INSURANCE LAW

Philippine Health Care Providers, Inc. is engaged in operating a prepaid group

practice health care delivery system or a health maintenance organization (HMO) to take
care of the sick and disabled persons enrolled in the health care plan. Individuals enrolled
in its health care programs pay an annual membership fee and are entitled to various
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 operated or accredited by it. Is Philippine Health Care Providers, Inc. a health
maintenance organization or an insurance company?

HMOs are not engaged in insurance business. Philippine Health Care Providers
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 Philippine Health Care Providers’ 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 (Philippine Health Care Providers, Inc., v. Commissioner of Internal
Revenue, G.R. No. 167330, 18 September 2009).

Principal Object & Purpose Test

HMOs are not engaged in 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. (Philippine Health Care Providers, Inc., v.
Commissioner Of Internal Revenue, G.R. No. 167330, 18 September 2009).

Business Risk & Actuarial Risk

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 he 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.
(Philippine Health Care Providers, Inc., v. Commissioner Of Internal Revenue, G.R. No.
167330, 18 September 2009).

Insurance as Uberrimae Fidae Contract

The contract of insurance is one of perfect good faith (uberrimae fidei) not for the
insured alone, but equally so for the insurer; in fact, it is more so for the latter, since its
dominant bargaining position carries with it stricter responsibility (Qua Chee Gan vs. Law
Union and Rock Insurance, Co. Ltd., No. L-4611, 17 December 1955). It requires the
parties to the contract to communicate that which a party knows and ought to
communicate, that is, the duty to disclose in good faith all facts material to the contract.
This doctrine is essential on account of the fact that the full circumstances of the subject
matter of insurance are, as a rule, known to the insured only and the insurer, in deciding
whether or not to accept a risk, must rely primarily upon the information supplied to him
by the applicant.

Only Juridical Insurers

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 Every corporation, partnership, or association duly authorized (by the Insurance
Commission) to transact insurance business may be an insurer (Sec. 6, Insurance Code, as
amended by RA 10607). The term “insurer” no longer includes “individuals” under RA
10607. Hence, an individual natural person is no longer allowed to be an insurer.

Illegitimate Children as Beneficiaries

In his life insurance, Loreto designated Eva, his concubine, and their illegitimate
children as beneficiaries. Loreto was killed with Eva as suspect. Vicenta, the legitimate wife
of Loreto, and their legitimate children contend that: Eva is disqualified to receive any
proceeds from the insurance policies; the illegitimate children of Loreto - Odessa, Karl
Brian, and Trisha Angelie - were entitled only to one-half of the legitime of the legitimate
children, thus, the proceeds released to Odessa and those to be released to Karl Brian and
Trisha Angelie were inofficious and should be reduced; and they could not be deprived of
their legitimes, which should be satisfied first.

The revocation of Eva as a beneficiary in one policy and her disqualification as such
in another are of no moment considering that the designation of the illegitimate children as
beneficiaries in Loreto’s insurance policies remains valid. Because no legal proscription
exists in naming as beneficiaries the children of illicit relationships by the insured, the
shares of Eva in the insurance proceeds must be awarded to the said illegitimate children,
the designated beneficiaries, to the exclusion of petitioners. It is only in cases where the
insured has not designated any beneficiary, or when the designated beneficiary is
disqualified by law to receive the proceeds, that the insurance policy proceeds shall
redound to the benefit of the estate of the insured (Heirs of Loreto Maramag v. Maramag,
G.R. No. 181132, 05 June 2009).

Is non-presentation of the insurance contract fatal to the claim of the

insurer/subrogee for the proceeds of insurance?

As a general rule, the marine insurance policy needs to be presented in evidence

before the insurer may recover the value of the lost/damaged cargo in the exercise of its
subrogatory right since it is the legal basis of the insurer’s right to subrogation. Nevertheless,
a marine insurance policy is dispensable evidence in reimbursement claims instituted by
the insurer especially when a subrogation receipt has been executed between the insured
and the insurer. Thus, where the Certificate of Insurance and the Release of Claim
presented as evidence sufficiently established the insurer’s right to collect reimbursement as
the subrogee of the consignee. To strictly require the presentation of the insurance
contract will run counter to the principle of equity upon which the doctrine of subrogation
is premised. (Asian Terminals, Inc. v. First Lepanto-Taisho Insurance Corporation, G.R.
No. 185964, 16 June 2014)

Rusting of Steel Pipes as Peril

Remington Industrial Sales Corporation (Remington) shipped on board a vessel

seamless steel pipes from Japan to the Philippines and insured the shipment with Cathay
Insurance Co. (Cathay). Upon receipt of said shipment, losses and damages were
discovered. Upon demand under the insurance contract, it was denied by Cathay.
Remington contends that the rust on the seamless steel pipes is not an inherent vice of the
shipment, thus the same is considered as a peril of the sea. Cathay, on the other hand
claims that the loss was occasioned by an inherent defect or vice in the insured article. Is
the “rusting” of the seamless steel pipes considered as a “peril of the sea”?

Yes. The rusting of steel pipes in the course of a voyage is a “peril of the sea” in
view of the toll on the cargo of wind, water, and salt conditions. Moreover, it is a cardinal
rule in the interpretation of contracts that any ambiguity therein should be construed

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against the maker/issuer/drafter thereof, namely, the insurer. Besides the precise purpose
of insuring cargo during a voyage would be rendered fruitless (Cathay Insurance Co., v.
CA, et al., No. L-76145, 30 June 1987).

What is “barratry” in marine insurance? (2010 Bar Question)

Barratry, is any willful misconduct on the part of the master or crew in pursuance of
some unlawful or fraudulent purpose without the consent of the owner and to the prejudice
of the interest of the owner. (Roque v. Intermediate Appellate Court, 139 SCRA
596[1985])

“Love is the only kind of fire which is never covered by insurance.”

Transfer of Insured Machineries without Insurer’s Consent

On 13 May 2014, Freedom Insurance Company (Freedom) issued Fire Insurance

Policy to BCP Corporation for the latter’s machineries and equipment located at Tower 1
Building located in Concepcion, Tarlac which was used as a factory for automotive parts.
The insurance, which was for 10 million and effective for a period of one year, was
procured by BCP Corporation for Rizal Commercial Banking Corporation (RCBC), the
mortgagee of the insured machineries and equipment. On 12 October 2014, the insured
machineries were totally lost by fire. BCP Corporation filed a fire insurance claim with
Freedom which denied the claim upon the ground that at the time of loss, the insured
machineries and equipment were transferred by BCP Corporation to a location different
from that indicated in the policy. The insured machineries were transferred from the
Tower 1 Building to the Tower 2 Building also found in Concepcion, Tarlac which was
used as a warehouse for storing old and unused machineries of the corporation. Was the
refusal of Freedom justified?

Yes. The policy stipulated that the insured properties were located at the Tower1
Building but BCP Corporation transferred the machineries without the consent of
Freedom. The alteration of the location increased the risk of loss. The transfer affected
Freedom’s ability to control the risk by guarding against the risk brought about by the
change in condition, specifically the change in the location of the risk. Tower 2 Building
was not the location stipulated in the policy. There being an unconsented removal, the
transfer was at BCP’s own risk and it must suffer the consequences of the fire (Malayan
Insurance Company, Inc. v. PAP Co., Ltd. G.R. No. 200784, 7 August 2013).

Accidental and Accidental Means

The terms “accident” and “accidental”, as used in insurance contracts, have not
acquired any technical meaning, and are construed by the courts in their ordinary and
common acceptation. Thus, the terms have been taken to mean that which happen by
chance or fortuitously, without intention and design, and which is unexpected, unusual, and
unforeseen. An accident is an event that takes place without one's foresight or expectation
— an event that proceeds from an unknown cause, or is an unusual effect of a known cause
and, therefore, not expected.

It is argued that to be considered within the protection of the policy, what is

required to be accidental is the means that caused or brought the death and not the death
itself. The tendency of court decisions in the United States in recent years is to eliminate
the fine distinction between the terms “accidental” and “accidental means” and to consider
them as legally synonymous. While the participation of the insured in the boxing contest is
voluntary, the injury was sustained when he slid, giving occasion to the infliction by his
opponent of the blow that threw him to the ropes of the ring. Without this unfortunate
incident, that is, the unintentional slipping of the deceased, perhaps he could not have

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received that blow in the head and would not have died. (Dela Cruz v. Capital Insurance &
Surety Co., No. L-21574, 30 June 1966)

Willful Exposure to Needless Peril

Sun Insurance Co. issued to Felix a personal accident policy having this provision:
“the company shall not be liable in respect of ‘bodily injury’ consequent upon the insured
person who willfully exposes himself to needless peril except in an attempt to save human
life". Felix designated his wife, Nerissa as beneficiary. One evening, Felix, while playing
with his hand gun, suddenly stood in front of his secretary, Pilar, and pointed the gun at
her. Startled, she pushed the gun aside and said that it may be loaded. Thus, Felix, to
assure her that it was not loaded, pointed it at his temple. The next moment, there was an
explosion and Felix slumped to the floor lifeless. Nerissa, then claimed the proceeds from
Sun Insurance, but the latter rejected her claim on the ground that the death of Felix was
not accidental. Nerissa sued the insurer. Will Nerissa’s claim prosper?

Nerissa can recover the proceeds of the policy from the insurer. The death of the
insured was not due to suicide or willful exposure to needless peril which are excepted
risks. The insured’s act was purely an act of negligence which is covered by the policy and
for which the insured got the insurance for his protection. In fact, he removed the
magazine from the gun and when he pointed the gun to his temple he did so because he
thought that it was safe for him to do so. He did so to assure his secretary that the gun was
harmless. There is none in the policy that would relieve the insurer of liability for the death
of the insured since the death was an accident (Sun Insurance v. CA, G.R. No. 92383, 17
July 1992).

Liability of Surety to Creditor in the absence of a Written Contract with Principal

[NOTE: issue of first impression.]

Fumitechniks Corporation, represented by Ma. Lourdes Apostol, had applied for

and was issued a surety bond by First Lepanto-Taisho Insurance Corporation (First
Lepanto-Taisho) for the amount of P15,700,000.00. As stated in the attached rider, the
bond was in compliance with the requirement for the grant of a credit line with the
Chevron Philippines, Inc. (Chevron) to guarantee payment of the cost of fuel products
withdrawn within the stipulated time in accordance with the terms and conditions of
agreement between Chevron and Fumitechniks. When Fumitechniks defaulted on its
obligation, Chevron notified First Lepanto-Taisho of Fumitechniks’ unpaid purchases. First
Lepanto-Taisho thereafter demanded to Fumitechniks the submission of a copy of the
agreement secured by the bond, together with copies of documents such as delivery
receipts. Fumitechniks, however, denied that it executed such an agreement with Chevron,
thus no copy of such agreement could be submitted. Because of this, Chevron Philippines,
Inc. sued First Lepanto-Taisho for the payment of unpaid oil and petroleum purchases
made by Fumitechniks. Is the surety liable to the creditor in absence of a written contract
with the principal?

No. Section 176 of the Insurance Code is clear that a surety contract should be read
and interpreted together with the contract entered into between the creditor and the
principal. A surety contract is merely a collateral one, its basis is the principal contract or
undertaking which it secures. Necessarily, the stipulations in such principal agreement must
at least be communicated or made known to the surety. Having accepted the bond,
Chevron as creditor must be held bound by the recital in the surety bond that the terms
and conditions of its distributorship contract be reduced in writing or at the very least
communicated in writing to the surety. Such non-compliance by the Chevron impacts not
on the validity or legality of the surety contract but on the creditor’s right to demand
performance (First Lepanto-Taisho Insurance v. Chevron Philippines, Inc., G.R. No.
177839, 18 January 2012).

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 “I don’t call it ‘Life Insurance,’ I call it ‘LOVE INSURANCE.’ We buy it because
we want to leave a legacy for those we love.”
- Farshad Asl

Liability of HMO to a Member, Non-Life Insurance

David Robert was a cardholder/member of Fortune Medicare, Inc. , an HMO. The

terms of his medical coverage were provided in a Corporate Health Program Contract.
While on vacation in Hawaii, he underwent an emergency surgery, specifically
appendectomy, causing him to incur professional and hospitalization expenses of
US$7,242.35 and US$1,777.79, respectively. He attempted to recover from Fortune Care
the full amount thereof upon his return to Manila, but the company merely approved a
reimbursement of P12,151.36, an amount that was based on the average cost of
appendectomy, net of medicare deduction, if the procedure were performed in an
accredited hospital in Metro Manila. He received under protest the approved amount, but
asked for its adjustment to cover the total amount of professional fees which he had paid,
and 80% of the approved standard charges based on “American standard”, considering that
the emergency procedure occurred in the U.S.A.

For purposes of determining the liability of a health care provider to its members, a
health care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. 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. It is an established rule in insurance
contracts that when their terms contain limitations on liability, they should be construed
strictly against the insurer. These are contracts of adhesion the terms of which must be
interpreted and enforced stringently against the insurer which prepared the contract. This
doctrine is equally applicable to health care agreements (Fortune Medicare Inc. v. Amorin,
G.R. No. 195872, 12 March 2014).

Theory of Cognition

Insurance contracts through correspondence follow the “cognition theory” wherein

an acceptance made by letter shall not bind the person making the offer except from the
time it came to his knowledge (Enriquez v. Sun Life Assurance Co. of Canada, No. L-
15895, 29 November 1920).

In 2005, Primitivo was insured with BF Lifeman Insurance Corporation for

P20,000.00. On October 20, 2013, he applied for an additional insurance coverage of
P50,000.00. His wife paid P2,075.00 as premiums to the agent who issued a receipt
indicating that the amount was merely a “deposit”. The application form was lost, so
Primitivo accomplished another one. On November 1, 2013, he underwent a physical
examination which he passed. As is the procedure, all of Primitivo’s papers were then sent
to the Manila office of BF Lifeman Insurance Corporation which received the papers on
November 27, 2013. On December 2, 2013, the insurer then approved the policy and
issued the corresponding policy not knowing that in the meantime, Primitivo drowned and
died on November 25, 2013. The insurer now disclaims liability on the additional
P50,000.00 coverage because of failure to comply with the following requisites stated in the
application form for the perfection of the contract of insurance: “There shall be no
contract of insurance unless and until a policy is issued on this application and that the said
policy shall not take effect until the premium has been paid and the policy delivered to and
accepted by me/us in person while I/We, am/are in good health.” Is Primitivo’s
beneficiary entitled to the proceeds additional P50,000.00 additional insurance which
amounts to P150,000.00 in view of a triple indemnity rider on the policy?

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 No. Primitivo’s beneficiary is not entitled to the insurance proceeds. The filing of
the insurance application, payment of the premium, and submission to the insurer, were all
subject to the acceptance of the insurer. There was no acceptance by the insurance as of
the date when Primitivo died on November 25, 2013. The conditions imposed by the
insurer for the protection of the contract is not a potestative or facultative condition, but is a
suspensive one whereby the acquisition of rights depends upon the happening of an event
which constitutes the condition. In this case, the suspensive condition was the policy must
have been delivered and accepted by the applicant while he is in good health. There was
non-fulfillment of the condition, however, inasmuch as the applicant was already dead at
the time the policy was issued. Hence, the non-fulfillment of the condition resulted in the
non-perfection of the contract. The insurer cannot be held for gross negligence. Delay in
acting on the application does not constitute acceptance even though the insured has
forwarded his first premium with his application. The corporation may not be penalized
for the delay in the processing of the application papers. (Perez v. Court of Appeals, et al.,
G.R. No. 11239, 28 January 2000)

Grace Period to Pay Premium

The Peninsula Insurance Company offered to insure Francis’ brand new car against
all risks in the sum of P1 Million for 1 year. The policy was issued with the premium fixed
at P60,000.00 payable in 6 months. Francis only paid the first two months installments.
Despite demands, he failed to pay the subsequent installments. Five months after the
issuance of the policy, the vehicle was carnapped. Francis filed with the insurance
company a claim for its value. However, the company denied his claim on the ground that
he failed to pay the premium resulting in the cancellation of the policy. Can Francis
recover from the Peninsula Insurance Company? (2006 Bar Question)

Yes, when insured and insurer have agreed to the payment of premium by
installments and partial payment has been made at the time of loss, then the insurer
becomes liable. When the car loss happened on the 5th month, the six months agreed
period of payment had not yet elapsed. The owner may recover from Peninsula Insurance
Company, but the latter has the right to deduct the amount of unpaid premium from the
insurance proceeds.

Return of Premium

Teodoro Cortez, applied for a 20-year endowment policy with Great Pacific
Insurance Corporation (Great Pacific). His application, with the requisite medical
examination, was accepted and approved by the Great Pacific and in due course, an
endowment policy was issued in his name. Thereafter, Great Pacific advised Cortez that
the policy was not in force. To make it enforceable and operative, Cortez was asked to
remit the balance to complete his initial annual premium and to see Dr. Felipe V. Remollo
for another full medical examination at his own expense. Because of this, Cortez informed
Great Pacific that he was cancelling the policy and he demanded the return of his premium
plus damages. Great Pacific ignored his demand. Is Cortez is entitled to a refund of his
premium?

Yes. Great Pacific should have informed Cortez of the deadline for paying the first
premium before or at least upon delivery of the policy to him, so he could have complied
with what was needful and would not have been misled into believing that his life and his
family were protected by the policy, when actually they were not. And, if the premium paid
by Cortez was unacceptable for being late, it was the company's duty to return it. Since his
policy was in fact inoperative or ineffectual from the beginning, the company was never at
risk, hence, it is not entitled to keep the premium (Great Pacific Life Insurance
Corporation v. CA, et al., G.R. No. L-57308, 23 April 1990).

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Obligation on Unfilled Spaces in the Application

On 30 October 1997, Philam Plans issued Pension Plan Agreement to Manuel,

with Ma. Lourdes, his wife, as beneficiary. It contains a one-year incontestability period.
While Manuel signed the application, he left to Perla the task of supplying the information
needed in the application. The comprehensive pension plan also provided life insurance
coverage to Manuel under Philam Life. In time, Manuel paid his quarterly premiums. On
15 September 1998, Manuel died of blood poisoning. Philam Life found that Manuel was
on maintenance medicine for his heart and had an implanted pacemaker; that he suffered
from diabetes mellitus and was taking insulin. Lourdes pointed out that, seeing the unfilled
spaces in Manuel’s pension plan application relating to his medical history, Philam Plans
should have returned it to Manuel for completion. Since Philam Plans chose to approve
the application just as it was, it cannot cry concealment on Manuel’s part.

There was concealment. Since Manuel signed the application without filling in the
details regarding his continuing treatments for heart condition and diabetes, the assumption
is that he has never been treated for the said illnesses in the last five years preceding his
application. This is implicit from the phrase “If your answer to any of the statements above
(specifically, the statement: I have never been treated for heart condition or diabetes) reveal
otherwise, please give details in the space provided for.” But this is untrue since he had
been on Coumadin, a treatment for venous thrombosis, and insulin, a drug used in the
treatment of diabetes mellitus, at that time. (Florendo v. Philam Plans, Inc., G.R. No.
186983, 22 February 2012)

Incontestability Clause

On 03 July 1993, Delia took out a life insurance policy from Manila Bankers Life
Insurance Corporation (Bankers Life), designating Cresencia, her niece, as her beneficiary.
The policy was issued on 30 August 1993, after the requisite medical examination and
payment of the insurance premium. On 10 April 1996, Delia died. Cresencia filed a claim
for the insurance proceeds on 09 July 1996. Banker’s Life conducted an investigation into
the claim, and found out that Delia did not personally apply for insurance coverage, as she
was illiterate; she was sickly since 1990; she did not have the financial capability to pay the
insurance premiums; she did not sign the application for insurance; and Cresencia was the
one who filed the insurance application, and designated herself as the beneficiary.
Banker’s Life denied the claim on 16 April 1997 and refunded the premiums paid on the
policy.

After two years, the defenses of concealment or misrepresentation, no matter how

patent or well-founded, will no longer lie. As borne by the records, the policy was issued
on 30 August 1993, the insured died on 10 April 1996, and the claim was denied on 16
April 1997. The insurance policy was thus in force for a period of 3 years, 7 months, and
24 days. Considering that the insured died after the two-year period, the plaintiff-appellant
is, therefore, barred from proving that the policy is void ab initio by reason of the insured’s
fraudulent concealment or misrepresentation or want of insurable interest on the part of
the beneficiary, herein defendant-appellee (Florendo v. Philam Plans, G.R. No. 186983, 22
February 2012)

Loss and Damage

Section III of the insurance policy states that the Insurer shall not be liable for any
malicious damage caused by the Insured, any member of his family or by a person in the
Insured’s service. It turned out that the Insurer instructed her driver to bring the said
vehicle to a nearby auto shop for tune up. However, her driver never returned and despite
diligent efforts of finding the vehicle, the same could not be found. Is the Insurer still
liable?

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 Yes. Section III refers to the liability of the Insurer for loss of or damage to the
vehicle in the enumerated cases which includes theft. The exception only pertains to any
malicious damage caused by the Insured, any member of his family or by a person in the
Insured’s service. The words “loss” and “damage” mean different things. The word “loss”
refers to act or fact of losing, while the word “damage” means deterioration or injury to
property. The exception clearly refers to malicious damage and does not contemplate loss
of property. Theft perpetrated by the driver is not an exception to the coverage of the
policy. (Alpha Insurance v. Castor, G.R. No. 198174, 02 September 2013)

Misappropriation under Theft Clause

On 26 May 1994, Yves and Teresa insured with Paramount Insurance their 1994
Toyota Corolla sedan under a comprehensive motor vehicle insurance policy for one year.
Ricardo took possession of the subject vehicle to add accessories and improvements
thereon, however, Ricardo failed to return it within the agreed three-day period. They
immediately reported the theft to the PNP. Yves and Teresa claimed for reimbursement
from Paramount Insurance but it refused to pay. It argued that it is not liable for the loss,
since the car cannot be classified as stolen as they entrusted the possession thereof to
another person.

Records would show that respondents entrusted possession of their vehicle only to
the extent that Ricardo will introduce repairs and improvements thereon, and not to
permanently deprive them of possession thereof. Since, Theft can also be committed
through misappropriation, the fact that Ricardo failed to return the subject vehicle to
respondents constitutes Qualified Theft. Hence, since respondents’ car is undeniably
covered by a Comprehensive Motor Vehicle Insurance Policy that allows for recovery in
cases of theft, petitioner is liable under the policy for the loss of respondents’ vehicle under
the “theft clause”. (Paramount Insurance Corporation v. Sps. Remondeulaz, G.R. No.
173773, 28 November 2012)

Collateral Source Rule

Under the collateral source rule, if an injured person receives compensation for his
injuries from a source wholly independent of the tortfeasor, the payment should not be
deducted from the damages which he would otherwise collect from the tortfeasor. It finds
no application to cases involving no-fault insurances under which the insured is
indemnified for losses by insurance companies, regardless of who was at fault in the
incident generating the losses. Here, it is clear that MMPC is a no fault insurer. Hence, it
cannot be obliged to pay hospitalization expenses of the dependents of its employees which
had already been paid by separate health insurance providers of said dependents.
(Mitsubishi Motors Philippines Salaried Employees Unionvs. Mitsubishi Motors
Corporation G.R. No. 175773, 17 June 2013)

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