INSURANCE LAW - Digest 1 - General Concepts

INSURANCE LAW_digest 1_General Concepts
PHILIPPINE HEALTH CARE PROVIDERS, INC.v.COMMISSIONER OF INTERNAL REVENUE

G.R. No. 167330 September 18, 2009
FACTS: 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(HMO) 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.
The respondent CIR sent petitioner a formal demand letter and the corresponding assessment notices demanding the
payment of deficiency taxes for the taxable years 1996 and 1997 in the total amount of ₱224,702,641.18 for the Documentary
Stamp Tax (DST) imposed on petitioner’s health care agreement with the members of its health care program pursuant to
Section 185 of the 1997 Tax Code.
Petitioner protested the assessment. As respondent did not act on the protest, petitioner filed a petition for review in
the CTA seeking the cancellation of the deficiency VAT and DST assessments. The CTA rendered a decision ordering petitioner to
pay the deficiency VATwhile CIR is ordered to desist from collecting the said DST deficiency tax. The CIR appealed to the CAas
regardscancellation of the DST assessment. CIR claimed that petitioner’s health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.
CA granted the petition for review.In our decision dated June 12, 2008, we 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.We also
ruled that petitioner’s contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts.
Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges
for the transaction of the business.
Hence, this motion for consideration.
ISSUE: Whether or not the petitioner is an HMO engaged in the business of insurance making it liable to DST on its health care
agreement. (No)
HELD: We find merit in petitioner’s motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission. 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

From the language of Section 185of NIRC, 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
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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 principalobject 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
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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.
x xx x xx x xx
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
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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,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.
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997
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.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.
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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.
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 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED and SET ASIDE
RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellantvs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
G.R. No. L-15895 November 29, 1920
FACTS:This is an action brought by the plaintiff as administrator of the estate of the late Joaquin Ma. Herrerto recover from the
defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life annuity. The trial court gave judgment
for the defendant. Plaintiff appeals.
On September 24, 1917, Joaquin Herrer made application to the Sun Life Assurance Company of Canada through its
office in Manila for a life annuity. Two days later he paid the sum of P6,000 to the manager of the company's Manila office and
was given a receipt.
The application was immediately forwarded to the head office of the company at Montreal, Canada. On November 26,
1917, the head office gave notice of acceptance by cable to Manila. (Whether on the same day the cable was received notice
was sent by the Manila office of Herrer that the application had been accepted, is a disputed point, which will be discussed
later.) On December 4, 1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the
Manila office of the company stating that Herrer desired to withdraw his application. The following day the local office replied
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to Mr. Torres, stating that the policy had been issued, and called attention to the notification of November 26, 1917. This letter
was received by Mr. Torres on the morning of December 21, 1917. Mr. Herrerdied on December 20, 1917.
ISSUE:
1. Whether the contract for life annuity has been perfected thus entitling the plaintiff of the refund of amount paid. (No)
2. What law should apply on the facts of the case. (1262 of the Civil Code)
HELD:
1. The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial testified that he
prepared the letter datedNovember 26, 1917, andhanded it to the local managerfor signature. The witness admitted on
cross-examination that after preparing the letter and giving it to the manager, he new nothing of what became of it. The
local manager, Mr. White, testified to having received the cablegram accepting the application of Mr. Herrer from the
home office on November 26, 1917. He said that on the same day he signed a letter notifying Mr. Herrer of this
acceptance. The witness further said that letters, after being signed, were sent to the chief clerk and placed on the mailing
desk for transmission. The witness could not tell if the letter had every actually been placed in the mails. Mr. Tuason, who
was the chief clerk, on November 26, 1917, was not called as a witness. For the defense, attorney Manuel Torres testified to
having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrermentioned his application for a life
annuity, and that he said that the only document relating to the transaction in his possession was the provisional receipt.
Rafael Enriquez, the administrator of the estate, testified that he had gone through the effects of the deceased and had
found no letter of notification from the insurance company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr. Herrer that
his application had been accepted, was prepared and signed in the local office of the insurance company, was placed in the
ordinary channels for transmission, but as far as we know, was never actually mailed and thus was never received by the
applicant.
2. Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code of Commerce
and the Civil Code.After July 1, 1915, there was, however, in force the Insurance Act. No. 2427. Chapter IV of this Act
concerns life and health insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of Book III of the
code of Commerce. The law of insurance is consequently now found in the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be followed in order that
there may be a contract of insurance. On the other hand, the Civil Code, in article 1802, not only describes a contact of life
annuity markedly similar to the one we are considering, but in two other articles, gives strong clues as to the proper disposition
of the case. For instance, article 16 of the Civil Code provides that "In matters which are governed by special laws, any deficiency
of the latter shall be supplied by the provisions of this Code." On the supposition, therefore, which is incontestable, that the
special law on the subject of insurance is deficient in enunciating the principles governing acceptance, the subject-matter of
the Civil code, if there be any, would be controlling. In the Civil Code is found article 1262 providing that "Consent is shown by
the concurrence of offer and acceptance with respect to the thing and the consideration which are to constitute the contract. An
acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge. The
contract, in such case, is presumed to have been entered into at the place where the offer was made." This latter article is in
opposition to the provisions of article 54 of the Code of Commerce.
The legislature in its wisdom having enacted a new law on insurance, and expressly repealed the provisions in the Code of
Commerce on the same subject, and having thus left a void in the commercial law, it would seem logical to make use of the only
pertinent provision of law found in the Civil code, closely related to the chapter concerning life annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from the date it came to
his knowledge, may not be the best expression of modern commercial usage. Still it must be admitted that its enforcement
avoids uncertainty and tends to security. Not only this, but in order that the principle may not be taken too lightly, let it be
noticed that it is identical with the principles announced by a considerable number of respectable courts in the United States.
The courts who take this view have expressly held that an acceptance of an offer of insurance not actually or constructively
communicated to the proposer does not make a contract. Only the mailing of acceptance, it has been said, completes the
contract of insurance, as the locus poenitentiae is ended when the acceptance has passed beyond the control of the party.
In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262 of the Civil Code
providing that an acceptance made by letter shall not bind the person making the offer except from the time it came to his
knowledge. The pertinent fact is, that according to the provisional receipt, three things had to be accomplished by the
insurance company before there was a contract: (1) There had to be a medical examination of the applicant; (2) there had to be
approval of the application by the head office of the company; and (3) this approval had in some way to be communicated by
the company to the applicant. The further admitted facts are that the head office in Montreal did accept the application, did
cable the Manila office to that effect, did actually issue the policy and did, through its agent in Manila, actually write the letter of
notification and place it in the usual channels for transmission to the addressee. The fact as to the letter of notification thus
fails to concur with the essential elements of the general rule pertaining to the mailing and delivery of mail matter as
announced by the American courts, namely, when a letter or other mail matter is addressed and mailed with postage prepaid
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there is a rebuttable presumption of fact that it was received by the addressee as soon as it could have been transmitted to him
in the ordinary course of the mails. But if any one of these elemental facts fails to appear, it is fatal to the presumption. For
instance, a letter will not be presumed to have been received by the addressee unless it is shown that it was deposited in the
post-office, properly addressed and stamped.
We hold that the contract for a life annuity in the case at bar was not perfected because it has not been proved
satisfactorily that the acceptance of the application ever came to the knowledge of the applicant.
Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000.
FIELDMEN'S INSURANCE CO., INC. v. MERCEDES VARGAS VDA. DE SONGCO, ET AL. and CA
G.R. No. L-24833 September 23, 1968
FACTS: Federico Songco of Floridablanca, Pampanga, a man of scant education being only a first grader ..., owned a private
jeepney. As such private vehicle owner, he was induced by Fieldmen's Insurance Company Pampanga agent Benjamin Sambat
to apply for a Common Carrier's Liability Insurance Policy covering his motor vehicle ... Upon paying an annual premium of
P16.50, defendant Fieldmen's Insurance Company, Inc. issued, Common Carriers Accident Insurance PolicY the duration of
which will be for one (1) year, effective September 15, 1960 to September 15, 1961. The defendant company, renewed the
policy by extending the coverage from October 15, 1961 to October 15, 1962. On October 29, 1961, during the effectivity of the
renewed policy, the insured vehicle while being driven by Rodolfo Songco, a duly licensed driver and son of Federico (the vehicle
owner) collided with a car in the municipality of Calumpit, province of Bulacan, as a result of which mishap Federico Songco
(father) and Rodolfo Songco (son) died, Carlos Songco (another son), the latter's wife, Angelita Songco, and a family friend by
the name of Jose Manuel sustained physical injuries of varying degree."
It was further shown according to the decision of respondent Court of Appeals: "Amor Songco, 42-year-old son of
deceased Federico Songco, testifying as witness, declared that when insurance agent Benjamin Sambat was inducing his father
to insure his vehicle, he butted in saying: 'That cannot be, Mr. Sambat, because our vehicle is an "owner" private vehicle and
not for passengers,' to which agent Sambat replied: 'whether our vehicle was an "owner" type or for passengers it could be
insured because their company is not owned by the Government and the Government has nothing to do with their company. So
they could do what they please whenever they believe a vehicle is insurable'.
The plaintiffs were the surviving widow and children of the deceased Federico Songco as well as the injured passenger
Jose Manuel. On the above facts they prevailed, as had been mentioned, in the lower court and in the respondent CA.
The basis for the favorable judgment is the doctrine announced in Qua Chee Gan v. Law Union and Rock Insurance Co.,
Ltd., with Justice J. B. L. Reyes speaking for the Court. It is now beyond question that where inequitable conduct is shown by an
insurance firm, it is "estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured."
ISSUE: Whether or not the plaintiff can claim the insurance proceeds despite the fact the vehicle concerned was an owner and
not a common carrier. (Yes)
HELD: An insurance firm, petitioner Fieldmen's Insurance Co., Inc., was not allowed to escape liability under a common carrier
insurance policy on the pretext that what was insured, not once but twice, was a private vehicle and not a common carrier, the
policy being issued upon the insistence of its agent who discounted fears of the insured that his privately owned vehicle might
not fall within its terms, the insured moreover being "a man of scant education," finishing only the first grade. So it was held in a
decision of the lower court thereafter affirmed by respondent Court of Appeals. Petitioner in seeking the review of the above
decision of respondent Court of Appeals cannot be so sanguine as to entertain the belief that a different outcome could be
expected. To be more explicit, we sustain the Court of Appeals.
This is a case where the doctrine of estoppel undeniably calls for application. After petitioner Fieldmen's Insurance
Co., Inc. had led the insured Federico Songco to believe that he could qualify under the common carrier liability insurance policy,
and to enter into contract of insurance paying the premiums due, it could not, thereafter, in any litigation arising out of such
representation, be permitted to change its stand to the detriment of the heirs of the insured. As estoppel is primarily based on
the doctrine of good faith and the avoidance of harm that will befall the innocent party due to its injurious reliance, the failure
to apply it in this case would result in a gross travesty of justice.
Nor is there any merit to the second alleged error of respondent Court that no legal liability was incurred under the
policy by petitioner. Why liability under the terms of the policy 5 was inescapable was set forth in the decision of respondent
Court of Appeals. Thus: "Since some of the conditions contained in the policy issued by the defendant-appellant were
impossible to comply with under the existing conditions at the time and 'inconsistent with the known facts,' the insurer 'is
estopped from asserting breach of such conditions.' From this jurisprudence, we find no valid reason to deviate and
consequently hold that the decision appealed from should be affirmed. The injured parties, to wit, Carlos Songco, Angelito
Songco and Jose Manuel, for whose hospital and medical expenses the defendant company was being made liable, were
passengers of the jeepney at the time of the occurrence, and Rodolfo Songco, for whose burial expenses the defendant
7
company was also being made liable was the driver of the vehicle in question. Except for the fact, that they were not fare paying
passengers, their status as beneficiaries under the policy is recognized therein." 6
Even if it be assumed that there was an ambiguity, ambiguities or obscurities must be strictly interpreted against the
party that caused them. "This rigid application of the rule on ambiguities has become necessary in view of current business
practices. The courts cannot ignore that nowadays monopolies, cartels and concentration of capital, endowed with
overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared 'agreements' that the
weaker party may not change one whit, his participation in the 'agreement' being reduced to the alternative to 'take it or leave
it' labelled since Raymond Saleilles 'contracts by adherence' (contrats d'adhesion), in contrast to those entered into by parties
bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are prime
examples) obviously call for greater strictness and vigilance on the part of courts of justice with a view to protecting the weaker
party from abuses and imposition, and prevent their becoming traps for the unwary.
To borrow once again from the language of the Qua Chee Gan opinion: "The contract of insurance is one of perfect
good faith (uberima fides) not for the insured alone, but equally so for the insurer; in fact, it is more so for the latter, since its
dominant bargaining position carries with it stricter responsibility." 9
WHEREFORE, the decision of respondent Court of Appeals is affirmed in its entirety.
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES v. HON. ARMANDO ANSALDO, in his capacity
as Insurance Commissioner, and RAMON MONTILLA PATERNO, JR.
G.R. No. 76452 July 26, 1994
FACTS: The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr. to respondent
Commissioner, alleging certain problems encountered by agents, supervisors, managers and public consumers of the Philippine
American Life Insurance Company (Philamlife) as a result of certain practices by said company.
Respondent Commissioner requested petitioner Rodrigo de los Reyes, in his capacity as Philamlife's president, to
comment on respondent Paterno's letter. Petitioner De los Reyes suggested that private respondent "submit some sort of a
'bill of particulars' listing and citing actual cases, facts, dates, figures, provisions of law, rules and regulations, and all other
pertinent data which are necessary to enable him to prepare an intelligent reply". Private respondent maintained that his letter-
complaint was sufficient in form and substance, and requested that a hearing thereon be conducted.
A hearing on the letter-complaint was held by respondent Commissioner on the validity of the Contract of Agency
complained of by private respondent. In said hearing, private respondent was required by respondent Commissioner to specify
the provisions of the agency contract which he claimed to be illegal.
Private respondent submitted a letter of specification to respondent Commissioner praying that the provisions on
charges and fees stated in the Contract of Agency executed between Philamlife and its agents, as well as the implementing
provisions as published in the agents' handbook, agency bulletins and circulars, be declared as null and void. He also asked that
the amounts of such charges and fees already deducted and collected by Philamlife in connection therewith be reimbursed to
the agents, with interest at the prevailing rate reckoned from the date when they were deducted.
Philamlife's Senior Assistant Vice-President and Executive Assistant to the President, asked that respondent
Commission first rule on the questions of the jurisdiction of the Insurance Commissioner over the subject matter of the letters-
complaint and the legal standing of private respondent.
Respondent Commissioner notified both parties of the hearing of the case. Petitioner filed a Motion to Quash
Subpoena/Notice on the following grounds: (1) The Subpoena/Notice has no legal basis and is premature; and (2) The Insurance
Commission has no jurisdiction over the subject matter or nature of the action and the parties involved.
Respondent Commissioner denied the Motion to Quash. Hence, this petition.
ISSUE: Whether or not the resolution of the legality of the Contract of Agency falls within the jurisdiction of the Insurance
Commissioner. (No)
HELD: The Solicitor General, upholding the jurisdiction of the Insurance Commissioner, claims that under Sections 414 and 415
of the Insurance Code, the Commissioner has authority to nullify the alleged illegal provisions of the Contract of Agency.
The general regulatory authority of the Insurance Commissioner is described in Section 414 of the Insurance Code:
The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance companies
and other insurance matters, mutual benefit associations and trusts for charitable uses are faithfully executed
and to perform the duties imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in this Code, the Insurance Commissioner is
hereby authorized, at his discretion, to impose upon insurance companies, their directors and/or officers
and/or agents, for any willful failure or refusal to comply with, or violation of any provision of this Code, or any
order, instruction, regulation or ruling of the Insurance Commissioner, or any commission of irregularities,
8
and/or conducting business in an unsafe and unsound manner as may be determined by the the Insurance
Commissioner, the following:
(a) fines not in excess of five hundred pesos a day; and
(b) suspension, or after due hearing, removal of directors and/or officers and/or agents.
A plain reading of the above-quoted provisions show that the Insurance Commissioner has the authority to regulate
the business of insurance, which is defined as follows:
(2) The term "doing an insurance business" or "transacting an insurance business," within the meaning of this
Code, shall include:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the
doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code. (Insurance Code, Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not included within the meaning of an
insurance business, Section 2 of the Insurance Code cannot be invoked to give jurisdiction over the same to the Insurance
Commissioner. Expressio unius est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the Insurance Commissioner under
Section 416 of the Insurance Code applies in his case, we likewise rule in the negative. Section 416 of the Code in pertinent part,
provides:
The Commissioner shall have the power to adjudicate claims and complaints involving any loss, damage or
liability for which an insurer may be answerable under any kind of policy or contract of insurance, or for which
such insurer may be liable under a contract of suretyship, or for which a reinsurer may be used under any
contract or reinsurance it may have entered into, or for which a mutual benefit association may be held liable
under the membership certificates it has issued to its members, where the amount of any such loss, damage or
liability, excluding interest, costs and attorney's fees, being claimed or sued upon any kind of insurance, bond,
reinsurance contract, or membership certificate does not exceed in any single claim one hundred thousand
pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance Commissioner is limited by law "to
claims and complaints involving any loss, damage or liability for which an insurer may be answerable under any kind of policy or
contract of insurance, . . ." Hence, this power does not cover the relationship affecting the insurance company and its agents
but is limited to adjudicating claims and complaints filed by the insured against the insurance company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the Insurance Code, the
provisions of said Chapter speak only of the licensing requirements and limitations imposed on insurance agents and brokers.
The Insurance Code does not have provisions governing the relations between insurance companies and their agents. It
follows that the Insurance Commissioner cannot, in the exercise of its quasi-judicial powers, assume jurisdiction over
controversies between the insurance companies and their agents.
We have held in cases that an insurance company may have two classes of agents who sell its insurance policies: (1)
salaried employees who keep definite hours and work under the control and supervision of the company; and (2) registered
representatives, who work on commission basis.
Under the first category, the relationship between the insurance company and its agents is governed by the Contract of
Employment and the provisions of the Labor Code, while under the second category, the same is governed by the Contract of
Agency and the provisions of the Civil Code on the Agency. Disputes involving the latter are cognizable by the regular courts.
WHEREFORE, the petition is GRANTED. The Order of the Insurance Commission is SET ASIDE.
AMERICAN HOME ASSURANCE COMPANY v. TANTUCO ENTERPRISES, INC.

FACTS: Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining industry. It owns two oil
mills. Both are located at its factory compound at Iyam, Lucena City. It appears that respondent commenced its business
operations with only one oil mill. In 1988, it started operating its second oil mill. The latter came to be commonly referred to as
the new oil mill.
9
The two oil mills were separately covered by fire insurance policies issued by petitioner American Home Assurance Co.,
Philippine Branch.] The first oil mill was insured for P3,000,000.00 under Policy No. 306-7432324-3 for the period March 1, 1991
to 1992.[2] The new oil mill was insured for P6,000,000.00 under Policy No. 306-7432321-9 for the same term.
A fire that broke out in the early morning of September 30,1991 gutted and consumed the new oil mill. Respondent
immediately notified the petitioner of the incident. The latter then sent its appraisers who inspected the burned premises and
the properties destroyed. Thereafter, petitioner rejected respondents claim for the insurance proceeds on the ground that no
policy was issued by it covering the burned oil mill. It stated that the description of the insured establishment referred to
another Building No. 5, whilst the affected oil mill was under Building No. 14.
A complaint for specific performance and damages was consequently instituted by the respondent with the RTC which
rendered a Decision finding the petitioner liable on the insurance policy. On appeal, the CA upheld the same decision.
ISSUE: Whether or not the petitioner insurer is liable on the insurance policy. (Yes)
HELD: The petition is devoid of merit.
Petitioner argues that respondent is barred by the parole evidence rule from presenting evidence (other than the policy in
question) of its self-serving intention (sic) that it intended really to insure the burned oil mill, just as it is barred by estoppel from
claiming that the description of the insured oil mill in the policy was wrong, because it retained the policy without having the
same corrected before the fire by an endorsement in accordance with its Condition No. 28.
These contentions can not pass judicial muster.
In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect
to the insurance. In view of the custom of insurance agents to examine buildings before writing policies upon them, and since a
mistake as to the identity and character of the building is extremely unlikely, the courts are inclined to consider that the policy
of insurance covers any building which the parties manifestly intended to insure, however inaccurate the description may be.
Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind, that what the parties
manifestly intended to insure was the new oil mill. This is obvious from the categorical statement embodied in the policy,
extending its protection:
On machineries and equipment with complete accessories usual to a coconut oil mill including stocks of copra,
copra cake and copra mills whilst contained in the new oil mill building, situate (sic) at UNNO. ALONG
NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY UNBLOCKED.[13] (emphasis supplied.)
If the parties really intended to protect the first oil mill, then there is no need to specify it as new.
Indeed, it would be absurd to assume that respondent would protect its first oil mill for different amounts and leave
uncovered its second one. As mentioned earlier, the first oil mill is already covered under Policy No. 306-7432324-4 issued by
the petitioner. It is unthinkable for respondent to obtain the other policy from the very same company. The latter ought to
know that a second agreement over that same realty results in its overinsurance.
The imperfection in the description of the insured oil mills boundaries can be attributed to a misunderstanding between
the petitioners general agent, Mr. Alfredo Borja, and its policy issuing clerk, who made the error of copying the boundaries of
the first oil mill when typing the policy to be issued for the new one. It is thus clear that the source of the discrepancy
happened during the preparation of the written contract.
These facts lead us to hold that the present case falls within one of the recognized exceptions to the parole evidence
rule. Under the Rules of Court, a party may present evidence to modify, explain or add to the terms of the written agreement if
he puts in issue in his pleading, among others, its failure to express the true intent and agreement of the parties
thereto.[15] Here, the contractual intention of the parties cannot be understood from a mere reading of the instrument. Thus,
while the contract explicitly stipulated that it was for the insurance of the new oil mill, the boundary description written on the
policy concededly pertains to the first oil mill. This irreconcilable difference can only be clarified by admitting
evidence aliunde, which will explain the imperfection and clarify the intent of the parties.
Anent petitioners argument that the respondent is barred by estoppel from claiming that the description of the insured oil
mill in the policy was wrong, we find that the same proceeds from a wrong assumption. Evidence on record reveals that
respondents operating manager, Mr. Edison Tantuco, notified Mr. Borja (the petitioners agent with whom respondent
negotiated for the contract) about the inaccurate description in the policy. However, Mr. Borja assured Mr. Tantuco that the use
of the adjective new will distinguish the insured property. The assurance convinced respondent that, despite the impreciseness
in the specification of the boundaries, the insurance will cover the new oil mill.
We again stress that the object of the court in construing a contract is to ascertain the intent of the parties to the contract
and to enforce the agreement which the parties have entered into. In determining what the parties intended, the courts will
read and construe the policy as a whole and if possible, give effect to all the parts of the contract, keeping in mind always,
however, the prime rule that in the event of doubt, this doubt is to be resolved against the insurer. In determining the intent of
the parties to the contract, the courts will consider the purpose and object of the contract.[17]
In a further attempt to avoid liability, petitioner claims that respondent forfeited the renewal policy for its failure to pay
the full amount of the premium and breach of the Fire Extinguishing Appliances Warranty. Petitioner argues that the warranty
10
clearly obligates the insured to maintain all the appliances specified therein. The breach occurred when the respondent failed to
install internal fire hydrants inside the burned building as warranted.
Again, the argument lacks merit. We agree with the appellate courts conclusion that the aforementioned warranty did not
require respondent to provide for all the fire extinguishing appliances enumerated therein. Additionally, we find that neither did
it require that the appliances are restricted to those mentioned in the warranty. In other words, what the warranty mandates is
that respondent should maintain in efficient working condition within the premises of the insured property, fire fighting
equipments such as, but not limited to, those identified in the list, which will serve as the oil mills first line of defense in case any
part of it bursts into flame.
To be sure, respondent was able to comply with the warranty. Within the vicinity of the new oil mill can be found the
following devices: numerous portable fire extinguishers, two fire hoses, [21] fire hydrant,[22] and an emergency fire engine.[23] All
of these equipments were in efficient working order when the fire occurred.
It ought to be remembered that not only are warranties strictly construed against the insurer, but they should, likewise, by
themselves be reasonably interpreted.[24] That reasonableness is to be ascertained in light of the factual conditions prevailing in
each case. Here, we find that there is no more need for an internal hydrant considering that inside the burned building were:
(1) numerous portable fire extinguishers, (2) an emergency fire engine, and (3) a fire hose which has a connection to one of the
external hydrants.
IN VIEW WHEREOF the instant petition is hereby DISMISSED.
VIRGINIA A. PEREZ v. CA and BF LIFEMAN INSURANCE CORPORATION

G.R. No. 112329. January 28, 2000
FACTS: Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980 for P20,000.00. An agent of
the insurance corporation, Rodolfo Lalog, visited Perez in Guinayangan, Quezon and convinced him to apply for additional
insurance coverage of P50,000.00, to avail of the ongoing promotional discount of P400.00 if the premium were paid annually.
On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional insurance coverage
of P50,000.00. On the same day, petitioner Virginia A. Perez, Primitivos wife, paid P2,075.00 to Lalog. The receipt issued by Lalog
indicated the amount received was a "deposit."[1] Unfortunately, Lalog lost the application form accomplished by Perez and so
on October 28, 1987, he asked the latter to fill up another application form.[2] On November 1, 1987, Perez was made to
undergo the required medical examination, which he passed.[3]
Pursuant to the established procedure of the company, Lalog forwarded the application for additional insurance of
Perez, together with all its supporting papers, to the office of BF Lifeman Insurance Corporation at Gumaca, Quezon which office
was supposed to forward the papers to the Manila office.
On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during a storm. At the time
of his death, his application papers for the additional insurance of P50,000.00 were still with the Gumaca office. Lalog testified
that when he went to follow up the papers, he found them still in the Gumaca office and so he personally brought the papers to
the Manila office of BF Lifeman Insurance Corporation. It was only on November 27, 1987 that said papers were received in
Manila.
Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation approved the application
and issued the corresponding policy for the P50,000.00 on December 2, 1987.
Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the deceased. She was
paid P40,000.00 under the first insurance policy for P20,000.00 (double indemnity in case of accident) but the insurance
company refused to pay the claim under the additional policy coverage of P50,000.00, the proceeds of which amount
to P150,000.00 in view of a triple indemnity rider on the insurance policy. The insurance company maintained that the
insurance for P50,000.00 had not been perfected at the time of the death of Primitivo Perez. Consequently, the insurance
company refunded the amount of P2,075.00 which Virginia Perez had paid.
On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint against Virginia A.
Perez seeking the rescission and declaration of nullity of the insurance contract in question. Petitioner on the other hand, filed
a counterclaim against private respondent for the collection of P150,000.00 as actual damages, P100,000.00 as exemplary
damages, P30,000.00 as attorneys fees and P10,000.00 as expenses for litigation.
The trial court rendered a decision in favor of petitioner. The Court of Appeals, however, reversed the decision of the
trial court saying that the insurance contract for P50,000.00 could not have been perfected since at the time that the policy was
issued, Primitivo was already dead.
ISSUE: Whether or not there was a consummated contract of insurance between the deceased and BF Lifeman Insurance
Corporation which would make the latter liable for insurance policy. (No)
HELD: The petition is bereft of merit.
11
Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss
on a specified subject by specified perils.[7] A contract, on the other hand, is a meeting of the minds between two persons
whereby one binds himself, with respect to the other to give something or to render some service. [8] Under Article 1318 of the
Civil Code, there is no contract unless the following requisites concur:
(1).......Consent of the contracting parties;
(2).......Object certain which is the subject matter of the contract;
(3).......Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical examination,
his application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The perfection of the
contract of insurance between the deceased and respondent corporation was further conditioned upon compliance with the
following requisites stated in the application form:
"there shall be no contract of insurance unless and until a policy is issued on this application and that the said
policy shall not take effect until the premium has been paid and the policy delivered to and accepted by me/us
in person while I/We, am/are in good health.”
The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely received
the application form and all the requisite supporting papers of the applicant. Its assent was given when it issues a corresponding
policy to the applicant. Under the abovementioned provision, it is only when the applicant pays the premium and receives and
accepts the policy while he is in good health that the contract of insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers for additional
insurance coverage were still with the branch office of respondent corporation in Gumaca and it was only two days later, or on
November 27, 1987, when Lalog personally delivered the application papers to the head office in Manila. Consequently, there
was absolutely no way the acceptance of the application could have been communicated to the applicant for the latter to
accept inasmuch as the applicant at the time was already dead. In the case of Enriquez vs. Sun Life Assurance Co. of
Canada,[10] recovery on the life insurance of the deceased was disallowed on the ground that the contract for annuity was not
perfected since it had not been proved satisfactorily that the acceptance of the application ever reached the knowledge of the
applicant.
Petitioner insists that the condition imposed by respondent corporation that a policy must have been delivered to and
accepted by the proposed insured in good health is potestative being dependent upon the will of the corporation and is
therefore null and void.
We do not agree.
A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is considered void.
Article 1182 of the New Civil Code states: When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void.
The condition imposed by the corporation that the policy must have been delivered to and accepted by the applicant
while he is in good health can hardly be considered as a potestative or facultative condition. On the contrary, the health of the
applicant at the time of the delivery of the policy is beyond the control or will of the insurance company. Rather, the condition is
a suspensive one whereby the acquisition of rights depends upon the happening of an event which constitutes the condition. In
this case, the suspensive condition was the policy must have been delivered and accepted by the applicant while he is in good
health. There was non-fulfillment of the condition, however, inasmuch as the applicant was already dead at the time the policy
was issued. Hence, the non-fulfillment of the condition resulted in the non-perfection of the contract.
As stated above, a contract of insurance, like other contracts, must be assented to by both parties either in person or
by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal
to make a contract. The contract, to be binding from the date of application, must have been a completed contract, one that
leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties have met in agreement.[11]
Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It should be noted
that an application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on
the application does not constitute acceptance even though the insured has forwarded his first premium with his application.
The corporation may not be penalized for the delay in the processing of the application papers. Moreover, while it may have
taken some time for the application papers to reach the main office, in the case at bar, the same was acted upon less than a
week after it was received. The processing of applications by respondent corporation normally takes two to three weeks, the
longest being a month.[12] In this case, however, the requisite medical examination was undergone by the deceased on
November 1, 1987; the application papers were forwarded to the head office on November 27, 1987; and the policy was issued
on December 2, 1987. Under these circumstances, we hold that the delay could not be deemed unreasonable so as to
constitute gross negligence.
12
A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy 056300 for P50,000.00
null and void and rescinded. True, rescission presupposes the existence of a valid contract. A contract which is null and void is no
contract at all and hence could not be the subject of rescission.
WHEREFORE, the decision rendered by the CA is AFFIRMED insofar as it declared Insurance Policy No. 056300
for P50,000.00 issued by BF Lifeman Insurance Corporation of no force and effect and hence null and void.
MITSUBISHI MOTORS PHILIPPINES SALARIED EMPLOYEES UNION (MMPSEU) v.MITSUBISHI MOTORS PHILIPPINES
CORPORATION
G.R. NO. 175773, June 17, 2013
FACTS: The parties’ CBA provides for the hospitalization insurance benefits for the covered dependents, thus:
SECTION 4. DEPENDENTS’ GROUP HOSPITALIZATION INSURANCE – The COMPANY shall obtain group
hospitalization insurance coverage or assume under a self-insurance basis hospitalization for the dependents
of regular employees up to a maximum amount of forty thousand pesos (P40,000.00) per confinement subject
to the following:
a. The room and board must not exceed three hundred pesos (P300.00) per day up to a maximum
of thirty-one (31) days. Similarly, Doctor’s Call fees must not exceed three hundred pesos
(P300.00) per day for a maximum of thirty-one (31) days. Any excess of this amount shall be
borne by the employee.
b. Confinement must be in a hospital designated by the COMPANY. For this purpose, the COMPANY
shall designate hospitals in different convenient places to be availed of by the dependents of
employees. In cases of emergency where the dependent is confined without the
recommendation of the company doctor or in a hospital not designated by the COMPANY, the
COMPANY shall look into the circumstances of such confinement and arrange for the payment of
the amount to the extent of the hospitalization benefit.
c. The limitations and restrictions listed in Annex "B" must be observed.
d. Payment shall be direct to the hospital and doctor and must be covered by actual billings.
Each employee shall pay one hundred pesos (P100.00) per month through salary deduction as his share in the payment
of the insurance premium for the above coverage with the balance of the premium to be paid by the COMPANYThe
hospitalization expenses must be covered by actual hospital and doctor’s bills and any amount in excess of the above mentioned
level of benefits will be for the account of the employee.
When the CBA expired on July 31, 1999, the parties executed another CBA7 effective August 1, 1999 to July 31, 2002
incorporating the same provisions on dependents’ hospitalization insurance benefits but in the increased amount of
P50,000.00. The room and board expenses, as well as the doctor’s call fees, were also increased to P375.00.
On separate occasions, three members of MMPSEU, namely, Ernesto Calida (Calida), Hermie Juan Oabel (Oabel) and
Jocelyn Martin (Martin), filed claims for reimbursement of hospitalization expenses of their dependents.
MMPC paid only a portion of their hospitalization insurance claims, not the full amount. In the case of Calida, his wife
was confined at Sto. Tomas University Hospital due to Thyroidectomy. The medical expenses incurred totalled P29,967.10. Of
this amount, P9,000.00 representing professional fees was paid by MEDICard Philippines, Inc. (MEDICard).8 MMPC only paid
P12,148.63.9 It did not pay the P9,000.00 already paid by MEDICard and the P6,278.47 not covered by official receipts. It
refused to give to Calida the difference between the amount of medical expenses of P27,427.1010 which he claimed to be
entitled to under the CBA and the P12,148.63 which MMPC directly paid to the hospital.
As regards Oabel’s claim, his wife was confined at The Medical City to Tonsillopharyngitis, incurring medical expenses
totalling P8,489.35.11 Of this amount, P7,811.00 was paid by personal health insurance, Prosper Insurance Company
(Prosper).12 MMPC paid the hospital the amount of P630.87,13 after deducting from the total medical expenses the amount paid
by Prosper and the P47.48 discount given by the hospital.
In the case of Martin, his father, as admitted at The Medical City due to Acid Peptic Disease and incurred medical
expenses amounting to P9,101.30.14 MEDICard paid P8,496.00.15 Consequently, MMPC only paid P288.40,16 after deducting
from the total medical expenses the amount paid by MEDICard and the P316.90 discount given by the hospital.
Claiming that under the CBA, they are entitled to hospital benefits amounting to P27,427.10, P6,769.35 and P8,123.80,
respectively, which should not be reduced by the amounts paid by MEDICard and by Prosper, Calida, Oabel and Martin asked for
reimbursement from MMPC. However, MMPC denied the claims contending that double insurance would result if the said
employees would receive from the company the full amount of hospitalization expenses despite having already received
payment of portions thereof from other health insurance providers.
The MMPSEU referred the dispute to the National Conciliation and Mediation Board and requested for preventive mediation.
13
Proceedings before the Voluntary Arbitrator: The case was referred to Voluntary Arbitrator for resolution of the issue
involving the interpretation of the subject CBA provision. MMPSEU alleged that there is nothing in the CBA which prohibits an
employee from obtaining other insurance or declares that medical expenses can be reimbursed only upon presentation of
original official receipts. It stressed that the hospitalization benefits should be computed based on the formula indicated in the
CBA without deducting the benefits derived from other insurance providers. Besides, if reduction is permitted, MMPC would be
unjustly benefitted from the monthly premium contributed by the employees through salary deduction. MMPSEU added that
its members had legitimate claims under the CBA and that any doubt as to any of its provisions should be resolved in favor of its
members. Moreover, any ambiguity should be resolved in favor of labor.
On the other hand, MMPC argued that the reimbursement of the entire amounts being claimed by the covered
employees, including those already paid by other insurance companies, would constitute double indemnity or double insurance,
which is circumscribed under the Insurance Code. Moreover, a contract of insurance is a contract of indemnity and the
employees cannot be allowed to profit from their dependents’ loss.
When queried by MMPSEU, the Insurance Commission, through Atty. Richard David C. Funk II (Atty. Funk) of the Claims
Adjudication Division, rendered an opinion that in cases of claims for reimbursement of medical expenses where there are two
contracts providing benefits to that effect, recovery may be had on both simultaneously. The result is consistent with the
public policy underlying the collateral source rule – that is, x x x the courts have usually concluded that the liability of a health or
accident insurer is not reduced by other possible sources of indemnification or compensation. (ibid).
The Voluntary Arbitrator rendered a Decision27 finding MMPC liable to pay or reimburse the amount of hospitalization
expenses already paid by other health insurance companies. The Voluntary Arbitrator held that the employees may demand
simultaneous payment from both the CBA and their dependents’ separate health insurance without resulting to double
insurance, since separate premiums were paid for each contract. He also noted that the CBA does not prohibit reimbursement
in case there are other health insurers.
On appeal, CA ruled in favor of MMPC.
ISSUE: Whether or not the covered employees are barred from claiming hospitalization expenses already paid by other insurers.
(Yes)
HELD: The Petition has no merit.

As part of American personal injury law, the collateral source rule was originally applied to tort cases wherein the
defendant is prevented from benefitting from the plaintiff’s receipt of money from other sources. 38 Under this rule, if an injured
person receives compensation for his injuries from a source wholly independent of the tortfeasor, the payment should not be
deducted from the damages which he would otherwise collect from the tortfeasor. 39
In Mitchell v. Haldar,42 the collateral source rule was rationalized by the Supreme Court of Delaware: The collateral
source rule is ‘predicated on the theory that a tortfeasor has no interest in, and therefore no right to benefit from monies
received by the injured person from sources unconnected with the defendant’. According to the collateral source rule, ‘a
tortfeasor has no right to any mitigation of damages because of payments or compensation received by the injured person from
an independent source.’ The rationale for the collateral source rule is based upon the quasi-punitive nature of tort law liability. It
has been explained as follows:
The collateral source rule is designed to strike a balance between two competing principles of tort law: (1) a
plaintiff is entitled to compensation sufficient to make him whole, but no more; and (2) a defendant is liable
for all damages that proximately result from his wrong. A plaintiff who receives a double recovery for a single
tort enjoys a windfall; a defendant who escapes, in whole or in part, liability for his wrong enjoys a windfall.
Because the law must sanction one windfall and deny the other, it favors the victim of the wrong rather than
the wrongdoer. Thus, the tortfeasor is required to bear the cost for the full value of his or her negligent
conduct even if it results in a windfall for the innocent plaintiff. (Citations omitted)
As seen, the collateral source rule applies in order to place the responsibility for losses on the party causing them. 43 Its
application is justified so that "'the wrongdoer should not benefit from the expenditures made by the injured party or take
advantage of contracts or other relations that may exist between the injured party and third persons."44 Thus, it finds no
application to cases involving no-fault insurances under which the insured is indemnified for losses by insurance companies,
regardless of who was at fault in the incident generating the losses. 45 Here, it is clear that MMPC is a no-fault insurer. Hence, it
cannot be obliged to pay the hospitalization expenses of the dependents of its employees which had already been paid by
separate health insurance providers of said dependents.
The Voluntary Arbitrator therefore erred in adopting Atty. Funk’s view that the covered employees are entitled to full
payment of the hospital expenses incurred by their dependents, including the amounts already paid by other health insurance
companies based on the theory of collateral source rule.
14
Further, we agree with the CA that the condition that payment should be direct to the hospital and doctor implies that
MMPC is only liable to pay medical expenses actually shouldered by the employees’ dependents. It follows that MMPC’s
liability is limited, that is, it does not include the amounts paid by other health insurance providers. This condition is obviously
intended to thwart not only fraudulent claims but also double claims for the same loss of the dependents of covered employees.
As there is no ambiguity in CBA, the terms must be taken in their plain, ordinary and popular sense. 47 Consequently,
MMPSEU cannot rely on the rule that a contract of insurance is to be liberally construed in favor of the insured. Neither can it
rely on the theory that any doubt must be resolved in favor of labor.
To allow reimbursement of amounts paid under other insurance policies shall constitute double recovery which is not
sanctioned by law.
MMPSEU insists that MMPC is also liable for the amounts covered under other insurance policies; otherwise, MMPC
will unjustly profit from the premiums the employees contribute through monthly salary deductions.
This contention is unmeritorious.
To constitute unjust enrichment, it must be shown that a party was unjustly enriched in the sense that the term
unjustly could mean illegally or unlawfully.50 A claim for unjust enrichment fails when the person who will benefit has a valid
claim to such benefit.
The CBA has provided for MMPC’s limited liability which extends only up to the amount to be paid to the hospital and
doctor by the employees’ dependents, excluding those paid by other insurers. Consequently, the covered employees will not
receive more than what is due them; neither is MMPC under any obligation to give more than what is due under the CBA.
Moreover, since the subject CBA provision is an insurance contract, the rights and obligations of the parties must be
determined in accordance with the general principles of insurance law. 52 Being in the nature of a non-life insurance contract
and essentially a contract of indemnity, the CBA provision obligates MMPC to indemnify the covered employees’ medical
expenses incurred by their dependents but only up to the extent of the expenses actually incurred. 53 This is consistent with the
principle of indemnity which proscribes the insured from recovering greater than the loss. 54 Indeed, to profit from a loss will
lead to unjust enrichment and therefore should not be countenanced. As aptly ruled by the CA, to grant the claims of MMPSEU
will permit possible abuse by employees.
WHEREFORE, the Petition is DENIED. The Decision of the CA is AFFIRMED.
SWEET LINES, INC. v. HON. BERNARDO TEVES, Presiding Judge, CFI of Misamis Oriental Branch VII et al.
G.R. No. L-37750 May 19, 1978
FACTS: Private respondents Atty. Leovigildo Tandog and Rogelio Tiro, bought tickets at the branch office of petitioner, a
shipping company transporting inter-island passengers and cargoes, at Cagayan de Oro City. Respondents were to board
petitioner's vessel, M/S "Sweet Hope" bound for Tagbilaran City via the port of Cebu. Upon learning that the vessel was not
proceeding to Bohol, since many passengers were bound for Surigao, private respondents per advice, went to the branch office
for proper relocation to M/S "Sweet Town". Because the said vessel was already filled to capacity, they were forced to agree
"to hide at the cargo section to avoid inspection of the officers of the Philippine Coastguard." Private respondents alleged that
they were, during the trip," "exposed to the scorching heat of the sun and the dust coming from the ship's cargo of corn grits,"
and that the tickets they bought at Cagayan de Oro City for Tagbilaran were not honored and they were constrained to pay for
other tickets. In view thereof, private respondents sued petitioner for damages and for breach of contract of carriage before
respondents CFI of Misamis Oriental. 2
Petitioner moved to dismiss the complaint on the ground of improper venue. This motion was premised on the
condition printed at the back of the tickets, i.e., Condition No. 14, which reads:
14. It is hereby agreed and understood that any and all actions arising out of the conditions and provisions of
this ticket, irrespective of where it is issued, shall be filed in the competent courts in the City of Cebu. 3
The motion was denied by the trial court.
ISSUE: Whether or not Condition No. 14 printed at the back of the petitioner's passage tickets purchased by private
respondents, which limits the venue of actions arising from the contract of carriage to the CFI of Cebu, valid and enforceable.
(No)
HELD: There is no question that there was a valid contract of carriage entered into by petitioner and private respondents and
that the passage tickets, upon which the latter based their complaint, are the best evidence thereof. All the essential elements
of a valid contract, i.e., consent, cause or consideration and object, are present. As held in Peralta de Guerrero, et al. v. Madrigal
Shipping Co., Inc., 15
It is a matter of common knowledge that whenever a passenger boards a ship for transportation from one
place to another he is issued a ticket by the shipper which has all the elements of a written contract, Namely:
(1) the consent of the contracting parties manifested by the fact that the passenger boards the ship and the
shipper consents or accepts him in the ship for transportation; (2) cause or consideration which is the fare paid
15
by the passenger as stated in the ticket; (3) object, which is the transportation of the passenger from the place
of departure to the place of destination which are stated in the ticket.
It should be borne in mind, however, that with respect to the fourteen (14) conditions — one of which is "Condition No.
14" which is in issue in this case — printed at the back of the passage tickets, these are commonly known as "contracts of
adhesion," the validity and/or enforceability of which will have to be determined by the peculiar circumstances obtaining in
each case and the nature of the conditions or terms sought to be enforced. For, "(W)hile generally, stipulations in a contract
come about after deliberate drafting by the parties thereto, ... there are certain contracts almost all the provisions of which have
been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only
participation of the party is the signing of his signature or his 'adhesion' thereto. Insurance contracts, bills of lading, contracts of
make of lots on the installment plan fall into this category" 16
By the peculiar circumstances under which contracts of adhesion are entered into — namely, that it is drafted only by
one party, usually the corporation, and is sought to be accepted or adhered to by the other party, in this instance the
passengers, private respondents, who cannot change the same and who are thus made to adhere thereto on the "take it or
leave it" basis — certain guidelines in the determination of their validity and/or enforceability have been formulated in order to
that justice and fan play characterize the relationship of the contracting parties. Thus, this Court speaking through Justice J.B.L.
Reyes in Qua Chee Gan v. Law Union and Rock Insurance Co., 17 and later through Justice Fernando in Fieldman Insurance v.
Vargas, 18 held —
The courts cannot ignore that nowadays, monopolies, cartels and concentration of capital endowed with
overwhelm economic power, manage to impose upon parties d with them y prepared 'agreements' that the
weaker party may not change one whit his participation in the 'agreement' being reduced to the alternative
'to take it or leave it,' labelled since Raymond Saleilles 'contracts by adherence' (contracts d' adhesion) in
contrast to those entered into by parties bargaining on an equal footing. Such contracts (of which policies of
insurance and international bill of lading are prime examples) obviously cap for greater strictness and
vigilance on the part of the courts of justice with a view to protecting the weaker party from abuses and
imposition, and prevent their becoming traps for the unwary.
To the same effect and import, and, in recognition of the character of contracts of this kind, the protection of the
disadvantaged is expressly enjoined by the New Civil Code —
In all contractual property or other relations, when one of the parties is at a disadvantage on account of his
moral dependence, ignorance indigence, mental weakness, tender age and other handicap, the courts must be
vigilant for his
protection.
Considered in the light Of the foregoing norms and in the context Of circumstances Prevailing in the inter-island
shipping industry in the country today, We find and hold that Condition No. 14 printed at the back of the passage tickets
should be held as void and unenforceable for the following reasons first, under circumstances obligation in the inter-island
shipping industry, it is not just and fair to bind passengers to the terms of the conditions printed at the back of the passage
tickets, on which Condition No. 14 is Printed in fine letters, and second, Condition No. 14 subverts the public policy on transfer
of venue of proceedings of this nature, since the same will prejudice rights and interests of innumerable passengers in different
of the country who, under Condition No. 14, will have to file suits against petitioner only in the City of Cebu.
It is hardly just and proper to expect the passengers to examine their tickets received from crowded/congested
counters, more often than not during rush hours, for conditions that may be printed much charge them with having consented
to the conditions, so printed, especially if there are a number of such conditions in fine print, as in this case. 20
Again, it should be noted that Condition No. 14 was prepared solely at the ms of the petitioner, respondents had no say
in its preparation. Neither did the latter have the opportunity to take the into account prior to the purpose chase of their tickets.
For, unlike the small print provisions of contracts — the common example of contracts of adherence — which are entered into
by the insured in his awareness of said conditions, since the insured is afforded the op to and co the same, passengers of inter-
island v do not have the same chance, since their alleged adhesion is presumed only from the fact that they purpose chased the
tickets.
Condition No. 14 is subversive of public policy on transfers of venue of actions. For, although venue may be changed
or transferred from one province to another by agreement of the parties in writing t to Rule 4, Section 3, of the Rules of Court,
such an agreement will not be held valid where it practically negates the action of the claimants, such as the private respondents
herein. The philosophy underlying the provisions on transfer of venue of actions is the convenience of the plaintiffs as well as his
witnesses and to promote 21 the ends of justice. Considering the expense and trouble a passenger residing outside of Cebu City
would incur to prosecute a claim in the City of Cebu, he would most probably decide not to file the action at all. The condition
will thus defeat, instead of enhance, the ends of justice. Upon the other hand, petitioner has branches or offices in the
16
respective ports of call of its vessels and can afford to litigate in any of these places. Hence, the filing of the suit in the CFI of
Misamis Oriental, as was done in the instant case, will not cause inconvenience to, much less prejudice, petitioner.
Public policy is ". . . that principle of the law which holds that no subject or citizen can lawfully do that which has a
tendency to be injurious to the public or against the public good ... 22 Under this principle" ... freedom of contract or private
dealing is restricted by law for the good of the public. 23 Clearly, Condition No. 14, if enforced, will be subversive of the public
good or interest, since it will frustrate in meritorious cases, actions of passenger cants outside of Cebu City, thus placing
petitioner company at a decided advantage over said persons, who may have perfectly legitimate claims against it. The said
condition should, therefore, be declared void and unenforceable, as contrary to public policy — to make the courts accessible
to all who may have need of their services.
WHEREFORE, the petition for prohibition is DISMISSED.
SUN INSURANCE OFFICE, LTD. v. CA and EMILIO TAN

G.R. No. 89741 March 13, 1991
FACTS: Private respondent Emilio Tan took from herein petitioner a P300,000.00 property insurance policy to cover his
interest in the electrical supply store of his brother housed in a building in Iloilo City. Four (4) days after the issuance of the
policy, the building was burned including the insured store. Tan filed his claim for fire loss with petitioner, but on February 29,
1984, petitioner wrote Tan denying the latter's claim. On April 3, 1984, Tan wrote petitioner, seeking reconsideration of the
denial of his claim. On September 3, 1985, Tan's counsel wrote the Insurer inquiring about the status of his April 3, 1984 request
for reconsideration. Petitioner answered the letter on October 11, 1985, advising Tan's counsel that the Insurer's denial of Tan's
claim remained unchanged, enclosing copies of petitioners' letters of February 29, 1984 and May 17, 1985 (response to petition
for reconsideration). On November 20, 1985, Tan filed Civil Case with the RTC of Iloilo, but petitioner filed a motion to dismiss
on the alleged ground that the action had already prescribed. Said motion was denied and petitioner's motion for
reconsideration was also denied.
On appeal, CA denied the petition. Hence, the instant petition.
ISSUE: Whether or not the respondent’s action for insurance claim had already prescribed. (Yes)
HELD: Corrollary, the filing of a motion for reconsideration does not interrupt the 12 month prescriptive period to contest the
denial of the insurance claims.
While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor
of the insured and strictly against the insurer company, yet, contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.
Condition 27 of the Insurance Policy, which is the subject of the conflicting contentions of the parties, reads:
27. Action or suit clause — If a claim be made and rejected and an action or suit be not commenced either in the
Insurance Commission or in any court of competent jurisdiction within twelve (12) months from receipt of notice of
such rejection, or in case of arbitration taking place as provided herein, within twelve (12) months after due notice of
the award made by the arbitrator or arbitrators or umpire, then the claim shall for all purposes be deemed to have
been abandoned and shall not thereafter be recoverable hereunder.
As the terms are very clear and free from any doubt or ambiguity whatsoever, it must be taken and understood in its
plain, ordinary and popular sense pursuant to the above-cited principle laid down by this Court.
Respondent Tan, in his letter addressed to the petitioner insurance company dated April 3, 1984, admitted that he
received a copy of the letter of rejection on April 2, 1984. Thus, the 12-month prescriptive period started to run from the said
date of April 2, 1984, for such is the plain meaning and intention of Section 27 of the insurance policy.
While the question of whether or not the insured was definitely advised of the rejection of his claim through the letter
of petitioner dated February 29, 1984, may arise, the certainty of the denial of Tan's claim was clearly manifested in said letter.
It is also important to note the principle laid down by this Court in the case of Ang v. Fulton Fire Insurance Co., to wit:
The condition contained in an insurance policy that claims must be presented within one year after rejection is not
merely a procedural requirement but an important matter essential to a prompt settlement of claims against
insurance companies as it demands that insurance suits be brought by the insured while the evidence as to the origin
and cause of destruction have not yet disappeared.
In enunciating the above-cited principle, this Court had definitely settled the rationale for the necessity of bringing suits
against the Insurer within one year from the rejection of the claim. The contention of the respondents that the one-year
prescriptive period does not start to run until the petition for reconsideration had been resolved by the insurer, runs counter to
the declared purpose for requiting that an action or suit be filed in the Insurance Commission or in a court of competent
17
jurisdiction from the denial of the claim. To uphold respondents' contention would contradict and defeat the very principle
which this Court had laid down. Moreover, it can easily be used by insured persons as a scheme or device to waste time until
any evidence which may be considered against them is destroyed.
It is apparent that Section 27 of the insurance policy was stipulated pursuant to Section 63 of the Insurance Code,
which states that:
Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time when the cause of action accrues, is void.
The crucial issue in this case is: When does the cause of action accrue?
In support of private respondent's view, two rulings of this Court have been cited, namely, the case of Eagle Star
Insurance Co. vs. Chia Yu, where the Court held:
The right of the insured to the payment of his loss accrues from the happening of the loss. However, the cause of
action in an insurance contract does not accrue until the insured's claim is finally rejected by the insurer. This is
because before such final rejection there is no real necessity for bringing suit.
and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. , holding that:
Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a correlated obligation of
the defendant in violation of the said legal right, the cause of action does not accrue until the party obligated (surety)
refuses, expressly or impliedly, to comply with its duty (in this case to pay the amount of the bond).
Indisputably, the above-cited pronouncements of this Court may be taken to mean that the insured's cause of action or
his right to file a claim either in the Insurance Commission or in a court of competent jurisdiction commences from the time of
the denial of his claim by the Insurer, either expressly or impliedly.
But as pointed out by the petitioner insurance company, the rejection referred to should be construed as the
rejection, in the first instance, for if what is being referred to is a reiterated rejection conveyed in a resolution of a petition for
reconsideration, such should have been expressly stipulated.
Thus, to allow the filing of a motion for reconsideration to suspend the running of the prescriptive period of twelve
months, a whole new body of rules on the matter should be promulgated so as to avoid any conflict that may be brought by it,
such as:
a) whether the mere filing of a plea for reconsideration of a denial is sufficient or must it be supported by
arguments/affidavits/material evidence;
b) how many petitions for reconsideration should be permitted?
While in the Eagle Star case, this Court uses the phrase "final rejection", the same cannot be taken to mean the
rejection of a petition for reconsideration as insisted by respondents. Such was clearly not the meaning contemplated by this
Court. The Insurance policy in said case provides that the insured should file his claim, first, with the carrier and then with the
insurer. The "final rejection" being referred to in said case is the rejection by the insurance company.
PREMISES CONSIDERED, the questioned decision of the Court of Appeals is REVERSED and SET ASIDE.
AGRICULTURAL CREDIT & COOPERATIVE FINANCING ADMINISTRATION (ACCFA) v.

ALPHA INSURANCE & SURETY CO., INC., RICARDO A. LADINES, ET AL.
G.R. No. L-24566 July 29, 1968
FACTS: In order to guarantee the Asingan Farmers' Cooperative Marketing Association, Inc. (FACOMA) against loss on account
of "personal dishonesty, amounting to larceny or estafa of its Secretary-Treasurer, Ricardo A. Ladines, the appellee, Alpha
Insurance & Surety Company had issued its bond, for the sum of P5,000.00 with said Ricardo Ladines as principal and the
appellee as solidary surety. On the same date, the Asingan FACOMA assigned its rights to the appellant, Agricultural Credit
Cooperative and Financing Administration (ACCFA), with approval of the principal and the surety.
During the effectivity of the bond, Ricardo Ladines converted and misappropriated, to his personal benefit, some
P11,513.22 of the FACOMA funds, of which P6,307.33 belonged to the ACCFA. Upon discovery of the loss, ACCFA immediately
notified in writing the survey company on 10 October 1958, and presented the proof of loss within the period fixed in the bond;
but despite repeated demands the surety company refused and failed to pay. Whereupon, ACCFA filed suit against appellee on
30 May 1960.
Alpha Insurance & Surety Co., Inc. moved to dismiss the complaint for failure to state a cause of action, giving as reason
that the same was filed more than one year after plaintiff made claim for loss, contrary to the eighth condition of the bond,
providing as follows: .
EIGHT LIMITATION OF ACTION
No action, suit or proceeding shall be had or maintained upon this Bond unless the same be commenced
within one year from the time of making claim for the loss upon which such action, suit or proceeding, is
based, in accordance with the fourth section hereof.
18
At first, the Court of First Instance denied dismissal; but, upon reconsideration, dismissed the complaint on the ground
that the action was filed beyond the contractual limitation period.
ISSUE: Whether or not the action for fidelity bond shall be dismissed for having been filed for more than one year from the
making of claim for the loss. (No)
HELD: We find the appeal meritorious.

A fidelity bond is, in effect, in the nature of a contract of insurance against loss from misconduct, and is governed by
the same principles of interpretation. Consequently, the condition of the bond in question, limiting the period for bringing
action thereon, is subject to the provisions of Section 61-A of the Insurance Act (No. 2427), as amended by Act 4101 of the pre-
Commonwealth Philippine Legislature, prescribing that —
SEC. 61-A — A condition, stipulation or agreement in any policy of insurance, limiting the time for
commencing an action thereunder to a period of less than one year from the time when the cause of action
accrues is void.
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 (in this case, to pay the amount
of the bond). The year for instituting action in court must be reckoned, therefore, from the time of appellee's refusal to comply
with its bond; it can not be counted from the creditor's filing of the claim of loss, for that does not import that the surety
company will refuse to pay. In so far, therefore, as condition eight of the bond requires action to be filed within one year from
the filing of the claim for loss, such stipulation contradicts the public policy expressed in Section 61-A of the Philippine Insurance
Act. Condition eight of the bond, therefore, is null and void, and the appellant is not bound to comply with its provisions.
In Eagle Star Insurance Co. vs. Chia Yu, 96 Phil. 696, 701, this Court ruled: It may perhaps be suggested that the policy
clause relied on by the insurer for defeating plaintiff's action should be given the construction that would harmonize it with
section 61-A of the Insurance Act by taking it to mean that the time given the insured for bringing his suit is twelve months after
the cause of action accrues. But the question then would be: When did the cause of action accrue? On that question we agree
with the court below that 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. As the policy provides that
the insured should file his claim, first, with the carrier and then with the insurer, he had a right to wait for his claim to be finally
decided before going to court. The law does not encourage unnecessary litigation.
The discouraging of unnecessary litigation must be deemed a rule of public policy, considering the unrelieved
congestion in the courts.
As a consequence of the foregoing, condition eight of the Alpha bond is null and void, and action may be brought
within the statutory period of limitation for written contracts (New Civil Code, Article 1144).
WHEREFORE, the appealed order granting the motion to dismiss is reversed and set aside, and the records are
remanded to the Court of First Instance, with instructions to require defendant to answer and thereafter proceed in conformity
with the law and the Rules of Court.
19

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PHILIPPINE HEALTH CARE PROVIDERS, INC.v.COMMISSIONER OF INTERNAL REVENUE

HELD: We find merit in petitioner’s motion for reconsideration.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

AMERICAN HOME ASSURANCE COMPANY v. TANTUCO ENTERPRISES, INC.

VIRGINIA A. PEREZ v. CA and BF LIFEMAN INSURANCE CORPORATION

HELD: The petition is bereft of merit.

HELD: The Petition has no merit.

SUN INSURANCE OFFICE, LTD. v. CA and EMILIO TAN

AGRICULTURAL CREDIT & COOPERATIVE FINANCING ADMINISTRATION (ACCFA) v.

HELD: We find the appeal meritorious.

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