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 quasi-delicts while the latter is based on contract. Confusing these
two sources of obligations as they arise from the same act of the taxicab fatally hitting private
respondent's mother, and in the face of overwhelming evidence of the reckless imprudence of the
driver of the Lady Love taxicab, the trial court brushed aside its ignorance of the terms and
conditions of the insurance contract and forthwith found all three the driver of the taxicab, the
owner of the taxicab, and the alleged insurer of the taxicab jointly and severally liable for actual,
moral and exemplary damages as well as attorney's fees and litigation expenses. This is clearly a
misapplication of the law by the trial court, and respondent appellate 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 counter-allegation of petitioner that,
assuming arguendo that it is the insurer of the Lady Love taxicab in question, its liability is limited to
only P50,000.00, this being its standard amount of coverage in vehicle insurance policies. It bears
repeating that no copy of the insurance contract was ever proffered before the trial court by the
private respondent, notwithstanding knowledge of the fact that the latter's complaint against
petitioner is one under a written contract. Thus, the trial court proceeded to hold petitioner liable for
an award of damages exceeding its limited liability of P50,000.00. This only shows beyond doubt
that the trial court was under the erroneous presumption that petitioner could be found liable absent
proof of the contract and based merely on the proof of reckless imprudence on the part of the driver
of the Lady Love taxicab that fatally hit private respondent's mother.
II
Petitioner did not tire in arguing before the trial court and the respondent appellate court that,
assuming arguendo that it had issued the insurance contract over the Lady Love taxicab, private
respondent's cause of action against petitioner did not successfully accrue because he failed to file
with petitioner a written notice of claim within six (6) months from the date of the accident as required
by Section 384 of the Insurance Code.
At the time of the vehicular incident which resulted in the death of private respondent's mother,
during which time the Insurance Code had not yet been amended by Batas Pambansa (B.P.) Blg.
874, Section 384 provided as follows:
Any person having any claim upon the policy issued pursuant to this chapter shall,
without any unnecessary delay, present to the insurance company concerned a
written notice of claim setting forth the amount of his loss, and/or the nature, extent

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

The one-year period should instead be counted from the date of rejection by the
insurer as this is the time when the cause of action accrues. . . .
In Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:
The plaintiff's cause of action did not accrue until his claim was finally rejected by the
insurance company. This is because, before such final rejection, there was no real
necessity for bringing suit.
The philosophy of the above pronouncement was pointed out in the case of ACCFA
vs. Alpha Insurance and Surety Co., viz:
Since a cause of action requires, as essential elements, not only a legal right of the
plaintiff and a correlative obligation of the defendant but also an act or omission of
the defendant in violation of said legal right, the cause of action does not accrue until
the party obligated refuses, expressly or impliedly, to comply with its duty. 16
When petitioner asseverates, thus, that no written claim was filed by private respondent and rejected
by petitioner, and private respondent does not dispute such asseveration through a denial in his
pleadings, we are constrained to rule that respondent appellate court committed reversible error in
finding petitioner liable under an insurance contract the existence of which had not at all been
proven in court. Even if there were such a contract, private respondent's cause of action can not
prevail because he failed to file the written claim mandated by Section 384 of the Insurance Code.
He is deemed, under this legal provision, to have waived his rights as against petitioner-insurer.
WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in Civil Case No. 135486 are
REVERSED and SET ASIDE insofar as Travelers Insurance & Surety Corporation was found jointly
and severally liable to pay actual, moral and exemplary damages, death indemnity, attorney's fees
and litigation expenses in Civil Case No. 135486. The complaint against Travellers Insurance &
Surety Corporation in said case is hereby ordered dismissed.
No pronouncement as to costs.
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 decision1 which dismissed its two appeals
and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the insurance
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%;

1,500,000.00 -

393,000.00 -

on the two swimming pools, only (against the peril

of earthquake shock only) @ 0.100%

116,600.00

other buildings include as follows:

a) Tilter House

on the furniture, etc. contained in the building

above-mentioned@ .490%;

P19,800.00 -

0.551%

b) Power House

P41,000.00 -

0.551%

c) House Shed

P55,000.00 -

0.540%

P100,000.00 -

for furniture, fixtures, lines air-con and operating

equipment

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

Rate-Various

Premium

P37,420.60 F/L

2,061.52

Typhoon

1,030.76

EC

393.00

ES

Doc. Stamps

3,068.10

F.S.T.

776.89

Prem. Tax

409.05

TOTAL

45,159.92;

that the above break-down of premiums shows that plaintiff paid only P393.00 as premium
against earthquake shock (ES); that in all the six insurance policies (Exhs. "C", "D", "E", "F",
"G" and "H"), the premium against the peril of earthquake shock is the same, that is P393.00
(Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-1";
"6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G" and "H") and in Policy No. 31944
issued by defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the
sum included additional premium the Company agrees, notwithstanding what is
stated in the printed conditions of this policy due to the contrary, that this insurance
covers loss or damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs. "1-D", "2-D", "3A", "4-B", "5-A", "6-D" and "7-C");
that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that on
July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and plaintiffs
properties covered by Policy No. 31944 issued by defendant, including the two swimming
pools in its Agoo Playa Resort were damaged.2
After the earthquake, petitioner advised respondent that it would be making a claim under its
Insurance Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a
formal claim, then assigned the investigation of the claim to an independent claims adjuster, Bayne
Adjusters and Surveyors, Inc.3 On July 30, 1990, respondent, through its adjuster, requested
petitioner to submit various documents in support of its claim. On August 7, 1990, Bayne Adjusters
and Surveyors, Inc., through its Vice-President A.R. de Leon, 4 rendered a preliminary report5 finding
extensive damage caused by the earthquake to the clubhouse and to the two swimming pools. Mr.
de Leon stated that "except for the swimming pools, all affected items have no coverage for
earthquake shocks."6 On August 11, 1990, petitioner filed its formal demand7 for settlement of the
damage to all its properties in the Agoo Playa Resort. On August 23, 1990, respondent denied
petitioners claim on the ground that its insurance policy only afforded earthquake shock coverage to
the two swimming pools of the resort.8Petitioner and respondent failed to arrive at a
settlement.9 Thus, on January 24, 1991, petitioner filed a complaint10 with the regional trial court of
Pasig praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with
interest thereon, as computed under par. 29 of the policy (Annex "B") until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff
on account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims. 12

On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the
peril of earthquake shock, the same premium it paid against earthquake shock only on the
two swimming pools in all the policies issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and
"G"). From this fact the Court must consequently agree with the position of defendant that
the endorsement rider (Exhibit "7-C") means that only the two swimming pools were insured
against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where
the language used in an insurance contract or application is such as to create ambiguity the
same should be resolved against the party responsible therefor, i.e., the insurance company
which prepared the contract. To the mind of [the] Court, the language used in the policy in
litigation is clear and unambiguous hence there is no need for interpretation or construction
but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which struck on
July 16, 1990. Defendant having admitted that the damage to the swimming pools was
appraised by 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 plaintiffappellant had with AHAC (AIU) and upon which the subject insurance contract with
Philippine Charter Insurance Corporation is said to have been based and copied (Exh. "I"),
covered an extended earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants 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 defendant-appellant has expressed its
willingness to pay the damage caused on the two (2) swimming pools, as the Court a quo
and this Court correctly found it to be liable only, it then cannot be said that it was in default
and therefore liable for interest.
Coming to the defendant-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 19901991. 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

393,000.00

0.100%-E/S

393.0022]

xxx

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 MANTOHAC36
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities
in Agoo Playa?

A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter
Insurance Corporation as long as it will follow the same or exact provisions of the previous
insurance policy we had with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the
American Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically
told him that the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 2064568061-9 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. 171468

August 24, 2011

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

vs.
NYK-FILJAPAN SHIPPING CORP., LEP PROFIT INTERNATIONAL, INC. (ORD), LEP
INTERNATIONAL PHILIPPINES, INC., DMT CORP., ADVATECH INDUSTRIES, INC., MARINA

PORT SERVICES, INC., SERBROS CARRIER CORPORATION, and SEABOARD-EASTERN

INSURANCE CO., INC., Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 174241
NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., Petitioner,
vs.
SEABOARD-EASTERN INSURANCE CO., INC., Respondent.
DECISION
ABAD, J.:
These consolidated petitions involve a cargo 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
Petitioner New World International Development (Phils.), Inc. (New World) bought from DMT
Corporation (DMT) through its agent, Advatech Industries, Inc. (Advatech) three emergency
generator sets worth US$721,500.00.
DMT shipped the generator sets by truck from Wisconsin, United States, to LEP Profit International,
Inc. (LEP Profit) in Chicago, Illinois. From there, the shipment went by train to Oakland, California,
where it was loaded on S/S California Luna V59, owned and operated by NYK Fil-Japan Shipping
Corporation (NYK) for delivery to petitioner New World in Manila. NYK issued a bill of lading,
declaring that it received the goods in good condition.
NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX Ruby V/72 that it also
owned and operated. On its journey to Manila, however, ACX Ruby encountered typhoon Kadiang
whose captain filed a sea protest on arrival at the Manila South Harbor on October 5, 1993
respecting the loss and damage that the goods on board his vessel suffered.
Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or cargo-handling operator,
received the shipment on October 7, 1993. Upon inspection of the three container vans separately
carrying the generator sets, two vans bore signs of external damage while the third van appeared
unscathed. The shipment remained at Pier 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 Makati City.
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.
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
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.
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 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
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.
The Courts Rulings
In G.R. 171468 -Petitioner New World asserts that the roles of respondents DMT, Advatech, LEP, LEP Profit, Marina
and Serbros in handling and transporting its shipment from Wisconsin to Manila collectively resulted
in the damage to the same, rendering such respondents solidarily liable with NYK, the vessel owner.
But the issue regarding which of the parties to a dispute incurred negligence is factual and is not a
proper subject of a petition for review on certiorari. And petitioner New World has been unable to
make out an exception to this rule.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.
Seaboard cannot pretend that the above documents are inadequate since they were precisely the
documents listed in its insurance policy.8 Being a contract of adhesion, an insurance policy is
construed strongly against the insurer who prepared it. The Court cannot read a requirement in the
policy that was not there.
Further, it appears from the exchanges of communications between Seaboard and Advatech that
submission of the requested itemized listing was incumbent on the latter as the seller DMTs local
agent. Petitioner New World should not be made to suffer for Advatechs shortcomings.
Two. Regarding prescription of claims, Section 3(6) of the COGSA provides that the carrier and the
ship shall be discharged from all liability in case of loss or damage unless the suit is brought within
one year after delivery of the goods or the date when the goods should have been delivered.
But whose fault was it that the suit against NYK, the common carrier, was not brought to court on
time? The last day for filing such a suit fell on October 7, 1994. The record shows that petitioner New
World filed its formal claim for its loss with Seaboard, its insurer, a remedy it had the right to take, as
early as November 16, 1993 or about 11 months before the suit against NYK would have fallen due.
In the ordinary course, if Seaboard had processed that claim and paid the same, Seaboard would
have been subrogated to petitioner New 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.
Section 241 of the Insurance Code provides that no insurance company doing business in the
Philippines shall refuse without just cause to pay or settle claims arising under coverages provided
by its policies. And, under Section 243, the insurer has 30 days after proof of loss is received and
ascertainment of the loss or damage within which to pay the claim. If such ascertainment is not had
within 60 days from receipt of evidence of loss, the insurer has 90 days to pay or settle the claim.
And, in case the insurer refuses or fails to pay within the prescribed time, the insured shall be
entitled to interest on the proceeds of the policy for the duration of delay at the rate of twice the
ceiling prescribed by the Monetary Board.
Notably, Seaboard already incurred delay when it failed to settle petitioner New 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.
1avvphi1

Petitioner New World is entitled to the value stated in the policy which is commensurate to the value
of the three emergency generator sets or US$721,500.00 with double interest plus 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-HO-000266, 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.

G.R. No. 154514. July 28, 2005

WHITE GOLD MARINE SERVICES, INC., Petitioners,
vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL
UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-G.R.
SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in I.C. Adm.
Case No. RD-277. Both decisions held that there was no violation of the Insurance Code and the
respondents do not need license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its
vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual)
through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued
a Certificate of Entry and Acceptance.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 1875 of the
Insurance Code, while Pioneer violated Sections 299,63007 and 3018 in relation to Sections 302 and
303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship
Mutual to secure a license because it was not engaged in the insurance business. It explained that
Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not
obtain another license as insurance agent and/or a broker for Steamship Mutual because Steamship
Mutual was not engaged in the insurance business. Moreover, Pioneer was already licensed, hence,
a separate license solely as agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the
appellate court distinguished between P & I Clubs vis--vis conventional insurance. The appellate
court also held that Pioneer merely acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING
BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED
NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER
AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER. 9
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the
insurance business in the Philippines? (2) Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a
license to do business in the Philippines although Pioneer is its resident agent. This relationship is
reflected in the certifications issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To
buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of
Appeals10 as "an association composed of shipowners in general who band together for the specific
purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning
that the members incur in favor of third parties." It stresses that as a P & I Club, Steamship Mutuals
primary purpose is to solicit and provide protection and indemnity coverage and for this purpose, it
has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the
insurance business in the Philippines. It is merely an association of vessel owners who have come
together to provide mutual protection against liabilities incidental to shipowning. 11 Respondents
aver Hyopsung is inapplicable in this case because the issue in Hyopsung was the jurisdiction of the
court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or
"transacting an insurance business". These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is derived from the making of insurance
contracts, agreements or transactions, or that no separate or direct consideration is received
therefor, shall not preclude the existence of an insurance business.12
The test to determine if a contract is an insurance contract or not, depends on the nature of the
promise, the act required to be performed, and the exact nature of the agreement in the light of the
occurrence, contingency, or circumstances under which the performance becomes requisite. It is not
by what it is called.13

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. 14
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such
as the losses incident to a marine adventure.15 Section 9916 of the Insurance Code enumerates the
coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the
insurer and insured. In it, the members all contribute, by a system of premiums or assessments, to
the creation of a fund from which all losses and liabilities are paid, and where the profits are divided
among themselves, in proportion to their interest.17 Additionally, mutual insurance associations, or
clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense
costs.18
A P & I Club is "a form of insurance against third party liability, where the third party is anyone other
than the P & I Club and the members."19 By definition then, Steamship Mutual as a P & I Club is a
mutual insurance association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite
certificate of authority mandated by Section 18720 of the Insurance Code. It maintains a resident
agent in the Philippines to solicit insurance and to collect payments in its behalf. We note that
Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment of
the calls. Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer,
must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no
insurer or insurance company is allowed to engage in the insurance business without a license or a
certificate of authority from the Insurance Commission. 21
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of
registration22 issued by the Insurance Commission. It has been licensed to do or transact insurance
business by virtue of the certificate of authority23 issued by the same agency. However, a Certification
from the Commission states that Pioneer does not have a separate license to be an agent/broker of
Steamship Mutual.24
Although Pioneer is already licensed as an insurance company, it needs a separate license to act as
insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or
procurement of applications for insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance company doing business in the Philippines

or any agent thereof, without first procuring a license so to act from the Commissioner, which must
be renewed annually on the first day of January, or within six months thereafter. . .
Finally, White Gold seeks revocation of 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. 156956

October 9, 2006

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

Commissioner,petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.

DECISION

PANGANIBAN, CJ.:
The securities required by the Insurance Code to be deposited with the Insurance Commissioner are
intended to answer for the claims of all policy holders in the event that the depositing insurance
company becomes insolvent or otherwise unable to satisfy their claims. The security deposit must be
ratably distributed among all the insured who are entitled to their respective shares; it cannot be
garnished or levied upon by a single claimant, to the detriment of the others.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the
January 16, 2003 Order2 of the Regional Court (RTC) of Quezon City (Branch 221) in Civil Case No.
Q-97-30412. The RTC found Insurance Commissioner Eduardo T. Malinis guilty of indirect contempt
for refusing to comply with the December 18, 2002 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 trust20 is created by the law for the benefit of all claimants under subsisting insurance
contracts issued by the insurance company.21
As the officer vested with custody of the security deposit, the insurance commissioner is in the best
position to determine if and when it may be released without prejudicing the rights of other policy
holders. Before allowing the withdrawal or the release of the deposit, the commissioner must be
satisfied that the conditions contemplated by the law are met and all policy holders protected.
Commissioner's Actions
Entitled to Great Respect

In this case, Commissioner Malinis refused to release the security deposit of CISCO. Believing that
the funds were exempt from execution as provided by law, he sought to protect other policy holders.
His interpretation of the provisions of the law carries great weight and consideration, 22 as he is the
head of a specialized body tasked with the regulation of insurance matters and primarily charged
with the implementation of the Insurance Code.
The emergence of the multifarious needs of modern society necessitates the establishment of
diverse administrative agencies. In addressing these needs, the administrative agencies charged
with applying and implementing particular statutes have accumulated experience and specialized
capabilities. Thus, in a long line of cases, this Court has recognized that their construction of a
statute is entitled to great respect and should ordinarily be controlling, unless clearly shown to be in
sharp conflict with the governing statute or the Constitution and other laws. 23
Clearly, then, the trial court erred in issuing the Writ of Garnishment against the security deposit of
CISCO. It follows that without the issuance of a valid order, the insurance commissioner could not
have been in contempt of court.24
WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No costs.
SO ORDERED.

G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION

CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the
people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women, and children. The State shall endeavor to provide free medical care to paupers. 1
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated
July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers,
Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance organization
to take care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.
xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount
of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax
Code xxxx
xxx

xxx

xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act
on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of
25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully
paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioners health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement
was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and
20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code,
until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx

xxx

xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We
held that petitioners health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioners contention that
it is a health maintenance organization (HMO) and not an insurance company is irrelevant because
contracts between companies like petitioner and the beneficiaries under their plans are treated as

insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental
motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on
a company engaged in the business of fidelity bonds and other insurance policies. Petitioner,
as an HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect
the CAs disposition that health care services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are not
those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health insurance, health
insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in
Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered
moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda
on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount
of P5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005. 8
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange Commission
on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals
who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual membership fee. Membership is on a
year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those directly employed
by it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as
room and board accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the
participating physicians and other health care providers for the services rendered, at pre-agreed
rates.14
To avail of petitioners health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision of
the health care services. The same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except
for the curative aspect of the medical service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15
Petitioner, however, submits that it is of critical importance to characterize the business it is engaged
in, that is, to determine whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for DST on its health care
agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of
petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business
of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing
the validity or legality of any bond or other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such person, company
or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each
four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute its every
word.18
From the language of Section 185, it is evident that two requisites must concur before the DST can
apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of
indemnity and (2)the maker should be transacting the business of accident, fidelity, employers
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"),
an HMO is "an entity that provides, offers or arranges for coverage of designated health services
needed by plan members for a fixed prepaid premium."19 The payments do not vary with the extent,
frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;

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

manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they have
applied is whether the assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization or whether they are
merely incidental to its business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal purpose, then the business is
not insurance.
Applying the "principal object and purpose test,"22 there is significant American case law supporting
the argument that a corporation (such as an HMO, whether or not organized for profit), whose main
object is to provide the members of a group with health services, is not engaged in the insurance
business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health Association should not be considered as engaged
in insurance activities since it was created primarily for the distribution of health care services rather
than the assumption of insurance risk.
xxx Although Group 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 Jersey27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only undertake
to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained
in the policy.
xxx

xxx

xxx

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

physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service 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,35the 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 bondsor 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.39Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However,
those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of
a health service provider to a member under the terms of their health care agreement. Such
contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue Crossand Philamcare are
applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium. 41
Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its primary purpose is the rendering of service,
it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned
above would be an insurance contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the insurance business. Its
contracts are simply for the purpose of rendering personal services. On the other hand, a contract by
which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance. Unlike the lawyers retainer contract, the
essential purpose of such a contract is not to render personal services, but to indemnify against loss
and damage resulting from the defense of actions for malpractice. 42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioners
agreements. To begin with, there is no loss, damage or liability on the part of the member that should
be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioners physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the member merely avails
of medical services to be paid or already paid in advance at a pre-agreed price under the
agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g.laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril, loss
or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from
a non-participating physician or hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health
care contracts called for the defendant to partially reimburse a subscriber for treatment received
from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court

determined that "the primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services."44 Since indemnity of the insured was
not the focal point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always
bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services:
the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured. 45
However, assuming that petitioners commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not
qualify as an insurance contract because petitioners objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us to conclude that it is
not an insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioners health
care agreements under Section 185 of the NIRC of 1997 is the provisions legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No.
1189 (otherwise known as the "Internal Revenue Law of 1904") 46 enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a
verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment, or
paper upon which such instrument, matters, or things or any of them shall be written or printed by
any person or persons who shall make, sign, or issue the same, on and after January first, nineteen
hundred and five, the several taxes following:
xxx

xxx

xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employers liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116,
Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917,
the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939),
which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40
on October 1, 1946, the DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158
(NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October
10, 1984 respectively, the DST rate was again increased.
1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was
renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to
the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of
1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to
the DST provisions were introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early
as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2 million. 49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been

the intent of the legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe
to say that health care agreements were never, at any time, recognized as insurance contracts or
deemed engaged in the business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is to pay it. 51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52
Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its
net worth ofP259 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 academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paidP5,127,149.08 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 CA64 in CIR v. Philippine National Bank65 that a health care agreement of
Philamcare Health Systems is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has already become final. 67 When a
minute resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. BaierNickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and
the same issues, was previously disposed of by the Court thru a minute resolution dated February
17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case
"ha(d) no bearing" on the latter case because the two cases involved different subject matters as
they were concerned with the taxable income of different taxable years.72
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the

Constitution that the facts and the law on which the judgment is based must be expressed clearly
and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices, unlike a decision. It does not require the certification
of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. 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.