1. Prudential Guarantee v. Trans-asia Shipping Lines "Received from Prudential Guarantee and Assurance, Inc.
ceived from Prudential Guarantee and Assurance, Inc., the sum of PESOS THREE MILLION
2. Constantino v. Asia Life, Inc.,
3. Travellers Insurance & Surety Corporation v. CA
4. Gulf Resorts, Inc., v. Philippine Charter Insurance Corp.,
5. New World International Dev. (Phils), Inc. v. NYK-FilJapan Shipping Corp.,
6. Loadstar Shipping Co., v. Malayan Insurance Co., Inc.
7. White Gold Marine Services, Inc. v. Pioneer Insurance and Surety Corp.,
8. Republic v. Del Monte Motors, Inc.,
9. Philippine Health Care Providers v. CIR
10. Fortune Medicare, Inc. v. Amorin
------------------------
G.R. No. 151890 June 20, 2006
PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner,
vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 151991 June 20, 2006
TRANS-ASIA SHIPPING LINES, INC., petitioner,
vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.
DECISION
CHICO-NAZARIO, J:
This is a consolidation of two separate Petitions for Review on Certiorari filed by petitioner
Prudential Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890 and Trans-Asia
Shipping Lines, Inc. (TRANS-ASIA) in G.R. No. 151991, assailing the Decision1 dated 6
November 2001 of the Court of Appeals in CA G.R. CV No. 68278, which reversed the
Judgment2 dated 6 June 2000 of the Regional Trial Court (RTC), Branch 13, Cebu City in Civil
Case No. CEB-20709. The 29 January 2002 Resolution3 of the Court of Appeals, denying
PRUDENTIAL’s Motion for Reconsideration and TRANS-ASIA’s Partial Motion for
Reconsideration of the 6 November 2001 Decision, is likewise sought to be annulled and set aside.
The Facts
The material antecedents as found by the court a quo and adopted by the appellate court are as
follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of payment of
premiums, defendant [PRUDENTIAL] insured M/V Asia Korea for loss/damage of the hull and
machinery arising from perils, inter alia, of fire and explosion for the sum of P40 Million, beginning
[from] the period [of] July 1, 1993 up to July 1, 1994. This is evidenced by Marine Policy No.
MH93/1363 (Exhibits "A" to "A-11"). On October 25, 1993, while the policy was in force, a fire
broke out while [M/V Asia Korea was] undergoing repairs at the port of Cebu. On October 26,
1993 plaintiff [TRANS-ASIA] filed its notice of claim for damage sustained by the vessel. This is
evidenced by a letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA] reserved its
right to subsequently notify defendant [PRUDENTIAL] as to the full amount of the claim upon final
survey and determination by average adjuster Richard Hogg International (Phil.) of the damage
sustained by reason of fire. An adjuster’s report on the fire in question was submitted by Richard
Hogg International together with the U-Marine Surveyor Report (Exhibits "4" to "4-115").
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan and Trust
receipt", a portion of which read (sic):
ONLY (P3,000,000.00) as a loan without interest under Policy No. MH 93/1353 [sic], repayable
only in the event and to the extent that any net recovery is made by Trans-Asia Shipping
Corporation, from any person or persons, corporation or corporations, or other parties, on account
of loss by any casualty for which they may be liable occasioned by the 25 October 1993: Fire on
Board." (Exhibit "4")
In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiff’s claim (Exhibit "5"). The
letter reads:
"After a careful review and evaluation of your claim arising from the above-captioned incident, it
has been ascertained that you are in breach of policy conditions, among them "WARRANTED
VESSEL CLASSED AND CLASS MAINTAINED". Accordingly, we regret to advise that your claim
is not compensable and hereby DENIED."
This was followed by defendant’s letter dated 21 July 1997 requesting the return or payment of
the P3,000,000.00 within a period of ten (10) days from receipt of the letter (Exhibit "6"). 4
Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint5 for Sum of
Money against PRUDENTIAL with the RTC of Cebu City, docketed as Civil Case No. CEB-20709,
wherein TRANS-ASIA sought the amount of P8,395,072.26 from PRUDENTIAL, alleging that the
same represents the balance of the indemnity due upon the insurance policy in the total amount
of P11,395,072.26. TRANS-ASIA similarly sought interest at 42% per annum citing Section 2436 of
Presidential Decreee No. 1460, otherwise known as the "Insurance Code," as amended.
In its Answer,7 PRUDENTIAL denied the material allegations of the Complaint and interposed the
defense that TRANS-ASIA breached insurance policy conditions, in particular: "WARRANTED
VESSEL CLASSED AND CLASS MAINTAINED." PRUDENTIAL further alleged that it acted as
facts and law require and incurred no liability to TRANS-ASIA; that TRANS-ASIA has no cause of
action; and, that its claim has been effectively waived and/or abandoned, or it is estopped from
pursuing the same. By way of a counterclaim, PRUDENTIAL sought a refund of P3,000,000.00,
which it allegedly advanced to TRANS-ASIA by way of a loan without interest and without
prejudice to the final evaluation of the claim, including the amounts of P500,000.00, for survey
fees and P200,000.00, representing attorney’s fees.
The Ruling of the Trial Court
On 6 June 2000, the court a quo rendered Judgment 8 finding for (therein defendant)
PRUDENTIAL. It ruled that a determination of the parties’ liabilities hinged on whether TRANS-
ASIA violated and breached the policy conditions on WARRANTED VESSEL CLASSED AND
CLASS MAINTAINED. It interpreted the provision to mean that TRANS-ASIA is required to
maintain the vessel at a certain class at all times pertinent during the life of the policy. According
to the court a quo, TRANS-ASIA failed to prove compliance of the terms of the warranty, the
violation thereof entitled PRUDENTIAL, the insured party, to rescind the contract. 9
Further, citing Section 10710 of the Insurance Code, the court a quo ratiocinated that the
concealment made by TRANS-ASIA that the vessel was not adequately maintained to preserve
its class was a material concealment sufficient to avoid the policy and, thus, entitled the injured
party to rescind the contract. The court a quo found merit in PRUDENTIAL’s contention that there
was nothing in the adjustment of the particular average submitted by the adjuster that would show
that TRANS-ASIA was not in breach of the policy. Ruling on the denominated loan and trust
receipt, the court a quo said that in substance and in form, the same is a receipt for a loan. It held
that if TRANS-ASIA intended to receive the amount of P3,000,000.00 as advance payment, it
should have so clearly stated as such.
The court a quo did not award PRUDENTIAL’s claim for P500,000.00, representing expert survey
fees on the ground of lack of sufficient basis in support thereof. Neither did it award attorney’s fees
on the rationalization that the instant case does not fall under the exceptions stated in Article
220811 of the Civil Code. However, the court a quo granted PRUDENTIAL’s counterclaim stating
that there is factual and legal basis for TRANS-ASIA to return the amount of P3,000,000.00 by
way of loan without interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its failure to prove a
cause of action.
On defendant’s counterclaim, plaintiff is directed to return the sum of P3,000,000.00 representing
the loan extended to it by the defendant, within a period of ten (10) days from and after this
judgment shall have become final and executory.12
The Ruling of the Court of Appeals
On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6 November 2001,
reversed the 6 June 2000 Judgment of the RTC.
On the issue of TRANS-ASIA’s alleged breach of warranty of the policy condition CLASSED AND
CLASS MAINTAINED, the Court of Appeals ruled that PRUDENTIAL, as the party asserting the
non-compensability of the loss had the burden of proof to show that TRANS-ASIA breached the
warranty, which burden it failed to discharge. PRUDENTIAL cannot rely on the lack of certification
to the effect that TRANS-ASIA was CLASSED AND CLASS MAINTAINED as its sole basis for
reaching the conclusion that the warranty was breached. The Court of Appeals opined that the
lack of a certification does not necessarily mean that the warranty was breached by TRANS-ASIA.
Instead, the Court of Appeals considered PRUDENTIAL’s admission that at the time the insurance
contract was entered into between the parties, the vessel was properly classed by Bureau Veritas,
a classification society recognized by the industry. The Court of Appeals similarly gave weight to
the fact that it was the responsibility of Richards Hogg International (Phils.) Inc., the average
adjuster hired by PRUDENTIAL, to secure a copy of such certification to support its conclusion
that mere absence of a certification does not warrant denial of TRANS-ASIA’s claim under the
insurance policy.
In the same token, the Court of Appeals found the subject warranty allegedly breached by TRANS-
ASIA to be a rider which, while contained in the policy, was inserted by PRUDENTIAL without the
intervention of TRANS-ASIA. As such, it partakes of a nature of a contract d’adhesion which
should be construed against PRUDENTIAL, the party which drafted the contract. Likewise,
according to the Court of Appeals, PRUDENTIAL’s renewal of the insurance policy from noon of
1 July 1994 to noon of 1 July 1995, and then again, until noon of 1 July 1996 must be deemed a
waiver by PRUDENTIAL of any breach of warranty committed by TRANS-ASIA.
Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the transaction
between PRUDENTIAL and TRANS-ASIA as one of subrogation, instead of a loan. The Court of
Appeals concluded that TRANS-ASIA has no obligation to pay back the amount of P3,000.000.00
to PRUDENTIAL based on its finding that the aforesaid amount was PRUDENTIAL’s partial
payment to TRANS-ASIA’s claim under the policy. Finally, the Court of Appeals denied TRANS-
ASIA’s prayer for attorney’s fees, but held TRANS-ASIA entitled to double interest on the policy
for the duration of the delay of payment of the unpaid balance, citing Section 24413 of the Insurance
Code.
Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise:
WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal is
ALLOWED and the Judgment appealed from REVERSED. The P3,000,000.00 initially paid by
appellee Prudential Guarantee Assurance Incorporated to appellant Trans-Asia and covered by a
"Loan and Trust Receipt" dated 29 May 1995 is HELD to be in partial settlement of the loss
suffered by appellant and covered by Marine Policy No. MH93/1363 issued by appellee. Further,
appellee is hereby ORDERED to pay appellant the additional amount of P8,395,072.26
representing the balance of the loss suffered by the latter as recommended by the average
adjuster Richard Hogg International (Philippines) in its Report, with double interest starting from
the time Richard Hogg’s Survey Report was completed, or on 13 August 1996, until the same is
fully paid.
All other claims and counterclaims are hereby DISMISSED.
All costs against appellee.14
Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for
Reconsideration and Partial Motion for Reconsideration thereon, respectively, which motions were
denied by the Court of Appeals in the Resolution dated 29 January 2002.
The Issues
Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as G.R. No.
151890, relying on the following grounds, viz:
I. THE AWARD IS GROSSLY UNCONSCIONABLE.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO
VIOLATION BY TRANS-ASIA OF A MATERIAL WARRANTY, NAMELY,
WARRANTY CLAUSE NO. 5, OF THE INSURANCE POLICY.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS
INSURER HAD THE BURDEN OF PROVING THAT THE ASSURED, TRANS-
ASIA, VIOLATED A MATERIAL WARRANTY.
IV. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY
CLAUSE EMBODIED IN THE INSURANCE POLICY CONTRACT WAS A MERE
RIDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED
RENEWALS OF THE POLICY CONSTITUTED A WAIVER ON THE PART OF
PRUDENTIAL OF THE BREACH OF THE WARRANTY BY TRANS-ASIA.
VI. THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND TRUST
RECEIPT" EXECUTED BY TRANS-ASIA IS AN ADVANCE ON THE POLICY,
THUS CONSTITUTING PARTIAL PAYMENT THEREOF.
VII. THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY
PRUDENTIAL OF THE FINDINGS OF RICHARDS HOGG IS INDICATIVE OF A
WAIVER ON THE PART OF PRUDENTIAL OF ANY VIOLATION BY TRANS-
ASIA OF THE WARRANTY.
VIII. THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT,
IN FINDING THAT PRUDENTIAL "UNJUSTIFIABLY REFUSED" TO PAY THE
CLAIM AND IN ORDERING PRUDENTIAL TO PAY TRANS-ASIA P8,395,072.26
PLUS DOUBLE INTEREST FROM 13 AUGUST 1996, UNTIL [THE] SAME IS
FULLY PAID.15
Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a Petition for Review
docketed as G.R. No. 151991, raising the following grounds for the allowance of the petition, to
wit:
 I. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING
ATTORNEY’S FEES TO PETITIONER TRANS-ASIA ON THE GROUND THAT
SUCH CAN ONLY BE AWARDED IN THE CASES ENUMERATED IN ARTICLE
2208 OF THE CIVIL CODE, AND THERE BEING NO BAD FAITH ON THE PART
OF RESPONDENT PRUDENTIAL IN DENYING HEREIN PETITIONER TRANS-
ASIA’S INSURANCE CLAIM.
II. THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06
NOVEMBER 2001 SHOULD BE CONSTRUED TO MEAN DOUBLE INTEREST
BASED ON THE LEGAL INTEREST OF 12%, OR INTEREST AT THE RATE OF
24% PER ANNUM.16
In our Resolution of 2 December 2002, we granted TRANS-ASIA’s Motion for Consolidation17 of
G.R. Nos. 151890 and 151991;18 hence, the instant consolidated petitions.
In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANS-ASIA arising
from the subject insurance contract; (2) the liability, if any, of TRANS-ASIA to PRUDENTIAL
arising from the transaction between the parties as evidenced by a document denominated as
"Loan and Trust Receipt," dated 29 May 1995; and (3) the amount of interest to be imposed on
the liability, if any, of either or both parties.
Ruling of the Court
Prefatorily, it must be emphasized that in a petition for review, only questions of law, and not
questions of fact, may be raised.19 This rule may be disregarded only when the findings of fact of
the Court of Appeals are contrary to the findings and conclusions of the trial court, or are not
supported by the evidence on record.20 In the case at bar, we find an incongruence between the
findings of fact of the Court of Appeals and the court a quo, thus, in our determination of the issues,
we are constrained to assess the evidence adduced by the parties to make appropriate findings
of facts as are necessary.
I.
A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached the policy
condition on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, as
contained in the subject insurance contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated an express
and material warranty in the subject insurance contract, i.e., Marine Insurance Policy No.
MH93/1363, specifically Warranty Clause No. 5 thereof, which stipulates that the insured vessel,
"M/V ASIA KOREA" is required to be CLASSED AND CLASS MAINTAINED. According to
PRUDENTIAL, on 25 October 1993, or at the time of the occurrence of the fire, "M/V ASIA
KOREA" was in violation of the warranty as it was not CLASSED AND CLASS MAINTAINED.
PRUDENTIAL submits that Warranty Clause No. 5 was a condition precedent to the recovery of
TRANS-ASIA under the policy, the violation of which entitled PRUDENTIAL to rescind the contract
under Sec. 7421 of the Insurance Code.
The warranty condition CLASSED AND CLASS MAINTAINED was explained by PRUDENTIAL’s
Senior Manager of the Marine and Aviation Division, Lucio Fernandez. The pertinent portions of
his testimony on direct examination is reproduced hereunder, viz:
ATTY. LIM
Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final action was
taken?
A It was eventually determined that there was a breach of the policy condition, and basically there
is a breach of policy warranty condition and on that basis the claim was denied.
Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here marked as
Exhibits "1", "1-A" series, please point to the warranty in the policy which you said was breached
or violated by the plaintiff which constituted your basis for denying the claim as you testified.
A Warranted Vessel Classed and Class Maintained.
ATTY. LIM
Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page of the policy
below the printed words: "Clauses, Endorsements, Special Conditions and Warranties," below this
are several typewritten clauses and the witness pointed out in particular the clause reading:
"Warranted Vessel Classed and Class Maintained."
COURT
Q Will you explain that particular phrase?
A Yes, a warranty is a condition that has to be complied with by the insured. When we say a class
warranty, it must be entered in the classification society.
COURT
Slowly.
WITNESS
(continued)
A: A classification society is an organization which sets certain standards for a vessel to maintain
in order to maintain their membership in the classification society. So, if they failed to meet that
standard, they are considered not members of that class, and thus breaching the warranty, that
requires them to maintain membership or to maintain their class on that classification society. And
it is not sufficient that the member of this classification society at the time of a loss, their
membership must be continuous for the whole length of the policy such that during the effectivity
of the policy, their classification is suspended, and then thereafter, they get reinstated, that again
still a breach of the warranty that they maintained their class (sic). Our maintaining team
membership in the classification society thereby maintaining the standards of the vessel (sic).
ATTY. LIM
Q: Can you mention some classification societies that you know?
A: Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local Classification
Society, The Philippine Registration of Ships Society, China Classification, NKK and Company
Classification Society, and many others, we have among others, there are over 20 worldwide. 22
At the outset, it must be emphasized that the party which alleges a fact as a matter of defense
has the burden of proving it. PRUDENTIAL, as the party which asserted the claim that TRANS-
ASIA breached the warranty in the policy, has the burden of evidence to establish the same.
Hence, on the part of PRUDENTIAL lies the initiative to show proof in support of its defense;
otherwise, failing to establish the same, it remains self-serving. Clearly, if no evidence on the
alleged breach of TRANS-ASIA of the subject warranty is shown, a fortiori, TRANS-ASIA would
be successful in claiming on the policy. It follows that PRUDENTIAL bears the burden of evidence
to establish the fact of breach.
In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the burden of proof
to show proof of loss, and the coverage thereof, in the subject insurance policy. However, in the
course of trial in a civil case, once plaintiff makes out a prima facie case in his favor, the duty or
the burden of evidence shifts to defendant to controvert plaintiff’s prima facie case, otherwise, a
verdict must be returned in favor of plaintiff.23 TRANS-ASIA was able to establish proof of loss and
the coverage of the loss, i.e., 25 October 1993: Fire on Board. Thereafter, the burden of evidence
shifted to PRUDENTIAL to counter TRANS-ASIA’s case, and to prove its special and affirmative
defense that TRANS-ASIA was in violation of the particular condition on CLASSED AND CLASS
MAINTAINED.
We sustain the findings of the Court of Appeals that PRUDENTIAL was not successful in
discharging the burden of evidence that TRANS-ASIA breached the subject policy condition on
CLASSED AND CLASS MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager of its Marine and Aviation Division, Lucio
Fernandez, made a categorical admission that at the time of the procurement of the insurance
contract in July 1993, TRANS-ASIA’s vessel, "M/V Asia Korea" was properly classed by Bureau
Veritas, thus:
Q Kindly examine the records particularly the policy, please tell us if you know whether M/V Asia
Korea was classed at the time (sic) policy was procured perthe (sic) insurance was procured that
Exhibit "1" on 1st July 1993 (sic).
WITNESS
A I recall that they were classed.
ATTY. LIM
Q With what classification society?
A I believe with Bureau Veritas.24
As found by the Court of Appeals and as supported by the records, Bureau Veritas is a
classification society recognized in the marine industry. As it is undisputed that TRANS-ASIA was
properly classed at the time the contract of insurance was entered into, thus, it becomes
incumbent upon PRUDENTIAL to show evidence that the status of TRANS-ASIA as being properly
CLASSED by Bureau Veritas had shifted in violation of the warranty. Unfortunately, PRUDENTIAL
failed to support the allegation.
We are in accord with the ruling of the Court of Appeals that the lack of a certification in
PRUDENTIAL’s records to the effect that TRANS-ASIA’s "M/V Asia Korea" was CLASSED AND
CLASS MAINTAINED at the time of the occurrence of the fire cannot be tantamount to the
conclusion that TRANS-ASIA in fact breached the warranty contained in the policy. With more
reason must we sustain the findings of the Court of Appeals on the ground that as admitted by
PRUDENTIAL, it was likewise the responsibility of the average adjuster, Richards Hogg
International (Phils.), Inc., to secure a copy of such certification, and the alleged breach of TRANS-
ASIA cannot be gleaned from the average adjuster’s survey report, or adjustment of particular
average per "M/V Asia Korea" of the 25 October 1993 fire on board.
We are not unmindful of the clear language of Sec. 74 of the Insurance Code which provides that,
"the violation of a material warranty, or other material provision of a policy on the part of either
party thereto, entitles the other to rescind." It is generally accepted that "[a] warranty is a statement
or promise set forth in the policy, or by reference incorporated therein, the untruth or non-fulfillment
of which in any respect, and without reference to whether the insurer was in fact prejudiced by
such untruth or non-fulfillment, renders the policy voidable by the insurer."25However, it is similarly
indubitable that for the breach of a warranty to avoid a policy, the same must be duly shown by
the party alleging the same. We cannot sustain an allegation that is unfounded. Consequently,
PRUDENTIAL, not having shown that TRANS-ASIA breached the warranty condition, CLASSED
AND CLASS MAINTAINED, it remains that TRANS-ASIA must be allowed to recover its rightful
claims on the policy.
B. Assuming arguendo that TRANS-ASIA violated the policy condition on WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED, PRUDENTIAL made a valid waiver of the same.
The Court of Appeals, in reversing the Judgment of the RTC which held that TRANS-ASIA
breached the warranty provision on CLASSED AND CLASS MAINTAINED, underscored that
PRUDENTIAL can be deemed to have made a valid waiver of TRANS-ASIA’s breach of warranty
as alleged, ratiocinating, thus:
Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2) consecutive
years, from noon of 01 July 1994 to noon of 01 July 1995, and then again until noon of 01 July
1996. This renewal is deemed a waiver of any breach of warranty. 26
PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the renewal
policies are deemed a waiver of TRANS-ASIA’s alleged breach, averring herein that the
subsequent policies, designated as MH94/1595 and MH95/1788 show that they were issued only
on 1 July 1994 and 3 July 1995, respectively, prior to the time it made a request to TRANS-ASIA
that it be furnished a copy of the certification specifying that the insured vessel "M/V Asia Korea"
was CLASSED AND CLASS MAINTAINED. PRUDENTIAL posits that it came to know of the
breach by TRANS-ASIA of the subject warranty clause only on 21 April 1997. On even date,
PRUDENTIAL sent TRANS-ASIA a letter of denial, advising the latter that their claim is not
compensable. In fine, PRUDENTIAL would have this Court believe that the issuance of the
renewal policies cannot be a waiver because they were issued without knowledge of the alleged
breach of warranty committed by TRANS-ASIA.27
We are not impressed. We do not find that the Court of Appeals was in error when it held that
PRUDENTIAL, in renewing TRANS-ASIA’s insurance policy for two consecutive years after the
loss covered by Policy No. MH93/1363, was considered to have waived TRANS-ASIA’s breach of
the subject warranty, if any. Breach of a warranty or of a condition renders the contract defeasible
at the option of the insurer; but if he so elects, he may waive his privilege and power to rescind by
the mere expression of an intention so to do. In that event his liability under the policy continues
as before.28 There can be no clearer intention of the waiver of the alleged breach than the renewal
of the policy insurance granted by PRUDENTIAL to TRANS-ASIA in MH94/1595 and MH95/1788,
issued in the years 1994 and 1995, respectively.
To our mind, the argument is made even more credulous by PRUDENTIAL’s lack of proof to
support its allegation that the renewals of the policies were taken only after a request was made
to TRANS-ASIA to furnish them a copy of the certificate attesting that "M/V Asia Korea" was
CLASSED AND CLASS MAINTAINED. Notwithstanding PRUDENTIAL’s claim that no certification
was issued to that effect, it renewed the policy, thereby, evidencing an intention to waive TRANS-
ASIA’s alleged breach. Clearly, by granting the renewal policies twice and successively after the
loss, the intent was to benefit the insured, TRANS-ASIA, as well as to waive compliance of the
warranty.
The foregoing finding renders a determination of whether the subject warranty is a rider, moot, as
raised by the PRUDENTIAL in its assignment of errors. Whether it is a rider will not effectively
alter the result for the reasons that: (1) PRUDENTIAL was not able to discharge the burden of
evidence to show that TRANS-ASIA committed a breach, thereof; and (2) assuming arguendo the
commission of a breach by TRANS-ASIA, the same was shown to have been waived by
PRUDENTIAL.
II.
A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a transaction
between the parties evidenced by a document denominated as "Loan and Trust Receipt," dated
29 May 1995 constituted partial payment on the policy.
It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of P3,000,000.00. The
same was evidenced by a transaction receipt denominated as a "Loan and Trust Receipt," dated
29 May 1995, reproduced hereunder:
LOAN AND TRUST RECEIPT
Claim File No. MH-93-025 May 29, 1995
P3,000,000.00
Check No. PCIB066755
Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of PESOS
THREE MILLION ONLY (P3,000,000.00) as a loan without interest, under Policy No. MH93/1353,
repayable only in the event and to the extent that any net recovery is made by TRANS ASIA
SHIPPING CORP., from any person or persons, corporation or corporations, or other parties, on
account of loss by any casualty for which they may be liable, occasioned by the 25 October 1993:
Fire on Board.
As security for such repayment, we hereby pledge to PRUDENTIAL GUARANTEE AND
ASSURANCE INC. whatever recovery we may make and deliver to it all documents necessary to
prove our interest in said property. We also hereby agree to promptly prosecute suit against such
persons, corporation or corporations through whose negligence the aforesaid loss was caused or
who may otherwise be responsible therefore, with all due diligence, in our own name, but at the
expense of and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION29
PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by the parties
evidenced a loan of P3,000,000.00 which it granted to TRANS-ASIA, and not an advance payment
on the policy or a partial payment for the loss. It further submits that it is a customary practice for
insurance companies in this country to extend loans gratuitously as part of good business dealing
with their assured, in order to afford their assured the chance to continue business without
embarrassment while awaiting outcome of the settlement of their claims. 30 According to
PRUDENTIAL, the "Trust and Loan Agreement" did not subrogate to it whatever rights and/or
actions TRANS-ASIA may have against third persons, and it cannot by no means be taken that
by virtue thereof, PRUDENTIAL was granted irrevocable power of attorney by TRANS-ASIA, as
the sole power to prosecute lies solely with the latter.
The Court of Appeals held that the real character of the transaction between the parties as
evidenced by the "Loan and Trust Receipt" is that of an advance payment by PRUDENTIAL of
TRANS-ASIA’s claim on the insurance, thus:
The Philippine Insurance Code (PD 1460 as amended) was derived from the old Insurance
Law Act No. 2427 of the Philippine Legislature during the American Regime. The Insurance
Act was lifted verbatim from the law of California, except Chapter V thereof, which was
taken largely from the insurance law of New York. Therefore, ruling case law in that
jurisdiction is to Us persuasive in interpreting provisions of our own Insurance Code. In
addition, the application of the adopted statute should correspond in fundamental points
with the application in its country of origin x x x.
xxxx
Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the Loan Receipt
that the money was intended as a loan does not detract from its real character as payment of
claim, thus:
"The receipt of money by the insured employers from a surety company for losses on account of
forgery of drafts by an employee where no provision or repayment of the money was made except
upon condition that it be recovered from other parties and neither interest nor security for the
asserted debts was provided for, the money constituted the payment of a liability and not a mere
loan, notwithstanding recitals in the written receipt that the money was intended as a mere loan."
What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement" is that
appellant is obligated to hand over to appellee "whatever recovery (Trans Asia) may make and
deliver to (Prudential) all documents necessary to prove its interest in the said property." For all
intents and purposes therefore, the money receipted is payment under the policy, with Prudential
having the right of subrogation to whatever net recovery Trans-Asia may obtain from third parties
resulting from the fire. In the law on insurance, subrogation is an equitable assignment to the
insurer of all remedies which the insured may have against third person whose negligence or
wrongful act caused the loss covered by the insurance policy, which is created as the legal effect
of payment by the insurer as an assignee in equity. The loss in the first instance is that of the
insured but after reimbursement or compensation, it becomes the loss of the insurer. It has been
referred to as the doctrine of substitution and rests on the principle that substantial justice should
be attained regardless of form, that is, its basis is the doing of complete, essential, and perfect
justice between all the parties without regard to form. 31
We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt" evidences
that the real nature of the transaction between the parties was that the amount of P3,000,000.00
was not intended as a loan whereby TRANS-ASIA is obligated to pay PRUDENTIAL, but rather,
the same was a partial payment or an advance on the policy of the claims due to TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA by
PRUDENTIAL, subrogating the former to the extent of "any net recovery made by TRANS ASIA
SHIPPING CORP., from any person or persons, corporation or corporations, or other parties, on
account of loss by any casualty for which they may be liable, occasioned by the 25 October 1993:
Fire on Board."32
Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed to "promptly
prosecute suit against such persons, corporation or corporations through whose negligence the
aforesaid loss was caused or who may otherwise be responsible therefore, with all due diligence"
in its name, the prosecution of the claims against such third persons are to be carried on "at the
expense of and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC."33 The clear import of the phrase "at the expense of and under the exclusive
direction and control" as used in the "Loan and Trust Receipt" grants solely to PRUDENTIAL the
power to prosecute, even as the same is carried in the name of TRANS-ASIA, thereby making
TRANS-ASIA merely an agent of PRUDENTIAL, the principal, in the prosecution of the suit against
parties who may have occasioned the loss.
Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA to repay
PRUDENTIAL is highly speculative and contingent, i.e., only in the event and to the extent that
any net recovery is made by TRANS-ASIA from any person on account of loss occasioned by the
fire of 25 October 1993. The transaction, therefore, was made to benefit TRANS-ASIA, such that,
if no recovery from third parties is made, PRUDENTIAL cannot be repaid the amount. Verily, we
do not think that this is constitutive of a loan. 34 The liberality in the tenor of the "Loan and Trust
Receipt" in favor of TRANS-ASIA leads to the conclusion that the amount of P3,000,000.00 was
a form of an advance payment on TRANS-ASIA’s claim on MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26, representing the
balance of the loss suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363.
Our foregoing discussion supports the conclusion that TRANS-ASIA is entitled to the unpaid
claims covered by Marine Policy No. MH93/1363, or a total amount of P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the form of attorney’s
fees equivalent to 10% of P8,395,072.26.
The Court of Appeals denied the grant of attorney’s fees. It held that attorney’s fees cannot be
awarded absent a showing of bad faith on the part of PRUDENTIAL in rejecting TRANS-ASIA’s
claim, notwithstanding that the rejection was erroneous. According to the Court of Appeals,
attorney’s fees can be awarded only in the cases enumerated in Article 2208 of the Civil Code
which finds no application in the instant case.
We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorney’s fees and
other expenses incurred by the insured after a finding by the Insurance Commissioner or the
Court, as the case may be, of an unreasonable denial or withholding of the payment of the claims
due. Moreover, the law imposes an interest of twice the ceiling prescribed by the Monetary Board
on the amount of the claim due the insured from the date following the time prescribed in Section
24235 or in Section 243,36 as the case may be, until the claim is fully satisfied. Finally, Section 244
considers the failure to pay the claims within the time prescribed in Sections 242 or 243, when
applicable, as prima facie evidence of unreasonable delay in payment.
To the mind of this Court, Section 244 does not require a showing of bad faith in order that
attorney’s fees be granted. As earlier stated, under Section 244, a prima facie evidence of
unreasonable delay in payment of the claim is created by failure of the insurer to pay the claim
within the time fixed in both Sections 242 and 243 of the Insurance Code. As established in Section
244, by reason of the delay and the consequent filing of the suit by the insured, the insurers shall
be adjudged to pay damages which shall consist of attorney’s fees and other expenses incurred
by the insured.37
Section 244 reads:
In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the
duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the
payment of the claim of the insured has been unreasonably denied or withheld; and in the
affirmative case, the insurance company shall be adjudged to pay damages which shall consist of
attorney’s fees and other expenses incurred by the insured person by reason of such
unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the
Monetary Board of the amount of the claim due the insured, from the date following the time
prescribed in section two hundred forty-two or in section two hundred forty-three, as the case may
be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within the time
prescribed in said sections shall be considered prima facie evidence of unreasonable delay in
payment.
Sections 243 and 244 of the Insurance Code apply when the court finds an unreasonable delay
or refusal in the payment of the insurance claims.
In the case at bar, the facts as found by the Court of Appeals, and confirmed by the records show
that there was an unreasonable delay by PRUDENTIAL in the payment of the unpaid balance of
P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day after the occurrence of the fire in
"M/V Asia Korea", TRANS-ASIA filed its notice of claim. On 13 August 1996, the adjuster, Richards
Hogg International (Phils.), Inc., completed its survey report recommending the amount of
P11,395,072.26 as the total indemnity due to TRANS-ASIA.38 On 21 April 1997, PRUDENTIAL, in
a letter39 addressed to TRANS-ASIA denied the latter’s claim for the amount of P8,395,072.26
representing the balance of the total indemnity. On 21 July 1997, PRUDENTIAL sent a second
letter40 to TRANS-ASIA seeking a return of the amount of P3,000,000.00. On 13 August 1997,
TRANS-ASIA was constrained to file a complaint for sum of money against PRUDENTIAL praying,
inter alia, for the sum of P8,395,072.26 representing the balance of the proceeds of the insurance
claim.
As can be gleaned from the foregoing, there was an unreasonable delay on the part of
PRUDENTIAL to pay TRANS-ASIA, as in fact, it refuted the latter’s right to the insurance claims,
from the time proof of loss was shown and the ascertainment of the loss was made by the
insurance adjuster. Evidently, PRUDENTIAL’s unreasonable delay in satisfying TRANS-ASIA’s
unpaid claims compelled the latter to file a suit for collection.
Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the policy as
attorney’s fees to TRANS-ASIA is reasonable under the circumstances, or otherwise stated, ten
percent (10%) of P8,395,072.26. In the case of Cathay Insurance, Co., Inc. v. Court of
Appeals,41 where a finding of an unreasonable delay under Section 244 of the Insurance Code
was made by this Court, we grant an award of attorney’s fees equivalent to ten percent (10%) of
the total proceeds. We find no reason to deviate from this judicial precedent in the case at bar.
C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be
imposed double interest in accordance with Section 244 of the Insurance Code.
Section 244 of the Insurance Code is categorical in imposing an interest twice the ceiling
prescribed by the Monetary Board due the insured, from the date following the time prescribed in
Section 242 or in Section 243, as the case may be, until the claim is fully satisfied. In the case at
bar, we find Section 243 to be applicable as what is involved herein is a marine insurance, clearly,
a policy other than life insurance.
Section 243 is hereunder reproduced:
SEC. 243. The amount of any loss or damage for which an insurer may be liable, under any policy
other than life insurance policy, shall be paid within thirty days after proof of loss is received by
the insurer and ascertainment of the loss or damage is made either by agreement between the
insured and the insurer or by arbitration; but if such ascertainment is not had or made within sixty
days after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid
within ninety days after such receipt. Refusal or failure to pay the loss or damage within the time
prescribed herein will entitle the assured to collect interest on the proceeds of the policy for the
duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such
failure or refusal to pay is based on the ground that the claim is fraudulent.
only after such time can the insurer be held to be in delay, thereby necessitating the imposition of
double interest.
In the case at bar, it was not disputed that the survey report on the ascertainment of the loss was
completed by the adjuster, Richard Hoggs International (Phils.), Inc. on 13 August 1996.
PRUDENTIAL had thirty days from 13 August 1996 within which to pay its liability to TRANS-ASIA
under the insurance policy, or until 13 September 1996. Therefore, the double interest can begin
to run from 13 September 1996 only.
IV.

A. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged
As specified, the assured is entitled to interest on the proceeds for the duration of the delay at the
in section III herein, computed from the time of finality of judgment until the full satisfaction thereof
rate of twice the ceiling prescribed by the Monetary Board except when the failure or refusal of the
in conformity with this Court’s ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.
insurer to pay was founded on the ground that the claim is fraudulent.

This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, 47 inscribed the rule of thumb48 in
D. The term "double interest" as used in the Decision of the Court of Appeals must be interpreted
the application of interest to be imposed on obligations, regardless of their source. Eastern
to mean 24% per annum.
emphasized beyond cavil that when the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, regardless of whether the obligation involves a loan
PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor of TRANS- or forbearance of money, shall be 12% per annum from such finality until its satisfaction, this
ASIA in the assailed Decision of 6 November 2001. It is PRUDENTIAL’s stance that the award is interim period being deemed to be by then an equivalent to a forbearance49 of credit.
extortionate and grossly unsconscionable. In support thereto, PRUDENTIAL makes a reference
to TRANS-ASIA’s prayer in the Complaint filed with the court a quo wherein the latter sought,
We find application of the rule in the case at bar proper, thus, a rate of 12% per annum from the
"interest double the prevailing rate of interest of 21% per annum now obtaining in the banking
finality of judgment until the full satisfaction thereof must be imposed on the total amount of liability
business or plus 42% per annum pursuant to Article 243 of the Insurance Code x x x."42
adjudged to PRUDENTIAL. It is clear that the interim period from the finality of judgment until the
satisfaction of the same is deemed equivalent to a forbearance of credit, hence, the imposition of
The contention fails to persuade. It is settled that an award of double interest is lawful and justified the aforesaid interest.
under Sections 243 and 244 of the Insurance Code.43 In Finman General Assurance Corporation
v. Court of Appeals,44 this Court held that the payment of 24% interest per annum is authorized
Fallo: WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in G.R.
by the Insurance Code.45 There is no gainsaying that the term "double interest" as used in Sections
No. 151991 is GRANTED, thus, we award the grant of attorney’s fees and make a clarification
243 and 244 can only be interpreted to mean twice 12% per annum or 24% per annum interest,
that the term "double interest" as used in the 6 November 2001 Decision of the Court of Appeals
thus:
in CA GR CV No. 68278 should be construed to mean interest at the rate of 24% per annum, with
a further clarification, that the same should be computed from 13 September 1996 until fully paid.
The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of twelve per The Decision and Resolution of the Court of Appeals, in CA-G.R. CV No. 68278, dated 6
centum per annum (12%) as prescribed by the Monetary Board in C.B. Circular No. 416, pursuant November 2001 and 29 January 2002, respectively, are, thus, MODIFIED in the following manner,
to P.D. No. 116, amending the Usury Law; so that when Sections 242, 243 and 244 of the to wit:
Insurance Code provide that the insurer shall be liable to pay interest "twice the ceiling prescribed
by the Monetary Board", it means twice 12% per annum or 24% per annum interest on the
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of P8,395,072.26,
proceeds of the insurance.46
representing the balance of the loss suffered by TRANS-ASIA and covered by Marine
Policy No. MH93/1363;
E. The payment of double interest should be counted from 13 September 1996.
2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the form of
The Court of Appeals, in imposing double interest for the duration of the delay of the payment of attorney’s fees equivalent to 10% of the amount of P8,395,072.26;
the unpaid balance due TRANS-ASIA, computed the same from 13 August 1996 until such time
when the amount is fully paid. Although not raised by the parties, we find the computation of the
3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be
duration of the delay made by the appellate court to be patently erroneous.
imposed double interest at the rate of 24% per annum to be computed from 13
September 1996 until fully paid; and
To be sure, Section 243 imposes interest on the proceeds of the policy for the duration of the
delay at the rate of twice the ceiling prescribed by the Monetary Board. Significantly, Section 243
4. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability
mandates the payment of any loss or damage for which an insurer may be liable, under any policy
adjudged as above-stated in paragraphs (1), (2), and (3) herein, computed from the
other than life insurance policy, within thirty days after proof of loss is received by the insurer and
time of finality of judgment until the full satisfaction thereof.
ascertainment of the loss or damage is made either by agreement between the insured and the
insurer or by arbitration. It is clear that under Section 243, the insurer has until the 30th day after
proof of loss and ascertainment of the loss or damage to pay its liability under the insurance, and
No costs.
SO ORDERED.
G.R. No. L-1669 August 31, 1950
PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-1670 August 31, 1950
AGUSTINA PERALTA, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
Mariano Lozada for appellant Constantino.
Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.
BENGZON, J.:
These two cases, appealed from the Court of First Instance of Manila, call for decision of the
question whether the beneficiary in a life insurance policy may recover the amount thereof
although the insured died after repeatedly failing to pay the stipulated premiums, such failure
having been caused by the last war in the Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia
Life Insurance Company (a foreign corporation incorporated under the laws of Delaware,
U.S.A.), issued on September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the
life of Arcadio Constantino for a term of twenty years. The first premium covered the period up to
September 26, 1942. The plaintiff Paz Lopez de Constantino was regularly appointed
beneficiary. The policy contained these stipulations, among others:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application here for a copy of which is attached hereto and is hereby made a part
hereof made a part hereof, and of the payment in advance during the lifetime and
good health of the Insured of the annual premium of One Hundred fifty-eight and
4/100 pesos Philippine currency1 and of the payment of a like amount upon each
twenty-seventh day of September hereafter during the term of Twenty years or until
the prior death of the Insured. (Emphasis supplied.)
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 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.2Act 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 conserved5 and should not lightly be thrown out, still we do not hesitate to enforce the
agreement of the parties.
Forfeitures of insurance policies are not favored, but courts cannot for that reason
alone refuse to enforce an insurance contract according to its meaning. (45 C.J.S., p.
150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the
consequence of war, it should be excused and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the
effect of non-payment of premiums occasioned by war, the American cases may be divided into
three groups, according as they support the so-called Connecticut Rule, the New York Rule, or
the United States Rule.
The first holds the view that "there are two elements in the consideration for which the annual
premium is paid — First, the mere protection for the year, and second, the privilege of renewing
the contract for each succeeding year by paying the premium for that year at the time agreed
upon. According to this view of the contract, the payment of premiums is a condition precedent,
the non-performance would be illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold that "war between
states in which the parties reside merely suspends the contracts of the life insurance, and that,
upon tender of all premiums due by the insured or his representatives after the war has
terminated, the contract revives and becomes fully operative."
The United States rule declares that the contract is not merely suspended, but is abrogated by
reason of non-payments is peculiarly of the essence of the contract. It additionally holds that it
would be unjust to allow the insurer to retain the reserve value of the policy, which is the excess
of the premiums paid over the actual risk carried during the years when the policy had been in
force. This rule was announced in the well-known Statham6 case 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:
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. (Noble vs. Southern States M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.)
(Emphasis ours.)

The truth is, that the doctrine of the revival of contracts suspended during the war is
It should be noted that the parties contracted not only for peacetime conditions but also for times
one based on considerations of equity and justice, and cannot be invoked to revive a
of war, because the policies contained provisions applicable expressly to wartime days. The
contract which it would be unjust or inequitable to revive.
logical inference, therefore, is that the parties contemplated uninterrupted operation of the
contract even if armed conflict should ensue.
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
For the plaintiffs, it is again argued that in view of the enormous growth of insurance business
parties do not stand on equal ground in reference to such a revival. It would operate
since the Statham decision, it could now be relaxed and even disregarded. It is stated "that the
most unjustly against the company. The business of insurance is founded on the law
relaxation of rules relating to insurance is in direct proportion to the growth of the business. If
of average; that of life insurance eminently so. The average rate of mortality is the
there were only 100 men, for example, insured by a Company or a mutual Association, the death
basis on which it rests. By spreading their risks over a large number of cases, the
of one will distribute the insurance proceeds among the remaining 99 policy-holders. Because
companies calculate on this average with reasonable certainty and safety. Anything
the loss which each survivor will bear will be relatively great, death from certain agreed or
that interferes with it deranges the security of the business. If every policy lapsed by
specified causes may be deemed not a compensable loss. But if the policy-holders of the
reason of the war should be revived, and all the back premiums should be paid, the
Company or Association should be 1,000,000 individuals, it is clear that the death of one of them
companies would have the benefit of this average amount of risk. But the good risks
will not seriously prejudice each one of the 999,999 surviving insured. The loss to be borne by
are never heard from; only the bar are sought to be revived, where the person insured
each individual will be relatively small."
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 The answer to this is that as there are (in the example) one million policy-holders, the "losses" to
person, as before stated, does not stand isolated and alone. His case is connected be considered will not be the death of one but the death of ten thousand, since the proportion of
with and co-related to the cases of all others insured by the same company. The 1 to 100 should be maintained. And certainly such losses for 10,000 deaths will not be "relatively
nature of the business, as a whole, must be looked at to understand the general small."
equities of the parties.
After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is
The above consideration certainly lend themselves to the approval of fair-minded men. such a vital defense of insurance companies that since the very beginning, said Act no. 2427
Moreover, if, as alleged, the consequences of war should not prejudice the insured, neither expressly preserved it, by providing that after the policy shall have been in force for two years, it
should they bear down on the insurer. 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
Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the
eliminated, while the defense of nonpayment of premiums was preserved. Thus the fundamental
insured to pay premiums was excused during the war owing to impossibility of performance, and
character of the undertaking to pay premiums and the high importance of the defense of non-
that consequently no unfavorable consequences should follow from such failure.
payment thereof, was specifically recognized.

The appellee answers, quite plausibly, that the periodic payment of premiums, at least those
In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule,
after the first, is not an obligation of the insured, so much so that it is not a debt enforceable by
which is in effect a variation of the Connecticut rule for the sake of equity. In this connection, it
action of the insurer.
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.
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
For all the foregoing, the lower court's decision absolving the defendant from all liability on the
settlement governed by the strict rule controlling payments of debts. So, the court in a
policies in question, is hereby affirmed, without costs.Moran, C.J., Ozaeta, Paras, Pablo,
Kentucky case declares, in the opinion, that it is not a debt. . . . The fact that it is
Montemayor, Tuason, and Reyes, JJ., concur.
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 G.R. No. 82036 May 22, 1997
a debt may be enforced at law, and the fact that the premium is agreed to be paid is TRAVELLERS INSURANCE & SURETY CORPORATION, petitioner,
without force, in the absence of an unqualified and absolute agreement to pay a vs.
specified sum at some certain time. In the ordinary policy there is no promise to pay, HON. COURT OF APPEALS and VICENTE MENDOZA, respondents.
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.) HERMOSISIMA, JR., J.:

The petition herein seeks the review and reversal of the decision 1 of respondent Court of
Appeals 2 affirming in totothe judgment 3 of the Regional Trial Court 4 in an action for
damages 5 filed by private respondent Vicente Mendoza, Jr. as heir of his mother who was killed
in a vehicular accident.
Before the trial court, the complainant lumped the erring taxicab driver, the owner of the taxicab,
and the alleged insurer of the vehicle which featured in the vehicular accident into one
complaint. The erring taxicab was allegedly covered by a third-party liability insurance policy
issued by petitioner Travellers Insurance & Surety Corporation.
The evidence presented before the trial court established the following facts:
At about 5:30 o'clock in the morning of July 20, 1980, a 78-year old woman
by the name of Feliza Vineza de Mendoza was on her way to hear mass at
the Tayuman Cathedral. While walking along Tayuman corner Gregorio
Perfecto Streets, she was bumped by a taxi that was running fast. Several
persons witnessed the accident, among whom were Rolando Marvilla,
Ernesto Lopez and Eulogio Tabalno. After the bumping, the old woman was
seen sprawled on the pavement. Right away, the good Samaritan that he
was, Mavilla ran towards the old woman and held her on his lap to inquire
from her what had happened, but obviously she was already in shock and
could not talk. At this moment, a private jeep stopped. With the driver of that
vehicle, the two helped board the old woman on the jeep and brought her to
the Mary Johnston Hospital in Tondo.
. . . Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman
Street from Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the
incident. It was on his return trip from Rizal Avenue when Lopez saw the
plaintiff and his brother who were crying near the scene of the accident.
Upon learning that the two were the sons of the old woman, Lopez told them
what had happened. The Mendoza brothers were then able to trace their
mother at the Mary Johnston Hospital where they were advised by the
attending physician that they should bring the patient to the National
Orthopedic Hospital because of her fractured bones. Instead, the victim was
brought to the U.S.T. Hospital where she expired at 9:00 o'clock that same
morning. Death was caused by "traumatic shock" as a result of the severe
injuries she sustained . . .
. . . The evidence shows that at the moment the victim was bumped by the
vehicle, the latter was running fast, so much so that because of the strong
impact the old woman was thrown away and she fell on the pavement. . . .
In truth, in that related criminal case against defendant Dumlao . . . the trial
court found as a fact that therein accused "was driving the subject taxicab in
a careless, reckless and imprudent manner and at a speed greater than
what was reasonable and proper without taking the necessary precaution to
avoid accident to persons . . . considering the condition of the traffic at the
place at the time aforementioned" . . . Moreover, the driver fled from the
scene of the accident and without rendering assistance to the victim. . . .
. . . Three (3) witnesses who were at the scene at the time identified the taxi
involved, though not necessarily the driver thereof. Marvilla saw a lone taxi
speeding away just after the bumping which, when it passed by him, said
witness noticed to be a Lady Love Taxi with Plate No. 438, painted maroon,
with baggage bar attached on the baggage compartment and with an
antenae [sic] attached at the right rear side. The same descriptions were
revealed by Ernesto Lopez, who further described the taxi to have . . .
reflectorized decorations on the edges of the glass at the back . . . A third
witness in the person of Eulogio Tabalno . . . made similar descriptions
although, because of the fast speed of the taxi, he was only able to detect
the last digit of the plate number which is "8". . . . [T]he police proceeded to
the garage of Lady Love Taxi and then and there they took possession of
such a taxi and later impounded it in the impounding area of the agency
concerned. . . . [T]he eyewitnesses . . . were unanimous in pointing to that
Lady Love Taxi with Plate No. 438, obviously the vehicle involved herein.
. . . During the investigation, defendant Armando Abellon, the registered
owner of Lady Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified
to the fact "that the vehicle was driven last July 20, 1980 by one Rodrigo
Dumlao. . ." . . . It was on the basis of this affidavit of the registered owner
that caused the police to apprehend Rodrigo Dumlao, and consequently to
have him prosecuted and eventually convicted of the offense . . . . . . . [S]aid
Dumlao absconded in that criminal case, specially at the time of the
promulgation of the judgment therein so much so that he is now a fugitive
from justice.6
Private respondent filed a complaint for damages against Armando Abellon as the owner of the
Lady Love Taxi and Rodrigo Dumlao as the driver of the Lady Love taxicab that bumped private
respondent's mother. Subsequently, private respondent amended his complaint to include
petitioner as the compulsory insurer of the said taxicab under Certificate of Cover No. 1447785-
3.
After trial, the trial court rendered judgment in favor of private respondent, the dispositive portion
of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more
particularly the "Heirs of the late Feliza Vineza de Mendoza," and against
defendants Rodrigo Dumlao, Armando Abellon and Travellers Insurance
and Surety Corporation, by ordering the latter to pay, jointly and severally,
the former the following amounts:
(a) The sum of P2,924.70, as actual and compensatory
damages, with interest thereon at the rate of 12% per
annum from October 17, 1980, when the complaint was
filed, until the said amount is fully paid;
(b) P30,000.00 as death indemnity;
(c) P25,000.00 as moral damages;
(d) P10,000.00 as by way of corrective or exemplary
damages; and
(e) Another P10,000.00 by way of attorney's fees and
other litigation expenses.
 Defendants are further ordered to pay, jointly and severally, the costs of this
suit.
SO ORDERED. 7
Petitioner appealed from the aforecited decision to the respondent Court of Appeals. The
decision of the trial court was affirmed by respondent appellate court. Petitioner's Motion for
Reconsideration 8 of September 22, 1987 was denied in a Resolution 9 dated February 9, 1988.
Hence this petition.
Petitioner mainly contends that it did not issue an insurance policy as compulsory insurer of the
Lady Love Taxi and that, assuming arguendo that it had indeed covered said taxicab for third-
party liability insurance, private respondent failed to file a written notice of claim with petitioner
as required by Section 384 of P.D. No. 612, otherwise known as the Insurance Code.
We find the petition to be meritorious.
I court grievously erred in not having reversed the trial court on this ground.
When private respondent filed his amended complaint to implead petitioner as party defendant
and therein alleged that petitioner was the third-party liability insurer of the Lady Love taxicab
that fatally hit private respondent's mother, private respondent did not attach a copy of the
insurance contract to the amended complaint. Private respondent does not deny this omission.
It is significant to point out at this juncture that the right of a third person to sue the insurer
depends on whether the contract of insurance is intended to benefit third persons also or only
the insured.
[A] policy . . . whereby the insurer agreed to indemnify the insured "against
all sums . . . which the Insured shall become legally liable to pay in respect
of: a. death of or bodily injury to any person . . . is one for indemnity against
liability; from the fact then that the insured is liable to the third person, such
third person is entitled to sue the insurer.
The right of the person injured to sue the insurer of the party at fault
(insured), depends on whether the contract of insurance is intended to
benefit third persons also or on the insured And the test applied has been
this: Where the contract provides for indemnity against liability to third
persons, then third persons to whom the insured is liable can sue the
insurer. Where the contract is for indemnity against actual loss or payment,
then third persons cannot proceed against the insurer, the contract being
solely to reimburse the insured for liability actually discharged by him thru
payment to third persons, said third persons' recourse being thus limited to
the insured alone. 10
Since private respondent failed to attach a copy of the insurance contract to his complaint, the
trial court could not have been able to apprise itself of the real nature and pecuniary limits of
petitioner's liability. More importantly, the trial court could not have possibly ascertained the right
of private respondent as third person to sue petitioner as insurer of the Lady Love taxicab
because the trial court never saw nor read the insurance contract and learned of its terms and
conditions.
Petitioner, understandably, did not volunteer to present any insurance contract covering the
Lady Love taxicab that fatally hit private respondent's mother, considering that petitioner
precisely presented the defense of lack of insurance coverage before the trial court. Neither did
the trial court issue a subpoena duces tecum to have the insurance contract produced before it
under pain of contempt.
We thus find hardly a basis in the records for the trial court to have validly found petitioner liable
jointly and severally with the owner and the driver of the Lady Love taxicab, for damages
accruing to private respondent.
Apparently, the trial court did not distinguish between the private respondent's cause of action
against the owner and the driver of the Lady Love taxicab and his cause of action against
petitioner. The former is based on torts and quasi-delicts while the latter is based on contract.
Confusing these two sources of obligations as they arise from the same act of the taxicab fatally
hitting private respondent's mother, and in the face of overwhelming evidence of the reckless
imprudence of the driver of the Lady Love taxicab, the trial court brushed aside its ignorance of
the terms and conditions of the insurance contract and forthwith found all three — the driver of
the taxicab, the owner of the taxicab, and the alleged insurer of the taxicab — jointly and
severally liable for actual, moral and exemplary damages as well as attorney's fees and litigation
expenses. This is clearly a misapplication of the law by the trial court, and respondent appellate
While it is true that where the insurance contract provides for indemnity
against liability to third persons, such third persons can directly sue the
insurer, however, the direct liability of the insurer under indemnity contracts
against third-party liability does not mean that the insurer can be held
solidarily liable with the insured and/or the other parties found at fault. The
liability of the insurer is based on contract; that of the insured is based on
tort. 11
Applying this principle underlying solidary obligation and insurance contracts, we ruled
in one case that:
In solidary obligation, the creditor may enforce the entire obligation against
one of the solidary debtors. On the other hand, insurance is defined as "a
contract whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent
event."
In the case at bar, the trial court held petitioner together with respondents
Sio Choy and San Leon Rice Mills Inc. solidarily liable to respondent
Vallejos for a total amount of P29,103.00, with the qualification that
petitioner's liability is only up to P20,000.00. In the context of a solidary
obligation, petitioner may be compelled by respondent Vallejos to pay the
entire obligation of P29,103.00, notwithstanding the qualification made by
the trial court. But, how can petitioner be obliged to pay the entire obligation
when the amount stated in its insurance policy with respondent Sio Choy for
indemnity against third-party liability is only P20,000.00? Moreover, the
qualification made in the decision of the trial court to the effect that petitioner
is sentenced to pay up to P20,000.00 only when the obligation to pay
P29,103.00 is made solidary is an evident breach of the concept of a
solidary obligation. 12
The above principles take on more significance in the light of the counter-allegation of petitioner
that, assuming arguendo that it is the insurer of the Lady Love taxicab in question, its liability is
limited to only P50,000.00, this being its standard amount of coverage in vehicle insurance
policies. It bears repeating that no copy of the insurance contract was ever proffered before the
trial court by the private respondent, notwithstanding knowledge of the fact that the latter's
complaint against petitioner is one under a written contract. Thus, the trial court proceeded to
hold petitioner liable for an award of damages exceeding its limited liability of P50,000.00. This
only shows beyond doubt that the trial court was under the erroneous presumption that petitioner
could be found liable absent proof of the contract and based merely on the proof of reckless
imprudence on the part of the driver of the Lady Love taxicab that fatally hit private respondent's
mother.
II
Petitioner did not tire in arguing before the trial court and the respondent appellate court that,
assuming arguendo that it had issued the insurance contract over the Lady Love taxicab, private
respondent's cause of action against petitioner did not successfully accrue because he failed to
file with petitioner a written notice of claim within six (6) months from the date of the accident as
required by Section 384 of the Insurance Code.
At the time of the vehicular incident which resulted in the death of private respondent's mother,
during which time the Insurance Code had not yet been amended by Batas Pambansa (B.P.)
Blg. 874, Section 384 provided as follows:
Any person having any claim upon the policy issued pursuant to this chapter
shall, without any unnecessary delay, present to the insurance company
concerned a written notice of claim setting forth the amount of his loss,
and/or the nature, extent and duration of the injuries sustained as certified
by a duly licensed physician. Notice of claim must be filed within six months
from date of the accident, otherwise, the claim shall be deemed waived.
Action or suit for recovery of damage due to loss or injury must be brought
in proper cases, with the Commission or the Courts within one year from
date of accident, otherwise the claimant's right of action shall prescribe
[emphasis supplied].
In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De Guzman, 13 we ruled
that the one year prescription period to bring suit in court against the insurer should be counted
from the time that the insurer rejects the written claim filed therewith by the insured, the
beneficiary or the third person interested under the insurance policy. We explained:
It is very obvious that petitioner company is trying to use Section 384 of the
Insurance Code as a cloak to hide itself from its liabilities. The facts of these
cases evidently reflect the deliberate efforts of petitioner company to
prevent the filing of a formal action against it. Bearing in mind that if it
succeeds in doing so until one year lapses from the date of the accident it
could set up the defense of prescription, petitioner company made private
respondents believe that their claims would be settled in order that the latter
will not find it necessary to immediately bring suit. In violation of its duties to
adopt and implement reasonable standards for the prompt investigation of
claims and to effectuate prompt, fair and equitable settlement of claims, and
with manifest bad faith, petitioner company devised means and ways of
stalling the settlement proceeding . . . [N]o steps were taken to process the
claim and no rejection of said claim was ever made even if private
respondent had already complied with all the requirements. . . .
This Court has made the observation that some insurance companies have
been inventing excuses to avoid their just obligations and it is only the State
that can give the protection which the insuring public needs from possible
abuses of the insurers. 14
It is significant to note that the aforecited Section 384 was amended by B.P. Blg. 874 to
categorically provide that "action or suit for recovery of damage due to loss or injury must be
brought in proper cases, with the Commissioner or the Courts within one year from denial of the
claim, otherwise the claimant's right of action shall prescribe" [emphasis ours]. 15
We have certainly ruled with consistency that the prescriptive period to bring suit in court under
an insurance policy, begins to run from the date of the insurer's rejection of the claim filed by the
insured, the beneficiary or any person claiming under an insurance contract. This ruling is
premised upon the compliance by the persons suing under an insurance contract, with the
indispensable requirement of having filed the written claim mandated by Section 384 of the
insurance Code before and after its amendment. Absent such written claim filed by the person
suing under an insurance contract, no cause of action accrues under such insurance contract,
considering that it is the rejection of that claim that triggers the running of the one-year
prescriptive period to bring suit in court, and there can be no opportunity for the insurer to even
reject a claim if none has been filed in the first place, as in the instant case.
The one-year period should instead be counted from the date of rejection by
the insurer as this is the time when the cause of action accrues. . . .
In Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:
The plaintiff's cause of action did not accrue until his claim was finally
rejected by the insurance company. This is because, before such final
rejection, there was no real necessity for bringing suit.
The philosophy of the above pronouncement was pointed out in the case
of ACCFA vs. Alpha Insurance and Surety Co., viz:
Since a cause of action requires, as essential elements, not only a legal
right of the plaintiff and a correlative obligation of the defendant but also an
act or omission of the defendant in violation of said legal right, the cause of
action does not accrue until the party obligated refuses, expressly or
impliedly, to comply with its duty. 16
When petitioner asseverates, thus, that no written claim was filed by private respondent and
rejected by petitioner, and private respondent does not dispute such asseveration through a
denial in his pleadings, we are constrained to rule that respondent appellate court committed
reversible error in finding petitioner liable under an insurance contract the existence of which had
not at all been proven in court. Even if there were such a contract, private respondent's cause of
action can not prevail because he failed to file the written claim mandated by Section 384 of the
Insurance Code. He is deemed, under this legal provision, to have waived his rights as against
petitioner-insurer.
WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of Appeals
in CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in Civil Case No. 135486
are REVERSED and SET ASIDE insofar as Travelers Insurance & Surety Corporation was
found jointly and severally liable to pay actual, moral and exemplary damages, death indemnity,
attorney's fees and litigation expenses in Civil Case No. 135486. The complaint against
Travellers Insurance & Surety Corporation in said case is hereby ordered dismissed.
No pronouncement as to costs. - 393,000.00 - on the two swimming pools, only
(against the peril of earthquake
SO ORDERED. shock only) @ 0.100%
- 116,600.00 other buildings include as follows:
a) Tilter House - P19,800.00 - 0.551%
G.R. No. 156167 May 16, 2005
GULF RESORTS, INC., petitioner, b) Power House - P41,000.00 - 0.551%
vs. c) House Shed - P55,000.00 - 0.540%
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
DECISION P100,000.00 - for furniture, fixtures, lines air-con
PUNO, J.: and operating equipment

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 decision1 which dismissed its two
appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the
insurance company’s liability for earthquake damage to petitioner’s properties. Petitioner avers
that, pursuant to its earthquake shock endorsement rider, Insurance Policy No. 31944 covers all
damages to the properties within its resort caused by earthquake. Respondent contends that the
rider limits its liability for loss to the two swimming pools of petitioner.
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU)
Policy No. 206-4568061-9 (Exh. "H") provided that the policy wording and rates in said
policy be copied in the policy to be issued by defendant; that defendant issued Policy
No. 31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991
for P10,700,600.00 for a total premium of P45,159.92 (Exh. "I"); that in the
computation of the premium, defendant’s 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

The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance
Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from
1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and "F"; also Exhs.
"1", "2", "3" and "4" respectively), the risk of loss from earthquake shock was extended
only to plaintiff’s two swimming pools, thus, "earthquake shock endt." (Item 5 only)
(Exhs. "C-1"; "D-1," and "E" and two (2) swimming pools only (Exhs. "C-1"; ‘D-1", "E"
and "F-1"). "Item 5" in those policies referred to the two (2) swimming pools only
(Exhs. "1-B", "2-B", "3-B" and "F-2"); that subsequently AHAC(AIU) issued in plaintiff’s
favor Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14,
1989 (Exhs. "G" also "G-1") and in said policy the earthquake endorsement clause as
indicated in Exhibits "C-1", "D-1", Exhibits "E" and "F-1" was deleted and the entry
under Endorsements/Warranties at the time of issue read that plaintiff renewed its
policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under
Policy No. 206-4568061-9 (Exh. "H") which carried the entry under
"Endorsement/Warranties at Time of Issue", which read "Endorsement to Include
Earthquake Shock (Exh. "6-B-1") in the amount of P10,700.00 and paid P42,658.14
(Exhs. "6-A" and "6-B") as premium thereof, computed as follows:
Item - P7,691,000.00 - on the Clubhouse only
@ .392%;
- 1,500,000.00 - on the furniture, etc. contained in
the building above-mentioned@
.490%;
– 2,061.52 – Typhoon
– 1,030.76 – EC
– 393.00 – ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against earthquake shock (ES); that in all the six insurance policies (Exhs.
"C", "D", "E", "F", "G" and "H"), the premium against the peril of earthquake shock is
the same, that is P393.00 (Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02"
and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G"
and "H") and in Policy No. 31944 issued by defendant, the shock endorsement
provide(sic):
In consideration of the payment by the insured to the company of the
sum included additional premium the Company agrees, notwithstanding
what is stated in the printed conditions of this policy due to the contrary, that
this insurance covers loss or damage to shock to any of the property
insured by this Policy occasioned by or through or in consequence of
earthquake (Exhs. "1-D", "2-D", "3-A", "4-B", "5-A", "6-D" and "7-C");
that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that
on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and
plaintiff’s properties covered by Policy No. 31944 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged.2
After the earthquake, petitioner advised respondent that it would be making a claim under its
Insurance Policy No. 31944 for damages on its properties. Respondent instructed petitioner to
file a formal claim, then assigned the investigation of the claim to an independent claims
adjuster, Bayne Adjusters and Surveyors, Inc.3 On July 30, 1990, respondent, through its
adjuster, requested petitioner to submit various documents in support of its claim. On August 7,
1990, Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon,4 rendered
a preliminary report5 finding extensive damage caused by the earthquake to the clubhouse and
to the two swimming pools. Mr. de Leon stated that "except for the swimming pools, all affected
items have no coverage for earthquake shocks."6 On August 11, 1990, petitioner filed its formal
demand7 for settlement of the damage to all its properties in the Agoo Playa Resort. On August
23, 1990, respondent denied petitioner’s claim on the ground that its insurance policy only
afforded earthquake shock coverage to the two swimming pools of the resort. 8 Petitioner and
respondent failed to arrive at a settlement.9 Thus, on January 24, 1991, petitioner filed a
complaint10 with the regional trial court of Pasig praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured
properties, with interest thereon, as computed under par. 29 of the policy (Annex "B")
until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by
plaintiff on account of defendant’s refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorney’s fees and expenses of litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00
against the peril of earthquake shock, the same premium it paid against earthquake
shock only on the two swimming pools in all the policies issued by AHAC(AIU)
(Exhibits "C", "D", "E", "F" and "G"). From this fact the Court must consequently agree
with the position of defendant that the endorsement rider (Exhibit "7-C") means that
only the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and unambiguous hence there is no
need for interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which
struck on July 16, 1990. Defendant having admitted that the damage to the swimming
pools was appraised by defendant’s 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
plaintiff’s 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 defendant’s obligation to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioner’s Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the
Court of Appeals based on the following assigned errors: 14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN
ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER
ITS FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE
CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND THE
ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY
16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANT’S RIGHT
TO RECOVER UNDER DEFENDANT-APPELLEE’S POLICY (NO. 31944; EXH "I")
BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID
POLICY ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS
ISSUANCE AND THE ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE
OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24%
PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower court’s failure to award it
attorney’s fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are
not convinced that the last two (2) insurance contracts (Exhs. "G" and "H"), which the
plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance contract
with Philippine Charter Insurance Corporation is said to have been based and copied
(Exh. "I"), covered an extended earthquake shock insurance on all the insured
properties.
xxx
 We also find that the Court a quo was correct in not granting the plaintiff-appellant’s
prayer for the imposition of interest – 24% on the insurance claim and 6% on loss of
income allegedly amounting to P4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools,
as the Court a quo and this Court correctly found it to be liable only, it then cannot be
said that it was in default and therefore liable for interest.
Coming to the defendant-appellant’s prayer for an attorney’s fees, long-standing is the
rule that the award thereof is subject to the sound discretion of the court. Thus, if such
discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et
al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception
rather than a rule, it is necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award (Country
Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc.,
G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiff-appellant’s
action is not baseless and highly speculative, We find that the Court a quo did not err
in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.15
Petitioner filed the present petition raising the following issues: 16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENT’S INSURANCE POLICY NO. 31944, ONLY THE TWO (2)
SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED
THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONER’S
PRAYER FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED,
ATTORNEY’S FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policy’s earthquake shock endorsement clearly covers all of the properties insured
and not only the swimming pools. It used the words "any property insured by this policy," and it
should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is
confirmed in the body of the insurance policy itself, which states that it is "[s]ubject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endt., Extended Coverage
Endt., FEA Warranty & Annual Payment Agreement On Long Term Policies."17
Third, that the qualification referring to the two swimming pools had already been deleted in the
earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when
it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the
wording of the insurance policy, because the rider is the more deliberate expression of the
agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of
petitioner and against respondent. It was respondent which caused the ambiguity when it made
the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should
be interpreted as a caveat on the standard fire insurance policy, such as to remove the two
swimming pools from the coverage for the risk of fire. It should not be used to limit the
respondent’s 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 resort’s
properties for earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake shock.
Respondent’s 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
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended
coverage against earthquake shock to petitioner’s insured properties other than on the two
swimming pools. Petitioner admitted that from 1984 to 1988, only the two swimming pools were
insured against earthquake shock. From 1988 until 1990, the provisions in its policy were
practically identical to its earlier policies, and there was no increase in the premium paid. AHAC-
AIU, in a letter19 by its representative Manuel C. Quijano, categorically stated that its previous
policy, from which respondent’s policy was copied, covered only earthquake shock for the two
swimming pools.
Second, petitioner’s payment of additional premium in the amount of P393.00 shows that the
policy only covered earthquake shock damage on the two swimming pools. The amount was the
same amount paid by petitioner for earthquake shock coverage on the two swimming pools from
1990-1991. No additional premium was paid to warrant coverage of the other properties in the
resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the earthquake
shock coverage to all of petitioner’s properties. As per its agreement with petitioner, respondent
copied its policy from the AHAC-AIU policy provided by petitioner. Although the first five policies
contained the said qualification in their rider’s title, in the last two policies, this qualification in the
title was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a mere
inadvertence. This inadvertence did not make the policy incomplete, nor did it broaden the scope ITEM 3 – 393,000.00 – On the two (2) swimming pools only (against the peril of
of the endorsement whose descriptive title was merely enumerated. Any ambiguity in the policy earthquake shock only)20
can be easily resolved by looking at the other provisions, specially the enumeration of the items
insured, where only the two swimming pools were noted as covered for earthquake shock
Second, under the breakdown for premium payments,21 it was stated that:
damage.

Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the PREMIUM RECAPITULATION
phrase "Item 5 – P393,000.00 – on the two swimming pools only (against the peril of earthquake ITEM NOS. AMOUNT RATES PREMIUM
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 xxx
designation of the two swimming pools as "Item 3." 3 393,000.00 0.100%-E/S 393.0022]

Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for
Third, Policy Condition No. 6 stated:
all the properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as
premium for coverage of the swimming pools against earthquake shock. No other premium was
paid for earthquake shock coverage on the other properties. In addition, the use of the qualifier 6. This insurance does not cover any loss or damage occasioned by or through or in
"ANY" instead of "ALL" to describe the property covered was done deliberately to enable the consequence, directly or indirectly of any of the following occurrences, namely:--
parties to specify the properties included for earthquake coverage.
(a) Earthquake, volcanic eruption or other convulsion of nature. 23
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be
included in the earthquake shock coverage. Petitioner’s own evidence shows that it only
Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To Include the
required respondent to follow the exact provisions of its previous policy from AHAC-AIU.
Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
Respondent complied with this requirement. Respondent’s 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. ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
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 THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS
adjuster’s letter notifying petitioner to present certain documents for its building claims and repair INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A
costs was given to petitioner before the adjuster knew the full coverage of its policy. DISCOUNT OF 5% OR 7 ½ % OF THE NET PREMIUM x x x POLICY HEREBY
UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x
x AND TO PAY THE PREMIUM.
Petitioner anchors its claims on AHAC-AIU’s 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 Earthquake Endorsement
swimming pools.
In consideration of the payment by the Insured to the Company of the sum of P. . . . . .
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not . . . . . . . . . . . additional premium the Company agrees, notwithstanding what is stated
object to any deficiency nor did it institute any action to reform the policy. The policy binds the in the printed conditions of this Policy to the contrary, that this insurance covers loss or
petitioner. damage (including loss or damage by fire) to any of the property insured by this Policy
occasioned by or through or in consequence of Earthquake.
Eighth, there is no basis for petitioner to claim damages, attorney’s fees and litigation expenses.
Since respondent was willing and able to pay for the damage caused on the two swimming Provided always that all the conditions of this Policy shall apply (except in so far as
pools, it cannot be considered to be in default, and therefore, it is not liable for interest. they may be hereby expressly varied) and that any reference therein to loss or
damage by fire should be deemed to apply also to loss or damage occasioned by or
through or in consequence of Earthquake.24
We hold that the petition is devoid of merit.

Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the
insured properties.
First, in the designation of location of risk, only the two swimming pools were specified as
included, viz:
It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other.25 All its parts are reflective of the true intent of the parties. The
policy cannot be construed piecemeal. Certain stipulations cannot be segregated and then made
to control; neither do particular words or phrases necessarily determine its character. Petitioner Q. For the period from March 14, 1988 up to March 14, 1989, did you personally
cannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All arrange for the procurement of this policy?
the provisions and riders, taken and interpreted together, indubitably show the intention of the
parties to extend earthquake shock coverage to the two swimming pools only.
A. Yes, sir.

A careful examination of the premium recapitulation will show that it is the clear intent of the
Q. Did you also do this through your insurance agency?
parties to extend earthquake shock coverage only to the two swimming pools. Section 2(1) of
the Insurance Code defines a contract of insurance as an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or liability arising from an A. If you are referring to Forte Insurance Agency, yes.
unknown or contingent event. Thus, an insurance contract exists where the following elements
concur:
Q. Is Forte Insurance Agency a department or division of your company?

1. The insured has an insurable interest;

A. No, sir. They are our insurance agency.

2. The insured is subject to a risk of loss by the happening of the designated peril;
Q. And they are independent of your company insofar as operations are concerned?

3. The insurer assumes the risk;

A. Yes, sir, they are separate entity.

4. Such assumption of risk is part of a general scheme to distribute actual losses

Q. But insofar as the procurement of the insurance policy is concerned they are of
among a large group of persons bearing a similar risk; and
course subject to your instruction, is that not correct?

5. In consideration of the insurer's promise, the insured pays a

premium.26 (Emphasis ours) A. Yes, sir. The final action is still with us although they can recommend what
insurance to take.

An insurance premium is the consideration paid an insurer for undertaking to indemnify the
insured against a specified peril.27 In fire, casualty, and marine insurance, the premium payable
becomes a debt as soon as the risk attaches.28 In the subject policy, no premium payments were
made with regard to earthquake shock coverage, except on the two swimming pools. There is no
mention of any premium payable for the other resort properties with regard to earthquake shock.
This is consistent with the history of petitioner’s previous insurance policies from AHAC-AIU. As
borne out by petitioner’s witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance
policy during the period from March 4, 1984 to March 4, 1985 the coverage on
earthquake shock was limited to the two swimming pools only?
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14,
1989, did you give written instruction to Forte Insurance Agency advising it that the
earthquake shock coverage must extend to all properties of Agoo Playa Resort in La
Union?
A. No, sir. We did not make any written instruction, although we made an oral
instruction to that effect of extending the coverage on (sic) the other properties of the
company.
Q. And that instruction, according to you, was very important because in April 1987
there was an earthquake tremor in La Union?
A. Yes, sir.

A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, Q. And you wanted to protect all your properties against similar tremors in the [future],
there is a provision here that it was only for item 5. is that correct?

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the A. Yes, sir.
two swimming pools only?
Q. Now, after this policy was delivered to you did you bother to check the provisions
A. Yes, sir. with respect to your instructions that all properties must be covered again by
earthquake shock endorsement?
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
A. Are you referring to the insurance policy issued by American Home Assurance
pp. 23-26 Company marked Exhibit "G"?
 Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I was
contented already that the previous limitation pertaining to the two swimming pools
was already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other Insurance
Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage
Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies"29 to
the insurance policy as proof of the intent of the parties to extend the coverage for earthquake
shock. 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.
We also hold that no significance can be placed on the deletion of the qualification limiting the
coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone.
As explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III30
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been
previously marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did
you have occasion to review of (sic) these six (6) policies issued by your
company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is, on
the basis on (sic) the wordings indicated in Exhibits C to H respectively what was the
extent of the coverage [against] the peril of earthquake shock as provided for in each
of the six (6) policies?
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.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiff’s witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E
and F inclusive [remained] its coverage against earthquake shock to two (2) swimming
pools only but that Exhibits G and H respectively entend the coverage against
earthquake shock to all the properties indicated in the respective schedules attached
to said policies, what can you say about that testimony of plaintiff’s witness?
WITNESS:
 As I have mentioned earlier, earthquake shock cannot stand alone without As an insurance executive will you not attach any significance to the
the other half of it. I assure you that this one covers the two swimming pools deletion of the qualifying phrase for the policies?
with respect to earthquake shock endorsement. Based on it, if we are going
to look at the premium there has been no change with respect to the rates.
WITNESS:
Everytime (sic) there is a renewal if the intention of the insurer was to
include the earthquake shock, I think there is a substantial increase in the
premium. We are not only going to consider the two (2) swimming pools of My answer to that would be, the deletion of that particular phrase is
the other as stated in the policy. As I see, there is no increase in the amount inadvertent. Being a company underwriter, we do not cover. . it was
of the premium. I must say that the coverage was not broaden (sic) to inadvertent because of the previous policies that we have issued with no
include the other items. specific attachments, premium rates and so on. It was inadvertent, sir.

COURT: The Court also rejects petitioner’s contention that respondent’s contemporaneous and
subsequent acts to the issuance of the insurance policy falsely gave the petitioner assurance
that the coverage of the earthquake shock endorsement included all its properties in the resort.
They are the same, the premium rates?
Respondent only insured the properties as intended by the petitioner. Petitioner’s own witness
testified to this agreement, viz:
WITNESS:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
They are the same in the sence (sic), in the amount of the coverage. If you TSN, January 14, 1992
are going to do some computation based on the rates you will arrive at the pp. 4-5
same premiums, your Honor.
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did
CROSS-EXAMINATION OF JUAN BARANDA III you tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of procuring the policy
TSN, September 7, 1992 from Philippine Charter Insurance Corporation?
pp. 4-6
A. I told him that the insurance that they will have to get will have the same provisions
ATTY. ANDRES: as this American Home Insurance Policy No. 206-4568061-9.

Would you as a matter of practice [insure] swimming pools for fire Q. You are referring to Exhibit "H" of course?
insurance?
A. Yes, sir, to Exhibit "H".
WITNESS:
Q. So, all the provisions here will be the same except that of the premium rates?
No, we don’t, sir.
A. Yes, sir. He assured me that with regards to the insurance premium rates that they
Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was will be charging will be limited to this one. I (sic) can even be lesser.
placed, is it not?
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
A. Yes, sir. TSN, January 14, 1992
pp. 12-14
ATTY. ANDRES:
Atty. Mejia:
Will you not also agree with me that these exhibits, Exhibits G and H which
you have pointed to during your direct-examination, the phrase "Item no. 5 Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
only" meaning to (sic) the two (2) swimming pools was deleted from the provisions and scope of coverage of Exhibits "I" and "H" sometime in the third week of
policies issued by AIU, is it not? March, 1990 or thereabout?

xxx A. Yes, sir, about that time.

ATTY. ANDRES: Q. And at that time did you notice any discrepancy or difference between the policy
wordings as well as scope of coverage of Exhibits "I" and "H" respectively?
 A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already
that the policy wordings and rates were copied from the insurance policy I sent them
but it was only when this case erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit "I" and those indicated in
Exhibit "H" respectively?
A. With regard to the wordings I did not notice any difference because it was exactly
the same P393,000.00 on the two (2) swimming pools only against the peril of
earthquake shock which I understood before that this provision will have to be placed
here because this particular provision under the peril of earthquake shock only is
requested because this is an insurance policy and therefore cannot be insured against
fire, so this has to be placed.
The verbal assurances allegedly given by respondent’s representative Atty. Umlas were not
proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondent’s independent claims adjuster,
Bayne Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters
and Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement
for earthquake shock covered properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors,
Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of
coverage of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy
of the insurance coverage policy and it was indicated under Item 3 specifically that the
coverage is only for earthquake shock. Then, I remember I had a talk with Atty. Umlas
(sic), and I relayed to him what I had found out in the policy and he confirmed to me
indeed only Item 3 which were the two swimming pools have coverage for earthquake
shock.
earthquake shock and all the other items have no computation for payment of
premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on
the general rule that insurance contracts are contracts of adhesion which should be liberally
construed in favor of the insured and strictly against the insurer company which usually prepares
it.31 A contract of adhesion is one wherein a party, usually a corporation, prepares the
stipulations in the contract, while the other party merely affixes his signature or his "adhesion"
thereto. Through the years, the courts have held that in these type of contracts, the parties do
not bargain on equal footing, the weaker party's participation being reduced to the alternative to
take it or leave it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect.32 Consequently, any ambiguity therein is resolved against the
insurer, or construed liberally in favor of the insured.33
The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided.34 Thus, we have called on lower
courts to remain careful in scrutinizing the factual circumstances behind each case to determine
the efficacy of the claims of contending parties. In Development Bank of the Philippines v.
National Merchandising Corporation, et al.,35 the parties, who were acute businessmen of
experience, were presumed to have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot
claim it did not know the provisions of the policy. From the inception of the policy, petitioner had
required the respondent to copy verbatimthe provisions and terms of its latest insurance policy
from AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in securing the
insurance policy of petitioner, is reflective of petitioner’s knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those
facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine
Charter Insurance Corporation as long as it will follow the same or exact provisions of
the previous insurance policy we had with American Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted
xxx
in the American Home Insurance policy are to be incorporated in the PCIC policy?

Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that
A. Yes, sir.
except for the swimming pools all affected items have no coverage for earthquake
shock?
Q. What steps did you take?
xxx
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied from the AIU Policy
A. I based my statement on my findings, because upon my examination of the policy I
No. 206-4568061-9.
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 Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-
which refers to the swimming pools have a computation for premium payment for 4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some
terms, specifically in the replacement cost endorsement, but the principal provisions of the policy
remained essentially similar to AHAC-AIU’s policy. Consequently, we cannot apply the "fine
print" or "contract of adhesion" rule in this case as the parties’ intent to limit the coverage of the
policy to the two swimming pools only is not ambiguous.37
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.
SO ORDERED.
G.R. No. 171468 August 24, 2011
NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., Petitioner,
vs.
NYK-FILJAPAN SHIPPING CORP., LEP PROFIT INTERNATIONAL, INC. (ORD), LEP
INTERNATIONAL PHILIPPINES, INC., DMT CORP., ADVATECH INDUSTRIES, INC.,
MARINA PORT SERVICES, INC., SERBROS CARRIER CORPORATION, and SEABOARD-
EASTERN INSURANCE CO., INC., Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 174241
NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., Petitioner,
vs.
SEABOARD-EASTERN INSURANCE CO., INC., Respondent.
DECISION
ABAD, J.:
These consolidated petitions involve a cargo owner’s right to recover damages from the loss of
insured goods under the Carriage of Goods by Sea Act and the Insurance Code.
The Facts and the Case
Petitioner New World International Development (Phils.), Inc. (New World) bought from DMT
Corporation (DMT) through its agent, Advatech Industries, Inc. (Advatech) three emergency
generator sets worth US$721,500.00.
DMT shipped the generator sets by truck from Wisconsin, United States, to LEP Profit
International, Inc. (LEP Profit) in Chicago, Illinois. From there, the shipment went by train to
Oakland, California, where it was loaded on S/S California Luna V59, owned and operated by
NYK Fil-Japan Shipping Corporation (NYK) for delivery to petitioner New World in Manila. NYK
issued a bill of lading, declaring that it received the goods in good condition.
NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX Ruby V/72 that it also
owned and operated. On its journey to Manila, however, ACX Ruby encountered typhoon
Kadiang whose captain filed a sea protest on arrival at the Manila South Harbor on October 5,
1993 respecting the loss and damage that the goods on board his vessel suffered.
Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or cargo-handling
operator, received the shipment on October 7, 1993. Upon inspection of the three container vans
separately carrying the generator sets, two vans bore signs of external damage while the third
van appeared unscathed. The shipment remained at Pier 3’s Container Yard under Marina’s
care pending clearance from the Bureau of Customs. Eventually, on October 20, 1993 customs
authorities allowed petitioner’s customs broker, Serbros Carrier Corporation (Serbros), to
withdraw the shipment and deliver the same to petitioner New World’s job site in Makati City.
An examination of the three generator sets in the presence of petitioner New World’s
representatives, Federal Builders (the project contractor) and surveyors of petitioner New
World’s insurer, Seaboard–Eastern Insurance Company (Seaboard), revealed that all three sets
suffered extensive damage and could no longer be repaired. For these reasons, New World
demanded recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit, LEP
International Philippines, Inc. (LEP), Marina, and Serbros. While LEP and NYK acknowledged
receipt of the demand, both denied liability for the loss.
Since Seaboard covered the goods with a marine insurance policy, petitioner New World sent it
a formal claim dated November 16, 1993. Replying on February 14, 1994, Seaboard required
petitioner New World to submit to it an itemized list of the damaged units, parts, and
accessories, with corresponding values, for the processing of the claim. But petitioner New
World did not submit what was required of it, insisting that the insurance policy did not include
the submission of such a list in connection with an insurance claim. Reacting to this, Seaboard
refused to process the claim.
On October 11, 1994 petitioner New World filed an action for specific performance and damages
against all the respondents before the Regional Trial Court (RTC) of Makati City, Branch 62, in
Civil Case 94-2770.
On August 16, 2001 the RTC rendered a decision absolving the various respondents from
liability with the exception of NYK. The RTC found that the generator sets were damaged during
transit while in the care of NYK’s vessel, ACX Ruby. The latter failed, according to the RTC, to
exercise the degree of diligence required of it in the face of a foretold raging typhoon in its path.
The RTC ruled, however, that petitioner New World filed its claim against the vessel owner NYK
beyond the one year provided under the Carriage of Goods by Sea Act (COGSA). New World
filed its complaint on October 11, 1994 when the deadline for filing the action (on or before
October 7, 1994) had already lapsed. The RTC held that the one-year period should be counted
from the date the goods were delivered to the arrastre operator and not from the date they were
delivered to petitioner’s job site.1
As regards petitioner New World’s claim against Seaboard, its insurer, the RTC held that the
latter cannot be faulted for denying the claim against it since New World refused to submit the
itemized list that Seaboard needed for assessing the damage to the shipment. Likewise, the
belated filing of the complaint prejudiced Seaboard’s right to pursue a claim against NYK in the
event of subrogation.
On appeal, the Court of Appeals (CA) rendered judgment on January 31, 2006,2 affirming the
RTC’s rulings except with respect to Seaboard’s liability. The CA held that petitioner New World
can still recoup its loss from Seaboard’s marine insurance policy, considering a) that the
submission of the itemized listing is an unreasonable imposition and b) that the one-year
prescriptive period under the COGSA did not affect New World’s right under the insurance policy
since it was the Insurance Code that governed the relation between the insurer and the insured.
Although petitioner New World promptly filed a petition for review of the CA decision before the
Court in G.R. 171468, Seaboard chose to file a motion for reconsideration of that decision. On
August 17, 2006 the CA rendered an amended decision, reversing itself as regards the claim
against Seaboard. The CA held that the submission of the itemized listing was a reasonable
requirement that Seaboard asked of New World. Further, the CA held that the one-year
prescriptive period for maritime claims applied to Seaboard, as insurer and subrogee of New
World’s right against the vessel owner. New World’s failure to comply promptly with what was
required of it prejudiced such right.
Instead of filing a motion for reconsideration, petitioner instituted a second petition for review
before the Court in G.R. 174241, assailing the CA’s amended decision.
The Issues Presented
The issues presented in this case are as follows:
a) In G.R. 171468, whether or not the CA erred in affirming the RTC’s release from
liability of respondents DMT, Advatech, LEP, LEP Profit, Marina, and Serbros who
were at one time or another involved in handling the shipment; and
b) In G.R. 174241, 1) whether or not the CA erred in ruling that Seaboard’s request
from petitioner New World for an itemized list is a reasonable imposition and did not
violate the insurance contract between them; and 2) whether or not the CA erred in
failing to rule that the one-year COGSA prescriptive period for marine claims does not
apply to petitioner New World’s prosecution of its claim against Seaboard, its insurer.
The Court’s Rulings
In G.R. 171468 --
Petitioner New World asserts that the roles of respondents DMT, Advatech, LEP, LEP Profit,
Marina and Serbros in handling and transporting its shipment from Wisconsin to Manila
collectively resulted in the damage to the same, rendering such respondents solidarily liable with
NYK, the vessel owner.
But the issue regarding which of the parties to a dispute incurred negligence is factual and is not
a proper subject of a petition for review on certiorari. And petitioner New World has been unable
to make out an exception to this rule.3Consequently, the Court will not disturb the finding of the
RTC, affirmed by the CA, that the generator sets were totally damaged during the typhoon which
beset the vessel’s voyage from Hong Kong to Manila and that it was her negligence in
continuing with that journey despite the adverse condition which caused petitioner New World’s
loss.
That the loss was occasioned by a typhoon, an exempting cause under Article 1734 of the Civil
Code, does not automatically relieve the common carrier of liability. The latter had the burden of
proving that the typhoon was the proximate and only cause of loss and that it exercised due
diligence to prevent or minimize such loss before, during, and after the disastrous typhoon. 4 As
found by the RTC and the CA, NYK failed to discharge this burden.
In G.R. 174241 --
One. The Court does not regard as substantial the question of reasonableness of Seaboard’s
additional requirement of an itemized listing of the damage that the generator sets suffered. The
record shows that petitioner New World complied with the documentary requirements evidencing
damage to its generator sets.
The marine open policy that Seaboard issued to New World was an all-risk policy. Such a policy
insured against all causes of conceivable loss or damage except when otherwise excluded or
when the loss or damage was due to fraud or intentional misconduct committed by the insured.
The policy covered all losses during the voyage whether or not arising from a marine peril. 5
Here, the policy enumerated certain exceptions like unsuitable packaging, inherent vice, delay in
voyage, or vessels unseaworthiness, among others.6 But Seaboard had been unable to show
that petitioner New World’s loss or damage fell within some or one of the enumerated
exceptions.
What is more, Seaboard had been unable to explain how it could not verify the damage that New
World’s goods suffered going by the documents that it already submitted, namely, (1) copy of the
Supplier’s Invoice KL2504; (2) copy of the Packing List; (3) copy of the Bill of Lading
01130E93004458; (4) the Delivery of Waybill Receipts 1135, 1222, and 1224; (5) original copy
of Marine Insurance Policy MA-HO-000266; (6) copies of Damage Report from Supplier and
Insurance Adjusters; (7) Consumption Report from the Customs Examiner; and (8) Copies of
Received Formal Claim from the following: a) LEP International Philippines, Inc.; b) Marina Port
Services, Inc.; and c) Serbros Carrier Corporation.7 Notably, Seaboard’s own marine surveyor
attended the inspection of the generator sets.
Seaboard cannot pretend that the above documents are inadequate since they were precisely
the documents listed in its insurance policy.8 Being a contract of adhesion, an insurance policy is
construed strongly against the insurer who prepared it. The Court cannot read a requirement in
the policy that was not there.
Further, it appears from the exchanges of communications between Seaboard and Advatech
that submission of the requested itemized listing was incumbent on the latter as the seller DMT’s
local agent. Petitioner New World should not be made to suffer for Advatech’s shortcomings.
Two. Regarding prescription of claims, Section 3(6) of the COGSA provides that the carrier and
the ship shall be discharged from all liability in case of loss or damage unless the suit is brought
within one year after delivery of the goods or the date when the goods should have been
delivered.
But whose fault was it that the suit against NYK, the common carrier, was not brought to court
on time? The last day for filing such a suit fell on October 7, 1994. The record shows that
petitioner New World filed its formal claim for its loss with Seaboard, its insurer, a remedy it had
the right to take, as early as November 16, 1993 or about 11 months before the suit against NYK
would have fallen due.
In the ordinary course, if Seaboard had processed that claim and paid the same, Seaboard
would have been subrogated to petitioner New World’s right to recover from NYK. And it could
have then filed the suit as a subrogee. But, as discussed above, Seaboard made an
unreasonable demand on February 14, 1994 for an itemized list of the damaged units, parts, and
accessories, with corresponding values when it appeared settled that New World’s loss was total
and when the insurance policy did not require the production of such a list in the event of a
claim.
Besides, when petitioner New World declined to comply with the demand for the list, Seaboard
against whom a formal claim was pending should not have remained obstinate in refusing to
process that claim. It should have examined the same, found it unsubstantiated by documents if
that were the case, and formally rejected it. That would have at least given petitioner New World
a clear signal that it needed to promptly file its suit directly against NYK and the others.
Ultimately, the fault for the delayed court suit could be brought to Seaboard’s doorstep.
Section 241 of the Insurance Code provides that no insurance company doing business in the
Philippines shall refuse without just cause to pay or settle claims arising under coverages
provided by its policies. And, under Section 243, the insurer has 30 days after proof of loss is
received and ascertainment of the loss or damage within which to pay the claim. If such
ascertainment is not had within 60 days from receipt of evidence of loss, the insurer has 90 days
to pay or settle the claim. And, in case the insurer refuses or fails to pay within the prescribed
time, the insured shall be entitled to interest on the proceeds of the policy for the duration of
delay at the rate of twice the ceiling prescribed by the Monetary Board.
Notably, Seaboard already incurred delay when it failed to settle petitioner New World’s claim as
Section 243 required. Under Section 244, a prima facie evidence of unreasonable delay in
payment of the claim is created by the failure of the insurer to pay the claim within the time fixed
in Section 243.
Consequently, Seaboard should pay interest on the proceeds of the policy for the duration of the
delay until the claim is fully satisfied at the rate of twice the ceiling prescribed by the Monetary
Board. The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of
12% per annum provided in Central Bank Circular 416, pursuant to Presidential Decree
116.9 Section 244 of the Insurance Code also provides for an award of attorney’s fees and other
expenses incurred by the assured due to the unreasonable withholding of payment of his claim.
In Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.,10 the Court
regarded as proper an award of 10% of the insurance proceeds as attorney’s fees. Such amount
is fair considering the length of time that has passed in prosecuting the claim. 11 Pursuant to the
Court’s ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,12 a 12% interest per annum
from the finality of judgment until full satisfaction of the claim should likewise be imposed, the
interim period equivalent to a forbearance of credit.1avvphi1
Petitioner New World is entitled to the value stated in the policy which is commensurate to the
value of the three emergency generator sets or US$721,500.00 with double interest plus
attorney’s fees as discussed above.
WHEREFORE, the Court DENIES the petition in G.R. 171468 and AFFIRMS the Court of
Appeals decision of January 31, 2006 insofar as petitioner New World International
Development (Phils.), Inc. is not allowed to recover against respondents DMT Corporation,
Advatech Industries, Inc., LEP International Philippines, Inc., LEP Profit International, Inc.,
Marina Port Services, Inc. and Serbros Carrier Corporation.
With respect to G.R. 174241, the Court GRANTS the petition and REVERSES and SETS ASIDE
the Court of Appeals Amended Decision of August 17, 2006. The Court DIRECTS Seaboard-
Eastern Insurance Company, Inc. to pay petitioner New World International Development
(Phils.), Inc. US$721,500.00 under Policy MA-HO-000266, with 24% interest per annum for the
duration of delay in accordance with Sections 243 and 244 of the Insurance Code and attorney’s
fees equivalent to 10% of the insurance proceeds. Seaboard shall also pay, from finality of
judgment, a 12% interest per annum on the total amount due to petitioner until its full
satisfaction.
SO ORDERED.
G.R. No. 185565 November 26, 2014
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR INTERNATIONAL
SHIPPING COMPANY, INCORPORATED, Petitioners,
vs.
MALAYAN INSURANCE COMPANY, INCORPORATED, Respondent.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari1 filed by Loadstai Shipping Company, Incorporated
and Loadstar International Shipping Company, Incorporated (petitioners) against Malayan
Insurance Company, Incorporated (Malayan) seeking to set aside the Decision2 dated April 14,
2008 and Resolution3 dated December 11, 2008 of the Court of Appeals (CA) in CA-G.R. CV
No. 82758, which reversed and set aside the Decision4 dated March 31, 2004 of the Regional
Trial Court of Manila, Branch 34, in Civil Case No. 01-101885.
The facts as found by the CA, are as follows:
Loadstar International Shipping, Inc.(Loadstar Shipping) and Philippine Associated Smelting and
Refining Corporation (PASAR) entered into a Contract of Affreightment for domestic bulk
transport of the latter’s copper concentrates for a period of one year from November 1, 1998 to
October 31, 1999. The contract was extended up to the end of October 2000.
On September 10, 2000, 5,065.47 wet metric tons (WMT) of copper concentrates were loaded in
Cargo Hold Nos. 1 and 2 of MV "Bobcat", a marine vessel owned by Loadstar International
Shipping Co., Inc. (Loadstar International) and operated by Loadstar Shipping under a charter
party agreement. The shipper and consignee under the Bill of Lading are Philex Mining
Corporation (Philex) and PASAR, respectively. The cargo was insured with Malayan Insurance
Company, Inc. (Malayan) under Open Policy No. M/OP/2000/001-582. P & I Association is the
third party liability insurer of Loadstar Shipping.
On said date (September 10, 2000), MV "Bobcat" sailed from Poro Point, San Fernando, La
Union bound for Isabel, Leyte. On September 12, 2000, while in the vicinity of Cresta de Gallo,
the vessel’s chief officer on routine inspection found a crack on starboard sideof the main deck
which caused seawater to enter and wet the cargo inside Cargo Hold No. 2 forward/aft. The
cracks at the top deck starboard side of Cargo Hold No. 2, measuring 1.21 meters long x 0.39
meters wide, and at top deck aft section starboard side on other point, measuring 0.82 meters
long x 0.32 meters wide, were welded.
Immediately after the vessel arrived at Isabel, Leyte anchorage area, on September 13, 2000,
PASAR and Philex’s representatives boarded and inspected the vessel and undertook sampling
of the copper concentrates. In its preliminary report dated September 15, 2000, the Elite
Adjusters and Surveyor, Inc. (Elite Surveyor) confirmed that samples of copper concentrates
from Cargo Hold No. 2 were contaminated by seawater. Consequently, PASAR rejected 750 MT
of the 2,300 MT cargo discharged from Cargo Hold No. 2.
On November 6, 2000, PASAR sent a formal notice of claim in the amount of [P]37,477,361.31
to Loadstar Shipping. In its final report dated November 16, 2000, Elite Surveyor recommended
payment to the assured the amount of [P]32,351,102.32 as adjusted. On the basis of such
recommendation, Malayan paid PASAR the amount of [P]32,351,102.32.
Meanwhile, on November 24, 2000, Malayan wrote Loadstar Shipping informing the latter of a
prospective buyer for the damaged copper concentrates and the opportunity to nominate/refer
other salvage buyers to PASAR. On November 29, 2000, Malayan wrote Loadstar Shipping
informing the latter of the acceptance of PASAR’s proposal to take the damaged copper
concentrates at a residual value of US$90,000.00. On December 9, 2000, Loadstar Shipping
wrote Malayan requesting for the reversal of its decision to accept PASAR’s proposal and the
conduct of a public bidding to allow Loadstar Shipping to match or top PASAR’s bid by 10%.
On January 23, 2001, PASAR signed a subrogation receipt in favor of Malayan. To recover the
amount paid and in the exercise of its right of subrogation, Malayan demanded reimbursement
from Loadstar Shipping, which refused to comply. Consequently, on September 19, 2001,
Malayan instituted with the RTC a complaint for damages. The complaint was later amended to
include Loadstar International as party defendant.
In its amended complaint, Malayan mainly alleged that as a direct and natural consequence of
the unseaworthiness of the vessel, PASAR suffered loss of the cargo. It prayed for the amount
of [P]33,934,948.75, representing actual damages plus legal interest fromdate of filing of the
complaint until fully paid, and attorney’s fees in the amount of not less than [P]500,000.00. It also
sought to declare the bill of lading as void since it violates the provisions of Articles 1734 and
1745 of the Civil Code.
On October 30, 2002, Loadstar Shipping and Loadstar International filed their answer with
counterclaim, denying plaintiff appellant’s allegations and averring as follows: that they are not
engaged in the business as common carriers but as private carriers; that the vessel was
seaworthy and defendants-appellees exercised the required diligence under the law; that the
entry of water into Cargo Hold No. 2 must have been caused by force majeureor heavy weather;
that due to the inherent nature of the cargo and the use of water in its production process, the
same cannot be considered damaged or contaminated; that defendants-appellees were denied
reasonable opportunity to participate in the salvage sale; that the claim had prescribed in
accordance with the bill of lading provisions and the Code of Commerce; that plaintiff-appellant’s
claim is excessive, grossly overstated, unreasonable and unsubstantiated; that their liability, if
any, should not exceed the CIFvalue of the lost/damaged cargo as set forth in the bill of lading,
charter party or customary rules of trade; and that the arbitration clause in the contract of
affreightment should be followed.
After trial, and considering that the billof lading, which was marked as Exhibit "B", is unreadable,
the RTC issued on February 17, 2004 an order directing the counsel for Malayan to furnish it
with a clearer copy of the same within three (3) days from receipt of the order. On February 23,
2004, Malayan filed a compliance attaching thereto copy of the bill of lading.
On March 31, 2004, the RTC rendered a judgment dismissing the complaint as well as the
counterclaim. The RTC was convinced that the vessel was seaworthy at the time of loading and
that the damage was attributable to the perils of the sea (natural disaster) and not due to the
fault or negligence of Loadstar Shipping.
The RTC found that although contaminated by seawater, the copper concentrates can still be
used. Itgave credence to the testimony of Francisco Esguerra, defendants-appellees’ expert
witness, that despite high chlorine content, the copper concentrates remain intact and will not
lose their value. The gold and silver remain with the grains/concentrates even if soaked with
seawater and does not melt. The RTC observed that the purchase agreement between PASAR
and Philex contains a penalty clause and has no rejection clause. Despite this agreement, the
parties failed to sit down and assess the penalty.
The RTC also found that defendants-appellees were not afforded the opportunity to object or
participate or nominate a participant in the sale of the contaminated copper concentrates to
lessen the damages to be paid. No record was presented to show that a public bidding was
conducted. Malayan sold the contaminated copper concentrates to PASAR at a low price then
paid PASAR the total value of the damaged concentrate without deducting anything from the
claim.
Finally, the RTC denied the prayer to declare the Bill of Lading null and void for lack of basis
because what was attached to Malayan’s compliance was still an unreadable machine copy
thereof.5 (Citations omitted)
Ruling of the CA
On April 14, 2008, the CA rendered its Decision,6 the dispositive portion of which reads:
WHEREFORE, the appeal is GRANTED. The Decision dated March 31, 2004 of the RTC,
Branch 34, Manila in Civil Case No. 01-101885, is REVERSED and SET ASIDE. In lieu thereof,
a new judgment is entered, ORDERING defendants-appellees to pay plaintiff-appellant
₱33,934,948.75 as actual damages, plus legal interest at 6% annually from the date of the trial
court’s decision. Upon the finality of the decision, the total amount of the judgment shall earn
annual interest at 12% until full payment.
SO ORDERED.7
On December 11, 2008, the CA modified the above decision through a Resolution, 8 the fallo
thereof states:
WHEREFORE, the Motion for Reconsiderationis PARTLY GRANTED. The decision of this Court
dated April 14, 2008 is PARTIALLY RECONSIDERED and MODIFIED. Defendants-appellees
are ORDERED to pay to plaintiff-appellant ₱33,934,948.74 as actual damages, less
US$90,000.00, computed at the exchange rate prevailing on November 29, 2000, plus legal
interest at 6% annually from the date of the trial court’s decision. Upon the finality of the
decision, the total amount of the judgment shall earn annual interest at 12% until full payment.
SO ORDERED.9
The CA discussed that the amount of US$90,000.00 should have been deducted from Malayan’s
claim against the petitioners in order to prevent undue enrichment on the part of Malayan.
Otherwise, Malayan would recover from the petitioners not merely the entire amount of
33,934,948.74 as actual damages, but would also end up unjustly enriching itself in the amount
of US$90,000.00 – the residual value of the subject copper concentrates it sold to Philippine
Associated Smelting and Refining Corporation (PASAR) on November 29, 2000.10 Issues
In sum, the grounds presented by the petitioners for the Court’s consideration are the following:
I.
THE [CA] HAS NO BASIS IN REVERSING THE DECISION OF THE TRIAL COURT. THERE IS
NOTHING IN THE DECISION OF THE HONORABLE COURT THAT REVERSED THE
FACTUAL FINDINGS AND CONCLUSIONS OF THE TRIAL COURT, THAT THERE WAS NO
ACTUAL LOSS OR DAMAGE TO THE CARGO OF COPPER CONCENTRATES WHICH
WOULD MAKE LOADSTAR AS THE SHIPOWNER LIABLE FOR A CARGO CLAIM.
CONSEQUENTLY, THERE IS NO BASIS FOR THE COURT TO ORDER LOADSTAR TO PAY
ACTUAL DAMAGES IN THE AMOUNT OF PH₱33 MILLION.11
II.
M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE COURT HAD NO BASIS IN
RULING THAT IT IS A COMMON CARRIER. THE DECISION OF THE TRIAL COURT IS
BEREFT OF ANY CATEGORICAL FINDING THAT M/V BOBCAT IS A COMMON CARRIER.12
III.
THE HONORABLE COURT OFAPPEALS COMMITTED A REVERSIBLE ERROR IN RULING
THAT RESPONDENT’S PAYMENT TO PASAR, ON THE BASIS OF THE LATTER’S
FRAUDULENT CLAIM, ENTITLED RESPONDENT AUTOMATIC RIGHT OF RECOVERY BY
VIRTUE OF SUBROGATION.13
Ruling of the Court
I. Proof of actual damages
It is not disputed that the copper concentrates carried by M/V Bobcat from Poro Point, La Union
to Isabel, Leyte were indeed contaminated with seawater. The issue lies on whether such
contamination resulted to damage, and the costs thereof, if any,incurred by the insured PASAR.
The petitioners argued that the copper concentrates, despite being dampened with seawater, is
neither subject to penalty nor rejection. Under the Philex Mining Corporation (Philex)-PASAR
Purchase Contract Agreement, there is no rejection clause. Instead, there is a pre-agreed
formula for the imposition of penalty in case other elements exceeding the provided minimum
level would be found on the concentrates.14 Since the chlorine content on the copper
concentrates is still below the minimum level provided under the Philex-PASAR purchase
contract, no penalty may be imposed against the petitioners.15
Malayan opposed the petitioners’ invocation of the Philex-PASAR purchase agreement, stating
that the contract involved in this case is a contract of affreightment between the petitioners and
PASAR, not the agreement between Philex and PASAR, which was a contract for the sale of
copper concentrates.16
On this score, the Court agrees withMalayan that contrary to the trial court’s disquisition, the
petitioners cannot validly invoke the penalty clause under the Philex-PASAR purchase
agreement, where penalties are to be imposed by the buyer PASAR against the seller Philex if
some elements exceeding the agreed limitations are found on the copper concentrates upon
delivery. The petitioners are not privy tothe contract of sale of the copper concentrates. The
contract between PASAR and the petitioners is a contract of carriage of goods and not a
contract of sale. Therefore, the petitioners and PASAR are bound by the laws on transportation
of goods and their contract of affreightment. Since the Contract of Affreightment 17 between the
petitioners and PASAR is silent as regards the computation of damages, whereas the bill of
lading presented before the trial court is undecipherable, the New Civil Code and the Code
ofCommerce shall govern the contract between the parties.
Malayan paid PASAR the amount of 32,351,102.32 covering the latter’s claim of damage to the
cargo.18 This is based on the recommendation of Elite Adjustors and Surveyors, Inc. (Elite)
which both Malayan and PASAR agreed to. The computation of Elite is presented as follows:
Computation of Loss Payable.We computed for the insured value of the loss and loss payable,
based on the following pertinent data:
1) Total quantity shipped - 5,065.47 wet metric tons and at risk or (Risk Note and B/L)
4,568.907 dry metric tons
2) Total sum insured - [P]212,032,203.77 (Risk Note and Endorsement)
3) Quantity damaged: 777.290 wet metric tons or (Pasar Laboratory Cert. & 696.336
dry metric tons discharge & sampling Cert.dated September 21, 2000)
Computation:
Total sum insured x Qty. damaged= Insured value of damage
Total Qty. in DMT (DMT) (DMT)
[P] 212,032,203.77 x 696.336 DMT = [P]32,315,312.32
4,568.907 DMT
Insured value of damage = [P] 32,315,312.3219
Based on the preceding computation, the sum of ₱32,315,312.32 represents damages for the
total loss ofthat portion of the cargo which were contaminated with seawater and not merely the
depreciation in its value. Strangely though, after claiming damages for the total loss of that
portion, PASAR bought back the contaminated copper concentrates from Malayan at the price of
US$90,000.00. The fact of repurchase is enough to conclude that the contamination of the
copper concentrates cannot be considered as total loss on the part of PASAR.
The following provisions of the Code of Commerce state how damages on goods delivered by
the carrier should be appraised:
Article 361. The merchandise shall be transported at the risk and venture of the shipper, if the
contrary has not been expressly stipulated. As a consequence, all the losses and deteriorations
which the goods may suffer during the transportation by reason of fortuitous event, force
majeure, or the inherent nature and defect of the goods, shall be for the account and risk of the
shipper. Proof of these accidents is incumbent upon the carrier.
Article 362. Nevertheless, the carrier shall be liable for the losses and damages resulting from
the causes mentioned in the preceding article if it is proved, as against him, that they arose
through his negligence or by reason of his having failed to take the precautions which usage has
established among careful persons, unless the shipper has committed fraud in the bill of lading,
representing the goods to be of a kind or quality different from what they really were.
If, notwithstanding the precautions referred to in this article, the goods transported run the risk of
being lost, on account of their nature or by reason of unavoidable accident, there being no time
for their owners to dispose of them, the carrier may proceed to sell them, placing them for this
purpose at the disposal of the judicial authority or of the officials designated by special
provisions.
xxxx
Article 364. If the effect of the damage referred to in Article 361 is merely a diminution in the
value of the goods, the obligation of the carrier shall be reduced to the payment of the amount
which, in the judgment of experts, constitutes such difference in value.
Article 365. If, in consequence of the damage, the goods are rendered useless for sale and
consumption for the purposes for which they are properly destined, the consignee shall not be
bound to receive them, and he may have them in the hands of the carrier, demanding of the
latter their value at the current price on that day.
If among the damaged goods there should be some pieces in good condition and without any
defect, the foregoing provision shall be applicable with respect to those damaged and the
consignee shall receive those which are sound, this segregation to be made by distinct and
separate pieces and without dividing a single object, unless the consignee proves the
impossibility of conveniently making use of them in this form.
The same rule shall be applied to merchandise in bales or packages, separating those parcels
which appear sound.
From the above-cited provisions, if the goods are delivered but arrived at the destination in
damaged condition, the remedies to be pursued by the consignee depend on the extent of
damage on the goods.
If the goods are rendered useless for sale, consumption or for the intended purpose, the
consignee may reject the goods and demand the payment of such goods at their marketprice on
that day pursuant to Article 365. In case the damaged portion of the goods can be segregated
from those delivered in good condition, the consignee may reject those in damaged condition
and accept merely those which are in good condition. But if the consignee is able to prove that it
is impossible to use those goods which were delivered in good condition without the others, then
the entire shipment may be rejected. To reiterate, under Article 365, the nature of damage must
be such that the goods are rendered useless for sale, consumption or intended purpose for the
consignee to be able to validly reject them.
If the effect of damage on the goods consisted merely of diminution in value, the carrier is bound
to pay only the difference between its price on that day and its depreciated value as provided
under Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved that the goods are rendered
useless or unfit for the purpose intended by PASAR due to contamination with seawater. Hence,
there is no basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly, it
is erroneous for Malayan to reimburse PASAR as though the latter suffered from total loss of
goods in the absence of proof that PASAR sustained such kind of loss. Otherwise, there will be
no difference inthe indemnification of goods which were not delivered at all; or delivered but
rendered useless, compared against those which were delivered albeit, there is diminution in
value.
Malayan also failed to establish the legal basis of its decision to sell back the rejected copper
concentrates to PASAR. It cannot be ascertained how and when Malayan deemed itself asthe
owner of the rejected copper concentrates to have these validly disposed of. If the goods were
rejected, it only means there was no acceptance on the part of PASAR from the carrier.
Furthermore, PASAR and Malayan simply agreed on the purchase price of US$90,000.00
without any allegation or proof that the said price was the depreciated value based on the
appraisal of experts as provided under Article 364 of the Code of Commerce.
II. Subrogation of Malayan to the rights of PASAR
Malayan’s claim against the petitioners is based on subrogation to the rights possessed by
PASAR as consignee of the allegedly damaged goods. The right of subrogation stems from
Article 2207 of the New Civil Code which states:
Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured against
the wrong doer or the person who has violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover
the deficiency from the person causing the loss or injury.
"The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance claim by the
insurer."20 The right of subrogation is however, not absolute. "There are a few recognized
exceptions to this rule. For instance, if the assured by his own act releases the wrongdoer or
third party liable for the loss or damage, from liability, the insurer’s right of subrogation is
defeated. x x x Similarly, where the insurer pays the assured the value of the lostgoods without
notifying the carrier who has in good faith settled the assured’s claim for loss, the settlement is
binding on both the assured and the insurer, and the latter cannot bring an action against the
carrier on his right of subrogation. x x x And where the insurer pays the assured for a loss which
is not a risk covered by the policy, thereby effecting ‘voluntary payment,’ the former has no right
of subrogation against the third party liable for the loss x x x."21
The rights of a subrogee cannot be superior to the rights possessed by a subrogor. "Subrogation
is the substitution of one person in the place of another with reference to a lawful claim or right,
so that he who is substituted succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities. The rights to which the subrogee succeeds are the same as,
but not greaterthan, those of the person for whom he is substituted, that is, he cannot acquire
any claim, security or remedy the subrogor did not have. In other words, a subrogee cannot
succeed to a right not possessed by the subrogor. A subrogee in effect steps into the shoes of
the insured and can recover only ifthe insured likewise could have recovered." 22 Consequently,
an insurer indemnifies the insured based on the loss or injury the latter actually suffered from. If
there is no loss or injury, then there is no obligation on the part of the insurer to indemnify the
insured. Should the insurer pay the insured and it turns out that indemnification is not due, or if
due, the amount paid is excessive, the insurer takes the risk of not being able to seek
recompense from the alleged wrongdoer. This is because the supposed subrogor did not
possessthe right to be indemnified and therefore, no right to collect is passed on to the
subrogee. As regards the determination of actual damages, "[i]t is axiomatic that actual
damages must be proved with reasonable degree of certainty and a party is entitled only to such
compensation for the pecuniary loss that was duly proven."23 Article 2199 of the New Civil Code
speaks of how actual damages are awarded:
Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved. Such
compensation is referred to as actual or compensatory damages.
Whereas the CA modified its Decision dated April 14, 2008 by deducting the amount of This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-
US$90,000.00 fromthe award, the same is still iniquitous for the petitioners because PASAR and G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in
Malayan never proved the actual damages sustained by PASAR. It is a flawed notion to merely I.C. Adm. Case No. RD-277. Both decisions held that there was no violation of the Insurance
accept that the salvage value of the goods is US$90,000.00, since the price was arbitrarily fixed Code and the respondents do not need license as insurer and insurance agent/broker.
between PASAR and Malayan. Actual damages to PASAR, for example, could include the
diminution in value as appraised by experts or the expenses which PASAR incurred for the
The facts are undisputed.
restoration of the copper concentrates to its former condition, ifthere is damage and rectification
is still possible.
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
It is also note worthy that when the expert witness for the petitioners, Engineer Francisco
Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold
Esguerra (Esguerra), testified as regards the lack of any adverse effect of seawater on copper
was issued a Certificate of Entry and Acceptance.3Pioneer also issued receipts evidencing
concentrates, Malayan never presented evidence of its own in refutation to Esguerra’s
payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual
testimony. And, even if the Court will disregard the entirety of his testimony, the effect on
refused to renew the coverage.
Malayan’s cause of action is nil. As Malayan is claiming for actual damages, it bears the burden
of proof to substantiate its claim.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to
recover the latter’s unpaid balance. White Gold on the other hand, filed a complaint before the
"The burden of proof is on the party who would be defeated if no evidence would be presented
Insurance Commission claiming that Steamship Mutual violated Sections 1864 and 1875 of the
on either side. The burden is to establish one’s case by a preponderance of evidence which
Insurance Code, while Pioneer violated Sections 299,63007 and 3018 in relation to Sections 302
means that the evidence, as a whole, adduced by one side, is superior tothat of the other. Actual
and 303, thereof.
damages are not presumed. The claimant must prove the actual amount of loss with a
reasonable degree of certainty premised upon competent proof and on the best evidence
obtainable. Specific facts that could afford a basis for measuring whatever compensatory or The Insurance Commission dismissed the complaint. It said that there was no need for
actual damages are borne must be pointed out. Actual damages cannot be anchored on mere Steamship Mutual to secure a license because it was not engaged in the insurance business. It
surmises, speculations or conjectures."24 explained that Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise,
Pioneer need not obtain another license as insurance agent and/or a broker for Steamship
Mutual because Steamship Mutual was not engaged in the insurance business. Moreover,
Having ruled that Malayan did not adduce proof of pecuniary loss to PASAR for which the latter
Pioneer was already licensed, hence, a separate license solely as agent/broker of Steamship
was questionably indemnified, there is no necessity to expound further on the other issues
Mutual was already superfluous.
raised by the petitioners and Malayan in this case.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the
WHEREFORE, the petition is GRANTED. The Decision dated April 14, 2008 and Resolution
appellate court distinguished between P & I Clubs vis-à-vis conventional insurance. The
dated December 11, 2008 of the Court of Appeals in CA-G.R. CV No. 82758 are hereby
appellate court also held that Pioneer merely acted as a collection agent of Steamship Mutual.
REVERSED and SET ASIDE. The Decision dated March 31, 2004 of the Regional Trial Comi of
Manila, Branch 34 in Civil Case No·. 01-101885 is REINSTATED.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
SO ORDERED.
FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT
DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT
NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.

G.R. No. 154514. July 28, 2005 SECOND ASSIGNMENT OF ERROR

WHITE GOLD MARINE SERVICES, INC., Petitioners, THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
vs. EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL
UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents.
THIRD ASSIGNMENT OF ERROR

DECISION
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
QUISUMBING, J.: RESPONDENT STEAMSHIP.
 FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT
PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT
PIONEER.9
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the
insurance business in the Philippines? (2) Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not
have a license to do business in the Philippines although Pioneer is its resident agent. This
relationship is reflected in the certifications issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business.
To buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v.
Court of Appeals10 as "an association composed of shipowners in general who band together for
the specific purpose of providing insurance cover on a mutual basis against liabilities incidental
to shipowning that the members incur in favor of third parties." It stresses that as a P & I Club,
Steamship Mutual’s primary purpose is to solicit and provide protection and indemnity coverage
and for this purpose, it has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the
insurance business in the Philippines. It is merely an association of vessel owners who have
come together to provide mutual protection against liabilities incidental to
shipowning.11 Respondents aver Hyopsung is inapplicable in this case because the issue
in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business"
or "transacting an insurance business". These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is derived from the making of insurance
contracts, agreements or transactions, or that no separate or direct consideration is received
therefor, shall not preclude the existence of an insurance business. 12
The test to determine if a contract is an insurance contract or not, depends on the nature of the
promise, the act required to be performed, and the exact nature of the agreement in the light of
the occurrence, contingency, or circumstances under which the performance becomes requisite.
It is not by what it is called.13
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event.14
In particular, a marine insurance undertakes to indemnify the assured against marine losses,
such as the losses incident to a marine adventure.15 Section 9916 of the Insurance Code
enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both
the insurer and insured. In it, the members all contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid, and where
the profits are divided among themselves, in proportion to their interest.17 Additionally, mutual
insurance associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.18
A P & I Club is "a form of insurance against third party liability, where the third party is anyone
other than the P & I Club and the members."19 By definition then, Steamship Mutual as a P & I
Club is a mutual insurance association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite
certificate of authority mandated by Section 18720 of the Insurance Code. It maintains a resident
agent in the Philippines to solicit insurance and to collect payments in its behalf. We note that
Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment
of the calls. Thus, to continue doing business here, Steamship Mutual or through its agent
Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus,
no insurer or insurance company is allowed to engage in the insurance business without a
license or a certificate of authority from the Insurance Commission. 21
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of
registration22 issued by the Insurance Commission. It has been licensed to do or transact
insurance business by virtue of the certificate of authority23 issued by the same agency.
However, a Certification from the Commission states that Pioneer does not have a separate
license to be an agent/broker of Steamship Mutual.24
Although Pioneer is already licensed as an insurance company, it needs a separate license to
act as insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or
procurement of applications for insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance company doing business in the
Philippines or any agent thereof, without first procuring a license so to act from the
Commissioner, which must be renewed annually on the first day of January, or within six months
thereafter. . .
Finally, White Gold seeks revocation of Pioneer’s certificate of authority and removal of its
directors and officers. Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the
Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is
hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association
(Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED to obtain
licenses and to secure proper authorizations to do business as insurer and insurance agent,
respectively. The petitioner’s prayer for the revocation of Pioneer’s Certificate of Authority and
removal of its directors and officers, is DENIED. Costs against respondents.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
G.R. No. 156956 October 9, 2006
REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His Capacity as Insurance
Commissioner, petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.
DECISION
PANGANIBAN, CJ.:
The securities required by the Insurance Code to be deposited with the Insurance Commissioner
are intended to answer for the claims of all policy holders in the event that the depositing
insurance company becomes insolvent or otherwise unable to satisfy their claims. The security
deposit must be ratably distributed among all the insured who are entitled to their respective
shares; it cannot be garnished or levied upon by a single claimant, to the detriment of the others.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the
January 16, 2003 Order2 of the Regional Court (RTC) of Quezon City (Branch 221) in Civil Case
No. Q-97-30412. The RTC found Insurance Commissioner Eduardo T. Malinis guilty of indirect
contempt for refusing to comply with the December 18, 2002 Resolution3 of the lower court. The
January 16, 2003 Order states in full:
"On January 8, 2003, [respondent] filed a Motion to Cite Commissioner Eduardo T.
Malinis of the Office of the Insurance Commission in Contempt of Court because of his
failure and refusal to obey the lawful order of this court embodied in a Resolution
dated December 18, 2002 directing him to allow the withdrawal of the security deposit
of Capital Insurance and Surety Co. (CISCO) in the amount of P11,835,375.50 to be
paid to Sheriff Manuel Paguyo in the satisfaction of the Notice of Garnishment
pursuant to a Decision of this Court which has become final and executory.
"During the hearing of the Motion set last January 10, 2003, Commissioner Malinis or
his counsel or his duly authorized representative failed to appear despite notice in
utter disregard of the order of this Court. However, Commissioner Malinis filed on
January 15, 2003 a written Comment reiterating the same grounds already passed
upon and rejected by this Court. This Court finds no lawful justification or excuse for
Commissioner Malinis' refusal to implement the lawful orders of this Court.
"Wherefore, premises considered and after due hearing, Commissioner Eduardo T.
Malinis is hereby declared guilty of Indirect Contempt of Court pursuant to Section 3
[of] Rule 71 of the 1997 Rules of Civil Procedure for willfully disobeying and refusing to
implement and obey a lawful order of this Court."4
The Facts
On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412, finding the
defendants (Vilfran Liner, Inc., Hilaria Villegas and Maura Villegas) jointly and severally liable to
pay Del Monte Motors, Inc., P11,835,375.50 representing the balance of Vilfran Liner's service
contracts with respondent. The trial court further ordered the execution of the Decision against
the counterbond posted by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and
Surety Co., Inc. (CISCO).
On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent, claiming that
the latter had no record or document regarding the alleged issuance of the counterbond; thus,
the bond was not valid and enforceable.
On June 13, 2002, the RTC granted the Motion for Execution and issued the corresponding Writ.
Armed with this Writ, Sheriff Manuel S. Paguyo proceeded to levy on the properties of CISCO.
He also issued a Notice of Garnishment on several depository banks of the insurance company.
Moreover, he served a similar notice on the Insurance Commission, so as to enforce the Writ on
the security deposit filed by CISCO with the Commission in accordance with Section 203 of the
Insurance Code.
On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled that the
Notice of Garnishment served by Sheriff Paguyo on the insurance commission was valid. The
trial court added that the letter and spirit of the law made the security deposit answerable for
contractual obligations incurred by CISCO under the insurance contracts the latter had entered
into. The RTC resolved thus:
"Furthermore, the Commissioner of the Office of the Insurance Commission is hereby
ordered to comply with its obligations under the Insurance Code by upholding the
integrity and efficacy of bonds validly issued by duly accredited Bonding and
Insurance Companies; and to safeguard the public interest by insuring the faithful
performance to enforce contractual obligations under existing bonds. Accordingly said
office is ordered to withdraw from the security deposit of Capital Insurance & Surety
Company, Inc. the amount of P11,835.50 to be paid to Sheriff Manuel S. Paguyo in
satisfaction of the Notice of Garnishment served on August 16, 2002." 5
On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo T. Malinis in
contempt of court for his refusal to obey the December 18, 2002 Resolution of the trial court.
 Ruling of the Trial Court
The RTC held Insurance Commissioner Malinis in contempt for his refusal to implement its
Order. It explained that the commissioner had no legal justification for his refusal to allow the
withdrawal of CISCO's security deposit.
Hence, this Petition.6
Issues
Petitioner raises this sole issue for the Court's consideration:
"Whether or not the security deposit held by the Insurance Commissioner pursuant to
Section 203 of the Insurance Code may be levied or garnished in favor of only one
insured."7
The Court's Ruling
The Petition is meritorious.
Preliminary Issue:
Propriety of Review
Before discussing the principal issue, the Court will first dispose of the question of mootness.
Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the treasurer of the
Philippines a letter dated March 26, 2003, stating that the former had no objection to the release
of the security deposit to Del Monte Motors. Portions of the fund were consequently released to
respondent in July, October, and December 2003. Thus, the issue arises: whether these
circumstances render the case moot.
Petitioner, however, contends that the partial releases should not be construed as an
abandonment of its stand that security deposits under Section 203 of the Insurance Code are
exempt from levy and garnishment. The Republic claims that the releases were made pursuant
to the commissioner's power of control over the fund, not to the lower court's Order of
garnishment. Petitioner further invokes the jurisdiction of this Court to put to rest the principal
issue of whether security deposits made with the Insurance Commission may be levied and
garnished.
The issue is not totally moot. To stress, only a portion of respondent's claim was satisfied, and
the Insurance Commission has required CISCO to replenish the latter's security deposit.
Respondent, therefore, may one day decide to further garnish the security deposit, once
replenished. Moreover, after the questioned Order of the lower court was issued, similar claims
on the security deposits of various insurance companies have been made before the Insurance
Commission. To set aside the resolution of the issue will only postpone a task that is certain to
crop up in the future.
Besides, the business of insurance is imbued with public interest. It is subject to regulation by
the State, with respect not only to the relations between the insurer and the insured, but also to
the internal affairs of insurance companies.8 As this case is undeniably endowed with public
interest and involves a matter of public policy, this Court shall not shirk from its duty to educate
the bench and the bar by formulating guiding and controlling principles, precepts, doctrines and
rules.9
Principal Issue:
Exemption of Security Deposit from Levy or Garnishment
Section 203 of the Insurance Code provides as follows:
"Sec. 203. Every domestic insurance company shall, to the extent of an amount equal
in value to twenty-five per centum of the minimum paid-up capital required under
section one hundred eighty-eight, invest its funds only in securities, satisfactory to the
Commissioner, consisting of bonds or other evidences of debt of the Government of
the Philippines or its political subdivisions or instrumentalities, or of government-
owned or controlled corporations and entities, including the Central Bank of the
Philippines: Provided, That such investments shall at all times be maintained free from
any lien or encumbrance; and Provided, further, That such securities shall be
deposited with and held by the Commissioner for the faithful performance by the
depositing insurer of all its obligations under its insurance contracts. The
provisions of section one hundred ninety-two shall, so far as practicable, apply to the
securities deposited under this section.
"Except as otherwise provided in this Code, no judgment creditor or other claimant
shall have the right to levy upon any of the securities of the insurer held on
deposit pursuant to the requirement of the Commissioner." (Emphasis supplied)
Respondent notes that Section 203 does not provide for an absolute prohibition on the levy and
garnishment of the security deposit. It contends that the law requires the deposit, precisely to
ensure faithful performance of all the obligations of the depositing insurer under the latter's
various insurance contracts. Hence, respondent claims that the security deposit should be
answerable for the counterbond issued by CISCO.
The Court is not convinced. As worded, the law expressly and clearly states that the security
deposit shall be (1) answerable for all the obligations of the depositing insurer under its
insurance contracts; (2) at all times free from any liens or encumbrance; and (3) exempt from
levy by any claimant.
To be sure, CISCO, though presently under conservatorship, has valid outstanding policies. Its
policy holders have a right under the law to be equally protected by its security deposit. To allow
the garnishment of that deposit would impair the fund by decreasing it to less than the
percentage of paid-up capital that the law requires to be maintained. Further, this move would
create, in favor of respondent, a preference of credit over the other policy holders and
beneficiaries.
Our Insurance Code is patterned after that of California.10 Thus, the ruling of the state's Supreme
Court on a similar concept as that of the security deposit is instructive. Engwicht v. Pacific States
Life Assurance Co.11 held that the money required to be deposited by a mutual assessment
insurance company with the state treasurer was "a trust fund to be ratably distributed amongst
all the claimants entitled to share in it. Such a distribution cannot be had except in an action in
the nature of a creditors' bill, upon the hearing of which, and with all the parties interested in the
fund before it, the court may make equitable distribution of the fund, and appoint a receiver to
carry that distribution into effect."12
Basic is the statutory construction rule that provisions of a statute should be construed in
accordance with the purpose for which it was enacted. 13 That is, the securities are held as a
contingency fund to answer for the claims against the insurance company by all its policy
holders and their beneficiaries. This step is taken in the event that the company becomes
insolvent or otherwise unable to satisfy the claims against it. Thus, a single claimant may not lay
stake on the securities to the exclusion of all others. The other parties may have their own
claims against the insurance company under other insurance contracts it has entered into.
Respondent's Inchoate Right
The right to lay claim on the fund is dependent on the solvency of the insurer and is subject to all
other obligations of the company arising from its insurance contracts. Thus, respondent's
interest is merely inchoate. Being a mere expectancy, it has no attribute of property. At this time,
it is nonexistent and may never exist.14 Hence, it would be premature to make the security
deposit answerable for CISCO's present obligation to Del Monte Motors.
Moreover, since insolvency proceedings against CISCO have yet to be conducted, it would be
impossible to establish at this time which claimants are entitled to the security deposit and in
what pro-rated amounts. Only after all other claimants under subsisting policies issued by
CISCO have been heard can respondent's share be determined.
Powers of the Commissioner
The Insurance Code has vested the Office of the Insurance Commission with
both regulatory and adjudicatoryauthority over insurance matters.15
The general regulatory authority of the insurance commissioner is described in Section 414 of
the Code as follows:
"Sec. 414. The Insurance Commissioner shall have the duty to see that all laws
relating to insurance, insurance companies and other insurance matters, mutual
benefit associations, and trusts for charitable uses are faithfully executed and to
perform the duties imposed upon him by this Code, and shall, notwithstanding any
existing laws to the contrary, have sole and exclusive authority to regulate the
issuance and sale of variable contracts as defined in section two hundred thirty-two
and to provide for the licensing of persons selling such contracts, and to issue such
reasonable rules and regulations governing the same.
"The Commissioner may issue such rulings, instructions, circulars, orders and
decisions as he may deem necessary to secure the enforcement of the provisions of
this Code, subject to the approval of the Secretary of Finance. Except as otherwise
specified, decisions made by the Commissioner shall be appealable to the Secretary
of Finance." (Emphasis supplied)
Pursuant to these regulatory powers, the commissioner is authorized to (1) issue (or to refuse to
issue) certificates of authority to persons or entities desiring to engage in insurance business in
the Philippines;16 (2) revoke or suspend these certificates of authority upon finding grounds for
the revocation or suspension;17 (3) impose upon insurance companies, their directors and/or
officers and/or agents appropriate penalties -- fines, suspension or removal from office -- for
failing to comply with the Code or with any of the commissioner's orders, instructions,
regulations or rulings, or for otherwise conducting business in an unsafe or unsound manner. 18
Included in the above regulatory responsibilities is the duty to hold the security deposits under
Sections 19119 and 203 of the Code, for the benefit and security of all policy holders. In relation
to these provisions, Section 192 of the Insurance Code states:
"Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the
benefit and security of all the policyholders of the company depositing the same, but
shall as long as the company is solvent, permit the company to collect the interest or
dividends on the securities so deposited, and, from time to time, with his assent, to
withdraw any of such securities, upon depositing with said Commissioner other like
securities, the market value of which shall be equal to the market value of such as
may be withdrawn. In the event of any company ceasing to do business in the
Philippines the securities deposited as aforesaid shall be returned upon the
company's making application therefor and proving to the satisfaction of the
Commissioner that it has no further liability under any of its policies in the Philippines."
(Emphasis supplied)
Undeniably, the insurance commissioner has been given a wide latitude of discretion to regulate
the insurance industry so as to protect the insuring public. The law specifically confers custody
over the securities upon the commissioner, with whom these investments are required to be
deposited. An implied trust20 is created by the law for the benefit of all claimants under subsisting
insurance contracts issued by the insurance company.21
As the officer vested with custody of the security deposit, the insurance commissioner is in the
best position to determine if and when it may be released without prejudicing the rights of other
policy holders. Before allowing the withdrawal or the release of the deposit, the commissioner
must be satisfied that the conditions contemplated by the law are met and all policy holders
protected.
Commissioner's Actions
Entitled to Great Respect
In this case, Commissioner Malinis refused to release the security deposit of CISCO. Believing
that the funds were exempt from execution as provided by law, he sought to protect other policy
holders. His interpretation of the provisions of the law carries great weight and
consideration,22 as he is the head of a specialized body tasked with the regulation of insurance
matters and primarily charged with the implementation of the Insurance Code.
The emergence of the multifarious needs of modern society necessitates the establishment of
diverse administrative agencies. In addressing these needs, the administrative agencies
charged with applying and implementing particular statutes have accumulated experience and
specialized capabilities. Thus, in a long line of cases, this Court has recognized that their
construction of a statute is entitled to great respect and should ordinarily be controlling, unless
clearly shown to be in sharp conflict with the governing statute or the Constitution and other
laws.23
Clearly, then, the trial court erred in issuing the Writ of Garnishment against the security deposit
of CISCO. It follows that without the issuance of a valid order, the insurance commissioner could
not have been in contempt of court.24
WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No costs.
G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
 RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social services
available to all the people at affordable cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide
free medical care to paupers.1
For resolution are a motion for reconsideration and supplemental motion for reconsideration
dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care
Providers, Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct
and operate a prepaid group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in the health care plan and to
provide for the administrative, legal, and financial responsibilities of the organization." Individuals
enrolled in its health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by its duly licensed physicians,
specialists and other professional technical staff participating in the group practice health
delivery system at a hospital or clinic owned, operated or accredited by it.
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 ₱224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health
care agreement with the members of its health care program pursuant to Section 185 of the
1997 Tax Code xxxx
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
₱22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully
paid for the 1996 VAT deficiency and ₱31,094,163.87 inclusive of 25% surcharge plus 20%
interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT
Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency
DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is
ORDERED to DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioner’s health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement
was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.
Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment
and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the
Tax Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision.
We held that petitioner’s health care agreement during the pertinent period was in the nature of
non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioner’s contention
that it is a health maintenance organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the beneficiaries under their plans are
treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an
excise on the privilege, opportunity or facility offered at exchanges for the transaction of the
business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed
only on a company engaged in the business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not an insurance company.
 (b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in
effect the CA’s disposition that health care services are not in the nature of an
insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is
clear, especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they
are not those contemplated under Section 185.
(f) Assuming arguendo that petitioner’s agreements are akin to health insurance,
health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance"
mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year
2005 and all prior years. Therefore, the questioned assessments on the DST are now
rendered moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax
amnesty under RA 94807(also known as the "Tax Amnesty Act of 2007") by fully paying the
amount of ₱5,127,149.08 representing 5% of its net worth as of the year ending December 31,
2005.8
We find merit in petitioner’s motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange
Commission on June 30, 1987.9 It is engaged in the dispensation of the following medical
services to individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and
immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member. 10
Individuals enrolled in its health care program pay an annual membership fee. Membership is on
a year-to-year basis. The medical services are dispensed to enrolled members in a hospital or
clinic owned, operated or accredited by petitioner, through physicians, medical and dental
practitioners under contract with it. It negotiates with such health care practitioners regarding
payment schemes, financing and other procedures for the delivery of health services. Except in
cases of emergency, the professional services are to be provided only by petitioner's
physicians, i.e. those directly employed by it11 or whose services are contracted by it.12 Petitioner
also provides hospital services such as room and board accommodation, laboratory services,
operating rooms, x-ray facilities and general nursing care.13 If and when a member avails of the
benefits under the agreement, petitioner pays the participating physicians and other health care
providers for the services rendered, at pre-agreed rates.14
To avail of petitioner’s health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision
of the health care services. The same agreement contains the various health care services that
can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical
services. Except for the curative aspect of the medical service offered, the enrolled member may
actually make use of the health care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on
the business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15
Petitioner, however, submits that it is of critical importance to characterize the business it is
engaged in, that is, to determine whether it is an HMO or an insurance company, as this
distinction is indispensable in turn to the issue of whether or not it is liable for DST on its health
care agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability
made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of
the duties of any office or position, for the doing or not doing of anything therein specified, and
on all obligations guaranteeing the validity or legality of any bond or other obligations issued by
any province, city, municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be
made or renewed by any such person, company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (₱0.50) on each four pesos (₱4.00), or fractional part
thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To
this end, a construction which renders every word operative is preferred over that which makes
some words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its
every word.18
From the language of Section 185, it is evident that two requisites must concur before the DST
can apply, namely: (1) the document must be a policy of insurance or an obligation in the
nature of indemnity and (2) the maker should be transacting the business of accident,
fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or
other branch of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of
1995"), an HMO is "an entity that provides, offers or arranges for coverage of designated health
services needed by plan members for a fixed prepaid premium."19 The payments do not vary
with the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what
constitutes "doing an insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation
and not as merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning of
this Code;
d) doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making
of insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they
have applied is whether the assumption of risk and indemnification of loss (which are elements
of an insurance business) are the principal object and purpose of the organization or whether
they are merely incidental to its business. If these are the principal objectives, the business is
that of insurance. But if they are merely incidental and service is the principal purpose, then the
business is not insurance.
Applying the "principal object and purpose test,"22 there is significant American case law
supporting the argument that a corporation (such as an HMO, whether or not organized for
profit), whose main object is to provide the members of a group with health services, is not
engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals
of the District of Columbia Circuit held that Group Health Association should not be considered
as engaged in insurance activities since it was created primarily for the distribution of health care
services rather than the assumption of insurance risk.
xxx Although Group Health’s activities may be considered in one aspect as creating security
against loss from illness or accident more truly they constitute the quantity purchase of well-
rounded, continuous medical service by its members. xxx The functions of such an
organization are not identical with those of insurance or indemnity companies. The latter
are concerned primarily, if not exclusively, with risk and the consequences of its descent, not
with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the
daily routine of living. Hazard is predominant. On the other hand, the cooperative is
concerned principally with getting service rendered to its members and doing so at lower
prices made possible by quantity purchasing and economies in operation. Its primary
purpose is to reduce the cost rather than the risk of medical care; to broaden the service
to the individual in kind and quantity; to enlarge the number receiving it; to regularize it
as an everyday incident of living, like purchasing food and clothing or oil and gas, rather
than merely protecting against the financial loss caused by extraordinary and unusual
occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take
care of colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as
well as the more serious and unusual illness. To summarize, the distinctive features of the
cooperative are the rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of service as well as payment,
the substantial reduction in cost by quantity purchasing in short, getting the medical job
done and paid for; not, except incidentally to these features, the indemnification for cost
after the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial difference
between contracting in this way for the rendering of service, even on the contingency that it be
needed, and contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh
all other factors. If attention is focused only on that feature, the line between insurance or
indemnity and other types of legal arrangement and economic function becomes faint, if not
extinct. This is especially true when the contract is for the sale of goods or services on
contingency. But obviously it was not the purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk. That view would cause them to engulf
practically all contracts, particularly conditional sales and contingent service agreements. The
fallacy is in looking only at the risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is involved or assumed, but
on 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
The primary purpose of a medical service corporation, however, is an undertaking to provide
physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporation’s plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected
would be provided, but the corporation will, in effect, be doing business solely as a health
and accident indemnity insurer without having qualified as such and rendering itself subject to
the more stringent financial requirements of the General Insurance Laws….
A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in
return for which the health service corporation agrees to make payment directly to the
participating provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose of
the business to provide medical services as needed, with payment made directly to the provider
of these services.29 In short, even if petitioner assumes the risk of paying the cost of these
services even if significantly more than what the member has prepaid, it nevertheless cannot be
considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case
of emergency by non-participating health providers would still be incidental to petitioner’s
purpose of providing and arranging for health care services and does not transform it into an
insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set
up a system and the facilities for the delivery of such medical services. This indubitably shows
that indemnification is not its sole object.
In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases. 30 As an
HMO, it is its obligation to maintain the good health of its members. Accordingly, its health
care programs are designed to prevent or to minimize thepossibility of any assumption of
risk on its part. Thus, its undertaking under its agreements is not to indemnify its members
against any loss or damage arising from a medical condition but, on the contrary, to provide the
health and medical services needed to prevent such loss or damage. 31
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather
than insurance services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the above-
quoted U.S. cases, we are not saying that petitioner’s operations are identical in every respect to
those of the HMOs or health providers which were parties to those cases. What we are stating is
that, for the purpose of determining what "doing an insurance business" means, we have to
scrutinize the operations of the business as a whole and not its mere components. This is of
course only prudent and appropriate, taking into account the burdensome and strict laws, rules
and regulations applicable to insurers and other entities engaged in the insurance business.
Moreover, we are also not unmindful that there are other American authorities who have found
particular HMOs to be actually engaged in insurance activities. 32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is
evident from the fact that it is not supervised by the Insurance Commission but by the
Department of Health.33 In fact, in a letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a statute is accorded
great respect and ordinarily controls the interpretation of laws by the courts. The reason behind
this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs of a
modern or modernizing society and the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to the accumulation of experience and
growth of specialized capabilities by the administrative agency charged with implementing a
particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,35 the Court
stressed that executive officials are presumed to have familiarized themselves with all the
considerations pertinent to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon. The courts give much weight
to the government agency officials charged with the implementation of the law, their
competence, expertness, experience and informed judgment, and the fact that they frequently
are the drafters of the law they interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185
Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance… or obligations of the
nature of indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we
ruled that petitioner’s health care agreements are contracts of indemnity and are therefore
insurance contracts:
It is … incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for
hospital, medical and related expenses (such as professional fees of physicians). The term "loss
or damage" is broad enough to cover the monetary expense or liability a member will incur in
case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to
the member in case of sickness, injury or emergency or his availment of so-called "out-patient
services" (including physical examination, x-ray and laboratory tests, medical consultations,
vaccine administration and family planning counseling) is the contingent event which gives rise
to liability on the part of the member. In case of exposure of the member to liability, he would be
entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The
expenses to be incurred by each member cannot be predicted beforehand, if they can be
predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they
are significantly and substantially more than what the member has "prepaid." Petitioner does not
bear the costs alone but distributes or spreads them out among a large group of persons bearing
a similar risk, that is, among all the other members of the health care program. This is
insurance.37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of
their property for the support of the government.39 Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax provision. Instead, they dealt
with the liability of a health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the
member and strictly against the HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event. An insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk and
5. In consideration of the insurer’s promise, the insured pays a premium. 41
Do the agreements between petitioner and its members possess all these elements? They do
not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a
contract contains all the elements of an insurance contract, if its primary purpose is the
rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties in
making the contract may negate the existence of an insurance contract. For example, a
law firm which enters into contracts with clients whereby in consideration of periodical payments,
it promises to represent such clients in all suits for or against them, is not engaged in the
insurance business. Its contracts are simply for the purpose of rendering personal services. On
the other hand, a contract by which a corporation, in consideration of a stipulated amount,
agrees at its own expense to defend a physician against all suits for damages for malpractice is
one of insurance, and the corporation will be deemed as engaged in the business of insurance.
Unlike the lawyer’s retainer contract, the essential purpose of such a contract is not to render
personal services, but to indemnify against loss and damage resulting from the defense of
actions for malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays
petitioner a predetermined consideration in exchange for the hospital, medical and professional
services rendered by the petitioner’s physician or affiliated physician to him. In case of availment
by a member of the benefits under the agreement, petitioner does not reimburse or indemnify
the member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability
on the part of the member to any third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose
that a liability or claim has already been incurred. There is no indemnity precisely because the
member merely avails of medical services to be paid or already paid in advance at a pre-agreed
price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril,
loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care
from a non-participating physician or hospital. However, this is only a very minor part of the list of
services available. The assumption of the expense by petitioner is not confined to the happening
of a contingency but includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the
health care contracts called for the defendant to partially reimburse a subscriber for treatment
received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan,
the Court determined that "the primary activity of the defendant (was) the provision of podiatric
services to subscribers in consideration of prepayment for such services." 44 Since indemnity of
the insured was not the focal point of the agreement but the extension of medical services to the
member at an affordable cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that
risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation
always bears a certain degree of financial risk. Consequently, there is a need to distinguish
prepaid service contracts (like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health
services: the risk that it might fail to earn a reasonable return on its investment. But it is not the
risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial
risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The
amount of premium is calculated on the basis of assumptions made relative to the insured. 45
However, assuming that petitioner’s commitment to provide medical services to its members can
be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still
will not qualify as an insurance contract because petitioner’s objective is to provide medical
services at reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioner’s agreements with its members leads us to conclude that it
is not an insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health
care agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history.
The text of Section 185 came into U.S. law as early as 1904 when HMOs and health care
agreements were not even in existence in this jurisdiction. It was imposed under Section 116,
Article XI of Act No. 1189 (otherwise known as the "Internal Revenue Law of 1904") 46enacted on
July 2, 1904 and became effective on August 1, 1904. Except for the rate of tax, Section 185 of
the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:
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, employer’s liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except
life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising
and consolidating the laws relating to internal revenue. The aforecited pertinent portion of
Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of
Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus
retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as
Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on
March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise
known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of
1939), which codified all the internal revenue laws of the Philippines. In an amendment
introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision
remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD
1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and
October 10, 1984 respectively, the DST rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977
was renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was
again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect
to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC
of 1997), the subject legal provision was retained as the present Section 185. In 2004,
amendments to the DST provisions were introduced by RA 924348 but Section 185 was
untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation
of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who
claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the
Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs
proliferated quickly and currently, there are 36 registered HMOs with a total enrollment of more
than 2 million.49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the
other) that when the law imposing the DST was first passed, HMOs were yet unknown in the
Philippines. However, when the various amendments to the DST law were enacted, they were
already in existence in the Philippines and the term had in fact already been defined by RA
7875. If it had been the intent of the legislature to impose DST on health care agreements, it
could have done so in clear and categorical terms. It had many opportunities to do so. But it did
not. The fact that the NIRC contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known 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 ₱376 million 53 is way beyond
its net worth of ₱259 million.54 Respondent never disputed these assertions. Given the realities
on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose
of the government to throttle private business. On the contrary, the government ought to
encourage private enterprise.55 Petitioner, just like any concern organized for a lawful economic
activity, has a right to maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et
al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence.
Incurring losses because of a tax imposition may be an acceptable consequence but killing the
business of an entity is another matter and should not be allowed. It is counter-productive and
ultimately subversive of the nation’s thrust towards a better economy which will ultimately benefit
the majority of our people.59
Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a)
of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity
from payment of the tax involved, including the civil, criminal, or administrative penalties
provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of
this case as discussed above, respondent concedes that such tax amnesty extinguishes
the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation
of the amnesty granted in case it is found to have been granted under circumstances amounting
to tax fraud under Section 10 of said amnesty law.62 (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for
DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax
amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is
bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement
of Philamcare Health Systems is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the
Court should apply the CA ruling there that a health care agreement is not an insurance
contract.
It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the
CA ruling being questioned. As a result, our ruling in that case has already become final. 67 When
a minute resolution denies or dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together with its findings of fact and legal
conclusions, are deemed sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the
same parties and issues) is involved, the minute resolution is not binding precedent. Thus,
in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving
the same parties and the same issues, was previously disposed of by the Court thru a minute
resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled
that the previous case "ha(d) no bearing" on the latter case because the two cases involved
different subject matters as they were concerned with the taxable income of different taxable
years.72
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of
the Constitution that the facts and the law on which the judgment is based must be expressed
clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is
signed only by the clerk of court by authority of the justices, unlike a decision. It does not require
the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not
published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision.73Indeed, as a rule, this Court lays down doctrines or principles of law which constitute
binding precedent in a decision duly signed by the members of the Court and certified by the
Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for
DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner
cannot successfully invoke the minute resolution in that case (which is not even binding
precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not
detract in any way from the fact that petitioner’s health care agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185
of the NIRC and there was never any legislative intent to impose the same on HMOs like
petitioner, the same should not be arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate medical
services at a cost which the average wage earner can afford. HMOs arrange, organize and
manage health care treatment in the furtherance of the goal of providing a more efficient and
inexpensive health care system made possible by quantity purchasing of services and
economies of scale. They offer advantages over the pay-for-service system (wherein individuals
are charged a fee each time they receive medical services), including the ability to control costs.
They protect their members from exposure to the high cost of hospitalization and other medical
expenses brought about by a fluctuating economy. Accordingly, they play an important role in
society as partners of the State in achieving its constitutional mandate of providing its citizens
with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. 74 Its
imposition will elevate the cost of health care services. This will in turn necessitate an increase in
the membership fees, resulting in either placing health services beyond the reach of the ordinary
wage earner or driving the industry to the ground. At the end of the day, neither side wins,
considering the indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of
the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and
1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET
ASIDE. Respondent is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.
G.R. No. 195872 March 12, 2014
FORTUNE MEDICARE, INC., Petitioner,
vs.
DAVID ROBERT U. AMORIN, Respondent.
DECISION
REYES, J.:
This is a petition for review on certiorari1 under Rule 45 of the Rules of Court, which challenges
the Decision2 dated September 27, 2010 and Resolution3 dated February 24, 2011 of the Court
of Appeals (CA) in CA-G.R. CV No. 87255.
The Facts
David Robert U. Amorin (Amorin) was a cardholder/member of Fortune Medicare, Inc. (Fortune
Care), a corporation engaged in providing health maintenance services to its members. The
terms of Amorin's medical coverage were provided in a Corporate Health Program
Contract4 (Health Care Contract) which was executed on January 6, 2000 by Fortune Care and
the House of Representatives, where Amorin was a permanent employee.
While on vacation in Honolulu, Hawaii, United States of America (U.S.A.) in May 1999, Amorin
underwent an emergency surgery, specifically appendectomy, at the St. Francis Medical Center,
causing him to incur professional and hospitalization expenses of US$7,242.35 and
US$1,777.79, respectively. He attempted to recover from Fortune Care the full amount thereof
upon his return to Manila, but the company merely approved a reimbursement of ₱12,151.36, an
amount that was based on the average cost of appendectomy, net of medicare deduction, if the
procedure were performed in an accredited hospital in Metro Manila.5 Amorin received under
protest the approved amount, but asked for its adjustment to cover the total amount of
professional fees which he had paid, and eighty percent (80%) of the approved standard
charges based on "American standard", considering that the emergency procedure occurred in
the U.S.A. To support his claim, Amorin cited Section 3, Article V on Benefits and Coverages of
the Health Care Contract, to wit:
A. EMERGENCY CARE IN ACCREDITED HOSPITAL. Whether as an in-patient or
out-patient, the member shall be entitled to full coverage under the benefits provisions
of the Contract at any FortuneCare accredited hospitals subject only to the pertinent
provision of Article VII (Exclusions/Limitations) hereof. For emergency care attended
by non affiliated physician (MSU), the member shall be reimbursed 80% of the
professional fee which should have been paid, had the member been treated by an
affiliated physician. The availment of emergency care from an unaffiliated physician
shall not invalidate or diminish any claim if it shall be shown to have been reasonably
impossible to obtain such emergency care from an affiliated physician.
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total hospitalization
cost including the professional fee (based on the total approved charges) to a member who
receives emergency care in a non-accredited hospital. The above coverage applies only to
Emergency confinement within Philippine Territory. However, if the emergency confinement
occurs in a foreign territory, Fortune Care will be obligated to reimburse or pay eighty (80%)
percent of the approved standard charges which shall cover the hospitalization costs and
professional fees. x x x6
Still, Fortune Care denied Amorin’s request, prompting the latter to file a complaint 7 for breach of
contract with damages with the Regional Trial Court (RTC) of Makati City.
For its part, Fortune Care argued that the Health Care Contract did not cover hospitalization
costs and professional fees incurred in foreign countries, as the contract’s operation was
confined to Philippine territory.8 Further, it argued that its liability to Amorin was extinguished
upon the latter’s acceptance from the company of the amount of ₱12,151.36.
The RTC Ruling
On May 8, 2006, the RTC of Makati, Branch 66 rendered its Decision9 dismissing Amorin’s
complaint. Citing Section 3, Article V of the Health Care Contract, the RTC explained:
Taking the contract as a whole, the Court is convinced that the parties intended to use the
Philippine standard as basis. Section 3 of the Corporate Health Care Program Contract provides
that:
xxxx
On the basis of the clause providing for reimbursement equivalent to 80% of the professional fee
which should have been paid, had the member been treated by an affiliated physician, the Court
concludes that the basis for reimbursement shall be Philippine rates. That provision, taken with
Article V of the health program contract, which identifies affiliated hospitals as only those
accredited clinics, hospitals and medical centers located "nationwide" only point to the Philippine
standard as basis for reimbursement.
The clause providing for reimbursement in case of emergency operation in a foreign territory
equivalent to 80% of the approved standard charges which shall cover hospitalization costs and
professional fees, can only be reasonably construed in connection with the preceding clause on
professional fees to give meaning to a somewhat vague clause. A particular clause should not
be studied as a detached and isolated expression, but the whole and every part of the contract
must be considered in fixing the meaning of its parts.10
In the absence of evidence to the contrary, the trial court considered the amount of ₱12,151.36
already paid by Fortune Care to Amorin as equivalent to 80% of the hospitalization and
professional fees payable to the latter had he been treated in an affiliated hospital.11
Dissatisfied, Amorin appealed the RTC decision to the CA.
The CA Ruling
On September 27, 2010, the CA rendered its Decision12 granting the appeal. Thus, the
dispositive portion of its decision reads:
WHEREFORE, all the foregoing premises considered, the instant appeal is hereby GRANTED.
The May 8, 2006 assailed Decision of the Regional Trial Court (RTC) of Makati City, Branch 66
is hereby REVERSED and SET ASIDE, and a new one entered ordering Fortune Medicare, Inc.
to reimburse [Amorin] 80% of the total amount of the actual hospitalization expenses of
$7,242.35 and professional fee of $1,777.79 paid by him to St. Francis Medical Center pursuant
to Section 3, Article V of the Corporate Health Care Program Contract, or their peso equivalent
at the time the amounts became due, less the [P]12,151.36 already paid by Fortunecare.
SO ORDERED.13
In so ruling, the appellate court pointed out that, first, health care agreements such as the
subject Health Care Contract, being like insurance contracts, must be liberally construed in favor
of the subscriber. In case its provisions are doubtful or reasonably susceptible of two
interpretations, the construction conferring coverage is to be adopted and exclusionary clauses
of doubtful import should be strictly construed against the provider.14 Second, the CA explained
that there was nothing under Article V of the Health Care Contract which provided that the
Philippine standard should be used even in the event of an emergency confinement in a foreign
territory.15
Fortune Care’s motion for reconsideration was denied in a Resolution16 dated February 24,
2011. Hence, the filing of the present petition for review on certiorari.
The Present Petition
Fortune Care cites the following grounds to support its petition:
I. The CA gravely erred in concluding that the phrase "approved standard charges" is
subject to interpretation, and that it did not automatically mean "Philippine Standard";
and
II. The CA gravely erred in denying Fortune Care’s motion for reconsideration, which
in effect affirmed its decision that the American Standard Cost shall be applied in the
payment of medical and hospitalization expenses and professional fees incurred by
the respondent.17
The Court’s Ruling
The petition is bereft of merit.
The Court finds no cogent reason to disturb the CA’s finding that Fortune Care’s liability to
Amorin under the subject Health Care Contract should be based on the expenses for hospital
and professional fees which he actually incurred, and should not be limited by the amount that
he would have incurred had his emergency treatment been performed in an accredited hospital
in the Philippines.
We emphasize that for purposes of determining the liability of a health care provider to its
members, jurisprudence holds that a health care agreement is in the nature of non-life
insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical
or any other expense arising from sickness, injury or other stipulated contingent, the health care
provider must pay for the same to the extent agreed upon under the contract. 18
To aid in the interpretation of health care agreements, the Court laid down the following
guidelines in Philamcare Health Systems v. CA19:
When the terms of insurance contract contain limitations on liability, courts should construe them
in such a way as to preclude the insurer from non-compliance with his obligation. Being a
contract of adhesion, the terms of an insurance contract are to be construed strictly against the
party which prepared the contract – the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid
forfeiture. This is equally applicable to Health Care Agreements. The phraseology used in
medical or hospital service contracts, such as the one at bar, must be liberally construed in favor
of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction
conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be
strictly construed against the provider.20 (Citations omitted and emphasis ours)
Consistent with the foregoing, we reiterated in Blue Cross Health Care, Inc. v. Spouses
Olivares21:
In Philamcare Health Systems, Inc. v. CA, we ruled that a health care agreement is in the nature
of a non-life insurance. It is an established rule in insurance contracts that when their terms
contain limitations on liability, they should be construed strictly against the insurer. These are
contracts of adhesion the terms of which must be interpreted and enforced stringently against
the insurer which prepared the contract. This doctrine is equally applicable to health care
agreements.
xxxx
x x x [L]imitations of liability on the part of the insurer or health care provider must be construed
in such a way as to preclude it from evading its obligations. Accordingly, they should be
scrutinized by the courts with "extreme jealousy" and "care" and with a "jaundiced eye." x x
x.22 (Citations omitted and emphasis supplied)
In the instant case, the extent of Fortune Care’s liability to Amorin under the attendant
circumstances was governed by Section 3(B), Article V of the subject Health Care Contract,
considering that the appendectomy which the member had to undergo qualified as an
emergency care, but the treatment was performed at St. Francis Medical Center in Honolulu,
Hawaii, U.S.A., a non-accredited hospital. We restate the pertinent portions of Section 3(B):
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total hospitalization
cost including the professional fee (based on the total approved charges) to a member who
receives emergency care in a non-accredited hospital. The above coverage applies only to
Emergency confinement within Philippine Territory. However, if the emergency confinement
occurs in foreign territory, Fortune Care will be obligated to reimburse or pay eighty (80%)
percent of the approved standard charges which shall cover the hospitalization costs and
professional fees. x x x23 (Emphasis supplied)
The point of dispute now concerns the proper interpretation of the phrase "approved standard
charges", which shall be the base for the allowable 80% benefit. The trial court ruled that the
phrase should be interpreted in light of the provisions of Section 3(A), i.e., to the extent that may
be allowed for treatments performed by accredited physicians in accredited hospitals. As the
appellate court however held, this must be interpreted in its literal sense, guided by the rule that
any ambiguity shall be strictly construed against Fortune Care, and liberally in favor of Amorin.
Contract were merely computed on assumption and risk under Philippine cost and, that the
American cost standard or any foreign country's cost was never considered, such limitations
should have been distinctly specified and clearly reflected in the extent of coverage which the
company voluntarily assumed. This was what Fortune Care found appropriate when in its new
health care agreement with the House of Representatives, particularly in their 2006 agreement,
the provision on emergency care in non-accredited hospitals was modified to read as follows:
However, if the emergency confinement occurs in a foreign territory, Fortunecare will be
obligated to reimburse or pay one hundred (100%) percent under approved Philippine Standard
covered charges for hospitalization costs and professional fees but not to exceed maximum
allowable coverage, payable in pesos at prevailing currency exchange rate at the time of
availment in said territory where he/she is confined. x x x24
Settled is the rule that ambiguities in a contract are interpreted against the party that caused the
ambiguity. "Any ambiguity in a contract whose terms are susceptible of different interpretations
must be read against the party who drafted it."25

The Court agrees with the CA. As may be gleaned from the Health Care Contract, the parties WHEREFORE, the petition is DENIED. The Decision dated September 27, 2010 and Resolution
thereto contemplated the possibility of emergency care in a foreign country. As the contract dated February 24, 2011 of the Court of Appeals in CA-G.R. CV No. 87255 are AFFIRMED.
recognized Fortune Care’s liability for emergency treatments even in foreign territories, it
expressly limited its liability only insofar as the percentage of hospitalization and professional
SO ORDERED.
fees that must be paid or reimbursed was concerned, pegged at a mere 80% of the approved
standard charges.

The word "standard" as used in the cited stipulation was vague and ambiguous, as it could be
susceptible of different meanings. Plainly, the term "standard charges" could be read as referring
to the "hospitalization costs and professional fees" which were specifically cited as compensable
even when incurred in a foreign country. Contrary to Fortune Care’s argument, from nowhere in
the Health Care Contract could it be reasonably deduced that these "standard charges" referred
to the "Philippine standard", or that cost which would have been incurred if the medical services
were performed in an accredited hospital situated in the Philippines. The RTC ruling that the use
of the "Philippine standard" could be inferred from the provisions of Section 3(A), which covered
emergency care in an accredited hospital, was misplaced. Evidently, the parties to the Health
Care Contract made a clear distinction between emergency care in an accredited hospital, and
that obtained from a non-accredited hospital.1âwphi1 The limitation on payment based on
"Philippine standard" for services of accredited physicians was expressly made applicable only
in the case of an emergency care in an accredited hospital.

The proper interpretation of the phrase "standard charges" could instead be correlated with and
reasonably inferred from the other provisions of Section 3(B), considering that Amorin’s case fell
under the second case, i.e., emergency care in a non-accredited hospital. Rather than a
determination of Philippine or American standards, the first part of the provision speaks of the
full reimbursement of "the total hospitalization cost including the professional fee (based on the
total approved charges) to a member who receives emergency care in a non-accredited
hospital" within the Philippines. Thus, for emergency care in non-accredited hospitals, this cited
clause declared the standard in the determination of the amount to be paid, without any
reference to and regardless of the amounts that would have been payable if the treatment was
done by an affiliated physician or in an affiliated hospital. For treatments in foreign territories, the
only qualification was only as to the percentage, or 80% of that payable for treatments
performed in non-accredited hospital.

All told, in the absence of any qualifying word that clearly limited Fortune Care's liability to costs
that are applicable in the Philippines, the amount payable by Fortune Care should not be limited
to the cost of treatment in the Philippines, as to do so would result in the clear disadvantage of
its member. If, as Fortune Care argued, the premium and other charges in the Health Care