G.R. No. L-1669 August 31, 1950

PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant, vs. ASIA LIFE INSURANCE COMPANY, defendant-appellee.

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G.R. No. L-1670 August 31, 1950

AGUSTINA PERALTA, plaintiff-appellant, vs. ASIA LIFE INSURANCE COMPANY, defendant-appellee.

Mariano Lozada for appellant Constantino. Cachero and Madarang for appellant Peralta. Dewitt, Perkins and Ponce Enrile for appellee. Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.

BENGZON, J.:

These two cases, appealed from the Court of First Instance of Manila, call for decision of the question whether the beneficiary in a life insurance policy may recover the amount thereof although the insured died after repeatedly failing to pay the stipulated premiums, such failure having been caused by the last war in the Pacific.

The facts are these:

First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia Life Insurance Company (a foreign corporation incorporated under the laws of Delaware, U.S.A.), issued on September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life of Arcadio Constantino for a term of twenty years. The first premium covered the period up to September 26, 1942. The plaintiff Paz Lopez de

Constantino was regularly appointed beneficiary. The policy contained these stipulations, among others:

This POLICY OF INSURANCE is issued in consideration of the written and printed application here for a copy of which is attached hereto and is hereby made a part hereof made a part hereof, and of the payment in advance during the lifetime and good health of the Insured of the annual premium of One Hundred fifty-eight and 4/100 pesos Philippine currency1 and of the payment of a like amount upon each twenty-seventh day of September hereafter during the term of Twenty years or until the prior death of the Insured. (Emphasis supplied.)

All premium payments are due in advance and any unpunctuality in making any such payment shall cause this policy to lapse unless and except as kept in force by the Grace Period condition or under Option 4 below. (Grace of 31 days.)

After that first payment, no further premiums were paid. The insured died on September 22, 1944.

It is admitted that the defendant, being an American corporation , had to close its branch office in Manila by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.

Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No. 78145 (Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of the spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The annual premium stipulated in the policy was regularly paid from August 1, 1938, up to and including September 30, 1941. Effective August 1, 1941, the mode of payment of premiums was changed from annual to quarterly, so that quarterly premiums were paid, the last having been delivered on November 18, 1941, said payment covering the period up to January 31, 1942. No further payments were handed to the insurer. Upon the Japanese occupation, the insured and the insurer became separated by the lines of war, and it was impossible and illegal for them to deal with each other. Because the insured had borrowed on the policy an mount of P234.00 in January, 1941, the cash surrender value of the policy was sufficient to maintain the policy in force only up to September 7, 1942. Tomas Ruiz died on February 16, 1945. The plaintiff Agustina Peralta is his beneficiary. Her demand for payment met with defendant's refusal, grounded on non-payment of the premiums.

The policy provides in part:

This POLICY OF INSURANCE is issued in consideration of the written and printed application herefor, a copy of which is attached hereto and is hereby made apart hereof, and of the payment in advance during the life time and good health of the Insured of the annual premium of Two hundred and 43/100 pesos Philippine currency and of the payment of a like amount upon each first day of August hereafter during the term of Twenty years or until the prior death of either of the Insured. (Emphasis supplied.)

All premium payments are due in advance and any unpunctuality in making any such payment shall cause this policy to lapse unless and except as kept in force by the Grace Period condition or under Option 4 below. (Grace of days.) . . .

Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies minus all sums due for premiums in arrears. They allege that non-payment of the premiums was caused by the closing of defendant's offices in Manila during the Japanese occupation and the imposs ible circumstances created by war.

Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in accordance with the contract of the parties and the law applicable to the situation.

The lower court absolved the defendant. Hence this appeal.

The controversial point has never been decided in this jurisdiction. Fortunately, this court has had the benefit of extensive and exhaustive memoranda including those of amici curiae. The matter has received careful consideration, inasmuch as it affects the interest of thousands of policy-holders and the obligations of many insurance companies operating in this country.

Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and the Civil Code.2 Act No. 2427 was largely copied from the Civil Code of California.3 And this court has heretofore announced its intention to supplement the statutory laws with general principles prevailing on the subject in the United State.4

In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The parties have a right to impose such reasonable conditions at the time of the making of the contract as they may deem wise and necessary. The rate of premium is measured by the character of the risk assumed. The insurance company, for a comparatively small consideration, undertakes to guarantee the insured against loss or damage, upon the terms and conditions agreed upon, and upon no other, and when called upon to pay, in case of loss, the insurer, therefore, may justly insists upon a fulfillment of these terms. If the insured cannot bring himself within the conditions of the policy, he is not entitled for the loss. The terms of the policy constitute the measure of the insurer's liability, and in order to recover the insured must show himself within those terms; and if it appears that the contract has been terminated by a violation, on the part of the insured, of its conditions, then there can be no right of recovery. The compliance of the insured with the terms of the contract is a condition precedent to the right of recovery."

Recall of the above pronouncements is appropriate because the policies in question stipu late that "all premium payments are due in advance and any unpunctuality in making any such payment shall cause this policy to lapse." Wherefore, it would seem that pursuant to the express terms of the policy, non-payment of premium produces its avoidance.

The conditions of contracts of Insurance, when plainly expressed in a policy, are binding upon the parties and should be enforced by the courts, if the evidence brings the case clearly within their meaning and intent. It tends to bring the law itself into disrepute when, by astute and subtle distinctions, a plain case is attempted to be taken without the operation of a clear, reasonable and material obligation of the contract. Mack vs. Rochester German Ins. Co., 106 N.Y., 560, 564. (Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)

In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided because the premium had not been paid within the time fixed, since by its express terms, non-payment of any premium when due or within the thirty-day period of grace, ipso facto caused the policy to lapse. This goes to show that although we take the view that insurance policies should be conserved5 and should not lightly be thrown out, still we do not hesitate to enforce the agreement of the parties.

Forfeitures of insurance policies are not favored, but courts cannot for that reason alone refuse to enforce an insurance contract according to its meaning. (45 C.J.S., p. 150.)

Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the consequence of war, it should be excused and should not cause the forfeiture of the policy.

Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of non-payment of premiums occasioned by war, the American cases may be divided into three groups, according as they support the so-called Connecticut Rule, the New York Rule, or the United States Rule.

The first holds the view that "there are two elements in the consideration for which the annual premium is paid — First, the mere protection for the year, and second, the privilege of renewing the contract for each succeeding year by paying the premium for that year at the time agreed upon. According to this view of the contract, the payment of premiums is a condition precedent, the non-performance would be illegal necessarily defeats the right to renew the contract."

The second rule, apparently followed by the greater number of decisions, hold that "war between states in which the parties reside merely suspends the contracts of the life insurance, and that, upon tender of all premiums due by the insured or his representatives after the war has terminated, the contract revives and becomes fully operative."

The United States rule declares that the contract is not merely suspended, but is abrogated by reason of non-payments is peculiarly of the essence of the contract. It additionally holds that it would be unjust to allow the insurer to retain the reserve value of the policy, which is the excess of the premiums paid over the actual risk carried during the years when the policy had been in force. This rule was announced in the well-known Statham6case which, in the opinion of Professor Vance, is the correct rule.7

The appellants and some amici curiae contend that the New York rule should be applied here. The appellee and other amici curiae contend that the United States doctrine is the orthodox view.

We have read and re-read the principal cases upholding the different theories. Besides the respect and

high regard we have always entertained for decisions of the Supreme Court of the United States, we cannot resist the conviction that the reasons expounded in its decision of the Statham case are logically and judicially sound. Like the instant case, the policy involved in the Statham decision specifies that non-payment on time shall cause the policy to cease and determine. Reasoning out that punctual payments were essential, the court said:

. . . it must be conceded that promptness of payment is essential in the business of life insurance. All the calculations of the insurance company are based on the hypothesis of prompt payments. They not only calculate on the receipt of the premiums when due, but on compounding interest upon them. It is on this basis that they are enabled to offer assurance at the favorable rates they do. Forfeiture for non-payment is an necessary means of protecting themselves from embarrassment. Unless it were enforceable, the business would be thrown into confusion. It is like the forfeiture of shares in mining enterprises, and all other hazardous undertakings. There must be power to cut-off unprofitable members, or the success of the whole scheme is endangered. The insured parties are associates in a great scheme. This associated relation exists whether the company be a mutual one or not. Each is interested in the engagements of all; for out of the co-existence of many risks arises the law of average, which underlies the whole business. An essential feature of this scheme i s the mathematical calculations referred to, on which the premiums and amounts assured are based. And these calculations, again, are based on the assumption of average mortality, and of prompt payments and compound interest thereon. Delinquency cannot be tolerated nor redeemed, except at the option of the company. This has always been the understanding and the practice in this department of business. Some companies, it is true, accord a grace of thirty days, or other fixed period, within which the premium in arrear may be paid, on certain conditions of continued good health, etc. But this is a matter of stipulation, or of discretion, on the part of the particular company. When no stipulation exists, it is the general understanding that time is material, and that the forfeiture is absolute if the premium be not paid. The extraordinary and even desperate efforts sometimes made, when an insured person is in extremes to meet a premium coming due, demonstrates the common view of this matter.

The case, therefore, is one in which time is material and of the essence and of the essence of the contract. Non-payment at the day involves absolute forfeiture if such be the terms of the contract, as is the case here. Courts cannot with safety vary the stipulation of the parties by introducing equities for the relief of the insured against their own negligence.

In another part of the decision, the United States Supreme Court considers and rejects what is, in effect, the New York theory in the following words and phrases:

The truth is, that the doctrine of the revival of contracts suspended during the war is one based on considerations of equity and justice, and cannot be invoked to revive a contract which it would be unjust or inequitable to revive.

In the case of Life insurance, besides the materiality of time in the performance of the contract, another strong reason exists why the policy should not be revived. The parties do not stand on equal ground in reference to such a revival. It would operate most unjustly against the company. The business of insurance is founded on the law of average; that of life insurance eminently so. The average rate of mortality is the basis on which it rests. By spreading their risks over a large number of cases, the companies calculate on this average with reasonable certainty and safety. Anything that interferes with it deranges the security of the business. If every policy lapsed by reason of the war should be revived, and all the back premiums should be paid, the companies would have the benefit of this average amount of risk. But the good risks are never heard from; only the bar are sought to be revived, where the person insured is either dead or dying. Those in health can get the new policies cheaper than to pay arrearages on the old. To enforce a revival of the bad cases, whilst the company necessarily lose the cases which are desirable, would be manifestly unjust. An insured person, as before stated, does not stand isolated and alone. His case is connected with and co-related to the cases of all others insured by the same company. The nature of the business, as a whole, must be looked at to

understand the general equities of the parties.

The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if, as alleged, the consequences of war should not prejudice the insured, neither should they bear down on the insurer.

Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the insured to pay premiums was excused during the wa r owing to impossibility of performance, and that consequently no unfavorable consequences should follow from such failure.

The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after the first, is not an obligation of the insured, so much so that it is not a debt enforceable by action of the insurer.

Under an Oklahoma decision, the annual premium due is not a debt. It is not an obligation upon which the insurer can maintain an action against insured; nor is its settlement governed by the strict rule controlling payments of debts. So, the court in a Kentucky case declares, in the opinion, that it is not a debt. . . . The fact that it is payable annually or semi-annually, or at any other stipulated time, does not of itself constitute a promise to pay, either express or implied. In case of non-payment the policy is forfeited, except so far as the forfeiture may be saved by agreement, by waiver, estoppel, or by statute. The payment of the premium is entirely optional, while a debt may be enforced at law, and the fact that the premium is agreed to be paid is without force, in the absence of an unqualified and absolute agreement to pay a specified sum at some certain time. In the ordinary policy there is no promise to pay, but it is optional with the insured whether he will continue the policy or forfeit it. (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996.)

It is well settled that a contract of insurance is sui generis. While the insured by an observance of the conditions may hold the insurer to his contract, the latter has not the power or right to compel the insured to maintain the contract relation with it longer than he chooses. Whether the insured will continue it or not is optional with him. There being no obligation to pay for the premium, they did not constitute a debt. (Noblevs. Southern States M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis ours.)

It should be noted that the parties contracted not only for peacetime conditions but also for times of war, because the policies contained provisions applicable expressly to wartime days. The logical inference, therefore, is that the parties contemplated uninterrupted operation of the contract even if armed conflict should ensue.

For the plaintiffs, it is again argued that in view of the enormous growth of insurance business since the Statham decision, it could now be relaxed and even disregarded. It is stated "that the relaxation of rules relating to insurance is in direct proportion to the growth of the business. If there were only 100 men, for example, insured by a Company or a mutual Association, the death of one will distribute the insurance proceeds among the remaining 99 policy-holders. Because the loss which each survivor will bear will be relatively great, death from certain agreed or specified causes may be deemed not a compensable loss. But if the policy-holders of the Company or Association should be 1,000,000 individuals, it is clear that the death of one of them will not seriously prejudice each one of the 999,999 surviving insured. The loss to be borne by each individual will be relatively small."

The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be considered will not be the death of one but the death of ten thousand, since the proportion of 1 to 100 should be maintained. And certainly such losses for 10,000 deaths will not be "relatively small."

After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is such a vital defense of insurance companies that since the very beginning, said Act no. 2427 expressly preserved it, by providing that after the policy shall have been in force for two years, it shall become incontestable (i.e. the insurer shall have no defense) except for fraud, non-payment of premiums, and military or naval service in time of war (sec. 184 [b], Insurance Act). And when Congress recently amended this section (Rep. Act No. 171), the defense of fraud was eliminated, while the defense of nonpayment of premiums was preserved. Thus the fundamental character of the undertaking to pay premiums and the high importance of the defense of non-payment thereof, was specifically recognized.

In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is in effect a variation of the Connecticut rule for the sake of equity. In this connection, it appears that the first policy had no reserve value, and that the equitable values of the second had been practically returned to the insured in the form of loan and advance for premium.

For all the foregoing, the lower court's decision absolving the defendant from all liability on the policies in question, is hereby affirmed, without costs.

Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes, JJ., concur.

CONSTANTINO VS PAZ CASE DIGEST

FACTS:

Case 1:

The life of Arcadio Constantino was insured with Asia Life Insurance Company

(Asia) for a term of 20 years with Paz Lopez de Constantino as beneficiary. The first premium covered the period up to September 26, 1942.

After the first premium, no further premiums were paid. The insured died on

September 22, 1944.

Asia Life Insurance Company, being an American Corp., had to close its branch office

in Manila by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.

Case 2:

Spouses Tomas Ruiz and Agustina Peralta. Their premium were initially annually but

subsequently changed to quarterly. The last quarterly premium was delivered on on November 18, 1941 and it covered the period until January 31, 1942.

Upon the Japanese occupation, the insurer and insured were not able to deal with

each other

Because the insured had borrowed on the policy P234.00 in January, 1941, the cash

surrender value of the policy was sufficient to maintain the policy in force only up to September 7, 1942.

Tomas Ruiz died on February 16, 1945 with Agustina Peralta as beneficiary. Her

demand for payment was refused on the ground of non-payment of the premiums.

Plaintiffs: As beneficiaries, they are entitled to receive the proceeds of the policies minus all

sums due for premiums in arrears. The non-payment of the premiums was caused by the closing

of Asia's offices in Manila during the Japanese occupation and the impossible circumstances created by war.

lower court: absolved Asia

ISSUE: W/N the insurers still have a right to claim.

HELD: YES. lower court affirmed.

it would seem that pursuant to the express terms of the policy, non-payment of premium

produces its avoidance

Forfeitures of insurance policies are not favored, but courts cannot for that reason alone refuse to enforce an insurance contract according to its meaning.

Nevertheless, inasmuch as the non-payment of premium was the consequence of war, it should

be excused and should not cause the forfeiture of the policy

3 Rules in case of war:

Connecticut Rule

2 elements in the consideration for which the annual premium is paid:

mere protection for the year

privilege of renewing the contract for each succeeding year

by paying the premium for that year at the time agreed upon

payment of premiums is a condition precedent, the non-performance would be illegal necessarily defeats the right to renew the contract

New York Rule - greatly followed by a number of cases

war between states in which the parties reside merely suspends the

contracts of the life insurance, and that, upon tender of all premiums due

by the insured or his representatives after the war has terminated, the contract revives and becomes fully operative

United States Rule

contract is not merely suspended, but is abrogated by reason of non-

payments is peculiarly of the essence of the contract

it would be unjust to allow the insurer to retain the reserve value of the

policy, which is the excess of the premiums paid over the actual risk carried during the years when the policy had been in force

The business of insurance is founded on the law of average; that of life insurance eminently so

contract of insurance is sui generis

Whether the insured will continue it or not is optional with him. There being no obligation to pay for the premium, they did not constitute a debt.

It should be noted that the parties contracted not only for peacetime conditions but also for

times of war, because the policies contained provisions applicable expressly to wartime days.

The logical inference, therefore, is that the parties contemplated uninterrupted operation of the contract even if armed conflict should ensue.

the fundamental character of the undertaking to pay premiums and the high importance of the

defense of non-payment thereof, was specifically recognized

adopt the United States Rule: first policy had no reserve value, and that the equitable values of

the second had been practically returned to the insured in the form of loan and advance for premium

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.

MARTIN, J.:

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 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 ins ured 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 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 t hereof;

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

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.

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 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.

Teehankee (Chairman), Makasiar, Muñ;oz Palma, Fernandez and Guerrero, JJ., concur.1äwphï1.ñët

INSULAR LIFE VS EBRADO CASE DIGEST

FACTS:

On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd., on a

whole-life for P5,882.00 with a rider for Accidental Death for the same amount. He designated Carponia

T. Ebrado, his common-law wife as the revocable beneficiary in his policy. He referred to her as his wife in

the policy. On October 21, 1969, He died as a result of an accident when he was hit by a failing branch of

a tree. As the policy was in force, the insurance company was 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 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. Pascual T. Ebrado, also filed a

claim to the insurance company, this time claiming to be the legal wife Buenaventura. She asserts that she

has a better right over the proceeds than Carponia who is a common-law wife. As the insurance company

is at a loss as to whom to give the proceeds, it commenced an action for interpleader in court. After the

issues have been joined, a pre-trial conference was held on July 8, 1972, that there is no possibility of

amicable settlement. The Court proceeded to have the parties submit their evidence for the purpose of

the pre-trial and make admissions for the purpose of pretrial. 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. 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.

ISSUE:

Whether or not 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.

HELD:

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

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.

A common-law wife named as a beneficiary in the life insurance policy of a legally married man cannot

claim the proceeds thereof in case the death of the latter. The contract of insurance is govern by the

provisions of the new civil code on matters not specifically provided for in the insurance code. 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. 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. Common-law spouses are, definitely, barred from receiving

donations from each other. Also conviction for adultery or concubinage is not required as only

preponderance of evidence is necessary. “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 the premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance.”

G.R. No. L-4611 December 17, 1955

QUA CHEE GAN, plaintiff-appellee,

vs.

LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER, BARNES AND CO., LTD., defendant-appellant.

Delgado, Flores & Macapagal for appellant.

Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile & Contreras for appellee.

REYES, J. B. L., J.:

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of said

province, seeking to recover the proceeds of certain fire insurance policies totalling P370,000, issued by

the Law Union & Rock Insurance Co., Ltd., upon certain bodegas and merchandise of the insured that were

burned on June 21, 1940. The records of the original case were destroyed during the liberation of the

region, and were reconstituted in 1946. After a trial that lasted several years, the Court of First Instance rendered a decision in favor of the plaintiff, the dispositive part whereof reads as follows:

Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the latter to pay the former —

(a) Under the first cause of action, the sum of P146,394.48;

(b) Under the second cause of action, the sum of P150,000;

(c) Under the third cause of action, the sum of P5,000;

(d) Under the fourth cause of action, the sum of P15,000; and

(e) Under the fifth cause of action, the sum of P40,000;

all of which shall bear interest at the rate of 8% per annum in accordance with Section 91 (b) of the Insurance Act from September 26, 1940, until each is paid, with costs against the defendant.

The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on Appeal, 166-167.)

From the decision, the defendant Insurance Company appealed directly to this Court.

The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas

(designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of stocks of

copra and of hemp, baled and loose, in which the appellee dealth extensively. They had been, with their

contents, insured with the defendant Company since 1937, and the lose made payable to the Philippine

National Bank as mortgage of the hemp and crops, to the extent of its interest. On June, 1940, the insurance stood as follows:

Policy No. Property Insured Amount

2637164 (Exhibit "LL") Bodega No. 1 (Building) P15,000.00

2637165 (Exhibit "JJ")

Bodega No. 2 (Building) 10,000.00

Bodega No. 3 (Building) 25,000.00

Bodega No. 4 (Building) 10,000.00

Hemp Press — moved by steam engine 5,000.00

2637345 (Exhibit "X") Merchandise contents (copra and empty sacks of Bodega No. 1) 150,000.00

2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No. 3 150,000.00

2637067 (Exhibit "GG") Merchandise contents (loose hemp) of Bodega No. 4 5,000.00

Total

P370,000.00

Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost one

week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored theren.

Plaintiff-appellee informed the insurer by telegram on the same date; and on the next day, the fire

adjusters engaged by appellant insurance company arrived and proceeded to examine and photograph

the premises, pored over the books of the insured and conducted an extensive investigation. The plaintiff

having submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of

the insurance, P370,000), the Insurance Company resisted payment, claiming violation of warranties and

conditions, filing of fraudulent claims, and that the fire had been deliberately caused by the insured or by other persons in connivance with him.

With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his brother, Qua

Chee Pao, and some employees of his, were indicted and tried in 1940 for the crime of arson, it being

claimed that they had set fire to the destroyed warehouses to collect the insurance. They were, however,

acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit WW). Thereafter, the civil suit to

collect the insurance money proceeded to its trial and termination in the Court below, with the result

noted at the start of this opinion. The Philippine National Bank's complaint in intervention was dismissed

because the appellee had managed to pay his indebtedness to the Bank during the pendecy of the suit, and despite the fire losses.

In its first assignment of error, the insurance company alleges that the trial Court should have held that

the policies were avoided for breach of warranty, specifically the one appearing on a rider pasted (with

other similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders were attached for the first time in 1939, and the pertinent portions read as follows:

Memo. of Warranty. — The undernoted Appliances for the extinction of fire being kept on the premises

insured hereby, and it being declared and understood that there is an ample and constant water supply

with sufficient pressure available at all seasons for the same, it is hereby warranted that the said appliances

shall be maintained in efficient working order during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed on the premium cha rgeable under this policy.

Hydrants in the compound, not less in number than one for each 150 feet of external wall measurement

of building, protected, with not less than 100 feet of hose piping and nozzles for every two hydrants kept

under cover in convenient places, the hydrants being supplied with water pressure by a pumping engine,

or from some other source, capable of discharging at the rate of not less than 200 gallons of water per

minute into the upper story of the highest building protected, and a trained brigade of not less than 20 men to work the same.'

It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the

appellee should have eleven (11) fire hydrants in the compound, and that he actually had only two (2), with a further pair nearby, belonging to the municipality of Tabaco.

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to

claim violation of the so-called fire hydrants warranty, for the reason that knowing fully all that the number

of hydrants demanded therein never existed from the very beginning, the appellant neverthless issued the

policies in question subject to such warranty, and received the corresponding premiums. It would be

perilously close to conniving at fraud upon the insured to allow appellant to claims now as void ab initio

the policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured

there were only two fire hydrants installed by Qua Chee Gan and two others nearby, owned by the

municipality of TAbaco, contrary to the requirements of the warranty in question. Such fact appears from

positive testimony for the insured that appellant's agents inspected the premises; and the simple denials

of appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made is

moreover rendered probable by its being a prerequisite for the fixing of the discount on the premium to

which the insured was entitled, since the discount depended on the number of hydrants, and the fire

fighting equipment available (See "Scale of Allowances" to which the policies were expressly made

subject). The law, supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:

It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge

of existing facts which, if insisted on, would invalidate the contract from its very inception, such knowledge

constitutes a waiver of conditions in the contract inconsistent with the facts, and the insurer is stopped

thereafter from asserting the breach of such conditions. The law is charitable enough to assume, in the

absence of any showing to the contrary, that an insurance company intends to executed a valid contract

in return for the premium received; and when the policy contains a condition which renders it voidable at

its inception, and this result is known to the insurer, it will be presumed to have intended to waive the

conditions and to execute a binding contract, rather than to have deceived the insured into thinking he is

insured when in fact he is not, and to have taken his money without consideration. (29 Am. Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money

for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, that

the assured believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing,

and so closely related to positive fraud, as to the abhorent to fairminded men. It would be to allow the

company to treat the policy as valid long enough to get the preium on it, and leave it at liberty to repudiate

it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal

construction of the policy expressed the true intention of the company would be to indict it, for fraudulent

purposes and designs which we cannot believe it to be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543-544).

The inequitableness of the conduct observed by the insurance company in this case is heightened by the

fact that after the insured had incurred the expense of installing the two hydrants, the company collected

the premiums and issued him a policy so worded that it gave the insured a discount much smaller than

that he was normaly entitledto. According to the "Scale of Allowances," a policy subject to a warranty of

the existence of one fire hydrant for every 150 feet of external wall entitled the insured to a discount of 7

1/2 per cent of the premium; while the existence of "hydrants, in compund" (regardless of number)

reduced the allowance on the premium to a mere 2 1/2 per cent. This schedule was logical, since a greater

number of hydrants and fire fighting appliances reduced the risk of loss. But the appellant company, in the

particular case now before us, so worded the policies that while exacting the greater number of fire

hydrants and appliances, it kept the premium discount at the minimum of 2 1/2 per cent, thereby giving

the insurance company a double benefit. No reason is shown why appellant's premises, that had been

insured with appellant for several years past, suddenly should be regarded in 1939 as so hazardous as to

be accorded a treatment beyond the limits of appellant's own scale of allowances. Such abnormal

treatment of the insured strongly points at an abuse of the insurance company's selection of the words and terms of the contract, over which it had absolute control.

These considerations lead us to regard the parol evidence rule, invoked by the appellant as not applicable

to the present case. It is not a question here whether or not the parties may vary a written contract by oral

evidence; but whether testimony is receivable so that a party may be, by reason of inequitable conduct

shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the

insured.

Receipt of Premiums or Assessments afte Cause for Forfeiture Other than Nonpayment. — It is a well settled

rule of law that an insurer which with knowledge of facts entitling it to treat a policy as no longer in force,

receives and accepts a preium on the policy, estopped to take advantage of the forfeiture. It cannot treat

the policy as void for the purpose of defense to an action to recover for a loss thereafter occurring and at

the same time treat it as valid for the purpose of earning and collecting further premiums." (29 Am. Jur.,

653, p. 657.)

It would be unconscionable to permit a company to issue a policy under circumstances which it knew

rendered the policy void and then to accept and retain premiums under such a void policy. Neither law

nor good morals would justify such conduct and the doctrine of equitable estoppel is peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co. 94 Pa. Super Ct. 457.)

Moreover, taking into account the well known rule that ambiguities or obscurities must be s trictly

interpreted aganst the prty that caused them, 1the "memo of warranty" invoked by appellant bars the

latter from questioning the existence of the appliances called for in the insured premises, since its initial

expression, "the undernoted appliances for the extinction of fire being kept on the premises insured

hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission of the existence of such appliances which appellant cannot now contradict, should the parol evidence rule apply.

The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally

rejected, since the appellant's argument thereon is based on the assumption that the insured was bound

to maintain no less than eleven hydrants (one per 150 feet of wall), which requirement appellant is

estopped from enforcing. The supposed breach of the wter pressure condition is made to rest on the

testimony of witness Serra, that the water supply could fill a 5-gallon can in 3 seconds; appellant thereupon

inferring that the maximum quantity obtainable from the hydrants was 100 gallons a minute, when the

warranty called for 200 gallons a minute. The transcript shows, however, that Serra repeatedly refused

and professed inability to estimate the rate of discharge of the water, and only gave the "5-gallon per 3-

second" rate because the insistence of appellant's counsel forced the witness to hazard a guess. Obviously,

the testimony is worthless and insufficient to establish the violation claimed, specially since the burden of its proof lay on appellant.

As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was

organized, and drilled, from time to give, altho not maintained as a permanently separate unit, which the

warranty did not require. Anyway, it would be unreasonable to expect the insured to maintain for his

compound alone a fire fighting force that many municipalities in the Islands do not even possess. There is

no merit in appellant's claim that subordinate membership of the business manager (Co Cuan) in the fire

brigade, while its direction was entrusted to a minor employee unders the testimony improbable. A

business manager is not necessarily adept at fire fighting, the qualities required being different for both activities.

Under the second assignment of error, appellant insurance company avers, that the insured violated the

"Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline, since

appellee admitted that there were 36 cans (latas) of gasoline in the building designed as "Bodega No. 2"

that was a separate structure not affected by the fire. It is well to note that gasoline is not specifically

mentioned among the prohibited articles listed in the so-called "hemp warranty." The cause relied upon

by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid products having

a flash point below 300o Fahrenheit", and is decidedly ambiguous and uncertain; for in ordinary parlance,

"Oils" mean "lubricants" and not gasoline or kerosene. And how many insured, it may well be wondered,

are in a position to understand or determine "flash point below 003o Fahrenheit. Here, again, by reason

of the exclusive control of the insurance company over the terms and phraseology of the contract, the

ambiguity must be held strictly against the insurer and liberraly in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).

Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by

experts who know and can anticipate the hearing 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.)

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 see no reason why the prohibition of keeping gasoline in the premises could not be expressed clearly

and unmistakably, in the language and terms that the general public can readily understand, without resort

to obscure esoteric expression (now derisively termed "gobbledygook"). We reiterate the rule stated in Bachrach vs. British American Assurance Co. (17 Phil. 555, 561):

If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the policy.

This rigid application of the rule on ambiguities has become necessary in view of current business practices.

The courts cannot ignore that nowadays monopolies, cartels and concentrations of capital, endowed with

overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared

"agreements" that the weaker party may not change one whit, his participation in the "agreement" being

reduced to the alternative to take it or leave it" labelled since Raymond Baloilles" contracts by adherence"

(con tracts d'adhesion), in contrast to these entered into by parties bargaining on an equal footing, such

contracts (of which policies of insurance and international bills of lading are prime examples) obviously

call for greater strictness and vigilance on the part of courts of justice with a view to protecting the weaker

party from abuses and imposition, and prevent their becoming traps for the unwarry (New Civil Coee, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942).

Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad, habra de ser

tenido en cuenta que al seguro es, practicamente un contrato de los llamados de adhesion y por

consiguiente en caso de duda sobre la significacion de las clausulas generales de una poliza — redactada

por las compafijas sin la intervencion alguna de sus clientes — se ha de adoptar de acuerdo con el articulo

1268 del Codigo Civil, la interpretacion mas favorable al asegurado, ya que la obscuridad es imputable a la empresa aseguradora, que debia haberse explicado mas claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934)

The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but equally

so for the insurer; in fact, it is mere so for the latter, since its dominant bargaining position carries with it stricter responsibility.

Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only incidental

to his business, being no more than a customary 2 day's supply for the five or six motor vehicles used for

transporting of the stored merchandise (t. s. n., pp. 1447-1448). "It is well settled that the keeping of

inflammable oils on the premises though prohibited by the policy does not void it if such keeping is

incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555, 560); and "according to

the weight of authority, even though there are printed prohibitions against keeping certain articles on the

insured premises the policy will not be avoided by a violation of these prohibitions, if the prohibit ed articles

are necessary or in customary use in carrying on the trade or business conducted on the premises." (45 C.

J. S., p. 311; also 4 Couch on Insurance, section 966b). It should also be noted that the "Hemp Warranty"

forbade storage only "in the building to which this insurance applies and/or in any building communicating

therewith", and it is undisputed that no gasoline was stored in the burned bodegas, and that "Bodega No.

2" which was not burned and where the gasoline was found, stood isolated from the other insured bodegas.

The charge that the insured failed or refused to submit to the examiners of the insurer the books, vouchers,

etc. demanded by them was found unsubstantiated by the trial Court, and no reason has been shown to

alter this finding. The insured gave the insurance examiner all the date he asked for (Exhibits AA, BB, CCC

and Z), and the examiner even kept and photographed some of the examined books in his possession.

What does appear to have been rejected by the insured was the demand that he should submit

"a list of all books, vouchers, receiptsand other records" (Age 4, Exhibit 9-c); but the refusal of the insured

in this instance was well justified, since the demand for a list of all the vouchers (which were not in use by

the insured) and receipts was positively unreasonable, considering that such listing was superfluous

because the insurer was not denied access to the records, that the volume of Qua Chee Gan's business ran

into millions, and that the demand was made just after the fire when everything was in turmoil. That the

representatives of the insurance company were able to secure all the date they needed is proved by the

fact that the adjuster Alexander Stewart was able to prepare his own balance sheet (Exhibit L of the

criminal case) that did not differ from that submitted by the insured (Exhibit J) except for the valuation of the merchandise, as expressly found by the Court in the criminal case for arson. (Decision, Exhibit WW).

How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the decision

of the arson case (Exhibit WW) acquiting Qua Choc Gan, appellee in the present proceedings. The decision

states (Exhibit WW, p. 11):

Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi como su

existencia de copra y abaca en las bodega al tiempo del incendio durante el periodo comprendido desde

el 1.o de enero al 21 de junio de 1940 y ha encontrado que Qua Choc Gan ha sufrico una perdida de

P1,750.76 en su negocio en Tabaco. Segun Steward al llegar a este conclusion el ha tenidoen cuenta el

balance de comprobacion Exhibit 'J' que le ha entregado el mismo acusado Que Choc Gan en relacion con

sus libros y lo ha encontrado correcto a excepcion de los precios de abaca y copra que alli aparecen que

no estan de acuerdo con los precios en el mercado. Esta comprobacion aparece en el balance mercado exhibit J que fue preparado por el mismo testigo.

In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the insurer,

the Court referred the controversy to a government auditor, Apolonio Ramos; but the latter reached a

different result from the other two. Not only that, but Ramos reported two different valuations that could be reached according to the methods employed (Exhibit WW, p. 35):

La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para promovar el comercio

y la finanza, pero en el caso presente ha resultado un tanto cumplicada y acomodaticia, como lo prueba el

resultado del examen hecho por los contadores Stewart y Ramos, pues el juzgado no alcanza a ver como

habiendo examinado las mismas partidas y los mismos libros dichos contadores hayan de llegara dos

conclusiones que difieron sustancialmente entre si. En otras palabras, no solamente la comprobacion

hecha por Stewart difiere de la comprobacion hecha por Ramos sino que, segun este ultimo, su comprobacion ha dado lugar a dos resultados diferentes dependiendo del metodo que se emplea.

Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer

attempted to bolster its case with alleged photographs of certain pages of the insurance book (destroyed

by the war) of insured Qua Chee Gan (Exhibits 26-A and 26-B) and allegedly showing abnormal purchases

of hemp and copra from June 11 to June 20, 1940. The Court below remained unconvinced of the

authenticity of those photographs, and rejected them, because they were not mentioned not introduced

in the criminal case; and considering the evident importance of said exhibits in establishing the motive of

the insured in committing the arson charged, and the absence of adequate explanation for their omission in the criminal case, we cannot say that their rejection in the civil case constituted reversible error.

The next two defenses pleaded by the insurer, — that the insured connived at the loss and that the

fraudulently inflated the quantity of the insured stock in the burnt bodegas, — are closely related to each

other. Both defenses are predicted on the assumption that the insured was in financial difficulties and set

the fire to defraud the insurance company, presumably in order to pay off the Philippine National Bank, to

which most of the insured hemp and copra was pledged. Both defenses are fatally undermined by the

established fact that, notwithstanding the insurer's refusal to pay the value of the policies the extensive

resources of the insured (Exhibit WW) enabled him to pay off the National Bank in a short time; and if he

was able to do so, no motive appears for attempt to defraud the insurer. While the acquittal of the insured

in the arson case is not res judicata on the present civil action, the insurer's evidence, to judge from the

decision in the criminal case, is practically identical in both cases and must lead to the same result, since

the proof to establish the defense of connivance at the fire in order to defraud the insurer "cannot be

materially less convincing than that required in order to convict the insured of the crime o f

arson"(Bachrach vs. British American Assurance Co., 17 Phil. 536).

As to the defense that the burned bodegas could not possibly have contained the quantities of copra and

hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates, inferences and

conclusionsAs to the defense that the burned bodegas could not possibly have contained the quantities of

copra and hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates,

inferences and conclusions of its adjuster investigator, Alexander D. Stewart, who examined the premises

during and after the fire. His testimony, however, was based on inferences from the photographs and

traces found after the fire, and must yield to the contradictory testimony of engineer Andres Bolinas, and

specially of the then Chief of the Loan Department of the National Bank's Legaspi branch, Porfirio Barrios,

and of Bank Appraiser Loreto Samson, who actually saw the contents of the bodegas shortly before the

fire, while inspecting them for the mortgagee Bank. The lower Court was satisfied of the veracity and

accuracy of these witnesses, and the appellant insurer has failed to substantiate its charges aganst their

character. In fact, the insurer's repeated accusations that these witnesses were later "suspended for

fraudulent transactions" without giving any details, is a plain attempt to create prejudice against them, without the least support in fact.

Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp

burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on the refusal of the Court below to accept

its inferences from the remains shown in the photographs of the burned premises. It appears, likewise,

that the adjuster's calculations of the maximum contents of the destroyed warehouses rested on the

assumption that all the copra and hemp were in sacks, and on the result of his experiments to determine

the space occupied by definite amounts of sacked copra. The error in the estimates thus arrived at

proceeds from the fact that a large amount of the insured's stock were in loose form, occupying less space

than when kept in sacks; and from Stewart's obvious failure to give due allowance for the compression of

the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight of the overlying stock,

as shown by engineer Bolinas. It is probable that the errors were due to inexperience (Stewart himself

admitted that this was the first copra fire he had investigated); but it is clear that such errors render

valueles Stewart's computations. These were in fact twice passed upon and twice rejected by different judges (in the criminal and civil cases) and their concordant opinion is practically conclusive.

The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since the

opinions stated therein were based on ex parte investigations made at the back of the insured; and the

appellant did not present at the trial the original testimony and documents from which the conclusions in the report were drawn.lawphi1.net

Appellant insurance company also contends that the claims filed by the insured contained false and

fraudulent statements that avoided the insurance policy. But the trial Court found that the discrepancies

were a result of the insured's erroneous interpretation of the provisions of the insurance policies and claim

forms, caused by his imperfect knowledge of English, and that the misstatements were innocently made

and without intent to defraud. Our review of the lengthy record fails to disclose reasons for rejecting these

conclusions of the Court below. For example, the occurrence of previous fires in the premises insured in

1939, altho omitted in the claims, Exhibits EE and FF, were nevertheless revealed by the insured in his

claims Exhibits Q (filed simultaneously with them), KK and WW. Considering that all these claims were

submitted to the smae agent, and that this same agent had paid the loss caused by the 1939 fire, we find

no error in the trial Court's acceptance of the insured's explanation that the omission in Exhibits EE and FF

was due to inadvertance, for the insured could hardly expect under such circumstances, that the 1939

would pass unnoticed by the insurance agents. Similarly, the 20 per cent overclaim on 70 per cent of the

hemo stock, was explained by the insured as caused by his belief that he was entitled to include in the

claim his expected profit on the 70 per cent of the hemp, because the same was already contracted for

and sold to other parties before the fire occurred. Compared with other cases of over-valuation recorded

in our judicial annals, the 20 per cent excess in the case of the insured is not by itself sufficient to establish

fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134, the claim was fourteen (14) times

(1,400 per cent) bigger than the actual loss; in Go Lu vs. Yorkshire Insurance Co., 43 Phil., 633, eight (8)

times (800 per cent); in Tuason vs. North China Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It

vs. Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85 while the goods insured were inventoried at

O13,113. Certainly, the insured's overclaim of 20 per cent in the case at bar, duly explained by him to the

Court a quo, appears puny by comparison, and can not be regarded as "more than misstatement, more

than inadvertence of mistake, more than a mere error in opinion, more than a slight exaggeration" (Tan It

vs. Sun Insurance Office, ante) that would entitle the insurer to avoid the policy. It is well to note that the

overchange of 20 per cent was claimed only on a part (70 per cent) of the hemp stock; had the insured

acted with fraudulent intent, nothing prevented him from increasing the value of all of his copra, hemp

and buildings in the same proportion. This also applies to the alleged fraudulent claim for burned empty

sacks, that was likewise explained to our satisfaction and that of the trial Court. The rule is that to avoid a

policy, the false swearing must be wilful and with intent to defraud (29 Am. Jur., pp. 849-851) which was

not the cause. Of course, the lack of fraudulent intent would not authorize the collection of the expected profit under the terms of the polices, and the trial Court correctly deducte the same from its award.

We find no reversible error in the judgment appealed from, wherefore the smae is hereby affirmed. Costs against the appellant. So ordered.

Paras, C. J., Padilla, Montemayor, Reyes, A., Jugo, Labrador, and Concepcion, JJ., concur.

QUA VS LAW UNION CASE DIGEST

Facts:

Qua owned 4 warehouses used for the storage of copra and hemp. They were insured with the Law Union.

Fire broke out and completely destroyed 3 bodegas. The plaintiff submitted claims totalling P398,562.81.

The Insurance Company resisted payment on the grounds that the fire had been deliberately caused by the insured or by other persons in connivance with him.

Que Chee Gan and his brother were tried for arson, but were acquitted by the trial court. As regards the

insurance claim, the trial court ruled in favor of Qua and entitled him to recover more than Php 300,000 for indemnities from the insurance company. Hence, the company appealed to the SC.

In its first assignment of error, the insurance company alleged that the trial Court should have held that

the policies were avoided for breach of warranty. The contract noted that fire hydrants were required in

a particular measurement of space (every 150 feet). Hence, they argued that since the bodegas insured

had an external wall perimeter of 500 meters, the appellee should have 11 fire hydrants in the compound, and that he actually had only 2, with a further pair.

Issues:

1. WON the insurance company can void the policies it had issued

2. WON the insured violated the "Hemp Warranty" provisions of the policy against the storage of gasoline

3. WON the insured planned the destruction of the bodega

Held: No. No. No.

Ratio:

1. The insurer, who at the time of issuance, has knowledge of existing facts which would invalidate the

contract from the beginning, such constitutes a waiver of conditions in the contract inconsistent with the

facts, and the insurer is stopped thereafter from asserting the breach of such conditions. Also, an insurance

company intends to executed a valid contract in return for the premium received; and when the policy

contains a condition which renders it voidable at its inception, and this result is known to the insurer, it

will be presumed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not.

The appellant is barred estoppel to claim violation of the so-called fire hydrants warranty, because it

knew the number of hydrants demanded therein never existed from the very beginning and issued the policies.

To allow a company to accept one's money for a policy of insurance which it then knows to be void and of

no effect, though it knows as it must, that the assured believes it to be valid and binding, is so contrary to

the dictates of honesty and fair dealing, and so closely related to positive fraud, as to the abhorrent to fair-minded men.

The appellant company so worded the policies that while exacting the greater number of fire hydrants and

appliances, it kept the premium discount at the minimum of 2 1/2%, thereby giving the insurance company

a double benefit. Such abnormal treatment of the insured strongly points at an abuse of the insurance company's selection of the words and terms of the contract, over which it had absolute control.

Receipt of Premiums or Assessments after Cause for Forfeiture Other than Nonpayment. — It is a well

settled rule of law that an insurer which with knowledge of facts entitling it to treat a policy as no longer

in force, receives and accepts a premium on the policy, estopped to take advantage of the forfeiture. It

cannot treat the policy as void for the purpose of defense to an action to recover for a loss thereafter occurring and at the same time treat it as valid for the purpose of earning and collecting further premiums.

Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly

interpreted against the party that caused them, the "memo of warranty" invoked by appellant bars the latter from questioning the existence of the appliances called for in the insured premises

2. The ambiguity must be held strictly against the insurer and liberally in favor of the insured, specially to

avoid a forfeiture. 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 everyambiguity in favor of the insured.

Appellee admitted that there were 36 cans of gasoline in the building designed. It However, gasoline is

not specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The

cause relied upon by the insurer speaks of "oils", and is uncertain because, "Oils" usually mean "lubricants" and not gasoline or kerosene.

If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the policy.

The contract of insurance is one of perfect good faith not for the insured alone, but equally so for the

insurer; in fact, it is mere so for the latter, since its dominant bargaining position carries with it stricter responsibility.

Also, the gasoline kept in Bodega No. 2 was only incidental to his business, being no more than a customary

2 day's supply for the five or six motor vehicles used for transporting of the stored merchandise. "It is well

settled that the keeping of inflammable oils on the premises though prohibited by the policy does not void it if such keeping is incidental to the business."

3. It was unlikely that Qua burned the warehouse to defraud the company because he had the resources

to pay off theNational Bank in a short time. Also, no motive appears for attempt to defraud the insurer.

While the acquittal of the insured in the arson case is not res judicata on the present civil action, the

insurer's evidence, to judge from the decision in the criminal case, is practically identical in both cases and

must lead to the same result, since the proof to establish the defense of connivance at the fire in order to

defraud the insurer "cannot be materially less convincing than that required in order to convict the insured of the crime of arson."

As to the defense that the burned bodegas could not possibly have contained the quantities of copra and

hemp stated in the fire claims, the insurer relied on its adjuster investigator who examined the premises

during and after the fire. His testimony, however, was based on inferences from the photographs and

traces found after the fire, and must yield to the contradictory testimony of those who actually saw the contents of the bodegas shortly before the fire, while inspecting them for the mortgagee Bank.

G.R. No. L-21821-22 and L-21824-27 May 31, 1966

DIOSDADO C. TY, plaintiff-appellant,

vs. FILIPINAS COMPAÑIA DE SEGUROS, et al., defendants-appellees.

Porfirio V. Villaroman for plaintiff-appellant.

Ramirez and Ortigas for defendants-appellees Filipinas Compañia de Seguros, Philippine Guaranty Co., Inc.

and Universal Insurance and Indemnity Co.

Renato L. Liboro for defendant-appellee People's Surety and Insurance Co., Inc.

Perfecto P. R. Chua Cheng for defendant-appellee South Sea Surety and Insurance Co., Inc. Gil Carlos and Associates for defendant-appellee Plaridel Surety and Insurance Co., Inc.

BARRERA, J.:

These are appeals instituted by Diosdado C. Ty from a single decision of the Court of First Instance of

Manila (in Civ. Cases Nos. 26343, 26344, 26404, 26405, 26406, 26442, which were tried together),

dismissing the six separate complaints he filed against six insurance companies (Filipinas Compañia de

Seguros, People's Surety & Insurance Co., Inc., South Sea Surety & Insurance Co., Inc., The Philippine

Guaranty Company, Inc., Universal Insurance & Indemnity Co., and Plaridel Surety & Insurance Co., Inc.) for collection from each of them, of the sum of P650.00, as compensation for the disability of his left hand.

The facts of these cases are not controverted:

Plaintiff-appellant was an employee of Broadway Cotton Factory at Grace Park, Caloocan City, working as

mechanic operator, with monthly salary of P185.00. In the latter part of 1953, he took Personal Accident

Policies from several insurance companies, among which are herein defendants-appellees, on different

dates,1 effective for 12 months. During the effectivity of these policies, or on December 24, 1953, a fire

broke out in the factory where plaintiff was working. As he was trying to put out said fire with the help of

a fire extinguisher, a heavy object fell upon his left hand. Plaintiff received treatment at the National Orthopedic Hospital from December 26, 1953 to February 8, 1954, for the following injuries, to wit:

(1) Fracture, simple, oraximal phalanx, index finger, left;

(2) Fracture, compound, communite proximal phalanx, middle finger, left and 2nd phalanx simple;

(3) Fracture, compound, communite phalanx, 4th finger, left;

(4) Fracture, simple, middle phalanx, middle finger, left;

(5) Lacerated wound, sutured, volar aspect, small finger, left;

(6) Fracture, simple, chip, head, 1st phalanx 5th digit, left.

which injuries, the attending surgeon certified, would cause temporary total disability of appellant's left hand.

As the insurance companies refused to pay his claim for compensation under the policies by reason of the

said disability of his left hand, Ty filed motions in the Municipal Court of Manila, which rendered favorable

decision. On appeal to the Court of First Instance by the insurance companies, the cases were dismissed

on the ground that under the uniform terms of the insurance policies, partial disability of the insured

caused by loss of either hand to be compensable, the loss must result in the amputation of that hand. Hence, these appeals by the insured.1äwphï1.ñët

Plaintiff-appellant is basing his claim for indemnity under the provision of the insurance contract, uniform in all the cases, which reads:

"INDEMNITY FOR TOTAL OR PARTIAL DISABILITY

If the Insured sustains any Bodily Injury which is effected solely through vi olent, external, visible and

accidental means, and which shall not prove fatal but shall result, independently of all other causes and

within sixty (60) days from the occurrence, thereof, in Total or Partial Disability of the Insured, the

Company shall pay, subject to the exceptions as provided for hereinafter, the amount set opposite such injury.

PARTIAL DISABILITY

LOSS OF:

Either Hand P650.00

The loss of a hand shall mean the loss, by amputation through the bones of the wrist.

Appellant contends that to be entitled to indemnification under the foregoing provision, it is enough that

the insured is disabled to such an extent that he cannot substantially perform all acts or duties of the kind

necessary in the prosecution of his business. It is argued that what is compensable is the disability and not

the amputation of the hand. The definition of what constitutes loss of hand, placed in the contract,

according to appellant, consequently, makes the provision ambiguous and calls for the interpretation

thereof by this Court.

This is not the first time that the proper construction of this provision, which is uniformly carried in

personal accident policies, has been questioned. Herein appellant himself has already brought this matter

to the attention of this Court in connection with the other accident policies which he took and under which

he had tried to collect indemnity, for the identical injury that is the basis of the claims in these cases. And, we had already ruled:

While we sympathize with the plaintiff or his employer, for whose benefit the policies were issued, we can

not go beyond the clear and express conditions of the insurance policies, all of which definite partial

disability as loss of either hand by amputation through the bones of the wrist. There was no such

amputation in the case at bar. All that was found by the trial court, which is not disputed on appeal, was

that the physical injuries "caused temporary total disability of plaintiff's left hand." Note that the disability

of plaintiff's hand was merely temporary, having been caused by fractures of the index, the middle and

the fourth fingers of the left hand.

We might add that the agreement contained in the insurance policies is the law between the parties. As

the terms of the policies are clear, express and specific that only amputation of the left hand should be

considered as a loss thereof, an interpretation that would include the mere fracture or other temporary disability not covered by the policies would certainly be unwarranted. 2

We find no reason to depart from the foregoing ruling on the matter.

Plaintiff-appellant cannot come to the courts and claim that he was misled by the terms of the contract.

The provision is clear enough to inform the party entering into that contract that the loss to be considered

a disability entitled to indemnity, must be severance or amputation of that affected member from the body of the insured.

Wherefore, finding no error in the decision appealed from, the same is hereby affirmed, without costs. So ordered.

Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

TY VS SEGUROS CASE DIGEST

FACTS:

October 1, 1941: Christern Huenefeld and co., inc. (Christern), a company whose major

stockholders are German, paid P1M and obtained a fire policy fromFilipinas Cia. de Seguros (Filipinas)

December 10, 1941: U.S. declared a war against Germany

February 27, 1942 (during the japanese occupation): the building and insured merchandise

were burned

their claimed from Filipinas and the salvage goods were auctioned for P92,650 who

refused since Christen was organized under the Philippine laws, it was under American jurisdiction which is an enemy of the Germans

April 9, 1943: The Director of Bureau of Financing ordered Filipinas to pay the P92,650 to Christen and it did.

Filipinas filed with the CFI the P92,650 paid to Christern

CA affirmed CFI: dismissed the action

Filed a petition for certiorari

ISSUE: W/N Christern is a public enemy and therefore ceased to be insured

HELD: YES. Ordered to pay Filipinas P77,208.33, Philippine currency, less the amount of the premium, in

Philippine currency, that should be returned by the Filipinas for the unexpired term of the policy in question, beginning December 11, 1941

Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone

except a public enemy may be insured

Effect of war, generally. — All intercourse between citizens of belligerent powers which is

inconsistent with a state of war is prohibited by the law of nations. Such prohibition includes

all negotiations, commerce, or trading with the enemy; all acts which will increase, or tend to

increase, its income or resources; all acts of voluntary submission to it; or receiving its

protection; also all acts concerning the transmission of money or goods; and all contracts

relating thereto are thereby nullified. It further prohibits insurance upon trade with or by the

enemy, upon the life or lives of aliens engaged in service with the enemy; this for the reason

that the subjects of one country cannot be permitted to lend their assistance to protect by

insurance the commerce or property of belligerent, alien subje cts, or to do anything

detrimental too their country's interest. The purpose of war is to cripple the power and exhaust

the resources of the enemy, and it is inconsistent that one country should destroy its enemy's

property and repay in insurance the value of what has been so destroyed, or that it should in

such manner increase the resources of the enemy, or render it aid, and the commencement of

war determines, for like reasons, all trading intercourse with the enemy, which prior thereto

may have been lawful. All individuals therefore, who compose the belligerent powers, exist, as to each other, in a state of utter exclusion, and are public enemies

In the case of an ordinary fire policy, which grants insurance only from year, or for some other

specified term it is plain that when the parties become alien enemies, the contractual tie is broken and the contractual rights of the parties, so far as not vested.

However, elementary rules of justice (in the absence of specific provision in the Insurance Law)

require that the premium paid by the respondent for the period covered by its policy from December 11, 1941, should be returned by the petitioner

G.R. No. L-16215 June 29, 1963

SIMEON DEL ROSARIO, vs. THE EQUITABLE INSURANCE AND CASUALTY CO., INC.,

On February 7, 1957, the defendant Equitable Insurance and Casualty Co., Inc., issued Personal

Accident Policy No. 7136 on the life of Francisco del Rosario, alias Paquito Bolero, son of herein

plaintiff-appellee, binding itself to pay the sum of P1,000.00 to P3,000.00, as indemnity for the death of the insured. The pertinent provisions of the Policy, recite:

Part I. Indemnity For Death

If the insured sustains any bodily injury which is effected solely through violent, external, visible

and accidental means, and which shall result, independently of all other causes and within sixty

(60) days from the occurrence thereof, in the Death of the Insured, the Company shall pay the amount set opposite such injury:

Section 1. Injury sustained other than those specified below unless excepted hereinafter. . . . . . . . P1,000.00

Section 2. Injury sustained by the wrecking or disablement of a

railroad passenger car or street railway car in or on which the Insured is travelling as a farepaying passenger. . . . . . . . P1,500.00

Section 3. Injury sustained by the burning of a church, theatre,

public library or municipal administration building while the Insured is therein at the commencement of the fire. . . . . . . . P2,000.00

Section 4. Injury sustained by the wrecking or disablement of a

regular passenger elevator car in which the Insured is being conveyed as a passenger (Elevator in mines excluded) P2,500.00

Section 5. Injury sustained by a stroke of lightning or by a cyclone. . . . . . . . P3,000.00

Part VI. Exceptions

This policy shall not cover disappearance of the Insured nor shall it cover Death, Disability, Hospital fees, or Loss of Time, caused to the insured:

. . . (h) By drowning except as a consequence of the wrecking or disablement in the Philippine

waters of a passenger steam or motor vessel in which the Insured is travelling as a farepaying

passenger; . . . .

A rider to the Policy contained the following:

IV. DROWNING

It is hereby declared and agreed that exemption clause Letter (h) embodied in PART VI of the

policy is hereby waived by the company, and to form a part of the provision covered by the policy.

On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while on board

the motor launch "ISLAMA" together with 33 others, including his beneficiary in the Policy,

Remedios Jayme, were forced to jump off said launch on account of fire which broke out on

said vessel, resulting in the death of drowning, of the insured and beneficiary in the waters of Jolo. 1äwphï1.ñët

On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir, filed a claim

for payment with defendant company, and on September 13, 1957, defendant company paid

to him (plaintiff) the sum of P1,000.00, pursuant to Section 1 of Part I of the policy. The receipt signed by plaintiff reads —

RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC., the sum of PESOS — ONE

THOUSAND (P1,000.00) Philippine Currency, being settlement in full for all claims and demands

against said Company as a result of an accident which occurred on February 26, 1957, insured under out ACCIDENT Policy No. 7136, causing the death of the Assured.

In view of the foregoing, this policy is hereby surrendered and CANCELLED.

LOSS COMPUTATION

Amount of Insurance P1,000.00

__________ v v v v v

On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant company

acknowledging receipt by his client (plaintiff herein), of the P1,000.00, but informing said company that said amount was not the correct one. Atty. Francisco claimed —

The amount payable under the policy, I believe should be P1,500.00 under the provision of

Section 2, part 1 of the policy, based on the rule of pari materia as the death of the insured occurred under the circumstances similar to that provided under the aforecited section.

Defendant company, upon receipt of the letter, referred the matter to the Insurance

Commissioner, who rendered an opinion that the liability of the company was only P1,000.00,

pursuant to Section 1, Part I of the Provisions of the policy (Exh. F, or 3). Because of the above

opinion, defendant insurance company refused to pay more than P1,000.00. In the meantime,

Atty. Vicente Francisco, in a subsequent letter to the insurance company, asked for P3,000.00

which the Company refused, to pay. Hence, a complaint for the recovery of the balance of

P2,000.00 more was instituted with the Court of First Instance of Rizal (Pasay City, Branch VII), praying for it further sum of P10,000.00 as attorney's fees, expenses of litigation and costs.

Defendant Insurance Company presented a Motion to Dismiss, alleging that the demand or

claim is set forth in the complaint had already been released, plaintiff having received the full

amount due as appearing in policy and as per opinion of the Insurance Commissioner. An

opposition to the motion to dismiss, was presented by plaintiff, and other pleadings were

subsequently file by the parties. On December 28, 1957, the trial court deferred action on the

motion to dismiss until termination of the trial of the case, it appearing that the ground thereof

was not indubitable. In the Answer to the complaint, defendant company practically admitted

all the allegations therein, denying only those which stated that under the policy its liability was P3,000.00.

On September 1, 1958, the trial court promulgated an Amended Decision, the pertinent portions of which read —

Since the contemporaneous and subsequent acts of the parties show that it was not their

intention that the payment of P1,000.00 to the plaintiff and the signing of the loss receipt

exhibit "1" would be considered as releasing the defendant completely from its liability on the

policy in question, said intention of the parties should prevail over the contents of the loss receipt "1" (Articles 1370 and 1371, New Civil Code).

". . . . Under the terms of this policy, defendant company agreed to pay P1,000.00 to P3,000.00

as indemnity for the death of the insured. The insured died of drowning. Death by drowning is covered by the policy the pertinent provisions of which reads as follows:

"Part I of the policy fixes specific amounts as indemnities in case of death resulting from "bodily

injury which is effected solely thru violence, external, visible and accidental means" but, Part I

of the Policy is not applicable in case of death by drowning because death by drowning is not

one resulting from "bodily injury which is affected solely thru violent, external, visible and

accidental means" as "Bodily Injury" means a cut, a bruise, or a wound and drowning is death due to suffocation and not to any cut, bruise or wound."

Besides, on the face of the policy Exhibit "A" itself, death by drowning is a ground for recovery

apart from the bodily injury because death by bodily injury is covered by Part I of the policy

while death by drowning is covered by Part VI thereof. But while the policy mentions specific

amounts that may be recovered for death for bodily injury, yet, there is not specific amount

mentioned in the policy for death thru drowning although the latter is, under Part VI of the

policy, a ground for recovery thereunder. Since the defendant has bound itself to pay P1000.00

to P3,000.00 as indemnity for the death of the insured but the policy does not positively state

any definite amount that may be recovered in case of death by drowning, there is an ambiguity

in this respect in the policy, which ambiguity must be interpreted in favor of the insured and strictly against the insurer so as to allow greater indemnity.

. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already paid the

amount of P1,000.00 to the plaintiff so that there still remains a balance of P2,000.00 of the amount to which plaintiff is entitled to recover under the policy Exhibit "A".

The plaintiff asks for an award of P10,000.00 as attorney's fees and expenses of litigation.

However, since it is evident that the defendant had not acted in bad faith in refusing to pay

plaintiff's claim, the Court cannot award plaintiff's claim for attorney's fees and expenses of litigation.

IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside its decision dated

July 21, 1958 and hereby renders judgment, ordering the defendant to pay plaintiff the sum of Two Thousand (P2,000.00) Pesos and to pay the costs.

The above judgment was appealed to the Court of Appeals on three (3) counts. Said Court, in a

Resolution dated September 29, 1959, elevated the case to this Court, stating that the genuine

issue is purely legal in nature.

All the parties agree that indemnity has to be paid. The conflict centers on how much should

the indemnity be. We believe that under the proven facts and circumstances, the findings and

conclusions of the trial court, are well taken, for they are supported by the generally accepted

principles or rulings on insurance, which enunciate that where there is an ambiguity with

respect to the terms and conditions of the policy, the same will be resolved against the one

responsible thereof. It should be recalled in this connection, that generally, the i nsured, has

little, if any, participation in the preparation of the policy, together with the drafting of its terms

and Conditions. The interpretation of obscure stipulations in a contract should not favor the

party who cause the obscurity (Art. 1377, N.C.C.), which, in the case at bar, is the insurance company.

. . . . And so it has been generally held that the "terms in an insurance policy, which are

ambiguous, equivocal or uncertain . . . are to be construed strictly 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 the "insured usually has no voice in the selection or arrangement of the words

employed and that the language of the contract is selected with great care and deliberation by

expert and legal advisers employed by, and acting exclusively in the interest of, the insurance company" (44 C.J.S. 1174). Calanoc v. Court of Appeals, et al., G.R. No. L-8151, Dec. 16, 1955.

. . . . Where two interpretations, equally fair, of languages used in an insurance policy may be

made, that which allows the greater indemnity will prevail. (L'Engel v. Scotish Union & Nat. F. Ins. Co., 48 Fla. 82, 37 So. 462, 67 LRA 581 111 Am. St. Rep. 70, 5 Ann. Cas. 749).

At any event, the policy under consideration, covers death or disability by accidental means,

and the appellant insurance company agreed to pay P1,000.00 to P3,000.00. is indemnity for death of the insured.

In view of the conclusions reached, it would seem unnecessary to discuss the other issues raised

in the appeal.

The judgment appealed from is hereby affirmed. Without costs.

DEL ROSARIO VS EQUITABLE INSURANCE CASE DIGEST

FACTS:

April 13, 1957: Simeon del Rosario, father of the insured who died from drowning filed a claim

for payment with Equitable Ins. and Casualty Co., Inc. but it refused to pay more than P1,000

php so a case was filed with the RTC for the P2,000 balance stating that under the policy they are entitled to P1,000 to P3,000 as indemnity

RTC: entitled to recover P3,000 - policy does not positively state any definite amount, there is

an ambiguity in this respect in the policy, which ambiguity must be interpreted in favor of the insured and strictly against the insurer so as to allow greater indemnity

ISSUE: W/N Simeon is entitled to recover P3,000

HELD: YES.

terms in an insurance policy, which are ambiguous, equivocal or uncertain are to be construed

strictly 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

reason for this rule is that the "insured usually has no voice in the selection or arrangement of

the words employed and that the language of the contract is selected with great care and

deliberation by expert and legal advisers employed by, and acting exclusively in the interest of, the insurance company

G.R. No. L-21380 May 20, 1966

MISAMIS LUMBER CORPORATION, plaintiff and appellee,

vs. CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.

Plaintiff-appellee Misamis Lumber Corporation, under its former name, Lanao Timber Mills, Inc., insured

its Ford Falcon motor car for the amount of P14,000 with the defendant-appellant, Capital Insurance & Surety Company, Inc. The pertinent provisions of the policy provided, as follows:

1. The Company will subject to the Limits of Liability indemnify the Insured against loss or damage to the Motor Vehicle and its accessories and spare parts whilst thereon.

2. (a) by accidental collision or overturning or collision or overturning consequent when mechanical breakdown or consequent upon wear and tear.

3. At its option, the Company may pay in cash the amount of the loss or damage or may repair, reinstate

or replace the Motor Vehicle or any part thereof or its accessories or spare parts. The liability of the

Company shall not exceed the value of the parts lost or damaged and the reasona ble cost of fitting such

parts or the value of the Motor Vehicle at the time of the loss or damage whichever is the loss. The

Insured's estimate of value stated in the schedule shall be the maximum amount payable by the Company in respect of any claim for loss or damage.1äwphï1.ñët

4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for which the Company may be liable under this policy provided that:

(a) the estimated cost of such repair does not exceed the authorized Repair Limit.

(b) a detailed estimate of the cost is forwarded to the Company without delay.

and providing also that the authorized repair limit is P150.00.

At around eleven o'clock in the evening of 25 November 1961, and while the above-mentioned insurance

policy was in force, the insured car, while traveling along in Aurora Boulevard in front of the Pepsi-Cola

plant in Quezon City, passed over a water hole which the driver did not see because an oncoming car did

not dim its light. The crankcase and flywheel housing of the car broke when it hit a hollow block lying

alongside the water hole. At the instance of the plaintiff-appellee, the car was towed and repaired by Morosi Motors at its shop at 1906 Taft Avenue Extension at a total cost of P302.27.

On 29 November 1961, when the repairs on the car had already been made, the plaintiff-appellee made a report of the accident to the defendant-appellant Capital Insurance & Surety Company.

Since the defendant-appellant refused to pay for the total cost of to wage and repairs, suit was filed in the municipal court originally.

The case before Us is now a direct appeal on a point of law from the judgment of the Court of First Instance

of Manila finding for the plaintiff and against the defendant-insurer in its Civil Case No. 51757. Per our

resolution on 13 February 1964, it was resolved to proceed with the case without the appellee's brief, which was filed late.

The defendant-appellant admits liability in the amount of P150, but not for any excess thereof.

The lower court did not exonerate the said appellant for the excess because, according to it, the company's

absolution would render the insurance contract one-sided and that the said insurer had not shown that

the cost of repairs in the sum of P302.27 is unreasonable, excessive or padded, nor had it shown that it could have undertaken the repairs itself at less expense.

The above reasoning is beside the point, because the insurance policy stipulated in paragraph 4 that if the

insured authorizes the repair the liability of the insurer, per its sub-paragraph (a), is limited to P150.00.

The literal meaning of this stipulation must control, it being the actual contract, expressly and plainly

provided for in the policy (Art. 1370, Civil Code; Young vs. Midland Textile Ins. Co., 30 Phil. 617; Ty vs. First Nat. Surety & Assur. Co., Inc., L-16138-45, 29 April 1961).

The lower court's recourse to legal hermeneutics is not called for because paragraph 4 of the policy is clear

and specific and leaves no room for interpretation. The interpretation given is even unjustified because it

opposes what was specifically stipulated. Thus, it will be observed that the policy drew out not only the

limits of the insurer's liability but also the mechanics that the insured had to follow to be entitled to full

indemnity of repairs. The option to undertake the repairs is accorded to the insurance company per

paragraph 2. The said company was deprived of the option because the insured took it upon itself to have

the repairs made, and only notified the insurer when the repairs were done. As a consequence, paragraph 4, which limits the company's liability to P150.00, applies.

The insurance contract may be rather onerous ("one-sided", as the lower court put it), but that in itself

does not justify the abrogation of its express terms, terms which the insured accepted or adhered to and which is the law between the contracting parties.

Finally, to require the insurer to prove that the cost of the repairs ordered by the insured is unreasonable,

as the appealed decision does, when the insurer was not given an opportunity to inspect and assess the damage before the repairs were made, strikes Us as contrary to elementary justice and equity.

For the foregoing reasons, the appealed decision is hereby modified by ordering the defendant-appellant

Capital Insurance & Surety Company, Inc. to pay not more than P150.00 to the plaintiff-appellee Misamis

Lumber Corporation. Each party shall bear its own costs and attorney's fees.

MISAMIS VS CAPITAL INSURANCE

Facts:

Misamis Lumber Company insured its Ford Falcon to Capital Insurance for P 14,000. One day, the

car’s crank andflywheel broke when it passed over a water hole in Aurora Boulevard. Misamis sent it to

be repaired at the cost of 302 pesos. However, Capital did not want to pay the entire amount because the

repair limit in the contract stipulated up to 150 pesos only. Misamis filed suit.

The lower court ruled against the insurance corporation because the company did not show that the cost

was excessive. Also , the court ruled that absolving the company of the excess amount would make the

contract one sided.

Issue: Is the insurance company liable for more than the amount in the repair limit?

Held: No. Insurance company only ordered to pay 150 pesos.

Ratio:

Paragraph 4, subpar a. of the insurance contract is clear and specific. It authorizes up to 150 pesos only as

a repair limit.

The lower court did not heed the express stipulation in the agreement. The policy specifically noted the

mechanics for repair in par. 2 and the limits of the liability in par 4. The company didn’t notify the insurance provider before it did the repairs. Also, even if the contract is onerous, this doesn’t justify its abrogation.

G.R. No. 75605 January 22, 1993

VEREDIA VS CA.

The two consolidated cases involved herein stemmed from the issuance by Fidelity and Surety Insurance

Company of the Philippines (Fidelity for short) of its Fire Insurance Policy No. F-18876 effective between

June 23, 1980 and June 23, 1981 covering Rafael (Rex) Verendia's residential building located at Tulip Drive,

Beverly Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as beneficiary was the Monte de

Piedad & Savings Bank. Verendia also insured the same building with two other companies, namely, The

Country Bankers Insurance for P56,000.00 under Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development Insurance for P400,000.00 under Policy No. F-48867 expiring on June 30, 198l.

While the three fire insurance policies were in force, the insured property was completely destroyed by

fire on the early morning of December 28, 1980. Fidelity was accordingly informed of the loss and despite

demands, refused payment under its policy, thus prompting Verendia to file a complaint with the then

Court of First Instance of Quezon City, praying for payment of P385,000.00, legal interest thereon, plus

attorney's fees and litigation expenses. The complaint was later amended to include Monte de Piedad as an "unwilling defendant" (P. 16, Record).

Answering the complaint, Fidelity, among other things, averred that the policy was avoided by reason of

over-insurance; that Verendia maliciously represented that the building at the time of the fire was leased

under a contract executed on June 25, 1980 to a certain Roberto Garcia, when actually it was a Marcelo Garcia who was the lessee.

On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in favor of Fidelity.

In sustaining the defenses set up by Fidelity, the trial court ruled that Paragraph 3 of the policy was also

violated by Verendia in that the insured failed to inform Fidelity of his other insurance coverages with Country Bankers Insurance and Development Insurance.

Verendia appealed to the then Intermediate Appellate Court and in a decision promulgated on March 31,

1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the appellate court

reversed for the following reasons: (a) there was no misrepresentation concerning the lease for the

contract was signed by Marcelo Garcia in the name of Roberto Garcia; and (b) Paragraph 3 of the policy

contract requiring Verendia to give notice to Fidelity of other contracts of insurance was waived by Fidelity as shown by its conduct in attempting to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).

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

motion for reconsideration within 15 days therefrom, Fidelity filed on April 21, 1986, a motion for

extension of 3 days within which to file a motion for reconsideration. The motion for extension was not

filed on April 19, 1986 which was the 15th day after receipt of the decision because said 15th day was a

Saturday and of course, the following day was a Sunday (p. 14., Rollo of G.R. No. 75605). The motion for

extension was granted by the appellate court on April 30, 1986 (p. 15. ibid.), but Fidelity had in the meantime filed its motion for reconsideration on April 24, 1986 (p. 16, ibid.).

Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration on the ground

that the motion for extension was filed out of time because the 15th day from receipt of the decision which

fell on a Saturday was ignored by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate Court has personnel receiving pleadings even on Saturdays.

The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for reconsideration

was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the petition herein docketed as G.R. No. 75605

was initiated. Subsequently, or more specifically on October 21, 1986, the appellate court denied Fidelity's

motion for reconsideration and account thereof. Fidelity filed on March 31, 1986, the petition for review

on certiorari now docketed as G.R. No. 76399. The two petitions, inter-related as they are, were

consolidated (p. 54, Rollo of G.R. No. 76399) and thereafter given due course.

Before we can even begin to look into the merits of the main case which is the petition for review

oncertiorari, we must first determine whether the decision of the appellate court may still be reviewed, or

whether the same is beyond further judicial scrutiny. Stated otherwise, before anything else, inquiry must

be made into the issue of whether Fidelity could have legally asked for an extension of the 15-day reglementary period for appealing or for moving for reconsideration.

As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that the pendency of

a motion for extension of time to perfect an appeal does not suspend the running of the period sought to

be extended (Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same effect were the rulings in Gibbs

vs. CFI of Manila (80 Phil. 160 [1948]) Bello vs. Fernando (4 SCRA 138 [1962]), and Joe vs. King(20 SCRA 1120 [1967]).

The above cases notwithstanding and because the Rules of Court do not expressly prohibit the filing of a

motion for extension of time to file a motion for reconsideration in re gard to a final order or judgment,

magistrates, including those in the Court of Appeals, held sharply divided opinions on whether the period

for appealing which also includes the period for moving to reconsider may be extended. The matter was

not definitely settled until this Court issued its Resolution in Habaluyas Enterprises, Inc. vs. Japson (142

SCRA [1986]), declaring that beginning one month from the promulgation of the resolution on May 30, 1986 —

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

In the instant case, the motion for extension was filed and granted before June 30, 1986, although, of

course, Verendia's motion to expunge the motion for reconsideration was not finally disposed until July

22, 1986, or after the dictum in Habaluyas had taken effect. Seemingly, therefore, the filing of the motion

for extension came before its formal proscription under Habaluyas, for which reason we now turn our attention to G.R. No. 76399.

Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not the contract of lease

submitted by Verendia to support his claim on the fire insurance policy constitutes a false declaration

which would forfeit his benefits under Section 13 of the policy and (b) whether or not, in submitting the

subrogation receipt in evidence, Fidelity had in effect agreed to settle Verendia's claim in the amount stated in said receipt. 1

Verging on the factual, the issue of the veracity or falsity of the lease contract could have been better

resolved by the appellate court for, in a petition for review on certiorari under Rule 45, the jurisdiction of

this Court is limited to the review of errors of law. The appellate court's findings of fact are, therefore,

conclusive upon this Court except in the following cases: (1) when the conclusion is a finding grounded

entirely on speculation, surmises, or conjectures; (2) when the inference made is manifestly absurd,

mistaken, or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when

the judgment is premised on a misapprehension of facts; (5) when the findings of fact are conflicting; and

(6) when the Court of Appeals in making its findings went beyond the issues of the case and the same are

contrary to the admissions of both appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA 433

[1991]). In view of the conflicting findings of the trial court and the appellate court on important issues in

these consolidated cases and it appearing that the appellate court judgment is based on a misapprehension of facts, this Court shall review the evidence on record.

The contract of lease upon which Verendia relies to support his claim for insurance benefits, was entered

into between him and one Robert Garcia, married to Helen Cawinian, on June 25, 1980 (Exh. "1"), a couple

of days after the effectivity of the insurance policy. When the rented residential building was razed to the

ground on December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within the

premises. However, according to the investigation report prepared by Pat. Eleuterio M. Buenviaje of the

Antipolo police, the building appeared to have "no occupant" and that Mr. Roberto Garcia was "renting on

the otherside (sic) portion of said compound"

(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that Marcelo Garcia, whom he considered as the real lessee, was occupying the building when it was burned (TSN, July 27, 1982, p.10).

Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster was able to locate

him. Robert Garcia then executed an affidavit before the National Intelligence and Security Authority

(NISA) to the effect that he was not the lessee of Verendia's house and that his signature on the contract

of lease was a complete forgery. Thus, on the strength of these facts, the adjuster submitted a report dated December 4, 1981 recommending the denial of Verendia's claim (Exh. "2").

Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed the lease contract.

According to Verendia, it was signed by Marcelo Garcia, cousin of Robert, who had been paying the rentals

all the while. Verendia, however, failed to explain why Marcelo had to sign his cousin's name when he in

fact was paying for the rent and why he (Verendia) himself, the lessor, allowed such a ruse. Fidelity's

conclusions on these proven facts appear, therefore, to have sufficient bases; Verendia concocted the

lease contract to deflect responsibility for the fire towards an alleged "lessee", inflated the value of the

property by the alleged monthly rental of P6,500 when in fact, the Provincial Assessor of Rizal had assessed

the property's fair market value to be only P40,300.00, insured the same property with two other

insurance companies for a total coverage of around P900,000, and created a dead-end for the adjuster by

the disappearance of Robert Garcia.

Basically a contract of indemnity, an insurance contract is the law between the parties (Pacific Banking

Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and conditions constitute the measure of

the insurer's liability and compliance therewith is a condition precedent to the insured's right to recovery

from the insurer (Oriental Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991], citing Perla

Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). As it is also a contract of adhesion,

an insurance contract should be liberally construed in favor of the insured and strictly against the insurer

company which usually prepares it (Western Guaranty Corporation vs. Court of Appeals, 187 SCRA 652 [1980]).

Considering, however, the foregoing discussion pointing to the fact that Verendia used a false lease

contract to support his claim under Fire Insurance Policy No. F-18876, the terms of the policy should be

strictly construed against the insured. Verendia failed to live by the terms of the policy, specifically Section

13 thereof which is expressed in terms that are clear and unambiguous, that all benefits under the policy

shall be forfeited "If the claim be in any respect fraudulent, or if any false declaration be made or used in

support thereof, or if any fraudulent means or devises are used by the Insured or anyone acting in his

behalf to obtain any benefit under the policy". Verendia, having presented a false declaration to support

his claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue

of Section 13 of the policy in the absence of proof that Fidelity waived such provision (Pacific Banking

Corporation vs. Court of Appeals, supra). Worse yet, by presenting a false lease contract, Verendia,

reprehensibly disregarded the principle that insurance contracts are uberrimae fidae and demand the most abundant good faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).

There is also no reason to conclude that by submitting the subrogation receipt as evidence in court, Fidelity

bound itself to a "mutual agreement" to settle Verendia's claims in consideration of the amount of

P142,685.77. While the said receipt appears to have been a filled-up form of Fidelity, no representative of

Fidelity had signed it. It is even incomplete as the blank spaces for a witness and his address are not filled

up. More significantly, the same receipt states that Verendia had received the aforesaid amount. However,

that Verendia had not received the amount stated therein, is proven by the fact that Verendia himself filed

the complaint for the full amount of P385,000.00 stated in the policy. It might be that there had been

efforts to settle Verendia's claims, but surely, the subrogation receipt by itself does not prove that a

settlement had been arrived at and enforced. Thus, to interpret Fidelity's presentation of the subrogation

receipt in evidence as indicative of its accession to its "terms" is not only wanting in rational basis but would be substituting the will of the Court for that of the parties.

WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399 is GRANTED and

the decision of the then Intermediate Appellate Court under review is REVERSED and SET ASIDE and that of the trial court is hereby REINSTATED and UPHELD.

SO ORDERED.

VEREDIA VS CA CASE DIGEST

FACTS:

Rafael (Rex) Verendia's residential building was insured with Fidelity and Surety Insurance

Company, Country Bankers Insurance and Development Insurance with Monte de Piedad & Savings Bank as beneficiary

December 28, 1980 early morning: the building was completely destroyed by fire

Fidelity refused the claim stating that there was a misrepresentation since the lessee was

not Roberto Garcia but Marcelo Garcia

trial court: favored Fidelity

CA: reversed

ISSUE: W/N there was false declaration which would forfeit his benefits under Section 13 of the policy

HELD: YES.

Section 13 thereof which is expressed in terms that are clear and unambiguous, that all benefits

under the policy shall be forfeited "If the claim be in any respect fraudulent, or if any false

declaration be made or used in support thereof, or if any fraudulent means or devises are used by the Insured or anyone acting in his behalf to obtain any benefit under the policy"

Robert Garcia then executed an affidavit before the National Intelligence and Security Authority

(NISA) to the effect that he was not the lessee of Verendia's house and that his signature on the contract of lease was a complete forgery.

Worse yet, by presenting a false lease contract, Verendia, reprehensibly disregarded the

principle that insurance contracts are uberrimae fidae and demand the most abundant good faith

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.

D E C I S I O N

PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner

GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner

assails the appellate court decision[1] which dismissed its two appeals and affirmed the judgment of the trial court.

For review are the warring interpretations of petitioner and respondent on the scope of the insurance

companys liability for earthquake damage to petitioners properties. Petitioner avers that, pursuant to its

earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the properties

within its resort caused by earthquake. Respondent contends that the rider limits its liability for loss to the two swimming pools of petitioner.

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

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort

insured originally with the American Home Assurance Company (AHAC-AIU). In the first four insurance

policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also

Exhs. 1, 2, 3 and 4 respectively), the risk of loss from earthquake shock was extended only to plaintiffs two

swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and two (2) swimming

pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies referred to the two (2) swimming pools only

(Exhs. 1-B, 2-B, 3-B and F-2); that subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-

4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. G also G-1) and in said policy the

earthquake endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E and F-1 was deleted and the

entry under Endorsements/Warranties at the time of issue read that plaintiff renewed its policy with AHAC

(AIU) for the period of March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which

carried the entry under Endorsement/Warranties at Time of Issue, which read Endorsement to Include

Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00 and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:

Item -P7,691,000.00 - on the Clubhouse only

@ .392%;

1,500,000.00 - on the furniture, etc.

contained in the building

above-mentioned@ .490%;

393,000.00- on the two swimming

pools, only (against the

peril of earthquake

shock only) @ 0.100%

116,600.00- other buildings include

as follows:

a) Tilter House- P19,800.00- 0.551%

b) Power House- P41,000.00- 0.551%

c) House Shed- P55,000.00 -0.540%

P100,000.00 for furniture, fixtures,

lines air-con and

operating equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 206-

4568061-9 (Exh. H) provided that the policy wording and rates in said policy be copied in the policy to be

issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of March 14,

1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the

computation of the premium, defendants Policy No. 31944 (Exh. I), whi ch is the policy in question, contained on the right-hand upper portion of page 7 thereof, the following:

Rate-Various

Premium - P37,420.60 F/L

2,061.52 Typhoon

1,030.76 EC

393.00 ES

Doc. Stamps 3,068.10

F.S.T. 776.89

Prem. Tax 409.05

TOTAL 45,159.92;

that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against

earthquake shock (ES); that in all the six insurance policies (Exhs. C, D, E, F, G and H), the premium against

the peril of earthquake shock is the same, that is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02

and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy No. 31944 issued by defendant, the shock endorsement provide(sic):

In consideration of the payment by the insured to the company of the sum included additional premium

the Company agrees, notwithstanding what is stated in the printed conditions of this policy due to the

contrary, that this insurance covers loss or damage to shock to any of the property insured by this Policy occasioned by or through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-C);

that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16, 1990 an

earthquake struck Central Luzon and Northern Luzon and plaintiffs properties covered by Policy No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were damaged. [2]

After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance

Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim,

then assigned the investigation of the cla im to an independent claims adjuster, Bayne Adjusters and

Surveyors, Inc.[3] On July 30, 1990, respondent, through its adjuster, requested petitioner to submit various

documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its

Vice-President A.R. de Leon,[4] rendered a preliminary report[5] finding extensive damage caused by the

earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated that except for the

swimming pools, all affected items have no coverage for earthquake shocks.[6] On August 11, 1990,

petitioner filed its formal demand[7] for settlement of the damage to all its properties in the Agoo Playa

Resort. On August 23, 1990, respondent denied petitioners claim on the ground that its insurance policy

only afforded earthquake shock coverage to the two swimming pools of the resort. [8] Petitioner and

respondent failed to arrive at a settlement.[9] Thus, on January 24, 1991, petitioner filed a complaint[10] with the regional trial court of Pasig praying for the payment of the following:

1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with interest thereon, as computed under par. 29 of the policy (Annex B) until fully paid;

2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on account of defendants refusal to pay the claims;

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

4.) The sum of P500,000.00 by way of attorneys fees and expenses of li tigation;

5.) Costs.[11]

Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims. [12]

On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:

The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of

earthquake shock, the same premium it paid against earthquake shock only on the two swimming pools

in all the policies issued by AHAC(AIU) (Exhibits C, D, E, F and G). From this fact the Court must consequently

agree with the position of defendant that the endorsement rider (Exhibit 7-C) means that only the two

swimming pools were insured against earthquake shock.

Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the language

used in an insurance contract or application is such as to create ambiguity the same should be resolved

against the party responsible therefor, i.e., the insurance company which prepared the contract. To the

mind of [the] Court, the language used in the policy in litigation is clear and unambiguous hence there is no need for interpretation or construction but only application of the provisions therein.

From the above observations the Court finds that only the two (2) swimming pools had earthquake shock

coverage and were heavily damaged by the earthquake which struck on July 16, 1990. Defendant having

admitted that the damage to the swimming pools was appraised by defendants adjuster at P386,000.00, defendant must, by virtue of the contract of insurance, pay plaintiff said amount.

Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is

liable only for the damage caused to the two (2) swimming pools and that defendant has made known to

plaintiff its willingness and readiness to settle said liabi lity, there is no basis for the grant of the other

damages prayed for by plaintiff. As to the counterclaims of defendant, the Court does not agree that the

action filed by plaintiff is baseless and highly speculative since such action is a lawful exercise of the

plaintiffs right to come to Court in the honest belief that their Complaint is meritorious. The prayer, therefore, of defendant for damages is likewise denied.

WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE HUNDRED

EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two (2) swimming pools, with

interest at 6% per annum from the date of the filing of the Complaint until defendants obligation to plaintiff is fully paid.

No pronouncement as to costs.[13]

Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of

Appeals based on the following assigned errors: [14]

A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY RECOVER FOR THE

DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS

PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO RECOVER UNDER

DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID

POLICY ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.

C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.

On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it attorneys fees and damages on its compulsory counterclaim.

After review, the appellate court affirmed the decision of the trial court and ruled, thus:

However, after carefully perusing the documentary evidence of both parties, We are not convinced that

the last two (2) insurance contracts (Exhs. G and H), which the plaintiff-appellant had with AHAC (AIU) and

upon which the subject insurance contract with Philippine Charter Insurance Corporation is said to have

been based and copied (Exh. I), covered an extended earthquake shock insurance on all the insured properties.

x x x

We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the

imposition of interest 24% on the insurance claim and 6% on loss of income allegedly amounting

to P4,280,000.00. Since the defendant-appellant has expressed its willingness to pay the damage caused

on the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable only, it then cannot be said that it was in default and therefore liable for interest.

Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that the award

thereof is subject to the sound discretion of the court. Thus, if such discretion is well-exercised, it will not

be disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the

award thereof an exception rather than a rule, it is necessary for the court to make findings of facts and

law that would bring the case within the exception and justify the grant of such award (Country Bankers

Insurance Corp. v. Lianga Bay and Community Multi -Purpose Coop., Inc., G.R. No. 136914, January 25,

2002). Therefore, holding that the plaintiff-appellants action is not baseless and highly speculative, We find that the Court a quo did not err in granting the same.

WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the Trial Court hereby AFFIRMED in toto. No costs.[15]

Petitioner filed the present petition raising the following issues: [16]

A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS INSURANCE POLICY

NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.

B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS FEES AND EXPENSES OF LITIGATION.

Petitioner contends:

First, that the policys earthquake shock endorsement clearly covers all of the properties insured and not

only the swimming pools. It used the words any property insured by this policy, and it should be interpreted as all inclusive.

Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the

body of the insurance policy itself, which states that it is [s]ubject to: Other Insurance Clause, Typhoon

Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On Long Term Policies. [17]

Third, that the qualification referring to the two swimming pools had already been deleted in the earthquake shock endorsement.

Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it deleted the said qualification.

Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the

insurance policy, because the rider is the more deliberate expression of the agreement of the contracting parties.

Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties enumerated at the time of issue.

Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner and against respondent. It was respondent which caused the ambiguity when it made the policy in issue.

Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be

interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming pools

from the coverage for the risk of fire. It should not be used to limit the respondents liability for earthquake shock to the two swimming pools only.

Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under the

extended coverage. The premium for the earthquake shock coverage was already included in the premium paid for the policy.

Tenth, the parties contemporaneous and subsequent acts show that they intended to extend earthquake

shock coverage to all insured properties. When it secured an insurance policy from respondent, petitioner

told respondent that it wanted an exact replica of its latest insurance policy from American Home

Assurance Company (AHAC-AIU), which covered all the resorts properties for earthquake shock damage

and respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner that it was

covered for earthquake shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc.,

likewise requested petitioner to submit the necessary documents for its building claims and other repair

costs. Thus, under the doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to petitioner covered all of the properties within the res ort.

Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the Revised

Rules of Court as its remedy, and there is no need for calibration of the evidence in order to establish the facts upon which this petition is based.

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

First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended coverage

against earthquake shock to petitioners insured properties other than on the two swimming pools.

Petitioner admitted that from 1984 to 1988, only the two swimming pools were insured against

earthquake shock. From 1988 until 1990, the provisions in its policy were practically identical to its earlier

policies, and there was no increase in the premium paid. AHAC-AIU, in a letter[19] by its representative

Manuel C. Quijano, categorically stated that its previous policy, from which respondents policy was copied, covered only earthquake shock for the two swimming pools.

Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy only

covered earthquake shock damage on the two swimming pools. The amount was the same amount paid

by petitioner for earthquake shock coverage on the two swimming pools from 1990-1991. No additional premium was paid to warrant coverage of the other properties in the resort.

Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the

two swimming pools in the policy schedule did not expand the earthquake shock coverage to all of

petitioners properties. As per its agreement with petitioner, respondent copied its policy from the AHAC-

AIU policy provided by petitioner. Although the first five policies contained the said qualification in their

riders title, in the last two policies, this qualification in the title was deleted. AHAC-AIU, through Mr. J.

Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did not make the policy

incomplete, nor did it broaden the scope of the endorsement whose descriptive title w as merely

enumerated. Any ambiguity in the policy can be easily resolved by looking at the other provisions, specially

the enumeration of the items insured, where only the two swimming pools were noted as covered for earthquake shock damage.

Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase Item

5 P393,000.00 on the two swimming pools only (against the peril of earthquake shock only) meant that

only the swimming pools were insured for earthquake damage. The same phrase is used in toto in the

policies from 1989 to 1990, the only difference being the designation of the two swimming pools as Item 3.

Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the

properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium for

coverage of the swimming pools against earthquake shock. No other premium was paid for earthquake

shock coverage on the other properties. In addition, the use of the qualifier ANY instead of ALL to describe

the property covered was done deliberately to enable the parties to specify the properties included for earthquake coverage.

Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included

in the earthquake shock coverage. Petitioners own evidence shows that it only required respondent to

follow the exact provisions of its previous policy from AHAC-AIU. Respondent complied with this

requirement. Respondents only deviation from the agreement was when it modified the provisions

regarding the replacement cost endorsement. With regard to the issue under litigation, the riders of the old policy and the policy in issue are identical.

Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from

maintaining that only the two swimming pools were covered for earthquake shock. The adjusters letter

notifying petitioner to present certain documents for its building claims and repair costs was given to petitioner before the adjuster knew the full coverage of its policy.

Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after the

descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy reflect the parties clear intention to limit earthquake shock coverage to the two swimming pools.

Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any deficiency nor did it institute any action to reform the policy. The policy binds the petitioner.

Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since

respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot be considered to be in default, and therefore, it is not liable for interest.

We hold that the petition is devoid of merit.

In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.

First, in the designation of location of risk, only the two swimming pools were specified as included, viz:

ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock only) [20]

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

PREMIUM RECAPITULATION

ITEM NOS. AMOUNT RATES PREMIUM

3 393,000.00 0.100%-E/S 393.00[22]

Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or indirectly of any of the following occurrences, namely:--

(a) Earthquake, volcanic eruption or other convulsion of nature. [23]

Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the Perils of Explosion, Aircraft, Vehicle and Smoke), stated, viz:

ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN EXCESS OF FIVE

MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY

HEREBY UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE

PREMIUM.

Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . .

additional premium the Company agrees, notwithstanding what is stated in the printed conditions of this

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

Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby

expressly varied) and that any reference therein to loss or damage by fire should be deemed to apply also to loss or damage occasioned by or through or in consequence of Earthquake. [24]

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

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

It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance

with each other.[25] All its parts are reflective of the true intent of the parties. The policy cannot be

construed piecemeal. Certain stipulations cannot be segregated and then made to control; neither do

particular words or phrases necessarily determine its character. Petitioner cannot focus on the earthquake

shock endorsement to the exclusion of the other provisions. All the provisions and riders, taken and

interpreted together, indubitably show the intention of the parties to extend earthquake shock coverage to the two swimming pools only.

A careful examination of the premium recapitulation will show that it is the clear intent of the parties to

extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code

defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify

another against loss, damage or liability arising from an unknown or contingent event. Thus, an insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

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

5. In consideration of the insurer's promise, the insured pays a premium.[26] (Emphasis ours)

An insurance premium is the consideration paid an insurer for undertaki ng to indemnify the insured

against a specified peril.[27] In fire, casualty, and marine insurance, the premium payable becomes a debt

as soon as the risk attaches.[28] In the subject policy, no premium payments were made with regard to

earthquake shock coverage, except on the two swimming pools. There is no ment ion of any premium

payable for the other resort properties with regard to earthquake shock. This is consistent with the history

of petitioners previous insurance policies from AHAC-AIU. As borne out by petitioners witnesses:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 12-13

Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the period

from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the two swimming pools only?

A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a provision

here that it was only for item 5.

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming pools only?

A. Yes, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 23-26

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

A. Yes, sir.

Q. Did you also do this through your insurance agency?

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

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

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

Q. And they are independent of your company insofar as operati ons are concerned?

A. Yes, sir, they are separate entity.

Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to your instruction, is that not correct?

A. Yes, sir. The final action is still with us although they can recommend what insurance to take.

Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give

written instruction to Forte Insurance Agency advising it that the earthquake shock coverage must extend

to all properties of Agoo Playa Resort in La Union?

A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect of extending the coverage on (sic) the other properties of the company.

Q. And that instruction, according to you, was very important because in April 1987 there was an earthquake tremor in La Union?

A. Yes, sir.

Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?

A. Yes, sir.

Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to your instructions that all properties must be covered again by earthquake shock endorsement?

A. Are you referring to the insurance policy issued by American Home Assurance Company marked Exhibit G?

Atty. Mejia: Yes.

Witness:

A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no more

limitation referring to the two swimming pools only, I was contented already that the previous limitation pertaining to the two swimming pools was already removed.

Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance Clause,

Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA

Warranty & Annual Payment Agreement on Long Term Policies[29] to the insurance policy as proof of the

intent of the parties to extend the coverage for earthquake shock. Howe ver, this phrase is merely an

enumeration of the descriptive titles of the riders, clauses, warranties or endorsements to which the policy is subject, as required under Section 50, paragraph 2 of the Insurance Code.

We also hold that no significance can be placed on the deletion of the qualification limiting the coverage

to the two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:

DIRECT EXAMINATION OF JUAN BARANDA III[30]

TSN, August 11, 1992

pp. 9-12

Atty. Mejia:

We respectfully manifest that the same exhibits C to H inclusive have been previously marked by counsel

for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these six (6) policies issued by your company [in favor] of Agoo Playa Resort?

WITNESS:

Yes[,] I remember having gone over these policies at one point of time, sir.

Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries an

earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated in

Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake shock as provided for in each of the six (6) policies?

x x x

WITNESS:

The extent of the coverage is only up to the two (2) swimming pools, sir.

Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?

A. Yes, sir.

ATTY. MEJIA:

What is your basis for stating that the coverage against earthquake shock as provided for in each of the six (6) policies extend to the two (2) swimming pools only?

WITNESS:

Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock Endorsement), sir.

ATTY. MEJIA:

Witness referring to Exhibit C-1, your Honor.

WITNESS:

We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools we

do cover earthquake shock. For building we covered it for full earthquake coverage which includes earthquake shock

COURT:

As far as earthquake shock endorsement you do not have a specific coverage for other things other than swimming pool? You are covering building? They are covered by a general insurance?

WITNESS:

Earthquake shock coverage could not stand alone. If we are covering building or another we can issue

earthquake shock solely but that the moment I see this, the thing that comes to my mind is either insuring a swimming pool, foundations, they are normally affected by earthquake but not by fire, sir.

DIRECT EXAMINATION OF JUAN BARANDA III

TSN, August 11, 1992

pp. 23-25

Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive

[remained] its coverage against earthquake shock to two (2) swimming pools only but that Exhibits G and

H respectively entend the coverage against earthquake shock to all the properties indicated in the respective schedules attached to said policies, what can you say about that testimony of plaintiffs witness?

WITNESS:

As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure you

that this one covers the two swimming pools with respect to earthquake shock endorsement. Based on it,

if we are going to look at the premium there has been no change with respect to the rates. Everytime (sic)

there is a renewal if the intention of the insurer was to include the earthquake shock, I think there is a

substantial increase in the premium. We are not only going to consider the two (2) swimming pools of the

other as stated in the policy. As I see, there is no increase in the amount of the premium. I must say that the coverage was not broaden (sic) to include the other items.

COURT:

They are the same, the premium rates?

WITNESS:

They are the same in the sence (sic), in the amount of the coverage. If you are going to do some computation based on the rates you will arrive at the same premiums, your Honor.

CROSS-EXAMINATION OF JUAN BARANDA III

TSN, September 7, 1992

pp. 4-6

ATTY. ANDRES:

Would you as a matter of practice [insure] swimming pools for fire insurance?

WITNESS:

No, we dont, sir.

Q. That is why the phrase earthquake shock to the two (2) swimming pools only was placed, is it not?

A. Yes, sir.

ATTY. ANDRES:

Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to during

your direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2) swimming pools was deleted from the policies issued by AIU, is it not?

ATTY. ANDRES:

As an insurance executive will you not attach any significance to the deletion of the qualifying phrase for the policies?

WITNESS:

My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company

underwriter, we do not cover. . it was inadvertent because of the previous policies that we have issued with no specific attachments, premium rates and so on. It was i nadvertent, sir.

The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts to

the issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the

earthquake shock endorsement included all its properties in the resort. Respondent only insured the properties as intended by the petitioner. Petitioners own witness testified to this agreement, viz:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992

pp. 4-5

Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty. Omlas

(sic) to copy from Exhibit H for purposes of procuring the policy from Philippine Charter Insurance Corporation?

A. I told him that the insurance that they will have to get will have the same provisions as this American Home Insurance Policy No. 206-4568061-9.

Q. You are referring to Exhibit H of course?

A. Yes, sir, to Exhibit H.

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

A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging will be limited to this one. I (sic) can even be lesser.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992

pp. 12-14

Atty. Mejia:

Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of coverage of Exhibits I and H sometime in the third week of March, 1990 or thereabout?

A. Yes, sir, about that time.

Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as scope of coverage of Exhibits I and H respectively?

A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy wordings

and rates were copied from the insurance policy I sent them but it was only when this case erupted that we discovered some discrepancies.

Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time between those indicated in Exhibit I and those indicated in Exhibit H respectively?

A. With regard to the wordings I did not notice any difference because it was exactly the same P393,000.00

on the two (2) swimming pools only against the peril of earthquake shock which I understood before that

this provision will have to be placed here because this particular provision under the peril of earthquake

shock only is requested because this is an insurance policy and therefore cannot be insured against fire, so this has to be placed.

The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved. Atty. Umlas categorically denied having given such assurances.

Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne

Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors,

Inc., respondent never meant to lead petitioner to believe that the endorsement for earthquake shock covered properties other than the two swimming pools, viz:

DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne

Adjusters and Surveyors, Inc.)

TSN, January 26, 1993

pp. 22-26

Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the policy issued by Philippine Charter Insurance Corporation?

A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance

coverage policy and it was indicated under Item 3 specifically that the coverage is only for earthquake

shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had found out in

the policy and he confirmed to me indeed only Item 3 which were the two swimming pools have coverage for earthquake shock.

Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the swimming pools all affected items have no coverage for earthquake shock?

A. I based my statement on my findings, because upon my examination of the policy I found out that under

Item 3 it was specific on the wordings that on the two swimming pools only, then enclosed in parenthesis

(against the peril[s] of earthquake shock only), and secondly, when I examined the summary of premium

payment only Item 3 which refers to the swimming pools have a computation for premium payment for earthquake shock and all the other items have no computation for payment of premiums.

In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the

general rule that insurance contracts are contracts of adhesion which should be liberally construed in favor

of the insured and strictly against the insurer company which usually prepares it.[31] A contract of adhesion

is one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other

party merely affixes his signature or his "adhesion" thereto. Through the years, the courts have held that

in these type of contracts, the parties do not bargain on equal footing, the weaker party's participation

being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the

weaker party whom the courts of justice must protect. [32] Consequently, any ambiguity therein is resolved against the insurer, or construed liberally in favor of the insured. [33]

The case law will show that this Court will only rule out blind adherence to terms where facts and

circumstances will show that they are basically one-sided.[34]Thus, we have called on lower courts to

remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy of the

claims of contending parties. In Development Bank of the Philippines v. National Merchandising

Corporation, et al.,[35] the parties, who were acute businessmen of experience, were presumed to have assented to the assailed documents with full knowledge.

We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it

did not know the provisions of the policy. From the inception of the policy, petitioner had required the

respondent to copy verbatim the provisions and terms of its latest insurance policy from AHAC-AIU. The

testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner, is reflective of petitioners knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]

TSN, September 23, 1991

pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo Playa?

A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance

Corporation as long as it will follow the same or exact provisions of the previous insurance policy we had with American Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American

Home Insurance policy are to be incorporated in the PCIC policy?

A. Yes, sir.

Q. What steps did you take?

A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him that the policy and wordings shall be copied from the AIU Policy No. 206 -4568061-9.

Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206 -4568061-9

in drafting its Insurance Policy No. 31944. It is true that there was variance in some terms, specifically in

the replacement cost endorsement, but the principal provisions of the policy remained essentially similar

to AHAC-AIUs policy. Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this

case as the parties intent to limit the coverage of the policy to the two swimming pools only is not ambiguous.[37]

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is dismissed. No costs.

SO ORDERED.

GULF RESORTS VS PCIC CASE DIGEST

Facts: Gulf Resorts is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in

said resort insured originally with the American Home Assurance Company (AHAC). In the first 4 policies

issued, the risks of loss from earthquake shock was extended only to petitioner’s two swimming pools.

Gulf Resorts agreed to insure with Phil Charter the properties covered by the AHAC policy provided that

the policy wording and rates in said policy be copied in the policy to be issued by Phil Charter. Phil Charter

issued Policy No. 31944 to Gulf Resorts covering the period of Ma rch 14, 1990 to March 14, 1991 for

P10,700,600.00 for a total premium of P45,159.92. the break-down of premiums shows that Gulf Resorts

paid only P393.00 as premium against earthquake shock (ES). In Policy No. 31944 issued by defendant, the

shock endorsement provided that “In consideration of the payment by the insured to the company of the

sum included additional premium the Company agrees, notwithstanding what is stated in the printed

conditions of this policy due to the contrary, that this insurance covers loss or damage to shock to any of

the property insured by this Policy occasioned by or through or in consequence of earthquake (Exhs. "1-

D", "2-D", "3-A", "4-B", "5-A", "6-D" and "7-C"). In Exhibit "7-C" the word "included" above the underlined

portion was deleted. On July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and

plaintiff’s properties covered by Policy No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were damaged.

Petitioner advised respondent that it would be making a claim under its Insurance Policy 31944 for

damages on its properties. Respondent denied petitioner’s claim on the ground that its insurance policy

only afforded earthquake shock coverage to the two swimming pools of the resort. The trial court ruled in

favor of respondent. In its ruling, the schedule clearly shows that petitioner paid only a premium of

P393.00 against the peril of earthquake shock, the same premium it had paid against earthquake shock only on the two swimming pools in all the policies issued by AHAC.

Issue: Whether or not the policy covers only the two swimming pools owned by Gulf Resorts and does not extend to all propertiesdamaged therein

Held: YES. All the provisions and riders taken and interpreted together, indubitably show the intention of

the parties to extend earthquake shock coverage to the two swimming pools only. An insurance premium

is the consideration paid an insurer for undertaking to indemnify the insured against a specified peril. In

fire, casualty and marine insurance, the premium becomes a debt as soon as the risk attaches. In the

subject policy, no premium payments were made with regard to earthquake shock coverage except on the

two swimming pools. There is no mention of any premium paya ble for the other resort properties with regard to earthquake shock. This is consistent with the history of petitioner’s insurance policies with AHAC.

G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

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.

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 P224,702,641.18. 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

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 P22,054,831.75 inclusive of 25% surcharge

plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT defici ency and P31,094,163.87

inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT

deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996

and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.

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 P55,746,352.19 and P68,450,258.73 as deficiency

Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20%

interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We held

that petitioner’s health care agreement during the pertinent period was in the nature of non-life insurance

which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares3 and Philamcare Health

Systems, Inc. v. CA.4We also ruled that petitioner’s contention that it is a health maintenance organization

(HMO) and not an insurance company is irrelevant because contracts between companies like petitioner

and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on

the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration, asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company

engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CA’s disposition that health care services are not in the nature of an insurance business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health insurance is not covered by Section 185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005 and all prior years. Therefore, the questioned assessments on the DST are now rendered moot and academic. 6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under

RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of P5,127,149.08 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 engage d by the

enrolled member, i.e., preventive, diagnostic and curative medical services. Except for the curative aspect

of the medical service offered, the enrolled member may actually make use of the health care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer

because its agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility used in the transaction of the business. 15

Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in,

that is, to determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of whether or not it is liable for DST on its health care agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of insurance or

bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any

person, association or company or corporation transacting the business of accident, fidelity, employer’s

liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance

(except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances,

conditioned for the performance of the duties of any office or position, for the doing or not doing of

anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other

obligations issued by any province, city, municipality, or other public body or organization, and on all

obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be

made or renewed by any such person, company or corporation, there shall be collected a documentary

stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute

shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a

construction which renders every word operative is preferred over that which makes some words idle and

nugatory.17 This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its every word.18

From the language of Section 185, it is evident that two requisites must concur before the DST can apply,

namely: (1) the document must be a policy of insurance or an obligation in the nature of

indemnity and (2)the maker should be transacting the business of accident, fidelity, employer’s liability,

plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO

is "an entity that provides, offers or arranges for coverage of designated health services needed by plan

members for a fixed prepaid premium."19 The payments do not vary with the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an insurance business" or "transacting an insurance business:"

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

b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the making of

insurance contracts, agreements or transactions or that no separate or direct consideration is received

therefore, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions,21 have

determined that HMOs are not in the insurance business. One test that they have applied is whether the

assumption of risk and indemnification of loss (which are elements of an insurance business) are the

principal object and purpose of the organization or whether they a re merely incidental to its business. If

these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance.

Applying the "principal object and purpose test,"22 there is significant American case law supporting the

argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services, is not engaged in the insurance business.

The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the

District of Columbia Circuit held that Group Health Association should not be considered as engaged in

insurance activities since it was created primarily for the distribution of health care services rather than the assumption of insurance risk.

xxx Although Group Health’s activities may be considered in one aspect as creating security against loss

from illness or accident more truly they constitute the quantity purchase of well -rounded, continuous

medical service by its members. xxx The functions of such an organization are not identical with those of

insurance or indemnity companies. The latter are concerned primarily, if not exclusively, with risk and the

consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the

unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the

cooperative is concerned principally with getting service rendered to its members and doing so at lower

prices made possible by quantity purchasing and economies in operation. Its primary purpose is to

reduce the cost rather than the risk of medical care; to broaden the service to the individual in kind and

quantity; to enlarge the number receiving it; to regularize it as an everyday incident of living, like

purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss

caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is,

in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary bodily

discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the

cooperative are the rendering of service, its extension, the bringing of physician and patient together,

the preventive features, the regularization of service as well as payment, the substantial reduction in

cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally

to these features, the indemnification for cost after the services is rendered. Except the last, these are

not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial

difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be present should not outweigh all other

factors. If attention is focused only on that feature, the line between insurance or indemnity and other

types of legal arrangement and economic function becomes faint, if not extinct. This is especially true

when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose

of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view

would cause them to engulf practically all contracts, particularly conditional sales and contingent service

agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or

their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether

that or something else to which it is related in the particular plan is its principal object purpose.24 (Emphasis supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan of

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

There is another and more compelling reason for holding that the service is not engaged in the insurance

business. Absence or presence of assumption of risk or peril is not the sole test to be applied in

determining its status. The question, more broadly, is whether, looking at the plan of operation as a

whole, ‘service’ rather than ‘indemnity’ is its principal object and purpose. Certainly the objects and

purposes of the corporation organized and maintained by the California physicians have a wide scope in

the field of social service. Probably there is no more impelling need than that of adequate medical care

on a voluntary, low-cost basis for persons of small income. The medical profession unitedly is

endeavoring to meet that need. Unquestionably this is ‘service’ of a high order and not ‘indemnity.’26 (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an insurance company

is that HMOs undertake to provide or arrange for the provision of medical services through participating

physicians while insurance companies simply undertake to indemnify the insured for medical expenses

incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident insurers is

that the former undertake to provide prepaid medical services through participating physicians, thus

relieving subscribers of any further financial burden, while the latter onl y undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the policy.

The primary purpose of a medical service corporation, however, is an undertaking to provide physicians

who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating

in the medical service corporation’s plan, not only will the subscribers be deprived of the protection

which they might reasonably have expected would be provided, but the corporation will, in effect, be

doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws….

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

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

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the

business to provide medical services as needed, with payment made directly to the provider of these

services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if

significantly more than what the member has prepaid, it nevertheless cannot be considered as being engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of

emergency by non-participating health providers would still be incidental to petitioner’s purpose of

providing and arranging for health care services and does not transform it into an insurer. To fulfill its

obligations to its members under the agreements, petitioner is required to set up a system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object.

In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical services

intended to keep members from developing medical conditions or diseases.30 As an HMO, it is its obligation

to maintain the good health of its members. Accordingly, its health care programs are designed to

prevent or to minimize the possibility of any assumption of risk on its part. Thus, its undertaking under

its agreements is not to indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to

its curative medical services), but these are incidental to the principal activity of providing them medical

care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its noninsurance

activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S.

cases, we are not saying that petitioner’s operations are identical in every respect to those of the HMOs

or health providers which were parties to those cases. What we are stating is that, for the purpose of

determining what "doing an insurance business" means, we have to scrutinize the operations of the

business as a whole and not its mere components. This is of course only prudent and appropriate, taking

into account the burdensome and strict laws, rules and regulations applicable to insurers and other 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 i n 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,35the 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 dra fters of the law they interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of

indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that petitioner’s health care agreements are contracts of indemnity and are therefore insurance contracts:

It is … incorrect to say that the health care agreement is not based on loss or damage because, under the

said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and

related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury.

Under the health care agreement, the rendition of hospital, medical and professional se rvices 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

bondsor 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.39Hence, 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 Crossand Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one

undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

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

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

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract

contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements mentioned above

would be an insurance contract. The primary purpose of the parties in making the contract may negate

the existence of an insurance contract. For example, a law firm which enters into contracts with clients

whereby in consideration of periodical payments, it promises to represent such clients in all suits for or

against them, is not engaged in the insurance business. Its contracts are simply for the purpose of

rendering personal services. On the other hand, a contract by which a corporation, in consideration of a

stipulated amount, agrees at its own expense to defend a physician against all suits for damages for

malpractice is one of insurance, and the corporation will be deemed as engaged in the business of

insurance. Unlike the lawyer’s retainer contract, the essential purpose of such a contract is not to render

personal services, but to indemnify against loss and damage resulting from the defense of actions for malpractice.42 (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioner’s agreements.

To begin with, there is no loss, damage or liability on the part of the member that should be indemnified

by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined

consideration in exchange for the hospital, medical and professional services rendered by the petitioner’s

physician or affiliated physician to him. In case of availment by a member of the benefits under the

agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third

party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the

part of the member to any third party-provider of medical services which might in turn necessitate

indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or claim

has already been incurred. There is no indemnity precisely because the member me rely avails of medical services to be paid or already paid in advance at a pre -agreed price under the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits

anytime, e.g.laboratory services, x-ray, routine annual physical examination and consultations, vaccine

administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a

non-participating physician or hospital. However, this is only a very minor part of the list of services

available. The assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health care

contracts called for the defendant to partially reimburse a subscriber for treatment received from a non-

designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined that "the

primary activity of the defendant (was) the provision of podiatric services to subscribers in consideration

of prepayment for such services."44 Since indemnity of the insured was not the focal point of the

agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone

is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain

degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the

risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar

only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of

insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured.45

However, assuming that petitioner’s commitment to provide medical services to its members can be

construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not

qualify as an insurance contract because petitioner’s objective is to provide medical services at reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is not an insurance contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health care

agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The text of Section

185 came into U.S. law as early as 1904 when HMOs and health care agreements were not even in

existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise known

as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and became effective on August 1, 1904.

Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures,

or certificates of stock and indebtedness, and other documents, instruments, matters, and things

mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon

which such instrument, matters, or things or any of them shall be written or printed by any person or

persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following:

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage,

or liability made or renewed by any person, association, company, or corporation transacting the

business of accident, fidelity, employer’s liability, plate glass, steam boiler, burglar, elevator, automatic

sprinkle, or other branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and

consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116, Article

XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l),

Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent

DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which

codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC

of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was

renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again renumbered and became Section 185.

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

of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997),

the subject legal provision was retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA 924348 but Section 185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom

Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated

Health Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance,

Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and having been

formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a total enrollment of more than 2 million. 49

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that

when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However,

when the various amendments to the DST law were enacted, they were already in existence in the

Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the

legislature to impose DST on health care agreements, it could have done so in clear and categorical terms.

It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision

on the DST liability of health care agreements of HMOs at a time they were already known a s such, belies

any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say

that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging

in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the

legislature which imposes the tax on the constituency who is to pay it.51 So potent indeed is the power that it was once opined that "the power to tax involves the power to destroy."52

Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its net

worth ofP259 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 paidP5,127,149.08 representing 5% of its net worth as of the year ended December 31, 2005 and

complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity

from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative

penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from

payment of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this

case as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of

petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in case

it is found to have been granted under circumstances amounting to tax fraud under Section 10 of said amnesty law.62(Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program

under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty under RA 9480.

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

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound

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

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing

the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R. No.

148680 by minute resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a health care agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of

the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being

questioned. As a result, our ruling in that case has already become final.67 When a minute resolution denies

or dismisses a petition for failure to comply with formal and substantive requirements, the challenged

decision, together with its findings of fact and legal conclusions, are deemed sustained.68 But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it

constitutes res judicata.69 However, if other parties or another subject matter (even with the same parties

and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,70 the

Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and the same issues,

was previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the

ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter

case because the two cases involved different subject matters as they were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision.

The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that

the facts and the law on which the judgment is based must be expressed clearly and distinctly applies only

to decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by authority

of the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike

decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section

4(3) of Article VIII speaks of a decision.73 Indeed, as a rule, this Court lays down doctrines or principles of

law which constitute binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for DST on

its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully

invoke the minute resolution in that case (which is not even binding precedent) in its favor. Nonetheless,

in view of the reasons already discussed, this does not detract in any way from the fact that petitioner’s health care agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within the ambit of Section 185 of the

NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services at a

cost which the average wage earner can afford. HMOs arrange, organize and manage health care

treatment in the furtherance of the goal of providing a more efficient and inexpensive health care system

made possible by quantity purchasing of services and economies of scale. They offer advantages over the

pay-for-service system (wherein individuals are charged a fee each time they receive medical services),

including the ability to control costs. They protect their members from exposure to the high cost of

hospitalization and other medical expenses brought about by a fluctuating economy. Accordingly, they

play an important role in society as partners of the State in achieving its constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition will

elevate the cost of health care services. This will in turn necessitate an increase in the membership fees,

resulting in either placing health services beyond the reach of the ordinary wage earner or driving the

industry to the ground. At the end of the day, neither side wins, considering the indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of

Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST

assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax.

No costs.

SO ORDERED.

PHCHP VS CIR

FACTS:

Philippine Health Care Providers, Inc. 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.

January 27, 2000: 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

P224,702,641.18

Petitioner protested the assessment in a letter dated February 23, 2000.

CIR did not act on the protest, petitioner filed a petition for review in the Court of

Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST

assessments.

CTA: PARTIALLY GRANTED

to pay VAT

DST assessment CANCELLED AND SET ASIDE

CIR: health care agreement was a contract of insurance subject to DST under Section 185 of the

1997 Tax Code

CA: health care agreement was in the nature of a non-life insurance contract subject to DST

Court Affirmed CA

ISSUE:

1. W/N the Philippine Health Care Providers, Inc (HMO) was engaged in the business of insurance

during the pertinent taxable years - NO

2. W/N the Philippine Health Care Providers, Inc enters into an insurance contract - NO

HELD: motion for reconsideration is GRANTED

G.R. No. 76452 July 26, 1994

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES, petitioners,

vs.

HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON MONTILLA PATERNO, JR., respondents.

QUIASON, J.:

This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court, with preliminary

injunction or temporary restraining order, to annul and set aside the Order dated November 6, 1986 of the Insurance Commissioner and the entire proceedings taken in I.C. Special Case No. 1 -86.

We grant the petition.

The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr. dated April

17, 1986, to respondent Commissioner, alleging certain problems encountered by agents, supervisors,

managers and public consumers of the Philippine American Life Insurance Company (Philamlife) as a result of certain practices by said company.

In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo de los Reyes, in his capacity as Philamlife's president, to comment on respondent Paterno's letter.

In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes suggested that private

respondent "submit some sort of a 'bill of particulars' listing and citing actual cases, facts, dates, figures,

provisions of law, rules and regulations, and all other pertinent data which are necessary to enable him to

prepare an intelligent reply" (Rollo, p. 37). A copy of this letter was sent by the Insurance Commissioner to private respondent for his comments thereon.

On May 16, 1986, respondent Commissioner received a letter from private respondent maintaining that

his letter-complaint of April 17, 1986 was sufficient in form and substance, and requested that a hearing

thereon be conducted.

Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986, reiterated his claim

that private respondent's letter of May 16, 1986 did not supply the information he needed to enable him to answer the letter-complaint.

On July 14, a hearing on the letter-complaint was held by respondent Commissioner on the validity of the Contract of Agency complained of by private respondent.

In said hearing, private respondent was required by respondent Commissioner to specify the provisions of the agency contract which he claimed to be illegal.

On August 4, private respondent submitted a letter of specification to respondent Commissioner dated

July 31, 1986, reiterating his letter of April 17, 1986 and praying that the provisions on charges and fees

stated in the Contract of Agency executed between Philamlife and its agents, as well as the implementing

provisions as published in the agents' handbook, agency bulletins and circulars, be declared as null and

void. He also asked that the amounts of such charges and fees already deducted and collected by Philamlife

in connection therewith be reimbursed to the agents, with interest at the prevailing rate reckoned from the date when they were deducted.

Respondent Commissioner furnished petitioner De los Reyes with a copy of private respondent's letter of July 31, 1986, and requested his answer thereto.

Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter alia that:

(1) Private respondent's letter of August 11, 1986 does not contain any of the particular information which Philamlife was seeking from him and which he promised to submit.

(2) That since the Commission's quasi-judicial power was being invoked with regard to the complaint,

private respondent must file a verified formal complaint before any further proceedings.

In his letter dated September 9, 1986, private respondent asked for the resumption of the hearings on his complaint.

On October 1, private respondent executed an affidavit, verifying his letters of April 17, 1986, and July 31, 1986.

In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant Vice-President and

Executive Assistant to the President, asked that respondent Commission first rule on the questions of the

jurisdiction of the Insurance Commissioner over the subject matter of the letters-complaint and the legal standing of private respondent.

On October 27, respondent Commissioner notified both parties of the hearing of the case on November 5, 1986.

On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following grounds;

1. The Subpoena/Notice has no legal basis and is premature because:

(1) No complaint sufficient in form and contents has been filed;

(2) No summons has been issued nor received by the respondent De los Reyes, and hence, no jurisdiction has been acquired over his person;

(3) No answer has been filed, and hence, the hearing scheduled on November 5, 1986 in the Subpoena/Notice, and wherein the respondent is required to appear, is premature and lacks legal basis.

II. The Insurance Commission has no jurisdiction over;

(1) the subject matter or nature of the action; and

(2) over the parties involved (Rollo, p. 102).

In the Order dated November 6, 1986, respondent Commissioner denied the Motion to Quash. The dispositive portion of said Order reads:

NOW, THEREFORE, finding the position of complainant thru counsel tenable and considering the fact that

the instant case is an informal administrative litigation falling outside the operation of the aforecited

memorandum circular but cognizable by this Commission, the hearing officer, in open session ruled as it is hereby ruled to deny the Motion to Quash Subpoena/Notice for lack of merit (Rollo, p. 109).

Hence, this petition.

II

The main issue to be resolved is whether or not the resolution of the legality of the Contract of Agency falls within the jurisdiction of the Insurance Commissioner.

Private respondent contends that the Insurance Commissioner has jurisdiction to take cognizance of the

complaint in the exercise of its quasi-judicial powers. The Solicitor General, upholding the jurisdiction of

the Insurance Commissioner, claims that under Sections 414 and 415 of the Insurance Code, the Commissioner has authority to nullify the alleged illegal provisions of the Contract of Agency.

III

The general regulatory authority of the Insurance Commissioner is described in Section 414 of the Insurance Code, to wit:

The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance

companies and other insurance matters, mutual benefit associations and trusts for charitable uses are faithfully executed and to perform the duties imposed upon him by this Code, . . .

On the other hand, Section 415 provides:

In addition to the administrative sanctions provided elsewhere in this Code, the Insurance Commissioner

is hereby authorized, at his discretion, to impose upon insurance companies, their directors and/or officers

and/or agents, for any willful failure or refusal to comply with, or violation of any provision of this Code,

or any order, instruction, regulation or ruling of the Insurance Commissioner, or any commission of

irregularities, and/or conducting business in an unsafe and unsound manner as may be determined by the the Insurance Commissioner, the following:

(a) fines not in excess of five hundred pesos a day; and

(b) suspension, or after due hearing, removal of directors and/or officers and/or agents.

A plain reading of the above-quoted provisions show that the Insurance Commissioner has the authority to regulate the business of insurance, which is defined as foll ows:

(2) The term "doing an insurance business" or "transacting an insurance business," within the meaning of

this Code, shall include

(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. (Insurance Code, Sec. 2[2]; Emphasis

supplied).

Since the contract of agency entered into between Philamlife and its agents is not included within the

meaning of an insurance business, Section 2 of the Insurance Code cannot be invoked to give jurisdiction over the same to the Insurance Commissioner. Expressio unius est exclusio alterius.

With regard to private respondent's contention that the quasi -judicial power of the Insurance

Commissioner under Section 416 of the Insurance Code applies in his case, we likewise rule in the negative. Section 416 of the Code in pertinent part, provides:

The Commissioner shall have the power to adjudicate claims and complaints involving any loss, damage or

liability for which an insurer may be answerable under any kind of policy or contract of insurance, or for

which such insurer may be liable under a contract of suretyship, or for which a reinsurer may be used

under any contract or reinsurance it may have entered into, or for which a mutual benefit association may

be held liable under the membership certificates it has issued to its members, where the amount of any

such loss, damage or liability, excluding interest, costs and attorney's fees, being claimed or sued upon any

kind of insurance, bond, reinsurance contract, or membership certificate does not exceed in any single claim one hundred thousand pesos.

A reading of the said section shows that the quasi-judicial power of the Insurance Commissioner is limited

by law "to claims and complaints involving any loss, damage or liability for which an insurer may be

answerable under any kind of policy or contract of insurance, . . ." Hence, this power does not cover the

relationship affecting the insurance company and its agents but is limited to adjudicating claims and complaints filed by the insured against the insurance company.

While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the Insurance

Code, the provisions of said Chapter speak only of the licensing requirements and limitations imposed on insurance agents and brokers.

The Insurance Code does not have provisions governing the relations between insurance companies and

their agents. It follows that the Insurance Commissioner cannot, in the exercise of its quasi-judicial powers, assume jurisdiction over controversies between the insurance companies and their agents.

We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445 (1989),

andInvestment Planning Corporation of the Philippines v. Social Security Commission, 21 SCRA 904 (1962),

that an insurance company may have two classes of agents who sell its insurance policies: (1) salaried

employees who keep definite hours and work under the control and supervision of the company; and (2)

registered representatives, who work on commission basis.

Under the first category, the relationship between the insurance company and its agents is governed by

the Contract of Employment and the provisions of the Labor Code, while under the second category, the

same is governed by the Contract of Agency and the provisions of the Civil Code on the Agency. Disputes involving the latter are cognizable by the regular courts.

WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the Insurance Commission is SET ASIDE.

SO ORDERED.

PHILAM VS ANSALDO

FACTS:

Ramon M. Paterno, Jr. sent a letter dated April 17, 1986 to Insurance Commissioner alleging

certain problems encountered by agents, supervisors, managers and public consumers of the Philippine American Life Insurance Company (Philamlife)

During the hearing Ramon stated that the contract of agency is illegal

Philamlife through its president De los Reyes contended that the Insurance Commissioner as a

quasi-judicial body cannot rule on the matter

ISSUE:

1. W/N the Insurance Commissioner has the authority to regulate the business of insurance - YES

2. W/N the business of insurance covers the contract of agency - NO

HELD: petition is GRANTED

1. YES.

Insurance Code

Sec. 414

Sec. 414. The Insurance Commissioner shall have the duty to see that all laws relating to insurance,

insurance companies and other insurance matters, mutual benefit associations, and trusts for

charitable uses are faithfully executed and to perform the duties imposed upon him by this Code, and

shall, notwithstanding any existing laws to the contrary, have sole and exclusive authority to regulate

the issuance and sale of variable contracts as defined in section two hundred thirty-two and to provide

for the licensing of persons selling such contracts, and to issue such reasonable rules and regulations governing the same.

The Commissioner may issue such rulings, instructions, circulars, orders and decision as he may deem

necessary to secure the enforcement of the provisions of this Code, subject to the approval of the

Secretary of Finance. Except as otherwise specified, decisions made by the Commissioner shall be appealable to the Secretary of Finance.

Sec. 415

Sec. 415. In addition to the administrative sanctions provided elsewhere in this Code, the Insurance

Commissioner is hereby authorized, at his discretion, to impose upon the insurance companies, their

directors and/or officers and/or agents, for any willful failure or refusal to comply with, or violation of

any provision of this Code, or any order, instruction, regulation, or ruling of the Insurance

Commissioner, or any commission or irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the Insurance Commissioner, the following:

(a) fines not in excess of five hundred pesos a day; and

(b) suspension, or after due hearing, removal of directors and/or officers and/or agents.

Insurance Commissioner has the authority to regulate the business of insurance

2. NO.

power does not cover the relationship affecting the insurance company and its agents but is

limited to adjudicating claims and complaints filed by the insured against the insurance company

While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the

Insurance Code, the provisions of said Chapter speak only of the licensing requirements and limitations imposed on insurance agents and brokers.

Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445 (1989):

insurance company may have two classes of agents who sell its insurance policies:

(1) salaried employees who keep definite hours and work under the

control and supervision of the company - governed by the Contract of Employment and the provisions of the Labor Code

(2) registered representatives, who work on commission basis.

- governed by the Contract of Agency and the provisions of the Civil Code on the Agency

[G.R. No. 125678. March 18, 2002]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with

petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:

Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details). [1]

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly,

he was issued Health Care Agreement No. P010194. Under the agreement, respondents 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

Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis 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 attorneys fees. After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the pl aintiff 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 attorneys 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] Petitioners 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 Code[6] does not apply.

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 insurers 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 respondents 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 respondents husband concealed a material fact in his application. It appears that in

the application for health coverage, petitioners required respondents 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 respondents husband states:

We hereby declare and agree that all statement and answers containe d herein and in any addendum

annexed to this application are full, complete and true and bind all parties in interest under the Agreement

herein applied for, that there shall be no contract of health care coverage unless and until an Agreement

is issued on this application and the full Membership Fee according to the mode of payment applied for is

actually paid during the lifetime and good health of proposed Members; that no information acquired by

any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the

application; that any physician is, by these presents, expressly authorized to disclose or give testimony at

anytime relative to any information acquired by him in his professional capacity upon any question

affecting the eligibility for health care coverage of the Proposed Members and that the acceptance of any

Agreement issued on this application shall be a ratification of any correction in or addition to this application as stated in the space for Home Office Endorsement.[11] (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicants 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 respondents husband

who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are untrue. [14] Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured

will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance

at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if

the statement is obviously of the foregoing character, since in such case the insurer is not justified in

relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between

such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of

expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is

shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud.[15] (Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance

contract.[16] Concealment as a defense for the health care provider or insurer to avoid liability is an

affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests

upon the provider or insurer. In any case, with or without the authority to investigate, petitioner is liable

for claims made under the contract. Having assumed a responsibility under the agreement, petitioner is

bound to answer the same to the extent agreed upon. In the end, the liability of the health care provider

attaches once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid.

Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a contract of

insurance. The right to rescind should be exercised previous to the commencement of an action on the

contract.[17] In this case, no rescission was made. Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following conditions:

1. Prior notice of cancellation to insured;

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

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

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

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain

limitations on liability, courts should construe them in such a way as to preclude the insurer from non-

compliance with his obligation.[19] Being a contract of adhesion, the terms of an insurance contract are to

be construed strictly against the party which prepared the contract the insurer.[20] By reason of the

exclusive control of the insurance company over the terms and phraseology of the insurance contract,

ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially

to avoid forfeiture.[21] This is equally applicable to Health Care Agreements. The phraseology used in

medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of the

subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring

coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider.[22]

Anent the incontestability of the membership of respondents 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 deceaseds hospitalization, medication and the professional fees of the attending physicians.[24]

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.

SO ORDERED.

PHILAMCARE VS CA

FACTS:

Ernani Trinos applied for a health care coverage with Philamcare Health Systems, Inc. To the 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?’, Ernani answered ‘No’. Under the

agreement, Ernani is entitled to avail of hospitalization benefits and out-patient benefits. The coverage

was approved for a period of one year from March 1, 1988 to March 1, 1989. The agreement was however

extended yearly until June 1, 1990 which increased the amount of coverage to a maximum sum of P75,000 per disability.

During the period of said coverage, Ernani suffered a heart attack and was confined at the Manila Medical

Center (MMC) for one month. While in the hospital, his wife Julita tried to claim the benefits under the

health care agreement. However, the Philamcare denied her claim alleging that the agreement was void

because Ernani concealed his 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, Julita paid for all the hospitalization expenses.

After Ernani 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.

Julita filed an action for damages and reimbursement of her expenses plus moral damages attorney’s fees

against Philamcare and its president, Dr. Benito Reverente. The Regional Trial court or Manila rendered

judgment in favor of Julita. On appeal, the decision of the trial court was affirmed but deleted all awards

for damages and absolved petitioner Reverente. Hence, this petition for review raising the primary

argument that a health care agreement is not an insurance contract; hence the “incontestability clause” under the Insurance Code does not apply.

ISSUES:

(1) Whether or not the health care agreement is not an insurance contract

(2) Whether or not there is concealment of material fact made by Ernani

HELD:

(1)YES. Section2 (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.

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future,

which my damnify a person having an insurable against him, may be insured against. Every person has an insurable interest in the life and health of himself.

Section 10 provides that every person has an insurable interest in the life and health (1) of himself, of his spouse and of his children.

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. 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.

(2) NO. 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 I good faith and without intent to deceive will not avoid a policy even though they are untrue.

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance

contract. Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative

defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the

provider or insurer. In any case, with or without the authority to investigate, petitioner is liable for claims

made under the contract. Having assumed a responsibility under the agreement, petitioner is bound to

answer to the extent agreed upon. In the end, the liabil ity of the health care provider attaches once the

member is hospitalized for the disease or injury covered by the agreement or wherever he avails of the covered benefits which he has prepaid.

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. This is equally applicable to Health Care Agreements.

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

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No.

60144, affirming the Decision[2] dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-

277. Both decisions held that there was no violation of the Insurance Code and the respondents do not need license as insurer and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels

from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through

Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of

Entry and Acceptance.[3] Pioneer also issued receipts evidencing payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual refus ed to renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the

latters unpaid balance. White Gold on the other hand, filed a complaint before the Insurance Commission

claiming that Steamship Mutual violated Sections 186[4] and 187[5] of the Insurance Code, while Pioneer violated Sections 299,[6] 300[7] and 301[8] 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--visconventional insurance. The appellate court also held that Pioneer merely acted as a collection agent of Steamship Mutual.

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

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN

THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR

BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT

REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER. [9]

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance

business in the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license

to do business in the Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications issued by the Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress

its assertion, it cites the definition of a P & I Club inHyopsung Maritime Co., Ltd. v. Court of Appeals[10] 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 Mutuals 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 99[16] of the Insurance Code enumerates the coverage of marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the

insurer and insured. In it, the members all contribute, by a system of premiums or assessments, to the

creation of a fund from which all losses and liabilities are paid, and where the profits are divided among

themselves, in proportion to their interest. [17] Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs. [18]

A P & I Club is a form of insurance against third party liability, where the third party is anyone other than

the P & I Club and the members.[19] By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the requisite

certificate of authority mandated by Section 187 [20] 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 registration [22] issued

by the Insurance Commission. It has been licensed to do or transact insurance business by virtue of the

certificate of authority[23] 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 Pioneers 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 petitioners prayer for the revocation of Pioneers Certificate of Authority and removal of its directors and officers, is DENIED. Costs against respondents.

SO ORDERED.

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

WHITEGOLD VS PIONEER

Facts: Petitioner White Gold bought a protection and indemnity coverage for its ships from Steamship

Mutual through Respondent Pioneer. Certificates and receipts thus were given. However, Petitioner failed

to fulfill its payments thus Steamship refused to renew its coverage. Steamship then filed for collection

against Petitioner for recovery of unpaid balance. Thereafter, Petitioner also filed a complaint against

Steamship and Respondent before the Insurance Commission for violations (186,187 for Steamship and

299,300,301 in relation to 302 and 303 for Respondent) of the Insurance Code-license requirements as an

Insurance company for the former and as insurance agent for the latter. Said commission dismissed the complaint which decision was affirmed by the CA.

Issue: Whether or not Steamship Mutual is a Protection and Indemnity Club engaged in the insurance business in the Philippines

Held: Steamship Mutual as a P & I Club is a mutual insurance company engaged in the marine insurance business.

An insurance contract is a contract of indemnity. This means that one party undertakes for a consideration

to indemnify another party against loss, damage, or liability arising from an unknown orcontingent event.

While to determine if a contract is an insurance contract we can look at the nature of the promise, the act

to be performed, exact nature of the agreement in view of the entire occurrence, contingency or

circumstance where the performance is mandated. The label is not controlling. While under Section 2(2)

of the Insurance Code the phrase “doing an insurance business” constitutes the following: 1) making or

proposing to make, as insurer, any insurance contract; 2) 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; 3) doing any kind of business, including a reinsurance business, specifically recognized as

constituting the doing of an insurance business withinthe meaning of this code; 4) doing or proposing to

do any business in substance to any of the foregoing in a manner designed to evade the provision of this code.

Taking all of these in to consideration, Steamship Mutual engaged in marine insurance business undertook

to indemnify Petitioner WhiteGold against marine losses as enumerated under sec. 99 of the Insurance

Code. It is immaterial whether profit is derived from making insurance contract and that no separate or direct consideration is received since these does not preclude the existence of an insurance business.

NOTES:

*Mutual Insurance company- cooperative enterprise where the members are both the insurer and insured.

*Protection and Indemnity Club- a form of insurance against third party liability where the third party is anyone other than the P & I Club and its members.

G.R. No. L-2294 May 25, 1951

FILIPINAS COMPAÑIA DE SEGUROS, petitioner,

vs. CHRISTERN, HUENEFELD and CO., INC., respondent.

Ramirez and Ortigas for petitioner. Ewald Huenefeld for respondent.

PARAS, C.J.:

On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of

corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333 in

the sum of P1000,000, covering merchandise contained in a building located at No. 711 Roman Street,

Binondo Manila. On February 27, 1942, or during the Japanese military occupation, the building and

insured merchandise were burned. In due time the respondent submitted to the petitioner its claim under

the policy. The salvage goods were sold at public auction and, after deducting their value, the total loss

suffered by the respondent was fixed at P92,650. The petitioner refused to pay the claim on the ground

that the policy in favor of the respondent had ceased to be in force on the date the United States declared

war against Germany, the respondent Corporation (though organized under and by virtue of the laws of

the Philippines) being controlled by the German subjects and the petitioner being a company under

American jurisdiction when said policy was issued on October 1, 1941. The petitioner, however, in

pursuance of the order of the Director of Bureau of Financing, Philippine Executive Commission, dated April 9, 1943, paid to the respondent the sum of P92,650 on April 19, 1943.

The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the purpose of

recovering from the respondent the sum of P92,650 above mentioned. The theory of the petitioner is that

the insured merchandise were burned up after the policy issued in 1941 in favor of the respondent

corporation has ceased to be effective because of the outbreak of the war between the United States and

Germany on December 10, 1941, and that the payment made by the petitioner to the respondent

corporation during the Japanese military occupation was under pressure. After trial, the Court of First

Instance of Manila dismissed the action without pronouncement as to costs. Upon appeal to the Court of

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

The Court of Appeals overruled the contention of the petitioner that the respondent corporation became

an enemy when the United States declared war against Germany, relying on English and American cases

which held that a corporation is a citizen of the country or state by and under the laws of which it was

created or organized. It rejected the theory that nationality of private corporation is determine by the character or citizenship of its controlling stockholders.

There is no question that majority of the stockholders of the respondent corporation were German

subjects. This being so, we have to rule that said respondent became an enemy corporation upon the

outbreak of the war between the United States and Germany. The English and American cases relied upon

by the Court of Appeals have lost their force in view of the latest decision of the Supreme Court of the

United States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed. Advance

Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In "Enemy Corporation" by

Martin Domke, a paper presented to the Second International Conference of the Legal Profession held at the Hague (Netherlands) in August. 1948 the following enlightening passages appear:

Since World War I, the determination of enemy nationality of corporations has been discussion in many

countries, belligerent and neutral. A corporation was subject to enemy legislation when it was controlled

by enemies, namely managed under the influence of individuals or corporations, themselves considered

as enemies. It was the English courts which first the Daimler case applied this new concept of "piercing the

corporate veil," which was adopted by the peace of Treaties of 1919 and the Mixed Arbitral established after the First World War.

The United States of America did not adopt the control test during the First World War. Courts refused to

recognized the concept whereby American-registered corporations could be considered as enemies and thus subject to domestic legislation and administrative measures regarding enemy property.

World War II revived the problem again. It was known that German and other enemy interests were

cloaked by domestic corporation structure. It was not only by legal ownership of shares that a material

influence could be exercised on the management of the corporation but also by long term loans and other

factual situations. For that reason, legislation on enemy property enacted in various countries during

World War II adopted by statutory provisions to the control test and determined, to various degrees, the

incidents of control. Court decisions were rendered on the basis of such newly enacted statutory provisions in determining enemy character of domestic corporation.

The United States did not, in the amendments of the Trading with the Enemy Act during the last war,

include as did other legislations the applications of the control test and again, as in World War I, courts

refused to apply this concept whereby the enemy character of an American or neutral-registered corporation is determined by the enemy nationality of the controlling stockholders.

Measures of blocking foreign funds, the so called freezing regulations, and other administrative practice

in the treatment of foreign-owned property in the United States allowed to large degree the determination

of enemy interest in domestic corporations and thus the application of the control test. Court decisions

sanctioned such administrative practice enacted under the First War Powers Act of 1941, and more

recently, on December 8, 1947, the Supreme Court of the United States definitely approved of the control

theory. In Clark vs. Uebersee Finanz Korporation, A. G., dealing with a Swiss corporation allegedly

controlled by German interest, the Court: "The property of all foreign interest was placed within the reach

of the vesting power (of the Alien Property Custodian) not to appropriate friendly or neutral assets but to

reach enemy interest which masqueraded under those innocent fronts. . . . The power of seizure and

vesting was extended to all property of any foreign country or national so that no innocent appearing device could become a Trojan horse."

It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the appealed

decision. However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz., (Supp. 9) 299,

we already held that China Banking Corporation came within the meaning of the word "enemy" as used in

the Trading with the Enemy Acts of civilized countries not only because it was incorporated under the laws of an enemy country but because it was controlled by enemies.

The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone except a

public enemy may be insured." It stands to reason that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy.

Effect of war, generally. — All intercourse between citizens of belligerent powers which is inconsistent

with a state of war is prohibited by the law of nations. Such prohibition includes all negotiations,

commerce, or trading with the enemy; all acts which will increase, or tend to increase, its income or

resources; all acts of voluntary submission to it; or receiving its protection; also all acts concerning the

transmission of money or goods; and all contracts relating thereto are thereby nullified. It further prohibits

insurance upon trade with or by the enemy, upon the life or lives of aliens engaged in service with the

enemy; this for the reason that the subjects of one country cannot be permitted to lend their assistance

to protect by insurance the commerce or property of belligerent, alien subjects, or to do anything

detrimental too their country's interest. The purpose of war is to cripple the power and exhaust the

resources of the enemy, and it is inconsistent that one country should destroy its enemy's property and

repay in insurance the value of what has been so destroyed, or that it should in such manner increase the

resources of the enemy, or render it aid, and the commencement of war determines, for like reasons, all

trading intercourse with the enemy, which prior thereto may have been lawful. All individuals therefore,

who compose the belligerent powers, exist, as to each other, in a state of utter exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)

In the case of an ordinary fire policy, which grants insurance only from year, or for some other specified

term it is plain that when the parties become alien enemies, the contractual tie is broken and the contractual rights of the parties, so far as not vested. lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)

The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued

in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be valid and

enforcible, and since the insured goods were burned after December 10, 1941, and during the war, the

respondent was not entitled to any indemnity under said policy from the petitioner. However, elementary

rules of justice (in the absence of specific provision in the Insurance Law) require that the premium paid

by the respondent for the period covered by its policy from December 11, 1941, should be returned by the petitioner.

The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether

the policy in question became null and void upon the declaration of war between the United States and

Germany on December 10, 1941, and its judgment in favor of the respondent corporation was predicated

on its conclusion that the policy did not cease to be in force. The Court of Appeals necessarily assumed

that, even if the payment by the petitioner to the respondent was involuntary, its action is not tenable in

view of the ruling on the validity of the policy. As a matter of fact, the Court of Appeals held that "any

intimidation resorted to by the appellee was not unjust but the exercise of its lawful right to claim for and

received the payment of the insurance policy," and that the ruling of the Bureau of Financing to the effect

that "the appellee was entitled to payment from the appellant was, well founded." Factually, there can be

no doubt that the Director of the Bureau of Financing, in ordering the petitioner to pay the claim of the

respondent, merely obeyed the instruction of the Japanese Military Administration, as may be seen from

the following: "In view of the findings and conclusion of this office contained in its decision on

Administrative Case dated February 9, 1943 copy of which was sent to your office and the concurrence

therein of the Financial Department of the Japanese Military Administration, and following the instruction

of said authority, you are hereby ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim, however, should be made by means of crossed check." (Emphasis supplied.)

It results that the petitioner is entitled to recover what paid to the respondent under the circumstances

on this case. However, the petitioner will be entitled to recover only the equivalent, i n actual Philippines currency of P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.

Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay to

the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in Philippine

currency, that should be returned by the petitioner for the unexpired term of the policy in question, beginning December 11, 1941. Without costs. So ordered.

Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.

FILIPINAS DE COMPANIA VS CHRISTERN & CO. CASE DIGEST

FACTS:

Christern, Huenefeld and Company, a German company, obtained a fire insurance policy from Filipinas

Compañia for the merchandise contained in a building located in Binondo, Manila in the sum of P100,000.

Filipinas Compañia is an American controlled company. The building and the insured merchandise were

burned during the Japanese occupation. Christern filed its claim amounting to P92,650.00 but Filipinas

Compañia refused to pay alleging that Christern is a corporation whose majority stockholders are Germans

and that during the Japanese occupation, America declared war against Germany hence the insurance

policy ceased to be effective because the insured has become an enemy. Filipinas Compañia was

eventually ordered to pay Christern as ordered by the Japanese government.

ISSUE:

Whether or not Christern, Huenefeld and Co is entitled to receive the proceeds from the insurance claim.

HELD:

NO. There is no question that majority of the stockholders of Christern were German subjects. This being

so, Christern became an enemy corporation upon the outbreak of the war between the United States and

Germany. The Philippine Insurance Law (Act No. 2427, as amended,) in Section 8, provides that “anyone

except a public enemy may be insured.” It stands to reason that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy.

The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued

in its favor on October 1, 1941, by the petitioner had ceased to be valid and enforceable, and since the

insured goods were burned after December 10, 1941, and during the war, the respondent was not entitled

to any indemnity under said policy from the petitioner. However, elementary rules of justice (in the

absence of specific provision in the Insurance Law) require that the premium paid by the respondent for the period covered by its policy from December 11, 1941, should be returned by the petitioner

G.R. No. L-14300 January 19, 1920

SAN MIGUEL BREWERY, ETC., plaintiff-appellee,

vs.

LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees. HENRY HARDING, defendant-appellant.

Crossfield and O'Brien for appellant Harding.

Lawrence and Ross for appellee Law Union etc. Ins. Co.

Sanz and Luzuriaga for appellee "Filipinas, Compañia de Seguros." No appearance for the other appellee.

STREET, J.:

This action was begun on October 8, 1917, in the Court of First Instance of the city of Manila by the plaintiff,

the San Miguel Brewery, for the purpose of recovering upon two policies of insurance underwritten

respectively by Law Union and Rock Insurance Company (Ltd.), and the "Filipinas" Compania de Seguros,

for the sum of P7,500 each, insuring certain property which has been destroyed by fire. The plaintiff, the

San Miguel Brewery, is named as the party assured in the two policies referred to, but it is alleged in the

complaint that said company was in reality interested in the property which was the subject of insurance

in the character of a mortgage creditor only, and that the owner of said property upon the date the policies

were issued was one D. P. Dunn who was later succeeded as owner by one Henry Harding. Accordingly said Harding was made a defendant, as a person interested in the subject of the litigation.

The prayer of the complaint is that judgment be entered in favor of the plaintiff against the two companies

named for the sum of P15,000, with interest and costs, and further that upon satisfaction of the balance

of P4,505.30 due to the plaintiff upon the mortgage debt, and upon the cancellation of the mortgage, the

plaintiff be absolved from liability to the defendants or any of them. The peculiar form of the latter part of

the prayer is evidently due to the design of the plaintiff to lay a foundation for Harding to recover the

difference between the plaintiff's credit and the amount for which the property was insured. Accordingly,

as was to be expected, Harding answered, admitting the material allegations of the complaint and claiming

for himself the right to recover the difference between the plaintiff's mortgage credit and the face value

of the policies. The two insurance companies also answered, admitting in effect their liability to the San

Miguel Brewery to the extent of its mortgage credit, but denying liability to Harding on the ground that

under the contracts of insurance the liability of the insurance companies was limited to the insurable

interest of the plaintiff therein. Soon after the action was begun the insurance companies effected a

settlement with the San Miguel Brewery by paying the full amount of the credit claimed by it, with the

result that the litigation as between the original plaintiff and the two insurance companies came to an end,

leaving the action to be prosecuted to final judgement by the defendant Harding with respect to the balance claimed to be due to him upon the policies.

Upon hearing the evidence the trial judge came to the conclusion that Harding had no right of action

whatever against the companies and absolved them from liability without special finding as to costs. From this decision the said Henry Harding has appealed.

The two insurance companies who are named as defendants do not dispute their liability to the San Miguel

Brewery, to the extent already stated, and the only question here under discussion is that of the liability

of the insurance companies to Harding. It is therefore necessary to take account of such facts only as bear upon this aspect of the case.

In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of the property to which

the insurance relates, mortgaged the same to the San Miguel Brewery to secure a debt of P10,000. In the

contract of mortgage Dunn agreed to keep the property insured at his expense to the full amount of its

value in companies to be selected by the Brewery Company and authorized the latter in case of loss to

receive the proceeds of the insurance and to retain such part as might be necessary to cover the mortgage

debt. At the same time, in order more conveniently to accomplish the end in view, Dunn authorized and

requested the Brewery Company to effect said insurance itself. Accordingly on the same date Antonio

Brias, general manager of the Brewery, made a verbal application to the Law Union and Rock Insurance

Company for insurance to the extent of P15,000 upon said property. In reply to a question of the

company's agent as to whether the Brewery was the owner of the property, he stated that the company

was interested only as a mortgagee. No information was asked as to who was the owner of the property, and no information upon this point was given.

It seems that the insurance company to whom this application was directed did not want to carry more

than one-half the risk. It therefore issued its own policy for P7,500 and procured a policy in a like amount

to be issued by the "Filipinas" Compania de Seguros. Both policies were issued in the name of the San

Miguel Brewery as the assured, and contained no reference to any other interest in the property. Both

policies contain the usual clause requiring assignments to be approved and noted on the policy. The

premiums were paid by the Brewery and charged to Dunn. A year later the policies were renewed, without

change, the renewal premiums being paid by the Brewery, supposedly for the account of the owner. In the

month of March of the year 1917 Dunn sold the insured property to the defendant Henry Harding, but not

assignment of the insurance, or of the insurance policies, was at any time made to him.

We agree with the trial court that no cause of action in Henry Harding against the insurance companies is

show. He is not a party to the contracts of insurance and ca nnot directly maintain an action thereon. (Uy

Tam and Uy Yet vs. Leonard, 30 Phil. Rep., 471.) His claim is merely of an equitable and subsidiary nature

and must be made effective, if at all, through the San Miguel Brewery in whose name the contracts are

written. Now the Brewery, as mortgagee of the insured property, undoubtedly had an insurable interest

therein; but it could not, in any event, recover upon these policies an amount in excess of its mortgage

credit. In this connection it will be remembered that Antonio Brias, upon making application for the

insurance, informed the company with which the insurance was placed that the Brewery was interested only as a mortgagee. It would, therefore, be impossible for the Brewery mortgage on the insured property.

This conclusion is not only deducible from the principles governing the operation and effect of insurance

contracts in general but the point is clearly covered by the express provisions of sections 16 and 50 of the

Insurance Act (Act No. 2427). In the first of the sections cited, it is declared that "the measure of an

insurable interest in property is the extent to which the insured might be damnified by loss or injury

thereof" (sec. 16); while in the other it is stated that "the insurance shall be applied exclusively to the proper interest of the person in whose name it is made unless otherwise specified in the policy" (sec. 50).

These provisions would have been fatal to any attempt at recovery even by D. P. Dunn, if the ownership

of the property had continued in him up to the time of the loss; and as regards Harding, an additional

insuperable obstacle is found in the fact that the ownership of the property had been charged, prior to the

loss, without any corresponding change having been effected in the policy of insurance. In section 19 of

the Insurance Act we find it stated that "a change of interest in any part of a thing insured unaccompanied

by a corresponding change of interest in the insurance, suspends the insurance to an equivalent extent,

until the interest in the thing and the interest in the insurance are vested in the same person." Again in

section 55 it is declared that "the mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured."

Undoubtedly these policies of insurance might have been so framed as to have been "payable to the Sane

Miguel Brewery, mortgagee, as its interest may appear, remainder to whomsoever, during the

continuance of the risk, may become the owner of the interest insured." (Sec 54, Act No. 2427.) Such a

clause would have proved an intention to insure the entire interest in the property, not merely the

insurable interest of the San Miguel Brewery, and would have shown exactly to whom the money, in case of loss, should be paid. But the policies are not so written.

It is easy to collect from the facts stated in the decision of the trial judge, no less than from the testimony

of Brias, the manager of the San Miguel Brewery, that, as the insurance was written up, the obligation of

the insurance companies was different from that contemplated by Dunn, at whose request the insurance

was written, and Brias. In the contract of mortgage Dunn had agreed, at his own expense, to insure the

mortgaged property for its full value and to indorse the policies in such manner as to authorize the Brewery

Company to receive the proceeds in case of loss and to retain such part thereof as might be necessary to

satisfy the remainder then due upon the mortgage debt. Instead, however, of effecting the insurance

himself Dunn authorized and requested the Brewery Company to procure insurance on the property in the

amount of P15,000 at Dunn's expense. The Brewery Company undertook to carry this mandate into effect,

and it of course became its duty to procure insurance of the character contemplated, that is, to have the

policies so written as to protect not only the insurable interest of the Brewery, but also the owner. Brias

seems to have supposed that the policies as written had this effect, but in this he was mistaken. It was

certainly a hardship on the owner to be required to pay the premiums upon P15,000 of insurance when

he was receiving no benefit whatever except in protection to the extent of his indebtedn ess to the

Brewery. The blame for the situation thus created rests, however, with the Brewery rather than with the

insurance companies, and there is nothing in the record to indicate that the insurance companies were

requested to write insurance upon the insurable interest of the owner or intended to make themselves liable to that extent.

If during the negotiations which resulted in the writing of this insurance, it had been agreed between the

contracting parties that the insurance should be so written as to protect not only the interest of the

mortgagee but also the residuary interest of the owner, and the policies had been, by inadvertence,

ignorance, or mistake written in the form in which they were issued, a court would have the power to

reform the contracts and give effect to them in the sense in which the parties intended to be bound. But

in order to justify this, it must be made clearly to appear that the minds of the contracting parties did

actually meet in agreement and that they labored under some mutual error or mistake in respect to the

expression of their purpose. Thus, in Bailey vs. American Central Insurance Co. (13 Fed., 250), it appeared

that a mortgage desiring to insure his own insurable interest only, correctly stated his interest, and asked

that the same be insured. The insurance company agreed to accept the risk, but the policy was issued in

the name of the owner, because of the mistaken belief of the company's agent that the law required it to

be so drawn. It was held that a court of equity had the power, at the suit of the mortgage, to reform the

instrument and give judgment in his favor for the loss thereunder, although it had been exactly as it was.

Said the court: "If the applicant correctly states his interest and distinctly asks for an insurance thereon,

and the agent of the insurer agrees to comply with his request, and assumes to decide upon the form of

the policy to be written for that purpose, and by mistake of law adopts the wrong form, a court of equity

will reform the instrument so as to make it insurance upon the interest named." (See also Fink vs. Queens

Insurance Co., 24 Fed., 318; Esch vs. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep., 443; Woodbury

Savings etc., Co., vs.Charter Oak Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire Insurance Co., 67 Mich., 179.)

Similarly, in cases where the mortgage is by mistake described as owner, the court may grant reformation

and permit a recovery by the mortgage in his character as such. (Dalton vs. Milwaukee etc. Insurance Co.,

126 Iowa, 377; Spare vs. Home Mutual Insurance Co., 17 Fed., 568.) In Thompson vs. Phoenix Insurance Co.

(136 U.S., 287; 34 L. 3d., 408), it appeared that one Kearney made application to an insurance company

for insurance on certain property in his hands as receiver and it was understood between him and the

company's agent that, in case of loss, the proceeds of the policy should accrue to him and his successors

as receiver and to others whom it might concern. However, the policy, as issued, was so worded as to be

payable only to him as receiver. In an action brought on the policy by a successor of Kearney, it was alleged

that the making of the contract in this form was due to inadvertence, accident, and mistake upon the part of both Kearney and the company.

Said the court:

If by inadvertence, accident, or mistake the terms of the contract were not fully set forth in the policy, the

plaintiff is entitled to have it reformed.

In another case the same court said:

We have before us a contract from which by mistake, material stipulations have been omitted, whereby

the true intent and meaning of the parties are not fully or accurately expressed. There was a definite

concluded agreement as to insurance, which, in point of time, preceded the preparation and delivery of

the policy, and this is demonstrated by legal and exact evidence, which removes all doubt as to the sense

and undertaking of the parties. In the agreement there has been a mutual mistake, caused chiefly by that

contracting party who now seeks to limit the insurance to an interest in the property less than that agreed

to be insured. The written agreement did not effect that which the parties intended. That a court of equity

can afford relief in such a case, is, we think, well settled by the authorities. (Smell vs. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.)

But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it

must clearly appear that the contract failed to express the real agreement between the parties. (Philippine

Sugar Estates Development Company vs. Government of the Philippine Islands, 62 L. ed.,

1177, reversing Government of Philippine Island vs. Philippine Sugar Estates Development Co., 30 Phil. Rep., 27.)

In the case now before us the proof is entirely insufficient to authorize the application of the doctrine state

in the foregoing cases, for it is by means clear from the testimony of Brias — and none other was offered

— that the parties intended for the policy to cover the risk of the owner in addition to that of the mortgagee. It results that the defendant Harding is not entitled to relief in any aspect of the case.

The judgment is therefore affirmed, with costs against the appellant. So ordered.

SAN MIGUEL VS LAW UNION CASE DIGEST

Lessons Applicable:

Mortgagor (Insurance)

Measure of Insurable Interest (Insurance)

Effect of Change of Interest in Thing Insured (Insurance)

Effect of transfer of thing insured (Insurance)

Laws Applicable: sec. 16,sec. 19 (now sec. 20),sec. 50,sec.55 (now sec. 58) of the Insurance Code (all old law)

FACTS:

In the contract of mortgage, the owner P.D. Dunn had agreed, at his own expense, to insure

the mortgaged property for its full value and to indorse the policies in such manner as to

authorize the Brewery Company to receive the proceeds in case of loss and to retain such part

thereof as might be necessary to satisfy the remainder then due upon the mortgage debt.

Instead, however, of effecting the insurance himself Dunn authorized and requested the

Brewery Company to procure insurance on the property in the amount of P15,000 at Dunn's expense.

San Miguel insured the property only as mortgagee.

Dunn sold the propert to Henry Harding. The insurance was not assigned by Dunn to Harding.

When it was destroyed by fire, the two companies settled with San Miguelto the extent of the

mortgage credit.

RTC: Absolved the 2 companies from the difference. Henry Harding is not entitled to the difference between the mortgage credit and the face value of the policies.

Henry Harding appealed.

ISSUE:

1. W/N San Miguel has insurable interest as mortgagor only to the extent of the mortgage credit - YES 2. W/N Harding has insurable interest as owner - NO

HELD: affirmed

section 19 of the Insurance Act:

a change of interest in any part of a thing insured unaccompanied by a

corresponding change of interest in the insurance, suspends the insurance to an

equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person

section 55:

the mere transfer of a thing insured does not transfer the policy, but suspends it

until the same person becomes the owner of both the policy and the thing insured

Undoubtedly these policies of insurance might have been so framed as to have been "payable

to the San Miguel Brewery, mortgagee, as its interest may appear, remainder to whomsoever,

during the continuance of the risk, may become the owner of the interest insured." (Sec 54, Act

No. 2427.) Such a clause would have proved an intention to insure the entire interest in the

property, not merely the insurable interest of the San Miguel Brewery, and would have shown exactly to whom the money, in case of loss, should be paid. But the policies are not so written.

The blame for the situation thus created rests, however, with the Brewery rather than with the

insurance companies, and there is nothing in the record to indicate that the insurance

companies were requested to write insurance upon the insurable interest of the owner or intended to make themselves liable to that extent

If by inadvertence, accident, or mistake the terms of the contract were not fully set forth in the

policy, the parties are entitled to have it reformed. But to justify the reformation of a contract,

the proof must be of the most satisfactory character, and it must clearly appear that the contract failed to express the real agreement between the parties

In the case now before us the proof is entirely insufficient to authorize reformation.

G.R. No. L-15184 May 31, 1963

SAURA IMPORT & EXPORT CO., INC., plaintiff-appellant,

vs. PHILIPPINE INTERNATIONAL SURETY CO., INC., and PHILIPPINE NATIONAL BANK, defendants-appellees.

Saura, Magno & Associates for plaintiff-appellant.

Tolentino, Garcia and D. R. Cruz for defendant-appellee Philippine International Surety Co., Inc. Ramon B. de los Reyes and Antonio P. Cruz for defendant-appellee Philippine National Bank.

PAREDES, J.:

Instant case was certified by the Court of Appeals to Us, it appearing that the issues involved are purely of law.

On December 26, 1952, the Saura Import & Export Co Inc., mortgaged to the Phil. National Bank, a parcel

of land covered by T.C.T. No. 40445 of the Registry of Deeds of Davao, issued in its name, to secure the

payment of promissory note of P27,000.00 (Exhs. P, B-2). On April 30, 1953, the mortgage was amended

to guarantee an increased amount, bringing the total mortgaged debt to P37,000.00 (Exhs. P-2, B-3). The provisions of the mortgaged contact, pertinent to the resolution of the present case, provide as follows —

2. . . . he shall insure the mortgaged property at all times against fire and earthquake for an amount and

with such company satisfactory to the Mortgagee, indorsing to the latter the corresponding policies; he

shall keep the mortgaged property in good condition, making repairs and protecting walls that may be necessary; . . .

x x x x x x x x x

Erected on the land mortgaged, was a building of strong materials owned by the mortgagor Saura Import

& Export Co., Inc., which had always been covered by insurance, many years prior to the mortgage

contract. Pursuant to the requirement, Saura insured the building and its contents with the Philippine

International Surety, an insurance firm acceptable to mortgagee Bank, for P29,000.00 against fire for the

period of one year from October 2, 1954. As required therefor, the insurance policy was endorsed to the mortgagee PNB, in a Memo which states —

Loss if any, payable to the Philippine National Bank as their interest may appear, subject to the terms, conditions and warranties of this policy (Exh. A).

The policy was delivered to the mortgagee Bank by Saura. On October 15, 1954, barely thirteen (13) days

after the issuance of the fire insurance policy (October 2, 1954), the insurer cancelled the same, effective

as of the date of issue (Exh. A-2). Notice of the cancellation was given to appellee bank in writing, sent by

Registered Mail and personally addressed to Fortunato Domingo, Branch Manager of the appellee Bank's

Davao Branch, and was received by the Bank on November 8, 1954. On April 6, 1955, the building and its

contents, worth P40,685.69 were burned. On April 11, 1955, Saura filed a claim with the Insurer and

mortgagee Bank. Upon the presentation of notice of loss with the PNB, Saura learned for the first time

that the policy had previously been cancelled on October 2, 1954, by the insurer, when Saura's folder in

the Bank's filed was opened and the notice of cancellation (original and duplicate) sent by the Insurer to

the Bank, was found. Upon refusal of the Insurer Philippine International Surety to pay the amount of the

insurance, Civil Case No. 26847 was filed with the Manila CFI against the Insurer, and the PNB was later

included as party defendant, after it had refused to prosecute the case jointly with Saura Import & Export Co., Inc.

At the trial, it was established that neither the Insurer nor the mortgagee Bank informed the plaintiff Saura of the cancellation of the policy. On April 30, 1957, the court a quo rendered the following judgment —

. . . IN VIEW WHEREOF, complaint dismissed; costs against the plaintiff; but as there is no proof on the counterclaim of the Philippines International Surety, the same is also dismissed.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved

by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët

A motion to reconsider the above judgment, seasonably presented on May 14, 1957, was subsequently

denied. The decision rendered and the resolution denying the motion for reconsideration constitute the

subject of the instant appeal by plaintiff Saura on the three alleged errors, which converge on the

correctness of the ruling, wholly dismissing the complaint absolving both the insurance company and the bank from liability.

In the determination of liabilities of the parties herein, let us look into the general principles of insurance,

in matters of cancellations of policy by the insurer. Fire insurance policies and other contracts of insurance

upon property, in addition to the common provision for cancellation of the policy upon request of the

insured, generally provide for cancellation by the insurer by notice to the insured for a prescribed period,

which is usually 5 days, and the return of the unearned portion of the premium paid by the insured, such

provision for cancellation upon notice being authorized by statutes in some jurisdiction, either specifically

or as a provision of an adopted standard form of policy. The purpose of provisions or stipulations for notice

to the insured, is to prevent the cancellation of the policy, without allowing the insured ample opportunity

to negotiate for other insurance in its stead. The form and sufficiency of a notice of cancellation is

determined by policy provisions. In order to form the basis for the cancellation of a policy, notice to the

insured n not be in any particular form, in the absence of a statute or policy provision prescribing such

form, and it is sufficient, so long as it positively and unequivocally indicates to the insured, that it is the

intention of the company that the policy shall cease to be binding. Where the policy contains no provisions

that a certain number of days notice shall be given, a reasonable notice and opportunity to obtain other

insurance must be given. Actual personal notice to the insured is essential to a cancellation under a

provision for cancellation by notice. The actual receipt by the insured of a notice of cancellation is

universally recognized as a condition precedent to a cancellation of the policy by the insurer, and

consequently a letter containing notice of cancellation which is mailed by the insurer but not received by the insured, is ineffective as cancellation (29 Am. Jur. pp. 732-741).

The policy in question (Exh. A), does not provide for the notice, its form or period. The Insurance Law, Act

No. 2427, does not likewise provide for such notice. This being the case, it devolves upon the Court to

apply the generally accepted principles of insurance, regarding cancellation of the insurance policy by the

insurer. From what has been heretofore stated, actual notice of cancellation in a clear and unequivocal

manner, preferably in writing, in view of the importance of an insurance contract, should be given by the

insurer to the insured, so that the latter might be given an opportunity to obtain other insurance for his

own protection. The notice should be personal to the insured and not to and/or through any unauthorized

person by the policy. In the case at bar, the defendant insurance company, must have realized the

paramount importance of sending a notice of cancellation, when it sent the notice of cancellation of the

policy to the defendant bank (as mortgagee), but not to the insured with which it (insurance company)

had direct dealing. It was the primary duty of the defendant-appellee insurance company to notify the

insured, but it did not. It should be stated that the house and its contents were burned on April 6, 1955,

at the time when the policy was enforced (October 2, 1954 to October 2, 1955); and that under the facts,

as found by the trial court, to which We are bound, it is evident that both the insurance company and the

appellee bank failed, wittingly or unwittingly, to notify the insured appellant Saura of the cancellation made.

Of course, the defendant insurance company contends that it gave notice to the defendant-appellee bank

as mortgagee of the property, and that was already a substantial compliance with its duty to notify the

insured of the cancellation of the policy. But notice to the bank, as far appellant herein is concerned, is not effective notice.

If a mortgage or lien exists against the property insured, and the policy contains a clause stating that loss,

if any, shall be payable to such mortgagee or the holder of such lien as interest may appear, notice of

cancellation to the mortgagee or lienholder alone is ineffective as a cancellation of the policy to the owner of the property. (Connecticut Ins. Co. v. Caumisar, 218 Ky. 378, 391 SW 776, cited in 29 Am. Jur. p. 743).

Upon authority of the above case, therefore, the liability of the insurance company becomes a fact.

It may be argued that in the appeal brief of appellant, no error has been assigned against the insurance

company and no prayer is found therein asking that it be made liable. It must be noted, however, that the

case was dismissed the lower court and the main object of the appeal is to secure a revers al of the said

judgment. This Court is clothed with ample authority to review matters, even if they are not assigned as

errors in the appeal, if it finds that their consideration is necessary in arriving at a just decision of the case. Thus it was held:

While an assignment of error which is required by law or rule of court has been held essential to appellate

review, only those assigned will be considered, there are a number of cases which appear to accord to the

appellate court a broad discretionary power to waive the lack of proper assignment of errors and consider

errors not assigned. And an unassigned error closely related to an error properly assigned, or upon which

the determination of the question raised by the error properly assigned is dependent, wi ll be considered

by the appellate court notwithstanding the failure to assign it as error. (Hernandez v. Andal, 78 Phil. 198-199).

Although assigned errors apparently appear to be directed against the appellee bank alone, they in

essence, seek a reversal of the decision on dismissal, entered by the lower court, which in the main has for

its purpose the finding of liability on the policy. In the course of our examination of the records of the case,

the decision and the errors assigned, We found that liability attached principally the insurance company, for its failure to give notice of the cancellation of the policy to herein appellant itself.

Because of the conclusions reached, We find it unnecessary to discuss the errors assigned against appellee bank.

WHEREFORE, the decision appealed from is hereby reversed, and another is entered, condemning the

defendant-appellee Philippine International Surety Co., Inc., to pay Saura Import & Export Co., Inc.,

appellant herein, the sum of P29,000.00, the amount involved in Policy No. 429, subject-matter of the instant case. Without costs.

SAURA IMPORT VS PIS CASE DIGEST

FACTS:

Saura Import & Export Co Inc., mortgaged to the Phil. National Bank, a parcel of land.

The mortgage was amended to guarantee an increased amount, bringing the total mortgaged

debt to P37,000

On the land mortgage is a building owned by Saura Import & Export Co Inc. which was insured

with Philippine International Surety (Insurer) even before the mortgage contract so it was required to endorse to mortgagee PNB

October 15, 1954: Barely 13 days after the issuance of the fire insurance policy, the insurer

cancelled it. Notice of the cancellation was given to PNB (mortgagee). But Saura (insured) was not informed.

April 6, 1955: The building and all its contents worth P40,685.69 were burned so Saura filed a

claim with the Insurer and mortgagee Bank

RTC: dismissed

ISSUE: W/N Philippine International Surety should be held liable for the claim because notice to only the

mortgagee is not substantial

HELD:YES. Appealed from is hereby reversed. Philippine International Surety Co., Inc., to pay Saura Import & Export Co., Inc., P29,000

It was the primary duty of Philippine International Surety to notify the insured, but it did not

If a mortgage or lien exists against the property insured, and the policy contains a clause stating

that loss, if any, shall be payable to such mortgagee or the holder of such lien as interest may

appear, notice of cancellation to the mortgagee or lienholder alone is ineffective as a cancellation of the policy to the owner of the property.

liability attached principally the insurance company, for its failure to give notice of the

cancellation of the policy to Saura

it is unnecessary to discuss the errors assigned against appellee bank

G.R. No. L-7667 November 28, 1955

CHERIE PALILEO, plaintiff-appellee,

vs. BEATRIZ COSIO, defendant-appellant.

Claro M. Recto for appellant. Bengson, Villegas, Jr. and Villar for appellee.

BAUTISTA ANGELO, J.:

Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1) the

transaction entered into between them on December 18, 1951 be declared as one of loan, and the

document executed covering the transaction as one of equitable mortgage to secure the payment of said

loan; (2) the defendant be ordered to credit to the plaintiff with the necessary amount from the sum

received by the defendant from the Associated Insurance & Surety Co., Inc. and to apply the same to the

payment of plaintiff's obligation thus considering it as fully paid; and (3) the defendant be ordered to pay

to plaintiff the difference between the alleged indebtedness of plaintiff and the sum received by defendant

from the aforementioned insurance company, plus the sum allegedly paid to defendant as interest on the alleged indebtedness.

On December 19, 1952, defendant filed her answer setting up as special defense that the transaction

entered into between the plaintiff and defendant is one of sale with option to repurchase but that the

period for repurchase had expired without plaintiff having returned the price agreed upon as a result of

which the ownership of the property had become consolidated in the defendant. Defendant also set up certain counterclaims which involve a total amount of P4,900.

On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked by

the parties, the same has to be set anew for trial on January 12, 1954. On this date, neither the defendant

nor her counsel appeared, even if the latter had been notified of the postponement almost a month earlier,

and so the court received the evidence of the plaintiff. On January 18, 1954, the court, having in view the evidence presented, rendered judgment granting the relief prayed for in the com plaint.

On February 2, 1954, the original counsel for the defendant was substituted and the new counsel

immediately moved that the judgment be set aside on the ground that, due to mistake or excusable

negligence, defendant was unable to present her evidence and the decision was contrary to law, and this motion having been denied, defendant took the present appeal.

The important issue to be determined in this appeal is whether the lower court committed a grave abuse

of discretion in not reopening the case to give defendant an opportunity to present her evidence

considering that the failure of her original counsel to appear was due to mistake or execusable negligence which ordinary prudence could not have guarded against.

The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said counsel

showed interest in the early disposal of this case by moving the court to have it set for trial. The first date

set was April 7, 1953, but no hearing was had on that date because plaintiff had moved to postpone it. The

case was next set for hearing on April 28, 1953, but on motion again of plaintiff, the hearing was

transferred to November 6, 1953. Then, upon petition of defendant, the trial had to be moved to

December 15, 1953, and because Atty. Guerrero could not appear on said date because of a case he had in Cebu City, the hearing was postponed to January 18, 1954.

And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was

appointed Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden and

unexpected that Atty. Guerrero, after taking his oath, was unable to wind up his private cases or make any

preparation at all. It is averred that "The days that followed his appointment were very busy days for

defendant's former counsel. There was an immediate need for clearing the backlog of official business,

including the reorganization of the Department of Foreign Affairs and our Foreign Service, and more

importantly, he had to assist the Secretary of Foreign Affairs in negotiations of national importance like

the Japanese reparations, and the revision of the trade agreement with the United States, that, Atty.

Guerrero had to work as much as fourteen hours daily . . . Because of all these unavoidable confusion that

followed in the wake of Atty. Guerrero's sudden and unexpected appointment, the trial of this case

scheduled for January 18, 1954 escaped his memory, and consequently, Atty. Guerrero and the defendant

were unable to appear when the case was called for trial." These reasons, — it is intimated, — constitute

excusable negligence which ordinary prudence could not have guarded against and should have been considered by the trial court as sufficient justification to grant the petition of defendant for a rehearing.

It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of

mistake or excusable negligence is addressed to the sound discretion of the court (see Coombs vs. Santos,

24 Phil., 446; Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the exercise of such discretion is

ordinarily not to be disturbed unless it is shown that the court has gravely abused such discretion. (See

Tell vs. Tell, 48 Phil., 70; Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil., 203;

Manzanares vs. Moreta, 38 Phil., 821; Salvavs. Palacio and Leuterio, 90 Phil., 731.) In denying the motion

for reopening the trial court said: "After going over the same arguments, this Court is of the opinion, and

so holds that the decision of this Court of January 18, 1954 should not be disturbed." Considering the

stature, ability and experience of counsel Leon Ma. Guerrero, and the fact that he was given almost one

month notice before the date set for trial, we are persuaded to conclude that the trial court did not abuse its discretion in refusing to reconsider its decision.

Coming now to the merits of the case, we note that the lower court made the following findings: On

December 18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the following

conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250 a month; (b) that

defendant shall deduct from the loan certain obligations of plaintiff to third persons amounting to P4,550,

plus the sum of P250 as interest for the first month; and (c) that after making the above deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000.

Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00

corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is more

than the maximum interest authorized by law. To secure the payment of the aforesaid loan, defendant

required plaintiff to sign a document known as "Conditional Sale of Residential Building", purporting to

convey to defendant, with right to repurchase, a two-story building of strong materials belonging to

plaintiff. This document did not express the true intention of the parties which was merely to place said property as security for the payment of the loan.

After the execution of the aforesaid document, defendant insured the building against fire with the

Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued in

the name of defendant. The building was partly destroyed by fire and, after proper demand, defendant

collected from the insurance company an indemnity of P13,107.00. Plaintiff demanded from de fendant

that she be credited with the necessary amount to pay her obligation out of the insurance proceeds but

defendant refused to do so. And on the strength of these facts, the court rendered decision the dispositive part of which reads as follows:

Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant,

as shown in Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by the

defendant to plaintiff; ordering the defendant to credit the sum of P13,107 received by the defendant

from the Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in the sum of

P12,000.00 as stated in the complaint, thus considering the agreement of December 18, 1951 between

the herein plaintiff and defendant completely paid and leaving still a balance in the sum of P1,107 from

the insurance collected by defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for

nine months as interest on the sum of P12,000 loaned to plaintiff and the legal interest allowed by law in

this transaction does not exceed 12 per cent per annum, or the sum of P1,440 for one year, so the herein

plaintiff and overpaid the sum of P810 to the defendant, which this Court hereby likewise orders the said

defendant to refund to herein plaintiff, plus the balance of P1,107 representing the difference of the sum

loan of P12,000 and the collected insurance of P13,107 from the insurance company abovementioned to which the herein plaintiff is entitled to receive, and to pay the costs.

The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully

compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107

representing the difference of the loan of P12,000 and the sum of P13,107 collected by said defendant

from the insurance company notwithstanding the fact that it was not proven that the insurance was taken for the benefit of the mortgagor?

Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an

insurance taken by a mortgagee independently of the mortgagor. The rule is that "where a mortgagee,

independently of the mortgagor, insures the mortgaged property in his own name and for his own interest,

he is entitled to the insurance proceeds in case of loss, but in such case, he is not allowed to retain his claim

against the mortgagor,but is passed by subrogation to the insurer to the extent of the money paid." (Vance

on Insurance, 2d ed., p. 654)Or, stated in another way, "the mortgagee may insure his interest in the

property independently of the mortgagor. In that event, upon the destruction of the property the

insurance money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount

due under the mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his

claim against the mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance

money paid." (Vance on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by this Court in a

case that arose in this jurisdiction. In the case mentioned, an insurance contract was taken out by the

mortgagee upon his own interest, it being stipulated that the proceeds would be paid to him only and

when the case came up for decision, this Court held that the mortgagee, in case of loss, may only recover

upon the policy to the extent of his credit at the time of the loss. It was declared that the mortgaged had no right of action against the mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40 Phil., 674.)

It is true that there are authorities which hold that "If a mortgagee procures insurance on his separate

interest at his own expense and for his own benefit, without any agreement with the mortgagor with

respect thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance

proceeds applied in reduction of the mortgage debt" (19 R.C.L., p. 405), and that, further more, the

mortgagee "has still a right to recover his whole debt of the mortgagor." (King vs. State Mut. F. Ins. Co., 7

Cush. 1; Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins. Co., 6 Gray,

396; Washington Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506;

Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent the minority view

(See case note, 3 Lawyers' Report Annotated, new series, p. 79). "The general rule and the weight of

authority is, that the insurer is thereupon subrogated to the rights of the mortgagee under the mortgage.

This is put upon the analogy of the situation of the insurer to that of a surety." (Jones on Mortgages, Vol. I, pp. 671-672.)

Considering the foregoing rules, it would appear that the lower court erred in declaring that the proceeds

of the insurance taken out by the defendant on the property mortgaged inured to the benefit of the

plaintiff and in ordering said defendant to deliver to the plaintiff the difference between her indebtedness

and the amount of insurance received by the defendant, for, in the light of the majority rule we have above

enunciated, the correct solution should be that the proceeds of the insurance should be delivered to the

defendant but that her claim against the plaintiff should be considered assigned to the insurance company who is deemed subrogated to the rights of the defendant to the extent of the money paid as indemnity.

Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as

follows:(1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely an

equitable mortgage intended to secure the payment of the loan of P12,000;(2) that the proceeds of the

insurance amounting to P13,107.00 was properly collected by defendant who is not required to account

for it to the plaintiff; (3) that the collection of said insurance proceeds shall not be deemed to have

compensated the obligation of the plaintiff to the defendant, but bars the latter from claiming its payment

from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00 representing the overpayment made by plaintiff by way of interest on the loan. No pronouncement as to costs .

PALILEO VS COSIO CASE DIGEST

Lessons Applicable: Mortgagor (Insurance)

FACTS:

Cherie Palileo (debtor-mortgagor) filed a complaint against Beatriz Cosio (creditor-mortgagee)

praying that their transaction be one of a loan with an equitable mortgage to secure the

payment of the loan. The original counsel of Cosio Atty. Guerrero being appointed Undersecretary of Foreign Affairs so she forgot the date of the trial and she was substituted.

it is a loan of P12,000 secured by a "Conditional Sale of Residential Building" with right to

repurchase. After the execution of the contract, Cosio insured in her name the building with Associated Insurance & Surety Co. against fire.

The building was partly destroyed by fire so she claimed an indemnity of P13,107

Palileo demanded that the amount of insurance proceeds be credited to her loan

RTC: it is a loan with equitable mortgage so the insurance proceeds should be credited to the

loan and refund the overpayment.

ISSUE: W/N Cosio as mortgagee is entitled to the insurance proceeds for her own benefit

HELD: YES. Modify. collection of insurance proceeds shall not be deemed to have compensated the

obligation of the Palileo to Cosio, but bars the Cosio from claiming its payment from the Palileo; and Cosio shall pay to Palileo P810 representing the overpayment made by Palileo by way of interest on the loan.

When the the mortgagee may insure his interest in the property independently of the

mortgagor , upon the destruction of the property the insurance money paid to the mortgagee

will not inure to the benefit of the mortgagor, and the amount due under the mortgage debt

remains unchanged. The mortgagee, however, is not allowed to retain his claim against the

mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance money paid

It is true that there are authorities which hold that "If a mortgagee procures insurance on his

separate interest at his own expense and for his own benefit, without any agreement with the

mortgagor with respect thereto, the mortgagor has no interest in the policy, and is not entitled

to have the insurance proceeds applied in reduction of the mortgage debt" But these authorities merely represent the minority view

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

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,

vs. HONORABLE COURT OF APPEALS, respondents.

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

LAPULAPU D. MONDRAGON, petitioner,

vs. HON. COURT OF APPEALS and NGO HING, respondents.

Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo fo r petitioner Company.

Voltaire Garcia for petitioner Mondragon.

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of this Court dated April 29,

1970, (Rollo, No. L-31878, p. 58), because the petitioners in both cases seek similar relief, through these

petitions for certiorari by way of appeal, from the amended decision of respondent Court of Appeals which

affirmed in toto the decision of the Court of First Instance of Cebu, ordering "the defendants (herein

petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly and severally to pay plaintiff

(herein private respondent Ngo Hing) the amount of P50,000.00 with interest at 6% from the date of the filing of the complaint, and the sum of P1,077.75, without interest.

It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the Great Pacific

Life Assurance Company (hereinafter referred to as Pacific Life) for a twenty-year endownment policy in

the amount of P50,000.00 on the life of his one-year old daughter Helen Go. Said respondent supplied the

essential data which petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City

wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon finally type-wrote the

data on the application form which was signed by private respondent Ngo Hing. The latter paid the annual

premuim the sum of P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as

his commission for being a duly authorized agebt of Pacific Life. Upon the payment of the insurance

premuim, the binding deposit receipt (Exhibit E) was issued to private respondent Ngo Hing. Likewise,

petitioner Mondragon handwrote at the bottom of the back page of the application form his strong

recommendation for the approval of the insurance application. Then on April 30, 1957, Mondragon

received a letter from Pacific Life disapproving the insurance application (Exhibit 3 -M). The letter stated

that the said life insurance application for 20-year endowment plan is not available for minors below seven

years old, but Pacific Life can consider the same under the Juvenile Triple Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by petitioner

Mondragon to private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote back Pacific Life

again strongly recommending the approval of the 20-year endowment insurance plan to children, pointing out that since 1954 the customers, especially the Chinese, were asking for such coverage (Exhibit 4 -M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza with complication

of bronchopneumonia. Thereupon, private respondent sought the payment of the proceeds of the

insurance, but having failed in his effort, he filed the action for the recovery of the same before the Court

of First Instance of Cebu, which rendered the adverse decision as earlier refered to against both petitioners.

The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E) constituted a

temporary contract of the life insurance in question; and (2) whether private respondent Ngo Hing

concealed the state of health and physical condition of Helen Go, which rendered void the aforesaid Exhibit E.

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

A. If the Company or its agent, shan have received the premium deposit ... and the insurance application,

ON or PRIOR to the date of medical examination ... said insurance shan be in force and in effect from the

date of such medical examination, for such period as is covered by the deposit ...,PROVIDED the company

shall be satisfied that on said date the applicant was insurable on standard rates under its rule for the amount of insurance and the kind of policy requested in the application.

D. If the Company does not accept the application on standard rate for the amount of insurance and/or

the kind of policy requested in the application but issue, or offers to issue a policy for a different plan

and/or amount ..., the insurance shall not be in force and in effect until the applicant shall have accepted

the policy as issued or offered by the Company and shall have paid the full premium thereof. If the

applicant does not accept the policy, the deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above, and the Company declines to

approve the application the insurance applied for shall not have been in force at any time and the sum paid be returned to the applicant upon the surrender of this receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is intended to be

merely a provisional or temporary insurance contract and only upon compliance of the following

conditions: (1) that the company shall be satisfied that the applicant was insurable on standard rates; (2)

that if the company does not accept the application and offers to issue a policy for a different plan, the

insurance contract shall not be binding until the applicant accepts the policy offered; otherwise, the

deposit shall be reftmded; and (3) that if the applicant is not ble according to the standard rates, and the

company disapproves the application, the insurance applied for shall not be in force at any time, and the premium paid shall be returned to the applicant.

Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is merely an

acknowledgment, on behalf of the company, that the latter's branch office had received from the applicant

the insurance premium and had accepted the application subject for processing by the insurance company;

and that the latter will either approve or reject the same on the basis of whether or not the applicant is

"insurable on standard rates." Since petitioner Pacific Life disapproved the insurance application of respondent Ngo Hing, the binding deposit receipt in question had never become in force at any time.

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does not

insure outright. As held by this Court, where an agreement is made between the applicant and the agent,

no liability shall attach until the principal approves the risk and a receipt is given by the agent. The

acceptance is merely conditional and is subordinated to the act of the company in approving or rejecting

the application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-M), Pacific

Life disapproved the insurance application in question on the ground that it is not offering the twenty-year

endowment insurance policy to children less than seven years of age. What it offered instead is another

plan known as the Juvenile Triple Action, which private respondent failed to accept. In the absence of a

meeting of the minds between petitioner Pacific Life and private respondent Ngo Hing over the 20-year

endowment life insurance in the amount of P50,000.00 in favor of the latter's one-year old daughter, and

with the non-compliance of the abovequoted conditions stated in the disputed binding deposit receipt,

there could have been no insurance contract duly perfected between thenl Accordingly, the deposit paid by private respondent shall have to be refunded by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada , supra, "a contract of insurance, like other

contracts, must be assented to by both parties either in person or by their agents ... The contract, to be

binding from the date of the application, must have been a completed contract, one that leaves nothing

to be dione, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement."

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

communicate to him the rejection of the insurance application would not have any adverse effect on the

allegedly perfected temporary contract (Respondent's Brief, pp. 13-14). In this first place, there was no

contract perfected between the parties who had no meeting of their minds. Private respondet, being an

authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware that said company

does not offer the life insurance applied for. When he filed the insurance application in dispute, private

respondent was, therefore, only taking the chance that Pacific Life will approve the recommendation of

Mondragon for the acceptance and approval of the application in question along with his proposal that

the insurance company starts to offer the 20-year endowment insurance plan for children less than seven

years. Nonetheless, the record discloses that Pacific Life had rejected the proposal and recommendation.

Secondly, having an insurable interest on the life of his one -year old daughter, aside from being an

insurance agent and an offense associate of petitioner Mondragon, private respondent Ngo Hing must

have known and followed the progress on the processing of such application and could not pretend ignorance of the Company's rejection of the 20-year endowment life insurance application.

At this juncture, We find it fit to quote with approval, the very apt observation of then Appellate Associate

Justice Ruperto G. Martin who later came up to this Court, from his dissenting opinion to the amended decision of the respondent court which completely reversed the original decision, the following:

Of course, there is the insinuation that neither the memorandum of rejection (Exhibit 3 -M) nor the reply

thereto of appellant Mondragon reiterating the desire for applicant's father to have the application

considered as one for a 20-year endowment plan was ever duly communicated to Ngo; Hing, father of the

minor applicant. I am not quite conninced that this was so. Ngo Hing, as father of the applicant herself,

was precisely the "underwriter who wrote this case" (Exhibit H-1). The unchallenged statement of

appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo Hing was

"our associate" and that it was the latter who "insisted that the plan be placed on the 20-year endowment

plan." Under these circumstances, it is inconceivable that the progress in the processing of the application

was not brought home to his knowledge. He must have been duly apprised of the rejection of the

application for a 20-year endowment plan otherwise Mondragon would not have asserted that it was Ngo

Hing himself who insisted on the application as originally filed, thereby implictly declining the offer to

consider the application under the Juvenile Triple Action Plan. Besides, the associate of Mondragon that

he was, Ngo Hing should only be presumed to know what kind of policies are available in the company for

minors below 7 years old. What he and Mondragon were apparently trying to do in the premises was

merely to prod the company into going into the business of issuing endowment policies for minors just as

other insurance companies allegedly do. Until such a definite policy is however, adopted by the company,

it can hardly be said that it could have been bound at all under the binding slip for a plan of insurance that it could not have, by then issued at all. (Amended Decision, Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is of the firm belief that private

respondent had deliberately concealed the state of health and piysical condition of his daughter Helen Go.

Wher private regpondeit supplied the required essential data for the insurance application form, he was

fully aware that his one-year old daughter is typically a mongoloid child. Such a congenital physical defect

could never be ensconced nor disguished. Nonetheless, private respondent, in apparent bad faith,

withheld the fact materal to the risk to be assumed by the insurance compary. As an insurance agent of

Pacific Life, he ought to know, as he surely must have known. his duty and responsibility to such a material

fact. Had he diamond said significant fact in the insurance application fom Pacific Life would have verified the same and would have had no choice but to disapprove the application outright.

The contract of insurance is one of perfect good faith uberrima fides meaning good faith, absolute and

perfect candor or openness and honesty; the absence of any concealment or demotion, however slight

[Black's Law Dictionary, 2nd Edition], not for the alone but equally so for the insurer (Field man's Insurance

Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a partY

knows aDd Ought to communicate (Section 25, Act No. 2427). Whether intentional or unintentional the

concealment entitles the insurer to rescind the contract of insurance (Section 26, Id.: Yu Pang Cheng vs.

Court of Appeals, et al, 105 Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316). Private respondent appears guilty thereof.

We are thus constrained to hold that no insurance contract was perfected between the parties with the

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

WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby entered

absolving petitioners Lapulapu D. Mondragon and Great Pacific Life Assurance Company from their civil

liabilities as found by respondent Court and ordering the aforesaid insurance company to reimburse the amount of P1,077.75, without interest, to private respondent, Ngo Hing. Costs against private respondent.

SO ORDERED.

GREPALIFE VS CA.

FACTS: A contract of group life insurance was executed between petitioner Grepalife and DBP. Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP.

Leuterio, a physician and a housing debtor of DBP applied for membership in the group life insurance plan. In an application form,. 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.

Grepalife then issued a Certificate, as insurance coverage of Leuterio, to the extent of his DBP mortgage indebtedness amounting to P86,200.00

Later, Leuterio died due to “massive cerebral hemorrhage.” Consequently, DBP submitted a death claim

to Grepalife. Grepalife denied the claim alleging that. Leuterio was not physically healthy when he applied

for an insurance coverage. Grepalife insisted that 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.

Tthe widow of the. Leuterio, respondent Medarda, filed a complaint with the RTC, against Grepalife for

“Specific Performance with Damages.” During the trial, Dr. Mejia, who iss ued the death certificate, was

called to testify. Dr. Mejia’s findings, based partly from the information given by the respondent widow,

stated that Leuterio complained of headaches presumably due to high blood pressure. The inference was not conclusive because Leuterio was not autopsied, hence, other causes were not ruled out.

The trial court rendered a decision in favor of respondent widow and against Grepalife. The CA sustained the trial court’s decision. Hence, the present petition.

ISSUE:

1. who is the proper party to bring the suit, the widow or the mortgagee (DBP)?

2. WON there was concealment as to justify Grepalife’s non-payment of the insurance proceeds

HELD: petition denied

1. 1. WIDOW

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. 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. Consequently, where the mortgagor pays the insurance premium

under the group insurance policy, making the loss payable to the mortgagee, the insurance is on the

mortgagor’s interest, and the mortgagor continues to be a party to the contract. In this type of policy

insurance, the mortgagee is simply an appointee of the insurance fund, such loss-payable clause does not make the mortgagee a party to the contract.

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 mortgagee is simply an appointee of the insurance fund, such loss-payable clause does not make the mortgagee a party to the contract.

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.” 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.

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.

2. 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.

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

On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy

on the body of the decedent. Hence, the statement of the physician was properly considered by the trial court as hearsay.

The CA’s stand is that contrary to appellant’s allegations, there was no sufficient proof that the insured had suffered from hypertension.

Appellant insurance company had failed to establish that there was concealment made by the insured, hence, it cannot refuse payment of the claim

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the

contract. 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. 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.

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. 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. 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.”

However, we noted that the CA decision was promulgated in 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 Leuterio’s heirs represented by his widow.