1
G.R. No. 82027 March 29, 1990
ROMARICO G. VITUG, petitioner,
vs. THE HONORABLE COURT OF APPEALS and
ROWENA FAUSTINO-CORONA, respondents.
SARMIENTO, J.:
This case is a chapter in an earlier suit decided by this
Court 1 involving the probate of the two wills of the late
Dolores Luchangco Vitug, who died in New York, U. S.A.,
on November 10, 1980, naming private respondent
Rowena Faustino-Corona executrix. In our said decision,
we upheld the appointment of Nenita Alonte as co-special
administrator of Mrs. Vitug's estate with her (Mrs. Vitug's)
widower, petitioner Romarico G. Vitug, pending probate.
On January 13, 1985, Romarico G. Vitug filed a motion
asking for authority from the probate court to sell certain
shares of stock and real properties belonging to the estate
to cover allegedly his advances to the estate in the sum of
P667,731.66, plus interests, which he claimed were
personal funds. As found by the Court of Appeals, 2 the
alleged advances consisted of P58,147.40 spent for the
payment of estate tax, P518,834.27 as deficiency estate
tax, and P90,749.99 as "increment thereto." 3 According
to Mr. Vitug, he withdrew the sums of P518,834.27 and
P90,749.99 from savings account No. 35342-038 of the
Bank of America, Makati, Metro Manila.
On April 12, 1985, Rowena Corona opposed the motion to
sell on the ground that the same funds withdrawn from
savings account No. 35342-038 were conjugal
partnership properties and part of the estate, and hence,
there was allegedly no ground for reimbursement. She
also sought his ouster for failure to include the sums in
question for inventory and for "concealment of funds
belonging to the estate." 4
Vitug insists that the said funds are his exclusive property
having acquired the same through a survivorship
agreement executed with his late wife and the bank on
June 19, 1970. The agreement provides:
We hereby agree with each other and with the BANK OF
AMERICAN NATIONAL TRUST AND SAVINGS
ASSOCIATION (hereinafter referred to as the BANK), that
all money now or hereafter deposited by us or any or
either of us with the BANK in our joint savings current
account shall be the property of all or both of us and shall
be payable to and collectible or withdrawable by either or
any of us during our lifetime, and after the death of either
or any of us shall belong to and be the sole property of
the survivor or survivors, and shall be payable to and
collectible or withdrawable by such survivor or survivors.
We further agree with each other and the BANK that the
receipt or check of either, any or all of us during our
lifetime, or the receipt or check of the survivor or
survivors, for any payment or withdrawal made for our
above-mentioned account shall be valid and sufficient
release and discharge of the BANK for such payment or
withdrawal. 5
The trial courts 6 upheld the validity of this agreement and
granted "the motion to sell some of the estate of Dolores
L. Vitug, the proceeds of which shall be used to pay the
personal funds of Romarico Vitug in the total sum of
P667,731.66 ... ." 7
On the other hand, the Court of Appeals, in the petition for
certiorari filed by the herein private respondent, held that
the above-quoted survivorship agreement constitutes a
conveyance mortis causa which "did not comply with the
formalities of a valid will as prescribed by Article 805 of
the Civil Code," 8 and secondly, assuming that it is a
mere donation inter vivos, it is a prohibited donation under
the provisions of Article 133 of the Civil Code. 9
The dispositive portion of the decision of the Court of
Appeals states:
WHEREFORE, the order of respondent Judge dated
November 26, 1985 (Annex II, petition) is hereby set aside
insofar as it granted private respondent's motion to sell
certain properties of the estate of Dolores L. Vitug for
reimbursement of his alleged advances to the estate, but
the same order is sustained in all other respects. In
addition, respondent Judge is directed to include
provisionally the deposits in Savings Account No. 35342-
038 with the Bank of America, Makati, in the inventory of
actual properties possessed by the spouses at the time of
the decedent's death. With costs against private
respondent. 10
In his petition, Vitug, the surviving spouse, assails the
appellate court's ruling on the strength of our decisions in
Rivera v. People's Bank and Trust Co. 11 and Macam v.
Gatmaitan 12 in which we sustained the validity of
"survivorship agreements" and considering them as
aleatory contracts. 13
The petition is meritorious.
The conveyance in question is not, first of all, one of
mortis causa, which should be embodied in a will. A will
has been defined as "a personal, solemn, revocable and
free act by which a capacitated person disposes of his
property and rights and declares or complies with duties
to take effect after his death." 14 In other words, the
bequest or device must pertain to the testator. 15 In this
case, the monies subject of savings account No. 35342-
038 were in the nature of conjugal funds In the case relied
on, Rivera v. People's Bank and Trust Co., 16 we rejected
claims that a survivorship agreement purports to deliver
one party's separate properties in favor of the other, but
simply, their joint holdings:
xxx xxx xxx
... Such conclusion is evidently predicated on the
assumption that Stephenson was the exclusive owner of
the funds-deposited in the bank, which assumption was in
turn based on the facts (1) that the account was originally
opened in the name of Stephenson alone and (2) that Ana
Rivera "served only as housemaid of the deceased." But it
not infrequently happens that a person deposits money in
the bank in the name of another; and in the instant case it
also appears that Ana Rivera served her master for about
nineteen years without actually receiving her salary from
him. The fact that subsequently Stephenson transferred
the account to the name of himself and/or Ana Rivera and
executed with the latter the survivorship agreement in
question although there was no relation of kinship
between them but only that of master and servant,
nullifies the assumption that Stephenson was the
exclusive owner of the bank account. In the absence,
then, of clear proof to the contrary, we must give full faith
and credit to the certificate of deposit which recites in
effect that the funds in question belonged to Edgar
Stephenson and Ana Rivera; that they were joint (and
several) owners thereof; and that either of them could
withdraw any part or the whole of said account during the
lifetime of both, and the balance, if any, upon the death of
either, belonged to the survivor. 17
xxx xxx xxx
In Macam v. Gatmaitan, 18 it was held:
xxx xxx xxx
This Court is of the opinion that Exhibit C is an aleatory
contract whereby, according to article 1790 of the Civil
Code, one of the parties or both reciprocally bind
themselves to give or do something as an equivalent for
that which the other party is to give or do in case of the
occurrence of an event which is uncertain or will happen
at an indeterminate time. As already stated, Leonarda
was the owner of the house and Juana of the Buick
automobile and most of the furniture. By virtue of Exhibit
C, Juana would become the owner of the house in case
Leonarda died first, and Leonarda would become the
owner of the automobile and the furniture if Juana were to
die first. In this manner Leonarda and Juana reciprocally
assigned their respective property to one another
conditioned upon who might die first, the time of death
determining the event upon which the acquisition of such
right by the one or the other depended. This contract, as
any other contract, is binding upon the parties thereto.
Inasmuch as Leonarda had died before Juana, the latter
thereupon acquired the ownership of the house, in the
same manner as Leonarda would have acquired the
ownership of the automobile and of the furniture if Juana
had died first. 19
xxx xxx xxx
There is no showing that the funds exclusively belonged
to one party, and hence it must be presumed to be

conjugal, having been acquired during the existence of
the marita. relations. 20
Neither is the survivorship agreement a donation inter
vivos, for obvious reasons, because it was to take effect
after the death of one party. Secondly, it is not a donation
between the spouses because it involved no conveyance
of a spouse's own properties to the other.
It is also our opinion that the agreement involves no
modification petition of the conjugal partnership, as held
by the Court of Appeals, 21 by "mere stipulation" 22 and
that it is no "cloak" 23 to circumvent the law on conjugal
property relations. Certainly, the spouses are not
prohibited by law to invest conjugal property, say, by way
of a joint and several bank account, more commonly
denominated in banking parlance as an "and/or" account.
In the case at bar, when the spouses Vitug opened
savings account No. 35342-038, they merely put what
rightfully belonged to them in a money-making venture.
They did not dispose of it in favor of the other, which
would have arguably been sanctionable as a prohibited
donation. And since the funds were conjugal, it can not be
said that one spouse could have pressured the other in
placing his or her deposits in the money pool.
The validity of the contract seems debatable by reason of
its "survivor-take-all" feature, but in reality, that contract
imposed a mere obligation with a term, the term being
death. Such agreements are permitted by the Civil Code.
24
Under Article 2010 of the Code:
ART. 2010. By an aleatory contract, one of the parties or
both reciprocally bind themselves to give or to do
something in consideration of what the other shall give or
do upon the happening of an event which is uncertain, or
which is to occur at an indeterminate time.
Under the aforequoted provision, the fulfillment of an
aleatory contract depends on either the happening of an
event which is (1) "uncertain," (2) "which is to occur at an
indeterminate time." A survivorship agreement, the sale of
a sweepstake ticket, a transaction stipulating on the value
of currency, and insurance have been held to fall under
the first category, while a contract for life annuity or
pension under Article 2021, et sequentia, has been
categorized under the second. 25 In either case, the
element of risk is present. In the case at bar, the risk was
the death of one party and survivorship of the other.
However, as we have warned:
xxx xxx xxx
But although the survivorship agreement is per se not
contrary to law its operation or effect may be violative of
the law. For instance, if it be shown in a given case that
such agreement is a mere cloak to hide an inofficious
donation, to transfer property in fraud of creditors, or to
defeat the legitime of a forced heir, it may be assailed and
annulled upon such grounds. No such vice has been
imputed and established against the agreement involved
in this case. 26
xxx xxx xxx
There is no demonstration here that the survivorship
agreement had been executed for such unlawful
purposes, or, as held by the respondent court, in order to
frustrate our laws on wills, donations, and conjugal
partnership.
The conclusion is accordingly unavoidable that Mrs. Vitug
having predeceased her husband, the latter has acquired
upon her death a vested right over the amounts under
savings account No. 35342-038 of the Bank of America.
Insofar as the respondent court ordered their inclusion in
the inventory of assets left by Mrs. Vitug, we hold that the
court was in error. Being the separate property of
petitioner, it forms no more part of the estate of the
deceased.
WHEREFORE, the decision of the respondent appellate
court, dated June 29, 1987, and its resolution, dated
February 9, 1988, are SET ASIDE.
No costs.
SO ORDERED.
PHILIPPINE HEALTH CARE G.R. No. 167330
PROVIDERS, INC., - v e r s u s - COMMISSIONER OF
INTERNAL REVENUE,
Respondent. September 18, 2009
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,
2
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 P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)]
assessment was imposed on petitioners health care
agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter dated
February 23, 2000. As respondent did not act on the
protest, petitioner filed a petition for review in the Court of
Tax Appeals (CTA) seeking the cancellation of the
deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the
dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant
Petition for Review is PARTIALLY GRANTED. Petitioner
is hereby ORDERED to PAY the deficiency VAT
amounting to P22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until fully paid for
the 1996 VAT deficiency and P31,094,163.87 inclusive of
25% surcharge plus 20% interest from January 20, 1998
until fully paid for the 1997 VAT deficiency. Accordingly,
VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED
AND SET ASIDE. Respondent is ORDERED to DESIST
from collecting the said DST deficiency tax.

SO ORDERED.
Respondent appealed the CTA decision to the [Court of
Appeals (CA)] insofar as it cancelled the DST
assessment. He claimed that petitioners health care
agreement was a contract of insurance subject to DST
under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held
that petitioners health care agreement was in the nature
of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The
Decision of the Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered
petitioner to desist from collecting the same is
REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of
P55,746,352.19 and P68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively,
plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248
and 249 of the Tax Code, until the same shall have been
fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it.
Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the
petition and affirmed the CAs decision. We held that
petitioners health care agreement during the pertinent
period was in the nature of non-life insurance which is a
contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4]
We also ruled that petitioners contention that it is a health
maintenance organization (HMO) and not an insurance
company is irrelevant because contracts between
companies like petitioner and the beneficiaries under their
plans are treated as insurance contracts. Moreover, DST
is not a tax on the business transacted but an excise on
the privilege, opportunity or facility offered at exchanges
for the transaction of the business.
Unable to accept our verdict, petitioner filed the present
motion for reconsideration and supplemental motion for
reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a company engaged
in the business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not
an insurance company.
(b) The Court, in dismissing the appeal in CIR v.
Philippine National Bank, affirmed in effect the CAs
disposition that health care services are not in the nature
of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements
from items subject to DST is clear, especially in the light
of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are
contracts of indemnity, they are not those contemplated
under Section 185.
(f) Assuming arguendo that petitioners agreements are
akin to health insurance, health insurance is not covered
by Section 185.
(g) The agreements do not fall under the phrase other
branch of insurance mentioned in Section 185.
(h) The June 12, 2008 decision should only apply
prospectively.
(i) Petitioner availed of the tax amnesty benefits under
RA[5] 9480 for the taxable year 2005 and all prior years.
Therefore, the questioned assessments on the DST are
now rendered moot and academic.[6]
Oral arguments were held in Baguio City on April 22,
2009. The parties submitted their memoranda on June 8,
2009.
In its motion for reconsideration, petitioner reveals for the
first time that it availed of a tax amnesty under RA 9480[7]
(also known as the Tax Amnesty Act of 2007) by fully
paying the amount of P5,127,149.08 representing 5% of
its net worth as of the year ending December 31, 2005.[8]
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with
the Securities and Exchange Commission on June 30,
1987.[9] It is engaged in the dispensation of the following
medical services to individuals who enter into health care
agreements with it:
Preventive medical services such as periodic monitoring
of health problems, family planning counseling,
consultation and advices on diet, exercise and other
healthy habits, and immunization;
Diagnostic medical services such as routine physical
examinations, x-rays, urinalysis, fecalysis, complete blood
count, and the like and
3
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
it[11] or whose services are contracted by it.[12] Petitioner
also provides hospital services such as room and board
accommodation, laboratory services, operating rooms, x-
ray facilities and general nursing care.[13] If and when a
member avails of the benefits under the agreement,
petitioner pays the participating physicians and other
health care providers for the services rendered, at pre-
agreed rates.[14]
To avail of petitioners health care programs, the individual
members are required to sign and execute a standard
health care agreement embodying the terms and
conditions for the provision of the health care services.
The same agreement contains the various health care
services that can be engaged by the enrolled member,
i.e., preventive, diagnostic and curative medical services.
Except for the curative aspect of the medical service
offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any
time.
HEALTH MAINTENANCE ORGANIZATIONS ARE NOT
ENGAGED IN THE INSURANCE BUSINESS
We said in our June 12, 2008 decision that it is irrelevant
that petitioner is an HMO and not an insurer because its
agreements are treated as insurance contracts and the
DST is not a tax on the business but an excise on the
privilege, opportunity or facility used in the transaction of
the business.[15]
Petitioner, however, submits that it is of critical importance
to characterize the business it is engaged in, that is, to
determine whether it is an HMO or an insurance
company, as this distinction is indispensable in turn to the
issue of whether or not it is liable for DST on its health
care agreements.[16]
A second hard look at the relevant law and jurisprudence
convinces the Court that the arguments of petitioner are
meritorious.

Section 185 of the National Internal Revenue Code of
1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other
insurance policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or
company or corporation transacting the business of
accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or
recognizances, conditioned for the performance of the
duties of any office or position, for the doing or not doing
of anything therein specified, and on all obligations
guaranteeing the validity or legality of any bond or other
obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing
any mercantile credits, which may be made or renewed by
any such person, company or corporation, there shall be
collected a documentary stamp tax of fifty centavos
(P0.50) on each four pesos (P4.00), or fractional part
thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word,
clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void
and insignificant. To this end, a construction which
renders every word operative is preferred over that which
makes some words idle and nugatory.[17] This principle is
expressed in the maxim Ut magis valeat quam pereat,
that is, we choose the interpretation which gives effect to
the whole of the statute its every word.[18]
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply, namely:
(1) the document must be a policy of insurance or an
obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or The
National Health Insurance Act of 1995), an HMO is an
entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a
fixed prepaid premium.[19] The payments do not vary with
the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in
the business of insurance during the pertinent taxable
years? We rule that it was not.
Section 2 (2) of PD[20] 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
Association[23] wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health
Association should not be considered as engaged in
insurance activities since it was created primarily for the
distribution of health care services rather than the
assumption of insurance risk.
xxx Although Group Healths activities may be considered
in one aspect as creating security against loss from illness
or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by
its members. xxx The functions of such an organization
are not identical with those of insurance or indemnity
companies. The latter are concerned primarily, if not
exclusively, with risk and the consequences of its descent,
4
not with service, or its extension in kind, quantity or
distribution; with the unusual occurrence, not the daily
routine of living. Hazard is predominant. On the other
hand, the cooperative is concerned principally with getting
service rendered to its members and doing so at lower
prices made possible by quantity purchasing and
economies in operation. Its primary purpose is to reduce
the cost rather than the risk of medical care; to broaden
the service to the individual in kind and quantity; to
enlarge the number receiving it; to regularize it as an
everyday incident of living, like purchasing food and
clothing or oil and gas, rather than merely protecting
against the financial loss caused by extraordinary and
unusual occurrences, such as death, disaster at sea, fire
and tornado. It is, in this instance, to take care of colds,
ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and
unusual illness. To summarize, the distinctive features of
the cooperative are the rendering of service, its extension,
the bringing of physician and patient together, the
preventive features, the regularization of service as well
as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid
for; not, except incidentally to these features, the
indemnification for cost after the services is rendered.
Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in
this way for the rendering of service, even on the
contingency that it be needed, and contracting merely to
stand its cost when or after it is rendered.
That an incidental element of risk distribution or
assumption may be present should not outweigh all other
factors. If attention is focused only on that feature, the line
between insurance or indemnity and other types of legal
arrangement and economic function becomes faint, if not
extinct. This is especially true when the contract is for the
sale of goods or services on contingency. But obviously it
was not the purpose of the insurance statutes to regulate
all arrangements for assumption or distribution of risk.
That view would cause them to engulf practically all
contracts, particularly conditional sales and contingent
service agreements. The fallacy is in looking only at the
risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk
is involved or assumed, but on whether that or something
else to which it is related in the particular plan is its
principal object purpose.[24] (Emphasis supplied)
In California Physicians Service v. Garrison,[25] the
California court felt that, after scrutinizing the plan of
operation as a whole of the corporation, it was service
rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding
that the service is not engaged in the insurance business.
Absence or presence of assumption of risk or peril is not
the sole test to be applied in determining its status. The
question, more broadly, is whether, looking at the plan of

operation as a whole, service rather than indemnity is its
principal object and purpose. Certainly the objects and
purposes of the corporation organized and maintained by
the California physicians have a wide scope in the field of
social service. Probably there is no more impelling need
than that of adequate medical care on a voluntary, low-
cost basis for persons of small income. The medical
profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not
indemnity.[26] (Emphasis supplied)
American courts have pointed out that the main difference
between an HMO and an insurance company is that
HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while
insurance companies simply undertake to indemnify the
insured for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon
Blue Cross and Blue Shield of New Jersey[27] is clear on
this point:
The basic distinction between medical service
corporations and ordinary health and accident insurers is
that the former undertake to provide prepaid medical
services through participating physicians, thus relieving
subscribers of any further financial burden, while the latter
only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates
contained in the policy.
xxx xxx xxx
The primary purpose of a medical service corporation,
however, is an undertaking to provide physicians who will
render services to subscribers on a prepaid basis. Hence,
if there are no physicians participating in the medical
service corporations plan, not only will the subscribers be
deprived of the protection which they might reasonably
have expected would be provided, but the corporation will,
in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as
such and rendering itself subject to the more stringent
financial requirements of the General Insurance Laws.
A participating provider of health care services is one who
agrees in writing to render health care services to or for
persons covered by a contract issued by health service
corporation in return for which the health service
corporation agrees to make payment directly to the
participating provider.[28] (Emphasis supplied)
Consequently, the mere presence of risk would be
insufficient to override the primary purpose of the
business to provide medical services as needed, with
payment made directly to the provider of these
services.[29] In short, even if petitioner assumes the risk
of paying the cost of these services even if significantly
more than what the member has prepaid, it nevertheless
cannot be considered as being engaged in the insurance
business.
By the same token, any indemnification resulting from the
payment for services rendered in case of emergency by
non-participating health providers would still be incidental
to petitioners purpose of providing and arranging for
health care services and does not transform it into an
insurer. To fulfill its obligations to its members under the
agreements, petitioner is required to set up a system and
the facilities for the delivery of such medical services. This
indubitably shows that indemnification is not its sole
object.
In fact, a substantial portion of petitioners services covers
preventive and diagnostic medical services intended to
keep members from developing medical conditions or
diseases.[30] As an HMO, it is its obligation to maintain
the good health of its members. Accordingly, its health
care programs are designed to prevent or to minimize the
possibility of any assumption of risk on its part. Thus, its
undertaking under its agreements is not to indemnify its
members against any loss or damage arising from a
medical condition but, on the contrary, to provide the
health and medical services needed to prevent such loss
or damage.[31]
Overall, petitioner appears to provide insurance-type
benefits to its members (with respect to its curative
medical services), but these are incidental to the principal
activity of providing them medical care. The insurance-like
aspect of petitioners business is miniscule compared to its
noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance
services, it cannot be considered as being in the
insurance business.
It is important to emphasize that, in adopting the principal
purpose test used in the above-quoted U.S. cases, we are
not saying that petitioners operations are identical in every
respect to those of the HMOs or health providers which
were parties to those cases. What we are stating is that,
for the purpose of determining what doing an insurance
business means, we have to scrutinize the operations 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
5
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 petitioners health care agreements
are contracts of indemnity and are therefore insurance
contracts:
It is incorrect to say that the health care agreement is not
based on loss or damage because, under the said
agreement, petitioner assumes the liability and
indemnifies its member for hospital, medical and related
expenses (such as professional fees of physicians). The
term "loss or damage" is broad enough to cover the
monetary expense or liability a member will incur in case
of illness or injury.
Under the health care agreement, the rendition of
hospital, medical and professional services to the member
in case of sickness, injury or emergency or his availment
of so-called "out-patient services" (including physical
examination, x-ray and laboratory tests, medical
consultations, vaccine administration and family planning
counseling) is the contingent event which gives rise to
liability on the part of the member. In case of exposure of
the member to liability, he would be entitled to
indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its
member from liability by paying for expenses arising from
the stipulated contingencies belies its claim that its
services are prepaid. The expenses to be incurred by
each member cannot be predicted beforehand, if they can
be predicted at all. Petitioner assumes the risk of paying

for the costs of the services even if they are significantly
and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of
persons bearing a similar risk, that is, among all the other
members of the health care program. This is
insurance.[37]
We reconsider. We shall quote once again the pertinent
portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other
insurance policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or
company or corporation transacting the business of
accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire
insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the
principle that tax statutes are strictly construed against the
taxing authority.[38] This is because taxation is a
destructive power which interferes with the personal and
property rights of the people and takes from them a
portion of their property for the support of the
government.[39] Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor
their operation enlarged so as to embrace matters not
specifically provided.[40]
We are aware that, in Blue Cross and Philamcare, the
Court pronounced that a health care agreement is in the
nature of 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 insurers promise, the
insured pays a premium.[41]
Do the agreements between petitioner and its members
possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance
laws has pointed out that, even if a contract contains all
the elements of an insurance contract, if its primary
purpose is the rendering of service, it is not a contract of
insurance:
It does not necessarily follow however, that a contract
containing all the four elements mentioned above would
be an insurance contract. The primary purpose of the
parties in making the contract may negate the existence
of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration
of periodical payments, it promises to represent such
clients in all suits for or against them, is not engaged in
the insurance business. Its contracts are simply for the
purpose of rendering personal services. On the other
hand, a contract by which a corporation, in consideration
of a stipulated amount, agrees at its own expense to
defend a physician against all suits for damages for
malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance.
Unlike the lawyers retainer contract, the essential purpose
of such a contract is not to render personal services, but
to indemnify against loss and damage resulting from the
defense of actions for malpractice.[42] (Emphasis
supplied)
Second. Not all the necessary elements of a contract of
insurance are present in petitioners agreements. To begin
with, there is no loss, damage or liability on the part of the
member that should be indemnified by petitioner as an
HMO. Under the agreement, the member pays petitioner
a predetermined consideration in exchange for the
hospital, medical and professional services rendered by
the petitioners physician or affiliated physician to him. In
case of availment by a member of the benefits under the
agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party.
Instead, it is the petitioner who pays the participating
physicians and other health care providers for the
services rendered at pre-agreed rates. The member does
not make any such payment.
In other words, there is nothing in petitioner's agreements
that gives rise to a monetary liability on the part of the
member to any third party-provider of medical services
which might in turn necessitate indemnification from
petitioner. The terms indemnify or indemnity presuppose
that a liability or claim has already been incurred. There is
no indemnity precisely because the member merely avails
6
of medical services to be paid or already paid in advance
at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take
advantage of the bulk of the benefits anytime, e.g.
laboratory services, x-ray, routine annual physical
examination and consultations, vaccine administration as
well as family planning counseling, even in the absence of
any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to
reimburse the member who receives care from a non-
participating physician or hospital. However, this is only a
very minor part of the list of services available. The
assumption of the expense by petitioner is not confined to
the happening of a contingency but includes incidents
even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot
Care Program, Inc.,[43] although the health care contracts
called for the defendant to partially reimburse a subscriber
for treatment received from a non-designated doctor, this
did not make defendant an insurer. Citing Jordan, the
Court determined that the primary activity of the defendant
(was) the provision of podiatric services to subscribers in
consideration of prepayment for such services.[44] Since
indemnity of the insured was not the focal point of the
agreement but the extension of medical services to the
member at an affordable cost, it did not partake of the
nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance
contract, it is not necessarily true that risk alone is
sufficient to establish it. Almost anyone who undertakes a
contractual obligation always bears a certain degree of
financial risk. Consequently, there is a need to distinguish
prepaid service contracts (like those of petitioner) from the
usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk
when it offers to provide health services: the risk that it
might fail to earn a reasonable return on its investment.
But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is
the risk that the cost of insurance claims might be higher
than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to
the insured.[45]
However, assuming that petitioners commitment to
provide medical services to its members can be construed
as an acceptance of the risk that it will shell out more than
the prepaid fees, it still will not qualify as an insurance
contract because petitioners objective is to provide
medical services at reduced cost, not to distribute risk like
an insurer.

In sum, an examination of petitioners agreements with its
members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.
THERE WAS NO LEGISLATIVE INTENT TO IMPOSE
DST ON HEALTH CARE AGREEMENTS OF HMOS
Furthermore, militating in convincing fashion against the
imposition of DST on petitioners health care agreements
under Section 185 of the NIRC of 1997 is the provisions
legislative history. The text of Section 185 came into U.S.
law as early as 1904 when HMOs and health care
agreements were not even in existence in this jurisdiction.
It was imposed under Section 116, Article XI of Act No.
1189 (otherwise known as the Internal Revenue Law of
1904)[46] enacted on July 2, 1904 and became effective
on August 1, 1904. Except for the rate of tax, Section 185
of the NIRC of 1997 is a verbatim reproduction of the
pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for
and in respect to the several bonds, debentures, or
certificates of stock and indebtedness, and other
documents, instruments, matters, and things mentioned
and described in this section, or for or in respect to the
vellum, parchment, or paper upon which such instrument,
matters, or things or any of them shall be written or
printed by any person or persons who shall make, sign, or
issue the same, on and after January first, nineteen
hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or
obligation of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association,
company, or corporation transacting the business of
accident, fidelity, employers liability, plate glass, steam
boiler, burglar, elevator, automatic sprinkle, or other
branch of insurance (except life, marine, inland, and fire
insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal
Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The
aforecited pertinent portion of Section 116, Article XI of
Act No. 1189 was completely reproduced as Section 30
(l), Article III of Act No. 2339. The very detailed and
exclusive enumeration of items subject to DST was thus
retained.
On December 31, 1916, Section 30 (l), Article III of Act
No. 2339 was again reproduced as Section 1604 (l),
Article IV of Act No. 2657 (Administrative Code). Upon its
amendment on March 10, 1917, the pertinent DST
provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of
Commonwealth Act No. 466 (the NIRC of 1939), which
codified all the internal revenue laws of the Philippines. In
an amendment introduced by RA 40 on October 1, 1946,
the DST rate was increased but the provision remained
substantially the same.
Thereafter, on June 3, 1977, the same provision with the
same DST rate was reproduced in PD 1158 (NIRC of
1977) as Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10, 1984
respectively, the DST rate was again increased.
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 EO[47] 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 9243[48] but Section 185 was
untouched.
On the other hand, the concept of an HMO was
introduced in the Philippines with the formation of Bancom
Health Care Corporation in 1974. The same pioneer HMO
was later reorganized and renamed Integrated Health
Care Services, Inc. (or Intercare). However, there are
those who claim that Health Maintenance, Inc. is the HMO
industry pioneer, having set foot in the Philippines as early
as 1965 and having been formally incorporated in 1991.
Afterwards, HMOs proliferated quickly and currently, there
are 36 registered HMOs with a total enrollment of more
than 2 million.[49]
We can clearly see from these two histories (of the DST
on the one hand and HMOs on the other) that when the
law imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were
already in existence in the Philippines and the term had in
fact already been defined by RA 7875. If it had been the
intent of the legislature to impose DST on health care
agreements, it could have done so in clear and
categorical terms. It 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
7
January 27, 2000, after more than a decade in the
business as an HMO.[50]
Considering that Section 185 did not change since 1904
(except for the rate of tax), it would be safe to say that
health care agreements were never, at any time,
recognized as insurance contracts or deemed engaged in
the business of insurance within the context of the
provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY
As a general rule, the power to tax is an incident of
sovereignty and is unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse
is to be found only in the responsibility of the legislature
which imposes the tax on the constituency who is to pay
it.[51] So potent indeed is the power that it was once
opined that the power to tax involves the power to
destroy.[52]
Petitioner claims that the assessed DST to date which
amounts to P376 million[53] is way beyond its net worth of
P259 million.[54] Respondent never disputed these
assertions. Given the realities on the ground, imposing the
DST on petitioner would be highly oppressive. It is not the
purpose of the government to throttle private business. On
the contrary, the government ought to encourage private
enterprise.[55] Petitioner, just like any concern organized
for a lawful economic activity, has a right to maintain a
legitimate business.[56] As aptly held in Roxas, et al. v.
CTA, et al.:[57]
The power of taxation is sometimes called also the power
to destroy. Therefore it should be exercised with caution
to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the
tax collector kill the hen that lays the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection
not to be taxed out of existence. Incurring losses because
of a tax imposition may be an acceptable consequence
but killing the business of an entity is another matter and
should not be allowed. It is counter-productive and
ultimately subversive of the nations thrust towards a better
economy which will ultimately benefit the majority of our
people.[59]
PETITIONERS TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the
DST assessment for taxable years 1996 and 1997
became moot and academic[60] when it availed of the tax
amnesty under RA 9480 on December 10, 2007. It paid

P5,127,149.08 representing 5% of its net worth as of the
year ended December 31, 2005 and complied with all
requirements of the tax amnesty. Under Section 6(a) of
RA 9480, it is entitled to immunity from payment of taxes
as well as additions thereto, and the appurtenant civil,
criminal or administrative penalties under the 1997 NIRC,
as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior
years.[61]
Far from disagreeing with petitioner, respondent
manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax
amnesty entitles a taxpayer to immunity from payment of
the tax involved, including the civil, criminal, or
administrative penalties provided under the 1997 [NIRC],
for tax liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA
9840], and without conceding the merits of this case as
discussed above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of petitioner. This
admission, however, is not meant to preclude a revocation
of the amnesty granted in case it is found to have been
granted under circumstances amounting to tax fraud
under Section 10 of said amnesty law.[62] (Emphasis
supplied)
Furthermore, we held in a recent case that DST is one of
the taxes covered by the tax amnesty program under RA
9480.[63] There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996 and
1997 was totally extinguished by its availment of the tax
amnesty under RA 9480.
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 CA[64] in CIR v. Philippine National Bank[65] 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-Nickel[71] 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.[73] Indeed, as a rule, this Court lays down
doctrines or principles of law which constitute binding
precedent in a decision duly signed by the members of
the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No.
148680 and since petitioners liability for DST on its health
care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute
resolution in that case (which is not even binding
precedent) in its favor. Nonetheless, in view of the
reasons already discussed, this does not detract in any
way from the fact that petitioners health care agreements
are not subject to DST.
A FINAL NOTE
Taking into account that health care agreements are
clearly not within the ambit of Section 185 of the NIRC
and there was never any legislative intent to impose the
same on HMOs like petitioner, the same should not be
arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great
social need for adequate medical services at a cost which
the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and
inexpensive health care system made possible by quantity
8
purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive
medical services), including the ability to control costs.
They protect their members from exposure to the high
cost of hospitalization and other medical expenses
brought about by a fluctuating economy. Accordingly, they
play an important role in society as partners of the State in
achieving its constitutional mandate of providing its
citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5%
of the premium charged.[74] Its imposition will elevate the
cost of health care services. This will in turn necessitate
an increase in the membership fees, resulting in either
placing health services beyond the reach of the ordinary
wage earner or driving the industry to the ground. At the
end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is
GRANTED. The August 16, 2004 decision of the Court of
Appeals in CA-G.R. SP No. 70479 is REVERSED and
SET ASIDE. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED and
SET ASIDE. Respondent is ordered to desist from
collecting the said tax.
No costs.
SO ORDERED.
G.R. No. L-67835 October 12, 1987
MALAYAN INSURANCE CO., INC. (MICO), petitioner,
vs. GREGORIA CRUZ ARNALDO, in her capacity as
the INSURANCE COMMISSIONER, and CORONACION
PINCA, respondents.
CRUZ, J.:
When a person's house is razed, the fire usually burns
down the efforts of a lifetime and forecloses hope for the
suddenly somber future. The vanished abode becomes a
charred and painful memory. Where once stood a home,
there is now, in the sighing wisps of smoke, only a gray
desolation. The dying embers leave ashes in the heart.
For peace of mind and as a hedge against possible loss,
many people now secure fire insurance. This is an
aleatory contract. By such insurance, the insured in effect
wagers that his house will be burned, with the insurer
assuring him against the loss, for a fee. If the house does
burn, the insured, while losing his house, wins the wagers.
The prize is the recompense to be given by the insurer to
make good the loss the insured has sustained.
It would be a pity then if, having lost his house, the
insured were also to lose the payment he expects to
recover for such loss. Sometimes it is his fault that he
cannot collect, as where there is a defect imputable to him
in the insurance contract. Conversely, the reason may be

an unjust refusal of the insurer to acknowledge a just
obligation, as has happened many times.
In the instant case the private respondent has been
sustained by the Insurance Commission in her claim for
compensation for her burned property. The petitioner is
now before us to dispute the decision, 1 on the ground
that there was no valid insurance contract at the time of
the loss.
The chronology of the relevant antecedent facts is as
follows:
On June 7, 1981, the petitioner (hereinafter called (MICO)
issued to the private respondent, Coronacion Pinca, Fire
Insurance Policy No. F-001-17212 on her property for the
amount of P14,000.00 effective July 22, 1981, until July
22, 1982. 2
On October 15,1981, MICO allegedly cancelled the policy
for non-payment, of the premium and sent the
corresponding notice to Pinca. 3
On December 24, 1981, payment of the premium for
Pinca was received by DomingoAdora, agent of MICO. 4
On January 15, 1982, Adora remitted this payment to
MICO,together with other payments. 5
On January 18, 1982, Pinca's property was completely
burned. 6
On February 5, 1982, Pinca's payment was returned by
MICO to Adora on the ground that her policy had been
cancelled earlier. But Adora refused to accept it. 7
In due time, Pinca made the requisite demands for
payment, which MICO rejected. She then went to the
Insurance Commission. It is because she was ultimately
sustained by the public respondent that the petitioner has
come to us for relief.
From the procedural viewpoint alone, the petition must be
rejected. It is stillborn.
The records show that notice of the decision of the public
respondent dated April 5, 1982, was received by MICO on
April 10, 1982. 8 On April 25, 1982, it filed a motion for
reconsideration, which was denied on June 4, 1982. 9
Notice of this denial was received by MICO on June 13,
1982, as evidenced by Annex "1" duly authenticated by
the Insurance Commission. 10 The instant petition was
filed with this Court on July 2, 1982. 11
The position of the petition is that the petition is governed
by Section 416 0f the Insurance Code giving it thirty days
wthin which to appeal by certiorari to this Court.
Alternatively, it also invokes Rule 45 of the Rules of Court.
For their part, the public and private respondents insist
that the applicable law is B.P. 129, which they say
governs not only courts of justice but also quasi-judicial
bodies like the Insurance Commission. The period for
appeal under this law is also fifteen days, as under Rule
45.
The pivotal date is the date the notice of the denial of the
motion for reconsideration was received by MICO.
MICO avers this was June 18, 1982, and offers in
evidence its Annex "B," 12 which is a copy of the Order of
June 14, 1982, with a signed rubber-stamped notation on
the upper left-hand corner that it was received on June
18, 1982, by its legal department. It does not indicate from
whom. At the bottom, significantly, there is another
signature under which are the ciphers "6-13-82," for which
no explanation has been given.
Against this document, the private respodent points in her
Annex "1," 13 the authenticated copy of the same Order
with a rubber-stamped notation at the bottom thereof
indicating that it was received for the Malayan Insurance
Co., Inc. by J. Gotladera on "6-13-82." The signature may
or may not habe been written by the same person who
signed at the bottom of the petitioner's Annex "B."
Between the two dates, the court chooses to believe June
13, 1982, not only because the numbers "6-13-82" appear
on both annexes but also because it is the date
authenticated by the administrative division of the
Insurance Commission. Annex "B" is at worst self-serving;
at best, it might only indicate that it was received on June
18, 1982, by the legal department of MICO, after it had
been received earlier by some other of its personnel on
June 13, 1982. Whatever the reason for the delay in
transmitting it to the legal department need not detain us
here.
Under Section 416 of the Insurance Code, the period for
appeal is thirty days from notice of the decision of the
Insurance Commission. The petitioner filed its motion for
reconsideration on April 25, 1981, or fifteen days such
notice, and the reglementary period began to run again
after June 13, 1981, date of its receipt of notice of the
denial of the said motion for reconsideration. As the
herein petition was filed on July 2, 1981, or nineteen days
later, there is no question that it is tardy by four days.
Counted from June 13, the fifteen-day period prescribed
under Rule 45, assuming it is applicable, would end on
June 28, 1982, or also four days from July 2, when the
petition was filed.
If it was filed under B.P. 129, then, considering that the
motion for reconsideration was filed on the fifteenth day
after MICO received notice of the decision, only one more
day would have remained for it to appeal, to wit, June 14,
1982. That would make the petition eighteen days late by
July 2.
9
Indeed, even if the applicable law were still R.A. 5434,
governing appeals from administrative bodies, the petition
would still be tardy. The law provides for a fixed period of
ten days from notice of the denial of a seasonable motion
for reconsideration within which to appeal from the
decision. Accordingly, that ten-day period, counted from
June 13, 1982, would have ended on June 23, 1982,
making the petition filed on July 2, 1982, nine days late.
Whichever law is applicable, therefore, the petition can
and should be dismissed for late filing.
On the merits, it must also fail. MICO's arguments that
there was no payment of premium and that the policy had
been cancelled before the occurence of the loss are not
acceptable. Its contention that the claim was allowed
without proof of loss is also untenable.
The petitioner relies heavily on Section 77 of the
Insurance Code providing that:
SEC. 77. An insurer is entitled to payment of the premium
as soon as the thing is exposed to the peril insured
against. Notwithstanding any agreement to the contrary,
no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the
premium thereof has been paid, except in the case of a
life or an industrial life policy whenever the grace period
provision applies.
The above provision is not applicable because payment of
the premium was in fact eventually made in this case.
Notably, the premium invoice issued to Pinca at the time
of the delivery of the policy on June 7, 1981 was stamped
"Payment Received" of the amoung of P930.60 on "12-
24-81" by Domingo Adora. 14 This is important because it
suggests an understanding between MICO and the
insured that such payment could be made later, as agent
Adora had assured Pinca. In any event, it is not denied
that this payment was actually made by Pinca to Adora,
who remitted the same to MICO.
The payment was made on December 24, 1981, and the
fire occured on January 18, 1982. One wonders: suppose
the payment had been made and accepted in, say,
August 1981, would the commencement date of the policy
have been changed to the date of the payment, or would
the payment have retroacted to July 22, 1981? If MICO
accepted the payment in December 1981 and the insured
property had not been burned, would that policy not have
expired just the same on July 22, 1982, pursuant to its
original terms, and not on December 24, 1982?
It would seem from MICO's own theory, that the policy
would have become effective only upon payment, if
accepted and so would have been valid only from
December 24, 1981m but only up to July 22, 1981,
according to the original terms. In others words, the policy
would have run for only eight months although the
premium paid was for one whole year.

It is not disputed that the preium was actually paid by
Pinca to Adora on December 24, 1981, who received it on
behalf of MICO, to which it was remitted on January 15,
1982. What is questioned is the validity of Pinca's
payment and of Adora's authority to receive it.
MICO's acknowledgment of Adora as its agent defeats its
contention that he was not authorized to receive the
premium payment on its behalf. It is clearly provided in
Section 306 of the Insurance Code that:
SEC. 306. xxx xxx xxx
Any insurance company which delivers to an insurance
agant or insurance broker a policy or contract of insurance
shall be demmed to have authorized such agent or broker
to receive on its behalf payment of any premium which is
due on such policy or contract of insurance at the time of
its issuance or delivery or which becomes due thereon.
And it is a well-known principle under the law of agency
that:
Payment to an agent having authority to receive or collect
payment is equivalent to payment to the principal himself;
such payment is complete when the money delivered is
into the agent's hands and is a discharge of the
indebtedness owing to the principal. 15
There is the petitioner's argument, however, that Adora
was not authorized to accept the premium payment
because six months had elapsed since the issuance by
the policy itself. It is argued that this prohibition was
binding upon Pinca, who made the payment to Adora at
her own riskl as she was bound to first check his authority
to receive it. 16
MICO is taking an inconsistent stand. While contending
that acceptance of the premium payment was prohibited
by the policy, it at the same time insists that the policy
never came into force because the premium had not been
paid. One surely, cannot have his cake and eat it too.
We do not share MICO's view that there was no existing
insurance at the time of the loss sustained by Pinca
because her policy never became effective for non-
payment of premium. Payment was in fact made,
rendering the policy operative as of June 22, 1981, and
removing it from the provisions of Article 77, Thereafter,
the policy could be cancelled on any of the supervening
grounds enumerated in Article 64 (except "nonpayment of
premium") provided the cancellation was made in
accordance therewith and with Article 65.
Section 64 reads as follows:
SEC. 64. No policy of insurance other than life shall be
cancelled by the insurer except upon prior notice thereof
to the insured, and no notice of cancellation shall be
effective unless it is based on the occurrence, after the
effective date of the policy, of one or more of the
following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts
increasing the hazard insured against;
(c) discovery of fraud or material
misrepresentation;
(d) discovery of willful, or reckless acts or
commissions increasing the hazard insured against;
(e) physical changes in the property insured which
result in the property becoming uninsurable;or
(f) a determination by the Commissioner that the
continuation of the policy would violate or would place the
insurer in violation of this Code.
As for the method of cancellation, Section 65 provides as
follows:
SEC. 65. All notices of cancellation mentioned in the
preceding section shall be in writing, mailed or delivered
to the named insured at the address shown in the policy,
and shall state (a) which of the grounds set forth in
section sixty-four is relied upon and (b) that, upon written
request of the named insured, the insurer will furnish the
facts on which the cancellation is based.
A valid cancellation must, therefore, require concurrence
of the following conditions:
(1) There must be prior notice of cancellation to the
insured; 17
(2) The notice must be based on the occurrence,
after the effective date of the policy, of one or more of the
grounds mentioned;18
(3) The notice must be (a) in writing, (b) mailed, or
delivered to the named insured, (c) at the address shown
in the policy; 19
(4) It must state (a) which of the grounds
mentioned in Section 64 is relied upon and (b) that upon
written request of the insured, the insurer will furnish the
facts on which the cancellation is based. 20
MICO's claims it cancelled the policy in question on
October 15, 1981, for non-payment of premium. To
support this assertion, it presented one of its employees,
who testified that "the original of the endorsement and
credit memo" — presumably meaning the alleged
cancellation — "were sent the assured by mail through
our mailing section" 21 However, there is no proof that the
notice, assuming it complied with the other requisites
10
mentioned above, was actually mailed to and received by
Pinca. All MICO's offers to show that the cancellation was
communicated to the insured is its employee's testimony
that the said cancellation was sent "by mail through our
mailing section." without more. The petitioner then says
that its "stand is enervated (sic) by the legal presumption
of regularity and due performance of duty." 22 (not
realizing perhaps that "enervated" means "debilitated" not
"strengthened").
On the other hand, there is the flat denial of Pinca, who
says she never received the claimed cancellation and
who, of course, did not have to prove such denial
Considering the strict language of Section 64 that no
insurance policy shall be cancelled except upon prior
notice, it behooved MICO's to make sure that the
cancellation was actually sent to and received by the
insured. The presumption cited is unavailing against the
positive duty enjoined by Section 64 upon MICO and the
flat denial made by the private respondent that she had
received notice of the claimed cancellation.
It stands to reason that if Pinca had really received the
said notice, she would not have made payment on the
original policy on December 24, 1981. Instead, she would
have asked for a new insurance, effective on that date
and until one year later, and so taken advantage of the
extended period. The Court finds that if she did pay on
that date, it was because she honestly believed that the
policy issued on June 7, 1981, was still in effect and she
was willing to make her payment retroact to July 22, 1981,
its stipulated commencement date. After all, agent Adora
was very accomodating and had earlier told her "to call
him up any time" she was ready with her payment on the
policy earlier issued. She was obviously only reciprocating
in kind when she paid her premium for the period
beginning July 22, 1981, and not December 24, 1981.
MICO's suggests that Pinca knew the policy had already
been cancelled and that when she paid the premium on
December 24, 1981, her purpose was "to renew it." As
this could not be done by the agent alone under the terms
of the original policy, the renewal thereof did not legally
bind MICO. which had not ratified it. To support this
argument, MICO's cites the following exchange:
Q: Now, Madam Witness, on December 25th you
made the alleged payment. Now, my question is that, did
it not come to your mind that after the lapse of six (6)
months, your policy was cancelled?
A: I have thought of that but the agent told me to
call him up at anytime.
Q: So if you thought that your policy was already
intended to revive cancelled policy?
A: Misleading, Your Honor.

Hearing Officer: The testimony of witness is that, she
thought of that.
Q: I will revise the question. Now, Mrs. Witness,
you stated that you thought the policy was cancelled.
Now, when you made the payment of December 24,
1981, your intention was to revive the policy if it was
already cancelled?
A: Yes, to renew it. 23
A close study of the above transcript will show that Pinca
meant to renew the policy if it had really been already
cancelled but not if it was stffl effective. It was all
conditional. As it has not been shown that there was a
valid cancellation of the policy, there was consequently no
need to renew it but to pay the premium thereon. Payment
was thus legally made on the original transaction and it
could be, and was, validly received on behalf of the
insurer by its agent Adora. Adora. incidentally, had not
been informed of the cancellation either and saw no
reason not to accept the said payment.
The last point raised by the petitioner should not pose
much difficulty. The valuation fixed in fire insurance policy
is conclusive in case of total loss in the absence of fraud,
24 which is not shown here. Loss and its amount may be
determined on the basis of such proof as may be offered
by the insured, which need not be of such persuasiveness
as is required in judicial proceedings. 25 If, as in this case,
the insured files notice and preliminary proof of loss and
the insurer fails to specify to the former all the defects
thereof and without unnecessary delay, all objections to
notice and proof of loss are deemed waived under
Section 90 of the Insurance Code.
The certification 26 issued by the Integrated National
Police, Lao-ang, Samar, as to the extent of Pinca's loss
should be considered sufficient. Notably,MICO submitted
no evidence to the contrary nor did it even question the
extent of the loss in its answer before the Insurance
Commission. It is also worth observing that Pinca's
property was not the only building bumed in the fire that
razed the commercial district of Lao-ang, Samar, on
January 18, 1982. 27
There is nothing in the Insurance Code that makes the
participation of an adjuster in the assessment of the loss
imperative or indespensable, as MICO suggests. Section
325, which it cites, simply speaks of the licensing and
duties of adjusters.
We see in this cases an obvious design to evade or at
least delay the discharge of a just obligation through
efforts bordering on bad faith if not plain duplicity, We note
that the motion for reconsideration was filed on the
fifteenth day from notice of the decision of the Insurance
Commission and that there was a feeble attempt to show
that the notice of denial of the said motion was not
received on June 13, 1982, to further hinder the
proceedings and justify the filing of the petition with this
Court fourteen days after June 18, 1982. We also look
askance at the alleged cancellation, of which the insured
and MICO's agent himself had no knowledge, and the
curious fact that although Pinca's payment was remitted
to MICO's by its agent on January 15, 1982, MICO sought
to return it to Adora only on February 5, 1982, after it
presumably had learned of the occurrence of the loss
insured against on January 18, 1982. These
circumstances make the motives of the petitioner highly
suspect, to say the least, and cast serious doubts upon its
candor and bona fides.
WHEREFORE, the petition is DENIED. The decision of
the Insurance Commission dated April 10, 1981, and its
Order of June 4, 1981, are AFFIRMED in full, with costs
against the petitioner. This decision is immediately
executory.
SO ORDERED.
G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE COMPANY,
petitioner, vs. HONORABLE COURT OF APPEALS,
respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU D. MONDRAGON, petitioner, vs.
HON. COURT OF APPEALS and NGO HING,
respondents.
DE CASTRO, J.:
The two above-entitled cases were ordered consolidated
by the Resolution of this Court dated April 29, 1970,
(Rollo, No. L-31878, p. 58), because the petitioners in
both cases seek similar relief, through these petitions for
certiorari by way of appeal, from the amended decision of
respondent Court of Appeals which affirmed in toto the
decision of the Court of First Instance of Cebu, ordering
"the defendants (herein petitioners Great Pacific Ligfe
Assurance Company and Mondragon) jointly and
severally to pay plaintiff (herein private respondent Ngo
Hing) the amount of P50,000.00 with interest at 6% from
the date of the filing of the complaint, and the sum of
P1,077.75, without interest.
It appears that on March 14, 1957, private respondent
Ngo Hing filed an application with the Great Pacific Life
Assurance Company (hereinafter referred to as Pacific
Life) for a twenty-year endownment policy in the amount
of P50,000.00 on the life of his one-year old daughter
Helen Go. Said respondent supplied the essential data
which petitioner Lapulapu D. Mondragon, Branch
Manager of the Pacific Life in Cebu City wrote on the
corresponding form in his own handwriting (Exhibit I-M).
Mondragon finally type-wrote the data on the application
form which was signed by private respondent Ngo Hing.
The latter paid the annual premuim the sum of P1,077.75
going over to the Company, but he reatined the amount of
P1,317.00 as his commission for being a duly authorized
11
agebt of Pacific Life. Upon the payment of the insurance
premuim, the binding deposit receipt (Exhibit E) was
issued to private respondent Ngo Hing. Likewise,
petitioner Mondragon handwrote at the bottom of the back
page of the application form his strong recommendation
for the approval of the insurance application. Then on
April 30, 1957, Mondragon received a letter from Pacific
Life disapproving the insurance application (Exhibit 3-M).
The letter stated that the said life insurance application for
20-year endowment plan is not available for minors below
seven years old, but Pacific Life can consider the same
under the Juvenile Triple Action Plan, and advised that if
the offer is acceptable, the Juvenile Non-Medical
Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life
was allegedly not communicated by petitioner Mondragon
to private respondent Ngo Hing. Instead, on May 6, 1957,
Mondragon wrote back Pacific Life again strongly
recommending the approval of the 20-year endowment
insurance plan to children, pointing out that since 1954
the customers, especially the Chinese, were asking for
such coverage (Exhibit 4-M).
It was when things were in such state that on May 28,
1957 Helen Go died of influenza with complication of
bronchopneumonia. Thereupon, private respondent
sought the payment of the proceeds of the insurance, but
having failed in his effort, he filed the action for the
recovery of the same before the Court of First Instance of
Cebu, which rendered the adverse decision as earlier
refered to against both petitioners.
The decisive issues in these cases are: (1) whether the
binding deposit receipt (Exhibit E) constituted a temporary
contract of the life insurance in question; and (2) whether
private respondent Ngo Hing concealed the state of
health and physical condition of Helen Go, which
rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition
precedents required before a deposit is considered a
BINDING RECEIPT. These conditions state that:
A. If the Company or its agent, shan have received
the premium deposit ... and the insurance application, ON
or PRIOR to the date of medical examination ... said
insurance shan be in force and in effect from the date of
such medical examination, for such period as is covered
by the deposit ..., PROVIDED the company shall be
satisfied that on said date the applicant was insurable on
standard rates under its rule for the amount of insurance
and the kind of policy requested in the application.
D. If the Company does not accept the application
on standard rate for the amount of insurance and/or the
kind of policy requested in the application but issue, or
offers to issue a policy for a different plan and/or amount
..., the insurance shall not be in force and in effect until
the applicant shall have accepted the policy as issued or

offered by the Company and shall have paid the full
premium thereof. If the applicant does not accept the
policy, the deposit shall be refunded.
E. If the applicant shall not have been insurable
under Condition A above, and the Company declines to
approve the application the insurance applied for shall not
have been in force at any time and the sum paid be
returned to the applicant upon the surrender of this
receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that
the binding deposit receipt is intended to be merely a
provisional or temporary insurance contract and only upon
compliance of the following conditions: (1) that the
company shall be satisfied that the applicant was
insurable on standard rates; (2) that if the company does
not accept the application and offers to issue a policy for a
different plan, the insurance contract shall not be binding
until the applicant accepts the policy offered; otherwise,
the deposit shall be reftmded; and (3) that if the applicant
is not ble according to the standard rates, and the
company disapproves the application, the insurance
applied for shall not be in force at any time, and the
premium paid shall be returned to the applicant.
Clearly implied from the aforesaid conditions is that the
binding deposit receipt in question is merely an
acknowledgment, on behalf of the company, that the
latter's branch office had received from the applicant the
insurance premium and had accepted the application
subject for processing by the insurance company; and
that the latter will either approve or reject the same on the
basis of whether or not the applicant is "insurable on
standard rates." Since petitioner Pacific Life disapproved
the insurance application of respondent Ngo Hing, the
binding deposit receipt in question had never become in
force at any time.
Upon this premise, the binding deposit receipt (Exhibit E)
is, manifestly, merely conditional and does not insure
outright. As held by this Court, where an agreement is
made between the applicant and the agent, no liability
shall attach until the principal approves the risk and a
receipt is given by the agent. The acceptance is merely
conditional and is subordinated to the act of the company
in approving or rejecting the application. Thus, in life
insurance, a "binding slip" or "binding receipt" does not
insure by itself (De Lim vs. Sun Life Assurance Company
of Canada, 41 Phil. 264).
It bears repeating that through the intra-company
communication of April 30, 1957 (Exhibit 3-M), Pacific Life
disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment
insurance policy to children less than seven years of age.
What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to
accept. In the absence of a meeting of the minds between
petitioner Pacific Life and private respondent Ngo Hing
over the 20-year endowment life insurance in the amount
of P50,000.00 in favor of the latter's one-year old
daughter, and with the non-compliance of the
abovequoted conditions stated in the disputed binding
deposit receipt, there could have been no insurance
contract duly perfected between thenl Accordingly, the
deposit paid by private respondent shall have to be
refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of
Canada, supra, "a contract of insurance, like other
contracts, must be assented to by both parties either in
person or by their agents ... The contract, to be binding
from the date of the application, must have been a
completed contract, one that leaves nothing to be dione,
nothing to be completed, nothing to be passed upon, or
determined, before it shall take effect. There can be no
contract of insurance unless the minds of the parties have
met in agreement."
We are not impressed with private respondent's
contention that failure of petitioner Mondragon to
communicate to him the rejection of the insurance
application would not have any adverse effect on the
allegedly perfected temporary contract (Respondent's
Brief, pp. 13-14). In this first place, there was no contract
perfected between the parties who had no meeting of
their minds. Private respondet, being an authorized
insurance agent of Pacific Life at Cebu branch office, is
indubitably aware that said company does not offer the life
insurance applied for. When he filed the insurance
application in dispute, private respondent was, therefore,
only taking the chance that Pacific Life will approve the
recommendation of Mondragon for the acceptance and
approval of the application in question along with his
proposal that the insurance company starts to offer the
20-year endowment insurance plan for children less than
seven years. Nonetheless, the record discloses that
Pacific Life had rejected the proposal and
recommendation. Secondly, having an insurable interest
on the life of his one-year old daughter, aside from being
an insurance agent and an offense associate of petitioner
Mondragon, private respondent Ngo Hing must have
known and followed the progress on the processing of
such application and could not pretend ignorance of the
Company's rejection of the 20-year endowment life
insurance application.
At this juncture, We find it fit to quote with approval, the
very apt observation of then Appellate Associate Justice
Ruperto G. Martin who later came up to this Court, from
his dissenting opinion to the amended decision of the
respondent court which completely reversed the original
decision, the following:
Of course, there is the insinuation that neither the
memorandum of rejection (Exhibit 3-M) nor the reply
thereto of appellant Mondragon reiterating the desire for
applicant's father to have the application considered as
one for a 20-year endowment plan was ever duly
12
communicated to Ngo; Hing, father of the minor applicant.
I am not quite conninced that this was so. Ngo Hing, as
father of the applicant herself, was precisely the
"underwriter who wrote this case" (Exhibit H-1). The
unchallenged statement of appellant Mondragon in his
letter of May 6, 1957) (Exhibit 4-M), specifically admits
that said Ngo Hing was "our associate" and that it was the
latter who "insisted that the plan be placed on the 20-year
endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the
application was not brought home to his knowledge. He
must have been duly apprised of the rejection of the
application for a 20-year endowment plan otherwise
Mondragon would not have asserted that it was Ngo Hing
himself who insisted on the application as originally filed,
thereby implictly declining the offer to consider the
application under the Juvenile Triple Action Plan. Besides,
the associate of Mondragon that he was, Ngo Hing should
only be presumed to know what kind of policies are
available in the company for minors below 7 years old.
What he and Mondragon were apparently trying to do in
the premises was merely to prod the company into going
into the business of issuing endowment policies for minors
just as other insurance companies allegedly do. Until such
a definite policy is however, adopted by the company, it
can hardly be said that it could have been bound at all
under the binding slip for a plan of insurance that it could
not have, by then issued at all. (Amended Decision, Rollo,
pp- 52-53).
2. Relative to the second issue of alleged
concealment. this Court is of the firm belief that private
respondent had deliberately concealed the state of health
and piysical condition of his daughter Helen Go. Wher
private regpondeit supplied the required essential data for
the insurance application form, he was fully aware that his
one-year old daughter is typically a mongoloid child. Such
a congenital physical defect could never be ensconced
nor disguished. Nonetheless, private respondent, in
apparent bad faith, withheld the fact materal to the risk to
be assumed by the insurance compary. As an insurance
agent of Pacific Life, he ought to know, as he surely must
have known. his duty and responsibility to such a material
fact. Had he diamond said significant fact in the insurance
application fom Pacific Life would have verified the same
and would have had no choice but to disapprove the
application outright.
The contract of insurance is one of perfect good faith
uberrima fides meaning good faith, absolute and perfect
candor or openness and honesty; the absence of any
concealment or demotion, however slight [Black's Law
Dictionary, 2nd Edition], not for the alone but equally so
for the insurer (Field man's Insurance Co., Inc. vs. Vda de
Songco, 25 SCRA 70). Concealment is a neglect to
communicate that which a partY knows aDd Ought to
communicate (Section 25, Act No. 2427). Whether
intentional or unintentional the concealment entitles the
insurer to rescind the contract of insurance (Section 26,
Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil

930; Satumino vs. Philippine American Life Insurance
Company, 7 SCRA 316). Private respondent appears
guilty thereof.
We are thus constrained to hold that no insurance
contract was perfected between the parties with the
noncompliance of the conditions provided in the binding
receipt, and concealment, as legally defined, having been
comraitted by herein private respondent.
WHEREFORE, the decision appealed from is hereby set
aside, and in lieu thereof, one is hereby entered absolving
petitioners Lapulapu D. Mondragon and Great Pacific Life
Assurance Company from their civil liabilities as found by
respondent Court and ordering the aforesaid insurance
company to reimburse the amount of P1,077.75, without
interest, to private respondent, Ngo Hing. Costs against
private respondent.
SO ORDERED.
G.R. No. L-24833 September 23, 1968
FIELDMEN'S INSURANCE CO., INC., petitioner,
vs. MERCEDES VARGAS VDA. DE SONGCO, ET AL.
and COURT OF APPEALS, respondents.
FERNANDO, J.:
An insurance firm, petitioner Fieldmen's Insurance Co.,
Inc., was not allowed to escape liability under a common
carrier insurance policy on the pretext that what was
insured, not once but twice, was a private vehicle and not
a common carrier, the policy being issued upon the
insistence of its agent who discounted fears of the insured
that his privately owned vehicle might not fall within its
terms, the insured moreover being "a man of scant
education," finishing only the first grade. So it was held in
a decision of the lower court thereafter affirmed by
respondent Court of Appeals. Petitioner in seeking the
review of the above decision of respondent Court of
Appeals cannot be so sanguine as to entertain the belief
that a different outcome could be expected. To be more
explicit, we sustain the Court of Appeals.
The facts as found by respondent Court of Appeals,
binding upon us, follow: "This is a peculiar case. Federico
Songco of Floridablanca, Pampanga, a man of scant
education being only a first grader ..., owned a private
jeepney with Plate No. 41-289 for the year 1960. On
September 15, 1960, as such private vehicle owner, he
was induced by Fieldmen's Insurance Company
Pampanga agent Benjamin Sambat to apply for a
Common Carrier's Liability Insurance Policy covering his
motor vehicle ... Upon paying an annual premium of
P16.50, defendant Fieldmen's Insurance Company, Inc.
issued on September 19, 1960, Common Carriers
Accident Insurance Policy No. 45-HO- 4254 ... the
duration of which will be for one (1) year, effective
September 15, 1960 to September 15, 1961. On
September 22, 1961, the defendant company, upon
payment of the corresponding premium, renewed the
policy by extending the coverage from October 15, 1961
to October 15, 1962. This time Federico Songco's private
jeepney carried Plate No. J-68136-Pampanga-1961. ...
On October 29, 1961, during the effectivity of the renewed
policy, the insured vehicle while being driven by Rodolfo
Songco, a duly licensed driver and son of Federico (the
vehicle owner) collided with a car in the municipality of
Calumpit, province of Bulacan, as a result of which
mishap Federico Songco (father) and Rodolfo Songco
(son) died, Carlos Songco (another son), the latter's wife,
Angelita Songco, and a family friend by the name of Jose
Manuel sustained physical injuries of varying degree." 1
It was further shown according to the decision of
respondent Court of Appeals: "Amor Songco, 42-year-old
son of deceased Federico Songco, testifying as witness,
declared that when insurance agent Benjamin Sambat
was inducing his father to insure his vehicle, he butted in
saying: 'That cannot be, Mr. Sambat, because our vehicle
is an "owner" private vehicle and not for passengers,' to
which agent Sambat replied: 'whether our vehicle was an
"owner" type or for passengers it could be insured
because their company is not owned by the Government
and the Government has nothing to do with their
company. So they could do what they please whenever
they believe a vehicle is insurable' ... In spite of the fact
that the present case was filed and tried in the CFI of
Pampanga, the defendant company did not even care to
rebut Amor Songco's testimony by calling on the witness-
stand agent Benjamin Sambat, its Pampanga Field
Representative." 2
The plaintiffs in the lower court, likewise respondents
here, were the surviving widow and children of the
deceased Federico Songco as well as the injured
passenger Jose Manuel. On the above facts they
prevailed, as had been mentioned, in the lower court and
in the respondent Court of Appeals.1awphîl.nèt
The basis for the favorable judgment is the doctrine
announced in Qua Chee Gan v. Law Union and Rock
Insurance Co., Ltd., 3 with Justice J. B. L. Reyes speaking
for the Court. It is now beyond question that where
inequitable conduct is shown by an insurance firm, it is
"estopped from enforcing forfeitures in its favor, in order to
forestall fraud or imposition on the insured." 4
As much, if not much more so than the Qua Chee Gan
decision, this is a case where the doctrine of estoppel
undeniably calls for application. After petitioner Fieldmen's
Insurance Co., Inc. had led the insured Federico Songco
to believe that he could qualify under the common carrier
liability insurance policy, and to enter into contract of
insurance paying the premiums due, it could not,
thereafter, in any litigation arising out of such
representation, be permitted to change its stand to the
detriment of the heirs of the insured. As estoppel is
primarily based on the doctrine of good faith and the
avoidance of harm that will befall the innocent party due to
13
its injurious reliance, the failure to apply it in this case
would result in a gross travesty of justice.
That is all that needs be said insofar as the first alleged
error of respondent Court of Appeals is concerned,
petitioner being adamant in its far-from-reasonable plea
that estoppel could not be invoked by the heirs of the
insured as a bar to the alleged breach of warranty and
condition in the policy. lt would now rely on the fact that
the insured owned a private vehicle, not a common
carrier, something which it knew all along when not once
but twice its agent, no doubt without any objection in its
part, exerted the utmost pressure on the insured, a man of
scant education, to enter into such a contract.
Nor is there any merit to the second alleged error of
respondent Court that no legal liability was incurred under
the policy by petitioner. Why liability under the terms of
the policy 5 was inescapable was set forth in the decision
of respondent Court of Appeals. Thus: "Since some of the
conditions contained in the policy issued by the
defendant-appellant were impossible to comply with under
the existing conditions at the time and 'inconsistent with
the known facts,' the insurer 'is estopped from asserting
breach of such conditions.' From this jurisprudence, we
find no valid reason to deviate and consequently hold that
the decision appealed from should be affirmed. The
injured parties, to wit, Carlos Songco, Angelito Songco
and Jose Manuel, for whose hospital and medical
expenses the defendant company was being made liable,
were passengers of the jeepney at the time of the
occurrence, and Rodolfo Songco, for whose burial
expenses the defendant company was also being made
liable was the driver of the vehicle in question. Except for
the fact, that they were not fare paying passengers, their
status as beneficiaries under the policy is recognized
therein." 6
Even if it be assumed that there was an ambiguity, an
excerpt from the Qua Chee Gan decision would reveal
anew the weakness of petitioner's contention. Thus:
"Moreover, taking into account the well known rule that
ambiguities or obscurities must be strictly interpreted
against the party that caused them, the 'memo of
warranty' invoked by appellant bars the latter from
questioning the existence of the appliances called for in
the insured premises, since its initial expression, 'the
undernoted appliances for the extinction of fire being kept
on the premises insured hereby, ... it is hereby warranted
...,' admits of interpretation as an admission of the
existence of such appliances which appellant cannot now
contradict, should the parol evidence rule apply." 7
To the same effect is the following citation from the same
leading case: "This rigid application of the rule on
ambiguities has become necessary in view of current
business practices. The courts cannot ignore that
nowadays monopolies, cartels and concentration of
capital, endowed with overwhelming economic power,

manage to impose upon parties dealing with them
cunningly prepared 'agreements' that the weaker party
may not change one whit, his participation in the
'agreement' being reduced to the alternative to 'take it or
leave it' labelled since Raymond Saleilles 'contracts by
adherence' (contrats d'adhesion), in contrast to those
entered into by parties bargaining on an equal footing,
such contracts (of which policies of insurance and
international bills of lading are prime examples) obviously
call for greater strictness and vigilance on the part of
courts of justice with a view to protecting the weaker party
from abuses and imposition, and prevent their becoming
traps for the unwary (New Civil Code. Article 24; Sent. of
Supreme Court of Spain, 13 Dec. 1934, 27 February
1942)." 8
The last error assigned which would find fault with the
decision of respondent Court of Appeals insofar as it
affirmed the lower court award for exemplary damages as
well as attorney's fees is, on its face, of no persuasive
force at all.
The conclusion that inescapably emerges from the above
is the correctness of the decision of respondent Court of
Appeals sought to be reviewed. For, to borrow once again
from the language of the Qua Chee Gan opinion: "The
contract of insurance is one of perfect good faith (uberima
fides) not for the insured alone,but equally so for the
insurer; in fact, it is more so for the latter, since its
dominant bargaining position carries with it stricter
responsibility." 9
This is merely to stress that while the morality of the
business world is not the morality of institutions of
rectitude like the pulpit and the academe, it cannot
descend so low as to be another name for guile or
deception. Moreover, should it happen thus, no court of
justice should allow itself to lend its approval and
support.1awphîl.nèt
We have no choice but to recognize the monetary
responsibility of petitioner Fieldmen's Insurance Co., Inc.
It did not succeed in its persistent effort to avoid
complying with its obligation in the lower court and the
Court of Appeals. Much less should it find any receptivity
from us for its unwarranted and unjustified plea to escape
from its liability.
WHEREFORE, the decision of respondent Court of
Appeals of July 20, 1965, is affirmed in its entirety. Costs
against petitioner Fieldmen's Insurance Co., Inc.
[G.R. No. 154514. July 28, 2005]
WHITE GOLD MARINE SERVICES, INC., petitioner, vs.
PIONEER INSURANCE AND SURETY CORPORATION
AND THE STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., respondents.
QUISUMBING, J.:
This petition for review assails the Decision[1] dated July
30, 2002 of the Court of Appeals in CA-G.R. SP No.
60144, affirming the Decision[2] dated May 3, 2000 of the
Insurance Commission in I.C. Adm. Case No. RD-277.
Both decisions held that there was no violation of the
Insurance Code and the respondents do not need license
as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a
protection and indemnity coverage for its vessels from
The Steamship Mutual Underwriting Association
(Bermuda) Limited (Steamship Mutual) through Pioneer
Insurance and Surety Corporation (Pioneer).
Subsequently, White Gold was issued a Certificate of
Entry and Acceptance.[3] Pioneer also issued receipts
evidencing payments for the coverage. When White Gold
failed to fully pay its accounts, Steamship Mutual refused
to renew the coverage.
Steamship Mutual thereafter filed a case against White
Gold for collection of sum of money to recover the latters
unpaid balance. White Gold on the other hand, filed a
complaint before the Insurance Commission claiming that
Steamship Mutual violated Sections 186[4] and 187[5] of
the Insurance Code, while Pioneer violated Sections
299,[6] 300[7] and 301[8] in relation to Sections 302 and
303, thereof.
The Insurance Commission dismissed the complaint. It
said that there was no need for Steamship Mutual to
secure a license because it was not engaged in the
insurance business. It explained that Steamship Mutual
was a Protection and Indemnity Club (P & I Club).
Likewise, Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual
because Steamship Mutual was not engaged in the
insurance business. 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--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
14
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 Appeals[10] 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
Mutuals 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 99[16] of the
Insurance Code enumerates the coverage of marine
insurance.
Relatedly, a mutual insurance company is a cooperative
enterprise where the members are both the insurer and
insured. In it, the members all contribute, by a system of
premiums or assessments, to the creation of a fund from
which all losses and liabilities are paid, and where the
profits are divided among themselves, in proportion to
their interest.[17] Additionally, mutual insurance
associations, or clubs, provide three types of coverage,
namely, protection and indemnity, war risks, and defense
costs.[18]
A P & I Club is a form of insurance against third party
liability, where the third party is anyone other than the P &
I Club and the members.[19] By definition then,
Steamship Mutual as a P & I Club is a mutual insurance
association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in
the country albeit without the requisite certificate of
authority mandated by Section 187[20] of the Insurance
Code. It maintains a resident agent in the Philippines to
solicit insurance and to collect payments in its behalf. We
note that Steamship Mutual even renewed its P & I Club
cover until it was cancelled due to non-payment of the
calls. Thus, to continue doing business here, Steamship
Mutual or through its agent Pioneer, must secure a
license from the Insurance Commission.
Since a contract of insurance involves public interest,
regulation by the State is necessary. Thus, no insurer or
insurance company is allowed to engage in the insurance
business without a license or a certificate of authority from
the Insurance Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need
a special license?
Pioneer is the resident agent of Steamship Mutual as
evidenced by the certificate of registration[22] issued by
the Insurance Commission. It has been licensed to do or
transact insurance business by virtue of the certificate of
authority[23] issued by the same agency. However, a
Certification from the Commission states that Pioneer
does not have a separate license to be an agent/broker of
Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance
company, it needs a separate license to act as insurance
agent for Steamship Mutual. Section 299 of the Insurance
Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an
insurance broker in the solicitation or procurement of
applications for insurance, or receive for services in
obtaining insurance, any commission or other
compensation from any insurance company doing
business in the Philippines or any agent thereof, without
first procuring a license so to act from the Commissioner,
which must be renewed annually on the first day of
January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers
certificate of authority and removal of its directors and
officers. Regrettably, we are not the forum for these
issues.
WHEREFORE, the petition is PARTIALLY GRANTED.
The Decision dated July 30, 2002 of the Court of Appeals
affirming the Decision dated May 3, 2000 of the Insurance
Commission is hereby REVERSED AND SET ASIDE. The
Steamship Mutual Underwriting Association (Bermuda)
Ltd., and Pioneer Insurance and Surety Corporation are
15
ORDERED to obtain licenses and to secure proper
authorizations to do business as insurer and insurance
agent, respectively. The petitioners prayer for the
revocation of Pioneers Certificate of Authority and
removal of its directors and officers, is DENIED. Costs
against respondents.
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, respondents husband was entitled to avail
of hospitalization benefits, whether ordinary or
emergency, listed therein. He was also entitled to avail of
out-patient benefits such as annual physical
examinations, preventive health care and other out-
patient services.
Upon the termination of the agreement, the same was
extended for another year from March 1, 1989 to March 1,
1990, then from March 1, 1990 to June 1, 1990. The
amount of coverage was increased to a maximum sum of
P75,000.00 per disability.[2]
During the period of his coverage, Ernani suffered a heart
attack and was confined at the Manila Medical Center
(MMC) for one month beginning March 9, 1990. While her
husband was in the hospital, respondent tried to claim the
benefits under the health care agreement. However,
petitioner denied her claim saying that the Health Care
Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history. Doctors
at the MMC allegedly discovered at the time of Ernanis
confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form.
Thus, respondent paid the hospitalization expenses
herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was
attended by a physical therapist at home. Later, he was
admitted at the Chinese General Hospital. Due to financial
difficulties, however, respondent brought her husband

home again. In the morning of April 13, 1990, Ernani had
fever and was feeling very weak. Respondent was
constrained to bring him back to the Chinese General
Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional
Trial Court of Manila, Branch 44, an action for damages
against petitioner and its president, Dr. Benito Reverente,
which was docketed as Civil Case No. 90-53795. She
asked for reimbursement of her expenses plus moral
damages and attorneys fees. After trial, the lower court
ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders
judgment in favor of the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and
hospital coverage of the late Ernani Trinos in the amount
of P76,000.00 plus interest, until the amount is fully paid
to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral
damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00
as exemplary damages to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus
costs of suit.
SO ORDERED.[3]
On appeal, the Court of Appeals affirmed the decision of
the trial court but deleted all awards for damages and
absolved petitioner Reverente.[4] Petitioners motion for
reconsideration was denied.[5] Hence, petitioner brought
the instant petition for review, raising the primary
argument that a health care agreement is not an
insurance contract; hence the incontestability clause
under the Insurance Code[6] does not apply.
Petitioner argues that the agreement grants living
benefits, such as medical check-ups and hospitalization
which a member may immediately enjoy so long as he is
alive upon effectivity of the agreement until its expiration
one-year thereafter. Petitioner also points out that only
medical and hospitalization benefits are given under the
agreement without any indemnification, unlike in an
insurance contract where the insured is indemnified for his
loss. Moreover, since Health Care Agreements are only
for a period of one year, as compared to insurance
contracts which last longer,[7] petitioner argues that the
incontestability clause does not apply, as the same
requires an effectivity period of at least two years.
Petitioner further argues that it is not an insurance
company, which is governed by the Insurance
Commission, but a Health Maintenance Organization
under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening
of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons
bearing a similar risk; and
5. In consideration of the insurers promise, the insured
pays a premium.[8]
Section 3 of the Insurance Code states that any
contingent or unknown event, whether past or future,
which may damnify a person having an insurable interest
against him, may be insured against. Every person has an
insurable interest in the life and health of himself. Section
10 provides:
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 respondents
husband in obtaining the health care agreement was his
own health. The health care agreement was in the nature
of non-life insurance, which is primarily a contract of
indemnity.[9] Once the member incurs hospital, medical or
any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay
for the same to the extent agreed upon under the
contract.
Petitioner argues that respondents husband concealed a
material fact in his application. It appears that in the
application for health coverage, petitioners required
respondents husband to sign an express authorization for
any person, organization or entity that has any record or
16
knowledge of his health to furnish any and all information
relative to any hospitalization, consultation, treatment or
any other medical advice or examination.[10] Specifically,
the Health Care Agreement signed by respondents
husband states:
We hereby declare and agree that all statement and
answers contained herein and in any addendum annexed
to this application are full, complete and true and bind all
parties in interest under the Agreement herein applied for,
that there shall be no contract of health care coverage
unless and until an Agreement is issued on this
application and the full Membership Fee according to the
mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no
information acquired by any Representative of
PhilamCare shall be binding upon PhilamCare unless set
out in writing in the application; that any physician is, by
these presents, expressly authorized to disclose or give
testimony at anytime relative to any information acquired
by him in his professional capacity upon any question
affecting the eligibility for health care coverage of the
Proposed Members and that the acceptance of any
Agreement issued on this application shall be a ratification
of any correction in or addition to this application as stated
in the space for Home Office Endorsement.[11]
(Underscoring ours)
In addition to the above condition, petitioner additionally
required the applicant for authorization to inquire about
the applicants medical history, thus:
I hereby authorize any person, organization, or entity that
has any record or knowledge of my health and/or that of
__________ to give to the PhilamCare Health Systems,
Inc. any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or
examination. This authorization is in connection with the
application for health care coverage only. A photographic
copy of this authorization shall be as valid as the
original.[12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding
Invalidation of agreement which reads:
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 respondents 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.[17] In this case, no rescission was made.
Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following
conditions:
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
respondents 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 deceaseds hospitalization, medication and the
professional fees of the attending physicians.[24]
WHEREFORE, in view of the foregoing, the petition is
DENIED. The assailed decision of the Court of Appeals
dated December 14, 1995 is AFFIRMED.
SO ORDERED.
BLUE CROSS HEALTH CARE, G.R. No. 169737 INC.,
- v e r s u s - CORONA, AZCUNA and
LEONARDO-DE CASTRO, JJ.
NEOMI* and DANILO OLIVARES,
February 12, 2008
CORONA, J.:
17
This is a petition for review on certiorari[1] of a decision[2]
and resolution[3] 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 xxx[12]
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
18
complications when occurring during the first year of a Petitioner argues that respondents prevented Dr. Saniel
Members coverage: from submitting his report regarding the medical condition
of Neomi. Hence, it contends that the presumption that
I. Tumor of Internal Organs evidence willfully suppressed would be adverse if
produced should apply in its favor.[17]
II. Hemorrhoids/Anal Fistula
Respondents counter that the burden was on petitioner to
III. Diseased tonsils and sinus conditions prove that Neomi's stroke was excluded from the
requiring surgery coverage of their agreement because it was due to a pre-
existing condition. It failed to prove this.[18]
IV. Cataract/Glaucoma
We agree with respondents.
V. Pathological Abnormalities of nasal septum
or turbinates In Philamcare Health Systems, Inc. v. CA,[19] we ruled
that a health care agreement is in the nature of a non-life
VI. Goiter and other thyroid disorders insurance.[20] It is an established rule in insurance
contracts that when their terms contain limitations on
VII. Hernia/Benign prostatic hypertrophy liability, they should be construed strictly against the
insurer. These are contracts of adhesion the terms of
VIII. Endometriosis which must be interpreted and enforced stringently
against the insurer which prepared the contract. This
IX. Asthma/Chronic Obstructive Lung disease doctrine is equally applicable to health care
agreements.[21]
X. Epilepsy
Petitioner never presented any evidence to prove that
XI. Scholiosis/Herniated disc and other Spinal respondent Neomi's stroke was due to a pre-existing
column abnormalities condition. It merely speculated that Dr. Saniel's report
would be adverse to Neomi, based on her invocation of
XII. Tuberculosis the doctor-patient privilege. This was a disputable
presumption at best.
XIII. Cholecysitis
Section 3 (e), Rule 131 of the Rules of Court states:
XIV. Gastric or Duodenal ulcer
Sec. 3. Disputable presumptions. ― The following
XV. Hallux valgus presumptions are satisfactory if uncontradicted, but may
be contradicted and overcome by other evidence:
XVI. Hypertension and other Cardiovascular
diseases xxx xxx xxx
XVII. Calculi (e) That evidence willfully suppressed would be adverse if
produced.
XVIII. Tumors of skin, muscular tissue, bone or any
form of blood dyscracias Suffice it to say that this presumption does not apply if (a)
the evidence is at the disposal of both parties; (b) the
XIX. Diabetes Mellitus suppression was not willful; (c) it is merely corroborative
or cumulative and (d) the suppression is an exercise of a
XX. Collagen/Auto-Immune disease privilege.[22] Here, respondents' refusal to present or
allow the presentation of Dr. Saniel's report was justified.
After the Member has been continuously covered for 12 It was privileged communication between physician and
months, this pre-existing provision shall no longer be patient.
applicable except for illnesses specifically excluded by an
endorsement and made part of this Agreement.[16] Furthermore, as already stated, limitations of liability on
the part of the insurer or health care provider must be
Under this provision, disabilities which existed before the construed in such a way as to preclude it from evading its
commencement of the agreement are excluded from its obligations. Accordingly, they should be scrutinized by the
coverage if they become manifest within one year from its courts with extreme jealousy[23] and care and with a
effectivity. Stated otherwise, petitioner is not liable for pre- jaundiced eye.[24] Since petitioner had the burden of
existing conditions if they occur within one year from the proving exception to liability, it should have made its own
time the agreement takes effect. 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 [petitioners] 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. 112329. January 28, 2000]
VIRGINIA A. PEREZ, petitioner, vs. COURT OF
APPEALS and BF LIFEMAN INSURANCE
CORPORATION, respondents.
YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts, must be
assented to by both parties, either in person or through
their agents and so long as an application for insurance
has not been either accepted or rejected, it is merely a
proposal or an offer to make a contract.
Petitioner Virginia A. Perez assails the decision of
respondent Court of Appeals dated July 9, 1993 in CA-
G.R. CV 35529 entitled, "BF Lifeman Insurance
Corporations, Plaintiff-Appellant versus Virginia A. Perez,
Defendant-Appellee," which declared Insurance Policy
056300 for P50,000.00 issued by private respondent
corporation in favor of the deceased Primitivo B. Perez,
null and void and rescinded, thereby reversing the
decision rendered by the Regional Trial Court of Manila,
Branch XVI.
The facts of the case as summarized by respondent Court
of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF Lifeman
Insurance Corporation since 1980 for P20,000.00.
Sometime in October 1987, an agent of the insurance
corporation, Rodolfo Lalog, visited Perez in Guinayangan,
Quezon and convinced him to apply for additional
insurance coverage of P50,000.00, to avail of the ongoing
promotional discount of P400.00 if the premium were paid
annually.
On October 20, 1987, Primitivo B. Perez accomplished an
application form for the additional insurance coverage of
P50,000.00. On the same day, petitioner Virginia A.
Perez, Primitivos wife, paid P2,075.00 to Lalog. The
receipt issued by Lalog indicated the amount received
was a "deposit."[1] Unfortunately, Lalog lost the
application form accomplished by Perez and so on
October 28, 1987, he asked the latter to fill up another
application form.[2] On November 1, 1987, Perez was
made to undergo the required medical examination, which
he passed.[3]
Pursuant to the established procedure of the company,
Lalog forwarded the application for additional insurance of
Perez, together with all its supporting papers, to the office
of BF Lifeman Insurance Corporation at Gumaca, Quezon
which office was supposed to forward the papers to the
Manila office.
On November 25, 1987, Perez died in an accident. He
was riding in a banca which capsized during a storm. At
the time of his death, his application papers for the
additional insurance of P50,000.00 were still with the
Gumaca office. Lalog testified that when he went to follow
up the papers, he found them still in the Gumaca office
and so he personally brought the papers to the Manila
office of BF Lifeman Insurance Corporation. It was only on
November 27, 1987 that said papers were received in
Manila.
Without knowing that Perez died on November 25, 1987,
BF Lifeman Insurance Corporation approved the
application and issued the corresponding policy for the
P50,000.00 on December 2, 1987.[4] Ncm
19
Petitioner Virginia Perez went to Manila to claim the
benefits under the insurance policies of the deceased.
She was paid P40,000.00 under the first insurance policy
for P20,000.00 (double indemnity in case of accident) but
the insurance company refused to pay the claim under the
additional policy coverage of P50,000.00, the proceeds of
which amount to P150,000.00 in view of a triple indemnity
rider on the insurance policy. In its letter of January 29,
1988 to Virginia A. Perez, the insurance company
maintained that the insurance for P50,000.00 had not
been perfected at the time of the death of Primitivo Perez.
Consequently, the insurance company refunded the
amount of P2,075.00 which Virginia Perez had paid.
On September 21, 1990, private respondent BF Lifeman
Insurance Corporation filed a complaint against Virginia A.
Perez seeking the rescission and declaration of nullity of
the insurance contract in question.
Petitioner Virginia A. Perez, on the other hand, averred
that the deceased had fulfilled all his prestations under
the contract and all the elements of a valid contract are
present. She then filed a counterclaim against private
respondent for the collection of P150,000.00 as actual
damages, P100,000.00 as exemplary damages,
P30,000.00 as attorneys fees and P10,000.00 as
expenses for litigation.
On October 25, 1991, the trial court rendered a decision in
favor of petitioner, the dispositive portion of which reads
as follows:
WHEREFORE PREMISES CONSIDERED, judgment is
hereby rendered in favor of defendant Virginia A. Perez,
ordering the plaintiff BF Lifeman Insurance Corporation to
pay to her the face value of BF Lifeman Insurance Policy
No. 056300, plus double indemnity under the SARDI or in
the total amount of P150,000.00 (any refund made and/or
premium deficiency to be deducted therefrom).
SO ORDERED.[5]
The trial court, in ruling for petitioner, held that the
premium for the additional insurance of P50,000.00 had
been fully paid and even if the sum of P2,075.00 were to
be considered merely as partial payment, the same does
not affect the validity of the policy. The trial court further
stated that the deceased had fully complied with the
requirements of the insurance company. He paid, signed
the application form and passed the medical examination.
He should not be made to suffer the subsequent delay in
the transmittal of his application form to private
respondents head office since these were no longer within
his control.
The Court of Appeals, however, reversed the decision of
the trial court saying that the insurance contract for
P50,000.00 could not have been perfected since at the
time that the policy was issued, Primitivo was already

dead.[6] Citing the provision in the application form signed
by Primitivo which states that: Ncmmis
"x x x there shall be no contract of insurance unless and
until a policy is issued on this application and that the
policy shall not take effect until the first premium has been
paid and the policy has been delivered to and accepted
by me/us in person while I/we, am/are in good health"
the Court of Appeals held that the contract of insurance
had to be assented to by both parties and so long as the
application for insurance has not been either accepted or
rejected, it is merely an offer or proposal to make a
contract.
Petitioners motion for reconsideration having been denied
by respondent court, the instant petition for certiorari was
filed on the ground that there was a consummated
contract of insurance between the deceased and BF
Lifeman Insurance Corporation and that the condition that
the policy issued by the corporation be delivered and
received by the applicant in good health, is potestative,
being dependent upon the will of the insurance company,
and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated
consideration, one party undertakes to compensate the
other for loss on a specified subject by specified perils.[7]
A contract, on the other hand, is a meeting of the minds
between two persons whereby one binds himself, with
respect to the other to give something or to render some
service.[8] Under Article 1318 of the Civil Code, there is
no contract unless the following requisites concur:
(1).......Consent of the contracting parties;
(2).......Object certain which is the subject matter of the
contract;
(3).......Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer
and the acceptance upon the thing and the cause which
are to constitute the contract. The offer must be certain
and the acceptance absolute.
When Primitivo filed an application for insurance, paid
P2,075.00 and submitted the results of his medical
examination, his application was subject to the
acceptance of private respondent BF Lifeman Insurance
Corporation. The perfection of the contract of insurance
between the deceased and respondent corporation was
further conditioned upon compliance with the following
requisites stated in the application form:
"there shall be no contract of insurance unless and until a
policy is issued on this application and that the said policy
shall not take effect until the premium has been paid and
the policy delivered to and accepted by me/us in person
while I/We, am/are in good health."[9] Scnc m
The assent of private respondent BF Lifeman Insurance
Corporation therefore was not given when it merely
received the application form and all the requisite
supporting papers of the applicant. Its assent was given
when it issues a corresponding policy to the applicant.
Under the abovementioned provision, it is only when the
applicant pays the premium and receives and accepts the
policy while he is in good health that the contract of
insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on
November 25, 1987, his application papers for additional
insurance coverage were still with the branch office of
respondent corporation in Gumaca and it was only two
days later, or on November 27, 1987, when Lalog
personally delivered the application papers to the head
office in Manila. Consequently, there was absolutely no
way the acceptance of the application could have been
communicated to the applicant for the latter to accept
inasmuch as the applicant at the time was already dead.
In the case of Enriquez vs. Sun Life Assurance Co. of
Canada,[10] recovery on the life insurance of the
deceased was disallowed on the ground that the contract
for annuity was not perfected since it had not been proved
satisfactorily that the acceptance of the application ever
reached the knowledge of the applicant.
Petitioner insists that the condition imposed by
respondent corporation that a policy must have been
delivered to and accepted by the proposed insured in
good health is potestative being dependent upon the will
of the corporation and is therefore null and void.
We do not agree.
A potestative condition depends upon the exclusive will of
one of the parties. For this reason, it is considered void.
Article 1182 of the New Civil Code states: When the
fulfillment of the condition depends upon the sole will of
the debtor, the conditional obligation shall be void.
In the case at bar, the following conditions were imposed
by the respondent company for the perfection of the
contract of insurance:
(a).......a policy must have been issued;
(b).......the premiums paid; and
(c).......the policy must have been delivered to and
accepted by the applicant while he is in good health.
The condition imposed by the corporation that the policy
must have been delivered to and accepted by the
applicant while he is in good health can hardly be
considered as a potestative or facultative condition. On
the contrary, the health of the applicant at the time of the
20
delivery of the policy is beyond the control or will of the
insurance company. Rather, the condition is a suspensive
one whereby the acquisition of rights depends upon the
happening of an event which constitutes the condition. In
this case, the suspensive condition was the policy must
have been delivered and accepted by the applicant while
he is in good health. There was non-fulfillment of the
condition, however, inasmuch as the applicant was
already dead at the time the policy was issued. Hence,
the non-fulfillment of the condition resulted in the non-
perfection of the contract. Sdaa miso
As stated above, a contract of insurance, like other
contracts, must be assented to by both parties either in
person or by their agents. So long as an application for
insurance has not been either accepted or rejected, it is
merely an offer or proposal to make a contract. The
contract, to be binding from the date of application, must
have been a completed contract, one that leaves nothing
to be done, nothing to be completed, nothing to be
passed upon, or determined, before it shall take effect.
There can be no contract of insurance unless the minds of
the parties have met in agreement.[11]
Prescinding from the foregoing, respondent corporation
cannot be held liable for gross negligence. It should be
noted that an application is a mere offer which requires
the overt act of the insurer for it to ripen into a contract.
Delay in acting on the application does not constitute
acceptance even though the insured has forwarded his
first premium with his application. The corporation may
not be penalized for the delay in the processing of the
application papers. Moreover, while it may have taken
some time for the application papers to reach the main
office, in the case at bar, the same was acted upon less
than a week after it was received. The processing of
applications by respondent corporation normally takes two
to three weeks, the longest being a month.[12] In this
case, however, the requisite medical examination was
undergone by the deceased on November 1, 1987; the
application papers were forwarded to the head office on
November 27, 1987; and the policy was issued on
December 2, 1987. Under these circumstances, we hold
that the delay could not be deemed unreasonable so as to
constitute gross negligence.
A final note. It has not escaped our notice that the Court
of Appeals declared Insurance Policy 056300 for
P50,000.00 null and void and rescinded. The Court of
Appeals corrected this in its Resolution of the motion for
reconsideration filed by petitioner, thus:
"Anent the appearance of the word rescinded in the
dispositive portion of the decision, to which defendant-
appellee attaches undue significance and makes capital
of, it is clear that the use of the words and rescinded is, as
it is hereby declared, a superfluity. It is apparent from the
context of the decision that the insurance policy in
question was found null and void, and did not have to be
rescinded."[13]

True, rescission presupposes the existence of a valid
contract. A contract which is null and void is no contract at
all and hence could not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of
Appeals in CA-G.R. CV No. 35529 is AFFIRMED insofar
as it declared Insurance Policy No. 056300 for
P50,000.00 issued by BF Lifeman Insurance Corporation
of no force and effect and hence null and void. No costs.
SO ORDERED.
G.R. No. L-2294 May 25, 1951
FILIPINAS COMPAÑIA DE SEGUROS, petitioner, vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation,
Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner
,Filipinas Cia. de Seguros, fire policy No. 29333 in the
sum of P1000,000, covering merchandise contained in a
building located at No. 711 Roman Street, Binondo
Manila. On February 27, 1942, or during the Japanese
military occupation, the building and insured merchandise
were burned. In due time the respondent submitted to the
petitioner its claim under the policy. The salvage goods
were sold at public auction and, after deducting their
value, the total loss suffered by the respondent was fixed
at P92,650. The petitioner refused to pay the claim on the
ground that the policy in favor of the respondent had
ceased to be in force on the date the United States
declared war against Germany, the respondent
Corporation (though organized under and by virtue of the
laws of the Philippines) being controlled by the German
subjects and the petitioner being a company under
American jurisdiction when said policy was issued on
October 1, 1941. The petitioner, however, in pursuance of
the order of the Director of Bureau of Financing, Philippine
Executive Commission, dated April 9, 1943, paid to the
respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the
Court of First Instance of Manila for the purpose of
recovering from the respondent the sum of P92,650
above mentioned. The theory of the petitioner is that the
insured merchandise were burned up after the policy
issued in 1941 in favor of the respondent corporation has
ceased to be effective because of the outbreak of the war
between the United States and Germany on December
10, 1941, and that the payment made by the petitioner to
the respondent corporation during the Japanese military
occupation was under pressure. After trial, the Court of
First Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court of
Appeals, the judgment of the Court of First Instance of
Manila was affirmed, with costs. The case is now before
us on appeal by certiorari from the decision of the Court of
Appeals.
The Court of Appeals overruled the contention of the
petitioner that the respondent corporation became an
enemy when the United States declared war against
Germany, relying on English and American cases which
held that a corporation is a citizen of the country or state
by and under the laws of which it was created or
organized. It rejected the theory that nationality of private
corporation is determine by the character or citizenship of
its controlling stockholders.
There is no question that majority of the stockholders of
the respondent corporation were German subjects. This
being so, we have to rule that said respondent became an
enemy corporation upon the outbreak of the war between
the United States and Germany. The English and
American cases relied upon by the Court of Appeals have
lost their force in view of the latest decision of the
Supreme Court of the United States in Clark vs. Uebersee
Finanz Korporation, decided on December 8, 1947, 92
Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which
the controls test has been adopted. In "Enemy
Corporation" by Martin Domke, a paper presented to the
Second International Conference of the Legal Profession
held at the Hague (Netherlands) in August. 1948 the
following enlightening passages appear:
Since World War I, the determination of enemy nationality
of corporations has been discussion in many countries,
belligerent and neutral. A corporation was subject to
enemy legislation when it was controlled by enemies,
namely managed under the influence of individuals or
corporations, themselves considered as enemies. It was
the English courts which first the Daimler case applied this
new concept of "piercing the corporate veil," which was
adopted by the peace of Treaties of 1919 and the Mixed
Arbitral established after the First World War.
The United States of America did not adopt the control
test during the First World War. Courts refused to
recognized the concept whereby American-registered
corporations could be considered as enemies and thus
subject to domestic legislation and administrative
measures regarding enemy property.
World War II revived the problem again. It was known that
German and other enemy interests were cloaked by
domestic corporation structure. It was not only by legal
ownership of shares that a material influence could be
exercised on the management of the corporation but also
by long term loans and other factual situations. For that
reason, legislation on enemy property enacted in various
countries during World War II adopted by statutory
provisions to the control test and determined, to various
degrees, the incidents of control. Court decisions were
rendered on the basis of such newly enacted statutory
provisions in determining enemy character of domestic
corporation.
21
The United States did not, in the amendments of the
Trading with the Enemy Act during the last war, include as
did other legislations the applications of the control test
and again, as in World War I, courts refused to apply this
concept whereby the enemy character of an American or
neutral-registered corporation is determined by the enemy
nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing
regulations, and other administrative practice in the
treatment of foreign-owned property in the United States
allowed to large degree the determination of enemy
interest in domestic corporations and thus the application
of the control test. Court decisions sanctioned such
administrative practice enacted under the First War
Powers Act of 1941, and more recently, on December 8,
1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee
Finanz Korporation, A. G., dealing with a Swiss
corporation allegedly controlled by German interest, the
Court: "The property of all foreign interest was placed
within the reach of the vesting power (of the Alien
Property Custodian) not to appropriate friendly or neutral
assets but to reach enemy interest which masqueraded
under those innocent fronts. . . . The power of seizure and
vesting was extended to all property of any foreign
country or national so that no innocent appearing device
could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on
the authorities cited in support of the appealed decision.
However, we may add that, in Haw Pia vs. China Banking
Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held
that China Banking Corporation came within the meaning
of the word "enemy" as used in the Trading with the
Enemy Acts of civilized countries not only because it was
incorporated under the laws of an enemy country but
because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as
amended,) in section 8, provides that "anyone except a
public enemy may be insured." It stands to reason that an
insurance policy ceases to be allowable as soon as an
insured becomes a public enemy.
Effect of war, generally. — All intercourse between
citizens of belligerent powers which is inconsistent with a
state of war is prohibited by the law of nations. Such
prohibition includes all negotiations, commerce, or trading
with the enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of voluntary
submission to it; or receiving its protection; also all acts
concerning the transmission of money or goods; and all
contracts relating thereto are thereby nullified. It further
prohibits insurance upon trade with or by the enemy, upon
the life or lives of aliens engaged in service with the
enemy; this for the reason that the subjects of one country
cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien
subjects, or to do anything detrimental too their country's
 22

interest. The purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is inconsistent
that one country should destroy its enemy's property and
repay in insurance the value of what has been so
destroyed, or that it should in such manner increase the
resources of the enemy, or render it aid, and the
commencement of war determines, for like reasons, all
trading intercourse with the enemy, which prior thereto
may have been lawful. All individuals therefore, who
compose the belligerent powers, exist, as to each other, in
a state of utter exclusion, and are public enemies. (6
Couch, Cyc. of Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants
insurance only from year, or for some other specified term
it is plain that when the parties become alien enemies, the
contractual tie is broken and the contractual rights of the
parties, so far as not vested. lost. (Vance, the Law on
Insurance, Sec. 44, p. 112.)
pay the claim of Messrs. Christern, Huenefeld & Co., Inc.
The payment of said claim, however, should be made by
means of crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid
to the respondent under the circumstances on this case.
However, the petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of P92,650 paid
on April 19, 1943, in accordance with the rate fixed in the
Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and
the respondent corporation is ordered to pay to the
petitioner the sum of P77,208.33, Philippine currency, less
the amount of the premium, in Philippine currency, that
should be returned by the petitioner for the unexpired term
of the policy in question, beginning December 11, 1941.
Without costs. So ordered.

The respondent having become an enemy corporation on

December 10, 1941, the insurance policy issued in its
favor on October 1, 1941, by the petitioner (a Philippine
corporation) had ceased to be valid and enforcible, and
since the insured goods were burned after December 10,
1941, and during the war, the respondent was not entitled
to any indemnity under said policy from the petitioner.
However, elementary rules of justice (in the absence of
specific provision in the Insurance Law) require that the
premium paid by the respondent for the period covered by
its policy from December 11, 1941, should be returned by
the petitioner.

The Court of Appeals, in deciding the case, stated that the

main issue hinges on the question of whether the policy in
question became null and void upon the declaration of
war between the United States and Germany on
December 10, 1941, and its judgment in favor of the
respondent corporation was predicated on its conclusion
that the policy did not cease to be in force. The Court of
Appeals necessarily assumed that, even if the payment by
the petitioner to the respondent was involuntary, its action
is not tenable in view of the ruling on the validity of the
policy. As a matter of fact, the Court of Appeals held that
"any intimidation resorted to by the appellee was not
unjust but the exercise of its lawful right to claim for and
received the payment of the insurance policy," and that
the ruling of the Bureau of Financing to the effect that "the
appellee was entitled to payment from the appellant was,
well founded." Factually, there can be no doubt that the
Director of the Bureau of Financing, in ordering the
petitioner to pay the claim of the respondent, merely
obeyed the instruction of the Japanese Military
Administration, as may be seen from the following: "In
view of the findings and conclusion of this office contained
in its decision on Administrative Case dated February 9,
1943 copy of which was sent to your office and the
concurrence therein of the Financial Department of the
Japanese Military Administration, and following the
instruction of said authority, you are hereby ordered to