1

Insurance Law

I. Provisions

Sections 1 to 25 of the Insurance Code, as amended

II. Cases

1. What Constitutes Insurance Business (Sec. 2 (2)) of the Insurance Code

White Gold Marine Services, Inc. vs. Pioneer Steamship Mutual Underwriting (GR No. 154514,
July 28, 2005)

2. Whether a Healthcare Agreement is an Insurance Contract

Philamcare Health Systems, Inc. vs. CA (GR No. 125678 March 18, 2002)
Philippine Health Care Providers, Inc. vs. CIR (GR No. 167330, September 18, 2009) 

3. Construction of Insurance Contract

Eternal Gardens Memorial Park vs. PhilamLife (April 9, 2008)
Calanoc vs. CA, et., al. (98 Phils 79) 
Biagtan vs. The Insular Life Assurance Co., Ltd. (44 SCRA 493)
Sun Insurance Office, Ltd. Vs. CA (185 SCRA 554)

4.Perfection of Insurance Contract

Enriquez vs. Sun Life Assurace Co. Of Canada (41 Phil 269)
Great Pacific Life Assurance Co. vs CA (89 SCRA 543)

5. Parties/Disqualified Beneficiaries
Insular vs. Ebrado (80 SCRA 181)
Heirs of Loreto Maramag vs. Maramag, (GR No. 181132, June 5,2009)

6. Insurable Interest
Cha vs. CA (227 SCRA 690)
RCBC vs. CA (289 SCRA 292, 1998)
Armando Geagonia vs. CA (241 SCRA 152)
Great Pacific Life Assurance Corp. Vs. CA (GR No. 113899, October 13, 1999)
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III. For Discussion

    1. What is a contract of insurance?

    2. Characteristics of an insurance contract.
    3. Construction of contracts of insurance.
    4. What may be insured?
    5. Parties to an insurance contract.
                   a. public enemy;
                   b. Effect of war and termination of such war between the countries of the insurer and
the insured
     6.  Standard or union mortgage clause and open or loss payable mortgage  clause.
     7. Can a mortgagee insure the property subject of mortgage to its full value?
     8. What constitutes insurable interest in life and health?
     9. When should insurable interest in life and health exist?
     10. Rules on the designation of the beneficiary 
     11. What will be the effect on the insurance contract if death of the insured  is caused by the
beneficiary?
     12. What would constitute insurable interest in property?
     13. When should insurable interest in property exist?

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

WHITE GOLD MARINE SERVICES, INC., Petitioners,
vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP
MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents.
This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-
G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in
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I.C. Adm. Case No. RD-277. Both decisions held that there was no violation of the Insurance
Code and the respondents do not need license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage
for its vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited
(Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently,
White Gold was issued a Certificate of Entry and Acceptance.3 Pioneer also issued receipts
evidencing payments for the coverage. When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to
recover the latter’s unpaid balance. White Gold on the other hand, filed a complaint before the
Insurance Commission claiming that Steamship Mutual violated Sections 1864 and 1875 of the
Insurance Code, while Pioneer violated Sections 299,6 3007 and 3018 in relation to Sections 302
and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship
Mutual to secure a license because it was not engaged in the insurance business. It explained that
Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need
not obtain another license as insurance agent and/or a broker for Steamship Mutual because
Steamship Mutual was not engaged in the insurance business. Moreover, Pioneer was already
licensed, hence, a separate license solely as agent/broker of Steamship Mutual was already
superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the
appellate court distinguished between P & I Clubs vis-à-vis conventional insurance. The
appellate court also held that Pioneer merely acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate
court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS
NOT DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT
COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE
AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE
BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF
ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE
BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED
NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER
OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT
PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF
RESPONDENT PIONEER.9
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Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the
insurance business in the Philippines? (2) Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not
have a license to do business in the Philippines although Pioneer is its resident agent. This
relationship is reflected in the certifications issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To
buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v.
Court of Appeals10 as "an association composed of shipowners in general who band together for
the specific purpose of providing insurance cover on a mutual basis against liabilities incidental
to shipowning that the members incur in favor of third parties." It stresses that as a P & I Club,
Steamship Mutual’s primary purpose is to solicit and provide protection and indemnity coverage
and for this purpose, it has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the
insurance business in the Philippines. It is merely an association of vessel owners who have
come together to provide mutual protection against liabilities incidental to
shipowning.11 Respondents aver Hyopsung is inapplicable in this case because the issue
in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or
"transacting an insurance business". These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is derived from the making of insurance
contracts, agreements or transactions, or that no separate or direct consideration is received
therefor, shall not preclude the existence of an insurance business.12
The test to determine if a contract is an insurance contract or not, depends on the nature of the
promise, the act required to be performed, and the exact nature of the agreement in the light of
the occurrence, contingency, or circumstances under which the performance becomes requisite.
It is not by what it is called.13
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event.14
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such
as the losses incident to a marine adventure.15 Section 9916 of the Insurance Code enumerates the
coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both
the insurer and insured. In it, the members all contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid, and where the
profits are divided among themselves, in proportion to their interest.17 Additionally, mutual
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insurance associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.18
A P & I Club is "a form of insurance against third party liability, where the third party is
anyone other than the P & I Club and the members."19 By definition then, Steamship Mutual as a
P & I Club is a mutual insurance association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite
certificate of authority mandated by Section 18720 of the Insurance Code. It maintains a resident
agent in the Philippines to solicit insurance and to collect payments in its behalf. We note that
Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment
of the calls. Thus, to continue doing business here, Steamship Mutual or through its agent
Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus,
no insurer or insurance company is allowed to engage in the insurance business without a license
or a certificate of authority from the Insurance Commission.21
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of
registration22 issued by the Insurance Commission. It has been licensed to do or transact
insurance business by virtue of the certificate of authority23 issued by the same agency. However,
a Certification from the Commission states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.24
Although Pioneer is already licensed as an insurance company, it needs a separate license to act
as insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or
procurement of applications for insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance company doing business in the
Philippines or any agent thereof, without first procuring a license so to act from the
Commissioner, which must be renewed annually on the first day of January, or within six months
thereafter. . .
Finally, White Gold seeks revocation of Pioneer’s certificate of authority and removal of its
directors and officers. Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of
the Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is
hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association
(Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses
and to secure proper authorizations to do business as insurer and insurance agent, respectively.
The petitioner’s prayer for the revocation of Pioneer’s Certificate of Authority and removal of its
directors and officers, is DENIED. Costs against respondents.
SO ORDERED.

G.R. No. 125678      March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
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Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage
with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no
to the following question:
Have you or any of your family members ever consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes,
give details).1
The application was approved for a period of one year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement,
respondent’s husband was entitled to avail of hospitalization benefits, whether ordinary or
emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual
physical examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1,
1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was
increased to a maximum sum of P75,000.00 per disability.2
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila
Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the
hospital, respondent tried to claim the benefits under the health care agreement. However,
petitioner denied her claim saying that the Health Care Agreement was void. According to
petitioner, there was a concealment regarding Ernani’s medical history. Doctors at the MMC
allegedly discovered at the time of Ernani’s confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus, respondent paid the
hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist at
home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties,
however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani
had fever and was feeling very weak. Respondent was constrained to bring him back to the
Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an
action for damages against petitioner and its president, Dr. Benito Reverente, which was
docketed as Civil Case No. 90-53795. She asked for reimbursement of her expenses plus moral
damages and attorney’s fees. After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani
Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff
who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to
plaintiff;
4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for
damages and absolved petitioner Reverente.4 Petitioner’s motion for reconsideration was
denied.5 Hence, petitioner brought the instant petition for review, raising the primary argument
that a health care agreement is not an insurance contract; hence the "incontestability clause"
under the Insurance Code6 does not apply.1âwphi1.nêt
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Petitioner argues that the agreement grants "living benefits," such as medical check-ups and
hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of
the agreement until its expiration one-year thereafter. Petitioner also points out that only medical
and hospitalization benefits are given under the agreement without any indemnification, unlike in
an insurance contract where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts which last
longer,7 petitioner argues that the incontestability clause does not apply, as the same requires an
effectivity period of at least two years. Petitioner further argues that it is not an insurance
company, which is governed by the Insurance Commission, but a Health Maintenance
Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event. An insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk; and
5. In consideration of the insurer’s promise, the insured pays a premium.8
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or
future, which may damnify a person having an insurable interest against him, may be insured
against. Every person has an insurable interest in the life and health of himself. Section 10
provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondent’s husband in obtaining the health care
agreement was his own health. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity.9 Once the member incurs hospital, medical
or any other expense arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the contract.
Petitioner argues that respondent’s husband concealed a material fact in his application. It
appears that in the application for health coverage, petitioners required respondent’s husband to
sign an express authorization for any person, organization or entity that has any record or
knowledge of his health to furnish any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination.10 Specifically, the Health
Care Agreement signed by respondent’s husband states:
We hereby declare and agree that all statement and answers contained herein and in any
addendum annexed to this application are full, complete and true and bind all parties in
interest under the Agreement herein applied for, that there shall be no contract of health
care coverage unless and until an Agreement is issued on this application and the full
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Membership Fee according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing
in the application; that any physician is, by these presents, expressly authorized to
disclose or give testimony at anytime relative to any information acquired by him in his
professional capacity upon any question affecting the eligibility for health care coverage
of the Proposed Members and that the acceptance of any Agreement issued on this
application shall be a ratification of any correction in or addition to this application as
stated in the space for Home Office Endorsement.11 (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization
to inquire about the applicant’s medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of
my health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any
and all information relative to any hospitalization, consultation, treatment or any other
medical advice or examination. This authorization is in connection with the application
for health care coverage only. A photographic copy of this authorization shall be as valid
as the original.12 (Underscoring ours)
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:
Failure to disclose or misrepresentation of any material information by the member in the
application or medical examination, whether intentional or unintentional, shall
automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or
misrepresented information is deemed material if its revelation would have resulted in the
declination of the applicant by Philamcare or the assessment of a higher Membership Fee
for the benefit or benefits applied for.13
The answer assailed by petitioner was in response to the question relating to the medical history
of the applicant. This largely depends on opinion rather than fact, especially coming from
respondent’s husband who was not a medical doctor. Where matters of opinion or judgment are
called for, answers made in good faith and without intent to deceive will not avoid a policy even
though they are untrue.14 Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in inducing
the acceptance of the risk, or its acceptance at a lower rate of premium, and this is
likewise the rule although the statement is material to the risk, if the statement is
obviously of the foregoing character, since in such case the insurer is not justified in
relying upon such statement, but is obligated to make further inquiry. There is a clear
distinction between such a case and one in which the insured is fraudulently and
intentionally states to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown by the facts within
his knowledge, since in such case the intent to deceive the insurer is obvious and amounts
to actual fraud.15 (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract.16 Concealment as a defense for the health care provider or insurer to avoid
liability is an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer. In any case, with or without the authority
to investigate, petitioner is liable for claims made under the contract. Having assumed a
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responsibility under the agreement, petitioner is bound to answer the same to the extent agreed
upon. In the end, the liability of the health care provider attaches once the member is hospitalized
for the disease or injury covered by the agreement or whenever he avails of the covered benefits
which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a
contract of insurance." The right to rescind should be exercised previous to the commencement
of an action on the contract.17 In this case, no rescission was made. Besides, the cancellation of
health care agreements as in insurance policies require the concurrence of the following
conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one or more of the
grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon
request of insured, to furnish facts on which cancellation is based.18
None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation.19 Being a contract of adhesion, the terms of an
insurance contract are to be construed strictly against the party which prepared the contract – the
insurer.20 By reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer
and liberally in favor of the insured, especially to avoid forfeiture.21 This is equally applicable to
Health Care Agreements. The phraseology used in medical or hospital service contracts, such as
the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or
reasonably susceptible of two interpretations the construction conferring coverage is to be
adopted, and exclusionary clauses of doubtful import should be strictly construed against the
provider.22
Anent the incontestability of the membership of respondent’s husband, we quote with approval
the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems
Inc. had twelve months from the date of issuance of the Agreement within which to
contest the membership of the patient if he had previous ailment of asthma, and six
months from the issuance of the agreement if the patient was sick of diabetes or
hypertension. The periods having expired, the defense of concealment or
misrepresentation no longer lie.23
Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time
of their marriage, the deceased was previously married to another woman who was still alive. The health care
agreement is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the
expenses. It is not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled
to reimbursement. The records adequately prove the expenses incurred by respondent for the deceased’s
hospitalization, medication and the professional fees of the attending physicians.24
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals
dated December 14, 1995 is AFFIRMED.
G.R. No. 167330               September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
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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.
x x x           x x x          x x x
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
x x x           x x x          x x x
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.
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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.
x x x           x x x          x x x
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
 12

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:
 13

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
 14

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
 15

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.
x x x           x x x          x x x
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
 16

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 entities engaged in the insurance business.
Moreover, we are also not unmindful that there are other American authorities who have found
particular HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is
evident from the fact that it is not supervised by the Insurance Commission but by the
Department of Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner
confirmed that petitioner is not engaged in the insurance business. This determination of the
commissioner must be accorded great weight. It is well-settled that the interpretation of an
administrative agency which is tasked to implement a statute is accorded great respect and
ordinarily controls the interpretation of laws by the courts. The reason behind this rule was
explained in Nestle Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs of a
modern or modernizing society and the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to the accumulation of experience and
growth of specialized capabilities by the administrative agency charged with implementing a
particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,35 the Court
stressed that executive officials are presumed to have familiarized themselves with all the
considerations pertinent to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon. The courts give much weight
to the government agency officials charged with the implementation of the law, their
competence, expertness, experience and informed judgment, and the fact that they frequently are
the drafters of the law they interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185
Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance… or obligations of the
nature of indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we
 17

ruled that petitioner’s health care agreements are contracts of indemnity and are therefore
insurance contracts:
It is … incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for
hospital, medical and related expenses (such as professional fees of physicians). The term "loss
or damage" is broad enough to cover the monetary expense or liability a member will incur in
case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to
the member in case of sickness, injury or emergency or his availment of so-called "out-patient
services" (including physical examination, x-ray and laboratory tests, medical consultations,
vaccine administration and family planning counseling) is the contingent event which gives rise
to liability on the part of the member. In case of exposure of the member to liability, he would be
entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are prepaid.
The expenses to be incurred by each member cannot be predicted beforehand, if they can be
predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid." Petitioner does not
bear the costs alone but distributes or spreads them out among a large group of persons bearing a
similar risk, that is, among all the other members of the health care program. This is insurance.37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of
their property for the support of the government.39 Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax provision. Instead, they dealt
with the liability of a health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the
member and strictly against the HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event. An insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
 18

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and
5. In consideration of the insurer’s promise, the insured pays a premium.41
Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a
contract contains all the elements of an insurance contract, if its primary purpose is the rendering
of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties in
making the contract may negate the existence of an insurance contract. For example, a law
firm which enters into contracts with clients whereby in consideration of periodical payments, it
promises to represent such clients in all suits for or against them, is not engaged in the insurance
business. Its contracts are simply for the purpose of rendering personal services. On the other
hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its
own expense to defend a physician against all suits for damages for malpractice is one of
insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike
the lawyer’s retainer contract, the essential purpose of such a contract is not to render personal
services, but to indemnify against loss and damage resulting from the defense of actions for
malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays
petitioner a predetermined consideration in exchange for the hospital, medical and professional
services rendered by the petitioner’s physician or affiliated physician to him. In case of
availment by a member of the benefits under the agreement, petitioner does not reimburse or
indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who
pays the participating physicians and other health care providers for the services rendered at pre-
agreed rates. The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability
on the part of the member to any third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose
that a liability or claim has already been incurred. There is no indemnity precisely because the
member merely avails of medical services to be paid or already paid in advance at a pre-agreed
price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g.  laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril,
loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care
from a non-participating physician or hospital. However, this is only a very minor part of the list
of services available. The assumption of the expense by petitioner is not confined to the
happening of a contingency but includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the
health care contracts called for the defendant to partially reimburse a subscriber for treatment
received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan,
 19

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:
x x x           x x x          x x x
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.
 20

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
 21

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.
 22

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.
G.R. No. 166245             April 9, 2008
ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set
aside the November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810
 23

is the query: May the inaction of the insurer on the insurance application be considered as
approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife)
entered into an agreement denominated as Creditor Group Life Policy No. P-19202 with
petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of
Eternal who purchased burial lots from it on installment basis would be insured by Philamlife.
The amount of insurance coverage depended upon the existing balance of the purchased burial
lots. The policy was to be effective for a period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is
indebted to the Assured for the unpaid balance of his loan with the Assured, and is
accepted for Life Insurance coverage by the Company on its effective date is eligible for
insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to P50,000.00.
However, a declaration of good health shall be required for all Lot Purchasers as part of
the application. The Company reserves the right to require further evidence of
insurability satisfactory to the Company in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the
unpaid balance of his loan (including arrears up to but not exceeding 2 months) as
reported by the Assured to the Company or the sum of P100,000.00, whichever is
smaller. Such benefit shall be paid to the Assured if the Lot Purchaser dies while insured
under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a
loan with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.3
Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers,
together with a copy of the application of each purchaser, and the amounts of the respective
unpaid balances of all insured lot purchasers. In relation to the instant petition, Eternal complied
by submitting a letter dated December 29, 1982,4 containing a list of insurable balances of its lot
buyers for October 1982. One of those included in the list as "new business" was a certain John
Chuang. His balance of payments was PhP 100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for
Chuang’s death. Attached to the claim were the following documents: (1) Chuang’s Certificate
of Death; (2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3)
Certificate of Claimant; (4) Certificate of Attending Physician; and (5) Assured’s Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit
the following documents relative to its insurance claim for Chuang’s death: (1) Certificate of
Claimant (with form attached); (2) Assured’s Certificate (with form attached); (3) Application
 24

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.
 25

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.
 26

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
 27

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
 28

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.
 29

G.R. No. L-8151        December 16, 1955

VIRGINIA CALANOC, petitioner,
vs.
COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE
CO., respondents.

This suit involves the collection of P2,000 representing the value of a supplemental policy
covering accidental death which was secured by one Melencio Basilio from the Philippine
American Life Insurance Company. The case originated in the Municipal Court of Manila and
judgment being favorable to the plaintiff it was appealed to the court of first instance. The latter
court affirmed the judgment but on appeal to the Court of Appeals the judgment was reversed
and the case is now before us on a petition for review.

Melencio Basilio was a watchman of the Manila Auto Supply located at the corner of Avenida
Rizal and Zurbaran. He secured a life insurance policy from the Philippine American Life
Insurance Company in the amount of P2,000 to which was attached a supplementary contract
covering death by accident. On January 25, 1951, he died of a gunshot wound on the occasion of
a robbery committed in the house of Atty. Ojeda at the corner of Oroquieta and Zurbaan streets.
Virginia Calanoc, the widow, was paid the sum of P2,000, face value of the policy, but when she
demanded the payment of the additional sum of P2,000 representing the value of the
supplemental policy, the company refused alleging, as main defense, that the deceased died
because he was murdered by a person who took part in the commission of the robbery and while
making an arrest as an officer of the law which contingencies were expressly excluded in the
contract and have the effect of exempting the company from liability.

The pertinent facts which need to be considered for the determination of the questions raised are
those reproduced in the decision of the Court of Appeals as follows:

The circumstances surrounding the death of Melencio Basilio show that when he was
killed at about seven o'clock in the night of January 25, 1951, he was on duty as
watchman of the Manila Auto Supply at the corner of Avenida Rizal and Zurbaran; that it
turned out that Atty. Antonio Ojeda who had his residence at the corner of Zurbaran and
Oroquieta, a block away from Basilio's station, had come home that night and found that
his house was well-lighted, but with the windows closed; that getting suspicious that
there were culprits in his house, Atty. Ojeda retreated to look for a policeman and finding
Basilio in khaki uniform, asked him to accompany him to the house with the latter
refusing on the ground that he was not a policeman, but suggesting that Atty. Ojeda
should ask the traffic policeman on duty at the corner of Rizal Avenue and Zurbaran; that
Atty. Ojeda went to the traffic policeman at said corner and reported the matter, asking
the policeman to come along with him, to which the policeman agreed; that on the way to
the Ojeda residence, the policeman and Atty. Ojeda passed by Basilio and somehow or
other invited the latter to come along; that as the tree approached the Ojeda residence and
stood in front of the main gate which was covered with galvanized iron, the fence itself
being partly concrete and partly adobe stone, a shot was fired; that immediately after the
shot, Atty. Ojeda and the policeman sought cover; that the policeman, at the request of
 30

Atty. Ojeda, left the premises to look for reinforcement; that it turned out afterwards that
the special watchman Melencio Basilio was hit in the abdomen, the wound causing his
instantaneous death; that the shot must have come from inside the yard of Atty. Ojeda,
the bullet passing through a hole waist-high in the galvanized iron gate; that upon inquiry
Atty. Ojeda found out that the savings of his children in the amount of P30 in coins kept
in his aparador contained in stockings were taken away, the aparador having been
ransacked; that a month thereafter the corresponding investigation conducted by the
police authorities led to the arrest and prosecution of four persons in Criminal Case No.
15104 of the Court of First Instance of Manila for 'Robbery in an Inhabited House and in
Band with Murder'.

It is contended in behalf of the company that Basilio was killed which "making an arrest as an
officer of the law" or as a result of an "assault or murder" committed in the place and therefore
his death was caused by one of the risks excluded by the supplementary contract which exempts
the company from liability. This contention was upheld by the Court of Appeals and, in reaching
this conclusion, made the following comment:

From the foregoing testimonies, we find that the deceased was a watchman of the Manila
Auto Supply, and, as such, he was not boud to leave his place and go with Atty. Ojeda
and Policeman Magsanoc to see the trouble, or robbery, that occurred in the house of
Atty. Ojeda. In fact, according to the finding of the lower court, Atty. Ojeda finding
Basilio in uniform asked him to accompany him to his house, but the latter refused on the
ground that he was not a policeman and suggested to Atty. Ojeda to ask help from the
traffic policeman on duty at the corner of Rizal Avenue and Zurbaran, but after Atty.
Ojeda secured the help of the traffic policeman, the deceased went with Ojeda and said
traffic policeman to the residence of Ojeda, and while the deceased was standing in front
of the main gate of said residence, he was shot and thus died. The death, therefore, of
Basilio, although unexpected, was not caused by an accident, being a voluntary and
intentional act on the part of the one wh robbed, or one of those who robbed, the house of
Atty. Ojeda. Hence, it is out considered opinion that the death of Basilio, though
unexpected, cannot be considered accidental, for his death occurred because he left his
post and joined policeman Magsanoc and Atty. Ojeda to repair to the latter's residence to
see what happened thereat. Certainly, when Basilio joined Patrolman Magsanoc and Atty.
Ojeda, he should have realized the danger to which he was exposing himself, yet, instead
of remaining in his place, he went with Atty. Ojeda and Patrolman Magsanoc to see what
was the trouble in Atty. Ojeda's house and thus he was fatally shot.

We dissent from the above findings of the Court of Appeals. For one thing, Basilio was a
watchman of the Manila Auto Supply which was a block away from the house of Atty. Ojeda
where something suspicious was happening which caused the latter to ask for help. While at first
he declied the invitation of Atty. Ojeda to go with him to his residence to inquire into what was
going on because he was not a regular policeman, he later agreed to come along when prompted
by the traffic policeman, and upon approaching the gate of the residence he was shot and died.
The circumstance that he was a mere watchman and had no duty to heed the call of Atty. Ojeda
should not be taken as a capricious desire on his part to expose his life to danger considering the fact that the place
he was in duty-bound to guard was only a block away. In volunteering to extend help under the situation, he might
 31

have thought, rightly or wrongly, that to know the truth was in the interest of his employer it being a matter that
affects the security of the neighborhood. No doubt there was some risk coming to him in pursuing that errand, but
that risk always existed it being inherent in the position he was holding. He cannot therefore be blamed solely for
doing what he believed was in keeping with his duty as a watchman and as a citizen. And he cannot be considered as
making an arrest as an officer of the law, as contended, simply because he went with the traffic policeman, for
certainly he did not go there for that purpose nor was he asked to do so by the policeman.

Much less can it be pretended that Basilio died in the course of an assault or murder considering the very nature of
these crimes. In the first place, there is no proof that the death of Basilio is the result of either crime for the record is
barren of any circumstance showing how the fatal shot was fired. Perhaps this may be clarified in the criminal case
now pending in court as regards the incident but before that is done anything that might be said on the point would
be a mere conjecture. Nor can it be said that the killing was intentional for there is the possibility that the malefactor
had fired the shot merely to scare away the people around for his own protection and not necessarily to kill or hit the
victim. In any event, while the act may not excempt the triggerman from liability for the damage done, the fact
remains that the happening was a pure accident on the part of the victim. The victim could have been either the
policeman or Atty. Ojeda for it cannot be pretended that the malefactor aimed at the deceased precisely because he
wanted to take his life.

We take note that these defenses are included among the risks exluded in the supplementary contract which
enumerates the cases which may exempt the company from liability. While as a general rule "the parties may limit
the coverage of the policy to certain particular accidents and risks or causes of loss, and may expressly except other
risks or causes of loss therefrom" (45 C. J. S. 781-782), however, it is to be desired that the terms and phraseology
of the exception clause be clearly expressed so as to be within the easy grasp and understanding of the insured, for if
the terms are doubtful or obscure the same must of necessity be interpreted or resolved aganst the one who has
caused the obscurity. (Article 1377, new Civil Code) And so it has bene generally held that the "terms in an
insurance policy, which are ambiguous, equivacal, or uncertain . . . are to be construed strictly and most strongly
against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or
payment to the insured, especially where a forfeiture is involved" (29 Am. Jur., 181), and the reason for this rule is
that he "insured usually has no voice in the selection or arrangement of the words employed and that the language of
the contract is selected with great care and deliberation by experts and legal advisers employed by, and acting
exclusively in the interest of, the insurance company." (44 C. J. S., p. 1174.)

Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by
experts who know and can anticipate the bearings and possible complications of every contingency. So
long as insurance companies insist upon the use of ambiguous, intricate and technical provisions, which
conceal rather than frankly disclose, their own intentions, the courts must, in fairness to those who purchase
insurance, construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash.
324, LRA 1917A, 1237.)lawphi1.net

An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the very purpose
for which the policy was procured. (Moore vs. Aetna Life Insurance Co., LRA 1915D, 264.)

We are therefore persuaded to conclude that the circumstances unfolded in the present case do not warrant the
finding that the death of the unfortunate victim comes within the purview of the exception clause of the
supplementary policy and, hence, do not exempt the company from liability.

Wherefore, reversing the decision appealed from, we hereby order the company to pay petitioner-appellant the
amount of P2,000, with legal interest from January 26, 1951 until fully paid, with costs.
 32

G.R. No. L-25579 March 29, 1972

EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T.

BIAGTAN and GRACIA T. BIAGTAN, plaintiffs-appellees,
vs.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., defendant-appellant.

.This is an appeal from the decision of the Court of First Instance of Pangasinan in its Civil Case
No. D-1700.

The facts are stipulated. Juan S. Biagtan was insured with defendant InsularLife Assurance
Company under Policy No. 398075 for the sum of P5,000.00 and, under a supplementary
contract denominated "Accidental Death Benefit Clause, for an additional sum of P5,000.00 if
"the death of the Insured resulted directly from bodily injury effected solely through external and
violent means sustained in an accident ... and independently of all other causes." The clause,
however,expressly provided that it would not apply where death resulted from an
injury"intentionally inflicted by another party."

On the night of May 20, 1964, or during the first hours of the following day a band of robbers
entered the house of the insured Juan S. Biagtan. What happened then is related in the decision
of the trial court as follows:

...; that on the night of May 20, 1964 or the first hours of May 21, 1964, while the
said life policy and supplementary contract were in full force and effect, the house
of insured Juan S. Biagtan was robbed by a band of robbers who were charged in
and convicted by the Court of First Instance of Pangasinan for robbery with
homicide; that in committing the robbery, the robbers, on reaching the staircase
landing on the second floor, rushed towards the door of the second floor room,
where they suddenly met a person near the door of oneof the rooms who turned
out to be the insured Juan S. Biagtan who received thrusts from their sharp-
pointed instruments, causing wounds on the body of said Juan S. Biagtan resulting
in his death at about 7 a.m. on the same day, May 21, 1964;

Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance company
paid the basic amount of P5,000.00 but refused to pay the additional sum of P5,000.00 under the
accidental death benefit clause, on the ground that the insured's death resulted from injuries
intentionally inflicted by third parties and therefore was not covered. Plaintiffs filed suit to
recover, and after due hearing the court a quo rendered judgment in their favor. Hence the
present appeal by the insurer.

The only issue here is whether under the facts are stipulated and found by the trial court the
wounds received by the insured at the hands of the robbers — nine in all, five of them mortal and
four non-mortal — were inflicted intentionally. The court, in ruling negatively on the issue,
stated that since the parties presented no evidence and submitted the case upon stipulation, there
was no "proof that the act of receiving thrust (sic) from the sharp-pointed instrument of the
robbers was intended to inflict injuries upon the person of the insured or any other person or
 33

merely to scare away any person so as to ward off any resistance or obstacle that might be
offered in the pursuit of their main objective which was robbery."

The trial court committed a plain error in drawing the conclusion it did from the admitted facts.
Nine wounds were inflicted upon the deceased, all by means of thrusts with sharp-pointed
instruments wielded by the robbers. This is a physical fact as to which there is no dispute. So is
the fact that five of those wounds caused the death of the insured. Whether the robbers had the
intent to kill or merely to scare the victim or to ward off any defense he might offer, it cannot be
denied that the act itself of inflicting the injuries was intentional. It should be noted that the
exception in the accidental benefit clause invoked by the appellant does not speak of the purpose
— whether homicidal or not — of a third party in causing the injuries, but only of the fact that
such injuries have been "intentionally" inflicted — this obviously to distinguish them from
injuries which, although received at the hands of a third party, are purely accidental. This
construction is the basic idea expressed in the coverage of the clause itself, namely, that "the
death of the insured resulted directly from bodily injury effected solely through external and
violent means sustained in an accident ... and independently of all other causes." A gun which
discharges while being cleaned and kills a bystander; a hunter who shoots at his prey and hits a
person instead; an athlete in a competitive game involving physical effort who collides with an
opponent and fatally injures him as a result: these are instances where the infliction of the injury
is unintentional and therefore would be within the coverage of an accidental death benefit clause
such as thatin question in this case. But where a gang of robbers enter a house and coming face
to face with the owner, even if unexpectedly, stab him repeatedly, it is contrary to all reason and
logic to say that his injuries are not intentionally inflicted, regardless of whether they prove fatal
or not. As it was, in the present case they did prove fatal, and the robbers have been accused and
convicted of the crime of robbery with homicide.

The case of Calanoc vs. Court of Appeals, 98 Phil. 79, is relied upon by the trial court in support
of its decision. The facts in that case, however, are different from those obtaining here. The
insured there was a watchman in a certain company, who happened to be invited by a policeman
to come along as the latter was on his way to investigate a reported robbery going on in a private
house. As the two of them, together with the owner of the house, approached and stood in front
of the main gate, a shot was fired and it turned out afterwards that the watchman was hit in the
abdomen, the wound causing his death. Under those circumstances this Court held that it could
not be said that the killing was intentional for there was the possibility that the malefactor had
fired the shot to scare people around for his own protection and not necessarrily to kill or hit the
victim. A similar possibility is clearly ruled out by the facts in the case now before Us. For while
a single shot fired from a distance, and by a person who was not even seen aiming at the victim,
could indeed have been fired without intent to kill or injure, nine wounds inflicted with bladed
weapons at close range cannot conceivably be considered as innocent insofar as such intent is
concerned. The manner of execution of the crime permits no other conclusion.

Court decisions in the American jurisdiction, where similar provisions in accidental death benefit
clauses in insurance policies have been construed, may shed light on the issue before Us. Thus, it
has been held that "intentional" as used in an accident policy excepting intentional injuries
inflicted by the insured or any other person, etc., implies the exercise of the reasoning faculties,
consciousness and volition.1 Where a provision of the policy excludes intentional injury, it is the
 34

intention of the person inflicting the injury that is controlling.2 If the injuries suffered by the
insured clearly resulted from the intentional act of a third person the insurer is relieved from
liability as stipulated.3

In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, 12 Am. St. Rep.
484, the insured was waylaid and assassinated for the purpose of robbery. Two (2) defenses were
interposed to the action to recover indemnity, namely: (1) that the insured having been killed by
intentional means, his death was not accidental, and (2) that the proviso in the policy expressly
exempted the insurer from liability in case the insured died from injuries intentionally inflicted
by another person. In rendering judgment for the insurance company the Court held that while
the assassination of the insured was as to him an unforeseen event and therefore accidental, "the
clause of the proviso that excludes the (insurer's) liability, in case death or injury is intentionally
inflicted by another person, applies to this case."

In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811, the insured
was shot three times by a person unknown late on a dark and stormy night, while working in the
coal shed of a railroad company. The policy did not cover death resulting from "intentional
injuries inflicted by the insured or any other person." The inquiry was as to the question whether
the shooting that caused the insured's death was accidental or intentional; and the Court found
that under the facts, showing that the murderer knew his victim and that he fired with intent to
kill, there could be no recovery under the policy which excepted death from intentional injuries
inflicted by any person.

WHEREFORE, the decision appealed from is reversed and the complaint dismissed, without
pronouncement as to costs.

G.R. No. 89741             March 13, 1991

SUN INSURANCE OFFICE, LTD., petitioner,
vs.
COURT OF APPEALS and EMILIO TAN, respondents.
This is a petition for review on certiorari of the June 20, 1989 decision1 of the Court of Appeals
in CA-G.R. SP. Case No. 13848 affirming the November 3, 1987 and January 14, 1988 orders of
the Regional Trial Court2 of Iloilo, Branch 27, in Civil Case No. 16817, denying the motion to
dismiss and the subsequent motion for reconsideration; and the August 22, 1989 resolution of the
same court denying the motion for reconsideration.
On August 15, 1983, herein private respondent Emilio Tan took from herein petitioner a
P300,000.00 property insurance policy to cover his interest in the electrical supply store of his
brother housed in a building in Iloilo City. Four (4) days after the issuance of the policy, the
building was burned including the insured store. On August 20, 1983, Tan filed his claim for fire
loss with petitioner, but on February 29, 1984, petitioner wrote Tan denying the latter's claim. On
April 3, 1984, Tan wrote petitioner, seeking reconsideration of the denial of his claim. On
September 3, 1985, Tan's counsel wrote the Insurer inquiring about the status of his April 3,
1984 request for reconsideration. Petitioner answered the letter on October 11, 1985, advising
Tan's counsel that the Insurer's denial of Tan's claim remained unchanged, enclosing copies of
petitioners' letters of February 29, 1984 and May 17, 1985 (response to petition for
reconsideration). On November 20, 1985, Tan filed Civil Case No. 16817 with the Regional
 35

Trial Court of Iloilo, Branch 27 but petitioner filed a motion to dismiss on the alleged ground
that the action had already prescribed. Said motion was denied in an order dated November 3,
1987; and petitioner's motion for reconsideration was also denied in an order dated January 14,
1988.
Petitioner went to the Court of Appeals and sought the nullification of the said Nov. 3, 1987 and
January 14, 1988 orders, but the Court of Appeals, in its June 20, 1989 decision denied the
petition and held that the court a quo may continue until its final termination.
A motion for reconsideration was filed, but the same was denied by the Court of Appeals in its
resolution of August 22, 1989 (Rollo, pp. 42-43).
Hence, the instant petition.
The Second Division of this Court, in its resolution of December 18, 1989 resolved to give due
course to the petition and to require the parties to submit simultaneous memoranda (Ibid., p. 56).
Petitioner raised two (2) issues which may be stated in substance, as follows:
I
WHETHER OR NOT THE FILING OF A MOTION FOR RECONSIDERATION
INTERRUPTS THE TWELVE (12) MONTHS PRESCRIPTIVE PERIOD TO
CONTEST THE DENIAL OF THE INSURANCE CLAIM; and
II
WHETHER OR NOT THE REJECTION OF THE CLAIM SHALL BE DEEMED
FINAL ONLY IF IT CONTAINS WORDS TO THE EFFECT THAT THE DENIAL IS
FINAL.
The answer to the first issue is in the negative.
While it is a cardinal principle of insurance law that a policy or contract of insurance is to be
construed liberally in favor of the insured and strictly against the insurer company, yet, contracts
of insurance, like other contracts, are to be construed according to the sense and meaning of the
terms which the parties themselves have used. If such terms are clear and unambiguous, they
must be taken and understood in their plain, ordinary and popular sense (Pacific Banking Corp.
v. Court of Appeals, 168 SCRA 1 [1988]).
Condition 27 of the Insurance Policy, which is the subject of the conflicting contentions of the
parties, reads:
27. Action or suit clause — If  a claim be made and rejected and an action or suit be not
commenced either in the Insurance Commission or in any court of competent jurisdiction
within twelve (12) months from receipt of notice of such rejection, or in case of
arbitration taking place as provided herein, within twelve (12) months after due notice of
the award made by the arbitrator or arbitrators or umpire, then the claim shall for all
purposes be deemed to have been abandoned and shall not thereafter be recoverable
hereunder.
As the terms are very clear and free from any doubt or ambiguity whatsoever, it must be taken
and understood in its plain, ordinary and popular sense pursuant to the above-cited principle laid
down by this Court.
Respondent Tan, in his letter addressed to the petitioner insurance company dated April 3, 1984
(Rollo, pp. 50-52), admitted that he received a copy of the letter of rejection on April 2, 1984.
Thus, the 12-month prescriptive period started to run from the said date of April 2, 1984, for
such is the plain meaning and intention of Section 27 of the insurance policy.
While the question of whether or not the insured was definitely advised of the rejection of his
claim through the letter (Rollo, pp. 48-49) of petitioner dated February 29, 1984, may arise, the
 36

certainty of the denial of Tan's claim was clearly manifested in said letter, the pertinent portion
of which reads:
We refer to your claim for fire loss of 20th August, 1983 at Huervana St., La Paz, Iloilo
City.
We now have the report of our adjusters and after a thorough and careful review of the
same and the accompanying documents at hand, we are rejecting, much to our regrets,
liability for the claim under our policies for one or more of the following reasons:
1. xxx xxx xxx
2. xxx xxx xxx
For your information, we have referred all these matters to our lawyers for their opinion
as to the compensability of your claim, particularly referring to the above violations. It is
their opinion and in fact their strong recomendation to us to deny your claim. By this
letter, we do not intend to waive or relinquish any of our rights or defenses under our
policies of insurance.
It is also important to note the principle laid down by this Court in the case of Ang v. Fulton Fire
Insurance Co., (2 SCRA 945 [1961]), to wit:
The condition contained in an insurance policy that claims must be presented within one
year after rejection is not merely a procedural requirement but an important matter
essential to a prompt settlement of claims against insurance companies as it demands that
insurance suits be brought by the insured while the evidence as to the origin and cause of
destruction have not yet disappeared.
In enunciating the above-cited principle, this Court had definitely settled the rationale for the
necessity of bringing suits against the Insurer within one year from the rejection of the claim.
The contention of the respondents that the one-year prescriptive period does not start to run until
the petition for reconsideration had been resolved by the insurer, runs counter to the declared
purpose for requiting that an action or suit be filed in the Insurance Commission or in a court of
competent jurisdiction from the denial of the claim. To uphold respondents' contention would
contradict and defeat the very principle which this Court had laid down. Moreover, it can easily
be used by insured persons as a scheme or device to waste time until any evidence which may be
considered against them is destroyed.
It is apparent that Section 27 of the insurance policy was stipulated pursuant to Section 63 of the
Insurance Code, which states that:
Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the
time for commencing an action thereunder to a period of less than one year from the time
when the cause of action accrues, is void.
The crucial issue in this case is: When does the cause of action accrue?
In support of private respondent's view, two rulings of this Court have been cited, namely, the
case of Eagle Star Insurance Co. vs. Chia Yu (96 Phil. 696 (1955]), where the Court held:
The right of the insured to the payment of his loss accrues from the happening of the loss.
However, the cause of action in an insurance contract does not accrue until the insured's
claim is finally rejected by the insurer. This is because before such final rejection there is
no real necessity for bringing suit.
and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968], holding
that:
Since "cause of action" requires as essential elements not only a legal right of the plaintiff
and a correlated obligation of the defendant in violation of the said legal right, the cause
 37

of action does not accrue until the party obligated (surety) refuses, expressly or impliedly,
to comply with its duty (in this case to pay the amount of the bond).
Indisputably, the above-cited pronouncements of this Court may be taken to mean that the
insured's cause of action or his right to file a claim either in the Insurance Commission or in a
court of competent jurisdiction commences from the time of the denial of his claim by the
Insurer, either expressly or impliedly.
But as pointed out by the petitioner insurance company, the rejection referred to should be
construed as the rejection, in the first instance, for if what is being referred to is a reiterated
rejection conveyed in a resolution of a petition for reconsideration, such should have been
expressly stipulated.
Thus, to allow the filing of a motion for reconsideration to suspend the running of the
prescriptive period of twelve months, a whole new body of rules on the matter should be
promulgated so as to avoid any conflict that may be brought by it, such as:
a) whether the mere filing of a plea for reconsideration of a denial is sufficient or must it
be supported by arguments/affidavits/material evidence;
b) how many petitions for reconsideration should be permitted?
While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final rejection", the same
cannot be taken to mean the rejection of a petition for reconsideration as insisted by respondents.
Such was clearly not the meaning contemplated by this Court. The Insurance policy in said case
provides that the insured should file his claim, first, with the carrier and then with the insurer.
The "final rejection" being referred to in said case is the rejection by the insurance company.
PREMISES CONSIDERED, the questioned decision of the Court of Appeals is REVERSED and
SET ASIDE, and Civil Case No. 16817 filed with the Regional Trial Court is hereby
DISMISSED.
SO ORDERED.

G.R. No. L-15895             November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma.

Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma.
Herrer to recover from the defendant life insurance company the sum of pesos 6,000 paid by the
deceased for a life annuity. The trial court gave judgment for the defendant. Plaintiff appeals.

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

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

PROVISIONAL RECEIPT Pesos 6,000

 38

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta
Vitalicia solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de
la Oficina Central de la Compañia.

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

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

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

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

Not forgetting our conclusion of fact, it next becomes necessary to determine the law which
should be applied to the facts. In order to reach our legal goal, the obvious signposts along the
way must be noticed.
 39

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

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

If no mistake has been made in announcing the successive steps by which we reach a conclusion,
then the only duty remaining is for the court to apply the law as it is found. The legislature in its
wisdom having enacted a new law on insurance, and expressly repealed the provisions in the
Code of Commerce on the same subject, and having thus left a void in the commercial law, it
would seem logical to make use of the only pertinent provision of law found in the Civil code,
closely related to the chapter concerning life annuities.

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

In resume, therefore, the law applicable to the case is found to be the second paragraph of article
1262 of the Civil Code providing that an acceptance made by letter shall not bind the person
making the offer except from the time it came to his knowledge. The pertinent fact is, that
 40

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

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

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

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

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,

vs.
HONORABLE COURT OF APPEALS, respondents.

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

LAPULAPU D. MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO HING, respondents.

The two above-entitled cases were ordered consolidated by the Resolution of this Court dated
April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both cases seek similar
relief, through these petitions for certiorari by way of appeal, from the amended decision of
respondent Court of Appeals which affirmed in toto the decision of the Court of First Instance of
Cebu, ordering "the defendants (herein petitioners Great Pacific Ligfe Assurance Company and
Mondragon) jointly and severally to pay plaintiff (herein private respondent Ngo Hing) the
amount of P50,000.00 with interest at 6% from the date of the filing of the complaint, and the
sum of P1,077.75, without interest.
 41

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

The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by
petitioner Mondragon to private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon
wrote back Pacific Life again strongly recommending the approval of the 20-year endowment
insurance plan to children, pointing out that since 1954 the customers, especially the Chinese,
were asking for such coverage (Exhibit 4-M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza with
complication of bronchopneumonia. Thereupon, private respondent sought the payment of the
proceeds of the insurance, but having failed in his effort, he filed the action for the recovery of
the same before the Court of First Instance of Cebu, which rendered the adverse decision as
earlier refered to against both petitioners.

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

1. At the back of Exhibit E are condition precedents required before a deposit is considered a
BINDING RECEIPT. These conditions state that:

A. If the Company or its agent, shan have received the premium deposit ... and the
insurance application, ON or PRIOR to the date of medical examination ... said
insurance shan be in force and in effect from the date of such medical
examination, for such period as is covered by the deposit ..., PROVIDED the
company shall be satisfied that on said date the applicant was insurable on
standard rates under its rule for the amount of insurance and the kind of policy
requested in the application.
 42

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

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

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

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

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

It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-
M), Pacific Life disapproved the insurance application in question on the ground that it is not
offering the twenty-year endowment insurance policy to children less than seven years of age.
What it offered instead is another plan known as the Juvenile Triple Action, which private
respondent failed to accept. In the absence of a meeting of the minds between petitioner Pacific
Life and private respondent Ngo Hing over the 20-year endowment life insurance in the amount
of P50,000.00 in favor of the latter's one-year old daughter, and with the non-compliance of the
 43

abovequoted conditions stated in the disputed binding deposit receipt, there could have been no
insurance contract duly perfected between thenl Accordingly, the deposit paid by private
respondent shall have to be refunded by Pacific Life.

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

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

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

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

(Exhibit 3-M) nor the reply thereto of appellant Mondragon reiterating the desire
for applicant's father to have the application considered as one for a 20-year
endowment plan was ever duly communicated to Ngo; Hing, father of the minor
applicant. I am not quite conninced that this was so. Ngo Hing, as father of the
applicant herself, was precisely the "underwriter who wrote this case" (Exhibit H-
1). The unchallenged statement of appellant Mondragon in his letter of May 6,
1957) (Exhibit 4-M), specifically admits that said Ngo Hing was "our associate"
and that it was the latter who "insisted that the plan be placed on the 20-year
endowment plan." Under these circumstances, it is inconceivable that the progress
in the processing of the application was not brought home to his knowledge. He
must have been duly apprised of the rejection of the application for a 20-year
endowment plan otherwise Mondragon would not have asserted that it was Ngo
 44

Hing himself who insisted on the application as originally filed, thereby implictly
declining the offer to consider the application under the Juvenile Triple Action
Plan. Besides, the associate of Mondragon that he was, Ngo Hing should only be
presumed to know what kind of policies are available in the company for minors
below 7 years old. What he and Mondragon were apparently trying to do in the
premises was merely to prod the company into going into the business of issuing
endowment policies for minors just as other insurance companies allegedly do.
Until such a definite policy is however, adopted by the company, it can hardly be
said that it could have been bound at all under the binding slip for a plan of
insurance that it could not have, by then issued at all. (Amended Decision, Rollo,
pp- 52-53).

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

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

We are thus constrained to hold that no insurance contract was perfected between the parties
with the noncompliance of the conditions provided in the binding receipt, and concealment, as
legally defined, having been comraitted by herein private respondent.

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

SO ORDERED.
 45

G.R. No. L-44059 October 28, 1977

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,

vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

This is a novel question in insurance law: Can a common-law wife named as beneficiary in the
life insurance policy of a legally married man claim the proceeds thereof in case of death of the
latter?

On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co.,
Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the
same amount Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in his
policy. He to her as his wife.

On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a
failing branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to
pay the coverage in the total amount of P11,745.73, representing the face value of the policy in
the amount of P5,882.00 plus the additional benefits for accidental death also in the amount of
P5,882.00 and the refund of P18.00 paid for the premium due November, 1969, minus the unpaid
premiums and interest thereon due for January and February, 1969, in the sum of P36.27.

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated
beneficiary therein, although she admits that she and the insured Buenaventura C. Ebrado were
merely living as husband and wife without the benefit of marriage.

Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts
that she is the one entitled to the insurance proceeds, not the common-law wife, Carponia T.
Ebrado.

In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for Interpleader before the Court of First Instance of
Rizal on April 29, 1970.

After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a
pre-trial order was entered reading as follows: ñé+.£ªwph!1

During the pre-trial conference, the parties manifested to the court. that there is no
possibility of amicable settlement. Hence, the Court proceeded to have the parties
submit their evidence for the purpose of the pre-trial and make admissions for the
 46

purpose of pretrial. During this conference, parties Carponia T. Ebrado and

Pascuala Ebrado agreed and stipulated: 1) that the deceased Buenaventura
Ebrado was married to Pascuala Ebrado with whom she has six — (legitimate)
namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed
Ebrado; 2) that during the lifetime of the deceased, he was insured with Insular
Life Assurance Co. Under Policy No. 009929 whole life plan, dated September 1,
1968 for the sum of P5,882.00 with the rider for accidental death benefit as
evidenced by Exhibits A for plaintiffs and Exhibit 1 for the defendant Pascuala
and Exhibit 7 for Carponia Ebrado; 3) that during the lifetime of Buenaventura
Ebrado, he was living with his common-wife, Carponia Ebrado, with whom she
had 2 children although he was not legally separated from his legal wife; 4) that
Buenaventura in accident on October 21, 1969 as evidenced by the death Exhibit
3 and affidavit of the police report of his death Exhibit 5; 5) that complainant
Carponia Ebrado filed claim with the Insular Life Assurance Co. which was
contested by Pascuala Ebrado who also filed claim for the proceeds of said policy
6) that in view ofthe adverse claims the insurance company filed this action
against the two herein claimants Carponia and Pascuala Ebrado; 7) that there is
now due from the Insular Life Assurance Co. as proceeds of the policy
P11,745.73; 8) that the beneficiary designated by the insured in the policy is
Carponia Ebrado and the insured made reservation to change the beneficiary but
although the insured made the option to change the beneficiary, same was never
changed up to the time of his death and the wife did not have any opportunity to
write the company that there was reservation to change the designation of the
parties agreed that a decision be rendered based on and stipulation of facts as to
who among the two claimants is entitled to the policy.

Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.

SO ORDERED.

On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T.
Ebrado disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and
directing the payment of the insurance proceeds to the estate of the deceased insured. The trial
court held: ñé+.£ªwph!1

It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of
such guilt or commission of those acts be made in a separate independent action
brought for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare
the nullity of the donation).

It is, however, essential that such adultery or concubinage exists at the time
defendant Carponia T. Ebrado was made beneficiary in the policy in question for
 47

the disqualification and incapacity to exist and that it is only necessary that such
fact be established by preponderance of evidence in the trial. Since it is agreed in
their stipulation above-quoted that the deceased insured and defendant Carponia
T. Ebrado were living together as husband and wife without being legally married
and that the marriage of the insured with the other defendant Pascuala Vda. de
Ebrado was valid and still existing at the time the insurance in question was
purchased there is no question that defendant Carponia T. Ebrado is disqualified
from becoming the beneficiary of the policy in question and as such she is not
entitled to the proceeds of the insurance upon the death of the insured.

From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976,
the Appellate Court certified the case to Us as involving only questions of law.

We affirm the judgment of the lower court.

1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new
Insurance Code (PD No. 612, as amended) does not contain any specific provision grossly
resolutory of the prime question at hand. Section 50 of the Insurance Act which provides that
"(t)he insurance shag be applied exclusively to the proper interest of the person in whose name it
is made" 1 cannot be validly seized upon to hold that the mm includes the beneficiary. The word
"interest" highly suggests that the provision refers only to the "insured" and not to the
beneficiary, since a contract of insurance is personal in character. 2 Otherwise, the prohibitory
laws against illicit relationships especially on property and descent will be rendered nugatory, as
the same could easily be circumvented by modes of insurance. Rather, the general rules of civil
law should be applied to resolve this void in the Insurance Law. Article 2011 of the New Civil
Code states: "The contract of insurance is governed by special laws. Matters not expressly
provided for in such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is governed by the
general rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code,
"any person who is forbidden from receiving any donation under Article 739 cannot be named
beneficiary of a fife insurance policy by the person who cannot make a donation to
him. 4 Common-law spouses are, definitely, barred from receiving donations from each other.
Article 739 of the new Civil Code provides: ñé+.£ªwph!1

The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at

the time of donation;

Those made between persons found guilty of the same criminal offense, in
consideration thereof;

3. Those made to a public officer or his wife, descendants or ascendants by reason

of his office.
 48

In the case referred to in No. 1, the action for declaration of nullity may be
brought by the spouse of the donor or donee; and the guilt of the donee may be
proved by preponderance of evidence in the same action.

2. In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary
is like a donee, because from the premiums of the policy which the insured pays out of liberality,
the beneficiary will receive the proceeds or profits of said insurance. As a consequence, the
proscription in Article 739 of the new Civil Code should equally operate in life insurance
contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot receive a
donation cannot be named as beneficiary in the life insurance policy of the person who cannot
make the donation. 5 Under American law, a policy of life insurance is considered as a testament
and in construing it, the courts will, so far as possible treat it as a will and determine the effect of
a clause designating the beneficiary by rules under which wins are interpreted. 6

3. Policy considerations and dictates of morality rightly justify the institution of a barrier
between common law spouses in record to Property relations since such hip ultimately
encroaches upon the nuptial and filial rights of the legitimate family There is every reason to
hold that the bar in donations between legitimate spouses and those between illegitimate ones
should be enforced in life insurance policies since the same are based on similar consideration
As above pointed out, a beneficiary in a fife insurance policy is no different from a donee. Both
are recipients of pure beneficence. So long as manage remains the threshold of family laws,
reason and morality dictate that the impediments imposed upon married couple should likewise
be imposed upon extra-marital relationship. If legitimate relationship is circumscribed by these
legal disabilities, with more reason should an illicit relationship be restricted by these disabilities.
Thus, in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said: ñé+.£ªwph!1

If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que
no se enganen desponjandose el uno al otro por amor que han de consuno'
(According to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale
'No Mutuato amore invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat,
inter virum et uxorem); then there is very reason to apply the same prohibitive
policy to persons living together as husband and wife without the benefit of
nuptials. For it is not to be doubted that assent to such irregular connection for
thirty years bespeaks greater influence of one party over the other, so that the
danger that the law seeks to avoid is correspondingly increased. Moreover, as
already pointed out by Ulpian (in his lib. 32 ad Sabinum, fr. 1), 'it would not be
just that such donations should subsist, lest the condition 6f those who incurred
guilt should turn out to be better.' So long as marriage remains the cornerstone of
our family law, reason and morality alike demand that the disabilities attached to
marriage should likewise attach to concubinage.
 49

It is hardly necessary to add that even in the absence of the above pronouncement,
any other conclusion cannot stand the test of scrutiny. It would be to indict the
frame of the Civil Code for a failure to apply a laudable rule to a situation which
in its essentials cannot be distinguished. Moreover, if it is at all to be
differentiated the policy of the law which embodies a deeply rooted notion of
what is just and what is right would be nullified if such irregular relationship
instead of being visited with disabilities would be attended with benefits.
Certainly a legal norm should not be susceptible to such a reproach. If there is
every any occasion where the principle of statutory construction that what is
within the spirit of the law is as much a part of it as what is written, this is it.
Otherwise the basic purpose discernible in such codal provision would not be
attained. Whatever omission may be apparent in an interpretation purely literal of
the language used must be remedied by an adherence to its avowed objective.

4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More specifically, with record to the disability on
"persons who were guilty of adultery or concubinage at the time of the donation," Article 739
itself provides: ñé+.£ªwph!1

In the case referred to in No. 1, the action for declaration of nullity may be
brought by the spouse of the donor or donee; and the guilty of the donee may be
proved by preponderance of evidence in the same action.

The underscored clause neatly conveys that no criminal conviction for the offense is a condition
precedent. In fact, it cannot even be from the aforequoted provision that a prosecution is needed.
On the contrary, the law plainly states that the guilt of the party may be proved "in the same
acting for declaration of nullity of donation. And, it would be sufficient if evidence
preponderates upon the guilt of the consort for the offense indicated. The quantum of proof in
criminal cases is not demanded.

In the caw before Us, the requisite proof of common-law relationship between the insured and
the beneficiary has been conveniently supplied by the stipulations between the parties in the pre-
trial conference of the case. It case agreed upon and stipulated therein that the deceased insured
Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate
children; that during his lifetime, the deceased insured was living with his common-law wife,
Carponia Ebrado, with whom he has two children. These stipulations are nothing less
than judicial admissions which, as a consequence, no longer require proof and cannot be
contradicted. 8 A fortiori, on the basis of these admissions, a judgment may be validly rendered
without going through the rigors of a trial for the sole purpose of proving the illicit liaison
between the insured and the beneficiary. In fact, in that pretrial, the parties even agreed "that a
decision be rendered based on this agreement and stipulation of facts as to who among the two
claimants is entitled to the policy."

ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T.
Ebrado is hereby declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado
 50

in his life insurance policy. As a consequence, the proceeds of the policy are hereby held payable
to the estate of the deceased insured. Costs against Carponia T. Ebrado.

SO ORDERED.

G.R. No. 181132               June 5, 2009

HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA
PANGILINAN MARAMAG, Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL
BRIAN DE GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR
LIFE ASSURANCE COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, Respondents.
This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to reverse and set
aside the Resolution2 dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No.
85948, dismissing petitioners’ appeal for lack of jurisdiction.
The case stems from a petition3 filed against respondents with the Regional Trial Court, Branch
29, for revocation and/or reduction of insurance proceeds for being void and/or inofficious, with
prayer for a temporary restraining order (TRO) and a writ of preliminary injunction.
The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto
Maramag (Loreto), while respondents were Loreto’s illegitimate family; (2) Eva de Guzman
Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the latter, thus, she is
disqualified to receive any proceeds from his insurance policies from Insular Life Assurance
Company, Ltd. (Insular)4 and Great Pacific Life Assurance Corporation (Grepalife);5 (3) the
illegitimate children of Loreto—Odessa, Karl Brian, and Trisha Angelie—were entitled only to
one-half of the legitime of the legitimate children, thus, the proceeds released to Odessa and
those to be released to Karl Brian and Trisha Angelie were inofficious and should be reduced;
and (4) petitioners could not be deprived of their legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged, among
others, that part of the insurance proceeds had already been released in favor of Odessa, while
the rest of the proceeds are to be released in favor of Karl Brian and Trisha Angelie, both minors,
upon the appointment of their legal guardian. Petitioners also prayed for the total amount of
₱320,000.00 as actual litigation expenses and attorney’s fees.
In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa,
Karl Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the
insurance proceeds of the insurance policies; that when it ascertained that Eva was not the legal
wife of Loreto, it disqualified her as a beneficiary and divided the proceeds among Odessa, Karl
Brian, and Trisha Angelie, as the remaining designated beneficiaries; and that it released
Odessa’s share as she was of age, but withheld the release of the shares of minors Karl Brian and
Trisha Angelie pending submission of letters of guardianship. Insular alleged that the complaint
or petition failed to state a cause of action insofar as it sought to declare as void the designation
of Eva as beneficiary, because Loreto revoked her designation as such in Policy No.
A001544070 and it disqualified her in Policy No. A001693029; and insofar as it sought to
declare as inofficious the shares of Odessa, Karl Brian, and Trisha Angelie, considering that no
 51

settlement of Loreto’s estate had been filed nor had the respective shares of the heirs been
determined. Insular further claimed that it was bound to honor the insurance policies designating
the children of Loreto with Eva as beneficiaries pursuant to Section 53 of the Insurance Code.
In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was not designated
as an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and Trisha
Angelie were denied because Loreto was ineligible for insurance due to a misrepresentation in
his application form that he was born on December 10, 1936 and, thus, not more than 65 years
old when he signed it in September 2001; that the case was premature, there being no claim filed
by the legitimate family of Loreto; and that the law on succession does not apply where the
designation of insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to
petitioners, summons by publication was resorted to. Still, the illegitimate family of Loreto failed
to file their answer. Hence, the trial court, upon motion of petitioners, declared them in default in
its Order dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in
their respective answers be resolved first. The trial court ordered petitioners to comment within
15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely
legal – whether the complaint itself was proper or not – and that the designation of a beneficiary
is an act of liberality or a donation and, therefore, subject to the provisions of Articles 7528 and
7729 of the Civil Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to
the designated beneficiaries in the policies, not to the estate or to the heirs of the insured.
Grepalife also reiterated that it had disqualified Eva as a beneficiary when it ascertained that
Loreto was legally married to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which reads
–
WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular Life and
Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha Maramag. The
action shall proceed with respect to the other defendants Eva Verna de Guzman, Insular Life and
Grepalife.
SO ORDERED.10
In so ruling, the trial court ratiocinated thus –
Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic)
special laws. Matters not expressly provided for in such special laws shall be regulated by this
Code. The principal law on insurance is the Insurance Code, as amended. Only in case of
deficiency in the Insurance Code that the Civil Code may be resorted to. (Enriquez v. Sun Life
Assurance Co., 41 Phil. 269.)
The Insurance Code, as amended, contains a provision regarding to whom the insurance
proceeds shall be paid. It is very clear under Sec. 53 thereof that the insurance proceeds shall be
applied exclusively to the proper interest of the person in whose name or for whose benefit it is
made, unless otherwise specified in the policy. Since the defendants are the ones named as the
primary beneficiary (sic) in the insurances (sic) taken by the deceased Loreto C. Maramag and
there is no showing that herein plaintiffs were also included as beneficiary (sic) therein the
insurance proceeds shall exclusively be paid to them. This is because the beneficiary has a vested
 52

right to the indemnity, unless the insured reserves the right to change the beneficiary. (Grecio v.
Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on testamentary
succession in order to defeat the right of herein defendants to collect the insurance indemnity.
The beneficiary in a contract of insurance is not the donee spoken in the law of donation. The
rules on testamentary succession cannot apply here, for the insurance indemnity does not partake
of a donation. As such, the insurance indemnity cannot be considered as an advance of the
inheritance which can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of
Southern Luzon Employees’ Association v. Juanita Golpeo, et al., the Honorable Supreme Court
made the following pronouncements[:]
"With the finding of the trial court that the proceeds to the Life Insurance Policy belongs
exclusively to the defendant as his individual and separate property, we agree that the proceeds
of an insurance policy belong exclusively to the beneficiary and not to the estate of the person
whose life was insured, and that such proceeds are the separate and individual property of the
beneficiary and not of the heirs of the person whose life was insured, is the doctrine in America.
We believe that the same doctrine obtains in these Islands by virtue of Section 428 of the Code
of Commerce x x x."
In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no
sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag for
the reduction and/or declaration of inofficiousness of donation as primary beneficiary (sic) in the
insurances (sic) of the late Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of any cause of action. One of the named
beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is his concubine
Eva Verna De Guzman. Any person who is forbidden from receiving any donation under Article
739 cannot be named beneficiary of a life insurance policy of the person who cannot make any
donation to him, according to said article (Art. 2012, Civil Code). If a concubine is made the
beneficiary, it is believed that the insurance contract will still remain valid, but the indemnity
must go to the legal heirs and not to the concubine, for evidently, what is prohibited under Art.
2012 is the naming of the improper beneficiary. In such case, the action for the declaration of
nullity may be brought by the spouse of the donor or donee, and the guilt of the donor and donee
may be proved by preponderance of evidence in the same action (Comment of Edgardo L. Paras,
Civil Code of the Philippines, page 897). Since the designation of defendant Eva Verna de
Guzman as one of the primary beneficiary (sic) in the insurances (sic) taken by the late Loreto C.
Maramag is void under Art. 739 of the Civil Code, the insurance indemnity that should be paid
to her must go to the legal heirs of the deceased which this court may properly take cognizance
as the action for the declaration for the nullity of a void donation falls within the general
jurisdiction of this Court.11
Insular12 and Grepalife13 filed their respective motions for reconsideration, arguing, in the main,
that the petition failed to state a cause of action. Insular further averred that the proceeds were
divided among the three children as the remaining named beneficiaries. Grepalife, for its part,
also alleged that the premiums paid had already been refunded.
Petitioners, in their comment, reiterated their earlier arguments and posited that whether the
complaint may be dismissed for failure to state a cause of action must be determined solely on
the basis of the allegations in the complaint, such that the defenses of Insular and Grepalife
would be better threshed out during trial.1avvphi1
On June 16, 2005, the trial court issued a Resolution, disposing, as follows:
 53

WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration filed by
defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the portion of the
Resolution of this Court dated 21 September 2004 which ordered the prosecution of the case
against defendant Eva Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and
the case against them is hereby ordered DISMISSED.
SO ORDERED.14
In granting the motions for reconsideration of Insular and Grepalife, the trial court considered the
allegations of Insular that Loreto revoked the designation of Eva in one policy and that Insular
disqualified her as a beneficiary in the other policy such that the entire proceeds would be paid to
the illegitimate children of Loreto with Eva pursuant to Section 53 of the Insurance Code. It
ruled that it is only in cases where there are no beneficiaries designated, or when the only
designated beneficiary is disqualified, that the proceeds should be paid to the estate of the
insured. As to the claim that the proceeds to be paid to Loreto’s illegitimate children should be
reduced based on the rules on legitime, the trial court held that the distribution of the insurance
proceeds is governed primarily by the Insurance Code, and the provisions of the Civil Code are
irrelevant and inapplicable. With respect to the Grepalife policy, the trial court noted that Eva
was never designated as a beneficiary, but only Odessa, Karl Brian, and Trisha Angelie; thus, it
upheld the dismissal of the case as to the illegitimate children. It further held that the matter of
Loreto’s misrepresentation was premature; the appropriate action may be filed only upon denial
of the claim of the named beneficiaries for the insurance proceeds by Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack
of jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to
state a cause of action involved a pure question of law. The appellate court also noted that
petitioners did not file within the reglementary period a motion for reconsideration of the trial
court’s Resolution, dated September 21, 2004, dismissing the complaint as against Odessa, Karl
Brian, and Trisha Angelie; thus, the said Resolution had already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause of action,
may the Court consider matters which were not alleged in the Complaint, particularly the
defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss for failure to state a
cause of action, did not the Regional Trial Court engage in the examination and
determination of what were the facts and their probative value, or the truth thereof, when
it premised the dismissal on allegations of the defendants in their answer – which had not
been proven?
c. x x x (A)re the members of the legitimate family entitled to the proceeds of the
insurance for the concubine?15
In essence, petitioners posit that their petition before the trial court should not have been
dismissed for failure to state a cause of action because the finding that Eva was either
disqualified as a beneficiary by the insurance companies or that her designation was revoked by
Loreto, hypothetically admitted as true, was raised only in the answers and motions for
reconsideration of both Insular and Grepalife. They argue that for a motion to dismiss to prosper
on that ground, only the allegations in the complaint should be considered. They further contend
that, even assuming Insular disqualified Eva as a beneficiary, her share should not have been
distributed to her children with Loreto but, instead, awarded to them, being the legitimate heirs
of the insured deceased, in accordance with law and jurisprudence.
 54

The petition should be denied.

The grant of the motion to dismiss was based on the trial court’s finding that the petition failed to
state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads –
SECTION 1. Grounds. – Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:
xxxx
(g) That the pleading asserting the claim states no cause of action.
A cause of action is the act or omission by which a party violates a right of another.16 A
complaint states a cause of action when it contains the three (3) elements of a cause of action—
(1) the legal right of the plaintiff; (2) the correlative obligation of the defendant; and (3) the act
or omission of the defendant in violation of the legal right. If any of these elements is absent, the
complaint becomes vulnerable to a motion to dismiss on the ground of failure to state a cause of
action.17
When a motion to dismiss is premised on this ground, the ruling thereon should be based only on
the facts alleged in the complaint. The court must resolve the issue on the strength of such
allegations, assuming them to be true. The test of sufficiency of a cause of action rests on
whether, hypothetically admitting the facts alleged in the complaint to be true, the court can
render a valid judgment upon the same, in accordance with the prayer in the complaint. This is
the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no hypothetical
admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear unfounded; or
5. there is evidence which has been presented to the court by stipulation of the parties or
in the course of the hearings related to the case.18
In this case, it is clear from the petition filed before the trial court that, although petitioners are
the legitimate heirs of Loreto, they were not named as beneficiaries in the insurance policies
issued by Insular and Grepalife. The basis of petitioners’ claim is that Eva, being a concubine of
Loreto and a suspect in his murder, is disqualified from being designated as beneficiary of the
insurance policies, and that Eva’s children with Loreto, being illegitimate children, are entitled to
a lesser share of the proceeds of the policies. They also argued that pursuant to Section 12 of the
Insurance Code,19 Eva’s share in the proceeds should be forfeited in their favor, the former
having brought about the death of Loreto. Thus, they prayed that the share of Eva and portions of
the shares of Loreto’s illegitimate children should be awarded to them, being the legitimate heirs
of Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code which expressly provides that insurance
contracts shall be governed by special laws, i.e., the Insurance Code. Section 53 of the Insurance
Code states—
SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the
person in whose name or for whose benefit it is made unless otherwise specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are
either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the
maturation of the policy.20 The exception to this rule is a situation where the insurance contract
 55

was intended to benefit third persons who are not parties to the same in the form of favorable
stipulations or indemnity. In such a case, third parties may directly sue and claim from the
insurer.21
Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus, are
not entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife have no
legal obligation to turn over the insurance proceeds to petitioners. The revocation of Eva as a
beneficiary in one policy and her disqualification as such in another are of no moment
considering that the designation of the illegitimate children as beneficiaries in Loreto’s insurance
policies remains valid. Because no legal proscription exists in naming as beneficiaries the
children of illicit relationships by the insured,22 the shares of Eva in the insurance proceeds,
whether forfeited by the court in view of the prohibition on donations under Article 739 of the
Civil Code or by the insurers themselves for reasons based on the insurance contracts, must be
awarded to the said illegitimate children, the designated beneficiaries, to the exclusion of
petitioners. It is only in cases where the insured has not designated any beneficiary,23 or when the
designated beneficiary is disqualified by law to receive the proceeds,24 that the insurance policy
proceeds shall redound to the benefit of the estate of the insured.
In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In the
same light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the
appellate court had no jurisdiction to take cognizance of the appeal; the issue of failure to state a
cause of action is a question of law and not of fact, there being no findings of fact in the first
place.25
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.

[G.R. No. 124520. August 18, 1997]

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO.,
INC., Petitioners, v. COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, Respondents.
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a
decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with
private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October
1988.
2. One of the stipulations of the one (1) year lease contract states:
18. x x x. The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and
effects placed at any stall or store or space in the leased premises without first obtaining the
written consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof
without the consent of the LESSOR then the policy is deemed assigned and transferred to the
LESSOR for its own benefit; x x x1chanroblesvirtuallawlibrary
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against
loss by fire their merchandise inside the leased premises for Five Hundred Thousand
(P500,000.00) with the United Insurance Co., Inc. (hereinafter United) without the written
consent of private respondents CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased premises.
 56

5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent),
it wrote the insurer (United) a demand letter asking that the proceeds of the insurance contract
(between the Cha spouses and United) be paid directly to CKS, based on its lease contract with
Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and
United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision* ordering
therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to
pay P50,000.00 as exemplary damages, P20,000.00 as attorneys fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision** dated
11 January 1996, affirming the trial court decision, deleting however the awards for exemplary
damages and attorneys fees. A motion for reconsideration by United was denied on 29 March
1996.
In the present petition, the following errors are assigned by petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE
STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF
THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO
LAW, MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE
CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR
OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL
OF THE RESPONDENT CORPORATION.2chanroblesvirtuallawlibrary
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the
lease contract entered into between CKS and the Cha spouses is valid insofar as it provides that
any fire insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the
leased premises is deemed assigned or transferred to the lessor (CKS) if said policy is obtained
without the prior written of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot
be contrary to law, morals, good customs, public order or public
policy.3chanroblesvirtuallawlibrary
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except for the
benefit of some person having an insurable interest in the property insured.
 57

A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over
their merchandise is primarily a contract of indemnity. Insurable interest in the property insured
must exist at the time the insurance takes effect and at the time the loss occurs.4 The basis of such
requirement of insurable interest in property insured is based on sound public policy: to prevent a
person from taking out an insurance policy on property upon which he has no insurable interest
and collecting the proceeds of said policy in case of loss of the property. In such a case, the
contract of insurance is a mere wager which is void under Section 25 of the Insurance Code,
which provides:
SECTION 25. Every stipulation in a policy of Insurance for the payment of loss, whether the
person insured has or has not any interest in the property insured, or that the policy shall be
received as proof of such interest, and every policy executed by way of gaming or wagering, is
void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods and
merchandise inside the leased premises under the provisions of Section 17 of the Insurance Code
which provide.
Section 17. The measure of an insurable interest in property is the extent to which the insured
might be damnified by loss of injury thereof."
Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a
beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise.
This insurable interest over said merchandise remains with the insured, the Cha spouses. The
automatic assignment of the policy to CKS under the provision of the lease contract previously
quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance
policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners).
The insurer (United) cannot be compelled to pay the proceeds of the fire insurance policy to a
person (CKS) who has no insurable interest in the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that Cha spouses
obtained a fire insurance policy over their own merchandise, without the consent of CKS, is a
separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE
and a new decision is hereby entered, awarding the proceeds of the fire insurance policy to
petitioners Nilo Cha and Stella Uy-Cha.
SO ORDERED.

G.R. Nos. 128833. April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D.

LAO, Petitioners, v. COURT OF APPEALS and GOYU & SONS, INC., Respondents.

G.R. No. 128834. April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, Petitioners, v. COURT OF

APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP,
SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, Respondents.

G.R. No. 128866. April 20, 1998

 58

MALAYAN INSURANCE INC., Petitioner, v. GOYU & SONS, INC. respondent.

The issues relevant to the herein three consolidated petitions revolve around the fire loss claims
of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc.
(MICO) in connection with the mortgage contracts entered into by and between Rizal
Commercial Banking Corporation (RCBC) and GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of
P74,040,518.58, plus 37% interest per annum commencing July 27, 1992. RCBC was ordered to
pay actual and compensatory damages in the amount of P5,000,000.00. MICO and RCBC were
held solidarily liable to pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for
attorneys fees. GOYUs obligation to RCBC was fixed at P68,785,069.04 as of April 1992,
without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in
view of the common facts and issues involved, their individual petitions were consolidated.

The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After
due evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and
Eli D. Lao, recommended GOYUs application for approval by RCBCs executive committee. A
credit facility in the amount of P30 million was initially granted. Upon GOYUs application and
Uys and Laos recommendation, RCBCs executive committee increased GOYUs credit facility to
P50 million, then to P90 million, and finally to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and
two chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at
Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU committed itself
to insure the mortgaged property with an insurance company approved by RCBC, and
subsequently, to endorse and deliver the insurance policies to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992,
Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan
insurance policies, issued nine endorsements in favor of RCBC seemingly upon instructions of
GOYU (Exhibits 1-Malayan to 9-Malayan).

On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire.
Consequently, GOYU submitted its claim for indemnity on account of the loss insured against.
MICO denied the claim on the ground that the insurance policies were either attached pursuant to
writs of attachments/garnishments issued by various courts or that the insurance proceeds were
also claimed by other creditors of GOYU alleging better rights to the proceeds than the insured.
GOYU filed a complaint for specific performance and damages which was docketed at the
Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case
No. 93-65442, now subject of the present G.R. No. 128833 and 128866.
 59

RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the proceeds of the
insurance policies, but said claims were also denied for the same reasons that MICO denied
GOYUs claims.

In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court
of Manila (Branch 3), confirmed that GOYUs other creditors, namely, Urban Bank, Alfredo
Sebastian, and Philippine Trust Company obtained their respective writs of attachments from
various courts, covering an aggregate amount of P14,938,080.23, and ordered that the proceeds
of the ten insurance policies be deposited with the said court minus the aforementioned
P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of
P50,505,594.60 with Branch 3 of the Manila RTC.

In the meantime, another notice of garnishment was handed down by another Manila RTC sala
(Branch 28) for the amount of P8,696,838.75 (Exhibit 22-Malayan).

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,
Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the
latter as follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount
of P50,000,000.00 which is deposited with this Court;

b. To pay the plaintiff damages by way of interest for the duration of the delay since July 27,
1992 (ninety days after defendant insurers receipt of the required proof of loss and notice of loss)
at the rate of twice the ceiling prescribed by the Monetary Board, on the following amounts:

1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited
with this Court on January 7, 1994;

2) P24,040,518.58 from July 27, 1992 up to the time when the writs of attachments
were received by defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

 60

2) P1,000,000.00 as, and for, attorneys fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan
obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27,
1992, with interest thereon at the rate stipulated in the respective promissory notes
(without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant
Malayan, together with all the interests earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with
the amounts awarded in its favor. MICO and RCBC disputed the trial courts findings of liability
on their part. The Court of Appeals partly granted GOYUs appeal, but sustained the findings of
the trial court with respect to MICO and RCBCs liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as
follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of
P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu receives the said amount at the rate of thirty-
seven (37%) percent per annum which is twice the ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:

a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL

BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:

a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan
obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any
interest, surcharges and penalties.
 61

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately
release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited
with it by Malayan Insurance Co., Inc., together with all the interests thereon.

(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking
review and consequent reversal of the above dispositions of the Court of Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376,
which case, by virtue of the Court of Appeals resolution dated August 7, 1996, was consolidated
with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At issue in said petition is
RCBCs right to intervene in the action between Alfredo C. Sebastian (the creditor) and GOYU
(the debtor), where the subject insurance policies were attached in favor of Sebastian.

After a careful review of the material facts as found by the two courts below in relation to the
pertinent and applicable laws, we find merit in the submissions of RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several related issues which
are now submitted in the petitions before us. This Court, however, discerns one primary and
central issue, and this is, whether or not RCBC, as mortgagee, has any right over the insurance
policies taken by GOYU, the mortgagor, in case of the occurrence of loss.

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter
executed several mortgage contracts in favor of RCBC. It was expressly stipulated in these
mortgage contracts that GOYU shall insure the mortgaged property with any of the insurance
companies acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an
insurance company acceptable to RCBC. Based on their stipulations in the mortgage contracts,
GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to RCBC.
Alchester Insurance Agency, Inc., MICOs underwriter from whom GOYU obtained the subject
insurance policies, prepared the nine endorsements (see Exh. 1-Malayan to 9-Malayan; also Exh.
51-RCBC to 59-RCBC), copies of which were delivered to GOYU, RCBC, and MICO.
However, because these endorsements do not bear the signature of any officer of GOYU, the
trial court, as well as the Court of Appeals, concluded that the endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the
same mortgaged property, such that each one of them may insure the same property for his own
sole benefit. There is no question that GOYU could insure the mortgaged property for its own
exclusive benefit. In the present case, although it appears that GOYU obtained the subject
insurance policies naming itself as the sole payee, the intentions of the parties as shown by their
contemporaneous acts, must be given due consideration in order to better serve the interest of
justice and equity.
 62

It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC.
The Court is in a quandary how Alchester could arrive at the idea of endorsing any specific
insurance policy in favor of any particular beneficiary or payee other than the insured had not
such named payee or beneficiary been specifically disclosed by the insured itself. It is also
significant that GOYU voluntarily and purposely took the insurance policies from MICO, a sister
company of RCBC, and not just from any other insurance company. Alchester would not have
found out that the subject pieces of property were mortgaged to RCBC had not such information
been voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester would not
have known of GOYUs intention of obtaining insurance coverage in compliance with its
undertaking in the mortgage contracts with RCBC, and verily, Alchester would not have
endorsed the policies to RCBC had it not been so directed by GOYU.

On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in
favor of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine
National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit:

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and
justice, and its purpose is to forbid one to speak against his own act, representations, or
commitments to the injury of one to whom they were directed and who reasonably relied
thereon. The doctrine of estoppel springs from equitable principles and the equities in the case. It
is designed to aid the law in the administration of justice where without its aid injustice might
result. It has been applied by this Court wherever and whenever special circumstances of a case
so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr.
Yam, she prepared in quadruplicate on February 11, 1992 the nine endorsement documents for
GOYUs nine insurance policies in favor of RCBC. The original copies of each of these nine
endorsement documents were sent to GOYU, and the others were sent to RCBC and MICO,
while the fourth copies were retained for Alchesters file (tsn, February 23, pp. 7-8). GOYU has
not denied having received from Alchester the originals of these endorsements.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant
to the stipulation in the mortgage contracts. We find such reliance to be justified under the
circumstances of the case. GOYU failed to seasonably repudiate the authority of the person or
persons who prepared such endorsements. Over and above this, GOYU continued, in the
meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the
occurrence of the loss insured against, it was too late for GOYU to disown the endorsements for
any imagined or contrived lack of authority of Alchester to prepare and issue said endorsements.
If there had not been actually an implied ratification of said endorsements by virtue of GOYUs
inaction in this case, GOYU is at the very least estopped from assailing their operative effects.
To permit GOYU to capitalize on its non-confirmation of these endorsements while it continued
to enjoy the benefits of the credit facilities of RCBC which believed in good faith that there was
due endorsement pursuant to their mortgage contracts, is to countenance grave contravention of
public policy, fair dealing, good faith, and justice. Such an unjust situation, the Court cannot
 63

sanction. Under the peculiar circumstances obtaining in this case, the Court is bound to recognize
RCBCs right to the proceeds of the insurance policies if not for the actual endorsement of the
policies, at least on the basis of the equitable principle of estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the
proceeds of insurance shall exclusively apply to the interest of the person in whose name or for
whose benefit it is made. The peculiarity of the circumstances obtaining in the instant case
presents a justification to take exception to the strict application of said provision, it having been
sufficiently established that it was the intention of the parties to designate RCBC as the party for
whose benefit the insurance policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage contracts
entered into between RCBC and GOYU in consideration of and for securing GOYUs credit
facilities from RCBC. The mortgage contracts contained common provisions whereby GOYU, as
mortgagor, undertook to have the mortgaged property properly covered against any loss by an
insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO,
no less than a sister company of RCBC and definitely an acceptable insurance company to
RCBC.

3. Endorsement documents were prepared by MICOs underwriter, Alchester Insurance Agency,

Inc., and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of
late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities
extended by RCBC which was conditioned upon the endorsement of the insurance policies to be
taken by GOYU to cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the endorsement
documents prepared by Alchester, GOYU, despite the absence of its written conformity thereto,
obviously considered said endorsement to be sufficient compliance with its obligation under the
mortgage contracts since RCBC accordingly continued to extend the benefits of its credit
facilities and GOYU continued to benefit therefrom. Just as plain too is the intention of the
parties to constitute RCBC as the beneficiary of the various insurance policies obtained by
GOYU. The intention of the parties will have to be given full force and effect in this particular
case. The insurance proceeds may, therefore, be exclusively applied to RCBC, which under the
factual circumstances of the case, is truly the person or entity for whose benefit the policies were
clearly intended.

Moreover, the laws evident intention to protect the interests of the mortgagee upon the
mortgaged property is expressed in Article 2127 of the Civil Code which states:

ART. 2127. The mortgage extends to the natural accessions, to the improvements, growing
fruits, and the rents or income not yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor from the insurers of the property
 64

mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and
limitations established by law, whether the estate remains in the possession of the mortgagor, or
it passes into the hands of a third person.

Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of
them appear to have been subject of the endorsements prepared and delivered by Alchester for
and upon instructions of GOYU as shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number : F-114-07795 None

Issue Date : March 18, 1992

Expiry Date : April 5, 1993

Amount : P9,646,224.92

b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P4,307,217.54

c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan

Issue Date : January 18, 1992

Expiry Date : February 15, 1993

Amount : P6,603,586.43

d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan

Issue Date : January 18, 1992

Expiry Date : (not legible)

Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan

Issue Date : January 18, 1992

 65

Expiry Date : February 9, 1993

Amount : P9,457,972.76

f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan

Issue Date : January 13, 1992

Expiry Date : January 13, 1993

Amount : P24,750,000.00

g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan

Issue Date : May 29, 1991

Expiry Date : June 27, 1992

Amount : P6,000,000.00

h. Policy Number : CI/F-128-03341 None

Issue Date : May 3, 1991

Expiry Date : May 3, 1992

Amount : P10,000,000.00

i. Policy Number : F-114-07402 Exhibit 8-Malayan

Issue Date : September 16, 1991

Expiry Date : October 19, 1992

Amount : P32,252,125.20

j. Policy Number : F-114-07525 Exhibit 9-Malayan

Issue Date : November 20, 1991

Expiry Date : December 5, 1992

Amount : P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

 66

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by
MICOs witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no
endorsement for Policy Number CI/F-128-03341 [(h) above]. Also, one of the endorsement
documents, Exhibit 5-Malayan, refers to a certain insurance policy number ACIA-F-07066,
which is not among the insurance policies involved in the complaint.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being
exclusively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we
already ruled to have the force and effect of an endorsement by GOYU itself, these 8 policies can
not be attached by GOYUs other creditors up to the extent of the GOYUs outstanding obligation
in RCBCs favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to the proper interest of the person for whose
benefit it was made. In this case, to the extent of GOYUs obligation with RCBC, the interest of
GOYU in the subject policies had been transferred to RCBC effective as of the time of the
endorsement. These policies may no longer be attached by the other creditors of GOYU, like
Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless forthwith be
dismissed for being moot and academic in view of the results reached herein. Only the two other
policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by
GOYUs other creditors. To the extent of GOYUs outstanding obligation with RCBC, all the rest
of the other insurance policies above-listed which were endorsed to RCBC, are, therefore, to be
released from attachment, garnishment, and levy by the other creditors of GOYU.

This brings us to the next relevant issue to be resolved, which is, the extent of GOYUs
outstanding obligation with RCBC which the proceeds of the 8 insurance policies will discharge
and liquidate, or put differently, the actual amount of GOYUs liability to RCBC.

The Court of Appeals simply echoed the declaration of the trial court finding that GOYUS total
obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial
courts exclusion of Promissory Note No. 421-92 (renewal of Promissory Note No. 908-91) and
Promissory Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground that their
execution is highly questionable for not only are these dated after the fire, but also because the
signatures of either GOYU or any its representative are conspicuously absent. Accordingly, the
Court of Appeals speculated thusly:

Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff
in blank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for
the same practice of procedure has always been adopted in its previous dealings with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that
the documents are spurious, for it is presumed that the ordinary course of business had been
followed (Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 222 SCRA 486
[1993]). The obligor and not the holder of the negotiable instrument has the burden of proof of
showing that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals,
210 SCRA 351 [1992]).
 67

Even casting aside the presumption of regularity of private transactions, receipt of the loan
amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in
the testimony of Go Song Hiap when he answered the queries of the trial court:

ATTY. NATIVIDAD

Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts
stated therein?

A: Yes, sir, I received the amount.

COURT

He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

A. The promissory Notes they did not give to me but the amount I asked which is correct, Your
Honor.

COURT

Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?

A: Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)

Furthermore, aside from its judicial admission of having received all the proceeds of the 29
promissory notes as hereinabove quoted, GOYU also offered and admitted to RCBC that its
obligation be fixed at P116,301,992.60 as shown in its letter dated March 9, 1993, which
pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the current past due
account of this company in the amount of P116,301,992.60 as of 21 January 1993, specified in
pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party Claims in the Urban case at
Makati, Metro Manila and in the Zamboanga case at Zamboanga city, respectively, less the total
of P8,851,519.71 paid from the Seaboard and Equitable insurance companies and other
 68

legitimate deductions. We accept and confirm this amount of P116,301,992.60 as stated as true
and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the excluded
promissory notes are dated after the fire. It failed to consider that said notes had for their origin
transactions consummated prior to the fire. Thus, careful attention must be paid to the fact that
Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91
and 952-91, loans already availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which they ruled should be
excluded for bearing dates which are after that of the fire, are mere renewals of previous ones.
The proceeds of the loan represented by these promissory notes were admittedly received by
GOYU. There is ample factual and legal basis for giving GOYUs judicial admission of liability
in the amount of P116,301,992.60 full force and effect

It should, however, be quickly added that whatever amount RCBC may have recovered from the
other insurers of the mortgaged property will, nonetheless, have to be applied as payment against
GOYUs obligation. But, contrary to the lower courts findings, payments effected by GOYU prior
to January 21, 1993 should no longer be deducted. Such payments had obviously been duly
considered by GOYU, in its aforequoted letter dated March 9, 1993, wherein it admitted that its
past due account totaled P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January
21, 1993, to wit:

Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60

Broken down as follows

Principal1 Interest

Regular 80,535,946.32

FDU 7,548,025.17

____________ _____________

Total: 108,083,971.49 8,218,021.112cräläwvirtualibräry

LESS:

1) Proceeds from

Seaboard Eastern
 69

Insurance Company: 6,095,145.81

2) Proceeds from

Equitable Insurance

Company: 2,756,373.00

3) Payment from

foreign department

negotiation: 203,584.89

9,055,104.703cräläwvirtualibräry

NET AMOUNT as of January 21, 1993: P 107,246,887.90

The need for the payment of interest due upon the principal amount of the obligation, which is
the cost of money to RCBC, the primary end and the ultimate reason for RCBCs existence and
being, was duly recognized by the trial court when it ruled favorably on RCBCs counterclaim,
ordering GOYU to pay its loan obligation with RCBC in the amount of P68,785,069.04, as of
April 27,1992, with interest thereon at the rate stipulated in the respective promissory
notes (without surcharges and penalties) per computation, pp. 14-A, 14-B, 14-C (Record, p. 479).
Inexplicably, the Court of Appeals, without even laying down the factual or legal justification for
its ruling, modified the trial courts ruling and ordered GOYU to pay the principal amount of
P68,785,069.04 without any interest, surcharges and penalties (Rollo, p. 200).

It is to be noted in this regard that even the trial court hedgingly and with much uncertainty
deleted the payment of additional interest, penalties, and charges, in this manner:

Regarding defendant RCBCs commitment not to charge additional interest, penalties and
surcharges, the same does not require that it be embodied in a document or some form of writing
to be binding and enforceable. The principle is well known that generally a verbal agreement or
contract is no less binding and effective than a written one. And the existence of such a verbal
agreement has been amply established by the evidence in this case. In any event, regardless of
the existence of such verbal agreement, it would still be unjust and inequitable for defendant
RCBC to charge the plaintiff with surcharges and penalties considering the latters pitiful
situation. (Emphasis supplied.)

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct
from that of surcharges and penalties. What may justify a court in not allowing the creditor to
charge surcharges and penalties despite express stipulation therefor in a valid agreement, may
not equally justify non-payment of interest. The charging of interest for loans forms a very
 70

essential and fundamental element of the banking business, which may truly be considered to be
at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it
will not charge any interest at all. We fail to find justification for the Court of Appeals outright
deletion of the payment of interest as agreed upon in the respective promissory notes. This
constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid
down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]),
shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on Damages of the Civil Code govern in determining the measure of recoverable
damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date of the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.

(pp. 95-97.)

There being written stipulations as to the rate of interest owing on each specific promissory note
as summarized and tabulated by the trial court in its decision (pp.470 and 471, Record) such
 71

agreed interest rates must be followed. This is very clear from paragraph II, sub-paragraph 1
quoted above.

On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful
situation must be taken into account. We do not agree, however, that payment of any amount as
surcharges and penalties should altogether be deleted. Even assuming that RCBC, through its
responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its
assurance for assistance to GOYU immediately after the occurrence of the fire, we cannot accept
the lower courts finding that RCBC had thereby ipso facto effectively waived collection of any
additional interests, surcharges, and penalties from GOYU. Assurances of assistance are one
thing, but waiver of additional interests, surcharges, and penalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature
of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article
2227 thereof provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court
must consider the circumstances of each case. It should be stressed that the Court will not make
any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the
loans extended by them are generally iniquitous and unconscionable. What may be iniquitous
and unconscionable in one case, may be totally just and equitable in another. This provision of
law will have to be applied to the established facts of any given case. Given the circumstances
under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges
rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely
iniquitous and unconscionable. The Court tempers these rates to 2% and 3%, respectively.
Furthermore, in the light of GOYUs offer to pay the amount of P116,301,992.60 to RCBC as
March 1993 (See: Exhibit BB), which RCBC refused, we find it more in keeping with justice and
equity for RCBC not to charge additional interest, surcharges, and penalties from that time
onward.

Given the factual milieu spread hereover, we rule that it was error to hold MICO liable in
damages for denying or withholding the proceeds of the insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies,
RCBC has the right to claim the insurance proceeds, in substitution of the property lost in the
fire. Having assigned its rights, GOYU lost its standing as the beneficiary of the said insurance
policies.

Secondly, for an insurance company to be held liable for unreasonably delaying and withholding
payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith
Insurance Corporation vs. CA, 185 SCRA 403 [1990]). It is generally agreed, however, that an
insurer may in good faith and honesty entertain a difference of opinion as to its liability.
Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be
 72

inflicted unless the evidence and circumstances show that such refusal was willful and without
reasonable cause as the facts appear to a reasonable and prudent man (Buffalo Ins. Co. vs.
Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE
853, 65 Am St Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189).
The case at bar does not show that MICO wantonly and in bad faith delayed the release of the
proceeds. The problem in the determination of who is the actual beneficiary of the insurance
policies, aggravated by the claim of various creditors who wanted to partake of the insurance
proceeds, not to mention the importance of the endorsement to RCBC, to our mind, and as now
borne out by the outcome herein, justified MICO in withholding payment to GOYU.

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot
avail itself of two simultaneous remedies in enforcing the claim of an unpaid creditor, one for
specific performance and the other for foreclosure. In doing so, said the appellate court, the
second action is deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-199).
The Court of Appeals was too accommodating in giving due consideration to this argument of
GOYU, for the foreclosure suit is still pending appeal before the same Court of Appeals in CA
G.R CV No. 46247, the case having been elevated by RCBC.

In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals
pre-empted the resolution of said foreclosure case which is not before it. This is plain reversible
error if not grave abuse of discretion.

As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):

It should have been enough, nonetheless, for the appellate court to merely set aside the
questioned orders of the trial court for having been issued by the latter with grave abuse of
discretion. In likewise enjoining permanently herein petitioner from entering in and interfering
with the use or occupation and enjoyment of petitioners (now private respondent) residential
house and compound, the appellate court in effect, precipitately resolved with finality the case
for injunction that was yet to be heard on the merits by the lower court. Elevated to the appellate
court, it might be stressed, were mere incidents of the principal case still pending with the trial
court. In Municipality of Bian, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the
Court of Appeals would have no jurisdiction in a certiorari proceeding involving an incident in a
case to rule on the merits of the main case itself which was not on appeal before it.

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional
Trial Court, since it has been determined that RCBC has the right to the insurance proceeds, the
subject matter of intervention is rendered moot and academic. Respondent Sebastian must,
however, yield to the preferential right of RCBC over the MICO insurance policies. It is basic
and fundamental that the first mortgagee has superior rights over junior mortgagees or attaching
creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance
Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).
 73

WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of
December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and
SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before
Branch 3 of the Manila Regional Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking

Corporation the proceeds of the insurance policies in the amount of P51,862,390.94 (per report
of adjuster Toplis & Harding (Far East), Inc., Exhibits 2 and 2-1), less the amount of
P50,505,594.60 (per O.R. No. 3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests
earned to Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking
Corporation in the principal amount of P107,246,887.90, with interest at the respective rates
stipulated in each promissory note from January 21, 1993 until finality of this judgment, and
surcharges at 2% and penalties at 3% from January 21, 1993 to March 9, 1993, minus payments
made by Malayan Insurance Company, Inc. and the proceeds of the amount deposited with the
trial court and its earned interest. The total amount due RCBC at the time of the finality of this
judgment shall earn interest at the legal rate of 12% in lieu of all other stipulated interests and
charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR
CV 48376 is DISMISSED for being moot and academic in view of the results herein arrived at.
Respondent Sebastians right as attaching creditor must yield to the preferential rights of Rizal
Commercial Banking Corporation over the Malayan insurance policies as first mortgagee.

SO ORDERED.

G.R. No. 114427 February 6, 1995

ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE
CORPORATION, respondents.

Four our review under Rule 45 of the Rules of Court is the decision1 of the Court of Appeals in
CA-G.R. SP No. 31916, entitled "Country Bankers Insurance Corporation versus Armando
Geagonia," reversing the decision of the Insurance Commission in I.C. Case No. 3340 which
awarded the claim of petitioner Armando Geagonia against private respondent Country Bankers
Insurance Corporation.

The petitioner is the owner of Norman's Mart located in the public market of San Francisco,
Agusan del Sur. On 22 December 1989, he obtained from the private respondent fire insurance
 74

policy No. F-146222 for P100,000.00. The period of the policy was from 22 December 1989 to
22 December 1990 and covered the following: "Stock-in-trade consisting principally of dry
goods such as RTW's for men and women wear and other usual to assured's business."

The petitioner declared in the policy under the subheading entitled CO-INSURANCE that
Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the
petitioner had in his inventory stocks amounting to P392,130.50, itemized as follows:

Zenco Sales, Inc. P55,698.00

F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
—————
P392,130.50

The policy contained the following condition:

3. The insured shall give notice to the Company of any insurance or insurances
already affected, or which may subsequently be effected, covering any of the
property or properties consisting of stocks in trade, goods in process and/or
inventories only hereby insured, and unless such notice be given and the
particulars of such insurance or insurances be stated therein or endorsed in this
policy pursuant to Section 50 of the Insurance Code, by or on behalf of the
Company before the occurrence of any loss or damage, all benefits under this
policy shall be deemed forfeited, provided however, that this condition shall not
apply when the total insurance or insurances in force at the time of the loss or
damage is not more than P200,000.00.

On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of
San Francisco, Agusan del Sur. The petitioner's insured stock-in-trade were completely
destroyed prompting him to file with the private respondent a claim under the policy. On 28
December 1990, the private respondent denied the claim because it found that at the time of the
loss the petitioner's stocks-in-trade were likewise covered by fire insurance policies No. GA-
28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu Branch of the Philippines
First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate that the insured was
"Messrs. Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading:

MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles,

Cebu City as their interest may appear subject to the terms of this policy. CO-
INSURANCE DECLARED: P100,000. — Phils. First CEB/F 24758.4

The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3
of the policy.

The petitioner then filed a complaint 5 against the private respondent with the Insurance
Commission (Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No. F-
 75

14622 and for attorney's fees and costs of litigation. He attached as Annex "AM"6 thereof his
letter of 18 January 1991 which asked for the reconsideration of the denial. He admitted in the
said letter that at the time he obtained the private respondent's fire insurance policy he knew that
the two policies issued by the PFIC were already in existence; however, he had no knowledge of
the provision in the private respondent's policy requiring him to inform it of the prior policies;
this requirement was not mentioned to him by the private respondent's agent; and had it been
mentioned, he would not have withheld such information. He further asserted that the total of the
amounts claimed under the three policies was below the actual value of his stocks at the time of
loss, which was P1,000,000.00.

In its answer,7 the private respondent specifically denied the allegations in the complaint and set
up as its principal defense the violation of Condition 3 of the policy.

In its decision of 21 June 1993,8 the Insurance Commission found that the petitioner did not
violate Condition 3 as he had no knowledge of the existence of the two fire insurance policies
obtained from the PFIC; that it was Cebu Tesing Textiles which procured the PFIC policies
without informing him or securing his consent; and that Cebu Tesing Textile, as his creditor, had
insurable interest on the stocks. These findings were based on the petitioner's testimony that he
came to know of the PFIC policies only when he filed his claim with the private respondent and
that Cebu Tesing Textile obtained them and paid for their premiums without informing him
thereof. The Insurance Commission then decreed:

WHEREFORE, judgment is hereby rendered ordering the respondent company to

pay complainant the sum of P100,000.00 with legal interest from the time the
complaint was filed until fully satisfied plus the amount of P10,000.00 as
attorney's fees. With costs. The compulsory counterclaim of respondent is hereby
dismissed.

Its motion for the reconsideration of the decision 9 having been denied by the Insurance
Commission in its resolution of 20 August 1993, 10 the private respondent appealed to the Court
of Appeals by way of a petition for review. The petition was docketed as CA-G.R. SP No.
31916.

In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the
Insurance Commission because it found that the petitioner knew of the existence of the two other
policies issued by the PFIC. It said:

It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that
the insurance was taken in the name of private respondent [petitioner herein]. The
policy states that "DISCOUNT MART (MR. ARMANDO GEAGONIA, PROP)"
was the assured and that "TESING TEXTILES" [was] only the mortgagee of the
goods.

In addition, the premiums on both policies were paid for by private respondent,
not by the Tesing Textiles which is alleged to have taken out the other insurance
without the knowledge of private respondent. This is shown by Premium Invoices
 76

nos. 46632 and 46630. (Annexes M and N). In both invoices, Tesing Textiles is
indicated to be only the mortgagee of the goods insured but the party to which
they were issued were the "DISCOUNT MART (MR. ARMANDO
GEAGONIA)."

In is clear that it was the private respondent [petitioner herein] who took out the
policies on the same property subject of the insurance with petitioner. Hence, in
failing to disclose the existence of these insurances private respondent violated
Condition No. 3 of Fire Policy No. 1462. . . .

Indeed private respondent's allegation of lack of knowledge of the provisions

insurances is belied by his letter to petitioner [of 18 January 1991. The body of
the letter reads as follows;]

xxx xxx xxx

Please be informed that I have no knowledge of the provision

requiring me to inform your office about my
prior insurance under FGA-28146 and F-CEB-24758. Your
representative did not mention about said requirement at the time
he was convincing me to insure with you. If he only die or even
inquired if I had other existing policies covering my establishment,
I would have told him so. You will note that at the time he talked
to me until I decided to insure with your company the two policies
aforementioned were already in effect. Therefore I would have no
reason to withhold such information and I would have desisted to
part with my hard earned peso to pay the insurance premiums [if] I
know I could not recover anything.

Sir, I am only an ordinary businessman interested in protecting my

investments. The actual value of my stocks damaged by the fire
was estimated by the Police Department to be P1,000,000.00
(Please see xerox copy of Police Report Annex "A"). My Income
Statement as of December 31, 1989 or five months before the fire,
shows my merchandise inventory was already some P595,455.75. .
. . These will support my claim that the amount claimed under the
three policies are much below the value of my stocks lost.

xxx xxx xxx

The letter contradicts private respondent's pretension that he did not know that
there were other insurances taken on the stock-in-trade and seriously puts in
question his credibility.
 77

His motion to reconsider the adverse decision having been denied, the petitioner filed the instant
petition. He contends therein that the Court of Appeals acted with grave abuse of discretion
amounting to lack or excess of jurisdiction:

A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE

INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH
THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE
DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE
COURTS;

B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE

NOT PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL;
AND

C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN

AGAINST THE PRIVATE RESPONDENT.

The chief issues that crop up from the first and third grounds are (a) whether the petitioner had
prior knowledge of the two insurance policies issued by the PFIC when he obtained the fire
insurance policy from the private respondent, thereby, for not disclosing such fact, violating
Condition 3 of the policy, and (b) if he had, whether he is precluded from recovering therefrom.

The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of
reconsideration of 18 January 1991, is without merit. The petitioner claims that the said letter
was not offered in evidence and thus should not have been considered in deciding the case.
However, as correctly pointed out by the Court of Appeals, a copy of this letter was attached to
the petitioner's complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral part of
the complaint. 12 It has attained the status of a judicial admission and since its due execution and
authenticity was not denied by the other party, the petitioner is bound by it even if it were not
introduced as an independent evidence. 13

As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the
previous two policies. The Court of Appeals disagreed and found otherwise in view of the
explicit admission by the petitioner in his letter to the private respondent of 18 January 1991,
which was quoted in the challenged decision of the Court of Appeals. These divergent findings
of fact constitute an exception to the general rule that in petitions for review under Rule 45, only
questions of law are involved and findings of fact by the Court of Appeals are conclusive and
binding upon this Court. 14

We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the
PFIC. His letter of 18 January 1991 to the private respondent conclusively proves this
knowledge. His testimony to the contrary before the Insurance Commissioner and which the
latter relied upon cannot prevail over a written admission made ante litem motam. It was, indeed,
incredible that he did not know about the prior policies since these policies were not new or
original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-
28146 had been renewed twice, the previous policy being F-24792.
 78

Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed
by law. Its incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which
provides that "[a] policy may declare that a violation of specified provisions thereof shall avoid
it, otherwise the breach of an immaterial provision does not avoid the policy." Such a condition
is a provision which invariably appears in fire insurance policies and is intended to prevent an
increase in the moral hazard. It is commonly known as the additional or "other insurance" clause
and has been upheld as valid and as a warranty that no other insurance exists. Its violation would
thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon same
subject matter, the same interest therein, and the same risk.17

As to a mortgaged property, the mortgagor and the mortgagee have each an independent
insurable interest therein and both interests may be one policy, or each may take out a separate
policy covering his interest, either at the same or at separate times. 18 The mortgagor's insurable
interest covers the full value of the mortgaged property, even though the mortgage debt is
equivalent to the full value of the property.19 The mortgagee's insurable interest is to the extent of
the debt, since the property is relied upon as security thereof, and in insuring he is not insuring
the property but his interest or lien thereon. His insurable interest is prima facie the value
mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged
property. 20 Thus, separate insurances covering different insurable interests may be obtained by
the mortgagor and the mortgagee.

A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the
usual practice. The mortgagee may be made the beneficial payee in several ways. He may
become the assignee of the policy with the consent of the insurer; or the mere pledgee without
such consent; or the original policy may contain a mortgage clause; or a rider making the policy
payable to the mortgagee "as his interest may appear" may be attached; or a "standard mortgage
clause," containing a collateral independent contract between the mortgagee and insurer, may be
attached; or the policy, though by its terms payable absolutely to the mortgagor, may have been
procured by a mortgagor under a contract duty to insure for the mortgagee's benefit, in which
case the mortgagee acquires an equitable lien upon the proceeds. 21

In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his
interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as
such by the insurer but not made a party to the contract himself. Hence, any act of the mortgagor
which defeats his right will also defeat the right of the mortgagee. 22 This kind of policy covers
only such interest as the mortgagee has at the issuing of the policy.23

On the other hand, a mortgagee may also procure a policy as a contracting party in accordance
with the terms of an agreement by which the mortgagor is to pay the premiums upon such
insurance. 24 It has been noted, however, that although the mortgagee is himself the insured, as
where he applies for a policy, fully informs the authorized agent of his interest, pays the
premiums, and obtains on the assurance that it insures him, the policy is in fact in the form used
to insure a mortgagor with loss payable clause. 25
 79

The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a
mortgage clause which reads:

Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as

their interest may appear subject to the terms of this policy.

This is clearly a simple loss payable clause, not a standard mortgage clause.

It must, however, be underscored that unlike the "other insurance" clauses involved in General
Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety
Corp. vs. Yap, 27 which read:

The insured shall give notice to the company of any insurance or insurances
already effected, or which may subsequently be effected covering any of the
property hereby insured, and unless such notice be given and the particulars of
such insurance or insurances be stated in or endorsed on this Policy by or on
behalf of the Company before the occurrence of any loss or damage, all benefits
under this Policy shall be forfeited.

or in the 1930 case of Santa Ana vs.  Commercial Union Assurance

Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the
objects thereby assured must be declared by the insured in writing and he must cause the
company to add or insert it in the policy, without which such policy shall be null and
void, and the insured will not be entitled to indemnity in case of loss," Condition 3 in the
private respondent's policy No. F-14622 does not absolutely declare void any violation
thereof. It expressly provides that the condition "shall not apply when the total insurance
or insurances in force at the time of the loss or damage is not more than P200,000.00."

It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in

favor of the insured and strictly against the company, the reason being, undoubtedly, to afford
the greatest protection which the insured was endeavoring to secure when he applied for
insurance. It is also a cardinal principle of law that forfeitures are not favored and that any
construction which would result in the forfeiture of the policy benefits for the person claiming
thereunder, will be avoided, if it is possible to construe the policy in a manner which would
permit recovery, as, for example, by finding a waiver for such forfeiture. 29 Stated differently,
provisions, conditions or exceptions in policies which tend to work a forfeiture of insurance
policies should be construed most strictly against those for whose benefits they are inserted, and
most favorably toward those against whom they are intended to operate. 30 The reason for this is
that, except for riders which may later be inserted, the insured sees the contract already in its
final form and has had no voice in the selection or arrangement of the words employed therein.
On the other hand, the language of the contract was carefully chosen and deliberated upon by
experts and legal advisers who had acted exclusively in the interest of the insurers and the
technical language employed therein is rarely understood by ordinary laymen. 31

With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not
totally free from ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us
 80

to conclude that (a) the prohibition applies only to double insurance, and (b) the nullity of the
policy shall only be to the extent exceeding P200,000.00 of the total policies obtained.

The first conclusion is supported by the portion of the condition referring to other insurance
"covering any of the property or properties consisting of stocks in trade, goods in process and/or
inventories only hereby insured," and the portion regarding the insured's declaration on the
subheading CO-INSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the sum of
P50,000.00. A double insurance exists where the same person is insured by several insurers
separately in respect of the same subject and interest. As earlier stated, the insurable interests of a
mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since the two
policies of the PFIC do not cover the same interest as that covered by the policy of the private
respondent, no double insurance exists. The non-disclosure then of the former policies was not
fatal to the petitioner's right to recover on the private respondent's policy.

Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total
insurance in force at the time of loss does not exceed P200,000.00, the private respondent was
amenable to assume a co-insurer's liability up to a loss not exceeding P200,000.00. What it had
in mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of
"other insurance" clause in fire policies is to prevent over-insurance and thus avert the
perpetration of fraud. When a property owner obtains insurance policies from two or more
insurers in a total amount that exceeds the property's value, the insured may have an inducement
to destroy the property for the purpose of collecting the insurance. The public as well as the
insurer is interested in preventing a situation in which a fire would be profitable to the insured.32

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals
in CA-G.R. SP No. 31916 is SET ASIDE and the decision of the Insurance Commission in Case
No. 3340 is REINSTATED.

Costs against private respondent Country Bankers Insurance Corporation.

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.
 81

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.
 82

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.
 83

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.
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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)
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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.