BATCH 1 - INSURANCE FULL TEXT (TOPIC I-III)

I. INTRODUCTION

(Republic v. Del Monte Motors, Inc., G.R. No. 156956, October 9, 2006)

FIRST DIVISION

[G.R. NO. 156956 : October 9, 2006]

REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His

Capacity as Insurance Commissioner, Petitioner, v.DEL MONTE MOTORS,
INC., Respondent.

DECISION

PANGANIBAN, C.J.:

The securities required by the Insurance Code to be deposited with the

Insurance Commissioner are intended to answer for the claims of all policy
holders in the event that the depositing insurance company becomes insolvent
or otherwise unable to satisfy their claims. The security deposit must be ratably
distributed among all the insured who are entitled to their respective shares; it
cannot be garnished or levied upon by a single claimant, to the detriment of the
others.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court,

seeking to reverse the January 16, 2003 Order2 of the Regional Court (RTC) of
Quezon City (Branch 221) in Civil Case No. Q-97-30412. The RTC found
Insurance Commissioner Eduardo T. Malinis guilty of indirect contempt for
refusing to comply with the December 18, 2002 Resolution3 of the lower court.
The January 16, 2003 Order states in full:

"On January 8, 2003, [respondent] filed a Motion to Cite

Commissioner Eduardo T. Malinis of the Office of the Insurance
Commission in Contempt of Court because of his failure and
refusal to obey the lawful order of this court embodied in a
Resolution dated December 18, 2002 directing him to allow the
withdrawal of the security deposit of Capital Insurance and
Surety Co. (CISCO) in the amount of P11,835,375.50 to be paid
 to Sheriff Manuel Paguyo in the satisfaction of the Notice of
Garnishment pursuant to a Decision of this Court which has
become final and executory.

"During the hearing of the Motion set last January 10, 2003,
Commissioner Malinis or his counsel or his duly authorized
representative failed to appear despite notice in utter disregard of
the order of this Court. However, Commissioner Malinis filed on
January 15, 2003 a written Comment reiterating the same
grounds already passed upon and rejected by this Court. This
Court finds no lawful justification or excuse for Commissioner
Malinis' refusal to implement the lawful orders of this Court.

"Wherefore, premises considered and after due hearing,

Commissioner Eduardo T. Malinis is hereby declared guilty of
Indirect Contempt of Court pursuant to Section 3 [of] Rule 71 of
the 1997 Rules of Civil Procedure for willfully disobeying and
refusing to implement and obey a lawful order of this Court."4

The Facts

On January 15, 2002, the RTC rendered a Decision in Civil Case No.
Q-97-30412, finding the defendants (Vilfran Liner, Inc., Hilaria Villegas and
Maura Villegas) jointly and severally liable to pay Del Monte Motors,
Inc., P11,835,375.50 representing the balance of Vilfran Liner's service
contracts with respondent. The trial court further ordered the execution of the
Decision against the counterbond posted by Vilfran Liner on June 10, 1997,
and issued by Capital Insurance and Surety Co., Inc. (CISCO).

On April 18, 2002, CISCO opposed the Motion for Execution filed by
respondent, claiming that the latter had no record or document regarding the
alleged issuance of the counterbond; thus, the bond was not valid and
enforceable.

On June 13, 2002, the RTC granted the Motion for Execution and issued the
corresponding Writ. Armed with this Writ, Sheriff Manuel S. Paguyo proceeded
to levy on the properties of CISCO. He also issued a Notice of Garnishment on
several depository banks of the insurance company. Moreover, he served a
similar notice on the Insurance Commission, so as to enforce the Writ on the
security deposit filed by CISCO with the Commission in accordance with
Section 203 of the Insurance Code.

On December 18, 2002, after a hearing on all the pending Motions, the RTC
ruled that the Notice of Garnishment served by Sheriff Paguyo on the
insurance commission was valid. The trial court added that the letter and spirit
of the law made the security deposit answerable for contractual obligations
incurred by CISCO under the insurance contracts the latter had entered into.
The RTC resolved thus:
 "Furthermore, the Commissioner of the Office of the Insurance
Commission is hereby ordered to comply with its obligations
under the Insurance Code by upholding the integrity and efficacy
of bonds validly issued by duly accredited Bonding and
Insurance Companies; and to safeguard the public interest by
insuring the faithful performance to enforce contractual
obligations under existing bonds. Accordingly said office is
ordered to withdraw from the security deposit of Capital
Insurance & Surety Company, Inc. the amount of P11,835.50 to
be paid to Sheriff Manuel S. Paguyo in satisfaction of the Notice
of Garnishment served on August 16, 2002."5

On January 8, 2003, respondent moved to cite Insurance Commissioner

Eduardo T. Malinis in contempt of court for his refusal to obey the December
18, 2002 Resolution of the trial court.

Ruling of the Trial Court

The RTC held Insurance Commissioner Malinis in contempt for his refusal to
implement its Order. It explained that the commissioner had no legal
justification for his refusal to allow the withdrawal of CISCO's security deposit.

Hence, this Petition.6

Issues

Petitioner raises this sole issue for the Court's consideration:

"Whether or not the security deposit held by the Insurance

Commissioner pursuant to Section 203 of the Insurance Code
may be levied or garnished in favor of only one insured."7

The Court's Ruling

The Petition is meritorious.

Preliminary Issue:
Propriety of Review

Before discussing the principal issue, the Court will first dispose of the
question of mootness.

Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent
the treasurer of the Philippines a letter dated March 26, 2003, stating that the
former had no objection to the release of the security deposit to Del Monte
Motors. Portions of the fund were consequently released to respondent in July,
October, and December 2003. Thus, the issue arises: whether these
circumstances render the case moot.
Petitioner, however, contends that the partial releases should not be construed
as an abandonment of its stand that security deposits under Section 203 of the
Insurance Code are exempt from levy and garnishment. The Republic claims
that the releases were made pursuant to the commissioner's power of control
over the fund, not to the lower court's Order of garnishment. Petitioner further
invokes the jurisdiction of this Court to put to rest the principal issue of whether
security deposits made with the Insurance Commission may be levied and
garnished.

The issue is not totally moot. To stress, only a portion of respondent's claim
was satisfied, and the Insurance Commission has required CISCO to replenish
the latter's security deposit. Respondent, therefore, may one day decide to
further garnish the security deposit, once replenished. Moreover, after the
questioned Order of the lower court was issued, similar claims on the security
deposits of various insurance companies have been made before the
Insurance Commission. To set aside the resolution of the issue will only
postpone a task that is certain to crop up in the future.

Besides, the business of insurance is imbued with public interest. It is subject

to regulation by the State, with respect not only to the relations between the
insurer and the insured, but also to the internal affairs of insurance
companies.8 As this case is undeniably endowed with public interest and
involves a matter of public policy, this Court shall not shirk from its duty to
educate the bench and the bar by formulating guiding and controlling principles,
precepts, doctrines and rules.9

Principal Issue:
Exemption of Security Deposit from Levy or Garnishment

Section 203 of the Insurance Code provides as follows:

"Sec. 203. Every domestic insurance company shall, to the

extent of an amount equal in value to twenty-five per centum of
the minimum paid-up capital required under section one hundred
eighty-eight, invest its funds only in securities, satisfactory to the
Commissioner, consisting of bonds or other evidences of debt of
the Government of the Philippines or its political subdivisions or
instrumentalities, or of government-owned or controlled
corporations and entities, including the Central Bank of the
Philippines: Provided, That such investments shall at all times be
maintained free from any lien or encumbrance; and Provided,
further, That such securities shall be deposited with and held by
the Commissioner for the faithful performance by the depositing
insurer of all its obligations under its insurance contracts.
The provisions of section one hundred ninety-two shall, so far as
practicable, apply to the securities deposited under this section.

"Except as otherwise provided in this Code, no judgment

creditor or other claimant shall have the right to levy upon
any of the securities of the insurer held on deposit pursuant
 to the requirement of the Commissioner." (Emphasis
supplied)cralawlibrary

Respondent notes that Section 203 does not provide for an absolute
prohibition on the levy and garnishment of the security deposit. It contends that
the law requires the deposit, precisely to ensure faithful performance of all the
obligations of the depositing insurer under the latter's various insurance
contracts. Hence, respondent claims that the security deposit should be
answerable for the counterbond issued by CISCO.

The Court is not convinced. As worded, the law expressly and clearly states
that the security deposit shall be (1) answerable for all the obligations of the
depositing insurer under its insurance contracts; (2) at all times free from any
liens or encumbrance; and (3) exempt from levy by any claimant.

To be sure, CISCO, though presently under conservatorship, has valid

outstanding policies. Its policy holders have a right under the law to be equally
protected by its security deposit. To allow the garnishment of that deposit
would impair the fund by decreasing it to less than the percentage of paid-up
capital that the law requires to be maintained. Further, this move would create,
in favor of respondent, a preference of credit over the other policy holders and
beneficiaries.

Our Insurance Code is patterned after that of California.10 Thus, the ruling of
the state's Supreme Court on a similar concept as that of the security deposit
is instructive. Engwicht v. Pacific States Life Assurance Co.11 held that the
money required to be deposited by a mutual assessment insurance company
with the state treasurer was "a trust fund to be ratably distributed amongst all
the claimants entitled to share in it. Such a distribution cannot be had except in
an action in the nature of a creditors' bill, upon the hearing of which, and with
all the parties interested in the fund before it, the court may make equitable
distribution of the fund, and appoint a receiver to carry that distribution into
effect."12

Basic is the statutory construction rule that provisions of a statute should be

construed in accordance with the purpose for which it was enacted.13 That is,
the securities are held as a contingency fund to answer for the claims against
the insurance company by all its policy holders and their beneficiaries. This
step is taken in the event that the company becomes insolvent or otherwise
unable to satisfy the claims against it. Thus, a single claimant may not lay
stake on the securities to the exclusion of all others. The other parties may
have their own claims against the insurance company under other insurance
contracts it has entered into.

Respondent's Inchoate Right

The right to lay claim on the fund is dependent on the solvency of the insurer
and is subject to all other obligations of the company arising from its insurance
contracts. Thus, respondent's interest is merely inchoate. Being a mere
expectancy, it has no attribute of property. At this time, it is nonexistent and
may never exist.14Hence, it would be premature to make the security deposit
answerable for CISCO's present obligation to Del Monte Motors.

Moreover, since insolvency proceedings against CISCO have yet to be

conducted, it would be impossible to establish at this time which claimants are
entitled to the security deposit and in what pro-rated amounts. Only after all
other claimants under subsisting policies issued by CISCO have been heard
can respondent's share be determined.

Powers of the Commissioner

The Insurance Code has vested the Office of the Insurance Commission with
both regulatory and adjudicatory authority over insurance matters.15

The general regulatory authority of the insurance commissioner is described in

Section 414 of the Code as follows:

"Sec. 414. 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, and shall,
notwithstanding any existing laws to the contrary, have sole and
exclusive authority to regulate the issuance and sale of variable
contracts as defined in section two hundred thirty-two and to
provide for the licensing of persons selling such contracts, and to
issue such reasonable rules and regulations governing the
same.

"The Commissioner may issue such rulings, instructions,

circulars, orders and decisions as he may deem necessary to
secure the enforcement of the provisions of this Code, subject to
the approval of the Secretary of Finance. Except as otherwise
specified, decisions made by the Commissioner shall be
appealable to the Secretary of Finance." (Emphasis
supplied)cralawlibrary

Pursuant to these regulatory powers, the commissioner is authorized to (1)

issue (or to refuse to issue) certificates of authority to persons or entities
desiring to engage in insurance business in the Philippines;16 (2) revoke or
suspend these certificates of authority upon finding grounds for the revocation
or suspension;17 (3) impose upon insurance companies, their directors and/or
officers and/or agents appropriate penalties - - fines, suspension or removal
from office - - for failing to comply with the Code or with any of the
commissioner's orders, instructions, regulations or rulings, or for otherwise
conducting business in an unsafe or unsound manner.18

Included in the above regulatory responsibilities is the duty to hold the security
deposits under Sections 19119 and 203 of the Code, for the benefit and
security of all policy holders. In relation to these provisions, Section 192 of the
Insurance Code states:

"Sec. 192. The Commissioner shall hold the securities, deposited

as aforesaid, for the benefit and security of all the policyholders
of the company depositing the same, but shall as long as the
company is solvent, permit the company to collect the interest or
dividends on the securities so deposited, and, from time to
time, with his assent, to withdraw any of such securities, upon
depositing with said Commissioner other like securities, the
market value of which shall be equal to the market value of such
as may be withdrawn. In the event of any company ceasing to do
business in the Philippines the securities deposited as aforesaid
shall be returned upon the company's making application
therefor and proving to the satisfaction of the Commissioner that
it has no further liability under any of its policies in the
Philippines." (Emphasis supplied)cralawlibrary

Undeniably, the insurance commissioner has been given a wide latitude of

discretion to regulate the insurance industry so as to protect the insuring public.
The law specifically confers custody over the securities upon the
commissioner, with whom these investments are required to be deposited. An
implied trust20 is created by the law for the benefit of all claimants under
subsisting insurance contracts issued by the insurance company.21

As the officer vested with custody of the security deposit, the insurance
commissioner is in the best position to determine if and when it may be
released without prejudicing the rights of other policy holders. Before allowing
the withdrawal or the release of the deposit, the commissioner must be
satisfied that the conditions contemplated by the law are met and all policy
holders protected.

Commissioner's Actions
Entitled to Great Respect

In this case, Commissioner Malinis refused to release the security deposit of

CISCO. Believing that the funds were exempt from execution as provided by
law, he sought to protect other policy holders. His interpretation of the
provisions of the law carries great weight and consideration,22 as he is the
head of a specialized body tasked with the regulation of insurance matters and
primarily charged with the implementation of the Insurance Code.

The emergence of the multifarious needs of modern society necessitates the

establishment of diverse administrative agencies. In addressing these needs,
the administrative agencies charged with applying and implementing particular
statutes have accumulated experience and specialized capabilities. Thus, in a
long line of cases, this Court has recognized that their construction of a statute
is entitled to great respect and should ordinarily be controlling, unless clearly
shown to be in sharp conflict with the governing statute or the Constitution and
other laws.23
Clearly, then, the trial court erred in issuing the Writ of Garnishment against
the security deposit of CISCO. It follows that without the issuance of a valid
order, the insurance commissioner could not have been in contempt of court.24

WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE.
No costs.

SO ORDERED.

Ynares-Santiago, Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ.,

concur.

(Philippine Health Care Providers, Inc. v. CIR, G.R. No. 167330, September 18,
2009)

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 167330 June 12, 2008

PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CORONA, J.:

Is a health care agreement in the nature of an insurance contract and therefore

subject to the documentary stamp tax (DST) imposed under Section 185 of
Republic Act 8424 (Tax Code of 1997)?

This is an issue of first impression. The Court of Appeals (CA) answered it

affirmatively in its August 16, 2004 decision1 in CA-G.R. SP No. 70479.
Petitioner Philippine Health Care Providers, Inc. believes otherwise and
assails the CA decision in this petition for review under Rule 45 of the Rules of
Court.

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."2 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.3

The pertinent part of petitioner's membership or health care

agreement4 provides:

VII BENEFITS

Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims
for reimbursement] of this Agreement, Members shall have the following
Benefits under this Agreement:

In-Patient Services. In the event that a Member contract[s] sickness or

suffers injury which requires confinement in a participating Hospital[,] the
services or benefits stated below shall be provided to the Member free of
charge, but in no case shall [petitioner] be liable to pay more than P75,000.00
in benefits with respect to anyone sickness, injury or related causes. If a
member has exhausted such maximum benefits with respect to a particular
sickness, injury or related causes, all accounts in excess of P75,000.00 shall
be borne by the enrollee. It is[,] however, understood that the payment by
[petitioner] of the said maximum in In-Patient Benefits to any one member shall
preclude a subsequent payment of benefits to such member in respect of an
unrelated sickness, injury or related causes happening during the remainder of
his membership term.

(a) Room and Board

(b) Services of physician and/or surgeon or specialist

(c) Use of operating room and recovery room

(d) Standard Nursing Services

(e) Drugs and Medication for use in the hospital except those which are used
to dissolve blood clots in the vascular systems (i.e., trombolytic agents)

(f) Anesthesia and its administration

(g) Dressings, plaster casts and other miscellaneous supplies

(h) Laboratory tests, x-rays and other necessary diagnostic services

(i) Transfusion of blood and other blood elements

Condition for in-Patient Care. The provision of the services or benefits

mentioned in the immediately preceding paragraph shall be subject to the
following conditions:
(a) The Hospital Confinement must be approved by [petitioner's] Physician,
Participating Physician or [petitioner's] Medical Coordinator in that Hospital
prior to confinement.

(b) The confinement shall be in a Participating Hospital and the

accommodation shall be in accordance with the Member[']s benefit
classification.

(c) Professional services shall be provided only by the [petitioner's] Physicians

or Participating Physicians.

(d) If discharge from the Hospital has been authorized by [petitioner's]

attending Physician or Participating Physician and the Member shall fail or
refuse to do so, [petitioner] shall not be responsible for any charges incurred
after discharge has been authorized.

Out-Patient Services. A Member is entitled free of charge to the following

services or benefits which shall be rendered or administered either in
[petitioner's] Clinic or in a Participating Hospital under the direction or
supervision of [petitioner's] Physician, Participating Physician or [petitioner's]
Medical Coordinator.

(a) Gold Plan Standard Annual Physical Examination on the anniversary date
of membership, to be done at [petitioner's] designated hospital/clinic, to wit:

(i) Taking a medical history

(ii) Physical examination

(iii) Chest x-ray

(iv) Stool examination

(v) Complete Blood Count

(vi) Urinalysis

(vii) Fasting Blood Sugar (FBS)

(viii) SGPT

(ix) Creatinine

(x) Uric Acid

(xi) Resting Electrocardiogram

(xii) Pap Smear (Optional for women 40 years and above)

(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical
Examination.

The following tests are to be done as part of the Member[']s Annual check-up
program at [petitioner's] designated clinic, to wit:

1) Routine Physical Examination

2) CBC (Complete Blood Count)

* Hemoglobin * Hematocrit

* Differential * RBC/WBC

3) Chest X-ray

4) Urinalysis

5) Fecalysis

(c) Preventive Health Care, which shall include:

(i) Periodic Monitoring of Health Problems

(ii) Family planning counseling

(iii) Consultation and advices on diet, exercise and other healthy habits

(iv) Immunization but excluding drugs for vaccines used

(d) Out-Patient Care, which shall include:

(i) Consultation, including specialist evaluation

(ii) Treatment of injury or illness

(iii) Necessary x-ray and laboratory examination

(iv) Emergency medicines needed for the immediate

relief of symptoms

(v) Minor surgery not requiring confinement

Emergency Care. Subject to the conditions and limitations in this Agreement

and those specified below, a Member is entitled to receive emergency care [in
case of emergency. For this purpose, all hospitals and all attending physician(s)
in the Emergency Room automatically become accredited. In participating
hospitals, the member shall be entitled to the following services free of charge:
(a) doctor's fees, (b) emergency room fees, (c) medicines used for immediate
relief and during treatment, (d) oxygen, intravenous fluids and whole blood and
human blood products, (e) dressings, casts and sutures and (f) x-rays,
laboratory and diagnostic examinations and other medical services related to
the emergency treatment of the patient.]5 Provided, however, that in no case
shall the total amount payable by [petitioner] for said Emergency, inclusive of
hospital bill and professional fees, exceed P75,000.00.

If the Member received care in a non-participating hospital, [petitioner] shall

reimburse [him]6 80% of the hospital bill or the amount of P5,000.00[,]
whichever is lesser, and 50% of the professional fees of non-participating
physicians based on [petitioner's] schedule of fees provided that the total
amount[,] inclusive of hospital bills and professional fee shall not exceed
P5,000.00.

On January 27, 2000, respondent Commissioner of Internal Revenue sent

petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest,
for the taxable years 1996 and 1997 in the total amount of P224,702,641.18.
The assessment represented the following:

Value Added Tax DST

(VAT)
1996 P 45,767,596.23 P 55,746,352.19
1997 54,738,434.03 68,450,258.73
P 100,506,030.26 P 124,196,610.92

The deficiency DST assessment was imposed on petitioner's health care

agreement with the members of its health care program pursuant to Section
185 of the 1997 Tax Code which 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,
employer's liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and
fire insurance), and all bonds, undertakings, or recognizances, conditioned
for the performance of the duties of any office or position, for the doing or not
doing of anything therein specified, and on all obligations guaranteeing the
validity or legality of any bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile credits,
which may be made or renewed by any such person, company or corporation,
there shall be collected a documentary stamp tax of fifty centavos (P0.50) on
each four pesos (P4.00), or fractional part thereof, of the premium charged.
(emphasis supplied)

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,7 the dispositive portion of

which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is

PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency
VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20%
interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from
January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT
Ruling No. [231]-88 is declared void and without force and effect. The 1996
and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from
collecting the said DST deficiency tax.

SO ORDERED.8

Respondent appealed the CTA decision to the CA9 insofar as it cancelled the
DST assessment. He claimed that petitioner's 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.10 It held that petitioner's
health care agreement was in the nature of a non-life insurance contract
subject to DST:

WHEREFORE, the petition for review is GRANTED. The Decision of the Court
of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997
deficiency documentary stamp tax assessment and ordered petitioner to desist
from collecting the same is REVERSED and SET ASIDE.

Respondent is ordered to pay the amounts of P55,746,352.19

and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.

SO ORDERED.11

Petitioner moved for reconsideration but the CA denied it. Hence, this petition.

Petitioner essentially argues that its health care agreement is not a contract of
insurance but a contract for the provision on a prepaid basis of medical
services, including medical check-up, that are not based on loss or damage.
Petitioner also insists that it is not engaged in the insurance business. It is a
health maintenance organization regulated by the Department of Health, not
an insurance company under the jurisdiction of the Insurance Commission. For
these reasons, petitioner asserts that the health care agreement is not subject
to DST.
We do not agree.

The DST is levied on the exercise by persons of certain privileges conferred by

law for the creation, revision, or termination of specific legal relationships
through the execution of specific instruments.12 It is an excise upon the
privilege, opportunity, or facility offered at exchanges for the transaction of the
business.13 In particular, the DST under Section 185 of the 1997 Tax Code
is imposed on the privilege of making or renewing any policy of
insurance (except life, marine, inland and fire insurance), bond or
obligation in the nature of indemnity for loss, damage, or liability.

Under the law, a contract of insurance is an agreement whereby one

undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event.14 The event insured
against must be designated in the contract and must either be unknown or
contingent.15

Petitioner's health care agreement is primarily a contract of indemnity. And in

the recent case of Blue Cross Healthcare, Inc. v. Olivares,16 this Court ruled
that a health care agreement is in the nature of a non-life insurance policy.

Contrary to petitioner's claim, its health care agreement is not a contract for the
provision of medical services. Petitioner does not actually provide medical or
hospital services but merely arranges for the same17 and pays for them up to
the stipulated maximum amount of coverage. It is also 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.
Petitioner's health care agreement is substantially similar to that involved
in Philamcare Health Systems, Inc. v. CA.18 The health care agreement in that
case entitled the subscriber to avail of the hospitalization benefits, whether
ordinary or emergency, listed therein. It also provided for "out-patient benefits"
such as annual physical examinations, preventive health care and other
out-patient services. This Court ruled in Philamcare Health Systems, Inc.:

[T]he insurable interest of [the subscriber] 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.
Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingency, the health care provider must
pay for the same to the extent agreed upon under the contract.19 (emphasis
supplied)

Similarly, the insurable interest of every member of petitioner's health care

program in obtaining the health care agreement is his own health. Under the
agreement, petitioner is bound to indemnify any member who incurs hospital,
medical or any other expense arising from sickness, injury or other stipulated
contingency to the extent agreed upon under the contract.

Petitioner's contention that it is a health maintenance organization and not an

insurance company is irrelevant. Contracts between companies like petitioner
and the beneficiaries under their plans are treated as insurance contracts.20

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.21 It is an excise on the facilities used in the transaction of the
business, separate and apart from the business itself.22

WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision
of the Court of Appeals in CA-G.R. SP No. 70479 is AFFIRMED.

Petitioner is ordered to pay the amounts of P55,746,352.19

and P68,450,258.73 as deficiency documentary stamp tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000 until full payment thereof.

Costs against petitioner.

SO ORDERED.

Puno, C.J., Chairperson, Carpio, Azcuna, Leonardo-de Castro, JJ., concur.

White Gold Marine Services v. Pioneer Insurance, et al., GR No. 154514, 28

July 2005;
 Republic of the Philippines
SUPREME COURT

FIRST DIVISION

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

WHITE GOLD MARINE SERVICES, INC., Petitioners,

vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE
STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA)
LTD., Respondents.

DECISION

QUISUMBING, J.:

This petition for review assails the Decision1 dated July 30, 2002 of the Court
of Appeals in CA-G.R. SP No. 60144, affirming the Decision2 dated May 3,
2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both
decisions held that there was no violation of the Insurance Code and the
respondents do not need license as insurer and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and
indemnity coverage for its vessels from The Steamship Mutual Underwriting
Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance
and Surety Corporation (Pioneer). Subsequently, White Gold was issued a
Certificate of Entry and Acceptance.3Pioneer also issued receipts evidencing
payments for the coverage. When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of
sum of money to recover the latter’s unpaid balance. White Gold on the other
hand, filed a complaint before the Insurance Commission claiming that
Steamship Mutual violated Sections 1864 and 1875 of the Insurance Code,
while Pioneer violated Sections 299,63007 and 3018 in relation to Sections 302
and 303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no
need for Steamship Mutual to secure a license because it was not engaged in
the insurance business. It explained that Steamship Mutual was a Protection
and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another
license as insurance agent and/or a broker for Steamship Mutual because
Steamship Mutual was not engaged in the insurance business. Moreover,
Pioneer was already licensed, hence, a separate license solely as
agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In
its decision, the appellate court distinguished between P & I
Clubs vis-à-vis conventional insurance. The appellate court also held that
Pioneer merely acted as a collection agent of Steamship Mutual.

In this petition, petitioner assigns the following errors allegedly committed by

the appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT

STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE
GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS
AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT
SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS

BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS
ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT

PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS
AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF

RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND
DIRECTORS OF RESPONDENT PIONEER.9

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club,
engaged in the insurance business in the Philippines? (2) Does Pioneer need
a license as an insurance agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual
admits it does not have a license to do business in the Philippines although
Pioneer is its resident agent. This relationship is reflected in the certifications
issued by the Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the

insurance business. To buttress its assertion, it cites the definition of a P & I
Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals10 as "an association
composed of shipowners in general who band together for the specific purpose
of providing insurance cover on a mutual basis against liabilities incidental to
shipowning that the members incur in favor of third parties." It stresses that as
a P & I Club, Steamship Mutual’s primary purpose is to solicit and provide
protection and indemnity coverage and for this purpose, it has engaged the
services of Pioneer to act as its agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not

engaged in the insurance business in the Philippines. It is merely an
association of vessel owners who have come together to provide mutual
protection against liabilities incidental to shipowning.11 Respondents
aver Hyopsung is inapplicable in this case because the issue in Hyopsung was
the jurisdiction of the court over Hyopsung.

Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes "doing an

insurance business" or "transacting an insurance business". These are:

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

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

vocation and not as merely incidental to any other legitimate business or
activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically

recognized as constituting the doing of an insurance business within the
meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the

foregoing in a manner designed to evade the provisions of this Code.

...

The same provision also provides, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions, or that no
separate or direct consideration is received therefor, shall not preclude the
existence of an insurance business.12

The test to determine if a contract is an insurance contract or not, depends on

the nature of the promise, the act required to be performed, and the exact
nature of the agreement in the light of the occurrence, contingency, or
circumstances under which the performance becomes requisite. It is not by
what it is called.13

Basically, an insurance contract is a contract of indemnity. In it, one

undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event.14

In particular, a marine insurance undertakes to indemnify the assured against

marine losses, such as the losses incident to a marine adventure.15 Section
9916 of the Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the
members are both the insurer and insured. In it, the members all contribute, by
a system of premiums or assessments, to the creation of a fund from which all
losses and liabilities are paid, and where the profits are divided among
themselves, in proportion to their interest.17 Additionally, mutual insurance
associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.18

A P & I Club is "a form of insurance against third party liability, where the
third party is anyone other than the P & I Club and the members."19 By
definition then, Steamship Mutual as a P & I Club is a mutual insurance
association engaged in the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit
without the requisite certificate of authority mandated by Section 18720 of the
Insurance Code. It maintains a resident agent in the Philippines to solicit
insurance and to collect payments in its behalf. We note that Steamship
Mutual even renewed its P & I Club cover until it was cancelled due to
non-payment of the calls. Thus, to continue doing business here, Steamship
Mutual or through its agent Pioneer, must secure a license from the Insurance
Commission.

Since a contract of insurance involves public interest, regulation by the State is

necessary. Thus, no insurer or insurance company is allowed to engage in the
insurance business without a license or a certificate of authority from the
Insurance Commission.21

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

Pioneer is the resident agent of Steamship Mutual as evidenced by the

certificate of registration22 issued by the Insurance Commission. It has been
licensed to do or transact insurance business by virtue of the certificate of
authority23 issued by the same agency. However, a Certification from the
Commission states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.24

Although Pioneer is already licensed as an insurance company, it needs a

separate license to act as insurance agent for Steamship Mutual. Section 299
of the Insurance Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the

solicitation or procurement of applications for insurance, or receive for services
in obtaining insurance, any commission or other compensation from any
insurance company doing business in the Philippines or any agent thereof,
without first procuring a license so to act from the Commissioner, which must
be renewed annually on the first day of January, or within six months
thereafter. . .
Finally, White Gold seeks revocation of Pioneer’s certificate of authority and
removal of its directors and officers. Regrettably, we are not the forum for
these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated

July 30, 2002 of the Court of Appeals affirming the Decision dated May 3, 2000
of the Insurance Commission is hereby REVERSED AND SET ASIDE. The
Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer
Insurance and Surety Corporation are ORDERED to obtain licenses and to
secure proper authorizations to do business as insurer and insurance agent,
respectively. The petitioner’s prayer for the revocation of Pioneer’s Certificate
of Authority and removal of its directors and officers, is DENIED. Costs against
respondents.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ.,

concur.

Verendia vs. CA, 217 SCRA 417;

G.R. No. 75605 January 22, 1993

RAFAEL (REX) VERENDIA, petitioner,

vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE
PHILIPPINES, respondents.

G.R. No. 76399 January 22, 1993

FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,

vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.

B.L. Padilla for petitioner.

Sabino Padilla, Jr. for Fidelity & Surety, Co.

MELO, J.:

The two consolidated cases involved herein stemmed from the issuance
by Fidelity and Surety Insurance Company of the Philippines (Fidelity for
short) of its Fire Insurance Policy No. F-18876 effective between June 23,
1980 and June 23, 1981 covering Rafael (Rex) Verendia's residential
building located at Tulip Drive, Beverly Hills, Antipolo, Rizal in the
amount of P385,000.00. Designated as beneficiary was the Monte de
Piedad & Savings Bank. Verendia also insured the same building with
two other companies, namely, The Country Bankers Insurance for
P56,000.00 under Policy No. PDB-80-1913 expiring on May 12, 1981, and
The Development Insurance for P400,000.00 under Policy No. F-48867
expiring on June 30, 198l.

While the three fire insurance policies were in force, the insured property
was completely destroyed by fire on the early morning of December 28,
1980. Fidelity was accordingly informed of the loss and despite demands,
refused payment under its policy, thus prompting Verendia to file a
complaint with the then Court of First Instance of Quezon City, praying
for payment of P385,000.00, legal interest thereon, plus attorney's fees
and litigation expenses. The complaint was later amended to include
Monte de Piedad as an "unwilling defendant" (P. 16, Record).

Answering the complaint, Fidelity, among other things, averred that the
policy was avoided by reason of over-insurance; that Verendia
maliciously represented that the building at the time of the fire was
leased under a contract executed on June 25, 1980 to a certain Roberto
Garcia, when actually it was a Marcelo Garcia who was the lessee.

On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A.
Ortiz, ruling in favor of Fidelity. In sustaining the defenses set up by
Fidelity, the trial court ruled that Paragraph 3 of the policy was also
violated by Verendia in that the insured failed to inform Fidelity of his
other insurance coverages with Country Bankers Insurance and
Development Insurance.

Verendia appealed to the then Intermediate Appellate Court and in a

decision promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895,
Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the appellate court
reversed for the following reasons: (a) there was no misrepresentation
concerning the lease for the contract was signed by Marcelo Garcia in
the name of Roberto Garcia; and (b) Paragraph 3 of the policy contract
requiring Verendia to give notice to Fidelity of other contracts of
insurance was waived by Fidelity as shown by its conduct in attempting
to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).

Fidelity received a copy of the appellate court's decision on April 4, 1986,

but instead of directly filing a motion for reconsideration within 15 days
therefrom, Fidelity filed on April 21, 1986, a motion for extension of 3
days within which to file a motion for reconsideration. The motion for
extension was not filed on April 19, 1986 which was the 15th day after
receipt of the decision because said 15th day was a Saturday and of
course, the following day was a Sunday (p. 14., Rollo of G.R. No. 75605).
The motion for extension was granted by the appellate court on April 30,
1986 (p. 15. ibid.), but Fidelity had in the meantime filed its motion for
reconsideration on April 24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the record Fidelity's motion for
reconsideration on the ground that the motion for extension was filed out
of time because the 15th day from receipt of the decision which fell on a
Saturday was ignored by Fidelity, for indeed, so Verendia contended, the
Intermediate Appellate Court has personnel receiving pleadings even on
Saturdays.

The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and
after a motion for reconsideration was similarly brushed aside on July 22,
1986 (p. 30, ibid .), the petition herein docketed as G.R. No. 75605 was
initiated. Subsequently, or more specifically on October 21, 1986, the
appellate court denied Fidelity's motion for reconsideration and account
thereof. Fidelity filed on March 31, 1986, the petition for review
on certiorari now docketed as G.R. No. 76399. The two petitions,
inter-related as they are, were consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.

Before we can even begin to look into the merits of the main case which
is the petition for review on certiorari, we must first determine whether
the decision of the appellate court may still be reviewed, or whether the
same is beyond further judicial scrutiny. Stated otherwise, before
anything else, inquiry must be made into the issue of whether Fidelity
could have legally asked for an extension of the 15-day reglementary
period for appealing or for moving for reconsideration.

As early as 1944, this Court through Justice Ozaeta already pronounced

the doctrine that the pendency of a motion for extension of time to
perfect an appeal does not suspend the running of the period sought to
be extended (Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same
effect were the rulings in Gibbs vs. CFI of Manila (80 Phil. 160
[1948]) Bello vs. Fernando (4 SCRA 138 [1962]), and Joe vs. King (20
SCRA 1120 [1967]).

The above cases notwithstanding and because the Rules of Court do not
expressly prohibit the filing of a motion for extension of time to file a
motion for reconsideration in regard to a final order or judgment,
magistrates, including those in the Court of Appeals, held sharply
divided opinions on whether the period for appealing which also
includes the period for moving to reconsider may be extended. The
matter was not definitely settled until this Court issued its Resolution
in Habaluyas Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring
that beginning one month from the promulgation of the resolution on
May 30, 1986 —

. . . the rule shall be strictly enforced that no motion for extension of time
to file a motion for new trial or reconsideration shall be filed . . . (at p.
212.)

In the instant case, the motion for extension was filed and granted before
June 30, 1986, although, of course, Verendia's motion to expunge the
motion for reconsideration was not finally disposed until July 22, 1986,
or after the dictum in Habaluyas had taken effect. Seemingly, therefore,
the filing of the motion for extension came before its formal proscription
under Habaluyas, for which reason we now turn our attention to G.R. No.
76399.

Reduced to bare essentials, the issues Fidelity raises therein are: (a)
whether or not the contract of lease submitted by Verendia to support his
claim on the fire insurance policy constitutes a false declaration which
would forfeit his benefits under Section 13 of the policy and (b) whether
or not, in submitting the subrogation receipt in evidence, Fidelity had in
effect agreed to settle Verendia's claim in the amount stated in said
receipt.1

Verging on the factual, the issue of the veracity or falsity of the lease contract
could have been better resolved by the appellate court for, in a petition for
review on certiorari under Rule 45, the jurisdiction of this Court is limited to the
review of errors of law. The appellate court's findings of fact are, therefore,
conclusive upon this Court except in the following cases: (1) when the
conclusion is a finding grounded entirely on speculation, surmises, or
conjectures; (2) when the inference made is manifestly absurd, mistaken, or
impossible; (3) when there is grave abuse of discretion in the appreciation of
facts; (4) when the judgment is premised on a misapprehension of facts; (5)
when the findings of fact are conflicting; and (6) when the Court of Appeals in
making its findings went beyond the issues of the case and the same are
contrary to the admissions of both appellant and appellee (Ronquillo v. Court
of Appeals, 195 SCRA 433 [1991]). In view of the conflicting findings of the trial
court and the appellate court on important issues in these consolidated cases
and it appearing that the appellate court judgment is based on a
misapprehension of facts, this Court shall review the evidence on record.

The contract of lease upon which Verendia relies to support his claim for
insurance benefits, was entered into between him and one Robert Garcia,
married to Helen Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after
the effectivity of the insurance policy. When the rented residential building was
razed to the ground on December 28, 1980, it appears that Robert Garcia (or
Roberto Garcia) was still within the premises. However, according to the
investigation report prepared by Pat. Eleuterio M. Buenviaje of the Antipolo
police, the building appeared to have "no occupant" and that Mr. Roberto
Garcia was "renting on the otherside (sic) portion of said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated
testimony that Marcelo Garcia, whom he considered as the real lessee, was
occupying the building when it was burned (TSN, July 27, 1982, p.10).

Robert Garcia disappeared after the fire. It was only on October 9, 1981 that
an adjuster was able to locate him. Robert Garcia then executed an affidavit
before the National Intelligence and Security Authority (NISA) to the effect that
he was not the lessee of Verendia's house and that his signature on the
contract of lease was a complete forgery. Thus, on the strength of these facts,
the adjuster submitted a report dated December 4, 1981 recommending the
denial of Verendia's claim (Exh. "2").

Ironically, during the trial, Verendia admitted that it was not Robert Garcia who
signed the lease contract. According to Verendia, it was signed by Marcelo
Garcia, cousin of Robert, who had been paying the rentals all the while.
Verendia, however, failed to explain why Marcelo had to sign his cousin's
name when he in fact was paying for the rent and why he (Verendia) himself,
the lessor, allowed such a ruse. Fidelity's conclusions on these proven facts
appear, therefore, to have sufficient bases; Verendia concocted the lease
contract to deflect responsibility for the fire towards an alleged "lessee",
inflated the value of the property by the alleged monthly rental of P6,500 when
in fact, the Provincial Assessor of Rizal had assessed the property's fair
market value to be only P40,300.00, insured the same property with two other
insurance companies for a total coverage of around P900,000, and created a
dead-end for the adjuster by the disappearance of Robert Garcia.

Basically a contract of indemnity, an insurance contract is the law between the

parties (Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]).
Its terms and conditions constitute the measure of the insurer's liability and
compliance therewith is a condition precedent to the insured's right to recovery
from the insurer (Oriental Assurance Corporation vs. Court of Appeals, 200
SCRA 459 [1991], citing Perla Compania de Seguros, Inc. vs. Court of
Appeals, 185 SCRA 741 [1991]). As it is also a contract of adhesion, an
insurance contract should be liberally construed in favor of the insured and
strictly against the insurer company which usually prepares it (Western
Guaranty Corporation vs. Court of Appeals, 187 SCRA 652 [1980]).

Considering, however, the foregoing discussion pointing to the fact that

Verendia used a false lease contract to support his claim under Fire Insurance
Policy No. F-18876, the terms of the policy should be strictly construed against
the insured. Verendia failed to live by the terms of the policy, specifically
Section 13 thereof which is expressed in terms that are clear and
unambiguous, that all benefits under the policy shall be forfeited "If the claim
be in any respect fraudulent, or if any false declaration be made or used in
support thereof, or if any fraudulent means or devises are used by the Insured
or anyone acting in his behalf to obtain any benefit under the policy". Verendia,
having presented a false declaration to support his claim for benefits in the
form of a fraudulent lease contract, he forfeited all benefits therein by virtue of
Section 13 of the policy in the absence of proof that Fidelity waived such
provision (Pacific Banking Corporation vs. Court of Appeals, supra). Worse yet,
by presenting a false lease contract, Verendia, reprehensibly disregarded the
principle that insurance contracts are uberrimae fidae and demand the most
abundant good faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).

There is also no reason to conclude that by submitting the subrogation receipt

as evidence in court, Fidelity bound itself to a "mutual agreement" to settle
Verendia's claims in consideration of the amount of P142,685.77. While the
said receipt appears to have been a filled-up form of Fidelity, no representative
of Fidelity had signed it. It is even incomplete as the blank spaces for a witness
and his address are not filled up. More significantly, the same receipt states
that Verendia had received the aforesaid amount. However, that Verendia had
not received the amount stated therein, is proven by the fact that Verendia
himself filed the complaint for the full amount of P385,000.00 stated in the
policy. It might be that there had been efforts to settle Verendia's claims, but
surely, the subrogation receipt by itself does not prove that a settlement had
been arrived at and enforced. Thus, to interpret Fidelity's presentation of the
subrogation receipt in evidence as indicative of its accession to its "terms" is
not only wanting in rational basis but would be substituting the will of the Court
for that of the parties.

WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in

G.R. No. 76399 is GRANTED and the decision of the then Intermediate
Appellate Court under review is REVERSED and SET ASIDE and that of the
trial court is hereby REINSTATED and UPHELD.

SO ORDERED.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

Rizal Surety and Insurance Co. v. CA, 336 SCRA 12;

G.R. No. 112360 July 18, 2000

RIZAL SURETY & INSURANCE COMPANY, petitioner,

vs.
COURT OF APPEALS and TRANSWORLD KNITTING MILLS,
INC., respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the July 15, 1993 Decision1 and October 22,
1993 Resolution2 of the Court of Appeals3 in CA-G.R. CV NO. 28779, which
modified the Ruling4 of the Regional Trial Court of Pasig, Branch 161, in Civil
Case No. 46106.

The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance)
issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills,
Inc. (Transworld), initially for One Million (₱1,000,000.00) Pesos and
eventually increased to One Million Five Hundred Thousand (₱1,500,000.00)
Pesos, covering the period from August 14, 1980 to March 13, 1981.
Pertinent portions of subject policy on the buildings insured, and location
thereof, read:

"‘On stocks of finished and/or unfinished products, raw materials and supplies
of every kind and description, the properties of the Insureds and/or held by
them in trust, on commission or on joint account with others and/or for which
they (sic) responsible in case of loss whilst contained and/or stored during the
currency of this Policy in the premises occupied by them forming part of the
buildings situate (sic) within own Compound at MAGDALO STREET, BARRIO
UGONG, PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601.’

xxx xxx xxx

‘Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills, garment and lingerie
factory, transistor-stereo assembly plant, offices, warehouse and caretaker's
quarters.

'Bounds in front partly by one-storey concrete building under galvanized iron

roof occupied as canteen and guardhouse, partly by building of two and partly
one storey constructed of concrete below, timber above undergalvanized iron
roof occupied as garage and quarters and partly by open space and/or
tracking/ packing, beyond which is the aforementioned Magdalo Street; on its
right and left by driveway, thence open spaces, and at the rear by open
spaces.'"5

The same pieces of property insured with the petitioner were also insured with
New India Assurance Company, Ltd., (New India).

On January 12, 1981, fire broke out in the compound of Transworld, razing the
middle portion of its four-span building and partly gutting the left and right
sections thereof. A two-storey building (behind said four-span building) where
fun and amusement machines and spare parts were stored, was also
destroyed by the fire.

Transworld filed its insurance claims with Rizal Surety & Insurance Company
and New India Assurance Company but to no avail.

On May 26, 1982, private respondent brought against the said insurance
companies an action for collection of sum of money and damages, docketed
as Civil Case No. 46106 before Branch 161 of the then Court of First Instance
of Rizal; praying for judgment ordering Rizal Insurance and New India to pay
the amount of ₱2,747, 867.00 plus legal interest, ₱400,000.00 as attorney's
fees, exemplary damages, expenses of litigation of ₱50,000.00 and costs of
suit.6

Petitioner Rizal Insurance countered that its fire insurance policy sued upon
covered only the contents of the four-span building, which was partly burned,
and not the damage caused by the fire on the two-storey annex building.7
On January 4, 1990, the trial court rendered its decision; disposing as follows:

"ACCORDINGLY, judgment is hereby rendered as follows:

(1)Dismissing the case as against The New India Assurance Co., Ltd.;

(2) Ordering defendant Rizal Surety And Insurance Company to pay

Transwrold (sic) Knitting Mills, Inc. the amount of P826, 500.00 representing
the actual value of the losses suffered by it; and

(3) Cost against defendant Rizal Surety and Insurance Company.

SO ORDERED."8

Both the petitioner, Rizal Insurance Company, and private respondent,

Transworld Knitting Mills, Inc., went to the Court of Appeals, which came out
with its decision of July 15, 1993 under attack, the decretal portion of which
reads:

"WHEREFORE, and upon all the foregoing, the decision of the court below is
MODIFIED in that defendant New India Assurance Company has and is
hereby required to pay plaintiff-appellant the amount of P1,818,604.19 while
the other Rizal Surety has to pay the plaintiff-appellant P470,328.67, based on
the actual losses sustained by plaintiff Transworld in the fire, totalling
P2,790,376.00 as against the amounts of fire insurance coverages
respectively extended by New India in the amount of P5,800,000.00 and Rizal
Surety and Insurance Company in the amount of P1,500,000.00.

No costs.

SO ORDERED."9

On August 20, 1993, from the aforesaid judgment of the Court of Appeals New
India appealed to this Court theorizing inter alia that the private respondent
could not be compensated for the loss of the fun and amusement machines
and spare parts stored at the two-storey building because it (Transworld) had
no insurable interest in said goods or items.

On February 2, 1994, the Court denied the appeal with finality in G.R. No.
L-111118 (New India Assurance Company Ltd. vs. Court of Appeals).

Petitioner Rizal Insurance and private respondent Transworld, interposed a

Motion for Reconsideration before the Court of Appeals, and on October 22,
1993, the Court of Appeals reconsidered its decision of July 15, 1993, as
regards the imposition of interest, ruling thus:

"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as
the imposition of legal interest is concerned, that, on the assessment against
New India Assurance Company on the amount of P1,818,604.19 and that
against Rizal Surety & Insurance Company on the amount of P470,328.67,
from May 26, 1982 when the complaint was filed until payment is made. The
rest of the said decision is retained in all other respects.

SO ORDERED."10

Undaunted, petitioner Rizal Surety & Insurance Company found its way to this
Court via the present Petition, contending that:

I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX

BUILDING WHERE THE BULK OF THE BURNED PROPERTIES WERE
STORED, WAS INCLUDED IN THE COVERAGE OF THE INSURANCE
POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.

II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN

NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY),
TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT
THE PREMISES OCCUPIED BY TRANSWORLD, WHERE THE INSURED
PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.

III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT

TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH MALICE
IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN NOT
ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL AND
PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES
AND EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL
CODE).11

The Petition is not impressed with merit.

It is petitioner's submission that the fire insurance policy litigated upon

protected only the contents of the main building (four-span),12 and did not
include those stored in the two-storey annex building. On the other hand, the
private respondent theorized that the so called "annex" was not an annex but
was actually an integral part of the four-span building13 and therefore, the
goods and items stored therein were covered by the same fire insurance
policy.

Resolution of the issues posited here hinges on the proper interpretation of the
stipulation in subject fire insurance policy regarding its coverage, which reads:

"xxx contained and/or stored during the currency of this Policy in the premises
occupied by them forming part of the buildings situate (sic) within own
Compound xxx"

Therefrom, it can be gleaned unerringly that the fire insurance policy in

question did not limit its coverage to what were stored in the four-span building.
As opined by the trial court of origin, two requirements must concur in order
that the said fun and amusement machines and spare parts would be deemed
protected by the fire insurance policy under scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas occupied
by Transworld and second, said areas must form part of the building described
in the policy xxx"14

'Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills, garment and lingerie
factory, transistor-stereo assembly plant, offices, ware house and caretaker's
quarter.'

The Court is mindful of the well-entrenched doctrine that factual findings by the
Court of Appeals are conclusive on the parties and not reviewable by this
Court, and the same carry even more weight when the Court of Appeals has
affirmed the findings of fact arrived at by the lower court.15

In the case under consideration, both the trial court and the Court of Appeals
found that the so called "annex " was not an annex building but an integral and
inseparable part of the four-span building described in the policy and
consequently, the machines and spare parts stored therein were covered by
the fire insurance in dispute. The letter-report of the Manila Adjusters and
Surveyor's Company, which petitioner itself cited and invoked, describes the
"annex" building as follows:

"Two-storey building constructed of partly timber and partly concrete hollow

blocks under g.i. roof which is adjoining and intercommunicating with the repair
of the first right span of the lofty storey building and thence by property fence
wall."16

Verily, the two-storey building involved, a permanent structure which adjoins

and intercommunicates with the "first right span of the lofty storey
building",17 formed part thereof, and meets the requisites for compensability
under the fire insurance policy sued upon.

So also, considering that the two-storey building aforementioned was already

existing when subject fire insurance policy contract was entered into on
January 12, 1981, having been constructed sometime in 1978,18 petitioner
should have specifically excluded the said two-storey building from the
coverage of the fire insurance if minded to exclude the same but if did not, and
instead, went on to provide that such fire insurance policy covers the products,
raw materials and supplies stored within the premises of respondent
Transworld which was an integral part of the four-span building occupied by
Transworld, knowing fully well the existence of such building adjoining and
intercommunicating with the right section of the four-span building.

After a careful study, the Court does not find any basis for disturbing what the
lower courts found and arrived at.

Indeed, the stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building insured
thereby. Article 1377 of the New Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity"

Conformably, it stands to reason that the doubt should be resolved against the
petitioner, Rizal Surety Insurance Company, whose lawyer or managers
drafted the fire insurance policy contract under scrutiny. Citing the aforecited
provision of law in point, the Court in Landicho vs. Government Service
Insurance System,19 ruled:

"This is particularly true as regards insurance policies, in respect of which it is

settled that the 'terms in an insurance policy, which are ambiguous, equivocal,
or uncertain x x x are to be construed strictly and most strongly against the
insurer, and liberally in favor of the insured so as to effect the dominant
purpose of indemnity or payment to the insured, especially where forfeiture is
involved' (29 Am. Jur., 181), and the reason for this is that the 'insured usually
has no voice in the selection or arrangement of the words employed and that
the language of the contract is selected with great care and deliberation by
experts and legal advisers employed by, and acting exclusively in the interest
of, the insurance company.' (44 C.J.S., p. 1174).""20

Equally relevant is the following disquisition of the Court in Fieldmen's

Insurance Company, Inc. vs. Vda. De Songco,21 to wit:

"'This rigid application of the rule on ambiguities has become necessary in

view of current business practices.1âwphi1 The courts cannot ignore that
nowadays monopolies, cartels and concentration of capital, endowed with
overwhelming economic power, manage to impose upon parties dealing with
them cunningly prepared 'agreements' that the weaker party may not change
one whit, his participation in the 'agreement' being reduced to the alternative to
'take it or leave it' labelled since Raymond Saleilles 'contracts by adherence'
(contrats [sic] d'adhesion), in contrast to these entered into by parties
bargaining on an equal footing, such contracts (of which policies of insurance
and international bills of lading are prime example) obviously call for greater
strictness and vigilance on the part of courts of justice with a view to protecting
the weaker party from abuses and imposition, and prevent their becoming
traps for the unwary (New Civil Code, Article 24; Sent. of Supreme Court of
Spain, 13 Dec. 1934, 27 February 1942.)'"22

The issue of whether or not Transworld has an insurable interest in the fun and
amusement machines and spare parts, which entitles it to be indemnified for
the loss thereof, had been settled in G.R. No. L-111118, entitled New India
Assurance Company, Ltd., vs. Court of Appeals, where the appeal of New
India from the decision of the Court of Appeals under review, was denied with
finality by this Court on February 2, 1994.

The rule on conclusiveness of judgment, which obtains under the premises,

precludes the relitigation of a particular fact or issue in another action between
the same parties based on a different claim or cause of action. "xxx the
judgment in the prior action operates as estoppel only as to those matters in
issue or points controverted, upon the determination of which the finding or
judgment was rendered. In fine, the previous judgment is conclusive in the
second case, only as those matters actually and directly controverted and
determined and not as to matters merely involved therein."23

Applying the abovecited pronouncement, the Court, in Smith Bell and

Company (Phils.), Inc. vs. Court of Appeals,24held that the issue of negligence
of the shipping line, which issue had already been passed upon in a case filed
by one of the insurers, is conclusive and can no longer be relitigated in a
similar case filed by another insurer against the same shipping line on the
basis of the same factual circumstances. Ratiocinating further, the Court
opined:

"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had
been negligent, or so negligent as to have proximately caused the collision
between them, was an issue that was actually, directly and expressly raised,
controverted and litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved
that issue in his Decision and held the 'Don Carlos' to have been negligent
rather than the 'Yotai Maru' and, as already noted, that Decision was affirmed
by this Court in G.R. No. L-48839 in a Resolution dated 6 December 1987. The
Reyes Decision thus became final and executory approximately two (2) years
before the Sison Decision, which is assailed in the case at bar, was
promulgated. Applying the rule of conclusiveness of judgment, the question of
which vessel had been negligent in the collision between the two (2) vessels,
had long been settled by this Court and could no longer be relitigated in
C.A.-G.R. No. 61206-R. Private respondent Go Thong was certainly bound by
the ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of
Appeals fell into clear and reversible error when it disregarded the Decision of
this Court affirming the Reyes Decision."25

The controversy at bar is on all fours with the aforecited case. Considering that
private respondent's insurable interest in, and compensability for the loss of
subject fun and amusement machines and spare parts, had been adjudicated,
settled and sustained by the Court of Appeals in CA-G.R. CV NO. 28779, and
by this Court in G.R. No. L-111118, in a Resolution, dated February 2, 1994,
the same can no longer be relitigated and passed upon in the present case.
Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by the
ruling of the Court of Appeals and of this Court that the private respondent has
an insurable interest in the aforesaid fun and amusement machines and spare
parts; and should be indemnified for the loss of the same.

So also, the Court of Appeals correctly adjudged petitioner liable for the
amount of P470,328.67, it being the total loss and damage suffered by
Transworld for which petitioner Rizal Insurance is liable.26

All things studiedly considered and viewed in proper perspective, the Court is
of the irresistible conclusion, and so finds, that the Court of Appeals erred not
in holding the petitioner, Rizal Surety Insurance Company, liable for the
destruction and loss of the insured buildings and articles of the private
respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated
October 22, 1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are
AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

Philamcare Health Systems Inc. v. CA, 379 SCRA 356;

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, respondent’s 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 Ernani’s medical history. Doctors at the
MMC allegedly discovered at the time of Ernani’s 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 attorney’s
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 attorney’s 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. Petitioner’s motion for reconsideration was denied. Hence,
4 5

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.1âwphi1.nêt

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 insurer’s 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 respondent’s 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 respondent’s husband concealed a material fact in his

application. It appears that in the application for health coverage, petitioners
required respondent’s 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 respondent’s 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 applicant’s 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 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.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 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 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
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 deceased’s 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.

SO ORDERED.

Davide, Jr., C.J., Puno, and Kapunan, JJ., concur.

5. Fortune Insurance and Surety Co., Inc. v. CA, 244 SCRA 308;

G.R. No. 115278 May 23, 1995

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,

vs.
COURT OF APPEALS and PRODUCERS BANK OF THE
PHILIPPINES, respondents.
DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is
whether the petitioner is liable under the Money, Security, and Payroll Robbery
policy it issued to the private respondent or whether recovery thereunder is
precluded under the general exceptions clause thereof. Both the trial court and
the Court of Appeals held that there should be recovery. The petitioner
contends otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati,
Metro Manila, by private respondent Producers Bank of the Philippines
(hereinafter Producers) against petitioner Fortune Insurance and Surety Co.,
Inc. (hereinafter Fortune) of a complaint for recovery of the sum of
P725,000.00 under the policy issued by Fortune. The sum was allegedly lost
during a robbery of Producer's armored vehicle while it was in transit to
transfer the money from its Pasay City Branch to its head office in Makati. The
case was docketed as Civil Case No. 1817 and assigned to Branch 146
thereof.

After joinder of issues, the parties asked the trial court to render judgment
based on the following stipulation of facts:

1. The plaintiff was insured by the defendants and an insurance policy was
issued, the duplicate original of which is hereto attached as Exhibit "A";

2. An armored car of the plaintiff, while in the process of transferring cash in

the sum of P725,000.00 under the custody of its teller, Maribeth Alampay, from
its Pasay Branch to its Head Office at 8737 Paseo de Roxas, Makati, Metro
Manila on June 29, 1987, was robbed of the said cash. The robbery took place
while the armored car was traveling along Taft Avenue in Pasay City;

3. The said armored car was driven by Benjamin Magalong Y de Vera,

escorted by Security Guard Saturnino Atiga Y Rosete. Driver Magalong was
assigned by PRC Management Systems with the plaintiff by virtue of an
Agreement executed on August 7, 1983, a duplicate original copy of which is
hereto attached as Exhibit "B";

4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc.
with the plaintiff by virtue of a contract of Security Service executed on October
25, 1982, a duplicate original copy of which is hereto attached as Exhibit "C";

5. After an investigation conducted by the Pasay police authorities, the driver

Magalong and guard Atiga were charged, together with Edelmer Bantigue Y
Eulalio, Reynaldo Aquino and John Doe, with violation of P.D. 532
(Anti-Highway Robbery Law) before the Fiscal of Pasay City. A copy of the
complaint is hereto attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging the aforesaid
persons with the said crime before Branch 112 of the Regional Trial Court of
Pasay City. A copy of the said information is hereto attached as Exhibit "E."
The case is still being tried as of this date;

7. Demands were made by the plaintiff upon the defendant to pay the amount
of the loss of P725,000.00, but the latter refused to pay as the loss is excluded
from the coverage of the insurance policy, attached hereto as Exhibit "A,"
specifically under page 1 thereof, "General Exceptions" Section (b), which is
marked as Exhibit "A-1," and which reads as follows:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in report of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the insured
or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with
others. . . .

8. The plaintiff opposes the contention of the defendant and contends that
Atiga and Magalong are not its "officer, employee, . . . trustee or authorized
representative . . . at the time of the robbery.1

On 26 April 1990, the trial court rendered its decision in favor of Producers.
The dispositive portion thereof reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and against
defendant, and

(a) orders defendant to pay plaintiff the net amount of P540,000.00 as liability
under Policy No. 0207 (as mitigated by the P40,000.00 special clause
deduction and by the recovered sum of P145,000.00), with interest thereon at
the legal rate, until fully paid;

(b) orders defendant to pay plaintiff the sum of P30,000.00 as and for
attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

SO ORDERED. 2

The trial court ruled that Magalong and Atiga were not employees or
representatives of Producers. It Said:

The Court is satisfied that plaintiff may not be said to have selected and
engaged Magalong and Atiga, their services as armored car driver and as
security guard having been merely offered by PRC Management and by
Unicorn Security and which latter firms assigned them to plaintiff. The wages
and salaries of both Magalong and Atiga are presumably paid by their
respective firms, which alone wields the power to dismiss them. Magalong and
Atiga are assigned to plaintiff in fulfillment of agreements to provide driving
services and property protection as such — in a context which does not
impress the Court as translating into plaintiff's power to control the conduct of
any assigned driver or security guard, beyond perhaps entitling plaintiff to
request are replacement for such driver guard. The finding is accordingly
compelled that neither Magalong nor Atiga were plaintiff's "employees" in
avoidance of defendant's liability under the policy, particularly the general
exceptions therein embodied.

Neither is the Court prepared to accept the proposition that driver Magalong
and guard Atiga were the "authorized representatives" of plaintiff. They were
merely an assigned armored car driver and security guard, respectively, for the
June 29, 1987 money transfer from plaintiff's Pasay Branch to its Makati Head
Office. Quite plainly — it was teller Maribeth Alampay who had "custody" of the
P725,000.00 cash being transferred along a specified money route, and hence
plaintiff's then designated "messenger" adverted to in the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the
case as CA-G.R. CV No. 32946. In its decision 4 promulgated on 3 May 1994,
it affirmed in toto the appealed decision.

The Court of Appeals agreed with the conclusion of the trial court that
Magalong and Atiga were neither employees nor authorized representatives of
Producers and ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the

insured and strictly against the insurance company (New Life Enterprises vs.
Court of Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs. Court of
Appeals, 211 SCRA 554). Contracts of insurance, like other contracts, are to
be construed according to the sense and meaning of the terms which the
parties themselves have used. If such terms are clear and unambiguous, they
must be taken and understood in their plain, ordinary and popular sense (New
Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs. Court of
Appeals, 195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is

plain, ordinary and simple. No other interpretation is necessary. The word
"employee" must be taken to mean in the ordinary sense.

The Labor Code is a special law specifically dealing with/and specifically

designed to protect labor and therefore its definition as to employer-employee
relationships insofar as the application/enforcement of said Code is concerned
must necessarily be inapplicable to an insurance contract which
defendant-appellant itself had formulated. Had it intended to apply the Labor
Code in defining what the word "employee" refers to, it must/should have so
stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees of
plaintiff-appellee bank because it has no power to hire or to dismiss said driver
and security guard under the contracts (Exhs. 8 and C) except only to ask for
their replacements from the contractors.5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges
that the trial court and the Court of Appeals erred in holding it liable under the
insurance policy because the loss falls within the general exceptions clause
considering that driver Magalong and security guard Atiga were Producers'
authorized representatives or employees in the transfer of the money and
payroll from its branch office in Pasay City to its head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to

transfer its funds from one branch to another, they effectively and necessarily
became its authorized representatives in the care and custody of the money.
Assuming that they could not be considered authorized representatives, they
were, nevertheless, employees of Producers. It asserts that the existence of
an employer-employee relationship "is determined by law and being such, it
cannot be the subject of agreement." Thus, if there was in reality an
employer-employee relationship between Producers, on the one hand, and
Magalong and Atiga, on the other, the provisions in the contracts of Producers
with PRC Management System for Magalong and with Unicorn Security
Services for Atiga which state that Producers is not their employer and that it is
absolved from any liability as an employer, would not obliterate the
relationship.

Fortune points out that an employer-employee relationship depends upon four

standards: (1) the manner of selection and engagement of the putative
employee; (2) the mode of payment of wages; (3) the presence or absence of
a power to dismiss; and (4) the presence and absence of a power to control
the putative employee's conduct. Of the four, the right-of-control test has been
held to be the decisive factor. 6 It asserts that the power of control over
Magalong and Atiga was vested in and exercised by Producers. Fortune
further insists that PRC Management System and Unicorn Security Services
are but "labor-only" contractors under Article 106 of the Labor Code which
provides:

Art. 106. Contractor or subcontractor. — There is "labor-only" contracting

where the person supplying workers to an employer does not have substantial
capital or investment in the form of tools, equipment, machineries, work
premises, among others, and the workers recruited and placed by such
persons are performing activities which are directly related to the principal
business of such employer. In such cases, the person or intermediary shall be
considered merely as an agent of the employer who shall be responsible to the
workers in the same manner and extent as if the latter were directly employed
by him.

Fortune thus contends that Magalong and Atiga were employees of Producers,
following the ruling in International Timber Corp. vs. NLRC 7 that a finding that
a contractor is a "labor-only" contractor is equivalent to a finding that there is
an employer-employee relationship between the owner of the project and the
employees of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its
employees since it had nothing to do with their selection and engagement, the
payment of their wages, their dismissal, and the control of their conduct.
Producers argued that the rule in International Timber Corp. is not applicable
to all cases but only when it becomes necessary to prevent any violation or
circumvention of the Labor Code, a social legislation whose provisions may set
aside contracts entered into by parties in order to give protection to the working
man.

Producers further asseverates that what should be applied is the rule

in American President Lines vs. Clave, 8 to wit:

In determining the existence of employer-employee relationship, the following

elements are generally considered, namely: (1) the selection and engagement
of the employee; (2) the payment of wages; (3) the power of dismissal; and (4)
the power to control the employee's conduct.

Since under Producers' contract with PRC Management Systems it is the latter
which assigned Magalong as the driver of Producers' armored car and was
responsible for his faithful discharge of his duties and responsibilities, and
since Producers paid the monthly compensation of P1,400.00 per driver to
PRC Management Systems and not to Magalong, it is clear that Magalong was
not Producers' employee. As to Atiga, Producers relies on the provision of its
contract with Unicorn Security Services which provides that the guards of the
latter "are in no sense employees of the CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft
or robbery insurance policy which is a form of casualty insurance. Section 174
of the Insurance Code provides:

Sec. 174. Casualty insurance is insurance covering loss or liability arising from
accident or mishap, excluding certain types of loss which by law or custom are
considered as falling exclusively within the scope of insurance such as fire or
marine. It includes, but is not limited to, employer's liability insurance, public
liability insurance, motor vehicle liability insurance, plate glass
insurance, burglary and theft insurance, personal accident and health
insurance as written by non-life insurance companies, and other substantially
similar kinds of insurance. (emphases supplied)

Except with respect to compulsory motor vehicle liability insurance, the

Insurance Code contains no other provisions applicable to casualty insurance
or to robbery insurance in particular. These contracts are, therefore, governed
by the general provisions applicable to all types of insurance. Outside of these,
the rights and obligations of the parties must be determined by the terms of
their contract, taking into consideration its purpose and always in accordance
with the general principles of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the
opportunity to defraud the insurer — the moral hazard — is so great that
insurers have found it necessary to fill up their policies with countless
restrictions, many designed to reduce this hazard. Seldom does the insurer
assume the risk of all losses due to the hazards insured against." 10 Persons
frequently excluded under such provisions are those in the insured's service
and employment. 11 The purpose of the exception is to guard against liability
should the theft be committed by one having unrestricted access to the
property. 12 In such cases, the terms specifying the excluded classes are to be
given their meaning as understood in common speech. 13 The terms "service"
and "employment" are generally associated with the idea of selection, control,
and compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein

should be resolved against the insurer, 15 or it should be construed liberally in
favor of the insured and strictly against the insurer. 16 Limitations of liability
should be regarded with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its
obligation. 17 It goes without saying then that if the terms of the contract are
clear and unambiguous, there is no room for construction and such terms
cannot be enlarged or diminished by judicial construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions

specified therein. 19 It is settled that the terms of the policy constitute the
measure of the insurer's liability. 20 In the absence of statutory prohibition to
the contrary, insurance companies have the same rights as individuals to limit
their liability and to impose whatever conditions they deem best upon their
obligations not inconsistent with public policy.

With the foregoing principles in mind, it may now be asked whether Magalong
and Atiga qualify as employees or authorized representatives of Producers
under paragraph (b) of the general exceptions clause of the policy which, for
easy reference, is again quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the insured
or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with
others. . . . (emphases supplied)

There is marked disagreement between the parties on the correct meaning of

the terms "employee" and "authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to
exclude and exempt from protection and coverage losses arising from
dishonest, fraudulent, or criminal acts of persons granted or having
unrestricted access to Producers' money or payroll. When it used then the
term "employee," it must have had in mind any person who qualifies as such
as generally and universally understood, or jurisprudentially established in the
light of the four standards in the determination of the employer-employee
relationship, 21 or as statutorily declared even in a limited sense as in the case
of Article 106 of the Labor Code which considers the employees under a
"labor-only" contract as employees of the party employing them and not of the
party who supplied them to the employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and
Unicorn Security Services are "labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the
employer of Magalong. Notwithstanding such express assumption of PRC
Management Systems and Unicorn Security Services that the drivers and the
security guards each shall supply to Producers are not the latter's employees,
it may, in fact, be that it is because the contracts are, indeed, "labor-only"
contracts. Whether they are is, in the light of the criteria provided for in Article
106 of the Labor Code, a question of fact. Since the parties opted to submit the
case for judgment on the basis of their stipulation of facts which are strictly
limited to the insurance policy, the contracts with PRC Management Systems
and Unicorn Security Services, the complaint for violation of P.D. No. 532, and
the information therefor filed by the City Fiscal of Pasay City, there is a paucity
of evidence as to whether the contracts between Producers and PRC
Management Systems and Unicorn Security Services are "labor-only"
contracts.

But even granting for the sake of argument that these contracts were not
"labor-only" contracts, and PRC Management Systems and Unicorn Security
Services were truly independent contractors, we are satisfied that Magalong
and Atiga were, in respect of the transfer of Producer's money from its Pasay
City branch to its head office in Makati, its "authorized representatives" who
served as such with its teller Maribeth Alampay. Howsoever viewed,
Producers entrusted the three with the specific duty to safely transfer the
money to its head office, with Alampay to be responsible for its custody in
transit; Magalong to drive the armored vehicle which would carry the money;
and Atiga to provide the needed security for the money, the vehicle, and his
two other companions. In short, for these particular tasks, the three acted as
agents of Producers. A "representative" is defined as one who represents or
stands in the place of another; one who represents others or another in a
special capacity, as an agent, and is interchangeable with "agent." 23

In view of the foregoing, Fortune is exempt from liability under the general
exceptions clause of the insurance policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the

Court of Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that
of Branch 146 of the Regional Trial Court of Makati in Civil Case No. 1817 are
REVERSED and SET ASIDE. The complaint in Civil Case No. 1817 is
DISMISSED.

No pronouncement as to costs.

SO ORDERED.

Bellosillo and Kapunan, JJ., concur.

Padilla, J., took no part.

Quiason, J., is on leave.

6. Gulf Resorts Inc. v. Philippine Charter Insurance Corp., GR No. 155167, 16

May 2005;

[G.R. NO. 156167 : May 16, 2005]

GULF RESORTS, INC., Petitioner, v. PHILIPPINE CHARTER INSURANCE

CORPORATION, Respondent.

DECISION

PUNO, J.:

Before the Court is the Petition for Certiorariunder Rule 45 of the Revised
Rules of Court by petitioner GULF RESORTS, INC., against respondent
PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner assails the
appellate court decision1 which dismissed its two appeals and affirmed the
judgment of the trial court.

For review are the warring interpretations of petitioner and respondent on the
scope of the insurance company's liability for earthquake damage to
petitioner's properties. 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 earthquake. Respondent contends that
the rider limits its liability for loss to the two swimming pools of petitioner.

The facts as established by the court a quo, and affirmed by the appellate
court are as follows:

[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 (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" respectively), the risk of loss from
earthquake shock was extended only to plaintiff's two swimming
pools, thus, "earthquake shock endt." (Item 5 only) (Exhs. "C-1";
"D-1," and "E" 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");
that subsequently AHAC(AIU) issued in plaintiff's favor Policy No.
206-4182383-0 covering 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-1" was deleted and the entry under
Endorsements/Warranties at the time of issue read that plaintiff
renewed its policy with AHAC (AIU) for the period of March 14,
1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh.
"H") which carried the entry under "Endorsement/Warranties at
Time of Issue", which read "Endorsement to Include 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:

Ite - P7,691,000.0 - on the Clubhouse only

m 0
@ .392%;
- 1,500,000.00 - on the furniture, etc. contained in the
building above-mentioned@ .490%;
- 393,000.00 - on the two swimming pools, only (against
the peril of earthquake shock only) @
0.100%
- 116,600.00 other buildings include as follows:
a) Tilter - P19,800.0 - 0.551%
House 0
b) Power - P41,000.0 - 0.551%
House 0
c) House - P55,000.0 - 0.540%
Shed 0
P100,000.00 - for furniture, fixtures, lines air-con and
operating equipment

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
copied in the policy to be issued by defendant; that defendant
issued Policy No. 31944 to plaintiff covering the period of March
14, 1990 to March 14, 1991 for P10,700,600.00 for a total
premium of P45,159.92 (Exh. "I"); that in the computation of the
premium, defendant's Policy No. 31944 (Exh. "I"), which is the
policy in question, contained on the right-hand upper portion of
page 7 thereof, the following:
 Rate-Various
Premium ' P37,420.60 F/L
' 2,061.52 ' Typhoon
' 1,030.76 ' EC
' 393.00 ' ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;

that the above break-down of premiums shows that plaintiff paid

only P393.00 as 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, 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"; "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):

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 the printed conditions of this policy
due to the contrary, that this insurance covers loss
or 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 in Exhibit "7-C" the word "included" above the underlined

portion was deleted; that on July 16, 1990 an earthquake struck
Central Luzon and Northern Luzon and plaintiff's properties
covered by Policy No. 31944 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged.2

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 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, 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
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 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 settlement of the damage to all its
properties in the Agoo Playa Resort. On August 23, 1990, respondent denied
petitioner's claim on the ground that its insurance policy only 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 filed a complaint10with the regional trial court of
Pasig praying for the payment of the following:

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;

2.) The sum of P428,842.00 per month, representing continuing

losses sustained by plaintiff on account of defendant's refusal to
pay the claims;

3.) The sum of P500,000.00, by way of exemplary damages;

4.) The sum of P500,000.00 by way of attorney's 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 defendant's 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 plaintiff's 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 defendant's obligation to
plaintiff is fully paid.

No pronouncement as to costs.13

Petitioner's 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-APPELLANT'S RIGHT TO RECOVER UNDER
DEFENDANT-APPELLEE'S 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 court's
failure to award it attorney's 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-appellant's 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-appellant's prayer for an attorney's 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-appellant's 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 RESPONDENT'S 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 PETITIONER'S PRAYER FOR DAMAGES WITH
INTEREST THEREON AT THE RATE CLAIMED, ATTORNEY'S
FEES AND EXPENSES OF LITIGATION.

Petitioner contends:

First, that the policy's 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 respondent's 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 resort's properties for
earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake
shock. Respondent's 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.

On the other hand, respondent made the following counter arguments:18

First, none of the previous policies issued by AHAC-AIU from 1983 to 1990
explicitly extended coverage against earthquake shock to petitioner's 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 respondent's policy was copied,
covered only earthquake shock for the two swimming pools.

Second, petitioner's 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 petitioner's 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 rider's 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. Petitioner's
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. Respondent's 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 adjuster's 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-AIU's 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, attorney's 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 Insurance Policy No. 31944, four key items are important in the resolution of
the case at bar.
First, in the designation of location of risk, only the two swimming pools were
specified as included, viz:

ITEM 3 - 393,000.00 - On the two (2) swimming pools only

(against the peril of earthquake shock only)20

Second, under the breakdown for premium payments,21 it was stated that:

PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.0022]

Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned

by or through or in consequence, directly or indirectly of any of
the following occurrences, namely: - -

(a) Earthquake, volcanic eruption or other

convulsion of nature.23

Fourth, the rider attached to the policy, titled "Extended Coverage

Endorsement (To Include the Perils of Explosion, Aircraft, Vehicle and
Smoke)," stated, viz:

ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES

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

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 printed
conditions of this Policy to the contrary, that this insurance
covers loss or damage (including loss or damage by fire) to any
of the property insured by this Policy occasioned by or through or
in consequence of Earthquake.

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 should be
 deemed to apply also to loss or damage occasioned by or
through or in consequence of Earthquake.24

Petitioner contends that pursuant to this rider, no qualifications were placed on

the scope of the earthquake shock coverage. Thus, the policy extended
earthquake shock coverage to all of the insured properties.

It is basic that all the provisions of the insurance policy should be examined
and interpreted in consonance with each other.25All its parts are reflective of
the true intent 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 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 together,
indubitably show the intention of the parties to extend earthquake shock
coverage to the two swimming pools only.

A careful examination of the premium recapitulation will show that it is the clear
intent of 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 undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or
contingent event. Thus, 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; andcralawlibrary

5. In consideration of the insurer's promise, the insured

pays a premium.26 (Emphasis ours)

An insurance premium is the consideration paid an insurer for undertaking to

indemnify the insured against a specified peril.27In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk
attaches.28 In the subject policy, no premium payments were made with regard
to earthquake shock coverage, except on the 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 petitioner's previous
insurance policies from AHAC-AIU. As borne out by petitioner's witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,
November 25, 1991
pp. 12-13

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 shock was limited to
the two swimming pools only?cralawlibrary

A. Yes, sir. It is limited to the two swimming pools, specifically

shown in the warranty, there is a provision here that it was only
for item 5.

Q. More specifically Item 5 states the amount of P393,000.00

corresponding to the two swimming pools only?cralawlibrary

A. Yes, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,

November 25, 1991

pp. 23-26

Q. For the period from March 14, 1988 up to March 14, 1989, did
you personally arrange for the procurement of this
policy?cralawlibrary

A. Yes, sir.

Q. Did you also do this through your insurance

agency?cralawlibrary

A. If you are referring to Forte Insurance Agency, yes.

Q. Is Forte Insurance Agency a department or division of your

company?cralawlibrary

A. No, sir. They are our insurance agency.

Q. And they are independent of your company insofar as

operations are concerned?cralawlibrary

A. Yes, sir, they are separate entity.

Q. But insofar as the procurement of the insurance policy is

concerned they are of course subject to your instruction, is that
not correct?cralawlibrary

A. Yes, sir. The final action is still with us although they can
recommend what insurance to take.
 Q. In the procurement of the insurance police (sic) from March 14,
1988 to March 14, 1989, did you give written instruction to Forte
Insurance Agency advising it that the earthquake shock
coverage must extend to all properties of Agoo Playa Resort in
La Union?cralawlibrary

A. No, sir. We did not make any written instruction, although we

made an oral instruction to that effect of extending the coverage
on (sic) the other properties of the company.

Q. And that instruction, according to you, was very important

because in April 1987 there was an earthquake tremor in La
Union?cralawlibrary

A. Yes, sir.

Q. And you wanted to protect all your properties against similar

tremors in the [future], is that correct?cralawlibrary

A. Yes, sir.

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 shock
endorsement?cralawlibrary

A. Are you referring to the insurance policy issued by American

Home Assurance Company marked Exhibit "G"?cralawlibrary

Atty. Mejia: Yes.

Witness:

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?cralawlibrary

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

TSN, August 11, 1992
pp. 23-25

Q. Plaintiff's 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 only but
that Exhibits G and H respectively entend the coverage against
earthquake shock to all the properties indicated in the respective
schedules attached to said policies, what can you say about that
testimony of plaintiff's witness?cralawlibrary

WITNESS:

As I have mentioned earlier, earthquake shock

cannot stand alone without the other half 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 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 premium. We are not only going to
consider the two (2) swimming pools of the other as
stated in the policy. As I see, there is no increase in
the amount of the premium. I must say that the
coverage was not broaden (sic) to include the other
items.

COURT:

They are the same, the premium rates?

WITNESS:

They are the same in the sence (sic), in the amount

of the coverage. If you are going to do some
computation based on the rates you will arrive at
the same premiums, your Honor.

CROSS-EXAMINATION OF JUAN BARANDA III

TSN, September 7, 1992
pp. 4-6

ATTY. ANDRES:

Would you as a matter of practice [insure]

swimming pools for fire insurance?

WITNESS:

No, we don't, sir.

Q. That is why the phrase "earthquake shock to the two (2)

swimming pools only" was placed, is it not?cralawlibrary

A. Yes, sir.

ATTY. ANDRES:

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) the two (2) swimming pools
was deleted from the policies issued by AIU, is it
not?
 xxx

ATTY. ANDRES:

As an insurance executive will you not attach any

significance to the deletion of the qualifying phrase
for the policies?

WITNESS:

My answer to that would be, the deletion of that

particular phrase is inadvertent. Being a company
underwriter, we do not cover. . it was inadvertent
because of the previous policies that we have
issued with no specific attachments, premium rates
and so on. It was inadvertent, sir.

The Court also rejects petitioner's contention that respondent's

contemporaneous and subsequent acts to the issuance of the insurance policy
falsely gave the petitioner 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 petitioner. Petitioner's own witness
testified to this agreement, viz:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 4-5

Q. Just to be clear about this particular answer of yours Mr.

Witness, what exactly did you tell Atty. Omlas (sic) to copy from
Exhibit "H" for purposes of procuring the policy from Philippine
Charter Insurance Corporation?cralawlibrary

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?cralawlibrary

A. Yes, sir, to Exhibit "H".

Q. So, all the provisions here will be the same except that of the
premium rates?cralawlibrary

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?cralawlibrary

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?cralawlibrary

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?cralawlibrary

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 respondent's representative Atty.

Umlas were not proved. Atty. Umlas categorically denied having given such
assurances.

Finally, petitioner puts much stress on the letter of respondent's 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?cralawlibrary

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 verbatim the 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 petitioner's
knowledge, viz:

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?cralawlibrary

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.

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?cralawlibrary

A. Yes, sir.

Q. What steps did you take?cralawlibrary

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-AIU's 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.

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

7. Manila Mahogany v. CA, 154 SCRA 650;

G.R. No. L-52756 October 12, 1987

MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,

vs.
COURT OF APPEALS AND ZENITH INSURANCE
CORPORATION, respondents.

PADILLA, J:

Petition to review the decision * of the Court of Appeals, in CA-G.R. No.

SP-08642, dated 21 March 1979, ordering petitioner Manila Mahogany
Manufacturing Corporation to pay private respondent Zenith Insurance
Corporation the sum of Five Thousand Pesos (P5,000.00) with 6% annual
interest from 18 January 1973, attorney's fees in the sum of five hundred
pesos (P500.00), and costs of suit, and the resolution of the same Court, dated
8 February 1980, denying petitioner's motion for reconsideration of it's
decision.

From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz
4-door sedan with respondent insurance company. On 4 May 1970 the insured
vehicle was bumped and damaged by a truck owned by San Miguel
Corporation. For the damage caused, respondent company paid petitioner five
thousand pesos (P5,000.00) in amicable settlement. Petitioner's general
manager executed a Release of Claim, subrogating respondent company to all
its right to action against San Miguel Corporation.

On 11 December 1972, respondent company wrote Insurance Adjusters, Inc.

to demand reimbursement from San Miguel Corporation of the amount it had
paid petitioner. Insurance Adjusters, Inc. refused reimbursement, alleging that
San Miguel Corporation had already paid petitioner P4,500.00 for the
damages to petitioner's motor vehicle, as evidenced by a cash voucher and a
Release of Claim executed by the General Manager of petitioner discharging
San Miguel Corporation from "all actions, claims, demands the rights of action
that now exist or hereafter [sic] develop arising out of or as a consequence of
the accident."

Respondent insurance company thus demanded from petitioner

reimbursement of the sum of P4,500.00 paid by San Miguel Corporation.
Petitioner refused; hence, respondent company filed suit in the City Court of
Manila for the recovery of P4,500.00. The City Court ordered petitioner to pay
respondent P4,500.00. On appeal the Court of First Instance of Manila
affirmed the City Court's decision in toto, which CFI decision was affirmed by
the Court of Appeals, with the modification that petitioner was to pay
respondent the total amount of P5,000.00 that it had earlier received from the
respondent insurance company.

Petitioner now contends it is not bound to pay P4,500.00, and much more,
P5,000.00 to respondent company as the subrogation in the Release of Claim
it executed in favor of respondent was conditioned on recovery of the total
amount of damages petitioner had sustained. Since total damages were
valued by petitioner at P9,486.43 and only P5,000.00 was received by
petitioner from respondent, petitioner argues that it was entitled to go after San
Miguel Corporation to claim the additional P4,500.00 eventually paid to it by
the latter, without having to turn over said amount to respondent. Respondent
of course disputes this allegation and states that there was no qualification to
its right of subrogation under the Release of Claim executed by petitioner, the
contents of said deed having expressed all the intents and purposes of the
parties.

To support its alleged right not to return the P4,500.00 paid by San Miguel
Corporation, petitioner cites Art. 2207 of the Civil Code, which states:

If the plaintiff's property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of the insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not fully cover the
injury or loss the aggrieved party shall be entitled to recover the deficiency
from the person causing the loss or injury.

Petitioner also invokes Art. 1304 of the Civil Code, stating.

A creditor, to whom partial payment has been made, may exercise his right for
the remainder, and he shall be preferred to the person who has been
subrogated in his place in virtue of the partial payment of the same credit.

We find petitioners arguments to be untenable and without merit. In the

absence of any other evidence to support its allegation that a gentlemen's
agreement existed between it and respondent, not embodied in the Release of
Claim, such ease of Claim must be taken as the best evidence of the intent
and purpose of the parties. Thus, the Court of Appeals rightly stated:

Petitioner argues that the release claim it executed subrogating Private

respondent to any right of action it had against San Miguel Corporation did not
preclude Manila Mahogany from filing a deficiency claim against the
wrongdoer. Citing Article 2207, New Civil Code, to the effect that if the amount
paid by an insurance company does not fully cover the loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing the
loss, petitioner claims a preferred right to retain the amount coming from San
Miguel Corporation, despite the subrogation in favor of Private respondent.

Although petitioners right to file a deficiency claim against San Miguel

Corporation is with legal basis, without prejudice to the insurer's right of
subrogation, nevertheless when Manila Mahogany executed another release
claim (Exhibit K) discharging San Miguel Corporation from "all actions, claims,
demands and rights of action that now exist or hereafter arising out of or as a
consequence of the accident" after the insurer had paid the proceeds of the
policy- the compromise agreement of P5,000.00 being based on the insurance
policy-the insurer is entitled to recover from the insured the amount of
insurance money paid (Metropolitan Casualty Insurance Company of New
York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance Code and
Insolvency Law with comments and annotations, H.B. Perez 1976, p. 151).
Since petitioner by its own acts released San Miguel Corporation, thereby
defeating private respondents, the right of subrogation, the right of action of
petitioner against the insurer was also nullified. (Sy Keng & Co. vs.
Queensland Insurance Co., Ltd., 54 O.G. 391) Otherwise stated: private
respondent may recover the sum of P5,000.00 it had earlier paid to
petitioner. 1

As held in Phil. Air Lines v. Heald Lumber Co., 2

If a property is insured and the owner receives the indemnity from the insurer,
it is provided in [Article 2207 of the New Civil Code] that the insurer is deemed
subrogated to the rights of the insured against the wrongdoer and if the
amount paid by the insurer does not fully cover the loss, then the aggrieved
party is the one entitled to recover the deficiency. ... Under this legal
provision, the real party in interest with regard to the portion of the indemnity
paid is the insurer and not the insured 3 (Emphasis supplied)

The decision of the respondent court ordering petitioner to pay respondent

company, not the P4,500.00 as originally asked for, but P5,000.00, the amount
respondent company paid petitioner as insurance, is also in accord with law
and jurisprudence. In disposing of this issue, the Court of Appeals held:

... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel
Corporation under its clear right to file a deficiency claim for damages incurred,
against the wrongdoer, should the insurance company not fully pay for the
injury caused (Article 2207, New Civil Code). However, when petitioner
released San Miguel Corporation from any liability, petitioner's right to retain
the sum of P5,000.00 no longer existed, thereby entitling private respondent to
recover the same. (Emphasis supplied)

As has been observed:

... The right of subrogation can only exist after the insurer has paid the
otherwise the insured will be deprived of his right to full indemnity. If the
insurance proceeds are not sufficient to cover the damages suffered by the
insured, then he may sue the party responsible for the damage for the the [sic]
remainder. To the extent of the amount he has already received from the
insurer enjoy's [sic] the right of subrogation.

Since the insurer can be subrogated to only such rights as the insured may
have, should the insured, after receiving payment from the insurer, release the
wrongdoer who caused the loss, the insurer loses his rights against the latter.
But in such a case, the insurer will be entitled to recover from the insured
whatever it has paid to the latter, unless the release was made with the
consent of the insurer. 4(Emphasis supplied.)

And even if the specific amount asked for in the complaint is P4,500.00 only
and not P5,000.00, still, the respondent Court acted well within its discretion in
awarding P5,000.00, the total amount paid by the insurer. The Court of
Appeals rightly reasoned as follows:

It is to be noted that private respondent, in its companies, prays for the

recovery, not of P5,000.00 it had paid under the insurance policy but
P4,500.00 San Miguel Corporation had paid to petitioner. On this score, We
believe the City Court and Court of First Instance erred in not awarding the
proper relief. Although private respondent prays for the reimbursement of
P4,500.00 paid by San Miguel Corporation, instead of P5,000.00 paid under
the insurance policy, the trial court should have awarded the latter, although
not prayed for, under the general prayer in the complaint "for such further or
other relief as may be deemed just or equitable, (Rule 6, Sec. 3, Revised
Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ; Cabigao vs. Lim,
50 Phil. 844; Baguiro vs. Barrios Tupas, 77 Phil 120).

WHEREFORE, premises considered, the petition is DENIED. The judgment

appealed from is hereby AFFIRMED with costs against petitioner.

SO ORDERED.

Yap (Chairman), Melencio-Herrera, Paras and Sarmiento, JJ., concur.

8. Federal Express Corporation v. American Home Assurance Company and

Phil-Am Insurance
Company, Inc., G.R. No. 150094, 18 August 2004;

[G.R. NO. 150094 : August 18, 2004]

FEDERAL EXPRESS CORPORATION, Petitioner, v. AMERICAN HOME

ASSURANCE COMPANY and PHILAM INSURANCE COMPANY,
INC., Respondents.

DECISION

PANGANIBAN, J.:

Basic is the requirement that before suing to recover loss of or damage to

transported goods, the plaintiff must give the carrier notice of the loss or
damage, within the period prescribed by the Warsaw Convention and/or the
airway bill.
 The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court,

challenging the June 4, 2001 Decision2 and the September 21, 2001
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 58208. The
assailed Decision disposed as follows:

"WHEREFORE, premises considered, the present appeal is

hereby DISMISSED for lack of merit. The appealed Decision of
Branch 149 of the Regional Trial Court of Makati City in Civil
Case No. 95-1219, entitled 'American Home Assurance Co. and
PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS
CORPORATION and/or CARGOHAUS, INC. (formerly
U-WAREHOUSE, INC.),' is
hereby AFFIRMED and REITERATED.

"Costs against the [petitioner and Cargohaus, Inc.]."4

The assailed Resolution denied petitioner's Motion for Reconsideration.

The Facts

The antecedent facts are summarized by the appellate court as follows:

"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE

for brevity) of Nebraska, USA delivered to Burlington Air Express
(BURLINGTON), an agent of [Petitioner] Federal Express
Corporation, a shipment of 109 cartons of veterinary biologicals
for delivery to consignee SMITHKLINE and French Overseas
Company in Makati City, Metro Manila. The shipment was
covered by Burlington Airway Bill No. 11263825 with the words,
'REFRIGERATE WHEN NOT IN TRANSIT' and 'PERISHABLE'
stamp marked on its face. That same day, Burlington insured the
cargoes in the amount of $39,339.00 with American Home
Assurance Company (AHAC). The following day, Burlington
turned over the custody of said cargoes to Federal Express
which transported the same to Manila. The first shipment,
consisting of 92 cartons arrived in Manila on January 29, 1994 in
Flight No. 0071-28NRT and was immediately stored at
[Cargohaus Inc.'s] warehouse. While the second, consisting of
17 cartons, came in two (2) days later, or on January 31, 1994, in
Flight No. 0071-30NRT which was likewise immediately stored at
Cargohaus' warehouse. Prior to the arrival of the cargoes,
Federal Express informed GETC Cargo International
Corporation, the customs broker hired by the consignee to
facilitate the release of its cargoes from the Bureau of Customs,
of the impending arrival of its client's cargoes.

"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'),

twelve (12) days after the cargoes arrived in Manila, a
non-licensed custom's broker who was assigned by GETC to
facilitate the release of the subject cargoes, found out, while he
was about to cause the release of the said cargoes, that the
same [were] stored only in a room with two (2) air conditioners
running, to cool the place instead of a refrigerator. When he
asked an employee of Cargohaus why the cargoes were stored
in the 'cool room' only, the latter told him that the cartons where
the vaccines were contained specifically indicated therein that it
should not be subjected to hot or cold temperature. Thereafter,
DIONEDA, upon instructions from GETC, did not proceed with
the withdrawal of the vaccines and instead, samples of the same
were taken and brought to the Bureau of Animal Industry of the
Department of Agriculture in the Philippines by SMITHKLINE for
examination wherein it was discovered that the 'ELISA reading of
vaccinates sera are below the positive reference serum.'

"As a consequence of the foregoing result of the veterinary

biologics test, SMITHKLINE abandoned the shipment and,
declaring 'total loss' for the unusable shipment, filed a claim with
AHAC through its representative in the Philippines, the Philam
Insurance Co., Inc. ('PHILAM') which recompensed
SMITHKLINE for the whole insured amount of THIRTY NINE
THOUSAND THREE HUNDRED THIRTY NINE DOLLARS
($39,339.00). Thereafter, [respondents] filed an action for
damages against the [petitioner] imputing negligence on either or
both of them in the handling of the cargo.

"Trial ensued and ultimately concluded on March 18, 1997 with

the [petitioner] being held solidarily liable for the loss as follows:

'WHEREFORE, judgment is hereby rendered in

favor of [respondents] and [petitioner and its
Co-Defendant Cargohaus] are directed to pay
[respondents], jointly and severally, the following:

1. Actual damages in the amount of

the peso equivalent of US$39,339.00
with interest from the time of the filing
of the complaint to the time the same
is fully paid.

2. Attorney's fees in the amount

of P50,000.00 and

3. Costs of suit.

'SO ORDERED.'

"Aggrieved, [petitioner] appealed to [the CA]."5

Ruling of the Court of Appeals

The Test Report issued by the United States Department of Agriculture

(Animal and Plant Health Inspection Service) was found by the CA to be
inadmissible in evidence. Despite this ruling, the appellate court held that the
shipping Receipts were a prima facie proof that the goods had indeed been
delivered to the carrier in good condition. We quote from the ruling as follows:

"Where the plaintiff introduces evidence which shows prima

faciethat the goods were delivered to the carrier in good
condition [i.e., the shipping receipts], and that the carrier
delivered the goods in a damaged condition, a presumption is
raised that the damage occurred through the fault or negligence
of the carrier , and this casts upon the carrier the burden of
showing that the goods were not in good condition when
delivered to the carrier, or that the damage was occasioned by
some cause excepting the carrier from absolute liability. This the
[petitioner] failed to discharge. x x x."6

Found devoid of merit was petitioner's claim that respondents had no

personality to sue. This argument was supposedly not raised in the Answer or
during trial.

Hence, this Petition.7

The Issues

In its Memorandum, petitioner raises the following issues for our consideration:

"I.

Are the decision and resolution of the Honorable Court of

Appeals proper subject for review by the Honorable Court under
Rule 45 of the 1997 Rules of Civil Procedure?

"II.

Is the conclusion of the Honorable Court of Appeals - petitioner's

claim that respondents have no personality to sue because the
payment was made by the respondents to Smithkline when the
insured under the policy is Burlington Air Express is devoid of
merit - correct or not?

"III.

Is the conclusion of the Honorable Court of Appeals that the

goods were received in good condition, correct or not?

"IV.
 Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not
admissible?

"V.

Is the Honorable Court of Appeals correct in ignoring and

disregarding respondents' own admission that petitioner is not
liable? and

"VI.

Is the Honorable Court of Appeals correct in ignoring the Warsaw

Convention?"8

Simply stated, the issues are as follows: (1) Is the Petition proper for review by
the Supreme Court? (2) Is Federal Express liable for damage to or loss of the
insured goods?

This Court's Ruling

The Petition has merit.

Preliminary Issue:
Propriety of Review

The correctness of legal conclusions drawn by the Court of Appeals from

undisputed facts is a question of law cognizable by the Supreme Court.9

In the present case, the facts are undisputed. As will be shown shortly,
petitioner is questioning the conclusions drawn from such facts. Hence, this
case is a proper subject for review by this Court.

Main Issue:
Liability for Damages

Petitioner contends that respondents have no personality to sue - - thus, no

cause of action against it - - because the payment made to Smithkline was
erroneous.

Pertinent to this issue is the Certificate of Insurance10("Certificate") that both

opposing parties cite in support of their respective positions. They differ only in
their interpretation of what their rights are under its terms. The determination of
those rights involves a question of law, not a question of fact. "As distinguished
from a question of law which exists 'when the doubt or difference arises as to
what the law is on a certain state of facts' - - 'there is a question of fact when
the doubt or difference arises as to the truth or the falsehood of alleged facts';
or when the 'query necessarily invites calibration of the whole evidence
considering mainly the credibility of witnesses, existence and relevancy of
specific surrounding circumstance, their relation to each other and to the whole
and the probabilities of the situation.'"11
Proper Payee

The Certificate specifies that loss of or damage to the insured cargo is

"payable to order x x x upon surrender of this Certificate." Such wording
conveys the right of collecting on any such damage or loss, as fully as if the
property were covered by a special policy in the name of the holder itself. At
the back of the Certificate appears the signature of the representative of
Burlington. This document has thus been duly indorsed in blank and is
deemed a bearer instrument.

Since the Certificate was in the possession of Smithkline, the latter had the
right of collecting or of being indemnified for loss of or damage to the insured
shipment, as fully as if the property were covered by a special policy in the
name of the holder. Hence, being the holder of the Certificate and having an
insurable interest in the goods, Smithkline was the proper payee of the
insurance proceeds.

Subrogation

Upon receipt of the insurance proceeds, the consignee (Smithkline) executed

a subrogation Receipt12 in favor of respondents. The latter were thus
authorized "to file claims and begin suit against any such carrier, vessel,
person, corporation or government." Undeniably, the consignee had a legal
right to receive the goods in the same condition it was delivered for transport to
petitioner. If that right was violated, the consignee would have a cause of
action against the person responsible therefor.

Upon payment to the consignee of an indemnity for the loss of or damage to

the insured goods, the insurer's entitlement to subrogation pro tanto - - being
of the highest equity - - equips it with a cause of action in case of a contractual
breach or negligence.13 "Further, the insurer's subrogatory right to sue for
recovery under the bill of lading in case of loss of or damage to the cargo is
jurisprudentially upheld."14

In the exercise of its subrogatory right, an insurer may proceed against an

erring carrier. To all intents and purposes, it stands in the place and in
substitution of the consignee. A fortiori, both the insurer and the consignee are
bound by the contractual stipulations under the bill of lading.15

Prescription of Claim

From the initial proceedings in the trial court up to the present, petitioner has
tirelessly pointed out that respondents' claim and right of action are already
barred. The latter, and even the consignee, never filed with the carrier any
written notice or complaint regarding its claim for damage of or loss to the
subject cargo within the period required by the Warsaw Convention and/or in
the airway bill. Indeed, this fact has never been denied by respondents and is
plainly evident from the records.

Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:

 "6. No action shall be maintained in the case of damage to or
partial loss of the shipment unless a written notice, sufficiently
describing the goods concerned, the approximate date of the
damage or loss, and the details of the claim, is presented by
shipper or consignee to an office of Burlington within (14) days
from the date the goods are placed at the disposal of the person
entitled to delivery, or in the case of total loss (including
non-delivery) unless presented within (120) days from the date of
issue of the [Airway Bill]."16

Relevantly, petitioner's airway bill states:

"12./12.1 The person entitled to delivery must make a complaint

to the carrier in writing in the case:

12.1.1 of visible damage to the goods, immediately after

discovery of the damage and at the latest within fourteen (14)
days from receipt of the goods;

12.1.2 of other damage to the goods, within fourteen (14) days

from the date of receipt of the goods;

12.1.3 delay, within twenty-one (21) days of the date the goods
are placed at his disposal; andcralawlibrary

12.1.4 of non-delivery of the goods, within one hundred and

twenty (120) days from the date of the issue of the air waybill.

12.2 For the purpose of 12.1 complaint in writing may be made to

the carrier whose air waybill was used, or to the first carrier or to
the last carrier or to the carrier who performed the transportation
during which the loss, damage or delay took place."17

Article 26 of the Warsaw Convention, on the other hand, provides:

"ART. 26. (1) Receipt by the person entitled to the delivery of

baggage or goods without complaint shall be prima
facie evidence that the same have been delivered in good
condition and in accordance with the document of transportation.

(2) In case of damage, the person entitled to delivery must

complain to the carrier forthwith after the discovery of the
damage, and, at the latest, within 3 days from the date of receipt
in the case of baggage and 7 days from the date of receipt in the
case of goods. In case of delay the complaint must be made at
the latest within 14 days from the date on which the baggage or
goods have been placed at his disposal.
 (3) Every complaint must be made in writing upon the document
of transportation or by separate notice in writing dispatched
within the times aforesaid.

(4) Failing complaint within the times aforesaid, no action shall lie
against the carrier, save in the case of fraud on his part."18

Condition Precedent

In this jurisdiction, the filing of a claim with the carrier within the time limitation
therefor actually constitutes a condition precedent to the accrual of a right of
action against a carrier for loss of or damage to the goods.19 The shipper or
consignee must allege and prove the fulfillment of the condition. If it fails to do
so, no right of action against the carrier can accrue in favor of the former. The
aforementioned requirement is a reasonable condition precedent; it does not
constitute a limitation of action.20

The requirement of giving notice of loss of or injury to the goods is not an

empty formalism. The fundamental reasons for such a stipulation are (1) to
inform the carrier that the cargo has been damaged, and that it is being
charged with liability therefor; and (2) to give it an opportunity to examine the
nature and extent of the injury. "This protects the carrier by affording it an
opportunity to make an investigation of a claim while the matter is fresh and
easily investigated so as to safeguard itself from false and fraudulent claims."21

When an airway bill - - or any contract of carriage for that matter - - has a
stipulation that requires a notice of claim for loss of or damage to goods
shipped and the stipulation is not complied with, its enforcement can be
prevented and the liability cannot be imposed on the carrier. To stress, notice
is a condition precedent, and the carrier is not liable if notice is not given in
accordance with the stipulation.22 Failure to comply with such a stipulation bars
recovery for the loss or damage suffered.23

Being a condition precedent, the notice must precede a suit for

enforcement.24 In the present case, there is neither an allegation nor a
showing of respondents' compliance with this requirement within the
prescribed period. While respondents may have had a cause of action then,
they cannot now enforce it for their failure to comply with the aforesaid
condition precedent.

In view of the foregoing, we find no more necessity to pass upon the other
issues raised by petitioner.

We note that respondents are not without recourse. Cargohaus, Inc. - -

petitioner's co-defendant in respondents' Complaint below - - has been
adjudged by the trial court as liable for, inter alia, "actual damages in the
amount of the peso equivalent of US $39,339."25 This judgment was affirmed
by the Court of Appeals and is already final and executory.26
WHEREFORE, the Petition is GRANTED, and the assailed
Decision REVERSED insofar as it pertains to Petitioner Federal Express
Corporation. No pronouncement as to costs.

SO ORDERED.

Corona, and Carpio-Morales, JJ., concur.

Sandoval-Gutierrez, J., on leave.

9. Eternal Gardens Memorial Park Corporation v. Phil. American Life Insurance

Co., GR No. 166245, 09 April 2008.

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 Chuang’s death. Attached to the claim were the following
documents: (1) Chuang’s 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) Assured’s 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
Chuang’s death: (1) Certificate of Claimant (with form attached); (2) Assured’s
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 latter’s 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 Eternal’s demand, Philamlife denied Eternal’s 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 Creditor’s 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 attorney’s fees.

SO ORDERED.

The RTC found that Eternal submitted Chuang’s application for insurance
which he accomplished before his death, as testified to by Eternal’s 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 Philamlife’s inaction from the submission of the requirements of the
group insurance on December 29, 1982 to Chuang’s death on August 2, 1984,
as well as Philamlife’s acceptance of the premiums during the same period,
Philamlife was deemed to have approved Chuang’s 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 Chuang’s application was
not enclosed in Eternal’s 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 Philamlife’s 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 Court’s 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 petitioner’s 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 Eternal’s 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 Chuang’s insurance application.

The evidence on record supports Eternal’s 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 Chuang’s insurance application. However, Philamlife failed to
do so; thus, Philamlife is deemed to have received Chuang’s insurance
application.

To reiterate, it was Philamlife’s bounden duty to make sure that before a

transmittal letter is stamped as received, the contents of the letter are correct
and accounted for.

Philamlife’s allegation that Eternal’s 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 prosecution’s 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 Eternal’s 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 latter’s 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 party’s 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
Philamlife’s 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 attorney’s fees in the amount of PhP 10,000.

No costs.

SO ORDERED.

Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario*, JJ., concur.

II. CONTRACT OF INSURANCE

Gaisano v. Development Insurance & Surety Corp., G.R. No. 190702,

February 27, 2017;

G.R. No. 190702, February 27, 2017

JAIME T. GAISANO, Petitioner, v. DEVELOPMENT INSURANCE AND

SURETY CORPORATION, Respondent.

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari1 seeking to nullify the Court of

Appeals' (CA) September 11, 2009 Decision2 and November 24, 2009
Resolution3 in CA-G.R. CV No. 81225. The CA reversed the September 24,
2003 Decision4 of the Regional Trial Court (RTC) in Civil Case No. 97-85464.
The RTC granted Jaime T. Gaisano's (petitioner) claim on the proceeds of the
comprehensive commercial vehicle policy issued by Development Insurance
and Surety Corporation (respondent), viz.:ChanRoblesVirtualawlibrary

IN VIEW OF THE FOREGOING, the decision appealed from is

reversed, and the defendant-appellant ordered to pay the
plaintiff-appellee the sum of P55,620.60 with interest at 6 percent
per annum from the date of the denial of the claim on October 9,
1996 until payment.

SO ORDERED.5chanroblesvirtuallawlibrary
I

The facts are undisputed. Petitioner was the registered owner of a 1992
Mitsubishi Montero with plate number GTJ-777 (vehicle), while respondent is a
domestic corporation engaged in the insurance business.6 On September 27,
1996, respondent issued a comprehensive commercial vehicle policy7 to
petitioner in the amount of P1,500,000.00 over the vehicle for a period of one
year commencing on September 27, 1996 up to September 27,
1997.8 Respondent also issued two other commercial vehicle policies to
petitioner covering two other motor vehicles for the same period.9

To collect the premiums and other charges on the policies, respondent's agent,
Trans-Pacific Underwriters Agency (Trans-Pacific), issued a statement of
account to petitioner's company, Noah's Ark Merchandising (Noah's
Ark).10 Noah's Ark immediately processed the payments and issued a Far East
Bank check dated September 27, 1996 payable to Trans-Pacific on the same
day.11 The check bearing the amount of P140,893.50 represents payment for
the three insurance policies, with P55,620.60 for the premium and other
charges over the vehicle.12 However, nobody from Trans-Pacific picked up the
check that day (September 27) because its president and general manager,
Rolando Herradura, was celebrating his birthday. Trans-Pacific informed
Noah's Ark that its messenger would get the check the next day, September
28.13

In the evening of September 27, 1996, while under the official custody of
Noah's Ark marketing manager Achilles Pacquing (Pacquing) as a service
company vehicle, the vehicle was stolen in the vicinity of SM Megamall at
Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine
National Police Traffic Management Command at Camp Crame in Quezon
City.14 Despite search and retrieval efforts, the vehicle was not recovered.15

Oblivious of the incident, Trans-Pacific picked up the check the next day,
September 28. It issued an official receipt numbered 124713 dated September
28, 1996, acknowledging the receipt of P55,620.60 for the premium and other
charges over the vehicle.16 The check issued to Trans-Pacific for P140,893.50
was deposited with Metrobank for encashment on October 1, 1996.17

On October 1, 1996, Pacquing informed petitioner of the vehicle's loss.

Thereafter, petitioner reported the loss and filed a claim with respondent for
the insurance proceeds of P1,500,000.00.18 After investigation, respondent
denied petitioner's claim on the ground that there was no insurance
contract.19 Petitioner, through counsel, sent a final demand on July 7,
1997.20 Respondent, however, refused to pay the insurance proceeds or return
the premium paid on the vehicle.

On October 9, 1997, petitioner filed a complaint for collection of sum of money

and damages21 with the RTC where it sought to collect the insurance proceeds
from respondent. In its Answer,22 respondent asserted that the non-payment of
the premium rendered the policy ineffective. The premium was received by the
respondent only on October 2, 1996, and there was no known loss covered by
the policy to which the payment could be applied.23

In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner.
It considered the premium paid as of September 27, even if the check was
received only on September 28 because (1) respondent's agent, Trans-Pacific,
acknowledged payment of the premium on that date, September 27, and (2)
the check that petitioner issued was honored by respondent in
acknowledgment of the authority of the agent to receive it.25 Instead of
returning the premium, respondent sent a checklist of requirements to
petitioner and assigned an underwriter to investigate the claim.26 The RTC
ruled that it would be unjust and inequitable not to allow a recovery on the
policy while allowing respondent to retain the premium paid.27 Thus, petitioner
was awarded an indemnity of P1,500,000.00 and attorney's fees of
P50,000.00.28

After respondent's motion for reconsideration was denied,29 it filed a Notice of

Appeal.30 Records were forwarded to the CA.31

The CA granted respondent's appeal.32 The CA upheld respondent's position

that an insurance contract becomes valid and binding only after the premium is
paid pursuant to Section 77 of the Insurance Code (Presidential Decree No.
612, as amended by Republic Act No. 10607).33 It found that the premium was
not yet paid at the time of the loss on September 27, but only a day after or on
September 28, 1996, when the check was picked up by Trans-Pacific.34 It also
found that none of the exceptions to Section 77 obtains in this
case.35 Nevertheless, the CA ordered respondent to return the premium it
received in the amount of P55,620.60, with interest at the rate of 6% per
annum from the date of the denial of the claim on October 9, 1996 until
payment.36

Hence petitioner filed this petition. He argues that there was a valid and
binding insurance contract between him and respondent.37 He submits that it
comes within the exceptions to the rule in Section 77 of the Insurance Code
that no contract of insurance becomes binding unless and until the premium
thereof has been paid. The prohibitive tenor of Section 77 does not apply
because the parties stipulated for the payment of premiums.38 The parties
intended the contract of insurance to be immediately effective upon issuance,
despite non-payment of the premium, because respondent trusted
petitioner.39He adds that respondent waived its right to a pre-payment in full of
the terms of the policy, and is in estoppel.40

Petitioner also argues that assuming he is not entitled to recover insurance

proceeds, but only to the return of the premiums paid, then he should be able
to recover the full amount of P140,893.50, and not merely P55,620.60.41 The
insurance policy covered three vehicles yet respondent's intention was merely
to disregard the contract for only the lost vehicle.42 According to petitioner, the
principle of mutuality of contracts is violated, at his expense, if respondent is
allowed to be excused from performance on the insurance contract only for
one vehicle, but not as to the two others, just because no loss is suffered as to
the two. To allow this "would be to place exclusively in the hands of one of the
contracting parties the right to decide whether the contract should stand or not
x x x."43

For failure of respondent to tile its comment to the petition, we declared

respondent to have waived its right to file a comment in our June 15, 2011
Resolution.44

The lone issue here is whether there is a binding insurance contract between
petitioner and respondent.
II

We deny the petition.

Insurance is a contract whereby one undertakes for a consideration to

indemnify another against loss, damage or liability arising from an unknown or
contingent event.45 Just like any other contract, it requires a cause or
consideration. The consideration is the premium, which must be paid at the
time and in the way and manner specified in the policy.46 If not so paid, the
policy will lapse and be forfeited by its own terms.47
The law, however, limits the parties' autonomy as to when payment of
premium may be made for the contract to take effect. The general rule in
insurance laws is that unless the premium is paid, the insurance policy is not
valid and binding.48 Section 77 of the Insurance Code, applicable at the time of
the issuance of the policy, provides:ChanRoblesVirtualawlibrary
Sec. 77. An insurer is entitled to payment of the premium as
soon as the thing insured is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy whenever
the grace period provision applies.
In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We
explained that in an insurance contract, both the insured and insurer undertake
risks. On one hand, there is the insured, a member of a group exposed to a
particular peril, who contributes premiums under the risk of receiving nothing in
return in case the contingency does not happen; on the other, there is the
insurer, who undertakes to pay the entire sum agreed upon in case the
contingency happens. This risk-distributing mechanism operates under a
system where, by prompt payment of the premiums, the insurer is able to meet
its legal obligation to maintain a legal reserve fund needed to meet its
contingent obligations to the public. The premium, therefore, is the elixir
vitae or source of life of the insurance business:ChanRoblesVirtualawlibrary
In the desire to safeguard the interest of the assured, it must not
be ignored that the contract of insurance is primarily a
risk-distributing device, a mechanism by which all members of a
group exposed to a particular risk contribute premiums to an
insurer. From these contributory funds are paid whatever losses
occur due to exposure to the peril insured against. Each party
therefore takes a risk: the insurer, that of being compelled upon
the happening of the contingency to pay the entire sum agreed
upon, and the insured, that of parting with the amount required
as premium. without receiving anything therefor in case the
contingency does not happen. To ensure payment tor these
losses, the law mandates all insurance companies to maintain a
legal reserve fund in favor of those claiming under their policies.
It should be understood that the integrity of this fund cannot be
secured and maintained if by judicial fiat partial offerings of
premiums were to be construed as a legal nexus between the
applicant and the insurer despite an express agreement to the
contrary. For what could prevent the insurance applicant from
deliberately or willfully holding back full premium payment and
wait for the risk insured against to transpire and then
conveniently pass on the balance of the premium to be deducted
from the proceeds of the insurance? x x x

xxx

And so it must be. For it cannot be disputed that premium is

 the elixir vitae of the insurance business because by law the
insurer must maintain a legal reserve fund to meet its contingent
obligations to the public, hence, the imperative need for its
prompt payment and full satisfaction. It must be emphasized
here that all actuarial calculations and various tabulations of
probabilities of losses under the risks insured against are based
on the sound hypothesis of prompt payment of premiums. Upon
this bedrock insurance firms are enabled to other the assurance
of security to the public at favorable rates. x x x50(Citations
omitted.)
Here, there is no dispute that the check was delivered to and was accepted by
respondent's agent, Trans-Pacific, only on September 28, 1996. No payment
of premium had thus been made at the time of the loss of the vehicle on
September 27, 1996. While petitioner claims that Trans-Pacific was informed
that the check was ready for pick-up on September 27, 1996, the notice of the
availability of the check, by itself, does not produce the effect of payment of the
premium. Trans-Pacific could not be considered in delay in accepting the
check because when it informed petitioner that it will only be able to pick-up
the check the next day, petitioner did not protest to this, but instead allowed
Trans-Pacific to do so. Thus, at the time of loss, there was no payment of
premium yet to make the insurance policy effective.

There are, of course, exceptions to the rule that no insurance contract takes
effect unless premium is paid. In UCPB General Insurance Co., Inc. v.
Masagana Telamart, Inc.,51 we said:ChanRoblesVirtualawlibrary
It can be seen at once that Section 77 does not restate the
portion of Section 72 expressly permitting an agreement to
extend the period to pay the premium. But are there exceptions
to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in

case of a life or industrial life policy whenever the grace period
provision applies.

The second is that covered by Section 78 of the Insurance Code,

which provides:ChanRoblesVirtualawlibrary
SEC. 78. Any acknowledgment in a policy or
contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to
make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until
premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium
Corporation vs. Court of Appeals, wherein we ruled that Section
77 may not apply if the parties have agreed to the payment in
installments of the premium and partial payment has been made
at the time of loss. We said therein,
thus:ChanRoblesVirtualawlibrary
 We hold that the subject policies are valid even if
the premiums were paid on installments. The
records clearly show that the petitioners and
private respondent intended subject insurance
policies to be binding and effective notwithstanding
the staggered payment of the premiums. The initial
insurance contract entered into in 1982 was
renewed in 1983, then in 1984. In those three years,
the insurer accepted all the installment payments.
Such acceptance of payments speaks loudly of the
insurer's intention to honor the policies it issued to
petitioner. Certainly, basic principles of equity and
fairness would not allow the insurer to continue
collecting and accepting the premiums, although
paid on installments, and later deny liability on the
lame excuse that the premiums were not prepaid in
full.
Not only that. In Tuscany, we also quoted with approval the
following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its
decision:ChanRoblesVirtualawlibrary
While the import of Section 77 is that prepayment
of premiums is strictly required as a condition to the
validity of the contract, We are not prepared to rule
that the request to make installment payments duly
approved by the insurer would prevent the entire
contract of insurance from going into effect despite
payment and acceptance of the initial premium or
first installment. Section 78 of the Insurance Code
in effect allows waiver by the insurer of the
condition of prepayment by making an
acknowledgment in the insurance policy of receipt
of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact
that premium is actually unpaid. Section 77 merely
precludes the parties from stipulating that the policy
is valid even if premiums are not paid, but docs not
expressly prohibit an agreement granting credit
extension, and such an agreement is not contrary
to morals, good customs, public order or public
policy (De Leon,' The Insurance Code, p. 175). So
is an understanding to allow insured to pay
premiums in installments not so prescribed. At the
very least, both parties should be deemed
in estoppel to question the arrangement they have
voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the
Court of Appeals, Tuscany has provided a fourth exception to
Section 77, namely, that the insurer may grant credit extension
for the payment of the premium. This simply means that if the
 insurer has granted the insured a credit term for the payment of
the premium and loss occurs before the expiration of the term,
recovery on the policy should be allowed even though the
premium is paid after the loss but within the credit term.

xxx

Finally in the instant case, it would be unjust and inequitable if

recovery on the policy would not be permitted against Petitioner,
which had consistently granted a 60- to 90-day credit term for the
payment of premiums despite its full awareness of Section 77.
Estoppel bars it from taking refuge under said Section, since
Respondent relied in good faith on such practice. Estoppel then
is the fifth exception to Section 77.52 (Citations omitted.)
In UCPB General Insurance Co., Inc., we summarized the exceptions as
follows: (1) in case of life or industrial life policy, whenever the grace period
provision applies, as expressly provided by Section 77 itself; (2) where the
insurer acknowledged in the policy or contract of insurance itself the receipt of
premium, even if premium has not been actually paid, as expressly provided
by Section 78 itself; (3) where the parties agreed that premium payment shall
be in installments and partial payment has been made at the time of loss, as
held in Makati Tuscany Condominium Corp. v. Court of Appeals;53 (4) where
the insurer granted the insured a credit term for the payment of the premium,
and loss occurs before the expiration of the term, as held in Makati Tuscany
Condominium Corp.; and (5) where the insurer is in estoppel as when it has
consistently granted a 60 to 90-day credit term for the payment of premiums.

The insurance policy in question does not fall under the first to third exceptions
laid out in UCPB General Insurance Co., Inc.: (1) the policy is not a life or
industrial life policy; (2) the policy does not contain an acknowledgment of the
receipt of premium but merely a statement of account on its face;54 and (3) no
payment of an installment was made at the time of loss on September 27.

Petitioner argues that his case falls under the fourth and fifth exceptions
because the parties intended the contract of insurance to be immediately
effective upon issuance, despite non-payment of the premium. This waiver to a
pre-payment in full of the premium places respondent in estoppel.

We do not agree with petitioner.

The fourth and fifth exceptions to Section 77 operate under the facts obtaining
in Makati Tuscany Condominium Corp. and UCPB General Insurance Co.,
Inc. Both contemplate situations where the insurers have consistently granted
the insured a credit extension or term for the payment of the premium. Here,
however, petitioner failed to establish the fact of a grant by respondent of a
credit term in his favor, or that the grant has been consistent. While there was
mention of a credit agreement between Trans-Pacific and respondent, such
arrangement was not proven and was internal between agent and
principal.55 Under the principle of relativity of contracts, contracts bind the
parties who entered into it. It cannot favor or prejudice a third person, even if
he is aware of the contract and has acted with knowledge.56

We cannot sustain petitioner's claim that the parties agreed that the insurance
contract is immediately effective upon issuance despite non payment of the
premiums. Even if there is a waiver of pre-payment of premiums, that in itself
does not become an exception to Section 77, unless the insured clearly gave a
credit term or extension. This is the clear import of the fourth exception in
the UCPB General Insurance Co., Inc. To rule otherwise would render
nugatory the requirement in Section 77 that "[n]otwithstanding any agreement
to the contrary, no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium thereof has been
paid, x x x." Moreover, the policy itself states:ChanRoblesVirtualawlibrary
WHEREAS THE INSURED, by his corresponding proposal and
declaration, and which shall be the basis of this Contract and
deemed incorporated herein, has applied to the company for the
insurance hereinafter contained, subject to the payment of the
Premium as consideration for such insurance.57 (Emphasis
supplied.)
The policy states that the insured's application for the insurance is subject to
the payment of the premium. There is no waiver of pre-payment, in full or in
installment, of the premiums under the policy. Consequently, respondent
cannot be placed in estoppel.

Thus, we find that petitioner is not entitled to the insurance proceeds because
no insurance policy became effective for lack of premium payment.

The consequence of this declaration is that petitioner is entitled to a return of

the premium paid for the vehicle in the amount of P55,620.60 under the
principle of unjust enrichment. There is unjust enrichment when a person
unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice,
equity and good conscience.58Petitioner cannot claim the full amount of
P140,893.50, which includes the payment of premiums for the two other
vehicles. These two policies are not affected by our ruling on the policy subject
of this case because they were issued as separate and independent contracts
of insurance.59 We, however, find that the award shall earn legal interest of 6%
from the time of extrajudicial demand on July 7, 1997.60

WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated

September 11, 2009 and the Resolution dated November 24, 2009
are AFFIRMED with the MODIFICATION that respondent should return the
amount of P55,620.60 with the legal interest computed at the rate of 6% per
annumreckoned from July 7, 1997 until finality of this judgment. Thereafter, the
total amount shall earn interest at the rate of 6% per annum from the finality of
this judgment until its full satisfaction.

SO ORDERED.chanroblesvirtuallawlibrary

Bersamin, (Acting Chairperson), Del Castillo,* and Caguioa,***JJ., concur.

Reyes, J., on official leave.
Endnotes:

*
Designated as additional Member per Raffle dated February 6,
2017.

Designated as Fifth Member of the Third Division per Special

***

Order No. 2417 dated January 4, 2017.

1
Rollo, pp. 10-35.
2
Id. at 37-44; penned by Associate Justice Mario L. Guariña III,
and concurred in by Associate Justices Mariflor P. Punzalan
Castillo and Jane Aurora C. Lantion.
3
Id. at 36.
4
CA rollo, pp. 32-36.
5
Rollo, pp. 43-44.
6
CA rollo, p. 32.
7
Rollo, pp. 46-47.
8
Id. at 38.
9
CA rollo, p. 32.
10
Rollo, p. 52.
11
Id. at 38; 48.
12
Id. at 39; 48.
13
Id. at 38-39; TSN, September 10, 1998, p. 17.
14
Rollo, pp. 38-39.
15
Id. at 54.
16
Id. at 53.
17
Id. at 39.
18
Id. at 15.
19
Id. at 39-40.
20
Id. at 59.
 21
Docketed as Civil Case No. 97-85464; RTC records, pp. 1-4.
22
Id. at 14-19.
23
Rollo, p. 40.
24
Supra note 4.
25
CA rollo, pp. 34-35.
26
Id. at 35-36.
27
Id. at 36.
28
Id. The dispositive portion reads:chanRoblesvirtualLawlibrary

WHEREFORE, PREMISES CONSIDERED, judgment is hereby

rendered in favor of the plaintiff and against the defendant.
Defendant is hereby ordered to pay plaintiff the
following:chanRoblesvirtualLawlibrary

a) P1,500,000.00 as indemnification for the loss of the subject

vehicle under the insurance policy;chanrobleslaw

b) P50,000.00 as attorney's fees. No pronouncement as to costs.

SO ORDERED.

2. Philippine Health Care Providers, Inc. v. CIR, G.R. No. 167330, September
18, 2009;

G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to
health of the people and instill health consciousness among
them.
 ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and

comprehensive approach to health development which shall
endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall
be priority for the needs of the underprivileged sick, elderly,
disabled, women, and children. The State shall endeavor to
provide free medical care to paupers.1

For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, Inc.2

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish,

maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and
disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization."
Individuals enrolled in its health care programs pay an annual membership fee
and are entitled to various preventive, diagnostic and curative medical services
provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR]

sent petitioner a formal demand letter and the corresponding assessment
notices demanding the payment of deficiency taxes, including surcharges and
interest, for the taxable years 1996 and 1997 in the total amount of
₱224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on

petitioner’s 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 petitioner’s 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 petitioner’s
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 CA’s decision. We held that petitioner’s 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 petitioner’s 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 CA’s 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 petitioner’s agreements are contracts of indemnity,

they are not those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s 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 petitioner’s 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 petitioner’s 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,
employer’s 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, employer’s 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 Health’s activities may be considered in one aspect as

creating security against loss from illness or accident more truly they constitute
the quantity purchase of well-rounded, continuous medical service by its
members. xxx The functions of such an organization are not identical with
those of insurance or indemnity companies. The latter are concerned
primarily, if not exclusively, with risk and the consequences of its descent, not
with service, or its extension in kind, quantity or distribution; with the unusual
occurrence, not the daily routine of living. Hazard is predominant. On the
other hand, the cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made possible by
quantity purchasing and economies in operation. Its primary purpose is
to reduce the cost rather than the risk of medical care; to broaden the
service to the individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of living, like
purchasing food and clothing or oil and gas, rather than merely
protecting against the financial loss caused by extraordinary and
unusual occurrences, such as death, disaster at sea, fire and tornado. It
is, in this instance, to take care of colds, ordinary aches and pains, minor ills
and all the temporary bodily discomforts as well as the more serious and
unusual illness. To summarize, the distinctive features of the cooperative
are the rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of service as
well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not,
except incidentally to these features, the indemnification for cost after
the services is rendered. Except the last, these are not distinctive or
generally characteristic of the insurance arrangement. There is, therefore,
a substantial difference between contracting in this way for the rendering of
service, even on the contingency that it be needed, and contracting merely to
stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be present

should not outweigh all other factors. If attention is focused only on that feature,
the line between insurance or indemnity and other types of legal arrangement
and economic function becomes faint, if not extinct. This is especially true
when the contract is for the sale of goods or services on contingency. But
obviously it was not the purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk. That view would cause
them to engulf practically all contracts, particularly conditional sales and
contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it.
The question turns, not on whether risk is involved or assumed, but on
whether that or something else to which it is related in the particular plan
is its principal object purpose.24 (Emphasis supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that,

after scrutinizing the plan of operation as a whole of the corporation, it was
service rather than indemnity which stood as its principal purpose.

There is another and more compelling reason for holding that the service is not
engaged in the insurance business. Absence or presence of assumption of
risk or peril is not the sole test to be applied in determining its status.
The question, more broadly, is whether, looking at the plan of operation
as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and
maintained by the California physicians have a wide scope in the field of social
service. Probably there is no more impelling need than that of adequate
medical care on a voluntary, low-cost basis for persons of small income.
The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not
‘indemnity.’26 (Emphasis supplied)

American courts have pointed out that the main difference between an HMO
and an insurance company is that HMOs undertake to provide or arrange for
the provision of medical services through participating physicians while
insurance companies simply undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates,
P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this
point:

The basic distinction between medical service corporations and ordinary

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

xxx xxx xxx

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

undertaking to provide physicians who will render services to subscribers on a
prepaid basis. Hence, if there are no physicians participating in the
medical service corporation’s plan, not only will the subscribers be
deprived of the protection which they might reasonably have expected
would be provided, but the corporation will, in effect, be doing business
solely as a health and accident indemnity insurer without having qualified
as such and rendering itself subject to the more stringent financial
requirements of the General Insurance Laws….

A participating provider of health care services is one who agrees in writing to

render health care services to or for persons covered by a contract issued by
health service corporation in return for which the health service corporation
agrees to make payment directly to the participating
provider. (Emphasis supplied)
28

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 petitioner’s 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 petitioner’s 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
petitioner’s 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 petitioner’s 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 petitioner’s 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,
employer’s 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 insurer’s 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 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.42 (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 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 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.

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

petitioner’s health care agreements under Section 185 of the NIRC of 1997 is
the provision’s 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, employer’s 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
EO47 273 dated July 25, 1987, it was again renumbered and became Section
185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again,
only with respect to the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA

8424 (or the NIRC of 1997), the subject legal provision was retained as the
present Section 185. In 2004, amendments to the DST provisions were
introduced by RA 924348 but Section 185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines
with the formation of Bancom Health Care Corporation in 1974. The same
pioneer HMO was later reorganized and renamed Integrated Health Care
Services, Inc. (or Intercare). However, there are those who claim that Health
Maintenance, Inc. is the HMO industry pioneer, having set foot in the
Philippines as early as 1965 and having been formally incorporated in 1991.
Afterwards, HMOs proliferated quickly and currently, there are 36 registered
HMOs with a total enrollment of more than 2 million.49

We can clearly see from these two histories (of the DST on the one hand and
HMOs on the other) that when the law imposing the DST was first passed,
HMOs were yet unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were already in existence in
the Philippines and the term had in fact already been defined by RA 7875. If it
had been the intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical terms. It had many
opportunities to do so. But it did not. The fact that the NIRC contained no
specific provision on the DST liability of health care agreements of HMOs at a
time they were already known as such, belies any legislative intent to impose it
on them. As a matter of fact, petitioner was assessed its DST liability only
on January 27, 2000, after more than a decade in the business as an
HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of
tax), it would be safe to say that health care agreements were never, at any
time, recognized as insurance contracts or deemed engaged in the business of
insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is

unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who is to pay it.51 So
potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy."52

Petitioner claims that the assessed DST to date which amounts to ₱376
million53 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
nation’s thrust towards a better economy which will ultimately benefit the
majority of our people.59

Petitioner’s 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 petitioner’s 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 petitioner’s liability for DST for the taxable years 1996 and 1997
was totally extinguished by its availment of the tax amnesty under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration:

whether this Court is bound by the ruling of the CA64 in CIR v. Philippine
National Bank65 that a health care agreement of Philamcare Health Systems is
not an insurance contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute
resolution of this Court dismissing the appeal in Philippine National Bank (G.R.
No. 148680).66 Petitioner argues that the dismissal of G.R. No. 148680 by
minute resolution was a judgment on the merits; hence, the Court should apply
the CA ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case. When we dismissed the
petition, we effectively affirmed the CA ruling being questioned. As a result, our
ruling in that case has already become final.67 When a minute resolution
denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and
legal conclusions, are deemed sustained.68 But what is its effect on other
cases?

With respect to the same subject matter and the same issues concerning the
same parties, it constitutes res judicata.69 However, if other parties or another
subject matter (even with the same parties and issues) is involved, the minute
resolution is not binding precedent. Thus, in CIR v. 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
petitioner’s 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 petitioner’s 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.

3. New World International Dev. (Phils), Inc. v. NYK-FilJapan Shipping Corp.,

G.R. No. 171468, August 24, 2011;

G.R. No. 171468 August 24, 2011

NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.),

INC., Petitioner,
vs.
NYK-FILJAPAN SHIPPING CORP., LEP PROFIT INTERNATIONAL, INC.
(ORD), LEP INTERNATIONAL PHILIPPINES, INC., DMT CORP.,
ADVATECH INDUSTRIES, INC., MARINA PORT SERVICES, INC.,
SERBROS CARRIER CORPORATION, and SEABOARD-EASTERN
INSURANCE CO., INC., Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 174241

NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.),

INC., Petitioner,
vs.
SEABOARD-EASTERN INSURANCE CO., INC., Respondent.

DECISION

ABAD, J.:

These consolidated petitions involve a cargo owner’s right to recover damages

from the loss of insured goods under the Carriage of Goods by Sea Act and
the Insurance Code.

The Facts and the Case

Petitioner New World International Development (Phils.), Inc. (New World)

bought from DMT Corporation (DMT) through its agent, Advatech Industries,
Inc. (Advatech) three emergency generator sets worth US$721,500.00.

DMT shipped the generator sets by truck from Wisconsin, United States, to
LEP Profit International, Inc. (LEP Profit) in Chicago, Illinois. From there, the
shipment went by train to Oakland, California, where it was loaded on S/S
California Luna V59, owned and operated by NYK Fil-Japan Shipping
Corporation (NYK) for delivery to petitioner New World in Manila. NYK issued
a bill of lading, declaring that it received the goods in good condition.

NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX
Ruby V/72 that it also owned and operated. On its journey to Manila, however,
ACX Ruby encountered typhoon Kadiang whose captain filed a sea protest on
arrival at the Manila South Harbor on October 5, 1993 respecting the loss and
damage that the goods on board his vessel suffered.

Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or
cargo-handling operator, received the shipment on October 7, 1993. Upon
inspection of the three container vans separately carrying the generator sets,
two vans bore signs of external damage while the third van appeared
unscathed. The shipment remained at Pier 3’s Container Yard under Marina’s
care pending clearance from the Bureau of Customs. Eventually, on October
20, 1993 customs authorities allowed petitioner’s customs broker, Serbros
Carrier Corporation (Serbros), to withdraw the shipment and deliver the same
to petitioner New World’s job site in Makati City.

An examination of the three generator sets in the presence of petitioner New

World’s representatives, Federal Builders (the project contractor) and
surveyors of petitioner New World’s insurer, Seaboard–Eastern Insurance
Company (Seaboard), revealed that all three sets suffered extensive damage
and could no longer be repaired. For these reasons, New World demanded
recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit,
LEP International Philippines, Inc. (LEP), Marina, and Serbros. While LEP and
NYK acknowledged receipt of the demand, both denied liability for the loss.
Since Seaboard covered the goods with a marine insurance policy, petitioner
New World sent it a formal claim dated November 16, 1993. Replying on
February 14, 1994, Seaboard required petitioner New World to submit to it an
itemized list of the damaged units, parts, and accessories, with corresponding
values, for the processing of the claim. But petitioner New World did not submit
what was required of it, insisting that the insurance policy did not include the
submission of such a list in connection with an insurance claim. Reacting to
this, Seaboard refused to process the claim.

On October 11, 1994 petitioner New World filed an action for specific
performance and damages against all the respondents before the Regional
Trial Court (RTC) of Makati City, Branch 62, in Civil Case 94-2770.

On August 16, 2001 the RTC rendered a decision absolving the various
respondents from liability with the exception of NYK. The RTC found that the
generator sets were damaged during transit while in the care of NYK’s vessel,
ACX Ruby. The latter failed, according to the RTC, to exercise the degree of
diligence required of it in the face of a foretold raging typhoon in its path.

The RTC ruled, however, that petitioner New World filed its claim against the
vessel owner NYK beyond the one year provided under the Carriage of Goods
by Sea Act (COGSA). New World filed its complaint on October 11, 1994 when
the deadline for filing the action (on or before October 7, 1994) had already
lapsed. The RTC held that the one-year period should be counted from the
date the goods were delivered to the arrastre operator and not from the date
they were delivered to petitioner’s job site.1

As regards petitioner New World’s claim against Seaboard, its insurer, the
RTC held that the latter cannot be faulted for denying the claim against it since
New World refused to submit the itemized list that Seaboard needed for
assessing the damage to the shipment. Likewise, the belated filing of the
complaint prejudiced Seaboard’s right to pursue a claim against NYK in the
event of subrogation.

On appeal, the Court of Appeals (CA) rendered judgment on January 31,

2006,2 affirming the RTC’s rulings except with respect to Seaboard’s liability.
The CA held that petitioner New World can still recoup its loss from Seaboard’s
marine insurance policy, considering a) that the submission of the itemized
listing is an unreasonable imposition and b) that the one-year prescriptive
period under the COGSA did not affect New World’s right under the insurance
policy since it was the Insurance Code that governed the relation between the
insurer and the insured.

Although petitioner New World promptly filed a petition for review of the CA
decision before the Court in G.R. 171468, Seaboard chose to file a motion for
reconsideration of that decision. On August 17, 2006 the CA rendered an
amended decision, reversing itself as regards the claim against Seaboard. The
CA held that the submission of the itemized listing was a reasonable
requirement that Seaboard asked of New World. Further, the CA held that the
one-year prescriptive period for maritime claims applied to Seaboard, as
insurer and subrogee of New World’s right against the vessel owner. New
World’s failure to comply promptly with what was required of it prejudiced such
right.

Instead of filing a motion for reconsideration, petitioner instituted a second

petition for review before the Court in G.R. 174241, assailing the CA’s
amended decision.

The Issues Presented

The issues presented in this case are as follows:

a) In G.R. 171468, whether or not the CA erred in affirming the RTC’s release
from liability of respondents DMT, Advatech, LEP, LEP Profit, Marina, and
Serbros who were at one time or another involved in handling the shipment;
and

b) In G.R. 174241, 1) whether or not the CA erred in ruling that Seaboard’s

request from petitioner New World for an itemized list is a reasonable
imposition and did not violate the insurance contract between them; and 2)
whether or not the CA erred in failing to rule that the one-year COGSA
prescriptive period for marine claims does not apply to petitioner New World’s
prosecution of its claim against Seaboard, its insurer.

The Court’s Rulings

In G.R. 171468 --

Petitioner New World asserts that the roles of respondents DMT, Advatech,
LEP, LEP Profit, Marina and Serbros in handling and transporting its shipment
from Wisconsin to Manila collectively resulted in the damage to the same,
rendering such respondents solidarily liable with NYK, the vessel owner.

But the issue regarding which of the parties to a dispute incurred negligence is
factual and is not a proper subject of a petition for review on certiorari. And
petitioner New World has been unable to make out an exception to this
rule.3Consequently, the Court will not disturb the finding of the RTC, affirmed
by the CA, that the generator sets were totally damaged during the typhoon
which beset the vessel’s voyage from Hong Kong to Manila and that it was her
negligence in continuing with that journey despite the adverse condition which
caused petitioner New World’s loss.

That the loss was occasioned by a typhoon, an exempting cause under Article
1734 of the Civil Code, does not automatically relieve the common carrier of
liability. The latter had the burden of proving that the typhoon was the
proximate and only cause of loss and that it exercised due diligence to prevent
or minimize such loss before, during, and after the disastrous typhoon.4 As
found by the RTC and the CA, NYK failed to discharge this burden.

In G.R. 174241 --
One. The Court does not regard as substantial the question of reasonableness
of Seaboard’s additional requirement of an itemized listing of the damage that
the generator sets suffered. The record shows that petitioner New World
complied with the documentary requirements evidencing damage to its
generator sets.

The marine open policy that Seaboard issued to New World was an all-risk
policy. Such a policy insured against all causes of conceivable loss or damage
except when otherwise excluded or when the loss or damage was due to fraud
or intentional misconduct committed by the insured. The policy covered all
losses during the voyage whether or not arising from a marine peril.5

Here, the policy enumerated certain exceptions like unsuitable packaging,

inherent vice, delay in voyage, or vessels unseaworthiness, among
others.6 But Seaboard had been unable to show that petitioner New World’s
loss or damage fell within some or one of the enumerated exceptions.

What is more, Seaboard had been unable to explain how it could not verify the
damage that New World’s goods suffered going by the documents that it
already submitted, namely, (1) copy of the Supplier’s Invoice KL2504; (2) copy
of the Packing List; (3) copy of the Bill of Lading 01130E93004458; (4) the
Delivery of Waybill Receipts 1135, 1222, and 1224; (5) original copy of Marine
Insurance Policy MA-HO-000266; (6) copies of Damage Report from Supplier
and Insurance Adjusters; (7) Consumption Report from the Customs Examiner;
and (8) Copies of Received Formal Claim from the following: a) LEP
International Philippines, Inc.; b) Marina Port Services, Inc.; and c) Serbros
Carrier Corporation.7 Notably, Seaboard’s own marine surveyor attended the
inspection of the generator sets.

Seaboard cannot pretend that the above documents are inadequate since they
were precisely the documents listed in its insurance policy.8 Being a contract of
adhesion, an insurance policy is construed strongly against the insurer who
prepared it. The Court cannot read a requirement in the policy that was not
there.

Further, it appears from the exchanges of communications between Seaboard

and Advatech that submission of the requested itemized listing was incumbent
on the latter as the seller DMT’s local agent. Petitioner New World should not
be made to suffer for Advatech’s shortcomings.

Two. Regarding prescription of claims, Section 3(6) of the COGSA provides

that the carrier and the ship shall be discharged from all liability in case of loss
or damage unless the suit is brought within one year after delivery of the goods
or the date when the goods should have been delivered.

But whose fault was it that the suit against NYK, the common carrier, was not
brought to court on time? The last day for filing such a suit fell on October 7,
1994. The record shows that petitioner New World filed its formal claim for its
loss with Seaboard, its insurer, a remedy it had the right to take, as early as
November 16, 1993 or about 11 months before the suit against NYK would
have fallen due.

In the ordinary course, if Seaboard had processed that claim and paid the
same, Seaboard would have been subrogated to petitioner New World’s right
to recover from NYK. And it could have then filed the suit as a subrogee. But,
as discussed above, Seaboard made an unreasonable demand on February
14, 1994 for an itemized list of the damaged units, parts, and accessories, with
corresponding values when it appeared settled that New World’s loss was total
and when the insurance policy did not require the production of such a list in
the event of a claim.

Besides, when petitioner New World declined to comply with the demand for
the list, Seaboard against whom a formal claim was pending should not have
remained obstinate in refusing to process that claim. It should have examined
the same, found it unsubstantiated by documents if that were the case, and
formally rejected it. That would have at least given petitioner New World a
clear signal that it needed to promptly file its suit directly against NYK and the
others. Ultimately, the fault for the delayed court suit could be brought to
Seaboard’s doorstep.

Section 241 of the Insurance Code provides that no insurance company doing
business in the Philippines shall refuse without just cause to pay or settle
claims arising under coverages provided by its policies. And, under Section
243, the insurer has 30 days after proof of loss is received and ascertainment
of the loss or damage within which to pay the claim. If such ascertainment is
not had within 60 days from receipt of evidence of loss, the insurer has 90 days
to pay or settle the claim. And, in case the insurer refuses or fails to pay within
the prescribed time, the insured shall be entitled to interest on the proceeds of
the policy for the duration of delay at the rate of twice the ceiling prescribed by
the Monetary Board.

Notably, Seaboard already incurred delay when it failed to settle petitioner

New World’s claim as Section 243 required. Under Section 244, a prima facie
evidence of unreasonable delay in payment of the claim is created by the
failure of the insurer to pay the claim within the time fixed in Section 243.

Consequently, Seaboard should pay interest on the proceeds of the policy for
the duration of the delay until the claim is fully satisfied at the rate of twice the
ceiling prescribed by the Monetary Board. The term "ceiling prescribed by the
Monetary Board" means the legal rate of interest of 12% per annum provided
in Central Bank Circular 416, pursuant to Presidential Decree 116.9 Section
244 of the Insurance Code also provides for an award of attorney’s fees and
other expenses incurred by the assured due to the unreasonable withholding
of payment of his claim.

In Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines,

Inc.,10 the Court regarded as proper an award of 10% of the insurance
proceeds as attorney’s fees. Such amount is fair considering the length of time
that has passed in prosecuting the claim.11 Pursuant to the Court’s ruling in
Eastern Shipping Lines, Inc. v. Court of Appeals,12 a 12% interest per annum
from the finality of judgment until full satisfaction of the claim should likewise
be imposed, the interim period equivalent to a forbearance of credit.1avvphi1

Petitioner New World is entitled to the value stated in the policy which is
commensurate to the value of the three emergency generator sets or
US$721,500.00 with double interest plus attorney’s fees as discussed above.

WHEREFORE, the Court DENIES the petition in G.R. 171468 and AFFIRMS
the Court of Appeals decision of January 31, 2006 insofar as petitioner New
World International Development (Phils.), Inc. is not allowed to recover against
respondents DMT Corporation, Advatech Industries, Inc., LEP International
Philippines, Inc., LEP Profit International, Inc., Marina Port Services, Inc. and
Serbros Carrier Corporation.

With respect to G.R. 174241, the Court GRANTS the petition and REVERSES
and SETS ASIDE the Court of Appeals Amended Decision of August 17, 2006.
The Court DIRECTS Seaboard-Eastern Insurance Company, Inc. to pay
petitioner New World International Development (Phils.), Inc. US$721,500.00
under Policy MA-HO-000266, with 24% interest per annum for the duration of
delay in accordance with Sections 243 and 244 of the Insurance Code and
attorney’s fees equivalent to 10% of the insurance proceeds. Seaboard shall
also pay, from finality of judgment, a 12% interest per annum on the total
amount due to petitioner until its full satisfaction.

SO ORDERED.

4. Travellers Insurance & Surety Corporation v. CA, G.R. No. 82036, May 22,
1997;

[G.R. No. 82036. May 22, 1997.]

TRAVELLERS INSURANCE & SURETY CORPORATION, Petitioner, v. HON.

COURT OF APPEALS and VICENTE MENDOZA, Respondents.

Espinas & Associates Law Office for Petitioner.

Carlos A. Tria for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; INSURANCE; CONTRACT OR POLICY;

NECESSITY OF AFFIXING A COPY THEREOF TO COMPLAINT; CASE AT
BENCH. — When private respondent filed his amended complaint to implead
petitioner as party defendant and therein alleged that petitioner was the
third-party liability insurer of the Lady Love taxicab that fatally hit private
respondent’s mother, private respondent did not attach a copy of the insurance
contract to the amended complaint. Private respondent does not deny this
omission. It is significant to point out at this juncture that the right of a third
person to sue the insurer depends on whether the contract of insurance is
intended to benefit third persons also or only the insured. . . Since private
respondent failed to attach a copy of the insurance contract to his complaint,
the trial court could not have been able to apprise itself of the real nature and
pecuniary limits of petitioner’s liability. More importantly, the trial court could
not have possibly ascertained the right of private respondent as third person to
sue petitioner as insurer of the Lady Love taxicab because the trial court never
saw nor read the insurance contract and learned of its terms and conditions.
Petitioner, understandably, did not volunteer to present any insurance contract
covering the Lady Love taxicab that fatally hit private respondent’s mother,
considering that petitioner precisely presented the defense of lack of insurance
coverage before the trial court. Neither did the trial court issue a subpoena
duces tecum to have the insurance contract produced before it under pain of
contempt. We thus find hardly a basis in the records for the trial court to have
validly found petitioner liable jointly and severally with the owner and the driver
of the Lady Love taxicab, for damages accruing to private Respondent.

2. ID.; ID.; ID.; LIABILITY BASED ON CONTRACT DISTINGUISHED FROM

LIABILITY BASED ON TORTS AND QUASI-DELICTS; CASE AT BAR. —
Apparently, the trial court did not distinguish between the private respondent’s
cause of action against the owner and the driver of the Lady Love taxicab and
his cause of action against petitioner. The former is based on torts and
quasi-delicts while the latter is based on contract. Confusing these two sources
of obligations as they arise from the same act of the taxicab fatally hitting
private respondent’s mother, and in the face of overwhelming evidence of the
reckless imprudence of the driver of the Lady Love taxicab, the trial court
brushed aside its ignorance of the terms and conditions of the insurance
contract and forthwith found all three — the driver of the taxicab, the owner of
the taxicab, and the alleged insurer of the taxicab — jointly and severally liable
for actual, moral and exemplary damages as well as attorney’s fees and
litigation expenses. This is clearly a misapplication of the law by the trial court
and respondent appellate court grievously erred in not having reversed the trial
court on this ground.

3. ID.; ID.; ID.; INSURER’S LIABILITY BASED THEREON LIMITED TO

P50,000.00 IN CASE AT BAR. — Assuming arguendo that petitioner is the
insurer of the Lady Love taxicab in question, its liability is limited to only
P50,000.00, this being its standard amount of coverage in vehicle insurance
policies. It bears repeating that no copy of the insurance contract was ever
proffered before the trial court by the private respondent, notwithstanding
knowledge of the fact that the latter’s complaint against petitioner is one under
a written contract. Thus, the trial court proceeded to hold petitioner liable for an
award of damages exceeding its limited liability of P50,000.00. This only
shows beyond doubt that the trial court was under the erroneous presumption
that petitioner could be found liable absent proof of contract and based merely
on the proof of reckless imprudence on the part of the driver of the Lady Love
taxicab that fatally hit private respondent’s mother.
4. ID.; ID.; NOTICE OF CLAIM; AN INDISPENSABLE PRE-REQUISITE TO
SUE UNDER AN INSURANCE CONTRACT; REASONS; CASE AT BENCH.
— Petitioner did not tire in arguing before the trial court and the respondent
appellate court that, assuming arguendo that it had issued the insurance
contract over the Lady Love taxicab, private respondent’s cause of action
against petitioner did not successfully accrue because he failed to file with
petitioner a written notice of claim within six (6) months from the date of the
accident as required by Section 384 of the Insurance Code. . . We have
certainly ruled with consistence, that the prescriptive period to bring suit in
court under an insurance policy, begins to run front the date of the insurer’s
rejection of the claim filed by the insured, the beneficiary or any person
claiming under an insurance contract. This ruling is premised upon the
compliance by the persons suing under an insurance contract, with the
indispensable requirement of having filed the written claim mandated by
Section 384 of the Insurance Code before and after its amendment. Absent
such written claim filed by the person suing under an insurance contract, no
cause of action accrues under such insurance contract, considering that it is
the rejection of that claim that triggers the running of the one-year prescriptive
period to bring suit in court, and there can be no opportunity for the insurer to
even reject a claim if none has been filed in the first place, as in the instant
case.

DECISION

HERMOSISIMA, JR., J.:

The petition herein seeks the review and reversal of the decision 1 of
respondent Court of Appeals 2 affirming in toto the judgment 3 of the Regional
Trial Court 4 in an action for damages 5 filed by private respondent Vicente
Mendoza, Jr. as heir of his mother who was killed in a vehicular accident.

Before the trial court, the complainant lumped the erring taxicab driver, the
owner of the taxicab, and the alleged insurer of the vehicle which featured in
the vehicular accident into one complaint. The erring taxicab was allegedly
covered by a third-party liability insurance policy issued by petitioner Travellers
Insurance & Surety Corporation. cdtech

The evidence presented before the trial court established the following
facts:jgc:chanrobles.com.ph

"At about 5:30 o’clock in the morning of July 20, 1980, a 78-year old woman by
the name of Feliza Vineza de Mendoza was on her way to hear mass at the
Tayuman Cathedral. While walking along Tayuman corner Gregorio Perfecto
Streets, she was bumped by a taxi that was running fast. Several persons
witnessed the accident, among whom were Rolando Marvilla, Ernesto Lopez
and Eulogio Tabalno. After the bumping, the old woman was seen sprawled on
the pavement. Right away, the good Samaritan that he was, Marvilla ran
towards the old woman and held her on his lap to inquire from her what had
happened, but obviously she was already in shock and could not talk. At this
moment, a private jeep stopped. With the driver of that vehicle, the two helped
board the old woman on the jeep and brought her to the Mary Johnston
Hospital in Tondo.

. . . Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman

Street from Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the
incident. It was on his return trip from Rizal Avenue when Lopez saw the
plaintiff and his brother who were crying near the scene of the accident. Upon
learning that the two were the sons of the old woman, Lopez told them what
had happened. The Mendoza brothers were then able to trace their mother at
the Mary Johnston Hospital where they were advised by the attending
physician that they should bring the patient to the National Orthopedic Hospital
because of her fractured bones. Instead, the victim was brought to the U.S.T.
Hospital where she expired at 9:00 o’clock that same morning. Death was
caused by ‘traumatic shock’ as a result of the severe injuries she
sustained. . . .

. . . The evidence shows that at the moment the victim was bumped by the
vehicle, the latter was running fast, so much so that because of the strong
impact the old woman was thrown away and she fell on the pavement. . . . In
truth, in that related criminal case against defendant Dumlao . . . the trial court
found as a fact that therein accused ‘was driving the subject taxicab in a
careless, reckless and imprudent manner and at a speed greater than what
was reasonable and proper without taking the necessary precaution to avoid
accident to persons . . . considering the condition of the traffic at the place at
the time aforementioned’. . . Moreover, the driver fled from the scene of the
accident and without rendering assistance to the victim. . . .

. . . Three (3) witnesses who were at the scene at the time identified the taxi
involved, though not necessarily the driver thereof. Marvilla saw a lone taxi
speeding away just after the bumping which, when it passed by him, said
witness noticed to be a Lady Love Taxi with Plate No. 438, painted maroon,
with baggage bar attached on the baggage compartment and with an
antenae[sic] attached at the right rear side. The same descriptions were
revealed by Ernesto Lopez, who further described the taxi to have . . .
reflectorized decorations on the edges of the glass at the back. . . . A third
witness in the person of Eulogio Tabalno . . . made similar descriptions
although, because of the fast speed of the taxi, he was only able to detect the
last digit of the plate number which is ‘8’. . . . [T]he police proceeded to the
garage of Lady Love Taxi and then and there they took possession of such a
taxi and later impounded it in the impounding area of the agency
concerned. . . . [T]he eyewitnesses . . . were unanimous in pointing to that
Lady Love Taxi with Plate No. 438, obviously the vehicle involved herein.

. . . During the investigation, defendant Armando Abellon, the registered owner

of Lady Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified to the fact
‘that the vehicle was driven last July 20, 1980 by one Rodrigo Dumlao . . .’ It
was on the basis of this affidavit of the registered owner that caused the police
to apprehend Rodrigo Dumlao, and consequently to have him prosecuted and
eventually convicted of the offense . . . [S]aid Dumlao absconded in that
criminal case, specially at the time of the promulgation of the judgment therein
so much so that he is now a fugitive from justice." 6

Private respondent filed a complaint for damages against Armando Abellon as

the owner of the Lady Love Taxi and Rodrigo Dumlao as the driver of the Lady
Love taxicab that bumped private respondent’s mother. Subsequently, private
respondent amended his complaint to include petitioner as the compulsory
insurer of the said taxicab under Certificate of Cover No. 1447785-3.

After trial, the trial court rendered judgment in favor of private respondent, the
dispositive portion of which reads:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more

particularly the ‘Heirs of the late Feliza Vineza de Mendoza,’ and against
defendants Rodrigo Dumlao, Armando Abellon and Travellers Insurance and
Surety Corporation, by ordering the latter to pay, jointly and severally, the
former the following amounts:chanrob1es virtual 1aw library

(a) The sum of P2,924.70, as actual and compensatory damages, with interest
thereon at the rate of 12% per annum from October 17, 1980, when the
complaint was filed, until the said amount is fully paid;

(b) P30,000.00 as death indemnity;

(c) P25,000.00 as moral damages;

(d) P10,000.00 as by way of corrective or exemplary damages, and

(e) Another P10,000.00 by way of attorney’s fees and other litigation expenses.

Defendants are further ordered to pay, jointly and severally, the costs of this
suit.

SO ORDERED." 7

Petitioner appealed from the aforecited decision to the respondent Court of

Appeals. The decision of the trial court was affirmed by respondent appellate
court. Petitioner’s Motion for Reconsideration 8 of September 22, 1987 was
denied in a Resolution 479 dated February 9, 1988.

Hence this petition.

Petitioner mainly contends that it did not issue an insurance policy as

compulsory insurer of the Lady Love Taxi and that, assuming arguendo that it
had indeed covered said taxicab for third-party liability insurance, private
respondent failed to file a written notice of claim with petitioner as required by
Section 384 of P.D. No. 612, otherwise known as the Insurance Code.
We find the petition to be meritorious.
I

When private respondent filed his amended complaint to implead petitioner as

party defendant and therein alleged that petitioner was the third-party liability
insurer of the Lady Love taxicab that fatally hit private respondent’s mother,
private respondent did not attach a copy of the insurance contract to the
amended complaint. Private respondent does not deny this omission.

It is significant to point out at this juncture that the right of a third person to sue
the insurer depends on whether the contract of insurance is intended to benefit
third persons also or only the insured.

" [A]" policy . . . whereby the insurer agreed to indemnify the insured ‘against
all sums . . . which the Insured shall become legally liable to pay in respect of:
(a) death of or bodily injury to any person . . . is one for indemnity against
liability; from the fact then that the insured is liable to the third person, such
third person is entitled to sue the insurer.

The right of the person injured to sue the insurer of the party at fault (insured),
depends on whether the contract of insurance is intended to benefit third
persons also or on the insured. And the test applied has been this: Where the
contract provides for indemnity against liability to third persons, then third
persons to whom the insured is liable can sue the insurer. Where the contract
is for indemnity against actual loss or payment, then third persons cannot
proceed against the insurer, the contract being solely to reimburse the insured
for liability actually discharged by him thru payment to third persons, said third
persons’ recourse being thus limited to the insured alone." 10

Since private respondent failed to attach a copy of the insurance contract to his
complaint, the trial court could not have been able to apprise itself of the real
nature and pecuniary limits of petitioner’s liability. More importantly, the trial
court could not have possibly ascertained the right of private respondent as
third person to sue petitioner as insurer of the Lady Love taxicab because the
trial court never saw nor read the insurance contract and learned of its terms
and conditions.

Petitioner, understandably, did not volunteer to present any insurance contract

covering the Lady Love taxicab that fatally hit private respondent’s mother,
considering that petitioner precisely presented the defense of lack of insurance
coverage before the trial court. Neither did the trial court issue a subpoena
duces tecum to have the insurance contract produced before it under pain of
contempt.

We thus find hardly a basis in the records for the trial court to have validly
found petitioner liable jointly and severally with the owner and the driver of the
Lady Love taxicab, for damages accruing to private Respondent.
Apparently, the trial court did not distinguish between the private respondent’s
cause of action against the owner and the driver of the Lady Love taxicab and
his cause of action against petitioner. The former is based on torts and
quasi-delicts while the latter is based on contract. Confusing these two sources
of obligations as they arise from the same act of the taxicab fatally hitting
private respondent’s mother, and in the face of overwhelming evidence of the
reckless imprudence of the driver of the Lady Love taxicab, the trial court
brushed aside its ignorance of the terms and conditions of the insurance
contract and forthwith found all three — the driver of the taxicab, the owner of
the taxicab, and the alleged insurer of the taxicab — jointly and severally liable
for actual, moral and exemplary damages as well as attorney’s fees and
litigation expenses. This is clearly a misapplication of the law by the trial court,
and respondent appellate court grievously erred in not having reversed the trial
court on this ground.chanrobles law library

"While it is true that where the insurance contract provides for indemnity
against liability to third persons, such third persons can directly sue the insurer,
however, the direct liability of the insurer under indemnity contracts against
third-party liability does not mean that the insurer can be held solidarily liable
with the insured and/or the other parties found at fault. The liability of the
insurer is based on contract; that of the insured is based on tort." 11

Applying this principle underlying solidary obligation and insurance contracts,

we ruled in one case that:jgc:chanrobles.com.ph

"In solidary obligation, the creditor may enforce the entire obligation against
one of the solidary debtors. On the other hand, insurance is defined as ‘a
contract whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.’

In the case at bar, the trial court held petitioner together with respondents Sio
Choy and Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total
amount of P29,103.00, with the qualification that petitioner’s liability is only up
to P20,000.00. In the context of a solidary obligation, petitioner may be
compelled by respondent Vallejos to pay the entire obligation of P29,103.00,
notwithstanding the qualification made by the trial court. But, how can
petitioner be obliged to pay the entire obligation when the amount stated in its
insurance policy with respondent Sio Choy for indemnity against third-party
liability is only P20,000.00? Moreover, the qualification made in the decision of
the trial court to the effect that petitioner is sentenced to pay up to P20,000.00
only when the obligation to pay P29,103.00 is made solidary is an evident
breach of the concept of a solidary obligation." 12

The above principles take on more significance in the light of the

counter-allegation of petitioner that, assuming arguendo that it is the insurer of
the Lady Love taxicab in question, its liability is limited to only P50,000.00, this
being its standard amount of coverage in vehicle insurance policies. It bears
repeating that no copy of the insurance contract was ever proffered before the
trial court by the private respondent, notwithstanding knowledge of the fact that
the latter’s complaint against petitioner is one under a written contract. Thus,
the trial court proceeded to hold petitioner liable for an award of damages
exceeding its limited liability of P50,000.00. This only shows beyond doubt that
the trial court was under the erroneous presumption that petitioner could be
found liable absent proof of the contract and based merely on the proof of
reckless imprudence on the part of the driver of the Lady Love taxicab that
fatally hit private respondent’s mother.

II

Petitioner did not tire in arguing before the trial court and the respondent
appellate court that, assuming arguendo that it had issued the insurance
contract over the Lady Love taxicab, private respondent’s cause of action
against petitioner did not successfully accrue because he failed to file with
petitioner a written notice of claim within six (6) months from the date of the
accident as required by Section 384 of the Insurance Code.

At the time of the vehicular incident which resulted in the death of private
respondent’s mother, during which time the Insurance Code had not yet been
amended by Batas Pambansa (B.P.) Blg. 874, Section 384 provided as
follows:jgc:chanrobles.com.ph

"Any person having any claim upon the policy issued pursuant to this chapter
shall, without any unnecessary delay, present to the insurance company
concerned a written notice of claim setting forth the amount of his loss, and/or
the nature, extent and duration of the injuries, sustained as certified by a duly
licensed physician. Notice of claim must be filed within six months from date of
the accident, otherwise, the claim shall be deemed waived. Action or suit for
recovery of damage due to loss or injury must be brought in proper cases, with
the Commission or the Courts within one year from date of accident, otherwise
the claimant’s right of action shall prescribe" [Emphasis supplied].

In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De

Guzman, 13 we ruled that the one year prescription period to bring suit in court
against the insurer should be counted from the time that the insurer rejects the
written claim filed therewith by the insured, the beneficiary or the third person
interested under the insurance policy. We explained:jgc:chanrobles.com.ph

"It is very obvious that petitioner company is trying to use Section 384 of the
Insurance Code as a cloak to hide itself from its liabilities. The facts of these
cases evidently reflect the deliberate efforts of petitioner company to prevent
the filing of a formal action against it. Bearing in mind that if it succeeds in
doing so until one year lapses from the date of the accident it could set up the
defense of prescription, petitioner company made private respondents believe
that their claims would be settled in order that the latter will not find it
necessary to immediately bring suit. In violation of its duties to adopt and
implement reasonable standards for the prompt investigation of claims and to
effectuate prompt, fair and equitable settlement of claims, and with manifest
bad faith, petitioner company devised means and ways of stalling the
settlement proceedings. . . . [No] steps were taken to process the claim and no
rejection of said claim was ever made even if private respondent had already
complied with all the requirements. . . .

This Court has made the observation that some insurance companies have
been inventing excuses to avoid their just obligations and it is only the State
that can give the protection which the insuring public needs from possible
abuses of the insurers." 14

It is significant to note that the aforecited Section 384 was amended by B.P.
Blg. 874 to categorically provide that "action or suit for recovery of damage due
to loss or injury must be brought in proper cases, with the Commissioner or the
Courts within one year from denial of the claim, otherwise the claimant’s right
of action shall prescribe" [Emphasis ours]. 15

We have certainly ruled with consistency that the prescriptive period to bring
suit in court under an insurance policy, begins to run from the date of the
insurer’s rejection of the claim filed by the insured, the beneficiary or any
person claiming under an insurance contract. This ruling is premised upon the
compliance by the persons suing under an insurance contract, with the
indispensable requirement of having filed the written claim mandated by
Section 384 of the Insurance Code before and after its amendment. Absent
such written claim filed by the person suing under an insurance contract, no
cause of action accrues under such insurance contract, considering that it is
the rejection of that claim that triggers the running of the one-year prescriptive
period to bring suit in court, and there can be no opportunity for the insurer to
even reject a claim if none has been filed in the first place, as in the instant
case.chanroblesvirtual|awlibrary

"The one-year period should instead be counted from the date of rejection by
the insurer as this is the time when the cause of action accrues. . .

In Eagle Star Insurance Co., Ltd., Et. Al. v. Chia Yu, this Court
ruled:chanrob1es virtual 1aw library

‘The plaintiff’s cause of action did not accrue until his claim was finally rejected
by the insurance company. This is because, before such final rejection, there
was no real necessity for bringing suit.’

The philosophy of the above pronouncement was pointed out in the case of
ACCFA v. Alpha Insurance and Surety Co., viz.:chanrob1es virtual 1aw library

‘Since a cause of action requires, as essential elements, not only a legal right
of the plaintiff and a correlative obligation of the defendant but also an act or
omission of the defendant in violation of said legal right, the cause of action
does not accrue until the party obligated refuses, expressly or impliedly, to
comply with its duty’." 16

When petitioner asseverates, thus, that no written claim was filed by private
respondent and rejected by petitioner, and private respondent does not
dispute such asseveration through a denial in his pleadings, we are
constrained to rule that respondent appellate court committed reversible error
in finding petitioner liable under an insurance contract the existence of which
had not at all been proven in court. Even if there were such a contract, private
respondent’s cause of action can not prevail because he failed to file the
written claim mandated by Section 384 of the Insurance Code. He is deemed,
under this legal provision, to have waived his rights as against
petitioner-insurer.

WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the

Court of Appeals in CA-G.R. CV No. 09416 and the decision of the Regional
Trial Court in Civil Case No. 135486 are REVERSED and SET ASIDE insofar
as Travellers Insurance & Surety Corporation was found jointly and severally
liable to pay actual, moral and exemplary damages, death indemnity,
attorney’s fees and litigation expenses in Civil Case No. 135486. The
complaint against Travellers Insurance & Surety Corporation in said case is
hereby ordered dismissed.chanrobles.com : virtual law library

No pronouncement as to costs.

SO ORDERED.

5. Enriquez vs. Sun Life Insurance of Canada, G.R. No. 15895, November 29,
1920;

[G.R. No. 15895. November 29, 1920. ]

RAFAEL ENRIQUEZ, as administrator of the estate of the late

Joaquin ’Ma. Herrer, Plaintiff-Appellant, v. SUN LIFE ASSURANCE
COMPANY OF CANADA, Defendant-Appellee.

Jose A. Espiritu for Appellant.

Cohn, Fisher & DeWitt for Appellee.

SYLLABUS
1. INSURANCE; PHILIPPINE LAW. — The law of insurance is now found in
the Insurance Act and the Civil Code.

2. ID.; OFFER AND ACCEPTANCE. — The Civil Code rule, that an

acceptance made by letter shall bind the person making the offer only from the
date it came to his knowledge, is controlling.

3. ID.; ID. — On September 24, 1917, H made application to an insurance

company through its office in Manila for a life annuity. Two days later he paid
the sum of P6,000 to the manager of the company’s Manila office and was
given a receipt therefor. On November 26, 1917, the head office gave notice of
acceptance by cable to Manila. On the same date the Manila office prepared a
letter notifying H that his application had been accepted and this was placed in
the ordinary channels for transmission, but as far as known, was never actually
mailed and was never received by the applicant. H died on December 20, 1917.
Held: That the contract for a life annuity was not perfected because it had not
been proved satisfactorily that the acceptance of the application ever came to
the knowledge of the applicant.

4. ID.; ID. — An acceptance of an offer of insurance not actually or

constructively communicated to the proposer does not make a contract. Only
the mailing of acceptance completes the contract of insurance, as the locus
poenitentiae is ended when the acceptance has passed beyond the control of
the party.

5. ID.; ID.; MAILING AND DELIVERY OF MAIL MATTER, PRESUMPTION. —

When a letter or other mail matter is addressed and mailed with postage
prepaid there is a rebuttable presumption of fact that it was received by the
addressee as soon as it could have been transmitted to him in the ordinary
course of the mails But if any one of these elemental facts fails to appear, it is
fatal to the presumption.

DECISION

MALCOLM, J. :

This is an action brought by the plaintiff as administrator of the estate of the

late Joaquin Ma. Herrer to recover from the defendant life insurance company
the sum of P6,000 paid by the deceased for a life annuity. The trial court gave
judgment for the defendant. Plaintiff appeals.

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made
application to the Sun Life Assurance Company of Canada through its office in
Manila for a life annuity. Two days later he paid the sum of P6,000 to the
manager of the company’s Manila office and was given a receipt reading as
follows:jgc:chanrobles.com.ph

"MANILA, I. F., 26 de septiembre, 1917.

"PROVISIONAL RECEIPT

"P6,000

"Recibi la suma de seis mil pesos de Don Joaquin-Herrer de Manila como

prima de la Renta Vitalicia solicitada por dicho Don Joaquin Herrer hoy, sujeta
al examen medico y aprobacion de la Oficina Central de la Compañia."cralaw
virtua1aw library

The application was immediately forwarded to the head office of the company
at Montreal, Canada. On November 26, 1917, the head office gave notice of
acceptance by cable to Manila. (Whether on the same day the cable was
received notice was sent by the Manila office to Herrer that the application had
been accepted, is a disputed point, which will be discussed later.) On
December 4, 1917, the policy was issued at Montreal. On December 18, 1917,
attorney Aurelio A. Torres wrote to the Manila office of the company stating
that Herrer desired to withdraw his application. The following day the local
office replied to Mr. Torres, stating that the policy had been issued, and called
attention to the notification of November 26, 1917. This letter was received by
Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on
December 20, 1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer
received notice of acceptance of his application. To resolve this question, we
propose to go directly to the evidence of record.

The chief clerk of the Manila office of the Sun Life Assurance Company of
Canada at the time of the trial testified that he prepared the letter introduced in
evidence as Exhibit 3, of date November 26, 1917, and handed it to the local
manager, Mr. E. E. White, for signature. The witness admitted on
cross-examination that after preparing the letter and giving it to the manager,
he knew nothing of what became of it. The local manager, Mr. White, testified
to having received the cablegram accepting the application of Mr. Herrer from
the home office on November 26, 1917. He said that on the same day he
signed a letter notifying Mr. Herrer of this acceptance. The witness further said
that letters, after being signed, were sent to the chief clerk and placed on the
mailing desk for transmission. The witness could not tell if the letter had ever
actually been placed in the mails. Mr. Tuason, who was the chief clerk, on
November 26, 1917, was not called as a witness. For the defense, attorney
Manuel Torres testified to having prepared the will of Joaquin Ma. Herrer, that
on this occasion, Mr. Herrer mentioned his application for a life annuity, and
that he said that the only document relating to the transaction in his possession
was the provisional receipt. Rafael Enriquez, the administrator of the estate
testified that he had gone through the effects of the deceased and had found
no letter of notification from the insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of
November 26, 1917, notifying Mr. Ferrer that his application had been
accepted, was prepared and signed in the local office of the insurance
company, was placed in the ordinary channels for transmission, but as far as
we know, was never actually mailed and thus was never received by the
applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine

the law which should be applied to the facts. In order to reach our legal goal,
the obvious signposts along the way must be noticed.

Until quite recently, all of the provisions concerning life insurance in the
Philippines were found in the Code of Commerce and the Civil Code. In the
Code of Commerce, there formerly existed Title VIII of Book II and Section III
of Title III of Book III, which dealt with insurance contracts. In the Civil Code
there formerly existed and presumably still exist, Chapters II and IV, entitled
insurance contracts and life annuities, respectively, of Title XII of Book IV. On
and after July 1, 1915, there was, however, in force the Insurance Act, No.
2427. Chapter IV of this Act concerns life and health insurance. The Act
expressly repealed Title VIII of Book II and Section III of Title III of Book III of
the Code of Commerce. The law of insurance is consequently now found in the
Insurance Act and the Civil Code.

While, as just noticed, the Insurance Act deals with life insurance, it is silent as
to the methods to be followed in order that there may be a contract of
insurance. On the other hand, the Civil Code, in article 1802, not only
describes a contract of life annuity markedly similar to the one we are
considering, but in two other articles, gives strong clues as to the proper
disposition of the case. For instance, article 16 of the Civil Code provides that
"In matters which are governed by special laws, any deficiency of the latter
shall be supplied by the provisions of this Code." On the supposition, therefore,
which is incontestable, that the special law on the subject of insurance is
deficient in enunciating the principles governing acceptance, the
subject-matter of the Civil Code, if there be any, would be controlling. In the
Civil Code is found article 1262 providing that "Consent is shown by the
concurrence of offer and acceptance with respect to the thing and the
consideration which are to constitute the contract. An acceptance made by
letter shall not bind the person making the offer except from the time it came to
his knowledge. The contract, in such case, is presumed to have been entered
into at the place where the offer was made." This latter article is in opposition
to the provisions of article 54 of the Code of Commerce.

If no mistake has been made in announcing the successive steps by which we

reach a conclusion, then the only duty remaining is for the court to apply the
law as it is found. The legislature in its wisdom having enacted a new law on
insurance, and expressly repealed the provisions in the Code of Commerce on
the same subject, and having thus left a void in the commercial law, it would
seem logical to make use of the only pertinent provision of law found in the
Civil Code, closely related to the chapter concerning life annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person
making the offer only from the date it came to his knowledge, may not be the
best expression of modern commercial usage. Still it must be admitted that its
enforcement avoids uncertainty and tends to security. Not only this, but in
order that the principle may not be taken too lightly, let it be noticed that it is
identical with the principles announced by a considerable number of
respectable, courts in the United States. The courts who take this view have
expressly held that an acceptance of an offer of insurance not actually or
constructively communicated to the proposer does not make a contract. Only
the mailing of acceptance, it has been said, completes the contract of
insurance, as the locus poienitentise is ended when the acceptance has
passed beyond the control of the party. (I Joyce, The Law of Insurance, pp.
235, 244.)

In resume, therefore, the law applicable to the case is found to be the second
paragraph of! article 1262 of the Civil Code providing that an acceptance made
by letter shall not bind the person making the offer except from the time it came
to his knowledge. The pertinent fact is, that according to the provisional receipt,
three things had to be accomplished by the insurance company before there
was a contract: (1) There had to be a medical examination of the applicant; (2)
there had to be approval of the application by the head office of the company;
and (3) this approval had in some way to be communicated by the company to
the applicant. The further admitted facts are that the head office in Montreal did
accept the application, did cable the Manila office to that effect, did actually
issue the policy and did, through its agent in Manila, actually write the letter of
notification and place it in the usual channels for transmission to the addressee.
The fact as to the letter of notification thus fails to concur with the essential
elements of the general rule pertaining to the mailing and delivery of mail
matter as announced by the American courts, namely, when a letter or other
mail matter is addressed and mailed with postage prepaid there is a rebuttable
presumption of fact that it was received by the addressee as soon as it could
have been transmitted to him in the ordinary course of the mails. But if any one
of these elemental facts fails to appear, it is fatal to the presumption. For
instance, a letter will not be presumed to have been received by the addressee
unless it is shown that it was deposited in the post-office, properly addressed
and stamped. (See 22 C. J., 96, and 49 L. R. A. [N. S. ], pp. 458, et seq.,
notes.)

We hold that the contract for a life annuity in the case at bar was not perfected
because it has not been proved satisfactorily that the acceptance of the
application ever came to the knowledge of the applicant.

Judgment is reversed, and the plaintiff shall have and recover from the
defendant the sum of P6,000 with legal interest from November 20, 1918, until
paid, without special finding as to costs in either instance. So ordered.

Mapa, C.J. Araullo, Avanceña and Villamor, JJ., concur.

Johnson, J., dissents.

6. Great Pacific Life Assurance Co. vs. CA, G.R. Nos. 31845 & 31873, April 30,
1979

G.R. No. L-31845 April 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,

vs.
HONORABLE COURT OF APPEALS, respondents.

G.R. No. L-31878 April 30, 1979

LAPULAPU D. MONDRAGON, petitioner,

vs.
HON. COURT OF APPEALS and NGO HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for
petitioner Company.

Voltaire Garcia for petitioner Mondragon.

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of

this Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the
petitioners in both cases seek similar relief, through these petitions for
certiorari by way of appeal, from the amended decision of respondent Court of
Appeals which affirmed in toto the decision of the Court of First Instance of
Cebu, ordering "the defendants (herein petitioners Great Pacific Ligfe
Assurance Company and Mondragon) jointly and severally to pay plaintiff
(herein private respondent Ngo Hing) the amount of P50,000.00 with interest
at 6% from the date of the filing of the complaint, and the sum of P1,077.75,
without interest.

It appears that on March 14, 1957, private respondent Ngo Hing filed an
application with the Great Pacific Life Assurance Company (hereinafter
referred to as Pacific Life) for a twenty-year endownment policy in the amount
of P50,000.00 on the life of his one-year old daughter Helen Go. Said
respondent supplied the essential data which petitioner Lapulapu D.
Mondragon, Branch Manager of the Pacific Life in Cebu City wrote on the
corresponding form in his own handwriting (Exhibit I-M). Mondragon finally
type-wrote the data on the application form which was signed by private
respondent Ngo Hing. The latter paid the annual premuim the sum of
P1,077.75 going over to the Company, but he reatined the amount of
P1,317.00 as his commission for being a duly authorized agebt of Pacific Life.
Upon the payment of the insurance premuim, the binding deposit receipt
(Exhibit E) was issued to private respondent Ngo Hing. Likewise, petitioner
Mondragon handwrote at the bottom of the back page of the application form
his strong recommendation for the approval of the insurance application. Then
on April 30, 1957, Mondragon received a letter from Pacific Life disapproving
the insurance application (Exhibit 3-M). The letter stated that the said life
insurance application for 20-year endowment plan is not available for minors
below seven years old, but Pacific Life can consider the same under the
Juvenile Triple Action Plan, and advised that if the offer is acceptable, the
Juvenile Non-Medical Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing.
Instead, on May 6, 1957, Mondragon wrote back Pacific Life again strongly
recommending the approval of the 20-year endowment insurance plan to
children, pointing out that since 1954 the customers, especially the Chinese,
were asking for such coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of
influenza with complication of bronchopneumonia. Thereupon, private
respondent sought the payment of the proceeds of the insurance, but having
failed in his effort, he filed the action for the recovery of the same before the
Court of First Instance of Cebu, which rendered the adverse decision as earlier
refered to against both petitioners.

The decisive issues in these cases are: (1) whether the binding deposit receipt
(Exhibit E) constituted a temporary contract of the life insurance in question;
and (2) whether private respondent Ngo Hing concealed the state of health
and physical condition of Helen Go, which rendered void the aforesaid Exhibit
E.

1. At the back of Exhibit E are condition precedents required before a deposit

is considered a BINDING RECEIPT. These conditions state that:

A. If the Company or its agent, shan have received the premium deposit ... and
the insurance application, ON or PRIOR to the date of medical
examination ... said insurance shan be in force and in effect from the date of
such medical examination, for such period as is covered by the
deposit ..., PROVIDED the company shall be satisfied that on said date the
applicant was insurable on standard rates under its rule for the amount of
insurance and the kind of policy requested in the application.

D. If the Company does not accept the application on standard rate for the
amount of insurance and/or the kind of policy requested in the
application but issue, or offers to issue a policy for a different plan and/or
amount ..., the insurance shall not be in force and in effect until the applicant
shall have accepted the policy as issued or offered by the Company and shall
have paid the full premium thereof. If the applicant does not accept the policy,
the deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above, and
the Company declines to approve the application the insurance applied for
shall not have been in force at any time and the sum paid be returned to the
applicant upon the surrender of this receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit
receipt is intended to be merely a provisional or temporary insurance contract
and only upon compliance of the following conditions: (1) that the company
shall be satisfied that the applicant was insurable on standard rates; (2) that if
the company does not accept the application and offers to issue a policy for a
different plan, the insurance contract shall not be binding until the applicant
accepts the policy offered; otherwise, the deposit shall be reftmded; and (3)
that if the applicant is not ble according to the standard rates, and the company
disapproves the application, the insurance applied for shall not be in force at
any time, and the premium paid shall be returned to the applicant.

Clearly implied from the aforesaid conditions is that the binding deposit receipt
in question is merely an acknowledgment, on behalf of the company, that the
latter's branch office had received from the applicant the insurance premium
and had accepted the application subject for processing by the insurance
company; and that the latter will either approve or reject the same on the basis
of whether or not the applicant is "insurable on standard rates." Since
petitioner Pacific Life disapproved the insurance application of respondent Ngo
Hing, the binding deposit receipt in question had never become in force at any
time.

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an
agreement is made between the applicant and the agent, no liability shall
attach until the principal approves the risk and a receipt is given by the agent.
The acceptance is merely conditional and is subordinated to the act of the
company in approving or rejecting the application. Thus, in life insurance, a
"binding slip" or "binding receipt" does not insure by itself (De Lim vs. Sun Life
Assurance Company of Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30,

1957 (Exhibit 3-M), Pacific Life disapproved the insurance application in
question on the ground that it is not offering the twenty-year endowment
insurance policy to children less than seven years of age. What it offered
instead is another plan known as the Juvenile Triple Action, which private
respondent failed to accept. In the absence of a meeting of the minds between
petitioner Pacific Life and private respondent Ngo Hing over the 20-year
endowment life insurance in the amount of P50,000.00 in favor of the latter's
one-year old daughter, and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt, there could have
been no insurance contract duly perfected between thenl Accordingly, the
deposit paid by private respondent shall have to be refunded by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a
contract of insurance, like other contracts, must be assented to by both parties
either in person or by their agents ... The contract, to be binding from the date
of the application, must have been a completed contract, one that leaves
nothing to be dione, nothing to be completed, nothing to be passed upon, or
determined, before it shall take effect. There can be no contract of insurance
unless the minds of the parties have met in agreement."

We are not impressed with private respondent's contention that failure of

petitioner Mondragon to communicate to him the rejection of the insurance
application would not have any adverse effect on the allegedly perfected
temporary contract (Respondent's Brief, pp. 13-14). In this first place, there
was no contract perfected between the parties who had no meeting of their
minds. Private respondet, being an authorized insurance agent of Pacific Life
at Cebu branch office, is indubitably aware that said company does not offer
the life insurance applied for. When he filed the insurance application in
dispute, private respondent was, therefore, only taking the chance that Pacific
Life will approve the recommendation of Mondragon for the acceptance and
approval of the application in question along with his proposal that the
insurance company starts to offer the 20-year endowment insurance plan for
children less than seven years. Nonetheless, the record discloses that Pacific
Life had rejected the proposal and recommendation. Secondly, having an
insurable interest on the life of his one-year old daughter, aside from being an
insurance agent and an offense associate of petitioner Mondragon, private
respondent Ngo Hing must have known and followed the progress on the
processing of such application and could not pretend ignorance of the
Company's rejection of the 20-year endowment life insurance application.

At this juncture, We find it fit to quote with approval, the very apt observation of
then Appellate Associate Justice Ruperto G. Martin who later came up to this
Court, from his dissenting opinion to the amended decision of the respondent
court which completely reversed the original decision, the following:

Of course, there is the insinuation that neither the memorandum of rejection

(Exhibit 3-M) nor the reply thereto of appellant Mondragon reiterating the
desire for applicant's father to have the application considered as one for a
20-year endowment plan was ever duly communicated to Ngo; Hing, father of
the minor applicant. I am not quite conninced that this was so. Ngo Hing, as
father of the applicant herself, was precisely the "underwriter who wrote this
case" (Exhibit H-1). The unchallenged statement of appellant Mondragon in his
letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo Hing was
"our associate" and that it was the latter who "insisted that the plan be placed
on the 20-year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the application was not
brought home to his knowledge. He must have been duly apprised of the
rejection of the application for a 20-year endowment plan otherwise
Mondragon would not have asserted that it was Ngo Hing himself who insisted
on the application as originally filed, thereby implictly declining the offer to
consider the application under the Juvenile Triple Action Plan. Besides, the
associate of Mondragon that he was, Ngo Hing should only be presumed to
know what kind of policies are available in the company for minors below 7
years old. What he and Mondragon were apparently trying to do in the
premises was merely to prod the company into going into the business of
issuing endowment policies for minors just as other insurance companies
allegedly do. Until such a definite policy is however, adopted by the company,
it can hardly be said that it could have been bound at all under the binding slip
for a plan of insurance that it could not have, by then issued at all. (Amended
Decision, Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is of the firm
belief that private respondent had deliberately concealed the state of health
and piysical condition of his daughter Helen Go. Wher private regpondeit
supplied the required essential data for the insurance application form, he was
fully aware that his one-year old daughter is typically a mongoloid child. Such a
congenital physical defect could never be ensconced nor disguished.
Nonetheless, private respondent, in apparent bad faith, withheld the fact
materal to the risk to be assumed by the insurance compary. As an insurance
agent of Pacific Life, he ought to know, as he surely must have known. his duty
and responsibility to such a material fact. Had he diamond said significant fact
in the insurance application fom Pacific Life would have verified the same and
would have had no choice but to disapprove the application outright.

The contract of insurance is one of perfect good faith uberrima fides meaning
good faith, absolute and perfect candor or openness and honesty; the absence
of any concealment or demotion, however slight [Black's Law Dictionary, 2nd
Edition], not for the alone but equally so for the insurer (Field man's Insurance
Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a neglect to
communicate that which a partY knows aDd Ought to communicate (Section
25, Act No. 2427). Whether intentional or unintentional the concealment
entitles the insurer to rescind the contract of insurance (Section 26, Id.: Yu
Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino vs. Philippine
American Life Insurance Company, 7 SCRA 316). Private respondent appears
guilty thereof.

We are thus constrained to hold that no insurance contract was perfected

between the parties with the noncompliance of the conditions provided in the
binding receipt, and concealment, as legally defined, having been comraitted
by herein private respondent.

WHEREFORE, the decision appealed from is hereby set aside, and in lieu
thereof, one is hereby entered absolving petitioners Lapulapu D. Mondragon
and Great Pacific Life Assurance Company from their civil liabilities as found
by respondent Court and ordering the aforesaid insurance company to
reimburse the amount of P1,077.75, without interest, to private respondent,
Ngo Hing. Costs against private respondent.

SO ORDERED.

III. PARTIES
IV. INSURABLE INTEREST