Cases in Insurance Instance of Manila dismissed the action without pronouncement as to costs.

Upon appeal to the Court

of Appeals, the judgment of the Court of First Instance of Manila was affirmed, with costs. The case is
FIFTH MEETING now before us on appeal by certiorari from the decision of the Court of Appeals.

The Court of Appeals overruled the contention of the petitioner that the respondent corporation became
Topics: an enemy when the United States declared war against Germany, relying on English and American
Parties to the Contract cases which held that a corporation is a citizen of the country or state by and under the laws of which
Control Test on Corporations it was created or organized. It rejected the theory that nationality of private corporation is determine
Proper party to file action by the character or citizenship of its controlling stockholders.
Types of Mortgage Clauses
There is no question that majority of the stockholders of the respondent corporation were German
subjects. This being so, we have to rule that said respondent became an enemy corporation upon the
outbreak of the war between the United States and Germany. The English and American cases relied
G.R. No. L-2294 May 25, 1951 upon by the Court of Appeals have lost their force in view of the latest decision of the Supreme Court
of the United States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law.
Ed. Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In "Enemy
FILIPINAS COMPAÑIA DE SEGUROS, petitioner, Corporation" by Martin Domke, a paper presented to the Second International Conference of the Legal
vs. Profession held at the Hague (Netherlands) in August. 1948 the following enlightening passages appear:
CHRISTERN, HUENEFELD and CO., INC., respondent.

Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333
in the sum of P1000,000, covering merchandise contained in a building located at No. 711 Roman
Street, Binondo Manila. On February 27, 1942, or during the Japanese military occupation, the building
and insured merchandise were burned. In due time the respondent submitted to the petitioner its claim
under the policy. The salvage goods were sold at public auction and, after deducting their value, the
total loss suffered by the respondent was fixed at P92,650. The petitioner refused to pay the claim on
the ground that the policy in favor of the respondent had ceased to be in force on the date the United
States declared war against Germany, the respondent Corporation (though organized under and by
virtue of the laws of the Philippines) being controlled by the German subjects and the petitioner being
a company under American jurisdiction when said policy was issued on October 1, 1941. The petitioner,
however, in pursuance of the order of the Director of Bureau of Financing, Philippine Executive
Commission, dated April 9, 1943, paid to the respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the purpose
of recovering from the respondent the sum of P92,650 above mentioned. The theory of the petitioner
is that the insured merchandise were burned up after the policy issued in 1941 in favor of the respondent
corporation has ceased to be effective because of the outbreak of the war between the United States
and Germany on December 10, 1941, and that the payment made by the petitioner to the respondent
corporation during the Japanese military occupation was under pressure. After trial, the Court of First
Since World War I, the determination of enemy nationality of corporations has been discussion
in many countries, belligerent and neutral. A corporation was subject to enemy legislation
when it was controlled by enemies, namely managed under the influence of individuals or
corporations, themselves considered as enemies. It was the English courts which first
the Daimler case applied this new concept of "piercing the corporate veil," which was adopted
by the peace of Treaties of 1919 and the Mixed Arbitral established after the First World War.
The United States of America did not adopt the control test during the First World War. Courts
refused to recognized the concept whereby American-registered corporations could be
considered as enemies and thus subject to domestic legislation and administrative measures
regarding enemy property.
World War II revived the problem again. It was known that German and other enemy interests
were cloaked by domestic corporation structure. It was not only by legal ownership of shares
that a material influence could be exercised on the management of the corporation but also by
long term loans and other factual situations. For that reason, legislation on enemy property
enacted in various countries during World War II adopted by statutory provisions to the control
test and determined, to various degrees, the incidents of control. Court decisions were
rendered on the basis of such newly enacted statutory provisions in determining enemy
character of domestic corporation.
The United States did not, in the amendments of the Trading with the Enemy Act during the
last war, include as did other legislations the applications of the control test and again, as in
World War I, courts refused to apply this concept whereby the enemy character of an American
or neutral-registered corporation is determined by the enemy nationality of the controlling
stockholders.
 Measures of blocking foreign funds, the so called freezing regulations, and other administrative
practice in the treatment of foreign-owned property in the United States allowed to large
degree the determination of enemy interest in domestic corporations and thus the application
of the control test. Court decisions sanctioned such administrative practice enacted under the
First War Powers Act of 1941, and more recently, on December 8, 1947, the Supreme Court
of the United States definitely approved of the control theory. In Clark vs. Uebersee Finanz
Korporation, A. G., dealing with a Swiss corporation allegedly controlled by German interest,
the Court: "The property of all foreign interest was placed within the reach of the vesting power
(of the Alien Property Custodian) not to appropriate friendly or neutral assets but to reach
enemy interest which masqueraded under those innocent fronts. . . . The power of seizure and
vesting was extended to all property of any foreign country or national so that no innocent
appearing device could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the appealed
decision. However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz., (Supp.
9) 299, we already held that China Banking Corporation came within the meaning of the word "enemy"
as used in the Trading with the Enemy Acts of civilized countries not only because it was incorporated
under the laws of an enemy country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone except
a public enemy may be insured." It stands to reason that an insurance policy ceases to be allowable as
soon as an insured becomes a public enemy.
Effect of war, generally. — All intercourse between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by the law of nations. Such prohibition includes
all negotiations, commerce, or trading with the enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of voluntary submission to it; or receiving its
protection; also all acts concerning the transmission of money or goods; and all contracts
relating thereto are thereby nullified. It further prohibits insurance upon trade with or by the
enemy, upon the life or lives of aliens engaged in service with the enemy; this for the reason
that the subjects of one country cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien subjects, or to do anything
detrimental too their country's interest. The purpose of war is to cripple the power and exhaust
the resources of the enemy, and it is inconsistent that one country should destroy its enemy's
property and repay in insurance the value of what has been so destroyed, or that it should in
such manner increase the resources of the enemy, or render it aid, and the commencement of
war determines, for like reasons, all trading intercourse with the enemy, which prior thereto
may have been lawful. All individuals therefore, who compose the belligerent powers, exist, as
to each other, in a state of utter exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law,
pp. 5352-5353.)
In the case of an ordinary fire policy, which grants insurance only from year, or for some other
specified term it is plain that when the parties become alien enemies, the contractual tie is
broken and the contractual rights of the parties, so far as not vested. lost. (Vance, the Law on
Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the insurance policy
issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be
valid and enforcible, and since the insured goods were burned after December 10, 1941, and during
the war, the respondent was not entitled to any indemnity under said policy from the petitioner.
However, elementary rules of justice (in the absence of specific provision in the Insurance Law) require
that the premium paid by the respondent for the period covered by its policy from December 11, 1941,
should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether
the policy in question became null and void upon the declaration of war between the United States and
Germany on December 10, 1941, and its judgment in favor of the respondent corporation was
predicated on its conclusion that the policy did not cease to be in force. The Court of Appeals necessarily
assumed that, even if the payment by the petitioner to the respondent was involuntary, its action is not
tenable in view of the ruling on the validity of the policy. As a matter of fact, the Court of Appeals held
that "any intimidation resorted to by the appellee was not unjust but the exercise of its lawful right to
claim for and received the payment of the insurance policy," and that the ruling of the Bureau of
Financing to the effect that "the appellee was entitled to payment from the appellant was, well founded."
Factually, there can be no doubt that the Director of the Bureau of Financing, in ordering the petitioner
to pay the claim of the respondent, merely obeyed the instruction of the Japanese Military
Administration, as may be seen from the following: "In view of the findings and conclusion of this office
contained in its decision on Administrative Case dated February 9, 1943 copy of which was sent to your
office and the concurrence therein of the Financial Department of the Japanese Military Administration,
and following the instruction of said authority, you are hereby ordered to pay the claim of Messrs.
Christern, Huenefeld & Co., Inc. The payment of said claim, however, should be made by means of
crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under the circumstances
on this case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippines
currency of P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay
to the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in
Philippine currency, that should be returned by the petitioner for the unexpired term of the policy in
question, beginning December 11, 1941. Without costs. So ordered.
G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the people
at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled,
women, and children. The State shall endeavor to provide free medical care to paupers.1
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July
10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance organization to
take care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to various preventive, diagnostic and
curative medical services provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a hospital or clinic owned,
operated or accredited by it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency taxes,
including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of
₱224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code
xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on
the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner
is hereby ORDERED to PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and
₱31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid
for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force
and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND
SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST
assessment. He claimed that petitioner’s health care agreement was a contract of insurance subject to
DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement was
in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as
it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered
petitioner to desist from collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and
20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code,
until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We
held that petitioner’s health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also ruled that petitioner’s contention that it
is a health maintenance organization (HMO) and not an insurance company is irrelevant because
contracts between companies like petitioner and the beneficiaries under their plans are treated as
insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental
motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a
company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as
an HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect
the CA’s disposition that health care services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not
those contemplated under Section 185.
(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health
insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in
Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered moot
and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on
June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of
₱5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.8
We find merit in petitioner’s motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange Commission on
June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals who
enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and therapeutic processes
in the event of an injury or sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-
to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic owned,
operated or accredited by petitioner, through physicians, medical and dental practitioners under
contract with it. It negotiates with such health care practitioners regarding payment schemes, financing
and other procedures for the delivery of health services. Except in cases of emergency, the professional
services are to be provided only by petitioner's physicians, i.e. those directly employed by it11 or whose
services are contracted by it.12 Petitioner also provides hospital services such as room and board
accommodation, laboratory services, operating rooms, x-ray facilities and general nursing care.13 If and
when a member avails of the benefits under the agreement, petitioner pays the participating physicians
and other health care providers for the services rendered, at pre-agreed rates.14
To avail of petitioner’s health care programs, the individual members are required to sign and execute
a standard health care agreement embodying the terms and conditions for the provision of the health
care services. The same agreement contains the various health care services that can be engaged by
the enrolled member, i.e., preventive, diagnostic and curative medical services. Except for the curative
aspect of the medical service offered, the enrolled member may actually make use of the health care
services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer
because its agreements are treated as insurance contracts and the DST is not a tax on the business but
an excise on the privilege, opportunity or facility used in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to characterize the business it is engaged
in, that is, to determine whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for DST on its health care agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of
petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business
of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing
the validity or legality of any bond or other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such person, company or
corporation, there shall be collected a documentary stamp tax of fifty centavos (₱0.50) on each four
pesos (₱4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end,
a construction which renders every word operative is preferred over that which makes some words idle
and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we
choose the interpretation which gives effect to the whole of the statute – its every word.18
From the language of Section 185, it is evident that two requisites must concur before the DST can
apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of
indemnity and (2) the maker should be transacting the business of accident, fidelity, employer’s
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an
HMO is "an entity that provides, offers or arranges for coverage of designated health services needed
by plan members for a fixed prepaid premium."19 The payments do not vary with the extent, frequency
or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent
taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is received
therefore, shall not be deemed conclusive to show that the making thereof does not constitute the doing
or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they have
applied is whether the assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization or whether they are merely
incidental to its business. If these are the principal objectives, the business is that of insurance. But if
they are merely incidental and service is the principal purpose, then the business is not insurance.
Applying the "principal object and purpose test,"22 there is significant American case law supporting the
argument that a corporation (such as an HMO, whether or not organized for profit), whose main object
is to provide the members of a group with health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health Association should not be considered as engaged in
insurance activities since it was created primarily for the distribution of health care services rather than
the assumption of insurance risk.
xxx Although Group Health’s activities may be considered in one aspect as creating security against
loss from illness or accident more truly they constitute the quantity purchase of well-rounded,
continuous medical service by its members. xxx The functions of such an organization are not
identical with those of insurance or indemnity companies. The latter are concerned primarily, if
not exclusively, with risk and the consequences of its descent, not with service, or its extension in kind,
quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made possible by quantity purchasing
and economies in operation. Its primary purpose is to reduce the cost rather than the risk of
medical care; to broaden the service to the individual in kind and quantity; to enlarge the
number receiving it; to regularize it as an everyday incident of living, like purchasing food
and clothing or oil and gas, rather than merely protecting against the financial loss caused
by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It
is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the regularization of service as well
as payment, the substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the indemnification
for cost after the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial difference between
contracting in this way for the rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and
other types of legal arrangement and economic function becomes faint, if not extinct. This is especially
true when the contract is for the sale of goods or services on contingency. But obviously it was not the
purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk.
That view would cause them to engulf practically all contracts, particularly conditional sales and
contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion
of all others present or their subordination to it. The question turns, not on whether risk is
involved or assumed, but on whether that or something else to which it is related in the
particular plan is its principal object purpose.24 (Emphasis supplied)
In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan
of operation as a whole of the corporation, it was service rather than indemnity which stood as its
principal purpose.
There is another and more compelling reason for holding that the service is not engaged in the insurance
business. Absence or presence of assumption of risk or peril is not the sole test to be applied
in determining its status. The question, more broadly, is whether, looking at the plan of
operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance company
is that HMOs undertake to provide or arrange for the provision of medical services through participating
physicians while insurance companies simply undertake to indemnify the insured for medical expenses
incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue
Shield of New Jersey27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and accident insurers is
that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only undertake
to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in
the policy.
xxx xxx xxx
The primary purpose of a medical service corporation, however, is an undertaking to provide physicians
who will render services to subscribers on a prepaid basis. Hence, if there are no physicians
participating in the medical service corporation’s plan, not only will the subscribers be
deprived of the protection which they might reasonably have expected would be
provided, but the corporation will, in effect, be doing business solely as a health and accident
indemnity insurer without having qualified as such and rendering itself subject to the more stringent
financial requirements of the General Insurance Laws….
A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in return for which
the health service corporation agrees to make payment directly to the participating
provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made directly to the provider of these
services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case of
emergency by non-participating health providers would still be incidental to petitioner’s purpose of
providing and arranging for health care services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is required to set up a system and the
facilities for the delivery of such medical services. This indubitably shows that indemnification is not its
sole object.
In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical services
intended to keep members from developing medical conditions or diseases.30 As an HMO, it is its
obligation to maintain the good health of its members. Accordingly, its health care programs are
designed to prevent or to minimize the possibility of any assumption of risk on its part. Thus,
its undertaking under its agreements is not to indemnify its members against any loss or damage arising
from a medical condition but, on the contrary, to provide the health and medical services needed to
prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted
U.S. cases, we are not saying that petitioner’s operations are identical in every respect to those of the
HMOs or health providers which were parties to those cases. What we are stating is that, for the purpose
of determining what "doing an insurance business" means, we have to scrutinize the operations of the
business as a whole and not its mere components. This is of course only prudent and appropriate, taking
into account the burdensome and strict laws, rules and regulations applicable to insurers and other be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner
entities engaged in the insurance business. Moreover, we are also not unmindful that there are other assumes the risk of paying for the costs of the services even if they are significantly and substantially
American authorities who have found particular HMOs to be actually engaged in insurance activities.32 more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or
spreads them out among a large group of persons bearing a similar risk, that is, among all the other
members of the health care program. This is insurance.37
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident
from the fact that it is not supervised by the Insurance Commission but by the Department of
Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that We reconsider. We shall quote once again the pertinent portion of Section 185:
petitioner is not engaged in the insurance business. This determination of the commissioner must be
accorded great weight. It is well-settled that the interpretation of an administrative agency which is
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of
or renewed by any person, association or company or corporation transacting the business of accident,
Appeals:34
fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and
In construing this provision, we should be guided by the principle that tax statutes are strictly construed
satisfying those needs; it also relates to the accumulation of experience and growth of specialized
against the taxing authority.38 This is because taxation is a destructive power which interferes with the
capabilities by the administrative agency charged with implementing a particular statute. In Asturias
personal and property rights of the people and takes from them a portion of their property for the
Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that executive officials are
support of the government.39 Hence, tax laws may not be extended by implication beyond the clear
presumed to have familiarized themselves with all the considerations pertinent to the meaning and
import of their language, nor their operation enlarged so as to embrace matters not specifically
purpose of the law, and to have formed an independent, conscientious and competent expert opinion
provided.40
thereon. The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed judgment, and the
fact that they frequently are the drafters of the law they interpret.36 We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement
is in the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases
did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a health
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
service provider to a member under the terms of their health care agreement. Such contracts, as
The NIRC of 1997
contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For
this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.
Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of
indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that petitioner’s
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
health care agreements are contracts of indemnity and are therefore insurance contracts:
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:
It is … incorrect to say that the health care agreement is not based on loss or damage because, under
the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical
1. The insured has an insurable interest;
and related expenses (such as professional fees of physicians). The term "loss or damage" is broad
enough to cover the monetary expense or liability a member will incur in case of illness or injury.
2. The insured is subject to a risk of loss by the happening of the designed peril;
Under the health care agreement, the rendition of hospital, medical and professional services to the
member in case of sickness, injury or emergency or his availment of so-called "out-patient services" 3. The insurer assumes the risk;
(including physical examination, x-ray and laboratory tests, medical consultations, vaccine
administration and family planning counseling) is the contingent event which gives rise to liability on 4. Such assumption of risk is part of a general scheme to distribute actual losses among a
the part of the member. In case of exposure of the member to liability, he would be entitled to large group of persons bearing a similar risk and
indemnification by petitioner.

5. In consideration of the insurer’s promise, the insured pays a premium.41

Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to
Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it
is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned above
would be an insurance contract. The primary purpose of the parties in making the contract may
negate the existence of an insurance contract. For example, a law firm which enters into contracts
with clients whereby in consideration of periodical payments, it promises to represent such clients in all
suits for or against them, is not engaged in the insurance business. Its contracts are simply for the
purpose of rendering personal services. On the other hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits
for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the
business of insurance. Unlike the lawyer’s retainer contract, the essential purpose of such a contract is
not to render personal services, but to indemnify against loss and damage resulting from the defense
of actions for malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that should
be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital, medical and professional services rendered
by the petitioner’s physician or affiliated physician to him. In case of availment by a member of the
benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter
does not pay any third party. Instead, it is the petitioner who pays the participating physicians and
other health care providers for the services rendered at pre-agreed rates. The member does not make
any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the
part of the member to any third party-provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the member merely avails of
medical services to be paid or already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine
administration as well as family planning counseling, even in the absence of any peril, loss or damage
on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a
non-participating physician or hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not confined to the happening of a contingency
but includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health
care contracts called for the defendant to partially reimburse a subscriber for treatment received from
a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined
that "the primary activity of the defendant (was) the provision of podiatric services to subscribers in
consideration of prepayment for such services."44 Since indemnity of the insured was not the focal point
of the agreement but the extension of medical services to the member at an affordable cost, it did not
partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears
a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts
(like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the
risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated
on the basis of assumptions made relative to the insured.45
However, assuming that petitioner’s commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not
qualify as an insurance contract because petitioner’s objective is to provide medical services at reduced
cost, not to distribute risk like an insurer.
In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is not
an insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health care
agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The text of
Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements were not
even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189
(otherwise known as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and became
effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim
reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and
things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper
upon which such instrument, matters, or things or any of them shall be written or printed by any person
or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and
five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employer’s liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116,
Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No. 2339. The
very detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the
pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which
codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on
October 1, 1946, the DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158
(NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10,
1984 respectively, the DST rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was
renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the
rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997),
the subject legal provision was retained as the present Section 185. In 2004, amendments to the DST
provisions were introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed
Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim that Health
Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and
having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there
are 36 registered HMOs with a total enrollment of more than 2 million.49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that
when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However,
when the various amendments to the DST law were enacted, they were already in existence in the
Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the
legislature to impose DST on health care agreements, it could have done so in clear and categorical
terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific
provision on the DST liability of health care agreements of HMOs at a time they were already known as
such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed
its DST liability only on January 27, 2000, after more than a decade in the business as an
HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to
say that health care agreements were never, at any time, recognized as insurance contracts or deemed
engaged in the business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is to pay it.51 So potent
indeed is the power that it was once opined that "the power to tax involves the power to destroy." 52
Petitioner claims that the assessed DST to date which amounts to ₱376 million53 is way beyond its net
worth of ₱259 million.54 Respondent never disputed these assertions. Given the realities on the ground,
imposing the DST on petitioner would be highly oppressive. It is not the purpose of the government to
throttle private business. On the contrary, the government ought to encourage private
enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable consequence but killing the business of an
entity is another matter and should not be allowed. It is counter-productive and ultimately subversive
of the nation’s thrust towards a better economy which will ultimately benefit the majority of our
people.59
Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and
1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on December
10, 2007. It paid ₱5,127,149.08 representing 5% of its net worth as of the year ended December 31,
2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is
entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil,
criminal or administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay
any and all internal revenue taxes for taxable year 2005 and prior years.61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under the
1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this
case as discussed above, respondent concedes that such tax amnesty extinguishes the tax
liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax fraud
under Section 10 of said amnesty law.62 (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program
under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for DST for the
taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty under RA
9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound
by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of Philamcare
Health Systems is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition
of the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being
questioned. As a result, our ruling in that case has already become final.67 When a minute resolution
denies or dismisses a petition for failure to comply with formal and substantive requirements, the
challenged decision, together with its findings of fact and legal conclusions, are deemed sustained.68 But
what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-
Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and
the same issues, was previously disposed of by the Court thru a minute resolution dated February 17,
2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no
bearing" on the latter case because the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years.72
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed clearly and
distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only by the
clerk of court by authority of the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports.
Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.73 Indeed, as a rule, this Court
lays down doctrines or principles of law which constitute binding precedent in a decision duly signed by
the members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for DST
on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot
successfully invoke the minute resolution in that case (which is not even binding precedent) in its favor.
Nonetheless, in view of the reasons already discussed, this does not detract in any way from the fact
that petitioner’s health care agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185 of the
NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the same
should not be arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate medical services at
a cost which the average wage earner can afford. HMOs arrange, organize and manage health care
treatment in the furtherance of the goal of providing a more efficient and inexpensive health care system
made possible by quantity purchasing of services and economies of scale. They offer advantages over
the pay-for-service system (wherein individuals are charged a fee each time they receive medical
services), including the ability to control costs. They protect their members from exposure to the high
cost of hospitalization and other medical expenses brought about by a fluctuating economy. Accordingly,
they play an important role in society as partners of the State in achieving its constitutional mandate
of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition will
elevate the cost of health care services. This will in turn necessitate an increase in the membership
fees, resulting in either placing health services beyond the reach of the ordinary wage earner or driving
the industry to the ground. At the end of the day, neither side wins, considering the indispensability of
the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court
of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist
from collecting the said tax.
No costs.
SO ORDERED.
G.R. No. L-23491 July 31, 1968
TAURUS TAXI CO., INC., FELICITAS V. MONJE, ET AL., plaintiffs-appellees,
vs.
THE CAPITAL INSURANCE & SURETY CO., INC., defendant-appellant.
Vergara and Dayot for plaintiffs-appellees.
Achacoso, Nera and Ocampo for defendant-appellant.
FERNANDO, J.:
The principal legal question in this appeal from a lower court decision, ordering defendant-appellant
The Capital Insurance & Surety Co., Inc. to pay the plaintiff-appellee Taurus Taxi Co., Inc. as well as
plaintiffs-appellees, widow and children of the deceased Alfredo Monje, who, in his lifetime, was
employed as a taxi driver of such plaintiff-appellee, "the sum of P5,000.00 with interest thereon at the
legal rate from the filing of the complaint until fully paid," with P500.00 as attorney's fees and the costs
of the suit, is whether or not a provision in the insurance contract that defendant-appellant will
indemnify any authorized driver provided that [he] is not entitled to any indemnity under any other
policy, it being shown that the deceased was paid his workman's compensation from another insurance
policy, should defeat such a right to recover under the insurance contract subject of this suit. The lower
court answered in the negative. Its holding cannot be successfully impugned.
The appealed decision stated at the outset that the motion for judgment on the pleadings filed by the
plaintiffs was granted, the defendant having no objection and the issue presented being capable of
resolution without the need of presenting any evidence. Then the decision continues: "Alfredo Monje,
according to the complaint, was employed as taxi driver by the plaintiff Taurus Taxi Co., Inc. On
December 6, 1962, the taxi he was driving collided with a Transport Taxicab at the intersection of Old
Sta. Mesa and V. Mapa Streets, Manila, resulting in his death. At the time of the accident, there was
subsisting and in force Commercial Vehicle Comprehensive Policy No. 101, 737 ... issued by the
defendant to the Taurus Taxi Co., Inc. The amount for which each passenger, including the driver, is
insured is P5,000.00. After the issuance of policy No. 101, 737, the defendant issued the Taurus Taxi
Co., Inc. Indorsement No. 1 which forms part of the policy ... " 1 Reference was then made to plaintiff-
appellee Felicitas Monje being the widow of the taxi driver, the other plaintiffs-appellees with the
exception of the Taurus Taxi Co., Inc., being the children of the couple. After which it was noted that
plaintiff Taurus Taxi Co., Inc. made representations "for the payment of the insurance benefit
corresponding to her and her children since it was issued in its name, benefit corresponding to her and
her children, ... but despite demands ... the defendant refused and still refuses to pay them." 2
On the above facts, the liability apparently clear, the defenses interposed by defendant insurance
company being in the opinion of the lower court without merit, the aforesaid judgment was rendered.
This being a direct appeal, to us on questions of law, the facts as found by the lower court cannot be
controverted.
Defendant-appellant Capital Insurance & Surety Co. Inc. alleged as the first error of the lower court its
failure to hold "that in view of the fact that the deceased Alfredo Monje was entitled to indemnity under
another insurance policy issued by Ed. A. Keller Co., Ltd., the heirs of the said deceased are not entitled
to indemnity under the insurance policy issued by appellant for the reason that the latter policy contains
a stipulation that "the company will indemnify any authorized driver provided that such authorized
driver is not entitled to indemnity under any other policy." " 3 In the discussion of the above error,
defendant-appellant stated the following: "The facts show that at the time of his death, the deceased
Alfredo Monje, as authorized driver and employee of plaintiff Taurus Taxi Co., Inc., was entitled to
indemnity under another insurance policy, then subsisting, which was Policy No. 50PH-1605 issued by
Ed. A. Keller Co., Ltd. to plaintiff Taurus Taxi Co., Inc. As a matter of fact, the indemnity to which the
deceased Alfredo Monje was entitled under the said Policy No. 50PH-1605 was paid by Ed. A. Keller Co.,
Ltd. to the heirs of Alfredo Monje on December 28, 1962, as evidenced by the records of W.C.C. Case
No. A88637 entitled "Felicitas V. Monje, et al. vs. Taurus Taxi Co., Inc.", Regional Office No. 4,
Department of Labor, Manila ... " 4
The above defense, based on a fact which was not disputed, was raised and rightfully rejected by the
lower court. From its own version, defendant-appellant would seek to escape liability on the plea that
the workman's compensation to which the deceased driver was rightfully entitled was settled by the
employer through a policy issued by another insurance firm. What was paid therefore was not indemnity
but compensation.
Since what is prohibited by the insurance policy in question is that any "authorized driver of plaintiff
Taurus Taxi Co., Inc." should not be "entitled to any indemnity under any policy", it would appear
indisputable that the obligation of defendant-appellant under the policy had not in any wise been
extinguished. It is too well-settled to need the citation of authorities that what the law requires enters
into and forms part of every contract. The Workmen's Compensation Act, explicitly requires that an
employee suffering any injury or death arising out of or in the course of employment be compensated.
The fulfillment of such statutory obligation cannot be the basis for evading the clear, explicit and
mandatory terms of a policy.
In the same way as was held in Benguet Consolidated, Inc. v. Social Security System 5 that sickness
benefits under the Social Security Act may be recovered simultaneously with disability benefits under
the Workmen's Compensation Act, the previous payment made of the compensation under such
legislation is no obstacle by virtue of a clause like that invoked by defendant-appellant to the payment WHEREFORE, the appealed decision of the lower court ordering defendant-appellant "to pay the
of indemnity under the insurance policy. plaintiffs the sum of P5,000.00 with interest thereon at the legal rate from the filing of the complaint
until fully paid, P500.00 as attorney's fees," 11 with costs is affirmed. Costs against defendant-appellant.
Assuming however that there is a doubt concerning the liability of defendant-appellant insurance firm,
nonetheless, it should be resolved against its pretense and in favor of the insured. It was the holding G.R. No. 166245 April 9, 2008
in Eagle Star Insurance, Ltd. v. Chia Yu 6 that courts are to regard "with extreme jealousy" limitations
of liability found in insurance policies and to construe them in such a way as to preclude the insurer
from non-compliance with his obligation. In other words, to quote a noted authority on the subject, "a ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,
contract of insurance couched in language chosen by the insurer is, if open to the construction vs.
contended for by the insured, to be construed most strongly, or strictly, against the insurer and liberally THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
in favor of the contention of the insured, which means in accordance with the rule contra
proferentem." 7 Enough has been said therefore to dispose of the first assigned error. DECISION

The point is made in the second alleged error that the lower court ought to have held "that by joining VELASCO, JR., J.:
the heirs of Alfredo Monje as a party plaintiff, plaintiff Taurus Taxi Co., Inc. committed a breach of policy
condition and thus forfeited whatever benefits, if any, to which it might be entitled under appellant's
The Case
policy." 8 The basis for such an allegation is one of the conditions set forth in the policy. Thus: " "5. No
admission, offer, promise or payment shall be made by or on behalf of the insured without the written
consent of the Company which shall be entitled if it so desires to take over and conduct in his name the Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the
defense or settlement of any claim or to prosecute in his name for its own benefit any claim for November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May
indemnity or damages or otherwise and shall have full discretion in the conduct of any proceedings and the inaction of the insurer on the insurance application be considered as approval of the application?
in the settlement of any claim and the Insured shall give all such information and assistance as the
Company may require ... " 9 The Facts

Such a plea is even less persuasive. It is understandable then why the lower court refused to be swayed
by it. The plaintiff Taurus Taxi Co., inc. had to join the suit on behalf of the real beneficiaries, the heirs
of the deceased driver, who are the other plaintiffs as it was a party to the policy.
Moreover, as noted in the decision appealed from: "The institution of the action cannot possibly be
construed as an admission, offer, promise, or payment by the company, for it merely seeks to enforce,
by court action, the only legal remedy available to it, its rights under the contract of insurance to which
it is a party. To consider, furthermore, the commencement of an action by the insured, alone or with
others, as a breach of the policy, resulting in forfeiture of the benefits thereunder, to place in the hands
of the insurer the power to nullify at will the whole contract of insurance by the simple expedient of
refusing to make payment and compelling the insured to bring a suit to enforce the policy." 10
On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered
into an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner Eternal
Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased
burial lots from it on installment basis would be insured by Philamlife. The amount of insurance coverage
depended upon the existing balance of the purchased burial lots. The policy was to be effective for a
period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.

To so construe the policy to yield a contrary result is to put a premium on technicality. If such a defense
is not frowned upon and rejected, the time will come when the confidence on the part of the public in
the good faith of insurance firms would be minimized, if not altogether lost. Such a deplorable
consequence ought to be avoided and a construction of any stipulation that would be fraught with such
a risk repudiated. What the lower court did then cannot be characterized as error.
The third error assigned, namely, that the lower court should have considered the filing of the complaint
against defendant-appellant as unjust and unwarranted, is, in the light of the above, clearly without
merit.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is
indebted to the Assured for the unpaid balance of his loan with the Assured, and is accepted
for Life Insurance coverage by the Company on its effective date is eligible for insurance under
the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to P50,000.00. However,
a declaration of good health shall be required for all Lot Purchasers as part of the application.
 The Company reserves the right to require further evidence of insurability satisfactory to the
Company in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid
balance of his loan (including arrears up to but not exceeding 2 months) as reported by the
Assured to the Company or the sum of P100,000.00, whichever is smaller. Such benefit shall
be paid to the Assured if the Lot Purchaser dies while insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan
with the Assured. However, there shall be no insurance if the application of the Lot Purchaser
is not approved by the Company.3
Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together
with a copy of the application of each purchaser, and the amounts of the respective unpaid balances of
all insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter
dated December 29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982.
One of those included in the list as "new business" was a certain John Chuang. His balance of payments
was PhP 100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for
Chuang’s death. Attached to the claim were the following documents: (1) Chuang’s Certificate of Death;
(2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate of
Claimant; (4) Certificate of Attending Physician; and (5) Assured’s Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit the
following documents relative to its insurance claim for Chuang’s death: (1) Certificate of Claimant (with
form attached); (2) Assured’s Certificate (with form attached); (3) Application for Insurance
accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account
showing the unpaid balance of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14, 1984,7 which was
received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the latter’s insurance
claim. This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on
April 25, 1986.8
In response to Eternal’s demand, Philamlife denied Eternal’s insurance claim in a letter dated May 20,
1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal
Gardens Memorial Park in October 1982 for the total maximum insurable amount of
P100,000.00 each. No application for Group Insurance was submitted in our office prior to his
death on August 2, 1984.
In accordance with our Creditor’s Group Life Policy No. P-1920, under Evidence of Insurability
provision, "a declaration of good health shall be required for all Lot Purchasers as party of the
application." We cite further the provision on Effective Date of Coverage under the policy which
states that "there shall be no insurance if the application is not approved by the Company."
Since no application had been submitted by the Insured/Assured, prior to his death, for our
approval but was submitted instead on November 15, 1984, after his death, Mr. John Uy
Chuang was not covered under the Policy. We wish to point out that Eternal Gardens being the
Assured was a party to the Contract and was therefore aware of these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our approval per se of the
insurance coverage but are held by us in trust for the payor until the prerequisites for insurance
coverage shall have been met. We will however, return all the premiums which have been paid
in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money
against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of Eternal, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL,
against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the sum of
P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus legal rate of
interest, until fully paid; and, to pay the sum of P10,000.00 as attorney’s fees.
SO ORDERED.
The RTC found that Eternal submitted Chuang’s application for insurance which he accomplished before
his death, as testified to by Eternal’s witness and evidenced by the letter dated December 29, 1982,
stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert."10 It further ruled that
due to Philamlife’s inaction from the submission of the requirements of the group insurance on
December 29, 1982 to Chuang’s death on August 2, 1984, as well as Philamlife’s acceptance of the
premiums during the same period, Philamlife was deemed to have approved Chuang’s application. The
RTC said that since the contract is a group life insurance, once proof of death is submitted, payment
must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuang’s application was not enclosed in Eternal’s
letter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted
application form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no
application form, Chuang was not covered by Philamlife’s insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore determined
by this Honorable Court, or has decided it in a way not in accord with law or with the applicable
jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife
before the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated May
29, 1996.
The Court’s Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before
the CA and first level courts, considering their findings of facts are conclusive and binding on this Court.
However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when
the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave
abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when
the findings of facts are conflicting; (6) when in making its findings the [CA] went beyond the
issues of the case, or its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings [of the CA] are contrary to the trial court; (8) when the
findings are conclusions without citation of specific evidence on which they are based; (9) when
the facts set forth in the petition as well as in the petitioner’s main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are premised on the supposed
absence of evidence and contradicted by the evidence on record; and (11) when the Court of
Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion.12 (Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review
them.
Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternal’s letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that was
apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy
of the insurance application which was signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that
Eternal must present evidence showing that Philamlife received a copy of Chuang’s insurance
application.
The evidence on record supports Eternal’s position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received,
states that the insurance forms for the attached list of burial lot buyers were attached to the letter.
Such stamp of receipt has the effect of acknowledging receipt of the letter together with the
attachments. Such receipt is an admission by Philamlife against its own interest.13 The burden of
evidence has shifted to Philamlife, which must prove that the letter did not contain Chuang’s insurance
application. However, Philamlife failed to do so; thus, Philamlife is deemed to have received Chuang’s
insurance application.
To reiterate, it was Philamlife’s bounden duty to make sure that before a transmittal letter is stamped
as received, the contents of the letter are correct and accounted for.
Philamlife’s allegation that Eternal’s witnesses ran out of credibility and reliability due to inconsistencies
is groundless. The trial court is in the best position to determine the reliability and credibility of the
witnesses, because it has the opportunity to observe firsthand the witnesses’ demeanor, conduct, and
attitude. Findings of the trial court on such matters are binding and conclusive on the appellate court,
unless some facts or circumstances of weight and substance have been overlooked, misapprehended,
or misinterpreted,14 that, if considered, might affect the result of the case.15
An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no
overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance application of
Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of this form and
the original of this is submitted to Philamlife together with the monthly remittances and the
second copy is remained or retained with the marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely asking for the
location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with that
payment together with the new clients all the originals I see to it before I sign the transmittal
letter the originals are attached therein.16
In other words, the witness admitted not knowing where the original insurance application was, but
believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two
insurance application forms were accomplished and the testimony of Mendoza on who actually filled out
the application form, these are minor inconsistencies that do not affect the credibility of the witnesses.
Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the credibility of
witnesses, and these may even serve to strengthen their credibility as these negate any suspicion that
the testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecution’s
evidence as a whole or reflect on the witnesses’ honesty. The test is whether the testimonies
agree on essential facts and whether the respective versions corroborate and substantially
coincide with each other so as to make a consistent and coherent whole.18
In the present case, the number of copies of the insurance application that Chuang executed is not at
issue, neither is whether the insurance application presented by Eternal has been falsified. Thus, the
inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternal’s
witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without approving the
application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life
Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan
with the Assured. However, there shall be no insurance if the application of the Lot Purchaser
is not approved by the Company.
An examination of the above provision would show ambiguity between its two sentences. The first
sentence appears to state that the insurance coverage of the clients of Eternal already became effective
upon contracting a loan with Eternal while the second sentence appears to require Philamlife to approve
the insurance contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest.
Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared
by the insurer. A contract of insurance, being a contract of adhesion, par excellence,
any ambiguity therein should be resolved against the insurer; in other words, it should
be construed liberally in favor of the insured and strictly against the insurer. Limitations of
liability should be regarded with extreme jealousy and must be construed in such a way as to
preclude the insurer from noncompliance with its obligations.19 (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above
ruling, stating that:
 When the terms of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his obligation. Being
a contract of adhesion, the terms of an insurance contract are to be construed strictly against
the party which prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally in favor of the insured, especially to
avoid forfeiture.20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10,
1980, must be construed in favor of the insured and in favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a party’s
purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser
is created and the same is effective, valid, and binding until terminated by Philamlife by disapproving
the insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective
Date of Benefit is in the nature of a resolutory condition which would lead to the cessation of the
insurance contract. Moreover, the mere inaction of the insurer on the insurance application must not
work to prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The
termination of the insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More often than not, insurance contracts
are contracts of adhesion containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of insurance. As such,
insurance contracts are imbued with public interest that must be considered whenever the rights and
obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest
of insurance applicants, insurance companies must be obligated to act with haste upon insurance
applications, to either deny or approve the same, or otherwise be bound to honor the application as a
valid, binding, and effective insurance contract.21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No. 57810
is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch 138
is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance
Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000
from the time of extra-judicial demand by Eternal until Philamlife’s receipt of the May 29, 1996
RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000
from June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorney’s fees in the amount of PhP 10,000.
No costs.
SO ORDERED.
G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner,
vs.
COURT OF APPEALS AND MEDARDA V. LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the Decision 1 dated May 17, 1993,
of the Court of Appeals and its Resolution 2 dated January 4, 1994 in CA-G.R. CV No. 18341. The
appellate court affirmed in toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18,
in an insurance claim filed by private respondent against Great Pacific Life Assurance Co. The dispositive
portion of the trial court's decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation
to Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY
SIX THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for
damages, attorney's fees and litigation expenses in the complaint and counterclaim,
with costs against the defendant and dismissing the complaint in respect to the
plaintiffs, other than the widow-beneficiary, for lack of cause of action. 3
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP).
Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart
condition, high blood pressure, cancer, diabetes, lung; kidney or
stomach disorder or any other physical impairment?
 Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [x] Yes [ ] NO. 4
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio,
to the extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred
(P86,200.00) pesos.1âwphi1.nêt
On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage." Consequently, DBP
submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not
physically healthy when he applied for an insurance coverage on November 15, 1983. Grepalife insisted
that Dr. Leuterio did not disclose he had been suffering from hypertension, which caused his death.
Allegedly, such non-disclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for "Specific
Performance with Damages." 5 During the trial, Dr. Hernando Mejia, who issued the death certificate,
was called to testify. Dr. Mejia's findings, based partly from the information given by the respondent
widow, stated that Dr. Leuterio complained of headaches presumably due to high blood pressure. The
inference was not conclusive because Dr. Leuterio was not autopsied, hence, other causes were not
ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court's decision. Hence, the present
petition. Petitioners interposed the following assigned errors:
1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT
LIABLE TO THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP)
WHICH IS NOT A PARTY TO THE CASE FOR PAYMENT OF THE
PROCEEDS OF A MORTGAGE REDEMPTION INSURANCE ON THE
LIFE OF PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE OF ITS
LOAN BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST
DEFENDANT-APPELLANT [Petitioner Grepalife] FOR LACK OF CAUSE
OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR
WANT OF JURISDICTION OVER THE SUBJECT OR NATURE OF THE
ACTION AND OVER THE PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-
APPELLANT TO PAY TO DBP THE AMOUNT OF P86,200.00 IN THE
ABSENCE OF ANY EVIDENCE TO SHOW HOW MUCH WAS THE
ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH ITS
GROUP INSURANCE CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN HOLDING THAT THERE WAS NO
CONCEALMENT OF MATERIAL INFORMATION ON THE PART OF
WILFREDO LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN
THE GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-
APPELLANT OF THE INSURANCE CLAIM ARISING FROM THE DEATH
OF WILFREDO LEUTERIO. 6
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to
DBP as beneficiary in a group life insurance contract from a
complaint filed by the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr.
Leuterio concealed that he had hypertension, which would vitiate
the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in
the amount of eighty six thousand, two hundred (P86,200.00)
pesos without proof of the actual outstanding mortgage payable by
the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in
interest, hence the trial court acquired no jurisdiction over the case. It argues that when the Court of
Appeals affirmed the trial court's judgment, Grepalife was held liable to pay the proceeds of insurance
contract in favor of DBP, the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties
to this type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as
the "mortgage redemption insurance," is a device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it has to enter into such form of contract so that in the event
of the unexpected demise of the mortgagor during the subsistence of the mortgage contract, the
proceeds from such insurance will be applied to the payment of the mortgage debt, thereby relieving
the heirs of the mortgagor from paying the obligation. 7 In a similar vein, ample protection is given to
the mortgagor under such a concept so that in the event of death; the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage
indebtedness. 8 Consequently, where the mortgagor pays the insurance premium under the group
insurance policy, making the loss payable to the mortgagee, the insurance is on the mortgagor's
interest, and the mortgagor continues to be a party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, such loss-payable clause does not make the
mortgagee a party to the contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects insurance in his
own name providing that the loss shall be payable to the mortgagee, or assigns a
policy of insurance to a mortgagee, the insurance is deemed to be upon the interest
of the mortgagor, who does not cease to be a party to the original contract, and any
act of his, prior to the loss, which would otherwise avoid the insurance, will have the
same effect, although the property is in the hands of the mortgagee, but any act
which, under the contract of insurance, is to be performed by the mortgagor, may be
performed by the mortgagee therein named, with the same effect as if it had been
performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance,
the policy stating that: "In the event of the debtor's death before his indebtedness with the Creditor
[DBP] shall have been fully paid, an amount to pay the outstanding indebtedness shall first be paid to
the creditor and the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor." 10 When DBP submitted the insurance claim against petitioner, the latter
denied payment thereof, interposing the defense of concealment committed by the insured. Thereafter,
DBP collected the debt from the mortgagor and took the necessary action of foreclosure on the
residential lot of private respondent. 11 In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co. 12 we
held:
Insured, being the person with whom the contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to some exceptions, insured may thus
sue, although the policy is taken wholly or in part for the benefit of another person
named or unnamed, and although it is expressly made payable to another as his
interest may appear or otherwise. * * * Although a policy issued to a mortgagor is
taken out for the benefit of the mortgagee and is made payable to him, yet the
mortgagor may sue thereon in his own name, especially where the mortgagee's
interest is less than the full amount recoverable under the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the
policy for the purpose of collection, or has assigned as collateral security any
judgment he may obtain. 13
And since a policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover it whatever the insured might
have recovered, 14 the widow of the decedent Dr. Leuterio may file the suit against the insurer,
Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed as its defense
to annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists where the assured had
knowledge of a fact material to the risk, and honesty, good faith, and fair dealing requires that he
should communicate it to the assured, but he designedly and intentionally withholds the same. 15
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported
by the information given by the widow of the decedent. Grepalife asserts that Dr. Mejia's technical
diagnosis of the cause of death of Dr. Leuterio was a duly documented hospital record, and that the
widow's declaration that her husband had "possible hypertension several years ago" should not be
considered as hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy
on the body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of
Dr. Leuterio's any previous hospital confinement. 16 Dr. Leuterio's death certificate stated that
hypertension was only "the possible cause of death." The private respondent's statement, as to the
medical history of her husband, was due to her unreliable recollection of events. Hence, the statement
of the physician was properly considered by the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate court, thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was in
good health and that he had not consulted a doctor or any of the enumerated
ailments, including hypertension; when he died the attending physician had certified
in the death certificate that the former died of cerebral hemorrhage, probably
secondary to hypertension. From this report, the appellant insurance company
refused to pay the insurance claim. Appellant alleged that the insured had concealed
the fact that he had hypertension.
Contrary to appellant's allegations, there was no sufficient proof that the insured had
suffered from hypertension. Aside from the statement of the insured's widow who was
not even sure if the medicines taken by Dr. Leuterio were for hypertension, the
appellant had not proven nor produced any witness who could attest to Dr. Leuterio's
medical history . . .
xxx xxx xxx
Appellant insurance company had failed to establish that there was concealment made
by the insured, hence, it cannot refuse payment of the claim. 17
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract.18 Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. 19 In
the case at bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore
liable to pay the proceeds of the insurance.1âwphi1.nêt
And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio's outstanding indebtedness to DBP at the time of the
mortgagor's death. Hence, for private respondent's failure to establish the same, the action for specific
performance should be dismissed. Petitioner's claim is without merit. A life insurance policy is a valued
policy. 20 Unless the interest of a person insured is susceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the coverage of his insurance, which states that:

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

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

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

WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in CA-
G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the insurance
proceeds amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the
insured, Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor's
indebtedness to Development Bank of the Philippines. Costs against petitioner.1âwphi1.nêt

SO ORDERED.