Beruflich Dokumente
Kultur Dokumente
L-4611
Policy No.
Property Insured
2637164 (Exhibit
"LL")
P15,000.00
10,000.00
25,000.00
10,000.00
2637165 (Exhibit
"JJ")
Amount
5,000.00
150,000.00
150,000.00
5,000.00
P370,000.00
Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost
one week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored
theren. Plaintiff-appellee informed the insurer by telegram on the same date; and on the next day,
the fire adjusters engaged by appellant insurance company arrived and proceeded to examine and
photograph the premises, pored over the books of the insured and conducted an extensive
investigation. The plaintiff having submitted the corresponding fire claims, totalling P398,562.81 (but
reduced to the full amount of the insurance, P370,000), the Insurance Company resisted payment,
claiming violation of warranties and conditions, filing of fraudulent claims, and that the fire had been
deliberately caused by the insured or by other persons in connivance with him.
With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his
brother, Qua Chee Pao, and some employees of his, were indicted and tried in 1940 for the crime of
arson, it being claimed that they had set fire to the destroyed warehouses to collect the insurance.
They were, however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit WW).
Thereafter, the civil suit to collect the insurance money proceeded to its trial and termination in the
Court below, with the result noted at the start of this opinion. The Philippine National Bank's
complaint in intervention was dismissed because the appellee had managed to pay his indebtedness
to the Bank during the pendecy of the suit, and despite the fire losses.
In its first assignment of error, the insurance company alleges that the trial Court should have held
that the policies were avoided for breach of warranty, specifically the one appearing on a rider
pasted (with other similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders
were attached for the first time in 1939, and the pertinent portions read as follows:
Memo. of Warranty. The undernoted Appliances for the extinction of fire being kept on the
premises insured hereby, and it being declared and understood that there is an ample and
constant water supply with sufficient pressure available at all seasons for the same, it is
hereby warranted that the said appliances shall be maintained in efficient working order
during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed
on the premium chargeable under this policy.
Hydrants in the compound, not less in number than one for each 150 feet of external wall
measurement of building, protected, with not less than 100 feet of hose piping and nozzles
for every two hydrants kept under cover in convenient places, the hydrants being supplied
with water pressure by a pumping engine, or from some other source, capable of discharging
at the rate of not less than 200 gallons of water per minute into the upper story of the highest
building protected, and a trained brigade of not less than 20 men to work the same.'
It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640
feet, the appellee should have eleven (11) fire hydrants in the compound, and that he actually had
only two (2), with a further pair nearby, belonging to the municipality of Tabaco.
We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to
claim violation of the so-called fire hydrants warranty, for the reason that knowing fully all that the
number of hydrants demanded therein never existed from the very beginning, the appellant
neverthless issued the policies in question subject to such warranty, and received the corresponding
premiums. It would be perilously close to conniving at fraud upon the insured to allow appellant to
claims now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal
defect, of which it was informed, and after it had misled the defendant into believing that the policies
were effective.
The insurance company was aware, even before the policies were issued, that in the premises
insured there were only two fire hydrants installed by Qua Chee Gan and two others nearby, owned
by the municipality of TAbaco, contrary to the requirements of the warranty in question. Such fact
appears from positive testimony for the insured that appellant's agents inspected the premises; and
the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such
inspection was made is moreover rendered probable by its being a prerequisite for the fixing of the
discount on the premium to which the insured was entitled, since the discount depended on the
number of hydrants, and the fire fighting equipment available (See "Scale of Allowances" to which
the policies were expressly made subject). The law, supported by a long line of cases, is expressed
by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance of a policy of insurance,
has knowledge of existing facts which, if insisted on, would invalidate the contract from its
very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent
with the facts, and the insurer is stopped thereafter from asserting the breach of such
conditions. The law is charitable enough to assume, in the absence of any showing to the
contrary, that an insurance company intends to executed a valid contract in return for the
premium received; and when the policy contains a condition which renders it voidable at its
inception, and this result is known to the insurer, it will be presumed to have intended to
waive the conditions and to execute a binding contract, rather than to have deceived the
insured into thinking he is insured when in fact he is not, and to have taken his money
without consideration. (29 Am. Jur., Insurance, section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept
one's money for a policy of insurance which it then knows to be void and of no effect, though
it knows as it must, that the assured believes it to be valid and binding, is so contrary to the
dictates of honesty and fair dealing, and so closely related to positive fraud, as to the
abhorent to fairminded men. It would be to allow the company to treat the policy as valid long
enough to get the preium on it, and leave it at liberty to repudiate it the next moment. This
cannot be deemed to be the real intention of the parties. To hold that a literal construction of
the policy expressed the true intention of the company would be to indict it, for fraudulent
purposes and designs which we cannot believe it to be guilty of (Wilson vs. Commercial
Union Assurance Co., 96 Atl. 540, 543-544).
The inequitableness of the conduct observed by the insurance company in this case is heightened
by the fact that after the insured had incurred the expense of installing the two hydrants, the
company collected the premiums and issued him a policy so worded that it gave the insured a
discount much smaller than that he was normaly entitledto. According to the "Scale of Allowances," a
policy subject to a warranty of the existence of one fire hydrant for every 150 feet of external wall
entitled the insured to a discount of 7 1/2 per cent of the premium; while the existence of "hydrants,
in compund" (regardless of number) reduced the allowance on the premium to a mere 2 1/2 per
cent. This schedule was logical, since a greater number of hydrants and fire fighting appliances
reduced the risk of loss. But the appellant company, in the particular case now before us, so worded
the policies that while exacting the greater number of fire hydrants and appliances, it kept the
premium discount at the minimum of 2 1/2 per cent, thereby giving the insurance company a double
benefit. No reason is shown why appellant's premises, that had been insured with appellant for
several years past, suddenly should be regarded in 1939 as so hazardous as to be accorded a
treatment beyond the limits of appellant's own scale of allowances. Such abnormal treatment of the
insured strongly points at an abuse of the insurance company's selection of the words and terms of
the contract, over which it had absolute control.
These considerations lead us to regard the parol evidence rule, invoked by the appellant as not
applicable to the present case. It is not a question here whether or not the parties may vary a written
contract by oral evidence; but whether testimony is receivable so that a party may be, by reason of
inequitable conduct shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud
or imposition on the insured.
Receipt of Premiums or Assessments afte Cause for Forfeiture Other than Nonpayment. It
is a well settled rule of law that an insurer which with knowledge of facts entitling it to treat a
policy as no longer in force, receives and accepts a preium on the policy, estopped to take
advantage of the forfeiture. It cannot treat the policy as void for the purpose of defense to an
action to recover for a loss thereafter occurring and at the same time treat it as valid for the
purpose of earning and collecting further premiums." (29 Am. Jur., 653, p. 657.)
It would be unconscionable to permit a company to issue a policy under circumstances
which it knew rendered the policy void and then to accept and retain premiums under such a
void policy. Neither law nor good morals would justify such conduct and the doctrine of
equitable estoppel is peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co.
94 Pa. Super Ct. 457.)
Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly
interpreted aganst the prty that caused them, 1the "memo of warranty" invoked by appellant bars the
latter from questioning the existence of the appliances called for in the insured premises, since its
initial expression, "the undernoted appliances for the extinction of fire being kept on the premises
insured hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission of the
existence of such appliances which appellant cannot now contradict, should the parol evidence rule
apply.
The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally
rejected, since the appellant's argument thereon is based on the assumption that the insured was
bound to maintain no less than eleven hydrants (one per 150 feet of wall), which requirement
appellant is estopped from enforcing. The supposed breach of the wter pressure condition is made
to rest on the testimony of witness Serra, that the water supply could fill a 5-gallon can in 3 seconds;
appellant thereupon inferring that the maximum quantity obtainable from the hydrants was 100
gallons a minute, when the warranty called for 200 gallons a minute. The transcript shows, however,
that Serra repeatedly refused and professed inability to estimate the rate of discharge of the water,
and only gave the "5-gallon per 3-second" rate because the insistence of appellant's counsel forced
the witness to hazard a guess. Obviously, the testimony is worthless and insufficient to establish the
violation claimed, specially since the burden of its proof lay on appellant.
As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was
organized, and drilled, from time to give, altho not maintained as a permanently separate unit, which
the warranty did not require. Anyway, it would be unreasonable to expect the insured to maintain for
his compound alone a fire fighting force that many municipalities in the Islands do not even possess.
There is no merit in appellant's claim that subordinate membership of the business manager (Co
Cuan) in the fire brigade, while its direction was entrusted to a minor employee unders the testimony
improbable. A business manager is not necessarily adept at fire fighting, the qualities required being
different for both activities.
Under the second assignment of error, appellant insurance company avers, that the insured violated
the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline,
since appellee admitted that there were 36 cans (latas) of gasoline in the building designed as
"Bodega No. 2" that was a separate structure not affected by the fire. It is well to note that gasoline is
not specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The
cause relied upon by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their
liquid products having a flash point below 300o Fahrenheit", and is decidedly ambiguous and
uncertain; for in ordinary parlance, "Oils" mean "lubricants" and not gasoline or kerosene. And how
many insured, it may well be wondered, are in a position to understand or determine "flash point
below 003o Fahrenheit. Here, again, by reason of the exclusive control of the insurance company
over the terms and phraseology of the contract, the ambiguity must be held strictly against the
insurer and liberraly in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175;
29 Am. Jur. 180).
Insurance is, in its nature, complex and difficult for the layman to understand. Policies are
prepared by experts who know and can anticipate the hearing and possible complications of
every contingency. So long as insurance companies insist upon the use of ambiguous,
intricate and technical provisions, which conceal rather than frankly disclose, their own
intentions, the courts must, in fairness to those who purchase insurance, construe every
ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA
1917A, 1237.)
An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat
the very purpose for which the policy was procured (Moore vs. Aetna Life Insurance Co.,
LRA 1915D, 264).
We see no reason why the prohibition of keeping gasoline in the premises could not be expressed
clearly and unmistakably, in the language and terms that the general public can readily understand,
without resort to obscure esoteric expression (now derisively termed "gobbledygook"). We reiterate
the rule stated in Bachrach vs. British American Assurance Co. (17 Phil. 555, 561):
If the company intended to rely upon a condition of that character, it ought to have been
plainly expressed in the policy.
This rigid application of the rule on ambiguities has become necessary in view of current business
practices. The courts cannot ignore that nowadays monopolies, cartels and concentrations of capital,
endowed with overwhelming economic power, manage to impose upon parties dealing with them
cunningly prepared "agreements" that the weaker party may not change one whit, his participation in
the "agreement" being reduced to the alternative to take it or leave it" labelled since Raymond
Baloilles" contracts by adherence" (con tracts d'adhesion), in contrast to these entered into by
parties bargaining on an equal footing, such contracts (of which policies of insurance and
international bills of lading are prime examples) obviously call for greater strictness and vigilance on
the part of courts of justice with a view to protecting the weaker party from abuses and imposition,
and prevent their becoming traps for the unwarry (New Civil Coee, Article 24; Sent. of Supreme
Court of Spain, 13 Dec. 1934, 27 February 1942).
Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad,
habra de ser tenido en cuenta que al seguro es, practicamente un contrato de los llamados
de adhesion y por consiguiente en caso de duda sobre la significacion de las clausulas
generales de una poliza redactada por las compafijas sin la intervencion alguna de sus
clientes se ha de adoptar de acuerdo con el articulo 1268 del Codigo Civil, la
interpretacion mas favorable al asegurado, ya que la obscuridad es imputable a la empresa
aseguradora, que debia haberse explicado mas claramante. (Dec. Trib. Sup. of Spain 13
Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but
equally so for the insurer; in fact, it is mere so for the latter, since its dominant bargaining position
carries with it stricter responsibility.
Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only
incidental to his business, being no more than a customary 2 day's supply for the five or six motor
vehicles used for transporting of the stored merchandise (t. s. n., pp. 1447-1448). "It is well settled
that the keeping of inflammable oils on the premises though prohibited by the policy does not void it
if such keeping is incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555,
560); and "according to the weight of authority, even though there are printed prohibitions against
keeping certain articles on the insured premises the policy will not be avoided by a violation of these
prohibitions, if the prohibited articles are necessary or in customary use in carrying on the trade or
business conducted on the premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section
966b). It should also be noted that the "Hemp Warranty" forbade storage only "in the building to
which this insurance applies and/or in any building communicating therewith", and it is undisputed
that no gasoline was stored in the burned bodegas, and that "Bodega No. 2" which was not burned
and where the gasoline was found, stood isolated from the other insured bodegas.
The charge that the insured failed or refused to submit to the examiners of the insurer the books,
vouchers, etc. demanded by them was found unsubstantiated by the trial Court, and no reason has
been shown to alter this finding. The insured gave the insurance examiner all the date he asked for
(Exhibits AA, BB, CCC and Z), and the examiner even kept and photographed some of the
examined books in his possession. What does appear to have been rejected by the insured was the
demand that he should submit "a list of all books, vouchers, receiptsand other records" (Age 4,
Exhibit 9-c); but the refusal of the insured in this instance was well justified, since the demand for a
list of all the vouchers (which were not in use by the insured) and receipts was positively
unreasonable, considering that such listing was superfluous because the insurer was not denied
access to the records, that the volume of Qua Chee Gan's business ran into millions, and that the
demand was made just after the fire when everything was in turmoil. That the representatives of the
insurance company were able to secure all the date they needed is proved by the fact that the
adjuster Alexander Stewart was able to prepare his own balance sheet (Exhibit L of the criminal
case) that did not differ from that submitted by the insured (Exhibit J) except for the valuation of the
merchandise, as expressly found by the Court in the criminal case for arson. (Decision, Exhibit WW).
How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the
decision of the arson case (Exhibit WW) acquiting Qua Choc Gan, appellee in the present
proceedings. The decision states (Exhibit WW, p. 11):
Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi
como su existencia de copra y abaca en las bodega al tiempo del incendio durante el
periodo comprendido desde el 1.o de enero al 21 de junio de 1940 y ha encontrado que Qua
Choc Gan ha sufrico una perdida de P1,750.76 en su negocio en Tabaco. Segun Steward al
llegar a este conclusion el ha tenidoen cuenta el balance de comprobacion Exhibit 'J' que le
ha entregado el mismo acusado Que Choc Gan en relacion con sus libros y lo ha
encontrado correcto a excepcion de los precios de abaca y copra que alli aparecen que no
estan de acuerdo con los precios en el mercado. Esta comprobacion aparece en el balance
mercado exhibit J que fue preparado por el mismo testigo.
In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the
insurer, the Court referred the controversy to a government auditor, Apolonio Ramos; but the latter
reached a different result from the other two. Not only that, but Ramos reported two different
valuations that could be reached according to the methods employed (Exhibit WW, p. 35):
La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para
promovar el comercio y la finanza, pero en el caso presente ha resultado un tanto
cumplicada y acomodaticia, como lo prueba el resultado del examen hecho por los
contadores Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo examinado
las mismas partidas y los mismos libros dichos contadores hayan de llegara dos
conclusiones que difieron sustancialmente entre si. En otras palabras, no solamente la
comprobacion hecha por Stewart difiere de la comprobacion hecha por Ramos sino que,
segun este ultimo, su comprobacion ha dado lugar a dos resultados diferentes dependiendo
del metodo que se emplea.
Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer
attempted to bolster its case with alleged photographs of certain pages of the insurance book
(destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A and 26-B) and allegedly showing
abnormal purchases of hemp and copra from June 11 to June 20, 1940. The Court below remained
unconvinced of the authenticity of those photographs, and rejected them, because they were not
mentioned not introduced in the criminal case; and considering the evident importance of said
exhibits in establishing the motive of the insured in committing the arson charged, and the absence
of adequate explanation for their omission in the criminal case, we cannot say that their rejection in
the civil case constituted reversible error.
The next two defenses pleaded by the insurer, that the insured connived at the loss and that the
fraudulently inflated the quantity of the insured stock in the burnt bodegas, are closely related to
each other. Both defenses are predicted on the assumption that the insured was in financial
difficulties and set the fire to defraud the insurance company, presumably in order to pay off the
Philippine National Bank, to which most of the insured hemp and copra was pledged. Both defenses
are fatally undermined by the established fact that, notwithstanding the insurer's refusal to pay the
value of the policies the extensive resources of the insured (Exhibit WW) enabled him to pay off the
National Bank in a short time; and if he was able to do so, no motive appears for attempt to defraud
the insurer. While the acquittal of the insured in the arson case is not res judicata on the present civil
action, the insurer's evidence, to judge from the decision in the criminal case, is practically identical
in both cases and must lead to the same result, since the proof to establish the defense of
connivance at the fire in order to defraud the insurer "cannot be materially less convincing than that
required in order to convict the insured of the crime of arson"(Bachrach vs. British American
Assurance Co., 17 Phil. 536).
As to the defense that the burned bodegas could not possibly have contained the quantities of copra
and hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates,
inferences and conclusionsAs to the defense that the burned bodegas could not possibly have
contained the quantities of copra and hemp stated in the fire claims, the insurer's case rests almost
exclusively on the estimates, inferences and conclusions of its adjuster investigator, Alexander D.
Stewart, who examined the premises during and after the fire. His testimony, however, was based on
inferences from the photographs and traces found after the fire, and must yield to the contradictory
testimony of engineer Andres Bolinas, and specially of the then Chief of the Loan Department of the
National Bank's Legaspi branch, Porfirio Barrios, and of Bank Appraiser Loreto Samson, who
actually saw the contents of the bodegas shortly before the fire, while inspecting them for the
mortgagee Bank. The lower Court was satisfied of the veracity and accuracy of these witnesses, and
the appellant insurer has failed to substantiate its charges aganst their character. In fact, the
insurer's repeated accusations that these witnesses were later "suspended for fraudulent
transactions" without giving any details, is a plain attempt to create prejudice against them, without
the least support in fact.
Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp
burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on the refusal of the Court below to
accept its inferences from the remains shown in the photographs of the burned premises. It appears,
likewise, that the adjuster's calculations of the maximum contents of the destroyed warehouses
rested on the assumption that all the copra and hemp were in sacks, and on the result of his
experiments to determine the space occupied by definite amounts of sacked copra. The error in the
estimates thus arrived at proceeds from the fact that a large amount of the insured's stock were in
loose form, occupying less space than when kept in sacks; and from Stewart's obvious failure to give
due allowance for the compression of the material at the bottom of the piles (t. s. n., pp. 1964, 1967)
due to the weight of the overlying stock, as shown by engineer Bolinas. It is probable that the errors
were due to inexperience (Stewart himself admitted that this was the first copra fire he had
investigated); but it is clear that such errors render valueles Stewart's computations. These were in
fact twice passed upon and twice rejected by different judges (in the criminal and civil cases) and
their concordant opinion is practically conclusive.
The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since
the opinions stated therein were based on ex parte investigations made at the back of the insured;
and the appellant did not present at the trial the original testimony and documents from which the
conclusions in the report were drawn.lawphi1.net
Appellant insurance company also contends that the claims filed by the insured contained false and
fraudulent statements that avoided the insurance policy. But the trial Court found that the
discrepancies were a result of the insured's erroneous interpretation of the provisions of the
insurance policies and claim forms, caused by his imperfect knowledge of English, and that the
misstatements were innocently made and without intent to defraud. Our review of the lengthy record
fails to disclose reasons for rejecting these conclusions of the Court below. For example, the
occurrence of previous fires in the premises insured in 1939, altho omitted in the claims, Exhibits EE
and FF, were nevertheless revealed by the insured in his claims Exhibits Q (filed simultaneously with
them), KK and WW. Considering that all these claims were submitted to the smae agent, and that
this same agent had paid the loss caused by the 1939 fire, we find no error in the trial Court's
acceptance of the insured's explanation that the omission in Exhibits EE and FF was due to
inadvertance, for the insured could hardly expect under such circumstances, that the 1939 would
pass unnoticed by the insurance agents. Similarly, the 20 per cent overclaim on 70 per cent of the
hemo stock, was explained by the insured as caused by his belief that he was entitled to include in
the claim his expected profit on the 70 per cent of the hemp, because the same was already
contracted for and sold to other parties before the fire occurred. Compared with other cases of overvaluation recorded in our judicial annals, the 20 per cent excess in the case of the insured is not by
itself sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134,
the claim was fourteen (14) times (1,400 per cent) bigger than the actual loss; in Go Lu vs. Yorkshire
Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs. North China Ins. Co., 47
Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled
P31,860.85 while the goods insured were inventoried at O13,113. Certainly, the insured's overclaim
of 20 per cent in the case at bar, duly explained by him to the Court a quo, appears puny by
comparison, and can not be regarded as "more than misstatement, more than inadvertence of
mistake, more than a mere error in opinion, more than a slight exaggeration" (Tan It vs. Sun
Insurance Office, ante) that would entitle the insurer to avoid the policy. It is well to note that the
overchange of 20 per cent was claimed only on apart (70 per cent) of the hemp stock; had the
insured acted with fraudulent intent, nothing prevented him from increasing the value of all of his
copra, hemp and buildings in the same proportion. This also applies to the alleged fraudulent claim
for burned empty sacks, that was likewise explained to our satisfaction and that of the trial Court.
The rule is that to avoid a policy, the false swearing must be wilful and with intent to defraud (29 Am.
Jur., pp. 849-851) which was not the cause. Of course, the lack of fraudulent intent would not
authorize the collection of the expected profit under the terms of the polices, and the trial Court
correctly deducte the same from its award.
We find no reversible error in the judgment appealed from, wherefore the smae is hereby affirmed.
Costs against the appellant. So ordered.
G.R. No. L-21821-22 and L-21824-27
Plaintiff-appellant was an employee of Broadway Cotton Factory at Grace Park, Caloocan City,
working as mechanic operator, with monthly salary of P185.00. In the latter part of 1953, he took
Personal Accident Policies from several insurance companies, among which are herein defendantsappellees, on different dates,1 effective for 12 months. During the effectivity of these policies, or on
December 24, 1953, a fire broke out in the factory where plaintiff was working. As he was trying to
put out said fire with the help of a fire extinguisher, a heavy object fell upon his left hand. Plaintiff
received treatment at the National Orthopedic Hospital from December 26, 1953 to February 8,
1954, for the following injuries, to wit:
(1) Fracture, simple, oraximal phalanx, index finger, left;
(2) Fracture, compound, communite proximal phalanx, middle finger, left and 2nd phalanx
simple;
(3) Fracture, compound, communite phalanx, 4th finger, left;
(4) Fracture, simple, middle phalanx, middle finger, left;
(5) Lacerated wound, sutured, volar aspect, small finger, left;
(6) Fracture, simple, chip, head, 1st phalanx 5th digit, left.
which injuries, the attending surgeon certified, would cause temporary total disability of appellant's
left hand.
As the insurance companies refused to pay his claim for compensation under the policies by reason
of the said disability of his left hand, Ty filed motions in the Municipal Court of Manila, which
rendered favorable decision. On appeal to the Court of First Instance by the insurance companies,
the cases were dismissed on the ground that under the uniform terms of the insurance policies,
partial disability of the insured caused by loss of either hand to be compensable, the loss must result
in the amputation of that hand. Hence, these appeals by the insured.
1wph1.t
Plaintiff-appellant is basing his claim for indemnity under the provision of the insurance contract,
uniform in all the cases, which reads:
"INDEMNITY FOR TOTAL OR PARTIAL DISABILITY
If the Insured sustains any Bodily Injury which is effected solely through violent, external,
visible and accidental means, and which shall not prove fatal but shall result, independently
of all other causes and within sixty (60) days from the occurrence, thereof, in Total or Partial
Disability of the Insured, the Company shall pay, subject to the exceptions as provided for
hereinafter, the amount set opposite such injury.
xxx
PARTIAL DISABILITY
LOSS OF:
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
The loss of a hand shall mean the loss, by amputation through the bones of the wrist.
Appellant contends that to be entitled to indemnification under the foregoing provision, it is enough
that the insured is disabled to such an extent that he cannot substantially perform all acts or duties of
the kind necessary in the prosecution of his business. It is argued that what is compensable is the
disability and not the amputation of the hand. The definition of what constitutes loss of hand, placed
in the contract, according to appellant, consequently, makes the provision ambiguous and calls for
the interpretation thereof by this Court.
This is not the first time that the proper construction of this provision, which is uniformly carried in
personal accident policies, has been questioned. Herein appellant himself has already brought this
matter to the attention of this Court in connection with the other accident policies which he took and
under which he had tried to collect indemnity, for the identical injury that is the basis of the claims in
these cases. And, we had already ruled:
While we sympathize with the plaintiff or his employer, for whose benefit the policies were
issued, we can not go beyond the clear and express conditions of the insurance policies, all
of which definite partial disability as loss of either hand by amputation through the bones of
the wrist. There was no such amputation in the case at bar. All that was found by the trial
court, which is not disputed on appeal, was that the physical injuries "caused temporary total
disability of plaintiff's left hand." Note that the disability of plaintiff's hand was merely
temporary, having been caused by fractures of the index, the middle and the fourth fingers of
the left hand.
We might add that the agreement contained in the insurance policies is the law between the parties.
As the terms of the policies are clear, express and specific that only amputation of the left hand
should be considered as a loss thereof, an interpretation that would include the mere fracture or
other temporary disability not covered by the policies would certainly be unwarranted. 2
We find no reason to depart from the foregoing ruling on the matter.
Plaintiff-appellant cannot come to the courts and claim that he was misled by the terms of the
contract. The provision is clear enough to inform the party entering into that contract that the loss to
be considered a disability entitled to indemnity, must be severance or amputation of that affected
member from the body of the insured.
Wherefore, finding no error in the decision appealed from, the same is hereby affirmed, without
costs. So ordered.
Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ.,
concur.
Footnotes
South Sea Surety & Ins. Co., Dec. 17, 1963; The Philippine Guaranty Company, Inc., Oct.
30, 1953; Universal Ins. & Indemnity Co., Oct. 30, 1953; Filipinas Compaia de Seguros,
Oct. 30, 1953; People's Surety & Ins. Co., Oct. 19, 1953; Plaridel Surety & Ins. Co., Dec. 22,
1953, Pacific Union, Ins.Co., Nov. 18, 1953.
1
Ty v. First National Surety & Ins. Co., G.R. Nos. L-16133-16145, April 29, 1961.
xxx
xxx
On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir, filed a claim for
payment with defendant company, and on September 13, 1957, defendant company paid to him
(plaintiff) the sum of P1,000.00, pursuant to Section 1 of Part I of the policy. The receipt signed by
plaintiff reads
RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC., the sum of
PESOS ONE THOUSAND (P1,000.00) Philippine Currency, being settlement in
full for all claims and demands against said Company as a result of an accident
which occurred on February 26, 1957, insured under out ACCIDENT Policy No.
7136, causing the death of the Assured.
In view of the foregoing, this policy is hereby surrendered and CANCELLED.
LOSS COMPUTATION
Amount of Insurance
P1,000.00
__________
vvvvv
On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant company
acknowledging receipt by his client (plaintiff herein), of the P1,000.00, but informing said company
that said amount was not the correct one. Atty. Francisco claimed
The amount payable under the policy, I believe should be P1,500.00 under the provision of
Section 2, part 1 of the policy, based on the rule of pari materia as the death of the insured
occurred under the circumstances similar to that provided under the aforecited section.
Defendant company, upon receipt of the letter, referred the matter to the Insurance Commissioner,
who rendered an opinion that the liability of the company was only P1,000.00, pursuant to Section 1,
Part I of the Provisions of the policy (Exh. F, or 3). Because of the above opinion, defendant
insurance company refused to pay more than P1,000.00. In the meantime, Atty. Vicente Francisco,
in a subsequent letter to the insurance company, asked for P3,000.00 which the Company refused,
to pay. Hence, a complaint for the recovery of the balance of P2,000.00 more was instituted with the
Court of First Instance of Rizal (Pasay City, Branch VII), praying for it further sum of P10,000.00 as
attorney's fees, expenses of litigation and costs.
Defendant Insurance Company presented a Motion to Dismiss, alleging that the demand or claim is
set forth in the complaint had already been released, plaintiff having received the full amount due as
appearing in policy and as per opinion of the Insurance Commissioner. An opposition to the motion
to dismiss, was presented by plaintiff, and other pleadings were subsequently file by the parties. On
December 28, 1957, the trial court deferred action on the motion to dismiss until termination of the
trial of the case, it appearing that the ground thereof was not indubitable. In the Answer to the
complaint, defendant company practically admitted all the allegations therein, denying only those
which stated that under the policy its liability was P3,000.00.
On September 1, 1958, the trial court promulgated an Amended Decision, the pertinent portions of
which read
xxx
xxx
xxx
Since the contemporaneous and subsequent acts of the parties show that it was not their
intention that the payment of P1,000.00 to the plaintiff and the signing of the loss receipt
exhibit "1" would be considered as releasing the defendant completely from its liability on the
policy in question, said intention of the parties should prevail over the contents of the loss
receipt "1" (Articles 1370 and 1371, New Civil Code).
". . . . Under the terms of this policy, defendant company agreed to pay P1,000.00 to
P3,000.00 as indemnity for the death of the insured. The insured died of drowning. Death by
drowning is covered by the policy the pertinent provisions of which reads as follows:
xxx
xxx
xxx
"Part I of the policy fixes specific amounts as indemnities in case of death resulting
from "bodily injury which is effected solely thru violence, external, visible and
accidental means" but, Part I of the Policy is not applicable in case of death by
drowning because death by drowning is not one resulting from "bodily injury which is
affected solely thru violent, external, visible and accidental means" as "Bodily Injury"
means a cut, a bruise, or a wound and drowning is death due to suffocation and not
to any cut, bruise or wound."
xxx
xxx
xxx
Besides, on the face of the policy Exhibit "A" itself, death by drowning is a ground for
recovery apart from the bodily injury because death by bodily injury is covered by Part I of
the policy while death by drowning is covered by Part VI thereof. But while the policy
mentions specific amounts that may be recovered for death for bodily injury, yet, there is not
specific amount mentioned in the policy for death thru drowning although the latter is, under
Part VI of the policy, a ground for recovery thereunder. Since the defendant has bound itself
to pay P1000.00 to P3,000.00 as indemnity for the death of the insured but the policy does
not positively state any definite amount that may be recovered in case of death by drowning,
there is an ambiguity in this respect in the policy, which ambiguity must be interpreted in
favor of the insured and strictly against the insurer so as to allow greater indemnity.
xxx
xxx
xxx
. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already paid the
amount of P1,000.00 to the plaintiff so that there still remains a balance of P2,000.00 of the
amount to which plaintiff is entitled to recover under the policy Exhibit "A".
The plaintiff asks for an award of P10,000.00 as attorney's fees and expenses of litigation.
However, since it is evident that the defendant had not acted in bad faith in refusing to pay
plaintiff's claim, the Court cannot award plaintiff's claim for attorney's fees and expenses of
litigation.
IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside its decision
dated July 21, 1958 and hereby renders judgment, ordering the defendant to pay plaintiff the
sum of Two Thousand (P2,000.00) Pesos and to pay the costs.
The above judgment was appealed to the Court of Appeals on three (3) counts. Said Court, in a
Resolution dated September 29, 1959, elevated the case to this Court, stating that the genuine issue
is purely legal in nature.
All the parties agree that indemnity has to be paid. The conflict centers on how much should the
indemnity be. We believe that under the proven facts and circumstances, the findings and
conclusions of the trial court, are well taken, for they are supported by the generally accepted
principles or rulings on insurance, which enunciate that where there is an ambiguity with respect to
the terms and conditions of the policy, the same will be resolved against the one responsible thereof.
It should be recalled in this connection, that generally, the insured, has little, if any, participation in
the preparation of the policy, together with the drafting of its terms and Conditions. The interpretation
of obscure stipulations in a contract should not favor the party who cause the obscurity (Art. 1377,
N.C.C.), which, in the case at bar, is the insurance company.
. . . . And so it has been generally held that the "terms in an insurance policy, which are
ambiguous, equivocal or uncertain . . . are to be construed strictly against, the insurer, and
liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment
to the insured, especially where a forfeiture is involved," (29 Am. Jur. 181) and the reason for
this rule is that the "insured usually has no voice in the selection or arrangement of the words
employed and that the language of the contract is selected with great care and deliberation
by expert and legal advisers employed by, and acting exclusively in the interest of, the
insurance company" (44 C.J.S. 1174). Calanoc v. Court of Appeals, et al., G.R. No. L-8151,
Dec. 16, 1955.
. . . . Where two interpretations, equally fair, of languages used in an insurance policy may
be made, that which allows the greater indemnity will prevail. (L'Engel v. Scotish Union &
Nat. F. Ins. Co., 48 Fla. 82, 37 So. 462, 67 LRA 581 111 Am. St. Rep. 70, 5 Ann. Cas. 749).
At any event, the policy under consideration, covers death or disability by accidental means, and the
appellant insurance company agreed to pay P1,000.00 to P3,000.00. is indemnity for death of the
insured.
In view of the conclusions reached, it would seem unnecessary to discuss the other issues raised in
the appeal.
The judgment appealed from is hereby affirmed. Without costs.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Dizon and Regala, JJ.,
concur.
Makalintal, J., reserves his vote.
G.R. No. L-21380
xxx
xxx
3. At its option, the Company may pay in cash the amount of the loss or damage or may
repair, reinstate or replace the Motor Vehicle or any part thereof or its accessories or spare
parts. The liability of the Company shall not exceed the value of the parts lost or damaged
and the reasonable cost of fitting such parts or the value of the Motor Vehicle at the time of
the loss or damage whichever is the loss. The Insured's estimate of value stated in the
schedule shall be the maximum amount payable by the Company in respect of any claim for
loss or damage.
1wph1.t
xxx
xxx
xxx
4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for
which the Company may be liable under this policy provided that:
(a) the estimated cost of such repair does not exceed the authorized Repair Limit.
(b) a detailed estimate of the cost is forwarded to the Company without delay.
and providing also that the authorized repair limit is P150.00.
At around eleven o'clock in the evening of 25 November 1961, and while the above-mentioned
insurance policy was in force, the insured car, while traveling along in Aurora Boulevard in front of
the Pepsi-Cola plant in Quezon City, passed over a water hole which the driver did not see because
an oncoming car did not dim its light. The crankcase and flywheel housing of the car broke when it
hit a hollow block lying alongside the water hole. At the instance of the plaintiff-appellee, the car was
towed and repaired by Morosi Motors at its shop at 1906 Taft Avenue Extension at a total cost of
P302.27.
On 29 November 1961, when the repairs on the car had already been made, the plaintiff-appellee
made a report of the accident to the defendant-appellant Capital Insurance & Surety Company.
Since the defendant-appellant refused to pay for the total cost of to wage and repairs, suit was filed
in the municipal court originally.
The case before Us is now a direct appeal on a point of law from the judgment of the Court of First
Instance of Manila finding for the plaintiff and against the defendant-insurer in its Civil Case No.
51757. Per our resolution on 13 February 1964, it was resolved to proceed with the case without the
appellee's brief, which was filed late.
The defendant-appellant admits liability in the amount of P150, but not for any excess thereof.
The lower court did not exonerate the said appellant for the excess because, according to it, the
company's absolution would render the insurance contract one-sided and that the said insurer had
not shown that the cost of repairs in the sum of P302.27 is unreasonable, excessive or padded, nor
had it shown that it could have undertaken the repairs itself at less expense.
The above reasoning is beside the point, because the insurance policy stipulated in paragraph 4 that
if the insured authorizes the repair the liability of the insurer, per its sub-paragraph (a), is limited to
P150.00. The literal meaning of this stipulation must control, it being the actual contract, expressly
and plainly provided for in the policy (Art. 1370, Civil Code; Young vs. Midland Textile Ins. Co., 30
Phil. 617; Ty vs. First Nat. Surety & Assur. Co., Inc., L-16138-45, 29 April 1961).
The lower court's recourse to legal hermeneutics is not called for because paragraph 4 of the policy
is clear and specific and leaves no room for interpretation. The interpretation given is even
unjustified because it opposes what was specifically stipulated. Thus, it will be observed that the
policy drew out not only the limits of the insurer's liability but also the mechanics that the insured had
to follow to be entitled to full indemnity of repairs. The option to undertake the repairs is accorded to
the insurance company per paragraph 2. The said company was deprived of the option because the
insured took it upon itself to have the repairs made, and only notified the insurer when the repairs
were done. As a consequence, paragraph 4, which limits the company's liability to P150.00, applies.
The insurance contract may be rather onerous ("one-sided", as the lower court put it), but that in
itself does not justify the abrogation of its express terms, terms which the insured accepted or
adhered to and which is the law between the contracting parties.
Finally, to require the insurer to prove that the cost of the repairs ordered by the insured is
unreasonable, as the appealed decision does, when the insurer was not given an opportunity to
inspect and assess the damage before the repairs were made, strikes Us as contrary to elementary
justice and equity.
For the foregoing reasons, the appealed decision is hereby modified by ordering the defendantappellant Capital Insurance & Surety Company, Inc. to pay not more than P150.00 to the plaintiffappellee Misamis Lumber Corporation. Each party shall bear its own costs and attorney's fees.
G.R. No. 75605 January 22, 1993
RAFAEL (REX) VERENDIA, petitioner,
vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES, respondents.
G.R. No. 76399 January 22, 1993
FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,
vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.
B.L. Padilla for petitioner.
Sabino Padilla, Jr. for Fidelity & Surety, Co.
MELO, J.:
The two consolidated cases involved herein stemmed from the issuance by Fidelity and
Surety Insurance Company of the Philippines (Fidelity for short) of its Fire Insurance Policy
No. F-18876 effective between June 23, 1980 and June 23, 1981 covering Rafael (Rex)
Verendia's residential building located at Tulip Drive, Beverly Hills, Antipolo, Rizal in the
amount of P385,000.00. Designated as beneficiary was the Monte de Piedad & Savings Bank.
Verendia also insured the same building with two other companies, namely, The Country
Bankers Insurance for P56,000.00 under Policy No. PDB-80-1913 expiring on May 12, 1981,
and The Development Insurance for P400,000.00 under Policy No. F-48867 expiring on June
30, 198l.
While the three fire insurance policies were in force, the insured property was completely
destroyed by fire on the early morning of December 28, 1980. Fidelity was accordingly
informed of the loss and despite demands, refused payment under its policy, thus prompting
Verendia to file a complaint with the then Court of First Instance of Quezon City, praying for
payment of P385,000.00, legal interest thereon, plus attorney's fees and litigation expenses.
The complaint was later amended to include Monte de Piedad as an "unwilling defendant" (P.
16, Record).
Answering the complaint, Fidelity, among other things, averred that the policy was avoided
by reason of over-insurance; that Verendia maliciously represented that the building at the
time of the fire was leased under a contract executed on June 25, 1980 to a certain Roberto
Garcia, when actually it was a Marcelo Garcia who was the lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in
favor of Fidelity. In sustaining the defenses set up by Fidelity, the trial court ruled that
Paragraph 3 of the policy was also violated by Verendia in that the insured failed to inform
Fidelity of his other insurance coverages with Country Bankers Insurance and Development
Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a decision promulgated on
March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome, and Ejercito (P), JJ.),
the appellate court reversed for the following reasons: (a) there was no misrepresentation
concerning the lease for the contract was signed by Marcelo Garcia in the name of Roberto
Garcia; and (b) Paragraph 3 of the policy contract requiring Verendia to give notice to Fidelity
of other contracts of insurance was waived by Fidelity as shown by its conduct in attempting
to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986, but instead of
directly filing a motion for reconsideration within 15 days therefrom, Fidelity filed on April 21,
1986, a motion for extension of 3 days within which to file a motion for reconsideration. The
motion for extension was not filed on April 19, 1986 which was the 15th day after receipt of
the decision because said 15th day was a Saturday and of course, the following day was a
Sunday (p. 14., Rollo of G.R. No. 75605). The motion for extension was granted by the
appellate court on April 30, 1986 (p. 15. ibid.), but Fidelity had in the meantime filed its motion
for reconsideration on April 24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration on
the ground that the motion for extension was filed out of time because the 15th day from
receipt of the decision which fell on a Saturday was ignored by Fidelity, for indeed, so
Verendia contended, the Intermediate Appellate Court has personnel receiving pleadings
even on Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for
reconsideration was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the petition herein
docketed as G.R. No. 75605 was initiated. Subsequently, or more specifically on October 21,
1986, the appellate court denied Fidelity's motion for reconsideration and account thereof.
Fidelity filed on March 31, 1986, the petition for review on certiorari now docketed as G.R. No.
76399. The two petitions, inter-related as they are, were consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is the petition for
review oncertiorari, we must first determine whether the decision of the appellate court may
still be reviewed, or whether the same is beyond further judicial scrutiny. Stated otherwise,
before anything else, inquiry must be made into the issue of whether Fidelity could have
legally asked for an extension of the 15-day reglementary period for appealing or for moving
for reconsideration.
As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that the
pendency of a motion for extension of time to perfect an appeal does not suspend the
running of the period sought to be extended (Garcia vs. Buenaventura 74 Phil. 611 [1944]). To
the same effect were the rulings in Gibbs vs. CFI of Manila (80 Phil. 160 [1948]) Bello vs.
Fernando (4 SCRA 138 [1962]), and Joe vs. King(20 SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not expressly prohibit
the filing of a motion for extension of time to file a motion for reconsideration in regard to a
final order or judgment, magistrates, including those in the Court of Appeals, held sharply
divided opinions on whether the period for appealing which also includes the period for
moving to reconsider may be extended. The matter was not definitely settled until this Court
issued its Resolution in Habaluyas Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring
that beginning one month from the promulgation of the resolution on May 30, 1986
. . . the rule shall be strictly enforced that no motion for extension of time to
file a motion for new trial or reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before June 30, 1986,
although, of course, Verendia's motion to expunge the motion for reconsideration was not
finally disposed until July 22, 1986, or after the dictum in Habaluyas had taken effect.
Seemingly, therefore, the filing of the motion for extension came before its formal
proscription under Habaluyas, for which reason we now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not the
contract of lease submitted by Verendia to support his claim on the fire insurance policy
constitutes a false declaration which would forfeit his benefits under Section 13 of the policy
and (b) whether or not, in submitting the subrogation receipt in evidence, Fidelity had in
effect agreed to settle Verendia's claim in the amount stated in said receipt. 1
Verging on the factual, the issue of the veracity or falsity of the lease contract could have
been better resolved by the appellate court for, in a petition for review on certiorari under
Rule 45, the jurisdiction of this Court is limited to the review of errors of law. The appellate
court's findings of fact are, therefore, conclusive upon this Court except in the following
cases: (1) when the conclusion is a finding grounded entirely on speculation, surmises, or
conjectures; (2) when the inference made is manifestly absurd, mistaken, or impossible; (3)
when there is grave abuse of discretion in the appreciation of facts; (4) when the judgment is
premised on a misapprehension of facts; (5) when the findings of fact are conflicting; and (6)
when the Court of Appeals in making its findings went beyond the issues of the case and the
same are contrary to the admissions of both appellant and appellee (Ronquillo v. Court of
Appeals, 195 SCRA 433 [1991]). In view of the conflicting findings of the trial court and the
appellate court on important issues in these consolidated cases and it appearing that the
appellate court judgment is based on a misapprehension of facts, this Court shall review the
evidence on record.
The contract of lease upon which Verendia relies to support his claim for insurance benefits,
was entered into between him and one Robert Garcia, married to Helen Cawinian, on June 25,
1980 (Exh. "1"), a couple of days after the effectivity of the insurance policy. When the rented
residential building was razed to the ground on December 28, 1980, it appears that Robert
Garcia (or Roberto Garcia) was still within the premises. However, according to the
investigation report prepared by Pat. Eleuterio M. Buenviaje of the Antipolo police, the
building appeared to have "no occupant" and that Mr. Roberto Garcia was "renting on the
otherside (sic) portion of said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that Marcelo
Garcia, whom he considered as the real lessee, was occupying the building when it was
burned (TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster was
able to locate him. Robert Garcia then executed an affidavit before the National Intelligence
and Security Authority (NISA) to the effect that he was not the lessee of Verendia's house and
that his signature on the contract of lease was a complete forgery. Thus, on the strength of
these facts, the adjuster submitted a report dated December 4, 1981 recommending the
denial of Verendia's claim (Exh. "2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed the
lease contract. According to Verendia, it was signed by Marcelo Garcia, cousin of Robert,
who had been paying the rentals all the while. Verendia, however, failed to explain why
Marcelo had to sign his cousin's name when he in fact was paying for the rent and why he
(Verendia) himself, the lessor, allowed such a ruse. Fidelity's conclusions on these proven
facts appear, therefore, to have sufficient bases; Verendia concocted the lease contract to
deflect responsibility for the fire towards an alleged "lessee", inflated the value of the
property by the alleged monthly rental of P6,500 when in fact, the Provincial Assessor of
Rizal had assessed the property's fair market value to be only P40,300.00, insured the same
property with two other insurance companies for a total coverage of around P900,000, and
created a dead-end for the adjuster by the disappearance of Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the parties
(Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and
conditions constitute the measure of the insurer's liability and compliance therewith is a
condition precedent to the insured's right to recovery from the insurer (Oriental Assurance
Corporation vs. Court of Appeals, 200 SCRA 459 [1991], citing Perla Compania de Seguros,
Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). As it is also a contract of adhesion, an
insurance contract should be liberally construed in favor of the insured and strictly against
the insurer company which usually prepares it (Western Guaranty Corporation vs. Court of
Appeals, 187 SCRA 652 [1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia used a
false lease contract to support his claim under Fire Insurance Policy No. F-18876, the terms
of the policy should be strictly construed against the insured. Verendia failed to live by the
terms of the policy, specifically Section 13 thereof which is expressed in terms that are clear
and unambiguous, that all benefits under the policy shall be forfeited "If the claim be in any
respect fraudulent, or if any false declaration be made or used in support thereof, or if any
fraudulent means or devises are used by the Insured or anyone acting in his behalf to obtain
any benefit under the policy". Verendia, having presented a false declaration to support his
claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by
virtue of Section 13 of the policy in the absence of proof that Fidelity waived such provision
(Pacific Banking Corporation vs. Court of Appeals, supra). Worse yet, by presenting a false
lease contract, Verendia, reprehensibly disregarded the principle that insurance contracts
are uberrimae fidae and demand the most abundant good faith (Velasco vs. Apostol, 173
SCRA 228 [1989]).
There is also no reason to conclude that by submitting the subrogation receipt as evidence in
court, Fidelity bound itself to a "mutual agreement" to settle Verendia's claims in
consideration of the amount of P142,685.77. While the said receipt appears to have been a
filled-up form of Fidelity, no representative of Fidelity had signed it. It is even incomplete as
the blank spaces for a witness and his address are not filled up. More significantly, the same
receipt states that Verendia had received the aforesaid amount. However, that Verendia had
not received the amount stated therein, is proven by the fact that Verendia himself filed the
complaint for the full amount of P385,000.00 stated in the policy. It might be that there had
been efforts to settle Verendia's claims, but surely, the subrogation receipt by itself does not
prove that a settlement had been arrived at and enforced. Thus, to interpret Fidelity's
presentation of the subrogation receipt in evidence as indicative of its accession to its
"terms" is not only wanting in rational basis but would be substituting the will of the Court for
that of the parties.
WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399 is
GRANTED and the decision of the then Intermediate Appellate Court under review is
REVERSED and SET ASIDE and that of the trial court is hereby REINSTATED and UPHELD.
SO ORDERED.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.
# Footnotes
1 Fidelity appears to have agreed with the appellate court that it had waived
Verendia's failure to abide by policy condition No. 3 on disclosure of other
insurance policies by its failure to assign it as an error in the petition in G.R.
No. 76399. It must have likewise realized the futility of assigning it as an error
because on the first page of the policy the following is typewritten: "Other
insurances allowed, the amounts to be declared in the event of loss or when
required."
GULF
RESORTS,
INC., petitioner, vs.
PHILIPPINE
INSURANCE CORPORATION, respondent.
CHARTER
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised
Rules of Court by petitioner GULF RESORTS, INC., against respondent
PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner assails the
appellate court decision which dismissed its two appeals and affirmed the
judgment of the trial court.
[1]
for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the
computation of the premium, defendants Policy No. 31944 (Exh. I), which is the
policy in question, contained on the right-hand upper portion of page 7 thereof, the
following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against earthquake shock (ES); that in all the six insurance policies (Exhs. C,
D, E, F, G and H), the premium against the peril of earthquake shock is the same, that
is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy No. 31944
issued by defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the
sum included additional premium the Company agrees, notwithstanding what is stated
in the printed conditions of this policy due to the contrary, that this insurance covers
loss or damage to shock to any of the property insured by this Policy occasioned by or
through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7C);
that in Exhibit 7-C the word included above the underlined portion was deleted; that
on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and
plaintiffs properties covered by Policy No. 31944 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged.
[2]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
Respondent filed its Answer with Special and Affirmative Defenses with
Compulsory Counterclaims.
[12]
On February 21, 1994, the lower court after trial ruled in favor of the
respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00
against the peril of earthquake shock, the same premium it paid against earthquake
shock only on the two swimming pools in all the policies issued by AHAC(AIU)
(Exhibits C, D, E, F and G). From this fact the Court must consequently agree with
the position of defendant that the endorsement rider (Exhibit 7-C) means that only the
two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and unambiguous hence there is no
need for interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools
had earthquake shock coverage and were heavily damaged by the earthquake which
struck on July 16, 1990. Defendant having admitted that the damage to the swimming
pools was appraised by defendants adjuster at P386,000.00, defendant must, by virtue
of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph
that defendant is liable only for the damage caused to the two (2) swimming pools and
that defendant has made known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed for by plaintiff. As
to the counterclaims of defendant, the Court does not agree that the action filed by
plaintiff is baseless and highly speculative since such action is a lawful exercise of the
plaintiffs right to come to Court in the honest belief that their Complaint is
meritorious. The prayer, therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of
THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing
damage to the two (2) swimming pools, with interest at 6% per annum from the date
of the filing of the Complaint until defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.
[13]
expressed its willingness to pay the damage caused on the two (2) swimming pools, as
the Court a quo and this Court correctly found it to be liable only, it then cannot be
said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the
rule that the award thereof is subject to the sound discretion of the court. Thus, if such
discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et
al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception
rather than a rule, it is necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award
(Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiffappellants action is not baseless and highly speculative, We find that the Court a quo
did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED
and judgment of the Trial Court hereby AFFIRMED in toto. No costs.
[15]
[16]
Third, that the qualification referring to the two swimming pools had
already been deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an
inadvertent omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given
precedence over the wording of the insurance policy, because the rider is the
more deliberate expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be
resolved in favor of petitioner and against respondent. It was respondent
which caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance
policy, such as to remove the two swimming pools from the coverage for the
risk of fire. It should not be used to limit the respondents liability for
earthquake shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional
premium was not paid under the extended coverage. The premium for the
earthquake shock coverage was already included in the premium paid for the
policy.
Tenth, the parties contemporaneous and subsequent acts show that they
intended to extend earthquake shock coverage to all insured properties. When
it secured an insurance policy from respondent, petitioner told respondent that
it wanted an exact replica of its latest insurance policy from American Home
Assurance Company (AHAC-AIU), which covered all the resorts properties for
earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake
shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc.,
likewise requested petitioner to submit the necessary documents for its
building claims and other repair costs. Thus, under the doctrine of equitable
estoppel, it cannot deny that the insurance policy it issued to petitioner
covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review
by certiorari under Rule 45 of the Revised Rules of Court as its remedy, and
there is no need for calibration of the evidence in order to establish the facts
upon which this petition is based.
On the other hand, respondent made the following counter arguments:
[18]
provisions, specially the enumeration of the items insured, where only the two
swimming pools were noted as covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984
through 1988, the phrase Item 5 P393,000.00 on the two swimming pools only
(against the peril of earthquake shock only) meant that only the swimming
pools were insured for earthquake damage. The same phrase is used in
toto in the policies from 1989 to 1990, the only difference being the
designation of the two swimming pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective,
premiums must be paid for all the properties covered. In all of its seven
insurance policies, petitioner only paidP393.00 as premium for coverage of
the swimming pools against earthquake shock. No other premium was paid
for earthquake shock coverage on the other properties. In addition, the use of
the qualifier ANY instead of ALL to describe the property covered was done
deliberately to enable the parties to specify the properties included for
earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its
properties must be included in the earthquake shock coverage. Petitioners
own evidence shows that it only required respondent to follow the exact
provisions of its previous policy from AHAC-AIU. Respondent complied with
this requirement. Respondents only deviation from the agreement was when it
modified the provisions regarding the replacement cost endorsement. With
regard to the issue under litigation, the riders of the old policy and the policy in
issue are identical.
Seventh, respondent did not do any act or give any assurance to
petitioner as would estop it from maintaining that only the two swimming pools
were covered for earthquake shock. The adjusters letter notifying petitioner to
present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the
phrase Item 5 Only after the descriptive name or title of the Earthquake Shock
Endorsement. However, the words of the policy reflect the parties clear
intention to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its
conditions. It did not object to any deficiency nor did it institute any action to
reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees
and litigation expenses. Since respondent was willing and able to pay for the
damage caused on the two swimming pools, it cannot be considered to be in
default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the
resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools
were specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of
earthquake shock only)
[20]
Second, under the breakdown for premium payments, it was stated that:
[21]
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.00
[22]
[23]
[28]
Q. Now, after this policy was delivered to you did you bother to check the provisions
with respect to your instructions that all properties must be covered again by
earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance
Company marked Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I
was contented already that the previous limitation pertaining to the two swimming
pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject
to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock
Endorsement, Extended Coverage Endorsement, FEA Warranty &
Annual Payment Agreement on Long Term Policies to the insurance
policy as proof of the intent of the parties to extend the coverage for
earthquake shock. However, this phrase is merely an enumeration of the
descriptive titles of the riders, clauses, warranties or endorsements to which
the policy is subject, as required under Section 50, paragraph 2 of the
Insurance Code.
[29]
[30]
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is,
on the basis on (sic) the wordings indicated in Exhibits C to H respectively what
was the extent of the coverage [against] the peril of earthquake shock as provided
for in each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as
provided for in each of the six (6) policies extend to the two (2) swimming pools
only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis.
For swimming pools we do cover earthquake shock. For building we covered it for
full earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for
other things other than swimming pool? You are covering building? They are
covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or
another we can issue earthquake shock solely but that the moment I see this, the
thing that comes to my mind is either insuring a swimming pool, foundations, they
are normally affected by earthquake but not by fire, sir.
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of the
qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent.
Being a company underwriter, we do not cover. . it was inadvertent because of the
previous policies that we have issued with no specific attachments, premium rates
and so on. It was inadvertent, sir.
them but it was only when this case erupted that we discovered some
discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit I and those indicated in
Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly
the same P393,000.00 on the two (2) swimming pools only against the peril of
earthquake shock which I understood before that this provision will have to be
placed here because this particular provision under the peril of earthquake shock
only is requested because this is an insurance policy and therefore cannot be
insured against fire, so this has to be placed.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except
for the swimming pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I
found out that under Item 3 it was specific on the wordings that on the two
swimming pools only, then enclosed in parenthesis (against the peril[s] of
earthquake shock only), and secondly, when I examined the summary of premium
payment only Item 3 which refers to the swimming pools have a computation for
premium payment for earthquake shock and all the other items have no
computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders.
Petitioner cannot rely on the general rule that insurance contracts are
contracts of adhesion which should be liberally construed in favor of the
insured and strictly against the insurer company which usually prepares it. A
contract of adhesion is one wherein a party, usually a corporation, prepares
the stipulations in the contract, while the other party merely affixes his
signature or his "adhesion" thereto. Through the years, the courts have held
that in these type of contracts, the parties do not bargain on equal footing, the
weaker party's participation being reduced to the alternative to take it or leave
it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect. Consequently, any ambiguity therein is
resolved against the insurer, or construed liberally in favor of the insured.
[31]
[32]
[33]
The case law will show that this Court will only rule out blind adherence to
terms where facts and circumstances will show that they are basically onesided. Thus, we have called on lower courts to remain careful in scrutinizing
the factual circumstances behind each case to determine the efficacy of the
claims of contending parties. In Development Bank of the Philippines v.
National Merchandising Corporation, et al., the parties, who were acute
businessmen of experience, were presumed to have assented to the assailed
documents with full knowledge.
[34]
[35]
[36]
This petition for review assails the Decision[1] dated July 30, 2002 of the
Court of Appeals in CA-G.R. SP No. 60144, affirming the Decision[2] dated
May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277.
Both decisions held that there was no violation of the Insurance Code and the
respondents do not need license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and
indemnity coverage for its vessels from The Steamship Mutual Underwriting
Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance
and Surety Corporation (Pioneer). Subsequently, White Gold was issued a
Certificate of Entry and Acceptance.[3] Pioneer also issued receipts evidencing
payments for the coverage. When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection
of sum of money to recover the latters unpaid balance. White Gold on the
other hand, filed a complaint before the Insurance Commission claiming that
Steamship Mutual violated Sections 186[4] and 187[5] of the Insurance Code,
while Pioneer violated Sections 299,[6] 300[7] and 301[8] in relation to Sections
302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was
no need for Steamship Mutual to secure a license because it was not
engaged in the insurance business. It explained that Steamship Mutual was a
Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain
another license as insurance agent and/or a broker for Steamship Mutual
because Steamship Mutual was not engaged in the insurance business.
...
The same provision also provides, the fact that no profit is derived from
the making of insurance contracts, agreements or transactions, or that no
separate or direct consideration is received therefor, shall not preclude the
existence of an insurance business.[12]
The test to determine if a contract is an insurance contract or not, depends
on the nature of the promise, the act required to be performed, and the exact
nature of the agreement in the light of the occurrence, contingency, or
circumstances under which the performance becomes requisite. It is not by
what it is called.[13]
Basically, an insurance contract is a contract of indemnity. In it, one
undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event.[14]
In particular, a marine insurance undertakes to indemnify the assured
against marine losses, such as the losses incident to a marine adventure.
[15]
Section 99[16] of the Insurance Code enumerates the coverage of marine
insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where
the members are both the insurer and insured. In it, the members all
contribute, by a system of premiums or assessments, to the creation of a fund
from which all losses and liabilities are paid, and where the profits are divided
among themselves, in proportion to their interest. [17] Additionally, mutual
insurance associations, or clubs, provide three types of coverage, namely,
protection and indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the
third party is anyone other than the P & I Club and the members. [19] By
definition then, Steamship Mutual as a P & I Club is a mutual insurance
association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country
albeit without the requisite certificate of authority mandated by Section
187[20] of the Insurance Code. It maintains a resident agent in the Philippines
to solicit insurance and to collect payments in its behalf. We note that
Steamship Mutual even renewed its P & I Club cover until it was cancelled
due to non-payment of the calls. Thus, to continue doing business here,
Steamship Mutual or through its agent Pioneer, must secure a license from
the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the
State is necessary. Thus, no insurer or insurance company is allowed to
engage in the insurance business without a license or a certificate of authority
from the Insurance Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special
license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the
certificate of registration[22] issued by the Insurance Commission. It has been
licensed to do or transact insurance business by virtue of the certificate of
authority[23] issued by the same agency. However, a Certification from the
Commission states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance company, it needs a
separate license to act as insurance agent for Steamship Mutual. Section 299
of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation
or procurement of applications for insurance, or receive for services in obtaining
insurance, any commission or other compensation from any insurance company doing
business in the Philippines or any agent thereof, without first procuring a license so to
act from the Commissioner, which must be renewed annually on the first day of
January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority
and removal of its directors and officers. Regrettably, we are not the forum for
these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated
July 30, 2002 of the Court of Appeals affirming the Decision dated May 3,
2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE.
April 9, 2008
In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter dated May
20, 1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal
Gardens Memorial Park in October 1982 for the total maximum insurable amount of
P100,000.00 each. No application for Group Insurance was submitted in our office prior to
his death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of good health shall be required for all Lot Purchasers as
party of the application." We cite further the provision on Effective Date of Coverage under
the policy which states that "there shall be no insurance if the application is not approved by
the Company." Since no application had been submitted by the Insured/Assured, prior to his
death, for our approval but was submitted instead on November 15, 1984, after his death,
Mr. John Uy Chuang was not covered under the Policy. We wish to point out that Eternal
Gardens being the Assured was a party to the Contract and was therefore aware of these
pertinent provisions.
With regard to our acceptance of premiums, these do not connote our approval per se of the
insurance coverage but are held by us in trust for the payor until the prerequisites for
insurance coverage shall have been met. We will however, return all the premiums which
have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of
money against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of
Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff
ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay
the sum of P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus
legal rate of interest, until fully paid; and, to pay the sum of P10,000.00 as attorneys fees.
SO ORDERED.
The RTC found that Eternal submitted Chuangs application for insurance which he accomplished
before his death, as testified to by Eternals witness and evidenced by the letter dated December 29,
1982, stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert." 10 It further
ruled that due to Philamlifes inaction from the submission of the requirements of the group
insurance on December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes
acceptance of the premiums during the same period, Philamlife was deemed to have approved
Chuangs application. The RTC said that since the contract is a group life insurance, once proof of
death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not enclosed in
Eternals letter dated December 29, 1982. It further ruled that the non-accomplishment of the
submitted application form violated Section 26 of the Insurance Code. Thus, the CA concluded, there
being no application form, Chuang was not covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore
determined by this Honorable Court, or has decided it in a way not in accord with law or with
the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife
before the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated May
29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before
the CA and first level courts, considering their findings of facts are conclusive and binding on this
Court. However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5)
when the findings of facts are conflicting; (6) when in making its findings the [CA] went
beyond the issues of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial
court; (8) when the findings are conclusions without citation of specific evidence on which
they are based; (9) when the facts set forth in the petition as well as in the petitioners main
and reply briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record;
and (11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed
by the parties, which, if properly considered, would justify a different conclusion. 12 (Emphasis
supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may
review them.
Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternals letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that
was apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a
copy of the insurance application which was signed by Chuang himself and executed before his
death.
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing
that Eternal must present evidence showing that Philamlife received a copy of Chuangs insurance
application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received,
states that the insurance forms for the attached list of burial lot buyers were attached to the letter.
Such stamp of receipt has the effect of acknowledging receipt of the letter together with the
attachments. Such receipt is an admission by Philamlife against its own interest. 13 The burden of
evidence has shifted to Philamlife, which must prove that the letter did not contain Chuangs
insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed to have
received Chuangs insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is stamped
as received, the contents of the letter are correct and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the reliability and
credibility of the witnesses, because it has the opportunity to observe firsthand the witnesses
demeanor, conduct, and attitude. Findings of the trial court on such matters are binding and
conclusive on the appellate court, unless some facts or circumstances of weight and substance have
been overlooked, misapprehended, or misinterpreted, 14 that, if considered, might affect the result of
the case.15
An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no
overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance application of
Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of this form and
the original of this is submitted to Philamlife together with the monthly remittances and the
second copy is remained or retained with the marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely asking for the
location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with that
payment together with the new clients all the originals I see to it before I sign the transmittal
letter the originals are attached therein.16
In other words, the witness admitted not knowing where the original insurance application was, but
believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two
insurance application forms were accomplished and the testimony of Mendoza on who actually filled
out the application form, these are minor inconsistencies that do not affect the credibility of the
witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility as these negate any
suspicion that the testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of the
prosecutions evidence as a whole or reflect on the witnesses honesty. The test is whether
the testimonies agree on essential facts and whether the respective versions corroborate
and substantially coincide with each other so as to make a consistent and coherent whole. 18
In the present case, the number of copies of the insurance application that Chuang executed is not
at issue, neither is whether the insurance application presented by Eternal has been falsified. Thus,
the inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternals
witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without approving the
application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group
Life Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan
with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two sentences. The first
sentence appears to state that the insurance coverage of the clients of Eternal already became
effective upon contracting a loan with Eternal while the second sentence appears to require
Philamlife to approve the insurance contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which must be
construed liberally in favor of the insured and strictly against the insurer in order to safeguard the
latters interest. Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is
prepared by the insurer. A contract of insurance, being a contract of adhesion, par
excellence, any ambiguity therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be construed in
such a way as to preclude the insurer from noncompliance with its obligations. 19 (Emphasis
supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the
above ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his obligation. Being
a contract of adhesion, the terms of an insurance contract are to be construed strictly against
the party which prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured, especially
to avoid forfeiture.20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December
10, 1980, must be construed in favor of the insured and in favor of the effectivity of the insurance
contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a
partys purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot
purchaser is created and the same is effective, valid, and binding until terminated by Philamlife by
disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P1920 on the Effective Date of Benefit is in the nature of a resolutory condition which would lead to
the cessation of the insurance contract. Moreover, the mere inaction of the insurer on the insurance
application must not work to prejudice the insured; it cannot be interpreted as a termination of the
insurance contract. The termination of the insurance contract by the insurer must be explicit and
unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More often than not, insurance
contracts are contracts of adhesion containing technical terms and conditions of the industry,
confusing if at all understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must be considered
whenever the rights and obligations of the insurer and the insured are to be delineated. Hence, in
order to protect the interest of insurance applicants, insurance companies must be obligated to act
with haste upon insurance applications, to either deny or approve the same, or otherwise be bound
to honor the application as a valid, binding, and effective insurance contract. 21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No.
57810 isREVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch
138 is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life
Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000
from the time of extra-judicial demand by Eternal until Philamlifes receipt of the May 29,
1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP
100,000 from June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.
No costs.
SO ORDERED.
Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario *, JJ., concur.
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care
coverage with petitioner Philamcare Health Systems, Inc. In the standard application form, he
answered no to the following question:
Have you or any of your family members ever consulted or been treated for high
blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer?
(If Yes, give details).[1]
The application was approved for a period of one year from March 1, 1988 to March 1,
1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement,
respondents husband was entitled to avail of hospitalization benefits, whether ordinary or
emergency, listed therein. He was also entitled to avail of out-patient benefits such as annual
physical examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March
1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage
was increased to a maximum sum of P75,000.00 per disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was confined at the
Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband was
in the hospital, respondent tried to claim the benefits under the health care agreement. However,
petitioner denied her claim saying that the Health Care Agreement was void. According to
petitioner, there was a concealment regarding Ernanis medical history. Doctors at the MMC
allegedly discovered at the time of Ernanis confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus, respondent paid the
hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist at
home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties,
however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani
had fever and was feeling very weak. Respondent was constrained to bring him back to the
Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44,
an action for damages against petitioner and its president, Dr. Benito Reverente, which was
docketed as Civil Case No. 90-53795. She asked for reimbursement of her expenses plus moral
damages and attorneys fees. After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late
Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid
to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to
plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.[3]
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all
awards for damages and absolved petitioner Reverente.[4] Petitioners motion for reconsideration
was denied.[5]Hence, petitioner brought the instant petition for review, raising the primary
argument that a health care agreement is not an insurance contract; hence the incontestability
clause under the Insurance Code[6]does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-ups and
hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of
the agreement until its expiration one-year thereafter. Petitioner also points out that only medical
and hospitalization benefits are given under the agreement without any indemnification, unlike in
an insurance contract where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts which last
longer,[7] petitioner argues that the incontestability clause does not apply, as the same requires an
effectivity period of at least two years. Petitioner further argues that it is not an insurance
company, which is governed by the Insurance Commission, but a Health Maintenance
Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event. An insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large
group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium. [8]
Section 3 of the Insurance Code states that any contingent or unknown event, whether past
or future, which may damnify a person having an insurable interest against him, may be insured
against. Every person has an insurable interest in the life and health of himself. Section 10
provides:
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondents husband in obtaining the health care
agreement was his own health. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity.[9] Once the member incurs hospital,
medical or any other expense arising from sickness, injury or other stipulated contingent, the
health care provider must pay for the same to the extent agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his application. It
appears that in the application for health coverage, petitioners required respondents husband to
sign an express authorization for any person, organization or entity that has any record or
knowledge of his health to furnish any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination. [10] Specifically, the Health
Care Agreement signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and in
any addendum annexed to this application are full, complete and true and bind all
parties in interest under the Agreement herein applied for, that there shall be no
contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied
for is actually paid during the lifetime and good health of proposed Members; that no
information acquired by any Representative of PhilamCare shall be binding upon
PhilamCare unless set out in writing in the application; that any physician is, by these
presents, expressly authorized to disclose or give testimony at anytime relative to any
information acquired by him in his professional capacity upon any question affecting
the eligibility for health care coverage of the Proposed Members and that the
acceptance of any Agreement issued on this application shall be a ratification of any
correction in or addition to this application as stated in the space for Home Office
Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for
authorization to inquire about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare Health
Systems, Inc. any and all information relative to any hospitalization, consultation,
treatment or any other medical advice or examination. This authorization is in
connection with the application for health care coverage only. A photographic copy of
this authorization shall be as valid as the original. [12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:
Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a
contract of insurance. The right to rescind should be exercised previous to the commencement of
an action on the contract.[17] In this case, no rescission was made. Besides, the cancellation of
health care agreements as in insurance policies require the concurrence of the following
conditions:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health
Systems Inc. had twelve months from the date of issuance of the Agreement within
which to contest the membership of the patient if he had previous ailment of asthma,
and six months from the issuance of the agreement if the patient was sick of diabetes
or hypertension. The periods having expired, the defense of concealment or
misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the deceased member
considering that at the time of their marriage, the deceased was previously married to another
woman who was still alive. The health care agreement is in the nature of a contract of
indemnity. Hence, payment should be made to the party who incurred the expenses. It is not
controverted that respondent paid all the hospital and medical expenses. She is therefore entitled
to reimbursement. The records adequately prove the expenses incurred by respondent for the
deceaseds hospitalization, medication and the professional fees of the attending physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of
the Court of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.
G.R. No. 167330
health care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.
xxx
xxx
xxx
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount
of P224,702,641.18. xxxx
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.
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.
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 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 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount
of P5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005. 8
We find merit in 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
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 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.
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.
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 service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and
other types of legal arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or services on contingency. But obviously it
was not the purpose of the insurance statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf practically all contracts, particularly
conditional sales and contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it. The question turns,
not on whether risk is involved or assumed, but on whether that or something else to which it
is related in the particular plan is its principal object purpose.24 (Emphasis supplied)
In California Physicians Service v. Garrison,25 the California court felt that, after scrutinizing the plan
of operation as a whole of the corporation, it was service rather than indemnity which stood as its
principal purpose.
There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to
be applied in determining its status. The question, more broadly, is whether, looking at the
plan of operation as a whole, service rather than indemnity is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not indemnity.26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter 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
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,35the Court stressed that executive officials are
presumed to have familiarized themselves with all the considerations pertinent to the meaning and
purpose of the law, and to have formed an independent, conscientious and competent expert opinion
thereon. The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed judgment, and
the fact that they frequently are the drafters of the law they interpret. 36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance or obligations of the nature of
indemnity for loss, damage, or liability." In our decision dated June 12, 2008, we ruled that
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 bondsor obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business of
accident, fidelity, 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.39Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However,
those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of
a health service provider to a member under the terms of their health care agreement. Such
contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue Crossand Philamcare are
applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and
5. In consideration of the 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 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
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") 46 enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a
verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment, or
paper upon which such instrument, matters, or things or any of them shall be written or printed by
any person or persons who shall make, sign, or issue the same, on and after January first, nineteen
hundred and five, the several taxes following:
xxx
xxx
xxx
Third 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 October 1, 1946, the DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158
(NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October
10, 1984 respectively, the DST rate was again increased.
1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was
renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to
the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of
1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to
the DST provisions were introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early
as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2 million. 49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been
the intent of the legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe
to say that health care agreements were never, at any time, recognized as insurance contracts or
deemed engaged in the business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is to pay it. 51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52
Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its
net worth ofP259 million.54 Respondent never disputed these assertions. Given the realities on the
ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government ought to encourage private
enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." 58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable consequence but killing the business of an
entity is another matter and should not be allowed. It is counter-productive and ultimately subversive
of the nations thrust towards a better economy which will ultimately benefit the majority of our
people.59
Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paidP5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA
9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. 61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under
the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
In view of 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)
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.
It is a matter of common knowledge that there is a great social need for adequate medical services
at a cost which the average wage earner can afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. 74 Its imposition
will elevate the cost of health care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent
is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.
G.R. No. L-2294
The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the
purpose of recovering from the respondent the sum of P92,650 above mentioned. The theory of the
petitioner is that the insured merchandise were burned up after the policy issued in 1941 in favor of
the respondent corporation has ceased to be effective because of the outbreak of the war between
the United States and Germany on December 10, 1941, and that the payment made by the
petitioner to the respondent corporation during the Japanese military occupation was under
pressure. After trial, the Court of First Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the Court of First
Instance of Manila was affirmed, with costs. The case is now before us on appeal by certiorari from
the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent corporation
became an enemy when the United States declared war against Germany, relying on English and
American cases which held that a corporation is a citizen of the country or state by and under the
laws of which it was created or organized. It rejected the theory that nationality of private corporation
is determine by the character or citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation were German
subjects. This being so, we have to rule that said respondent became an enemy corporation upon
the outbreak of the war between the United States and Germany. The English and American cases
relied upon by the Court of Appeals have lost their force in view of the latest decision of the Supreme
Court of the United States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947,
92 Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In
"Enemy Corporation" by Martin Domke, a paper presented to the Second International Conference
of the Legal Profession held at the Hague (Netherlands) in August. 1948 the following enlightening
passages appear:
Since World War I, the determination of enemy nationality of corporations has been
discussion in many countries, belligerent and neutral. A corporation was subject to enemy
legislation when it was controlled by enemies, namely managed under the influence of
individuals or corporations, themselves considered as enemies. It was the English courts
which first the Daimler case applied this new concept of "piercing the corporate veil," which
was adopted by the peace of Treaties of 1919 and the Mixed Arbitral established after the
First World War.
The United States of America did not adopt the control test during the First World War.
Courts refused to recognized the concept whereby American-registered corporations could
be considered as enemies and thus subject to domestic legislation and administrative
measures regarding enemy property.
World War II revived the problem again. It was known that German and other enemy
interests were cloaked by domestic corporation structure. It was not only by legal ownership
of shares that a material influence could be exercised on the management of the corporation
but also by long term loans and other factual situations. For that reason, legislation on
enemy property enacted in various countries during World War II adopted by statutory
provisions to the control test and determined, to various degrees, the incidents of control.
Court decisions were rendered on the basis of such newly enacted statutory provisions in
determining enemy character of domestic corporation.
The United States did not, in the amendments of the Trading with the Enemy Act during the
last war, include as did other legislations the applications of the control test and again, as in
World War I, courts refused to apply this concept whereby the enemy character of an
valid and enforcible, and since the insured goods were burned after December 10, 1941, and during
the war, the respondent was not entitled to any indemnity under said policy from the petitioner.
However, elementary rules of justice (in the absence of specific provision in the Insurance Law)
require that the premium paid by the respondent for the period covered by its policy from December
11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of
whether the policy in question became null and void upon the declaration of war between the United
States and Germany on December 10, 1941, and its judgment in favor of the respondent corporation
was predicated on its conclusion that the policy did not cease to be in force. The Court of Appeals
necessarily assumed that, even if the payment by the petitioner to the respondent was involuntary,
its action is not tenable in view of the ruling on the validity of the policy. As a matter of fact, the Court
of Appeals held that "any intimidation resorted to by the appellee was not unjust but the exercise of
its lawful right to claim for and received the payment of the insurance policy," and that the ruling of
the Bureau of Financing to the effect that "the appellee was entitled to payment from the appellant
was, well founded." Factually, there can be no doubt that the Director of the Bureau of Financing, in
ordering the petitioner to pay the claim of the respondent, merely obeyed the instruction of the
Japanese Military Administration, as may be seen from the following: "In view of the findings and
conclusion of this office contained in its decision on Administrative Case dated February 9, 1943
copy of which was sent to your office and the concurrence therein of the Financial Department of the
Japanese Military Administration, and following the instruction of said authority, you are hereby
ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim,
however, should be made by means of crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under the
circumstances on this case. However, the petitioner will be entitled to recover only the equivalent, in
actual Philippines currency of P92,650 paid on April 19, 1943, in accordance with the rate fixed in
the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to
pay to the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in
Philippine currency, that should be returned by the petitioner for the unexpired term of the policy in
question, beginning December 11, 1941. Without costs. So ordered.
Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.
xxx
xxx
All premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of 31 days.)
After that first payment, no further premiums were paid. The insured died on September 22, 1944.
It is admitted that the defendant, being an American corporation , had to close its branch office in
Manila by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No.
78145 (Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of
the spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The annual premium
stipulated in the policy was regularly paid from August 1, 1938, up to and including September 30,
1941. Effective August 1, 1941, the mode of payment of premiums was changed from annual to
quarterly, so that quarterly premiums were paid, the last having been delivered on November 18,
1941, said payment covering the period up to January 31, 1942. No further payments were handed
to the insurer. Upon the Japanese occupation, the insured and the insurer became separated by the
lines of war, and it was impossible and illegal for them to deal with each other. Because the insured
had borrowed on the policy an mount of P234.00 in January, 1941, the cash surrender value of the
policy was sufficient to maintain the policy in force only up to September 7, 1942. Tomas Ruiz died
on February 16, 1945. The plaintiff Agustina Peralta is his beneficiary. Her demand for payment met
with defendant's refusal, grounded on non-payment of the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application herefor, a copy of which is attached hereto and is hereby made apart hereof, and
of the payment in advance during the life time and good health of the Insured of the annual
premium of Two hundred and 43/100 pesos Philippine currency and of the payment of a like
amount upon each first day of August hereafter during the term of Twenty years or until the
prior death of either of the Insured. (Emphasis supplied.)
xxx
xxx
xxx
All premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies
minus all sums due for premiums in arrears. They allege that non-payment of the premiums was
caused by the closing of defendant's offices in Manila during the Japanese occupation and the
impossible circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in
accordance with the contract of the parties and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction. Fortunately, this court has had
the benefit of extensive and exhaustive memoranda including those of amici curiae. The matter has
received careful consideration, inasmuch as it affects the interest of thousands of policy-holders and
the obligations of many insurance companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and
the Civil Code.2 Act No. 2427 was largely copied from the Civil Code of California. 3 And this court
has heretofore announced its intention to supplement the statutory laws with general principles
prevailing on the subject in the United State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance are
contracts of indemnity upon the terms and conditions specified in the policy. The parties have a right
to impose such reasonable conditions at the time of the making of the contract as they may deem
wise and necessary. The rate of premium is measured by the character of the risk assumed. The
insurance company, for a comparatively small consideration, undertakes to guarantee the insured
against loss or damage, upon the terms and conditions agreed upon, and upon no other, and when
called upon to pay, in case of loss, the insurer, therefore, may justly insists upon a fulfillment of these
terms. If the insured cannot bring himself within the conditions of the policy, he is not entitled for the
loss. The terms of the policy constitute the measure of the insurer's liability, and in order to recover
the insured must show himself within those terms; and if it appears that the contract has been
terminated by a violation, on the part of the insured, of its conditions, then there can be no right of
recovery. The compliance of the insured with the terms of the contract is a condition precedent to the
right of recovery."
Recall of the above pronouncements is appropriate because the policies in question stipulate that
"all premium payments are due in advance and any unpunctuality in making any such payment shall
cause this policy to lapse." Wherefore, it would seem that pursuant to the express terms of the
policy, non-payment of premium produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in a policy, are binding
upon the parties and should be enforced by the courts, if the evidence brings the case
clearly within their meaning and intent. It tends to bring the law itself into disrepute when, by
astute and subtle distinctions, a plain case is attempted to be taken without the operation of
a clear, reasonable and material obligation of the contract. Mack vs. Rochester German Ins.
Co., 106 N.Y., 560, 564. (Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided because
the premium had not been paid within the time fixed, since by its express terms, non-payment of any
premium when due or within the thirty-day period of grace, ipso facto caused the policy to lapse. This
goes to show that although we take the view that insurance policies should be conserved 5 and
should not lightly be thrown out, still we do not hesitate to enforce the agreement of the parties.
Forfeitures of insurance policies are not favored, but courts cannot for that reason alone
refuse to enforce an insurance contract according to its meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the
consequence of war, it should be excused and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of
non-payment of premiums occasioned by war, the American cases may be divided into three groups,
according as they support the so-called Connecticut Rule, the New York Rule, or the United States
Rule.
The first holds the view that "there are two elements in the consideration for which the annual
premium is paid First, the mere protection for the year, and second, the privilege of renewing the
contract for each succeeding year by paying the premium for that year at the time agreed upon.
According to this view of the contract, the payment of premiums is a condition precedent, the nonperformance would be illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold that "war between
states in which the parties reside merely suspends the contracts of the life insurance, and that, upon
tender of all premiums due by the insured or his representatives after the war has terminated, the
contract revives and becomes fully operative."
The United States rule declares that the contract is not merely suspended, but is abrogated by
reason of non-payments is peculiarly of the essence of the contract. It additionally holds that it would
be unjust to allow the insurer to retain the reserve value of the policy, which is the excess of the
premiums paid over the actual risk carried during the years when the policy had been in force. This
rule was announced in the well-known Statham6case which, in the opinion of Professor Vance, is the
correct rule.7
The appellants and some amici curiae contend that the New York rule should be applied here. The
appellee and other amici curiae contend that the United States doctrine is the orthodox view.
We have read and re-read the principal cases upholding the different theories. Besides the respect
and high regard we have always entertained for decisions of the Supreme Court of the United
States, we cannot resist the conviction that the reasons expounded in its decision of the Statham
case are logically and judicially sound. Like the instant case, the policy involved in the Statham
decision specifies that non-payment on time shall cause the policy to cease and determine.
Reasoning out that punctual payments were essential, the court said:
. . . it must be conceded that promptness of payment is essential in the business of life
insurance. All the calculations of the insurance company are based on the hypothesis of
prompt payments. They not only calculate on the receipt of the premiums when due, but on
compounding interest upon them. It is on this basis that they are enabled to offer assurance
at the favorable rates they do. Forfeiture for non-payment is an necessary means of
protecting themselves from embarrassment. Unless it were enforceable, the business would
be thrown into confusion. It is like the forfeiture of shares in mining enterprises, and all other
hazardous undertakings. There must be power to cut-off unprofitable members, or the
success of the whole scheme is endangered. The insured parties are associates in a great
scheme. This associated relation exists whether the company be a mutual one or not. Each
is interested in the engagements of all; for out of the co-existence of many risks arises the
law of average, which underlies the whole business. An essential feature of this scheme is
the mathematical calculations referred to, on which the premiums and amounts assured are
based. And these calculations, again, are based on the assumption of average mortality, and
of prompt payments and compound interest thereon. Delinquency cannot be tolerated nor
redeemed, except at the option of the company. This has always been the understanding
and the practice in this department of business. Some companies, it is true, accord a grace
of thirty days, or other fixed period, within which the premium in arrear may be paid, on
certain conditions of continued good health, etc. But this is a matter of stipulation, or of
discretion, on the part of the particular company. When no stipulation exists, it is the general
understanding that time is material, and that the forfeiture is absolute if the premium be not
paid. The extraordinary and even desperate efforts sometimes made, when an insured
person is in extremes to meet a premium coming due, demonstrates the common view of
this matter.
The case, therefore, is one in which time is material and of the essence and of the essence
of the contract. Non-payment at the day involves absolute forfeiture if such be the terms of
the contract, as is the case here. Courts cannot with safety vary the stipulation of the parties
by introducing equities for the relief of the insured against their own negligence.
In another part of the decision, the United States Supreme Court considers and rejects what is, in
effect, the New York theory in the following words and phrases:
The truth is, that the doctrine of the revival of contracts suspended during the war is one
based on considerations of equity and justice, and cannot be invoked to revive a contract
which it would be unjust or inequitable to revive.
In the case of Life insurance, besides the materiality of time in the performance of the
contract, another strong reason exists why the policy should not be revived. The parties do
not stand on equal ground in reference to such a revival. It would operate most unjustly
against the company. The business of insurance is founded on the law of average; that of life
insurance eminently so. The average rate of mortality is the basis on which it rests. By
spreading their risks over a large number of cases, the companies calculate on this average
with reasonable certainty and safety. Anything that interferes with it deranges the security of
the business. If every policy lapsed by reason of the war should be revived, and all the back
premiums should be paid, the companies would have the benefit of this average amount of
risk. But the good risks are never heard from; only the bar are sought to be revived, where
the person insured is either dead or dying. Those in health can get the new policies cheaper
than to pay arrearages on the old. To enforce a revival of the bad cases, whilst the company
necessarily lose the cases which are desirable, would be manifestly unjust. An insured
person, as before stated, does not stand isolated and alone. His case is connected with and
co-related to the cases of all others insured by the same company. The nature of the
business, as a whole, must be looked at to understand the general equities of the parties.
The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if,
as alleged, the consequences of war should not prejudice the insured, neither should they bear
down on the insurer.
Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the
insured to pay premiums was excused during the war owing to impossibility of performance, and that
consequently no unfavorable consequences should follow from such failure.
The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after
the first, is not an obligation of the insured, so much so that it is not a debt enforceable by action of
the insurer.
Under an Oklahoma decision, the annual premium due is not a debt. It is not an obligation
upon which the insurer can maintain an action against insured; nor is its settlement governed
by the strict rule controlling payments of debts. So, the court in a Kentucky case declares, in
the opinion, that it is not a debt. . . . The fact that it is payable annually or semi-annually, or at
any other stipulated time, does not of itself constitute a promise to pay, either express or
implied. In case of non-payment the policy is forfeited, except so far as the forfeiture may be
saved by agreement, by waiver, estoppel, or by statute. The payment of the premium is
entirely optional, while a debt may be enforced at law, and the fact that the premium is
agreed to be paid is without force, in the absence of an unqualified and absolute agreement
to pay a specified sum at some certain time. In the ordinary policy there is no promise to pay,
but it is optional with the insured whether he will continue the policy or forfeit it. (3 Couch,
Cyc. on Insurance, Sec. 623, p. 1996.)
It is well settled that a contract of insurance is sui generis. While the insured by an
observance of the conditions may hold the insurer to his contract, the latter has not the
power or right to compel the insured to maintain the contract relation with it longer than he
chooses. Whether the insured will continue it or not is optional with him. There being no
obligation to pay for the premium, they did not constitute a debt. (Noblevs. Southern States
M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis ours.)
It should be noted that the parties contracted not only for peacetime conditions but also for times of
war, because the policies contained provisions applicable expressly to wartime days. The logical
inference, therefore, is that the parties contemplated uninterrupted operation of the contract even if
armed conflict should ensue.
For the plaintiffs, it is again argued that in view of the enormous growth of insurance business since
the Statham decision, it could now be relaxed and even disregarded. It is stated "that the relaxation
of rules relating to insurance is in direct proportion to the growth of the business. If there were only
100 men, for example, insured by a Company or a mutual Association, the death of one will
distribute the insurance proceeds among the remaining 99 policy-holders. Because the loss which
each survivor will bear will be relatively great, death from certain agreed or specified causes may be
deemed not a compensable loss. But if the policy-holders of the Company or Association should be
1,000,000 individuals, it is clear that the death of one of them will not seriously prejudice each one of
the 999,999 surviving insured. The loss to be borne by each individual will be relatively small."
The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be
considered will not be the death of one but the death of ten thousand, since the proportion of 1 to
100 should be maintained. And certainly such losses for 10,000 deaths will not be "relatively small."
After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is such
a vital defense of insurance companies that since the very beginning, said Act no. 2427 expressly
preserved it, by providing that after the policy shall have been in force for two years, it shall become
incontestable (i.e. the insurer shall have no defense) except for fraud, non-payment of premiums,
and military or naval service in time of war (sec. 184 [b], Insurance Act). And when Congress
recently amended this section (Rep. Act No. 171), the defense of fraud was eliminated, while the
defense of nonpayment of premiums was preserved. Thus the fundamental character of the
undertaking to pay premiums and the high importance of the defense of non-payment thereof, was
specifically recognized.
In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is
in effect a variation of the Connecticut rule for the sake of equity. In this connection, it appears that
the first policy had no reserve value, and that the equitable values of the second had been practically
returned to the insured in the form of loan and advance for premium.
For all the foregoing, the lower court's decision absolving the defendant from all liability on the
policies in question, is hereby affirmed, without costs.
This petition for review, under Rule 45 of the Rules of Court, assails the Decision [1] dated
May 17, 1993, of the Court of Appeals and its Resolution [2] dated January 4, 1994 in CA-G.R.
CV No. 18341.The appellate court affirmed in toto the judgment of the Misamis Oriental
Regional Trial Court, Branch 18, in an insurance claim filed by private respondent against Great
Pacific Life Assurance Co. The dispositive portion of the trial courts decision reads:
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of
Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting to eighty-six thousand,
two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to massive cerebral hemorrhage. Consequently,
DBP submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio
was not physically healthy when he applied for an insurance coverage on November 15,
1983. Grepalife insisted that Dr. Leuterio did not disclose he had been suffering from
hypertension, which caused his death.Allegedly, such non-disclosure constituted concealment
that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio,
filed a complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against
Grepalife for Specific Performance with Damages. [5] During the trial, Dr. Hernando Mejia, who
issued the death certificate, was called to testify. Dr. Mejias findings, based partly from the
information given by the respondent widow, stated that Dr. Leuterio complained of headaches
presumably due to high blood pressure. The inference was not conclusive because Dr. Leuterio
was not autopsied, hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow and
against Grepalife. On May 17, 1993, the Court of Appeals sustained the trial courts
decision. Hence, the present petition. Petitioners interposed the following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO
THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY
TO THE CASE FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE
REDEMPTION INSURANCE ON THE LIFE OF PLAINTIFFS HUSBAND WILFREDO
LEUTERIO ONE OF ITS LOAN BORROWERS, INSTEAD OF DISMISSING THE CASE
AGAINST DEFENDANT-APPELLANT [Petitioner Grepalife] FOR LACK OF CAUSE OF
ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER
THE PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO
DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW
HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE
WITH ITS GROUP INSURANCE CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO CONCEALMENT
OF MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS
APPLICATION FOR MEMBERSHIP IN THE GROUP LIFE INSURANCE PLAN
BETWEEN DEFENDANT-APPELLANT OF THE INSURANCE CLAIM ARISING
FROM THE DEATH OF WILFREDO LEUTERIO.[6]
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty six
thousand, two hundred (P86,200.00) pesos without proof of the actual outstanding mortgage
payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real
party in interest, hence the trial court acquired no jurisdiction over the case. It argues that when
the Court of Appeals affirmed the trial courts judgment, Grepalife was held liable to pay the
proceeds of insurance contract in favor of DBP, the indispensable party who was not joined in
the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the
parties to this type of contract. The rationale of a group insurance policy of mortgagors,
otherwise known as the mortgage redemption insurance, is a device for the protection of both the
mortgagee and the mortgagor. On the part of the mortgagee, it has to enter into such form of
contract so that in the event of the unexpected demise of the mortgagor during the subsistence of
the mortgage contract, the proceeds from such insurance will be applied to the payment of the
mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation. [7] In a
similar vein, ample protection is given to the mortgagor under such a concept so that in the event
of death; the mortgage obligation will be extinguished by the application of the insurance
proceeds to the mortgage indebtedness.[8] Consequently, where the mortgagor pays the insurance
premium under the group insurance policy, making the loss payable to the mortgagee, the
insurance is on the mortgagors interest, and the mortgagor continues to be a party to the
contract. In this type of policy insurance, the mortgagee is simply an appointee of the insurance
fund, such loss-payable clause does not make the mortgagee a party to the contract.[9]
Section 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects insurance in his
own name providing that the loss shall be payable to the mortgagee, or assigns a
policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of
the mortgagor, who does not cease to be a party to the original contract, and any act of
his, prior to the loss, which would otherwise avoid the insurance, will have the same
effect, although the property is in the hands of the mortgagee, but any act which,
under the contract of insurance, is to be performed by the mortgagor, may be
performed by the mortgagee therein named, with the same effect as if it had been
performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in the
insurance, the policy stating that: In the event of the debtors death before his indebtedness with
the Creditor [DBP] shall have been fully paid, an amount to pay the outstanding indebtedness
shall first be paid to the creditor and the balance of sum assured, if there is any, shall then be paid
to the beneficiary/ies designated by the debtor.[10] When DBP submitted the insurance claim
against petitioner, the latter denied payment thereof, interposing the defense of concealment
committed by the insured. Thereafter, DBP collected the debt from the mortgagor and took the
necessary action of foreclosure on the residential lot of private respondent. [11] In Gonzales La O
vs. Yek Tong Lin Fire & Marine Ins. Co.[12] we held:
Insured, being the person with whom the contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to some exceptions, insured may thus sue,
although the policy is taken wholly or in part for the benefit of another person named
or unnamed, and although it is expressly made payable to another as his interest may
appear or otherwise. * * * Although a policy issued to a mortgagor is taken out for the
benefit of the mortgagee and is made payable to him, yet the mortgagor may sue
thereon in his own name, especially where the mortgagees interest is less than the full
amount recoverable under the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the
policy for the purpose of collection, or has assigned as collateral security any
judgment he may obtain.[13]
And since a policy of insurance upon life or health may pass by transfer, will or succession
to any person, whether he has an insurable interest or not, and such person may recover it
whatever the insured might have recovered,[14] the widow of the decedent Dr. Leuterio may file
the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed as
its defense to annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose
that he had hypertension, which might have caused his death. Concealment exists where the
assured had knowledge of a fact material to the risk, and honesty, good faith, and fair dealing
requires that he should communicate it to the assured, but he designedly and intentionally
withholds the same.[15]
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as
supported by the information given by the widow of the decedent. Grepalife asserts that Dr.
Mejias technical diagnosis of the cause of death of Dr. Leuterio was a duly documented hospital
record, and that the widows declaration that her husband had possible hypertension several years
ago should not be considered as hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct
an autopsy on the body of the decedent. As the attending physician, Dr. Mejia stated that he had
no knowledge of Dr. Leuterios any previous hospital confinement.[16] Dr. Leuterios death
certificate stated that hypertension was only the possible cause of death. The private respondents
statement, as to the medical history of her husband, was due to her unreliable recollection of
events. Hence, the statement of the physician was properly considered by the trial court as
hearsay.
The question of whether there was concealment was aptly answered by the appellate court,
thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was in
good health and that he had not consulted a doctor or any of the enumerated ailments,
including hypertension; when he died the attending physician had certified in the
death certificate that the former died of cerebral hemorrhage, probably secondary to
hypertension. From this report, the appellant insurance company refused to pay the
insurance claim. Appellant alleged that the insured had concealed the fact that he had
hypertension.
Contrary to appellants allegations, there was no sufficient proof that the insured had
suffered from hypertension. Aside from the statement of the insureds widow who was
not even sure if the medicines taken by Dr. Leuterio were for hypertension, the
appellant had not proven nor produced any witness who could attest to Dr. Leuterios
medical history...
xxx
Appellant insurance company had failed to establish that there was concealment made
by the insured, hence, it cannot refuse payment of the claim. [17]
The fraudulent intent on the part of the insured must be established to entitle the insurer to
rescind the contract.[18] Misrepresentation as a defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the insurer.[19] In the case at bar, the petitioner failed to clearly and
satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance.
And that brings us to the last point in the review of the case at bar. Petitioner claims that
there was no evidence as to the amount of Dr. Leuterios outstanding indebtedness to DBP at the
time of the mortgagors death. Hence, for private respondents failure to establish the same, the
action for specific performance should be dismissed. Petitioners claim is without merit. A life
insurance policy is a valued policy.[20] Unless the interest of a person insured is susceptible of
exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or
health is the sum fixed in the policy.[21] The mortgagor paid the premium according to the
coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtors death during the terms
of this insurance, a death benefit in the amount of P86,200.00 shall be paid.
In the event of the debtors death before his indebtedness with the creditor shall have
been fully paid, an amount to pay the outstanding indebtedness shall first be paid to
the Creditor and the balance of the Sum Assured, if there is any shall then be paid to
the beneficiary/ies designated by the debtor.[22] (Emphasis omitted)
However, we noted that the Court of Appeals decision was promulgated on May 17, 1993. In
private respondents memorandum, she states that DBP foreclosed in 1995 their residential lot, in
satisfaction of mortgagors outstanding loan. Considering this supervening event, the insurance
proceeds shall inure to the benefit of the heirs of the deceased person or his beneficiaries. Equity
dictates that DBP should not unjustly enrich itself at the expense of another (Nemo cum alterius
detrimenio protest). Hence, it cannot collect the insurance proceeds, after it already foreclosed on
the mortgage. The proceeds now rightly belong to Dr. Leuterios heirs represented by his widow,
herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court
of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is
ORDERED to pay the insurance proceeds amounting to Eighty-six thousand, two hundred
(P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo Leuterio (deceased), upon
presentation of proof of prior settlement of mortgagors indebtedness to Development Bank of the
Philippines. Costs against petitioner.
SO ORDERED.
G.R. No. 114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.
The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile
Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his
inventory stocks amounting to P392,130.50, itemized as follows:
P55,698.00
86,432.50
P392,130.50
The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission
(Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for
attorney's fees and costs of litigation. He attached as Annex "AM" 6 thereof his letter of 18 January 1991
which asked for the reconsideration of the denial. He admitted in the said letter that at the time he
obtained the private respondent's fire insurance policy he knew that the two policies issued by the PFIC
were already in existence; however, he had no knowledge of the provision in the private respondent's
policy requiring him to inform it of the prior policies; this requirement was not mentioned to him by the
private respondent's agent; and had it been mentioned, he would not have withheld such information. He
further asserted that the total of the amounts claimed under the three policies was below the actual value
of his stocks at the time of loss, which was P1,000,000.00.
In its answer, 7 the private respondent specifically denied the allegations in the complaint and set up as its
principal defense the violation of Condition 3 of the policy.
In its decision of 21 June 1993, 8 the Insurance Commission found that the petitioner did not violate
Condition 3 as he had no knowledge of the existence of the two fire insurance policies obtained from the
PFIC; that it was Cebu Tesing Textiles which procured the PFIC policies without informing him or securing
his consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These
findings were based on the petitioner's testimony that he came to know of the PFIC policies only when he
filed his claim with the private respondent and that Cebu Tesing Textile obtained them and paid for their
premiums without informing him thereof. The Insurance Commission then decreed:
WHEREFORE, judgment is hereby rendered ordering the respondent company to
pay complainant the sum of P100,000.00 with legal interest from the time the
complaint was filed until fully satisfied plus the amount of P10,000.00 as attorney's
fees. With costs. The compulsory counterclaim of respondent is hereby dismissed.
Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in
its resolution of 20 August 1993, 10 the private respondent appealed to the Court of Appeals by way of a
petition for review. The petition was docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance
Commission because it found that the petitioner knew of the existence of the two other policies issued by
the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the
insurance was taken in the name of private respondent [petitioner herein]. The policy
states that "DISCOUNT MART (MR. ARMANDO GEAGONIA, PROP)" was the
assured and that "TESING TEXTILES" [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private respondent, not by
the Tesing Textiles which is alleged to have taken out the other insurance without the
knowledge of private respondent. This is shown by Premium Invoices nos. 46632
and 46630. (Annexes M and N). In both invoices, Tesing Textiles is indicated to be
only the mortgagee of the goods insured but the party to which they were issued
were the "DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who took out the
policies on the same property subject of the insurance with petitioner. Hence, in
failing to disclose the existence of these insurances private respondent violated
Condition No. 3 of Fire Policy No. 1462. . . .
policy from the private respondent, thereby, for not disclosing such fact, violating Condition 3 of the
policy, and (b) if he had, whether he is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of
reconsideration of 18 January 1991, is without merit. The petitioner claims that the said letter was
not offered in evidence and thus should not have been considered in deciding the case. However, as
correctly pointed out by the Court of Appeals, a copy of this letter was attached to the petitioner's
complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral part of the complaint. 12 It
has attained the status of a judicial admission and since its due execution and authenticity was not denied
by the other party, the petitioner is bound by it even if it were not introduced as an independent
evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the
previous two policies. The Court of Appeals disagreed and found otherwise in view of the explicit
admission by the petitioner in his letter to the private respondent of 18 January 1991, which was
quoted in the challenged decision of the Court of Appeals. These divergent findings of fact constitute
an exception to the general rule that in petitions for review under Rule 45, only questions of law are
involved and findings of fact by the Court of Appeals are conclusive and binding upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC.
His letter of 18 January 1991 to the private respondent conclusively proves this knowledge. His
testimony to the contrary before the Insurance Commissioner and which the latter relied upon cannot
prevail over a written admission made ante litem motam. It was, indeed, incredible that he did not
know about the prior policies since these policies were not new or original. Policy No. GA-28144 was
a renewal of Policy No. F-24758, while Policy No. GA-28146 had been renewed twice, the previous
policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by
law. Its incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides
that "[a] policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the
breach of an immaterial provision does not avoid the policy." Such a condition is a provision which
invariably appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It
is commonly known as the additional or "other insurance" clause and has been upheld as valid and as a
warranty that no other insurance exists. Its violation would thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject
matter, the same interest therein, and the same risk. 17
As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable
interest therein and both interests may be one policy, or each may take out a separate policy
covering his interest, either at the same or at separate times. 18 The mortgagor's insurable interest
covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full
value of the property. 19 The mortgagee's insurable interest is to the extent of the debt, since the property
is relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien
thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount of the
debt, not exceeding the value of the mortgaged property. 20 Thus, separate insurances covering different
insurable interests may be obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual
practice. The mortgagee may be made the beneficial payee in several ways. He may become the
assignee of the policy with the consent of the insurer; or the mere pledgee without such consent; or
the original policy may contain a mortgage clause; or a rider making the policy payable to the
mortgagee "as his interest may appear" may be attached; or a "standard mortgage clause,"
containing a collateral independent contract between the mortgagee and insurer, may be attached;
or the policy, though by its terms payable absolutely to the mortgagor, may have been procured by a
mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the mortgagee
acquires an equitable lien upon the proceeds. 21
In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his
interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such
by the insurer but not made a party to the contract himself. Hence, any act of the mortgagor which
defeats his right will also defeat the right of the mortgagee. 22 This kind of policy covers only such
interest as the mortgagee has at the issuing of the policy.23
On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with
the terms of an agreement by which the mortgagor is to pay the premiums upon such insurance. 24 It
has been noted, however, that although the mortgagee is himself the insured, as where he applies for a
policy, fully informs the authorized agent of his interest, pays the premiums, and obtains on the assurance
that it insures him, the policy is in fact in the form used to insure a mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a
mortgage clause which reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their
interest may appear subject to the terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in General
Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:
The insured shall give notice to the company of any insurance or insurances already
effected, or which may subsequently be effected covering any of the property hereby
insured, and unless such notice be given and the particulars of such insurance or
insurances be stated in or endorsed on this Policy by or on behalf of the Company
before the occurrence of any loss or damage, all benefits under this Policy shall be
forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects
thereby assured must be declared by the insured in writing and he must cause the company to
add or insert it in the policy, without which such policy shall be null and void, and the insured will
not be entitled to indemnity in case of loss," Condition 3in the private respondent's policy No. F14622 does not absolutely declare void any violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or insurances in force at the time of the loss or
damage is not more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in
favor of the insured and strictly against the company, the reason being, undoubtedly, to afford the
greatest protection which the insured was endeavoring to secure when he applied for insurance. It is
also a cardinal principle of law that forfeitures are not favored and that any construction which would
result in the forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if it is
possible to construe the policy in a manner which would permit recovery, as, for example, by finding
a waiver for such forfeiture. 29 Stated differently, provisions, conditions or exceptions in policies which
tend to work a forfeiture of insurance policies should be construed most strictly against those for whose
benefits they are inserted, and most favorably toward those against whom they are intended to
operate. 30 The reason for this is that, except for riders which may later be inserted, the insured sees the
contract already in its final form and has had no voice in the selection or arrangement of the words
employed therein. On the other hand, the language of the contract was carefully chosen and deliberated
upon by experts and legal advisers who had acted exclusively in the interest of the insurers and the
technical language employed therein is rarely understood by ordinary laymen. 31
With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally
free from ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to
conclude that (a) the prohibition applies only to double insurance, and (b) the nullity of the policy
shall only be to the extent exceeding P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of the condition referring to other insurance "covering
any of the property or properties consisting of stocks in trade, goods in process and/or inventories
only hereby insured," and the portion regarding the insured's declaration on the subheading COINSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A
double insurance exists where the same person is insured by several insurers separately in respect
of the same subject and interest. As earlier stated, the insurable interests of a mortgagor and a
mortgagee on the mortgaged property are distinct and separate. Since the two policies of the PFIC
do not cover the same interest as that covered by the policy of the private respondent, no double
insurance exists. The non-disclosure then of the former policies was not fatal to the petitioner's right
to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total
insurance in force at the time of loss does not exceed P200,000.00, the private respondent was
amenable to assume a co-insurer's liability up to a loss not exceeding P200,000.00. What it had in
mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of "other
insurance" clause in fire policies is to prevent over-insurance and thus avert the perpetration of
fraud. When a property owner obtains insurance policies from two or more insurers in a total amount
that exceeds the property's value, the insured may have an inducement to destroy the property for
the purpose of collecting the insurance. The public as well as the insurer is interested in preventing a
situation in which a fire would be profitable to the insured. 32
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CAG.R. SP No. 31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340
is REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.
SO ORDERED.
Padilla, Bellosillo, Quiason and Kapunan, JJ., concur.
G.R. No. L-7667
Foreign Service, and more importantly, he had to assist the Secretary of Foreign Affairs in
negotiations of national importance like the Japanese reparations, and the revision of the trade
agreement with the United States, that, Atty. Guerrero had to work as much as fourteen hours
daily . . . Because of all these unavoidable confusion that followed in the wake of Atty. Guerrero's
sudden and unexpected appointment, the trial of this case scheduled for January 18, 1954 escaped
his memory, and consequently, Atty. Guerrero and the defendant were unable to appear when the
case was called for trial." These reasons, it is intimated, constitute excusable negligence which
ordinary prudence could not have guarded against and should have been considered by the trial
court as sufficient justification to grant the petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of
mistake or excusable negligence is addressed to the sound discretion of the court (see
Coombs vs. Santos, 24 Phil., 446; Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the
exercise of such discretion is ordinarily not to be disturbed unless it is shown that the court has
gravely abused such discretion. (See Tell vs. Tell, 48 Phil., 70; Macke vs. Camps, 5 Phil., 185;
Calvo vs. De Gutierrez, 4 Phil., 203; Manzanares vs. Moreta, 38 Phil., 821; Salvavs. Palacio and
Leuterio, 90 Phil., 731.) In denying the motion for reopening the trial court said: "After going over the
same arguments, this Court is of the opinion, and so holds that the decision of this Court of January
18, 1954 should not be disturbed." Considering the stature, ability and experience of counsel Leon
Ma. Guerrero, and the fact that he was given almost one month notice before the date set for trial,
we are persuaded to conclude that the trial court did not abuse its discretion in refusing to reconsider
its decision.
Coming now to the merits of the case, we note that the lower court made the following findings: On
December 18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the
following conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250 a
month; (b) that defendant shall deduct from the loan certain obligations of plaintiff to third persons
amounting to P4,550, plus the sum of P250 as interest for the first month; and (c) that after making
the above deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00
corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is
more than the maximum interest authorized by law. To secure the payment of the aforesaid loan,
defendant required plaintiff to sign a document known as "Conditional Sale of Residential Building",
purporting to convey to defendant, with right to repurchase, a two-story building of strong materials
belonging to plaintiff. This document did not express the true intention of the parties which was
merely to place said property as security for the payment of the loan.
After the execution of the aforesaid document, defendant insured the building against fire with the
Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been
issued in the name of defendant. The building was partly destroyed by fire and, after proper demand,
defendant collected from the insurance company an indemnity of P13,107.00. Plaintiff demanded
from defendant that she be credited with the necessary amount to pay her obligation out of the
insurance proceeds but defendant refused to do so. And on the strength of these facts, the court
rendered decision the dispositive part of which reads as follows:
Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and
defendant, as shown in Exhibit A, an equitable mortgage to secure the payment of the sum
of P12,000 loaned by the defendant to plaintiff; ordering the defendant to credit the sum of
P13,107 received by the defendant from the Associated Insurance & surety Co., Inc. to the
payment of plaintiff's obligation in the sum of P12,000.00 as stated in the complaint, thus
considering the agreement of December 18, 1951 between the herein plaintiff and defendant
completely paid and leaving still a balance in the sum of P1,107 from the insurance collected
by defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine
months as interest on the sum of P12,000 loaned to plaintiff and the legal interest allowed by
law in this transaction does not exceed 12 per cent per annum, or the sum of P1,440 for one
year, so the herein plaintiff and overpaid the sum of P810 to the defendant, which this Court
hereby likewise orders the said defendant to refund to herein plaintiff, plus the balance of
P1,107 representing the difference of the sum loan of P12,000 and the collected insurance of
P13,107 from the insurance company abovementioned to which the herein plaintiff is entitled
to receive, and to pay the costs.
The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully
compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of
P1,107 representing the difference of the loan of P12,000 and the sum of P13,107 collected by said
defendant from the insurance company notwithstanding the fact that it was not proven that the
insurance was taken for the benefit of the mortgagor?
Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing
an insurance taken by a mortgagee independently of the mortgagor. The rule is that "where a
mortgagee, independently of the mortgagor, insures the mortgaged property in his own name and for
his own interest, he is entitled to the insurance proceeds in case of loss, but in such case, he is not
allowed to retain his claim against the mortgagor,but is passed by subrogation to the insurer to the
extent of the money paid." (Vance on Insurance, 2d ed., p. 654)Or, stated in another way, "the
mortgagee may insure his interest in the property independently of the mortgagor. In that event,
upon the destruction of the property the insurance money paid to the mortgagee will not inure to the
benefit of the mortgagor, and the amount due under the mortgage debt remains unchanged. The
mortgagee, however, is not allowed to retain his claim against the mortgagor, but it passes by
subrogation to the insurer, to the extent of the insurance money paid." (Vance on Insurance, 3rd ed.,
pp. 772-773) This is the same rule upheld by this Court in a case that arose in this jurisdiction. In the
case mentioned, an insurance contract was taken out by the mortgagee upon his own interest, it
being stipulated that the proceeds would be paid to him only and when the case came up for
decision, this Court held that the mortgagee, in case of loss, may only recover upon the policy to the
extent of his credit at the time of the loss. It was declared that the mortgaged had no right of action
against the mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40 Phil., 674.)
It is true that there are authorities which hold that "If a mortgagee procures insurance on his
separate interest at his own expense and for his own benefit, without any agreement with the
mortgagor with respect thereto, the mortgagor has no interest in the policy, and is not entitled to
have the insurance proceeds applied in reduction of the mortgage debt" (19 R.C.L., p. 405), and
that, furthermore, the mortgagee "has still a right to recover his whole debt of the mortgagor."
(King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123; See also
Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg.
Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster vs. Equitable Mut. F. Ins. Co., 2 Gray
216.) But these authorities merely represent the minority view (See case note, 3 Lawyers' Report
Annotated, new series, p. 79). "The general rule and the weight of authority is, that the insurer is
thereupon subrogated to the rights of the mortgagee under the mortgage. This is put upon the
analogy of the situation of the insurer to that of a surety." (Jones on Mortgages, Vol. I, pp. 671-672.)
Considering the foregoing rules, it would appear that the lower court erred in declaring that the
proceeds of the insurance taken out by the defendant on the property mortgaged inured to the
benefit of the plaintiff and in ordering said defendant to deliver to the plaintiff the difference between
her indebtedness and the amount of insurance received by the defendant, for, in the light of the
majority rule we have above enunciated, the correct solution should be that the proceeds of the
insurance should be delivered to the defendant but that her claim against the plaintiff should be
considered assigned to the insurance company who is deemed subrogated to the rights of the
defendant to the extent of the money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court
as follows:(1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely
an equitable mortgage intended to secure the payment of the loan of P12,000;(2) that the proceeds
of the insurance amounting to P13,107.00 was properly collected by defendant who is not required
to account for it to the plaintiff; (3) that the collection of said insurance proceeds shall not be deemed
to have compensated the obligation of the plaintiff to the defendant, but bars the latter from claiming
its payment from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00
representing the overpayment made by plaintiff by way of interest on the loan. No pronouncement as
to costs.