G.R. No. 154514.

July 28, 2005

WHITE GOLD MARINE SERVICES, INC., Petitioners,

vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL
UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents.

DECISION

QUISUMBING, J.:

This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-G.R.
SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in I.C. Adm.
Case No. RD-277. Both decisions held that there was no violation of the Insurance Code and the
respondents do not need license as insurer and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its
vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship
Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold
was issued a Certificate of Entry and Acceptance.3Pioneer also issued receipts evidencing payments
for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual refused to
renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to
recover the latter’s unpaid balance. White Gold on the other hand, filed a complaint before the
Insurance Commission claiming that Steamship Mutual violated Sections 1864 and 1875 of the
Insurance Code, while Pioneer violated Sections 299,63007 and 3018 in relation to Sections 302 and
303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no need for Steamship
Mutual to secure a license because it was not engaged in the insurance business. It explained that
Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not
obtain another license as insurance agent and/or a broker for Steamship Mutual because Steamship
Mutual was not engaged in the insurance business. Moreover, Pioneer was already licensed, hence,
a separate license solely as agent/broker of Steamship Mutual was already superfluous.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the
appellate court distinguished between P & I Clubs vis-à-vis conventional insurance. The appellate
court also held that Pioneer merely acted as a collection agent of Steamship Mutual.

In this petition, petitioner assigns the following errors allegedly committed by the appellate court,

FIRST ASSIGNMENT OF ERROR

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

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER
AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.9

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the
insurance business in the Philippines? (2) Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a
license to do business in the Philippines although Pioneer is its resident agent. This relationship is
reflected in the certifications issued by the Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To
buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of
Appeals10 as "an association composed of shipowners in general who band together for the specific
purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning
that the members incur in favor of third parties." It stresses that as a P & I Club, Steamship Mutual’s
primary purpose is to solicit and provide protection and indemnity coverage and for this purpose, it
has engaged the services of Pioneer to act as its agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the
insurance business in the Philippines. It is merely an association of vessel owners who have come
together to provide mutual protection against liabilities incidental to shipowning.11 Respondents
aver Hyopsung is inapplicable in this case because the issue in Hyopsung was the jurisdiction of the
court over Hyopsung.

Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or
"transacting an insurance business". These are:

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

(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.

...

The same provision also provides, the fact that no profit is derived from the making of insurance
contracts, agreements or transactions, or that no separate or direct consideration is received
therefor, shall not preclude the existence of an insurance business.12

The test to determine if a contract is an insurance contract or not, depends on the nature of the
promise, the act required to be performed, and the exact nature of the agreement in the light of the
occurrence, contingency, or circumstances under which the performance becomes requisite. It is not
by what it is called.13

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration
to indemnify another against loss, damage or liability arising from an unknown or contingent event.14

In particular, a marine insurance undertakes to indemnify the assured against marine losses, such
as the losses incident to a marine adventure.15 Section 9916 of the Insurance Code enumerates the
coverage of marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the
insurer and insured. In it, the members all contribute, by a system of premiums or assessments, to
the creation of a fund from which all losses and liabilities are paid, and where the profits are divided
among themselves, in proportion to their interest.17 Additionally, mutual insurance associations, or
clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense
costs.18

A P & I Club is "a form of insurance against third party liability, where the third party is anyone
other than the P & I Club and the members."19 By definition then, Steamship Mutual as a P & I Club
is a mutual insurance association engaged in the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the requisite
certificate of authority mandated by Section 18720 of the Insurance Code. It maintains a resident
agent in the Philippines to solicit insurance and to collect payments in its behalf. We note that
Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment of
the calls. Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer,
must secure a license from the Insurance Commission.

Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no
insurer or insurance company is allowed to engage in the insurance business without a license or a
certificate of authority from the Insurance Commission.21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of

registration22 issued by the Insurance Commission. It has been licensed to do or transact insurance
business by virtue of the certificate of authority23 issued by the same agency. However, a
Certification from the Commission states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.24
Although Pioneer is already licensed as an insurance company, it needs a separate license to act as
insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the solicitation or

procurement of applications for insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance company doing business in the Philippines
or any agent thereof, without first procuring a license so to act from the Commissioner, which must
be renewed annually on the first day of January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneer’s certificate of authority and removal of its directors
and officers. Regrettably, we are not the forum for these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the
Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby
REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and
Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses and to secure proper
authorizations to do business as insurer and insurance agent, respectively. The petitioner’s prayer
for the revocation of Pioneer’s Certificate of Authority and removal of its directors and officers, is
DENIED. Costs against respondents.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.

ARTICLE XIII
Social Justice and Human Rights

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

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated
July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers,
Inc.2

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance organization
to take care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of
₱224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax
Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act
on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of
25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and ₱31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully
paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioner’s health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement
was in the nature of a non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.

Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as deficiency

Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and
20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code,
until the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We
held that petitioner’s health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioner’s contention that
it is a health maintenance organization (HMO) and not an insurance company is irrelevant because
contracts between companies like petitioner and the beneficiaries under their plans are treated as
insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental
motion for reconsideration, asserting the following arguments:
 (a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on
a company engaged in the business of fidelity bonds and other insurance policies. Petitioner,
as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect
the CA’s disposition that health care services are not in the nature of an insurance business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not
those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health
insurance is not covered by Section 185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in
Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered
moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda
on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807(also known as the "Tax Amnesty Act of 2007") by fully paying the amount of
₱5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.8

We find merit in petitioner’s motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission
on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals
who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member.10

Individuals enrolled in its health care program pay an annual membership fee. Membership is on a
year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those directly employed
by it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as
room and board accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the
participating physicians and other health care providers for the services rendered, at pre-agreed
rates.14

To avail of petitioner’s health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision of
the health care services. The same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except
for the curative aspect of the medical service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15

Petitioner, however, submits that it is of critical importance to characterize the business it is engaged
in, that is, to determine whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for DST on its health care
agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of
petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business
of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing
the validity or legality of any bond or other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such person, company
or corporation, there shall be collected a documentary stamp tax of fifty centavos (₱0.50) on each
four pesos (₱4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its every
word.18

From the language of Section 185, it is evident that two requisites must concur before the DST can
apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of
indemnity and (2) the maker should be transacting the business of accident, fidelity, employer’s
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"),
an HMO is "an entity that provides, offers or arranges for coverage of designated health services
needed by plan members for a fixed prepaid premium."19 The payments do not vary with the extent,
frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"

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

b) making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized as

constituting the doing of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the foregoing in a

manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.

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

Applying the "principal object and purpose test,"22 there is significant American case law supporting
the argument that a corporation (such as an HMO, whether or not organized for profit), whose main
object is to provide the members of a group with health services, is not engaged in the
insurance business.

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

That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and
other types of legal arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or services on contingency. But obviously it
was not the purpose of the insurance statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf practically all contracts, particularly
conditional sales and contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it. The question turns,
not on whether risk is involved or assumed, but on whether that or something else to which it
is related in the particular plan is its principal object purpose.24 (Emphasis supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan
of operation as a whole of the corporation, it was service rather than indemnity which stood as its
principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to
be applied in determining its status. The question, more broadly, is whether, looking at the
plan of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only undertake
to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained
in the policy.

xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide

physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporation’s plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected would
be provided, but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering itself subject to the
more stringent financial requirements of the General Insurance Laws….

A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in return for
which the health service corporation agrees to make payment directly to the participating
provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made directly to the provider of these
services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of
emergency by non-participating health providers would still be incidental to petitioner’s purpose of
providing and arranging for health care services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is required to set up a system and the
facilities for the delivery of such medical services. This indubitably shows that indemnification is not
its sole object.

In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases.30 As an HMO, it
is its obligation to maintain the good health of its members. Accordingly, its health care programs
are designed to prevent or to minimize thepossibility of any assumption of risk on its
part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to provide the health and medical
services needed to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted
U.S. cases, we are not saying that petitioner’s operations are identical in every respect to those of
the HMOs or health providers which were parties to those cases. What we are stating is that, for the
purpose of determining what "doing an insurance business" means, we have to scrutinize the
operations of the business as a whole and not its mere components. This is of course only prudent
and appropriate, taking into account the burdensome and strict laws, rules and regulations
applicable to insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular HMOs to be
actually engaged in insurance activities.32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident
from the fact that it is not supervised by the Insurance Commission but by the Department of
Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of the commissioner must be
accorded great weight. It is well-settled that the interpretation of an administrative agency which is
tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of
Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and
satisfying those needs; it also relates to the accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a particular statute. In Asturias
Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that executive officials are
presumed to have familiarized themselves with all the considerations pertinent to the meaning and
purpose of the law, and to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed judgment, and
the fact that they frequently are the drafters of the law they interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of
indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that
petitioner’s health care agreements are contracts of indemnity and are therefore insurance contracts:

It is … incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of physicians). The term "loss or damage"
is broad enough to cover the monetary expense or liability a member will incur in case of illness or
injury.

Under the health care agreement, the rendition of hospital, medical and professional services to the
member in case of sickness, injury or emergency or his availment of so-called "out-patient services"
(including physical examination, x-ray and laboratory tests, medical consultations, vaccine
administration and family planning counseling) is the contingent event which gives rise to liability on
the part of the member. In case of exposure of the member to liability, he would be entitled to
indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses
to be incurred by each member cannot be predicted beforehand, if they can be predicted at all.
Petitioner assumes the risk of paying for the costs of the services even if they are significantly and
substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of persons bearing a similar risk, that is, among
all the other members of the health care program. This is insurance.37

We reconsider. We shall quote once again the pertinent portion of Section 185:

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

In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of their
property for the support of the government.39 Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40

We are aware that, in Blue Cross and Philamcare, the

Court pronounced that a health care agreement is in
the nature of non-life insurance, which is primarily a
contract of indemnity. However, those cases did not
involve the interpretation of a tax provision. Instead,
they dealt with the liability of a health service provider
to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion,
are liberally interpreted in favor of the member and
strictly against the HMO. For this reason, we
reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

 2. The insured is subject to a risk of loss by the happening of the designed peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and

5. In consideration of the insurer’s promise, the insured pays a premium.41

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its primary purpose is the rendering of service,
it is not a contract of insurance:

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

Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioner’s physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the member merely avails
of medical services to be paid or already paid in advance at a pre-agreed price under the
agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril, loss
or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from
a non-participating physician or hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health
care contracts called for the defendant to partially reimburse a subscriber for treatment received
from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court
determined that "the primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services."44 Since indemnity of the insured was
not the focal point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always
bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services:
the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured.45

However, assuming that petitioner’s commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not
qualify as an insurance contract because petitioner’s objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is
not an insurance contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health
care agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act
No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a
verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment, or
paper upon which such instrument, matters, or things or any of them shall be written or printed by
any person or persons who shall make, sign, or issue the same, on and after January first, nineteen
hundred and five, the several taxes following:

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employer’s liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116,
Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917,
the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939),
which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40
on October 1, 1946, the DST rate was increased but the provision remained substantially the same.

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

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was
renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to
the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of
1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to
the DST provisions were introduced by RA 924348 but Section 185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early
as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2 million.49

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been
the intent of the legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe
to say that health care agreements were never, at any time, recognized as insurance contracts or
deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is to pay it.51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52

Petitioner claims that the assessed DST to date which amounts to ₱376 million53 is way beyond its
net worth of ₱259 million.54 Respondent never disputed these assertions. Given the realities on the
ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government ought to encourage private
enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable consequence but killing the business of an
entity is another matter and should not be allowed. It is counter-productive and ultimately subversive
of the nation’s thrust towards a better economy which will ultimately benefit the majority of our
people.59

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of
RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under
the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this
case as discussed above, respondent concedes that such tax amnesty extinguishes the tax
liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62 (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for DST
for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty
under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is
bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of
Philamcare Health Systems is not an insurance contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has already become final.67 When a
minute resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.68 But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-
Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and
the same issues, was previously disposed of by the Court thru a minute resolution dated February
17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case
"ha(d) no bearing" on the latter case because the two cases involved different subject matters as
they were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed clearly
and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices, unlike a decision. It does not require the certification
of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.73Indeed,
as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for
DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot
successfully invoke the minute resolution in that case (which is not even binding precedent) in its
favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from
the fact that petitioner’s health care agreements are not subject to DST.

A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185 of
the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the
same should not be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services
at a cost which the average wage earner can afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition
will elevate the cost of health care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent
is ordered to desist from collecting the said tax.

No costs.

SO ORDERED.
G.R. No. 125678 March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage
with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to
the following question:

Have you or any of your family members ever consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give
details).1

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

Upon the termination of the agreement, the same was extended for another year from March 1, 1989
to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased
to a maximum sum of P75,000.00 per disability.2

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila
Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the
hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner
denied her claim saying that the Health Care Agreement was void. According to petitioner, there was
a concealment regarding Ernani’s medical history. Doctors at the MMC allegedly discovered at the
time of Ernani’s confinement that he was hypertensive, diabetic and asthmatic, contrary to his
answer in the application form. Thus, respondent paid the hospitalization expenses herself,
amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home.
Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however,
respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and
was feeling very weak. Respondent was constrained to bring him back to the Chinese General
Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action
for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil
Case No. 90-53795. She asked for reimbursement of her expenses plus moral damages and
attorney’s fees. After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff
Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani
Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who
paid the same;

2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;

4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.

SO ORDERED.3

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for
damages and absolved petitioner Reverente.4 Petitioner’s motion for reconsideration was
denied.5 Hence, petitioner brought the instant petition for review, raising the primary
argument that a health care agreement is not an insurance contract; hence the
"incontestability clause" under the Insurance Code6 does not apply. 1âwphi1.n êt

Petitioner argues that the agreement grants "living benefits," such as medical check-ups and
hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the
agreement until its expiration one-year thereafter. Petitioner also points out that only medical
and hospitalization benefits are given under the agreement without any
indemnification, unlike in an insurance contract where the insured is indemnified for his
loss. Moreover, since Health Care Agreements are only for a period of one year,
as compared to insurance contracts which last longer,7 petitioner argues that the incontestability
clause does not apply, as the same requires an effectivity period of at least two years. Petitioner
that it is not an insurance company, which is
further argues

governed by the Insurance Commission, but a Health

Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;

3. The insurer assumes the risk;

 4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk; and

5. In consideration of the insurer’s promise, the insured pays a premium.8

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or
future, which may damnify a person having an insurable interest against him, may be insured
against. Every person has an insurable interest in the life and health of himself. Section 10 provides:

Every person has an insurable interest in the life and health:

(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in whom
he has a pecuniary interest;

(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

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

Petitioner argues that respondent’s husband concealed a material fact in his application. It appears
that in the application for health coverage, petitioners required respondent’s husband to sign an
express authorization for any person, organization or entity that has any record or knowledge of his
health to furnish any and all information relative to any hospitalization, consultation, treatment or any
other medical advice or examination.10 Specifically, the Health Care Agreement signed by
respondent’s husband states:

We hereby declare and agree that all statement and answers contained herein and in any
addendum annexed to this application are full, complete and true and bind all parties in
interest under the Agreement herein applied for, that there shall be no contract of health care
coverage unless and until an Agreement is issued on this application and the full
Membership Fee according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in
the application; that any physician is, by these presents, expressly authorized to disclose or
give testimony at anytime relative to any information acquired by him in his professional
capacity upon any question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this application shall be a
ratification of any correction in or addition to this application as stated in the space for Home
Office Endorsement.11 (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to
inquire about the applicant’s medical history, thus:
 I hereby authorize any person, organization, or entity that has any record or knowledge of my
health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any and all
information relative to any hospitalization, consultation, treatment or any other medical
advice or examination. This authorization is in connection with the application for health care
coverage only. A photographic copy of this authorization shall be as valid as the
original.12 (Underscoring ours)

Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:

Failure to disclose or misrepresentation of any material information by the member in the

application or medical examination, whether intentional or unintentional, shall automatically
invalidate the Agreement from the very beginning and liability of Philamcare shall be limited
to return of all Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the applicant by
Philamcare or the assessment of a higher Membership Fee for the benefit or benefits applied
for.13

The answer assailed by petitioner was in response to the question relating to the medical history of
the applicant. This largely depends on opinion rather than fact, especially coming from respondent’s
husband who was not a medical doctor. Where matters of opinion or judgment are called for,
answers made in good faith and without intent to deceive will not avoid a policy even though they are
untrue.14 Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of

the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of
the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although
the statement is material to the risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon such statement, but is obligated
to make further inquiry. There is a clear distinction between such a case and one in which
the insured is fraudulently and intentionally states to be true, as a matter of expectation or
belief, that which he then knows, to be actually untrue, or the impossibility of which is shown
by the facts within his knowledge, since in such case the intent to deceive the insurer is
obvious and amounts to actual fraud.15(Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract.16 Concealment as a defense for the health care provider or insurer to avoid
liability is an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer. In any case, with or without the authority to
investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility
under the agreement, petitioner is bound to answer the same to the extent agreed upon. In the end,
the liability of the health care provider attaches once the member is hospitalized for the disease or
injury covered by the agreement or whenever he avails of the covered benefits which he has
prepaid.

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a
contract of insurance." The right to rescind should be exercised previous to the commencement of
an action on the contract.17In this case, no rescission was made. Besides, the cancellation of health
care agreements as in insurance policies require the concurrence of the following conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the
grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon
request of insured, to furnish facts on which cancellation is based.18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the insurer
from non-compliance with his obligation.19 Being a contract of adhesion, the terms of an insurance
contract are to be construed strictly against the party which prepared the contract – the insurer.20 By
reason of the exclusive control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of
the insured, especially to avoid forfeiture.21 This is equally applicable to Health Care Agreements.
The phraseology used in medical or hospital service contracts, such as the one at bar, must be
liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two
interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of
doubtful import should be strictly construed against the provider.22

Anent the incontestability of the membership of respondent’s husband, we quote with approval the
following findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems
Inc. had twelve months from the date of issuance of the Agreement within which to contest
the membership of the patient if he had previous ailment of asthma, and six months from the
issuance of the agreement if the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or misrepresentation no longer lie.23

Finally, petitioner alleges that respondent was not the legal wife of the deceased member
considering that at the time of their marriage, the deceased was previously married to another
woman who was still alive. The health care agreement is in the nature of a contract of indemnity.
Hence, payment should be made to the party who incurred the expenses. It is not controverted that
respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement.
The records adequately prove the expenses incurred by respondent for the deceased’s
hospitalization, medication and the professional fees of the attending physicians.24

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court
of Appeals dated December 14, 1995 is AFFIRMED.

SO ORDERED.
G.R. No. 169737 February 12, 2008

BLUE CROSS HEALTH CARE, INC., petitioner,

vs.
NEOMI* and DANILO OLIVARES, respondents.

DECISION

CORONA, J.:

This is a petition for review on certiorari1 of a decision2 and resolution3 of the Court of Appeals (CA)
dated July 29, 2005 and September 21, 2005, respectively, in CA-G.R. SP No. 84163 which affirmed
the decision of the Regional Trial Court (RTC), Makati City, Branch 61 dated February 2, 2004 in
Civil Case No. 03-1153,4 which in turn reversed the decision of the Metropolitan Trial Court (MeTC),
Makati City, Branch 66 dated August 5, 2003 in Civil Case No. 80867.5

Respondent Neomi T. Olivares applied for a health care program with petitioner Blue Cross Health
Care, Inc., a health maintenance firm. For the period October 16, 2002 to October 15, 2003,6 she
paid the amount of P11,117. For the same period, she also availed of the additional service of
limitless consultations for an additional amount of P1,000. She paid these amounts in full on October
17, 2002. The application was approved on October 22, 2002. In the health care agreement,
ailments due to "pre-existing conditions" were excluded from the coverage.7

On November 30, 2002, or barely 38 days from the effectivity of her health insurance, respondent
Neomi suffered a stroke and was admitted at the Medical City which was one of the hospitals
accredited by petitioner. During her confinement, she underwent several laboratory tests. On
December 2, 2002, her attending physician, Dr. Edmundo Saniel,8 informed her that she could be
discharged from the hospital. She incurred hospital expenses amounting to P34,217.20.
Consequently, she requested from the representative of petitioner at Medical City a letter of
authorization in order to settle her medical bills. But petitioner refused to issue the letter and
suspended payment pending the submission of a certification from her attending physician that the
stroke she suffered was not caused by a pre-existing condition.9

She was discharged from the hospital on December 3, 2002. On December 5, 2002, she demanded
that petitioner pay her medical bill. When petitioner still refused, she and her husband, respondent
Danilo Olivares, were constrained to settle the bill.10 They thereafter filed a complaint for collection of
sum of money against petitioner in the MeTC on January 8, 2003.11 In its answer dated January 24,
2003, petitioner maintained that it had not yet denied respondents' claim as it was still awaiting Dr.
Saniel's report.

In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:

This is in response to your letter dated February 13, 2003. [Respondent] Neomi T. Olivares
called by phone on January 29, 2003. She stated that she is invoking patient-physician
confidentiality. That she no longer has any relationship with [petitioner]. And that I should not
release any medical information concerning her neurologic status to anyone without her
approval. Hence, the same day I instructed my secretary to inform your office thru Ms. Bernie
regarding [respondent's] wishes.

xxx xxx xxx12

In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of cause of action. It
held:

xxx the best person to determine whether or not the stroke she suffered was not caused by
"pre-existing conditions" is her attending physician Dr. Saniel who treated her and conducted
the test during her confinement. xxx But since the evidence on record reveals that it was no
less than [respondent Neomi] herself who prevented her attending physician from issuing the
required certification, petitioner cannot be faulted from suspending payment of her claim, for
until and unless it can be shown from the findings made by her attending physician that the
stroke she suffered was not due to pre-existing conditions could she demand entitlement to
the benefits of her policy.13

On appeal, the RTC, in a decision dated February 2, 2004, reversed the ruling of the MeTC and
ordered petitioner to pay respondents the following amounts: (1) P34,217.20 representing the
medical bill in Medical City and P1,000 as reimbursement for consultation fees, with legal interest
from the filing of the complaint until fully paid; (2) P20,000 as moral damages; (3) P20,000 as
exemplary damages; (4) P20,000 as attorney's fees and (5) costs of suit.14 The RTC held that it was
the burden of petitioner to prove that the stroke of respondent Neomi was excluded from the
coverage of the health care program for being caused by a pre-existing condition. It was not able to
discharge that burden.15

Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of Court in the CA. In a
decision promulgated on July 29, 2005, the CA affirmed the decision of the RTC. It denied
reconsideration in a resolution promulgated on September 21, 2005. Hence this petition which raises
the following issues: (1) whether petitioner was able to prove that respondent Neomi's stroke was
caused by a pre-existing condition and therefore was excluded from the coverage of the health care
agreement and (2) whether it was liable for moral and exemplary damages and attorney's fees.

The health care agreement defined a "pre-existing condition" as:

x x x a disability which existed before the commencement date of membership whose natural
history can be clinically determined, whether or not the Member was aware of such illness or
condition. Such conditions also include disabilities existing prior to reinstatement date in the
case of lapse of an Agreement. Notwithstanding, the following disabilities but not to the
exclusion of others are considered pre-existing conditions including their complications when
occurring during the first year of a Member’s coverage:
 I. Tumor of Internal Organs

II. Hemorrhoids/Anal Fistula

III. Diseased tonsils and sinus conditions requiring surgery

IV. Cataract/Glaucoma

V. Pathological Abnormalities of nasal septum or turbinates

VI. Goiter and other thyroid disorders

VII. Hernia/Benign prostatic hypertrophy

VIII. Endometriosis

IX. Asthma/Chronic Obstructive Lung disease

X. Epilepsy

XI. Scholiosis/Herniated disc and other Spinal column abnormalities

XII. Tuberculosis

XIII. Cholecysitis

XIV. Gastric or Duodenal ulcer

XV. Hallux valgus

XVI. Hypertension and other Cardiovascular diseases

XVII. Calculi

XVIII. Tumors of skin, muscular tissue, bone or any form of blood dyscracias

XIX. Diabetes Mellitus

XX. Collagen/Auto-Immune disease

After the Member has been continuously covered for 12 months, this pre-existing provision
shall no longer be applicable except for illnesses specifically excluded by an endorsement
and made part of this Agreement.16

Under this provision, disabilities which existed before the commencement of the agreement are
excluded from its coverage if they become manifest within one year from its effectivity. Stated
otherwise, petitioner is not liable for pre-existing conditions if they occur within one year from the
time the agreement takes effect.
Petitioner argues that respondents prevented Dr. Saniel from submitting his report regarding the
medical condition of Neomi. Hence, it contends that the presumption that evidence willfully
suppressed would be adverse if produced should apply in its favor.17

Respondents counter that the burden was on petitioner to prove that Neomi's stroke was excluded
from the coverage of their agreement because it was due to a pre-existing condition. It failed to
prove this.18

We agree with respondents.

In Philamcare Health Systems, Inc. v. CA,19 we ruled that a health care agreement is in the nature of
a non-life insurance.20 It is an established rule in insurance contracts that when their terms contain
limitations on liability, they should be construed strictly against the insurer. These are contracts of
adhesion the terms of which must be interpreted and enforced stringently against the insurer which
prepared the contract. This doctrine is equally applicable to health care agreements.21

Petitioner never presented any evidence to prove that respondent Neomi's stroke was due to a pre-
existing condition. It merely speculated that Dr. Saniel's report would be adverse to Neomi, based on
her invocation of the doctor-patient privilege. This was a disputable presumption at best.

Section 3 (e), Rule 131 of the Rules of Court states:

Sec. 3. Disputable presumptions. ― The following presumptions are satisfactory if

uncontradicted, but may be contradicted and overcome by other evidence:

xxx xxx xxx

(e) That evidence willfully suppressed would be adverse if produced.

Suffice it to say that this presumption does not apply if (a) the evidence is at the disposal of both
parties; (b) the suppression was not willful; (c) it is merely corroborative or cumulative and (d)
the suppression is an exercise of a privilege.22 Here, respondents' refusal to present or allow the
presentation of Dr. Saniel's report was justified. It was privileged communication between physician
and patient.

Furthermore, as already stated, limitations of liability on the part of the insurer or health care provider
must be construed in such a way as to preclude it from evading its obligations. Accordingly, they
should be scrutinized by the courts with "extreme jealousy"23 and "care" and with a "jaundiced
eye."24 Since petitioner had the burden of proving exception to liability, it should have made its own
assessment of whether respondent Neomi had a pre-existing condition when it failed to obtain the
attending physician's report. It could not just passively wait for Dr. Saniel's report to bail it out. The
mere reliance on a disputable presumption does not meet the strict standard required under our
jurisprudence.

Next, petitioner argues that it should not be held liable for moral and exemplary damages, and
attorney's fees since it did not act in bad faith in denying respondent Neomi's claim. It insists that it
waited in good faith for Dr. Saniel's report and that, based on general medical findings, it had
reasonable ground to believe that her stroke was due to a pre-existing condition, considering it
occurred only 38 days after the coverage took effect.25

We disagree.
The RTC and CA found that there was a factual basis for the damages adjudged against petitioner.
They found that it was guilty of bad faith in denying a claim based merely on its own perception that
there was a pre-existing condition:

[Respondents] have sufficiently shown that [they] were forced to engage in a dispute with
[petitioner] over a legitimate claim while [respondent Neomi was] still experiencing the effects
of a stroke and forced to pay for her medical bills during and after her hospitalization despite
being covered by [petitioner’s] health care program, thereby suffering in the process extreme
mental anguish, shock, serious anxiety and great stress. [They] have shown that because of
the refusal of [petitioner] to issue a letter of authorization and to pay [respondent Neomi's]
hospital bills, [they had] to engage the services of counsel for a fee of P20,000.00.
Finally, the refusal of petitioner to pay respondent Neomi's bills smacks of bad faith, as
its refusal [was] merely based on its own perception that a stroke is a pre-existing condition.
(emphasis supplied)

This is a factual matter binding and conclusive on this Court.26 We see no reason to disturb these
findings.

WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision and September 21, 2005
resolution of the Court of Appeals in CA-G.R. SP No. 84163 are AFFIRMED.

Treble costs against petitioner.

SO ORDERED.
G.R. No. 195872 March 12, 2014

FORTUNE MEDICARE, INC., Petitioner,

vs.
DAVID ROBERT U. AMORIN, Respondent.

DECISION

REYES, J.:

This is a petition for review on certiorari1 under Rule 45 of the Rules of Court, which challenges the
Decision2 dated September 27, 2010 and Resolution3 dated February 24, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 87255.

The Facts

David Robert U. Amorin (Amorin) was a cardholder/member of Fortune Medicare, Inc. (Fortune
Care), a corporation engaged in providing health maintenance services to its members. The terms of
Amorin's medical coverage were provided in a Corporate Health Program Contract4 (Health Care
Contract) which was executed on January 6, 2000 by Fortune Care and the House of
Representatives, where Amorin was a permanent employee.

While on vacation in Honolulu, Hawaii, United States of America (U.S.A.) in May 1999, Amorin
underwent an emergency surgery, specifically appendectomy, at the St. Francis Medical Center,
causing him to incur professional and hospitalization expenses of US$7,242.35 and US$1,777.79,
respectively. He attempted to recover from Fortune Care the full amount thereof upon his return to
Manila, but the company merely approved a reimbursement of ₱12,151.36, an amount that was
based on the average cost of appendectomy, net of medicare deduction, if the procedure were
performed in an accredited hospital in Metro Manila.5 Amorin received under protest the approved
amount, but asked for its adjustment to cover the total amount of professional fees which he had
paid, and eighty percent (80%) of the approved standard charges based on "American standard",
considering that the emergency procedure occurred in the U.S.A. To support his claim, Amorin cited
Section 3, Article V on Benefits and Coverages of the Health Care Contract, to wit:

A. EMERGENCY CARE IN ACCREDITED HOSPITAL. Whether as an in-patient or out-

patient, the member shall be entitled to full coverage under the benefits provisions of the
 Contract at any FortuneCare accredited hospitals subject only to the pertinent provision of
Article VII (Exclusions/Limitations) hereof. For emergency care attended by non affiliated
physician (MSU), the member shall be reimbursed 80% of the professional fee which should
have been paid, had the member been treated by an affiliated physician. The availment of
emergency care from an unaffiliated physician shall not invalidate or diminish any claim if it
shall be shown to have been reasonably impossible to obtain such emergency care from an
affiliated physician.

B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL

1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total hospitalization cost
including the professional fee (based on the total approved charges) to a member who receives
emergency care in a non-accredited hospital. The above coverage applies only to Emergency
confinement within Philippine Territory. However, if the emergency confinement occurs in a foreign
territory, Fortune Care will be obligated to reimburse or pay eighty (80%) percent of the approved
standard charges which shall cover the hospitalization costs and professional fees. x x x6

Still, Fortune Care denied Amorin’s request, prompting the latter to file a complaint7 for breach of
contract with damages with the Regional Trial Court (RTC) of Makati City.

For its part, Fortune Care argued that the Health Care Contract did not cover hospitalization costs
and professional fees incurred in foreign countries, as the contract’s operation was confined to
Philippine territory.8 Further, it argued that its liability to Amorin was extinguished upon the latter’s
acceptance from the company of the amount of ₱12,151.36.

The RTC Ruling

On May 8, 2006, the RTC of Makati, Branch 66 rendered its Decision9 dismissing Amorin’s
complaint. Citing Section 3, Article V of the Health Care Contract, the RTC explained:

Taking the contract as a whole, the Court is convinced that the parties intended to use the Philippine
standard as basis. Section 3 of the Corporate Health Care Program Contract provides that:

xxxx

On the basis of the clause providing for reimbursement equivalent to 80% of the professional fee
which should have been paid, had the member been treated by an affiliated physician, the Court
concludes that the basis for reimbursement shall be Philippine rates. That provision, taken with
Article V of the health program contract, which identifies affiliated hospitals as only those accredited
clinics, hospitals and medical centers located "nationwide" only point to the Philippine standard as
basis for reimbursement.

The clause providing for reimbursement in case of emergency operation in a foreign territory
equivalent to 80% of the approved standard charges which shall cover hospitalization costs and
professional fees, can only be reasonably construed in connection with the preceding clause on
professional fees to give meaning to a somewhat vague clause. A particular clause should not be
studied as a detached and isolated expression, but the whole and every part of the contract must be
considered in fixing the meaning of its parts.10
In the absence of evidence to the contrary, the trial court considered the amount of ₱12,151.36
already paid by Fortune Care to Amorin as equivalent to 80% of the hospitalization and professional
fees payable to the latter had he been treated in an affiliated hospital.11

Dissatisfied, Amorin appealed the RTC decision to the CA.

The CA Ruling

On September 27, 2010, the CA rendered its Decision12 granting the appeal. Thus, the dispositive
portion of its decision reads:

WHEREFORE, all the foregoing premises considered, the instant appeal is hereby GRANTED. The
May 8, 2006 assailed Decision of the Regional Trial Court (RTC) of Makati City, Branch 66 is hereby
REVERSED and SET ASIDE, and a new one entered ordering Fortune Medicare, Inc. to reimburse
[Amorin] 80% of the total amount of the actual hospitalization expenses of $7,242.35 and
professional fee of $1,777.79 paid by him to St. Francis Medical Center pursuant to Section 3, Article
V of the Corporate Health Care Program Contract, or their peso equivalent at the time the amounts
became due, less the [P]12,151.36 already paid by Fortunecare.

SO ORDERED.13

In so ruling, the appellate court pointed out that, first, health care agreements such as the subject
Health Care Contract, being like insurance contracts, must be liberally construed in favor of the
subscriber. In case its provisions are doubtful or reasonably susceptible of two interpretations, the
construction conferring coverage is to be adopted and exclusionary clauses of doubtful import
should be strictly construed against the provider.14 Second, the CA explained that there was nothing
under Article V of the Health Care Contract which provided that the Philippine standard should be
used even in the event of an emergency confinement in a foreign territory.15

Fortune Care’s motion for reconsideration was denied in a Resolution16 dated February 24, 2011.
Hence, the filing of the present petition for review on certiorari.

The Present Petition

Fortune Care cites the following grounds to support its petition:

I. The CA gravely erred in concluding that the phrase "approved standard charges" is subject
to interpretation, and that it did not automatically mean "Philippine Standard"; and

II. The CA gravely erred in denying Fortune Care’s motion for reconsideration, which in effect
affirmed its decision that the American Standard Cost shall be applied in the payment of
medical and hospitalization expenses and professional fees incurred by the respondent.17

The Court’s Ruling

The petition is bereft of merit.

The Court finds no cogent reason to disturb the CA’s finding that Fortune Care’s liability to Amorin
under the subject Health Care Contract should be based on the expenses for hospital and
professional fees which he actually incurred, and should not be limited by the amount that he would
have incurred had his emergency treatment been performed in an accredited hospital in the
Philippines.

We emphasize that for purposes of determining the liability of a health care provider to its members,
jurisprudence holds that a health care agreement is in the nature of non-life insurance, which is
primarily a contract of indemnity. Once the member incurs hospital, medical or any other expense
arising from sickness, injury or other stipulated contingent, the health care provider must pay for the
same to the extent agreed upon under the contract.18

To aid in the interpretation of health care agreements, the Court laid down the following guidelines in
Philamcare Health Systems v. CA19:

When the terms of insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his obligation. Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the party which
prepared the contract – the insurer. By reason of the exclusive control of the insurance company
over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted
against the insurer and liberally in favor of the insured, especially to avoid forfeiture. This is equally
applicable to Health Care Agreements. The phraseology used in medical or hospital service
contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if
doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to
be adopted, and exclusionary clauses of doubtful import should be strictly construed against the
provider.20 (Citations omitted and emphasis ours)

Consistent with the foregoing, we reiterated in Blue Cross Health Care, Inc. v. Spouses Olivares21:

In Philamcare Health Systems, Inc. v. CA, we ruled that a health care agreement is in the nature of a
non-life insurance. It is an established rule in insurance contracts that when their terms contain
limitations on liability, they should be construed strictly against the insurer. These are contracts of
adhesion the terms of which must be interpreted and enforced stringently against the insurer which
prepared the contract. This doctrine is equally applicable to health care agreements.

xxxx

x x x [L]imitations of liability on the part of the insurer or health care provider must be construed in
such a way as to preclude it from evading its obligations. Accordingly, they should be scrutinized by
the courts with "extreme jealousy" and "care" and with a "jaundiced eye." x x x.22 (Citations omitted
and emphasis supplied)

In the instant case, the extent of Fortune Care’s liability to Amorin under the attendant circumstances
was governed by Section 3(B), Article V of the subject Health Care Contract, considering that the
appendectomy which the member had to undergo qualified as an emergency care, but the treatment
was performed at St. Francis Medical Center in Honolulu, Hawaii, U.S.A., a non-accredited hospital.
We restate the pertinent portions of Section 3(B):

B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL

1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total hospitalization cost
including the professional fee (based on the total approved charges) to a member who receives
emergency care in a non-accredited hospital. The above coverage applies only to Emergency
confinement within Philippine Territory. However, if the emergency confinement occurs in foreign
territory, Fortune Care will be obligated to reimburse or pay eighty (80%) percent of the approved
standard charges which shall cover the hospitalization costs and professional fees. x x x23 (Emphasis
supplied)

The point of dispute now concerns the proper interpretation of the phrase "approved standard
charges", which shall be the base for the allowable 80% benefit. The trial court ruled that the phrase
should be interpreted in light of the provisions of Section 3(A), i.e., to the extent that may be allowed
for treatments performed by accredited physicians in accredited hospitals. As the appellate court
however held, this must be interpreted in its literal sense, guided by the rule that any ambiguity shall
be strictly construed against Fortune Care, and liberally in favor of Amorin.

The Court agrees with the CA. As may be gleaned from the Health Care Contract, the parties thereto
contemplated the possibility of emergency care in a foreign country. As the contract recognized
Fortune Care’s liability for emergency treatments even in foreign territories, it expressly limited its
liability only insofar as the percentage of hospitalization and professional fees that must be paid or
reimbursed was concerned, pegged at a mere 80% of the approved standard charges.

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

for services of accredited physicians was expressly made applicable only in the case of an
emergency care in an accredited hospital.

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

All told, in the absence of any qualifying word that clearly limited Fortune Care's liability to costs that
are applicable in the Philippines, the amount payable by Fortune Care should not be limited to the
cost of treatment in the Philippines, as to do so would result in the clear disadvantage of its member.
If, as Fortune Care argued, the premium and other charges in the Health Care Contract were merely
computed on assumption and risk under Philippine cost and, that the American cost standard or any
foreign country's cost was never considered, such limitations should have been distinctly specified
and clearly reflected in the extent of coverage which the company voluntarily assumed. This was
what Fortune Care found appropriate when in its new health care agreement with the House of
Representatives, particularly in their 2006 agreement, the provision on emergency care in non-
accredited hospitals was modified to read as follows:
However, if the emergency confinement occurs in a foreign territory, Fortunecare will be obligated to
reimburse or pay one hundred (100%) percent under approved Philippine Standard covered charges
for hospitalization costs and professional fees but not to exceed maximum allowable coverage,
payable in pesos at prevailing currency exchange rate at the time of availment in said territory where
he/she is confined. x x x24

Settled is the rule that ambiguities in a contract are interpreted against the party that caused the
ambiguity. "Any ambiguity in a contract whose terms are susceptible of different interpretations must
be read against the party who drafted it."25

WHEREFORE, the petition is DENIED. The Decision dated September 27, 2010 and Resolution
dated February 24, 2011 of the Court of Appeals in CA-G.R. CV No. 87255 are AFFIRMED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

WE CONCUR:

G.R. No. 175773 June 17, 2013

MITSUBISHI MOTORS PHILIPPINES SALARIED EMPLOYEES UNION (MMPSEU), Petitioner,

vs.
MITSUBISHI MOTORS PHILIPPINES CORPORATION, Respondent.

DECISION

DEL CASTILLO, J.:

The Collective Bargaining Agreement (CBA) of the parties in this case provides that the company
shoulder the hospitalization expenses of the dependents of covered employees subject to certain
limitations and restrictions. Accordingly, covered employees pay part of the hospitalization insurance
premium through monthly salary deduction while the company, upon hospitalization of the covered
employees' dependents, shall pay the hospitalization expenses incurred for the same. The conflict
arose when a portion of the hospitalization expenses of the covered employees' dependents were
paid/shouldered by the dependent's own health insurance. While the company refused to pay the
portion of the hospital expenses already shouldered by the dependents' own health insurance, the
union insists that the covered employees are entitled to the whole and undiminished amount of said
hospital expenses.

By this Petition for Review on Certiorari,1 petitioner Mitsubishi Motors Philippines Salaried
Employees Union (MMPSEU) assails the March 31, 2006 Decision2 and December 5, 2006
Resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 75630, which reversed and set aside
the Voluntary Arbitrator’s December 3, 2002 Decision4 and declared respondent Mitsubishi Motors
Philippines Corporation (MMPC) to be under no legal obligation to pay its covered employees’
dependents’ hospitalization expenses which were already shouldered by other health insurance
companies.

Factual Antecedents
The parties’ CBA5 covering the period August 1, 1996 to July 31, 1999 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 (₱40,000.00) per confinement subject to the following:

a. The room and board must not exceed three hundred pesos (₱300.00) per day up to a
maximum of thirty-one (31) days. Similarly, Doctor’s Call fees must not exceed three
hundred pesos (₱300.00) 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 (₱100.00) 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 COMPANY. If the COMPANY is self-insured the one hundred pesos
(₱100.00) per employee monthly contribution shall be given to the COMPANY which shall shoulder
the expenses subject to the above level of benefits and subject to the same limitations and
restrictions provided for in Annex "B" hereof.

The 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.

For purposes of this provision, eligible dependents are the covered employees’ natural parents, legal
spouse and legitimate or legally adopted or step children who are unmarried, unemployed who have
not attained twenty-one (21) years of age and wholly dependent upon the employee for support.

This provision applies only in cases of actual confinement in the hospital for at least six (6) hours.

Maternity cases are not covered by this section but will be under the next succeeding section on
maternity benefits.6

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 ₱50,000.00. The room and board expenses, as well as the
doctor’s call fees, were also increased to ₱375.00.

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, Lanie, was confined at Sto. Tomas University Hospital from September 4 to 9, 1998
due to Thyroidectomy. The medical expenses incurred totalled ₱29,967.10. Of this amount,
₱9,000.00 representing professional fees was paid by MEDICard Philippines, Inc. (MEDICard) which
provides health maintenance to Lanie.8 MMPC only paid ₱12,148.63.9 It did not pay the ₱9,000.00
already paid by MEDICard and the ₱6,278.47 not covered by official receipts. It refused to give to
Calida the difference between the amount of medical expenses of ₱27,427.1010 which he claimed to
be entitled to under the CBA and the ₱12,148.63 which MMPC directly paid to the hospital.

In the case of Martin, his father, Jose, was admitted at The Medical City from March 26 to 27, 2000
due to Acid Peptic Disease and incurred medical expenses amounting to ₱9,101.30.14 MEDICard
paid ₱8,496.00.15Consequently, MMPC only paid ₱288.40,16 after deducting from the total medical
expenses the amount paid by MEDICard and the ₱316.90 discount given by the hospital.

Claiming that under the CBA, they are entitled to hospital benefits amounting to ₱27,427.10,
₱6,769.35 and ₱8,123.80, 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.

This prompted the MMPSEU President to write the MMPC President17 demanding full payment of the
hospitalization benefits. Alleging discrimination against MMPSEU union members, she pointed out
that full reimbursement was given in a similar claim filed by Luisito Cruz (Cruz), a member of the
Hourly Union. In a letter-reply,18 MMPC, through its Vice-President for Industrial Relations Division,
clarified that the claims of the said MMPSEU members have already been paid on the basis of
official receipts submitted. It also denied the charge of discrimination and explained that the case of
Cruz involved an entirely different matter since it concerned the admissibility of certified true copies
of documents for reimbursement purposes, which case had been settled through voluntary
arbitration.

On August 28, 2000, MMPSEU referred the dispute to the National Conciliation and Mediation Board
and requested for preventive mediation.19

Proceedings before the Voluntary Arbitrator

On October 3, 2000, the case was referred to Voluntary Arbitrator Rolando Capocyan for resolution
of the issue involving the interpretation of the subject CBA provision.20

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 benefited 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.21

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.22

Meanwhile, the parties separately sought for a legal opinion from the Insurance Commission relative
to the issue at hand. In its letter23 to the Insurance Commission, MMPC requested for confirmation of
its position that the covered employees cannot claim insurance benefits for a loss that had already
been covered or paid by another insurance company. However, the Office of the Insurance
Commission opted not to render an opinion on the matter as the same may become the subject of a
formal complaint before it.24 On the other hand, when queried by MMPSEU,25the Insurance
Commission, through Atty. Richard David C. Funk II (Atty. Funk) of the Claims Adjudication Division,
rendered an opinion contained in a letter,26 viz:

Ms. Cecilia L. ParasPresident

Mitsubishi Motors Phils.

[Salaried] Employees Union

Ortigas Avenue Extension,
Cainta, Rizal

Madam:

We acknowledge receipt of your letter which, to our impression, basically poses the question of
whether or not recovery of medical expenses from a Health Maintenance Organization bars recovery
of the same reimbursable amount of medical expenses under a contract of health or medical
insurance.

We wish to opine 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. In the
absence of an Other Insurance provision in these coverages, the courts have uniformly held that an
insured is entitled to receive the insurance benefits without regard to the amount of total benefits
provided by other insurance. (INSURANCE LAW, A Guide to Fundamental Principles, Legal
Doctrines, and Commercial Practices; Robert E. Keeton, Alau I. Widiss, p. 261). 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).

Very truly yours,

RICHARD DAVID C. FUNK II

Officer-in-Charge
Claims Adjudication Division

(SGD.)
Attorney IV

On December 3, 2002, 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.
Proceedings before the Court of Appeals

MMPC filed a Petition for Review with Prayer for the Issuance of a Temporary Restraining Order
and/or Writ of Preliminary Injunction28 before the CA. It claimed that the Voluntary Arbitrator
committed grave abuse of discretion in not finding that recovery under both insurance policies
constitutes double insurance as both had the same subject matter, interest insured and risk or peril
insured against; in relying solely on the unauthorized legal opinion of Atty. Funk; and in not finding
that the employees will be benefited twice for the same loss. In its Comment,29 MMPSEU countered
that MMPC will unjustly enrich itself and profit from the monthly premiums paid if full reimbursement
is not made.

On March 31, 2006, the CA found merit in MMPC’s Petition. It ruled that despite the lack of a
provision which bars recovery in case of payment by other insurers, the wordings of the subject
provision of the CBA showed that the parties intended to make MMPC liable only for expenses
actually incurred by an employee’s qualified dependent. In particular, the provision stipulates that
payment should be made directly to the hospital and that the claim should be supported by actual
hospital and doctor’s bills. These mean that the employees shall only be paid amounts not covered
by other health insurance and is more in keeping with the principle of indemnity in insurance
contracts. Besides, a contrary interpretation would "allow unscrupulous employees to unduly profit
from the x x x benefits" and shall "open the floodgates to questionable claims x x x."30

The dispositive portion of the CA Decision31 reads:

WHEREFORE, the instant petition is GRANTED. The decision of the voluntary arbitrator dated
December 3, 2002 is REVERSED and SET ASIDE and judgment is rendered declaring that under
Art. XI, Sec. 4 of the Collective Bargaining Agreement between petitioner and respondent effective
August 1, 1999 to July 31, 2002, the former’s obligation to reimburse the Union members for the
hospitalization expenses incurred by their dependents is exclusive of those paid by the Union
members to the hospital.

SO ORDERED.32

In its Motion for Reconsideration,33 MMPSEU pointed out that the alleged oppression that may be
committed by abusive employees is a mere possibility whereas the resulting losses to the
employees are real. MMPSEU cited Samsel v. Allstate Insurance Co.,34 wherein the Arizona
Supreme Court explicitly ruled that an insured may recover from separate health insurance
providers, regardless of whether one of them has already paid the medical expenses incurred. On
the other hand, MMPC argued in its Comment35 that the cited foreign case involves a different set of
facts.

The CA, in its Resolution36 dated December 5, 2006, denied MMPSEU’s motion.

Hence, this Petition.

Issues

MMPSEU presented the following grounds in support of its Petition:

A.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT REVERSED THE DECISION DATED
03 [DECEMBER] 2002 OF THE VOLUNTARY ARBITRATOR BELOW WHEN THE SAME WAS
SUPPORTED BY SUBSTANTIAL EVIDENCE, INCLUDING THE OPINION OF THE INSURANCE
COMMISSION THAT RECOVERY FROM BOTH THE CBA AND SEPARATE HEALTH CARDS IS
NOT PROHIBITED IN THE ABSENCE OF ANY SPECIFIC PROVISION IN THE CBA.

B.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN OVERTURNING THE

DECISION OF THE VOLUNTARY ARBITRATOR WITHOUT EVEN GIVING ANY LEGAL OR
JUSTIFIABLE BASIS FOR SUCH REVERSAL.

C.

THE COURT OF APPEALS COMMITTED GRAVE ERROR IN REFUSING TO CONSIDER OR

EVEN MENTION ANYTHING ABOUT THE AMERICAN AUTHORITIES CITED IN THE RECORDS
THAT DO NOT PROHIBIT, BUT IN FACT ALLOW, RECOVERY FROM TWO SEPARATE HEALTH
PLANS.

D.

THE COURT OF APPEALS GRAVELY ERRED IN GIVING MORE IMPORTANCE TO A POSSIBLE,

HENCE MERELY SPECULATIVE, ABUSE BY EMPLOYEES OF THE BENEFITS IF DOUBLE
RECOVERY WERE ALLOWED INSTEAD OF THE REAL INJURY TO THE EMPLOYEES WHO
ARE PAYING FOR THE CBA HOSPITALIZATION BENEFITS THROUGH MONTHLY SALARY
DEDUCTIONS BUT WHO MAY NOT BE ABLE TO AVAIL OF THE SAME IF THEY OR THEIR
DEPENDENTS HAVE OTHER HEALTH INSURANCE.37

MMPSEU avers that the Decision of the Voluntary Arbitrator deserves utmost respect and finality
because it is supported by substantial evidence and is in accordance with the opinion rendered by
the Insurance Commission, an agency equipped with vast knowledge concerning insurance
contracts. It maintains that under the CBA, member-employees are entitled to full reimbursement of
medical expenses incurred by their dependents regardless of any amounts paid by the latter’s health
insurance provider. Otherwise, non-recovery will constitute unjust enrichment on the part of MMPC.
It avers that recovery from both the CBA and other insurance companies is allowed under their CBA
and not prohibited by law nor by jurisprudence.

Our Ruling

The Petition has no merit.

Atty. Funk erred in applying the

collateral source rule.

The Voluntary Arbitrator based his ruling on the opinion of Atty. Funk that the employees may
recover benefits from different insurance providers without regard to the amount of benefits paid by
each. According to him, this view is consistent with the theory of the collateral source rule.

As part of American personal injury law, the collateral source rule was originally applied to tort cases
wherein the defendant is prevented from benefiting 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 a recent Decision40 by the Illinois Supreme Court,
the rule has been described as "an established exception to the general rule that damages in
negligence actions must be compensatory." The Court went on to explain that although the rule
appears to allow a double recovery, the collateral source will have a lien or subrogation right to
prevent such a double recovery.41 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.43Its 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."44Thus, 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.

The conditions set forth in the CBA provision indicate an intention to limit MMPC’s liability only to
actual expenses incurred by the employees’ dependents, that is, excluding the amounts paid by
dependents’ other health insurance providers.

The Voluntary Arbitrator ruled that the CBA has no express provision barring claims for
hospitalization expenses already paid by other insurers. Hence, the covered employees can recover
from both. The CA did not agree, saying that the conditions set forth in the CBA implied an intention
of the parties to limit MMPC’s liability only to the extent of the expenses actually incurred by their
dependents which excludes the amounts shouldered by other health insurance companies.

We agree with the CA. 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.

It is well to note at this point that the CBA constitutes a contract between the parties and as such, it
should be strictly construed for the purpose of limiting the amount of the employer’s liability.46 The
terms of the subject provision are clear and provide no room for any other interpretation. As there is
no ambiguity, 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.

Samsel v. Allstate Insurance Co. is not

on all fours with the case at bar.

MMPSEU cannot rely on Samsel v. Allstate Insurance Co. where the Supreme Court of Arizona
allowed the insured to enjoy medical benefits under an automobile policy insurance despite being
able to also recover from a separate health insurer. In that case, the Allstate automobile policy does
not contain any clause restricting medical payment coverage to expenses actually paid by the
insured nor does it specifically provide for reduction of medical payments benefits by a coordination
of benefits.48 However, in the case before us, the dependents’ group hospitalization insurance
provision in the CBA specifically contains a condition which limits MMPC’s liability only up to the
extent of the expenses that should be paid by the covered employee’s dependent to the hospital and
doctor. This is evident from the portion which states that "payment by MMPC shall be direct to the
hospital and doctor."49 In contrast, the Allstate automobile policy expressly gives Allstate the
authority to pay directly to the insured person or on the latter’s behalf all reasonable expenses
actually incurred. Therefore, reliance on Samsel is unavailing because the facts therein are different
and not decisive of the issues in the present case.

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.51

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 dated March 31, 2006 and Resolution dated
December 5, 2006 of the Court of Appeals in CA-G.R. SP No. 75630, are AFFIRMED.

SO ORDERED.

Elements of Insurance

G.R. No. 156167 May 16, 2005

GULF RESORTS, INC., petitioner,

vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.

DECISION

PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by
petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE
CORPORATION. Petitioner assails the appellate court decision1 which dismissed its two appeals
and affirmed the judgment of the trial court.

For review are the warring interpretations of petitioner and respondent on the scope of the insurance
company’s liability for earthquake damage to petitioner’s properties. Petitioner avers that, pursuant
to its earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the
properties within its resort caused by earthquake. Respondent contends that the rider limits its
liability for loss to the two swimming pools of petitioner.

The facts as established by the court a quo, and affirmed by the appellate court are as follows:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties
in said resort insured originally with the American Home Assurance Company (AHAC-AIU).
In the first four insurance policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987;
and 1987-88 (Exhs. "C", "D", "E" and "F"; also Exhs. "1", "2", "3" and "4" respectively), the
risk of loss from earthquake shock was extended only to plaintiff’s two swimming pools, thus,
"earthquake shock endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E" and two (2) swimming
pools only (Exhs. "C-1"; ‘D-1", "E" and "F-1"). "Item 5" in those policies referred to the two (2)
swimming pools only (Exhs. "1-B", "2-B", "3-B" and "F-2"); that subsequently AHAC(AIU)
issued in plaintiff’s favor Policy No. 206-4182383-0 covering the period March 14, 1988 to
March 14, 1989 (Exhs. "G" also "G-1") and in said policy the earthquake endorsement clause
as indicated in Exhibits "C-1", "D-1", Exhibits "E" and "F-1" was deleted and the entry under
Endorsements/Warranties at the time of issue read that plaintiff renewed its policy with
AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under Policy No. 206-
4568061-9 (Exh. "H") which carried the entry under "Endorsement/Warranties at Time of
Issue", which read "Endorsement to Include Earthquake Shock (Exh. "6-B-1") in the amount
of P10,700.00 and paid P42,658.14 (Exhs. "6-A" and "6-B") as premium thereof, computed
as follows:

Item - P7,691,000.00 - on the Clubhouse only

@ .392%;
- 1,500,000.00 - on the furniture, etc. contained in the building
above-mentioned@ .490%;
- 393,000.00 - on the two swimming pools, only (against the peril
of earthquake shock only) @ 0.100%
- 116,600.00 other buildings include as follows:

a) Tilter House - P19,800.00 - 0.551%

b) Power House - P41,000.00 - 0.551%

c) House Shed - P55,000.00 - 0.540%

P100,000.00 - for furniture, fixtures, lines air-con and operating

equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy
No. 206-4568061-9 (Exh. "H") provided that the policy wording and rates in said policy be
copied in the policy to be issued by defendant; that defendant issued Policy No. 31944 to
plaintiff covering the period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for a
total premium of P45,159.92 (Exh. "I"); that in the computation of the premium, defendant’s
Policy No. 31944 (Exh. "I"), which is the policy in question, contained on the right-hand upper
portion of page 7 thereof, the following:

Rate-Various

Premium – P37,420.60 F/L

– 2,061.52 – Typhoon

– 1,030.76 – EC

– 393.00 – ES

Doc. Stamps 3,068.10

 F.S.T. 776.89

Prem. Tax 409.05

TOTAL 45,159.92;

that the above break-down of premiums shows that plaintiff paid only P393.00 as premium
against earthquake shock (ES); that in all the six insurance policies (Exhs. "C", "D", "E", "F",
"G" and "H"), the premium against the peril of earthquake shock is the same, that is P393.00
(Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-1";
"6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G" and "H") and in Policy No. 31944
issued by defendant, the shock endorsement provide(sic):

In consideration of the payment by the insured to the company of the

sum included additional premium the Company agrees, notwithstanding what is
stated in the printed conditions of this policy due to the contrary, that this insurance
covers loss or damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs. "1-D", "2-D", "3-
A", "4-B", "5-A", "6-D" and "7-C");

that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that on
July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and plaintiff’s
properties covered by Policy No. 31944 issued by defendant, including the two swimming
pools in its Agoo Playa Resort were damaged.2

After the earthquake, petitioner advised respondent that it would be making a claim under its
Insurance Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a
formal claim, then assigned the investigation of the claim to an independent claims adjuster, Bayne
Adjusters and Surveyors, Inc.3 On July 30, 1990, respondent, through its adjuster, requested
petitioner to submit various documents in support of its claim. On August 7, 1990, Bayne Adjusters
and Surveyors, Inc., through its Vice-President A.R. de Leon,4 rendered a preliminary report5 finding
extensive damage caused by the earthquake to the clubhouse and to the two swimming pools. Mr.
de Leon stated that "except for the swimming pools, all affected items have no coverage for
earthquake shocks."6 On August 11, 1990, petitioner filed its formal demand7 for settlement of the
damage to all its properties in the Agoo Playa Resort. On August 23, 1990, respondent denied
petitioner’s claim on the ground that its insurance policy only afforded earthquake shock coverage to
the two swimming pools of the resort.8 Petitioner and respondent failed to arrive at a
settlement.9 Thus, on January 24, 1991, petitioner filed a complaint10 with the regional trial court of
Pasig praying for the payment of the following:

1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with
interest thereon, as computed under par. 29 of the policy (Annex "B") until fully paid;

2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff
on account of defendant’s refusal to pay the claims;

3.) The sum of P500,000.00, by way of exemplary damages;

4.) The sum of P500,000.00 by way of attorney’s fees and expenses of litigation;
 5.) Costs.11

Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.12

On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:

The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the
peril of earthquake shock, the same premium it paid against earthquake shock only on the
two swimming pools in all the policies issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and
"G"). From this fact the Court must consequently agree with the position of defendant that
the endorsement rider (Exhibit "7-C") means that only the two swimming pools were insured
against earthquake shock.

Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where
the language used in an insurance contract or application is such as to create ambiguity the
same should be resolved against the party responsible therefor, i.e., the insurance company
which prepared the contract. To the mind of [the] Court, the language used in the policy in
litigation is clear and unambiguous hence there is no need for interpretation or construction
but only application of the provisions therein.

From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which struck on
July 16, 1990. Defendant having admitted that the damage to the swimming pools was
appraised by defendant’s adjuster at P386,000.00, defendant must, by virtue of the contract
of insurance, pay plaintiff said amount.

Because it is the finding of the Court as stated in the immediately preceding paragraph that
defendant is liable only for the damage caused to the two (2) swimming pools and that
defendant has made known to plaintiff its willingness and readiness to settle said liability,
there is no basis for the grant of the other damages prayed for by plaintiff. As to the
counterclaims of defendant, the Court does not agree that the action filed by plaintiff is
baseless and highly speculative since such action is a lawful exercise of the plaintiff’s right to
come to Court in the honest belief that their Complaint is meritorious. The prayer, therefore,
of defendant for damages is likewise denied.

WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of

THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage
to the two (2) swimming pools, with interest at 6% per annum from the date of the filing of the
Complaint until defendant’s obligation to plaintiff is fully paid.

No pronouncement as to costs.13

Petitioner’s Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of
Appeals based on the following assigned errors:14

A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY

RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE
POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES
SURROUNDING THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE
PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
 B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANT’S RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEE’S POLICY (NO. 31944; EXH "I") BY
LIMITING ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.

C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS

ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.

On the other hand, respondent filed a partial appeal, assailing the lower court’s failure to award it
attorney’s fees and damages on its compulsory counterclaim.

After review, the appellate court affirmed the decision of the trial court and ruled, thus:

However, after carefully perusing the documentary evidence of both parties, We are not
convinced that the last two (2) insurance contracts (Exhs. "G" and "H"), which the plaintiff-
appellant had with AHAC (AIU) and upon which the subject insurance contract with
Philippine Charter Insurance Corporation is said to have been based and copied (Exh. "I"),
covered an extended earthquake shock insurance on all the insured properties.

xxx

We also find that the Court a quo was correct in not granting the plaintiff-appellant’s prayer
for the imposition of interest – 24% on the insurance claim and 6% on loss of income
allegedly amounting to P4,280,000.00. Since the defendant-appellant has expressed its
willingness to pay the damage caused on the two (2) swimming pools, as the Court a quo
and this Court correctly found it to be liable only, it then cannot be said that it was in default
and therefore liable for interest.

Coming to the defendant-appellant’s prayer for an attorney’s fees, long-standing is the rule
that the award thereof is subject to the sound discretion of the court. Thus, if such discretion
is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et al., G.R. No.
115838, July 18, 2002). Moreover, being the award thereof an exception rather than a rule, it
is necessary for the court to make findings of facts and law that would bring the case within
the exception and justify the grant of such award (Country Bankers Insurance Corp. v.
Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, 2002).
Therefore, holding that the plaintiff-appellant’s action is not baseless and highly speculative,
We find that the Court a quo did not err in granting the same.

WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.15

Petitioner filed the present petition raising the following issues:16

A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER

RESPONDENT’S INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING
POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE
INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
 B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONER’S PRAYER
FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEY’S
FEES AND EXPENSES OF LITIGATION.

Petitioner contends:

First, that the policy’s earthquake shock endorsement clearly covers all of the properties insured
and not only the swimming pools. It used the words "any property insured by this policy," and it
should be interpreted as all inclusive.

Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed
in the body of the insurance policy itself, which states that it is "[s]ubject to: Other Insurance Clause,
Typhoon Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty &
Annual Payment Agreement On Long Term Policies."17

Third, that the qualification referring to the two swimming pools had already been deleted in the
earthquake shock endorsement.

Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it
deleted the said qualification.

Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of
the insurance policy, because the rider is the more deliberate expression of the agreement of the
contracting parties.

Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties
enumerated at the time of issue.

Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of
petitioner and against respondent. It was respondent which caused the ambiguity when it made the
policy in issue.

Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be
interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming
pools from the coverage for the risk of fire. It should not be used to limit the respondent’s liability for
earthquake shock to the two swimming pools only.

Ninth, there is no basis for the appellate court to hold that the additional premium was not paid
under the extended coverage. The premium for the earthquake shock coverage was already
included in the premium paid for the policy.

Tenth, the parties’ contemporaneous and subsequent acts show that they intended to extend
earthquake shock coverage to all insured properties. When it secured an insurance policy from
respondent, petitioner told respondent that it wanted an exact replica of its latest insurance policy
from American Home Assurance Company (AHAC-AIU), which covered all the resort’s properties for
earthquake shock damage and respondent agreed. After the July 16, 1990 earthquake, respondent
assured petitioner that it was covered for earthquake shock. Respondent’s insurance adjuster,
Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the necessary
documents for its building claims and other repair costs. Thus, under the doctrine of equitable
estoppel, it cannot deny that the insurance policy it issued to petitioner covered all of the properties
within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the
Revised Rules of Court as its remedy, and there is no need for calibration of the evidence in order to
establish the facts upon which this petition is based.

On the other hand, respondent made the following counter arguments:18

First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended
coverage against earthquake shock to petitioner’s insured properties other than on the two
swimming pools. Petitioner admitted that from 1984 to 1988, only the two swimming pools were
insured against earthquake shock. From 1988 until 1990, the provisions in its policy were practically
identical to its earlier policies, and there was no increase in the premium paid. AHAC-AIU, in a
letter19 by its representative Manuel C. Quijano, categorically stated that its previous policy, from
which respondent’s policy was copied, covered only earthquake shock for the two swimming pools.

Second, petitioner’s payment of additional premium in the amount of P393.00 shows that the policy
only covered earthquake shock damage on the two swimming pools. The amount was the same
amount paid by petitioner for earthquake shock coverage on the two swimming pools from 1990-
1991. No additional premium was paid to warrant coverage of the other properties in the resort.

Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to
the two swimming pools in the policy schedule did not expand the earthquake shock coverage to all
of petitioner’s properties. As per its agreement with petitioner, respondent copied its policy from the
AHAC-AIU policy provided by petitioner. Although the first five policies contained the said
qualification in their rider’s title, in the last two policies, this qualification in the title was deleted.
AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This
inadvertence did not make the policy incomplete, nor did it broaden the scope of the endorsement
whose descriptive title was merely enumerated. Any ambiguity in the policy can be easily resolved
by looking at the other provisions, specially the enumeration of the items insured, where only the two
swimming pools were noted as covered for earthquake shock damage.

Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase
"Item 5 – P393,000.00 – on the two swimming pools only (against the peril of earthquake shock
only)" meant that only the swimming pools were insured for earthquake damage. The same phrase
is used in toto in the policies from 1989 to 1990, the only difference being the designation of the two
swimming pools as "Item 3."

Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all
the properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as
premium for coverage of the swimming pools against earthquake shock. No other premium was paid
for earthquake shock coverage on the other properties. In addition, the use of the qualifier "ANY"
instead of "ALL" to describe the property covered was done deliberately to enable the parties to
specify the properties included for earthquake coverage.

Sixth, petitioner did not inform respondent of its requirement that all of its properties must be
included in the earthquake shock coverage. Petitioner’s own evidence shows that it only required
respondent to follow the exact provisions of its previous policy from AHAC-AIU. Respondent
complied with this requirement. Respondent’s only deviation from the agreement was when it
modified the provisions regarding the replacement cost endorsement. With regard to the issue under
litigation, the riders of the old policy and the policy in issue are identical.

Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from
maintaining that only the two swimming pools were covered for earthquake shock. The adjuster’s
letter notifying petitioner to present certain documents for its building claims and repair costs was
given to petitioner before the adjuster knew the full coverage of its policy.

Petitioner anchors its claims on AHAC-AIU’s inadvertent deletion of the phrase "Item 5 Only" after
the descriptive name or title of the Earthquake Shock Endorsement. However, the words of the
policy reflect the parties’ clear intention to limit earthquake shock coverage to the two swimming
pools.

Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to
any deficiency nor did it institute any action to reform the policy. The policy binds the petitioner.

Eighth, there is no basis for petitioner to claim damages, attorney’s fees and litigation expenses.
Since respondent was willing and able to pay for the damage caused on the two swimming pools, it
cannot be considered to be in default, and therefore, it is not liable for interest.

We hold that the petition is devoid of merit.

In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.

First, in the designation of location of risk, only the two swimming pools were specified as
included, viz:

ITEM 3 – 393,000.00 – On the two (2) swimming pools only (against the peril of earthquake
shock only)20

Second, under the breakdown for premium payments,21 it was stated that:

PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx

3 393,000.00 0.100%-E/S 393.0022]

Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:--

(a) Earthquake, volcanic eruption or other convulsion of nature. 23

Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To Include the
Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:

ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS

INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT
OF 5% OR 7 ½ % OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO
 CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.

Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . .

. . . . . . additional premium the Company agrees, notwithstanding what is stated in the
printed conditions of this Policy to the contrary, that this insurance covers loss or damage
(including loss or damage by fire) to any of the property insured by this Policy occasioned by
or through or in consequence of Earthquake.

Provided always that all the conditions of this Policy shall apply (except in so far as they may
be hereby expressly varied) and that any reference therein to loss or damage by fire should
be deemed to apply also to loss or damage occasioned by or through or in consequence of
Earthquake.24

Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the
insured properties.

It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other.25 All its parts are reflective of the true intent of the parties. The policy
cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control;
neither do particular words or phrases necessarily determine its character. Petitioner cannot focus
on the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and
riders, taken and interpreted together, indubitably show the intention of the parties to extend
earthquake shock coverage to the two swimming pools only.

A careful examination of the premium recapitulation will show that it is the clear intent of the parties
to extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance
Code defines a contract of insurance as an agreement whereby one undertakes for a consideration
to indemnify another against loss, damage or liability arising from an unknown or contingent event.
Thus, an insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk; and

5. In consideration of the insurer's promise, the insured pays a premium.26 (Emphasis

ours)

An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured
against a specified peril.27 In fire, casualty, and marine insurance, the premium payable becomes a
debt as soon as the risk attaches.28 In the subject policy, no premium payments were made with
regard to earthquake shock coverage, except on the two swimming pools. There is no mention of
any premium payable for the other resort properties with regard to earthquake shock. This is
consistent with the history of petitioner’s previous insurance policies from AHAC-AIU. As borne out
by petitioner’s witnesses:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 12-13

Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy
during the period from March 4, 1984 to March 4, 1985 the coverage on earthquake shock
was limited to the two swimming pools only?

A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is
a provision here that it was only for item 5.

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two
swimming pools only?

A. Yes, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 23-26

Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for
the procurement of this policy?

A. Yes, sir.

Q. Did you also do this through your insurance agency?

A. If you are referring to Forte Insurance Agency, yes.

Q. Is Forte Insurance Agency a department or division of your company?

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

Q. And they are independent of your company insofar as operations are concerned?

A. Yes, sir, they are separate entity.

Q. But insofar as the procurement of the insurance policy is concerned they are of course
subject to your instruction, is that not correct?

A. Yes, sir. The final action is still with us although they can recommend what insurance to
take.

Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989,
did you give written instruction to Forte Insurance Agency advising it that the earthquake
shock coverage must extend to all properties of Agoo Playa Resort in La Union?
 A. No, sir. We did not make any written instruction, although we made an oral instruction to
that effect of extending the coverage on (sic) the other properties of the company.

Q. And that instruction, according to you, was very important because in April 1987 there
was an earthquake tremor in La Union?

A. Yes, sir.

Q. And you wanted to protect all your properties against similar tremors in the [future], is that
correct?

A. Yes, sir.

Q. Now, after this policy was delivered to you did you bother to check the provisions with
respect to your instructions that all properties must be covered again by earthquake shock
endorsement?

A. Are you referring to the insurance policy issued by American Home Assurance Company
marked Exhibit "G"?

Atty. Mejia: Yes.

Witness:

A. I examined the policy and seeing that the warranty on the earthquake shock endorsement
has no more limitation referring to the two swimming pools only, I was contented already that
the previous limitation pertaining to the two swimming pools was already removed.

Petitioner also cited and relies on the attachment of the phrase "Subject to: Other Insurance
Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage
Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies"29 to the
insurance policy as proof of the intent of the parties to extend the coverage for earthquake shock.
However, this phrase is merely an enumeration of the descriptive titles of the riders, clauses,
warranties or endorsements to which the policy is subject, as required under Section 50, paragraph
2 of the Insurance Code.

We also hold that no significance can be placed on the deletion of the qualification limiting the
coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone. As
explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:

DIRECT EXAMINATION OF JUAN BARANDA III30

TSN, August 11, 1992
pp. 9-12

Atty. Mejia:

We respectfully manifest that the same exhibits C to H inclusive have been

previously marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have
occasion to review of (sic) these six (6) policies issued by your company [in favor] of
Agoo Playa Resort?
WITNESS:

Yes[,] I remember having gone over these policies at one point of time, sir.

Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is, on the basis
on (sic) the wordings indicated in Exhibits C to H respectively what was the extent of the
coverage [against] the peril of earthquake shock as provided for in each of the six (6)
policies?

xxx

WITNESS:

The extent of the coverage is only up to the two (2) swimming pools, sir.

Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?

A. Yes, sir.

ATTY. MEJIA:

What is your basis for stating that the coverage against earthquake shock as
provided for in each of the six (6) policies extend to the two (2) swimming pools only?

WITNESS:

Because it says here in the policies, in the enumeration "Earthquake Shock

Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement)," sir.

ATTY. MEJIA:

Witness referring to Exhibit C-1, your Honor.

WITNESS:

We do not normally cover earthquake shock endorsement on stand alone basis. For
swimming pools we do cover earthquake shock. For building we covered it for full
earthquake coverage which includes earthquake shock…

COURT:

As far as earthquake shock endorsement you do not have a specific coverage for
other things other than swimming pool? You are covering building? They are covered
by a general insurance?

WITNESS:
 Earthquake shock coverage could not stand alone. If we are covering building or
another we can issue earthquake shock solely but that the moment I see this, the
thing that comes to my mind is either insuring a swimming pool, foundations, they are
normally affected by earthquake but not by fire, sir.

DIRECT EXAMINATION OF JUAN BARANDA III

TSN, August 11, 1992
pp. 23-25

Q. Plaintiff’s witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F
inclusive [remained] its coverage against earthquake shock to two (2) swimming pools only
but that Exhibits G and H respectively entend the coverage against earthquake shock to all
the properties indicated in the respective schedules attached to said policies, what can you
say about that testimony of plaintiff’s witness?

WITNESS:

As I have mentioned earlier, earthquake shock cannot stand alone without the other
half of it. I assure you that this one covers the two swimming pools with respect to
earthquake shock endorsement. Based on it, if we are going to look at the premium
there has been no change with respect to the rates. Everytime (sic) there is a
renewal if the intention of the insurer was to include the earthquake shock, I think
there is a substantial increase in the premium. We are not only going to consider the
two (2) swimming pools of the other as stated in the policy. As I see, there is no
increase in the amount of the premium. I must say that the coverage was not
broaden (sic) to include the other items.

COURT:

They are the same, the premium rates?

WITNESS:

They are the same in the sence (sic), in the amount of the coverage. If you are going
to do some computation based on the rates you will arrive at the same premiums,
your Honor.

CROSS-EXAMINATION OF JUAN BARANDA III

TSN, September 7, 1992
pp. 4-6

ATTY. ANDRES:

Would you as a matter of practice [insure] swimming pools for fire insurance?

WITNESS:

No, we don’t, sir.

Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was
placed, is it not?
 A. Yes, sir.

ATTY. ANDRES:

Will you not also agree with me that these exhibits, Exhibits G and H which you have
pointed to during your direct-examination, the phrase "Item no. 5 only" meaning to
(sic) the two (2) swimming pools was deleted from the policies issued by AIU, is it
not?

xxx

ATTY. ANDRES:

As an insurance executive will you not attach any significance to the deletion of the
qualifying phrase for the policies?

WITNESS:

My answer to that would be, the deletion of that particular phrase is inadvertent.
Being a company underwriter, we do not cover. . it was inadvertent because of the
previous policies that we have issued with no specific attachments, premium rates
and so on. It was inadvertent, sir.

The Court also rejects petitioner’s contention that respondent’s contemporaneous and subsequent
acts to the issuance of the insurance policy falsely gave the petitioner assurance that the coverage
of the earthquake shock endorsement included all its properties in the resort. Respondent only
insured the properties as intended by the petitioner. Petitioner’s own witness testified to this
agreement, viz:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 4-5

Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell
Atty. Omlas (sic) to copy from Exhibit "H" for purposes of procuring the policy from Philippine
Charter Insurance Corporation?

A. I told him that the insurance that they will have to get will have the same provisions as this
American Home Insurance Policy No. 206-4568061-9.

Q. You are referring to Exhibit "H" of course?

A. Yes, sir, to Exhibit "H".

Q. So, all the provisions here will be the same except that of the premium rates?

A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be
charging will be limited to this one. I (sic) can even be lesser.
 CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14

Atty. Mejia:

Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and
scope of coverage of Exhibits "I" and "H" sometime in the third week of March, 1990 or
thereabout?

A. Yes, sir, about that time.

Q. And at that time did you notice any discrepancy or difference between the policy wordings
as well as scope of coverage of Exhibits "I" and "H" respectively?

A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the
policy wordings and rates were copied from the insurance policy I sent them but it was only
when this case erupted that we discovered some discrepancies.

Q. With respect to the items declared for insurance coverage did you notice any discrepancy
at any time between those indicated in Exhibit "I" and those indicated in Exhibit "H"
respectively?

A. With regard to the wordings I did not notice any difference because it was exactly the
same P393,000.00 on the two (2) swimming pools only against the peril of earthquake shock
which I understood before that this provision will have to be placed here because this
particular provision under the peril of earthquake shock only is requested because this is an
insurance policy and therefore cannot be insured against fire, so this has to be placed.

The verbal assurances allegedly given by respondent’s representative Atty. Umlas were not proved.
Atty. Umlas categorically denied having given such assurances.

Finally, petitioner puts much stress on the letter of respondent’s independent claims adjuster, Bayne
Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and
Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement for
earthquake shock covered properties other than the two swimming pools, viz:

DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors, Inc.)

TSN, January 26, 1993
pp. 22-26

Q. Do you recall the circumstances that led to your discussion regarding the extent of
coverage of the policy issued by Philippine Charter Insurance Corporation?

A. I remember that when I returned to the office after the inspection, I got a photocopy of the
insurance coverage policy and it was indicated under Item 3 specifically that the coverage is
only for earthquake shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed
to him what I had found out in the policy and he confirmed to me indeed only Item 3 which
were the two swimming pools have coverage for earthquake shock.

xxx
 Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for
the swimming pools all affected items have no coverage for earthquake shock?

xxx

A. I based my statement on my findings, because upon my examination of the policy I found

out that under Item 3 it was specific on the wordings that on the two swimming pools only,
then enclosed in parenthesis (against the peril[s] of earthquake shock only), and secondly,
when I examined the summary of premium payment only Item 3 which refers to the
swimming pools have a computation for premium payment for earthquake shock and all the
other items have no computation for payment of premiums.

In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the
general rule that insurance contracts are contracts of adhesion which should be liberally construed in
favor of the insured and strictly against the insurer company which usually prepares it.31 A contract of
adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract,
while the other party merely affixes his signature or his "adhesion" thereto. Through the years, the
courts have held that in these type of contracts, the parties do not bargain on equal footing, the
weaker party's participation being reduced to the alternative to take it or leave it. Thus, these
contracts are viewed as traps for the weaker party whom the courts of justice must
protect.32 Consequently, any ambiguity therein is resolved against the insurer, or construed liberally
in favor of the insured.33

The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided.34 Thus, we have called on lower courts to
remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy
of the claims of contending parties. In Development Bank of the Philippines v. National
Merchandising Corporation, et al.,35 the parties, who were acute businessmen of experience, were
presumed to have assented to the assailed documents with full knowledge.

We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim
it did not know the provisions of the policy. From the inception of the policy, petitioner had required
the respondent to copy verbatimthe provisions and terms of its latest insurance policy from AHAC-
AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of
petitioner, is reflective of petitioner’s knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36

TSN, September 23, 1991
pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities
in Agoo Playa?

A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter
Insurance Corporation as long as it will follow the same or exact provisions of the previous
insurance policy we had with American Home Assurance Corporation.

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

A. Yes, sir.
 Q. What steps did you take?

A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically
told him that the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.

Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-
4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some
terms, specifically in the replacement cost endorsement, but the principal provisions of the policy
remained essentially similar to AHAC-AIU’s policy. Consequently, we cannot apply the "fine print" or
"contract of adhesion" rule in this case as the parties’ intent to limit the coverage of the policy to the
two swimming pools only is not ambiguous.37

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is
dismissed. No costs.

SO ORDERED.

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

Characteristics of Insurance Contracts

G.R. No. L-109937 March 21, 1994

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS, represented by
CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION INSURANCE POOL, respondents.

Office of the Legal Counsel for petitioner.

Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance Pool.

QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to reverse and
set aside the decision of the Court of Appeals in CA-G.R CV No. 26434 and its resolution denying
reconsideration thereof.

We affirm the decision of the Court of Appeals with modification.

In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-law, applied for
a loan of P500,000.00 with the Development Bank of the Philippines (DBP), Basilan Branch. As the
principal mortgagor, Dans, then 76 years of age, was advised by DBP to obtain a mortgage
redemption insurance (MRI) with the DBP Mortgage Redemption Insurance Pool (DBP MRI Pool).

A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4, 1987 and
released on August 11, 1987. From the proceeds of the loan, DBP deducted the amount of
P1,476.00 as payment for the MRI premium. On August 15, 1987, Dans accomplished and
submitted the "MRI Application for Insurance" and the "Health Statement for DBP MRI Pool."

On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was
credited by DBP to the savings account of the DBP MRI Pool. Accordingly, the DBP MRI Pool was
advised of the credit.

On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this information
to the DBP MRI Pool. On September 23, 1987, the DBP MRI Pool notified DBP that Dans was not
eligible for MRI coverage, being over the acceptance age limit of 60 years at the time of application.

On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late husband's MRI
application. The DBP offered to refund the premium of P1,476.00 which the deceased had paid, but
Candida Dans refused to accept the same, demanding payment of the face value of the MRI or an
amount equivalent to the loan. She, likewise, refused to accept an ex gratia settlement of
P30,000.00, which the DBP later offered.

On February 10, 1989, respondent Estate, through Candida Dans as administratrix, filed a complaint
with the Regional Trial Court, Branch I, Basilan, against DBP and the insurance pool for "Collection
of Sum of Money with Damages." Respondent Estate alleged that Dans became insured by the DBP
MRI Pool when DBP, with full knowledge of Dans' age at the time of application, required him to
apply for MRI, and later collected the insurance premium thereon. Respondent Estate therefore
prayed: (1) that the sum of P139,500.00, which it paid under protest for the loan, be reimbursed; (2)
that the mortgage debt of the deceased be declared fully paid; and (3) that damages be awarded.

The DBP and the DBP MRI Pool separately filed their answers, with the former asserting a cross-
claim against the latter.

At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits submitted by
respondent Estate. As a result of these admissions, the trial court narrowed down the issues and,
without opposition from the parties, found the case ripe for summary judgment. Consequently, the
trial court ordered the parties to submit their respective position papers and documentary evidence,
which may serve as basis for the judgment.

On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and against
DBP. The DBP MRI Pool, however, was absolved from liability, after the trial court found no privity of
contract between it and the deceased. The trial court declared DBP in estoppel for having led Dans
into applying for MRI and actually collecting the premium and the service fee, despite knowledge of
his age ineligibility. The dispositive portion of the decision read as follows:

WHEREFORE, in view of the foregoing consideration and in the furtherance of

justice and equity, the Court finds judgment for the plaintiff and against Defendant
DBP, ordering the latter:

1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of
interest as amortization payment paid under protest;

2. To consider the mortgage loan of P300,000.00 including all interest accumulated

or otherwise to have been settled, satisfied or set-off by virtue of the insurance
coverage of the late Juan B. Dans;

3. To pay plaintiff the amount of P10,000.00 as attorney's fees;

4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other

expenses, and other relief just and equitable.

The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed.
The Cross-claim of Defendant DBP is likewise dismissed (Rollo, p. 79)

The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the appellate
court affirmed in toto the decision of the trial court. The DBP's motion for reconsideration was denied
in a resolution dated April 20, 1993.

Hence, this recourse.

II

When Dans applied for MRI, he filled up and personally signed a "Health Statement for DBP MRI
Pool" (Exh. "5-Bank") with the following declaration:

I hereby declare and agree that all the statements and answers contained herein are
true, complete and correct to the best of my knowledge and belief and form part of
my application for insurance. It is understood and agreed that no insurance coverage
shall be effected unless and until this application is approved and the full premium is
paid during my continued good health (Records, p. 40).

Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the application
shall be approved by the insurance pool; and (2) when the full premium is paid during the continued
good health of the applicant. These two conditions, being joined conjunctively, must concur.

Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool. The pool,
however, did not approve the application of Dans. There is also no showing that it accepted the sum
of P1,476.00, which DBP credited to its account with full knowledge that it was payment for Dan's
premium. There was, as a result, no perfected contract of insurance; hence, the DBP MRI Pool
cannot be held liable on a contract that does not exist.

The liability of DBP is another matter.

It was DBP, as a matter of policy and practice, that required Dans, the borrower, to secure MRI
coverage. Instead of allowing Dans to look for his own insurance carrier or some other form of
insurance policy, DBP compelled him to apply with the DBP MRI Pool for MRI coverage. When
Dan's loan was released on August 11, 1987, DBP already deducted from the proceeds thereof the
MRI premium. Four days latter, DBP made Dans fill up and sign his application for MRI, as well as
his health statement. The DBP later submitted both the application form and health statement to the
DBP MRI Pool at the DBP Main Building, Makati Metro Manila. As service fee, DBP deducted 10
percent of the premium collected by it from Dans.

In dealing with Dans, DBP was wearing two legal hats: the first as a
lender, and the second as an insurance agent.
As an insurance agent, DBP made Dans go through the motion of applying for said insurance,
thereby leading him and his family to believe that they had already fulfilled all the requirements for
the MRI and that the issuance of their policy was forthcoming. Apparently, DBP had full knowledge
that Dan's application was never going to be approved. The maximum age for MRI acceptance is 60
years as clearly and specifically provided in Article 1 of the Group Mortgage Redemption Insurance
Policy signed in 1984 by all the insurance companies concerned (Exh. "1-Pool").

Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is not personally
liable to the party with whom he contracts, unless he expressly binds himself or exceeds the limits of
his authority without giving such party sufficient notice of his powers."

The DBP is not authorized to accept applications for MRI when its clients are more than 60 years of
age (Exh. "1-Pool"). Knowing all the while that Dans was ineligible for MRI coverage because of his
DBP exceeded the scope of its authority when
advanced age,
it accepted Dan's application for MRI by collecting the
insurance premium, and deducting its agent's
commission and service fee.
The liability of an agent who exceeds the scope of his authority depends upon whether the third
person is aware of the limits of the agent's powers. There is no showing that Dans knew of the
limitation on DBP's authority to solicit applications for MRI.

If the third person dealing with an agent is unaware of the limits of the authority conferred by the
principal on the agent and he (third person) has been deceived by the non-disclosure thereof by the
agent, then the latter is liable for damages to him (V Tolentino, Commentaries and Jurisprudence on
the Civil Code of the Philippines, p. 422 [1992], citing Sentencia [Cuba] of September 25, 1907). The
rule that the agent is liable when he acts without authority is founded upon the supposition that there
has been some wrong or omission on his part either in misrepresenting, or in affirming, or concealing
the authority under which he assumes to act (Francisco, V., Agency 307 [1952], citing Hall v.
Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-disclosure of the limits of the agency carries with
it the implication that a deception was perpetrated on the unsuspecting client, the provisions of
Articles 19, 20 and 21 of the Civil Code of the Philippines come into play.

Article 19 provides:
 Every person must, in the exercise of his rights and in the performance of his duties,
act with justice give everyone his due and observe honesty and good faith.

Article 20 provides:

Every person who, contrary to law, willfully or negligently causes damage to another,
shall indemnify the latter for the same.

Article 21 provides:

Any person, who willfully causes loss or injury to another in a manner that is contrary
to morals, good customs or public policy shall compensate the latter for the damage.

The DBP's liability, however, cannot be for the entire value of the insurance policy. To
assume that were it not for DBP's concealment of the limits of its authority, Dans would have
secured an MRI from another insurance company, and therefore would have been fully

Considering his
insured by the time he died, is highly speculative.

advanced age, there is no absolute certainty

that Dans could obtain an insurance coverage
from another company. It must also be noted that Dans died almost
immediately, i.e., on the nineteenth day after applying for the MRI, and on the twenty-third day
from the date of release of his loan.

One is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has
duly proved (Civil Code of the Philippines, Art. 2199). Damages, to be recoverable, must not only
be capable of proof, but must be actually proved with a reasonable degree of certainty
(Refractories Corporation v. Intermediate Appellate Court, 176 SCRA 539 [1989]; Choa Tek Hee v.
Philippine Publishing Co., 34 Phil. 447 [1916]). Speculative damages are too remote to be included
in an accurate estimate of damages (Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).

While Dans is not entitled to compensatory damages, he is entitled to moral damages. No

proof of pecuniary loss is required in the assessment of said kind of damages (Civil Code of
Philippines, Art. 2216). The same may be recovered in acts referred to in Article 2219 of the Civil
Code.

The assessment of moral damages is left to the discretion of the court according to the
circumstances of each case (Civil Code of the Philippines, Art. 2216). Considering that DBP had
offered to pay P30,000.00 to respondent Estate in ex gratia settlement of its claim and that DBP's
non-disclosure of the limits of its authority amounted to a deception to its client, an award of moral
damages in the amount of P50,000.00 would be reasonable.

The award of attorney's fees is also just and equitable under the circumstances (Civil Code of the
Philippines, Article 2208 [11]).

WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV

No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE respondent Estate of
Juan B. Dans the amount of P1,476.00 with legal interest from the date of the filing of the complaint
until fully paid; and (2) to PAY said Estate the amount of Fifty Thousand Pesos (P50,000.00) as
moral damages and the amount of Ten Thousand Pesos (P10,000.00) as attorney's fees. With costs
against petitioner.

SO ORDERED.

Cruz, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

G.R. No. L-15895 November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-
appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

Jose A. Espiritu for appellant.

Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer
to recover from the defendant life insurance company the sum of pesos 6,000 paid by the
deceased for a life annuity. The trial court gave judgment for the defendant. Plaintiff appeals.

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the
Sun Life Assurance Company of Canada through its office in Manila for a life annuity. Two days later
he paid the sum of P6,000 to the manager of the company's Manila office and was given a receipt
reading as follows:

MANILA, I. F., 26 de septiembre, 1917.

PROVISIONAL RECEIPT Pesos 6,000

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia
solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina
Central de la Compañia.

The application was immediately forwarded to the head office of the company at Montreal, Canada.
On November 26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on
the same day the cable was received notice was sent by the Manila office of Herrer that the
application had been accepted, is a disputed point, which will be discussed later.) On December 4,
1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote
to the Manila office of the company stating that Herrer desired to withdraw his application.
The following day the local office replied to Mr. Torres, stating that the policy had been issued, and
called attention to the notification of November 26, 1917. This letter was received by Mr. Torres on
the morning of December 21, 1917. Mr. Herrer died on December 20, 1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of
acceptance of his application. To resolve this question, we propose to go directly to the evidence of
record.

The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the
trial testified that he prepared the letter introduced in evidence as Exhibit 3, of date November 26,
1917, and handed it to the local manager, Mr. E. E. White, for signature. The witness admitted on
cross-examination that after preparing the letter and giving it to he manager, he new nothing of what
became of it. The local manager, Mr. White, testified to having received the cablegram accepting the
application of Mr. Herrer from the home office on November 26, 1917. He said that on the same day
he signed a letter notifying Mr. Herrer of this acceptance. The witness further said that letters, after
being signed, were sent to the chief clerk and placed on the mailing desk for transmission. The
witness could not tell if the letter had every actually been placed in the mails. Mr. Tuason, who was
the chief clerk, on November 26, 1917, was not called as a witness. For the defense, attorney
Manuel Torres testified to having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr.
Herrer mentioned his application for a life annuity, and that he said that the only document relating to
the transaction in his possession was the provisional receipt. Rafael Enriquez, the administrator of
the estate, testified that he had gone through the effects of the deceased and had found no letter of
notification from the insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26, 1917,
notifying Mr. Herrer that his application had been accepted, was prepared and signed in the local
office of the insurance company, was placed in the ordinary channels for transmission, but as far as
we know, was never actually mailed and thus was never received by the applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should
be applied to the facts. In order to reach our legal goal, the obvious signposts along the way must be
noticed.

Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the
Code of Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title
VIII of Book III and Section III of Title III of Book III, which dealt with insurance contracts. In the Civil
Code there formerly existed and presumably still exist, Chapters II and IV, entitled insurance
contracts and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915, there was,
however, in force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and health
insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of Book III of the
code of Commerce. The law of insurance is consequently now found in the Insurance Act and the
Civil Code.

While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be
followed in order that there may be a contract of insurance. On the other hand, the Civil Code, in
article 1802, not only describes a contact of life annuity markedly similar to the one we are
considering, but in two other articles, gives strong clues as to the proper disposition of the case. For
instance, article 16 of the Civil Code provides that "In matters which are governed by special laws,
any deficiency of the latter shall be supplied by the provisions of this Code." On the supposition,
therefore, which is incontestable, that the special law on the subject of insurance is deficient in
enunciating the principles governing acceptance, the subject-matter of the Civil code, if there be any,
would be controlling. In the Civil Code is found article 1262 providing that "Consent is shown by the
concurrence of offer and acceptance with respect to the thing and the consideration which are to
constitute the contract. An acceptance made by letter shall not bind the person making the offer
except from the time it came to his knowledge. The contract, in such case, is presumed to have
been entered into at the place where the offer was made." This latter article is in opposition to the
provisions of article 54 of the Code of Commerce.

If no mistake has been made in announcing the successive steps by which we reach a conclusion,
then the only duty remaining is for the court to apply the law as it is found. The legislature in its
wisdom having enacted a new law on insurance, and expressly repealed the provisions in the Code
of Commerce on the same subject, and having thus left a void in the commercial law, it would seem
logical to make use of the only pertinent provision of law found in the Civil code, closely related to
the chapter concerning life annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only
from the date it came to his knowledge, may not be the best expression of modern commercial
usage. Still it must be admitted that its enforcement avoids uncertainty and tends to security. Not
only this, but in order that the principle may not be taken too lightly, let it be noticed that it is identical
with the principles announced by a considerable number of respectable courts in the United States.
The courts who take this view have expressly held that an acceptance of an offer of
insurance not actually or constructively communicated to the proposer does not make a
contract. Only the mailing of acceptance, it has been said, completes the contract of insurance, as
the locus poenitentiae is ended when the acceptance has passed beyond the control of the party. (I
Joyce, The Law of Insurance, pp. 235, 244.)

In resume, therefore, the law applicable to the case is found to be the second paragraph of
article 1262 of the Civil Code providing that an acceptance made by letter shall not bind the
person making the offer except from the time it came to his knowledge. The pertinent fact is,
that according to the provisional receipt, three things had to be accomplished by the insurance
company before there was a contract: (1) There had to be a medical examination of the
applicant; (2) there had to be approval of the application by the head office of the company;
and (3) this approval had in some way to be communicated by the company to the applicant.
The further admitted facts are that the head office in Montreal did accept the application, did cable
the Manila office to that effect, did actually issue the policy and did, through its agent in Manila,
actually write the letter of notification and place it in the usual channels for transmission to the
addressee. The fact as to the letter of notification thus fails to concur with the essential elements of
the general rule pertaining to the mailing and delivery of mail matter as announced by the American
courts, namely, when a letter or other mail matter is addressed and mailed with postage prepaid
there is a rebuttable presumption of fact that it was received by the addressee as soon as it could
have been transmitted to him in the ordinary course of the mails. But if any one of these elemental
facts fails to appear, it is fatal to the presumption. For instance, a letter will not be presumed to have
been received by the addressee unless it is shown that it was deposited in the post-office, properly
addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)

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

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

Mapa, C.J., Araullo, Avanceña and Villamor, JJ., concur.

Johnson, J., dissents.

G.R. No. 166245 April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,

vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.

DECISION

VELASCO, JR., J.:

The Case

Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside
the November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the
query: May the inaction of the insurer on the insurance application be considered as approval of the
application?

The Facts

On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife)
entered into an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner
Eternal Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who
purchased burial lots from it on installment basis would be insured by Philamlife. The amount of
insurance coverage depended upon the existing balance of the purchased burial lots. The policy was
to be effective for a period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:

ELIGIBILITY.

Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is
indebted to the Assured for the unpaid balance of his loan with the Assured, and is accepted
for Life Insurance coverage by the Company on its effective date is eligible for insurance
under the Policy.

EVIDENCE OF INSURABILITY.

No medical examination shall be required for amounts of insurance up to P50,000.00.

However, a declaration of good health shall be required for all Lot Purchasers as part of the
application. The Company reserves the right to require further evidence of insurability
satisfactory to the Company in respect of the following:

1. Any amount of insurance in excess of P50,000.00.

2. Any lot purchaser who is more than 55 years of age.

LIFE INSURANCE BENEFIT.

The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the
unpaid balance of his loan (including arrears up to but not exceeding 2 months) as reported
by the Assured to the Company or the sum of P100,000.00, whichever is smaller. Such
benefit shall be paid to the Assured if the Lot Purchaser dies while insured under the Policy.

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts
a loan with the Assured. However, there shall be no insurance if the application of the
Lot Purchaser is not approved by the Company.3

Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together
with a copy of the application of each purchaser, and the amounts of the respective unpaid balances
of all insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter
dated December 29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982.
One of those included in the list as "new business" was a certain John Chuang. His balance of
payments was PhP 100,000. On August 2, 1984, Chuang died.

Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for
Chuang’s death. Attached to the claim were the following documents: (1) Chuang’s Certificate of
Death; (2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate
of Claimant; (4) Certificate of Attending Physician; and (5) Assured’s Certificate.

In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit the
following documents relative to its insurance claim for Chuang’s death: (1) Certificate of Claimant
(with form attached); (2) Assured’s Certificate (with form attached); (3) Application for Insurance
accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account
showing the unpaid balance of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14, 1984,7 which was
received by Philamlife on November 15, 1984.

After more than a year, Philamlife had not furnished Eternal with any reply to the latter’s insurance
claim. This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000
on April 25, 1986.8

In response to Eternal’s demand, Philamlife denied Eternal’s insurance claim in a letter dated May
20, 1986,9 a portion of which reads:

The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal
Gardens Memorial Park in October 1982 for the total maximum insurable amount of
P100,000.00 each. No application for Group Insurance was submitted in our office prior to
his death on August 2, 1984.

In accordance with our Creditor’s Group Life Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of good health shall be required for all Lot Purchasers as
party of the application." We cite further the provision on Effective Date of Coverage under
the policy which states that "there shall be no insurance if the application is not approved by
the Company." Since no application had been submitted by the Insured/Assured, prior to his
death, for our approval but was submitted instead on November 15, 1984, after his death,
Mr. John Uy Chuang was not covered under the Policy. We wish to point out that Eternal
Gardens being the Assured was a party to the Contract and was therefore aware of these
pertinent provisions.

With regard to our acceptance of premiums, these do not connote our approval per se of the
insurance coverage but are held by us in trust for the payor until the prerequisites for
insurance coverage shall have been met. We will however, return all the premiums which
have been paid in behalf of John Uy Chuang.

Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of
money against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of
Eternal, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff

ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay
the sum of P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus
legal rate of interest, until fully paid; and, to pay the sum of P10,000.00 as attorney’s fees.

SO ORDERED.

The RTC found that Eternal submitted Chuang’s application for insurance which he accomplished
before his death, as testified to by Eternal’s witness and evidenced by the letter dated December 29,
1982, stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert."10 It further
ruled that due to Philamlife’s inaction from the submission of the requirements of the group
insurance on December 29, 1982 to Chuang’s death on August 2, 1984, as well as Philamlife’s
acceptance of the premiums during the same period, Philamlife was deemed to have approved
Chuang’s application. The RTC said that since the contract is a group life insurance, once
proof of death is submitted, payment must follow.

Philamlife appealed to the CA, which ruled, thus:

 WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.

SO ORDERED.11

The CA based its Decision on the factual finding that Chuang’s application was not enclosed in
Eternal’s letter dated December 29, 1982. It further ruled that the non-accomplishment of the
submitted application form violated Section 26 of the Insurance Code. Thus, the CA concluded,
there being no application form, Chuang was not covered by Philamlife’s insurance.

Hence, we have this petition with the following grounds:

The Honorable Court of Appeals has decided a question of substance, not therefore
determined by this Honorable Court, or has decided it in a way not in accord with law or with
the applicable jurisprudence, in holding that:

I. The application for insurance was not duly submitted to respondent PhilamLife
before the death of John Chuang;

II. There was no valid insurance coverage; and

III. Reversing and setting aside the Decision of the Regional Trial Court dated May
29, 1996.

The Court’s Ruling

As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before
the CA and first level courts, considering their findings of facts are conclusive and binding on this
Court. However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:

(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5)
when the findings of facts are conflicting; (6) when in making its findings the [CA] went
beyond the issues of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial
court; (8) when the findings are conclusions without citation of specific evidence on which
they are based; (9) when the facts set forth in the petition as well as in the petitioner’s main
and reply briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record;
and (11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed
by the parties, which, if properly considered, would justify a different conclusion.12(Emphasis
supplied.)

In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may
review them.

Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternal’s letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that
was apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a
copy of the insurance application which was signed by Chuang himself and executed before his
death.

On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing
that Eternal must present evidence showing that Philamlife received a copy of Chuang’s insurance
application.

The evidence on record supports Eternal’s position.

The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received,
states that the insurance forms for the attached list of burial lot buyers were attached to the letter.
Such stamp of receipt has the effect of acknowledging receipt of the letter together with the
attachments. Such receipt is an admission by Philamlife against its own interest.13 The burden of
evidence has shifted to Philamlife, which must prove that the letter did not contain Chuang’s
insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed to have
received Chuang’s insurance application.

To reiterate, it was Philamlife’s bounden duty to make sure that before a transmittal letter is stamped
as received, the contents of the letter are correct and accounted for.

Philamlife’s allegation that Eternal’s witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the reliability and
credibility of the witnesses, because it has the opportunity to observe firsthand the witnesses’
demeanor, conduct, and attitude. Findings of the trial court on such matters are binding and
conclusive on the appellate court, unless some facts or circumstances of weight and substance have
been overlooked, misapprehended, or misinterpreted,14 that, if considered, might affect the result of
the case.15

An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no

overlooked facts of substance and value.

Philamlife primarily claims that Eternal did not even know where the original insurance application of
Chuang was, as shown by the testimony of Edilberto Mendoza:

Atty. Arevalo:

Q Where is the original of the application form which is required in case of new coverage?

[Mendoza:]

A It is [a] standard operating procedure for the new client to fill up two copies of this form and
the original of this is submitted to Philamlife together with the monthly remittances and the
second copy is remained or retained with the marketing department of Eternal Gardens.

Atty. Miranda:

We move to strike out the answer as it is not responsive as counsel is merely asking for the
location and does not [ask] for the number of copy.
 Atty. Arevalo:

Q Where is the original?

[Mendoza:]

A As far as I remember I do not know where the original but when I submitted with that
payment together with the new clients all the originals I see to it before I sign the transmittal
letter the originals are attached therein.16

In other words, the witness admitted not knowing where the original insurance application was, but
believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.

As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two
insurance application forms were accomplished and the testimony of Mendoza on who actually filled
out the application form, these are minor inconsistencies that do not affect the credibility of the
witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility as these negate any
suspicion that the testimonies have been rehearsed.17

We reiterated the above ruling in Merencillo v. People:

Minor discrepancies or inconsistencies do not impair the essential integrity of the

prosecution’s evidence as a whole or reflect on the witnesses’ honesty. The test is whether
the testimonies agree on essential facts and whether the respective versions corroborate
and substantially coincide with each other so as to make a consistent and coherent whole.18

In the present case, the number of copies of the insurance application that Chuang executed is not
at issue, neither is whether the insurance application presented by Eternal has been falsified. Thus,
the inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternal’s
witnesses.

However, the question arises as to whether Philamlife assumed the risk of loss without approving
the application.

This question must be answered in the affirmative.

As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group
Life Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts
a loan with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.

An examination of the above provision would show ambiguity between its two sentences. The first
sentence appears to state that the insurance coverage of the clients of Eternal already became
effective upon contracting a loan with Eternal while the second sentence appears to require
Philamlife to approve the insurance contract before the same can become effective.
It must be remembered that an insurance contract is a
contract of adhesion which must be construed liberally in
favor of the insured and strictly against the insurer in order
to safeguard the latter’s interest. Thus, in Malayan Insurance Corporation v.
Court of Appeals, this Court held that:

Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is
prepared by the insurer. A contract of insurance, being a contract of adhesion, par
excellence, any ambiguity therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be construed in
such a way as to preclude the insurer from noncompliance with its obligations.19 (Emphasis
supplied.)

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the
above ruling, stating that:

When the terms of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his obligation. Being
a contract of adhesion, the terms of an insurance contract are to be construed strictly against
the party which prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured, especially
to avoid forfeiture.20

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December
10, 1980, must be construed in favor of the insured and in favor of the effectivity of the insurance
contract.

On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a
party’s purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot
s effective, valid, and binding until
purchaser is created and the same i
terminated by Philamlife by disapproving the insurance
application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective
Date of Benefit is in the nature of a resolutory condition which would lead to the cessation of the
insurance contract. Moreover, the mere inaction of the insurer on the insurance application must not
work to prejudice the insured; it cannot be interpreted as a termination of the insurance contract.
The termination of the insurance contract by the
insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More often than not, insurance
contracts are contracts of adhesion containing technical terms and conditions of the industry,
confusing if at all understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must be considered
whenever the rights and obligations of the insurer and the insured are to be delineated. Hence, in
order to protect the interest of insurance applicants, insurance companies must be obligated to act
with haste upon insurance applications, to either deny or approve the same, or otherwise be bound
to honor the application as a valid, binding, and effective insurance contract.21

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No.
57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch
138 is MODIFIED. Philamlife is hereby ORDERED:

(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life
Insurance Policy of Chuang;

(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000
from the time of extra-judicial demand by Eternal until Philamlife’s receipt of the May 29,
1996 RTC Decision on June 17, 1996;

(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP
100,000 from June 17, 1996 until full payment of this award; and

(4) To pay Eternal attorney’s fees in the amount of PhP 10,000.

No costs.

SO ORDERED.

Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario*, JJ., concur.

G.R. No. 105562 September 27, 1993

LUZ PINEDA, MARILOU MONTENEGRO, VIRGINIA ALARCON, DINA LORENA AYO, CELIA
CALUMBAG and LUCIA LONTOK, petitioners,
vs.
HON. COURT OF APPEALS and THE INSULAR LIFE ASSURANCE COMPANY,
LIMITED, respondents.

Mariano V. Ampil, Jr. for petitioners.

Ramon S. Caguiao for private respondent.

DAVIDE, JR., J.:

This is an appeal by certiorari to review and set aside the Decision of the public respondent Court of
Appeals in CA-G.R. SP No. 229501 and its Resolution denying the petitioners' motion for
reconsideration.2 The challenged decision modified the decision of the Insurance Commission in IC
Case
No. RD-058. 3

The petitioners were the complainants in IC Case No. RD-058, an administrative complaint against
private respondent Insular Life Assurance Company, Ltd. (hereinafter Insular Life), which was filed
with the Insurance Commission on 20 September 1989. 4 They prayed therein that after due
proceedings, Insular Life "be ordered to pay the claimants their insurance claims" and that "proper
sanctions/penalties be imposed on" it "for its deliberate, feckless violation of its contractual
obligations to the complainants, and of the Insurance Code." 5 Insular Life's motion to dismiss the
complaint on the ground that "the claims of complainants are all respectively beyond the jurisdiction
of the Insurance Commission as provided in Section 416 of the Insurance Code,"6 having been
denied in the Order of 14 November 1989, 7 it filed its answer on 5 December 1989. 8 Thereafter,
hearings were conducted on various dates.

On 20 June 1990, the Commission rendered its decision9 in favor of the complainants, the dispositive
portion of which reads as follows:
 WHEREFORE, this Commission merely orders the respondent company to:

a) Pay a fine of FIVE HUNDRED PESOS (P500.00) a day from the receipt of a copy
of this Decision until actual payment thereof;

b) Pay and settle the claims of DINA AYO and LUCIA LONTOK, for P50,000.00 and
P40,000.00, respectively;

c) Notify henceforth it should notify individual beneficiaries designated under any

Group Policy, in the event of the death of insured(s), where the corresponding claims
are filed by the Policyholder;

d) Show cause within ten days why its other responsible officers who have handled
this case should not be subjected to disciplinary and other administrative sanctions
for deliberately releasing to Capt. Nuval the check intended for spouses ALARCON,
in the absence of any Special Power of Attorney for that matter, and for negligence
with respect to the release of the other five checks.

SO ORDERED. 10

In holding for the petitioners, the Insurance Commission made the following findings and
conclusions:

After taking into consideration the evidences [sic], testimonial and documentary for
the complainants and the respondent, the Commission finds that; First: The
respondent erred in appreciating that the powers of attorney executed by five (5) of
the several beneficiaries convey absolute authority to Capt. Nuval, to demand,
receive, receipt and take delivery of insurance proceeds from respondent Insular
Life. A cursory reading of the questioned powers of authority would disclosed [sic]
that they do not contain in unequivocal and clear terms authority to Capt. Nuval to
obtain, receive, receipt from respondent company insurance proceeds arising from
the death of the seaman-insured. On the contrary, the said powers of attorney are
couched in terms which could easily arouse suspicion of an ordinary
man. . . .

Second: The testimony of the complainants' rebuttal witness,

Mrs. Trinidad Alarcon, who declared in no uncertain terms that neither she nor her
husband, executed a special power of attorney in favor of Captain Rosendo Nuval,
authorizing him to claim, receive, receipt and take delivery of any insurance proceeds
from Insular Life arising out of the death of their insured/seaman son, is not
convincingly refuted.

Third: Respondent Insular Life did not observe Section 180 of the Insurance Code,
when it issued or released two checks in the amount of P150,000.00 for the three
minor children (P50,000.00 each) of complainant, Dina Ayo and another check of
P40,000.00 for minor beneficiary Marissa Lontok, daughter of another complainant
Lucia Lontok, there being no showing of any court authorization presented or the
requisite bond posted.

Section 180 is quotes [sic] partly as follows:

 . . . In the absence of a judicial guardian, the father, or in the latter's
absence or incapacity, the mother of any minor, who is an insured or
a beneficiary under a contract of life, health or accident insurance,
may exercise, in behalf of said minor, any right, under the policy,
without necessity of court authority or the giving of a bond where the
interest of the minor in the particular act involved does not exceed
twenty thousand pesos . . . . 11

Insular Life appealed the decision to the public respondent which docketed the case as CA-G.R. SP
No. 22950. The appeal urged the appellate court to reverse the decision because the Insurance
Commission (a) had no jurisdiction over the case considering that the claims exceeded
P100,000.00,
(b) erred in holding that the powers of attorney relied upon by Insular Life were insufficient to convey
absolute authority to Capt. Nuval to demand, receive and take delivery of the insurance proceeds
pertaining to the petitioners, (c) erred in not giving credit to the version of Insular Life that the power
of attorney supposed to have been executed in favor of the Alarcons was missing, and
(d) erred in holding that Insular Life was liable for violating Section 180 of the Insurance Code for
having released to the surviving mothers the insurance proceeds pertaining to the beneficiaries who
were still minors despite the failure of the former to obtain a court authorization or to post a bond.

On 10 October 1991, the public respondent rendered a decision, 12 the decretal portion of which
reads:

WHEREFORE, the decision appealed from is modified by eliminating therefrom the

award to Dina Ayo and Lucia Lontok in the amounts of P50,000.00 and P40,000.00,
respectively. 13

It found the following facts to have been duly established:

It appears that on 23 September 1983, Prime Marine Services, Inc. (PMSI, for
brevity), a crewing/manning outfit, procured Group PoIicy
No. G-004694 from respondent-appellant Insular Life Assurance Co., Ltd. to provide
life insurance coverage to its sea-based employees enrolled under the plan. On 17
February 1986, during the effectivity of the policy, six covered employees of the
PMSI perished at sea when their vessel, M/V Nemos, a Greek cargo vessel, sunk
somewhere in El Jadida, Morocco. They were survived by complainants-appellees,
the beneficiaries under the policy.

Following the tragic demise of their loved ones, complainants-appellees sought to

claim death benefits due them and, for this purpose, they approached the President
and General Manager of PMSI, Capt. Roberto Nuval. The latter evinced willingness
to assist complainants-appellees to recover Overseas Workers Welfare
Administration (OWWA) benefits from the POEA and to work for the increase of their
PANDIMAN and other benefits arising from the deaths of their husbands/sons. They
were thus made to execute, with the exception of the spouses Alarcon, special
powers of attorney authorizing Capt. Nuval to, among others, "follow up, ask,
demand, collect and receive" for their benefit indemnities of sums of money due them
relative to the sinking of M/V Nemos. By virtue of these written powers of attorney,
complainants-appellees were able to receive their respective death benefits.
Unknown to them, however, the PMSI, in its capacity as employer and policyholder
of the life insurance of its deceased workers, filed with respondent-appellant formal
claims for and in behalf of the beneficiaries, through its President, Capt. Nuval.
 Among the documents submitted by the latter for the processing of the claims were
five special powers of attorney executed by complainants-appellees. On the basis of
these and other documents duly submitted, respondent-appellant drew against its
account with the Bank of the Philippine Islands on 27 May 1986 six (6) checks, four
for P200,00.00 each, one for P50,000.00 and another for P40,00.00, payable to the
order of complainants-appellees. These checks were released to the treasurer of
PMSI upon instructions of
Capt. Nuval over the phone to Mr. Mariano Urbano, Assistant Department Manager
for Group Administration Department of respondent-appellant. Capt. Nuval, upon
receipt of these checks from the treasurer, who happened to be his son-in-law,
endorsed and deposited them in his account with the Commercial Bank of Manila,
now Boston Bank.

On 3 July 1989, after complainants-appellees learned that they were entitled, as

beneficiaries, to life insurance benefits under a group policy with respondent-
appellant, they sought to recover these benefits from Insular Life but the latter denied
their claim on the ground that the liability to complainants-appellees was already
extinguished upon delivery to and receipt by PMSI of the six (6) checks issued in
their names.14

On the basis thereof, the public respondent held that the Insurance Commission had jurisdiction over
the case on the ground that although some of the claims exceed P100,000.00, the petitioners had
asked for administrative sanctions against Insular Life which are within the Commission's jurisdiction
to grant; hence, "there was merely a misjoinder of causes of action . . . and, like misjoinder of
parties, it is not a ground for the dismissal of the action as it does not affect the other reliefs prayed
for." 15 It also rejected Insular Life's claim that the Alarcons had submitted a special power of attorney
which they (Insular Life) later misplaced.

On the other hand, the public respondent ruled that the powers of attorney, Exhibits "1" to "5," relied
upon by Insular Life were sufficient to authorize Capt. Nuval to receive the proceeds of the insurance
pertaining to the beneficiaries. It stated:

When the officers of respondent-appellant read these written powers, they must have
assumed Capt. Nuval indeed had authority to collect the insurance proceeds in
behalf of the beneficiaries who duly affixed their signatures therein. The written
power is specific enough to define the authority of the agent to collect any sum of
money pertaining to the sinking of the fatal vessel. Respondent-appellant interpreted
this power to include the collection of insurance proceeds in behalf of the
beneficiaries concerned. We believe this is a reasonable interpretation even by an
officer of respondent-appellant unschooled in the law. Had respondent appellant,
consulted its legal department it would not have received a contrary view. There is
nothing in the law which mandates a specific or special power of attorney to be
executed to collect insurance proceeds. Such authority is not included in the
enumeration of Art. 1878 of the New Civil Code. Neither do we perceive collection of
insurance claims as an act of strict dominion as to require a special power of
attorney. Moreover, respondent-appellant had no reason to doubt Capt. Nuval. Not
only was he armed with a seemingly genuine authorization, he also appeared to be
the proper person to deal with respondent-appellant being the President and General
Manager of the PMSI, the policyholder with whom respondent-appellant always
dealt. The fact that there was a verbal agreement between complainants-appellees
and Capt. Nuval limiting the authority of the latter to claiming specified death benefits
cannot prejudice the insurance company which relied on the terms of the powers of
attorney which on their face do not disclose such limitation. Under the circumstances,
 it appearing that complainants-appellees have failed to point to a positive provision of
law or stipulation in the policy requiring a specific power of attorney to be presented,
respondents-appellant's reliance on the written powers was in order and it cannot be
penalized for such an act. 16

Insofar as the minor children of Dina Ayo and Lucia Lontok were concerned, it ruled that the
requirement in Section 180 of the Insurance Code which provides in part that:

In the absence of a judicial guardian, the father, or in the latter's absence or

incapacity, the mother, of any minor, who is an insured or a beneficiary under a
contract of life, health or accident insurance, may exercise, in behalf of said minor,
any right under the policy, without necessity of court authority or the giving of a bond,
where the interest of the minor in the particular act involved does not exceed twenty
thousand pesos. Such a right, may include, but shall not be limited to, obtaining a
policy loan, surrendering the policy, receiving the proceeds of the policy, and giving
the minor's consent to any transaction on the policy.

has been amended by the Family Code 17 which grants the father and mother joint legal
guardianship over the property of their unemancipated common child without the necessity of
a court appointment; however, when the market value of the property or the annual income
of the child exceeds P50,000.00, the parent concerned shall be required to put up a bond in
such amount as the court may determine.

Hence, this petition for review on certiorari which we gave due course after the private respondent
had filed the required comment thereon and the petitioners their reply to the comment.

We rule for the petitioners.

We have carefully examined the specific powers of attorney, Exhibits "1" to "5," which were executed
by petitioners Luz Pineda, Lucia B. Lontok, Dina Ayo, Celia Calumag, and Marilyn Montenegro,
respectively, on 14 May 198618and uniformly granted to Capt. Rosendo Nuval the following powers:

To follow-up, ask, demand, collect and receipt for my benefit indemnities or sum of
money due me relative to the sinking of M.V. NEMOS in the vicinity of El Jadida,
Casablanca, Morocco on the evening of February 17, 1986; and

To sign receipts, documents, pertinent waivers of indemnities or other writings of

whatsoever nature with any and all third persons, concerns and entities, upon terms
and conditions acceptable to my said attorney.

We agree with the Insurance Commission that the special powers of attorney "do not contain in
unequivocal and clear terms authority to Capt. Nuval to obtain, receive, receipt from respondent
company insurance proceeds arising from the death of the seaman-insured. On the contrary, the
said powers of attorney are couched in terms which could easily arouse suspicion of an ordinary
man." 19 The holding of the public respondent to the contrary is principally premised on its opinion
that:

[t]here is nothing in the law which mandates a specific or special power of attorney to
be executed to collect insurance proceeds. Such authority is not included in the
enumeration of art. 1878 of the New Civil Code. Neither do we perceive collection of
insurance claims as an act of strict dominion as to require a special power of
attorney.
 If this be so, then they could not have been meant to be a general power of attorney since
Exhibits "1" to "5" are special powers of attorney. The execution by the principals of special
powers of attorney, which clearly appeared to be in prepared forms and only had to be filled
up with their names, residences, dates of execution, dates of acknowledgment and others,
excludes any intent to grant a general power of attorney or to constitute a universal agency.
Being special powers of attorney, they must be strictly construed.

Certainly, it would be highly imprudent to read into the special powers of attorney in question the
power to collect and receive the insurance proceeds due the petitioners from Group Policy No. G-
004694. Insular Life knew that a power of attorney in favor of Capt. Nuval for the collection and
receipt of such proceeds was a deviation from its practice with respect to group policies. Such
practice was testified to by Mr. Marciano Urbano, Insular Life's Assistant Manager of the Group
Administrative Department, thus:

ATTY. CAGUIOA:

Can you explain to us why in this case, the claim was filed by a
certain Capt. Noval [sic]?

WITNESS:

a The practice of our company in claim pertaining to group insurance,

the policyholder is the one who files the claim for the beneficiaries of
the deceased. At that time, Capt. Noval [sic] is the President and
General Manager of Prime Marine.

q What is the reason why policyholders are the ones who file the
claim and not the designated beneficiaries of the employees of the
policyholders?

a Yes because group insurance is normally taken by the employer as

an employee-benefit program and as such, the benefit should be
awarded by the policyholder to make it appear that the benefit really
is given by the employer. 20

On cross-examination, Urbano further elaborated that even payments, among other things, are
coursed through the policyholder:

q What is the corporate concept of group insurance insofar as Insular

Life is concerned?

WITNESS:

a Group insurance is a contract where a group of individuals are

covered under one master contract. The individual underwriting
characteristics of each individual is not considered in the
determination of whether the individual is insurable or not. The
contract is between the policyholder and the insurance company. In
our case, it is Prime Marine and Insular Life. We do not have
contractual obligations with the individual employees; it is between
Prime Marine and Insular Life.
q And so it is part of that concept that all inquiries, follow-up, payment
of claims, premium billings, etc. should always be coursed thru the
policyholder?

a Yes that is our practice.

q And when you say claim payments should always be coursed thru
the policyholder, do you require a power of attorney to be presented
by the policyholder or not?

a Not necessarily.

q In other words, under a group insurance policy like the one in this
case, Insular Life could pay the claims to the policyholder himself
even without the presentation of any power of attorney from the
designated beneficiaries?

xxx xxx xxx

WITNESS:

a No. Sir.

ATTY. AMPIL:

q Why? Is this case, the present case different from the cases which
you answered that no power of attorney is necessary in claims
payments?

WITNESS:

a We did not pay Prime Marine; we paid the beneficiaries.

q Will you now tell the Honorable Commission why you did not pay
Prime Marine and instead paid the beneficiaries, the designated
beneficiaries?

xxx xxx xxx

ATTY. AMPIL:

I will rephrase the question.

q Will you tell the Commission what circumstances led you to pay the
designated beneficiaries, the complainants in this case, instead of the
policyholder when as you answered a while ago, it is your practice in
group insurance that claims payments, etc., are coursed thru the
policyholder?

WITNESS:
 a It is coursed but, it is not paid to the policyholder.

q And so in this case, you gave the checks to the policyholder only
coursing them thru said policyholder?

a That is right, Sir.

q Not directly to the designated beneficiaries?

a Yes, Sir. 21

This practice is usual in the group insurance business and is consistent with the jurisprudence
thereon in the State of California — from whose laws our Insurance Code has been mainly patterned
— which holds that the employer-policyholder is the agent of the insurer.

Group insurance is a comparatively new form of insurance. In the United States, the first modern
group insurance policies appear to have been issued in 1911 by the Equitable Life Assurance
Society. 22 Group insurance is essentially a single insurance contract that provides coverage for
many individuals. In its original and most common form, group insurance provides life or health
insurance coverage for the employees of one employer.

The coverage terms for group insurance are usually stated in a master agreement or policy that is
issued by the insurer to a representative of the group or to an administrator of the insurance
program, such as an employer. 23 The employer acts as a functionary in the collection and payment
of premiums and in performing related duties. Likewise falling within the ambit of administration of a
group policy is the disbursement of insurance payments by the employer to the employees. 24 Most
policies, such as the one in this case, require an employee to pay a portion of the premium, which
the employer deducts from wages while the remainder is paid by the employer. This is known as a
contributory plan as compared to a non-contributory plan where the premiums are solely paid by the
employer.

Although the employer may be the titular or named insured, the insurance is actually related to the
life and health of the employee. Indeed, the employee is in the position of a real party to the master
policy, and even in a non-contributory plan, the payment by the employer of the entire premium is a
part of the total compensation paid for the services of the employee. 25 Put differently, the labor of the
employees is the true source of the benefits, which are a form of additional compensation to them.

It has been stated that every problem concerning group insurance presented to a court should be
approached with the purpose of giving to it every legitimate opportunity of becoming a social agency
of real consequence considering that the primary aim is to provide the employer with a means of
procuring insurance protection for his employees and their families at the lowest possible cost, and
in so doing, the employer creates goodwill with his employees, enables the employees to carry a
larger amount of insurance than they could otherwise, and helps to attract and hold a permanent
class of employees. 26

In Elfstrom vs. New York Life Insurance Company, 27 the California Supreme Court explicitly ruled
that in group insurance policies, the employer is the agent of the insurer. Thus:

We are convinced that the employer is the agent of the insurer in performing the
duties of administering group insurance policies. It cannot be said that the employer
acts entirely for its own benefit or for the benefit of its employees in undertaking
 administrative functions. While a reduced premium may result if the employer
relieves the insurer of these tasks, and this, of course, is advantageous to both the
employer and the employees, the insurer also enjoys significant advantages from the
arrangement. The reduction in the premium which results from employer-
administration permits the insurer to realize a larger volume of sales, and at the
same time the insurer's own administrative costs are markedly reduced.

xxx xxx xxx

The most persuasive rationale for adopting the view that the employer acts as the
agent of the insurer, however, is that the employee has no knowledge of or control
over the employer's actions in handling the policy or its administration. An agency
relationship is based upon consent by one person that another shall act in his behalf
and be subject to his control. It is clear from the evidence regarding procedural
techniques here that the insurer-employer relationship meets this agency test with
regard to the administration of the policy, whereas that between the employer and its
employees fails to reflect true agency. The insurer directs the performance of the
employer's administrative acts, and if these duties are not undertaken properly the
insurer is in a position to exercise more constricted control over the employer's
conduct.

In Neider vs. Continental Assurance Company, 28 which was cited in Elfstrom, it was held that:

[t]he employer owes to the employee the duty of good faith and due care in attending
to the policy, and that the employer should make clear to the employee anything
required of him to keep the policy in effect, and the time that the obligations are due.
In its position as administrator of the policy, we feel also that the employer should be
considered as the agent of the insurer, and any omission of duty to the employee in
its administration should be attributable to the insurer.

The ruling in Elfstrom was subsequently reiterated in the cases of Bass vs. John Hancock Mutual
Life Insurance Co. 29 and Metropolitan Life Insurance Co. vs. State Board of Equalization.30

In the light of the above disquisitions and after an examination of the facts of this case, we hold that
PMSI, through its President and General Manager, Capt. Nuval, acted as the agent of Insular Life.
The latter is thus bound by the misconduct of its agent.

Insular Life, however, likewise recognized Capt. Nuval as the attorney-in-fact of the petitioners.
Unfortunately, through its official, Mr. Urbano, it acted imprudently and negligently in the premises by
relying without question on the special power of attorney. In Strong vs. Repide, 31 this Court ruled that
it is among the established principles in the civil law of Europe as well as the common law of
American that third persons deal with agents at their peril and are bound to inquire as to the extent
of the power of the agent with whom they contract. And in Harry E. Keller Electric
Co. vs. Rodriguez, 32 this Court, quoting Mechem on Agency, 33 stated that:

The person dealing with an agent must also act with ordinary prudence and
reasonable diligence. Obviously, if he knows or has good reason to believe that the
agent is exceeding his authority, he cannot claim protection. So if the suggestions of
probable limitations be of such a clear and reasonable quality, or if the character
assumed by the agent is of such a suspicious or unreasonable nature, or if the
authority which he seeks to exercise is of such an unusual or improbable character,
as would suffice to put an ordinarily prudent man upon his guard, the party dealing
 with him may not shut his eyes to the real state of the case, but should either refuse
to deal with the agent at all, or should ascertain from the principal the true condition
of affairs. (emphasis supplied)

Even granting for the sake of argument that the special powers of attorney were in due form, Insular
Life was grossly negligent in delivering the checks, drawn in favor of the petitioners, to a party who is
not the agent mentioned in the special power of attorney.

Nor can we agree with the opinion of the public respondent that since the shares of the minors in the
insurance proceeds are less than P50,000.00, then under Article 225 of the Family Code their
mothers could receive such shares without need of either court appointments as guardian or the
posting of a bond. It is of the view that said Article had repealed the third paragraph of Section 180
of the Insurance Code. 34 The pertinent portion of Article 225 of the Family Code reads as follows:

Art. 225. The father and the mother shall jointly exercise legal guardianship over the
property of their unemancipated common child without the necessity of a court
appointment. In case of disagreement, the father's decision shall prevail, unless there
is judicial order to the contrary.

Where the market value of the property or the annual income of the child exceeds
P50,000, the parent concerned shall be required to furnish a bond in such amount as
the court may determine, but not less than ten per centum (10%) of the value of the
property or annual income, to guarantee the performance of the obligations
prescribed for general guardians.

It is clear from the said Article that regardless of the value of the unemancipated common child's
property, the father and mother ipso jure become the legal guardian of the child's property. However,
if the market value of the property or the annual income of the child exceeds P50,000.00, a bond has
to be posted by the parents concerned to guarantee the performance of the obligations of a general
guardian.

It must, however, be noted that the second paragraph of Article 225 of the Family Code speaks of
the "market value of the property or the annual income of the child," which means, therefore, the
aggregate of the child's property or annual income; if this exceeds P50,000.00, a bond is required.
There is no evidence that the share of each of the minors in the proceeds of the group policy in
question is the minor's only property. Without such evidence, it would not be safe to conclude that,
indeed, that is his only property.

WHEREFORE, the instant petition is GRANTED. The Decision of

10 October 1991 and the Resolution of 19 May 1992 of the public respondent in CA-G.R. SP No.
22950 are SET ASIDE and the Decision of the Insurance Commission in IC Case No. RD-058 is
REINSTATED.

Costs against the private respondent.

SO ORDERED.