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE OF ITS LOAN BORROWERS,
INSTEAD OF DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT [Petitioner
Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF JURISDICTION
OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE PERSON OF THE
DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP THE
AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW MUCH WAS
THE ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP INSURANCE
CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN HOLDING THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION FOR
MEMBERSHIP IN THE GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT
OF THE INSURANCE CLAIM ARISING FROM THE DEATH OF WILFREDO LEUTERIO. 6
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in
a group life insurance contract from a complaint filed by the widow of the
decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he
had hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty
six thousand, two hundred (P86,200.00) pesos without proof of the actual outstanding
mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the
real party in interest, hence the trial court acquired no jurisdiction over the case. It argues
that when the Court of Appeals affirmed the trial court's judgment, Grepalife was held
liable to pay the proceeds of insurance contract in favor of DBP, the indispensable party
who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and
the parties to this type of contract. The rationale of a group insurance policy of
mortgagors, otherwise known as the "mortgage redemption insurance," is a device for
the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it
has to enter into such form of contract so that in the event of the unexpected demise of
the mortgagor during the subsistence of the mortgage contract, the proceeds from such
insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs
of the mortgagor from paying the obligation. 7 In a similar vein, ample protection is given
to the mortgagor under such a concept so that in the event of death; the mortgage
obligation will be extinguished by the application of the insurance proceeds to the
mortgage indebtedness. 8 Consequently, where the mortgagor pays the insurance
premium under the group insurance policy, making the loss payable to the mortgagee,
the insurance is on the mortgagor's interest, and the mortgagor continues to be a party to
the contract. In this type of policy insurance, the mortgagee is simply an appointee of the
insurance fund, such loss-payable clause does not make the mortgagee a party to the
contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects insurance in his own
name providing that the loss shall be payable to the mortgagee, or assigns a policy of
insurance to a mortgagee, the insurance is deemed to be upon the interest of the
mortgagor, who does not cease to be a party to the original contract, and any act of his,
prior to the loss, which would otherwise avoid the insurance, will have the same effect,
although the property is in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor, may be performed by the
mortgagee therein named, with the same effect as if it had been performed by the
mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in
the insurance, the policy stating that: "In the event of the debtor's death before his
indebtedness with the Creditor [DBP] shall have been fully paid, an amount to pay the
outstanding indebtedness shall first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the beneficiary/ies designated by the
debtor." 10 When DBP submitted the insurance claim against petitioner, the latter denied
payment thereof, interposing the defense of concealment committed by the insured.
Thereafter, DBP collected the debt from the mortgagor and took the necessary action of
foreclosure on the residential lot of private respondent. 11 In Gonzales La O vs. Yek Tong
Lin Fire & Marine Ins. Co. 12 we held:
Insured, being the person with whom the contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to some exceptions, insured may thus sue,
although the policy is taken wholly or in part for the benefit of another person named or
unnamed, and although it is expressly made payable to another as his interest may
appear or otherwise. * * * Although a policy issued to a mortgagor is taken out for the
benefit of the mortgagee and is made payable to him, yet the mortgagor may sue thereon
in his own name, especially where the mortgagee's interest is less than the full amount
recoverable under the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the policy
for the purpose of collection, or has assigned as collateral security any judgment he may
obtain. 13
And since a policy of insurance upon life or health may pass by transfer, will or succession
to any person, whether he has an insurable interest or not, and such person may recover
it whatever the insured might have recovered, 14the widow of the decedent Dr. Leuterio
may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed
as its defense to annul the insurance contract. Petitioner contends that Dr. Leuterio failed
to disclose that he had hypertension, which might have caused his death. Concealment
exists where the assured had knowledge of a fact material to the risk, and honesty, good
faith, and fair dealing requires that he should communicate it to the assured, but he
designedly and intentionally withholds the same. 15
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia,
as supported by the information given by the widow of the decedent. Grepalife asserts
that Dr. Mejia's technical diagnosis of the cause of death of Dr. Leuterio was a duly
documented hospital record, and that the widow's declaration that her husband had
"possible hypertension several years ago" should not be considered as hearsay, but as
part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not
conduct an autopsy on the body of the decedent. As the attending physician, Dr. Mejia
stated that he had no knowledge of Dr. Leuterio's any previous hospital
confinement. 16 Dr. Leuterio's death certificate stated that hypertension was only "the
possible cause of death." The private respondent's statement, as to the medical history of
her husband, was due to her unreliable recollection of events. Hence, the statement of
the physician was properly considered by the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate
court, thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was in good
health and that he had not consulted a doctor or any of the enumerated ailments,
including hypertension; when he died the attending physician had certified in the death
certificate that the former died of cerebral hemorrhage, probably secondary to
hypertension. From this report, the appellant insurance company refused to pay the
insurance claim. Appellant alleged that the insured had concealed the fact that he had
hypertension.
Contrary to appellant's allegations, there was no sufficient proof that the insured had
suffered from hypertension. Aside from the statement of the insured's widow who was
not even sure if the medicines taken by Dr. Leuterio were for hypertension, the appellant
had not proven nor produced any witness who could attest to Dr. Leuterio's medical
history . . .
xxx xxx xxx
Appellant insurance company had failed to establish that there was concealment made by
the insured, hence, it cannot refuse payment of the claim. 17
The fraudulent intent on the part of the insured must be established to entitle the insurer
to rescind the contract.18Misrepresentation as a defense of the insurer to avoid liability is
an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the insurer. 19 In the case at bar, the petitioner failed to
clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds
of the insurance.1wphi1.nt
(P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo Leuterio (deceased), upon
presentation of proof of prior settlement of mortgagor's indebtedness to Development
Bank of the Philippines. Costs against petitioner.1wphi1.nt
SO ORDERED.

And that brings us to the last point in the review of the case at bar. Petitioner claims that
there was no evidence as to the amount of Dr. Leuterio's outstanding indebtedness to
DBP at the time of the mortgagor's death. Hence, for private respondent's failure to
establish the same, the action for specific performance should be dismissed. Petitioner's
claim is without merit. A life insurance policy is a valued policy. 20 Unless the interest of a
person insured is susceptible of exact pecuniary measurement, the measure of indemnity
under a policy of insurance upon life or health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the coverage of his insurance, which states
that:

The policy states that upon receipt of due proof of the Debtor's death during the terms of
this insurance, a death benefit in the amount of P86,200.00 shall be paid.

In the event of the debtor's death before his indebtedness with the creditor shall have
been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the
Creditor and the balance of the Sum Assured, if there is any shall then be paid to the
beneficiary/ies designated by the debtor." 22(Emphasis omitted)

However, we noted that the Court of Appeals' decision was promulgated on May 17,
1993. In private respondent's memorandum, she states that DBP foreclosed in 1995 their
residential lot, in satisfaction of mortgagor's outstanding loan. Considering this
supervening event, the insurance proceeds shall inure to the benefit of the heirs of the
deceased person or his beneficiaries. Equity dictates that DBP should not unjustly enrich
itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot
collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds
now rightly belong to Dr. Leuterio's heirs represented by his widow, herein private
respondent Medarda Leuterio.

WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of
Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is
ORDERED to pay the insurance proceeds amounting to Eighty-six thousand, two hundred
G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA
TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care
coverage with petitioner Philamcare Health Systems, Inc. In the standard application
form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes,
give details).1
The application was approved for a period of one year from March 1, 1988 to March 1,
1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the
agreement, respondents husband was entitled to avail of hospitalization benefits,
whether ordinary or emergency, listed therein. He was also entitled to avail of "out-
patient benefits" such as annual physical examinations, preventive health care and other
out-patient services.
Upon the termination of the agreement, the same was extended for another year from
March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of
coverage was increased to a maximum sum of P75,000.00 per disability.2
During the period of his coverage, Ernani suffered a heart attack and was confined at the
Manila Medical Center (MMC) for one month beginning March 9, 1990. While her
husband was in the hospital, respondent tried to claim the benefits under the health care
agreement. However, petitioner denied her claim saying that the Health Care Agreement
was void. According to petitioner, there was a concealment regarding Ernanis medical
history. Doctors at the MMC allegedly discovered at the time of Ernanis confinement that
he was hypertensive, diabetic and asthmatic, contrary to his answer in the application
form. Thus, respondent paid the hospitalization expenses herself, amounting to about
P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist
at home. Later, he was admitted at the Chinese General Hospital. Due to financial
difficulties, however, respondent brought her husband home again. In the morning of
April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained
to bring him back to the Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch
44, an action for damages against petitioner and its president, Dr. Benito Reverente,
which was docketed as Civil Case No. 90-53795. She asked for reimbursement of her
expenses plus moral damages and attorneys fees. After trial, the lower court ruled
against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff
Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani
Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff
who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to
plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all
awards for damages and absolved petitioner Reverente.4 Petitioners motion for
reconsideration was denied.5 Hence, petitioner brought the instant petition for review,
raising the primary argument that a health care agreement is not an insurance contract;
hence the "incontestability clause" under the Insurance Code6 does not
apply.1wphi1.nt
Petitioner argues that the agreement grants "living benefits," such as medical check-ups
and hospitalization which a member may immediately enjoy so long as he is alive upon
effectivity of the agreement until its expiration one-year thereafter. Petitioner also points
out that only medical and hospitalization benefits are given under the agreement without
any indemnification, unlike in an insurance contract where the insured is indemnified for
his loss. Moreover, since Health Care Agreements are only for a period of one year, as
compared to insurance contracts which last longer, 7 petitioner argues that the
incontestability clause does not apply, as the same requires an effectivity period of at
least two years. Petitioner further argues that it is not an insurance company, which is
governed by the Insurance Commission, but a Health Maintenance Organization under
the authority of the Department of Health.
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 designated 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. 8
Section 3 of the Insurance Code states that any contingent or unknown event, whether
past or future, which may damnify a person having an insurable interest against him, may
be insured against. Every person has an insurable interest in the life and health of himself.
Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance;
and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondents husband in obtaining the health
care agreement was his own health. The health care agreement was in the nature of non-
life insurance, which is primarily a contract of indemnity. 9 Once the member incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated
contingent, the health care provider must pay for the same to the extent agreed upon
under the contract.
Petitioner argues that respondents husband concealed a material fact in his application.
It appears that in the application for health coverage, petitioners required respondents
husband to sign an express authorization for any person, organization or entity that has
any record or knowledge of his health to furnish any and all information relative to any
hospitalization, consultation, treatment or any other medical advice or
examination.10 Specifically, the Health Care Agreement signed by respondents husband
states:
We hereby declare and agree that all statement and answers contained herein and in any
addendum annexed to this application are full, complete and true and bind all parties in
interest under the Agreement herein applied for, that there shall be no contract of health
care coverage unless and until an Agreement is issued on this application and the full
Membership Fee according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing
in the application; that any physician is, by these presents, expressly authorized to
disclose or give testimony at anytime relative to any information acquired by him in his
professional capacity upon any question affecting the eligibility for health care coverage
of the Proposed Members and that the acceptance of any Agreement issued on this
application shall be a ratification of any correction in or addition to this application as
stated in the space for Home Office Endorsement.11 (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for
authorization to inquire about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of
my health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any
and all information relative to any hospitalization, consultation, treatment or any other
medical advice or examination. This authorization is in connection with the application for
health care coverage only. A photographic copy of this authorization shall be as valid as
the original.12 (Underscoring ours)
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which
reads:
Failure to disclose or misrepresentation of any material information by the member in the
application or medical examination, whether intentional or unintentional, shall
automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or
misrepresented information is deemed material if its revelation would have resulted in
the declination of the applicant by Philamcare or the assessment of a higher Membership
Fee for the benefit or benefits applied for.13
The answer assailed by petitioner was in response to the question relating to the medical
history of the applicant. This largely depends on opinion rather than fact, especially
coming from respondents husband who was not a medical doctor. Where matters of
opinion or judgment are called for, answers made in good faith and without intent to
deceive will not avoid a policy even though they are untrue. 14 Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in inducing the
acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise
the rule although the statement is material to the risk, if the statement is obviously of the
foregoing character, since in such case the insurer is not justified in relying upon such
statement, but is obligated to make further inquiry. There is a clear distinction between
such a case and one in which the insured is fraudulently and intentionally states to be
true, as a matter of expectation or belief, that which he then knows, to be actually untrue,
or the impossibility of which is shown by the facts within his knowledge, since in such case
the intent to deceive the insurer is obvious and amounts to actual fraud. 15(Underscoring
ours)
The fraudulent intent on the part of the insured must be established to warrant rescission
of the insurance contract.16 Concealment as a defense for the health care provider or
insurer to avoid liability is an affirmative defense and the duty to establish such defense
by satisfactory and convincing evidence rests upon the provider or insurer. In any case,
with or without the authority to investigate, petitioner is liable for claims made under the
contract. Having assumed a responsibility under the agreement, petitioner is bound to
answer the same to the extent agreed upon. In the end, the liability of the health care
provider attaches once the member is hospitalized for the disease or injury covered by
the agreement or whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to
rescind a contract of insurance." The right to rescind should be exercised previous to the
commencement of an action on the contract.17In this case, no rescission was made.
Besides, the cancellation of health care agreements as in insurance policies require the
concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one or
more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the
policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and SO ORDERED.
upon request of insured, to furnish facts on which cancellation is based. 18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance
contract contain limitations on liability, courts should construe them in such a way as to
preclude the insurer from non-compliance with his obligation.19 Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the party
which prepared the contract the insurer.20 By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured,
especially to avoid forfeiture.21 This is equally applicable to Health Care Agreements. The
phraseology used in medical or hospital service contracts, such as the one at bar, must be
liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of
two interpretations the construction conferring coverage is to be adopted, and
exclusionary clauses of doubtful import should be strictly construed against the
provider.22

Anent the incontestability of the membership of respondents husband, we quote with

approval the following findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems
Inc. had twelve months from the date of issuance of the Agreement within which to
contest the membership of the patient if he had previous ailment of asthma, and six
months from the issuance of the agreement if the patient was sick of diabetes or
hypertension. The periods having expired, the defense of concealment or
misrepresentation no longer lie.23

Finally, petitioner alleges that respondent was not the legal wife of the deceased member
considering that at the time of their marriage, the deceased was previously married to
another woman who was still alive. The health care agreement is in the nature of a
contract of indemnity. Hence, payment should be made to the party who incurred the
expenses. It is not controverted that respondent paid all the hospital and medical
expenses. She is therefore entitled to reimbursement. The records adequately prove the
expenses incurred by respondent for the deceaseds hospitalization, medication and the
professional fees of the attending physicians.24

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the
Court of Appeals dated December 14, 1995 is AFFIRMED.
G.R. No. 156167 May 16, 2005 and two (2) swimming pools only (Exhs. "C-1"; D-1", "E" and "F-1"). "Item 5" in those
policies referred to the two (2) swimming pools only (Exhs. "1-B", "2-B", "3-B" and "F-2");
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE that subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-4182383-0 covering
CORPORATION, respondent. the period March 14, 1988 to March 14, 1989 (Exhs. "G" also "G-1") and in said policy the
earthquake endorsement clause as indicated in Exhibits "C-1", "D-1", Exhibits "E" and "F-
PUNO, J.:
1" was deleted and the entry under Endorsements/Warranties at the time of issue read
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court that plaintiff renewed its policy with AHAC (AIU) for the period of March 14, 1989 to
by petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE March 14, 1990 under Policy No. 206-4568061-9 (Exh. "H") which carried the entry under
CORPORATION. Petitioner assails the appellate court decision 1 which dismissed its two "Endorsement/Warranties at Time of Issue", which read "Endorsement to Include
appeals and affirmed the judgment of the trial court. Earthquake Shock (Exh. "6-B-1") in the amount of P10,700.00 and paid P42,658.14 (Exhs.
"6-A" and "6-B") as premium thereof, computed as follows:
For review are the warring interpretations of petitioner and respondent on the scope of
the insurance companys liability for earthquake damage to petitioners properties. Item - P7,691,000.00 - on the Clubhouse only
Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance
Policy No. 31944 covers all damages to the properties within its resort caused by @ .392%;
earthquake. Respondent contends that the rider limits its liability for loss to the two
swimming pools of petitioner. - 1,500,000.00 - on the furniture, etc. contained in th
mentioned@ .490%;
The facts as established by the court a quo, and affirmed by the appellate court are as
follows: - 393,000.00 - on the two swimming pools, only (a
earthquake shock only) @ 0.100%
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance Company
- 116,600.00 other buildings include as follows:
(AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from 1984-85; 1985-
86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and "F"; also Exhs. "1", "2", "3" and "4"
a) Tilter House - P19,800.00 - 0.551%
respectively), the risk of loss from earthquake shock was extended only to plaintiffs two
swimming pools, thus, "earthquake shock endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E"
 b) Power House - P41,000.00 - 0.551% "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G" and "H") and in
Policy No. 31944 issued by defendant, the shock endorsement provide(sic):
c) House Shed - P55,000.00 - 0.540%
In consideration of the payment by the insured to the company of the
sum included additional premium the Company agrees, notwithstanding what is stated in
P100,000.00 - for furniture, fixtures, lines air-con and operating
the printed conditions of this policy due to the contrary, that this insurance covers loss or
equipment
damage to shock to any of the property insured by this Policy occasioned by or through or
in consequence of earthquake (Exhs. "1-D", "2-D", "3-A", "4-B", "5-A", "6-D" and "7-C");
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy
No. 206-4568061-9 (Exh. "H") provided that the policy wording and rates in said policy be that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that
copied in the policy to be issued by defendant; that defendant issued Policy No. 31944 to on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and plaintiffs
plaintiff covering the period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for properties covered by Policy No. 31944 issued by defendant, including the two swimming
a total premium of P45,159.92 (Exh. "I"); that in the computation of the premium, pools in its Agoo Playa Resort were damaged. 2
defendants Policy No. 31944 (Exh. "I"), which is the policy in question, contained on the
right-hand upper portion of page 7 thereof, the following: After the earthquake, petitioner advised respondent that it would be making a claim
under its Insurance Policy No. 31944 for damages on its properties. Respondent
Rate-Various instructed petitioner to file a formal claim, then assigned the investigation of the claim to
an independent claims adjuster, Bayne Adjusters and Surveyors, Inc. 3 On July 30, 1990,
Premium P37,420.60 F/L respondent, through its adjuster, requested petitioner to submit various documents in
support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its
2,061.52 Typhoon Vice-President A.R. de Leon,4 rendered a preliminary report5 finding extensive damage
caused by the earthquake to the clubhouse and to the two swimming pools. Mr. de Leon
1,030.76 EC stated that "except for the swimming pools, all affected items have no coverage for
earthquake shocks."6 On August 11, 1990, petitioner filed its formal demand7 for
393.00 ES settlement of the damage to all its properties in the Agoo Playa Resort. On August 23,
1990, respondent denied petitioners claim on the ground that its insurance policy only
Doc. Stamps 3,068.10 afforded earthquake shock coverage to the two swimming pools of the resort. 8 Petitioner
and respondent failed to arrive at a settlement.9 Thus, on January 24, 1991, petitioner
F.S.T. 776.89 filed a complaint10 with the regional trial court of Pasig praying for the payment of the
following:
Prem. Tax 409.05
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties,
with interest thereon, as computed under par. 29 of the policy (Annex "B") until fully paid;
TOTAL 45,159.92;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by
that the above break-down of premiums shows that plaintiff paid only P393.00 as
plaintiff on account of defendants refusal to pay the claims;
premium against earthquake shock (ES); that in all the six insurance policies (Exhs. "C",
"D", "E", "F", "G" and "H"), the premium against the peril of earthquake shock is the same, 3.) The sum of P500,000.00, by way of exemplary damages;
that is P393.00 (Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02" and "4-A-1";
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against
the peril of earthquake shock, the same premium it paid against earthquake shock only on
the two swimming pools in all the policies issued by AHAC(AIU) (Exhibits "C", "D", "E", "F"
and "G"). From this fact the Court must consequently agree with the position of
defendant that the endorsement rider (Exhibit "7-C") means that only the two swimming
pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the language
used in the policy in litigation is clear and unambiguous hence there is no need for
interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which struck on
July 16, 1990. Defendant having admitted that the damage to the swimming pools was
appraised by defendants adjuster at P386,000.00, defendant must, by virtue of the
contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph
that defendant is liable only for the damage caused to the two (2) swimming pools and
that defendant has made known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed for by plaintiff. As to
the counterclaims of defendant, the Court does not agree that the action filed by plaintiff
is baseless and highly speculative since such action is a lawful exercise of the plaintiffs
right to come to Court in the honest belief that their Complaint is meritorious. The prayer,
therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of
THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to
the two (2) swimming pools, with interest at 6% per annum from the date of the filing of
the Complaint until defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with
the Court of Appeals based on the following assigned errors:14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY RECOVER
FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY NO. 31944,
CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE ISSUANCE OF
SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE
OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO RECOVER
UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH "I") BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE CIRCUMSTANCES
SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE PARTIES AFTER THE
EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED TO
THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS
ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to
award it attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not
convinced that the last two (2) insurance contracts (Exhs. "G" and "H"), which the
plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance contract
with Philippine Charter Insurance Corporation is said to have been based and copied (Exh.
"I"), covered an extended earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants
prayer for the imposition of interest 24% on the insurance claim and 6% on loss of
income allegedly amounting to P4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools, as the
Court a quo and this Court correctly found it to be liable only, it then cannot be said that it
was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the
rule that the award thereof is subject to the sound discretion of the court. Thus, if such
discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et al.,
G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception rather
than a rule, it is necessary for the court to make findings of facts and law that would bring
the case within the exception and justify the grant of such award (Country Bankers
Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914,
January 25, 2002). Therefore, holding that the plaintiff-appellants action is not baseless
and highly speculative, We find that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.15
Petitioner filed the present petition raising the following issues: 16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS
INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER THAN ALL
THE PROPERTIES COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF
EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR
DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS FEES AND
EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties
insured and not only the swimming pools. It used the words "any property insured by this
policy," and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is
confirmed in the body of the insurance policy itself, which states that it is "[s]ubject to:
Other Insurance Clause, Typhoon Endorsement, Earthquake Shock Endt., Extended
Coverage Endt., FEA Warranty & Annual Payment Agreement On Long Term Policies." 17
Third, that the qualification referring to the two swimming pools had already been
deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent
omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the
wording of the insurance policy, because the rider is the more deliberate expression of
the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor
of petitioner and against respondent. It was respondent which caused the ambiguity
when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement
should be interpreted as a caveat on the standard fire insurance policy, such as to remove
the two swimming pools from the coverage for the risk of fire. It should not be used to
limit the respondents liability for earthquake shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was
not paid under the extended coverage. The premium for the earthquake shock coverage
was already included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to
extend earthquake shock coverage to all insured properties. When it secured an insurance
policy from respondent, petitioner told respondent that it wanted an exact replica of its
latest insurance policy from American Home Assurance Company (AHAC-AIU), which
covered all the resorts properties for earthquake shock damage and respondent agreed.
After the July 16, 1990 earthquake, respondent assured petitioner that it was covered for
earthquake shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc.,
likewise requested petitioner to submit the necessary documents for its building claims
and other repair costs. Thus, under the doctrine of equitable estoppel, it cannot deny that
the insurance policy it issued to petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45
of the Revised Rules of Court as its remedy, and there is no need for calibration of the
evidence in order to establish the facts upon which this petition is based.
18
On the other hand, respondent made the following counter arguments:
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly
extended coverage against earthquake shock to petitioners insured properties other than
on the two swimming pools. Petitioner admitted that from 1984 to 1988, only the two
swimming pools were insured against earthquake shock. From 1988 until 1990, the
provisions in its policy were practically identical to its earlier policies, and there was no
increase in the premium paid. AHAC-AIU, in a letter19 by its representative Manuel C.
Quijano, categorically stated that its previous policy, from which respondents policy was
copied, covered only earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that
the policy only covered earthquake shock damage on the two swimming pools. The
amount was the same amount paid by petitioner for earthquake shock coverage on the
two swimming pools from 1990-1991. No additional premium was paid to warrant
coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the
earthquake shock coverage to all of petitioners properties. As per its agreement with
petitioner, respondent copied its policy from the AHAC-AIU policy provided by petitioner.
Although the first five policies contained the said qualification in their riders title, in the
last two policies, this qualification in the title was deleted. AHAC-AIU, through Mr. J.
Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did not
make the policy incomplete, nor did it broaden the scope of the endorsement whose
descriptive title was merely enumerated. Any ambiguity in the policy can be easily
resolved by looking at the other provisions, specially the enumeration of the items
insured, where only the two swimming pools were noted as covered for earthquake shock
damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the
phrase "Item 5 P393,000.00 on the two swimming pools only (against the peril of
earthquake shock only)" meant that only the swimming pools were insured for
earthquake damage. The same phrase is used in toto in the policies from 1989 to 1990,
the only difference being the designation of the two swimming pools as "Item 3."
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be
paid for all the properties covered. In all of its seven insurance policies, petitioner only
paid P393.00 as premium for coverage of the swimming pools against earthquake shock.
No other premium was paid for earthquake shock coverage on the other properties. In
addition, the use of the qualifier "ANY" instead of "ALL" to describe the property covered
was done deliberately to enable the parties to specify the properties included for
earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties
must be included in the earthquake shock coverage. Petitioners own evidence shows that
it only required respondent to follow the exact provisions of its previous policy from
AHAC-AIU. Respondent complied with this requirement. Respondents only deviation
from the agreement was when it modified the provisions regarding the replacement cost
endorsement. With regard to the issue under litigation, the riders of the old policy and
the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would
estop it from maintaining that only the two swimming pools were covered for earthquake
shock. The adjusters letter notifying petitioner to present certain documents for its
building claims and repair costs was given to petitioner before the adjuster knew the full
coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase "Item 5
Only" after the descriptive name or title of the Earthquake Shock Endorsement. However,
the words of the policy reflect the parties clear intention to limit earthquake shock
coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did
not object to any deficiency nor did it institute any action to reform the policy. The policy
binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation
expenses. Since respondent was willing and able to pay for the damage caused on the two
swimming pools, it cannot be considered to be in default, and therefore, it is not liable for
interest.
We hold that the petition is devoid of merit. In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . .
. . . . . . . . additional premium the Company agrees, notwithstanding what is stated in the
In Insurance Policy No. 31944, four key items are important in the resolution of the case printed conditions of this Policy to the contrary, that this insurance covers loss or damage
at bar. (including loss or damage by fire) to any of the property insured by this Policy occasioned
by or through or in consequence of Earthquake.
First, in the designation of location of risk, only the two swimming pools were specified as
included, viz: Provided always that all the conditions of this Policy shall apply (except in so far as they
may be hereby expressly varied) and that any reference therein to loss or damage by fire
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of
should be deemed to apply also to loss or damage occasioned by or through or in
earthquake shock only)20
consequence of Earthquake.24
Second, under the breakdown for premium payments,21 it was stated that:
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope
PREMIUM RECAPITULATION of the earthquake shock coverage. Thus, the policy extended earthquake shock coverage
to all of the insured properties.
ITEM NOS. AMOUNT RATES PREMIUM
It is basic that all the provisions of the insurance policy should be examined and
interpreted in consonance with each other.25 All its parts are reflective of the true intent
xxx of the parties. The policy cannot be construed piecemeal. Certain stipulations cannot be
segregated and then made to control; neither do particular words or phrases necessarily
3 393,000.00 0.100%-E/S 393.0022] determine its character. Petitioner cannot focus on the earthquake shock endorsement to
the exclusion of the other provisions. All the provisions and riders, taken and interpreted
Third, Policy Condition No. 6 stated:
together, indubitably show the intention of the parties to extend earthquake shock
6. This insurance does not cover any loss or damage occasioned by or through or in coverage to the two swimming pools only.
consequence, directly or indirectly of any of the following occurrences, namely:--
A careful examination of the premium recapitulation will show that it is the clear intent of
(a) Earthquake, volcanic eruption or other convulsion of nature. 23 the parties to extend earthquake shock coverage only to the two swimming pools. Section
2(1) of the Insurance Code defines a contract of insurance as an agreement whereby one
Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To undertakes for a consideration to indemnify another against loss, damage or liability
Include the Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz: arising from an unknown or contingent event. Thus, an insurance contract exists where
the following elements concur:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES 1. The insured has an insurable interest;

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN
EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF
THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE INSURANCE
UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.
Earthquake Endorsement
2. The insured is subject to a risk of loss by the happening of the designated 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 insurer's promise, the insured pays a premium.26 (Emphasis A. No, sir. They are our insurance agency.
ours)
Q. And they are independent of your company insofar as operations are concerned?
An insurance premium is the consideration paid an insurer for undertaking to indemnify
the insured against a specified peril.27 In fire, casualty, and marine insurance, the A. Yes, sir, they are separate entity.
premium payable becomes a debt as soon as the risk attaches. 28 In the subject policy, no
Q. But insofar as the procurement of the insurance policy is concerned they are of course
premium payments were made with regard to earthquake shock coverage, except on the
subject to your instruction, is that not correct?
two swimming pools. There is no mention of any premium payable for the other resort
properties with regard to earthquake shock. This is consistent with the history of A. Yes, sir. The final action is still with us although they can recommend what insurance to
petitioners previous insurance policies from AHAC-AIU. As borne out by petitioners take.
witnesses:
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14,
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991 1989, did you give written instruction to Forte Insurance Agency advising it that the
pp. 12-13 earthquake shock coverage must extend to all properties of Agoo Playa Resort in La
Union?
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy
during the period from March 4, 1984 to March 4, 1985 the coverage on earthquake A. No, sir. We did not make any written instruction, although we made an oral instruction
shock was limited to the two swimming pools only? to that effect of extending the coverage on (sic) the other properties of the company.

A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, Q. And that instruction, according to you, was very important because in April 1987 there
there is a provision here that it was only for item 5. was an earthquake tremor in La Union?

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two A. Yes, sir.
swimming pools only?
Q. And you wanted to protect all your properties against similar tremors in the [future], is
A. Yes, sir. that correct?

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991 A. Yes, sir.

pp. 23-26 Q. Now, after this policy was delivered to you did you bother to check the provisions with
respect to your instructions that all properties must be covered again by earthquake
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange
shock endorsement?
for the procurement of this policy?
A. Are you referring to the insurance policy issued by American Home Assurance Company
A. Yes, sir.
marked Exhibit "G"?
Q. Did you also do this through your insurance agency?
Atty. Mejia: Yes.
A. If you are referring to Forte Insurance Agency, yes.
Witness:
Q. Is Forte Insurance Agency a department or division of your company?
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I was
contented already that the previous limitation pertaining to the two swimming pools was
already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended
Coverage Endorsement, FEA Warranty & Annual Payment Agreement on Long Term
Policies"29 to the insurance policy as proof of the intent of the parties to extend the
coverage for earthquake shock. However, this phrase is merely an enumeration of the
descriptive titles of the riders, clauses, warranties or endorsements to which the policy is
subject, as required under Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification
limiting the coverage to the two swimming pools. The earthquake shock endorsement
cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter for
AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III30
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously
marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to
review of (sic) these six (6) policies issued by your company [in favor] of Agoo Playa
Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is, on the
basis on (sic) the wordings indicated in Exhibits C to H respectively what was the extent of
the coverage [against] the peril of earthquake shock as provided for in each of the six (6)
policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as provided for
in each of the six (6) policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration "Earthquake Shock Endorsement,
in the Clauses and Warranties: Item 5 only (Earthquake Shock Endorsement)," sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For
swimming pools we do cover earthquake shock. For building we covered it for full
earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for other
things other than swimming pool? You are covering building? They are covered by a
general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or another
we can issue earthquake shock solely but that the moment I see this, the thing that comes
to my mind is either insuring a swimming pool, foundations, they are normally affected by
earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III No, we dont, sir.
TSN, August 11, 1992
pp. 23-25 Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was
placed, is it not?
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and
F inclusive [remained] its coverage against earthquake shock to two (2) swimming pools A. Yes, sir.
only but that Exhibits G and H respectively entend the coverage against earthquake shock
ATTY. ANDRES:
to all the properties indicated in the respective schedules attached to said policies, what
can you say about that testimony of plaintiffs witness? Will you not also agree with me that these exhibits, Exhibits G and H which you have
pointed to during your direct-examination, the phrase "Item no. 5 only" meaning to (sic)
WITNESS:
the two (2) swimming pools was deleted from the policies issued by AIU, is it not?
As I have mentioned earlier, earthquake shock cannot stand alone without the other half
xxx
of it. I assure you that this one covers the two swimming pools with respect to earthquake
shock endorsement. Based on it, if we are going to look at the premium there has been no ATTY. ANDRES:
change with respect to the rates. Everytime (sic) there is a renewal if the intention of the
insurer was to include the earthquake shock, I think there is a substantial increase in the As an insurance executive will you not attach any significance to the deletion of the
premium. We are not only going to consider the two (2) swimming pools of the other as qualifying phrase for the policies?
stated in the policy. As I see, there is no increase in the amount of the premium. I must
WITNESS:
say that the coverage was not broaden (sic) to include the other items.
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a
COURT:
company underwriter, we do not cover. . it was inadvertent because of the previous
They are the same, the premium rates? policies that we have issued with no specific attachments, premium rates and so on. It
was inadvertent, sir.
WITNESS:
The Court also rejects petitioners contention that respondents contemporaneous and
They are the same in the sence (sic), in the amount of the coverage. If you are going to do subsequent acts to the issuance of the insurance policy falsely gave the petitioner
some computation based on the rates you will arrive at the same premiums, your Honor. assurance that the coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as intended by the
CROSS-EXAMINATION OF JUAN BARANDA III
petitioner. Petitioners own witness testified to this agreement, viz:
TSN, September 7, 1992
pp. 4-6 CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
ATTY. ANDRES:
pp. 4-5
Would you as a matter of practice [insure] swimming pools for fire insurance?
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you
WITNESS: tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of procuring the policy from
Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as
this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit "H" of course?
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will
be charging will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions
and scope of coverage of Exhibits "I" and "H" sometime in the third week of March, 1990
or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy
wordings as well as scope of coverage of Exhibits "I" and "H" respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the
policy wordings and rates were copied from the insurance policy I sent them but it was
only when this case erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit "I" and those indicated in
Exhibit "H" respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the
same P393,000.00 on the two (2) swimming pools only against the peril of earthquake
shock which I understood before that this provision will have to be placed here because
this particular provision under the peril of earthquake shock only is requested because
this is an insurance policy and therefore cannot be insured against fire, so this has to be
placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were
not proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims
adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative of
Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to believe
that the endorsement for earthquake shock covered properties other than the two
swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of
coverage of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of
the insurance coverage policy and it was indicated under Item 3 specifically that the
coverage is only for earthquake shock. Then, I remember I had a talk with Atty. Umlas
(sic), and I relayed to him what I had found out in the policy and he confirmed to me
indeed only Item 3 which were the two swimming pools have coverage for earthquake
shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except
for the swimming pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I
found out that under Item 3 it was specific on the wordings that on the two swimming
pools only, then enclosed in parenthesis (against the peril[s] of earthquake shock only),
and secondly, when I examined the summary of premium payment only Item 3 which
refers to the swimming pools have a computation for premium payment for earthquake
shock and all the other items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot
rely on the general rule that insurance contracts are contracts of adhesion which should
be liberally construed in favor of the insured and strictly against the insurer company
which usually prepares it.31 A contract of adhesion is one wherein a party, usually a
corporation, prepares the stipulations in the contract, while the other party merely affixes
his signature or his "adhesion" thereto. Through the years, the courts have held that in
these type of contracts, the parties do not bargain on equal footing, the weaker party's
participation being reduced to the alternative to take it or leave it. Thus, these contracts
are viewed as traps for the weaker party whom the courts of justice must
protect.32 Consequently, any ambiguity therein is resolved against the insurer, or
construed liberally in favor of the insured.33
The case law will show that this Court will only rule out blind adherence to terms where
facts and circumstances will show that they are basically one-sided.34 Thus, we have called
on lower courts to remain careful in scrutinizing the factual circumstances behind each
case to determine the efficacy of the claims of contending parties. In Development Bank
of the Philippines v. National Merchandising Corporation, et al.,35 the parties, who were
acute businessmen of experience, were presumed to have assented to the assailed
documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner
cannot claim it did not know the provisions of the policy. From the inception of the policy,
petitioner had required the respondent to copy verbatimthe provisions and terms of its
latest insurance policy from AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct
participant in securing the insurance policy of petitioner, is reflective of petitioners
knowledge, viz:
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in
the American Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied from the AIU Policy No.
206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No.
206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance
in some terms, specifically in the replacement cost endorsement, but the principal
provisions of the policy remained essentially similar to AHAC-AIUs policy. Consequently,
we cannot apply the "fine print" or "contract of adhesion" rule in this case as the parties
intent to limit the coverage of the policy to the two swimming pools only is not
ambiguous.37
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.
SO ORDERED.

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36

TSN, September 23, 1991
pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those
facilities in Agoo Playa?

A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine
Charter Insurance Corporation as long as it will follow the same or exact provisions of the
previous insurance policy we had with American Home Assurance Corporation.
G.R. No. 166245 April 9, 2008
ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner, vs. THE PHILIPPINE
AMERICAN LIFE INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and
set aside the November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No.
57810 is the query: May the inaction of the insurer on the insurance application be
considered as approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company
(Philamlife) entered into an agreement denominated as Creditor Group Life Policy No. P-
19202 with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under the
policy, the clients of Eternal who purchased burial lots from it on installment basis would
be insured by Philamlife. The amount of insurance coverage depended upon the existing
balance of the purchased burial lots. The policy was to be effective for a period of one
year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is
indebted to the Assured for the unpaid balance of his loan with the Assured, and is
accepted for Life Insurance coverage by the Company on its effective date is eligible for
insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to P50,000.00.
However, a declaration of good health shall be required for all Lot Purchasers as part of
the application. The Company reserves the right to require further evidence of insurability
satisfactory to the Company in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the
unpaid balance of his loan (including arrears up to but not exceeding 2 months) as
reported by the Assured to the Company or the sum of P100,000.00, whichever is smaller.
Such benefit shall be paid to the Assured if the Lot Purchaser dies while insured under the
Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a
loan with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.3
Eternal was required under the policy to submit to Philamlife a list of all new lot
purchasers, together with a copy of the application of each purchaser, and the amounts of
the respective unpaid balances of all insured lot purchasers. In relation to the instant
petition, Eternal complied by submitting a letter dated December 29, 1982, 4 containing a
list of insurable balances of its lot buyers for October 1982. One of those included in the
list as "new business" was a certain John Chuang. His balance of payments was PhP
100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance
claim for Chuangs death. Attached to the claim were the following documents: (1)
Chuangs Certificate of Death; (2) Identification Certificate stating that Chuang is a
naturalized Filipino Citizen; (3) Certificate of Claimant; (4) Certificate of Attending
Physician; and (5) Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984, 6 requiring Eternal to
submit the following documents relative to its insurance claim for Chuangs death: (1)
Certificate of Claimant (with form attached); (2) Assureds Certificate (with form
attached); (3) Application for Insurance accomplished and signed by the insured, Chuang,
while still living; and (4) Statement of Account showing the unpaid balance of Chuang
before his death.
Eternal transmitted the required documents through a letter dated November 14,
1984,7 which was received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the latters
insurance claim. This prompted Eternal to demand from Philamlife the payment of the
claim for PhP 100,000 on April 25, 1986.8
In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter
dated May 20, 1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and 9529 with
Eternal Gardens Memorial Park in October 1982 for the total maximum insurable amount
of P100,000.00 each. No application for Group Insurance was submitted in our office prior
to his death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of good health shall be required for all Lot Purchasers
as party of the application." We cite further the provision on Effective Date of Coverage
under the policy which states that "there shall be no insurance if the application is not
approved by the Company." Since no application had been submitted by the
Insured/Assured, prior to his death, for our approval but was submitted instead on
November 15, 1984, after his death, Mr. John Uy Chuang was not covered under the
Policy. We wish to point out that Eternal Gardens being the Assured was a party to the
Contract and was therefore aware of these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our approval per se of
the insurance coverage but are held by us in trust for the payor until the prerequisites for
insurance coverage shall have been met. We will however, return all the premiums which
have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a
sum of money against Philamlife, docketed as Civil Case No. 14736. The trial court decided
in favor of Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff
ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the
sum of P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus legal
rate of interest, until fully paid; and, to pay the sum of P10,000.00 as attorneys fees.
SO ORDERED.
The RTC found that Eternal submitted Chuangs application for insurance which he
accomplished before his death, as testified to by Eternals witness and evidenced by the
letter dated December 29, 1982, stating, among others: "Encl: Phil-Am Life Insurance
Application Forms & Cert."10 It further ruled that due to Philamlifes inaction from the
submission of the requirements of the group insurance on December 29, 1982 to
Chuangs death on August 2, 1984, as well as Philamlifes acceptance of the premiums
during the same period, Philamlife was deemed to have approved Chuangs application.
The RTC said that since the contract is a group life insurance, once proof of death is
submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not
enclosed in Eternals letter dated December 29, 1982. It further ruled that the non-
accomplishment of the submitted application form violated Section 26 of the Insurance
Code. Thus, the CA concluded, there being no application form, Chuang was not covered
by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore
determined by this Honorable Court, or has decided it in a way not in accord with law or
with the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife before
the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29,
1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues
raised before the CA and first level courts, considering their findings of facts are
conclusive and binding on this Court. However, such rule is subject to exceptions, as
enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts;
(5) when the findings of facts are conflicting; (6) when in making its findings the [CA] went
beyond the issues of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial
court; (8) when the findings are conclusions without citation of specific evidence on which
they are based; (9) when the facts set forth in the petition as well as in the petitioners
main and reply briefs are not disputed by the respondent; (10) when the findings of fact
are premised on the supposed absence of evidence and contradicted by the evidence on
record; and (11) when the Court of Appeals manifestly overlooked certain relevant facts
not disputed by the parties, which, if properly considered, would justify a different
conclusion.12(Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this
Court may review them.
Eternal claims that the evidence that it presented before the trial court supports its
contention that it submitted a copy of the insurance application of Chuang before his
death. In Eternals letter dated December 29, 1982, a list of insurable interests of buyers
for October 1982 was attached, including Chuang in the list of new businesses. Eternal
added it was noted at the bottom of said letter that the corresponding "Phil-Am Life
Insurance Application Forms & Cert." were enclosed in the letter that was apparently
received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy
of the insurance application which was signed by Chuang himself and executed before his
death.
On the other hand, Philamlife claims that the evidence presented by Eternal is
insufficient, arguing that Eternal must present evidence showing that Philamlife received
a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped
as received, states that the insurance forms for the attached list of burial lot buyers were
attached to the letter. Such stamp of receipt has the effect of acknowledging receipt of
the letter together with the attachments. Such receipt is an admission by Philamlife
against its own interest.13 The burden of evidence has shifted to Philamlife, which must
prove that the letter did not contain Chuangs insurance application. However, Philamlife
failed to do so; thus, Philamlife is deemed to have received Chuangs insurance
application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal
letter is stamped as received, the contents of the letter are correct and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the
reliability and credibility of the witnesses, because it has the opportunity to observe
firsthand the witnesses demeanor, conduct, and attitude. Findings of the trial court on
such matters are binding and conclusive on the appellate court, unless some facts or
circumstances of weight and substance have been overlooked, misapprehended, or
misinterpreted,14 that, if considered, might affect the result of the case. 15
An examination of the testimonies of the witnesses mentioned by Philamlife, however,
reveals no overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance
application of Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of this form
and the original of this is submitted to Philamlife together with the monthly remittances
and the second copy is remained or retained with the marketing department of Eternal
Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely asking for
the location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with that
payment together with the new clients all the originals I see to it before I sign the
transmittal letter the originals are attached therein.16
In other words, the witness admitted not knowing where the original insurance
application was, but believed that the application was transmitted to Philamlife as an
attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether
one or two insurance application forms were accomplished and the testimony of
Mendoza on who actually filled out the application form, these are minor inconsistencies
that do not affect the credibility of the witnesses. Thus, we ruled in People v. Paredes that
minor inconsistencies are too trivial to affect the credibility of witnesses, and these may
even serve to strengthen their credibility as these negate any suspicion that the
testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of the
prosecutions evidence as a whole or reflect on the witnesses honesty. The test is
whether the testimonies agree on essential facts and whether the respective versions
corroborate and substantially coincide with each other so as to make a consistent and
coherent whole.18
In the present case, the number of copies of the insurance application that Chuang
executed is not at issue, neither is whether the insurance application presented by Eternal
has been falsified. Thus, the inconsistencies pointed out by Philamlife are minor and do
not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without
approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is
provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a
loan with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two sentences.
The first sentence appears to state that the insurance coverage of the clients of Eternal
already became effective upon contracting a loan with Eternal while the second sentence
appears to require Philamlife to approve the insurance contract before the same can
become effective.
It must be remembered that an insurance contract is a contract of adhesion which must
be construed liberally in favor of the insured and strictly against the insurer in order to
safeguard the latters interest. Thus, in Malayan Insurance Corporation v. Court of
Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the general
rule of resolving any ambiguity therein in favor of the insured, where the contract or
policy is prepared by the insurer. A contract of insurance, being a contract of adhesion,
par excellence, any ambiguity therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and strictly against the
insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with its
obligations.19 (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with his
obligation. Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract, the insurer. By reason of
the exclusive control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the insurer and liberally
in favor of the insured, especially to avoid forfeiture. 20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated
December 10, 1980, must be construed in favor of the insured and in favor of the
effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that
upon a partys purchase of a memorial lot on installment from Eternal, an insurance
contract covering the lot purchaser is created and the same is effective, valid, and binding
until terminated by Philamlife by disapproving the insurance application. The second
sentence of Creditor Group Life Policy No. P-1920 on the Effective Date of Benefit is in the
nature of a resolutory condition which would lead to the cessation of the insurance
contract. Moreover, the mere inaction of the insurer on the insurance application must
not work to prejudice the insured; it cannot be interpreted as a termination of the
insurance contract. The termination of the insurance contract by the insurer must be
explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal
footing is inaccurate at best. Insurance contracts are wholly prepared by the insurer with
vast amounts of experience in the industry purposefully used to its advantage. More often
than not, insurance contracts are contracts of adhesion containing technical terms and
conditions of the industry, confusing if at all understandable to laypersons, that are
imposed on those who wish to avail of insurance. As such, insurance contracts are imbued
with public interest that must be considered whenever the rights and obligations of the
insurer and the insured are to be delineated. Hence, in order to protect the interest of
insurance applicants, insurance companies must be obligated to act with haste upon
insurance applications, to either deny or approve the same, or otherwise be bound to
honor the application as a valid, binding, and effective insurance contract. 21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV
No. 57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC,
Branch 138 is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life
Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000
from the time of extra-judicial demand by Eternal until Philamlifes receipt of the May 29,
1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP
100,000 from June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000. No costs. SO ORDERED.
G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
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
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
XIII
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 224,702,641.18. 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
22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until
fully paid for the 1996 VAT deficiency and 31,094,163.87 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 55,746,352.19 and 68,450,258.73 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 5,127,149.08 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 (0.50) on each four pesos (4.00), 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)
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.

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:
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 and Philamcare 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.1avvphi1
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 EO 47 273 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 9243 48 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 376 million 53 is way
beyond its net worth of 259 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 paid 5,127,149.08 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 CA 64 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. Baier-Nickel,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 that the 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.
G.R. No. 198174 September 2, 2013
ALPHA INSURANCE AND SURETY CO., PETITIONER, vs. ARSENIA SONIA
CASTOR, RESPONDENT.
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision1 dated May 31, 2011 and Resolution2 dated August 10, 2011 of the
Court of Appeals (CA) in CA-G.R. CV No. 93027.
The facts follow.
On February 21, 2007, respondent entered into a contract of insurance, Motor Car Policy
No. MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota Revo DLX
DSL. The contract of insurance obligates the petitioner to pay the respondent the amount
of Six Hundred Thirty Thousand Pesos (630,000.00) in case of loss or damage to said
vehicle during the period covered, which is from February 26, 2007 to February 26, 2008.
On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel Salazar
Lanuza (Lanuza), to bring the above-described vehicle to a nearby auto-shop for a tune-
up. However, Lanuza no longer returned the motor vehicle to respondent and despite
diligent efforts to locate the same, said efforts proved futile. Resultantly, respondent
promptly reported the incident to the police and concomitantly notified petitioner of the
said loss and demanded payment of the insurance proceeds in the total sum of
630,000.00.
In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent, stating
among others, thus:
Upon verification of the documents submitted, particularly the Police Report and your
Affidavit, which states that the culprit, who stole the Insure[d] unit, is employed with you.
We would like to invite you on the provision of the Policy under Exceptions to Section-III,
which we quote:
1.) The Company shall not be liable for:
xxxx
(4) Any malicious damage caused by the Insured, any member of his family or by "A
PERSON IN THE INSUREDS SERVICE."
In view [of] the foregoing, we regret that we cannot act favorably on your claim.
In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim and
argued that the exception refers to damage of the motor vehicle and not to its loss.
However, petitioners denial of respondents insured claim remains firm.
Accordingly, respondent filed a Complaint for Sum of Money with Damages against
petitioner before the Regional Trial Court (RTC) of Quezon City on September 10, 2007.
In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of
respondent in this wise:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
and against the defendant ordering the latter as follows:
To pay plaintiff the amount of 466,000.00 plus legal interest of 6% per annum from the
time of demand up to the time the amount is fully settled;
To pay attorneys fees in the sum of 65,000.00; and Significant portions of Section III of the Insurance Policy states:

To pay the costs of suit. SECTION III LOSS OR DAMAGE

All other claims not granted are hereby denied for lack of legal and factual basis. 3 The Company will, subject to the Limits of Liability, indemnify the Insured against loss of
or damage to the Schedule Vehicle and its accessories and spare parts whilst thereon:
Aggrieved, petitioner filed an appeal with the CA.
(a)
On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon Citys
decision. The fallo reads: by accidental collision or overturning, or collision or overturning consequent upon
mechanical breakdown or consequent upon wear and tear;
WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the Decision,
dated December 19, 2008, of Branch 215 of the Regional Trial Court of Quezon City, in (b)
Civil Case No. Q-07-61099, is hereby AFFIRMED in toto.
by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;
4
SO ORDERED.
(c)
Petitioner filed a Motion for Reconsideration against said decision, but the same was
denied in a Resolution dated August 10, 2011. by malicious act;

Hence, the present petition wherein petitioner raises the following grounds for the (d)
allowance of its petition:
whilst in transit (including the processes of loading and unloading) incidental to such
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND GROSSLY OR transit by road, rail, inland waterway, lift or elevator.
GRAVELY ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF THE PRIVATE
xxxx
RESPONDENT AND AGAINST THE PETITIONER AND RULED THAT EXCEPTION DOES NOT
COVER LOSS BUT ONLY DAMAGE BECAUSE THE TERMS OF THE INSURANCE POLICY ARE EXCEPTIONS TO SECTION III
[AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH THAT THE PARTIES THEMSELVES
DISAGREE ABOUT THE MEANING OF PARTICULAR PROVISIONS, THE POLICY WILL BE The Company shall not be liable to pay for:
CONSTRUED BY THE COURTS LIBERALLY IN FAVOR OF THE ASSURED AND STRICTLY
Loss or Damage in respect of any claim or series of claims arising out of one event, the
AGAINST THE INSURER.
first amount of each and every loss for each and every vehicle insured by this Policy, such
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND COMMITTED amount being equal to one percent (1.00%) of the Insureds estimate of Fair Market Value
GRAVE ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN TOTO THE JUDGMENT OF THE as shown in the Policy Schedule with a minimum deductible amount of Php3,000.00;
TRIAL COURT.5
Consequential loss, depreciation, wear and tear, mechanical or electrical breakdowns,
Simply, the core issue boils down to whether or not the loss of respondents vehicle is failures or breakages;
excluded under the insurance policy.
Damage to tires, unless the Schedule Vehicle is damaged at the same time;
We rule in the negative.
Any malicious damage caused by the Insured, any member of his family or by a person in
the Insureds service.6
In denying respondents claim, petitioner takes exception by arguing that the word
"damage," under paragraph 4 of "Exceptions to Section III," means loss due to injury or
harm to person, property or reputation, and should be construed to cover malicious "loss"
as in "theft." Thus, it asserts that the loss of respondents vehicle as a result of it being
stolen by the latters driver is excluded from the policy.
We do not agree.
Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that theft
perpetrated by the driver of the insured is not an exception to the coverage from the
insurance policy, since Section III thereof did not qualify as to who would commit the
theft. Thus:
Theft perpetrated by a driver of the insured is not an exception to the coverage from the
insurance policy subject of this case. This is evident from the very provision of Section III
"Loss or Damage." The insurance company, subject to the limits of liability, is obligated to
indemnify the insured against theft. Said provision does not qualify as to who would
commit the theft. Thus, even if the same is committed by the driver of the insured, there
being no categorical declaration of exception, the same must be covered. As correctly
pointed out by the plaintiff, "(A)n insurance contract should be interpreted as to carry out
the purpose for which the parties entered into the contract which is to insure against risks
of loss or damage to the goods. Such interpretation should result from the natural and
reasonable meaning of language in the policy. Where restrictive provisions are open to
two interpretations, that which is most favorable to the insured is adopted." The
defendant would argue that if the person employed by the insured would commit the
theft and the insurer would be held liable, then this would result to an absurd situation
where the insurer would also be held liable if the insured would commit the theft. This
argument is certainly flawed. Of course, if the theft would be committed by the insured
himself, the same would be an exception to the coverage since in that case there would
be fraud on the part of the insured or breach of material warranty under Section 69 of the
Insurance Code.7
Moreover, 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.8 Accordingly, in interpreting the exclusions in an insurance
contract, the terms used specifying the excluded classes therein are to be given their
meaning as understood in common speech. 9
Adverse to petitioners claim, the words "loss" and "damage" mean different things in
common ordinary usage. The word "loss" refers to the act or fact of losing, or failure to
keep possession, while the word "damage" means deterioration or injury to
property.1wphi1
Therefore, petitioner cannot exclude the loss of respondents vehicle under the insurance
policy under paragraph 4 of "Exceptions to Section III," since the same refers only to
"malicious damage," or more specifically, "injury" to the motor vehicle caused by a person
under the insureds service. Paragraph 4 clearly does not contemplate "loss of property,"
as what happened in the instant case.
Further, the CA aptly ruled that "malicious damage," as provided for in the subject policy
as one of the exceptions from coverage, is the damage that is the direct result from the
deliberate or willful act of the insured, members of his family, and any person in the
insureds service, whose clear plan or purpose was to cause damage to the insured vehicle
for purposes of defrauding the insurer, viz.:
This interpretation by the Court is bolstered by the observation that the subject policy
appears to clearly delineate between the terms "loss" and "damage" by using both terms
throughout the said policy. x x x
xxxx
If the intention of the defendant-appellant was to include the term "loss" within the term
"damage" then logic dictates that it should have used the term "damage" alone in the
entire policy or otherwise included a clear definition of the said term as part of the
provisions of the said insurance contract. Which is why the Court finds it puzzling that in
the said policys provision detailing the exceptions to the policys coverage in Section III
thereof, which is one of the crucial parts in the insurance contract, the insurer, after
liberally using the words "loss" and "damage" in the entire policy, suddenly went specific
by using the word "damage" only in the policys exception regarding "malicious damage."
Now, the defendant-appellant would like this Court to believe that it really intended the
word "damage" in the term "malicious damage" to include the theft of the insured
vehicle.
The Court does not find the particular contention to be well taken.
True, it is a basic rule in the interpretation of contracts that the terms of a contract are to
be construed according to the sense and meaning of the terms which the parties thereto
have used. In the case of property insurance policies, the evident intention of the
contracting parties, i.e., the insurer and the assured, determine the import of the various
terms and provisions embodied in the policy. However, when the terms of the insurance
policy are ambiguous, equivocal or uncertain, such that the parties themselves disagree
about the meaning of particular provisions, the policy will be construed by the courts
liberally in favor of the assured and strictly against the insurer.10
insurance contract, ambiguity must be strictly interpreted against the insurer and liberally
in favor of the insured, especially to avoid forfeiture.12
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is
DENIED. Accordingly, the Decision dated May 31, 2011 and Resolution dated August 10,
2011 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.

Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the
insurance contract contain limitations on liability, courts should construe them in such a
way as to preclude the insurer from non-compliance with his obligation. Thus, in Eternal
Gardens Memorial Park Corporation v. Philippine American Life Insurance Company, 11 this
Court ruled

It must be remembered that an insurance contract is a contract of adhesion which must

be construed liberally in favor of the insured and strictly against the insurer in order to
safeguard the latters interest. Thus, in Malayan Insurance Corporation v. Court of
Appeals, this Court held that:

Indemnity and liability insurance policies are construed in accordance with the general
rule of resolving any ambiguity therein in favor of the insured, where the contract or
policy is prepared by the insurer. A contract of insurance, being a contract of adhesion,
par excellence, any ambiguity therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and strictly against the
insurer. 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
obligations.

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:

When the terms of insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with his
obligation. Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract, the insurer. By reason of
the exclusive control of the insurance company over the terms and phraseology of the