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. 4 Petitioner’s motion for reconsideration was
denied.5 Hence, petitioner brought the instant petition for review, raising the primary argument
that a health care agreement is not an insurance contract; hence the "incontestability clause"
under the Insurance Code6 does not apply.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. 17 In 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.
G.R. No. L-27541 November 21, 1927
TAN CHAY HENG, Plaintiff-Appellee, vs. THE WEST COAST LIFE INSURANCE
COMPANY, Defendant-Appellant.
Gibbs and McDonough and Roman Ozaeta for appellant.
Hilado and Hilado for appellee.
STATEMENT chanrobles virtual law library
Plaintiff alleges that he is of age and a resident of Bacolod, Occidental Negros; that the
defendant is a foreign insurance corporation duly organized by the laws of the Philippines to
engage in the insurance business, its main office of which is in the City of Manila; that in the
month of April, 1925, on his application the defendant accepted and approved a life insurance
policy of for the sum of P10,000 in which the plaintiff was the sole beneficiary; that the policy
was issued upon the payment by the said Tan Ceang of the first year's premium amounting to
P936; that in and by its terms, the defendant agreed to pay the plaintiff as beneficiary the
amount of the policy upon the receipt of the proofs of the death of the insured while the policy
was in force; that without any premium being due or unpaid, Tan Ceang died on May 10,
1925; that in June, 1925, plaintiff submitted the proofs of the death of Tan Ceang with a claim
for the payment of the policy which the defendant refused to pay, for which he prays for a
corresponding judgment, with legal interest from the date of the policy, and
costs.chanroblesvirtualawlibrary chanrobles virtual law library
In February, 1926, the defendant filed an answer to the complaint in which it made a general
and specific denial, and then announced its intention to file an amended answer, alleging
special defense, and on August 31, 1926, it filed the following:
AMENDED ANSWER
Comes now the defendant, by its undersigned attorneys, and with leave of court amends its
answer to plaintiff's complaint herein by making it reads as follows:
I
That it admits paragraph 1 of said complaint.
II
That it denies each and every other allegation contained in each and every other paragraph
of said complaint.
SPECIAL DEFENSE
By way of special defense, defendant alleges:
I
That the insurance policy on the life of Tan Ceang, upon which plaintiff's action is based, was
obtained by the plaintiff in confabulation with one Go Chulian, of Bacolod, Negros Occidental;
Francisco Sanchez of the same place; and Dr. V. S. Locsin, of La Carlota, Negros
Occidental, thru fraud and deceit perpetrated against this defendant in the following manner,
to wit: chanrobles virtual law library
1. That on or about the 22d day of February, 1925, in the municipality of Pulupandan,
Occidental Negros, the present plaintiff and the said Go Chulian, Francisco Sanchez and Dr.,
V. S. Locsin, conspiring and confederating together for the purpose of defrauding and
cheating the defendant in the sum of P10,000, caused one Tan Caeng to sign an application
for insurance with the defendant in the sum of P10,000, in which application it was falsely
represented to the defendant that the said Tan Ceang was single and was a merchant, and
that the plaintiff Tan Chai Heng, the beneficiary, was his nephew, whereas in truth and in fact
and as the plaintiff and his said coconspirators well knew, the said Tan Ceang was not single
but was legally married to Marcelina Patalita with whom he had several children; and that he
was not a merchant but was a mere employee of another Chinaman by the name of Tan
Quina from whom he received only a meager salary, and that the present plaintiff was not a
nephew of the said Tan Ceang.chanroblesvirtualawlibrary chanrobles virtual law library
2. That on said date, February 22, 1925, the said Tan Ceang was seriously ill, suffering from
pulmonary tuberculosis of about three years' duration, which illness was incurable and was
well known to the plaintiff and his said coconspirators.chanroblesvirtualawlibrary chanrobles
virtual law library
3. That on or about the same date, February 22, 1925, the said Dr. V. S. Locsin, in his
capacity as medical examiner for the defendant insurance company, pursuant to the
conspiracy above mentioned, prepared and falsified the necessary medical certificate, in
which it was made to appear, among other things, that the said Tan Ceang had never used
morphine, cocaine or any other drug; that he was then in good health and had never
consulted any physician; that he had never spit blood; and that there was no sign of either
present or past disease of his lungs; whereas in truth and in fact, as the plaintiff and his said
coconspirators well knew, the said Tan Ceang was addicted to morphine, cocaine, and opium
and had been convicted and imprisoned therefor, and was then, and for about three year
prior thereto had been suffering from pulmonary
tuberculosis.chanroblesvirtualawlibrary chanrobles virtual law library
4. That on or about the same date, to wit, February 22, 1925, the plaintiff and his said
coconspirators, pursuant to the conspiracy above mentioned, cause a confidential report to
the defendant insurance company to be signed by one V. Sy Yock Kian, who was an
employee of Go Chulian, in which confidential report, among other things, it was falsely
represented to the defendant insurance company that the said Tan Ceang was worth about
P40,000, had an annual income of from eight to ten thousand pesos net, had the appearance
of good health, and never had tuberculosis; that the plaintiff and his said coconspirators well
knew that said representations were false; and that they were made for the purpose of
deceiving the defendant and inducing it to accept the said application for
insurance.chanroblesvirtualawlibrary chanrobles virtual law library
5. That after the said application for insurance, medical certificate and confidential report had
been prepared and falsified, as aforesaid, the plaintiff and his said coconspirators caused the
same to be forwarded to the defendant at its office in Manila, the medical certificate thru the
said Dr. V. S. Locsin as medical examiner, and said application for insurance and confidential
report thru the said Francisco Sanchez in his capacity as one of the agents of the defendant
insurance company in the Province of Occidental Negros; that the defendant, believing that
the representations made in said document were true, and relying thereon, provisionally
accepted the said application for insurance on the life of Tan Ceang in the sum of P10,000
and issued a temporary policy pending the final approval or disapproval of said application by
defendant's home-office in San Francisco, California, where in case of approval a permanent
policy was to be issued; that such permanent policy was never delivered to the plaintiff
because defendant discovered the fraud before its
delivery.chanroblesvirtualawlibrary chanrobles virtual law library
6. That the first agreed annual premium on the insurance in question of P936.50 not having
been paid within sixty (60) days after the date of the supposed medical examination of the
applicant as required by the regulations of the defendant insurance company, of which
regulations the said Francisco Sanchez as agent of the defendant had knowledge, the
plaintiff and his said coconspirators in order to secure the delivery to them of said temporary
policy, and in accordance with said regulations of the defendant company, caused the said
Tan Ceang on April 10, 1925 to sign the following document:
WEST COAST LIFE INSURANCE COMPANY
SAN FRANCISCO, CALIFORNIA
HEALTH CERTIFICATE FOR RE-INSTATEMENT
I herewith request the West Coast Life Insurance Company to re-instate Policy
No. ............................. issued by it upon my life, the first unpaid premium on which became
due .............................., 19................chanroblesvirtualawlibrary chanrobles virtual law library
I certify and state that I am now in good and sound health, that since the date of my
examination under the application on which said policy was written, I have had no injury,
sickness, impairment of health or symptom thereof, and that since said date I have neither
consulted a physician nor made any application for life insurance that has not been granted in
exact kind and amount applied for, except:
NADA
(State fully all exceptions to all above statements. If no exceptions insert "NONE.")chanrobles
virtual law library
I agree that, if said policy re-instated, it shall be only on condition of the truth of the above
statements and such re-instatement shall not operate as a waiver on the part of said
Company of its right to refuse to accept any future overdue premiums or installments
thereof.chanroblesvirtualawlibrary chanrobles virtual law library
Witness: (Sgd.)      TAN CHAI HENG
          TAN CAENG
          Signature of Applicant.
"Dated at Palupandan on this 10 day of April, 1925." that the statements and representations
contained in the application for reinstatement above set forth with regard to the health and
physical condition of the said Tan Ceang were false and known to the plaintiff and his said
coconspirators to be false; that the said temporary policy was delivered by defendant to the
insured on April 10, 1925, in the belief that said statements and representations were true
and in reliance thereon.chanroblesvirtualawlibrary chanrobles virtual law library
7. That on May 10, 1925, that is to say, two months and a half after the supposed medical
examination above referred to, and exactly one month after the date of the health certificate
for reinstatement above set forth, the said Tan Ceang died in Valladolid, Occidental Negros,
of pulmonary tuberculosis, the same illnes from which suffering at the time it is supposed he
was examined by Dr. V. S. Locsin, but that the plaintiff and his said coconspirators, pursuant
to their conspiracy, caused the said Dr. V. S. Locsin to state falsely in the certificate of death
that the said Tan Ceang had died of cerebral hemorrhage.
II
That the plaintiff Tan Chai Heng, on the dates herein-above mentioned, was, liked V. Sy Yock
Kian who signed the confidential report above mentioned, an employee of the said Go
Chulian; that the latter was the ringleader of a gang of malefactors, who, during, and for some
years previous to the dates above mentioned, were engaged in the illicit enterprise of
procuring fraudulent life insurances from the present defendant, similar to the one in question,
and which enterprise was capitalized by him by furnishing the funds with which to pay the
premium on said fraudulent insurance; that the said Go Chulian was the one who furnished
the money with which to pay the first and only annual premium on the insurance here in
question, amounting to P936.50; that the said Go Chulian, on August 28, 1926, was
convicted by the Court of First Instance of the City of Manila, in criminal case No. 31425 of
that court, of the crime of falsification of private documents in connection with an fraudulent
insurance, similar to the present, committed against this defendant in the month of
September, 1924; that in the same case the said Francisco Sanchez was one of the
coaccused of the said Go Chulian but was discharged from the complaint, because he
offered himself and was utilized as a state's witness; that there is another civil action now
pending against Go Chulian and Sanchez in the Court of First Instance of Manila (civil case
No. 28680), in which the present defendant is the plaintiff, for the recovery of the amounts of
two insurance policies aggregating P19,000, fraudulently obtained by the said Go Chulian
and Sanchez upon the lives of one Tan Deco, who was also suffering from and died of
tuberculosis, and one Tan Anso, who was suffering from and died of beriberi.
III
That by reason of all the facts above set forth, the temporary policy of insurance on the life of
Tan Caeng for the sum of P10,000 upon which the present action is base is null and
void.chanroblesvirtualawlibrary chanrobles virtual law library
Wherefore, defendant prays that it be absolved from plaintiff's complaint, with costs against
the plaintiff.
To this special defense, the plaintiff, claiming that it was a cross-complaint, filed a general
demurrer upon the ground that it does not state facts sufficient to constitute a cause of
defense.chanroblesvirtualawlibrary chanrobles virtual law library
After exhaustive arguments and on September 16, 1926, the court rendered the following
decision:
After considering the demurrer filed by the plaintiff to the special defense contained in the
amended answer of the defendant, dated August 31, 1926, without prejudice to writing a
more extensive decision, said demurrer is sustained, and the defendant is given a period of
five days within which to amend its aforesaid answer.chanroblesvirtualawlibrary chanrobles
virtual law library
So ordered.
To which the defendant duly excepted.chanroblesvirtualawlibrary chanrobles virtual law
library
As a result of the trial the general issues, the lower court rendered judgment for the plaintiff
for P10,000, with legal interest from January 4, 1926, and costs, to which the defendant duly
excepted and filed a motion for a new trial, which was overruled. On appeal the defendant
assigns the following errors:
The trial court erred - chanrobles virtual law library
1. In sustaining plaintiff's demurrer to the special defense contained in defendant's amended
answer.chanroblesvirtualawlibrary chanrobles virtual law library
2. In holding, in effect, that an insurer cannot avoid a policy which had been procured by
fraud unless he brings an action to rescind it before he is sued
thereon.chanroblesvirtualawlibrary chanrobles virtual law library
3. In rejecting all proofs offered by the defendant during the trial for the purpose of defeating
plaintiff's fraudulent claim.chanroblesvirtualawlibrary chanrobles virtual law library
4. In not absolving the defendant from plaintiff's complaint.
JOHNS, J.:
It will thus be noted that the premium was paid on April 10, 1925, at which time the temporary
policy was issued; that the plaintiff's action was commenced on January 4, 1926; that the
original answer of the defendant, consisting of a general and specific denial, was filed on
February 27, 1926; and that its amended answer was filed on August 31,
1926.chanroblesvirtualawlibrary chanrobles virtual law library
Based upon those facts the plaintiff vigorously contended in the lower court and now
contends in the court, that section 47 of the Insurance Act should be applied, and that when
so applied, defendant is barred and estopped to plead and set forth the matters alleged in its
special defense. That section is as follows:
Whenever a right to rescind a contract of insurance is given to the insurer by any provision of
this chapter, such right must be exercised previous to the commencement of an action on the
contract.
The defendant contended in the lower court and now contends in this court, that section 47
does not apply to the new matters alleged in the special defense. If in legal effect defendant's
special defense is in the nature of an act to rescind "a contract of insurance," then such right
must be exercised prior to an action enforce the contract. That is the real question involved in
this appeal.chanroblesvirtualawlibrary chanrobles virtual law library
Defendant's original answer was a general and specific denial. In other words, it specifically
denied that if ever issued the policy in question, or that it ever agreed with Tan Ceang in the
even of his death to pay P10,000 to the plaintiff or any one else. In its amended answer the
defendant again makes a general and specific denial, and alleges the reasons, the specific
facts, and the reasons why it never made or entered into the contract alleged in the
complaint, and based upon those alleged facts, defendant contends that it never did enter
into any contract of insurance on the life of Tan Caeng.chanroblesvirtualawlibrary chanrobles
virtual law library
The word "rescind" has a well defined legal meaning, and as applied to contracts, it
presupposes the existence of a contract to rescind.chanroblesvirtualawlibrary chanrobles
virtual law library
Word & Phrases, volume 7, page 6139, says:
To rescind is to abrogate, annual, avoid, or cancel a
contract.chanroblesvirtualawlibrary chanrobles virtual law library
The word "rescind," as used in a statement by a party to a contrary as follows. "I hereby
terminate and rescind my said written contract," is synonymous with the word `terminate,' and
the rescission therefore relates only to the unfulfilled part, and not to the entire agreement,
making the party rescinding liable on notes executed pursuant to the contract which matured
before the rescission.chanroblesvirtualawlibrary chanrobles virtual law library
The rescission is the unmaking of a contract, requiring the same concurrence of wills as that
which made it, and nothing short of this will suffice. There is a wide difference between the
rescission of a contract and its mere termination or
cancellation.chanroblesvirtualawlibrary chanrobles virtual law library
After a contract has been broken, whether by an inability to perform it, or by rescinding
against right or otherwise, the party not in fault may sue the other for the damages suffered,
or, if the parties can be placed in status quo, he may, should he prefer, return what he has
received and recover in a suit value of what he has paid or done. The latter remedy is termed
"rescission."
In the instant case, it will be noted that even in its prayer, the defendant does not seek to
have the alleged insurance contract rescinded. It denies that it ever made any contract of
insurance on the life of Tan Ceang or that any such a contract ever existed, and that is the
question which it seeks to have litigated by its special defense. In the very nature of things, if
the defendant never made or entered into the contract in question, there is no contract to
rescind, and, hence, section 47 upon which the lower based its decision in sustaining the
demurrer does not apply. As stated, an action to rescind a contract is founded upon and
presupposes the existence of the contract which is sought to be rescinded. If all of the the insurance premium.6cralaw virtualaw library
material matters set forth and alleged in the defendant's special plea are true, there was no
valid contract of insurance, for the simple reason that the minds of the parties never met and On April 10, 1996,7 when the insurance policy had been in force for more than two years and
never agreed upon the terms and conditions of the contract. We are clearly of the opinion seven months, Sotero died. Respondent filed a claim for the insurance proceeds on July 9,
that, if such matters are known to exist by a preponderance of the evidence, they would 1996. Petitioner conducted an investigation into the claim, 8 and came out with the following
constitute a valid defense to plaintiff's cause of action. Upon the question as to whether or not findings:
they or are not true, we do not at this time have or express any opinion, but we are clear that
section 47 does not apply to the allegations made in the answer, and that the trial court erred 1. Sotero did not personally apply for insurance coverage, as she was
in sustaining the demurrer.chanroblesvirtualawlibrary chanrobles virtual law library illiterate;chanr0blesvirtualawlibrary

The judgment of the lower court is reversed and the case is remanded for such other and 2. Sotero was sickly since 1990;chanr0blesvirtualawlibrary
further proceedings as are not inconsistent with this opinion, with costs against the plaintiff.
So ordered.chanroblesvirtualawlibrary chanrobles virtual law library 3. Sotero did not have the financial capability to pay the insurance premiums on
Insurance Policy No. 747411;chanr0blesvirtualawlibrary
G.R. No. 175666, July 29, 2013
4. Sotero did not sign the July 3, 1993 application for insurance; 9 [and]
MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner, v. CRESENCIA P.
ABAN, Respondent. 5. Respondent was the one .who filed the insurance application, and x x x designated
herself as the beneficiary.10cralaw virtualaw library
DECISION
For the above reasons, petitioner denied respondent's claim on April 16, 1997 and refunded
the premiums paid on the policy.11cralaw virtualaw library
DEL CASTILLO, J.:
On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the policy,
  which was docketed as Civil Case No. 97-867 and assigned to Branch 134 of the Makati
Regional Trial Court. The main thesis of the Complaint was that the policy was obtained by
The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit business fraud, concealment and/or misrepresentation under the Insurance Code, 12 which thus renders
from or provide insurance coverage only to legitimate and bona fide clients, by requiring them it voidable under Article 139013 of the Civil Code.
to thoroughly investigate those they insure within two years from effectivity of the policy and
while the insured is still alive. If they do not, they will be obligated to honor claims on the Respondent filed a Motion to Dismiss14 claiming that petitioner's cause of action was barred
policies they issue, regardless of fraud, concealment or misrepresentation. The law assumes by prescription pursuant to Section 48 of the Insurance Code, which provides as follows:
that they will do just that and not sit on their laurels, indiscriminately soliciting and accepting Whenever a right to rescind a contract of insurance is given to the insurer by any provision of
insurance business from any Tom, Dick and Harry. this chapter, such right must be exercised previous to the commencement of an action on the
contract.
Assailed in this Petition for Review on Certiorari1 are the September 28, 2005 Decision 2 of the
Court of Appeals (CA) in CA-G.R. CV No. 62286 and its November 9, 2006 After a policy of life insurance made payable on the death of the insured shall have been in
Resolution3 denying the petitioner's Motion for Reconsideration. 4cralaw virtualaw library force during the lifetime of the insured for a period of two years from the date of its issue or of
its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible
Factual Antecedents by reason of the fraudulent concealment or misrepresentation of the insured or his agent.
During the proceedings on the Motion to Dismiss, petitioner's investigator testified in court,
On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers
stating among others that the insurance underwriter who solicited the insurance is a cousin of
Life Insurance Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban),
respondent's husband, Dindo Aban, 15 and that it was the respondent who paid the annual
her niece,5 as her beneficiary.
premiums on the policy.16cralaw virtualaw library
Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of P100,000.00,
Ruling of the Regional Trial Court
in Sotero's favor on August 30, 1993, after the requisite medical examination and payment of
  
I
On December 9, 1997, the trial court issued an Order 17 granting respondent's Motion to
Dismiss, thus: [WHETHER] THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE
WHEREFORE, defendant CRESENCIA P. ABAN's Motion to Dismiss is hereby granted. Civil TRIAL COURT DISMISSING THE COMPLAINT ON THE GROUND OF PRESCRIPTION IN
Case No. 97-867 is hereby dismissed. CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE JURISPRUDENCE.

SO ORDERED.18cralaw virtualaw library II

In dismissing the case, the trial court found that Sotero, and not respondent, was the one who
procured the insurance; thus, Sotero could legally take out insurance on her own life and [WHETHER] THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION OF
validly designate - as she did — respondent as the beneficiary. It held further that under THE INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE TRIAL
Section 48, petitioner had only two years from the effectivity of the policy to question the COURT.
same; since the policy had been in force for more than two years, petitioner is now barred
from contesting the same or seeking a rescission or annulment thereof. III

Petitioner moved for reconsideration, but in another Order 19 dated October 20, 1998, the trial [WHETHER] THE COURT OF APPEALS ERRED IN DENYING PETITIONER'S MOTION
court stood its ground. FOR RECONSIDERATION.23cralaw virtualaw library

Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286. Petitioner Petitioner's Arguments
questioned the dismissal of Civil Case No. 97-867, arguing that the trial court erred in
applying Section 48 and declaring that prescription has set in. It contended that since it was In praying that the CA Decision be reversed and that the case be remanded to the trial court
respondent - and not Sotero - who obtained the insurance, the policy issued was rendered for the conduct of further proceedings, petitioner argues in its Petition and Reply 24 that
void ab initio for want of insurable interest. Section 48 cannot apply to a case where the beneficiary under the insurance contract posed
as the insured and obtained the policy under fraudulent circumstances. It adds that
Ruling of the Court of Appeals respondent, who was merely Sotero's niece, had no insurable interest in the life of her aunt.

On September 28, 2005, the CA issued the assailed Decision, which contained the following Relying on the results of the investigation that it conducted after the claim for the insurance
decretal portion: proceeds was filed, petitioner insists that respondent's claim was spurious, as it appeared
WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for lack of that Sotero did not actually apply for insurance coverage, was unlettered, sickly, and had no
merit. visible source of income to pay for the insurance premiums; and that respondent was an
impostor, posing as Sotero and fraudulently obtaining insurance in the latter's name without
SO ORDERED.20cralaw virtualaw library her knowledge and consent.

The CA thus sustained the trial court. Applying Section 48 to petitioner's case, the CA held Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not have given
that petitioner may no longer prove that the subject policy was void ab initio or rescindible by rise to rights and obligations; as such, the action for the declaration of its nullity or inexistence
reason of fraudulent concealment or misrepresentation after the lapse of more than two years does not prescribe.25cralaw virtualaw library
from its issuance. It ratiocinated that petitioner was equipped with ample means to determine,
within the first two years of the policy, whether fraud, concealment or misrepresentation was Respondent's Arguments
present when the insurance coverage was obtained. If it failed to do so within the statutory
two-year period, then the insured must be protected and allowed to claim upon the policy. Respondent, on the other hand, essentially argues in her Comment 26 that the CA is correct in
applying Section 48. She adds that petitioner's new allegation in its Petition that the policy is
Petitioner moved for reconsideration,21 but the CA denied the same in its November 9, 2006 void ab initio merits no attention, having failed to raise the same below, as it had claimed
Resolution.22 Hence, the present Petition. originally that the policy was merely voidable.

Issues On the issue of insurable interest, respondent echoes the CA's pronouncement that since it
was Sotero who obtained the insurance, insurable interest was present. Under Section 10 of
Petitioner raises the following issues for resolution:
the Insurance Code, Sotero had insurable interest in her own life, and could validly designate insurers, claims which may no longer be set up after the two-year period expires as ordained
anyone as her beneficiary. Respondent submits that the CA's findings of fact leading to such under the law.
conclusion should be respected.
Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and the
Our Ruling insured are given the assurance that any dishonest scheme to obtain life insurance would be
exposed, and attempts at unduly denying a claim would be struck down. Life insurance
The Court denies the Petition. policies that pass the statutory two-year period are essentially treated as legitimate and
beyond question, and the individuals who wield them are made secure by the thought that
The Court will not depart from the trial and appellate courts' finding that it was Sotero who they will be paid promptly upon claim. In this manner, Section 48 contributes to the stability of
obtained the insurance for herself, designating respondent as her beneficiary. Both courts are the insurance industry.
in accord in this respect, and the Court is loath to disturb this. While petitioner insists that its
independent investigation on the claim reveals that it was respondent, posing as Sotero, who Section 48 prevents a situation where the insurer knowingly continues to accept annual
obtained the insurance, this claim is no longer feasible in the wake of the courts' finding that it premium payments on life insurance, only to later on deny a claim on the policy on specious
was Sotero who obtained the insurance for herself. This finding of fact binds the Court. claims of fraudulent concealment and misrepresentation, such as what obtains in the instant
case. Thus, instead of conducting at the first instance an investigation into the circumstances
With the above crucial finding of fact - that it was Sotero who obtained the insurance for surrounding the issuance of insurance Policy No. 747411 which would have timely exposed
herself - petitioner's case is severely weakened, if not totally disproved. Allegations of fraud, the supposed flaws and irregularities attending it as it now professes, petitioner appears to
which are predicated on respondent's alleged posing as Sotero and forgery of her signature have turned a blind eye and opted instead to continue collecting the premiums on the policy.
in the insurance application, are at once belied by the trial and appellate courts' finding that For nearly three years, petitioner collected the premiums and devoted the same to its own
Sotero herself took out the insurance for herself. "[Fraudulent intent on the part of the insured profit. It cannot now deny the claim when it is called to account. Section 48 must be applied to
must be established to entitle the insurer to rescind the contract" 27 In the absence of proof of it with full force and effect.
such fraudulent intent, no right to rescind arises.
The Court therefore agrees fully with the appellate court's pronouncement that -
Moreover, the results and conclusions arrived at during the investigation conducted [t]he "incontestability clause" is a provision in law that after a policy of life insurance made
unilaterally by petitioner after the claim was filed may simply be dismissed as self-serving and payable on the death of the insured shall have been in force during the lifetime of the insured
may not form the basis of a cause of action given the existence and application of Section 48, for a period of two (2) years from the date of its issue or of its last reinstatement, the insurer
as will be discussed at length below. cannot prove that the policy is void ab initio or is rescindible by reason of fraudulent
concealment or misrepresentation of the insured or his agent.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the
insured. Under the provision, an insurer is given two years - from the effectivity of a life The purpose of the law is to give protection to the insured or his beneficiary by limiting the
insurance contract and while the insured is alive - to discover or prove that the policy is rescinding of the contract of insurance on the ground of fraudulent concealment or
void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of misrepresentation to a period of only two (2) years from the issuance of the policy or its last
the insured or his agent. After the two-year period lapses, or when the insured dies within the reinstatement.
period, the insurer must make good on the policy, even though the policy was obtained by
fraud, concealment, or misrepresentation. This is not to say that insurance fraud must be The insurer is deemed to have the necessary facilities to discover such fraudulent
rewarded, but that insurers who recklessly and indiscriminately solicit and obtain business concealment or misrepresentation within a period of two (2) years. It is not fair for the insurer
must be penalized, for such recklessness and lack of discrimination ultimately work to the to collect the premiums as long as the insured is still alive, only to raise the issue of
detriment of bona fide takers of insurance and the public in general. fraudulent concealment or misrepresentation when the insured dies in order to defeat the
right of the beneficiary to recover under the policy.
Section 48 regulates both the actions of the insurers and prospective takers of life insurance.
It gives insurers enough time to inquire whether the policy was obtained by fraud, At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary
concealment, or misrepresentation; on the other hand, it forewarns scheming individuals that is given the stability to recover under the policy when the insured dies. The provision also
their attempts at insurance fraud would be timely uncovered - thus deterring them from makes clear when the two-year period should commence in case the policy should lapse and
venturing into such nefarious enterprise. At the same time, legitimate policy holders are is reinstated, that is, from the date of the last reinstatement.
absolutely protected from unwarranted denial of their claims or delay in the collection of
insurance proceeds occasioned by allegations of fraud, concealment, or misrepresentation by After two years, the defenses of concealment or misrepresentation, no matter how patent or
well-founded, will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by insurance
companies to avoid liability.
The so-called "incontestability clause" precludes the insurer from raising the defenses of false
representations or concealment of material facts insofar as health and previous diseases are
concerned if the insurance has been in force for at least two years during the insured’s
lifetime. The phrase "during the lifetime" found in Section 48 simply means that the policy is
no longer considered in force after the insured has died. The key phrase in the second
paragraph of Section 48 is "for a period of two years."
As borne by the records, the policy was issued on August 30. 1993, the insured died on April
10, 1996, and the claim was denied on April 16, 1997. The insurance policy was thus in force
for a period of 3 years, 7 months, and 24 days. Considering that the insured died after the
two-year period, the plaintiff-appellant is, therefore, barred from proving that the policy is
void ab initio by reason of the insured fraudulent concealment or misrepresentation or want of
insurable interest on the part of the beneficiary, herein defendant-appellee.
Well-settled is the rule that it is the plaintiff-appellant's burden to show that the factual findings
of the trial court are not based on substantial evidence or that its conclusions are contrary to
applicable law and jurisprudence. The plaintiff-appellant failed to discharge that
burden.28cralaw virtualaw library
Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be
the cousin of respondent's husband, and thus insinuates that both connived to commit
insurance fraud. If this were truly the case, then petitioner would have discovered the scheme
earlier if it had in earnest conducted an investigation into the circumstances surrounding the
Sotero policy. But because it did not and it investigated the Sotero account only after a claim
was filed thereon more than two years later, naturally it was unable to detect the scheme. For
its negligence and inaction, the Court cannot sympathize with its plight. Instead, its case
precisely provides the strong argument for requiring insurers to diligently conduct
investigations on each policy they issue within the two-year period mandated under Section
48, and not alter claims for insurance proceeds are filed with them.
Besides, if insurers cannot vouch for the integrity and honesty of their insurance
agents/salesmen and the insurance policies they issue, then they should cease doing
business. If they could not properly screen their agents or salesmen before taking them in to
market their products, or if they do not thoroughly investigate the insurance contracts they
enter into with their clients, then they have only themselves to blame. Otherwise said,
insurers cannot be allowed to collect premiums on insurance policies, use these amounts
collected and invest the same through the years, generating profits and returns therefrom for
their own benefit, and thereafter conveniently deny insurance claims by questioning the
authority or integrity of their own agents or the insurance policies they issued to their
premium-paying clients. This is exactly one of the schemes which Section 48 aims to prevent.
Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court,
hoping that the inevitable may be put off for years - or even decades — by the pendency of
these unnecessary court cases. In the meantime, they benefit from collecting the interest
and/or returns on both the premiums previously paid by the insured and the insurance
proceeds which should otherwise go to their beneficiaries. The business of insurance is a
highly regulated commercial activity in the country, 29 and is imbued with public interest. 30 "[A]n
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 [former's] interest." 31cralaw
virtualaw library
WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and the
November 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 62286
are AFFIRMED.
SO ORDERED.
G.R. No. 186983               February 22, 2012
MA. LOURDES S. FLORENDO, Petitioner,
vs.
PHILAM PLANS, INC., PERLA ABCEDE MA. CELESTE ABCEDE, Respondents.
DECISION
ABAD, J.:
This case is about an insured’s alleged concealment in his pension plan application of his
true state of health and its effect on the life insurance portion of that plan in case of death.
The Facts and the Case
On October 23, 1997 Manuel Florendo filed an application for comprehensive pension plan
with respondent Philam Plans, Inc. (Philam Plans) after some convincing by respondent Perla
Abcede. The plan had a pre-need price of ₱997,050.00, payable in 10 years, and had a
maturity value of ₱2,890,000.00 after 20 years. 1 Manuel signed the application and left to
Perla the task of supplying the information needed in the application. 2 Respondent Ma.
Celeste Abcede, Perla’s daughter, signed the application as sales counselor. 3
Aside from pension benefits, the comprehensive pension plan also provided life insurance
coverage to Florendo.4 This was covered by a Group Master Policy that Philippine American
Life Insurance Company (Philam Life) issued to Philam Plans. 5 Under the master policy,
Philam Life was to automatically provide life insurance coverage, including accidental death,
to all who signed up for Philam Plans’ comprehensive pension plan. 6 If the plan holder died
before the maturity of the plan, his beneficiary was to instead receive the proceeds of the life
insurance, equivalent to the pre-need price. Further, the life insurance was to take care of any
unpaid premium until the pension plan matured, entitling the beneficiary to the maturity value
of the pension plan.7
On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584 8 to Manuel,
with petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time, Manuel paid his
quarterly premiums.9
Eleven months later or on September 15, 1998, Manuel died of blood poisoning.
Subsequently, Lourdes filed a claim with Philam Plans for the payment of the benefits under
her husband’s plan.10 Because Manuel died before his pension plan matured and his wife was
to get only the benefits of his life insurance, Philam Plans forwarded her claim to Philam
Life.11
On May 3, 1999 Philam Plans wrote Lourdes a letter, 12 declining her claim. Philam Life found
that Manuel was on maintenance medicine for his heart and had an implanted pacemaker.
Further, he suffered from diabetes mellitus and was taking insulin. Lourdes renewed her
demand for payment under the plan 13 but Philam Plans rejected it, 14 prompting her to file the
present action against the pension plan company before the Regional Trial Court (RTC) of
Quezon City.15
On March 30, 2006 the RTC rendered judgment, 16 ordering Philam Plans, Perla and Ma.
Celeste, solidarily, to pay Lourdes all the benefits from her husband’s pension plan, namely:
₱997,050.00, the proceeds of his term insurance, and ₱2,890,000.00 lump sum pension
benefit upon maturity of his plan; ₱100,000.00 as moral damages; and to pay the costs of the
suit. The RTC ruled that Manuel was not guilty of concealing the state of his health from his
pension plan application.
On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision, 17 holding that
insurance policies are traditionally contracts uberrimae fidae or contracts of utmost good faith.
As such, it required Manuel to disclose to Philam Plans conditions affecting the risk of which
he was aware or material facts that he knew or ought to know. 18
Issues Presented
The issues presented in this case are:
1. Whether or not the CA erred in finding Manuel guilty of concealing his illness when
he kept blank and did not answer questions in his pension plan application regarding
the ailments he suffered from;
2. Whether or not the CA erred in holding that Manuel was bound by the failure of
respondents Perla and Ma. Celeste to declare the condition of Manuel’s health in the
pension plan application; and
3. Whether or not the CA erred in finding that Philam Plans’ approval of Manuel’s
pension plan application and acceptance of his premium payments precluded it from
denying Lourdes’ claim.
Rulings of the Court
One. Lourdes points out that, seeing the unfilled spaces in Manuel’s pension plan application
relating to his medical history, Philam Plans should have returned it to him for completion.
Since Philam Plans chose to approve the application just as it was, it cannot cry concealment
on Manuel’s part. Further, Lourdes adds that Philam Plans never queried Manuel directly
regarding the state of his health. Consequently, it could not blame him for not mentioning it. 19
But Lourdes is shifting to Philam Plans the burden of putting on the pension plan application
the true state of Manuel’s health. She forgets that since Philam Plans waived medical
examination for Manuel, it had to rely largely on his stating the truth regarding his health in his
application. For, after all, he knew more than anyone that he had been under treatment for
heart condition and diabetes for more than five years preceding his submission of that
application. But he kept those crucial facts from Philam Plans.
Besides, when Manuel signed the pension plan application, he adopted as his own the written
representations and declarations embodied in it. It is clear from these representations that he
concealed his chronic heart ailment and diabetes from Philam Plans. The pertinent portion of
his representations and declarations read as follows:
I hereby represent and declare to the best of my knowledge that:
xxxx
(c) I have never been treated for heart condition, high blood pressure, cancer,
diabetes, lung, kidney or stomach disorder or any other physical impairment in the
last five years.
(d) I am in good health and physical condition.
If your answer to any of the statements above reveal otherwise, please give details in the
space provided for:
Date of confinement : ____________________________
Name of Hospital or Clinic : ____________________________
Name of Attending Physician : ____________________________
Findings : ____________________________
 Others: (Please specify) : ____________________________
x x x x.20 (Emphasis supplied)
Since Manuel signed the application without filling in the details regarding his continuing
treatments for heart condition and diabetes, the assumption is that he has never been treated
for the said illnesses in the last five years preceding his application. This is implicit from the
phrase "If your answer to any of the statements above (specifically, the statement: I have
never been treated for heart condition or diabetes) reveal otherwise, please give details in the
space provided for." But this is untrue since he had been on "Coumadin," a treatment for
venous thrombosis,21 and insulin, a drug used in the treatment of diabetes mellitus, at that
time.22
Lourdes insists that Manuel had concealed nothing since Perla, the soliciting agent, knew that
Manuel had a pacemaker implanted on his chest in the 70s or about 20 years before he
signed up for the pension plan.23 But by its tenor, the responsibility for preparing the
application belonged to Manuel. Nothing in it implies that someone else may provide the
information that Philam Plans needed. Manuel cannot sign the application and disown the
responsibility for having it filled up. If he furnished Perla the needed information and
delegated to her the filling up of the application, then she acted on his instruction, not on
Philam Plans’ instruction.
Lourdes next points out that it made no difference if Manuel failed to reveal the fact that he
had a pacemaker implant in the early 70s since this did not fall within the five-year timeframe
that the disclosure contemplated.24 But a pacemaker is an electronic device implanted into the
body and connected to the wall of the heart, designed to provide regular, mild, electric shock
that stimulates the contraction of the heart muscles and restores normalcy to the
heartbeat.25 That Manuel still had his pacemaker when he applied for a pension plan in
October 1997 is an admission that he remained under treatment for irregular heartbeat within
five years preceding that application.
Besides, as already stated, Manuel had been taking medicine for his heart condition and
diabetes when he submitted his pension plan application. These clearly fell within the five-
year period. More, even if Perla’s knowledge of Manuel’s pacemaker may be applied to
Philam Plans under the theory of imputed knowledge, 26 it is not claimed that Perla was aware
of his two other afflictions that needed medical treatments. Pursuant to Section 27 27 of the
Insurance Code, Manuel’s concealment entitles Philam Plans to rescind its contract of
insurance with him.
Two. Lourdes contends that the mere fact that Manuel signed the application in blank and let
Perla fill in the required details did not make her his agent and bind him to her concealment of
his true state of health. Since there is no evidence of collusion between them, Perla’s fault
must be considered solely her own and cannot prejudice Manuel. 28
But Manuel forgot that in signing the pension plan application, he certified that he wrote all
the information stated in it or had someone do it under his direction. Thus:
APPLICATION FOR PENSION PLAN
(Comprehensive)
I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program described
herein in accordance with the General Provisions set forth in this application and hereby
certify that the date and other information stated herein are written by me or under my
direction. x x x.29 (Emphasis supplied)
Assuming that it was Perla who filled up the application form, Manuel is still bound by what it
contains since he certified that he authorized her action. Philam Plans had every right to act
on the faith of that certification.
Lourdes could not seek comfort from her claim that Perla had assured Manuel that the state
of his health would not hinder the approval of his application and that what is written on his
application made no difference to the insurance company. But, indubitably, Manuel was made
aware when he signed the pension plan application that, in granting the same, Philam Plans
and Philam Life were acting on the truth of the representations contained in that application.
Thus:
DECLARATIONS AND REPRESENTATIONS
xxxx
I agree that the insurance coverage of this application is based on the truth of the foregoing
representations and is subject to the provisions of the Group Life Insurance Policy issued by
THE PHILIPPINE AMERICAN LIFE INSURANCE CO. to PHILAM PLANS, INC. 30 (Emphasis
supplied)
As the Court said in New Life Enterprises v. Court of Appeals: 31
It may be true that x x x insured persons may accept policies without reading them, and that
this is not negligence per se. But, this is not without any exception. It is and was incumbent
upon petitioner Sy to read the insurance contracts, and this can be reasonably expected of
him considering that he has been a businessman since 1965 and the contract concerns
indemnity in case of loss in his money-making trade of which important consideration he
could not have been unaware as it was precisely the reason for his procuring the same. 32
The same may be said of Manuel, a civil engineer and manager of a construction
company.33 He could be expected to know that one must read every document, especially if it
creates rights and obligations affecting him, before signing the same. Manuel is not
unschooled that the Court must come to his succor. It could reasonably be expected that he
would not trifle with something that would provide additional financial security to him and to
his wife in his twilight years.
Three. In a final attempt to defend her claim for benefits under Manuel’s pension plan,
Lourdes points out that any defect or insufficiency in the information provided by his pension
plan application should be deemed waived after the same has been approved, the policy has
been issued, and the premiums have been collected. 34
The Court cannot agree. The comprehensive pension plan that Philam Plans issued contains
a one-year incontestability period. It states:
VIII. INCONTESTABILITY
After this Agreement has remained in force for one (1) year, we can no longer contest for
health reasons any claim for insurance under this Agreement, except for the reason that
installment has not been paid (lapsed), or that you are not insurable at the time you bought
this pension program by reason of age. If this Agreement lapses but is reinstated afterwards,
the one (1) year contestability period shall start again on the date of approval of your request
for reinstatement.35 1âwphi1
The above incontestability clause precludes the insurer from disowning liability under the
policy it issued on the ground of concealment or misrepresentation regarding the health of the
insured after a year of its issuance.
Since Manuel died on the eleventh month following the issuance of his plan, 36 the one year
incontestability period has not yet set in. Consequently, Philam Plans was not barred from
questioning Lourdes’ entitlement to the benefits of her husband’s pension plan.
WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of Appeals in CA-
G.R. CV 87085 dated December 18, 2007.
SO ORDERED.
G.R. No. 48049 June 29, 1989
EMILIO TAN, JUANITO TAN, ALBERTO TAN and ARTURO TAN, petitioners,
vs.
THE COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE
COMPANY, respondents.
O.F. Santos & P.C. Nolasco for petitioners.
Ferry, De la Rosa and Associates for private respondent.
GUTIERREZ, JR., J.:
This is a petition for review on certiorari  of the Court of Appeals' decision affirming the
decision of the Insurance Commissioner which dismissed the petitioners' complaint against
respondent Philippine American Life Insurance Company for the recovery of the proceeds
from their late father's policy. The facts of the case as found by the Court of Appeals are:
Petitioners appeal from the Decision of the Insurance Commissioner
dismissing herein petitioners' complaint against respondent Philippine
American Life Insurance Company for the recovery of the proceeds of Policy
No. 1082467 in the amount of P 80,000.00.
On September 23,1973, Tan Lee Siong, father of herein petitioners, applied
for life insurance in the amount of P 80,000.00 with respondent company.
Said application was approved and Policy No. 1082467 was issued effective
November 6,1973, with petitioners the beneficiaries thereof (Exhibit A).
On April 26,1975, Tan Lee Siong died of hepatoma (Exhibit B). Petitioners
then filed with respondent company their claim for the proceeds of the life
insurance policy. However, in a letter dated September 11, 1975, respondent
company denied petitioners' claim and rescinded the policy by reason of the
alleged misrepresentation and concealment of material facts made by the
deceased Tan Lee Siong in his application for insurance (Exhibit 3). The
premiums paid on the policy were thereupon refunded .
Alleging that respondent company's refusal to pay them the proceeds of the
policy was unjustified and unreasonable, petitioners filed on November 27,
1975, a complaint against the former with the Office of the Insurance
Commissioner, docketed as I.C. Case No. 218.
After hearing the evidence of both parties, the Insurance Commissioner
rendered judgment on August 9, 1977, dismissing petitioners' complaint.
(Rollo, pp. 91-92)
The Court of Appeals dismissed ' the petitioners' appeal from the Insurance Commissioner's
decision for lack of merit
Hence, this petition.
The petitioners raise the following issues in their assignment of errors, to wit:
 A. The conclusion in law of respondent Court that respondent insurer has the
right to rescind the policy contract when insured is already dead is not in
accordance with existing law and applicable jurisprudence.
B. The conclusion in law of respondent Court that respondent insurer may be
allowed to avoid the policy on grounds of concealment by the deceased
assured, is contrary to the provisions of the policy contract itself, as well as,
of applicable legal provisions and established jurisprudence.
C. The inference of respondent Court that respondent insurer was misled in
issuing the policy are manifestly mistaken and contrary to admitted evidence.
(Rollo, p. 7)
The petitioners contend that the respondent company no longer had the right to rescind the
contract of insurance as rescission must allegedly be done during the lifetime of the insured
within two years and prior to the commencement of action.
The contention is without merit.
The pertinent section in the Insurance Code provides:
Section 48. Whenever a right to rescind a contract of insurance is given to
the insurer by any provision of this chapter, such right must be exercised
previous to the commencement of an action on the contract.
After a policy of life insurance made payable on the death of the insured shall
have been in force during the lifetime of the insured for a period of two years
from the date of its issue or of its last reinstatement, the insurer cannot prove
that the policy is void ab initio or is rescindable by reason of the fraudulent
concealment or misrepresentation of the insured or his agent.
According to the petitioners, the Insurance Law was amended and the second paragraph of
Section 48 added to prevent the insurance company from exercising a right to rescind after
the death of the insured.
The so-called "incontestability clause" precludes the insurer from raising the defenses of false
representations or concealment of material facts insofar as health and previous diseases are
concerned if the insurance has been in force for at least two years during the insured's
lifetime. The phrase "during the lifetime" found in Section 48 simply means that the policy is
no longer considered in force after the insured has died. The key phrase in the second
paragraph of Section 48 is "for a period of two years."
As noted by the Court of Appeals, to wit:
The policy was issued on November 6,1973 and the insured died on April
26,1975. The policy was thus in force for a period of only one year and five
months. Considering that the insured died before the two-year period had
lapsed, respondent company is not, therefore, barred from proving that the
policy is void ab initio by reason of the insured's fraudulent concealment or
misrepresentation. Moreover, respondent company rescinded the contract of
insurance and refunded the premiums paid on September 11, 1975, previous
to the commencement of this action on November 27,1975. (Rollo, pp. 99-
100)
xxx xxx xxx
The petitioners contend that there could have been no concealment or misrepresentation by
their late father because Tan Lee Siong did not have to buy insurance. He was only
pressured by insistent salesmen to do so. The petitioners state:
Here then is a case of an assured whose application was submitted because
of repeated visits and solicitations by the insurer's agent. Assured did not
knock at the door of the insurer to buy insurance. He was the object of
solicitations and visits.
Assured was a man of means. He could have obtained a bigger insurance,
not just P 80,000.00. If his purpose were to misrepresent and to conceal his
ailments in anticipation of death during the two-year period, he certainly could
have gotten a bigger insurance. He did not.
Insurer Philamlife could have presented as witness its Medical Examiner Dr.
Urbano Guinto. It was he who accomplished the application, Part II, medical.
Philamlife did not.
Philamlife could have put to the witness stand its Agent Bienvenido S.
Guinto, a relative to Dr. Guinto, Again Philamlife did not. (pp. 138139, Rollo)
xxx xxx xxx
This Honorable Supreme Court has had occasion to denounce the pressure
and practice indulged in by agents in selling insurance. At one time or
another most of us have been subjected to that pressure, that practice. This
court took judicial cognizance of the whirlwind pressure of insurance selling-
especially of the agent's practice of 'supplying the
information, preparing and answering the application, submitting the
application to their companies, concluding the transactions and
otherwise smoothing out all difficulties.
We call attention to what this Honorable Court said in Insular Life v. Feliciano, et al., 73 Phil.
201; at page 205:
It is of common knowledge that the selling of insurance today is subjected to
the whirlwind pressure of modern salesmanship.
Insurance companies send detailed instructions to their agents to solicit and
procure applications.
These agents are to be found all over the length and breadth of the land.
They are stimulated to more active efforts by contests and by the keen
competition offered by the other rival insurance companies.
They supply all the information, prepare and answer the applications, submit
the applications to their companies, conclude the transactions, and otherwise
smooth out all difficulties.
The agents in short do what the company set them out to do.
The Insular Life case was decided some forty years ago when the pressure
of insurance salesmanship was not overwhelming as it is now; when the
population of this country was less than one-fourth of what it is now; when
the insurance companies competing with one another could be counted by
the fingers. (pp. 140-142, Rollo)
xxx xxx xxx
In the face of all the above, it would be unjust if, having been subjected to the
whirlwind pressure of insurance salesmanship this Court itself has long
denounced, the assured who dies within the two-year period, should stand
charged of fraudulent concealment and misrepresentation." (p. 142, Rollo)
The legislative answer to the arguments posed by the petitioners is the "incontestability
clause" added by the second paragraph of Section 48.
The insurer has two years from the date of issuance of the insurance contract or of its last
reinstatement within which to contest the policy, whether or not, the insured still lives within
such period. After two years, the defenses of concealment or misrepresentation, no matter
how patent or well founded, no longer lie. Congress felt this was a sufficient answer to the
various tactics employed by insurance companies to avoid liability. The petitioners'
interpretation would give rise to the incongruous situation where the beneficiaries of an
insured who dies right after taking out and paying for a life insurance policy, would be allowed
to collect on the policy even if the insured fraudulently concealed material facts.
The petitioners argue that no evidence was presented to show that the medical terms were
explained in a layman's language to the insured. They state that the insurer should have
presented its two medical field examiners as witnesses. Moreover, the petitioners allege that
the policy intends that the medical examination must be conducted before its issuance
otherwise the insurer "waives whatever imperfection by ratification."
We agree with the Court of Appeals which ruled:
On the other hand, petitioners argue that no evidence was presented by
respondent company to show that the questions appearing in Part II of the
application for insurance were asked, explained to and understood by the
deceased so as to prove concealment on his part. The same is not well
taken. The deceased, by affixing his signature on the application form,
affirmed the correctness of all the entries and answers appearing therein. It is
but to be expected that he, a businessman, would not have affixed his
signature on the application form unless he clearly understood its
significance. For, the presumption is that a person intends the ordinary
consequence of his voluntary act and takes ordinary care of his concerns.
[Sec. 5(c) and (d), Rule 131, Rules of Court].
The evidence for respondent company shows that on September 19,1972,
the deceased was examined by Dr. Victoriano Lim and was found to be
diabetic and hypertensive; that by January, 1973, the deceased was
complaining of progressive weight loss and abdominal pain and was
diagnosed to be suffering from hepatoma, (t.s.n. August 23, 1976, pp. 8-10;
Exhibit 2). Another physician, Dr. Wenceslao Vitug, testified that the
deceased came to see him on December 14, 1973 for consolation and
claimed to have been diabetic for five years. (t.s.n., Aug. 23,1976, p. 5;
Exhibit 6) Because of the concealment made by the deceased of his
consultations and treatments for hypertension, diabetes and liver disorders,
respondent company was thus misled into accepting the risk and approving
his application as medically standard (Exhibit 5- C) and dispensing with
further medical investigation and examination (Exhibit 5-A). For as long as no
adverse medical history is revealed in the application form, an applicant for
insurance is presumed to be healthy and physically fit and no further medical
investigation or examination is conducted by respondent company. (t.s.n.,
April 8,1976, pp. 6-8). (Rollo, pp. 96-98)
There is no strong showing that we should apply the "fine print" or "contract of adhesion" rule
in this case. (Sweet Lines, Inc. v. Teves, 83 SCRA 361 [1978]). The petitioners cite:
It is a matter of common knowledge that large amounts of money are
collected from ignorant persons by companies and associations which adopt
high sounding titles and print the amount of benefits they agree to pay in
large black-faced type, following such undertakings by fine print conditions
 which destroy the substance of the promise. All provisions, conditions, or
exceptions which in any way tend to work a forfeiture of the policy should be
construed most strongly against those for whose benefit they are inserted,
and most favorably toward those against whom they are meant to operate.
(Trinidad v. Orient Protective Assurance Assn., 67 Phil. 184)
There is no showing that the questions in the application form for insurance regarding the
insured's medical history are in smaller print than the rest of the printed form or that they are
designed in such a way as to conceal from the applicant their importance. If a warning in bold
red letters or a boxed warning similar to that required for cigarette advertisements by the
Surgeon General of the United States is necessary, that is for Congress or the Insurance
Commission to provide as protection against high pressure insurance salesmanship. We are
limited in this petition to ascertaining whether or not the respondent Court of Appeals
committed reversible error. It is the petitioners' burden to show that the factual findings of the
respondent court are not based on substantial evidence or that its conclusions are contrary to
applicable law and jurisprudence. They have failed to discharge that burden.
WHEREFORE, the petition is hereby DENIED for lack of merit. The questioned decision of
the Court of Appeals is AFFIRMED.
SO ORDERED.
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
x x x           x x x          x x x
(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
x x x           x x x          x x x
(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" G.R. No. 196072 is a Petition for Review1 seeking to set aside the November 26, 2010
contracts, and PRC Management Systems and Unicorn Security Services were truly Decision2 and March 10, 2011 Resolution 3 of the Court of Appeals in CA-GR. SP No. 106103.
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 GR. No. 208603 is a Petition for Indirect Contempt 4 filed by Sulpicio Lines, Inc. (Sulpicio)
"authorized representatives" who served as such with its teller Maribeth Alampay. Howsoever against Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship). It prays,
viewed, Producers entrusted the three with the specific duty to safely transfer the money to its among others, that Steamship be (a) declared guilty of indirect contempt; (b) imposed a fine
head office, with Alampay to be responsible for its custody in transit; Magalong to drive the of P30,000.00; and (c) ordered to restitute to Sulpicio the amount of US$69,570.99 or its
armored vehicle which would carry the money; and Atiga to provide the needed security for equivalent in Philippine currency plus interest, computed from December 3, 2012 until fully
the money, the vehicle, and his two other companions. In short, for these particular tasks, the restituted.5
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 Steamship was a Bermuda-based Protection and Indemnity Club, managed outside London,
an agent, and is interchangeable with "agent." 23 England.6 It insures its members-shipowners against "third party risks and liabilities" for
claims arising from (a) death or injury to passengers; (b) loss or damage to cargoes; and (c)
In view of the foregoing, Fortune is exempt from liability under the general exceptions clause loss or damage from collisions.7
of the insurance policy.
Sulpicio insured its fleet of inter-island vessels with Steamship for Protection & Indemnity
risks through local insurance agents, Pioneer Insurance and Surety Corporation (Pioneer
WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of
Insurance) or Seaboard-Eastern Insurance Co., Inc. (Seaboard-Eastern). 8 One (1) of these
Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the
vessels was the M/V Princess of the World, evidenced by a Certificate of Entry and
Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET ASIDE. The
Acceptance issued by Steamship, which provided:
complaint in Civil Case No. 1817 is DISMISSED.
CERTIFICATE OF ENTRY AND ACCEPTANCE 
No pronouncement as to costs. by the Club of your proposal for entering the ship(s) specified below, and of
the tonnage set out against each, in:
SO ORDERED.
Class 1 PROTECTION AND INDEMNITY
GR. No. 196072, September 20, 2017 of the Club from
Noon 20th February 2005 to Noon 20th February 2006
STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA)
LIMITED, Petitioner, v. SULPICIO LINES, INC., Respondent.

G.R. NO. 208603 or until sold, lost, withdrawn or the entry is terminated in accordance with the rules, to the
extent specified and in accordance with the Act, By(e)-Laws and the Rules from time to time
SULPICIO LINES, INC., Petitioner, v. STEAMSHIP MUTUAL UNDERWRITING in force and the special terms specified overleaf.
ASSOCIATION (BERMUDA) LIMITED, Respondent.
Your name has been entered in the Register of Members of the Club as a  Member.
DECISION
FOR ACCOUNT OF CERTIFICATE
LEONEN, J.:       Sulpicio Lines Inc., NUMBER
      1st Floor,
An insured member may be compelled to arbitration pursuant to the Rules of the Protection Reclamation Area, 155,534
and Indemnity Club, which were incorporated in the insurance policy by reference. Where       P.O. Box No. 137
there are multiple parties, the court must refer to arbitration the parties covered by the       Cebu City,
agreement while proceeding with the civil action against those who were not bound by the Philippines.
arbitration agreement.
 On July 7, 2005, M/V Princess of the World was gutted by fire while on voyage from Iloilo to
NAME OF SHIP BUILT ENTERE CLASS PORT OF Zamboanga City, resulting in total loss of its cargoes. The fire incident was found by the
D REGISTR Department of Interior and Local Government to be "accidental" in nature. 10
"PRINCESS OF THE 1975 GROSS B.V. Y
OCEAN" TONNAG
1983 B.V. 6,150 Sulpicio claimed indemnity from Steamship under the Protection & Indemnity insurance
"PRINCESS OF THE E policy. Steamship denied the claim and subsequently rescinded the insurance coverage of
UNIVERSE" 1979 B.V. 13,526 Sulpicio's other vessels on the ground that "Sulpicio was grossly negligent in conducting its
Cebu City
1972 B.V. business regarding safety, maintaining the seaworthiness of its vessels as well as proper
"PRINCESS OF THE Cebu City 3,768 training of its crew."11
CARIBBEAN" 1984 (Rebuilt 1990) X.X.
Cebu City 9,627
"PRINCESS OF THE On June 28, 2007, Sulpicio filed a Complaint 12 with the Regional Trial Court of Makati City
WORLD" Cebu City 19,329 against Steamship; one (1) of its directors, Gary Rynsard; and its local insurance agents
Pioneer Insurance and Seaboard-Eastern for specific performance and damages. This
"PRINCESS OF THE Cebu City Complaint was docketed as Civil Case No. 07-577, was amended on August 10, 2007, 13 and
STARS" further amended on September 11, 2007.14

.... Steamship filed its Motion to Dismiss and/or to Refer Case to Arbitration 15 pursuant to
Republic Act No. 9285, or the Alternative Dispute Resolution Act of 2004 (ADR Law), and to
NOTES  
Rule 4716 of the 2005/2006 Club Rules, which supposedly provided for arbitration in London
1. REFERENCE 2. THE RULES of disputes between Steamship and its members. 17 The other defendants filed separate
IS ARE PRINTED motions to dismiss.18
REQUESTED ANNUALLY IN
TO THE BOOK FORM, Branch 149, Regional Trial Court, Makati City denied the motions to dismiss. In its July 11,
RULES AS TO INCORPORAT 2008 Order,19 denying Steamship's motion and supplemental motion to dismiss and
THE ING ALL citing20European Resources and Technologies, Inc. v. Ingenieuburo Birkhann + Nolte,
CIRCUMSTAN PREVIOUS Ingeniurgesellschaft Gmbh21 the Regional Trial Court held that "arbitration [did] not appear to
CES OF ALTERATION be the most prudent action, . . . considering that the other defendants . . . ha[d] already filed
ENTRY BEING S AND A their [respective] [a]nswers."22 Steamship filed its Motion for Reconsideration, 23 but it was
CANCELLED COPY IS likewise denied in the Order24 dated September 24, 2008.
AND AS TO SENT TO
THE EACH Steamship assailed trial court orders before the Court of Appeals through a Rule 65 Petition,
CIRCUMSTAN MEMBER. docketed as CA-G.R. SP No. 106103.25 The Court  of Appeals dismissed the petition in its
CES OF AN ALTERATION November 26, 2010 Decision.26 It found no grave abuse of discretion on the part of the trial
ALTERATION S CAN BE court in denying Steamship's Motion to Dismiss and/or to Refer Case to Arbitration 27 or any
IN THE RULES MADE BY convincing evidence to show that a valid arbitration agreement existed between the
OR BY(E)- ORDINARY parties.28 Steamship's Motion for Reconsideration of this Decision was likewise denied in the
LAWS. RESOLUTION Resolution29 dated March 10, 2011.
FOLLOWING
A GENERAL On April 29, 2011, Steamship filed before this Court this Petition for Review, docketed
MEETING as G.R. No. 196072. In compliance with this Court's June 13, 2011 Resolution, 30 Sulpicio filed
NOTIFIED TO its Comment31 on August 31, 2011 and Steamship filed its Reply 32 on October 20, 2011.
ALL
MEMBERS.[9 On September 6, 2013, Sulpicio filed with this Court a Petition for Indirect Contempt 33 under
Rule 71 of the Rules of Court against Steamship. This Petition was docketed as GR. No.
208603.
Sulpicio alleges that sometime in September 2012, it settled its judgment liability of
P4,121,600.00 in Civil Case No. CEB-24783, entitled Verna Unabia v. Sulpicio Lines, Finally, whether or not Steamship Mutual Underwriting (Bermuda) Limited is guilty of indirect
Inc.34 However, the actual amount reimbursed by Steamship was not P4,121,600.00, contempt.
equivalent to US$96,958.47, but only US$27,387.48. 35 Steamship deducted US$69,570.99,
which allegedly represented Sulpicio's share in the arbitration costs for the arbitration in This Court addresses first the procedural issue raised by Sulpicio.
London of the dispute in Civil Case No. 07-577.36
I.A
Sulpicio accuses Steamship of indirect contempt for its "improper conduct tending directly, or
indirectly, to impede, obstruct, or degrade the administration of justice" 37 consisting of the
following acts: Sulpicio contends that Steamship's Petition for Review should be dismissed outright on
procedural grounds.42
(a) Without Sulpicio's knowledge or consent, Steamship initiated and "concluded" during the
pendency of this case an alleged "arbitration proceeding" in London for the "Arbitrator" there First, this Petition, couched as a Rule 45 Petition, is actually a Rule 65 Petition because it
to "resolve" the very dispute involved in this case; contained arguments dealing with "grave abuse of discretion" allegedly committed by the
Court of Appeals.43
(b) Without Sulpicio's knowledge or consent, Steamship proclaimed itself the "victor" entitled
to arbitration costs from Sulpicio; Second, the Petition's Verification and Certification Against Forum Shopping is defective
because it was signed and executed by Steamship's lawyer. Additionally, the Power of
(c) Without Sulpicio's knowledge or consent, Steamship unceremoniously deducted from the Attorney appended to the Petition did not indicate its signatory's name and authority. 44
refund due to Sulpicio in the separate "Unabia Case" the huge amount of U.S.
$69,570.99 despite the fact that: (a) Said "Unabia Case" is unrelated to the instant case; (b) Third, the issue of whether or not Sulpicio has been furnished with the Club's Rulebook,
The propriety of a London arbitration is still to be resolved in this case by this Honorable which contained the arbitration clause, is factual and beyond the realm of a Rule 45 petition. 45
Court; (c) Steamship "enforced" by itself said "arbitration costs" against Sulpicio without the
courtesy of even informing this Honorable Court about it[; and] In its Reply, Steamship avers that its counsel's law firm was duly authorized to sign its
Verification and Certification against Forum Shopping. Moreover, Sulpicio never assailed this
(d) Without Sulpicio's knowledge or consent, and more importantly, without the prior approval law firm's authority to represent Steamship before the Regional Trial Court, and therefore, is
of this Honorable Court, Steamship initiated and "concluded" said London "arbitration" during estopped to deny its authority before this Court. 46 Together with its Reply, Steamship
the pendency of this G.R. No. 196072 and before this Honorable Court could render its ruling submitted a copy of the Secretary's Certificate 47 to the July 24, 2007 Board of Directors'
or decision.38 (Emphasis in the original) resolution authorizing Scott Davis (Davis) or his Assistant Secretaries to sign a Power of
Attorney on behalf of Steamship. It also appended a Secretary's Certificate 48 to the Jvly 26,
2011 Board of Directors' resolution re appointing Davis and John Charles Ross Collis 49 to
Steamship filed its Comment/Opposition39on January 30, 2014, to which Sulpicio filed its
their current positions as Secretary and Assistant Secretary, respectively.
Reply40 on July 2, 2014.
Steamship further contends that the basic issues raised in the petition are questions of law
In its Resolution41 dated January 15, 2014, this Court resolved to consolidate G.R. Nos.
that are cognizable by this Court.50 It adds that a reversal of some factual findings is
208603 and 196072.
warranted because the Court of Appeals committed a grave abuse of discretion in concluding
that Sulpicio was ignorant of the 2005/2006 Club Rules and its arbitration clause, when
The issues for this Court's resolution are:
Steamship had presented ample evidence to establish otherwise. 51 Steamship submits that
this Court may exercise its power of review to reverse errors committed by the lower courts
First, whether or not the petition in G.R. No. 196072 is proper under the Rules of Court;
including grave abuse of discretion of the Court of Appeals. 52
Second, whether or not there is a valid and binding arbitration agreement between Steamship
This Court finds for Steamship.
Mutual Underwriting (Bermuda) Limited and Sulpicio Lines, Inc.;
The appeal from a final disposition of the Court of Appeals is a petition for review under Rule
Third, whether or not the Court of Appeals gravely erred in affirming the Regional Trial Court
45 and not a special civil action under Rule 65.53 Rule 45, Section 1 is clear that:
Order denying referral of Sulpicio Lines, Inc.'s complaint to arbitration in London in
accordance with the 2005/2006 Club Rules; and
Section 1. Filing of petition with Supreme Court. A patty desiring to appeal by certiorari  from a
judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the
Regional Trial Court or other courts whenever authorized by law, may file with the Supreme
Court a verified petition for review on certiorari. The petition shall raise only questions of law
which must be distinctly set forth.
A Rule 45 petition is the proper remedy to reverse a decision or resolution of the Court of
Appeals even if the error assigned is grave abuse of discretion in the findings of fact or of law.
"The existence and availability of the right of appeal prohibits the resort to certiorari because
one of the requirements for the latter remedy is that there should be no appeal." 54
Allegations in the petition of grave abuse of discretion on the part of the Court of Appeals do
not ipso facto render the intended remedy that of certiorari  under Rule 65 of the Rules of
Court. In Microsoft Corporation v. Best Deal Computer Center Corporation, 55 this Court
discussed the distinction between a Petition for Certiorari under Rule 65 and a Petition for
Review on Certiorari under Rule 45:
Significantly, even assuming that the orders were erroneous, such error would merely be
deemed as an error of judgment that cannot be remedied by certiorari. As long as the
respondent acted with jurisdiction, any error committed by him or it in the exercise thereof will
amount to nothing more than an error of judgment which may be reviewed or corrected only
by appeal. The distinction is clear: A petition for certiorari seeks to correct errors of
jurisdiction while a petition for review seeks to correct errors of judgment committed by the
court. Errors of judgment include errors of procedure or mistakes in the court's findings.
Where a court has jurisdiction over the person and subject matter, the decision on all other
questions arising in the case an exercise of that jurisdiction. Consequently, all errors
committed in the exercise of such jurisdiction are merely errors of judgment. Certiorari under
Rule 65 is a remedy designed for the correction of errors of jurisdiction and not errors of
judgment.56 (Citations omitted)
In this case, what Steamship seeks to rectify may be construed as errors of judgment of the
Court of Appeals. These errors pertain to Steamship's allegations of the Court of Appeals'
failure to rule that a valid arbitration agreement existed between the parties and to refer the
case to arbitration. It does not impute any error with respect to the Court of Appeals' exercise
of jurisdiction, As such, the Petition is simply a continuation of the appellate process where a
case is elevated from the trial court of origin, to the Court of Appeals, and to this Court via
Rule 45.
The basic issues raised in the Petition for Review are: (1) whether or not an arbitration
agreement may be validly incorporated by reference to a contract; and (2) how the trial court
should proceed to trial upon its finding "that only some and not all of the defendants are
bound by an arbitration agreement[.]" 57 These are questions of law properly cognizable in a
Rule 45 petition.
In BCDA v. DMCI Project Developers, Inc..58 citing Villamor v. Balmores59:
[T]here is a question of law "when there is doubt or controversy as to what the law is on a
certain [set] of facts." The test is "whether the appellate court can determine the issue raised
without reviewing or evaluating the evidence." Meanwhile, there is a question of fact when
there is "doubt . . . as to the truth or falsehood of facts." The question must involve the
examination of probative value of the evidence presented. 60
Sulpicio denies being bound by the arbitration clause in the Club Rules since neither the
Certificate of Entry and Acceptance, which covers M/V Princess of the World, mentioned this
arbitration agreement, nor was it given a copy of the Club Rulebook.
In sustaining the denial of Steamship's Motion to Dismiss and/or to Refer Case to Arbitration,
the Court of Appeals ruled:
Unfortunately, the Court is not convinced that a valid and binding arbitration agreement exists
between the Steamship and Sulpicio. And even assuming that there is such an agreement, it
does not comply with Section 4 of the Arbitration Law which provides that "a contract to
arbitrate a controversy thereafter arising between the parties, as well as a submission to
arbitrate an existing controversy shall be in writing and subscribed by the party sought to be
charged, or by his lawful agent."
As correctly pointed out by Sulpicio, there is no proof that it was served a copy of the Club
Rules in question and that it signed therein.61 (Emphasis supplied)
A factual question on whether or not Sulpicio was given a copy of the Club Rulebook must be
resolved because it has a bearing on the legal issue of whether or not a binding arbitration
agreement existed between the parties. Factual review, nonetheless, may be justified: (1)
when there is a grave abuse of discretion in the appreciation of facts; 62 (2) when the judgment
of the Court of Appeals is premised on a misapprehension of facts; 63 and (3) when the Court
of Appeals' findings of fact are premised on the absence of evidence but such findings are
contradicted by the evidence on record. 64
Here, this Court finds grave abuse of discretion by the Court of Appeals in its appreciation of
facts. As will be discussed later, the evidence on record shows that Sulpicio was furnished a
copy of the Club Rulebook and was aware of its provisions. Other pieces of evidence were
Sulpicio's letters65 to Steamship and the affidavits of Director and Head of Underwriting of the
Club and In-Charge of Far East membership including the Philippines, Jonathan
Andrews;66 Vice-President of Pioneer Insurance who was in charge of Sulpicio's account,
Roderick Gil Narvacan;67 and Manager of Seaboard-Eastern's Marine Department who was in
charge of Sulpicio's account, Elmer Felipe.68
I.B In this case, Steamship's Petition's Verification and Certification against forum shopping was
signed by its counsel. A Power of Attorney 77 dated August 1, 2007 was appended to the
Petition, which purportedly authorized "Atty. Charles Jay D. Dela Cruz or any of the partners
The Verification and Certification against Forum Shopping signed by Steamship's counsel of Del Rosario & Del Rosario . . . to sign the verification or certification" 78 against forum
substantially complied with the  requirements of the Rules of Court. shopping of petitions and appeals in appellate courts necessary in representing and
defending Steamship. It was notarized, apostilled in accordance with the law of Bermuda and
Under Rule 45 of the Rules of Court, a petition for review must be verified 69 and must contain authenticated by the Philippine consulate in London, United Kingdom. However, a closer look
a sworn certification against forum shopping. 70 into the Power of Attorney reveals that the signatory of the document was not identified. This
was pointed out by Sulpicio in its Comment.79
"A pleading is verified by an affidavit that the affiant has read the pleading and that the
allegations therein are true and correct of his [or her] personal knowledge or based on Nonetheless, Steamship subsequent filed its Reply, 80 to which it attached two (2) Secretary's
authentic records."71 Certificates81 signed by Davis containing excerpts of the July 24, 2007 and July 26, 2011
board resolutions showing Davis' authority to execute the Power of Attorney on its behalf, and
On the other hand, a certification against forum shopping is a petitioner's, statement "under Davis' reappointment as Corporate Secretary, respectively. The signature in the Power of
oath that he [or she] has not . . . commenced any other action involving the same issues in Attorney was similar in form and appearance to Davis' signature in the Secretary's
the Supreme Court, the Court of Appeals or different divisions, or any other tribunal or Certificates, which lends credence to Steamship's submission that the Power of Attorney was
agency[.]72 In this certification, the petitioner must state the status of any other action or executed and signed by Davis.82
proceeding, if there is any, and undertakes to report to the courts and other tribunal within five
(5) days from learning of any similar action or proceeding. 73 The rule on verification of a pleading is a formal, not jurisdictional, requirement. 83 This Court
has held that:
Failure to comply with the foregoing mandates constitutes a sufficient ground for the denial of
the petition.74 Non compliance with the verification requirement does not necessarily render the pleading
fatally defective, and is substantially complied with when signed by one who has ample
In case the petitioner is a private corporation, the verification and certification may be signed, knowledge of the truth of the allegations in the complaint or petition, and when matters
for and on behalf of this corporation, by a specifically authorized person, including its retained alleged in the petition have been made in good faith or are true and correct. 84 (Citation
counsel, who has personal knowledge of the facts required to be established by the omitted)
documents.75 The reason is that:

A corporation, such as the petitioner, has no powers except those expressly conferred on it
by the Corporation Code and those that are implied by or are incidental to its existence. In
turn, a corporation exercises said powers through its board of directors and/or its duly
authorized officers and agents. Physical acts, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose by corporate bylaws or by
a specific act of the board of directors. "All acts within the powers of a corporation may be
performed by agents of its selection; and, except so far as limitations or restrictions which
may be imposed by special charter, by-law, or statutory provisions, the same general
principles of law which govern the relation of agency for a natural person govern the officer or
agent of a corporation, of whatever status or rank, in respect to his power to act for the
corporation; and agents once appointed, or members acting in their stead, are subject to the
same rules, liabilities and incapacities as are agents of individuals and private persons."
. . . .
For who else knows of the circumstances required in the Certificate but its own retained
counsel. Its regular officers, like its board chairman and president may not even know the
details required therein.76
On the other hand, a certification not signed by a duly authorized person renders the petition
subject to dismissal.85 Moreover, the lack of or defect in the certification is not generally
curable by its subsequent submission or correction. 86 However, there are cases where this
Court exercised leniency due to the presence of special circumstances or compelling
reasons, such as the prima facie merits of the petition.87 In some cases, the subsequent
submission of proof of authority of the party signing the certification on behalf of the
corporation was considered as substantial compliance with the rules and the petition was
given due course.88
In Shipside Incorporated v. Court of Appeals,89 this Court held:
Moreover, in Loyola, Roadway,  and Uy, the Court excused non-compliance with the
requirement as to the certificate of non-forum shopping. With more, reason should we allow
the instant petition since petitioner herein did submit a certification on non-forum shopping,
failing only to show proof that the signatory was authorized to do so. That petitioner
subsequently submitted a secretary's certificate attesting that Balbin was authorized to file an
action on behalf of petitioner likewise mitigates this oversight. 90

Likewise, this Court ho1ds that there is substantial compliance with the rules on verification
and certification against forum shopping. Steamship's subsequent submission of the
Secretary's Certificates showing Davis' authority to execute the Power of Attorney in favor of
Del Rosario & Del Rosario cured the defect in the verification and certification appended to
the petition. Under the circumstances of this case, Steamship's counsel would be in the best
position to determine the truthfulness of the allegations in the petition and certify on non-
forum shopping considering that "it has handled the case for . . . Steamship since its
inception."91 This Court also considers Steamship's allegations that the same Power of
Attorney was used in its Answer Ad Cautelam filed on August 12, 2008 before the Regional
Trial Court and in its Petition for Certiorari before the Court of Appeals on November 12,
2008. Significantly, Sulpicio never questioned the authority of Del Rosario & Del Rosario to
represent Steamship in the proceedings before the lower courts. 92
The rules on forum-shopping are "designed . . . to promote and facilitate the orderly
administration of justice." They are not to be interpreted with "absolute literalness" as to
subvert the procedural rules' ultimate objective of achieving substantial justice as
expeditiously as possible.93 These goals would not be circumvented by this Court's
recognition of the authorized counsel's signature in the verification and certification of non-
forum shopping.
This Court now proceeds to the substantive issues of whether or not there was a valid
arbitration agreement between the parties and whether or not referral to arbitration was
imperative.
II
Steamship contends that the arbitration agreement set forth in its Club Rules, which in turn is
incorporated by reference in the Certificate of Entry and Acceptance of M/V  Princess of the
World,94 is valid and binding upon Sulpicio,95 pursuant to this Court's ruling in BF Corporation
v. Court of Appeals.96
Steamship further avers that the Court of Appeals' finding that there was no proof that
Sulpicio was given a copy of the Club Rules was incorrect and contradicted by the evidence
on record.97 Steamship adds that by Sulpicio's own declarations in its letter-application 98 for
membership of its vessels, Sulpicio acknowledged that it had received a copy of the Club
Rules and that its membership in Steamship is subject to them. 99  It contends that Sulpicio
was "provided with copies of the Club's Rule books on an annual basis by Pioneer Insurance
and Seaboard-Eastern who acted as brokers [for Sulpicio's] entry." 100 Moreover, throughout
Sulpicio's almost 20 years of membership, 101 it has been aware of, and relied upon, the terms
of the Club Rules, as revealed in its various correspondences through its brokers with
Steamship.102 Thus, Sulpicio is estopped to deny that it was aware of, and agreed to be
bound by, the Club Rules and their provisions. 103
Steamship argues that a referral of the case to arbitration is imperative pursuant to the
mandates of Republic Act No. 9285 or the ADR Law. 104 It adds that the trial court's reliance
on the ruling in European Resources and Technologies, Inc. v. Ingenieuburo
Birkhann + Nolte, Ingeniurgesellschaft Gmbh105 was misplaced. That case was decided on
the basis of Republic Act 876 or the Old Arbitration Law, which did not provide for instances
where some of the multiple impleaded parties were not covered by an arbitration
agreement.106 It adds that now, Section 25 of the ADR Law specifically provides that "the
court shall refer to arbitration those parties who are bound by the arbitration agreement
although the civil action may continue as to those who are not bound by such arbitration
agreement."107 Even from a procedural standpoint, Steamship contends that the claim against
it may be separated from Pioneer Insurance and Seaboard-Eastern as these local insurance
companies were impleaded as solidary obligors/debtors. 108
Steamship further submits that "a Philippine court is an inconvenient forum to thresh out the
issues involved in Sulpicio's claim." 109 First, Sulpicio's claim is governed by the English Law,
as expressly stated in the 2005/2006 Club Rules. 110 Second, a Philippine court would be "an
ineffective venue" to enforce any judgment that may be obtained against Steamship, a foreign
corporation.111 Thus, on the basis of the doctrine of forum non conveniens alone, Steamship
contends that the claim against it should be referred to arbitration in London. 112
Finally, Steamship holds that "Sulpicio should participate in the London Arbitration as [it] is
already progressing . . . [i]nstead of wasting its time on prosecuting its claim before a
Philippine court that is devoid of jurisdiction[.] 113
Sulpicio counters that the Court of Appeals was correct in ruling that there was no arbitration
agreement between the parties. 114 The arbitration clause in the 2005/2006 Club Rules is not
valid and binding for failure to comply with Section 4 of the ADR Law, which requires that an
arbitration agreement be in writing and subscribed by the parties or their lawful
agent.115 Sulpicio adds that "[i]n White Gold Marine Services, Inc. vs. Pioneer Insurance and
Surety Corporation, . . . Steamship did not invoke arbitration but filed suit before a Philippine
court, which . . . proves that [the 2005/2006 Club Rules' arbitration clause] is neither
mandatory nor binding" upon the parties. 116
Sulpicio further contends that the Certificate of Entry and Acceptance did not provide for
arbitration as a mode of dispute resolution, that the rules referred to was not particularly
identified or described, and that it never received a copy of the Club Rules. 117
Assuming there was valid arbitration agreement between them, Sulpicio submits that the trial
court correctly relied on the ruling in European Resources in denying the referral of the case
to arbitration.118 Arbitration in London would not be the "most prudent action" because the
arbitral decision will not be binding on Pioneer Insurance and Seaboard-Eastern and it would
result in a "split jurisdiction."119 Sulpicio further contends that the exception laid down
in European Resources still applies because the ADR Law was already in effect when the
case was decided by this Court.120
In its Reply, Steamship maintains that there is a valid arbitration clause between them and
that Sulpicio was well aware of its Club Rules. It adds that Sulpicio is merely feigning
ignorance of the Club Rules to escape the obligatory nature of the arbitration agreement.
Steamship further reiterates that Section 25 of the ADR Law is plain and clear that when
there are multiple parties in an action, the court must "refer to arbitration those parties bound
by the arbitration agreement and let the action remain as to those who are not
bound."121 "Moreover, as the relationship between . . . Steamship and . . . Sulpicio are
governed by English Law[,] it may be more prudent to refer the disgute to arbitration in
London under the doctrine of forum non conveniens."122
Finally, Steamship avers that under Rule 47 of the 2005/2006 Club Rules, it has "the right to
pursue legal action against a [m]ember before any jurisdiction at its sole discretion." 123 Even if
there is no such provision, Steamship contends that it may waive its rights to compel
arbitration in individual cases.124 It adds that the waiver of such right in White Gold has no
effect to this case because Sulpicio is not a party in that case. 125
II.A
It is the State's policy to promote party autonomy in the mode of resolving disputes. 126 Under
the freedom of contract principle, parties to a contract may stipulate on a particular method of
settling any conflict between them. 127  Arbitration and other alternative dispute resolution
methods like mediation, negotiation, and conciliation are favored over court action. Republic
Act No. 9285128 expresses this policy:
Section 2. Declaration of Policy. — It is hereby declared the policy of the State to actively
promote party autonomy in the resolution of disputes or the freedom of the parties to make
their own arrangements to resolve their disputes. Towards this end, the State shall
encourage and actively promote the use of Alternative Dispute Resolution (ADR) as an
important means to achieve speedy and impartial justice and declog court dockets.  As such,
the State shall provide means for the use of ADR as an efficient tool and an alternative
procedure for the resolution of appropriate cases. Likewise, the State shall enlist active
private sector participation in the settlement of disputes through ADR. This Act shall be
without prejudice to the adoption by the Supreme Court of any ADR system, such as
mediation, conciliation, arbitration, or any combination thereof as a means of achieving
speedy and efficient means of resolving cases pending before all courts in the Philippines
which shall be governed by such rules as the Supreme Court may approve from time to time.
(Emphasis supplied)
Arbitration, as a mode of settling disputes, was already recognized in the Civil Code. 129 In
1953, Republic Act No. 876 was passed, which reinforced domestic arbitration as a process
of dispute resolution. Foreign arbitration was likewise recognized through the Philippines'
adherence to the United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards of 1958, otherwise known as the New York Convention. 130 Republic Act No.
9285 sets the basic principles in the enforcement of foreign arbitral awards in the
Philippines.131
Consistent with State policy, "arbitration agreements are liberally construed in favor of
proceeding to arbitration."132 Every reasonable interpretation is indulged to give effect to
arbitration agreements. Thus, courts must give effect to the arbitration clause as much as the
terms of the agreement would allow. 133 "Any doubt should be resolved in favor of
arbitration."134
II.B
Sulpicio contends that there was no valid arbitration agreement between them, and if there
were, it was not aware of it.
This Court rules against Sulpicio's submission.
The contract between Sulpicio and Steamship is more than a contract of insurance between a
marine insurer and a shipowner. By entering its vessels in Steamship, Sulpicio not only
obtains insurance coverage for its vessels but also becomes a member of Steamship.
A protection and indemnity club, like Steamship, is an association composed of shipowners
generally formed for the specific purpose of providing insurance cover against third-party
liabilities of its members.135 A protection and indemnity club is a mutual insurance association,
described in White Gold Marine Services, Inc. v. Pioneer Insurance and Surety Corp. 136 as
follows:
[A] mutual insurance company is a cooperative enterprise where the members are both the
insurer and insured. In it, the members all contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid, and
where the profits are divided among themselves, in proportion to their interest. Additionally,
mutual insurance associations, or clubs, provide three types of coverage, namely, protection
and indemnity, war risks, and defense costs.137
A shipowner wishing to enter its fleet of vessels to Steamship must fill in an application for
entry form, which states:
PLEASE ENTER IN THE ASSOCIATION, SUBJECT TO THE RULES, RECEIPT OF WHICH
WE ACKNOWLEDGE, THE UNDERMENTIONED VESSEL(S).138
The application form is signed by the shipowner or its authorized representative.
Steamship then issues a Certificate of Entry and Acceptance of the vessels, showing its
acceptance of the entry. The Certificate of Entry and Acceptance for M/V Princess of the
World states:
CERTIFICATE OF ENTRY AND ACCEPTANCE REQUESTED ANNUALLY IN
TO THE BOOK FORM,
by the Club of your proposal for entering the ship(s) specified below, and of the tonnage set RULES AS TO INCORPORAT
out against each, in: THE ING ALL
CIRCUMSTAN PREVIOUS
Class 1 PROTECTION AND INDEMNITY CES OF ALTERATION
of the Club from ENTRY BEING S AND A
Noon 20th February 2005 to Noon 20th February 2006 CANCELLED COPY IS
AND AS TO SENT TO
THE EACH
CIRCUMSTAN MEMBER.
or until sold, lost, withdrawn or the entry is terminated in accordance with the rules, to the CES OF AN ALTERATION
extent specified and in accordance with the Act, By(e)-Laws and the Rules from time to time ALTERATION S CAN BE
in force and the special terms specified overleaf. IN THE RULES MADE BY
OR BY(E)- ORDINARY
Your name has been entered in the Register of Members of the Club as a Member. LAWS. RESOLUTION
FOLLOWING
A GENERAL
FOR ACCOUNT OF CERTIFICATE MEETING
      Sulpicio Lines Inc., NUMBER NOTIFIED TO
      1st Floor, ALL
Reclamation Area, 155,534 MEMBERS.[139
      P.O. Box No. 137
      Cebu City,
Philippines.

NAME OF SHIP BUILT ENTERE CLASS PORT OF Thus, a contract of insurance is perfected between the parties upon Steamship's issuance of
D REGISTR the Certificate of Entry and Acceptance.
"PRINCESS OF THE 1975 GROSS B.V. Y
OCEAN" TONNAG [A] contract of insurance, like other contracts, must be assented to by both parties either in
1983 B.V. 6,150
"PRINCESS OF THE E person or by their agents. So long as an application for insurance has not been either
UNIVERSE" 1979 B.V. 13,526 accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be
Cebu City binding from the date of application, must have been a completed contract, one that leaves
"PRINCESS OF THE 1972 B.V. 3,768
Cebu City nothing to be done, nothing to be completed, nothing to be passed upon, or determined,
CARIBBEAN" 1984 (Rebuilt 1990) X.X. before it shall take effect. There can be no contract of insurance unless the minds of the
Cebu City 9,627 parties have met in agreement.140
"PRINCESS OF THE
WORLD" Cebu City 19,329

"PRINCESS OF THE Cebu City Title VI, Section 49 of Presidential Decree No. 612141 or the Insurance Code defines an
STARS" insurance policy as "the written instrument in which a contract of insurance is set forth."
Section 50 of this Code provides that the policy, which is required to be in printed form, "may
.... contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number,
NOTES   or word necessary to complete the contract of insurance shall be written on the blank
spaces." Any rider, clause, warranty, or endorsement attached and referred to in the policy by
1. REFERENCE 2. THE RULES its descriptive title or name is considered part of this policy or contract of insurance and binds
IS ARE PRINTED the insured.

Section 51 of the Insurance Code prescribes the information that must be stated in the policy,
namely: the parties in the insurance contract, amount insured, premium, property or life
insured, risks insured against, and period of insurance. However, there is nothing in the law
that prohibits the parties from agreeing to other terms and conditions that would govern their
relationship, in which case the general rules of the Civil Code regulating contracts will
apply.142
The Certificate of Entry and Acceptance plainly provides that the Class 1 protection and
indemnity coverage would be to the extent specified and in accordance with the Act, the By-
Laws, and the Rules of the Club in force at the time of the coverage. The "Notes" in the
bottom portion of the Certificate states that these Rules "are printed annually in book form"
and disseminated to all members. M/V Princess of the World was insured from February 20,
2005 to February 20, 2006. Hence, the 2005/2006 Club Rules apply.
Moreover, attached to the Certificate of Entry and Acceptance is a War Risk Extension clause
and Bio-Chem clause which refer to Rule 21 of the 2005/2006 Club Rules relating to war risk
insurance.
WAR RISK EXTENSION
Cover excluded under Rule 21 is hereby reinstated subject to the terms set out in this
Certificate of Entry and any Endorsement thereto, and to the following conditions.
. . . .
At any time or times before, or at the commencement of, or during the currency of any Policy
Year of the Club, the Directors may in their discretion determine that any ports, places,
countries, zones or areas (whether of land or sea) be excluded from the insurance provided
by this [Protection and Indemnity] war risks cover. Save as otherwise provided by the
Directors, this [Protection and Indemnity] war risks cover shall cease in respect of such ports,
places, countries, zones or areas at midnight on the seventh day following the issue to the
Members of notice of such detem1ination in accordance with the terms of the cover provided
pursuant to Rule 21 of the Club's Rules
. . . .
Notwithstanding any other term or condition of this insurance, the Directors may in their
discretion cancel this special cover giving 7 days' notice to the Members (such cancellation
becoming effective on the expiry of 7 days from midnight of the day on which notice of
cancellation is issued by the Club and the Directors may at any time after the issue of notice
of such cancellation resolve to reinstate special cover pursuant to the proviso to the terms of
the cover issued pursuant to Rule 21 on such terms and conditions and subject to such limit
as the Directors in their discretion may determine.
When either a Demise, Time, Voyage, Space or Slot Charterer and/or the Owner of the
Entered Ship are separately insured for losses, liabilities, or the costs and expenses
incidental thereto covered under Rule 21 of the Club and/or the equivalent Rule of any other
Association which participates in the Pooling Agreement and General Excess Loss
Reinsurance Contract, the aggregate of claims in respect of such losses, liabilities, or the
costs and expenses incidental thereto covered under Rule 21 of the Club and/or the
equivalent Rule of such other Association(s), shall be limited to the amount set out in the
Certificate of Entry in respect of any one ship, any one incident or occurrence. 143
Sulpicio's acceptance of the Certificate of Entry and Acceptance manifests its acquiescence
to all its provisions. There is no showing in the records or in Sulpicio's contentions that it
objected to any of the terms in this Certificate. Its acceptance, likewise, operated as an
acceptance of the entire provisions of the Club Rules.
When a contract is embodied in two (2) or more writings, the writings of the parties should be
read and interpreted together in such a way as to render their intention effective. 144
With the exception of the War Risk Extension clause, the Bio-chem clause, and a succinct
statement of the limits of liability, warranties, exclusion, and deductibles, the Certificate of
Entry and Acceptance does not contain the details of the insurance coverage. A person
would have to refer to the Club Rules to have a complete understanding of the contract
between the parties.
The Club Rules contain the terms and conditions of the relationship between the Steamship
and its members including the scope, nature, and extent of insurance coverage of its
members' vessels. The 2005/2006 Club Rules 145 of Class 1, which cover protection and
indemnity risks provide, insofar as relevant:
3 Scope of Cover
i. The terms upon which a Member is entered in the Club are set out in the
Rules and any Certificate of Entry for that Member.
ii. The risks against which a Member is insured by entry in the Club are set out
in Rule 25 and are always subject to the conditions, exceptions, limitations
and other terms set out in the remainder of these Rules and any Certificate of
Entry for that Member.
. . . .
6 Entry
....
iv. The provisions of this Rule apply throughout the period of entry of the Ship in
the Club . . .
. . . .
8 Members
i. Every Owner who enters any ship in the Club shall (if not already a Member)
be and become a Member of the Club as from the date of the
commencement of such entry. Each Member is bound by the Act and By(e)-
Laws of the Club and by these Rules.
....
iv. All contracts of insurance with the Club shall be deemed to be subject to and
incorporate all the provisions of these Rules except to the extent otherwise
expressly agreed in writing with the Managers.
iv. Each Member or other person whose application for insurance or reinsurance
is accepted shall be deemed to have agreed both for itself and its successors
and each of them that both it and they and each and all of them will be
subject to and bound by and will perform their obligations under the Rules,
Act and By(e)-Laws of the Club and any contract of insurance with the Club.
. . . .
45 Amendments to Rules
The Rules of this Class may be altered or added to by Ordinary Resolution passed at a
separate meeting of the Members of this Class provided that no such alterations shall be
effective unless and until the same shall be sanctioned by the Directors. 146
The 2005/2006 Club Rules also provide the nature of Steamship's Protection and Indemnity
cover and the terms on which it is provided. In particular, Rule 25(i) to (xxi) identify a
member's liabilities, costs, and expenses covered by the insurance, Rules 18 to 24 set out
the general exclusions and limitations, Rule 26 provides the requirements for classification
and condition surveys, and Rule 28 addresses general terms and conditions for recovery of
claims. The 2005/2006 Club Rules also contain provisions on double insurance (Rule 23),
claims handling (Rules 30 and 31), cessation of membership (Rule 35), cessation of
insurance of individual vessels (Rule 36) deduction and set-off (Rule 40), and assignment
and subrogation (Rules 41 and 42).
The arbitration clause is found in Rule 47 of the 2005/2006 Club Rules:
47 dispute resolution, Adjudication
i. in the event of any difference or dispute whatsoever, between or affecting a
Member and the Club and concerning the insurance afforded by the Club
under these rules or any amounts due from the Club to the Member or the
Member to the Club, such difference or dispute shall in the first instance be
referred to adjudication by the Directors. That adjudication shall be on the
basis of documents and written submissions alone. Notwithstanding the
terms of this Rule 47i, the Managers shall be entitled to refer any difference
or dispute to arbitration in accordance with sub-paragraph ii below without
prior adjudication by the Directors.
ii. If the Member does not accept the decision of the Directors, or if the
Managers, in their absolute discretion, so decide, the difference or dispute
shall be referred to the arbitration of three arbitrators, one to be appointed by
each of the parties and the third by the two arbitrators so chosen, in London.
The submission to arbitration and all the proceedings therein shall be subject
to the provisions of the English Arbitration Act, 1996 and the schedules
thereto or any statutory modifications or re-enactment thereof.
iii. No Member shall be entitled to maintain any action, suit or other legal
proceedings against the Club upon any such difference or dispute unless and
until the same has been submitted to the Directors and they shall have given
their decision thereon, or shall have made default for three months in so
doing; and, if such decision be not accepted by the Member or such default
be made, unless and until the difference or dispute shall have been referred
to arbitration in the manner provided in this Rule, and the Award shall have
been published; and then only for such sum as the Award may direct to be
paid by the Club. And the sole obligation of the Club to the Member under
these Rules or otherwise howsoever in respect of any disputed claim made
by the Member shall be to pay such sum as may be directed by such an
Award.
iv. In any event no request for adjudication by the Member shall be made to the
Directors in respect of any difference or dispute between, or matter affecting,
the Member and the Club more than two years from the date when that
dispute, difference or matter arose unless, prior to the expiry of this limitation
period, the Managers have agreed in writing to extend the same.
v. Nothing in this Rule 47 including paragraph i, or in any other Rule or
otherwise shall preclude the Club from taking any legal action of whatsoever
nature in any jurisdiction at its absolute discretion in order to pursue or
enforce any of its rights whatsoever and howsoever arising including but not
limited to: -
a. Recovering sums it considers to be due from the Member to the
Club;
b. Obtaining security for such sums; and/or
 c. Enforcement of its right of lien whether arising by law or under these
rules.
vi. These rules and any contract of insurance between the Club and the Member
shall be governed by and construed in accordance with English
law.147 (Emphasis in the original)
Under Rule 47, any dispute concerning the insurance afforded by Steamship must first be
brought by a claiming member to the Directors for adjudication. If this member disagrees with
the decision of the Director, the dispute must be referred to arbitration in London. Despite the
member's disagreement, the Managers of Steamship may refer the dispute to arbitration
without adjudication of the Directors. This procedure must be complied with before the
member can pursue legal proceedings against Steamship.
There is no ambiguity in the terms and clauses of the Certificate of Entry Acceptance.
Contrary to the ruling of the Court of Appeals, the Certificate clearly incorporates the entire
Club Rules—not only those provisions relating to cancellation and alteration of the policy. 148
"[W]hen the text of a contract is explicit and leaves no doubt as to its intention, the court may
not read into it any other intention that would contradict its plain import." 149
The incorporation of the Club Rules in the insurance policy is without any qualification. This
includes the arbitration clause even if not particularly stipulated. A basic rule in construction is
that the entire contract, and each and all of its parts, must be read together and given effect,
with all its clauses and provisions harmomonized with one another. 150
II.C
The Court of Appeals ruled that the arbitration agreement in the 2005/2006 Club Rules is not
valid because it was not signed by the parties.
In domestic arbitration, the formal requirements of an arbitration agreement are that it must
"be in writing and subscribed by the party sought to be charged, or by his lawful agent." 151 In
international commercial arbitration,152 it is likewise required that the arbitration agreement
must be in writing.
An arbitration agreement is in writing if it is contained (1) in a document signed by the parties,
(2) in an exchange of letters, telex, telegrams or other means of telecommunication which
provide a record of the agreement, or (3) in an exchange of statements of claim and defense
in which the existence of an agreement is alleged by a party and not denied by another. The
reference in a contract to a document containing an arbitration clause constitutes an
arbitration agreement provided that the contract is in writing and the reference is such as to
make that clause part of the contract. 153
In BF Corp. v. Court of Appeals,154 one (1) of the parties denied the existence of the
arbitration cause on the ground that it did not sign the Conditions of Contract that contained
the clause. This Court held that the arbitration clause was nonetheless binding because the
Conditions of Contract were expressly made an integral part of the principal contract between
the parties. The formal requirements of the law were deemed complied with because "the
subscription of the principal agreement effectively covered the other documents incorporated
by reference [to them]."155 In, arriving at this ruling, this Court explained:
A contract need not be contained in a single writing. It may be collected from several different
writings which do not conflict with each other and which, when connected, show the parties,
subject matter, terms and consideration, as in contracts entered into by correspondence.  A
contract may be encompassed in several instruments even though every instrument is
not signed by the parties, since it is sufficient if the unsigned instruments are clearly
identified or referred to and made part of the signed instrument or
instruments. Similarly, a written agreement of which there are two copies, one signed by
each of the parties, is binding on both to the same extent as though there had been only one
copy of the agreement and both had signed it.156 (Emphasis supplied)
Thus, an arbitration agreement that was not embodied in the main agreement but set forth in
another document is binding upon the parties, where the document was incorporated by
reference to the main agreement. The arbitration agreement contained in the Club Rules,
which in turn was referred to in the Certificate of Entry and Acceptance, is binding upon
Sulpicio even though there was no specific stipulation on dispute resolution in this Certificate.
Furthermore, as stated earlier, Sulpicio became a member of Steamship by the very act of
making a contract of insurance with it. The Certificate of Entry and Acceptance issued by
Steamship states that "[its] name has been entered in the Register of Members of the Club as
a Member."157 Sulpicio admits its membership and the entry of its vessels to Steamship.
Rule 8(v) of the 2005/2006 Club Rules provides that:
Each Member or other person whose application for insurance or reinsurance is accepted
shall be deemed to have agreed both for itself and its successors and each of them that both
it and they and each and all of them will be subject to and bound by and will perform their
obligations under the Rules, Act and By(e)-Laws of the Club and any contract of insurance
with the Club.
Sulpicio's agreement to abide by Steamship's Club Rules, including its arbitration clause, can
be reasonably inferred from its submission of an application for entry of its vessels to
Steamship "subject to the Rules, receipt of which we acknowledge." 158
The ruling of this Court in Associated Bank v. Court of Appeals 159 is applicable by analogy to
this case.
In that case, plaintiffs sought to recover the amount of 16 checks that were honored by
Associated Bank despite the apparent alterations in the name of the payee. Associated Bank
filed a Third-Party Complaint against Philippine Commercial International Bank, Far East
Bank & Trust Company, Security Bank and Trust Company, and Citytrust Banking
Corporation for reimbursement, contribution, and indemnity. This Complaint was based on
their being the collecting banks and by virtue of their bank guarantee for all checks sent for
clearing to the Philippine Clearing House Corporation (PCHC). The trial court dismissed the
Third-Party Complaint for lack of jurisdiction, citing Section 36 of the Clearing House Rules
and Regulations of the PCHC, which provides for arbitration. This Court, in affirming the
dismissal, held:
manifest their consent to the PCHC Rules, including the binding effect of the arbitration
agreements under these Rules.
In this case, by its act of entering its fleet of vessels to Steamship and accepting without
objection the Certificate of Entry and Acceptance covering its vessels, Sulpicio manifests its
consent to be bound by the Club Rules. The contract between Sulpicio and Steamship gives
rise to reciprocal rights and obligations. Steamship undertakes to provide protection and
indemnity cover to Sulpicio's fleet. On the other hand, Sulpicio, as a member, agrees to
observe Steamship's rules and regulations, including its provisions on arbitration.
III.A

Under the rules and regulations of the Philippine Clearing House Corporation (PCHC), the The Court of Appeals' finding that there was no proof that Sulpicio was given a copy of the
mere act of participation of the parties concerned in its operations in effect amounts to a 2005/2006 Club Rules is contradicted by the evidence on record.
manifestation of agreement by the parties to abide by its rules and regulations. As a
consequence of such participation, a party cannot invoke the jurisdiction of the courts over In its Comment, Sulpicio contends that it "was never given or sent a copy" of the Rulebook as
disputes and controversies which fall under the PCHC Rules and Regulations without first stated in the affidavits of its Executive Vice President, Atty. Eusebio S. Go and its Safety and
going through the arbitration processes laid out by the body. Since claims relating to the Quality Assurance Manager, Engr. Ernelson P. Morales. 161 It also quoted a portion of the
regularity of checks cleared by banking institutions are among those claims which should first Affidavit of its Executive Vice President and Chief Executive Officer, Carlos S. Go, who
be submitted for resolution by the PCHC's Arbitration Committee, petitioner Associated Bank, declared that "[Sulpicio] and Steamship have not signed any arbitration agreement" and "[n]o
having voluntarily bound itself to abide by such rules and regulations, is estopped from such agreement exists."162
seeking relief from the Regional Trial Court on the coattails of a private claim and in the guise
of a third party complaint without first having obtained a decision adverse to its claim from the Sulpicio cannot feign ignorance of the arbitration clause since it was already charged with
said body. lt cannot bypass the arbitration process on the basis of its averment that its third notice of the Club Rules due to an appropriate reference to it in the Certificate of Entry and
party complaint is inextricably linked to the original complaint in the Regional Trial Court. Acceptance. Assuming its contentions were true that it was not furnished a copy of the
2005/2006 Club Rules, by the exercise of ordinary diligence, it could have easily obtained a
.... copy of them from Pioneer Insurance or Seaboard-Eastern.

Section 36.6 is even more emphatic: In any case, Sulpicio's bare denials cannot succeed in light of the preponderance of evidence
submitted by Steamship.
36.6 The fact that a bank participates in the clearing operations of PCHC shall be deemed its
written and subscribed consent to the binding effect of this arbitration agreement as if it had The Affidavit163 dated August 29, 2007 of Jonathan Andrews, Director and Head of
done so in accordance with Section 4 of the Republic Act No. 876 otherwise known as the Underwriting of the Eastern Syndicate of the Managers of Steamship and in charge of
Arbitration Law. Steamship's Far East membership, including the Philippines, stated:

Thus, not only do the parties manifest by mere participation their consent to these rules, but 4. The contract of insurance between the Club and a Member is contained in,
such participation is deemed (their) written and subscribed consent to the binding effect of and evidenced by:
arbitration agreements under the PCHC rules. Moreover, a participant subject to the Clearing
House Rules and Regulations of the PCHC may go on appeal to any of the Regional Trial a) The Rules of the Club for whichever Class or Classes the vessel is entered, for the
Courts in the National Capital Region where the head office of any of the parties is located time being in force; and
only after a decision or award has been rendered by the arbitration committee or arbitrator on
questions of law.160 (Emphasis supplied, citation omitted) b) A Certificate of Entry.

5.
This Court held that mere participation by the banks in the clearing operations of the PCHC
    . . . .
5. The Club's policy year runs from noon on 20 th February of each year until
noon on 20th February of the year following . . . The Rule book is published
on an annual basis prior to the commencement of the Policy year to which it
applies. Although the Rules can be amended pursuant to Rule 45, the
dispute resolution provisions of the Rules have provided for arbitration in
London since well before the Plaintiff's entry in the Club.
    . . . .
10. In addition, it is quite clear that throughout their lengthy membership of the
Club, the Plaintiffs were aware of, and relied upon, the terms of the Club's
Rules. Produced and shown to me, marked "JHDA 4", is a copy of a
letter164 from the Plaintiffs, dated 4th June, 1993, seeking a refund of premium
for the "SURIGAO PRINCESS" on the grounds that the vessel was laid up.
That letter's enclosures consist of:
(a) The Club's printed form for returns of premium when a vessel is laid-up . . . signed by
Mr. Carlos S. Go on behalf of the Plaintiffs;
(b) A photocopy of the relevant provision in the Club's Rules dealing with laid-up returns,
Rule 29; and
(c) A Certificate from the Philippines Port Authority . . .
11.
The fact that Sulpicio's application for a laid up return attached a photocopy
of the Club's Rule book demonstrates both that this was physically in their
possession and that they were familiar with its contents.
11. Throughout the lengthy period of this entry, as might be anticipated, there
was a considerable volume of correspondence between the Plaintiffs and the
Club via the former's brokers. Examples of that correspondence are
produced and shown to me, marked "JHDA 5". As the Court will note from
that correspondence, it contains numerous and frequent references to
various of the Club's Rules, e.g.:
 Rule 22, dealing with double insurance
 Rule 25 xix, dealing with towage
 Rule 23 i, dealing with classification
 Rule 23 v b and c, dealing with defect warranties
 Rule 23 iv, dealing with safety audits.
12. The fact that Plaintiffs possessed and were fully conversant with the Club's
Rules is most clearly demonstrated by the correspondence provided and
shown to me, marked "JHDA 6". After the grounding of the "PRINCESS OF
THE PACIFIC", due to the concerns arising out of this casualty, the Club
initially reserved cover pending further investigation and required an
independent audit of the Plaintiffs Safety Management System. When this
decision was conveyed to the Plaintiffs via their brokers, Seaboard-Eastern,
they replied:
As expected, Carlos Go was so upset and expressed disappointment when the undersigned
spoke to him about the report of Noble Denton and the club's decision to suspend any action
on the claim especially so since owners believe the findings of the surveyors to the club are
inaccurate and after relating such findings to the club rules owners find no basis for club's
decision to suspend action on the claim.165
Roderick Gil Narvacan, Vice-President of the Hull Unit of Pioneer Insurance which handled
Sulpicio's account, also narrated in his Affidavit [166 dated September 4, 2007:
7. I know for a fact that Sulpicio received a copy of the Club's Rule Book and had full
knowledge of the Club's Rules during the length of time that it was a member of the Club.
8. [I]n all Entry Forms signed and submitted by Sulpicio to the Club throughout its years of
membership in the Club, Sulpicio always acknowledged that it received a copy of Club's Rule
Book. A sample of Sulpicio's duly signed Entry Form submitted to the Club on 6 February
1997 is hereto attached as Annex "1."
9. The Company, through my department, also makes it a point to remind all the Club's
Members including Sulpicio to familiarize themselves with the Club's Rulebook as the rules
therein provided are applied to all Club related matters including claims procedures. A copy of
Ms. May Valles' email167 to Sulpicio dated 27 August 2002 is hereto attached as Annex "2"
and her letter168 to Sulpicio dated 17 October 2002 is hereto attached as Annex "3." Ms.
Valles was a former member of the Company's Hull Department and in both written
communications, she reminded Sulpicio through its Executive Vice-President and CFO Mr.
Carlos S. Go of certain Club Rules such as the prescriptive period to claim for lay-up
premium refund.
10. In reply to the 27 August 2002 email, Mr. Carlos S. Go, by a 28 August 2002 email 169 to
Ms. Valles, explained his understanding of the provision on the prescriptive period to claim for
lay-up premium refund under the Club's Rules, thereby clearly showing that Sulpicio was 
aware of the Club's Rules. A copy of the 28 August 2002 email of Mr. Go is hereto attached
as Annex "4."
11. To further prove Sulpicio's knowledge of Club's Rules, I hereto attach the following copies
of letters from Sulpicio addressed to the Company with attached letter by Sulpicio to the Club:
  Letter-request170 for refund of lay-up premiums for the vessel M/V Surigao
Princess dated 4 June 1993 as Annex "5";
 Letter-request171 for refund of lay-up premiums for the vessel M/V Manila
Princess dated 10 June 1998 as Annex '"6";
 Letter request172 for refund of lay-up premiums for the vessel M/V Filipina
Princess dated 21 June 1999 as Annex  "7";
 Letter-request173 for refund of lay-up premiums for the vessel M/V Manila
Princess dated 17 May 2001 as Annex "8"; and
 Letter-request174 for refund of lay-up premiums for the vessel M/V Nasipit
Princess dated 16 August 2002 as Annex "9";
In each of the above letters, Sulpicio declared to both the Company and the Club that "(w)e
shall therefore be glad to receive a credit note for the return of premium  under the Rules of
the Association."175 (Emphasis in the original)
Finally, Elmer Felipe, Manager of Marine Department of Seaboard-Eastern in charge of
Sulpicio's account, also narrated:
11. As insurers for the Hull & Machinery of Sulpicio's Fleet, the Company, through my
department, assisted Sulpicio in regard to its [Protection and Indemnity] cover by sending
copy of the Club's Rulebook while it was an active Member of the Club.
12. By way of example, in the year 2002, the Company sent five (5) copies of the Club's
Rulebook to Mr. Carlos S. Go, Executive Vice-President and CEO of Sulpicio as evidenced
by a transmittal letter dated 11 April 2002 duly signed by the Company's First Vice-President
Joli Co-Wu. A copy of said transmittal letter 176 dated 11 April 2002 is hereto attached as
Annex "1."
13. The other transmittal letters proving distribution of the Club's Rulebook to Sulpicio in its
other years of membership with the Club were among those discarded by the Company when
it moved . . . to a smaller office . .
14. [Sulpicio is presumed to] know the Club's Rules as it was provided with copies of the
Rulebook on an annual basis.
15. In fact, in a 8 May 2004 letter addressed to the Company, Sulpicio claimed for refund of
lay-up premiums from the Club in connection with the vessel M/V Princess of the World and
in Sulpicio's letter to the Club attached to the said 8 May 2004 letter, Sulpicio declared that
"(w)e shall therefore be glad to receive a credit note for the return of premium under the
Rules of the Association." This was followed by December 2004 letter for refund of lay-up
returns for the vessel M/V Princess of the World where Sulpicio also invoked the Club Rules.
A copy of the 8 May 2004 letter 177 with attachment is hereto attached as Annex "2" and a
copy of the 8 December 2004 letter 178 is hereto attached as Annex "3."
. . . .
18. More importantly, after the Club denied cover for the vessel M/V Princess of the World
and prior to the date when the termination of Sulpicio's entry in the Club took effect, our EVP,
Mr. Jose G. Banzon, Jr. sent an emai1 179 dated 30 November 2005 to Mr. Carlos Go
reminding Sulpicio of the remedy of voluntary arbitration under Rule 47 of the Club's
Rulebook and attaching a copy of Rule 47. Copies of these documents are attached as
Annex "4."180
These foregoing affidavits and the attached supporting documents consistently declared that
Sulpicio was given copies of the Rulebook on an annual basis and had even invoked its
provisions in making a claim from Steamship. Sulpicio's previous letters to Steamship
referring to provisions of the Club Rules show its knowledge. Sulpicio was also reminded of
the arbitration clause during the negotiations preceding the institution of the present case.
"[A] party is not relieved of the duty to exercise the ordinary care and prudence that would be
exacted in relation to other contracts. The conformity of the insured to the terms of the policy
is implied from [its] failure to express any disagreement with what is provided for." 181 The
agreement to submit all disputes to arbitration is a long standing provision in the Club Rules.
It was incumbent upon Sulpicio to familiarize itself with the Club Rules, under the
presumption that a person takes due care of its concerns. Being a member of Steamship for
20 years,182 it has been bound by its Rules and has been expected to abide by them in good
faith.
In Development Bank of the Philippines v. National Merchandising Corp., 183 the parties, who
were acute businessmen of experience, were presumed to have assented to the assailed
documents with full knowledge:
The principal stockholders and officers of NAMERCO, particularly the Sycips who co-signed
the promissory notes in question, were, as the lower court found, businessmen of experience
and intelligence . . . We might say — paraphrasing Tin Tua Sia vs. Yu Biao Sontua,  56 Phil.
707 — that they being of age and businessmen of experience, it must be presumed that they
had acted with due care and to have signed the documents in question with full knowledge of
.
their import and the obligations they were assuming thereby; that this presumption of law may
not be overcome by the mere testimony of the obligor or obligors; that, to permit a party,
when, sued upon a contract, to admit that he signed it but to deny that it expresses the
agreement he had made, or to allow him to admit that he signed it solely on the verbal
assurance given by one party, however high his station may be, that he would not be held
liable thereon, would destroy the value of all contracts. Indeed, it would be disastrous to give
more weight and reliability to the self-serving testimony of a party bound by the contract than
to the contents thereof. Verba volant, scripta manent.184
Sulpicio is estopped from denying knowledge of the Rulebook by its own acts and
representations, as evidenced by its various letters to Steamship, showing its familiarity with
the Rulebook and its provisions.
"In estoppel, a person, who by his [or her] deed or conduct has induced another to act in a
particular manner, is barred from adopting an inconsistent position, attitude or course of The present rule on multiple parties manifests due regard to the policy of the law in favor of
conduct that thereby causes loss or injury to another." 185 It further bars a party from denying arbitration. In light of the express mandate of Republic Act No. 9285 and the subsequent
or disproving a fact, which has become settled by its acts. 186 2009 Special ADR Rules, this Court's ruling in European Resources and Technologies, Inc. 
v. Ingenieuburo Birkhann + Nolte, Ingeniurgesellschaft Gmbh 188 is deemed abrogated.
Hence, this Court finds a preponderance of evidence showing that Sulpicio was given a copy
and had knowledge of the 2005/2006 Club Rules. Moreover, the 2005/2006 Club Rules' Notably, the Regional Trial Court did not rule on whether or not a valid and existing arbitration
provision on arbitration is valid and binding upon Sulpicio. .agreement existed between the parties. It merely stated in its Order. citing European
Resources, that:
III.B
["]Even if there is an arbitration clause, there are instances when referral to arbitration does
The Regional Trial Court should suspend proceedings to give way to arbitration. Even if there not appear to be the most prudent action. The object of arbitration is to allow the expeditious
are other defendants who are not parties to the arbitration agreement, arbitration is still determination of a dispute. Clearly, the issue before us could not be speedily and efficiently
proper. resolved in its entirety if we allow simultaneous arbitration proceedings and trial, or
suspension of trial pending arbitration."
Republic Act No. 9285 was approved on April 2, 2004 and was the controlling law at the time
the original and amended complaints were filed. Moreover, it is noted that defendants Seaboard-Eastern Insurance Co. Inc. and Pioneer
Insurance and Surety Corporation already filed their respective Answers to the second
Section 25 of Republic Act No. 9285 is explicit that: amended complaint.189

[W]here action is commenced by or against multiple parties, one or more of whom are parties
to an arbitration agreement, the court shall refer to arbitration those parties who are bound by On this basis, the Regional Trial Court denied Steamship's Motion to  Dismiss and/or to Refer
the arbitration agreement although the civil action may continue as to those who are not Case to Arbitration and directed it to file an answer.
bound by such arbitration agreement.
This Court finds that the Regional Trial Court acted in excess of its jurisdiction.

Rule 4.7 of the Special Rules on Alternative Dispute Resolution 187 (2009 Special ADR Rules)
further expresses:
The court shall not decline to refer some or all of the parties to arbitration for any of the
following reasons:
a. Not all of the disputes subject of the civil action may be referred to arbitration;
b. Not all of the parties to the civil action are bound by the arbitration agreement
and referral to arbitration would result in multiplicity of suits;
c. The issues raised in the civil action could be speedily and efficiently resolved
in its entirety by the court rather than in arbitration;
Where a motion is filed in court for the referral of a dispute to arbitration, Section 24 of
Republic Act No. 9285 ordains that the dispute shall be referred "to arbitration unless it finds
that the arbitration agreement is null and void, inoperative or incapable of being performed."
Thus, the Regional Trial Court went beyond its authority of determining only the issue of
whether or not there was a valid arbitration agreement between the parties when it denied
Steamship's Motion to Dismiss and/or to Refer Case to Arbitration solely on the ground that it
would not be the most prudent action under the circumstances of the case. The Regional
Trial Court went against the express mandate of Republic Act No. 9285. Consequently, the
Court of Appeals erred in finding no grave abuse of discretion on the part of the trial court in
denying referral to arbitration.
IV

d. Referral to arbitration does not appear to be the most prudent action; or

In G.R. No. 208603, Sulpicio contends that Steamship's acts were contumacious because
they were intended to defeat Civil Case No. 07-577 and oust the Regional Trial Court of its
e. The stay of the action would prejudice the rights of the parties to the civil
jurisdiction, without the approval of this Court.
action who are not bound by the arbitration agreement.
Sulpicio further contends that there was no valid off-setting of the amount of US$69,570.99
from the refund payable to it in the Unabia case because the issue on the propriety of the
referral to arbitration had yet to be resolved by this Court. 190 It adds that the "arbitration – anti-
suit injuction" cost was not a debt of Sulpicio but a unilateral charge arising from an arbitration
that it had not participated in, or was enforceable in the Philippines. 191
In its Comment/Opposition192 to the Petition for Indirect Contempt, Steamship contends that it
"exercised its right to set-off in good faith" 193 and that the amount set-off represents costs of
obtaining the Anti-Suit Injunction awarded to it by the English Commercial Court and are not
arbitration costs as contended by Sulpicio.194 It also holds that Sulpicio's prayer for restitution
of the offset amount was improper in a petition for indirect contempt. 195
Steamship emphasizes that even before the denial of its Motion to Dismiss in Civil Case No.
07-577 on July 11, 2008, it already commenced arbitration in London 196 on July 31, 2007.197 It
had also "obtained a permanent Anti-Suit Injunction [with interim award for costs] 198 from the
English Commercial Court on 4th April 2008[.]"199 The April 4, 2008 Order enjoined Sulpicio
from proceeding with Civil Case No. 07-577 and to refer the dispute to arbitration in
London.200
Steamship further avers that "Sulpicio was served a copy of an Order to file Claims
Submissions in the London arbitration and a copy of the Anti-Suit Injunction but it refused to
participate in the London Arbitration."201 It also did not pay the costs of the Anti-Suit
Injunction. Sulpicio refused "service of all orders, notices, pleadings and documents related to
the London arbitration and the Commercial Court proceedings." 202
Steamship adds that in 2012, Sulpicio filed a claim for reimbursement of US$96,958.47
representing passenger liabilities arising from the capsizing of one (1) of Sulpicio's fleet in
1998.203 Pursuant to Rule 32 of the Club Rules for the 1998 policy, which gave Steamship
"the right to make deduction 'from any claims . . . due to a Member' of 'any liabilities of such
Member to the Club,'"204 Steamship set-off the costs awarded by the English Commercial
Court from the amount reimbursed to Sulpicio. Sulpicio's brokers and lawyers were informed
of the set-off through an email dated December 3, 2012. 205
Steamship contends that there was no legal impediment when it initiated arbitration
proceedings in London.206 The action was taken in good faith to preserve its rights while
defending its position that Sulpicio's filing of Civil Case No. 07-577 constituted a breach of the
Club Rules.207 On the other hand, Sulpicio's acts were far from desirable for it did not only fail
to participate in the London arbitration proceedings but also evaded service of all notices so
that it could feign ignorance of the existence of arbitration proceedings." 208
This Court finds Sulpicio's arguments to be untenable.
Steamship's commencement of arbitration even before the Regional Trial Court had ruled on
its motion to dismiss and suspend proceedings does not constitute an "improper conduct"
that "impede[s], obstruct[s] or degrade[s] the administration of justice." 209
In Heirs of Trinidad de Leon vda. de Roxas v. Court of Appeals, 210 this Court explained the
concept of contempt of court:
Contempt of court is a defiance of the authority, justice or dignity of the court; such conduct
as tends to bring the authority and administration of the law into disrespect or to interfere with
or prejudice parties litigant or their witnesses during litigation . . .
Contempt of court is defined as a disobedience to the Court by acting in opposition to its
authority, justice and dignity. It signifies not only a willful disregard or disobedience of the
court's orders, but such conduct as tends to bring the authority of the court and the
administration of law into disrepute or in some manner to impede the due administration of
justice . . .
This Court has thus repeatedly declared that the power to punish for contempt is inherent in
all courts and is essential to the preservation of order in judicial proceedings and to the
enforcement of judgments, orders, and mandates of the court, and consequently, to the due
administration of justice . . .211
The court's contempt power should be exercised with restraint and for a preservative, and not
a vindictive, purpose. "Only in cases of clear and contumacious refusal to obey should the
power be exercised."212
In Lorenzo Shipping Corporation v. Distribution Management Association of the
Philippines,213 this Court held that:
There is no question that in contempt the intent goes to the gravamen of the offense. Thus,
the good faith, or lack of it, of the alleged contemnor should be considered. Where the act
complained of is ambiguous or does not clearly show on its face that it is contempt, and is
one which, if the party is acting in good faith, is within his rights, the presence or absence of a
contumacious intent is, in some instances, held to be determinative of its character. A person
should not be condemned for contempt where he contends for what he believes to be right
and in good faith institutes proceedings for the purpose, however erroneous may be his
conclusion as to his rights. To constitute contempt, the act must be done willfully and for an
illegitimate or improper purpose.214 (Citations omitted)
In Lim Lua v. Lua,215 the father's deferral in giving monthly support pendente lite granted by
the trial court was held not contumacious, considering that "he had not been remiss in
actually providing for the needs of his children." It was also taken into account that he
"believed in good faith that the trial and appellate courts, upon equitable grounds, would allow
him to offset the substantial amounts he had spent or paid directly to his children." This Court
explained:
Contempt of court is defined as a disobedience to the court by acting in opposition to its
authority, justice, and dignity. It signifies not only a willful disregard or disobedience of the
court's order, but such conduct which tends to bring the authority of the court and the
administration of law into disrepute or, in some manner, to impede the due administration of
justice. To constitute contempt, the act must be done willfully and for an illegitimate or
improper purpose. The good faith, or lack of it, of the alleged contemnor should be
considered.216
This Court finds no dear and contumacious conduct on the part of Steamship. It does not
appear that Steamship was motivated by bad faith in initiating the arbitration proceedings.
Rather, its act of commencing arbitration in London is but a bona fide attempt to preserve and
enforce its rights under the Club Rules.
There was no legal impediment at the time Steamship initiated London arbitration
proceedings. Steamship commenced arbitration on July 31, 2007 even before the Regional
Trial Court denied its Motion to Dismiss and/or Refer Case to Arbitration on July 11, 2008.
There was no order from the Regional Trial Court enjoining Steamship from initiating
arbitration proceedings in London. Besides, the 2009 Special ADR Rules specifically provided
that arbitration proceedings may be commenced or continued and an award may be made,
while the motion for the stay of civil action and for referral to arbitration is pending resolution
by the court.217
This Court notes that while the arbitration proceeding was commenced as early as July 31,
2007, it is only six (6) years later that Sulpicio filed its Petition 218 to cite Steamship for indirect
contempt. Sulpicio cannot invoke lack of knowledge of the London arbitration proceedings
due to several reasons. First, it received and replied 219 to the notice of commencement of
arbitration proceedings220 dated July 31, 2007. Second, Steamship presented evidence
showing Sulpicio's refusal to receive any notices, orders, or communications related to the
arbitration proceedings. Lastly, the pendency of the London arbitration was made known to
the Court of Appeals and this Court through Steamship's petitions. Sulpicio's belated filing of
its Petition, only after Steamship has deducted from the refund due it the alleged "arbitration
costs," indicates its lack of sincerity and good faith.
Finally, this Court finds Sulpicio's claim for damages to be improperly raised. It should be
addressed in an ordinary civil action. Its petition for indirect contempt is not the proper action
to determine the validity of the set-off and to make a factual determination relating to the
propriety of ordering restitution.
WHEREFORE, the Petition for Review in G.R. No. 196072 is GRANTED. The Decision dated
November 26, 2010 of the Court of Appeals in CA-G.R. SP No. 106103 and the Order dated
July 11, 2008 of the Regional Trial Court, Branch 149, Makati City in Civil Case No. 07-577
are SET ASIDE. The dispute between Sulpicio Lines, Inc. and Steamship Mutual
Underwriting (Bermuda) Limited is referred to arbitration in London in accordance with Rule
47 of the 2005/2006 Club Rules.
The Petition for Indirect Contempt in G.R. No. 208603 is DISMISSED for lack of merit.
SO ORDERED
G.R. No. L-25317 August 6, 1979
PHILIPPINE PHOENIX SURETY & INSURANCE COMPANY, Plaintiff-Appellee,
vs. WOODWORKS, INC., Defendant-Appellant.
Zosimo Rivas for appellant.chanrobles virtual law library
Manuel O. Chan for appellee.
MELENCIO-HERRERA, J.:
This case was certified to this Tribunal by the Court of Appeals in its Resolution of October 4,
1965 on a pure question of law and "because the issues raised are practically the same as
those in CA-G.R. No. 32017-R" between the same parties, which case had been forwarded to
us on April 1, 1964. The latter case, "Philippine Phoenix Surety & Insurance Inc. vs.
Woodworks, Inc.," docketed in this Court as L-22684, was decided on August 31, 1967 and
has been reported in 20 SCRA 1270.chanroblesvirtualawlibrary chanrobles virtual law library
Specifically, this action is for recovery of unpaid premium on a fire insurance policy issued by
plaintiff, Philippine Phoenix Surety & Insurance Company, in favor of defendant Woodworks,
Inc.chanroblesvirtualawlibrary chanrobles virtual law library
The following are the established facts: chanrobles virtual law library
On July 21, 1960, upon defendant's application, plaintiff issued in its favor Fire Insurance
Policy No. 9749 for P500,000.00 whereby plaintiff insured defendant's building, machinery
and equipment for a term of one year from July 21, 1960 to July 21, 1961 against loss by fire.
The premium and other charges including the margin fee surcharge of P590.76 and the
documentary stamps in the amount of P156.60 affixed on the Policy, amounted to
P10,593.36.chanroblesvirtualawlibrary chanrobles virtual law library
It is undisputed that defendant did not pay the premium stipulated in the Policy when it was
issued nor at any time thereafter.chanroblesvirtualawlibrarychanrobles virtual law library
On April 19, 1961, or before the expiration of the one-year term, plaintiff notified defendant,
through its Indorsement No. F-6963/61, of the cancellation of the Policy allegedly upon
request of defendant. 1 The latter has denied having made such a request. In said
Indorsement, plaintiff credited defendant with the amount of P3,110.25 for the unexpired
period of 94 days, and claimed the balance of P7,483.11 representing ,learned premium from
July 21, 1960 to 18th April 1961 or, say 271 days." On July 6, 1961, plaintiff demanded in
writing for the payment of said amount. 2 Defendant, through counsel, disclaimed any liability
in its reply- letter of August 15, 1961, contending, in essence, that it need not pay premium
"because the Insurer did not stand liable for any indemnity during the period the premiums
were not paid." 3 chanrobles virtual law library
On January 30, 1962, plaintiff commenced action in the Court of First Instance of Manila,
Branch IV (Civil Case No. 49468), to recover the amount of P7,483.11 as "earned premium."
Defendant controverted basically on the theory that its failure "to pay the premium after the
issuance of the policy put an end to the insurance contract and rendered the policy
unenforceable." 4 chanrobles virtual law library
On September 13, 1962, judgment was rendered in plaintiff's favor "ordering defendant to pay
plaintiff the sum of P7,483.11, with interest thereon at the rate of 6%, per annum from
January 30, 1962, until the principal shall have been fully paid, plus the sum of P700.00 as
attorney's fees of the plaintiff, and the costs of the suit." From this adverse Decision,
defendant appealed to the Court of Appeals which, as heretofore stated, certified the case to
us on a question of law.chanroblesvirtualawlibrary chanrobles virtual law library
The errors assigned read:
1. The lower court erred in sustaining that Fire Insurance Policy, Exhibit A, was a binding
contract even if the premium stated in the policy has not been
paid.chanroblesvirtualawlibrary chanrobles virtual law library
2. That the lower court erred in sustaining that the premium in Insurance Policy, Exhibit B,
became an obligation which was demandable even after the period in the Policy has
expired.chanroblesvirtualawlibrary chanrobles virtual law library
3. The lower court erred in not deciding that a premium not paid is not a debt enforceable by
action of the insurer.
We find the appeal meritorious.chanroblesvirtualawlibrary chanrobles virtual law library
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." 5 The
consideration is the "premium". "The premium must be paid at the time and in the way and
manner specified in the policy and, if not so paid, the policy will lapse and be forfeited by its
own terms." 6chanrobles virtual law library
The provisions on premium in the subject Policy read:
THIS POLICY OF INSURANCE WITNESSETH, THAT in consideration of - MESSRS.
WOODWORKS, INC. - hereinafter called the Insured, paying to the PHILIPPINE PHOENIX
SURETY AND INSURANCE, INC., hereinafter called the Company, the sum of - PESOS
NINE THOUSAND EIGHT HUNDRED FORTY SIX ONLY - the Premium for the first period
hereinafter mentioned. ...chanroblesvirtualawlibrarychanrobles virtual law library
xxx xxx xxxchanrobles virtual law library
THE COMPANY HEREBY AGREES with the Insured ... that if the Property above described,
or any part thereof, shall be destroyed or damaged by Fire or Lightning after payment of
Premium, at any time between 4:00 o'clock in the afternoon of the TWENTY FIRST day of
JULY One Thousand Nine Hundred and SIXTY and 4:00 o'clock in the afternoon of the
TWENTY FIRST day of JULY One Thousand Nine Hundred and SIXTY ONE. ... (Emphasis
supplied)
Paragraph "2" of the Policy further contained the following condition:
2. No payment in respect of any premium shall be deemed to be payment to the Company
unless a printed form of receipt for the same signed by an Official or duly-appointed Agent of
the Company shall have been given to the Insured.
Paragraph "10" of the Policy also provided:
10. This insurance may be terminated at any time at the request of the Insured, in which case
the Company will retain the customary short period rate for the time the policy has been in
force. This insurance may also at any time be terminated at the option of the Company, on
notice to that effect being given to the Insured, in which case the Company shall be liable to
repay on demand a ratable proportion of the premium for the unexpired term from the date of
the cancelment.
Clearly, the Policy provides for pre-payment of premium. Accordingly; "when the policy is
tendered the insured must pay the premium unless credit is given or there is a waiver, or
some agreement obviating the necessity for prepayment." 7 To constitute an extension of
credit there must be a clear and express agreement therefor." 8chanrobles virtual law library
From the Policy provisions, we fail to find any clear agreement that a credit extension was
accorded defendant. And even if it were to be presumed that plaintiff had extended credit
from the circumstances of the unconditional delivery of the Policy without prepayment of the
premium, yet it is obvious that defendant had not accepted the insurer's offer to extend credit,
which is essential for the validity of such agreement.
An acceptance of an offer to allow credit, if one was made, is as essential to make a valid
agreement for credit, to change a conditional delivery of an insurance policy to an
unconditional delivery, as it is to make any other contract. Such an acceptance could not be
merely a mental act or state of mind, but would require a promise to pay made known in
some manner to defendant. 9
In this respect, the instant case differs from that involving the same parties entitled Philippine Teehankee (Chairman), Fernandez, Guerrero and De Castro, JJ.,
Phoenix Surety & Insurance Inc. vs. Woodworks, Inc., 10 where recovery of the balance of the concur.chanroblesvirtualawlibrary  chanrobles virtual law library
unpaid premium was allowed inasmuch as in that case "there was not only a perfected
contract of insurance but a partially performed one as far as the payment of the agreed Makasiar, J., is on leave.
premium was concerned." This is not the situation obtaining here where no partial payment of
premiums has been made whatsoever.chanroblesvirtualawlibrary chanrobles virtual law
library

Since the premium had not been paid, the policy must be deemed to have lapsed.

The non-payment of premiums does not merely suspend but put, an end to an insurance
contract, since the time of the payment is peculiarly of the essence of the
contract. 11 chanrobles virtual law library

... the rule is that under policy provisions that upon the failure to make a payment of a
premium or assessment at the time provided for, the policy shall become void or forfeited, or
the obligation of the insurer shall cease, or words to like effect, because the contract so
prescribes and because such a stipulation is a material and essential part of the contract.
This is true, for instance, in the case of life, health and accident, fire and hail insurance
policies. 12

In fact, if the peril insured against had occurred, plaintiff, as insurer, would have had a valid
defense against recovery under the Policy it had issued. Explicit in the Policy itself is plaintiff's
agreement to indemnify defendant for loss by fire only "after payment of premium,"
supra. Compliance by the insured with the terms of the contract is a condition precedent to
the right of recovery.

The burden is on an insured to keep a policy in force by the payment of premiums, rather
than on the insurer to exert every effort to prevent the insured from allowing a policy to elapse
through a failure to make premium payments. The continuance of the insurer's obligation is
conditional upon the payment of premiums, so that no recovery can be had upon a lapsed
policy, the contractual relation between the parties having ceased. 13

Moreover, "an insurer cannot treat a contract as valid for the purpose of collecting premiums
and invalid for the purpose of indemnity." 14 chanrobles virtual law library

The foregoing findings are buttressed by section 77 of the Insurance Code (Presidential
Decree No. 612, promulgated on December 18, 1974), which now provides that no contract
of insurance issued by an insurance company is valid and binding unless and until the
premium thereof has been paid, notwithstanding any agreement to the
contrary.chanroblesvirtualawlibrary chanrobles virtual law library

WHEREFORE, the judgment appealed from is reversed, and plaintiff's complaint hereby
dismissed.