Philippine Health Care Providers v.

Commissioner
Facts: 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.
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. The deficiency [documentary stamp tax (DST)] assessment was imposed on
petitioner’s health care agreement with the members of its health care program.
Petitioner protested the assessment. 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.
CTA: Ruled in favor of petitioner.
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.
CA: Held that petitioner’s health care agreement was in the nature of a non-life insurance
contract subject to DST.
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.
Petitioner moved for reconsideration but it was set aside.
 The SC 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.
MR: petitioner reveals for the first time that it availed of a tax amnesty under RA 9480 7 (also known
as the "Tax Amnesty Act of 2007") by fully paying the amount of ₱5,127,149.08 
Issue: 1. WON the petitioner, as an HMO, is a service provider, not an insurance company.
2. WON petitioner is liable for the payment of DST on Health Care Agreement of HMOS in accordance
with Section 185.

Ruling:
Health Maintenance Organizations Are Not Engaged In The Insurance Business

NO. Health Maintenance Organizations are not engaged in the insurance business. 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. To determine whether an HMO is an insurance business or not, one test
– principal object and purpose test – may be applied, that is to determine 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. HMO’s
principal object and purpose is service rather than indemnity.

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).

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.

No. Health care agreements are not subject to DST. 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).

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

Facts: Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with
petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the following
question:

Have you or any of your family members ever consulted or been treated for high blood pressure, heart
trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details)

The application was approved for a period of one year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondent’s
husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed
therein. He was also entitled to avail of "out-patient benefits" such as annual physical examinations,
preventive health care and other out-patient services.

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical
Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent
tried to claim the benefits under the health care agreement. However, petitioner denied her claim saying that
the Health Care Agreement was void. According to petitioner, there was a concealment regarding Ernani’s
medical history. Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that he was
hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the
hospitalization expenses herself, amounting to about P76,000.00.

Respondent was constrained to bring him back to the Chinese General Hospital where he died on the same day.
Respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against
petitioner and its president, Dr. Benito Reverente. The trial court ruledin favor of plaintiff. Aggrieved, the CA
affirmed the decision of the trial court but IT DELETED ALL AWARDS FOR DAMAGES against and it
absolved petitioner Reverente. Hence, petitioner brought the present petition for review raising the primary
argument that a health care agreement is not an insurance contract; hence the "incontestability clause" under
the Insurance Code6 does not apply. 1âwphi1.nêt

 Petitioner further argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the Department of
Health.

Issue: WON Philamcare can avoid the health coverage agreement.

Ruling: NO. Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An insurance contract exists where the
following elements concur:
 1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk; and

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

In the case at bar, the insurable interest of respondent’s husband in obtaining the health care
agreement was his own health. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity.9 Once the member incurs hospital, medical
or any other expense arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the contract.

The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract.16 Concealment as a defense for the health care provider or insurer to avoid
liability is an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer. In any case, with or without the authority
to investigate, petitioner is liable for claims made under the contract. Having assumed a
responsibility under the agreement, petitioner is bound to answer the same to the extent agreed
upon. In the end, the liability of the health care provider attaches once the member is hospitalized
for the disease or injury covered by the agreement or whenever he avails of the covered benefits
which he has prepaid.

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind
a contract of insurance." The right to rescind should be exercised previous to the
commencement of an action on the contract.17 In this case, no rescission was made. Besides,
the cancellation of health care agreements as in insurance policies require the concurrence of the
following conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the
grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon
request of insured, to furnish facts on which cancellation is based.18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation.19 Being a contract of adhesion, the terms of an
insurance contract are to be construed strictly against the party which prepared the contract – the
insurer.20 By reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer
and liberally in favor of the insured, especially to avoid forfeiture. 21 This is equally applicable to
Health Care Agreements. The phraseology used in medical or hospital service 

Blue Cross Health Care v, Olivares, G.R, 169737, February 12,

2005; 544 SCRA 580 (2008)

Facts: Neomi T. Olivares applied for a health care program with petitioner Blue Cross Health
Care, Inc., a health maintenance firm. For the period October 16, 2002 to October 15, 2003, she
paid the amount of P11,117. For the same period, she also availed of the additional service of
limitless consultations for an additional amount of P1,000.She paid these amounts in full on
October 17, 2002. The application was approved on October 22, 2002.
In the health care agreement, ailments due to pre-existing conditions were excluded from the
coverage. On November 30, 2002, or barely 38 days from the effectivity of her health insurance,
respondent Neomi suffered a stroke and was admitted at the Medical City which was one of the
hospitals accredited by petitioner. During her confinement, she underwent several laboratory
tests. On December 2, 2002, her attending physician informed her that she could be discharged
from the hospital. She incurred hospital expenses amounting to P34,217.20. Consequently, she
requested from the representative of petitioner at Medical City a letter of authorization in order
to settle her medical bills.
But petitioner refused to issue the letter and suspended payment pending the submission of a
certification from her attending physician that the stroke she suffered was not caused by a
preexisting condition. She was discharged from the hospital on December 3, 2002. On December
5, 2002, she demanded that petitioner pay her medical bill. When petitioner still refused, she and
her husband, respondent Danilo Olivares, were constrained to settle the bill. They thereafter filed
a complaint for collection of sum of money against petitioner in the MeTC. In its answer,
petitioner maintained that it had not yet denied respondents' claim as it was still awaiting the
attending physicians report.

Issue: Whether petitioner was able to prove that respondent Neomi's stroke was caused by a
preexisting condition and therefore was excluded from the coverage of the health care
agreement.

Ruling: NO. In Philamcare Health Systems, Inc. v. CA, we ruled that a health care agreement is
in the nature of a non-life insurance. It is an established rule in insurance contracts that when
their terms contain limitations on liability, they should be construed strictly against the insurer.
These are contracts of adhesion the terms of which must be interpreted and enforced stringently
against the insurer which prepared the contract. This doctrine is equally applicable to health care
agreements. Petitioner never presented any evidence to prove that respondent Neomi's stroke was
due to a pre-existing condition. It merely speculated that Dr. Saniel's report would be adverse to
Neomi, based on her invocation of the doctor-patient privilege. This was a disputable
presumption at best.
Suffice it to say that this presumption does not apply if (a) the evidence is at the disposal of both
parties; (b) the suppression was not willful; (c) it is merely corroborative or cumulative and (d)
the suppression is an exercise of a privilege. Here, respondents' refusal to present or allow the
presentation of Dr. Saniel's report was justified. It was privileged communication between
physician and patient. Furthermore, as already stated, limitations of liability on the part of the
insurer or health care provider must be construed in such a way as to preclude it from evading its
obligations. Accordingly, they should be scrutinized by the courts with extreme jealousy and
care and with a jaundiced eye. Since petitioner had the burden of proving exception to liability, it
should have made its own assessment of whether respondent Neomi had a pre-existing condition
when it failed to obtain the attending physician's report. It could not just passively wait for Dr.
Saniel's report to bail it out. The mere reliance on a disputable presumption does not meet the
strict standard required under our jurisprudence.

CEBU SHIPYARD v. WILLIAM LINES, INC. G.R. No. 132607 May 5, 1999

Facts: Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged
in the business of dry-docking and repairing of marine vessels while the private respondent,
Prudential Guarantee and Assurance, Inc. (Prudential), also a domestic corporation is in the non-
life insurance business. William Lines, Inc. (plaintiff below) is in the shipping business. It was
the owner of M/V Manila City, a luxury passenger-cargo vessel, which caught fire and sank on
February 16, 1991. At the time of the unfortunate occurrence sued upon, subject vessel was
insured with Prudential for P45,000,000.00 pesos for hull and machinery.

The Hull Policy included an Additional Perils (INCHMAREE) Clause covering loss of or
damage to the vessel through the negligence of, among others, ship repairmen. Provided such
loss or damage has not resulted from want of due diligence by the Assured, the Owners or
Managers of the Vessel, of any of them. Masters, Officers, Crew or Pilots are not to be
considered Owners within the meaning of this Clause should they hold shares in the Vessel.
CSEW was also insured by Prudential for third party liability under a Shiprepairers Legal
Liability Insurance Policy. William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu
Shipyard in Lapulapu City for annual dry-docking and repair.

The contracts, denominated as Work Orders, were signed thereafter stipulating that the
Contractor shall replace at its own work and at its own cost any work or material which can be
shown to be defective and that the Contractor shall not be under any liability to the Customer
either in contract or for delict or quasi-delict or otherwise except for negligence, with limited
liability of up to P1 million only. Also, the insurance on the vessel should be maintained by the
customer and/or owner of the vessel during the period the contract is in effect. While the M/V
Manila City was undergoing dry-docking and repairs within the premises of CSEW, the master,
officers and crew of M/V Manila City stayed in the vessel, using their cabins as living quarters.

Other employees hired by William Lines to do repairs and maintenance work on the vessel were
also present during the dry-docking. After subject vessel was transferred to the docking quay, it
caught fire and sank, resulting to its eventual total loss. William Lines, Inc. filed a complaint for
damages against CSEW, alleging that the fire which broke out in M/V Manila City was caused
by CSEWs negligence and lack of care. An amended Complaint impleading Prudential as co-
plaintiff, after the latter had paid William Lines, Inc. the value of the hull and machinery
insurance on the M/V Manila City. As a result of such payment Prudential was subrogated to the
claim of P45 million, representing the value of the said insurance it paid. The trial court brought
judgment against CSEW 45 million for the ship indemnity, 65 million for loss of income, and
more than 13 million in other damages. The court of appeals affirmed the trial court’s decision,
finding negligence on the part of CSEW.

Issues: Whether or not the insurance on the vessel should be maintained by the customer and/or
owner of the vessel while under drydock or repair.

Ruling: Yes. Petitioner contends that Prudential is not entitled to be subrogated to the rights of
William Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an excluded
risk and (2) it is a co-assured under the Marine Hull Insurance Policy. It is petitioners submission
that the loss of M/V Manila City or damage thereto is expressly excluded from the coverage of
the insurance because the same resulted from want of due diligence by the Assured, Owners or
Managers which is not included in the risks insured against. Again, this theory of petitioner is
bereft of any factual or legal basis.

It proceeds from a wrong premise that the fire which gutted subject vessel was caused by the
negligence of the employees of William Lines, Inc. To repeat, the issue of who between the
parties was negligent has already been resolved against Cebu Shipyard and Engineering Works,
Inc. Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-
assured under the subject insurance policy. To buttress its stance that it is a co-assured, petitioner
placed reliance on Clause 20 of of the Work Order states that the insurance on the vessel should
be maintained by the customer and/or owner of the vessel during the period the contract is in
effect. According to petitioner, under the aforecited clause, William Lines, Inc., agreed to
assume the risk of loss of the vessel while under drydock or repair and to such extent, it is
benefited and effectively constituted as a co-assured under the policy

This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question
is clear in the sense that it requires William Lines to maintain insurance on the vessel during the
period of dry-docking or repair. Concededly, such a stipulation works to the benefit of CSEW as
the ship repairer. However, the fact that CSEW benefits from the said stipulation does not
automatically make it as a co-assured of William Lines. The intention of the parties to make each
other a co-assured under an insurance policy is to be gleaned principally from the insurance
contract or policy itself and not from any other contract or agreement because the insurance
policy denominates the assured and the beneficiaries of the insurance. The hull and machinery
insurance procured by William Lines, Inc. from Prudential named only William Lines, Inc. as the
assured. There was no manifestation of any intention of William Lines, Inc. to constitute CSEW
as a co-assured under subject policy. It is axiomatic that when the terms of a contract are clear its
stipulations control. Thus, when the insurance policy involved named only William Lines, Inc. as
the assured thereunder, the claim of CSEW that it is a co-assured is unfounded
SUN INSURANCE OFFICE, LTD. v. COURT OF APPEALS AND EMILIO TAN G.R. No.
89741 March 13, 1991