[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.

Marlito I. Villanueva Law Office for petitioner. Borja Medialdea Bello Guevarra & Gerodias for respondent.
SYLLABUS 1.MERCANTILE LAW; INSURANCE; WHAT CONSTITUTES "DOING AN INSURANCE BUSINESS" OR "TRANSACTING AN 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. 2.ID.; ID.; TEST TO DETERMINE IF A CONTRACT IS AN INSURANCE CONTRACT OR NOT. 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. 3.ID.; ID.; AN INSURANCE CONTRACT; A CONTRACT OF INDEMNITY. 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. 4.ID.; ID.; MUTUAL INSURANCE COMPANY; ELUCIDATED. 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. Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs. 5.ID.; ID.; INSURANCE CONTRACT; REGULATION BY THE STATE IS NECESSARY. 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.

DECISION 1

QUISUMBING, J :
p

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. RD277. Both decisions held that there was no violation of the Insurance Code and the respondents do not need license as insurer and insurance agent/broker. The facts are undisputed. White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and Acceptance. 3 Pioneer also issued receipts evidencing payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew the coverage. Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latter's unpaid balance. White Gold on the other hand, filed a complaint before the Insurance Commission claiming that Steamship Mutual violated Sections 186 4 and 187 5 of the Insurance Code, while Pioneer violatedSections 299, 6 300 7 and 301 8 in relation to Sections 302 and 303, thereof.
STaCIA

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.
ECcTaS

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 Mutual's primary purpose is to solicit and provide protection and indemnity coverage and for this purpose, it has engaged the services of Pioneer to act as its agent. Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in the Philippines. It is merely an association of vessel owners who have come together to provide mutual protection against liabilities incidental to shipowning. 11 Respondents aver Hyopsung is inapplicable in this case because the issue in Hyopsung was the jurisdiction of the court over Hyopsung. Is Steamship Mutual engaged in the insurance business? Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or "transacting an insurance business". These are:
(a)making or proposing to make, as insurer, any insurance contract; (b)making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (c)doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; (d)doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. xxx xxx xxx

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.
HEacDA

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.
AEaSTC

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 Pioneer's certificate of authority and removal of its directors and officers. Regrettably, we are not the forum for these issues. WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety 4

Corporation are ORDERED to obtain licenses and to secure proper authorizations to do business as insurer and insurance agent, respectively. The petitioner's prayer for the revocation of Pioneer's Certificate of Authority and removal of its directors and officers, is DENIED. Costs against respondents.

SO ORDERED.

Davide, Jr., C.J., Ynares-Santiago, Carpio and Azcuna, JJ., concur.

[G.R. No. 167330. September 18, 2009.] PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

RESOLUTION

CORONA, J :
p

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.
HAEIac

ARTICLE III Social Justice and Human Rights Section 11.The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide free medical care to paupers. 1

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc. 2 We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization". Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional

technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. xxx xxx xxx On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. . . . The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner's health care agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code ... xxx xxx xxx Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments. On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read: WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency 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.
DIEAHc

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.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA's decision. We held that petitioner's health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares 3 and Philamcare Health Systems, Inc. v. CA. 4 We also ruled that petitioner's contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business. Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration, asserting the following arguments:
(a)The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance company. (b)The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CA's disposition that health care services are not in the nature of an insurance business. (c)Section 185 should be strictly construed. (d)Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the amendments made in the DST law in 2002. (e)Assuming arguendo that petitioner's agreements are contracts of indemnity, they are not those contemplated under Section 185. (f)Assuming arguendo that petitioner's agreements are akin to health insurance, health insurance is not covered by Section 185. (g)The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185. (h)The June 12, 2008 decision should only apply prospectively. (i)Petitioner availed of the tax amnesty benefits under RA 5 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 9480 7 (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: 7

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-toyear 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 it 11 or whose services are contracted by it. 12 Petitioner also provides hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray facilities and general nursing care. 13 If and when a member avails of the benefits under the agreement, petitioner pays the participating physicians and other health care providers for the services rendered, at pre-agreed rates. 14 To avail of petitioner's health care programs, the individual members are required to sign and execute a standard health care agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the various health care services that can be engaged by the enrolled member,i.e., preventive, diagnostic and curative medical services. Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health care services being offered by petitioner at any time. HEALTH MAINTENANCE ORGANIZATIONS ARE NOT ENGAGED IN THE INSURANCE BUSINESS We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility used in the transaction of the business. 15 Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of whether or not it is liable for DST on its health care agreements. 16 A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious. Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185.Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business ofaccident, 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)
ECaITc

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 PD 20 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.
IHCSTE

Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, 21 have determined that HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the 9

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 objects 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 Association 23 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.
. . . 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. . . . 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 there 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

10

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)
EcDATH

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 Jersey 27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and accident insurers is that the former undertake to provide prepaid medical services through participating physicians, thus relieving subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the policy. xxx xxx xxx The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corporation's plan, not only will the subscribers be deprived of the protection which they might reasonably have expected would be provided, but the corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws. . . . A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the health service corporation agrees to make payment directly to the participating provider. 28(Emphasis supplied)

AcSCaI

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 11

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 non-insurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business.
SAaTHc

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S. cases, we are not saying that petitioner's operations are identical in every respect to those of the HMOs or health providers which were parties to those cases. What we are stating is that, for the purpose of determining what "doing an insurance business" means, we have to scrutinize the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance business. Moreover, we are also not unmindful that there are other American authorities who have found particular HMOs to be actually engaged in insurance activities. 32 Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it is not supervised by the Insurance Commission but by the Department of Health. 33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business. This determination of the commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals: 34
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs, 35 the Court stressed that executive officials are presumed to have familiarized themselves with all the considerations pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious and competent expert opinion thereon. The courts give much weight to the government agency officials charged with the implementation of the law, their competence, expertness, experience and informed judgment, and the fact that they frequently are the drafters of the law they interpret. 36

A HEALTH CARE AGREEMENT IS NOT AN INSURANCE CONTRACT CONTEMPLATED UNDER SECTION 185 OF THE NIRC OF 1997 Section 185 states that DST is imposed on "all policies of insurance . . . or obligations of the nature of indemnity for loss, damage, or liability. . . ." In our decision dated June 12, 2008, we 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.
cSIHCA

Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on

12

the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner. Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid". Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care program. This is insurance. 37

We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185.Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employer's liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), . . . (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing authority. 38 This is because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. 39 Hence, tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided. 40 We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.
cEaSHC

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.

13

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains
all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned above would be an insurance contract. The primary purpose of the parties in making the contract may negate the existence of an insurance contract. For example, a law firm which enters into contracts with clients whereby in consideration of periodical payments, it promises to represent such clients in all suits for or against them, is not engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike the lawyer's retainer contract, the essential purpose of such a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of actions for malpractice. 42 (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioner's agreements. To

begin with, there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioner's physician or affiliated physician to him. In case of availment by a member of the benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment. In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements.
EScAHT

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 nondesignated 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. 14

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 quality as an insurance contract because petitioner's objective is to provide medical services at reduced cost, not to distribute risk like an insurer. In sum, an examination of petitioner's agreements with its members leads us to conclude that it is not an insurance contract within the context of our Insurance Code. THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE AGREEMENTS OF HMOs Furthermore, militating in convincing fashion against the imposition of DST on petitioner's health care agreements under Section 185 of the NIRC of 1997 is the provision's legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise known as the "Internal Revenue Law of 1904") 46 enacted on July 2, 1904 and became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI Stamp Taxes on Specified Objects Section 116.There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following: xxx xxx xxx Third . . . (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) . . . (Emphasis supplied)
TSacCH

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.

15

On December 31, 1916, Section 30 (1), Article III of Act No. 2339 was again reproduced as Section 1604 (1), 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. 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 EO 47 273 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 9243 48 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 bad been the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an HMO. 50 Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the provision. THE POWER TO TAX IS NOT THE POWER TO DESTROY As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the

16

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 million 53 is way beyond its net worth of P259 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 academic 60 when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 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.
acIHDA

IS THE COURT BOUND BY A MINUTE RESOLUTION IN ANOTHER CASE?

17

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the CA 64 in CIR v. Philippine National Bank 65that 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). 66Petitioner 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-Nickel 71 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.
cEATSI

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 18

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.
IESTcD

No costs. SO ORDERED.

Puno, C.J., Chico-Nazario, * Leonardo-de Castro and Bersamin, ** JJ., concur.

[G.R. No. 125678. March 18, 2002.] PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents.

Alvin B. Cunada for petitioner. Ronald O. Layawen for private respondent.

SYNOPSIS Ernani Trinos, deceased husband of respondent Julita Trinos, was issued a Health Care Agreement for a health coverage with petitioner. During the period of his coverage, he suffered a heart attack and was confined in the hospital. Respondent tried to claim the benefits under the health care agreement, but petitioner denied her claim. Thus, respondent paid the hospitalization expenses herself. Respondent then filed with the RTC an action for damages against petitioner and its president, Dr. Benito Reverente. The court ruled in favor of Julita and awarded damages. On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner Reverente. Hence, petitioner brought the instant petition for review, raising the primary argument that a health care agreement is not an insurance contract.
IAaCST

In affirming the decision of the Court of Appeals, the Supreme Court ruled that an insurance contract exists when the following elements concur: (1) the insured has an insurable interest; (2) the insured is subject to a 19

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. The health care agreement was in the nature of a non-life insurance, which is primarily a contract of indemnity. SYLLABUS 1.COMMERCIAL LAW; INSURANCE LAW; CONTRACT OF INSURANCE; DEFINED. 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. 2.ID.; ID.; ID.; ELEMENTS. 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. 3.ID.; ID.; ID.; INSURABLE INTEREST, CONSTRUED; CASE AT BAR. 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 andhealth of himself. Section 10 provides: "Every person has an insurable interest in the life and health: (1) of himself, of his spouse and of his children; (2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or illness might delay or prevent the performance; and (4) of any person upon whose life any estate or interest vested in him depends." In the case at bar, the insurable interest of respondent's husband in obtaining the health care agreement was his own health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. 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. 4.ID.; ID.; ID.; CONCEALMENT; AVOIDS A POLICY; EXCEPTION; CASE AT BAR. The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely depends on opinion rather than fact, especially coming from respondent's husband who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are untrue. 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."
CAacTH

5.ID.; ID.; ID.; ID.; MUST BE ESTABLISHED BY SATISFACTORY AND CONVINCING EVIDENCE BY INSURER. 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 20

defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. 6.ID.; ID.; ID.; HEALTH CARE AGREEMENT; HEALTH CARE PROVIDER, WHEN LIABLE; CASE AT BAR. 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. 7.ID.; ID.; ID.; RESCISSION OF; CONDITIONS; NOT FULFILLED IN CASE AT BAR. 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. 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. None of the above pre-conditions was fulfilled in this case. 8.ID.; ID.; ID.; TERMS AND PHRASEOLOGY CONTAINED THEREIN MUST BE STRICTLY INTERPRETED AGAINST THE INSURER AND LIBERALLY IN FAVOR OF THE INSURED; CASE AT BAR. When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract the insurer. By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture. 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.

DECISION

YNARES-SANTIAGO, J :
p

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details). 1

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondent's husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual physical examinations, preventive health care and other out-patient services. 21

Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability. 2 During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a concealment regarding Ernani's medical history. Doctors at the MMC allegedly discovered at the time of Ernani's confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization expenses herself, amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital where he died on the same day.
THcaDA

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. 9053795. She asked for reimbursement of her expenses plus moral damages and attorney's fees. After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the foregoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering: 1.Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same; 2.Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff; 3.Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff; 4.Defendants to pay attorney's fees of P20,000.00, plus costs of suit. SO ORDERED.
3

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner Reverente. 4 Petitioner's motion for reconsideration was denied. 5 Hence, petitioner brought the instant petition for review, raising the primary argument that a health care agreement is not an insurance contract; hence the "incontestability clause" under the Insurance 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 22

insurance company, which is governed by the Insurance Commission, but a Health Maintenance Organization under the authority of the Department of Health. Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur: 1.The insured has an insurable interest; 2.The insured is subject to a risk of loss by the happening of the designated peril; 3.The insurer assumes the risk; 4.Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk; and 5.In consideration of the insurer's promise, the insured pays a premium.
8

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest against him, may be insured against. Every person has an insurable interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health: (1)of himself, of his spouse and of his children; (2)of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (3)of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or illness might delay or prevent the performance; and (4)of any person upon whose life any estate or interest vested in him depends.

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

Petitioner argues that respondent's husband concealed a material fact in his application. It appears that in the application for health coverage, petitioners required respondent's husband to sign an express authorization for any person, organization or entity that has any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination. 10 Specifically, the Health Care Agreement signed by respondent's husband states:
We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application are full, complete and true and bind all parties-in-interest under the Agreement herein applied for, that there shall be no contract of health care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the mode of payment applied for is actually paid during the lifetime and good health of proposed Members; that no

23

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 (Emphasis ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicant's medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of ________ to give to the PhilamCare Health Systems, Inc. any and all information relative

to any hospitalization, consultation, treatment or any other medical advice or examination. This authorization is in connection with the application for health care coverage only. A photographic copy
of this authorization shall be as valid as the original.
12(Emphasis

ours)

Petitioner cannot rely on the stipulation regarding "Invalidation of Agreement" which reads:
Failure to disclose or misrepresentation of any material information by the member in the application or medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented information is deemed material if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher Membership Fee for the benefit or benefits applied for. 13

The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely depends on opinion rather than fact, especially coming from respondent's husband who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are untrue. 14 Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud. 15 (Emphasis 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 24

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 noncompliance with his obligation. 19 Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract the insurer. 20 By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture. 21 This is equally applicable to Health Care Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider. 22 Anent the incontestability of the membership of respondent's husband, we quote with approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date of issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired, the defense of concealment or misrepresentation no longer lie. 23

Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of their marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses incurred by respondent for the deceased's hospitalization, medication and the professional fees of the attending physicians. 24 WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December 14, 1995 is AFFIRMED. SO ORDERED.

Davide, Jr., C.J., Puno and Kapunan, JJ., concur.

25

[G.R. No. L-16215. June 29, 1963.] SIMEON DEL ROSARIO, plaintiff-appellee, vs. THE EQUITABLE INSURANCE AND CASUALTY CO., INC., defendant-appellant.

Vicente J. Francisco and Jose R. Francisco for plaintiff-appellee. K. V. Faylona for defendant appellant.
SYLLABUS 1.INSURANCE; INDEMNITY; AMBIGUITY IN TERMS AND CONDITIONS OF A LIFE ACCIDENT POLICY RESOLVED AGAINST INSURER. Where there is an ambiguity with respect to the terms and conditions of a policy, the same will be resolved against the one responsible thereof. Generally, the insured, 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 caused the obscurity (Art. 1377, N.C.C.) which, in the case at bar, is the insurance company.

DECISION

PAREDES, J :
p

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 hereinafterP1,000.00 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 traveling as a fare-paying passengerP1,500.00 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 fireP2,000.00 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 cycloneP3,000.00

26

xxx xxx xxx

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 traveling as a fare-paying 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 to the death by drowning, of the insured and beneficiary in the waters of Jolo. 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 1 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 our 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 InsuranceP1,000.00"

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 ofpari 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 1 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 27

the recovery of the balance of P2,000.00 more was instituted with the CFI of Rizal (Pasay City, Branch VIII), praying for a 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 as set forth in the complaint had already been released, plaintiff having received the full amount due as appearing in the 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 filed 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
"xxx xxx xxx 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: xxx xxx xxx 'Part I of the policy fixes specific amounts as indemnities in case of deaths 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 any cut, bruise or wound.' xxx xxx xxx Besides, on the face of the policy Exhibit 'A' itself, death by drowning is a ground for recovery a part 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 no 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 P1,000.00 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 a low a greater indemnity. xxx xxx xxx

28

. . . 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 a policy, the same will be resolved against the one responsible thereof. It should be recalled in this connection, that generally, the insured, 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 caused 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 vs. Court of Appeals, et al. 98 Phil., 79". ". . . 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, as 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.

Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Dizon and Regala, JJ., concur. Makalintal, J., reserves his vote.
29

[G.R. No. L-2294. May 25, 1951.] FILIPINAS COMPAIA DE SEGUROS, petitioner, vs. CHRISTERN, HUENEFELD & CO., INC., respondent.

Ramirez & Ortigas for petitioner. Ewald Huenefeld for respondent.

SYLLABUS 1.CORPORATIONS; NATIONALITY OF PRIVATE CORPORATION; CONTROL TEST. The nationality of a private corporation is determined by the character or citizenship of its controlling stockholders. 2.ID.; ID.; ID.; INTERNATIONAL LAW; EFFECT OF WAR. Where majority of the stockholders of a corporation were German subjects, the corporation became an enemy corporation upon the outbreak of the war between the United States and Germany. 3.INSURANCE; TERMINATION OF POLICY OF PUBLIC ENEMY. As the Philippine Insurance Law (Act No. 2427, as amended), in its section 8, provides that "anyone except a public enemy may be insured," an insurance policy ceases to be allowable as soon as an insured becomes a public enemy. 4.ID.; ID.; RETURN OF PREMIUMS UPON TERMINATION OF POLICY BY REASON OF WAR. Where an insurance policy ceases to be effective by reason of war, which has made the insured an enemy, the premiums paid for the period covered by the policy from the date war is declared, should be returned.

DECISION

PARAS, C. J :
p

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 P100,000, 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 salvaged 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 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 the 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 after the policy issued in 1941 in favor of the 30

respondent corporation had 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 the nationality of a private corporation is determined 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 control test has been adopted. In "Enemy Corporations" 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 discussed 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 in the Daimler case applied this new concept of "piercing the corporate veil', which was adopted by the Peace Treaties of 1919 and the Mixed Arbitral Tribunals 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 recognize 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 longterm loans and other factual situations. For that reason, legislation on enemy property enacted in various countries during World War II adopted by statutory provisions 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 application 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 neutralregistered 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 a large degree the determination of enemy interests 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 interests, the Court said: '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 interests 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.'"

31

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) 229, we already held that the 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 of 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, and 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 to 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 insurances 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. 53525353.)
"In the case of an ordinary fire policy, which grants insurance only from year to 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 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. 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 receive 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 instructions 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, andfollowing the instructions 32

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." (Italics supplied.). It results that the petitioner is entitled to recover what was paid to the respondent under the circumstances of this case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippine 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 P77,208.39, 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.

33