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COMMREV - INSURANCE

6 CASES
G.R. No. 167330

I. GENERAL CONCEPTS

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, vs.


COMMISSIONER OF INTERNAL REVENUE, Respondent.

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.

CORONA, J.:

xxx

ARTICLE II
Declaration of Principles and State Policies

On January 27, 2000, respondent Commissioner of Internal Revenue


[CIR] sent petitioner a formal demand letter and the corresponding
assessment notices demanding the payment of deficiency taxes,
including surcharges and interest, for the taxable years 1996 and
1997 in the total amount of P224,702,641.18. xxxx

Section 15. The State shall protect and promote the right to health
of the people and instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive
approach to health development which shall endeavor to make
essential goods, health and other social services available to all the
people at affordable cost. There shall be priority for the needs of
the underprivileged sick, elderly, disabled, women, and children.
The State shall endeavor to provide free medical care to paupers. 1
For resolution are a motion for reconsideration and supplemental
motion for reconsideration dated July 10, 2008 and July 14, 2008,
respectively, filed by petitioner Philippine Health Care Providers,
Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o
establish, maintain, conduct and operate a prepaid group practice
health care delivery system or a health maintenance organization
to take care of the sick and disabled persons enrolled in the health
care plan and to provide for the administrative, legal, and financial
responsibilities of the organization." Individuals enrolled in its
health care programs pay an annual membership fee and are
entitled to various preventive, diagnostic and curative medical

xxx

xxx

The deficiency [documentary stamp tax (DST)] assessment was


imposed on petitioners health care agreement with the members
of its health care program pursuant to Section 185 of the 1997 Tax
Code xxxx
xxx

xxx

xxx

Petitioner protested the assessment in a letter dated February 23,


2000. As respondent did not act on the protest, petitioner filed a
petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive
portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to
PAY the deficiency VAT amounting to 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.
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6 CASES
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals
(CA)] insofar as it cancelled the DST assessment. He claimed that
petitioners health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that
petitioners 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 CAs decision. We held that petitioners health care
agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross
Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v.
CA.4We also ruled that petitioners 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

I. GENERAL CONCEPTS
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 CAs 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 petitioners agreements are
contracts of indemnity, they are not those contemplated
under Section 185.
(f) Assuming arguendo that petitioners agreements are
akin to health insurance, health insurance is not covered
by Section 185.
(g) The agreements do not fall under the phrase "other
branch of insurance" mentioned in Section 185.
(h) The June 12, 2008 decision should only apply
prospectively.
(i) Petitioner availed of the tax amnesty benefits under
RA5 9480 for the taxable year 2005 and all prior years.
Therefore, the questioned assessments on the DST are
now rendered moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The
parties submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time
that it availed of a tax amnesty under RA 9480 7(also known as the
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6 CASES
"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 petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the
Securities and Exchange Commission on June 30, 1987. 9 It is
engaged in the dispensation of the following medical services to
individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health
problems, family planning counseling, consultation and advices on
diet, exercise and other healthy habits, and immunization;
Diagnostic medical
services
such
as
routine
physical
examinations, x-rays, urinalysis, fecalysis, complete blood count,
and the like and
Curative medical services which pertain to the performing of other
remedial and therapeutic processes in the event of an injury or
sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual
membership fee. Membership is on a year-to-year basis. The
medical services are dispensed to enrolled members in a hospital
or clinic owned, operated or accredited by petitioner, through
physicians, medical and dental practitioners under contract with it.
It negotiates with such health care practitioners regarding payment
schemes, financing and other procedures for the delivery of health
services. Except in cases of emergency, the professional services
are to be provided only by petitioner's physicians,i.e. those directly
employed by it11 or whose services are contracted by it. 12 Petitioner
also provides hospital services such as room and board
accommodation, laboratory services, operating rooms, x-ray
facilities and general nursing care.13 If and when a member avails of
the benefits under the agreement, petitioner pays the participating
physicians and other health care providers for the services
rendered, at pre-agreed rates.14

I. GENERAL CONCEPTS
To avail of petitioners health care programs, the individual
members are required to sign and execute a standard health care
agreement embodying the terms and conditions for the provision of
the health care services. The same agreement contains the various
health care services that can be engaged by the enrolled
member, i.e., preventive, diagnostic and curative medical services.
Except for the curative aspect of the medical service offered, the
enrolled member may actually make use of the health care services
being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The
Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that
petitioner is an HMO and not an insurer because its agreements are
treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used
in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to
characterize the business it is engaged in, that is, to determine
whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for
DST on its health care agreements.16
A second hard look at the relevant law and jurisprudence convinces
the Court that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of
1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance
policies. On all policies of insurance or bonds or obligations of
the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or
corporation transacting the business of accident, fidelity,
employers 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
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COMMREV - INSURANCE
6 CASES
the duties of any office or position, for the doing or not doing of
anything therein specified, and on all obligations guaranteeing the
validity or legality of any bond or other obligations issued by any
province, city, municipality, or other public body or organization,
and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or
renewed by any such person, company or corporation, there shall
be collected a documentary stamp tax of fifty centavos (P0.50) on
each four pesos (P4.00), or fractional part thereof, of the premium
charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause,
sentence, provision or part of a statute shall be considered
surplusage or superfluous, meaningless, void and insignificant. To
this end, a construction which renders every word operative is
preferred over that which makes some words idle and
nugatory.17 This principle is expressed in the maxim Ut magis valeat
quam pereat, that is, we choose the interpretation which gives
effect to the whole of the statute its every word.18
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply, namely: (1) the
document must be a policy of insurance or an obligation in
the nature of indemnity and (2) the maker should be
transacting the business of accident, fidelity, employers
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.

I. GENERAL CONCEPTS
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code)
enumerates what constitutes "doing an insurance business" or
"transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance
contract;
b) making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to
any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance
business, specifically recognized as constituting the
doing of an insurance business within the meaning of
this Code;
d) doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed
to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no
profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive
to show that the making thereof does not constitute the doing or
transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a
persuasive effect on our decisions, 21 have determined that HMOs
are not in the insurance business. One test that they have applied
is whether the assumption of risk and indemnification of loss (which
are elements of an insurance business) are the principal object and
purpose of the organization or whether they are merely incidental
to its business. If these are the principal objectives, the business is
that of insurance. But if they are merely incidental and service is
the principal purpose, then the business is not insurance.
Applying the "principal object and purpose test,"22 there is
significant American case law supporting the argument that a
corporation (such as an HMO, whether or not organized for profit),
whose main object is to provide the members of a group with
health services, is not engaged in the insurance business.

COMMREV - INSURANCE
6 CASES
The
rule
was
enunciated
in Jordan
v.
Group
Health
Association23 wherein the Court of Appeals of the District of
Columbia Circuit held that Group Health Association should not be
considered as engaged in insurance activities since it was created
primarily for the distribution of health care services rather than the
assumption of insurance risk.
xxx Although Group Healths activities may be considered in one
aspect as creating security against loss from illness or accident
more truly they constitute the quantity purchase of well-rounded,
continuous medical service by its members. xxx The functions of
such an organization are not identical with those of
insurance or indemnity companies. The latter are concerned
primarily, if not exclusively, with risk and the consequences of its
descent, not with service, or its extension in kind, quantity or
distribution; with the unusual occurrence, not the daily routine of
living. Hazard is predominant. On the other hand, the
cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made
possible by quantity purchasing and economies in
operation. Its primary purpose is to reduce the cost rather
than the risk of medical care; to broaden the service to the
individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of
living, like purchasing food and clothing or oil and gas,
rather than merely protecting against the financial loss
caused by extraordinary and unusual occurrences, such as
death, disaster at sea, fire and tornado. It is, in this instance,
to take care of colds, ordinary aches and pains, minor ills and all
the temporary bodily discomforts as well as the more serious and
unusual illness. To summarize, the distinctive features of the
cooperative are the rendering of service, its extension, the
bringing of physician and patient together, the preventive
features, the regularization of service as well as payment,
the substantial reduction in cost by quantity purchasing in
short, getting the medical job done and paid for; not,
except incidentally to these features, the indemnification
for cost after the services is rendered. Except the last,
these are not distinctive or generally characteristic of the
insurance arrangement. There is, therefore, a substantial
difference between contracting in this way for the rendering of

I. GENERAL CONCEPTS
service, even on the contingency that it be needed, and contracting
merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may
be present should not outweigh all other factors. If attention is
focused only on that feature, the line between insurance or
indemnity and other types of legal arrangement and economic
function becomes faint, if not extinct. This is especially true when
the contract is for the sale of goods or services on contingency. But
obviously it was not the purpose of the insurance statutes to
regulate all arrangements for assumption or distribution of risk.
That view would cause them to engulf practically all contracts,
particularly
conditional
sales
and
contingent
service
agreements. The fallacy is in looking only at the risk element,
to the exclusion of all others present or their subordination
to it. The question turns, not on whether risk is involved or
assumed, but on whether that or something else to which it
is related in the particular plan is its principal object
purpose.24 (Emphasis supplied)
In California Physicians Service v. Garrison,25 the California court
felt that, after scrutinizing the plan of operation as a whole of the
corporation, it was service rather than indemnity which stood as its
principal purpose.
There is another and more compelling reason for holding that the
service is not engaged in the insurance business.Absence or
presence of assumption of risk or peril is not the sole test
to be applied in determining its status. The question, more
broadly, is whether, looking at the plan of operation as a
whole, service rather than indemnity is its principal
object and purpose. Certainly the objects and purposes of the
corporation organized and maintained by the California physicians
have a wide scope in the field of social service. Probably there is
no more impelling need than that of adequate medical care
on a voluntary, low-cost basis for persons of small income.
The medical profession unitedly is endeavoring to meet that
need. Unquestionably this is service of a high order and
not indemnity.26 (Emphasis supplied)

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6 CASES
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 corporations
plan, not only will the subscribers be deprived of the
protection which they might reasonably have expected
would be provided, but the corporation will, in effect, be
doing business solely as a health and accident indemnity
insurer without having qualified as such and rendering itself
subject to the more stringent financial requirements of the General
Insurance Laws.
A participating provider of health care services is one who agrees in
writing to render health care services to or for persons covered by a
contract issued by health service corporation in return for which
the health service corporation agrees to make payment
directly to the participating provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to
override the primary purpose of the business to provide medical
services as needed, with payment made directly to the provider of

I. GENERAL CONCEPTS
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 petitioners 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 petitioners 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 thepossibility of any
assumption of risk on its part. Thus, its undertaking under its
agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to
provide the health and medical services needed to prevent such
loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its
members (with respect to its curative medical services), but these
are incidental to the principal activity of providing them medical
care. The "insurance-like" aspect of petitioners business is
miniscule compared to its noninsurance activities. Therefore, since
it substantially provides health care services rather than insurance
services, it cannot be considered as being in the insurance
business.
It is important to emphasize that, in adopting the "principal purpose
test" used in the above-quoted U.S. cases, we are not saying that
petitioners 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
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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

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

I. GENERAL CONCEPTS
5. In consideration of the insurers promise, the insured
pays a premium.41
Do the agreements between petitioner and its members possess all
these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has
pointed out that, even if a contract contains all the elements of an
insurance contract, if its primary purpose is the rendering of
service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing
all the four elements mentioned above would be an insurance
contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract.
For example, a law firm which enters into contracts with clients
whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not
engaged in the insurance business. Its contracts are simply for the
purpose of rendering personal services. On the other hand, a
contract by which a corporation, in consideration of a stipulated
amount, agrees at its own expense to defend a physician against all
suits for damages for malpractice is one of insurance, and the
corporation will be deemed as engaged in the business of
insurance. Unlike the lawyers 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 petitioners 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 petitioners 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
8

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6 CASES
care providers for the services rendered at pre-agreed rates. The
member does not make any such payment.
In other words, there is nothing in petitioner's agreements that
gives rise to a monetary liability on the part of the member to any
third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms "indemnify"
or "indemnity" presuppose that a liability or claim has already been
incurred. There is no indemnity precisely because the member
merely avails of medical services to be paid or already paid in
advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage
of the bulk of the benefits anytime, e.g. laboratory services, x-ray,
routine annual physical examination and consultations, vaccine
administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the
member who receives care from a non-participating physician or
hospital. However, this is only a very minor part of the list of
services available. The assumption of the expense by petitioner is
not confined to the happening of a contingency but includes
incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care
Program, Inc.,43 although the health care contracts called for the
defendant to partially reimburse a subscriber for treatment
received from a non-designated doctor, this did not make
defendant an insurer. Citing Jordan, the Court determined that "the
primary activity of the defendant (was) the provision of podiatric
services to subscribers in consideration of prepayment for such
services."44 Since indemnity of the insured was not the focal point
of the agreement but the extension of medical services to the
member at an affordable cost, it did not partake of the nature of a
contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it
is not necessarily true that risk alone is sufficient to establish it.
Almost anyone who undertakes a contractual obligation always

I. GENERAL CONCEPTS
bears a certain degree of financial risk. Consequently, there is a
need to distinguish prepaid service contracts (like those of
petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it
offers to provide health services: the risk that it might fail to earn a
reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as
actuarial risk, is the risk that the cost of insurance claims might be
higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the
insured.45
However, assuming that petitioners commitment to provide
medical services to its members can be construed as an
acceptance of the risk that it will shell out more than the prepaid
fees, it still will not qualify as an insurance contract because
petitioners objective is to provide medical services at reduced cost,
not to distribute risk like an insurer.
In sum, an examination of petitioners 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 petitioners health care agreements under Section 185 of
the NIRC of 1997 is the provisions 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")46enacted 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:

COMMREV - INSURANCE
6 CASES
ARTICLE
Stamp Taxes on Specified Objects

I. GENERAL CONCEPTS
XI

October 1, 1946, the DST rate was increased but the provision
remained substantially the same.

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:

Thereafter, on June 3, 1977, the same provision with the same DST
rate was reproduced in PD 1158 (NIRC of 1977) as Section 234.
Under PDs 1457 and 1959, enacted on June 11, 1978 and October
10, 1984 respectively, the DST rate was again increased.1avvphi1

xxx

On December 23, 1993, under RA 7660, Section 185 was amended


but, again, only with respect to the rate of tax.

xxx

xxx

Third xxx (c) on all policies of insurance or bond or obligation


of the nature of indemnity for loss, damage, or liability
made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity,
employers liability, plate glass, steam boiler, burglar,
elevator, automatic sprinkle, or other branch of insurance
(except
life,
marine,
inland,
and
fire
insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of
1914) was enacted revising and consolidating the laws relating to
internal revenue. The aforecited pertinent portion of Section 116,
Article XI of Act No. 1189 was completely reproduced as Section 30
(l), Article III of Act No. 2339. The very detailed and exclusive
enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339
was again reproduced as Section 1604 (l), Article IV of Act No. 2657
(Administrative Code). Upon its amendment on March 10, 1917, the
pertinent DST provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act
No. 466 (the NIRC of 1939), which codified all the internal revenue
laws of the Philippines. In an amendment introduced by RA 40 on

Effective January 1, 1986, pursuant to Section 45 of PD 1994,


Section 234 of the NIRC of 1977 was renumbered as Section 198.
And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.

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 had been
the intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical terms. It
10

COMMREV - INSURANCE
6 CASES

I. GENERAL CONCEPTS

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

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 counterproductive and ultimately subversive of the nations thrust towards
a better economy which will ultimately benefit the majority of our
people.59

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.

Petitioners Tax Liability Was


Provisions Of RA 9840

The Power To Tax Is Not The Power To Destroy


As a general rule, the power to tax is an incident of sovereignty and
is unlimited in its range, acknowledging in its very nature no limits,
so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency who is to pay it.51 So potent indeed is the power that it
was once opined that "the power to tax involves the power to
destroy."52
Petitioner claims that the assessed DST to date which amounts
to P376 million53 is way beyond its net worth ofP259
million.54 Respondent never disputed these assertions. Given the
realities on the ground, imposing the DST on petitioner would be
highly oppressive. It is not the purpose of the government to
throttle private business. On the contrary, the government ought to
encourage private enterprise.55 Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a
legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that
lays the golden egg."58

Extinguished

Under The

Petitioner asserts that, regardless of the arguments, the DST


assessment for taxable years 1996 and 1997 became moot and
academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paidP5,127,149.08 representing 5% of its
net worth as of the year ended December 31, 2005 and complied
with all requirements of the tax amnesty. Under Section 6(a) of RA
9480, it is entitled to immunity from payment of taxes as well as
additions thereto, and the appurtenant civil, criminal or
administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.61
Far from disagreeing with petitioner, respondent manifested in its
memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty
entitles a taxpayer to immunity from payment of the tax involved,
including the civil, criminal, or administrative penalties provided
under the 1997 [NIRC], for tax liabilities arising in 2005 and the
preceding years.
In view of petitioners 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)
11

COMMREV - INSURANCE
6 CASES
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 petitioners liability for DST for
the taxable years 1996 and 1997 was totally extinguished by its
availment of the tax amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for
reconsideration: whether this Court is bound by the ruling of the
CA64 in CIR v. Philippine National Bank65 that a health care
agreement of Philamcare Health Systems is not an insurance
contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001
minute resolution of this Court dismissing the appeal in Philippine
National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment
on the merits; hence, the Court should apply the CA ruling there
that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our
dismissal of the petition was a disposition of the merits of the case.
When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has
already become final.67 When a minute resolution denies or
dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together with
its findings of fact and legal conclusions, are deemed
sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res judicata.69 However,
if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a
previous case,CIR v. Baier-Nickel71 involving the same parties
and the same issues, was previously disposed of by the Court
thru a minute resolution dated February 17, 2003 sustaining the
ruling of the CA. Nonetheless, the Court ruled thatthe previous

I. GENERAL CONCEPTS
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.73Indeed, as a rule, this Court lays down
doctrines or principles of law which constitute binding precedent in
a decision duly signed by the members of the Court and certified by
the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680
and since petitioners 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 petitioners 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
12

COMMREV - INSURANCE
6 CASES

I. GENERAL CONCEPTS

more efficient and inexpensive health care system made possible


by quantity purchasing of services and economies of scale. They
offer advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive medical
services), including the ability to control costs. They protect their
members from exposure to the high cost of hospitalization and
other medical expenses brought about by a fluctuating economy.
Accordingly, they play an important role in society as partners of
the State in achieving its constitutional mandate of providing its
citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the
premium charged.74 Its imposition will elevate the cost of health
care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond
the reach of the ordinary wage earner or driving the industry to the
ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The
August 16, 2004 decision of the Court of Appeals in CA-G.R. SP
No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency
DST
assessment
against
petitioner
is
hereby CANCELLED and SET ASIDE. Respondent is ordered to
desist from collecting the said tax.
No costs.
SO ORDERED.

G.R. No. L-15895

November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late


Joaquin
Ma.
Herrer, plaintiff-appellant, vs.
SUN
LIFE
ASSURANCE COMPANY OF CANADA, defendant-appellee.
MALCOLM, J.:
13

COMMREV - INSURANCE
6 CASES
This is an action brought by the plaintiff ad administrator of the
estate of the late Joaquin Ma. Herrer to recover from the defendant
life insurance company the sum of pesos 6,000 paid by the
deceased for a life annuity. The trial court gave judgment for the
defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin
Herrer made application to the Sun Life Assurance Company of
Canada through its office in Manila for a life annuity. Two days later
he paid the sum of P6,000 to the manager of the company's Manila
office and was given a receipt reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila
como prima dela Renta Vitalicia solicitada por dicho Don Joaquin
Herrer hoy, sujeta al examen medico y aprobacion de la Oficina
Central de la Compaia.
The application was immediately forwarded to the head office of
the company at Montreal, Canada. On November 26, 1917, the
head office gave notice of acceptance by cable to Manila. (Whether
on the same day the cable was received notice was sent by the
Manila office of Herrer that the application had been accepted, is a
disputed point, which will be discussed later.) On December 4,
1917, the policy was issued at Montreal. On December 18, 1917,
attorney Aurelio A. Torres wrote to the Manila office of the company
stating that Herrer desired to withdraw his application. The
following day the local office replied to Mr. Torres, stating that the
policy had been issued, and called attention to the notification of
November 26, 1917. This letter was received by Mr. Torres on the
morning of December 21, 1917. Mr. Herrer died on December 20,
1917.
As above suggested, the issue of fact raised by the evidence is
whether Herrer received notice of acceptance of his application. To
resolve this question, we propose to go directly to the evidence of
record.

I. GENERAL CONCEPTS
The chief clerk of the Manila office of the Sun Life Assurance
Company of Canada at the time of the trial testified that he
prepared the letter introduced in evidence as Exhibit 3, of date
November 26, 1917, and handed it to the local manager, Mr. E. E.
White, for signature. The witness admitted on cross-examination
that after preparing the letter and giving it to he manager, he new
nothing of what became of it. The local manager, Mr. White,
testified to having received the cablegram accepting the
application of Mr. Herrer from the home office on November 26,
1917. He said that on the same day he signed a letter notifying Mr.
Herrer of this acceptance. The witness further said that letters,
after being signed, were sent to the chief clerk and placed on the
mailing desk for transmission. The witness could not tell if the letter
had every actually been placed in the mails. Mr. Tuason, who was
the chief clerk, on November 26, 1917, was not called as a witness.
For the defense, attorney Manuel Torres testified to having prepared
the will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer
mentioned his application for a life annuity, and that he said that
the only document relating to the transaction in his possession was
the provisional receipt. Rafael Enriquez, the administrator of the
estate, testified that he had gone through the effects of the
deceased and had found no letter of notification from the insurance
company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the
letter of November 26, 1917, notifying Mr. Herrer that his
application had been accepted, was prepared and signed in the
local office of the insurance company, was placed in the ordinary
channels for transmission, but as far as we know, was never
actually mailed and thus was never received by the applicant.
Not forgetting our conclusion of fact, it next becomes necessary to
determine the law which should be applied to the facts. In order to
reach our legal goal, the obvious signposts along the way must be
noticed.
Until quite recently, all of the provisions concerning life insurance in
the Philippines were found in the Code of Commerce and the Civil
Code. In the Code of the Commerce, there formerly existed Title VIII
of Book III and Section III of Title III of Book III, which dealt with
insurance contracts. In the Civil Code there formerly existed and
14

COMMREV - INSURANCE
6 CASES
presumably still exist, Chapters II and IV, entitled insurance
contracts and life annuities, respectively, of Title XII of Book IV. On
the after July 1, 1915, there was, however, in force the Insurance
Act. No. 2427. Chapter IV of this Act concerns life and health
insurance. The Act expressly repealed Title VIII of Book II and
Section III of Title III of Book III of the code of Commerce. The law of
insurance is consequently now found in the Insurance Act and the
Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it
is silent as to the methods to be followed in order that there may
be a contract of insurance. On the other hand, the Civil Code, in
article 1802, not only describes a contact of life annuity markedly
similar to the one we are considering, but in two other articles,
gives strong clues as to the proper disposition of the case. For
instance, article 16 of the Civil Code provides that "In matters
which are governed by special laws, any deficiency of the latter
shall be supplied by the provisions of this Code." On the
supposition, therefore, which is incontestable, that the special law
on the subject of insurance is deficient in enunciating the principles
governing acceptance, the subject-matter of the Civil code, if there
be any, would be controlling. In the Civil Code is found article 1262
providing that "Consent is shown by the concurrence of offer and
acceptance with respect to the thing and the consideration which
are to constitute the contract. An acceptance made by letter shall
not bind the person making the offer except from the time it came
to his knowledge. The contract, in such case, is presumed to have
been entered into at the place where the offer was made." This
latter article is in opposition to the provisions of article 54 of the
Code of Commerce.
If no mistake has been made in announcing the successive steps by
which we reach a conclusion, then the only duty remaining is for
the court to apply the law as it is found. The legislature in its
wisdom having enacted a new law on insurance, and expressly
repealed the provisions in the Code of Commerce on the same
subject, and having thus left a void in the commercial law, it would
seem logical to make use of the only pertinent provision of law
found in the Civil code, closely related to the chapter concerning
life annuities.

I. GENERAL CONCEPTS
The Civil Code rule, that an acceptance made by letter shall bind
the person making the offer only from the date it came to his
knowledge, may not be the best expression of modern commercial
usage. Still it must be admitted that its enforcement avoids
uncertainty and tends to security. Not only this, but in order that
the principle may not be taken too lightly, let it be noticed that it is
identical with the principles announced by a considerable number
of respectable courts in the United States. The courts who take this
view have expressly held that an acceptance of an offer of
insurance not actually or constructively communicated to the
proposer does not make a contract. Only the mailing of acceptance,
it has been said, completes the contract of insurance, as the locus
poenitentiae is ended when the acceptance has passed beyond the
control of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be
the second paragraph of article 1262 of the Civil Code providing
that an acceptance made by letter shall not bind the person making
the offer except from the time it came to his knowledge. The
pertinent fact is, that according to the provisional receipt, three
things had to be accomplished by the insurance company before
there was a contract: (1) There had to be a medical examination of
the applicant; (2) there had to be approval of the application by the
head office of the company; and (3) this approval had in some way
to be communicated by the company to the applicant. The further
admitted facts are that the head office in Montreal did accept the
application, did cable the Manila office to that effect, did actually
issue the policy and did, through its agent in Manila, actually write
the letter of notification and place it in the usual channels for
transmission to the addressee. The fact as to the letter of
notification thus fails to concur with the essential elements of the
general rule pertaining to the mailing and delivery of mail matter as
announced by the American courts, namely, when a letter or other
mail matter is addressed and mailed with postage prepaid there is
a rebuttable presumption of fact that it was received by the
addressee as soon as it could have been transmitted to him in the
ordinary course of the mails. But if any one of these elemental facts
fails to appear, it is fatal to the presumption. For instance, a letter
will not be presumed to have been received by the addressee
unless it is shown that it was deposited in the post-office, properly
15

COMMREV - INSURANCE
6 CASES

I. GENERAL CONCEPTS

addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp.
458, et seq., notes.)

different outcome could be expected. To be more explicit, we


sustain the Court of Appeals.

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

The facts as found by respondent Court of Appeals, binding upon


us, follow: "This is a peculiar case. Federico Songco of
Floridablanca, Pampanga, a man of scant education being only a
first grader ..., owned a private jeepney with Plate No. 41-289 for
the year 1960. On September 15, 1960, as such private vehicle
owner, he was induced by Fieldmen's Insurance Company
Pampanga agent Benjamin Sambat to apply for a Common Carrier's
Liability Insurance Policy covering his motor vehicle ... Upon paying
an annual premium of P16.50, defendant Fieldmen's Insurance
Company, Inc. issued on September 19, 1960, Common Carriers
Accident Insurance Policy No. 45-HO- 4254 ... the duration of which
will be for one (1) year, effective September 15, 1960 to September
15, 1961. On September 22, 1961, the defendant company, upon
payment of the corresponding premium, renewed the policy by
extending the coverage from October 15, 1961 to October 15,
1962. This time Federico Songco's private jeepney carried Plate No.
J-68136-Pampanga-1961. ... On October 29, 1961, during the
effectivity of the renewed policy, the insured vehicle while being
driven by Rodolfo Songco, a duly licensed driver and son of
Federico (the vehicle owner) collided with a car in the municipality
of Calumpit, province of Bulacan, as a result of which mishap
Federico Songco (father) and Rodolfo Songco (son) died, Carlos
Songco (another son), the latter's wife, Angelita Songco, and a
family friend by the name of Jose Manuel sustained physical injuries
of varying degree." 1

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

G.R. No. L-24833

September 23, 1968

FIELDMEN'S INSURANCE CO., INC., petitioner, vs. MERCEDES


VARGAS VDA. DE SONGCO, ET AL. and COURT OF
APPEALS, respondents.
FERNANDO, J.:
An insurance firm, petitioner Fieldmen's Insurance Co., Inc., was not
allowed to escape liability under a common carrier insurance policy
on the pretext that what was insured, not once but twice, was a
private vehicle and not a common carrier, the policy being issued
upon the insistence of its agent who discounted fears of the insured
that his privately owned vehicle might not fall within its terms, the
insured moreover being "a man of scant education," finishing only
the first grade. So it was held in a decision of the lower court
thereafter affirmed by respondent Court of Appeals. Petitioner in
seeking the review of the above decision of respondent Court of
Appeals cannot be so sanguine as to entertain the belief that a

It was further shown according to the decision of respondent Court


of Appeals: "Amor Songco, 42-year-old son of deceased Federico
Songco, testifying as witness, declared that when insurance agent
Benjamin Sambat was inducing his father to insure his vehicle, he
butted in saying: 'That cannot be, Mr. Sambat, because our vehicle
is an "owner" private vehicle and not for passengers,' to which
agent Sambat replied: 'whether our vehicle was an "owner" type or
for passengers it could be insured because their company is not
owned by the Government and the Government has nothing to do
with their company. So they could do what they please whenever
they believe a vehicle is insurable' ... In spite of the fact that the
present case was filed and tried in the CFI of Pampanga, the
16

COMMREV - INSURANCE
6 CASES
defendant company did not even care to rebut Amor Songco's
testimony by calling on the witness-stand agent Benjamin Sambat,
its Pampanga Field Representative." 2
The plaintiffs in the lower court, likewise respondents here, were
the surviving widow and children of the deceased Federico Songco
as well as the injured passenger Jose Manuel. On the above facts
they prevailed, as had been mentioned, in the lower court and in
the respondent Court of Appeals.1awphl.nt
The basis for the favorable judgment is the doctrine announced
in Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., 3 with
Justice J. B. L. Reyes speaking for the Court. It is now beyond
question that where inequitable conduct is shown by an insurance
firm, it is "estopped from enforcing forfeitures in its favor, in order
to forestall fraud or imposition on the insured." 4
As much, if not much more so than the Qua Chee Gan decision, this
is a case where the doctrine of estoppel undeniably calls for
application. After petitioner Fieldmen's Insurance Co., Inc. had led
the insured Federico Songco to believe that he could qualify under
the common carrier liability insurance policy, and to enter into
contract of insurance paying the premiums due, it could not,
thereafter, in any litigation arising out of such representation, be
permitted to change its stand to the detriment of the heirs of the
insured. As estoppel is primarily based on the doctrine of good faith
and the avoidance of harm that will befall the innocent party due to
its injurious reliance, the failure to apply it in this case would result
in a gross travesty of justice.
That is all that needs be said insofar as the first alleged error of
respondent Court of Appeals is concerned, petitioner being
adamant in its far-from-reasonable plea that estoppel could not be
invoked by the heirs of the insured as a bar to the alleged breach of
warranty and condition in the policy. lt would now rely on the fact
that the insured owned a private vehicle, not a common carrier,
something which it knew all along when not once but twice its
agent, no doubt without any objection in its part, exerted the
utmost pressure on the insured, a man of scant education, to enter
into such a contract.

I. GENERAL CONCEPTS
Nor is there any merit to the second alleged error of respondent
Court that no legal liability was incurred under the policy by
petitioner. Why liability under the terms of the policy 5 was
inescapable was set forth in the decision of respondent Court of
Appeals. Thus: "Since some of the conditions contained in the
policy issued by the defendant-appellant were impossible to comply
with under the existing conditions at the time and 'inconsistent with
the known facts,' the insurer 'is estopped from asserting breach of
such conditions.' From this jurisprudence, we find no valid reason to
deviate and consequently hold that the decision appealed from
should be affirmed. The injured parties, to wit, Carlos Songco,
Angelito Songco and Jose Manuel, for whose hospital and medical
expenses the defendant company was being made liable, were
passengers of the jeepney at the time of the occurrence, and
Rodolfo Songco, for whose burial expenses the defendant company
was also being made liable was the driver of the vehicle in
question. Except for the fact, that they were not fare paying
passengers, their status as beneficiaries under the policy is
recognized therein." 6
Even if it be assumed that there was an ambiguity, an excerpt from
the Qua Chee Gan decision would reveal anew the weakness of
petitioner's contention. Thus: "Moreover, taking into account the
well known rule that ambiguities or obscurities must be strictly
interpreted against the party that caused them, the 'memo of
warranty' invoked by appellant bars the latter from questioning the
existence of the appliances called for in the insured premises, since
its initial expression, 'the undernoted appliances for the extinction
of fire being kept on the premises insured hereby, ... it is hereby
warranted ...,' admits of interpretation as an admission of the
existence of such appliances which appellant cannot now
contradict, should the parol evidence rule apply." 7
To the same effect is the following citation from the same leading
case: "This rigid application of the rule on ambiguities has become
necessary in view of current business practices. The courts cannot
ignore that nowadays monopolies, cartels and concentration of
capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared
'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to
17

COMMREV - INSURANCE
6 CASES

I. GENERAL CONCEPTS

'take it or leave it' labelled since Raymond Saleilles 'contracts by


adherence' (contrats d'adhesion), in contrast to those entered into
by parties bargaining on an equal footing, such contracts (of which
policies of insurance and international bills of lading are prime
examples) obviously call for greater strictness and vigilance on the
part of courts of justice with a view to protecting the weaker party
from abuses and imposition, and prevent their becoming traps for
the unwary (New Civil Code. Article 24; Sent. of Supreme Court of
Spain, 13 Dec. 1934, 27 February 1942)." 8

G.R. No. 76452 July 26, 1994

The last error assigned which would find fault with the decision of
respondent Court of Appeals insofar as it affirmed the lower court
award for exemplary damages as well as attorney's fees is, on its
face, of no persuasive force at all.

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and


RODRIGO DE LOS REYES, petitioners, vs. HON. ARMANDO
ANSALDO, in his capacity as Insurance Commissioner, and
RAMON MONTILLA PATERNO, JR., respondents.

The conclusion that inescapably emerges from the above is the


correctness of the decision of respondent Court of Appeals sought
to be reviewed. For, to borrow once again from the language of the
Qua Chee Gan opinion: "The contract of insurance is one of perfect
good faith (uberima fides) not for the insured alone,but equally so
for the insurer; in fact, it is more so for the latter, since its dominant
bargaining position carries with it stricter responsibility."9

QUIASON, J.:

This is merely to stress that while the morality of the business


world is not the morality of institutions of rectitude like the pulpit
and the academe, it cannot descend so low as to be another name
for guile or deception. Moreover, should it happen thus, no court of
justice
should
allow
itself
to lend
its approval
and
support.1awphl.nt

We grant the petition.

We have no choice but to recognize the monetary responsibility of


petitioner Fieldmen's Insurance Co., Inc. It did not succeed in its
persistent effort to avoid complying with its obligation in the lower
court and the Court of Appeals. Much less should it find any
receptivity from us for its unwarranted and unjustified plea to
escape from its liability.
WHEREFORE, the decision of respondent Court of Appeals of July
20, 1965, is affirmed in its entirety. Costs against petitioner
Fieldmen's Insurance Co., Inc.

This is a petition for certiorari and prohibition under Rule 65 of the


Revised Rules of Court, with preliminary injunction or temporary
restraining order, to annul and set aside the Order dated November
6, 1986 of the Insurance Commissioner and the entire proceedings
taken in I.C. Special Case No. 1-86.

The instant case arose from a letter-complaint of private


respondent Ramon M. Paterno, Jr. dated April 17, 1986, to
respondent Commissioner, alleging certain problems encountered
by agents, supervisors, managers and public consumers of the
Philippine American Life Insurance Company (Philamlife) as a result
of certain practices by said company.
In a letter dated April 23, 1986, respondent Commissioner
requested petitioner Rodrigo de los Reyes, in his capacity as
Philamlife's president, to comment on respondent Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner,
petitioner De los Reyes suggested that private respondent "submit
some sort of a 'bill of particulars' listing and citing actual cases,
facts, dates, figures, provisions of law, rules and regulations, and all
18

COMMREV - INSURANCE
6 CASES
other pertinent data which are necessary to enable him to prepare
an intelligent reply" (Rollo, p. 37). A copy of this letter was sent by
the Insurance Commissioner to private respondent for his
comments thereon.
On May 16, 1986, respondent Commissioner received a letter from
private respondent maintaining that his letter-complaint of April 17,
1986 was sufficient in form and substance, and requested that a
hearing thereon be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner
dated June 6, 1986, reiterated his claim that private respondent's
letter of May 16, 1986 did not supply the information he needed to
enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by
respondent Commissioner on the validity of the Contract of Agency
complained of by private respondent.
In said hearing, private respondent was required by respondent
Commissioner to specify the provisions of the agency contract
which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification
to respondent Commissioner dated July 31, 1986, reiterating his
letter of April 17, 1986 and praying that the provisions on charges
and fees stated in the Contract of Agency executed between
Philamlife and its agents, as well as the implementing provisions as
published in the agents' handbook, agency bulletins and circulars,
be declared as null and void. He also asked that the amounts of
such charges and fees already deducted and collected by Philamlife
in connection therewith be reimbursed to the agents, with interest
at the prevailing rate reckoned from the date when they were
deducted.
Respondent Commissioner furnished petitioner De los Reyes with a
copy of private respondent's letter of July 31, 1986, and requested
his answer thereto.

I. GENERAL CONCEPTS
Petitioner De los Reyes submitted an Answer dated September 8,
1986, stating inter alia that:
(1) Private respondent's letter of August 11, 1986 does not
contain any of the particular information which Philamlife
was seeking from him and which he promised to submit.
(2) That since the Commission's quasi-judicial power was
being invoked with regard to the complaint, private
respondent must file a verified formal complaint before any
further proceedings.
In his letter dated September 9, 1986, private respondent asked for
the resumption of the hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying
his letters of April 17, 1986, and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's
Senior Assistant Vice-President and Executive Assistant to the
President, asked that respondent Commission first rule on the
questions of the jurisdiction of the Insurance Commissioner over
the subject matter of the letters-complaint and the legal standing
of private respondent.
On October 27, respondent Commissioner notified both parties of
the hearing of the case on November 5, 1986.
On November 3, Manuel Ortega filed
Subpoena/Notice on the following grounds;

Motion

to

Quash

1. The Subpoena/Notice has no legal basis and is premature


because:
(1) No complaint sufficient in form and contents has
been filed;

19

COMMREV - INSURANCE
6 CASES
(2) No summons has been issued nor received by the
respondent De los Reyes, and hence, no jurisdiction
has been acquired over his person;
(3) No answer has been filed, and hence, the hearing
scheduled
on
November
5,
1986
in
the
Subpoena/Notice, and wherein the respondent is
required to appear, is premature and lacks legal
basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action; and
(2) over the parties involved (Rollo, p. 102).
In the Order dated November 6, 1986, respondent Commissioner
denied the Motion to Quash. The dispositive portion of said Order
reads:
NOW, THEREFORE, finding the position of complainant thru
counsel tenable and considering the fact that the instant
case is an informal administrative litigation falling outside
the operation of the aforecited memorandum circular but
cognizable by this Commission, the hearing officer, in open
session ruled as it is hereby ruled to deny the Motion to
Quash Subpoena/Notice for lack of merit (Rollo, p. 109).
Hence, this petition.

I. GENERAL CONCEPTS
jurisdiction of the Insurance Commissioner, claims that under
Sections 414 and 415 of the Insurance Code, the Commissioner has
authority to nullify the alleged illegal provisions of the Contract of
Agency.
III
The general regulatory authority of the Insurance Commissioner is
described in Section 414 of the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that
all laws relating to insurance, insurance companies and
other insurance matters, mutual benefit associations and
trusts for charitable uses are faithfully executed and to
perform the duties imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided
elsewhere in this Code, the Insurance Commissioner is
hereby authorized, at his discretion, to impose upon
insurance companies, their directors and/or officers and/or
agents, for any willful failure or refusal to comply with, or
violation of any provision of this Code, or any order,
instruction, regulation or ruling of the Insurance
Commissioner, or any commission of irregularities, and/or
conducting business in an unsafe and unsound manner as
may be determined by the the Insurance Commissioner, the
following:

II

(a) fines not in excess of five hundred pesos a day; and

The main issue to be resolved is whether or not the resolution of


the legality of the Contract of Agency falls within the jurisdiction of
the Insurance Commissioner.

(b) suspension, or after due hearing, removal of directors


and/or officers and/or agents.

Private respondent contends that the Insurance Commissioner has


jurisdiction to take cognizance of the complaint in the exercise of its
quasi-judicial powers. The Solicitor General, upholding the

A plain reading of the above-quoted provisions show that the


Insurance Commissioner has the authority to regulate the business
of insurance, which is defined as follows:

20

COMMREV - INSURANCE
6 CASES

I. GENERAL CONCEPTS

(2) The term "doing an insurance business" or "transacting an


insurance business," within the meaning of this Code, shall include

kind of insurance, bond, reinsurance contract, or


membership certificate does not exceed in any single claim
one hundred thousand pesos.

(a) making or proposing to make, as insurer, any insurance


contract;

A reading of the said section shows that the quasi-judicial power of


the Insurance Commissioner is limited by law "to claims and
complaints involving any loss, damage or liability for which an
insurer may be answerable under any kind of policy or contract of
insurance, . . ." Hence, this power does not cover the relationship
affecting the insurance company and its agents but is limited to
adjudicating claims and complaints filed by the insured against the
insurance company.

(b) making, or proposing to make, as surety, any contract of


suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety; (c) doing
any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an
insurance business within the meaning of this Code; (d)
doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.(Insurance Code, Sec.
2[2]; Emphasis supplied).

While the subject of Insurance Agents and Brokers is discussed


under Chapter IV, Title I of the Insurance Code, the provisions of
said Chapter speak only of the licensing requirements and
limitations imposed on insurance agents and brokers.

Since the contract of agency entered into between Philamlife and


its agents is not included within the meaning of an insurance
business, Section 2 of the Insurance Code cannot be invoked to
give
jurisdiction
over
the
same
to
the
Insurance
Commissioner. Expressio unius est exclusio alterius.

The Insurance Code does not have provisions governing the


relations between insurance companies and their agents. It follows
that the Insurance Commissioner cannot, in the exercise of its
quasi-judicial powers, assume jurisdiction over controversies
between the insurance companies and their agents.

With regard to private respondent's contention that the quasijudicial power of the Insurance Commissioner under Section 416 of
the Insurance Code applies in his case, we likewise rule in the
negative. Section 416 of the Code in pertinent part, provides:

We have held in the cases of Great Pacific Life Assurance


Corporation v. Judico, 180 SCRA 445 (1989), andInvestment
Planning Corporation of the Philippines v. Social Security
Commission, 21 SCRA 904 (1962), that an insurance company may
have two classes of agents who sell its insurance policies: (1)
salaried employees who keep definite hours and work under the
control and supervision of the company; and (2) registered
representatives, who work on commission basis.

The Commissioner shall have the power to adjudicate claims


and complaints involving any loss, damage or liability for
which an insurer may be answerable under any kind of
policy or contract of insurance, or for which such insurer
may be liable under a contract of suretyship, or for which a
reinsurer may be used under any contract or reinsurance it
may have entered into, or for which a mutual benefit
association may be held liable under the membership
certificates it has issued to its members, where the amount
of any such loss, damage or liability, excluding interest,
costs and attorney's fees, being claimed or sued upon any

Under the first category, the relationship between the insurance


company and its agents is governed by the Contract of
Employment and the provisions of the Labor Code, while under the
second category, the same is governed by the Contract of Agency
and the provisions of the Civil Code on the Agency. Disputes
involving the latter are cognizable by the regular courts.
21

COMMREV - INSURANCE
6 CASES

I. GENERAL CONCEPTS

WHEREFORE, the petition is GRANTED. The Order dated November


6, 1986 of the Insurance Commission is SET ASIDE.
SO ORDERED.

G.R. No. 152334

September 24, 2014

H.H.
HOLLERO
CONSTRUCTION,
INC., Petitioner, vs.
GOVERNMENT SERVICE INSURANCE SYSTEM and POOL OF
MACHINERY INSURERS, Respondents.
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 are the
Decision2 dated March 13, 2001 and the Resolution 3 dated February
21, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 63175,
which set aside and reversed the Judgment 4 dated February 3, 1999
of the Regional Trial Court of Quezon City, Branch 220 (RTC) in Civil
Case No. 91-10144, and dismissed petitioner H.H. Hollero
Construction, Inc.' s (petitioner) Complaint for Sum of Money and
Damages under the insurance policies issued by public respondent,
the Government Service Insurance System (GSIS), on the ground of
prescription.
The Facts
On April 26, 1988, the GSIS and petitioner entered into a Project
Agreement (Agreement) whereby the latter undertook the
development of a GSIS housing project known as Modesta Village
Section B (Project).5 Petitioner obligated itself to insurethe Project,
including all the improvements, upon the execution of the
Agreement under a Contractors All Risks (CAR) Insurance with the
GSIS General Insurance Department for an amount equal to its cost
or sound value, which shall not be subject to any automatic annual
reduction.6

Pursuant to its undertaking, petitioner secured CAR Policy No.


88/0857 in the amount of P1,000,000.00 for land development,
which was later increased to P10,000,000.00,8 effective from May 2,
1988 to May 2, 1989.9 Petitioner likewise secured CAR Policy No.
88/08610 in the amount of P1,000,000.00 for the construction of
twenty (20) housing units, which amount was later increased
to P17,750,000.0011 to cover the construction of another 355 new
units, effective from May 2, 1988 toJune 1, 1989. 12 In turn, the GSIS
reinsured CAR Policy No. 88/085 with respondent Pool of Machinery
Insurers (Pool).13
Under both policies, it was provided that: (a) there must be prior
notice of claim for loss, damage or liability within fourteen (14)
days from the occurrence of the loss or damage; 14 (b) all benefits
thereunder shall be forfeited if no action is instituted within
twelve(12) months after the rejection of the claim for loss, damage
or liability;15 and (c) if the sum insured is found to be less than the
amount required to be insured, the amount recoverable shall be
reduced tosuch proportion before taking into account the
deductibles stated in the schedule (average clause provision). 16
During the construction, three (3) typhoons hit the country, namely,
Typhoon Biring from June 1 to June 4, 1988, Typhoon Huaning on
July 29, 1988, and Typhoon Saling on October 11, 1989, which
caused considerable damage to the Project. 17 Accordingly,
petitioner filed several claims for indemnity with the GSIS on June
30, 1988,18 August 25, 1988,19 and October 18, 1989,20 respectively.
In a letter21 dated April 26, 1990, the GSIS rejected petitioners
indemnity claims for the damages wrought by Typhoons Biring and
Huaning, finding that no amount is recoverable pursuant to the
average clause provision under the policies. 22 In a letter23 dated
June 21, 1990, the GSIS similarly rejected petitioners indemnity
claim for damages wrought by Typhoon Saling on a "no loss" basis,
itappearing from its records that the policies were not renewed
before the onset of the said typhoon.24
In a letter25 dated April 18, 1991, petitioner impugned the rejection
of its claims for damages/loss on accountof Typhoon Saling, and
reiterated its demand for the settlement of its claims.
22

COMMREV - INSURANCE
6 CASES
On September 27, 1991, petitioner filed a Complaint 26 for Sum of
Money and Damages before the RTC, docketed as Civil Case No. 9110144,27 which was opposed by the GSIS through a Motion to
Dismiss28 dated October 25, 1991 on the ground that the causes of
action stated therein are barred by the twelve-month limitation
provided under the policies, i.e., the complaint was filed more than
one(1) year from the rejection of the indemnity claims. The RTC, in
an Order29 dated May 13, 1993, denied the said motion; hence, the
GSIS filed its answer30 with counterclaims for litigation expenses,
attorneys fees, and exemplary damages. Subsequently, the GSIS
filed a Third Party Complaint 31 for indemnification against Pool, the
reinsurer.
The RTC Ruling
In a Judgment32 dated February 3, 1999, the RTC granted
petitioners indemnity claims. It held that: (a) the average
clauseprovision in the policies which did not contain the assentor
signature of the petitioner cannot limit the GSIS liability, for being
inefficacious and contrary to public policy; 33 (b) petitioner has
established that the damages it sustained were due to the peril
insured against;34 and (c) CAR Policy No. 88/086 was deemed
renewed when the GSIS withheld the amount of 35,855.00
corresponding to the premium payable, 35 from the retentions it
released to petitioner.36 The RTC thereby declared the GSIS liable
for petitioners indemnity claims for the damages brought about by
the said typhoons, less the stipulated deductions under the
policies,plus 6% legal interest from the dates of extrajudicial
demand, as well as for attorneys fees and costs of suit. It further
dismissed for lack of merit GSISs counterclaim and third party
complaint.37
Dissatisfied, the GSIS elevated the matter to the CA. The CA Ruling
In a Decision38 dated March 13, 2001, the CAset aside and reversed
the RTC Judgment, thereby dismissing the complaint. It ruled that
the complaint filed on September 27, 1991 was barred by
prescription, having been commenced beyond the twelve-month
limitation provided under the policies, reckoned from the final
rejection of the indemnity claims on April 26, 1990 and June 21,
1990. The Issue Before the Court

I. GENERAL CONCEPTS
The essential issue for the Courts resolution is whether or not the
CA committed reversible error in dismissing the complaint onthe
ground of prescription.
The Courts Ruling
The petition lacks merit.
Contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary, and
popular sense.39
Section 1040 of the General Conditions of the subject CAR Policies
commonly read:
10. If a claim is in any respect fraudulent, or if any false declaration
is made or used in support thereof, or if any fraudulent means or
devices are used by the Insured or anyone acting on his behalf to
obtain any benefit under this Policy, or if a claim is made and
rejected and no action or suit is commenced within twelve months
after such rejectionor, in case of arbitration taking place as
provided herein, within twelve months after the Arbitrator or
Arbitrators or Umpire have made their award, all benefit under this
Policy shall be forfeited. (Emphases supplied)
In this relation, case law illumines that the prescriptive period for
the insureds action for indemnity should bereckoned from the
"final rejection" of the claim.41
Here, petitioner insists that the GSISs letters dated April 26, 1990
and June 21, 1990 did not amount to a "final rejection" ofits claims,
arguing that they were mere tentative resolutions pending further
action on petitioners part or submission of proof in refutation of the
reasons for rejection.42 Hence, its causes of action for indemnity did
not accrue on those dates.
The Court does not agree.
23

COMMREV - INSURANCE
6 CASES
A perusal of the letter43 dated April 26, 1990 shows that the GSIS
denied petitioners indemnity claims wrought by Typhoons Biring
and Huaning, it appearing that no amount was recoverable under
the policies. While the GSIS gave petitioner the opportunity to
dispute its findings, neither of the parties pursued any further
action on the matter; this logically shows that they deemed the
said letter as a rejection of the claims. Lest it cause any confusion,
the statement in that letter pertaining to any queries petitioner
may have on the denial should be construed, at best, as a form of
notice to the former that it had the opportunity to seek
reconsideration of the GSISs rejection. Surely, petitioner cannot
construe the said letter to be a mere "tentative resolution." In fact,
despite its disavowals, petitioner admitted in its pleadings 44 that
the GSIS indeed denied its claim through the aforementioned letter,
buttarried in commencing the necessary action in court.
The same conclusion obtains for the letter 45 dated June 21, 1990
denying petitioners indemnity claim caused by Typhoon Saling on a
"no loss" basis due to the non-renewal of the policies therefor
before the onset of the said typhoon. The fact that petitioner filed a
letter46 of reconsideration therefrom dated April 18, 1991,
considering too the inaction of the GSIS on the same similarly
shows that the June 21, 1990 letter was also a final rejection of
petitioners indemnity claim.
As correctly observed by the CA, "final rejection" simply means
denial by the insurer of the claims of the insured and not the
rejection or denial by the insurer of the insureds motion or request
for reconsideration.47 The rejection referred to should be construed
as the rejection in the first instance, 48 as in the two instances
above-discussed.
Comparable to the foregoing is the Courts action in the case of Sun
Insurance Office, Ltd. v. CA49 wherein it debunked "[t]he contention
of the respondents [therein] that the one-year prescriptive period
does not start to run until the petition for reconsideration had been
resolved by the insurer," holding that such view "runs counter to
the declared purpose for requiring that an action or suit be filed in
the Insurance Commission or in a court of competent jurisdiction
from the denial of the claim."50 In this regard, the Court rationalized
that "uphold[ing]respondents' contention would contradict and

I. GENERAL CONCEPTS
defeat the very principle which this Court had laid down. Moreover,
it can easily be used by insured persons as a scheme or device to
waste time until any evidence which may be considered against
them is destroyed."51 Expounding on the matter, the Court had this
to say:
The crucial issue in this case is: When does the cause of action
accrue?
In support of private respondents view, two rulings of this Court
have been cited, namely, the case of Eagle Star Insurance
Co.vs.Chia Yu ([supra note 41]), where the Court held:
The right of the insured to the payment of his loss accrues from the
happening of the loss. However, the cause of action in an insurance
contract does not accrue until the insureds claim is finally rejected
by the insurer. This is because before such final rejection there is no
real necessity for bringing suit.
and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24
SCRA 151 [1968], holding that:
Since "cause of action" requires as essential elements not only a
legal right of the plaintiff and a correlated obligation of the
defendant in violation of the said legal right, the cause of action
does not accrue until the party obligated (surety) refuses, expressly
or impliedly, to comply with its duty (in this case to pay the amount
of the bond)."
Indisputably, the above-cited pronouncements of this Court may be
taken to mean that the insured' s cause of action or his right to file
a claim either in the Insurance Commission or in a court of
competent jurisdiction [as in this case] commences from the time
of the denial of his claim by the Insurer, either expressly or
impliedly.1wphi1
But as pointed out by the petitioner insurance company, the
rejection referred to should be construed as the rejection, in the
first instance, for if what is being referred to is a reiterated rejection
24

COMMREV - INSURANCE
6 CASES

I. GENERAL CONCEPTS

conveyed in a resolution of a yetition for reconsideration, such


should have been expressly stipulated.52
In light of the foregoing, it is thus clear that petitioner's causes of
action for indemnity respectively accrued from its receipt of the
letters dated April 26, 1990 and June 21, 1990, or the date the GSIS
rejected its claims in the first instance. Consequently, given that it
allowed more than twelve (12) months to lapse before filing the
necessary complaint before the R TC on September 27, 1991, its
causes of action had already prescribed.
WHEREFORE, the petition is DENIED. The Decision dated March 13,
2001 and the Resolution dated February 21, 2002 of the Court of
Appeals (CA) in CA-G.R. CV No. 63175 are hereby AFFIRMED.
SO ORDERED.

G.R. NO. 147039

January 27, 2006

DBP
POOL
OF
COMPANIES, Petitioner, vs.
INC., Respondent.

ACCREDITED
INSURANCE
RADIO MINDANAO NETWORK,

AUSTRIA-MARTINEZ, J.:
This refers to the petition for certiorari under Rule 45 of the Rules of
Court seeking the review of the Decision 1 dated November 16, 2000
of the Court of Appeals (CA) in CA-G.R. CV No. 56351, the
dispositive portion of which reads:
Wherefore, premises considered, the appealed Decision of the
Regional Trial Court of Makati City, Branch 138 in Civil Case No. 90602 is hereby AFFIRMED with MODIFICATION in that the interest
rate is hereby reduced to 6% per annum.
Costs against the defendants-appellants.
SO ORDERED.2
The assailed decision originated from Civil Case No. 90-602 filed by
Radio Mindanao Network, Inc. (respondent) against DBP Pool of
Accredited Insurance Companies (petitioner) and Provident
Insurance Corporation (Provident) for recovery of insurance
benefits. Respondent owns several broadcasting stations all over
the country. Provident covered respondents transmitter equipment
and generating set for the amount of P13,550,000.00 under Fire
Insurance Policy No. 30354, while petitioner covered respondents
transmitter, furniture, fixture and other transmitter facilities for the
amount of P5,883,650.00 under Fire Insurance Policy No. F-66860.
In the evening of July 27, 1988, respondents radio station located
in SSS Building, Bacolod City, was razed by fire causing damage in
the amount of P1,044,040.00. Respondent sought recovery under
the two insurance policies but the claims were denied on the
25

COMMREV - INSURANCE
6 CASES

I. GENERAL CONCEPTS

ground that the cause of loss was an excepted risk excluded under
condition no. 6 (c) and (d), to wit:

Hence, herein petition by DBP Pool of Accredited Insurance


Companies,6 with the following assignment of errors:

6. This insurance does not cover any loss or damage occasioned by


or through or in consequence, directly or indirectly, of any of the
following consequences, namely:

Assignment of Errors

(c) War, invasion, act of foreign enemy, hostilities, or warlike


operations (whether war be declared or not), civil war.
(d) Mutiny, riot, military or popular rising, insurrection, rebellion,
revolution, military or usurped power.3
The insurance companies maintained that the evidence showed
that the fire was caused by members of the Communist Party of the
Philippines/New Peoples Army (CPP/NPA); and consequently,
denied the claims. Hence, respondent was constrained to file Civil
Case No. 90-602 against petitioner and Provident.
After trial on the merits, the Regional Trial Court of Makati, Branch
138, rendered a decision in favor of respondent. The dispositive
portion of the decision reads:
IN VIEW THEREOF, judgment is rendered in favor of plaintiff.
Defendant Provident Insurance Corporation is directed to pay
plaintiff the amount of P450,000.00 representing the value of the
destroyed property insured under its Fire Insurance Policy plus 12%
legal interest from March 2, 1990 the date of the filing of the
Complaint. Defendant DBP Pool Accredited Insurance Companies is
likewise ordered to pay plaintiff the sum of P602,600.00
representing the value of the destroyed property under its Fire
Insurance Policy plus 12% legal interest from March 2, 1990.
SO ORDERED.4
Both insurance companies appealed from the trial courts decision
but the CA affirmed the decision, with the modification that the
applicable interest rate was reduced to 6% per annum. A motion for
reconsideration was filed by petitioner DBP which was denied by
the CA per its Resolution dated January 30, 2001.5

THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT


THERE WERE NO SUFFICIENT EVIDENCE SHOWING THAT THE
APPROXIMATELY TENTY [sic] (20) ARMED MEN WHO CUSED [sic]
THE FIRE AT RESPONDENTS RMN PROPERTY AT BACOLOD CITY
WERE MEMBERS OF THE CPP-NPA.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT ADJUDGED
THAT RESPONDENT RMN CANNOT BEHELD [sic] FOR DAMAGES AND
ATTORNEYS FEES FOR INSTITUTING THE PRESENT ACTION AGAINST
THE PETITIONER UNDER ARTICLES 21, 2208, 2229 AND 2232 OF
THE CIVIL CODE OF THE PHILIPPINES.7
Petitioner assails the factual finding of both the trial court and the
CA that its evidence failed to support its allegation that the loss
was caused by an excepted risk, i.e., members of the CPP/NPA
caused the fire. In upholding respondents claim for indemnity, the
trial court found that:
The only evidence which the Court can consider to determine if the
fire was due to the intentional act committed by the members of
the New Peoples Army (NPA), are the testimony [sic] of witnesses
Lt. Col. Nicolas Torres and SPO3 Leonardo Rochar who were
admittedly not present when the fire occurred. Their testimony [sic]
was [sic] limited to the fact that an investigation was conducted
and in the course of the investigation they were informed by
bystanders that "heavily armed men entered the transmitter house,
poured gasoline in (sic) it and then lighted it. After that, they went
out shouting "Mabuhay ang NPA" (TSN, p. 12., August 2, 1995). The
persons whom they investigated and actually saw the burning of
the station were not presented as witnesses. The documentary
evidence particularly Exhibits "5" and "5-C" do not satisfactorily
prove that the author of the burning were members of the NPA.
Exhibit "5-B" which is a letter released by the NPA merely mentions
some dissatisfaction with the activities of some people in the media
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6 CASES
in Bacolod. There was no mention there of any threat on media
facilities.8
The CA went over the evidence on record and sustained the
findings of the trial court, to wit:
To recapitulate, defendants-appellants presented the following to
support its claim, to wit: police blotter of the burning of DYHB,
certification of the Negros Occidental Integrated National Police,
Bacolod City regarding the incident, letter of alleged NPA members
Celso Magsilang claiming responsibility for the burning of DYHB, fire
investigation report dated July 29, 1988, and the testimonies of Lt.
Col. Nicolas Torres and SFO III Leonardo Rochas. We examined
carefully the report on the police blotter of the burning of DYHB, the
certification issued by the Integrated National Police of Bacolod City
and the fire investigation report prepared by SFO III Rochas and
there We found that none of them categorically stated that the
twenty (20) armed men which burned DYHB were members of the
CPP/NPA. The said documents simply stated that the said armed
men were believed to be or suspected of being members of the
said group. Even SFO III Rochas admitted that he was not sure that
the said armed men were members of the CPP-NPA, thus:

In fact the only person who seems to be so sure that that the CPPNPA had a hand in the burning of DYHB was Lt. Col. Nicolas Torres.
However, though We found him to be persuasive in his testimony
regarding how he came to arrive at his opinion, We cannot
nevertheless admit his testimony as conclusive proof that the CPPNPA was really involved in the incident considering that he
admitted that he did not personally see the armed men even as he
tried to pursue them. Note that when Lt. Col. Torres was presented
as witness, he was presented as an ordinary witness only and not
an expert witness. Hence, his opinion on the identity or
membership of the armed men with the CPP-NPA is not admissible
in evidence.
Anent the letter of a certain Celso Magsilang, who claims to be a
member of NPA-NIROC, being an admission of person which is not a

I. GENERAL CONCEPTS
party to the present action, is likewise inadmissible in evidence
under Section 22, Rule 130 of the Rules of Court. The reason being
that an admission is competent only when the declarant, or
someone identified in legal interest with him, is a party to the
action.9
The Court will not disturb these factual findings absent compelling
or exceptional reasons. It should be stressed that a review by
certiorari under Rule 45 is a matter of discretion. Under this mode
of review, the jurisdiction of the Court is limited to reviewing only
errors of law, not of fact.10
Moreover, when supported by substantial evidence, findings of fact
of the trial court as affirmed by the CA are conclusive and binding
on the parties,11 which this Court will not review unless there are
exceptional circumstances. There are no exceptional circumstances
in this case that would have impelled the Court to depart from the
factual findings of both the trial court and the CA.
Both the trial court and the CA were correct in ruling that petitioner
failed to prove that the loss was caused by an excepted risk.
Petitioner argues that private respondent is responsible for proving
that the cause of the damage/loss is covered by the insurance
policy, as stipulated in the insurance policy, to wit:

Any loss or damage happening during the existence of abnormal


conditions (whether physical or otherwise) which are occasioned by
or through in consequence directly or indirectly, of any of the said
occurrences shall be deemed to be loss or damage which is not
covered by the insurance, except to the extent that the Insured
shall prove that such loss or damage happened independently of
the existence of such abnormal conditions.
In any action, suit or other proceeding where the Companies allege
that by reason of the provisions of this condition any loss or
damage is not covered by this insurance, the burden of proving
that such loss or damage is covered shall be upon the Insured.12
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An insurance contract, being a contract of adhesion, should be so
interpreted as to carry out the purpose for which the parties
entered into the contract which is to insure against risks of loss or
damage to the goods. Limitations of liability should be regarded
with extreme jealousy and must be construed in such a way as to
preclude the insurer from noncompliance with its obligations. 13
The "burden of proof" contemplated by the aforesaid provision
actually refers to the "burden of evidence" (burden of going
forward).14 As applied in this case, it refers to the duty of the
insured to show that the loss or damage is covered by the policy.
The foregoing clause notwithstanding, the burden of proof still rests
upon petitioner to prove that the damage or loss was caused by an
excepted risk in order to escape any liability under the contract.
Burden of proof is the duty of any party to present evidence to
establish his claim or defense by the amount of evidence required
by law, which is preponderance of evidence in civil cases. The
party, whether plaintiff or defendant, who asserts the affirmative of
the issue has the burden of proof to obtain a favorable judgment.
For the plaintiff, the burden of proof never parts. 15 For the
defendant, an affirmative defense is one which is not a denial of an
essential ingredient in the plaintiffs cause of action, but one which,
if established, will be a good defense i.e. an "avoidance" of the
claim.16
Particularly, in insurance cases, where a risk is excepted by the
terms of a policy which insures against other perils or hazards, loss
from such a risk constitutes a defense which the insurer may urge,
since it has not assumed that risk, and from this it follows that an
insurer seeking to defeat a claim because of an exception
or limitation in the policy has the burden of proving that
the loss comes within the purview of the exception or
limitation set up. If a proof is made of a loss apparently within a
contract of insurance, the burden is upon the insurer to prove that
the loss arose from a cause of loss which is excepted or for which it
is not liable, or from a cause which limits its liability. 17
Consequently, it is sufficient for private respondent to prove the
fact of damage or loss. Once respondent makes out a prima facie
case in its favor, the duty or the burden of evidence shifts to

I. GENERAL CONCEPTS
petitioner to controvert respondents prima facie case. 18 In this
case, since petitioner alleged an excepted risk, then the burden of
evidence shifted to petitioner to prove such exception. It is only
when petitioner has sufficiently proven that the damage or loss was
caused by an excepted risk does the burden of evidence shift back
to respondent who is then under a duty of producing evidence to
show why such excepted risk does not release petitioner from any
liability. Unfortunately for petitioner, it failed to discharge its
primordial burden of proving that the damage or loss was caused
by an excepted risk.
Petitioner however, insists that the evidence on record established
the identity of the author of the damage. It argues that the trial
court and the CA erred in not appreciating the reports of witnesses
Lt. Col Torres and SFO II Rochar that the bystanders they
interviewed claimed that the perpetrators were members of the
CPP/NPA as an exception to the hearsay rule as part of res gestae.
A witness can testify only to those facts which he knows of his
personal knowledge, which means those facts which are derived
from his perception.19 A witness may not testify as to what he
merely learned from others either because he was told or read or
heard the same. Such testimony is considered hearsay and may not
be received as proof of the truth of what he has learned. The
hearsay rule is based upon serious concerns about the
trustworthiness and reliability of hearsay evidence inasmuch as
such evidence are not given under oath or solemn affirmation and,
more importantly, have not been subjected to cross-examination by
opposing counsel to test the perception, memory, veracity and
articulateness of the out-of-court declarant or actor upon whose
reliability on which the worth of the out-of-court statement
depends.20
Res gestae, as an exception to the hearsay rule, refers to those
exclamations and statements made by either the participants,
victims, or spectators to a crime immediately before, during, or
after the commission of the crime, when the circumstances are
such that the statements were made as a spontaneous reaction or
utterance inspired by the excitement of the occasion and there was
no opportunity for the declarant to deliberate and to fabricate a
false statement. The rule in res gestae applies when the declarant
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6 CASES
himself did not testify and provided that the testimony of the
witness who heard the declarant complies with the following
requisites: (1) that the principal act, the res gestae, be a startling
occurrence; (2) the statements were made before the declarant had
the time to contrive or devise a falsehood; and (3) that the
statements must concern the occurrence in question and its
immediate attending circumstances.21
The Court is not convinced to accept the declarations as part of res
gestae. While it may concede that these statements were made by
the bystanders during a startling occurrence, it cannot be said
however, that these utterances were made spontaneously by the
bystanders and before they had the time to contrive or
devise a falsehood. Both SFO III Rochar and Lt. Col. Torres
received the bystanders statements while they were making their
investigations during and after the fire. It is reasonable to assume
that when these statements were noted down, the bystanders
already had enough time and opportunity to mill around, talk to one
another and exchange information, not to mention theories and
speculations, as is the usual experience in disquieting situations
where hysteria is likely to take place. It cannot therefore be
ascertained whether these utterances were the products of truth.
That the utterances may be mere idle talk is not remote.
At best, the testimonies of SFO III Rochar and Lt. Col. Torres that
these statements were made may be considered as independently
relevant statements gathered in the course of their investigation,
and are admissible not as to the veracity thereof but to the fact
that they had been thus uttered.22
Furthermore, admissibility of evidence should not be equated with
its weight and sufficiency.23 Admissibility of evidence depends on its
relevance and competence, while the weight of evidence pertains
to evidence already admitted and its tendency to convince and
persuade.24 Even assuming that the declaration of the bystanders
that it was the members of the CPP/NPA who caused the fire may
be admitted as evidence, it does not follow that such declarations
are sufficient proof. These declarations should be calibrated vis-vis the other evidence on record. And the trial court aptly noted
that there is a need for additional convincing proof, viz.:

I. GENERAL CONCEPTS
The Court finds the foregoing to be insufficient to establish that the
cause of the fire was the intentional burning of the radio facilities
by the rebels or an act of insurrection, rebellion or usurped power.
Evidence that persons who burned the radio facilities shouted
"Mabuhay ang NPA" does not furnish logical conclusion that they
are member [sic] of the NPA or that their act was an act of rebellion
or insurrection. Additional convincing proof need be submitted.
Defendants failed to discharge their responsibility to present
adequate proof that the loss was due to a risk excluded. 25
While the documentary evidence presented by petitioner, i.e., (1)
the police blotter; (2) the certification from the Bacolod Police
Station; and (3) the Fire Investigation Report may be considered
exceptions to the hearsay rule, being entries in official records,
nevertheless, as noted by the CA, none of these documents
categorically stated that the perpetrators were members of the
CPP/NPA.26 Rather, it was stated in the police blotter that: "a group
of persons accompanied by one (1) woman all believed to be
CPP/NPA more or less 20 persons suspected to be
CPP/NPA,"27 while the certification from the Bacolod Police station
stated that " some 20 or more armed menbelieved to be
members of the New Peoples Army NPA," 28 and the fire
investigation report concluded that "(I)t is therefore believed by
this Investigating Team that the cause of the fire is intentional, and
the armed mensuspected to be members of the CPP/NPA where
(sic) the ones responsible "29 All these documents show that
indeed, the "suspected" executor of the fire were believed to be
members of the CPP/NPA. But suspicion alone is not sufficient,
preponderance of evidence being the quantum of proof.
All told, the Court finds no reason to grant the present petition.
WHEREFORE, the petition is DISMISSED. The Court of Appeals
Decision dated November 16, 2000 and Resolution dated January
30, 2001 rendered in CA-G.R. CV No. 56351 are AFFIRMED in
toto.
SO ORDERED.

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I. GENERAL CONCEPTS

30