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 Ramon M. Paterno sent a letter-complaint to the
Insurance Commissioner alleging certain problems
encountered by agents, supervisors, managers
and public consumers of the Philamlife.
 Insurance Commissioner set the case for hearing
and sent subpoena to the officers of Philamlife.
 During the hearing Ramon stated that the
contract of agency is illegal.
 Philamlife through its president De los
Reyes contended that the Insurance
Commissioner as a quasi-judicial body cannot rule
on the matter.
ISSUE: W/N the resolution of the legality of the contract of
agency falls within the jurisdiction of the Insurance
HELD: NO. While the subject of Insurance Agents is
discussed under Chapter 4, Title I of the IC, 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.
 Ernie Trinos, deceased husband of respondent,
applied for a health care coverage w/ Philamcare
Health Systems, Inc.
 Under the agreement, respondent’s husband was
entitled to avail of hospitalization benefits,
whether ordinary or emergency, listed therein.
 He was also entitled to avail “out-patient
benefits” such as annual physical examinations,
preventive health care and other services.
 In the standard application form, he answered NO
to the ff. question: “Have you or any of your
family members ever consulted or been treated
for high blood pressure, heart trouble, diabetes,
liver disease, asthma or peptic ulcer?”.

1. W/N the agreement is an insurance contract.
1. YES. The health care agreement was in the nature
of non-life insurance, w/c is primarily a contract of
indemnity. In this, the insurable interest of
respondent’s husband in obtaining the health care
agreement was on his own health. 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.
2. 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.
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 respondent’s 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. 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. (Underscoring ours)
The fraudulent intent on the part of the insured must
be established to warrant rescission of the insurance
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. In this case, no rescission was
made. Besides, the cancellations 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
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 upon request of
insured, to furnish facts on which cancellation is based.
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. 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. 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.
Anent the incontestability of the membership of
respondent’s 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
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 deceased’s hospitalization, medication
and the professional fees of the attending physicians.
 White Gold procured a protection and indemnity
coverage for its vessels from Steamship Mutual
through Pioneer Insurance
 When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.
 Steamship Mutual thereafter filed a case against
White Gold for collection of sum of money to
recover the latter’s unpaid balance.
 White Gold on the other hand, filed a complaint
before the Insurance Commission claiming that
Steamship Mutual violated Sections 186 and 187
of the Insurance Code, while Pioneer
violated Sections 299, 300 and 301 in relation to
Sections 302 and 303, thereof.
 The Insurance Commission dismissed the
complaint. It said that there was no need for
Steamship Mutual to secure a license because it

was not engaged in the insurance business. It
explained that Steamship Mutual was a Protection
and Indemnity Club (P & I Club). Likewise, Pioneer
need not obtain another license as insurance
agent and/or a broker for Steamship Mutual
because Steamship Mutual was not engaged in
the insurance business. Moreover, Pioneer was
already licensed, hence, a separate license solely
as agent/broker of Steamship Mutual was already
 The Court of Appeals affirmed the decision of the
Insurance Commissioner.
1. W/N Steamship Mutual, a P & I Club, is engaged in the
insurance business in the Philippines.
2. W/N Pioneer needs a license as an insurance
agent/broker for Steamship Mutual.
1. YES
- The test to determine if a contract is an insurance
contract or not, depends on the nature of the promise, the
act required to be performed, and the exact nature of the
agreement in the light of the occurrence, contingency, or
circumstances under which the performance becomes
requisite. It is not by what it is called. Basically, an
insurance contract is a contract of indemnity. In it, one
undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown
or contingent event.
- In particular, a marine insurance undertakes to indemnify
the assured against marine losses, such as the losses
incident to a marine adventure. Section 99 of the
Insurance Code enumerates the coverage of marine
- Relatedly, a mutual insurance company is a cooperative
enterprise where the members are both the insurer and
insured. In it, the members all contribute, by a system of
premiums or assessments, to the creation of a fund from
which all losses and liabilities are paid, and where the
profits are divided among themselves, in proportion to
their interest. Additionally, mutual insurance associations,
or clubs, provide three types of coverage, namely,
protection and indemnity, war risks, and defense costs.
- A P & I Club is “a form of insurance against third party
liability, where the third party is anyone other than the P
& I Club and the members.” By definition then, Steamship
Mutual as a P & I Club is a mutual insurance association
engaged in the marine insurance business.
- The records reveal Steamship Mutual is doing business in
the country albeit without the requisite certificate of
authority mandated by Section 187 of the Insurance
Code. It maintains a resident agent in the Philippines to
solicit insurance and to collect payments in its behalf. We
note that Steamship Mutual even renewed its P & I Club
cover until it was cancelled due to non-payment of the
calls. Thus, to continue doing business here, Steamship
Mutual or through its agent Pioneer, must secure a license
from the Insurance Commission.
- Since a contract of insurance involves public interest,
regulation by the State is necessary. Thus, no insurer or
insurance company is allowed to engage in the insurance
business without a license or a certificate of authority
from the Insurance Commission.
2. YES
- SEC. 299 . . .
- No person shall act as an insurance agent or as an
insurance broker in the solicitation or procurement of
applications for insurance, or receive for services in
obtaining insurance, any commission or other
compensation from any insurance company doing
business in the Philippines or any agent thereof, without
first procuring a license so to act from the Commissioner,
which must be renewed annually on the first day of
January, or within six months thereafter.
 Christern, Huenefeld and Co., a German Co.,
obtained a fire insurance policy from Filipinas for
the former’s merchandise contained in a building
located in Binondo, Manila.
 Filipinas is an American controlled company.
 During the Japanese occupation, the building
housing the insured merchandise was burned.
 Christern filed its claim amounting to P92,650.00
but Filipinas refused to pay, alleging that Christern
is a corporation whose majority stockholders are
Germans; that during the Japanese occupation,
America declared war against Germany hence the
insurance policy ceased to be effective because
the insured has become an enemy.
W/N Christern is entitled to receive the proceeds
of the insurance.

NO. Majority of the stockholders of Christern
were German subjects. This being so, SC ruled that said
corporation became an enemy corporation upon the war
between the US and Germany. Sec.8 of the Philippine
Insurance Law 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.
*Elementary rules of justice require that the
premium paid by Christern for the period covered by the
policy should be returned by Filipinas.

 Dunn mortgaged a parcel of land to SMB to secure
a debt of 10K.
 Mortgage contract stated that Dunn was to have
the property insured at his own expense,
authorizing SMB to choose the insurers and to
receive the proceeds thereof and retain so much
of the proceeds as would cover the mortgage
 Brias, SMB’s GM approached law union for
insurance to the extent of 15K upon the property.
In the application he stated that SMB’s interest in
the property was merely that of a mortgagee.
 Law union, not wanting to issue a policy for the
entire amount, issued 7,700 and procured another
policy of equal amount from Filipinas Cia de
seguros. Both policies were issued in the name of
SMB only and contained no reference to any other
interests in the property.
 Dunn sold the property to Harding, but no
assignment of policies was made to the latter.
 Property was destroyed by fire.
 SMB filed an action in court to recover on the
policies. SMB sought to recover the proceeds to
the extent of its mortgage credit, w/ the balance
to go to Harding.
 Insurance companies contended that they were
not liable to Harding because their liability under
the policies was limited to the insurable interests
of SMB only.

W/N the insurance companies are liable to
Harding for the balance of the proceeds of the 2 policies.
NO. Under the Insurance Act, the measure of
insurable interest in the property is the extent to which
the insured might be damnified by the loss or injury
thereof. Also it is provided in the IA that the insurance
shall be applied exclusively to the proper interest of the
person in whose name it is made. Undoubtedly, SMB as
the mortgagee of the property, had an insurable interest
therein; but it could NOT, in any event, recover upon the
two policies an amount in excess of its mortgage credit.

By virtue of the Insurance Act, neither Dunn nor
Harding could have recovered from the two policies. With
respect to Harding, when he acquired the property, no
change or assignment of the policies had been
undertaken. The policies might have been worded
differently so as to protect the owner, but this was not

 Saura mortgaged to PNB its registered parcel of
land in Davao to secure the payment of a
promissory note of P27T.
 A building of strong materials which was also
owned by Saura, was erected on the parcel of land
and the building had always been covered by
insurance even before the execution of the
mortgage contract.
 Pursuant to the mortgage agreement which
required Saura to insure the building and its
contents, it obtained fire insurance for P29T from
PISC for a period of 1 year starting Oct. 2, 1954.
 The mortgage also required Saura to endorse the
insurance policy to PNB. The memo stated: Loss if
any, payable to PNG as their interest may appear,
subject to the terms, conditions and warranties of
this policy.
 The policy was delivered to PNB by Saura.
 13 days after the issuance of the fire insurance,
PISC cancelled the same, effective as of the date
of issue. Notice of the cancellation was sent to
PNB in writing and was received by the bank.

 On Apr. 6, 1955, the building and its contents
worth P4, 685 were burned.
 Saura filed a claim with PISC and mortgagee bank.
 Upon presentation of notice of loss with PNB,
Saura learned for the first time that the policy had
been previously cancelled by PISC, when Saura’s
folder in the bank’s file was opened and the
notice of the cancellation by PISC was found.
W/N PISC is liable to pay the amount involved in
the policy, considering that notice of cancellation was sent
to PNB in writing and was received by the bank.

The policy in question does NOT provide for the
notice of cancellation, its form or period. The Insurance
Law 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.

Actual notice of cancellation in a clear and
unequivocal manner, preferably in writing should be given
by the insurer to the insured so that the latter might be
given an opportunity to obtain other insurance for his own
protection. The notice should be personal to the insurer
and not to and/or through any unauthorized person by the
policy. Both the PSIC and the PNB failed, wittingly or
unwittingly to notify Saura of the cancellation made.

The insurer contends that it gave notice to PNB as
mortgagee of the property and that was already
substantial compliance with its duty to notify the insured
of the cancellation of the policy. But notice to the bank, as
far as Saura herein is concerned, is not effective
notice. PISC is then ordered to pay Saura P29T, the
amount involved in the policy subject matter of this case.

 Palileo obtained from Cosio a loan of P12T.
 To secure payment, Cosio required Palileo to sign
a document known as “conditional sale of
residential building”, purporting to convey to
Cosio, with a right to repurchase (on the part of
Palileo), a two-story building of strong materials
belonging to Palileo.
 After execution of the document, Cosio insured
the building against fire with Associated Insurance
& Surety Co. (Associated) for 15T.
 The insurance policy was issued in the name of
 The building was partly destroyed by fire and after
proper demand, Cosio was able to collect from
the insurance company an indemnity of P13, 107.
 Palileo demanded from Cosio that she be credited
with the necessary amount to pay her obligation
out of the insurance proceeds, but Cosio refused
to do so.
 Trial Court found that the debt had an unpaid
balance of P12T. It declared the obligation of
Palileo to Cosio fully compensated by virtue of the
proceeds collected by Cosio and further held that
the excess of P1,107 (13,107 – 12,000) be
refunded to Palileo
W/N the trial court was justified in considering the
obligation of Palileo fully compensated by the insurance
amount that Cosio was able to collect from Associated,
and whether or not the trial court was correct in requiring
Cosio to refund the excess of P1,107 to Palileo.
NO and NO.
The rule is that “where a mortgagee, independently of the
mortgagor, insures the mortgaged property in his own
name and for his own interest, he is entitled to the
insurance proceeds in case of loss, but in such case, he is
not allowed to retain his claim against the mortgagor, but
is passed by subrogation to the insurer to the extent of the
money paid.”

The lower court erred in declaring that the proceeds of the
insurance taken out by Cosio on the property insured to
the benefit of Palileo and in ordering the former to deliver
to the latter, the difference between the indebtedness and
the amount of insurance received by Cosio. In the light of
this ruling, the correct solution would be that the proceeds
of the Insurance be delivered to Cosio, but her claim
against Palileo should be considered assigned to the
insurance company who is deemed subrogated to the
rights of Cosio to the extent of the money paid as


 A contract of group life insurance was executed
between petitioner Grepalife and DBP. Grepalife agreed to
insure the lives of eligible housing loan mortgagors of DBP.
 Leuterio, a physician and a housing debtor of DBP
applied for membership in the group life insurance plan. In
an application form, 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
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in good
Answer: [x] Yes [ ] NO.

 Grepalife then issued a Certificate, as insurance
coverage of Leuterio, to the extent of his DBP mortgage
indebtedness amounting to P86,200.00
 Later, Leuterio died due to “massive cerebral
hemorrhage.” Consequently, DBP submitted a death claim
to Grepalife.
 Grepalife denied the claim alleging that. Leuterio
was not physically healthy when he applied for an
insurance coverage.
 Grepalife insisted that 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.
 The widow of the. Leuterio, respondent Medarda,
filed a complaint with the RTC, against Grepalife for
“Specific Performance with Damages.” During the trial, Dr.
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
Leuterio complained of headaches presumably due to high
blood pressure. The inference was not conclusive because
Leuterio was not autopsied, hence, other causes were not
ruled out.
 The trial court rendered a decision in favor of
Respondent widow and against Grepalife. The CA
sustained the trial court’s decision. Hence, the present

1. Who is the proper party to bring the suit, the
widow or the mortgagee (DBP)?
2. W/N there was concealment as to justify
Grepalife’s non-payment of insurance proceeds.
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. 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. 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.
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 mortgagee is simply an appointee of the insurance
fund, such loss-payable clause does not make the
mortgagee a party to the contract.
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.” 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.
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
the widow of the decedent Dr. Leuterio may
file the suit against the insurer, Grepalife.
2. 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.
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
On the contrary the medical findings were not conclusive
because Dr. Mejia did not conduct an autopsy on the body
of the decedent. Hence, the statement of the physician
was properly considered by the trial court as hearsay.
The CA’s stand is that contrary to appellant’s allegations,
there was no sufficient proof that the insured had suffered
from hypertension.
Appellant insurance company had failed to establish that
there was concealment made by the insured, hence, it
cannot refuse payment of the claim
The fraudulent intent on the part of the insured must be
established to entitle the insurer to rescind the
contract. Misrepresentation 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. 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
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. 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. 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.”
However, we noted that the CA decision was promulgated
in 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 Leuterio’s heirs
represented by his widow.
 Philippine Health Care Providers, Inc. 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.
 January 27, 2000: 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
 Petitioner protested the assessment in a letter
dated February 23, 2000.
 CIR 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.
 to pay VAT
 CIR: health care agreement was a contract of
insurance subject to DST under Section 185 of the
1997 Tax Code
 CA: health care agreement was in the nature of a
non-life insurance contract subject to DST
 Court Affirmed CA
ISSUE: W/N the Health care agreement is considered a
contract of insurance.
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
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 insurer’s promise, the insured
pays a premium.
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
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 lawyer’s 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. (Emphasis supplied)
Second. Not all the necessary elements of a contract of
insurance are present in petitioner’s 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
petitioner’s 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
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
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., 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." 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.
However, assuming that petitioner’s 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 petitioner’s objective is to provide
medical services at reduced cost, not to distribute risk like
an insurer.
In sum, an examination of petitioner’s agreements with its
members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.

 Sunlife issued a life insurance policy to Gercio, the
former agreeing to insure the life of Gercio for 2T to be
paid to him on Feb. 1, 1930 or if he should die before said
date, then to his wife Andrea, should she survive him;
otherwise to the executor, administrator of Gercio.
 The policy did not include any provision reserving
to Gercio the right to change the beneficiary.
 The wife was convicted of adultery and a decree
of divorce was issued.
 Gercio notified Sunlife that he had revoked his
donation in favor of Andrea and that he had designated his
present wife Adela as his beneficiary.
 Sunlife refused to change the beneficiary.
W/N Gercio may change the beneficiary in the
The wife has an insurable interest in the life of her
husband. The beneficiary has an absolute vested interest
in the policy from the date of its issuance and delivery. So
when a policy of life insurance is taken out by the husband
in which the wife is named as beneficiary, she has a
subsisting interest in the policy. If the husband wishes to
retain to himself the control and ownership of the policy
he may so provide in the policy. But if the policy contains
no provision authorizing a change of beneficiary without
the beneficiary's consent, the insured cannot make such
change. Accordingly, it is held that a life insurance policy of
a husband made payable to the wife as beneficiary, is the
separate property of the beneficiary and beyond the
control of the husband.
Court also held that the designation of a
beneficiary that is originally valid does NOT render it
invalid due to a subsequent cessation of the interests
between the beneficiary and insured.
Insurer: Manufacturers Life Insurance Co., of Toronto,
Canada, thru its local agent E.E.Else
rInsured: A. Velhagen (manager of El Oriente)
Beneficiary: El Oriente Fabrica de Tabacos, Inc.
 El Oriente, in order to protect itself against the
loss that it might suffer by reason of the death of its
manager, whose death would be a serious loss to El
Oriente procured from the Insurer an insurance policy on
the life of the said manager for the sum of 50,000 USD
with El Oriente as the designated sole beneficiary.
 The insured has no interest or participation in the
proceeds of said life insurance policy. El Oriente charged
as expenses of its business all the said premiums and
the same from its gross incomes as reported in its
annual income tax returns, which deductions were
allowed by Posadas (Collector of Internal Revenue) upon
showing by El Oriente that such premiums were legitimate
expenses of the business.
 Upon the death of the manager, El Oriente
received all the proceeds of the life insurance policy
together with the interest and the dividends accruing
thereon, aggregating P104,957.88.
 Posadas assessed and levied the sum of P3,148.74
as income tax on the proceeds of the insurance policy,
which was paid by El Oriente under protest. El Oriente
claiming exemption under Section 4 of the Income
Tax Law.
W/N the proceeds of the insurance taken by a
corporation on the life of an important official to
indemnify it against loss in case death, are taxable as
income under the Philippine Income Tax Law.
The Income Tax Law for the Philippines is Act No. 2833, as
amended. It is divided into four chapters: Chapter I On
Individuals, Chapter II On Corporations, Chapter III General
Administrative Provisions, and Chapter IV General
Provisions. In chapter I On Individuals, is to be found
section 4 which provides that, "The following incomes shall
be exempt from the provisions of this law: (a) The
proceeds of life insurance policies paid to beneficiaries
upon the death of the insured ... ." Section 10, as
amended, in Chapter II On Corporations, provides that,
There shall be levied, assessed, collected, and paid
annually upon the total net income received in the
preceding calendar year from all sources by every
corporation ... a tax of three per centum upon such
income ... ." Section 11 in the same chapter, provides the
exemptions under the law, but neither here nor in any

other section is reference made to the provisions of
section 4 in Chapter I.
Under the view we take of the case, it is sufficient for our
purposes to direct attention to the anomalous and vague
condition of the law. It is certain that the proceeds of life
insurance policies are exempt. It is not so certain that the
proceeds of life insurance policies paid to corporate
beneficiaries upon the death of the insured are likewise
exempt. But at least, it may be said that the law is
indefinite in phraseology and does not permit us
unequivocally to hold that the proceeds of life insurance
policies received by corporations constitute income which
is taxable.
It will be recalled that El Oriente, Fabrica de Tabacos, Inc.,
took out the insurance on the life of its manager, who had
had more than thirty-five years' experience in the
manufacture of cigars in the Philippines, to protect itself
against the loss it might suffer by reason of the death of its
manager. We do not believe that this fact signifies that
when the plaintiff received P104,957.88 from the
insurance on the life of its manager, it thereby realized a
net profit in this amount. It is true that the Income Tax
Law, in exempting individual beneficiaries, speaks of the
proceeds of life insurance policies as income, but this is a
very slight indication of legislative intention. In reality,
what the plaintiff received was in the nature of an
indemnity for the loss which it actually suffered because of
the death of its manager.
 Southern Luzon Employees’ Association(SLEA) is
composed of laborers and employees of Laguna
Tayabas Bus Co. and Batangas Transportation Co.
(PURPOSE: mutual aid of its members and their
dependents in case of death)
 SLEA adopted a resolution allowing a member to
name as his beneficiaries his common law wife
and/or children with her.
 Roman Concepcion, member of SLEA, listed as his
-Aquilina Maloles(common law wife); Raman Jr.,
Estela, Rolando, Robin(children w/ Aquilina)
 Roman died.
 Those who presented to claim: (1) Juanita Golpeo-
legal wife and children; (2) Aquilina-CL wife and
children; (3) Elsie Hicban-CL wife and child
 The court rendered the decision declaring Aquilina
and her children the sole beneficiaries.
 Golpeo & children appealed claiming that:
-insurance law is not applicable since SLEA is a
mutual benefit assoc. under Revised Admin. Code
-even if the agreement is a contract of insurance,
the stipulation bet. SLEA and the deceased is void
for being contrary to law, moral, or public policy
because according to Art. 739 of NCC, a donation
is void when made between persons who are
guilty of adultery or concubinage at the time of
donation, considering that Aquilina is not the legal
W/N the agreement is a contract of insurance and
W/N Aquilina and her children can be validly named as
beneficiaries of Roman.
SLEA is not a regular Insurance Co. but the death
benefit is analogous to an insurance. Revised Admin. Code,
Sec. 1628 defines a mutual benefit association as “an
association providing for any method of accident or life
insurance among its members out of dues or assessments
collected from the membership”, thus, the LC correctly
held that the agreement between SLEA and Roman
partook of the nature of a contract of insurance.
Specifically, the appellants cite article 2012 of the
new Civil Code providing that "Any person who is
forbidden from receiving any donation under article 739
cannot be named beneficiary of a life insurance policy and
by the person who cannot make any donation to him,
according to said article." Inasmuch as, according to article
739 of the new Civil Code, a donation is valid when made
"between persons who are guilty or adultery or
concubinage at the time of the donation," it is alleged that
the defendant-appellee Aquilina Maloles, cannot be
named a beneficiary, every assuming that the insurance
law is applicable. Without considering the intimation in the
brief for the defendant appellees that appellant Juanita
Golpeo, by her silence and actions, had acquiesced in the
illicit relations between her husband and appellee Aquilina
Maloles, appellant argument would certainly not apply to
the children of Aquilina likewise named beneficiaries by
the deceased Roman A. Concepcion. As a matter of a fact

the new Civil Code recognized certain successional rights
of illegitimate children. (Article 287.)
Mrs. Nario was issued by respondent Philamlife a
life insurance policy. She designated
her husband, Delfin and their unemancipated minor
son, Ernesto, as her irrevocable beneficiaries. She applied
for a loan on the policy for the school expenses of her son.
The loan application bore the signature of Delfin as the
father-guardian of minor son and as the legal
administrator of the minor's properties. Philamlife denied
the application because the written consent for the minor
son must not only be given by his father as legal guardian
but it must also be authorized by the court in a competent
guardianship proceeding. After the denial, Mrs. Nario
decided to surrender her policy to Philamlife and
demanded its cash value of then amounting to P520.
Philamlife also denied the surrender of the policy ,on the
same ground, hence, Nario brought suit. Philamlife claims
that under Articles 320 and 326 of the Civil Code, mere
written consent given by the father-guardian, for and in
behalf of the minor son, without any court authority, was
insufficient, inasmuch as the policy loan application and
the surrender of the policy involved acts of disposition and
alienation of the property rights of the minor, and said
acts are not within the powers of the legal administrator.
The lower court agreed with Philamlife and dismissed
petitioner’s claim. It held that under the policy, the minor
son, as one of the designated irrevocable beneficiaries,
"acquired a vested right to all benefits accruing to the
policy, including that of obtaining a policy loan to the
extent stated in the schedule of values attached to the
policy. On appeal to the SC, petitioner averred that the
minor's interest amounted to only one-half of the policy's
cash surrender value of P520; that payment of the
ward's debts is within the powers of the guardian, where
no realty is involved (Rule 96, Sec. 2 of the Revised Rules
of Court); hence, father may validly agree to the proposed
transaction on behalf of the minor without need of court
Can an insurer refuse to grant the loan application (on a
cash surrender value and not full face value) and the
surrender of the policy claimed by a father-guardian in
behalf of his minor son when it is without court authority?
Yes, the insurer can validly refuse. The vested interest or
right of the beneficiaries in the policy should be measured
on its full face value and not on its cash surrender value,
for in case of death of the insured, said beneficiaries are
paid on the basis of its face value and in case the
insured should discontinue paying premiums, the
beneficiaries may continue paying it and are entitled to
automatic extended term or paid-up insurance options,
etc. and that said vested right under the policy cannot be
divisible at any given time. As above noted, the full face
value of the policy is P5,000 and the minor's vested
interest therein, as one of the two irrevocable
beneficiaries, consists of one-half (½) of said amount or
P2,500.The transactions in question (policy loan and
surrender of policy) constitute acts of disposition
or alienation of property rights and not merely of
management or administration because they involve the
incurring or termination of contractual obligations. Under
Articles 320 and 326 of the Civil Code provide that the
father, or in his absence the mother, is the legal
administrator of their child’s property and when it is worth
more than two thousand pesos, as in this case, he should
have filed a formal application or petition for guardianship
and bond. As there was no such petition for guardianship
and bond, the consent given by the father-
guardian, was insufficient and ineffective, and defendant-
appellee was justified in disapproving theproposed
transactions in question. The result would be the same
even if interest is worth less thanP2, 000. The parent's
authority over the estate of the ward as a legal-guardian
would not extend to acts of encumbrance or disposition,
as distinguished from acts of management or
administration. Since the law merely constitutes the
parent as legal administrator of the child's property (which
is a general power), the parent requires special authority
for the acts above specified, and this authority can be
given only by a court.