G.R. No.

L-47593 December 29, 1943

THE
INSULAR
LIFE
ASSURANCE
CO.,
LTD., petitioner,
vs.
SERAFIN D. FELICIANO ET AL., respondents.
Manuel Roxas and Araneta, Zaragoza, Araneta and Bautista for petitioner.
Deflfin
Joven
and
Pablo
Lorenzo
for
respondents.
Ramirez and Ortigas as amici curiae.
OZAETA, J.:
In a four-to-three decision promulgated on September 13, 1941, 1 this Court
affirmed the judgment of the Court of Appeals in favor of the respondents and
against the petitioner for the sum of P25,000, representing the value of two
insurance policies issued by the petitioner on the life of Evaristo Feliciano. A
motion to reconsider and set aside said decision has been filed by the petitioner,
and both parties have submitted exhaustive and luminous written arguments in
support of their respective contentions.
The facts of the case are set forth in the majority and dissenting opinions
heretofore handed down by this Court, the salient points of which may be briefly
restated as follows:
Evaristo Feliciano, who died on September 29, 1935, was suffering with advanced
pulmonary tuberculosis when he signed his applications for insurance with the
petitioner on October 12, 1934. On that same date Doctor Trepp, who had taken
X-ray pictures of his lungs, informed the respondent Dr. Serafin D. Feliciano,
brother of Evaristo, that the latter "was already in a very serious ad practically
hopeless condition." Nevertheless the question contained in the application
"Have you ever suffered from any ailment or disease of the lungs, pleurisy,
pneumonia or asthma?" appears to have been answered , "No" And above the
signature of the applicant, following the answers to the various questions
propounded to him, is the following printed statement:1awphil.net
I declare on behalf of myself and of any person who shall have or claim any
interest in any policy issued hereunder, that each of the above answers is full,
complete and true, and that to the best of my knowledge and belief I am a proper
subject for life insurance. (Exhibit K.)
The false answer above referred to, as well as the others, was written by the
Company's soliciting agent Romulo M. David, in collusion with the medical
examiner Dr. Gregorio Valdez, for the purpose of securing the Company's
approval of the application so that the policy to be issued thereon might be
credited to said agent in connection with the inter-provincial contest which the
Company was then holding among its soliciting agents to boost the sales of its
policies. Agent David bribed Medical Examiner Valdez with money which the
former borrowed from the applicant's mother by way of advanced payment on the
premium, according to the finding of the Court of Appeals. Said court also found
that before the insured signed the application he, as well as the members of his
family, told the agent and the medical examiner that he had been sick and
coughing for some time and that he had gone three times to the Santol
Sanatorium and had X-ray pictures of his lungs taken; but that in spite of such

information the agent and the medical examiner told them that the applicant was
a fit subject for insurance.
Each of the policies sued upon contains the following stipulations:
This policy and the application herefor constitute the entire contract between the
parties hereto. . . . Only the President, or the Manager, acting jointly with the
Secretary or Assistant Secretary (and then only in writing signed by them) have
power in behalf of the Company to issue permits, or to modify this or any
contract, or to extend the same time for making any premium payment, and the
Company shall not be bound by any promise or representation heretofore or
hereafter given by any person other than the above-named officials, and by them
only in writing and signed conjointly as stated.
The application contains, among others, the following statements:
18. I [the applicant] hereby declare that all the above statements and answers
as well as all those that I may make to the Company's Medical Examiner in
continuation of this application, to be complete, true and correct to the best of my
knowledge and belief, and I hereby agree as follows:
1. That his declaration, with the answers to be given by me to the Medical
Examiner, shall be the basis of the policy and form part of same.
xxx
xxx
xxx
3. That the said policy shall not take effect until the first premium has been
paid and the policy has been delivered to and accepted by me, while I am in good
health.
4. That the agent taking this application has no authority to make, modify or
discharge contracts, or to waive any of the Company's rights or requirements.
5. My acceptance of any policy issued on this application will constitute a
ratification by me of any corrections in or additions to this application made by
the Company in the space provided "For Home Office Corrections or Additions
Only." I agree that photographic copy of this applications as corrected or added to
shall constitute sufficient notice to me of the changes made. (Emphasis added.)
The petitioner insists that upon the facts of the case the policies in question are
null and void ab initio and that all that the respondents are entitled to is the
refund of the premiums paid thereon. After a careful re-examination of the facts
and the law, we are persuaded that petitioner's contention is correct. To the
reasons adduced in the dissenting opinion heretofore published, we only desire to
add the following considerations:
When Evaristo Feliciano, the applicant for insurance, signed the application in
blank and authorized the soliciting agent and/or medical examiner of the
Company to write the answers for him, he made them his own agents for that
purpose, and he was responsible for their acts in that connection. If they falsified
the answers for him, he could not evade the responsibility for he falsification. He
was not supposed to sign the application in blank. He knew that the answers to
the questions therein contained would be "the basis of the policy," and for that
every reason he was required with his signature to vouch for truth thereof.
Moreover, from the facts of the case we cannot escape the conclusion that the
insured acted in connivance with the soliciting agent and the medical examiner of
the Company in accepting the policies in question. Above the signature of the

applicant is the printed statement or representation: " . . . I am a proper subject

for life insurance." In another sheet of the same application and above another
signature of the applicant was also printed this statement: "That the said policy
shall not take effect until he first premium has been paid and the policy as been
delivered to and accepted by me, while I am in good health." When the applicant
signed the application he was "having difficulty in breathing, . . . with a very high
fever." He had gone three times to the Santol Sanatorium and had X-ray pictures
taken of his lungs. He therefore knew that he was not "a proper subject for life
insurance." When he accepted the policy, he knew that he was not in good health.
Nevertheless, he not only accepted the first policy of P20,000 but then and there
applied for and later accepted another policy of P5,000.
We cannot bring ourselves to believe that the insured did not take the trouble to
read the answers contained in the photostatic copy of the application attached to
and made a part of the policy before he accepted it and paid the premium
thereon. He must have notice that the answers to the questions therein asked
concerning his clinical history were false, and yet he accepted the first policy and
applied for another. In any event, he obligated himself to read the policy when he
subscribed to this statement: "My acceptance of any policy issued on this
application will constitute a ratification by me of any corrections in or additions to
this application made by the Company . . ." By accepting the policy he became
charged with knowledge of its contents, whether he actually read it or not. He
could not ostrich-like hide his head from it in order to avoid his part of the bargain
and at the same time claim the benefit thereof. He knew, or was chargeable with
knowledge, from the very terms of the two policies sued upon (one of which is
printed in English and the other in Spanish) that the soliciting agent and the
medical examiner had no power to bind the Company by any verbal promise or
oral representation. The insured, therefore, had no right to rely and we cannot
believe he relied in good faith upon the oral representation. The insured,
therefore, had no right to rely and we cannot believe he relied in good faith
upon the oral representation of said agent and medical examiner that he (the
applicant) was a fit subject for insurance notwithstanding that he had been and
was still suffering with advanced pulmonary tuberculosis.
From all the facts and circumstances of this case, we are constrained to conclude
that the insured was a coparticipant, and coresponsible with Agent David and
Medical Examiner Valdez, in the fraudulent procurement of the policies in
question and that by reason thereof said policies are void ab initio.
Wheretofore, the motion for reconsideration is sustained and the judgment of the
Court of Appeals is hereby reversed. Let another judgment be entered in favor of
the respondents and against the petitioner for the refund of the premiums
amounting to P1,389, with legal interest thereon from the date of the complaint,
and without any finding as to costs.
Moran, Paras and Bocobo, JJ., concur.
G.R. No. L-1669

August 31, 1950

PAZ
LOPEZ
DE
CONSTANTINO, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-1670
August 31, 1950
AGUSTINA
PERALTA, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
Mariano
Lozada
for
appellant
Constantino.
Cachero
and
Madarang
for
appellant
Peralta.
Dewitt,
Perkins
and
Ponce
Enrile
for
appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.
BENGZON, J.:
These two cases, appealed from the Court of First Instance of Manila, call for
decision of the question whether the beneficiary in a life insurance policy may
recover the amount thereof although the insured died after repeatedly failing to
pay the stipulated premiums, such failure having been caused by the last war in
the Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual premium duly paid to
it, the Asia Life Insurance Company (a foreign corporation incorporated under the
laws of Delaware, U.S.A.), issued on September 27, 1941, its Policy No. 93912 for
P3,000, whereby it insured the life of Arcadio Constantino for a term of twenty
years. The first premium covered the period up to September 26, 1942. The
plaintiff Paz Lopez de Constantino was regularly appointed beneficiary. The policy
contained these stipulations, among others:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application here for a copy of which is attached hereto and is hereby made a part
hereof made a part hereof, and of the payment in advance during the lifetime and
good health of the Insured of the annual premium of One Hundred fifty-eight and
4/100 pesos Philippine currency1 and of the payment of a like amount upon each
twenty-seventh day of September hereafter during the term of Twenty years or
until the prior death of the Insured. (Emphasis supplied.)
xxx
xxx
xxx
All premium payments are due in advance and any unpunctuality in making any
such payment shall cause this policy to lapse unless and except as kept in force
by the Grace Period condition or under Option 4 below. (Grace of 31 days.)
After that first payment, no further premiums were paid. The insured died on
September 22, 1944.
It is admitted that the defendant, being an American corporation , had to close its
branch office in Manila by reason of the Japanese occupation, i.e. from January 2,
1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life Insurance Company
issued its Policy No. 78145 (Joint Life 20-Year Endowment Participating with
Accident Indemnity), covering the lives of the spouses Tomas Ruiz and Agustina
Peralta, for the sum of P3,000. The annual premium stipulated in the policy was

regularly paid from August 1, 1938, up to and including September 30, 1941.
Effective August 1, 1941, the mode of payment of premiums was changed from
annual to quarterly, so that quarterly premiums were paid, the last having been
delivered on November 18, 1941, said payment covering the period up to January
31, 1942. No further payments were handed to the insurer. Upon the Japanese
occupation, the insured and the insurer became separated by the lines of war,
and it was impossible and illegal for them to deal with each other. Because the
insured had borrowed on the policy an mount of P234.00 in January, 1941, the
cash surrender value of the policy was sufficient to maintain the policy in force
only up to September 7, 1942. Tomas Ruiz died on February 16, 1945. The plaintiff
Agustina Peralta is his beneficiary. Her demand for payment met with defendant's
refusal, grounded on non-payment of the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application herefor, a copy of which is attached hereto and is hereby made apart
hereof, and of the payment in advance during the life time and good health of the
Insured of the annual premium of Two hundred and 43/100 pesos Philippine
currency and of the payment of a like amount upon each first day of August
hereafter during the term of Twenty years or until the prior death of either of the
Insured. (Emphasis supplied.)
xxx
xxx
xxx
All premium payments are due in advance and any unpunctuality in making any
such payment shall cause this policy to lapse unless and except as kept in force
by the Grace Period condition or under Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds
of the policies minus all sums due for premiums in arrears. They allege that nonpayment of the premiums was caused by the closing of defendant's offices in
Manila during the Japanese occupation and the impossible circumstances created
by war.
Defendant on the other hand asserts that the policies had lapsed for nonpayment of premiums, in accordance with the contract of the parties and the law
applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction. Fortunately,
this court has had the benefit of extensive and exhaustive memoranda including
those of amici curiae. The matter has received careful consideration, inasmuch as
it affects the interest of thousands of policy-holders and the obligations of many
insurance companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427,
as amended, and the Civil Code.2 Act No. 2427 was largely copied from the Civil
Code of California.3 And this court has heretofore announced its intention to
supplement the statutory laws with general principles prevailing on the subject in
the United State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts
of insurance are contracts of indemnity upon the terms and conditions specified
in the policy. The parties have a right to impose such reasonable conditions at the

time of the making of the contract as they may deem wise and necessary. The
rate of premium is measured by the character of the risk assumed. The insurance
company, for a comparatively small consideration, undertakes to guarantee the
insured against loss or damage, upon the terms and conditions agreed upon, and
upon no other, and when called upon to pay, in case of loss, the insurer,
therefore, may justly insists upon a fulfillment of these terms. If the insured
cannot bring himself within the conditions of the policy, he is not entitled for the
loss. The terms of the policy constitute the measure of the insurer's liability, and
in order to recover the insured must show himself within those terms; and if it
appears that the contract has been terminated by a violation, on the part of the
insured, of its conditions, then there can be no right of recovery. The compliance
of the insured with the terms of the contract is a condition precedent to the right
of recovery."
Recall of the above pronouncements is appropriate because the policies in
question stipulate that "all premium payments are due in advance and any
unpunctuality in making any such payment shall cause this policy to lapse."
Wherefore, it would seem that pursuant to the express terms of the policy, nonpayment of premium produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in a policy, are
binding upon the parties and should be enforced by the courts, if the evidence
brings the case clearly within their meaning and intent. It tends to bring the law
itself into disrepute when, by astute and subtle distinctions, a plain case is
attempted to be taken without the operation of a clear, reasonable and material
obligation of the contract. Mack vs. Rochester German Ins. Co., 106 N.Y., 560, 564.
(Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy
was avoided because the premium had not been paid within the time fixed, since
by its express terms, non-payment of any premium when due or within the thirtyday period of grace, ipso facto caused the policy to lapse. This goes to show that
although we take the view that insurance policies should be conserved 5 and
should not lightly be thrown out, still we do not hesitate to enforce the agreement
of the parties.
Forfeitures of insurance policies are not favored, but courts cannot for that reason
alone refuse to enforce an insurance contract according to its meaning. (45 C.J.S.,
p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of
premium was the consequence of war, it should be excused and should not cause
the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in
determining the effect of non-payment of premiums occasioned by war, the
American cases may be divided into three groups, according as they support the
so-called Connecticut Rule, the New York Rule, or the United States Rule.
The first holds the view that "there are two elements in the consideration for
which the annual premium is paid First, the mere protection for the year, and
second, the privilege of renewing the contract for each succeeding year by paying
the premium for that year at the time agreed upon. According to this view of the

contract, the payment of premiums is a condition precedent, the nonperformance would be illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold
that "war between states in which the parties reside merely suspends the
contracts of the life insurance, and that, upon tender of all premiums due by the
insured or his representatives after the war has terminated, the contract revives
and becomes fully operative."
The United States rule declares that the contract is not merely suspended, but is
abrogated by reason of non-payments is peculiarly of the essence of the contract.
It additionally holds that it would be unjust to allow the insurer to retain the
reserve value of the policy, which is the excess of the premiums paid over the
actual risk carried during the years when the policy had been in force. This rule
was announced in the well-known Statham 6case which, in the opinion of Professor
Vance, is the correct rule.7
The appellants and some amici curiae contend that the New York rule should be
applied here. The appellee and other amici curiae contend that the United States
doctrine is the orthodox view.
We have read and re-read the principal cases upholding the different theories.
Besides the respect and high regard we have always entertained for decisions of
the Supreme Court of the United States, we cannot resist the conviction that the
reasons expounded in its decision of the Statham case are logically and judicially
sound. Like the instant case, the policy involved in the Statham decision specifies
that non-payment on time shall cause the policy to cease and determine.
Reasoning out that punctual payments were essential, the court said:
. . . it must be conceded that promptness of payment is essential in the business
of life insurance. All the calculations of the insurance company are based on the
hypothesis of prompt payments. They not only calculate on the receipt of the
premiums when due, but on compounding interest upon them. It is on this basis
that they are enabled to offer assurance at the favorable rates they do. Forfeiture
for non-payment is an necessary means of protecting themselves from
embarrassment. Unless it were enforceable, the business would be thrown into
confusion. It is like the forfeiture of shares in mining enterprises, and all other
hazardous undertakings. There must be power to cut-off unprofitable members, or
the success of the whole scheme is endangered. The insured parties are
associates in a great scheme. This associated relation exists whether the
company be a mutual one or not. Each is interested in the engagements of all; for
out of the co-existence of many risks arises the law of average, which underlies
the whole business. An essential feature of this scheme is the mathematical
calculations referred to, on which the premiums and amounts assured are based.
And these calculations, again, are based on the assumption of average mortality,
and of prompt payments and compound interest thereon. Delinquency cannot be
tolerated nor redeemed, except at the option of the company. This has always
been the understanding and the practice in this department of business. Some
companies, it is true, accord a grace of thirty days, or other fixed period, within
which the premium in arrear may be paid, on certain conditions of continued good
health, etc. But this is a matter of stipulation, or of discretion, on the part of the

particular company. When no stipulation exists, it is the general understanding

that time is material, and that the forfeiture is absolute if the premium be not
paid. The extraordinary and even desperate efforts sometimes made, when an
insured person is in extremes to meet a premium coming due, demonstrates the
common view of this matter.
The case, therefore, is one in which time is material and of the essence and of the
essence of the contract. Non-payment at the day involves absolute forfeiture if
such be the terms of the contract, as is the case here. Courts cannot with safety
vary the stipulation of the parties by introducing equities for the relief of the
insured against their own negligence.
In another part of the decision, the United States Supreme Court considers and
rejects what is, in effect, the New York theory in the following words and phrases:
The truth is, that the doctrine of the revival of contracts suspended during the
war is one based on considerations of equity and justice, and cannot be invoked
to revive a contract which it would be unjust or inequitable to revive.
In the case of Life insurance, besides the materiality of time in the performance of
the contract, another strong reason exists why the policy should not be revived.
The parties do not stand on equal ground in reference to such a revival. It would
operate most unjustly against the company. The business of insurance is founded
on the law of average; that of life insurance eminently so. The average rate of
mortality is the basis on which it rests. By spreading their risks over a large
number of cases, the companies calculate on this average with reasonable
certainty and safety. Anything that interferes with it deranges the security of the
business. If every policy lapsed by reason of the war should be revived, and all
the back premiums should be paid, the companies would have the benefit of this
average amount of risk. But the good risks are never heard from; only the bar are
sought to be revived, where the person insured is either dead or dying. Those in
health can get the new policies cheaper than to pay arrearages on the old. To
enforce a revival of the bad cases, whilst the company necessarily lose the cases
which are desirable, would be manifestly unjust. An insured person, as before
stated, does not stand isolated and alone. His case is connected with and corelated to the cases of all others insured by the same company. The nature of the
business, as a whole, must be looked at to understand the general equities of the
parties.
The above consideration certainly lend themselves to the approval of fair-minded
men. Moreover, if, as alleged, the consequences of war should not prejudice the
insured, neither should they bear down on the insurer.
Urging adoption of the New York theory, counsel for plaintiff point out that the
obligation of the insured to pay premiums was excused during the war owing to
impossibility of performance, and that consequently no unfavorable
consequences should follow from such failure.
The appellee answers, quite plausibly, that the periodic payment of premiums, at
least those after the first, is not an obligation of the insured, so much so that it is
not a debt enforceable by action of the insurer.
Under an Oklahoma decision, the annual premium due is not a debt. It is not an
obligation upon which the insurer can maintain an action against insured; nor is

its settlement governed by the strict rule controlling payments of debts. So, the
court in a Kentucky case declares, in the opinion, that it is not a debt. . . . The fact
that it is payable annually or semi-annually, or at any other stipulated time, does
not of itself constitute a promise to pay, either express or implied. In case of nonpayment the policy is forfeited, except so far as the forfeiture may be saved by
agreement, by waiver, estoppel, or by statute. The payment of the premium is
entirely optional, while a debt may be enforced at law, and the fact that the
premium is agreed to be paid is without force, in the absence of an unqualified
and absolute agreement to pay a specified sum at some certain time. In the
ordinary policy there is no promise to pay, but it is optional with the insured
whether he will continue the policy or forfeit it. (3 Couch, Cyc. on Insurance, Sec.
623, p. 1996.)
It is well settled that a contract of insurance is sui generis. While the insured by
an observance of the conditions may hold the insurer to his contract, the latter
has not the power or right to compel the insured to maintain the contract relation
with it longer than he chooses. Whether the insured will continue it or not is
optional with him. There being no obligation to pay for the premium, they did not
constitute a debt. (Noblevs. Southern States M.D. Ins. Co., 157 Ky., 46; 162 S.W.,
528.) (Emphasis ours.)
It should be noted that the parties contracted not only for peacetime conditions
but also for times of war, because the policies contained provisions applicable
expressly to wartime days. The logical inference, therefore, is that the parties
contemplated uninterrupted operation of the contract even if armed conflict
should ensue.
For the plaintiffs, it is again argued that in view of the enormous growth of
insurance business since the Statham decision, it could now be relaxed and even
disregarded. It is stated "that the relaxation of rules relating to insurance is in
direct proportion to the growth of the business. If there were only 100 men, for
example, insured by a Company or a mutual Association, the death of one will
distribute the insurance proceeds among the remaining 99 policy-holders.
Because the loss which each survivor will bear will be relatively great, death from
certain agreed or specified causes may be deemed not a compensable loss. But if
the policy-holders of the Company or Association should be 1,000,000 individuals,
it is clear that the death of one of them will not seriously prejudice each one of
the 999,999 surviving insured. The loss to be borne by each individual will be
relatively small."
The answer to this is that as there are (in the example) one million policy-holders,
the "losses" to be considered will not be the death of one but the death of ten
thousand, since the proportion of 1 to 100 should be maintained. And certainly
such losses for 10,000 deaths will not be "relatively small."
After perusing the Insurance Act, we are firmly persuaded that the non-payment
of premiums is such a vital defense of insurance companies that since the very
beginning, said Act no. 2427 expressly preserved it, by providing that after the
policy shall have been in force for two years, it shall become incontestable (i.e.
the insurer shall have no defense) except for fraud, non-payment of premiums,
and military or naval service in time of war (sec. 184 [b], Insurance Act). And

when Congress recently amended this section (Rep. Act No. 171), the defense of
fraud was eliminated, while the defense of nonpayment of premiums was
preserved. Thus the fundamental character of the undertaking to pay premiums
and the high importance of the defense of non-payment thereof, was specifically
recognized.
In keeping with such legislative policy, we feel no hesitation to adopt the United
States Rule, which is in effect a variation of the Connecticut rule for the sake of
equity. In this connection, it appears that the first policy had no reserve value,
and that the equitable values of the second had been practically returned to the
insured in the form of loan and advance for premium.
For all the foregoing, the lower court's decision absolving the defendant from all
liability on the policies in question, is hereby affirmed, without costs.
Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes, JJ., concur.
G.R. No. L-2294
May 25, 1951
FILIPINAS
COMPAIA
DE
SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez
and
Ortigas
for
petitioner.
Ewald Huenefeld for 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.
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 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.)
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 pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment
of said claim, however, should be made by means of crossed check." (Emphasis
supplied.)
It results that the petitioner is entitled to recover what paid to the respondent
under the circumstances on this case. However, the petitioner will be entitled to
recover only the equivalent, in actual Philippines currency of P92,650 paid on
April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent
corporation is ordered to pay to the petitioner the sum of P77,208.33, Philippine
currency, less the amount of the premium, in Philippine currency, that should be
returned by the petitioner for the unexpired term of the policy in question,
beginning December 11, 1941. Without costs. So ordered.
Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.

G.R. No. L-16163

February 28, 1963
IGNACIO SATURNINO, in his own behalf and as the JUDICIAL GUARDIAN OF
CARLOS
SATURNINO,
minor, plaintiffs-appellants,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.
Eleazaro
A.
Samson
for
plaintiffs-appellants.
Abello & Macias for defendant-appellee.
MAKALINTAL, J.:
Plaintiffs, now appellants, filed this action in the Court of First Instance of Manila
to recover the sum of P5,000.00, corresponding to the face value of an insurance
policy issued by defendant on the life of Estefania A. Saturnino, and the sum of
P1,500.00 as attorney's fees. Defendant, now appellee, set up special defenses in
its answer, with a counterclaim for damages allegedly sustained as a result of the
unwarranted presentation of this case. Both the complaint and the counterclaim
were dismissed by the trial court; but appellants were declared entitled to the
return of the premium already paid; plus interest at 6% up to January 8, 1959,
when a check for the corresponding amount P359.65 was sent to them by
appellee.
The policy sued upon is one for 20-year endowment non-medical insurance. This
kind of policy dispenses with the medical examination of the applicant usually
required in ordinary life policies. However, detailed information is called for in the
application concerning the applicant's health and medical history. The written
application in this case was submitted by Saturnino to appellee on November 16,
1957, witnessed by appellee's agent Edward A. Santos. The policy was issued on
the same day, upon payment of the first year's premium of P339.25. On
September 19, 1958 Saturnino died of pneumonia, secondary to influenza.
Appellants here, who are her surviving husband and minor child, respectively,
demanded payment of the face value of the policy. The claim was rejected and
this suit was subsequently instituted.
It appears that two months prior to the issuance of the policy or on September 9,
1957, Saturnino was operated on for cancer, involving complete removal of the
right breast, including the pectoral muscles and the glands found in the right
armpit. She stayed in the hospital for a period of eight days, after which she was
discharged, although according to the surgeon who operated on her she could not
be considered definitely cured, her ailment being of the malignant type.
Notwithstanding the fact of her operation Estefania A. Saturnino did not make a
disclosure thereof in her application for insurance. On the contrary, she stated
therein that she did not have, nor had she ever had, among other ailments listed
in the application, cancer or other tumors; that she had not consulted any
physician, undergone any operation or suffered any injury within the preceding
five years; and that she had never been treated for nor did she ever have any
illness or disease peculiar to her sex, particularly of the breast, ovaries, uterus,
and menstrual disorders. The application also recites that the foregoing
declarations constituted "a further basis for the issuance of the policy."
The question at issue is whether or not the insured made such false
representations of material facts as to avoid the policy. There can be no dispute

that the information given by her in her application for insurance was false,
namely, that she had never had cancer or tumors, or consulted any physician or
undergone any operation within the preceding period of five years. Are the facts
then falsely represented material? The Insurance Law (Section 30) provides that
"materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication is
due, in forming his estimate of the proposed contract, or in making his inquiries."
It seems to be the contention of appellants that the facts subject of the
representation were not material in view of the "non-medical" nature of the
insurance applied for, which does away with the usual requirement of medical
examination before the policy is issued. The contention is without merit. If
anything, the waiver of medical examination renders even more material the
information required of the applicant concerning previous condition of health and
diseases suffered, for such information necessarily constitutes an important factor
which the insurer takes into consideration in deciding whether to issue the policy
or not. It is logical to assume that if appellee had been properly apprised of the
insured's medical history she would at least have been made to undergo medical
examination in order to determine her insurability.
Appellants argue that due information concerning the insured's previous illness
and operation had been given to appellees agent Edward A. Santos, who filled the
application form after it was signed in blank by Estefania A. Saturnino. This was
denied by Santos in his testimony, and the trial court found such testimony to be
true. This is a finding of fact which is binding upon us, this appeal having been
taken upon questions of law alone. We do not deem it necessary, therefore, to
consider appellee's additional argument, which was upheld by the trial court, that
in signing the application form in blank and leaving it to Edward A. Santos to fill
(assuming that to be the truth) the insured in effect made Santos her agent for
that purpose and consequently was responsible for the errors in the entries made
by him in that capacity.
In the application for insurance signed by the insured in this case, she agreed to
submit to a medical examination by a duly appointed examiner of appellee if in
the latter's opinion such examination was necessary as further evidence of
insurability. In not asking her to submit to a medical examination, appellants
maintain, appellee was guilty of negligence, which precluded it from finding about
her actual state of health. No such negligence can be imputed to appellee. It was
precisely because the insured had given herself a clean bill of health that appellee
no longer considered an actual medical checkup necessary.
Appellants also contend there was no fraudulent concealment of the truth
inasmuch as the insured herself did not know, since her doctor never told her,
that the disease for which she had been operated on was cancer. In the first place
the concealment of the fact of the operation itself was fraudulent, as there could
not have been any mistake about it, no matter what the ailment. Secondly, in
order to avoid a policy it is not necessary to show actual fraud on the part of the
insured. In the case of Kasprzyk v. Metropolitan Insurance Co., 140 N.Y.S. 211,
214, it was held:

Moreover, if it were the law that an insurance company could not depend a policy
on the ground of misrepresentation, unless it could show actual knowledge on the
part of the applicant that the statements were false, then it is plain that it would
be impossible for it to protect itself and its honest policyholders against
fraudulent and improper claims. It would be wholly at the mercy of any one who
wished to apply for insurance, as it would be impossible to show actual fraud
except in the extremest cases. It could not rely on an application as containing
information on which it could act. There would be no incentive to an applicant to
tell the truth.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of
facts. 1wph1.t
In this jurisdiction a concealment, whether intentional or unintentional, entitles
the insurer to rescind the contract of insurance, concealment being defined as
"negligence to communicate that which a party knows and ought to
communicate" (Sections 24 & 26, Act No. 2427). In the case of Argente v. West
Coast Life Insurance Co., 51 Phil. 725, 732, this Court said, quoting from Joyce,
The Law of Insurance, 2nd ed., Vol. 3:
"The basis of the rule vitiating the contract in cases of concealment is that it
misleads or deceives the insurer into accepting the risk, or accepting it at the rate
of premium agreed upon. The insurer, relying upon the belief that the assured will
disclose every material fact within his actual or presumed knowledge, is misled
into a belief that the circumstance withheld does not exist, and he is thereby
induced to estimate the risk upon a false basis that it does not exist."
The judgment appealed from, dismissing the complaint and awarding the return
to appellants of the premium already paid, with interest at 6% up to January 29,
1959, affirmed, with costs against appellants.
GR. No. L-44059 October 28, 1977
THE
INSULAR
LIFE
ASSURANCE
COMPANY,
LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.
MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as
beneficiary in the life insurance policy of a legally married man claim the
proceeds thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life
Assurance Co., Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider
for Accidental Death for the same amount Buenaventura C. Ebrado designated T.
Ebrado as the revocable beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he
was hit by a failing branch of a tree. As the policy was in force, The Insular Life
Assurance Co., Ltd. liable to pay the coverage in the total amount of P11,745.73,
representing the face value of the policy in the amount of P5,882.00 plus the

additional benefits for accidental death also in the amount of P5,882.00 and the
refund of P18.00 paid for the premium due November, 1969, minus the unpaid
premiums and interest thereon due for January and February, 1969, in the sum of
P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as
the designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the
benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased
insured. She asserts that she is the one entitled to the insurance proceeds, not
the common-law wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular
Life Assurance Co., Ltd. commenced an action for Interpleader before the Court of
First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972,
after which, a pre-trial order was entered reading as follows: +.wph!1
During the pre-trial conference, the parties manifested to the court. that there is
no possibility of amicable settlement. Hence, the Court proceeded to have the
parties submit their evidence for the purpose of the pre-trial and make
admissions for the purpose of pretrial. During this conference, parties Carponia T.
Ebrado and Pascuala Ebrado agreed and stipulated: 1) that the deceased
Buenaventura Ebrado was married to Pascuala Ebrado with whom she has six
(legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all
surnamed Ebrado; 2) that during the lifetime of the deceased, he was insured
with Insular Life Assurance Co. Under Policy No. 009929 whole life plan, dated
September 1, 1968 for the sum of P5,882.00 with the rider for accidental death
benefit as evidenced by Exhibits A for plaintiffs and Exhibit 1 for the defendant
Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during the lifetime of
Buenaventura Ebrado, he was living with his common-wife, Carponia Ebrado, with
whom she had 2 children although he was not legally separated from his legal
wife; 4) that Buenaventura in accident on October 21, 1969 as evidenced by the
death Exhibit 3 and affidavit of the police report of his death Exhibit 5; 5) that
complainant Carponia Ebrado filed claim with the Insular Life Assurance Co. which
was contested by Pascuala Ebrado who also filed claim for the proceeds of said
policy 6) that in view ofthe adverse claims the insurance company filed this action
against the two herein claimants Carponia and Pascuala Ebrado; 7) that there is
now due from the Insular Life Assurance Co. as proceeds of the policy P11,745.73;
8) that the beneficiary designated by the insured in the policy is Carponia Ebrado
and the insured made reservation to change the beneficiary but although the
insured made the option to change the beneficiary, same was never changed up
to the time of his death and the wife did not have any opportunity to write the
company that there was reservation to change the designation of the parties
agreed that a decision be rendered based on and stipulation of facts as to who
among the two claimants is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.

SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among
others, Carponia T. Ebrado disqualified from becoming beneficiary of the insured
Buenaventura Cristor Ebrado and directing the payment of the insurance
proceeds to the estate of the deceased insured. The trial court held: +.wph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of
such guilt or commission of those acts be made in a separate independent action
brought for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare
the nullity of the donation).
It is, however, essential that such adultery or concubinage exists at the time
defendant Carponia T. Ebrado was made beneficiary in the policy in question for
the disqualification and incapacity to exist and that it is only necessary that such
fact be established by preponderance of evidence in the trial. Since it is agreed in
their stipulation above-quoted that the deceased insured and defendant Carponia
T. Ebrado were living together as husband and wife without being legally married
and that the marriage of the insured with the other defendant Pascuala Vda. de
Ebrado was valid and still existing at the time the insurance in question was
purchased there is no question that defendant Carponia T. Ebrado is disqualified
from becoming the beneficiary of the policy in question and as such she is not
entitled to the proceeds of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on
July 11, 1976, the Appellate Court certified the case to Us as involving only
questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even
the new Insurance Code (PD No. 612, as amended) does not contain any specific
provision grossly resolutory of the prime question at hand. Section 50 of the
Insurance Act which provides that "(t)he insurance shag be applied exclusively to
the proper interest of the person in whose name it is made" 1 cannot be validly
seized upon to hold that the mm includes the beneficiary. The word "interest"
highly suggests that the provision refers only to the "insured" and not to the
beneficiary, since a contract of insurance is personal in character. 2 Otherwise, the
prohibitory laws against illicit relationships especially on property and descent will
be rendered nugatory, as the same could easily be circumvented by modes of
insurance. Rather, the general rules of civil law should be applied to resolve this
void in the Insurance Law. Article 2011 of the New Civil Code states: "The contract
of insurance is governed by special laws. Matters not expressly provided for in
such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is
governed by the general rules of the civil law regulating contracts. 3 And under
Article 2012 of the same Code, "any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a fife insurance policy
by the person who cannot make a donation to him. 4 Common-law spouses are,

definitely, barred from receiving donations from each other. Article 739 of the new
Civil Code provides: +.wph!1
The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at
the time of donation;
Those made between persons found guilty of the same criminal offense, in
consideration thereof;
3. Those made to a public officer or his wife, descendants or ascendants by
reason of his office.
In the case referred to in No. 1, the action for declaration of nullity may be
brought by the spouse of the donor or donee; and the guilt of the donee may be
proved by preponderance of evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as
the beneficiary is concerned. Both are founded upon the same consideration:
liberality. A beneficiary is like a donee, because from the premiums of the policy
which the insured pays out of liberality, the beneficiary will receive the proceeds
or profits of said insurance. As a consequence, the proscription in Article 739 of
the new Civil Code should equally operate in life insurance contracts. The
mandate of Article 2012 cannot be laid aside: any person who cannot receive a
donation cannot be named as beneficiary in the life insurance policy of the person
who cannot make the donation.5 Under American law, a policy of life insurance is
considered as a testament and in construing it, the courts will, so far as possible
treat it as a will and determine the effect of a clause designating the beneficiary
by rules under which wins are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a
barrier between common law spouses in record to Property relations since such
hip ultimately encroaches upon the nuptial and filial rights of the legitimate family
There is every reason to hold that the bar in donations between legitimate
spouses and those between illegitimate ones should be enforced in life insurance
policies since the same are based on similar consideration As above pointed out,
a beneficiary in a fife insurance policy is no different from a donee. Both are
recipients of pure beneficence. So long as manage remains the threshold of
family laws, reason and morality dictate that the impediments imposed upon
married couple should likewise be imposed upon extra-marital relationship. If
legitimate relationship is circumscribed by these legal disabilities, with more
reason should an illicit relationship be restricted by these disabilities. Thus,
in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said: +.
wph!1
If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que
no se enganen desponjandose el uno al otro por amor que han de consuno'
(According to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No
Mutuato amore invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter
virum et uxorem); then there is very reason to apply the same prohibitive policy

to persons living together as husband and wife without the benefit of nuptials. For
it is not to be doubted that assent to such irregular connection for thirty years
bespeaks greater influence of one party over the other, so that the danger that
the law seeks to avoid is correspondingly increased. Moreover, as already pointed
out by Ulpian (in his lib. 32 ad Sabinum, fr. 1), 'it would not be just that such
donations should subsist, lest the condition 6f those who incurred guilt should
turn out to be better.' So long as marriage remains the cornerstone of our family
law, reason and morality alike demand that the disabilities attached to marriage
should likewise attach to concubinage.
It is hardly necessary to add that even in the absence of the above
pronouncement, any other conclusion cannot stand the test of scrutiny. It would
be to indict the frame of the Civil Code for a failure to apply a laudable rule to a
situation which in its essentials cannot be distinguished. Moreover, if it is at all to
be differentiated the policy of the law which embodies a deeply rooted notion of
what is just and what is right would be nullified if such irregular relationship
instead of being visited with disabilities would be attended with benefits.
Certainly a legal norm should not be susceptible to such a reproach. If there is
every any occasion where the principle of statutory construction that what is
within the spirit of the law is as much a part of it as what is written, this is it.
Otherwise the basic purpose discernible in such codal provision would not be
attained. Whatever omission may be apparent in an interpretation purely literal of
the language used must be remedied by an adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before
the disabilities mentioned in Article 739 may effectuate. More specifically, with
record to the disability on "persons who were guilty of adultery or concubinage at
the time of the donation," Article 739 itself provides: +.wph!1
In the case referred to in No. 1, the action for declaration of nullity may be
brought by the spouse of the donor or donee; and the guilty of the donee may be
proved by preponderance of evidence in the same action.
The underscored clause neatly conveys that no criminal conviction for the offense
is a condition precedent. In fact, it cannot even be from the aforequoted provision
that a prosecution is needed. On the contrary, the law plainly states that the guilt
of the party may be proved "in the same acting for declaration of nullity of
donation. And, it would be sufficient if evidence preponderates upon the guilt of
the consort for the offense indicated. The quantum of proof in criminal cases is
not demanded.
In the caw before Us, the requisite proof of common-law relationship between the
insured and the beneficiary has been conveniently supplied by the stipulations
between the parties in the pre-trial conference of the case. It case agreed upon
and stipulated therein that the deceased insured Buenaventura C. Ebrado was
married to Pascuala Ebrado with whom she has six legitimate children; that
during his lifetime, the deceased insured was living with his common-law wife,
Carponia Ebrado, with whom he has two children. These stipulations are nothing
less thanjudicial admissions which, as a consequence, no longer require proof and
cannot be contradicted. 8 A fortiori, on the basis of these admissions, a judgment
may be validly rendered without going through the rigors of a trial for the sole

purpose of proving the illicit liaison between the insured and the beneficiary. In
fact, in that pretrial, the parties even agreed "that a decision be rendered based
on this agreement and stipulation of facts as to who among the two claimants is
entitled to the policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed.
Carponia T. Ebrado is hereby declared disqualified to be the beneficiary of the late
Buenaventura C. Ebrado in his life insurance policy. As a consequence, the
proceeds of the policy are hereby held payable to the estate of the deceased
insured. Costs against Carponia T. Ebrado.
SO ORDERED.
G.R. No. L-34200 September 30, 1982
REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitionersappellants,
vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST
INSTANCE OF RIZAL, BRANCH V, QUEZON CITY, respondents-appellees.
K.V. Faylona for petitioners-appellants.
L. L. Reyes for respondents-appellees.
VASQUEZ, J.:
The question of law raised in this case that justified a direct appeal from a
decision of the Court of First Instance Rizal, Branch V, Quezon City, to be taken
directly to the Supreme Court is whether or not the acceptance by the private
respondent insurance corporation of the premium and the issuance of the
corresponding certificate of insurance should be deemed a waiver of the
exclusionary condition of overage stated in the said certificate of insurance.
The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz
applied with respondent insurance corporation for insurance coverage against
accident and injuries. She filled up the blank application form given to her and
filed the same with the respondent insurance corporation. In the said application
form which was dated April 15, 1969, she gave the date of her birth as July 11,
1904. On the same date, she paid the sum of P20.00 representing the premium
for which she was issued the corresponding receipt signed by an authorized agent
of the respondent insurance corporation. (Rollo, p. 27.) Upon the filing of said
application and the payment of the premium on the policy applied for, the
respondent insurance corporation issued to Carmen O. Lapuz its Certificate of
Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of
90 days.
On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886,
Carmen O. Lapuz died in a vehicular accident in the North Diversion Road.
On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was
the named beneficiary in the policy, filed her claim for the proceeds of the
insurance, submitting all the necessary papers and other requisites with the

private respondent. Her claim having been denied, Regina L. Edillon instituted this
action in the Court of First Instance of Rizal on August 27, 1969.
In resisting the claim of the petitioner, the respondent insurance corporation
relies on a provision contained in the Certificate of Insurance, excluding its
liability to pay claims under the policy in behalf of "persons who are under the
age of sixteen (16) years of age or over the age of sixty (60) years ..." It is
pointed out that the insured being over sixty (60) years of age when she applied
for the insurance coverage, the policy was null and void, and no risk on the part
of the respondent insurance corporation had arisen therefrom.
The trial court sustained the contention of the private respondent and dismissed
the complaint; ordered the petitioner to pay attorney's fees in the sum of ONE
THOUSAND (P1,000.00) PESOS in favor of the private respondent; and ordered
the private respondent to return the sum of TWENTY (P20.00) PESOS received by
way of premium on the insurancy policy. It was reasoned out that a policy of
insurance being a contract of adhesion, it was the duty of the insured to know the
terms of the contract he or she is entering into; the insured in this case, upon
learning from its terms that she could not have been qualified under the
conditions stated in said contract, what she should have done is simply to ask for
a refund of the premium that she paid. It was further argued by the trial court
that the ruling calling for a liberal interpretation of an insurance contract in favor
of the insured and strictly against the insurer may not be applied in the present
case in view of the peculiar facts and circumstances obtaining therein.
We REVERSE the judgment of the trial court. The age of the insured Carmen 0.
Lapuz was not concealed to the insurance company. Her application for insurance
coverage which was on a printed form furnished by private respondent and which
contained very few items of information clearly indicated her age of the time of
filing the same to be almost 65 years of age. Despite such information which
could hardly be overlooked in the application form, considering its prominence
thereon and its materiality to the coverage applied for, the respondent insurance
corporation received her payment of premium and issued the corresponding
certificate of insurance without question. The accident which resulted in the death
of the insured, a risk covered by the policy, occurred on May 31, 1969 or FORTYFIVE (45) DAYS after the insurance coverage was applied for. There was sufficient
time for the private respondent to process the application and to notice that the
applicant was over 60 years of age and thereby cancel the policy on that ground
if it was minded to do so. If the private respondent failed to act, it is either
because it was willing to waive such disqualification; or, through the negligence
or incompetence of its employees for which it has only itself to blame, it simply
overlooked such fact. Under the circumstances, the insurance corporation is
already deemed in estoppel. It inaction to revoke the policy despite a departure
from the exclusionary condition contained in the said policy constituted a waiver
of such condition, as was held in the case of "Que Chee Gan vs. Law Union
Insurance Co., Ltd.,", 98 Phil. 85. This case involved a claim on an insurance
policy which contained a provision as to the installation of fire hydrants the
number of which depended on the height of the external wan perimeter of the
bodega that was insured. When it was determined that the bodega should have

eleven (11) fire hydrants in the compound as required by the terms of the policy,
instead of only two (2) that it had, the claim under the policy was resisted on that
ground. In ruling that the said deviation from the terms of the policy did not
prevent the claim under the same, this Court stated the following:
We are in agreement with the trial Court that the appellant is barred by waiver (or
rather estoppel) to claim violation of the so-called fire hydrants warranty, for the
reason that knowing fully an that the number of hydrants demanded therein
never existed from the very beginning, the appellant nevertheless issued the
policies in question subject to such warranty, and received the corresponding
premiums. It would be perilously close to conniving at fraud upon the insured to
allow appellant to claim now as void ab initio the policies that it had issued to the
plaintiff without warning of their fatal defect, of which it was informed, and after it
had misled the defendant into believing that the policies were effective.
The insurance company was aware, even before the policies were issued, that in
the premises insured there were only two fire hydrants installed by Que Chee Gan
and two others nearby, owned by the municipality of Tabaco, contrary to the
requirements of the warranty in question. Such fact appears from positive
testimony for the insured that appellant's agents inspected the premises; and the
simple denials of appellant's representative (Jamiczon) can not overcome that
proof. That such inspection was made it moreover rendered probable by its being
a prerequisite for the fixing of the discount on the premium to which the insured
was entitled, since the discount depended on the number of hydrants, and the
fire fighting equipment available (See"'Scale of Allowances" to which the policies
were expressly made subject). The law, supported by a long line of cases, is
expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance of a policy of
insurance, has knowledge of existing facts which, if insisted on, would invalidate
the contract from its very inception, such knowledge constitutes a waiver of
conditions in the contract inconsistent with the known facts, and the insurer is
stopped thereafter from asserting the breach of such conditions. The law is
charitable enough to assume, in the absence of any showing to the contrary, that
an insurance company intends to execute a valid contract in return for the
premium received; and when the policy contains a condition which renders it
voidable at its inception, and this result is known to the insurer, it will be
presumed to have intended to waive the conditions and to execute a binding
contract, rather than to have deceived the insured into thinking he is insured
when in fact he is not, and to have taken is money without consideration.' (29
Am. Jur., Insurance, section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To allow a company
to accept one's money for a policy of insurance which it then knows to be void
and of no effect, though it knows as it must, that the assured believes it to be
valid and binding, is so contrary to the dictates of honesty and fair dealing, and so
closely related to positive fraud, as to be abhorent to fairminded men. It would be
to allow the company to treat the policy as valid long enough to get the premium
on it, and leave it at liberty to repudiate it the next moment. This cannot be

deemed to be the real intention of the parties. To hold that a literal construction of
the policy expressed the true intention of the company would be to indict it, for
fraudulent purposes and designs which we cannot believe it to be guilty of
(Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543544).
A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs.
Plastic Era Co., Inc., 65 SCRA 134, which involved a violation of the provision of
the policy requiring the payment of premiums before the insurance shall become
effective. The company issued the policy upon the execution of a promissory note
for the payment of the premium. A check given subsequent by the insured as
partial payment of the premium was dishonored for lack of funds. Despite such
deviation from the terms of the policy, the insurer was held liable.
Significantly, in the case before Us the Capital Insurance accepted the promise of
Plastic Era to pay the insurance premium within thirty (30) days from the effective
date of policy. By so doing, it has impliedly agreed to modify the tenor of the
insurance policy and in effect, waived the provision therein that it would only pay
for the loss or damage in case the same occurs after the payment of the
premium. Considering that the insurance policy is silent as to the mode of
payment, Capital Insurance is deemed to have accepted the promissory note in
payment of the premium. This rendered the policy immediately operative on the
date it was delivered. The view taken in most cases in the United States:
... is that although one of conditions of an insurance policy is that "it shall not be
valid or binding until the first premium is paid", if it is silent as to the mode of
payment, promissory notes received by the company must be deemed to have
been accepted in payment of the premium. In other words, a requirement for the
payment of the first or initial premium in advance or actual cash may be waived
by acceptance of a promissory note...
WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In
lieu thereof, the private respondent insurance corporation is hereby ordered to
pay to the petitioner the sum of TEN THOUSAND (P10,000.00) PESOS as proceeds
of Insurance Certificate No. 128866 with interest at the legal rate from May 31,
1969 until fully paid, the further sum of TWO THOUSAND (P2,000.00) PESOS as
and for attorney's fees, and the costs of suit.
SO ORDERED.
G.R. No. L-30685 May 30, 1983
NG
GAN
ZEE, plaintiff-appellee,
vs.
ASIAN CRUSADER LIFE ASSURANCE CORPORATION, defendant-appellant.
Alberto Q. Ubay for plaintiff-appellee.
Santiago F. A lidio for defendant-appellant.
ESCOLIN, J.:
This is an appeal from the judgment of the Court of First Instance of Manila,
ordering the appellant Asian-Crusader Life Assurance Corporation to pay the face
value of an insurance policy issued on the life of Kwong Nam the deceased
husband of appellee Ng Gan Zee. Misrepresentation and concealment of material

facts in obtaining the policy were pleaded to avoid the policy. The lower court
rejected the appellant's theory and ordered the latter to pay appellee "the
amount of P 20,000.00, with interest at the legal rate from July 24, 1964, the date
of the filing of the complaint, until paid, and the costs. "
The Court of Appeals certified this appeal to Us, as the same involves solely a
question of law.
On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his
life for the sum of P20,000.00, with his wife, appellee Ng Gan Zee as beneficiary.
On the same date, appellant, upon receipt of the required premium from the
insured, approved the application and issued the corresponding policy. On
December 6, 1963, Kwong Nam died of cancer of the liver with metastasis. All
premiums had been religiously paid at the time of his death.
On January 10, 1964, his widow Ng Gan Zee presented a claim in due form to
appellant for payment of the face value of the policy. On the same date, she
submitted the required proof of death of the insured. Appellant denied the claim
on the ground that the answers given by the insured to the questions appealing in
his application for life insurance were untrue.
Appellee brought the matter to the attention of the Insurance Commissioner, the
Hon. Francisco Y. Mandamus, and the latter, after conducting an investigation,
wrote the appellant that he had found no material concealment on the part of the
insured and that, therefore, appellee should be paid the full face value of the
policy. This opinion of the Insurance Commissioner notwithstanding, appellant
refused to settle its obligation.
Appellant alleged that the insured was guilty of misrepresentation when he
answered "No" to the following question appearing in the application for life
insuranceHas any life insurance company ever refused your application for insurance or for
reinstatement of a lapsed policy or offered you a policy different from that applied
for? If, so, name company and date.
In its brief, appellant rationalized its thesis thus:
... As pointed out in the foregoing summary of the essential facts in this case, the
insured had in January, 1962, applied for reinstatement of his lapsed life
insurance policy with the Insular Life Insurance Co., Ltd, but this was declined by
the insurance company, although later on approved for reinstatement with a very
high premium as a result of his medical examination. Thus notwithstanding the
said insured answered 'No' to the [above] question propounded to him. ... 1
The lower court found the argument bereft of factual basis; and We quote with
approval its disquisition on the matterOn the first question there is no evidence that the Insular Life Assurance Co., Ltd.
ever refused any application of Kwong Nam for insurance. Neither is there any
evidence that any other insurance company has refused any application of Kwong
Nam for insurance.
... The evidence shows that the Insular Life Assurance Co., Ltd. approved Kwong
Nam's request for reinstatement and amendment of his lapsed insurance policy
on April 24, 1962 [Exh. L-2 Stipulation of Facts, Sept. 22, 1965). The Court notes
from said application for reinstatement and amendment, Exh. 'L', that the amount

applied for was P20,000.00 only and not for P50,000.00 as it was in the lapsed
policy. The amount of the reinstated and amended policy was also for P20,000.00.
It results, therefore, that when on May 12, 1962 Kwong Nam answered 'No' to the
question whether any life insurance company ever refused his application for
reinstatement of a lapsed policy he did not misrepresent any fact.
... the evidence shows that the application of Kwong Nam with the Insular Life
Assurance Co., Ltd. was for the reinstatement and amendment of his lapsed
insurance policy-Policy No. 369531 -not an application for a 'new insurance policy.
The Insular Life Assurance Co., Ltd. approved the said application on April 24,
1962. Policy No. 369531 was reinstated for the amount of P20,000.00 as applied
for by Kwong Nam [Exhs. 'L', 'L-l' and 'L-2']. No new policy was issued by the
Insular Life Assurance Co., Ltd. to Kwong Nam in connection with said application
for reinstatement and amendment. Such being the case, the Court finds that
there is no misrepresentation on this matter. 2
Appellant further maintains that when the insured was examined in connection
with his application for life insurance, he gave the appellant's medical examiner
false and misleading information as to his ailment and previous operation. The
alleged false statements given by Kwong Nam are as follows:
Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been
associated with ulcer of stomach. Tumor taken out was hard and of a hen's egg
size. Operation was two [2] years ago in Chinese General Hospital by Dr. Yap.
Now, claims he is completely recovered.
To demonstrate the insured's misrepresentation, appellant directs Our attention
to:
[1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the
Chinese General Hospital on May 22, 1960, i.e., about 2 years before he applied
for an insurance policy on May 12, 1962. According to said report, Dr. Fu Sun Yuan
had diagnosed the patient's ailment as 'peptic ulcer' for which, an operation,
known as a 'sub-total gastric resection was performed on the patient by Dr.
Pacifico Yap; and
[2] The Surgical Pathology Report of Dr. Elias Pantangco showing that the
specimen removed from the patient's body was 'a portion of the stomach
measuring 12 cm. and 19 cm. along the lesser curvature with a diameter of 15
cm. along the greatest dimension.
On the bases of the above undisputed medical data showing that the insured was
operated on for peptic ulcer", involving the excision of a portion of the stomach,
appellant argues that the insured's statement in his application that a tumor,
"hard and of a hen's egg size," was removed during said operation, constituted
material concealment.
The question to be resolved may be propounded thus: Was appellant, because of
insured's aforesaid representation, misled or deceived into entering the contract
or in accepting the risk at the rate of premium agreed upon?
The lower court answered this question in the negative, and We agree.
Section 27 of the Insurance Law [Act 2427] provides:
Sec. 27. Such party a contract of insurance must communicate to the other, in
good faith, all facts within his knowledge which are material to the contract, and

which the other has not the means of ascertaining, and as to which he makes no
warranty. 3
Thus, "concealment exists where the assured had knowledge of a fact material to
the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assurer, but he designedly and intentionally withholds the
same." 4
It has also been held "that the concealment must, in the absence of inquiries, be
not only material, but fraudulent, or the fact must have been intentionally
withheld." 5
Assuming that the aforesaid answer given by the insured is false, as claimed by
the appellant. Sec. 27 of the Insurance Law, above-quoted, nevertheless requires
that fraudulent intent on the part of the insured be established to entitle the
insurer to rescind the contract. And as correctly observed by the lower court,
"misrepresentation as a defense of the insurer to avoid liability is an 'affirmative'
defense. The duty to establish such a defense by satisfactory and convincing
evidence rests upon the defendant. The evidence before the Court does not
clearly and satisfactorily establish that defense."
It bears emphasis that Kwong Nam had informed the appellant's medical
examiner that the tumor for which he was operated on was "associated with ulcer
of the stomach." In the absence of evidence that the insured had sufficient
medical knowledge as to enable him to distinguish between "peptic ulcer" and "a
tumor", his statement that said tumor was "associated with ulcer of the stomach,
" should be construed as an expression made in good faith of his belief as to the
nature of his ailment and operation. Indeed, such statement must be presumed to
have been made by him without knowledge of its incorrectness and without any
deliberate intent on his part to mislead the appellant.
While it may be conceded that, from the viewpoint of a medical expert, the
information communicated was imperfect, the same was nevertheless sufficient
to have induced appellant to make further inquiries about the ailment and
operation of the insured.
Section 32 of Insurance Law [Act No. 24271 provides as follows:
Section 32. The right to information of material facts maybe waived either by the
terms of insurance or by neglect to make inquiries as to such facts where they are
distinctly implied in other facts of which information is communicated.
It has been held that where, upon the face of the application, a question appears
to be not answered at all or to be imperfectly answered, and the insurers issue a
policy without any further inquiry, they waive the imperfection of the answer and
render the omission to answer more fully immaterial. 6
As aptly noted by the lower court, "if the ailment and operation of Kwong Nam
had such an important bearing on the question of whether the defendant would
undertake the insurance or not, the court cannot understand why the defendant
or its medical examiner did not make any further inquiries on such matters from
the Chinese General Hospital or require copies of the hospital records from the
appellant before acting on the application for insurance. The fact of the matter is
that the defendant was too eager to accept the application and receive the

insured's premium. It would be inequitable now to allow the defendant to avoid

liability under the circumstances."
Finding no reversible error committed by the trial court, the judgment appealed
from is hereby affirmed, with costs against appellant Asian-Crusader life
Assurance Corporation.
SO ORDERED.

G.R. No. 92492 June 17, 1993

THELMA
VDA.
DE
CANILANG, petitioner,
vs.
HON.
COURT
OF
APPEALS
and
GREAT
PACIFIC
LIFE
ASSURANCE
CORPORATION, respondents.
Simeon C. Sato for petitioner.
FELICIANO, J.:
On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was
diagnosed as suffering from "sinus tachycardia." The doctor prescribed the
following fro him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug. Mr.
Canilang consulted the same doctor again on 3 August 1982 and this time was
found to have "acute bronchitis."
On next day, 4 August 1982, Jaime Canilang applied for a "non-medical"
insurance policy with respondent Great Pacific Life Assurance Company ("Great
Pacific") naming his wife, Thelma Canilang, as his beneficiary. 1 Jaime Canilang
was issued ordinary life insurance Policy No. 345163, with the face value of
P19,700, effective as of 9 August 1982.
On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia,"
and "chronic anemia." 2 Petitioner, widow and beneficiary of the insured, filed a
claim with Great Pacific which the insurer denied on 5 December 1983 upon the
ground that the insured had concealed material information from it.
Petitioner then filed a complaint against Great Pacific with the Insurance
Commission for recovery of the insurance proceeds. During the hearing called by
the Insurance Commissioner, petitioner testified that she was not aware of any
serious illness suffered by her late husband 3 and that, as far as she knew, her
husband had died because of a kidney disorder. 4 A deposition given by Dr.
Wilfredo Claudio was presented by petitioner. There Dr. Claudio stated that he
was the family physician of the deceased Jaime Canilang 5 and that he had
previously treated him for "sinus tachycardia" and "acute bronchitis." 6 Great
Pacific for its part presented Dr. Esperanza Quismorio, a physician
and a medical underwriter working for Great Pacific. 7 She testified that the
deceased's insurance application had been approved on the basis of his medical
declaration. 8 She explained that as a rule, medical examinations are required
only in cases where the applicant has indicated in his application for insurance
coverage that he has previously undergone medical consultation and
hospitalization. 9

In a decision dated 5 November 1985, Insurance Commissioner Armando Ansaldo

ordered Great Pacific to pay P19,700 plus legal interest and P2,000.00 as
attorney's fees after holding that:
1. the ailment of Jaime Canilang was not so serious that, even if it had been
disclosed, it would not have affected Great Pacific's decision to insure him;
2. Great Pacific had waived its right to inquire into the health condition of the
applicant by the issuance of the policy despite the lack of answers to "some of
the pertinent questions" in the insurance application;
3. there was no intentional concealment on the part of the insured Jaime Canilang
as he had thought that he was merely suffering from a minor ailment and simple
cold; 10 and
4. Batas Pambansa Blg. 847 which voids an insurance contract, whether or not
concealment was intentionally made, was not applicable to Canilang's case as
that law became effective only on 1 June 1985.
On appeal by Great Pacific, the Court of Appeals reversed and set aside the
decision of the Insurance Commissioner and dismissed Thelma Canilang's
complaint and Great Pacific's counterclaim. The Court of Appealed found that the
use of the word "intentionally" by the Insurance Commissioner in defining and
resolving the issue agreed upon by the parties at pre-trial before the Insurance
Commissioner was not supported by the evidence; that the issue agreed upon by
the parties had been whether the deceased insured, Jaime Canilang, made
a material concealment as the state of his health at the time of the filing of
insurance application, justifying respondent's denial of the claim. The Court of
Appeals also found that the failure of Jaime Canilang to disclose previous medical
consultation and treatment constituted material information which should have
been communicated to Great Pacific to enable the latter to make proper inquiries.
The Court of Appeals finally held that the Ng Gan Zee case which had
involved misrepresentation was not applicable in respect of the case at bar which
involves concealment.
Petitioner Thelma Canilang is now before this Court on a Petition for Review
on Certiorari alleging that:
1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not
holding that the issue in the case agreed upon between the parties before the
Insurance Commission is whether or not Jaime Canilang "intentionally" made
material concealment in stating his state of health;
2. . . . at any rate, the non-disclosure of certain facts about his previous health
conditions does not amount to fraud and private respondent is deemed to have
waived inquiry thereto. 11
The medical declaration which was set out in the application for insurance
executed by Jaime Canilang read as follows:
MEDICAL DECLARATION
I hereby declare that:
(1) I have not been confined in any hospital, sanitarium or infirmary, nor receive
any medical or surgical advice/attention within the last five (5) years.

(2) I have never been treated nor consulted a physician for a heart condition, high
blood pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other
physical impairment.
(3) I am, to the best of my knowledge, in good health.
EXCEPTIONS:
________________________________________________________________________________
GENERAL DECLARATION
I hereby declare that all the foregoing answers and statements are complete,
true and correct. I herebyagree that if there be any fraud or misrepresentation in
the above statements material to the risk, the INSURANCE COMPANY upon
discovery within two (2) years from the effective date of insurance shall have the
right to declare such insurance null and void. That the liabilities of the Company
under the said Policy/TA/Certificate shall accrue and begin only from the date of
commencement of risk stated in the Policy/TA/Certificate, provided that the first
premium is paid and the Policy/TA/Certificate is delivered to, and accepted by me
in person, when I am in actual good health.
Signed at Manila his 4th day of August, 1992.
Illegible

Signature of Applicant. 12
We note that in addition to the negative statements made by Mr. Canilang in
paragraph 1 and 2 of the medical declaration, he failed to disclose in the
appropriate space, under the caption "Exceptions," that he had twice consulted
Dr. Wilfredo B. Claudio who had found him to be suffering from "sinus
tachycardia" and "acute bronchitis."
The relevant statutory provisions as they stood at the time Great Pacific issued
the contract of insurance and at the time Jaime Canilang died, are set out in P.D.
No. 1460, also known as the Insurance Code of 1978, which went into effect on
11 June 1978. These provisions read as follows:
Sec. 26. A neglect to communicate that which a party knows and ought to
communicate, is called a concealment.
xxx xxx xxx
Sec. 28. Each party to a contract of insurance must communicate to the other, in
good faith, all factorswithin his knowledge which are material to the contract and
as to which he makes no warranty, and which the other has not the means of
ascertaining. (Emphasis supplied)
Under the foregoing provisions, the information concealed must be information
which the concealing party knew and "ought to [have] communicate[d]," that is
to say, information which was "material to the contract." The test of materiality is
contained in Section 31 of the Insurance Code of 1978 which reads:
Sec. 31. Materially is to be determined not by the event, but solely by
the probable and reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries. (Emphasis supplied)
"Sinus tachycardia" is considered present "when the heart rate exceeds 100
beats per minute." 13 The symptoms of this condition include pounding in the

chest and sometimes faintness and weakness of the person affected. The
following elaboration was offered by Great Pacific and set out by the Court of
Appeals in its Decision:
Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats
per minute. (Harrison' s Principles of Internal Medicine, 8th ed. [1978], p. 1193.) It
is, among others, a common reaction to heart disease, including myocardial
infarction, and heart failure per se. (Henry J.L. Marriot, M.D.,Electrocardiography,
6th ed., [1977], p. 127.) The medication prescribed by Dr. Claudio for treatment
of Canilang's ailment on June 18, 1982, indicates the condition that said physician
was trying to manage. Thus, he prescribed Trazepam, (Philippine Index of Medical
Specialties (PIMS), Vol. 14, No. 3, Dec. 1985, p. 112) which is anti-anxiety, anticonvulsant, muscle-relaxant; and Aptin, (Idem, p. 36) a cardiac drug, for
palpitations and nervous heart. Such treatment could have been a very material
information to the insurer in determining the action to be take on Canilang's
application for life insurance coverage. 14
We agree with the Court of Appeals that the information which Jaime Canilang
failed to disclose was material to the ability of Great Pacific to estimate the
probable risk he presented as a subject of life insurance. Had Canilang disclosed
his visits to his doctor, the diagnosis made and medicines prescribed by such
doctor, in the insurance application, it may be reasonably assumed that Great
Pacific would have made further inquiries and would have probably refused to
issue a non-medical insurance policy or, at the very least, required a higher
premium for the same coverage. 15 The materiality of the information withheld by
Great Pacific did not depend upon the state of mind of Jaime Canilang. A man's
state of mind or subjective belief is not capable of proof in our judicial process,
except through proof of external acts or failure to act from which inferences as to
his subjective belief may be reasonably drawn. Neither does materiality depend
upon the actual or physical events which ensue. Materiality relates rather to the
"probable and reasonable influence of the facts" upon the party to whom the
communication should have been made, in assessing the risk involved in making
or omitting to make further inquiries and in accepting the application for
insurance; that "probable and reasonable influence of the facts" concealed must,
of course, be determined objectively, by the judge ultimately.
The insurance Great Pacific applied for was a "non-medical" insurance policy.
In Saturnino v. Philippine-American Life Insurance Company, 16 this Court held
that:
. . . if anything, the waiver of medical examination [in a non-medical insurance
contract] renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer takes
into consideration in deciding whether to issue the policy or not . . . . 17 (Emphasis
supplied)
The Insurance Commissioner had also ruled that the failure of Great Pacific to
convey certain information to the insurer was not "intentional" in nature, for the
reason that Jaime Canilang believed that he was suffering from minor ailment like
a common cold. Section 27 of the Insurance Code of 1978 as it existed from 1974

up to 1985, that is, throughout the time range material for present purposes,
provided that:
Sec. 27. A concealment entitles the injured party to rescind a contract of
insurance.
The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had
provided:
Sec. 26. A concealment, whether intentional or unintentional, entitles the injured
party to rescind a contract of insurance. (Emphasis supplied)
Upon the other hand, in 1985, the Insurance Code of 1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance Code
of 1978 so as to read as follows:
Sec. 27. A concealment whether intentional or unintentional entitles the injured
party to rescind a contract of insurance. (Emphasis supplied)
The unspoken theory of the Insurance Commissioner appears to have been that
by deleting the phrase "intentional or unintentional," the Insurance Code of 1978
(prior to its amendment by B.P. Blg. 874) intended to limit the kinds of
concealment which generate a right to rescind on the part of the injured party to
"intentional concealments." This argument is not persuasive. As a simple matter
of grammar, it may be noted that "intentional" and "unintentional" cancel each
other out. The net result therefore of the phrase "whether intentional or
unitentional" is precisely to leave unqualified the term "concealment." Thus,
Section 27 of the Insurance Code of 1978 is properly read as referring to
"any concealment" without regard to whether such concealment is intentional or
unintentional. The phrase "whether intentional or unintentional" was in fact
superfluous. The deletion of the phrase "whether intentional or unintentional"
could not have had the effect of imposing an affirmative requirement that a
concealment must be intentional if it is to entitle the injured party to rescind a
contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase
"whether intentional or unintentional" merely underscored the fact that all
throughout (from 1914 to 1985), the statute did not require proof that
concealment must be "intentional" in order to authorize rescission by the injured
party.
In any case, in the case at bar, the nature of the facts not conveyed to the insurer
was such that the failure to communicate must have been intentional rather than
merely inadvertent. For Jaime Canilang could not have been unaware that his
heart beat would at times rise to high and alarming levels and that he had
consulted a doctor twice in the two (2) months before applying for non-medical
insurance. Indeed, the last medical consultation took place just the day before
the insurance application was filed. In all probability, Jaime Canilang went to visit
his doctor precisely because of the discomfort and concern brought about by his
experiencing "sinus tachycardia."
We find it difficult to take seriously the argument that Great Pacific had waived
inquiry into the concealment by issuing the insurance policy notwithstanding
Canilang's failure to set out answers to some of the questions in the insurance
application. Such failure precisely constituted concealment on the part of

Canilang. Petitioner's argument, if accepted, would obviously erase Section 27

from the Insurance Code of 1978.
It remains only to note that the Court of Appeals finding that the parties
had not agreed in the pretrial before the Insurance Commission that the relevant
issue was whether or not Jaime Canilang had intentionally concealed material
information from the insurer, was supported by the evidence of record, i.e., the
Pre-trial Order itself dated 17 October 1984 and the Minutes of the Pre-trial
Conference dated 15 October 1984, which "readily shows that the word
"intentional" does not appear in the statement or definition of the issue in the
said Order and Minutes." 18
WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision
of the Court of Appeals dated 16 October 1989 in C.A.-G.R. SP No. 08696 is
hereby AFFIRMED. No pronouncement as to the costs.
SO ORDERED.
G.R. No. 105135 June 22, 1995
SUNLIFE
ASSURANCE
COMPANY
OF
CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA
BACANI, respondents.
QUIASON, J.:
This is a petition for review for certiorari under Rule 45 of the Revised Rules of
Court to reverse and set aside the Decision dated February 21, 1992 of the Court
of Appeals in CA-G.R. CV No. 29068, and its Resolution dated April 22, 1992,
denying reconsideration thereof.
We grant the petition.
I
On April 15, 1986, Robert John B. Bacani procured a life insurance contract for
himself from petitioner. He was issued Policy No. 3-903-766-X valued at
P100,000.00, with double indemnity in case of accidental death. The designated
beneficiary was his mother, respondent Bernarda Bacani.
On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani
filed a claim with petitioner, seeking the benefits of the insurance policy taken by
her son. Petitioner conducted an investigation and its findings prompted it to
reject the claim.
In its letter, petitioner informed respondent Bernarda Bacani, that the insured did
not disclose material facts relevant to the issuance of the policy, thus rendering
the contract of insurance voidable. A check representing the total premiums paid
in the amount of P10,172.00 was attached to said letter.
Petitioner claimed that the insured gave false statements in his application when
he answered the following questions:
5. Within the past 5 years have you:
a) consulted any doctor or other health practitioner?
b) submitted to:

EGG?
X-rays?
blood
tests?
other tests?
c) attended or been admitted to any hospital or other medical facility?
6. Have you ever had or sought advice for:
xxx xxx xxx
b) urine, kidney or bladder disorder? (Rollo, p. 53)
The deceased answered question No. 5(a) in the affirmative but limited his
answer to a consultation with a certain Dr. Reinaldo D. Raymundo of the Chinese
General Hospital on February 1986, for cough and flu complications. The other
questions were answered in the negative (Rollo, p. 53).
Petitioner discovered that two weeks prior to his application for insurance, the
insured was examined and confined at the Lung Center of the Philippines, where
he was diagnosed for renal failure. During his confinement, the deceased was
subjected to urinalysis, ultra-sonography and hematology tests.
On November 17, 1988, respondent Bernarda Bacani and her husband,
respondent Rolando Bacani, filed an action for specific performance against
petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro Manila.
Petitioner filed its answer with counterclaim and a list of exhibits consisting of
medical records furnished by the Lung Center of the Philippines.
On January 14, 1990, private respondents filed a "Proposed Stipulation with
Prayer for Summary Judgment" where they manifested that they "have no
evidence to refute the documentary evidence of concealment/misrepresentation
by the decedent of his health condition (Rollo, p. 62).
Petitioner filed its Request for Admissions relative to the authenticity and due
execution of several documents as well as allegations regarding the health of the
insured. Private respondents failed to oppose said request or reply thereto,
thereby rendering an admission of the matters alleged.
Petitioner then moved for a summary judgment and the trial court decided in
favor of private respondents. The dispositive portion of the decision is reproduced
as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against
the defendant, condemning the latter to pay the former the amount of One
Hundred Thousand Pesos (P100,000.00) the face value of insured's Insurance
Policy No. 3903766, and the Accidental Death Benefit in the amount of One
Hundred Thousand Pesos (P100,000.00) and further sum of P5,000.00 in the
concept of reasonable attorney's fees and costs of suit.
Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).
In ruling for private respondents, the trial court concluded that the facts
concealed by the insured were made in good faith and under a belief that they
need not be disclosed. Moreover, it held that the health history of the insured was
immaterial since the insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which affirmed the decision of the
trial court. The appellate court ruled that petitioner cannot avoid its obligation by
claiming concealment because the cause of death was unrelated to the facts

concealed by the insured. It also sustained the finding of the trial court that
matters relating to the health history of the insured were irrelevant since
petitioner waived the medical examination prior to the approval and issuance of
the insurance policy. Moreover, the appellate court agreed with the trial court that
the policy was "non-medical" (Rollo, pp. 4-5).
Petitioner's motion for reconsideration was denied; hence, this petition.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate court are
binding on this Court is not absolute and admits of exceptions, such as when the
judgment is based on a misappreciation of the facts (Geronimo v. Court of
Appeals, 224 SCRA 494 [1993]).
In weighing the evidence presented, the trial court concluded that indeed there
was concealment and misrepresentation, however, the same was made in "good
faith" and the facts concealed or misrepresented were irrelevant since the policy
was "non-medical". We disagree.
Section 26 of The Insurance Code is explicit in requiring a party to a contract of
insurance to communicate to the other, in good faith, all facts within his
knowledge which are material to the contract and as to which he makes no
warranty, and which the other has no means of ascertaining. Said Section
provides:
A neglect to communicate that which a party knows and ought to communicate,
is called concealment.
Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due,
in forming his estimate of the disadvantages of the proposed contract or in
making his inquiries (The Insurance Code, Sec. 31).
The terms of the contract are clear. The insured is specifically required to disclose
to the insurer matters relating to his health.
The information which the insured failed to disclose were material and relevant to
the approval and issuance of the insurance policy. The matters concealed would
have definitely affected petitioner's action on his application, either by approving
it with the corresponding adjustment for a higher premium or rejecting the same.
Moreover, a disclosure may have warranted a medical examination of the insured
by petitioner in order for it to reasonably assess the risk involved in accepting the
application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that
materiality of the information withheld does not depend on the state of mind of
the insured. Neither does it depend on the actual or physical events which ensue.
Thus, "goad faith" is no defense in concealment. The insured's failure to disclose
the fact that he was hospitalized for two weeks prior to filing his application for
insurance, raises grave doubts about his bonafides. It appears that such
concealment was deliberate on his part.
The argument, that petitioner's waiver of the medical examination of the insured
debunks the materiality of the facts concealed, is untenable. We reiterate our
ruling in Saturnino v. Philippine American Life Insurance Company, 7 SCRA 316

(1963), that " . . . the waiver of a medical examination [in a non-medical

insurance contract] renders even more material the information required of the
applicant concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer takes
into consideration in deciding whether to issue the policy or not . . . "
Moreover, such argument of private respondents would make Section 27 of the
Insurance Code, which allows the injured party to rescind a contract of insurance
where there is concealment, ineffective (See Vda. de Canilang v. Court of
Appeals, supra).
Anent the finding that the facts concealed had no bearing to the cause of death of
the insured, it is well settled that the insured need not die of the disease he had
failed to disclose to the insurer. It is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of the proposed insurance policy or in
making inquiries (Henson v. The Philippine American Life Insurance Co., 56 O.G.
No. 48 [1960]).
We, therefore, rule that petitioner properly exercised its right to rescind the
contract of insurance by reason of the concealment employed by the insured. It
must be emphasized that rescission was exercised within the two-year
contestability period as recognized in Section 48 of The Insurance Code.
WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is
REVERSED and SET ASIDE.
SO ORDERED
G.R. No. 82036 May 22, 1997
TRAVELLERS
INSURANCE
&
SURETY
CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and VICENTE MENDOZA, respondents.
HERMOSISIMA, JR., J.:
The petition herein seeks the review and reversal of the decision 1 of respondent
Court of Appeals 2 affirming in totothe judgment 3 of the Regional Trial Court 4 in
an action for damages 5 filed by private respondent Vicente Mendoza, Jr. as heir of
his mother who was killed in a vehicular accident.
Before the trial court, the complainant lumped the erring taxicab driver, the
owner of the taxicab, and the alleged insurer of the vehicle which featured in the
vehicular accident into one complaint. The erring taxicab was allegedly covered
by a third-party liability insurance policy issued by petitioner Travellers Insurance
& Surety Corporation.
The evidence presented before the trial court established the following facts:
At about 5:30 o'clock in the morning of July 20, 1980, a 78-year old woman by the
name of Feliza Vineza de Mendoza was on her way to hear mass at the Tayuman
Cathedral. While walking along Tayuman corner Gregorio Perfecto Streets, she
was bumped by a taxi that was running fast. Several persons witnessed the
accident, among whom were Rolando Marvilla, Ernesto Lopez and Eulogio Tabalno.
After the bumping, the old woman was seen sprawled on the pavement. Right
away, the good Samaritan that he was, Mavilla ran towards the old woman and

held her on his lap to inquire from her what had happened, but obviously she was
already in shock and could not talk. At this moment, a private jeep stopped. With
the driver of that vehicle, the two helped board the old woman on the jeep and
brought her to the Mary Johnston Hospital in Tondo.
. . . Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman Street
from Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the incident. It
was on his return trip from Rizal Avenue when Lopez saw the plaintiff and his
brother who were crying near the scene of the accident. Upon learning that the
two were the sons of the old woman, Lopez told them what had happened. The
Mendoza brothers were then able to trace their mother at the Mary Johnston
Hospital where they were advised by the attending physician that they should
bring the patient to the National Orthopedic Hospital because of her fractured
bones. Instead, the victim was brought to the U.S.T. Hospital where she expired at
9:00 o'clock that same morning. Death was caused by "traumatic shock" as a
result of the severe injuries she sustained . . .
. . . The evidence shows that at the moment the victim was bumped by the
vehicle, the latter was running fast, so much so that because of the strong impact
the old woman was thrown away and she fell on the pavement. . . . In truth, in
that related criminal case against defendant Dumlao . . . the trial court found as a
fact that therein accused "was driving the subject taxicab in a careless, reckless
and imprudent manner and at a speed greater than what was reasonable and
proper without taking the necessary precaution to avoid accident to persons . . .
considering the condition of the traffic at the place at the time aforementioned" . .
. Moreover, the driver fled from the scene of the accident and without rendering
assistance to the victim. . . .
. . . Three (3) witnesses who were at the scene at the time identified the taxi
involved, though not necessarily the driver thereof. Marvilla saw a lone taxi
speeding away just after the bumping which, when it passed by him, said witness
noticed to be a Lady Love Taxi with Plate No. 438, painted maroon, with baggage
bar attached on the baggage compartment and with an antenae [sic] attached at
the right rear side. The same descriptions were revealed by Ernesto Lopez, who
further described the taxi to have . . . reflectorized decorations on the edges of
the glass at the back . . . A third witness in the person of Eulogio Tabalno . . .
made similar descriptions although, because of the fast speed of the taxi, he was
only able to detect the last digit of the plate number which is "8". . . . [T]he police
proceeded to the garage of Lady Love Taxi and then and there they took
possession of such a taxi and later impounded it in the impounding area of the
agency concerned. . . . [T]he eyewitnesses . . . were unanimous in pointing to that
Lady Love Taxi with Plate No. 438, obviously the vehicle involved herein.
. . . During the investigation, defendant Armando Abellon, the registered owner of
Lady Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified to the fact "that
the vehicle was driven last July 20, 1980 by one Rodrigo Dumlao. . ." . . . It was on
the basis of this affidavit of the registered owner that caused the police to
apprehend Rodrigo Dumlao, and consequently to have him prosecuted and
eventually convicted of the offense . . . . . . . [S]aid Dumlao absconded in that

criminal case, specially at the time of the promulgation of the judgment therein
so much so that he is now a fugitive from justice. 6
Private respondent filed a complaint for damages against Armando Abellon as the
owner of the Lady Love Taxi and Rodrigo Dumlao as the driver of the Lady Love
taxicab that bumped private respondent's mother. Subsequently, private
respondent amended his complaint to include petitioner as the compulsory
insurer of the said taxicab under Certificate of Cover No. 1447785-3.
After trial, the trial court rendered judgment in favor of private respondent, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more
particularly the "Heirs of the late Feliza Vineza de Mendoza," and against
defendants Rodrigo Dumlao, Armando Abellon and Travellers Insurance and
Surety Corporation, by ordering the latter to pay, jointly and severally, the former
the following amounts:
(a) The sum of P2,924.70, as actual and compensatory damages, with interest
thereon at the rate of 12% per annum from October 17, 1980, when the
complaint was filed, until the said amount is fully paid;
(b) P30,000.00 as death indemnity;
(c) P25,000.00 as moral damages;
(d) P10,000.00 as by way of corrective or exemplary damages; and
(e) Another P10,000.00 by way of attorney's fees and other litigation expenses.
Defendants are further ordered to pay, jointly and severally, the costs of this suit.
SO ORDERED. 7
Petitioner appealed from the aforecited decision to the respondent Court of
Appeals. The decision of the trial court was affirmed by respondent appellate
court. Petitioner's Motion for Reconsideration 8 of September 22, 1987 was denied
in a Resolution 9 dated February 9, 1988.
Hence this petition.
Petitioner mainly contends that it did not issue an insurance policy as compulsory
insurer of the Lady Love Taxi and that, assuming arguendo that it had indeed
covered said taxicab for third-party liability insurance, private respondent failed
to file a written notice of claim with petitioner as required by Section 384 of P.D.
No. 612, otherwise known as the Insurance Code.
We find the petition to be meritorious.
I
When private respondent filed his amended complaint to implead petitioner as
party defendant and therein alleged that petitioner was the third-party liability
insurer of the Lady Love taxicab that fatally hit private respondent's mother,
private respondent did not attach a copy of the insurance contract to the
amended complaint. Private respondent does not deny this omission.
It is significant to point out at this juncture that the right of a third person to sue
the insurer depends on whether the contract of insurance is intended to benefit
third persons also or only the insured.
[A] policy . . . whereby the insurer agreed to indemnify the insured "against all
sums . . . which the Insured shall become legally liable to pay in respect of: a.
death of or bodily injury to any person . . . is one for indemnity against liability;

from the fact then that the insured is liable to the third person, such third person
is entitled to sue the insurer.
The right of the person injured to sue the insurer of the party at fault (insured),
depends on whether the contract of insurance is intended to benefit third persons
also or on the insured And the test applied has been this: Where the contract
provides for indemnity against liability to third persons, then third persons to
whom the insured is liable can sue the insurer. Where the contract is for
indemnity against actual loss or payment, then third persons cannot proceed
against the insurer, the contract being solely to reimburse the insured for liability
actually discharged by him thru payment to third persons, said third persons'
recourse being thus limited to the insured alone. 10
Since private respondent failed to attach a copy of the insurance contract to his
complaint, the trial court could not have been able to apprise itself of the real
nature and pecuniary limits of petitioner's liability. More importantly, the trial
court could not have possibly ascertained the right of private respondent as third
person to sue petitioner as insurer of the Lady Love taxicab because the trial
court never saw nor read the insurance contract and learned of its terms and
conditions.
Petitioner, understandably, did not volunteer to present any insurance contract
covering the Lady Love taxicab that fatally hit private respondent's mother,
considering that petitioner precisely presented the defense of lack of insurance
coverage before the trial court. Neither did the trial court issue a subpoena duces
tecum to have the insurance contract produced before it under pain of contempt.
We thus find hardly a basis in the records for the trial court to have validly found
petitioner liable jointly and severally with the owner and the driver of the Lady
Love taxicab, for damages accruing to private respondent.
Apparently, the trial court did not distinguish between the private respondent's
cause of action against the owner and the driver of the Lady Love taxicab and his
cause of action against petitioner. The former is based on torts and quasidelicts while the latter is based on contract. Confusing these two sources of
obligations as they arise from the same act of the taxicab fatally hitting private
respondent's mother, and in the face of overwhelming evidence of the reckless
imprudence of the driver of the Lady Love taxicab, the trial court brushed aside
its ignorance of the terms and conditions of the insurance contract and forthwith
found all three the driver of the taxicab, the owner of the taxicab, and the
alleged insurer of the taxicab jointly and severally liable for actual, moral and
exemplary damages as well as attorney's fees and litigation expenses. This is
clearly a misapplication of the law by the trial court, and respondent appellate
court grievously erred in not having reversed the trial court on this ground.
While it is true that where the insurance contract provides for indemnity against
liability to third persons, such third persons can directly sue the insurer, however,
the direct liability of the insurer under indemnity contracts against third-party
liability does not mean that the insurer can be held solidarily liable with the
insured and/or the other parties found at fault. The liability of the insurer is based
on contract; that of the insured is based on tort. 11

Applying this principle underlying solidary obligation and insurance contracts, we

ruled in one case that:
In solidary obligation, the creditor may enforce the entire obligation against one
of the solidary debtors. On the other hand, insurance is defined as "a contract
whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event."
In the case at bar, the trial court held petitioner together with respondents Sio
Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total
amount of P29,103.00, with the qualification that petitioner's liability is only up to
P20,000.00. In the context of a solidary obligation, petitioner may be compelled
by respondent Vallejos to pay the entire obligation of P29,103.00, notwithstanding
the qualification made by the trial court. But, how can petitioner be obliged to pay
the entire obligation when the amount stated in its insurance policy with
respondent Sio Choy for indemnity against third-party liability is only P20,000.00?
Moreover, the qualification made in the decision of the trial court to the effect
that petitioner is sentenced to pay up to P20,000.00 only when the obligation to
pay P29,103.00 is made solidary is an evident breach of the concept of a solidary
obligation. 12
The above principles take on more significance in the light of the counterallegation of petitioner that, assuming arguendo that it is the insurer of the Lady
Love taxicab in question, its liability is limited to only P50,000.00, this being its
standard amount of coverage in vehicle insurance policies. It bears repeating that
no copy of the insurance contract was ever proffered before the trial court by the
private respondent, notwithstanding knowledge of the fact that the latter's
complaint against petitioner is one under a written contract. Thus, the trial court
proceeded to hold petitioner liable for an award of damages exceeding its limited
liability of P50,000.00. This only shows beyond doubt that the trial court was
under the erroneous presumption that petitioner could be found liable absent
proof of the contract and based merely on the proof of reckless imprudence on
the part of the driver of the Lady Love taxicab that fatally hit private respondent's
mother.
II
Petitioner did not tire in arguing before the trial court and the respondent
appellate court that, assuming arguendo that it had issued the insurance contract
over the Lady Love taxicab, private respondent's cause of action against
petitioner did not successfully accrue because he failed to file with petitioner a
written notice of claim within six (6) months from the date of the accident as
required by Section 384 of the Insurance Code.
At the time of the vehicular incident which resulted in the death of private
respondent's mother, during which time the Insurance Code had not yet been
amended by Batas Pambansa (B.P.) Blg. 874, Section 384 provided as follows:
Any person having any claim upon the policy issued pursuant to this chapter
shall, without any unnecessary delay, present to the insurance company
concerned a written notice of claim setting forth the amount of his loss, and/or
the nature, extent and duration of the injuries sustained as certified by a duly
licensed physician. Notice of claim must be filed within six months from date of

the accident, otherwise, the claim shall be deemed waived. Action or suit for
recovery of damage due to loss or injury must be brought in proper cases, with
the Commission or the Courts within one year from date of accident, otherwise
the claimant's right of action shall prescribe [emphasis supplied].
In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De
Guzman, 13 we ruled that the one year prescription period to bring suit in court
against the insurer should be counted from the time that the insurer rejects the
written claim filed therewith by the insured, the beneficiary or the third person
interested under the insurance policy. We explained:
It is very obvious that petitioner company is trying to use Section 384 of the
Insurance Code as a cloak to hide itself from its liabilities. The facts of these cases
evidently reflect the deliberate efforts of petitioner company to prevent the filing
of a formal action against it. Bearing in mind that if it succeeds in doing so until
one year lapses from the date of the accident it could set up the defense of
prescription, petitioner company made private respondents believe that their
claims would be settled in order that the latter will not find it necessary to
immediately bring suit. In violation of its duties to adopt and implement
reasonable standards for the prompt investigation of claims and to effectuate
prompt, fair and equitable settlement of claims, and with manifest bad faith,
petitioner company devised means and ways of stalling the settlement
proceeding . . . [N]o steps were taken to process the claim and no rejection of said
claim was ever made even if private respondent had already complied with all the
requirements. . . .
This Court has made the observation that some insurance companies have been
inventing excuses to avoid their just obligations and it is only the State that can
give the protection which the insuring public needs from possible abuses of the
insurers. 14
It is significant to note that the aforecited Section 384 was amended by B.P. Blg.
874 to categorically provide that "action or suit for recovery of damage due to
loss or injury must be brought in proper cases, with the Commissioner or the
Courts within one year from denial of the claim, otherwise the claimant's right of
action shall prescribe" [emphasis ours]. 15
We have certainly ruled with consistency that the prescriptive period to bring suit
in court under an insurance policy, begins to run from the date of the insurer's
rejection of the claim filed by the insured, the beneficiary or any person claiming
under an insurance contract. This ruling is premised upon the compliance by the
persons suing under an insurance contract, with the indispensable requirement of
having filed the written claim mandated by Section 384 of the insurance Code
before and after its amendment. Absent such written claim filed by the person
suing under an insurance contract, no cause of action accrues under such
insurance contract, considering that it is the rejection of that claim that triggers
the running of the one-year prescriptive period to bring suit in court, and there
can be no opportunity for the insurer to even reject a claim if none has been filed
in the first place, as in the instant case.
The one-year period should instead be counted from the date of rejection by the
insurer as this is the time when the cause of action accrues. . . .

In Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:
The plaintiff's cause of action did not accrue until his claim was finally rejected by
the insurance company. This is because, before such final rejection, there was no
real necessity for bringing suit.
The philosophy of the above pronouncement was pointed out in the case
of ACCFA vs. Alpha Insurance and Surety Co., viz:
Since a cause of action requires, as essential elements, not only a legal right of
the plaintiff and a correlative obligation of the defendant but also an act or
omission of the defendant in violation of said legal right, the cause of action does
not accrue until the party obligated refuses, expressly or impliedly, to comply with
its duty. 16
When petitioner asseverates, thus, that no written claim was filed by private
respondent and rejected by petitioner, and private respondent does not dispute
such asseveration through a denial in his pleadings, we are constrained to rule
that respondent appellate court committed reversible error in finding petitioner
liable under an insurance contract the existence of which had not at all been
proven in court. Even if there were such a contract, private respondent's cause of
action can not prevail because he failed to file the written claim mandated by
Section 384 of the Insurance Code. He is deemed, under this legal provision, to
have waived his rights as against petitioner-insurer.
WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court
of Appeals in CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in
Civil Case No. 135486 are REVERSED and SET ASIDE insofar as Travelers
Insurance & Surety Corporation was found jointly and severally liable to pay
actual, moral and exemplary damages, death indemnity, attorney's fees and
litigation expenses in Civil Case No. 135486. The complaint against Travellers
Insurance & Surety Corporation in said case is hereby ordered dismissed.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 113899 October 13, 1999
GREAT
PACIFIC
LIFE
ASSURANCE
CORP., petitioner,
vs.
COURT OF APPEALS AND MEDARDA V. LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the
Decision 1 dated May 17, 1993, of the Court of Appeals and its Resolution 2 dated
January 4, 1994 in CA-G.R. CV No. 18341. The appellate court affirmed in toto the
judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance
claim filed by private respondent against Great Pacific Life Assurance Co. The
dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in
relation to Certification B-18558 liable and ordered to pay to the DEVELOPMENT
BANK OF THE PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the
amount of EIGHTY SIX THOUSAND TWO HUNDRED PESOS (P86,200.00);

dismissing the claims for damages, attorney's fees and litigation expenses in the
complaint and counterclaim, with costs against the defendant and dismissing the
complaint in respect to the plaintiffs, other than the widow-beneficiary, for lack of
cause of action. 3
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific
Life Assurance Corporation (hereinafter Grepalife) and Development Bank of the
Philippines (hereinafter DBP). Grepalife agreed to insure the lives of eligible
housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of
DBP applied for membership in the group life insurance plan. In an application
form, Dr. Leuterio answered questions concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high blood
pressure, cancer, diabetes, lung; kidney or stomach disorder or any other physical
impairment?
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [x] Yes [ ] NO. 4
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance
coverage of Dr. Leuterio, to the extent of his DBP mortgage indebtedness
amounting to eighty-six thousand, two hundred (P86,200.00) pesos.1wphi1.nt
On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage."
Consequently, DBP submitted a death claim to Grepalife. Grepalife denied the
claim alleging that Dr. Leuterio was not physically healthy when he applied for an
insurance coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio
did not disclose he had been suffering from hypertension, which caused his death.
Allegedly, such non-disclosure constituted concealment that justified the denial of
the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V.
Leuterio, filed a complaint with the Regional Trial Court of Misamis Oriental,
Branch 18, against Grepalife for "Specific Performance with Damages." 5 During
the trial, Dr. Hernando Mejia, who issued the death certificate, was called to
testify. Dr. Mejia's findings, based partly from the information given by the
respondent widow, stated that Dr. Leuterio complained of headaches presumably
due to high blood pressure. The inference was not conclusive because Dr. Leuterio
was not autopsied, hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent
widow and against Grepalife. On May 17, 1993, the Court of Appeals sustained
the trial court's decision. Hence, the present petition. Petitioners interposed the
following assigned errors:
1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE
CASE FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION
INSURANCE ON THE LIFE OF PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE OF
ITS LOAN BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST DEFENDANTAPPELLANT [Petitioner Grepalife] FOR LACK OF CAUSE OF ACTION.

2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO
DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW
HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH
ITS GROUP INSURANCE CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN HOLDING THAT THERE WAS NO CONCEALMENT
OF MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS
APPLICATION FOR MEMBERSHIP IN THE GROUP LIFE INSURANCE PLAN BETWEEN
DEFENDANT-APPELLANT OF THE INSURANCE CLAIM ARISING FROM THE DEATH OF
WILFREDO LEUTERIO. 6
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as
beneficiary in a group life insurance contract from a complaint filed by the widow
of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed
that he had hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of
eighty six thousand, two hundred (P86,200.00) pesos without proof of the actual
outstanding mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio,
not the real party in interest, hence the trial court acquired no jurisdiction over
the case. It argues that when the Court of Appeals affirmed the trial court's
judgment, Grepalife was held liable to pay the proceeds of insurance contract in
favor of DBP, the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged
properties and the parties to this type of contract. The rationale of a group
insurance policy of mortgagors, otherwise known as the "mortgage redemption
insurance," is a device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it has to enter into such form of
contract so that in the event of the unexpected demise of the mortgagor during
the subsistence of the mortgage contract, the proceeds from such insurance will
be applied to the payment of the mortgage debt, thereby relieving the heirs of
the mortgagor from paying the obligation. 7 In a similar vein, ample protection is
given to the mortgagor under such a concept so that in the event of death; the
mortgage obligation will be extinguished by the application of the insurance
proceeds to the mortgage indebtedness. 8 Consequently, where the mortgagor
pays the insurance premium under the group insurance policy, making the loss
payable to the mortgagee, the insurance is on the mortgagor's interest, and the
mortgagor continues to be a party to the contract. In this type of policy insurance,
the mortgagee is simply an appointee of the insurance fund, such loss-payable
clause does not make the mortgagee a party to the contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects insurance in his
own name providing that the loss shall be payable to the mortgagee, or assigns a

policy of insurance to a mortgagee, the insurance is deemed to be upon the

interest of the mortgagor, who does not cease to be a party to the original
contract, and any act of his, prior to the loss, which would otherwise avoid the
insurance, will have the same effect, although the property is in the hands of the
mortgagee, but any act which, under the contract of insurance, is to be
performed by the mortgagor, may be performed by the mortgagee therein
named, with the same effect as if it had been performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or
interests in the insurance, the policy stating that: "In the event of the debtor's
death before his indebtedness with the Creditor [DBP] shall have been fully paid,
an amount to pay the outstanding indebtedness shall first be paid to the creditor
and the balance of sum assured, if there is any, shall then be paid to the
beneficiary/ies designated by the debtor." 10 When DBP submitted the insurance
claim against petitioner, the latter denied payment thereof, interposing the
defense of concealment committed by the insured. Thereafter, DBP collected the
debt from the mortgagor and took the necessary action of foreclosure on the
residential lot of private respondent. 11 In Gonzales La O vs. Yek Tong Lin Fire &
Marine Ins. Co. 12 we held:
Insured, being the person with whom the contract was made, is primarily the
proper person to bring suit thereon. * * * Subject to some exceptions, insured may
thus sue, although the policy is taken wholly or in part for the benefit of another
person named or unnamed, and although it is expressly made payable to another
as his interest may appear or otherwise. * * * Although a policy issued to a
mortgagor is taken out for the benefit of the mortgagee and is made payable to
him, yet the mortgagor may sue thereon in his own name, especially where the
mortgagee's interest is less than the full amount recoverable under the policy, * *
*.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned
the policy for the purpose of collection, or has assigned as collateral security any
judgment he may obtain. 13
And since a policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such
person may recover it whatever the insured might have recovered, 14 the widow of
the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner
interposed as its defense to annul the insurance contract. Petitioner contends that
Dr. Leuterio failed to disclose that he had hypertension, which might have caused
his death. Concealment exists where the assured had knowledge of a fact
material to the risk, and honesty, good faith, and fair dealing requires that he
should communicate it to the assured, but he designedly and intentionally
withholds the same. 15
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando
Mejia, as supported by the information given by the widow of the decedent.
Grepalife asserts that Dr. Mejia's technical diagnosis of the cause of death of Dr.
Leuterio was a duly documented hospital record, and that the widow's declaration

that her husband had "possible hypertension several years ago" should not be
considered as hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did
not conduct an autopsy on the body of the decedent. As the attending physician,
Dr. Mejia stated that he had no knowledge of Dr. Leuterio's any previous hospital
confinement. 16 Dr. Leuterio's death certificate stated that hypertension was only
"the possible cause of death." The private respondent's statement, as to the
medical history of her husband, was due to her unreliable recollection of events.
Hence, the statement of the physician was properly considered by the trial court
as hearsay.
The question of whether there was concealment was aptly answered by the
appellate court, thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was
in good health and that he had not consulted a doctor or any of the enumerated
ailments, including hypertension; when he died the attending physician had
certified in the death certificate that the former died of cerebral hemorrhage,
probably secondary to hypertension. From this report, the appellant insurance
company refused to pay the insurance claim. Appellant alleged that the insured
had concealed the fact that he had hypertension.
Contrary to appellant's allegations, there was no sufficient proof that the insured
had suffered from hypertension. Aside from the statement of the insured's widow
who was not even sure if the medicines taken by Dr. Leuterio were for
hypertension, the appellant had not proven nor produced any witness who could
attest to Dr. Leuterio's medical history . . .
xxx xxx xxx
Appellant insurance company had failed to establish that there was concealment
made by the insured, hence, it cannot refuse payment of the claim. 17
The fraudulent intent on the part of the insured must be established to entitle the
insurer to rescind the contract. 18 Misrepresentation as a defense of the insurer to
avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the insurer. 19 In the case at bar,
the petitioner failed to clearly and satisfactorily establish its defense, and is
therefore liable to pay the proceeds of the insurance.1wphi1.nt
And that brings us to the last point in the review of the case at bar. Petitioner
claims that there was no evidence as to the amount of Dr. Leuterio's outstanding
indebtedness to DBP at the time of the mortgagor's death. Hence, for private
respondent's failure to establish the same, the action for specific performance
should be dismissed. Petitioner's claim is without merit. A life insurance policy is a
valued policy. 20 Unless the interest of a person insured is susceptible of exact
pecuniary measurement, the measure of indemnity under a policy of insurance
upon life or health is the sum fixed in the policy. 21 The mortgagor paid the
premium according to the coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtor's death during the
terms of this insurance, a death benefit in the amount of P86,200.00 shall be
paid.

In the event of the debtor's death before his indebtedness with the creditor shall
have been fully paid, an amount to pay the outstanding indebtedness shall first
be paid to the Creditor and the balance of the Sum Assured, if there is any shall
then be paid to the beneficiary/ies designated by the debtor." 22 (Emphasis
omitted)
However, we noted that the Court of Appeals' decision was promulgated on May
17, 1993. In private respondent's memorandum, she states that DBP foreclosed in
1995 their residential lot, in satisfaction of mortgagor's outstanding loan.
Considering this supervening event, the insurance proceeds shall inure to the
benefit of the heirs of the deceased person or his beneficiaries. Equity dictates
that DBP should not unjustly enrich itself at the expense of another (Nemo cum
alterius detrimenio protest). Hence, it cannot collect the insurance proceeds, after
it already foreclosed on the mortgage. The proceeds now rightly belong to Dr.
Leuterio's heirs represented by his widow, herein private respondent Medarda
Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the
Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the
petitioner is ORDERED to pay the insurance proceeds amounting to Eighty-six
thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr.
Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of
mortgagor's indebtedness to Development Bank of the Philippines. Costs against
petitioner.1wphi1.nt
SO ORDERED.
G.R. No. 137172 June 15, 1999
UCPB
GENERAL
INSURANCE
vs.
MASAGANA TELAMART, INC., respondent.

CO.,

INC., petitioner,

PARDO, J.:
The case is an appeal via certiorari seeking to set aside the decision of the Court
of Appeals, 1 affirming with modification that of the Regional Trial Court, Branch
58, Makati, ordering petitioner to pay respondent the sum of P18,645,000.00, as
the proceeds of the insurance coverage of respondent's property razed by fire;
25% of the total amount due as attorney's fees and P25,000.00 as litigation
expenses, and costs.
The facts are undisputed and may be related as follows:
On April 15, 1991, petitioner issued five (5) insurance policies covering
respondent's various property described therein against fire, for the period from
May 22, 1991 to May 22, 1992.
In March 1992, petitioner evaluated the policies and decided not to renew them
upon expiration of their terms on May 22, 1992. Petitioner advised respondent's
broker, Zuellig Insurance Brokers, Inc. of its intention not to renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of the non-renewal
of the policies at the address stated in the policies.

On June 13, 1992, fire razed respondent's property covered by three of the
insurance policies petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at its head office
five (5) manager's checks in the total amount of P225,753.95, representing
premium for the renewal of the policies from May 22, 1992 to May 22, 1993. No
notice of loss was filed by respondent under the policies prior to July 14, 1992.
On July 14, 1992, respondent filed with petitioner its formal claim for
indemnification of the insured property razed by fire.
On the same day, July 14, 1992, petitioner returned to respondent the five (5)
manager's checks that it tendered, and at the same time rejected respondent's
claim for the reasons (a) that the policies had expired and were not renewed, and
(b) that the fire occurred on June 13, 1992, before respondent's tender of
premium payment.
On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati
City, a civil complaint against petitioner for recovery of P18,645,000.00,
representing the face value of the policies covering respondent's insured property
razed by fire, and for attorney's fees. 2
On October 23, 1992, after its motion to dismiss had been denied, petitioner filed
an answer to the complaint. It alleged that the complaint "fails to state a cause of
action"; that petitioner was not liable to respondent for insurance proceeds under
the policies because at the time of the loss of respondent's property due to fire,
the policies had long expired and were not renewed. 3
After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati,
rendered decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and against the defendant, as follows:
(1) Authorizing and allowing the plaintiff to consign/deposit with this Court the
sum of P225,753.95 (refused by the defendant) as full payment of the
corresponding premiums for the replacement-renewal policies for Exhibits A, B, C,
D and E;
(2) Declaring plaintiff to have fully complied with its obligation to pay the
premium thereby rendering the replacement-renewal policy of Exhibits A, B, C, D
and E effective and binding for the duration May 22, 1992 until May 22, 1993;
and, ordering defendant to deliver forthwith to plaintiff the said replacementrenewal policies;
(3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992
and August 9, 1991 to August 9, 1992, respectively; and
(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00
representing the latter's claim for indemnity under Exhibits A, B & C and/or its
replacement-renewal policies; (b) 25% of the total amount due as and for
attorney's fees; (c) P25,000.00 as necessary litigation expenses; and, (d) the
costs of suit.
All other claims and counterclaims asserted by the parties are denied and/or
dismissed, including plaintiff's claim for interests.
SO ORDERED.
Makati, Metro-Manila, March 10, 1993.

ZOSIMO Z. ANGELES.
Judge. 4
In due time, petitioner appealed to the Court of Appeals. 5
On September 7, 1998, the Court of Appeals promulgated its decision 6 affirming
that of the Regional Trial Court with the modification that item No. 3 of the
dispositive portion was deleted, and the award of attorney's fees was reduced to
10% of the total amount due. 7
The Court of Appeals held that following previous practise, respondent was
allowed a sixty (60) to ninety (90) day credit term for the renewal of its policies,
and that the acceptance of the late premium payment suggested an
understanding that payment could be made later.
Hence, this appeal.
By resolution adopted on March 24, 1999, we required respondent to comment on
the petition, not to file a motion to dismiss within ten (10) days from notice. 8 On
April 22, 1999, respondent filed its comment. 9
Respondent submits that the Court of Appeals correctly ruled that no timely
notice of non-renewal was sent. The notice of non-renewal sent to broker Zuellig
which claimed that it verbally notified the insurance agency but not respondent
itself did not suffice. Respondent submits further that the Court of Appeals did not
err in finding that there existed a sixty (60) to ninety (90) days credit agreement
between UCPB and Masagana, and that, finally, the Supreme Court could not
review factual findings of the lower court affirmed by the Court of Appeals. 10
We give due course to the appeal.
The basic issue raised is whether the fire insurance policies issued by petitioner to
the respondent covering the period May 22, 1991 to May 22, 1992, had expired
on the latter date or had been extended or renewed by an implied credit
arrangement though actual payment of premium was tendered on a later date
after the occurrence of the risk (fire) insured against.
The answer is easily found in the Insurance Code. No, an insurance policy, other
than life, issued originally or on renewal, is not valid and binding until actual
payment of the premium. Any agreement to the contrary is void. 11The parties
may not agree expressly or impliedly on the extension of creditor time to pay the
premium and consider the policy binding before actual payment.
The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 12 cited by the Court of
Appeals, is not applicable. In that case, payment of the premium was in fact
actually made on December 24, 1981, and the fire occurred on January 18, 1982.
Here, the payment of the premium for renewal of the policies was tendered on
July 13, 1992, a month after the fire occurred on June 13, 1992. The assured did
not even give the insurer a notice of loss within a reasonable time after
occurrence of the fire.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the
Court of Appeals in CA-G.R. CV No. 42321. In lieu thereof the Court renders
judgment dismissing respondent's complaint and petitioner's counterclaims
thereto filed with the Regional Trial Court, Branch 58, Makati City, in Civil Case No.
92-2023. Without costs.1wphi1.nt
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 Code6 does not apply.1wphi1.nt
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 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.
[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.
DECISION
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 theDecision [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
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
overHyopsung.
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 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. 156167
May 16, 2005
GULF
RESORTS,
INC., petitioner,
vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of
Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER
INSURANCE CORPORATION. Petitioner assails the appellate court decision 1 which
dismissed its two appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the
scope of the insurance companys liability for earthquake damage to petitioners
properties. Petitioner avers that, pursuant to its earthquake shock endorsement
rider, Insurance Policy No. 31944 covers all damages to the properties within its
resort caused by earthquake. Respondent contends that the rider limits its liability
for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court
are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance
Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from
1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and "F"; also
Exhs. "1", "2", "3" and "4" respectively), the risk of loss from earthquake shock
was extended only to plaintiffs two swimming pools, thus, "earthquake shock
endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E" and two (2) swimming pools only
(Exhs. "C-1"; D-1", "E" and "F-1"). "Item 5" in those policies referred to the two
(2) swimming pools only (Exhs. "1-B", "2-B", "3-B" and "F-2"); that subsequently
AHAC(AIU) issued in plaintiffs favor Policy No. 206-4182383-0 covering the period
March 14, 1988 to March 14, 1989 (Exhs. "G" also "G-1") and in said policy the
earthquake endorsement clause as indicated in Exhibits "C-1", "D-1", Exhibits "E"
and "F-1" was deleted and the entry under Endorsements/Warranties at the time
of issue read that plaintiff renewed its policy with AHAC (AIU) for the period of
March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. "H")

which carried the entry under "Endorsement/Warranties at Time of Issue", which

read "Endorsement to Include Earthquake Shock (Exh. "6-B-1") in the amount
of P10,700.00 and paid P42,658.14 (Exhs. "6-A" and "6-B") as premium thereof,
computed as follows:
Item
- P7,691,000.00
on the Clubhouse only
@ .392%;

(Exhs. "C", "D", "E", "F", "G" and "H") and in Policy No. 31944 issued by
defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the
sum included additional premium the Company agrees, notwithstanding what is
stated in the printed conditions of this policy due to the contrary, that this
insurance covers loss or damage to shock to any of the property insured by this
Policy occasioned by or through or in consequence of earthquake (Exhs. "1-D", "2- 1,500,000.00
on the furniture, etc. contained in the building
D", "3-A", "4-B", "5-A", "6-D" and "7-C");
above-mentioned@ .490%;
that in Exhibit "7-C" the word "included" above the underlined portion was
- 393,000.00
on the two swimming pools, only (against
the that on July 16, 1990 an earthquake struck Central Luzon and Northern
deleted;
peril of earthquake shock only) @ 0.100%Luzon and plaintiffs properties covered by Policy No. 31944 issued by defendant,
including the two swimming pools in its Agoo Playa Resort were damaged. 2
- 116,600.00
other buildings include as follows:
After the earthquake, petitioner advised respondent that it would be making a
a) Tilter House
P19,800.00 0.551%
claim under its Insurance Policy No. 31944 for damages on its properties.
Respondent instructed petitioner to file a formal claim, then assigned the
b) Power House P41,000.00 0.551%
investigation of the claim to an independent claims adjuster, Bayne Adjusters and
c) House Shed
P55,000.00 0.540%
Surveyors, Inc.3 On July 30, 1990, respondent, through its adjuster, requested
P100,000.00
for furniture, fixtures, lines air-conpetitioner
and
to submit various documents in support of its claim. On August 7, 1990,
operating equipment
Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de
Leon,4 rendered a preliminary report 5 finding extensive damage caused by the
that plaintiff agreed to insure with defendant the properties covered by AHAC
earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated
(AIU) Policy No. 206-4568061-9 (Exh. "H") provided that the policy wording and
that "except for the swimming pools, all affected items have no coverage for
rates in said policy be copied in the policy to be issued by defendant; that
earthquake shocks."6 On August 11, 1990, petitioner filed its formal demand 7 for
defendant issued Policy No. 31944 to plaintiff covering the period of March 14,
settlement of the damage to all its properties in the Agoo Playa Resort. On August
1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92
23, 1990, respondent denied petitioners claim on the ground that its insurance
(Exh. "I"); that in the computation of the premium, defendants Policy No. 31944
policy only afforded earthquake shock coverage to the two swimming pools of the
(Exh. "I"), which is the policy in question, contained on the right-hand upper
resort.8Petitioner and respondent failed to arrive at a settlement. 9 Thus, on
portion of page 7 thereof, the following:
January 24, 1991, petitioner filed a complaint 10 with the regional trial court of
Rate-Various
Pasig praying for the payment of the following:
Premium

P37,420.60 F/L
1.) The sum of P5,427,779.00, representing losses sustained by the insured
properties, with interest thereon, as computed under par. 29 of the policy (Annex

2,061.52

Typhoon
"B") until fully paid;

1,030.76

EC
2.) The sum of P428,842.00 per month, representing continuing losses sustained

393.00

ES
by plaintiff on account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
Doc. Stamps
3,068.10
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
F.S.T.
776.89
5.) Costs.11
Prem. Tax
409.05
Respondent filed its Answer with Special and Affirmative Defenses with
Compulsory Counterclaims.12
TOTAL
45,159.92;
On February 21, 1994, the lower court after trial ruled in favor of the
that the above break-down of premiums shows that plaintiff paid only P393.00 as
respondent, viz:
premium against earthquake shock (ES); that in all the six insurance policies
The above schedule clearly shows that plaintiff paid only a premium of P393.00
(Exhs. "C", "D", "E", "F", "G" and "H"), the premium against the peril of
against the peril of earthquake shock, the same premium it paid against
earthquake shock is the same, that is P393.00 (Exhs. "C" and "1-B"; "2-B" and "3earthquake shock only on the two swimming pools in all the policies issued by
B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC
AHAC(AIU) (Exhibits "C", "D", "E", "F" and "G"). From this fact the Court must
consequently agree with the position of defendant that the endorsement rider

(Exhibit "7-C") means that only the two swimming pools were insured against
earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion
hence, where the language used in an insurance contract or application is such as
to create ambiguity the same should be resolved against the party responsible
therefor, i.e., the insurance company which prepared the contract. To the mind of
[the] Court, the language used in the policy in litigation is clear and unambiguous
hence there is no need for interpretation or construction but only application of
the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools
had earthquake shock coverage and were heavily damaged by the earthquake
which struck on July 16, 1990. Defendant having admitted that the damage to the
swimming pools was appraised by defendants adjuster at P386,000.00,
defendant must, by virtue of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding
paragraph that defendant is liable only for the damage caused to the two (2)
swimming pools and that defendant has made known to plaintiff its willingness
and readiness to settle said liability, there is no basis for the grant of the other
damages prayed for by plaintiff. As to the counterclaims of defendant, the Court
does not agree that the action filed by plaintiff is baseless and highly speculative
since such action is a lawful exercise of the plaintiffs right to come to Court in the
honest belief that their Complaint is meritorious. The prayer, therefore, of
defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum
of THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing
damage to the two (2) swimming pools, with interest at 6% per annum from the
date of the filing of the Complaint until defendants obligation to plaintiff is fully
paid.
No pronouncement as to costs.13
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an
appeal with the Court of Appeals based on the following assigned errors: 14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE
POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES
SURROUNDING THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE
PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH "I") BY
LIMITING ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts
failure to award it attorneys fees and damages on its compulsory counterclaim.

After review, the appellate court affirmed the decision of the trial court and ruled,
thus:
However, after carefully perusing the documentary evidence of both parties, We
are not convinced that the last two (2) insurance contracts (Exhs. "G" and "H"),
which the plaintiff-appellant had with AHAC (AIU) and upon which the subject
insurance contract with Philippine Charter Insurance Corporation is said to have
been based and copied (Exh. "I"), covered an extended earthquake shock
insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiffappellants prayer for the imposition of interest 24% on the insurance claim and
6% on loss of income allegedly amounting toP4,280,000.00. Since the defendantappellant has expressed its willingness to pay the damage caused on the two (2)
swimming pools, as the Court a quo and this Court correctly found it to be liable
only, it then cannot be said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing
is the rule that the award thereof is subject to the sound discretion of the court.
Thus, if such discretion is well-exercised, it will not be disturbed on appeal (Castro
et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the award
thereof an exception rather than a rule, it is necessary for the court to make
findings of facts and law that would bring the case within the exception and
justify the grant of such award (Country Bankers Insurance Corp. v. Lianga Bay
and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, 2002).
Therefore, holding that the plaintiff-appellants action is not baseless and highly
speculative, We find that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.15
Petitioner filed the present petition raising the following issues: 16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING
POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE
INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER
FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS
FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words "any
property insured by this policy," and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states
that it is "[s]ubject to: Other Insurance Clause, Typhoon Endorsement,Earthquake
Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment
Agreement On Long Term Policies."17
Third, that the qualification referring to the two swimming pools had already been
deleted in the earthquake shock endorsement.

Fourth, it is unbelievable for respondent to claim that it only made an inadvertent

omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence
over the wording of the insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved
in favor of petitioner and against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance
policy, such as to remove the two swimming pools from the coverage for the risk
of fire. It should not be used to limit the respondents liability for earthquake
shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium
was not paid under the extended coverage. The premium for the earthquake
shock coverage was already included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they
intended to extend earthquake shock coverage to all insured properties. When it
secured an insurance policy from respondent, petitioner told respondent that it
wanted an exact replica of its latest insurance policy from American Home
Assurance Company (AHAC-AIU), which covered all the resorts properties for
earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake
shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc.,
likewise requested petitioner to submit the necessary documents for its building
claims and other repair costs. Thus, under the doctrine of equitable estoppel, it
cannot deny that the insurance policy it issued to petitioner covered all of the
properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under
Rule 45 of the Revised Rules of Court as its remedy, and there is no need for
calibration of the evidence in order to establish the facts upon which this petition
is based.
On the other hand, respondent made the following counter arguments: 18
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990
explicitly extended coverage against earthquake shock to petitioners insured
properties other than on the two swimming pools. Petitioner admitted that from
1984 to 1988, only the two swimming pools were insured against earthquake
shock. From 1988 until 1990, the provisions in its policy were practically identical
to its earlier policies, and there was no increase in the premium paid. AHAC-AIU,
in a letter19 by its representative Manuel C. Quijano, categorically stated that its
previous policy, from which respondents policy was copied, covered only
earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00
shows that the policy only covered earthquake shock damage on the two

swimming pools. The amount was the same amount paid by petitioner for
earthquake shock coverage on the two swimming pools from 1990-1991. No
additional premium was paid to warrant coverage of the other properties in the
resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake
shock endorsement to the two swimming pools in the policy schedule did not
expand the earthquake shock coverage to all of petitioners properties. As per its
agreement with petitioner, respondent copied its policy from the AHAC-AIU policy
provided by petitioner. Although the first five policies contained the said
qualification in their riders title, in the last two policies, this qualification in the
title was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such deletion
was a mere inadvertence. This inadvertence did not make the policy incomplete,
nor did it broaden the scope of the endorsement whose descriptive title was
merely enumerated. Any ambiguity in the policy can be easily resolved by looking
at the other provisions, specially the enumeration of the items insured, where
only the two swimming pools were noted as covered for earthquake shock
damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through
1988, the phrase "Item 5 P393,000.00 on the two swimming pools only
(against the peril of earthquake shock only)" meant that only the swimming pools
were insured for earthquake damage. The same phrase is used in toto in the
policies from 1989 to 1990, the only difference being the designation of the two
swimming pools as "Item 3."
Fifth, in order for the earthquake shock endorsement to be effective, premiums
must be paid for all the properties covered. In all of its seven insurance policies,
petitioner only paid P393.00 as premium for coverage of the swimming pools
against earthquake shock. No other premium was paid for earthquake shock
coverage on the other properties. In addition, the use of the qualifier "ANY"
instead of "ALL" to describe the property covered was done deliberately to enable
the parties to specify the properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its
properties must be included in the earthquake shock coverage. Petitioners own
evidence shows that it only required respondent to follow the exact provisions of
its previous policy from AHAC-AIU. Respondent complied with this requirement.
Respondents only deviation from the agreement was when it modified the
provisions regarding the replacement cost endorsement. With regard to the issue
under litigation, the riders of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as
would estop it from maintaining that only the two swimming pools were covered
for earthquake shock. The adjusters letter notifying petitioner to present certain
documents for its building claims and repair costs was given to petitioner before
the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase
"Item 5 Only" after the descriptive name or title of the Earthquake Shock
Endorsement. However, the words of the policy reflect the parties clear intention
to limit earthquake shock coverage to the two swimming pools.

Before petitioner accepted the policy, it had the opportunity to read its conditions.
It did not object to any deficiency nor did it institute any action to reform the
policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and
litigation expenses. Since respondent was willing and able to pay for the damage
caused on the two swimming pools, it cannot be considered to be in default, and
therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of
the case at bar.
First, in the designation of location of risk, only the two swimming pools were
specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of
earthquake shock only)20
Second, under the breakdown for premium payments,21 it was stated that:
PREMIUM RECAPITULATION
ITEM NOS.

AMOUNT

RATES

PREMIUM

xxx
3
393,000.00
0.100%-E/S
393.0022]
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or through or
in consequence, directly or indirectly of any of the following occurrences,
namely:-(a) Earthquake, volcanic eruption or other convulsion of nature. 23
Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement
(To Include the Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
ANNUAL
PAYMENT
AGREEMENT
ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS
INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT
OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO
CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum
of P. . . . . . . . . . . . . . . . . additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this Policy to the
contrary, that this insurance covers loss or damage (including loss or damage by
fire) to any of the property insured by this Policy occasioned by or through or in
consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far
as they may be hereby expressly varied) and that any reference therein to loss or
damage by fire should be deemed to apply also to loss or damage occasioned by
or through or in consequence of Earthquake.24

Petitioner contends that pursuant to this rider, no qualifications were placed on

the scope of the earthquake shock coverage. Thus, the policy extended
earthquake shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and
interpreted in consonance with each other.25 All its parts are reflective of the true
intent of the parties. The policy cannot be construed piecemeal. Certain
stipulations cannot be segregated and then made to control; neither do particular
words or phrases necessarily determine its character. Petitioner cannot focus on
the earthquake shock endorsement to the exclusion of the other provisions. All
the provisions and riders, taken and interpreted together, indubitably show the
intention of the parties to extend earthquake shock coverage to the two
swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear
intent of the parties to extend earthquake shock coverage only to the two
swimming pools. Section 2(1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or
contingent event. Thus, an insurance contract exists where the following
elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a
premium.26 (Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to
indemnify the insured against a specified peril. 27 In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk attaches. 28 In
the subject policy, no premium payments were made with regard to earthquake
shock coverage, except on the two swimming pools. There is no mention of any
premium payable for the other resort properties with regard to earthquake shock.
This is consistent with the history of petitioners previous insurance policies from
AHAC-AIU. As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance
policy during the period from March 4, 1984 to March 4, 1985 the coverage on
earthquake shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the
warranty, there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to
the two swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26

Q. For the period from March 14, 1988 up to March 14, 1989, did you personally
arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are
concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of
course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what
insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March
14, 1989, did you give written instruction to Forte Insurance Agency advising it
that the earthquake shock coverage must extend to all properties of Agoo Playa
Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral
instruction to that effect of extending the coverage on (sic) the other properties of
the company.
Q. And that instruction, according to you, was very important because in April
1987 there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the
[future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the
provisions with respect to your instructions that all properties must be covered
again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance
Company marked Exhibit "G"?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I
was contented already that the previous limitation pertaining to the two
swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement on
Long Term Policies"29 to the insurance policy as proof of the intent of the parties to
extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or
endorsements to which the policy is subject, as required under Section 50,
paragraph 2 of the Insurance Code.

We also hold that no significance can be placed on the deletion of the

qualification limiting the coverage to the two swimming pools. The earthquake
shock endorsement cannot stand alone. As explained by the testimony of Juan
Baranda III, underwriter for AHAC-AIU:
DIRECT
EXAMINATION
OF
JUAN
BARANDA
III30
TSN,
August
11,
1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been
previously marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you
have occasion to review of (sic) these six (6) policies issued by your company [in
favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is,
on the basis on (sic) the wordings indicated in Exhibits C to H respectively what
was the extent of the coverage [against] the peril of earthquake shock as
provided for in each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as
provided for in each of the six (6) policies extend to the two (2) swimming pools
only?
WITNESS:
Because it says here in the policies, in the enumeration "Earthquake Shock
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement)," sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis.
For swimming pools we do cover earthquake shock. For building we covered it for
full earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for
other things other than swimming pool? You are covering building? They are
covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or
another we can issue earthquake shock solely but that the moment I see this, the

thing that comes to my mind is either insuring a swimming pool, foundations,

they are normally affected by earthquake but not by fire, sir.
DIRECT
EXAMINATION
OF
JUAN
BARANDA
III
TSN,
August
11,
1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C,
D, E and F inclusive [remained] its coverage against earthquake shock to two (2)
swimming pools only but that Exhibits G and H respectively entend the coverage
against earthquake shock to all the properties indicated in the respective
schedules attached to said policies, what can you say about that testimony of
plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the
other half of it. I assure you that this one covers the two swimming pools with
respect to earthquake shock endorsement. Based on it, if we are going to look at
the premium there has been no change with respect to the rates. Everytime (sic)
there is a renewal if the intention of the insurer was to include the earthquake
shock, I think there is a substantial increase in the premium. We are not only
going to consider the two (2) swimming pools of the other as stated in the policy.
As I see, there is no increase in the amount of the premium. I must say that the
coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are
going to do some computation based on the rates you will arrive at the same
premiums, your Honor.
CROSS-EXAMINATION
OF
JUAN
BARANDA
III
TSN,
September
7,
1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase "earthquake shock to the two (2) swimming pools only"
was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you
have pointed to during your direct-examination, the phrase "Item no. 5 only"
meaning to (sic) the two (2) swimming pools was deleted from the policies issued
by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of
the qualifying phrase for the policies?

WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent.
Being a company underwriter, we do not cover. . it was inadvertent because of
the previous policies that we have issued with no specific attachments, premium
rates and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous
and subsequent acts to the issuance of the insurance policy falsely gave the
petitioner assurance that the coverage of the earthquake shock endorsement
included all its properties in the resort. Respondent only insured the properties as
intended by the petitioner. Petitioners own witness testified to this
agreement, viz:
CROSS
EXAMINATION
OF
LEOPOLDO
MANTOHAC
TSN,
January
14,
1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly
did you tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of procuring the
policy from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same
provisions as this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit "H" of course?
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that
they will be charging will be limited to this one. I (sic) can even be lesser.
CROSS
EXAMINATION
OF
LEOPOLDO
MANTOHAC
TSN,
January
14,
1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
provisions and scope of coverage of Exhibits "I" and "H" sometime in the third
week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the
policy wordings as well as scope of coverage of Exhibits "I" and "H" respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured
already that the policy wordings and rates were copied from the insurance policy I
sent them but it was only when this case erupted that we discovered some
discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit "I" and those
indicated in Exhibit "H" respectively?
A. With regard to the wordings I did not notice any difference because it was
exactly the same P393,000.00 on the two (2) swimming pools only against the
peril of earthquake shock which I understood before that this provision will have
to be placed here because this particular provision under the peril of earthquake

shock only is requested because this is an insurance policy and therefore cannot
be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas
were not proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent
claims adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the
representative of Bayne Adjusters and Surveyors, Inc., respondent never meant to
lead petitioner to believe that the endorsement for earthquake shock covered
properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors,
Inc.)
TSN,
January
26,
1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the
extent of coverage of the policy issued by Philippine Charter Insurance
Corporation?
A. I remember that when I returned to the office after the inspection, I got a
photocopy of the insurance coverage policy and it was indicated under Item 3
specifically that the coverage is only for earthquake shock. Then, I remember I
had a talk with Atty. Umlas (sic), and I relayed to him what I had found out in the
policy and he confirmed to me indeed only Item 3 which were the two swimming
pools have coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that
except for the swimming pools all affected items have no coverage for
earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the
policy I found out that under Item 3 it was specific on the wordings that on the
two swimming pools only, then enclosed in parenthesis (against the peril[s] of
earthquake shock only), and secondly, when I examined the summary of premium
payment only Item 3 which refers to the swimming pools have a computation for
premium payment for earthquake shock and all the other items have no
computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion
which should be liberally construed in favor of the insured and strictly against the
insurer company which usually prepares it. 31 A contract of adhesion is one
wherein a party, usually a corporation, prepares the stipulations in the contract,
while the other party merely affixes his signature or his "adhesion" thereto.
Through the years, the courts have held that in these type of contracts, the
parties do not bargain on equal footing, the weaker party's participation being
reduced to the alternative to take it or leave it. Thus, these contracts are viewed
as traps for the weaker party whom the courts of justice must
protect.32Consequently, any ambiguity therein is resolved against the insurer, or
construed liberally in favor of the insured.33

The case law will show that this Court will only rule out blind adherence to terms
where facts and circumstances will show that they are basically one-sided. 34 Thus,
we have called on lower courts to remain careful in scrutinizing the factual
circumstances behind each case to determine the efficacy of the claims of
contending parties. In Development Bank of the Philippines v. National
Merchandising Corporation, et al.,35 the parties, who were acute businessmen of
experience, were presumed to have assented to the assailed documents with full
knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar.
Petitioner cannot claim it did not know the provisions of the policy. From the
inception of the policy, petitioner had required the respondent to
copyverbatim the provisions and terms of its latest insurance policy from AHACAIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in securing the
insurance policy of petitioner, is reflective of petitioners knowledge,viz:
DIRECT
EXAMINATION
OF
LEOPOLDO
MANTOHAC 36
TSN,
September
23,
1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for
those facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine
Charter Insurance Corporation as long as it will follow the same or exact
provisions of the previous insurance policy we had with American Home
Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you
wanted in the American Home Insurance policy are to be incorporated in the PCIC
policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied from the AIU
Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU
Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that
there was variance in some terms, specifically in the replacement cost
endorsement, but the principal provisions of the policy remained essentially
similar to AHAC-AIUs policy. Consequently, we cannot apply the "fine print" or
"contract of adhesion" rule in this case as the parties intent to limit the coverage
of the policy to the two swimming pools only is not ambiguous. 37
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.
SO ORDERED.

G.R. No. 156956

October 9, 2006

REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His Capacity as

Insurance
Commissioner,petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.
DECISION
PANGANIBAN, CJ.:
The securities required by the Insurance Code to be deposited with the Insurance
Commissioner are intended to answer for the claims of all policy holders in the
event that the depositing insurance company becomes insolvent or otherwise
unable to satisfy their claims. The security deposit must be ratably distributed
among all the insured who are entitled to their respective shares; it cannot be
garnished or levied upon by a single claimant, to the detriment of the others.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, seeking to
reverse the January 16, 2003 Order2 of the Regional Court (RTC) of Quezon City
(Branch 221) in Civil Case No. Q-97-30412. The RTC found Insurance
Commissioner Eduardo T. Malinis guilty of indirect contempt for refusing to
comply with the December 18, 2002 Resolution 3 of the lower court. The January
16, 2003 Order states in full:
"On January 8, 2003, [respondent] filed a Motion to Cite Commissioner Eduardo T.
Malinis of the Office of the Insurance Commission in Contempt of Court because
of his failure and refusal to obey the lawful order of this court embodied in a
Resolution dated December 18, 2002 directing him to allow the withdrawal of the
security deposit of Capital Insurance and Surety Co. (CISCO) in the amount
of P11,835,375.50 to be paid to Sheriff Manuel Paguyo in the satisfaction of the
Notice of Garnishment pursuant to a Decision of this Court which has become
final and executory.
"During the hearing of the Motion set last January 10, 2003, Commissioner Malinis
or his counsel or his duly authorized representative failed to appear despite
notice in utter disregard of the order of this Court. However, Commissioner
Malinis filed on January 15, 2003 a written Comment reiterating the same grounds
already passed upon and rejected by this Court. This Court finds no lawful
justification or excuse for Commissioner Malinis' refusal to implement the lawful
orders of this Court.
"Wherefore, premises considered and after due hearing, Commissioner Eduardo T.
Malinis is hereby declared guilty of Indirect Contempt of Court pursuant to Section
3 [of] Rule 71 of the 1997 Rules of Civil Procedure for willfully disobeying and
refusing to implement and obey a lawful order of this Court."4
The Facts
On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412,
finding the defendants (Vilfran Liner, Inc., Hilaria Villegas and Maura Villegas)
jointly and severally liable to pay Del Monte Motors, Inc.,P11,835,375.50
representing the balance of Vilfran Liner's service contracts with respondent. The
trial court further ordered the execution of the Decision against the counterbond

posted by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and
Surety Co., Inc. (CISCO).
On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent,
claiming that the latter had no record or document regarding the alleged issuance
of the counterbond; thus, the bond was not valid and enforceable.
On June 13, 2002, the RTC granted the Motion for Execution and issued the
corresponding Writ. Armed with this Writ, Sheriff Manuel S. Paguyo proceeded to
levy on the properties of CISCO. He also issued a Notice of Garnishment on
several depository banks of the insurance company. Moreover, he served a similar
notice on the Insurance Commission, so as to enforce the Writ on the security
deposit filed by CISCO with the Commission in accordance with Section 203 of the
Insurance Code.
On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled
that the Notice of Garnishment served by Sheriff Paguyo on the insurance
commission was valid. The trial court added that the letter and spirit of the law
made the security deposit answerable for contractual obligations incurred by
CISCO under the insurance contracts the latter had entered into. The RTC resolved
thus:
"Furthermore, the Commissioner of the Office of the Insurance Commission is
hereby ordered to comply with its obligations under the Insurance Code by
upholding the integrity and efficacy of bonds validly issued by duly accredited
Bonding and Insurance Companies; and to safeguard the public interest by
insuring the faithful performance to enforce contractual obligations under existing
bonds. Accordingly said office is ordered to withdraw from the security deposit of
Capital Insurance & Surety Company, Inc. the amount ofP11,835.50 to be paid to
Sheriff Manuel S. Paguyo in satisfaction of the Notice of Garnishment served on
August 16, 2002."5
On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo
T. Malinis in contempt of court for his refusal to obey the December 18, 2002
Resolution of the trial court.
Ruling of the Trial Court
The RTC held Insurance Commissioner Malinis in contempt for his refusal to
implement its Order. It explained that the commissioner had no legal justification
for his refusal to allow the withdrawal of CISCO's security deposit.
Hence, this Petition.6
Issues
Petitioner raises this sole issue for the Court's consideration:
"Whether or not the security deposit held by the Insurance Commissioner
pursuant to Section 203 of the Insurance Code may be levied or garnished in
favor of only one insured."7
The Court's Ruling
The Petition is meritorious.
Preliminary
Issue:
Propriety of Review
Before discussing the principal issue, the Court will first dispose of the question of
mootness.

Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the
treasurer of the Philippines a letter dated March 26, 2003, stating that the former
had no objection to the release of the security deposit to Del Monte Motors.
Portions of the fund were consequently released to respondent in July, October,
and December 2003. Thus, the issue arises: whether these circumstances render
the case moot.
Petitioner, however, contends that the partial releases should not be construed as
an abandonment of its stand that security deposits under Section 203 of the
Insurance Code are exempt from levy and garnishment. The Republic claims that
the releases were made pursuant to the commissioner's power of control over the
fund, not to the lower court's Order of garnishment. Petitioner further invokes the
jurisdiction of this Court to put to rest the principal issue of whether security
deposits made with the Insurance Commission may be levied and garnished.
The issue is not totally moot. To stress, only a portion of respondent's claim was
satisfied, and the Insurance Commission has required CISCO to replenish the
latter's security deposit. Respondent, therefore, may one day decide to further
garnish the security deposit, once replenished. Moreover, after the questioned
Order of the lower court was issued, similar claims on the security deposits of
various insurance companies have been made before the Insurance Commission.
To set aside the resolution of the issue will only postpone a task that is certain to
crop up in the future.
Besides, the business of insurance is imbued with public interest. It is subject to
regulation by the State, with respect not only to the relations between the insurer
and the insured, but also to the internal affairs of insurance companies. 8 As this
case is undeniably endowed with public interest and involves a matter of public
policy, this Court shall not shirk from its duty to educate the bench and the bar by
formulating guiding and controlling principles, precepts, doctrines and rules. 9
Principal
Issue:
Exemption of Security Deposit from Levy or Garnishment
Section 203 of the Insurance Code provides as follows:
"Sec. 203. Every domestic insurance company shall, to the extent of an amount
equal in value to twenty-five per centum of the minimum paid-up capital required
under section one hundred eighty-eight, invest its funds only in securities,
satisfactory to the Commissioner, consisting of bonds or other evidences of debt
of the Government of the Philippines or its political subdivisions or
instrumentalities, or of government-owned or controlled corporations and entities,
including the Central Bank of the Philippines: Provided, That such investments
shall at all times be maintained free from any lien or encumbrance; and Provided,
further, That such securities shall be deposited with and held by the
Commissioner for the faithful performance by the depositing insurer of all its
obligations under its insurance contracts. The provisions of section one hundred
ninety-two shall, so far as practicable, apply to the securities deposited under this
section.
"Except as otherwise provided in this Code, no judgment creditor or other
claimant shall have the right to levy upon any of the securities of the insurer held

on deposit pursuant to the requirement of the Commissioner." (Emphasis

supplied)
Respondent notes that Section 203 does not provide for an absolute prohibition
on the levy and garnishment of the security deposit. It contends that the law
requires the deposit, precisely to ensure faithful performance of all the obligations
of the depositing insurer under the latter's various insurance contracts. Hence,
respondent claims that the security deposit should be answerable for the
counterbond issued by CISCO.
The Court is not convinced. As worded, the law expressly and clearly states that
the security deposit shall be (1) answerable for all the obligations of the
depositing insurer under its insurance contracts; (2) at all times free from any
liens or encumbrance; and (3) exempt from levy by any claimant.
To be sure, CISCO, though presently under conservatorship, has valid outstanding
policies. Its policy holders have a right under the law to be equally protected by
its security deposit. To allow the garnishment of that deposit would impair the
fund by decreasing it to less than the percentage of paid-up capital that the law
requires to be maintained. Further, this move would create, in favor of
respondent, a preference of credit over the other policy holders and beneficiaries.
Our Insurance Code is patterned after that of California. 10 Thus, the ruling of the
state's Supreme Court on a similar concept as that of the security deposit is
instructive. Engwicht v. Pacific States Life Assurance Co.11 held that the money
required to be deposited by a mutual assessment insurance company with the
state treasurer was "a trust fund to be ratably distributed amongst all the
claimants entitled to share in it. Such a distribution cannot be had except in an
action in the nature of a creditors' bill, upon the hearing of which, and with all the
parties interested in the fund before it, the court may make equitable distribution
of the fund, and appoint a receiver to carry that distribution into effect." 12
Basic is the statutory construction rule that provisions of a statute should be
construed in accordance with the purpose for which it was enacted. 13 That is, the
securities are held as a contingency fund to answer for the claims against the
insurance company by all its policy holders and their beneficiaries. This step is
taken in the event that the company becomes insolvent or otherwise unable to
satisfy the claims against it. Thus, a single claimant may not lay stake on the
securities to the exclusion of all others. The other parties may have their own
claims against the insurance company under other insurance contracts it has
entered into.
Respondent's Inchoate Right
The right to lay claim on the fund is dependent on the solvency of the insurer and
is subject to all other obligations of the company arising from its insurance
contracts. Thus, respondent's interest is merely inchoate. Being a mere
expectancy, it has no attribute of property. At this time, it is nonexistent and may
never exist.14 Hence, it would be premature to make the security deposit
answerable for CISCO's present obligation to Del Monte Motors.
Moreover, since insolvency proceedings against CISCO have yet to be conducted,
it would be impossible to establish at this time which claimants are entitled to the
security deposit and in what pro-rated amounts. Only after all other claimants

under subsisting policies issued by CISCO have been heard can respondent's
share be determined.
Powers of the Commissioner
The Insurance Code has vested the Office of the Insurance Commission with
both regulatory and adjudicatoryauthority over insurance matters.15
The general regulatory authority of the insurance commissioner is described in
Section 414 of the Code as follows:
"Sec. 414. The Insurance Commissioner shall have the duty to see that all laws
relating to insurance, insurance companies and other insurance matters, mutual
benefit associations, and trusts for charitable uses are faithfully executed and to
perform the duties imposed upon him by this Code, and shall, notwithstanding
any existing laws to the contrary, have sole and exclusive authority to regulate
the issuance and sale of variable contracts as defined in section two hundred
thirty-two and to provide for the licensing of persons selling such contracts, and
to issue such reasonable rules and regulations governing the same.
"The Commissioner may issue such rulings, instructions, circulars, orders and
decisions as he may deem necessary to secure the enforcement of the provisions
of this Code, subject to the approval of the Secretary of Finance. Except as
otherwise specified, decisions made by the Commissioner shall be appealable to
the Secretary of Finance." (Emphasis supplied)
Pursuant to these regulatory powers, the commissioner is authorized to (1) issue
(or to refuse to issue) certificates of authority to persons or entities desiring to
engage in insurance business in the Philippines; 16 (2) revoke or suspend these
certificates of authority upon finding grounds for the revocation or
suspension;17 (3) impose upon insurance companies, their directors and/or officers
and/or agents appropriate penalties -- fines, suspension or removal from office -for failing to comply with the Code or with any of the commissioner's orders,
instructions, regulations or rulings, or for otherwise conducting business in an
unsafe or unsound manner.18
Included in the above regulatory responsibilities is the duty to hold the security
deposits under Sections 19119 and 203 of the Code, for the benefit and security of
all policy holders. In relation to these provisions, Section 192 of the Insurance
Code states:
"Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for
the benefit and security of all the policyholders of the company depositing the
same, but shall as long as the company is solvent, permit the company to collect
the interest or dividends on the securities so deposited, and, from time to
time, with his assent, to withdraw any of such securities, upon depositing with
said Commissioner other like securities, the market value of which shall be equal
to the market value of such as may be withdrawn. In the event of any company
ceasing to do business in the Philippines the securities deposited as aforesaid
shall be returned upon the company's making application therefor and proving to
the satisfaction of the Commissioner that it has no further liability under any of its
policies in the Philippines." (Emphasis supplied)
Undeniably, the insurance commissioner has been given a wide latitude of
discretion to regulate the insurance industry so as to protect the insuring public.

The law specifically confers custody over the securities upon the commissioner,
with whom these investments are required to be deposited. An implied trust 20 is
created by the law for the benefit of all claimants under subsisting insurance
contracts issued by the insurance company. 21
As the officer vested with custody of the security deposit, the insurance
commissioner is in the best position to determine if and when it may be released
without prejudicing the rights of other policy holders. Before allowing the
withdrawal or the release of the deposit, the commissioner must be satisfied that
the conditions contemplated by the law are met and all policy holders protected.
Commissioner's
Actions
Entitled to Great Respect
In this case, Commissioner Malinis refused to release the security deposit of
CISCO. Believing that the funds were exempt from execution as provided by law,
he sought to protect other policy holders. His interpretation of the provisions of
the law carries great weight and consideration, 22 as he is the head of a specialized
body tasked with the regulation of insurance matters and primarily charged with
the implementation of the Insurance Code.
The emergence of the multifarious needs of modern society necessitates the
establishment of diverse administrative agencies. In addressing these needs, the
administrative agencies charged with applying and implementing particular
statutes have accumulated experience and specialized capabilities. Thus, in a
long line of cases, this Court has recognized that their construction of a statute is
entitled to great respect and should ordinarily be controlling, unless clearly shown
to be in sharp conflict with the governing statute or the Constitution and other
laws.23
Clearly, then, the trial court erred in issuing the Writ of Garnishment against the
security deposit of CISCO. It follows that without the issuance of a valid order, the
insurance commissioner could not have been in contempt of court. 24
WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No
costs.
SO ORDERED.

G.R. No. 147839

June 8, 2006
GAISANO
CAGAYAN,
INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision 1 dated
October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set
aside the Decision dated August 31, 1998 of the Regional Trial Court, Branch 138,
Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for
damages of Insurance Company of North America (respondent) against Gaisano

Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which
denied petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent
fire insurance policies with book debt endorsements. The insurance policies
provide for coverage on "book debts in connection with ready-made clothing
materials which have been sold or delivered to various customers and dealers of
the Insured anywhere in the Philippines."2 The policies defined book debts as the
"unpaid account still appearing in the Book of Account of the Insured 45 days
after the time of the loss covered under this Policy." 3 The policies also provide for
the following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from the
date of the covering invoice or actual delivery of the merchandise whichever shall
first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12)
days after the close of every calendar month all amount shown in their books of
accounts as unpaid and thus become receivable item from their customers and
dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February
25, 1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by
petitioner, was consumed by fire. Included in the items lost or destroyed in the
fire were stocks of ready-made clothing materials sold and delivered by IMC and
LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner.
It alleges that IMC and LSPI filed with respondent their claims under their
respective fire insurance policies with book debt endorsements; that as of
February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of
ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue
thereof, respondent was subrogated to their rights against petitioner; that
respondent made several demands for payment upon petitioner but these went
unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it
could not be held liable because the property covered by the insurance policies
were destroyed due to fortuities event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was no breach of contract committed
by it since the loss was due to fire which it could not prevent or foresee; that IMC
and LSPI never communicated to it that they insured their properties; that it
never consented to paying the claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the fire
was not attributable to the negligence of the petitioner; that it has not been
established that petitioner is the debtor of IMC and LSPI; that since the sales
invoices state that "it is further agreed that merely for purpose of securing the
payment of purchase price, the above-described merchandise remains the
property of the vendor until the purchase price is fully paid", IMC and LSPI
retained ownership of the delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA. 9 On October 11, 2000, the CA
rendered its decision setting aside the decision of the RTC. The dispositive portion
of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and
SET ASIDE and a new one is entered ordering defendant-appellee Gaisano
Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiffappellant to the insured Inter Capitol Marketing Corporation, plus legal interest
from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiffappellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time of
demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements
of the nature, quantity and cost of the thing sold; that loss of the goods in the fire
must be borne by petitioner since the proviso contained in the sales invoices is an
exception under Article 1504 (1) of the Civil Code, to the general rule that if the
thing is lost by a fortuitous event, the risk is borne by the owner of the thing at
the time the loss under the principle of res perit domino; that petitioner's
obligation to IMC and LSPI is not the delivery of the lost goods but the payment of
its unpaid account and as such the obligation to pay is not extinguished, even if
the fire is considered a fortuitous event; that by subrogation, the insurer has the
right to go against petitioner; that, being a fire insurance with book debt
endorsements, what was insured was the vendor's interest as a creditor. 11
Petitioner filed a motion for reconsideration 12 but it was denied by the CA in its
Resolution dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE
INSTANT CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT. 14
Anent the first error, petitioner contends that the insurance in the present case
cannot be deemed to be over credit since an insurance "on credit" belies not only

the nature of fire insurance but the express terms of the policies; that it was not
credit that was insured since respondent paid on the occasion of the loss of the
insured goods to fire and not because of the non-payment by petitioner of any
obligation; that, even if the insurance is deemed as one over credit, there was no
loss as the accounts were not yet due since no prior demands were made by IMC
and LSPI against petitioner for payment of the debt and such demands came from
respondent only after it had already paid IMC and LSPI under the fire insurance
policies.15
As to the second error, petitioner avers that despite delivery of the goods,
petitioner-buyer IMC and LSPI assumed the risk of loss when they secured fire
insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in
favor of respondent as no valid insurance could be maintained thereon by IMC
and LSPI since all risk had transferred to petitioner upon delivery of the goods;
that petitioner was not privy to the insurance contract or the payment between
respondent and its insured nor was its consent or approval ever secured; that this
lack of privity forecloses any real interest on the part of respondent in the
obligation to pay, limiting its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made
clothing materials was transferred upon delivery to petitioner, IMC and LSPI have
insurable interest over said goods as creditors who stand to suffer direct
pecuniary loss from its destruction by fire; that petitioner is liable for loss of the
ready-made clothing materials since it failed to overcome the presumption of
liability under Article 126516 of the Civil Code; that the fire was caused through
petitioner's negligence in failing to provide stringent measures of caution, care
and maintenance on its property because electric wires do not usually short
circuit unless there are defects in their installation or when there is lack of proper
maintenance and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be liable
to respondent for contracted lawyer's fees, litigation expenses and cost of suit. 17
As a general rule, in petitions for review, the jurisdiction of this Court in cases
brought before it from the CA is limited to reviewing questions of law which
involves no examination of the probative value of the evidence presented by the
litigants or any of them.18 The Supreme Court is not a trier of facts; it is not its
function to analyze or weigh evidence all over again. 19 Accordingly, findings of
fact of the appellate court are generally conclusive on the Supreme Court. 20
Nevertheless, jurisprudence has recognized several exceptions in which factual
issues may be resolved by this Court, such as: (1) when the findings are grounded
entirely on speculation, surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5)
when the findings of facts are conflicting; (6) when in making its findings the CA
went beyond the issues of the case, or its findings are contrary to the admissions
of both the appellant and the appellee; (7) when the findings are contrary to the
trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as

well as in the petitioner's main and reply briefs are not disputed by the
respondent; (10) when the findings of fact are premised on the supposed absence
of evidence and contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion. 21 Exceptions (4), (5), (7),
and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner
claims that the CA erred in construing a fire insurance policy on book debts as
one covering the unpaid accounts of IMC and LSPI since such insurance applies to
loss of the ready-made clothing materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily
understood, there is no room for construction. 22 In this case, the questioned
insurance policies provide coverage for "book debts in connection with readymade clothing materials which have been sold or delivered to various customers
and dealers of the Insured anywhere in the Philippines." 23 ; and defined book
debts as the "unpaid account still appearing in the Book of Account of the Insured
45 days after the time of the loss covered under this Policy." 24 Nowhere is it
provided in the questioned insurance policies that the subject of the insurance is
the goods sold and delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms
are to be understood literally just as they appear on the face of the
contract.25 Thus, what were insured against were the accounts of IMC and LSPI
with petitioner which remained unpaid 45 days after the loss through fire, and not
the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further
agreed that merely for purpose of securing the payment of the purchase price the
above described merchandise remains the property of the vendor until the
purchase price thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery
has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been
retained by the seller merely to secure performance by the buyer of his
obligations under the contract, the goods are at the buyer's risk from the time of
such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its
debt, the risk of loss is borne by the buyer. 27 Accordingly, petitioner bears the risk
of loss of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods. Unlike
the civil law concept of res perit domino, where ownership is the basis for
consideration of who bears the risk of loss, in property insurance, one's interest is
not determined by concept of title, but whether insured has substantial economic
interest in the property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the
insured." Parenthetically, under Section 14 of the same Code, an insurable
interest in property may consist in: (a) an existing interest; (b) an inchoate
interest founded on existing interest; or (c) an expectancy, coupled with an
existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance,
and neither the title nor a beneficial interest is requisite to the existence of such
an interest, it is sufficient that the insured is so situated with reference to the
property that he would be liable to loss should it be injured or destroyed by the
peril against which it is insured. 29 Anyone has an insurable interest in property
who derives a benefit from its existence or would suffer loss from its
destruction.30Indeed, a vendor or seller retains an insurable interest in the
property sold so long as he has any interest therein, in other words, so long as he
would suffer by its destruction, as where he has a vendor's lien. 31 In this case, the
insurable interest of IMC and LSPI pertain to the unpaid accounts appearing in
their Books of Account 45 days after the time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event
under Article 117432 of the Civil Code is misplaced. As held earlier, petitioner
bears the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of
goods by fire but for petitioner's accounts with IMC and LSPI that remained unpaid
45 days after the fire. Accordingly, petitioner's obligation is for the payment of
money. As correctly stated by the CA, where the obligation consists in the
payment of money, the failure of the debtor to make the payment even by reason
of a fortuitous event shall not relieve him of his liability. 33 The rationale for this is
that the rule that an obligor should be held exempt from liability when the loss
occurs thru a fortuitous event only holds true when the obligation consists in the
delivery of a determinate thing and there is no stipulation holding him liable even
in case of fortuitous event. It does not apply when the obligation is pecuniary in
nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind does not extinguish the
obligation." If the obligation is generic in the sense that the object thereof is
designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class, the loss or destruction of
anything of the same kind even without the debtor's fault and before he has

incurred in delay will not have the effect of extinguishing the obligation. 35This rule
is based on the principle that the genus of a thing can never perish. Genus
nunquan perit.36 An obligation to pay money is generic; therefore, it is not
excused by fortuitous loss of any specific property of the debtor. 37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established
that petitioner has outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits
"C" to "C-22"38 show that petitioner has an outstanding account with IMC in the
amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment
to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of
respondent upon receipt of the insurance proceeds. All these documents have
been properly identified, presented and marked as exhibits in court. The
subrogation receipt, by itself, is sufficient to establish not only the relationship of
respondent as insurer and IMC as the insured, but also the amount paid to settle
the insurance claim. The right of subrogation accrues simply upon payment by
the insurance company of the insurance claim. 41Respondent's action against
petitioner is squarely sanctioned by Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who
has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of
action. No evidentiary weight can be given to Exhibit "F Levi Strauss", 42 a letter
dated April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr.,
since it is not an admission of petitioner's unpaid account with LSPI. It only
confirms the loss of Levi's products in the amount of P535,613.00 in the fire that
razed petitioner's building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no
subrogation receipt was offered in evidence. Thus, there is no evidence that
respondent has been subrogated to any right which LSPI may have against
petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's
case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October
11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R.
CV No. 61848 are AFFIRMED with the MODIFICATIONthat the order to pay the
amount of P535,613.00 to respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 168115
VICENTE ONG LIM SING, JR.,
Petitioner,

Present:

- versus -

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and
NACHURA, JJ.
Promulgated:

FEB LEASING & FINANCE CORPORATION,

Respondent.

June 8, 2007

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:

This
is
a
petition
for
review
on
certiorari
assailing
the
Decision[1] dated March 15, 2005 and the Resolution[2] dated May 23, 2005 of the
Court of Appeals (CA) in CA-G.R. CV No. 77498.
The facts are as follows:
On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into
a lease[3] of equipment and motor vehicles with JVL Food Products (JVL). On the
same date, Vicente Ong Lim Sing, Jr. (Lim) executed an Individual Guaranty
Agreement[4] with FEB to guarantee the prompt and faithful performance of the
terms and conditions of the aforesaid lease agreement. Corresponding Lease
Schedules with Delivery and Acceptance Certificates [5] over the equipment and
motor vehicles formed part of the agreement. Under the contract, JVL was
obliged to pay FEB an aggregate gross monthly rental of One Hundred Seventy
Thousand Four Hundred Ninety-Four Pesos (P170,494.00).
JVL defaulted in the payment of the monthly rentals. As of July 31, 2000,
the amount in arrears, including penalty charges and insurance premiums,
amounted to Three Million Four Hundred Fourteen Thousand Four Hundred SixtyEight and 75/100 Pesos (P3,414,468.75). On August 23, 2000, FEB sent a letter to
JVL demanding payment of the said amount. However, JVL failed to pay. [6]
On December 6, 2000, FEB filed a Complaint[7] with the Regional Trial Court of
Manila, docketed as Civil Case No. 00-99451, for sum of money, damages, and
replevin against JVL, Lim, and John Doe.

In the Amended Answer,[8] JVL and Lim admitted the existence of the lease
agreement but asserted that it is in reality a sale of equipment on installment
basis, with FEB acting as the financier. JVL and Lim claimed that this intention
was apparent from the fact that they were made to believe that when full
payment was effected, a Deed of Sale will be executed by FEB as vendor in favor
of JVL and Lim as vendees.[9] FEB purportedly assured them that documenting the
transaction as a lease agreement is just an industry practice and that the proper
documentation would be effected as soon as full payment for every item was
made. They also contended that the lease agreement is a contract of adhesion
and should, therefore, be construed against the party who prepared it,i.e., FEB.
In upholding JVL and Lims stance, the trial court stressed the contradictory terms
it found in the lease agreement. The pertinent portions of the Decision
dated November 22, 2002 read:
A profound scrutiny of the provisions of the contract which is a contract of
adhesion at once exposed the use of several contradictory terms. To name a few,
in Section 9 of the said contract disclaiming warranty, it is stated that the lessor
is not the manufacturer nor the latters agent and therefore does not guarantee
any feature or aspect of the object of the contract as to its merchantability.
Merchantability is a term applied in a contract of sale of goods where conditions
and warranties are made to apply. Article 1547 of the Civil Code provides that
unless a contrary intention appears an implied warranty on the part of the seller
that he has the right to sell and to pass ownership of the object is furnished by
law together with an implied warranty that the thing shall be free from hidden
faults or defects or any charge or encumbrance not known to the buyer.
In an adhesion contract which is drafted and printed in advance and
parties are not given a real arms length opportunity to transact, the Courts treat
this kind of contract strictly against their architects for the reason that the party
entering into this kind of contract has no choice but to accept the terms and
conditions found therein even if he is not in accord therewith and for that matter
may
not
have
understood
all
the
terms
and
stipulations prescribed thereat. Contracts of
this character are
prepared
unilaterally by the stronger party with the best legal talents at its disposal. It is
upon that thought that the Courts are called upon to analyze closely said
contracts so that the weaker party could be fully protected.
Another instance is when the alleged lessee was required to insure the
thing against loss, damage or destruction.
In property insurance against loss or other accidental causes, the assured
must have an insurable interest, 32 Corpus Juris 1059.
xxxx

It has also been held that the test of insurable interest in property is
whether the assured has a right, title or interest therein that he will be benefited
by its preservation and continued existence or suffer a direct pecuniary loss from
its destruction or injury by the peril insured against. If the defendants were to be
regarded as only a lessee, logically the lessor who asserts ownership will be the
one directly benefited or injured and therefore the lessee is not supposed to be
the assured as he has no insurable interest.
There is also an observation from the records that the actual value of each
object of the contract would be the result after computing the monthly rentals by
multiplying the said rentals by the number of months specified when the rentals
ought to be paid.

to pay the price thereof to the plaintiff together with attorneys fee and the costs
of suit in the sum of Php25,000.00.
SO ORDERED.[11]
On December 27, 2002, FEB filed its Notice of Appeal. [12] Accordingly, on January
17, 2003, the court issued an Order [13]elevating the entire records of the case to
the CA. FEB averred that the trial court erred:
A.
When it ruled that the agreement between the Parties-Litigants is one of
sale of personal properties on installment and not of lease;

Still another observation is the existence in the records of a Deed of

Absolute Sale by and between the same parties, plaintiff and defendants which
was an exhibit of the defendant where the plaintiff sold to the same defendants
one unit 1995 Mitsubishi L-200 STRADA DC PICK UP and in said Deed, The Court
noticed that the same terms as in the alleged lease were used in respect to
warranty, as well as liability in case of loss and other conditions. This action of the
plaintiff unequivocally exhibited their real intention to execute the corresponding
Deed after the defendants have paid in full and as heretofore discussed and for
the sake of emphasis the obscurity in the written contract cannot favor the party
who caused the obscurity.

B.
When it ruled that the applicable law on the case is Article 1484 (of the
Civil Code) and not R.A. No. 8556;

Based on substantive Rules on Interpretation, if the terms are clear and

leave no doubt upon the intention of the contracting parties, the literal meaning
of its stipulations shall control. If the words appear to be contrary to the evident
intention of the parties, their contemporaneous and subsequent acts shall be
principally considered. If the doubts are cast upon the principal object of the
contract in such a way that it cannot be known what may have been the intention
or will of the parties, the contract shall be null and void. [10]

On March 15, 2005, the CA issued its Decision[15] declaring the transaction
between the parties as a financial lease agreement under Republic Act (R.A.) No.
8556.[16] The fallo of the assailed Decision reads:

Thus, the court concluded with the following disposition:

In this case, which is held by this Court as a sale on installment there is no
chattel mortgage on the thing sold, but it appears amongst the Complaints
prayer, that the plaintiff elected to exact fulfillment of the obligation.
For the vehicles returned, the plaintiff can only recover the unpaid balance
of the price because of the previous payments made by the defendants for the
reasonable use of the units, specially so, as it appears, these returned vehicles
were sold at auction and that the plaintiff can apply the proceeds to the balance.
However, with respect to the unreturned units and machineries still in the
possession of the defendants, it is this Courts view and so hold that the
defendants are liable therefore and accordingly are ordered jointly and severally

C.
When it ruled that the Plaintiff-Appellant can no longer recover the
unpaid balance of the price because of the previous payments made by the
defendants for the reasonable use of the units;
D.
When it failed to make a ruling or judgment on the Joint and Solidary
Liability of Vicente Ong Lim, Jr. to the Plaintiff-Appellant. [14]

WHEREFORE, the instant appeal is GRANTED and the assailed Decision

dated 22 November 2002 rendered by the Regional Trial Court of Manila, Branch
49 in Civil Case No. 00-99451 is REVERSED and SET ASIDE, and a new judgment
is hereby ENTEREDordering appellees JVL Food Products and Vicente Ong Lim, Jr.
to solidarily pay appellant FEB Leasing and Finance Corporation the amount
of Three Million Four Hundred Fourteen Thousand Four Hundred Sixty Eight Pesos
and 75/100 (Php3,414,468.75), with interest at the rate of twelve percent
(12%) per annum starting from the date of judicial demand on 06 December
2000, until full payment thereof. Costs against appellees.
SO ORDERED.[17]
Lim filed the instant Petition for Review on Certiorari under Rule 45
contending that:
I

THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED

TO CONSIDER THAT THE UNDATED COMPLAINT WAS FILED BY SATURNINO J.
GALANG, JR., WITHOUT ANY AUTHORITY FROM RESPONDENTS BOARD OF
DIRECTORS AND/OR SECRETARYS CERTIFICATE.
II
THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED
TO STRICTLY APPLY SECTION 7, RULE 18 OF THE 1997 RULES OF CIVIL
PROCEDURE AND NOW ITEM 1, A(8) OF A.M. NO. 03-1-09 SC (JUNE 8, 2004).
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE
APPEAL FOR FAILURE OF THE RESPONDENT TO FILE ON TIME ITS APPELLANTS
BRIEF AND TO SEPARATELY RULE ON THE PETITIONERS MOTION TO DISMISS.
IV
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THE
CONTRACT BETWEEN THE PARTIES IS ONE OF A FINANCIAL LEASE AND NOT OF A
CONTRACT OF SALE.
V
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
PAYMENTS PAID BY THE PETITIONER TO THE RESPONDENT ARE RENTALS AND
NOT INSTALLMENTS PAID FOR THE PURCHASE PRICE OF THE SUBJECT MOTOR
VEHICLES, HEAVY MACHINES AND EQUIPMENT.
VI
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
PREVIOUS CONTRACT OF SALEINVOLVING THE PICK-UP VEHICLE IS OF NO
CONSEQUENCE.
VII
THE
HONORABLE
COURT
OF
APPEALS
FAILED
TO
TAKE
INTO CONSIDERATION THAT THE CONTRACT OF LEASE, A
CONTRACT
OF
ADHESION, CONCEALED THE TRUE INTENTION OF THE PARTIES, WHICH IS A
CONTRACT OFSALE.
VIII

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE

PETITIONER IS A LESSEE WITH INSURABLE INTEREST OVER THE SUBJECT
PERSONAL PROPERTIES.
IX
THE HONORABLE COURT OF APPEALS ERRED IN CONSTRUING THE
INTENTIONS OF THE COURT A QUO IN ITS USAGE OF THE TERM MERCHANTABILITY.
[18]

We affirm the ruling of the appellate court.

First, Lim can no longer question Galangs authority as FEBs authorized
representative in filing the suit against Lim. Galang was the representative of FEB
in the proceedings before the trial court up to the appellate court. Petitioner
never placed in issue the validity of Galangs representation before the trial and
appellate courts. Issues raised for the first time on appeal are barred by
estoppel. Arguments not raised in the original proceedings cannot be considered
on review; otherwise, it would violate basic principles of fair play. [19]
Second, there is no legal basis for Lim to question the authority of the CA to go
beyond the matters agreed upon during the pre-trial conference, or in not
dismissing the appeal for failure of FEB to file its brief on time, or in not ruling
separately on the petitioners motion to dismiss.
Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an
end to litigation and the parties right to due process. In numerous cases, this
Court has allowed liberal construction of the rules when to do so would serve the
demands of substantial justice and equity. [20] In Aguam v. Court of Appeals, the
Court explained:
The court has the discretion to dismiss or not to dismiss an appellant's appeal. It
is a power conferred on the court, not a duty. The "discretion must be a sound
one, to be exercised in accordance with the tenets of justice and fair play, having
in mind the circumstances obtaining in each case." Technicalities, however, must
be avoided. The law abhors technicalities that impede the cause of justice. The
court's primary duty is to render or dispense justice. "A litigation is not a game of
technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust.
Technicality, when it deserts its proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant consideration from
courts." Litigations must be decided on their merits and not on technicality.
Every party litigant must be afforded the amplest opportunity for the proper and
just determination of his cause, free from the unacceptable plea of technicalities.
Thus, dismissal of appeals purely on technical grounds is frowned upon where the

policy of the court is to encourage hearings of appeals on their merits and the
rules of procedure ought not to be applied in a very rigid, technical sense; rules of
procedure are used only to help secure, not override substantial justice. It is a far
better and more prudent course of action for the court to excuse a technical lapse
and afford the parties a review of the case on appeal to attain the ends of justice
rather than dispose of the case on technicality and cause a grave injustice to the
parties, giving a false impression of speedy disposal of cases while actually
resulting in more delay, if not a miscarriage of justice. [21]
Third, while we affirm that the subject lease agreement is a contract of
adhesion, such a contract is not void per se. It is as binding as any ordinary
contract. A party who enters into an adhesion contract is free to reject the
stipulations entirely.[22] If the terms thereof are accepted without objection, then
the contract serves as the law between the parties.
In Section 23 of the lease contract, it was expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE
23.1. The LESSOR and the LESSEE agree this instrument constitute the entire
agreement between them, and that no representations have been made other
than as set forth herein. This Agreement shall not be amended or altered in any
manner, unless such amendment be made in writing and signed by the parties
hereto.
Petitioners claim that the real intention of the parties was a contract of sale of
personal property on installment basis is more likely a mere afterthought in order
to defeat the rights of the respondent.
The Lease Contract with corresponding Lease Schedules with Delivery and
Acceptance Certificates is, in point of fact, a financial lease within the purview of
R.A. No. 8556. Section 3(d) thereof defines financial leasing as:
[A] mode of extending credit through a non-cancelable lease contract under
which the lessor purchases or acquires, at the instance of the lessee, machinery,
equipment,
motor
vehicles,
appliances,
business
and office machines, and other movable or immovable
property
in
consideration of the periodic payment by the lessee of a fixed amount of
money sufficient to amortize at least seventy (70%) of the purchase price or
acquisition cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during which the lessee has
the right to hold and use the leased property with the right to expense the lease
rentals paid to the lessor and bears the cost of repairs, maintenance, insurance

and preservation thereof, but with no obligation or option on his part to purchase
the leased property from the owner-lessor at the end of the lease contract.
FEB leased the subject equipment and motor vehicles to JVL in consideration of a
monthly periodic payment ofP170,494.00. The periodic payment by petitioner is
sufficient to amortize at least 70% of the purchase price or acquisition cost of the
said
movables
in
accordance
with
the
Lease
Schedules
with
Delivery and Acceptance Certificates. The
basic purpose
of a financial
leasing transaction is to enable the prospective buyer of equipment, who is
unable to pay for such equipment in cash in one lump sum, to lease such
equipment in the meantime for his use, at a fixed rental sufficient to amortize at
least 70% of the acquisition cost (including the expenses and a margin of profit
for the financial lessor) with the expectation that at the end of the lease period
the buyer/financial lessee will be able to pay any remaining balance of the
purchase price.[23]
The allegation of petitioner that the rent for the use of each movable constitutes
the value of the vehicle or equipment leased is of no moment. The law on
financial lease does not prohibit such a circumstance and this alone does not
make the transaction between the parties a sale of personal property on
installment. In fact, the value of the lease, usually constituting the value or
amount of the property involved, is a benefit allowed by law to the lessor for the
use of the property by the lessee for the duration of the lease. It is recognized
that the value of these movables depreciates through wear and tear upon use by
the lessee. In Beltran v. PAIC Finance Corporation,[24] we stated that:
Generally speaking, a financing company is not a buyer or seller of goods; it is not
a trading company. Neither is it an ordinary leasing company; it does not make its
profit by buying equipment and repeatedly leasing out such equipment to
different users thereof. But a financial lease must be preceded by a purchase
and sale contract covering the equipment which becomes the subject matter of
the financial lease. The financial lessor takes the role of the buyer of the
equipment leased. And so the formal or documentary tie between the seller and
the real buyer of the equipment, i.e., the financial lessee, is apparently severed.
In economic reality, however, that relationship remains. The sale of the
equipment by the supplier thereof to the financial lessor and the latter's legal
ownership thereof are intended to secure the repayment over time of the
purchase price of the equipment, plus financing charges, through the payment of
lease rentals; that legal title is the upfront security held by the financial lessor, a
security probably superior in some instances to a chattel mortgagee's lien. [25]
Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld.
JVL entered into the lease contract with full knowledge of its terms and
conditions. The contract was in force for more than four years. Since its

inception on March 9, 1995, JVL and Lim never questioned its provisions. They
only attacked the validity of the contract after they were judicially made to
answer for their default in the payment of the agreed rentals.

position to enforce such warranty directly against the supplier of the equipment
and not against the financial lessor. We find nothing contra legem or contrary to
public policy in such a contractual arrangement.[30]

It is settled that the parties are free to agree to such stipulations, clauses, terms,
and conditions as they may want to include in a contract. As long as such
agreements are not contrary to law, morals, good customs, public policy, or public
order, they shall have the force of law between the parties. [26] Contracting
parties may stipulate on terms and conditions as they may see fit and these have
the force of law between them.[27]

Fifth, petitioner further proffers the view that the real intention of the parties was
to enter into a contract of sale on installment in the same manner that a previous
transaction between the parties over a 1995 Mitsubishi L-200 Strada DC-Pick-Up
was initially covered by an agreement denominated as a lease and eventually
became the subject of a Deed of Absolute Sale.

The stipulation in Section 14[28] of the lease contract, that the equipment shall be
insured at the cost and expense of the lessee against loss, damage, or
destruction from fire, theft, accident, or other insurable risk for the full term of the
lease, is a binding and valid stipulation. Petitioner, as a lessee, has an insurable
interest in the equipment and motor vehicles leased. Section 17 of the Insurance
Code provides that the measure of an insurable interest in property is the extent
to which the insured might be damnified by loss or injury thereof. It cannot be
denied that JVL will be directly damnified in case of loss, damage, or destruction
of any of the properties leased.

We join the CA in rejecting this view because to allow the transaction involving
the pick-up to be read into the terms of the lease agreement would expand the
coverage of the agreement, in violation of Article 1372 of the New Civil
Code. [31] The lease contract subject of the complaint speaks only of a lease. Any
agreement between the parties after the lease contract has ended is a different
transaction altogether and should not be included as part of the
lease. Furthermore, it is a cardinal rule in the interpretation of contracts that if
the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations shall control. No
amount of extrinsic aid is necessary in order to determine the parties' intent. [32]

Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does
not warrant the merchantability of the equipment is a valid stipulation. Section
9.1 of the lease contract is stated as:

WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision
of the CA in CA-G.R. CV No. 77498 dated March 15, 2005 and Resolution
dated May 23, 2005 are AFFIRMED. Costs against petitioner.

9.1
IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES
THAT
IT
HAS
SELECTED
THE
EQUIPMENT
AND
THE
SUPPLIER
THEREOF
AND THAT THERE ARE NO
WARRANTIES,
CONDITIONS,
TERMS, REPRESENTATION OR INDUCEMENTS, EXPRESS OR IMPLIED, STATUTORY
OR OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS TO ANY FEATURE OR
ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS FITNESS,
SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER
THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE,
SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC MACHINERY OR
APPARATUS OR SPECIAL METHODS.[29]

SO ORDERED.

In the financial lease agreement, FEB did not assume responsibility as to the
quality, merchantability, or capacity of the equipment. This stipulation provides
that, in case of defect of any kind that will be found by the lessee in any of the
equipment, recourse should be made to the manufacturer. The financial lessor,
being a financing company, i.e., an extender of credit rather than an ordinary
equipment rental company, does not extend a warranty of the fitness of the
equipment for any particular use. Thus, the financial lessee was precisely in a

THE PHILIPPINE AMERICAN

Promulgated:
LIFE INSURANCE COMPANY,
Respondent.
April 9, 2008
x-----------------------------------------------------------------------------------------x

ETERNAL GARDENS MEMORIAL

PARK CORPORATION,
Petitioner,

- versus -

DECISION

G.R. No. 166245

Present:
CARPIO MORALES,
Acting Chairperson,
TINGA,
VELASCO, JR.,
CHICO-NAZARIO,* and
BRION, JJ.

VELASCO, JR., J.:

The Case

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

Central to this Petition for Review on Certiorari under Rule 45 which seeks
to reverse and set aside the November 26, 2004 Decision [1] of the Court of
Appeals (CA) in CA-G.R. CV No. 57810 is the query: May the inaction of the insurer
on the insurance application be considered as approval of the application?

EFFECTIVE DATE OF BENEFIT.

The Facts

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

On December 10, 1980, respondent Philippine American Life Insurance

Company (Philamlife) entered into an agreement denominated as Creditor Group
Life Policy No. P-1920[2] with petitioner Eternal Gardens Memorial Park Corporation
(Eternal). Under the policy, the clients of Eternal who purchased burial lots from it
on installment basis would be insured by Philamlife. The amount of insurance
coverage depended upon the existing balance of the purchased burial lots. The
policy was to be effective for a period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65
years of age, is indebted to the Assured for the unpaid balance of his loan with
the Assured, and is accepted for Life Insurance coverage by the Company on its
effective date is eligible for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to
P50,000.00. However, a declaration of good health shall be required for all Lot
Purchasers as part of the application. The Company reserves the right to require
further evidence of insurability satisfactory to the Company in respect of the
following:
1.
2.

Any amount of insurance in excess of P50,000.00.

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

LIFE INSURANCE BENEFIT.

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

Eternal sent a letter dated August 20, 1984[5] to Philamlife, which served as
an insurance claim for Chuangs death. Attached to the claim were the following
documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating
that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4)
Certificate of Attending Physician; and (5) Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984, [6] requiring
Eternal to submit the following documents relative to its insurance claim for
Chuangs death: (1) Certificate of Claimant (with form attached); (2) Assureds
Certificate (with form attached); (3) Application for Insurance accomplished and
signed by the insured, Chuang, while still living; and (4) Statement of Account
showing the unpaid balance of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14,
1984,[7] which was received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the
latters insurance claim. This prompted Eternal to demand from Philamlife the
payment of the claim for PhP 100,000 on April 25, 1986.[8]
In response to Eternals demand, Philamlife denied Eternals insurance claim in a
letter dated May 20, 1986,[9] a portion of which reads:

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

Philamlife appealed to the CA, which ruled, thus:

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

SO ORDERED.[11]

With regard to our acceptance of premiums, these do not connote our approval
per se of the insurance coverage but are held by us in trust for the payor until the
prerequisites for insurance coverage shall have been met. We will however, return
all the premiums which have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial
Court (RTC) for a sum of money against Philamlife, docketed as Civil Case No.
14736. The trial court decided in favor of Eternal, the dispositive portion of which
reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant
PHILAMLIFE, to pay the sum of P100,000.00, representing the proceeds of the
Policy of John Uy Chuang, plus legal rate of interest, until fully paid; and, to pay
the sum of P10,000.00 as attorneys fees.
SO ORDERED.
The RTC found that Eternal submitted Chuangs application for insurance which he
accomplished before his death, as testified to by Eternals witness and evidenced
by the letter dated December 29, 1982, stating, among others: Encl: Phil-Am Life
Insurance Application Forms & Cert. [10] It further ruled that due to Philamlifes
inaction from the submission of the requirements of the group insurance
on December 29, 1982 to Chuangs death on August 2, 1984, as well as
Philamlifes acceptance of the premiums during the same period, Philamlife was
deemed to have approved Chuangs application. The RTC said that since the
contract is a group life insurance, once proof of death is submitted, payment must
follow.

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

The CA based its Decision on the factual finding that Chuangs application
was not enclosed in Eternals letter datedDecember 29, 1982. It further ruled that
the non-accomplishment of the submitted application form violated Section 26 of
the Insurance Code. Thus, the CA concluded, there being no application form,
Chuang was not covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not
therefore determined by this Honorable Court, or has decided it in a way not in
accord with law or with the applicable jurisprudence, in holding that:
I.
The application for insurance was not duly submitted to respondent
PhilamLife before the death of John Chuang;
II.

There was no valid insurance coverage; and

III. Reversing and setting aside the Decision of the Regional Trial Court
dated May 29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual
issues raised before the CA and first level courts, considering their findings of
facts are conclusive and binding on this Court. However, such rule is subject to
exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the [CA] went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings [of the CA] are contrary to the trial court; (8) when
the findings are conclusions without citation of specific evidence on which they
are based; (9) when the facts set forth in the petition as well as in the petitioners
main and reply briefs are not disputed by the respondent; (10) when the findings
of fact are premised on the supposed absence of evidence and contradicted by
the evidence on record; and (11) when the Court of Appeals manifestly

overlooked certain relevant facts not disputed by the parties, which, if properly
considered, would justify a different conclusion.[12] (Emphasis supplied.)

An examination of the testimonies of the witnesses mentioned by

Philamlife, however, reveals no overlooked facts of substance and value.

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

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

Eternal claims that the evidence that it presented before the trial court
supports its contention that it submitted a copy of the insurance application of
Chuang before his death. In Eternals letter dated December 29, 1982, a list of
insurable interests of buyers for October 1982 was attached, including Chuang in
the list of new businesses. Eternal added it was noted at the bottom of said letter
that the corresponding Phil-Am Life Insurance Application Forms & Cert. were
enclosed in the letter that was apparently received by Philamlife on January 15,
1983. Finally, Eternal alleged that it provided a copy of the insurance application
which was signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by
Eternal is insufficient, arguing that Eternal must present evidence showing that
Philamlife received a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which
Philamlife stamped as received, states that the insurance forms for the attached
list of burial lot buyers were attached to the letter. Such stamp of receipt has the
effect of acknowledging receipt of the letter together with the attachments. Such
receipt is an admission by Philamlife against its own interest. [13] The burden of
evidence has shifted to Philamlife, which must prove that the letter did not
contain Chuangs insurance application. However, Philamlife failed to do so; thus,
Philamlife is deemed to have received Chuangs insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a
transmittal letter is stamped as received, the contents of the letter are correct
and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and
reliability due to inconsistencies is groundless. The trial court is in the best
position to determine the reliability and credibility of the witnesses, because it
has the opportunity to observe firsthand the witnesses demeanor, conduct, and
attitude. Findings of the trial court on such matters are binding and conclusive on
the appellate court, unless some facts or circumstances of weight and substance
have been overlooked, misapprehended, or misinterpreted,[14] that, if considered,
might affect the result of the case.[15]

Atty. Arevalo:
Q
Where is the original of the application form which is required in
case of new coverage?
[Mendoza:]
A
It is [a] standard operating procedure for the new client to fill up
two copies of this form and the original of this is submitted to Philamlife together
with the monthly remittances and the second copy is remained or retained with
the marketing department of EternalGardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is
merely asking for the location and does not [ask] for the number of copy.
Atty. Arevalo:
Q

Where is the original?

[Mendoza:]
A
As far as I remember I do not know where the original but when I
submitted with that payment together with the new clients all the originals I see
to it before I sign the transmittal letter the originals are attached therein. [16]
In other words, the witness admitted not knowing where the original insurance
application was, but believed that the application was transmitted to Philamlife as
an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on
whether one or two insurance application forms were accomplished and the
testimony of Mendoza on who actually filled out the application form, these are
minor inconsistencies that do not affect the credibility of the witnesses. Thus, we
ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility
as these negate any suspicion that the testimonies have been rehearsed. [17]

We reiterated the above ruling in Merencillo v. People:

Minor discrepancies or inconsistencies do not impair the essential integrity of the
prosecutions evidence as a whole or reflect on the witnesses honesty. The test is
whether the testimonies agree on essential facts and whether the respective
versions corroborate and substantially coincide with each other so as to make a
consistent and coherent whole.[18]
In the present case, the number of copies of the insurance application that
Chuang executed is not at issue, neither is whether the insurance application
presented by Eternal has been falsified. Thus, the inconsistencies pointed out by
Philamlife are minor and do not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss
without approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated
as Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy,
it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if the
application of the Lot Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two
sentences. The first sentence appears to state that the insurance coverage of the
clients of Eternal already became effective upon contracting a loan with Eternal
while the second sentence appears to require Philamlife to approve the insurance
contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which
must be construed liberally in favor of the insured and strictly against the insurer
in order to safeguard the latters interest. Thus, in Malayan Insurance Corporation
v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of insurance, being a
contract of adhesion, par excellence, any ambiguity therein should be resolved
against the insurer; in other words, it should be construed liberally in favor of the
insured and strictly against the insurer. Limitations of liability should be regarded

with extreme jealousy and must be construed in such a way as to preclude the
insurer from noncompliance with its obligations.[19] (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals,
we reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts
should construe them in such a way as to preclude the insurer from noncompliance with his obligation. Being a contract of adhesion, the terms of an
insurance contract are to be construed strictly against the party which prepared
the contract, the insurer. By reason of the exclusive control of the insurance
company over the terms and phraseology of the insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the
insured, especially to avoid forfeiture.[20]
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920
dated December 10, 1980, must be construed in favor of the insured and in favor
of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to
mean that upon a partys purchase of a memorial lot on installment from Eternal,
an insurance contract covering the lot purchaser is created and the same is
effective, valid, and binding until terminated by Philamlife by disapproving the
insurance application. The second sentence of Creditor Group Life Policy No. P1920 on the Effective Date of Benefit is in the nature of a resolutory condition
which would lead to the cessation of the insurance contract. Moreover, the mere
inaction of the insurer on the insurance application must not work to prejudice the
insured; it cannot be interpreted as a termination of the insurance contract. The
termination of the insurance contract by the insurer must be explicit and
unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties
on equal footing is inaccurate at best. Insurance contracts are wholly prepared by
the insurer with vast amounts of experience in the industry purposefully used to
its advantage. More often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must
be considered whenever the rights and obligations of the insurer and the insured
are to be delineated. Hence, in order to protect the interest of insurance
applicants, insurance companies must be obligated to act with haste upon
insurance applications, to either deny or approve the same, or otherwise be
bound to honor the application as a valid, binding, and effective insurance
contract.[21]

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision

in CA-G.R. CV No. 57810 is REVERSEDand SET ASIDE. The May 29, 1996 Decision
of the Makati City RTC, Branch 138 is MODIFIED. Philamlife is herebyORDERED:

questioned Orders dated 10 April 2008 and 3 July 2008, respectively, the RTC
declared the finality of the aforesaid Decision and denied petitioners Notice of
Appeal.

(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of
the Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum
of PhP 100,000 from the time of extra-judicial demand by Eternal until Philamlifes
receipt of the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per
annum of PhP 100,000 from June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.

The factual and procedural antecedents of the case, as culled from the records,
are as follows:

No costs.
SO ORDERED.
VIOLETA R. LALICAN,
Petitioner,

G.R. No. 183526

Present:

- versus -

THE
INSULAR
LIFE
ASSURANCE
COMPANY LIMITED, AS REPRESENTED
BY THE PRESIDENT VICENTE R.
AVILON,
Respondent.

CARPIO MORALES,* J.,

CHICO-NAZARIO,**
Acting Chairperson,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.
Promulgated:

August 25, 2009

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:
Challenged in this Petition for Review on Certiorari[1] under Rule 45 of the Rules of
Court are the Decision[2] dated 30 August 2007 and the Orders dated 10 April
2008[3] and 3 July 2008[4] of the Regional Trial Court (RTC) of Gapan City, Branch
34, in Civil Case No. 2177. In its assailed Decision, the RTC dismissed the claim
for death benefits filed by petitioner Violeta R. Lalican (Violeta) against
respondent Insular Life Assurance Company Limited (Insular Life); while in its

Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).

During his lifetime, Eulogio applied for an insurance policy with Insular
Life. On 24 April 1997, Insular Life, through Josephine Malaluan (Malaluan), its
agent in Gapan City, issued in favor of Eulogio Policy No. 9011992, [5] which
contained a 20-Year Endowment Variable Income Package Flexi Plan
worth P500,000.00,[6] with two riders valued at P500,000.00 each.[7] Thus, the
value of the policy amounted to P1,500,000.00. Violeta was named as the
primary beneficiary.
Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a
quarterly basis in the amount of P8,062.00, payable every 24 April, 24 July, 24
October and 24 January of each year, until the end of the 20-year period of the
policy. According to the Policy Contract, there was a grace period of 31 days for
the payment of each premium subsequent to the first. If any premium was not
paid on or before the due date, the policy would be in default, and if the premium
remained unpaid until the end of the grace period, the policy would automatically
lapse and become void.[8]
Eulogio paid the premiums due on 24 July 1997 and 24 October 1997. However,
he failed to pay the premium due on 24 January 1998, even after the lapse of the
grace period of 31 days. Policy No. 9011992, therefore, lapsed and became void.
Eulogio submitted to the Cabanatuan District Office of Insular Life, through
Malaluan, on 26 May 1998, an Application for Reinstatement [9] of Policy
No. 9011992, together with the amount of P8,062.00 to pay for the premium due
on 24 January 1998. In a letter[10] dated 17 July 1998, Insular Life notified Eulogio
that his Application for Reinstatement could not be fully processed because,
although he already deposited P8,062.00 as payment for the 24 January
1998 premium, he left unpaid the overdue interest thereon amounting
to P322.48. Thus, Insular Life instructed Eulogio to pay the amount of interest
and to file another application for reinstatement. Eulogio was likewise advised by
Malaluan to pay the premiums that subsequently became due on 24 April
1998 and24 July 1998, plus interest.
On 17 September 1998, Eulogio went to Malaluans house and submitted a
second Application for Reinstatement[11] of Policy No. 9011992, including the
amount of P17,500.00, representing payments for the overdue interest on the
premium for 24 January 1998, and the premiums which became due on 24 April

1998 and 24 July 1998. As Malaluan was away on a business errand, her husband
received Eulogios second Application for Reinstatement and issued a receipt for
the amount Eulogio deposited.
A while later, on the same day, 17 September 1998, Eulogio died of cardiorespiratory arrest secondary to electrocution.
Without knowing of Eulogios death, Malaluan forwarded to the Insular Life
Regional Office in the City of San Fernando, on18 September 1998, Eulogios
second Application for Reinstatement of Policy No. 9011992 and P17,500.00
deposit. However, Insular Life no longer acted upon Eulogios second Application
for Reinstatement, as the former was informed on 21 September 1998 that
Eulogio had already passed away.
On 28 September 1998, Violeta filed with Insular Life a claim for payment of the
full proceeds of Policy No. 9011992.
In a letter[12] dated 14 January 1999, Insular Life informed Violeta that her claim
could not be granted since, at the time of Eulogios death, Policy No. 9011992 had
already lapsed, and Eulogio failed to reinstate the same. According to the
Application for Reinstatement, the policy would only be considered reinstated
upon approval of the application by Insular Life during the applicants lifetime
and good health, and whatever amount the applicant paid in connection thereto
was considered to be a deposit only until approval of said application. Enclosed
with the 14 January 1999 letter of Insular Life to Violeta was DBP Check No.
0000309734, for the amount of P25,417.00, drawn in Violetas favor, representing
the full refund of the payments made by Eulogio on Policy No. 9011992.
On 12 February 1998, Violeta requested a reconsideration of the disallowance of
her claim. In a letter[13] dated 10 March 1999, Insular Life stated that it could not
find any reason to reconsider its decision rejecting Violetas claim. Insular Life
again tendered to Violeta the above-mentioned check in the amount
of P25,417.00.
Violeta returned the letter dated 10 March 1999 and the check enclosed therein
to the Cabanatuan District Office of Insular Life. Violetas counsel subsequently
sent a letter[14] dated 8 July 1999 to Insular Life, demanding payment of the full
proceeds of Policy No. 9011992. On 11 August 1999, Insular Life responded to
the said demand letter by agreeing to conduct a re-evaluation of Violetas claim.
Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with
the RTC, on 11 October 1999, a Complaint for Death Claim Benefit, [15] which was
docketed as Civil Case No. 2177. Violeta alleged that Insular Life engaged in
unfair claim settlement practice and deliberately failed to act with reasonable
promptness on her insurance claim. Violeta prayed that Insular Life be ordered to

pay her death claim benefits on Policy No. 9011992, in

of P1,500,000.00, plus interests, attorneys fees, and cost of suit.

the

amount

Insular Life filed with the RTC an Answer with Counterclaim, [16] asserting that
Violetas Complaint had no legal or factual bases. Insular Life maintained that
Policy No. 9011992, on which Violeta sought to recover, was rendered void by the
non-payment of the 24 January 1998 premium and non-compliance with the
requirements for the reinstatement of the same. By way of counterclaim, Insular
Life prayed that Violeta be ordered to pay attorneys fees and expenses of
litigation incurred by the former.
Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements
for the reinstatement of Policy No. 9011992 had been complied with and the
defenses put up by Insular Life were purely invented and illusory.
After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular
Life.
The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio needed to
have the same reinstated:
[The] arguments [of Insular Life] are not without basis. When the
premiums for April 24 and July 24, 1998 were not paid by [Eulogio] even after the
lapse of the 31-day grace period, his insurance policy necessarily lapsed. This is
clear from the terms and conditions of the contract between [Insular Life] and
[Eulogio] which are written in [the] Policy provisions of Policy No. 9011992 x x x.
[17]

The RTC, taking into account the clear provisions of the Policy Contract between
Eulogio and Insular Life and the Application for Reinstatement Eulogio
subsequently signed and submitted to Insular Life, held that Eulogio was not able
to fully comply with the requirements for the reinstatement of Policy No.
9011992:
The well-settled rule is that a contract has the force of law between the
parties. In the instant case, the terms of the insurance contract between
[Eulogio] and [Insular Life] were spelled out in the policy provisions of Insurance
Policy No. 9011992. There is likewise no dispute that said insurance contract is
by nature a contract of adhesion[,] which is defined as one in which one of the
contracting parties imposes a ready-made form of contract which the other party
may accept or reject but cannot modify. (Polotan, Sr. vs. CA, 296 SCRA 247).
xxxx

The New Lexicon Websters Dictionary defines ambiguity as the quality of

having more than one meaning and an idea, statement or expression capable of
being understood in more than one sense. In Nacu vs. Court of Appeals, 231
SCRA 237 (1994), the Supreme Court stated that[:]
Any ambiguity in a contract, whose terms are susceptible of different
interpretations as a result thereby, must be read and construed against the party
who drafted it on the assumption that it could have been avoided by the exercise
of a little care.
In the instant case, the dispute arises from the afore-quoted provisions
written on the face of the second application for reinstatement. Examining the
said provisions, the court finds the same clearly written in terms that are simple
enough to admit of only one interpretation. They are clearly not ambiguous,
equivocal or uncertain that would need further construction. The same are
written on the very face of the application just above the space where [Eulogio]
signed his name. It is inconceivable that he signed it without reading and
understanding its import.
Similarly, the provisions of the policy provisions (sic) earlier mentioned are
written in simple and clear laymans language, rendering it free from any
ambiguity that would require a legal interpretation or construction. Thus, the
court believes that [Eulogio] was well aware that when he filed the said
application for reinstatement, his lapsed policy was not automatically reinstated
and that its approval was subject to certain conditions. Nowhere in the policy or
in the application for reinstatement was it ever mentioned that the payment of
premiums would have the effect of an automatic and immediate renewal of the
lapsed policy. Instead, what was clearly stated in the application for
reinstatement is that pending approval thereof, the premiums paid would be
treated as a deposit only and shall not bind the company until this application is
finally approved during my/our lifetime and good health[.]
Again, the court finds nothing in the aforesaid provisions that would even
suggest an ambiguity either in the words used or in the manner they were
written. [Violeta] did not present any proof that [Eulogio] was not conversant
with the English language. Hence, his having personally signed the application
for reinstatement[,] which consisted only of one page, could only mean that he
has read its contents and that he understood them. x x x
Therefore, consistent with the above Supreme Court ruling and finding no
ambiguity both in the policy provisions of Policy No. 9011992 and in the
application for reinstatement subject of this case, the court finds no merit in
[Violetas] contention that the policy provision stating that [the lapsed policy of
Eulogio] should be reinstated during his lifetime is ambiguous and should be
construed in his favor. It is true that [Eulogio] submitted his application for
reinstatement, together with his premium and interest payments, to [Insular Life]

through its agent Josephine Malaluan in the morning of September 17,

1998. Unfortunately, he died in the afternoon of that same day. It was only on
the following day, September 18, 1998 that Ms. Malaluan brought the said
document to [the regional office of Insular Life] in San Fernando, Pampanga for
approval. As correctly pointed out by [Insular Life] there was no more application
to approve because the applicant was already dead and no insurance company
would issue an insurance policy to a dead person. [18] (Emphases ours.)
The RTC, in the end, explained that:
While the court truly empathizes with the [Violeta] for the loss of her
husband, it cannot express the same by interpreting the insurance agreement in
her favor where there is no need for such interpretation. It is conceded that
[Eulogios] payment of overdue premiums and interest was received by [Insular
Life] through its agent Ms. Malaluan. It is also true that [the] application for
reinstatement was filed by [Eulogio] a day before his death. However, there is
nothing that would justify a conclusion that such receipt amounted to an
automatic reinstatement of the policy that has already lapsed. The evidence
suggests clearly that no such automatic renewal was contemplated in the
contract between [Eulogio] and [Insular Life]. Neither was it shown that Ms.
Malaluan was the officer authorized to approve the application for reinstatement
and that her receipt of the documents submitted by [Eulogio] amounted to its
approval.[19] (Emphasis ours.)
The fallo of the RTC Decision thus reads:
WHEREFORE, all the foregoing premises considered and finding that
[Violeta] has failed to establish by preponderance of evidence her cause of action
against the defendant, let this case be, as it is hereby DISMISSED.[20]
On 14 September 2007, Violeta filed a Motion for Reconsideration [21] of the
afore-mentioned RTC Decision. Insular Life opposed[22] the said motion, averring
that the arguments raised therein were merely a rehash of the issues already
considered and addressed by the RTC. In an Order[23] dated 8 November 2007,
the RTC denied Violetas Motion for Reconsideration, finding no cogent and
compelling reason to disturb its earlier findings. Per the Registry Return Receipt
on record, the 8 November 2007 Order of the RTC was received by Violeta on 3
December 2007.
In the interim, on 22 November 2007, Violeta filed with the RTC
a Reply[24] to the Motion for Reconsideration, wherein she reiterated the prayer in
her Motion for Reconsideration for the setting aside of the Decision dated 30

August 2007. Despite already receiving on 3 December 2007, a copy of the RTC
Order dated 8 November 2007, which denied her Motion for Reconsideration,
Violeta still filed with the RTC, on 26 February 2008, a Reply Extended Discussion
elaborating on the arguments she had previously made in her Motion for
Reconsideration and Reply.
On 10 April 2008, the RTC issued an Order, [25] declaring that the Decision
dated 30 August 2007 in Civil Case No. 2177had already attained finality in view
of Violetas failure to file the appropriate notice of appeal within the reglementary
period. Thus, any further discussions on the issues raised by Violeta in her Reply
and Reply Extended Discussion would be moot and academic.
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion,
praying that the Order dated 10 April 2008be set aside and that she be
allowed to file an appeal with the Court of Appeals.

Section. 19. x x x [I]nterest in the life or health of a person insured must

exist when the insurance takes effect, but need not exist thereafter or when the
loss occurs.
On the basis thereof, Violeta argues that Eulogio still had insurable interest in his
own life when he reinstated Policy No. 9011992 just before he passed away on 17
September 1998. The RTC should have construed the provisions of the Policy
Contract and Application for Reinstatement in favor of the insured Eulogio and
against the insurer Insular Life, and considered the special circumstances of the
case, to rule that Eulogio had complied with the requisites for the reinstatement
of Policy No. 9011992 prior to his death, and that Violeta is entitled to claim the
proceeds of said policy as the primary beneficiary thereof.

[26]

The Petition lacks merit.

In an Order[27] dated 3 July 2008, the RTC denied Violetas Notice of Appeal
with Motion given that the Decision dated 30 August 2007 had long since attained
finality.

At the outset, the Court notes that the elevation of the case to us via the instant
Petition for Review on Certiorari is not justified. Rule 41, Section 1 of the Rules of
Court,[28] provides that no appeal may be taken from an order disallowing or
dismissing an appeal. In such a case, the aggrieved party may file a Petition
for Certiorari under Rule 65 of the Rules of Court.[29]

Violeta directly elevated her case to this Court via the instant Petition for
Review on Certiorari, raising the following issues for consideration:
1.
Whether or not the Decision of the court a quo dated August 30,
2007, can still be reviewed despite having allegedly attained finality and despite
the fact that the mode of appeal that has been availed of by Violeta is erroneous?
2.
Whether or not the Regional Trial Court in its original jurisdiction has
decided the case on a question of law not in accord with law and applicable
decisions of the Supreme Court?
Violeta insists that her former counsel committed an honest mistake in
filing a Reply, instead of a Notice of Appeal of the RTC Decision dated 30 August
2007; and in the computation of the reglementary period for appealing the said
judgment. Violeta claims that her former counsel suffered from poor health,
which rapidly deteriorated from the first week of July 2008 until the latters death
just shortly after the filing of the instant Petition on 8 August 2008. In light of
these circumstances, Violeta entreats this Court to admit and give due course to
her appeal even if the same was filed out of time.
Violeta further posits that the Court should address the question of law arising in
this case involving the interpretation of the second sentence of Section 19 of the
Insurance Code, which provides:

Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had
long become final and executory. Violeta filed a Motion for Reconsideration
thereof, but the RTC denied the same in an Order dated 8 November 2007. The
records of the case reveal that Violeta received a copy of the 8 November
2007 Order on 3 December 2007. Thus, Violeta had 15 days[30] from said date of
receipt, or until 18 December 2007, to file a Notice of Appeal. Violeta filed a
Notice of Appeal only on 20 May 2008, more than five months after receipt of the
RTC Order dated 8 November 2007 denying her Motion for Reconsideration.
Violetas claim that her former counsels failure to file the proper remedy within
the reglementary period was an honest mistake, attributable to the latters
deteriorating health, is unpersuasive.
Violeta merely made a general averment of her former counsels poor health,
lacking relevant details and supporting evidence. By Violetas own admission, her
former counsels health rapidly deteriorated only by the first week of July
2008. The events pertinent to Violetas Notice of Appeal took place months
before July 2008, i.e., a copy of the RTC Order dated 8 November 2007, denying
Violetas Motion for Reconsideration of the Decision dated 30 August 2007, was
received on 3 December 2007; and Violetas Notice of Appeal was filed on 20 May
2008. There is utter lack of proof to show that Violetas former counsel was
already suffering from ill health during these times; or that the illness of Violetas
former counsel would have affected his judgment and competence as a lawyer.

Moreover, the failure of her former counsel to file a Notice of Appeal within the
reglementary period binds Violeta, which failure the latter cannot now disown on
the basis of her bare allegation and self-serving pronouncement that the former
was ill. A client is bound by his counsels mistakes and negligence. [31]
The Court, therefore, finds no reversible error on the part of the RTC in denying
Violetas Notice of Appeal for being filed beyond the reglementary
period. Without an appeal having been timely filed, the RTC Decision dated 30
August 2007 in Civil Case No. 2177 already became final and executory.
A judgment becomes "final and executory" by operation of law. Finality
becomes a fact when the reglementary period to appeal lapses and no appeal is
perfected within such period. As a consequence, no court (not even this Court)
can exercise appellate jurisdiction to review a case or modify a decision that has
become final.[32] When a final judgment is executory, it becomes immutable and
unalterable. It may no longer be modified in any respect either by the court,
which rendered it or even by this Court. The doctrine is founded on considerations
of public policy and sound practice that, at the risk of occasional errors,
judgments must become final at some definite point in time. [33]
The only recognized exceptions to the doctrine of immutability and
unalterability are the correction of clerical errors, the so-called nunc pro
tunc entries, which cause no prejudice to any party, and void judgments. [34] The
instant case does not fall under any of these exceptions.
Even if the Court ignores the procedural lapses committed herein, and
proceeds to resolve the substantive issues raised, the Petition must still fail.
Violeta makes it appear that her present Petition involves a question of
law, particularly, whether Eulogio had an existing insurable interest in his own life
until the day of his death.
An insurable interest is one of the most basic and essential requirements in
an insurance contract. In general, an insurable interest is that interest which a
person is deemed to have in the subject matter insured, where he has a relation
or connection with or concern in it, such that the person will derive pecuniary
benefit or advantage from the preservation of the subject matter insured and will
suffer pecuniary loss or damage from its destruction, termination, or injury by the
happening of the event insured against. [35] The existence of an insurable interest
gives a person the legal right to insure the subject matter of the policy of
insurance.[36] Section 10 of the Insurance Code indeed provides that every person
has an insurable interest in his own life. [37] Section 19 of the same code also
states that an interest in the life or health of a person insured must exist when
the insurance takes effect, but need not exist thereafter or when the loss occurs.
[38]

Upon more extensive study of the Petition, it becomes evident that the
matter of insurable interest is entirely irrelevant in the case at bar. It is actually
beyond question that while Eulogio was still alive, he had an insurable interest in
his own life, which he did insure under Policy No. 9011992. The real point of
contention herein is whether Eulogio was able to reinstate the lapsed insurance
policy on his life before his death on 17 September 1998.
The Court rules in the negative.
Before proceeding, the Court must correct the erroneous declaration of the RTC in
its 30 August 2007 Decision that Policy No. 9011992 lapsed because of Eulogios
non-payment of the premiums which became due on 24 April 1998 and 24 July
1998. Policy No. 9011992 had lapsed and become void earlier, on 24 February
1998, upon the expiration of the 31-day grace period for payment of the
premium, which fell due on 24 January 1998, without any payment having been
made.
That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogios
filing of his first Application for Reinstatement with Insular Life, through Malaluan,
on 26 May 1998, constitutes an admission that Policy No. 9011992 had lapsed by
then. Insular Life did not act on Eulogios first Application for Reinstatement,
since the amount Eulogio simultaneously deposited was sufficient to cover only
the P8,062.00
overdue
premium
for 24
January
1998,
but
not
the P322.48 overdue interests thereon. On 17 September 1998, Eulogio
submitted a second Application for Reinstatement to Insular Life, again through
Malaluan, depositing at the same time P17,500.00, to cover payment for the
overdue interest on the premium for 24 January 1998, and the premiums that had
also become due on 24 April 1998 and 24 July 1998. On the very same day,
Eulogio passed away.
To reinstate a policy means to restore the same to premium-paying status
after it has been permitted to lapse. [39] Both the Policy Contract and the
Application for Reinstatement provide for specific conditions for the reinstatement
of a lapsed policy.
The Policy Contract between Eulogio and Insular Life identified the following
conditions for reinstatement should the policy lapse:
10. REINSTATEMENT
You may reinstate this policy at any time within three years after it lapsed
if the following conditions are met: (1) the policy has not been surrendered for its
cash value or the period of extension as a term insurance has not expired; (2)
evidence of insurability satisfactory to [Insular Life] is furnished; (3) overdue
premiums are paid with compound interest at a rate not exceeding that which
would have been applicable to said premium and indebtedness in the policy years

prior to reinstatement; and (4) indebtedness which existed at the time of

lapsation is paid or renewed.[40]
Additional conditions for reinstatement of a lapsed policy were stated in the
Application for Reinstatement which Eulogio signed and submitted, to wit:
I/We agree that said Policy shall not be considered reinstated until this application
is approved by the Company during my/our lifetime and good health and until all
other Company requirements for the reinstatement of said Policy are fully
satisfied.
I/We further agree that any payment made or to be made in connection with this
application shall be considered as deposit only and shall not bind the Company
until this application is finally approved by the Company during my/our lifetime
and good health. If this application is disapproved, I/We also agree to accept the
refund of all payments made in connection herewith, without interest, and to
surrender the receipts for such payment.[41] (Emphases ours.)
In the instant case, Eulogios death rendered impossible full compliance
with the conditions for reinstatement of Policy No.9011992. True, Eulogio, before
his death, managed to file his Application for Reinstatement and deposit the
amount for payment of his overdue premiums and interests thereon with
Malaluan; but Policy No. 9011992 could only be considered reinstated after the
Application for Reinstatement had been processed and approved by Insular
Life during Eulogios lifetime and good health.
Relevant herein is the following pronouncement of the Court in Andres v.
The Crown Life Insurance Company,[42] citingMcGuire v. The Manufacturer's Life
Insurance Co.[43]:
The stipulation in a life insurance policy giving the insured the privilege to
reinstate it upon written application does not give the insured absolute right to
such reinstatement by the mere filing of an application. The insurer has the right
to deny the reinstatement if it is not satisfied as to the insurability of the insured
and if the latter does not pay all overdue premium and all other indebtedness to
the insurer. After the death of the insured the insurance Company cannot be
compelled to entertain an application for reinstatement of the policy because the
conditions precedent to reinstatement can no longer be determined and
satisfied. (Emphases ours.)
It does not matter that when he died, Eulogios Application for
Reinstatement and deposits for the overdue premiums and interests were already

with Malaluan. Insular Life, through the Policy Contract, expressly limits the
power or authority of its insurance agents, thus:
Our agents have no authority to make or modify this contract, to extend
the time limit for payment of premiums, to waive any lapsation, forfeiture or any
of our rights or requirements, such powers being limited to our president, vicepresident or persons authorized by the Board of Trustees and only in writing.
[44]
(Emphasis ours.)
Malaluan did not have the authority to approve Eulogios Application for
Reinstatement. Malaluan still had to turn over to Insular Life Eulogios Application
for Reinstatement and accompanying deposits, for processing and approval by
the latter.
The Court agrees with the RTC that the conditions for reinstatement under the
Policy Contract and Application for Reinstatement were written in clear and simple
language, which could not admit of any meaning or interpretation other than
those that they so obviously embody. A construction in favor of the insured is not
called for, as there is no ambiguity in the said provisions in the first place. The
words thereof are clear, unequivocal, and simple enough so as to preclude any
mistake in the appreciation of the same.
Violeta did not adduce any evidence that Eulogio might have failed to fully
understand the import and meaning of the provisions of his Policy Contract and/or
Application for Reinstatement, both of which he voluntarily signed. While it is a
cardinal principle of insurance law that a policy or contract of insurance is to be
construed liberally in favor of the insured and strictly as against the insurer
company, yet, contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms, which the parties themselves
have used. If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular sense.[45]
Eulogios death, just hours after filing his Application for Reinstatement and
depositing his payment for overdue premiums and interests with Malaluan, does
not constitute a special circumstance that can persuade this Court to already
consider Policy No.9011992 reinstated. Said circumstance cannot override the
clear and express provisions of the Policy Contract and Application for
Reinstatement, and operate to remove the prerogative of Insular Life thereunder
to approve or disapprove the Application for Reinstatement. Even though the
Court commiserates with Violeta, as the tragic and fateful turn of events leaves
her practically empty-handed, the Court cannot arbitrarily burden Insular Life with
the payment of proceeds on a lapsed insurance policy. Justice and fairness must
equally apply to all parties to a case. Courts are not permitted to make contracts
for the parties. The function and duty of the courts consist simply in enforcing and
carrying out the contracts actually made.[46]

Policy No. 9011992 remained lapsed and void, not having been reinstated in
accordance with the Policy Contract and Application for Reinstatement before
Eulogios death. Violeta, therefore, cannot claim any death benefits from Insular
Life on the basis of Policy No. 9011992; but she is entitled to receive the full
refund of the payments made by Eulogio thereon.
WHEREFORE, premises considered, the Court DENIES the instant Petition for
Review on Certiorari under Rule 45 of the Rules of Court. The Court AFFIRMS the
Orders dated 10 April 2008 and 3 July 2008 of the RTC of Gapan City, Branch 34,
in Civil Case No. 2177, denying petitioner Violeta R. Lalicans Notice of Appeal, on
the ground that the Decision dated 30 August 2007 subject thereof, was already
final and executory. No costs.

SO ORDERED.
PHILIPPINE HEALTH CARE
PROVIDERS, INC.,
Petitioner,

G.R. No. 167330

Present:
PUNO, C.J., Chairperson,
CORONA,
CHICO-NAZARIO,*
LEONARDO-DE CASTRO and
BERSAMIN, JJ.**

- versus -

COMMISSIONER OF
INTERNAL REVENUE,
Respondent.

Promulgated:

September 18, 2009

x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15.
The State shall protect and promote the right to health of the
people and instill health consciousness among them.

ARTICLE XIII
Social Justice and Human Rights
Section 11.
The State shall adopt an integrated and comprehensive approach
to health development which shall endeavor to make essential goods, health and
other social services available to all the people at affordable cost. There shall be
priority for the needs of the underprivileged sick, elderly, disabled, women, and
children. The State shall endeavor to provide free medical care to paupers. [1]
For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, Inc.[2]
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is [t]o
establish, maintain, conduct and operate a prepaid group practice health care
delivery system or a health maintenance organization to take care of the sick and
disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization.
Individuals enrolled in its health care programs pay an annual membership fee
and are entitled to various preventive, diagnostic and curative medical services
provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.
xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent

petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest,
for the taxable years 1996 and 1997 in the total amount of 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, citingBlue 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
indemnity, they are not those contemplated under Section 185.

contracts

of

(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;

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.

Diagnostic medical services such as routine physical examinations, x-rays,

urinalysis, fecalysis, complete blood count, and the like and

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

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]

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)

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, xray 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

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,

of insurance (except life, marine, inland, and fire insurance).

or

other

branch

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, 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 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

Cross and Philamcare are applicable here.

reconsider

our

ruling

that Blue

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.
peril;

The insured is subject to a risk of loss by the happening of the designed

3.

The insurer assumes the risk;

4.
Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk and
5.

In consideration of the insurers promise, the insured pays a premium. [41]

Do the agreements between petitioner and its members possess all these
elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out
that, even if a contract contains all the elements of an insurance contract, if its
primary purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four
elements mentioned above would be an insurance contract. The primary purpose
of the parties in making the contract may negate the existence of an insurance
contract. For example, a law firm which enters into contracts with clients whereby
in consideration of periodical payments, it promises to represent such clients in all
suits for or against them, is not engaged in the insurance business. Its contracts
are simply for the purpose of rendering personal services. On the other hand, a
contract by which a corporation, in consideration of a stipulated amount, agrees
at its own expense to defend a physician against all suits for damages for
malpractice is one of insurance, and the corporation will be deemed as engaged
in the business of insurance. Unlike the lawyers retainer contract, the essential
purpose of such a contract is not to render personal services, but to indemnify
against loss and damage resulting from the defense of actions for malpractice.
[42]
(Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in
petitioners agreements. To begin with, there is no loss, damage or liability on the
part of the member that should be indemnified by petitioner as an HMO. Under

the agreement, the member pays petitioner a predetermined consideration in

exchange for the hospital, medical and professional services rendered by the
petitioners physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement,petitioner does not reimburse or
indemnify the member as the latter does not pay any third party. Instead, it is
the petitioner who pays the participating physicians and other health care
providers for the services rendered at pre-agreed rates. The member does not
make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a
monetary liability on the part of the member to any third party-provider of
medical services which might in turn necessitate indemnification from petitioner.
The terms indemnify or indemnity presuppose that a liability or claim has
already been incurred. There is no indemnity precisely because the member
merely avails of medical services to be paid or already paid in advance at a preagreed 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:

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.

ARTICLE XI
Stamp Taxes on Specified Objects

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

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:

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

xxx

xxx

xxx

and currently, there are 36 registered HMOs with a total enrollment of more than
2 million.[49]
We can clearly see from these two histories (of the DST on the one hand and
HMOs on the other) that when the law imposing the DST was first passed, HMOs
were yet unknown in the Philippines. However, when the various amendments to
the DST law were enacted, they were already in existence in the Philippines and
the term had in fact already been defined by RA 7875. If it had been the intent of
the legislature to impose DST on health care agreements, it could have done so in
clear and categorical terms. It had many opportunities to do so. But it did
not. The fact that the NIRC contained no specific provision on the DST liability of
health care agreements of HMOs at a time they were already known as such,
belies any legislative intent to impose it on them. As a matter of fact, petitioner
was assessed its DST liability only on January 27, 2000, after more than a decade
in the business as an HMO.[50]
Considering that Section 185 did not change since 1904 (except for the rate of
tax), it would be safe to say that health care agreements were never, at any time,
recognized as insurance contracts or deemed engaged in the business of
insurance within the context of the provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that security
against its abuse is to be found only in the responsibility of the legislature which
imposes the tax on the constituency who is to pay it. [51] So potent indeed is the
power that it was once opined that the power to tax involves the power to
destroy.[52]
Petitioner claims that the assessed DST to date which amounts to P376
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 inPhilippine 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, 2003sustaining the ruling of the CA. Nonetheless, the Court
ruled that the previous case ha(d) no bearing on the latter case becausethe 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 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.

ABAD, J.:
These consolidated petitions involve a cargo owners right to recover
damages from the loss of insured goods under the Carriage of Goods by Sea Act
and the Insurance Code.
The Facts and the Case
NEW WORLD INTERNATIONAL
DEVELOPMENT (PHILS.), INC.,
Petitioner,
- versus PERALTA,
ABAD, and
MENDOZA, JJ.
NYK-FILJAPAN SHIPPING CORP.,
LEP PROFIT INTERNATIONAL,
INC. (ORD), LEP INTERNATIONAL
PHILIPPINES, INC., DMT CORP.,
ADVATECH INDUSTRIES, INC.,
MARINA PORT SERVICES, INC.,
SERBROS CARRIER CORPORATION,
and SEABOARD-EASTERN
INSURANCE CO., INC.,
Respondents.

G.R. No. 171468

Present:
VELASCO, JR., J., Chairperson,
LEONARDO-DE CASTRO,*

G.R. No. 174241

- versus SEABOARD-EASTERN
INSURANCE CO., INC.,
Respondent.

Promulgated:
August 24, 2011

x --------------------------------------------------------------------------------------- x
DECISION

DMT shipped the generator sets by truck from Wisconsin, United States, to LEP
Profit International, Inc. (LEP Profit) inChicago, Illinois. From there, the shipment
went by train to Oakland, California, where it was loaded on S/S California Luna
V59, owned and operated by NYK Fil-Japan Shipping Corporation (NYK) for
delivery to petitioner New World in Manila. NYK issued a bill of lading, declaring
that it received the goods in good condition.
NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX
Ruby V/72 that it also owned and operated. On its journey to Manila, however,
ACX Ruby encountered typhoon Kadiang whose captain filed a sea protest on
arrival at the ManilaSouth Harbor on October 5, 1993 respecting the loss and
damage that the goods on board his vessel suffered.

x ------------------------------------------------- x
NEW WORLD INTERNATIONAL
DEVELOPMENT (PHILS.), INC.,
Petitioner,

Petitioner New World International Development (Phils.), Inc. (New World)

bought from DMT Corporation (DMT) through its agent, Advatech Industries, Inc.
(Advatech) three emergency generator sets worth US$721,500.00.

Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or
cargo-handling operator, received the shipment on October 7, 1993. Upon
inspection of the three container vans separately carrying the generator sets, two
vans bore signs of external damage while the third van appeared unscathed. The
shipment remained at Pier 3s Container Yard under Marinas care pending
clearance from the Bureau of Customs. Eventually, on October 20, 1993 customs
authorities allowed petitioners customs broker, Serbros Carrier Corporation
(Serbros), to withdraw the shipment and deliver the same to petitioner New
Worlds job site in MakatiCity.
An examination of the three generator sets in the presence of petitioner
New Worlds representatives, Federal Builders (the project contractor) and
surveyors of petitioner New Worlds insurer, SeaboardEastern Insurance
Company (Seaboard), revealed that all three sets suffered extensive damage and
could no longer be repaired. For these reasons, New World demanded
recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit, LEP
International Philippines, Inc. (LEP), Marina, and Serbros. While LEP and NYK
acknowledged receipt of the demand, both denied liability for the loss.

Since Seaboard covered the goods with a marine insurance policy,

petitioner New World sent it a formal claim dated November 16, 1993. Replying
on February 14, 1994, Seaboard required petitioner New World to submit to it an
itemized list of the damaged units, parts, and accessories, with corresponding
values, for the processing of the claim. But petitioner New World did not submit
what was required of it, insisting that the insurance policy did not include the
submission of such a list in connection with an insurance claim. Reacting to this,
Seaboard refused to process the claim.
On October 11, 1994 petitioner New World filed an action for specific performance
and damages against all the respondents before the Regional Trial Court (RTC)
of Makati City, Branch 62, in Civil Case 94-2770.
On August 16, 2001 the RTC rendered a decision absolving the various
respondents from liability with the exception of NYK. The RTC found that the
generator sets were damaged during transit while in the care of NYKs vessel,
ACX Ruby. The latter failed, according to the RTC, to exercise the degree of
diligence required of it in the face of a foretold raging typhoon in its path.

amended decision, reversing itself as regards the claim against Seaboard. The CA
held that the submission of the itemized listing was a reasonable requirement
that Seaboard asked of New World. Further, the CA held that the one-year
prescriptive period for maritime claims applied to Seaboard, as insurer and
subrogee of New Worlds right against the vessel owner. New Worlds failure to
comply promptly with what was required of it prejudiced such right.
Instead of filing a motion for reconsideration, petitioner instituted a second
petition for review before the Court in G.R. 174241, assailing the CAs amended
decision.
The Issues Presented
The issues presented in this case are as follows:
a)
In G.R. 171468, whether or not the CA erred in affirming the RTCs release
from liability of respondents DMT, Advatech, LEP, LEP Profit, Marina, and Serbros
who were at one time or another involved in handling the shipment; and

The RTC ruled, however, that petitioner New World filed its claim against
the vessel owner NYK beyond the one year provided under the Carriage of Goods
by Sea Act (COGSA). New World filed its complaint on October 11, 1994 when the
deadline for filing the action (on or before October 7, 1994) had already
lapsed. The RTC held that the one-year period should be counted from the date
the goods were delivered to the arrastre operator and not from the date they
were delivered to petitioners job site.[1]

b)
In G.R. 174241, 1) whether or not the CA erred in ruling that
Seaboards request from petitioner New World for an itemized list is a reasonable
imposition and did not violate the insurance contract between them; and 2)
whether or not the CA erred in failing to rule that the one-year COGSA
prescriptive period for marine claims does not apply to petitioner New Worlds
prosecution of its claim against Seaboard, its insurer.

As regards petitioner New Worlds claim against Seaboard, its insurer, the
RTC held that the latter cannot be faulted for denying the claim against it
since New World refused to submit the itemized list that Seaboard needed for
assessing the damage to the shipment. Likewise, the belated filing of the
complaint prejudiced Seaboards right to pursue a claim against NYK in the event
of subrogation.

The Courts Rulings

On appeal, the Court of Appeals (CA) rendered judgment on January 31,

2006,[2] affirming the RTCs rulings except with respect to Seaboards liability. The
CA held that petitioner New World can still recoup its loss from Seaboards marine
insurance policy, considering a) that the submission of the itemized listing is an
unreasonable imposition and b) that the one-year prescriptive period under the
COGSA did not affect New Worlds right under the insurance policy since it was
the Insurance Code that governed the relation between the insurer and the
insured.
Although petitioner New World promptly filed a petition for review of the CA
decision before the Court in G.R. 171468, Seaboard chose to file a motion for
reconsideration of that decision. On August 17, 2006 the CA rendered an

In G.R. 171468 -Petitioner New World asserts that the roles of respondents DMT, Advatech, LEP,
LEP Profit, Marina and Serbros in handling and transporting its shipment
from Wisconsin to Manila collectively resulted in the damage to the same,
rendering such respondents solidarily liable with NYK, the vessel owner.
But the issue regarding which of the parties to a dispute incurred negligence is
factual and is not a proper subject of a petition for review on certiorari. And
petitioner New World has been unable to make out an exception to this rule.
[3]
Consequently, the Court will not disturb the finding of the RTC, affirmed by the
CA, that the generator sets were totally damaged during the typhoon which beset
the vessels voyage from Hong Kong to Manila and that it was her negligence in
continuing with that journey despite the adverse condition which caused
petitioner New Worlds loss.

That the loss was occasioned by a typhoon, an exempting cause under Article
1734 of the Civil Code, does not automatically relieve the common carrier of
liability. The latter had the burden of proving that the typhoon was the proximate
and only cause of loss and that it exercised due diligence to prevent or minimize
such loss before, during, and after the disastrous typhoon. [4] As found by the RTC
and the CA, NYK failed to discharge this burden.
In G.R. 174241 -One. The Court does not regard as substantial the question of reasonableness of
Seaboards additional requirement of an itemized listing of the damage that the
generator sets suffered. The record shows that petitioner New World complied
with the documentary requirements evidencing damage to its generator sets.
The marine open policy that Seaboard issued to New World was an all-risk
policy. Such a policy insured against all causes of conceivable loss or damage
except when otherwise excluded or when the loss or damage was due to fraud or
intentional misconduct committed by the insured. The policy covered all losses
during the voyage whether or not arising from a marine peril.[5]
Here, the policy enumerated certain exceptions like unsuitable packaging,
inherent vice, delay in voyage, or vessels unseaworthiness, among others. [6] But
Seaboard had been unable to show that petitioner New Worlds loss or damage
fell within some or one of the enumerated exceptions.
What is more, Seaboard had been unable to explain how it could not verify the
damage that New Worlds goods suffered going by the documents that it already
submitted, namely, (1) copy of the Suppliers Invoice KL2504; (2) copy of the
Packing List; (3) copy of the Bill of Lading 01130E93004458; (4) the Delivery of
Waybill Receipts 1135, 1222, and 1224; (5) original copy of Marine Insurance
Policy MA-HO-000266; (6) copies of Damage Report from Supplier and Insurance
Adjusters; (7) Consumption Report from the Customs Examiner; and (8) Copies of
Received Formal Claim from the following: a) LEP International Philippines, Inc.; b)
Marina Port Services, Inc.; and c) Serbros Carrier Corporation. [7] Notably,
Seaboards own marine surveyor attended the inspection of the generator sets.

Two. Regarding prescription of claims, Section 3(6) of the COGSA provides that
the carrier and the ship shall be discharged from all liability in case of loss or
damage unless the suit is brought within one year after delivery of the goods or
the date when the goods should have been delivered.
But whose fault was it that the suit against NYK, the common carrier, was not
brought to court on time? The last day for filing such a suit fell on October 7,
1994. The record shows that petitioner New World filed its formal claim for its
loss with Seaboard, its insurer, a remedy it had the right to take, as early as
November 16, 1993 or about 11 months before the suit against NYK would have
fallen due.
In the ordinary course, if Seaboard had processed that claim and paid the same,
Seaboard would have been subrogated to petitioner New Worlds right to recover
from NYK. And it could have then filed the suit as a subrogee. But, as discussed
above, Seaboard made an unreasonable demand on February 14, 1994 for an
itemized list of the damaged units, parts, and accessories, with corresponding
values when it appeared settled that New Worlds loss was total and when the
insurance policy did not require the production of such a list in the event of a
claim.
Besides, when petitioner New World declined to comply with the demand for the
list, Seaboard against whom a formal claim was pending should not have
remained obstinate in refusing to process that claim. It should have examined
the same, found it unsubstantiated by documents if that were the case, and
formally rejected it. That would have at least given petitioner New World a clear
signal that it needed to promptly file its suit directly against NYK and the
others. Ultimately, the fault for the delayed court suit could be brought to
Seaboards doorstep.

Seaboard cannot pretend that the above documents are inadequate since they
were precisely the documents listed in its insurance policy. [8] Being a contract of
adhesion, an insurance policy is construed strongly against the insurer who
prepared it. The Court cannot read a requirement in the policy that was not there.

Section 241 of the Insurance Code provides that no insurance company doing
business in the Philippines shall refuse without just cause to pay or settle claims
arising under coverages provided by its policies. And, under Section 243, the
insurer has 30 days after proof of loss is received and ascertainment of the loss or
damage within which to pay the claim. If such ascertainment is not had within 60
days from receipt of evidence of loss, the insurer has 90 days to pay or settle the
claim. And, in case the insurer refuses or fails to pay within the prescribed time,
the insured shall be entitled to interest on the proceeds of the policy for the
duration of delay at the rate of twice the ceiling prescribed by the Monetary
Board.

Further, it appears from the exchanges of communications between Seaboard and

Advatech that submission of the requested itemized listing was incumbent on the
latter as the seller DMTs local agent. Petitioner New World should not be made
to suffer for Advatechs shortcomings.

Notably, Seaboard already incurred delay when it failed to settle petitioner New
Worlds claim as Section 243 required. Under Section 244, a prima facie evidence
of unreasonable delay in payment of the claim is created by the failure of the
insurer to pay the claim within the time fixed in Section 243.

Consequently, Seaboard should pay interest on the proceeds of the policy for the
duration of the delay until the claim is fully satisfied at the rate of twice the
ceiling prescribed by the Monetary Board. The term ceiling prescribed by the
Monetary Board means the legal rate of interest of 12% per annum provided in
Central Bank Circular 416, pursuant to Presidential Decree 116. [9] Section 244 of
the Insurance Code also provides for an award of attorneys fees and other
expenses incurred by the assured due to the unreasonable withholding of
payment of his claim.
In Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.,
[10]
the Court regarded as proper an award of 10% of the insurance proceeds as
attorneys fees. Such amount is fair considering the length of time that has
passed in prosecuting the claim. [11] Pursuant to the Courts ruling in Eastern
Shipping Lines, Inc. v. Court of Appeals,[12] a 12% interest per annum from the
finality of judgment until full satisfaction of the claim should likewise be imposed,
the interim period equivalent to a forbearance of credit.
Petitioner New World is entitled to the value stated in the policy which is
commensurate to the value of the three emergency generator sets or
US$721,500.00 with double interest plus attorneys fees as discussed above.
WHEREFORE, the Court DENIES the petition in G.R. 171468 and AFFIRMS the
Court of Appeals decision of January 31, 2006 insofar as petitioner New World
International Development (Phils.), Inc. is not allowed to recover against
respondents DMT Corporation, Advatech Industries, Inc., LEP International
Philippines, Inc., LEP Profit International, Inc., Marina Port Services, Inc. and
Serbros Carrier Corporation.
With respect to G.R. 174241, the Court GRANTS the petition and REVERSES and
SETS ASIDE the Court of Appeals Amended Decision of August 17, 2006. The
Court DIRECTS Seaboard-Eastern Insurance Company, Inc. to pay petitioner New
World International Development (Phils.), Inc. US$721,500.00 under Policy MA-HO000266, with 24% interest per annum for the duration of delay in accordance with
Sections 243 and 244 of the Insurance Code and attorneys fees equivalent to
10% of the insurance proceeds. Seaboard shall also pay, from finality of
judgment, a 12% interest per annum on the total amount due to petitioner until
its full satisfaction.
SO ORDERED.
MA. LOURDES S. FLORENDO,
Petitioner,

G.R. No. 186983

Present:
VELASCO, JR., J., Chairperson,

- versus ABAD,
MENDOZA, and
PERLAS-BERNABE, JJ.
PHILAM PLANS, INC.,
PERLA ABCEDE and
MA. CELESTE ABCEDE,
Respondents.

PERALTA,

Promulgated:
February 22, 2012

x --------------------------------------------------------------------------------------- x
DECISION
ABAD, J.:
This case is about an insureds alleged concealment in his pension plan
application of his true state of health and its effect on the life insurance portion of
that plan in case of death.
The Facts and the Case
On October 23, 1997 Manuel Florendo filed an application for comprehensive
pension plan with respondent Philam Plans, Inc. (Philam Plans) after some
convincing by respondent Perla Abcede. The plan had a pre-need price
of P997,050.00, payable in 10 years, and had a maturity value of P2,890,000.00
after 20 years.[1] Manuel signed the application and left to Perla the task of
supplying the information needed in the application. [2] Respondent Ma. Celeste
Abcede, Perlas daughter, signed the application as sales counselor. [3]
Aside from pension benefits, the comprehensive pension plan also provided life
insurance coverage to Florendo.[4] This was covered by a Group Master Policy that
Philippine American Life Insurance Company (Philam Life) issued to Philam Plans.
[5]
Under the master policy, Philam Life was to automatically provide life insurance
coverage, including accidental death, to all who signed up for Philam Plans
comprehensive pension plan.[6] If the plan holder died before the maturity of the
plan, his beneficiary was to instead receive the proceeds of the life insurance,
equivalent to the pre-need price. Further, the life insurance was to take care of
any unpaid premium until the pension plan matured, entitling the beneficiary to
the maturity value of the pension plan.[7]
On October 30, 1997 Philam Plans issued Pension Plan Agreement
PP43005584[8] to Manuel, with petitioner Ma. Lourdes S. Florendo, his wife, as
beneficiary. In time, Manuel paid his quarterly premiums.[9]

Eleven months later or on September 15, 1998, Manuel died of blood

poisoning. Subsequently, Lourdes filed a claim with Philam Plans for the payment
of the benefits under her husbands plan. [10] Because Manuel died before his
pension plan matured and his wife was to get only the benefits of his life
insurance, Philam Plans forwarded her claim to Philam Life.[11]
On May 3, 1999 Philam Plans wrote Lourdes a letter,[12] declining her
claim. Philam Life found that Manuel was on maintenance medicine for his heart
and had an implanted pacemaker. Further, he suffered from diabetes mellitus
and was taking insulin. Lourdes renewed her demand for payment under the
plan[13] but Philam Plans rejected it, [14] prompting her to file the present action
against the pension plan company before the Regional Trial Court (RTC) of Quezon
City.[15]
On March 30, 2006 the RTC rendered judgment, [16] ordering Philam Plans, Perla
and Ma. Celeste, solidarily, to pay Lourdes all the benefits from her husbands
pension plan, namely: P997,050.00, the proceeds of his term insurance,
and P2,890,000.00 lump sum pension benefit upon maturity of his
plan; P100,000.00 as moral damages; and to pay the costs of the suit. The RTC
ruled that Manuel was not guilty of concealing the state of his health from his
pension plan application.
On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision,
[17]
holding that insurance policies are traditionally contracts uberrimae fidae or
contracts of utmost good faith. As such, it required Manuel to disclose to Philam
Plans conditions affecting the risk of which he was aware or material facts that he
knew or ought to know.[18]

One. Lourdes points out that, seeing the unfilled spaces in Manuels
pension plan application relating to his medical history, Philam Plans should have
returned it to him for completion. Since Philam Plans chose to approve the
application just as it was, it cannot cry concealment on Manuels
part. Further, Lourdes adds that Philam Plans never queried Manuel directly
regarding the state of his health. Consequently, it could not blame him for not
mentioning it.[19]
But Lourdes is shifting to Philam Plans the burden of putting on the pension
plan application the true state of Manuels health. She forgets that since Philam
Plans waived medical examination for Manuel, it had to rely largely on his stating
the truth regarding his health in his application. For, after all, he knew more than
anyone that he had been under treatment for heart condition and diabetes for
more than five years preceding his submission of that application. But he kept
those crucial facts from Philam Plans.
Besides, when Manuel signed the pension plan application, he adopted as
his own the written representations and declarations embodied in it. It is clear
from these representations that he concealed his chronic heart ailment and
diabetes from Philam Plans. The pertinent portion of his representations and
declarations read as follows:
I hereby represent and declare to the best of my knowledge that:
xxxx

Issues Presented

(c)
I have never been treated for heart condition, high blood pressure,
cancer, diabetes, lung, kidney or stomach disorder or any other physical
impairment in the last five years.

The issues presented in this case are:

(d)

1.
Whether or not the CA erred in finding Manuel guilty of concealing his
illness when he kept blank and did not answer questions in his pension plan
application regarding the ailments he suffered from;

If your answer to any of the statements above reveal otherwise, please give
details in the space provided for:

2.
Whether or not the CA erred in holding that Manuel was bound by the
failure of respondents Perla and Ma. Celeste to declare the condition of Manuels
health in the pension plan application; and
3.
Whether or not the CA erred in finding that Philam Plans approval of
Manuels pension plan application and acceptance of his premium payments
precluded it from denying Lourdes claim.
Rulings of the Court

I am in good health and physical condition.

Date of confinement
: ____________________________
Name of Hospital or Clinic
: ____________________________
Name of Attending Physician
: ____________________________
Findings
: ____________________________
Others: (Please specify)
: ____________________________
x x x x.[20] (Emphasis supplied)
Since Manuel signed the application without filling in the details regarding his
continuing treatments for heart condition and diabetes, the assumption is that he
has never been treated for the said illnesses in the last five years preceding his

application. This is implicit from the phrase If your answer to any of the
statements above (specifically, the statement: I have never been treated for
heart condition or diabetes) reveal otherwise, please give details in the space
provided for. But this is untrue since he had been on Coumadin, a treatment
for venous thrombosis,[21] and insulin, a drug used in the treatment of diabetes
mellitus, at that time.[22]
Lourdes insists that Manuel had concealed nothing since Perla, the soliciting
agent, knew that Manuel had a pacemaker implanted on his chest in the 70s or
about 20 years before he signed up for the pension plan. [23] But by its tenor, the
responsibility for preparing the application belonged to Manuel. Nothing in it
implies that someone else may provide the information that Philam Plans
needed. Manuel cannot sign the application and disown the responsibility for
having it filled up. If he furnished Perla the needed information and delegated to
her the filling up of the application, then she acted on his instruction, not on
Philam Plans instruction.
Lourdes next points out that it made no difference if Manuel failed to reveal the
fact that he had a pacemaker implant in the early 70s since this did not fall within
the five-year timeframe that the disclosure contemplated. [24] But a pacemaker is
an electronic device implanted into the body and connected to the wall of the
heart, designed to provide regular, mild, electric shock that stimulates the
contraction of the heart muscles and restores normalcy to the heartbeat. [25] That
Manuel still had his pacemaker when he applied for a pension plan in October
1997 is an admission that he remained under treatment for irregular heartbeat
within five years preceding that application.
Besides, as already stated, Manuel had been taking medicine for his heart
condition and diabetes when he submitted his pension plan application. These
clearly fell within the five-year period. More, even if Perlas knowledge of
Manuels pacemaker may be applied to Philam Plans under the theory of imputed
knowledge,[26] it is not claimed that Perla was aware of his two other afflictions
that needed medical treatments. Pursuant to Section 27[27] of the Insurance Code,
Manuels concealment entitles Philam Plans to rescind its contract of insurance
with him.
Two. Lourdes contends that the mere fact that Manuel signed the
application in blank and let Perla fill in the required details did not make her his
agent and bind him to her concealment of his true state of health. Since there is
no evidence of collusion between them, Perlas fault must be considered solely
her own and cannot prejudice Manuel.[28]
But Manuel forgot that in signing the pension plan application, he certified
that he wrote all the information stated in it or had someone do it under his
direction. Thus:

APPLICATION FOR PENSION PLAN

(Comprehensive)
I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan
Program described herein in accordance with the General Provisions set forth in
this application and hereby certify that the date and other information stated
herein are written by me or under my direction. x x x.[29] (Emphasis supplied)
Assuming that it was Perla who filled up the application form, Manuel is still bound
by what it contains since he certified that he authorized her action. Philam Plans
had every right to act on the faith of that certification.
Lourdes could not seek comfort from her claim that Perla had assured Manuel that
the state of his health would not hinder the approval of his application and that
what is written on his application made no difference to the insurance
company. But, indubitably, Manuel was made aware when he signed the pension
plan application that, in granting the same, Philam Plans and Philam Life were
acting on the truth of the representations contained in that application. Thus:
DECLARATIONS AND REPRESENTATIONS
xxxx
I agree that the insurance coverage of this application is based on the truth of the
foregoing representations and is subject to the provisions of the Group Life
Insurance Policy issued by THE PHILIPPINE AMERICAN LIFE INSURANCE CO. to
PHILAM PLANS, INC.[30] (Emphasis supplied)
As the Court said in New Life Enterprises v. Court of Appeals:[31]
It may be true that x x x insured persons may accept policies without reading
them, and that this is not negligence per se. But, this is not without any
exception. It is and was incumbent upon petitioner Sy to read the insurance
contracts, and this can be reasonably expected of him considering that he has
been a businessman since 1965 and the contract concerns indemnity in case of
loss in his money-making trade of which important consideration he could not
have been unaware as it was precisely the reason for his procuring the same. [32]
The same may be said of Manuel, a civil engineer and manager of a construction
company.[33] He could be expected to know that one must read every document,
especially if it creates rights and obligations affecting him, before signing the
same. Manuel is not unschooled that the Court must come to his succor. It could
reasonably be expected that he would not trifle with something that would
provide additional financial security to him and to his wife in his twilight years.

Three. In a final attempt to defend her claim for benefits under Manuels
pension plan, Lourdes points out that any defect or insufficiency in the
information provided by his pension plan application should be deemed waived
after the same has been approved, the policy has been issued, and the premiums
have been collected. [34]

CORPORATION,

The Court cannot agree. The comprehensive pension plan that Philam
Plans issued contains a one-year incontestability period. It states:

CARPIO, J.:

VIII. INCONTESTABILITY
After this Agreement has remained in force for one (1) year, we can no longer
contest for health reasons any claim for insurance under this Agreement, except
for the reason that installment has not been paid (lapsed), or that you are not
insurable at the time you bought this pension program by reason of age. If this
Agreement lapses but is reinstated afterwards, the one (1) year contestability
period shall start again on the date of approval of your request for reinstatement.

July 11, 2012

Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION

The Case
This Petition for Review on Certiorari [1] seeks to reverse the Court of
Appeals Decision[2] dated 16 June 2011 and its Resolution [3] dated 8 September
2011 in CA-G.R. CV No. 85777. The Court of Appeals reversed the Decision [4] of
the Regional Trial Court (RTC) of Manila, Branch 3, and ruled that the claim on the
Insurance Policy is void.
The Facts

[35]

The facts, as culled from the records, are as follows:

The above incontestability clause precludes the insurer from disowning liability
under the policy it issued on the ground of concealment or misrepresentation
regarding the health of the insured after a year of its issuance.
Since Manuel died on the eleventh month following the issuance of his plan, [36] the
one year incontestability period has not yet set in. Consequently, Philam Plans
was not barred from questioning Lourdes entitlement to the benefits of her
husbands pension plan.
WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of
Appeals in CA-G.R. CV 87085 dated December 18, 2007.

Petitioner United Merchants Corporation (UMC) is engaged in the business

of buying, selling, and manufacturing Christmas lights. UMC leased a warehouse
at 19-B Dagot Street, San Jose Subdivision, Barrio Manresa, Quezon City, where
UMC assembled and stored its products.
On 6 September 1995, UMCs General Manager Alfredo Tan insured UMCs
stocks in trade of Christmas lights against fire with defendant Country Bankers
Insurance Corporation (CBIC) for P15,000,000.00. The Fire Insurance Policy No. FHO/95-576 (Insurance Policy) and Fire Invoice No. 12959A, valid until 6 September
1996, states:
AMOUNT OF INSURANCE:

SO ORDERED.
UNITED MERCHANTS
CORPORATION,

G.R. No. 198588

Petitioner,

- versus -

Present:

xxx

CARPIO, J., Chairperson,

BRION,
PEREZ,
SERENO, and
REYES, JJ.

PROPERTY INSURED: On stocks in trade only, consisting of Christmas Lights, the

properties of the Assured or held by them in trust, on commissions, or on joint
account with others and/or for which they are responsible in the event of loss
and/or damage during the currency of this policy, whilst contained in the building
of one lofty storey in height, constructed of concrete and/or hollow blocks with
portion of galvanized iron sheets, under galvanized iron rood, occupied as
Christmas lights storage.[5]

Promulgated:
COUNTRY

BANKERS

INSURANCE

FIFTEEN
MILLION PESOS
PHILIPPINE
CURRENCY

On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire
Invoice No. 16583A to form part of the Insurance Policy. Endorsement F/96-154
provides that UMCs stocks in trade were insured against additional perils, to wit:
typhoon, flood, ext. cover, and full earthquake. The sum insured was also
increased to P50,000,000.00 effective 7 May 1996 to 10 January 1997. On 9 May
1996, CBIC issued Endorsement F/96-157 where the name of the assured was
changed from Alfredo Tan to UMC.
On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC
designated CRM Adjustment Corporation (CRM) to investigate and evaluate UMCs
loss by reason of the fire. CBICs reinsurer, Central Surety, likewise requested the
National Bureau of Investigation (NBI) to conduct a parallel investigation. On 6
July 1996, UMC, through CRM, submitted to CBIC its Sworn Statement of Formal
Claim, with proofs of its loss.
On 20 November 1996, UMC demanded for at least fifty percent (50%)
payment of its claim from CBIC. On 25 February 1997, UMC received CBICs letter,
dated 10 January 1997, rejecting UMCs claim due to breach of Condition No. 15
of the Insurance Policy. Condition No. 15 states:
If the claim be in any respect fraudulent, or if any false declaration be made or
used in support thereof, or if any fraudulent means or devices are used by the
Insured or anyone acting in his behalf to obtain any benefit under this Policy; or if
the loss or damage be occasioned by the willful act, or with the connivance of the
Insured, all the benefits under this Policy shall be forfeited. [6]
On 19 February 1998, UMC filed a Complaint[7] against CBIC with the RTC of
Manila. UMC anchored its insurance claim on the Insurance Policy, the Sworn
Statement of Formal Claim earlier submitted, and the Certification dated 24 July
1996 made by Deputy Fire Chief/Senior Superintendent Bonifacio J. Garcia of the
Bureau of Fire Protection. The Certification dated 24 July 1996 provides that:
This is to certify that according to available records of this office, on or about 6:10
P.M. of July 3, 1996, a fire broke out at United Merchants Corporation located at
19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an estimated damage
of Fifty-Five Million Pesos (P55,000,000.00) to the building and contents, while the
reported insurance coverage amounted to Fifty Million Pesos (P50,000,000.00)
with Country Bankers Insurance Corporation.
The Bureau further certifies that no evidence was gathered to prove that
the establishment was willfully, feloniously and intentionally set on fire.
That the investigation of the fire incident is already closed being
ACCIDENTAL in nature.[8]

In its Answer with Compulsory Counterclaim [9] dated 4 March 1998, CBIC
admitted the issuance of the Insurance Policy to UMC but raised the following
defenses: (1) that the Complaint states no cause of action; (2) that UMCs claim
has already prescribed; and (3) that UMCs fire claim is tainted with fraud. CBIC
alleged that UMCs claim was fraudulent because UMCs Statement of Inventory
showed that it had no stocks in trade as of 31 December 1995, and that UMCs
suspicious purchases for the year 1996 did not even amount to P25,000,000.00.
UMCs GIS and Financial Reports further revealed that it had insufficient capital,
which meant UMC could not afford the alleged P50,000,000.00 worth of stocks in
trade.
In its Reply[10] dated 20 March 1998, UMC denied violation of Condition No.
15 of the Insurance Policy. UMC claimed that it did not make any false declaration
because the invoices were genuine and the Statement of Inventory was for
internal revenue purposes only, not for its insurance claim.
During trial, UMC presented five witnesses. The first witness was Josie
Ebora (Ebora), UMCs disbursing officer. Ebora testified that UMCs stocks in trade,
at the time of the fire, consisted of: (1) raw materials for its Christmas lights;
(2) Christmas lights already assembled; and (3) Christmas lights purchased from
local suppliers. These stocks in trade were delivered from August 1995 to May
1996. She stated that Straight Cargo Commercial Forwarders delivered the
imported materials to the warehouse, evidenced by delivery receipts. However,
for the year 1996, UMC had no importations and only bought from its local
suppliers. Ebora identified the suppliers as Fiber Technology Corporation from
which UMC bought stocks worth P1,800,000.00 on 20 May 1996; Fuze Industries
Manufacturer Philippines from which UMC bought stocks worth P19,500,000.00
from 20 January 1996 to 23 February 1996; and Tomco Commercial Press from
which UMC bought several Christmas boxes. Ebora testified that all these
deliveries were not yet paid. Ebora also presented UMCs Balance Sheet, Income
Statement and Statement of Cash Flow. Per her testimony, UMCs purchases
amounted to P608,986.00 in 1994; P827,670.00 in 1995; and P20,000,000.00 in
1996. Ebora also claimed that UMC had sales only from its fruits business but no
sales from its Christmas lights for the year 1995.
The next witness, Annie Pabustan (Pabustan), testified that her company
provided about 25 workers to assemble and pack Christmas lights for UMC from
28 March 1996 to 3 July 1996. The third witness, Metropolitan Bank and Trust
Company (MBTC) Officer Cesar Martinez, stated that UMC opened letters of credit
with MBTC for the year 1995 only. The fourth witness presented was Ernesto Luna
(Luna), the delivery checker of Straight Commercial Cargo Forwarders. Luna
affirmed the delivery of UMCs goods to its warehouse on 13 August 1995, 6
September 1995,
8 September 1995, 24 October 1995, 27 October 1995, 9
November 1995, and 19 December 1995. Lastly, CRMs adjuster Dominador
Victorio testified that he inspected UMCs warehouse and prepared preliminary
reports in this connection.

On the other hand, CBIC presented the claims manager Edgar Caguindagan
(Caguindagan), a Securities and Exchange Commission (SEC) representative, Atty.
Ernesto Cabrera (Cabrera), and NBI Investigator Arnold Lazaro (Lazaro).
Caguindagan testified that he inspected the burned warehouse on 5 July 1996,
took pictures of it and referred the claim to an independent adjuster. The SEC
representatives testimony was dispensed with, since the parties stipulated on the
existence of certain documents, to wit: (1) UMCs GIS for 1994-1997; (2) UMCs
Financial Report as of
31 December 1996; (3) SEC Certificate that UMC did not
file GIS or Financial Reports for certain years; and (4) UMCs Statement of
Inventory as of 31 December 1995 filed with the BIR.
Cabrera and Lazaro testified that they were hired by Central Surety to
investigate UMCs claim. On 19 November 1996, they concluded that arson was
committed based from their interview with barangay officials and the pictures
showing that blackened surfaces were present at different parts of the
warehouse. On cross-examination, Lazaro admitted that they did not conduct a
forensic investigation of the warehouse, nor did they file a case for arson.
For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of
the documents of UCPB General Insurance, the insurer of Perfect Investment
Company, Inc., the warehouse owner. When asked to bring documents related to
the insurance of Perfect Investment Company, Inc., Batallones brought the papers
of Perpetual Investment, Inc.
The Ruling of the Regional Trial Court

Fraud is never presumed but must be proved by clear and convincing

evidence. (see Alonso v. Cebu Country Club, 417 SCRA 115 [2003]) Defendant
failed to establish by clear and convincing evidence that the documents
submitted to the SEC and BIR were true. It is common business practice for
corporations to have 2 sets of reports/statements for tax purposes. The stipulated
documents of plaintiff (Exhs. 2 8) may not have been accurate.
The conflicting findings of defendants adjuster, CRM Adjustment [with
stress] and that made by Atty. Cabrera & Mr. Lazaro for Central Surety shall be
resolved in favor of the former. Definitely the formers finding is more credible as
it was made soon after the fire while that of the latter was done 4 months later.
Certainly it would be a different situation as the site was no longer the same after
the clearing up operation which is normal after a fire incident. The Christmas
lights and parts could have been swept away. Hence the finding of the latter
appears to be speculative to benefit the reinsurer and which defendant wants to
adopt to avoid liability.
The CRM Adjustment report found no arson and confirmed substantial
stocks in the burned warehouse (Exhs. QQQ) [underscoring supplied]. This is
bolstered by the BFP certification that there was no proof of arson and the fire
was accidental (Exhs. PPP). The certification by a government agency like BFP is
presumed to be a regular performance of official duty. Absent convincing
evidence to the contrary, the presumption of regularity in the performance of
official functions has to be upheld. (People vs. Lapira, 255 SCRA 85) The report of
UCPB General Insurances adjuster also found no arson so that the burned
warehouse owner PIC was indemnified.[12]

On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor

of UMC, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
ordering defendant to pay plaintiff:
a) the sum of P43,930,230.00 as indemnity with interest thereon at
6% per annum from November 2003 until fully paid;
b) the sum of P100,000.00 for exemplary damages;
c) the sum of P100,000.00 for attorneys fees; and
d) the costs of suit.
Defendants counterclaim is denied for lack of merit.
SO ORDERED.[11]
The RTC found no dispute as to UMCs fire insurance contract with CBIC.
Thus, the RTC ruled for UMCs entitlement to the insurance proceeds, as follows:

Hence, CBIC filed an appeal with the Court of Appeals (CA).

The Ruling of the Court of Appeals
On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The
dispositive portion of the Decision reads:
WHEREFORE, in view of the foregoing premises, the instant appeal is
GRANTED and the Decision of the Regional Trial Court, of the National Judicial
Capital Region, Branch 3 of the City of Manila dated June 16, 2005 in Civil Case
No. 98-87370 is REVERSED and SET ASIDE. The plaintiff-appellees claim upon its
insurance policy is deemed avoided.
SO ORDERED.[13]
The CA ruled that UMCs claim under the Insurance Policy is void. The CA
found that the fire was intentional in origin, considering the array of evidence

submitted by CBIC, particularly the pictures taken and the reports of Cabrera and
Lazaro, as opposed to UMCs failure to explain the details of the alleged fire
accident. In addition, it found that UMCs claim was overvalued through
fraudulent transactions. The CA ruled:

Exhs. RRWisdom
EEE, inclusive Manpower
Services

361,966.00

We have meticulously gone over the entirety of the evidence submitted

by the parties and have come up with a conclusion that the claim of the plaintiffappellee was indeed overvalued by transactions which were fraudulently
concocted so that the full coverage of the insurance policy will have to be fully
awarded to the plaintiff-appellee.
First, We turn to the backdrop of the plaintiff-appellees case, thus, [o]n
September 6, 1995 its stocks-in-trade were insured for Fifteen Million Pesos and
on May 7, 1996 the same was increased to 50 Million Pesos. Two months
thereafter, a fire gutted the plaintiff-appellees warehouse.
Second, We consider the reported purchases of the plaintiff-appellee as
shown in its financial report dated December 31, 1996 vis--vis the testimony of
Ms. Ebora thus:
1994- P608,986.00
1995- P827,670.00
1996- P20,000,000.00 (more or less) which were purchased for a period of one
month.
Third, We shall also direct our attention to the alleged true and complete
purchases of the plaintiff-appellee as well as the value of all stock-in-trade it had
at the time that the fire occurred. Thus:
Exhibit
Source
Amount (pesos) Dates Covered
Exhs. P-DD, Fuze Industries
19,550,400.00 January 20, 1996
inclusive
Manufacturer
January 31, 1996
Phils.
February 12, 1996
February 20, 1996
February 23, 1996
Exhs. EE-HH, Tomco
1,712,000.00
December 19, 1995
Commercial Press
January 24, 1996
inclusive
February 21, 1996
November 24, 1995
Exhs. II-QQ, Precious Belen
2,720,400.00
January 13, 1996
inclusive
Trading
January 19, 1996
January 26, 1996
February 3, 1996
February 13, 1996
February 20, 1996
February 27, 1996

Exhs. GGGCosts of Letters of 15,159,144.71

NNN, inclusive Credit for
imported raw
materials

Exhs. GGG-11 SCCFI statements384,794.38

- GGG-24,
of account
HHH-12,
HHH-22,
III11, III-14,
JJJ-13,
KKK11, LLL-5

TOTAL

April 3, 1996
April 12, 1996
April 19, 1996
April 26, 1996
May 3, 1996
May 10, 1996
May 17, 1996
May 24, 1996
June 7, 1996
June 14, 1996
June 21, 1996
June 28, 1996
July 5, 1996
May 29, 1995
June 15, 1995
July 5, 1995
September 4, 1995
October 2, 1995
October 27, 1995
January 8, 1996
March 19, 1996
June 15, 1995
June 28, 1995
August 1, 1995
September 4, 1995
September 8, 1995
September
11,
1995
October 30, 199[5]
November 10, 1995
December 21, 1995

44,315,024.31

Fourth, We turn to the allegation of fraud by the defendant-appellant by

thoroughly looking through the pieces of evidence that it adduced during the trial.
The latter alleged that fraud is present in the case at bar as shown by the
discrepancy of the alleged purchases from that of the reported purchases made
by plaintiff-appellee. It had also averred that fraud is present when upon
verification of the address of Fuze Industries, its office is nowhere to be found.
Also, the defendant-appellant expressed grave doubts as to the purchases of the

plaintiff-appellee sometime in 1996 when such purchases escalated to a high 19.5

Million Pesos without any contract to back it up. [14]
On 7 July 2011, UMC filed a Motion for Reconsideration, [15] which the CA denied in
its Resolution dated 8 September 2011. Hence, this petition.
The Issues
UMC seeks a reversal and raises the following issues for resolution:
I.
WHETHER THE COURT OF APPEALS MADE A RULING INCO[N]SISTENT WITH LAW,
APPLICABLE JURISPRUDENCE AND EVIDENCE AS TO THE EXISTENCE OF ARSON
AND FRAUD IN THE ABSENCE OF MATERIALLY CONVINCING EVIDENCE.
II.
WHETHER THE COURT OF APPEALS MADE A RULING INCONSISTENT WITH LAW,
APPLICABLE JURISPRUDENCE AND EVIDENCE WHEN IT FOUND THAT PETITIONER
BREACHED ITS WARRANTY.[16]
The Ruling of the Court
At the outset, CBIC assails this petition as defective since what UMC
ultimately wants this Court to review are questions of fact. However, UMC argues
that where the findings of the CA are in conflict with those of the trial court, a
review of the facts may be made. On this procedural issue, we find UMCs claim
meritorious.
A petition for review under Rule 45 of the Rules of Court specifically
provides that only questions of law may be raised. The findings of fact of the CA
are final and conclusive and this Court will not review them on appeal, [17] subject
to exceptions as when the findings of the appellate court conflict with the findings
of the trial court.[18] Clearly, the present case falls under the exception. Since
UMC properly raised the conflicting findings of the lower courts, it is proper for
this Court to resolve such contradiction.
Having settled the procedural issue, we proceed to the primordial issue
which boils down to whether UMC is entitled to claim from CBIC the full coverage
of its fire insurance policy.
UMC contends that because it had already established a prima facie case
against CBIC which failed to prove its defense, UMC is entitled to claim the full
coverage under the Insurance Policy. On the other hand, CBIC contends that
because arson and fraud attended the claim, UMC is not entitled to recover under
Condition No. 15 of the Insurance Policy.

Burden of proof is the duty of any party to present evidence to establish

his claim or defense by the amount of evidence required by law, [19] which is
preponderance of evidence in civil cases. [20] The party, whether plaintiff or
defendant, who asserts the affirmative of the issue has the burden of proof to
obtain a favorable judgment.[21] Particularly, in insurance cases, once an insured
makes out a prima facie case in its favor, the burden of evidence shifts to the
insurer to controvert the insureds prima faciecase.[22] In the present case, UMC
established a prima facie case against CBIC. CBIC does not dispute that UMCs
stocks in trade were insured against fire under the Insurance Policy and that the
warehouse, where UMCs stocks in trade were stored, was gutted by fire on 3 July
1996, within the duration of the fire insurance. However, since CBIC alleged an
excepted risk, then the burden of evidence shifted to CBIC to prove such
exception.
An insurer who seeks to defeat a claim because of an exception or
limitation in the policy has the burden of establishing that the loss comes within
the purview of the exception or limitation. [23] If loss is proved apparently within a
contract of insurance, the burden is upon the insurer to establish that the loss
arose from a cause of loss which is excepted or for which it is not liable, or from a
cause which limits its liability. [24] In the present case, CBIC failed to discharge its
primordial burden of establishing that the damage or loss was caused by arson, a
limitation in the policy.
In prosecutions for arson, proof of the crime charged is complete where
the evidence establishes: (1) the corpus delicti, that is, a fire caused by a criminal
act; and (2) the identity of the defendants as the one responsible for the crime.
[25]
Corpus delictimeans the substance of the crime, the fact that a crime has
actually been committed.[26] This is satisfied by proof of the bare occurrence of the
fire and of its having been intentionally caused.[27]
In the present case, CBICs evidence did not prove that the fire was
intentionally caused by the insured. First, the findings of CBICs witnesses,
Cabrera and Lazaro, were based on an investigation conducted more than four
months after the fire. The testimonies of Cabrera and Lazaro, as to the boxes
doused with kerosene as told to them by barangay officials, are hearsay because
the barangay officials were not presented in court. Cabrera and Lazaro even
admitted that they did not conduct a forensic investigation of the warehouse nor
did they file a case for arson. [28] Second, the Sworn Statement of Formal Claim
submitted by UMC, through CRM, states that the cause of the fire was faulty
electrical wiring/accidental in nature. CBIC is bound by this evidence because in
its Answer, it admitted that it designated CRM to evaluate UMCs loss. Third, the
Certification by the Bureau of Fire Protection states that the fire was accidental in
origin. This Certification enjoys the presumption of regularity, which CBIC failed to
rebut.

Contrary to UMCs allegation, CBICs failure to prove arson does not mean
that it also failed to prove fraud. Qua Chee Gan v. Law Union [29] does not apply in
the present case. In Qua Chee Gan,[30] the Court dismissed the allegation of fraud
based on the dismissal of the arson case against the insured, because the
evidence was identical in both cases, thus:

assembling the Christmas lights and delivery receipts could not support its
insurance claim. The Insurance Policy provides that CBIC agreed to insure UMCs
stocks in trade. UMC defined stock in trade as tangible personal property kept for
sale or traffic.[33] Applying UMCs definition, only the letters of credit and invoices
for raw materials, Christmas lights and cartons may be considered.

While the acquittal of the insured in the arson case is not res judicata on the
present civil action, the insurers evidence, to judge from the decision in the
criminal case, is practically identical in both cases and must lead to the same
result, since the proof to establish the defense of connivance at the fire in order to
defraud the insurer cannot be materially less convincing than that required in
order to convict the insured of the crime of arson (Bachrach vs. British American
Assurance Co., 17 Phil. 536). [31]

The invoices, however, cannot be taken as genuine. The invoices reveal that the
stocks in trade purchased for 1996 amounts to P20,000,000.00 which were
purchased in one month. Thus, UMC needs to prove purchases amounting
to P30,000,000.00 worth of stocks in trade for 1995 and prior years. However, in
the Statement of Inventory it submitted to the BIR, which is considered an entry
in official records,[34] UMC stated that it had no stocks in trade as of 31 December
1995. In its defense, UMC alleged that it did not include as stocks in trade the raw
materials to be assembled as Christmas lights, which it had on 31 December
1995. However, as proof of its loss, UMC submitted invoices for raw materials,
knowing that the insurance covers only stocks in trade.

In the present case, arson and fraud are two separate grounds based on
two different sets of evidence, either of which can void the insurance claim of
UMC. The absence of one does not necessarily result in the absence of the
other. Thus, on the allegation of fraud, we affirm the findings of the Court of
Appeals.
Condition No. 15 of the Insurance Policy provides that all the benefits under
the policy shall be forfeited, if the claim be in any respect fraudulent, or if any
false declaration be made or used in support thereof, to wit:
15. If the claim be in any respect fraudulent, or if any false declaration be made
or used in support thereof, or if any fraudulent means or devices are used by the
Insured or anyone acting in his behalf to obtain any benefit under this Policy; or if
the loss or damage be occasioned by the willful act, or with the connivance of the
Insured, all the benefits under this Policy shall be forfeited.
In Uy Hu & Co. v. The Prudential Assurance Co., Ltd.,[32] the Court held that
where a fire insurance policy provides that if the claim be in any respect
fraudulent, or if any false declaration be made or used in support thereof, or if
any fraudulent means or devices are used by the Insured or anyone acting on his
behalf to obtain any benefit under this Policy, and the evidence is conclusive that
the proof of claim which the insured submitted was false and fraudulent both as
to the kind, quality and amount of the goods and their value destroyed by the fire,
such a proof of claim is a bar against the insured from recovering on the policy
even for the amount of his actual loss.
In the present case, as proof of its loss of stocks in trade amounting
to P50,000,000.00, UMC submitted its Sworn Statement of Formal Claim together
with the following documents: (1) letters of credit and invoices for raw materials,
Christmas lights and cartons purchased; (2) charges for assembling the Christmas
lights; and (3) delivery receipts of the raw materials. However, the charges for

Equally important, the invoices (Exhibits P-DD) from Fuze Industries

Manufacturer Phils. were suspicious. The purchases, based on the invoices and
without any supporting contract, amounted to P19,550,400.00 worth of Christmas
lights from 20 January 1996 to 23 February 1996. The uncontroverted testimony
of Cabrera revealed that there was no Fuze Industries Manufacturer Phils. located
at 55 Mahinhin St., Teachers Village, Quezon City, the business address
appearing in the invoices and the records of the Department of Trade & Industry.
Cabrera testified that:
A: Then we went personally to the address as I stated a while ago appearing in
the record furnished by the United Merchants Corporation to the adjuster, and the
adjuster in turn now, gave us our basis in conducting investigation, so we went to
this place which according to the records, the address of this company but there
was no office of this company.
Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon City and
discover the address indicated by the United Merchants as the place of business
of Fuze Industries Manufacturer, Phils. was a residential place, what then did you
do after determining that it was a residential place?
A: We went to the owner of the alleged company as appearing in the Department
of Trade & Industry record, and as appearing a certain Chinese name Mr. Huang,
and the address as appearing there is somewhere in Binondo. We went personally
there together with the NBI Agent and I am with them when the subpoena was
served to them, but a male person approached us and according to him, there
was no Fuze Industries Manufacturer, Phils., company in that building sir. [35]
In Yu Ban Chuan v. Fieldmens Insurance, Co., Inc.,[36] the Court ruled that
the submission of false invoices to the adjusters establishes a clear case of fraud

and misrepresentation which voids the insurers liability as per condition of the
policy. Their falsity is the best evidence of the fraudulent character of plaintiffs
claim.[37] In Verendia v. Court of Appeals,[38] where the insured presented a
fraudulent lease contract to support his claim for insurance benefits, the Court
held that by its false declaration, the insured forfeited all benefits under the policy
provision similar to Condition No. 15 of the Insurance Policy in this case.
Furthermore, UMCs Income Statement indicated that the purchases or
costs of sales are P827,670.00 for 1995 andP1,109,190.00 for 1996 or a total
of P1,936,860.00.[39] To corroborate this fact, Ebora testified that:
Q: Based on your 1995 purchases, how much were the purchases made in 1995?
A: The purchases made by United Merchants Corporation for the last year 1995
is P827,670.[00] sir
Q: And how about in 1994?
A: In 1994, its P608,986.00 sir.
Q: These purchases were made for the entire year of 1995 and 1994 respectively,
am I correct?
A: Yes sir, for the year 1994 and 1995.[40] (Emphasis supplied)
In its 1996 Financial Report, which UMC admitted as existing, authentic and duly
executed during the 4 December 2002 hearing, it had P1,050,862.71 as total
assets and P167,058.47 as total liabilities.[41]
Thus, either amount in UMCs Income Statement or Financial Reports
is twenty-five times the claim UMC seeks to enforce. The RTC itself recognized
that UMC padded its claim when it only allowed P43,930,230.00 as insurance
claim. UMC supported its claim of P50,000,000.00 with the Certification from the
Bureau of Fire Protection stating that x x x a fire broke out at United Merchants
Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring
an estimated damage of Fifty- Five Million Pesos (P55,000,000.00) to the building
and contents x x x. However, this Certification only proved that the estimated
damage of P55,000,000.00 is shared by both the building and the stocks in trade.
It has long been settled that a false and material statement made with an
intent to deceive or defraud voids an insurance policy. [42] In Yu Cua v. South
British Insurance Co.,[43] the claim was fourteen times bigger than the real loss;
in Go Lu v. Yorkshire Insurance Co,[44] eight times; and in Tuason v. North China
Insurance Co.,[45] six times. In the present case, the claim is twenty five times the
actual claim proved.
The most liberal human judgment cannot attribute such difference to mere
innocent error in estimating or counting but to a deliberate intent to demand from
insurance companies payment for indemnity of goods not existing at the time of
the fire.[46] This constitutes the so-called fraudulent claim which, by express

agreement between the insurers and the insured, is a ground for the exemption of
insurers from civil liability.[47]
In its Reply, UMC admitted the discrepancies when it stated
that discrepancies in its statements were not covered by the warranty such that
any discrepancy in the declaration in other instruments or documents as to
matters that may have some relation to the insurance coverage voids the
policy.[48]
On UMCs allegation that it did not breach any warranty, it may be argued
that the discrepancies do not, by themselves, amount to a breach of warranty.
However, the Insurance Code provides that a policy may declare that a violation
of specified provisions thereof shall avoid it. [49] Thus, in fire insurance policies,
which contain provisions such as Condition No. 15 of the Insurance Policy, a
fraudulent discrepancy between the actual loss and that claimed in the proof of
loss voids the insurance policy. Mere filing of such a claim will exonerate the
insurer.[50]
Considering that all the circumstances point to the inevitable conclusion
that UMC padded its claim and was guilty of fraud, UMC violated Condition No. 15
of the Insurance Policy. Thus, UMC forfeited whatever benefits it may be entitled
under the Insurance Policy, including its insurance claim.
While it is a cardinal principle of insurance law that a contract of insurance
is to be construed liberally in favor of the insured and strictly against the insurer
company,[51] contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves
have used.[52] If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular sense. Courts are not permitted to
make contracts for the parties; the function and duty of the courts is simply to
enforce and carry out the contracts actually made.[53]
WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011
Decision and the 8 September 2011 Resolution of the Court of Appeals in CA-G.R.
CV No. 85777.
SO ORDERED.
G.R. No. 173773
November 28, 2012
PARAMOUNT
INSURANCE
CORPORATION, Petitioner,
vs.
SPOUSES YVES and MARIA TERESA REMONDEULAZ, Respondents.
DECISION
PERALTA, J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking the reversal and setting aside of the Decision 1 dated April 12, 2005 and
Resolution2 dated July 20, 2006 of the Court of Appeals in CA-G.R. CV No. 61490.
The undisputed facts follow.
On May 26, 1994, respondents insured with petitioner their 1994
Toyota Corolla sedan under a comprehensive motor vehicle insurance policy for
one year.
During the effectivity of said insurance, respondents car was unlawfully taken.
Hence, they immediately reported the theft to the Traffic Management Command
of the PNP who made them accomplish a complaint sheet. In said complaint
sheet, respondents alleged that a certain Ricardo Sales (Sales) took possession of
the subject vehicle to add accessories and improvements thereon, however, Sales
failed to return the subject vehicle within the agreed three-day period.
As a result, respondents notified petitioner to claim for the reimbursement of their
lost vehicle. However, petitioner refused to pay.
Accordingly, respondents lodged a complaint for a sum of money against
petitioner before the Regional Trial Court of Makati City (trial court) praying for the
payment of the insured value of their car plus damages on April 21, 1995.
After presentation of respondents evidence, petitioner filed a Demurrer to
Evidence.
Acting thereon, the trial court dismissed the complaint filed by respondents. The
full text of said Order3 reads:
Before the Court is an action filed by the plaintiffs, spouses Yves and Maria Teresa
Remondeulaz against the defendant, Paramount Insurance Corporation, to
recover from the defendant the insured value of the motor vehicle.
It appears that on 26 May 1994, plaintiffs insured their vehicle, a 1994 Toyota
Corolla XL with chassis number EE-100-9524505, with defendant under Private
Car Policy No. PC-37396 for Own Damage, Theft, Third-Party Property Damage
and Third-Party Personal Injury, for the period commencing 26 May 1994 to 26
May 1995. Then on 1 December 1994, defendants received from plaintiff a
demand letter asking for the payment of the proceeds in the amount of
PhP409,000.00 under their policy. They alleged the loss of the vehicle and
claimed the same to be covered by the policys provision on "Theft." Defendant
disagreed and refused to pay.
It appears, however, that plaintiff had successfully prosecuted and had been
awarded the amount claimed in this action, in another action (Civil Case No. 951524 entitled Sps. Yves and Maria Teresa Remondeulaz versus Standard Insurance
Company, Inc.), which involved the loss of the same vehicle under the same
circumstances although under a different policy and insurance company. This,
considered with the principle that an insured may not recover more than its
interest in any property subject of an insurance, leads the court to dismiss this
action.
SO ORDERED.4
Not in conformity with the trial courts Order, respondents interposed an appeal to
the Court of Appeals (appellate court).

In its Decision dated April 12, 2005, the appellate court reversed and set aside
the Order issued by the trial court, to wit:
Indeed, the trial court erred when it dismissed the action on the ground of double
recovery since it is clear that the subject car is different from the one insured with
another insurance company, the Standard Insurance Company. In this case,
defendant-appellee herein petitioner denied the reimbursement for the lost
vehicle on the ground that the said loss could not fall within the concept of the
"theft clause" under the insurance policy x x x
xxxx
WHEREFORE, the October 7, 1998 Order of the Regional Trial Court of Makati City,
Branch 63, is hereby REVERSED and SET ASIDE
x x x.
SO ORDERED.5
Petitioner, thereafter, filed a motion for reconsideration against said Decision, but
the same was denied by the appellate court in a Resolution dated July 20, 2006.
Consequently, petitioner filed a petition for review on certiorari before this Court
praying that the appellate courts Decision and Resolution be reversed and set
aside.
In its petition, petitioner raises this issue for our resolution:
Whether or not the Court of Appeals decided the case a quo in a way not in
accord with law and/or applicable jurisprudence when it promulgated in favor of
the respondents Remondeulaz, making Paramount liable for the alleged "theft" of
respondents vehicle.6
Essentially, the issue is whether or not petitioner is liable under the insurance
policy for the loss of respondents vehicle.
Petitioner argues that the loss of respondents vehicle is not a peril covered by
the policy. It maintains that it is not liable for the loss, since the car cannot be
classified as stolen as respondents entrusted the possession thereof to another
person.
We do not agree.
Adverse to petitioners claim, respondents policy clearly undertook to indemnify
the insured against loss of or damage to the scheduled vehicle when caused by
theft, to wit:
SECTION III LOSS OR DAMAGE
1. The Company will, subject to the Limits of Liability, indemnify the insured
against loss of or damage to the Scheduled Vehicle and its accessories and spare
parts whilst thereon:
(a) by accidental collision or overturning, or collision or overturning consequent
upon mechanical breakdown or consequent upon wear and tear;
(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking
or theft;
(c) by malicious act;
(d) whilst in transit (including the process of loading and unloading) incidental to
such transit by road, rail, inland waterway, lift or elevator. 7
Apropos, we now resolve the issue of whether the loss of respondents vehicle
falls within the concept of the "theft clause" under the insurance policy.

In People v. Bustinera,8 this Court had the occasion to interpret the "theft clause"
of an insurance policy. In this case, the Court explained that when one takes the
motor vehicle of another without the latters consent even if the motor vehicle is
later returned, there is theft there being intent to gain as the use of the thing
unlawfully taken constitutes gain.
Also, in Malayan Insurance Co., Inc. v. Court of Appeals, 9 this Court held that the
taking of a vehicle by another person without the permission or authority from the
owner thereof is sufficient to place it within the ambit of the word theft as
contemplated in the policy, and is therefore, compensable.
Moreover, the case of Santos v. People10 is worthy of note. Similarly in Santos, the
owner of a car entrusted his vehicle to therein petitioner Lauro Santos who owns
a repair shop for carburetor repair and repainting. However, when the owner tried
to retrieve her car, she was not able to do so since Santos had abandoned his
shop. In the said case, the crime that was actually committed was Qualified Theft.
However, the Court held that because of the fact that it was not alleged in the
information that the object of the crime was a car, which is a qualifying
circumstance, the Court found that Santos was only guilty of the crime of Theft
and merely considered the qualifying circumstance as an aggravating
circumstance in the imposition of the appropriate penalty. The Court therein
clarified the distinction between the crime of Estafa and Theft, to wit:
x x x The principal distinction between the two crimes is that in theft the thing is
taken while in estafa the accused receives the property and converts it to his own
use or benefit. However, there may be theft even if the accused has possession of
the property. If he was entrusted only with the material or physical (natural) or de
facto possession of the thing, his misappropriation of the same constitutes theft,

but if he has the juridical possession of the thing his conversion of the same
constitutes embezzlement or estafa.11
In the instant case, Sales did not have juridical possession over the vehicle.
Hence, it is apparent that the taking of repondents vehicle by Sales is without
any consent or authority from the former.
Records would show that respondents entrusted possession of their vehicle only
to the extent that Sales will introduce repairs and improvements thereon, and not
to permanently deprive them of possession thereof. Since, Theft can also be
committed through misappropriation, the fact that Sales failed to return the
subject vehicle to respondents constitutes Qualified Theft. Hence, since
repondents car is undeniably covered by a Comprehensive Motor Vehicle
Insurance Policy that allows for recovery in cases of theft, petitioner is liable
under the policy for the loss of respondents vehicle under the "theft clause."
All told, Sales act of depriving respondents of their motor vehicle at, or soon after
the transfer of physical possession of the movable property, constitutes theft
under the insurance policy, which is compensable.12
WHEREFORE, the instant petition is DENIED. The Decision dated April 12, 2005
and Resolution dated July 20, 2006 of the Court of Appeals are hereby AFFIRMED
in toto.
SO ORDERED.