1
G.R. No. 82027 March 29, 1990
ROMARICO G. VITUG, petitioner, vs.
THE HONORABLE COURT OF APPEALS and ROWENA
FAUSTINO-CORONA, respondents.
SARMIENTO, J.:
This case is a chapter in an earlier suit decided by this
Court 1 involving the probate of the two wills of the late Dolores
Luchangco Vitug, who died in New York, U. S.A., on November
10, 1980, naming private respondent Rowena Faustino-Corona
executrix. In our said decision, we upheld the appointment of
Nenita Alonte as co-special administrator of Mrs. Vitug's estate
with her (Mrs. Vitug's) widower, petitioner Romarico G. Vitug,
pending probate.
On January 13, 1985, Romarico G. Vitug filed a motion asking
for authority from the probate court to sell certain shares of stock
and real properties belonging to the estate to cover allegedly his
advances to the estate in the sum of P667,731.66, plus
interests, which he claimed were personal funds. As found by
the Court of Appeals, 2 the alleged advances consisted of
P58,147.40 spent for the payment of estate tax, P518,834.27 as
deficiency estate tax, and P90,749.99 as "increment
thereto." 3 According to Mr. Vitug, he withdrew the sums of
P518,834.27 and P90,749.99 from savings account No. 35342-
038 of the Bank of America, Makati, Metro Manila.
On April 12, 1985, Rowena Corona opposed the motion to sell
on the ground that the same funds withdrawn from savings
account No. 35342-038 were conjugal partnership properties
and part of the estate, and hence, there was allegedly no ground
for reimbursement. She also sought his ouster for failure to
include the sums in question for inventory and for "concealment
of funds belonging to the estate." 4
Vitug insists that the said funds are his exclusive property having
acquired the same through a survivorship agreement executed
with his late wife and the bank on June 19, 1970. The agreement
provides:
We hereby agree with each other and with the BANK OF
AMERICAN NATIONAL TRUST AND SAVINGS
ASSOCIATION (hereinafter referred to as the BANK), that all
money now or hereafter deposited by us or any or either of us
with the BANK in our joint savings current account shall be the
property of all or both of us and shall be payable to and
collectible or withdrawable by either or any of us during our
lifetime, and after the death of either or any of us shall belong to
and be the sole property of the survivor or survivors, and shall
be payable to and collectible or withdrawable by such survivor
or survivors.
We further agree with each other and the BANK that the receipt
or check of either, any or all of us during our lifetime, or the
receipt or check of the survivor or survivors, for any payment or
withdrawal made for our above-mentioned account shall be valid
and sufficient release and discharge of the BANK for such
payment or withdrawal. 5
The trial courts 6 upheld the validity of this agreement and
granted "the motion to sell some of the estate of Dolores L.
Vitug, the proceeds of which shall be used to pay the personal
funds of Romarico Vitug in the total sum of P667,731.66 ... ." 7
On the other hand, the Court of Appeals, in the petition for
certiorari filed by the herein private respondent, held that the
above-quoted survivorship agreement constitutes a
conveyance mortis causa which "did not comply with the
formalities of a valid will as prescribed by Article 805 of the Civil
Code," 8 and secondly, assuming that it is a mere donation inter
vivos, it is a prohibited donation under the provisions of Article
133 of the Civil Code. 9
The dispositive portion of the decision of the Court of Appeals
states:
WHEREFORE, the order of respondent Judge dated November
26, 1985 (Annex II, petition) is hereby set aside insofar as it
granted private respondent's motion to sell certain properties of
the estate of Dolores L. Vitug for reimbursement of his alleged
advances to the estate, but the same order is sustained in all
other respects. In addition, respondent Judge is directed to
include provisionally the deposits in Savings Account No.
35342-038 with the Bank of America, Makati, in the inventory of
actual properties possessed by the spouses at the time of the
decedent's death. With costs against private respondent. 10
In his petition, Vitug, the surviving spouse, assails the appellate
court's ruling on the strength of our decisions in Rivera v.
People's Bank and Trust Co. 11 and Macam v. Gatmaitan 12 in
which we sustained the validity of "survivorship agreements"
and considering them as aleatory contracts. 13
The petition is meritorious.
The conveyance in question is not, first of all, one of mortis
causa, which should be embodied in a will. A will has been
defined as "a personal, solemn, revocable and free act by which
a capacitated person disposes of his property and rights and
declares or complies with duties to take effect after his
death." 14 In other words, the bequest or device must pertain to
the testator. 15 In this case, the monies subject of savings
account No. 35342-038 were in the nature of conjugal funds In
the case relied on, Rivera v. People's Bank and Trust Co., 16 we
rejected claims that a survivorship agreement purports to deliver
one party's separate properties in favor of the other, but simply,
their joint holdings:
xxx xxx xxx
... Such conclusion is evidently predicated on the assumption
that Stephenson was the exclusive owner of the funds-deposited
in the bank, which assumption was in turn based on the facts (1)
that the account was originally opened in the name of
Stephenson alone and (2) that Ana Rivera "served only as
housemaid of the deceased." But it not infrequently happens that
a person deposits money in the bank in the name of another;
and in the instant case it also appears that Ana Rivera served
her master for about nineteen years without actually receiving
her salary from him. The fact that subsequently Stephenson
transferred the account to the name of himself and/or Ana
Rivera and executed with the latter the survivorship agreement
in question although there was no relation of kinship between
them but only that of master and servant, nullifies the
 2

assumption that Stephenson was the exclusive owner of the The validity of the contract seems debatable by reason of its
bank account. In the absence, then, of clear proof to the "survivor-take-all" feature, but in reality, that contract imposed a
contrary, we must give full faith and credit to the certificate of mere obligation with a term, the term being death. Such
deposit which recites in effect that the funds in question agreements are permitted by the Civil Code. 24
belonged to Edgar Stephenson and Ana Rivera; that they were
joint (and several) owners thereof; and that either of them could Under Article 2010 of the Code:
withdraw any part or the whole of said account during the lifetime
ART. 2010. By an aleatory contract, one of the parties or both
of both, and the balance, if any, upon the death of either,
reciprocally bind themselves to give or to do something in
belonged to the survivor. 17
consideration of what the other shall give or do upon the
xxx xxx xxx happening of an event which is uncertain, or which is to occur at
an indeterminate time.
In Macam v. Gatmaitan, 18 it was held:
Under the aforequoted provision, the fulfillment of an aleatory
xxx xxx xxx contract depends on either the happening of an event which is
(1) "uncertain," (2) "which is to occur at an indeterminate time."
This Court is of the opinion that Exhibit C is an aleatory contract A survivorship agreement, the sale of a sweepstake ticket, a
whereby, according to article 1790 of the Civil Code, one of the transaction stipulating on the value of currency, and insurance
parties or both reciprocally bind themselves to give or do have been held to fall under the first category, while a contract
something as an equivalent for that which the other party is to for life annuity or pension under Article 2021, et sequentia, has
give or do in case of the occurrence of an event which is been categorized under the second. 25 In either case, the
uncertain or will happen at an indeterminate time. As already element of risk is present. In the case at bar, the risk was the
stated, Leonarda was the owner of the house and Juana of the death of one party and survivorship of the other.
Buick automobile and most of the furniture. By virtue of Exhibit
C, Juana would become the owner of the house in case However, as we have warned:
Leonarda died first, and Leonarda would become the owner of
the automobile and the furniture if Juana were to die first. In this xxx xxx xxx
manner Leonarda and Juana reciprocally assigned their
But although the survivorship agreement is per se not contrary
respective property to one another conditioned upon who might
to law its operation or effect may be violative of the law. For
die first, the time of death determining the event upon which the
instance, if it be shown in a given case that such agreement is a
acquisition of such right by the one or the other depended. This
mere cloak to hide an inofficious donation, to transfer property
contract, as any other contract, is binding upon the parties
in fraud of creditors, or to defeat the legitime of a forced heir, it
thereto. Inasmuch as Leonarda had died before Juana, the latter
may be assailed and annulled upon such grounds. No such vice
thereupon acquired the ownership of the house, in the same
has been imputed and established against the agreement
manner as Leonarda would have acquired the ownership of the
involved in this case. 26
automobile and of the furniture if Juana had died first. 19
xxx xxx xxx
xxx xxx xxx
There is no demonstration here that the survivorship agreement
There is no showing that the funds exclusively belonged to one
had been executed for such unlawful purposes, or, as held by
party, and hence it must be presumed to be conjugal, having
the respondent court, in order to frustrate our laws on wills,
been acquired during the existence of the marita. relations. 20
donations, and conjugal partnership.
Neither is the survivorship agreement a donation inter vivos, for
The conclusion is accordingly unavoidable that Mrs. Vitug
obvious reasons, because it was to take effect after the death of
having predeceased her husband, the latter has acquired upon
one party. Secondly, it is not a donation between the spouses
her death a vested right over the amounts under savings
because it involved no conveyance of a spouse's own properties
account No. 35342-038 of the Bank of America. Insofar as the
to the other.
respondent court ordered their inclusion in the inventory of
It is also our opinion that the agreement involves no modification assets left by Mrs. Vitug, we hold that the court was in error.
petition of the conjugal partnership, as held by the Court of Being the separate property of petitioner, it forms no more part
Appeals, 21 by "mere stipulation" 22 and that it is no "cloak" 23 to of the estate of the deceased.
circumvent the law on conjugal property relations. Certainly, the
WHEREFORE, the decision of the respondent appellate court,
spouses are not prohibited by law to invest conjugal property,
dated June 29, 1987, and its resolution, dated February 9, 1988,
say, by way of a joint and several bank account, more commonly
are SET ASIDE. No costs. SO ORDERED.
denominated in banking parlance as an "and/or" account. In the
case at bar, when the spouses Vitug opened savings account
No. 35342-038, they merely put what rightfully belonged to them
in a money-making venture. They did not dispose of it in favor of
the other, which would have arguably been sanctionable as a
prohibited donation. And since the funds were conjugal, it can
not be said that one spouse could have pressured the other in
placing his or her deposits in the money pool.

G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to
health of the people and instill health consciousness among
them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and
comprehensive approach to health development which shall
endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall
be priority for the needs of the underprivileged sick, elderly,
disabled, women, and children. The State shall endeavor to
provide free medical care to paupers.1
For resolution are a motion for reconsideration and
supplemental motion for reconsideration dated July 10, 2008
and July 14, 2008, respectively, filed by petitioner Philippine
Health Care Providers, Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is
"[t]o establish, maintain, conduct and operate a prepaid group
practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons
enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the
organization." Individuals enrolled in its health care programs
pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by
its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by
it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal
Revenue [CIR] sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of
deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of
₱224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was
imposed on petitioner’s health care agreement with the
members of its health care program pursuant to Section 185 of
the 1997 Tax Code xxxx
xxx xxx xxx
3
Petitioner protested the assessment in a letter dated February
23, 2000. As respondent did not act on the protest, petitioner
filed a petition for review in the Court of Tax Appeals (CTA)
seeking the cancellation of the deficiency VAT and DST
assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive
portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED to PAY the deficiency VAT amounting to
₱22,054,831.75 inclusive of 25% surcharge plus 20% interest
from January 20, 1997 until fully paid for the 1996 VAT
deficiency and ₱31,094,163.87 inclusive of 25% surcharge plus
20% interest from January 20, 1998 until fully paid for the 1997
VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is
declared void and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to
DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals
(CA)] insofar as it cancelled the DST assessment. He claimed
that petitioner’s health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax
Code.
On August 16, 2004, the CA rendered its decision. It held that
petitioner’s health care agreement was in the nature of a non-
life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The
Decision of the Court of Tax Appeals, insofar as it cancelled and
set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the
same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of ₱55,746,352.19
and ₱68,450,258.73 as deficiency Documentary Stamp Tax for
1996 and 1997, respectively, plus 25% surcharge for late
payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the
same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it.
Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition
and affirmed the CA’s decision. We held that petitioner’s health
care agreement during the pertinent period was in the nature of
non-life insurance which is a contract of indemnity, citing Blue
Cross Healthcare, Inc. v. Olivares3 and Philamcare Health
Systems, Inc. v. CA.4We also ruled that petitioner’s contention
that it is a health maintenance organization (HMO) and not an
insurance company is irrelevant because contracts between
companies like petitioner and the beneficiaries under their plans
are treated as insurance contracts. Moreover, DST is not a tax

on the business transacted but an excise on the privilege,
opportunity or facility offered at exchanges for the transaction of
the business.
Unable to accept our verdict, petitioner filed the present motion
for reconsideration and supplemental motion for
reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue
of 1997 is imposed only on a company engaged in the business
of fidelity bonds and other insurance policies. Petitioner, as an
HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine
National Bank, affirmed in effect the CA’s disposition that health
care services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from
items subject to DST is clear, especially in the light of the
amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioner’s agreements are
contracts of indemnity, they are not those contemplated under
Section 185.
(f) Assuming arguendo that petitioner’s agreements are akin to
health insurance, health insurance is not covered by Section
185.
(g) The agreements do not fall under the phrase "other branch
of insurance" mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480
for the taxable year 2005 and all prior years. Therefore, the
questioned assessments on the DST are now rendered moot
and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The
parties submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first
time that it availed of a tax amnesty under RA 94807(also known
as the "Tax Amnesty Act of 2007") by fully paying the amount of
₱5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005.8
We find merit in petitioner’s motion for reconsideration.
Petitioner was formally registered and incorporated with the
Securities and Exchange Commission on June 30, 1987. 9 It is
engaged in the dispensation of the following medical services to
individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of
health problems, family planning counseling, consultation and
advices on diet, exercise and other healthy habits, and
immunization;
Diagnostic medical services such as routine physical
examinations, x-rays, urinalysis, fecalysis, complete blood
count, and the like and
4
Curative medical services which pertain to the performing of
other remedial and therapeutic processes in the event of an
injury or sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual
membership fee. Membership is on a year-to-year basis. The
medical services are dispensed to enrolled members in a
hospital or clinic owned, operated or accredited by petitioner,
through physicians, medical and dental practitioners under
contract with it. It negotiates with such health care practitioners
regarding payment schemes, financing and other procedures for
the delivery of health services. Except in cases of emergency,
the professional services are to be provided only by petitioner's
physicians, i.e. those directly employed by it11 or whose services
are contracted by it.12 Petitioner also provides hospital services
such as room and board accommodation, laboratory services,
operating rooms, x-ray facilities and general nursing care.13 If
and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care
providers for the services rendered, at pre-agreed rates.14
To avail of petitioner’s health care programs, the individual
members are required to sign and execute a standard health
care agreement embodying the terms and conditions for the
provision of the health care services. The same agreement
contains the various health care services that can be engaged
by the enrolled member, i.e., preventive, diagnostic and curative
medical services. Except for the curative aspect of the medical
service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The
Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that
petitioner is an HMO and not an insurer because its agreements
are treated as insurance contracts and the DST is not a tax on
the business but an excise on the privilege, opportunity or facility
used in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to
characterize the business it is engaged in, that is, to determine
whether it is an HMO or an insurance company, as this
distinction is indispensable in turn to the issue of whether or not
it is liable for DST on its health care agreements.16
A second hard look at the relevant law and jurisprudence
convinces the Court that the arguments of petitioner are
meritorious.
Section 185 of the National Internal Revenue Code of 1997
(NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance
policies. – On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or
company or corporation transacting the business
of accident, fidelity, employer’s liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance),
and all bonds, undertakings, or recognizances, conditioned for
the performance of the duties of any office or position, for the

doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond or
other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any
mercantile credits, which may be made or renewed by any such
person, company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (₱0.50) on each four
pesos (₱4.00), or fractional part thereof, of the premium
charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause,
sentence, provision or part of a statute shall be considered
surplusage or superfluous, meaningless, void and insignificant.
To this end, a construction which renders every word operative
is preferred over that which makes some words idle and
nugatory.17 This principle is expressed in the maxim Ut magis
valeat quam pereat, that is, we choose the interpretation which
gives effect to the whole of the statute – its every word.18
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply, namely: (1)
the document must be a policy of insurance or an obligation
in the nature of indemnity and (2) the maker should be
transacting the business of accident, fidelity, employer’s
liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine,
inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The
National Health Insurance Act of 1995"), an HMO is "an entity
that provides, offers or arranges for coverage of designated
health services needed by plan members for a fixed prepaid
premium."19 The payments do not vary with the extent,
frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the
business of insurance during the pertinent taxable years? We
rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance
Code) enumerates what constitutes "doing an insurance
business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance
contract;
b) making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance
business within the meaning of this Code;
d) doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no
profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed
5
conclusive to show that the making thereof does not constitute
the doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a
persuasive effect on our decisions,21 have determined that
HMOs are not in the insurance business. One test that they have
applied is whether the assumption of risk and indemnification of
loss (which are elements of an insurance business) are the
principal object and purpose of the organization or whether they
are merely incidental to its business. If these are the principal
objectives, the business is that of insurance. But if they are
merely incidental and service is the principal purpose, then the
business is not insurance.
Applying the "principal object and purpose test," 22 there is
significant American case law supporting the argument that a
corporation (such as an HMO, whether or not organized for
profit), whose main object is to provide the members of a group
with health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health
Association23 wherein the Court of Appeals of the District of
Columbia Circuit held that Group Health Association should not
be considered as engaged in insurance activities since it was
created primarily for the distribution of health care services
rather than the assumption of insurance risk.
xxx Although Group Health’s activities may be considered in one
aspect as creating security against loss from illness or accident
more truly they constitute the quantity purchase of well-rounded,
continuous medical service by its members. xxx The functions
of such an organization are not identical with those of
insurance or indemnity companies. The latter are concerned
primarily, if not exclusively, with risk and the consequences of
its descent, not with service, or its extension in kind, quantity or
distribution; with the unusual occurrence, not the daily routine of
living. Hazard is predominant. On the other hand, the
cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made
possible by quantity purchasing and economies in
operation. Its primary purpose is to reduce the cost rather
than the risk of medical care; to broaden the service to the
individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of living,
like purchasing food and clothing or oil and gas, rather than
merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death,
disaster at sea, fire and tornado. It is, in this instance, to take
care of colds, ordinary aches and pains, minor ills and all the
temporary bodily discomforts as well as the more serious and
unusual illness. To summarize, the distinctive features of the
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
6
physicians participating in the medical service
corporation’s plan, not only will the subscribers be
deprived of the protection which they might reasonably
have expected would be provided, but the corporation will,
in effect, be doing business solely as a health and accident
indemnity insurer without having qualified as such and
rendering itself subject to the more stringent financial
requirements of the General Insurance Laws….
A participating provider of health care services is one who
agrees in writing to render health care services to or for persons
covered by a contract issued by health service corporation in
return for which the health service corporation agrees to
make payment directly to the participating
provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to
override the primary purpose of the business to provide medical
services as needed, with payment made directly to the provider
of these services.29 In short, even if petitioner assumes the risk
of paying the cost of these services even if significantly more
than what the member has prepaid, it nevertheless cannot be
considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the
payment for services rendered in case of emergency by non-
participating health providers would still be incidental to
petitioner’s purpose of providing and arranging for health care
services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is
required to set up a system and the facilities for the delivery of
such medical services. This indubitably shows that
indemnification is not its sole object.
In fact, a substantial portion of petitioner’s services covers
preventive and diagnostic medical services intended to keep
members from developing medical conditions or diseases.30 As
an HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are
designed to prevent or to minimize thepossibility of any
assumption of risk on its part. Thus, its undertaking under its
agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to
provide the health and medical services needed to prevent such
loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to
its members (with respect to its curative medical services), but
these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s
business is miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health care services
rather than insurance services, it cannot be considered as being
in the insurance business.
It is important to emphasize that, in adopting the "principal
purpose test" used in the above-quoted U.S. cases, we are not
saying that petitioner’s operations are identical in every respect
to those of the HMOs or health providers which were parties to
those cases. What we are stating is that, for the purpose of
determining what "doing an insurance business" means, we
have to scrutinize the operations of the business as a whole and
not its mere components. This is of course only prudent and

appropriate, taking into account the burdensome and strict laws,
rules and regulations applicable to insurers and other entities
engaged in the insurance business. Moreover, we are also not
unmindful that there are other American authorities who have
found particular HMOs to be actually engaged in insurance
activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of
the insurance industry. This is evident from the fact that it is not
supervised by the Insurance Commission but by the Department
of Health.33 In fact, in a letter dated September 3, 2000, the
Insurance Commissioner confirmed that petitioner is not
engaged in the insurance business. This determination of the
commissioner must be accorded great weight. It is well-settled
that the interpretation of an administrative agency which is
tasked to implement a statute is accorded great respect and
ordinarily controls the interpretation of laws by the courts. The
reason behind this rule was explained in Nestle Philippines, Inc.
v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of
the multifarious needs of a modern or modernizing society and
the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to the
accumulation of experience and growth of specialized
capabilities by the administrative agency charged with
implementing a particular statute. In Asturias Sugar Central, Inc.
vs. Commissioner of Customs,35 the Court stressed that
executive officials are presumed to have familiarized themselves
with all the considerations pertinent to the meaning and purpose
of the law, and to have formed an independent, conscientious
and competent expert opinion thereon. The courts give much
weight to the government agency officials charged with the
implementation of the law, their competence, expertness,
experience and informed judgment, and the fact that they
frequently are the drafters of the law they interpret. 36
A Health Care Agreement Is Not An Insurance Contract
Contemplated Under Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of
insurance… or obligations of the nature of indemnity for loss,
damage, or liability…." In our decision dated June 12, 2008, we
ruled that petitioner’s health care agreements are contracts of
indemnity and are therefore insurance contracts:
It is … incorrect to say that the health care agreement is not
based on loss or damage because, under the said agreement,
petitioner assumes the liability and indemnifies its member for
hospital, medical and related expenses (such as professional
fees of physicians). The term "loss or damage" is broad enough
to cover the monetary expense or liability a member will incur in
case of illness or injury.
Under the health care agreement, the rendition of hospital,
medical and professional services to the member in case of
sickness, injury or emergency or his availment of so-called "out-
patient services" (including physical examination, x-ray and
laboratory tests, medical consultations, vaccine administration
and family planning counseling) is the contingent event which
gives rise to liability on the part of the member. In case of
exposure of the member to liability, he would be entitled to
indemnification by petitioner.
7
Furthermore, the fact that petitioner must relieve its member
from liability by paying for expenses arising from the stipulated
contingencies belies its claim that its services are prepaid. The
expenses to be incurred by each member cannot be predicted
beforehand, if they can be predicted at all. Petitioner assumes
the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of persons
bearing a similar risk, that is, among all the other members of
the health care program. This is insurance.37
We reconsider. We shall quote once again the pertinent portion
of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance
policies. – On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or
company or corporation transacting the business of accident,
fidelity, employer’s liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance), xxxx (Emphasis
supplied)
In construing this provision, we should be guided by the principle
that tax statutes are strictly construed against the taxing
authority.38 This is because taxation is a destructive power
which interferes with the personal and property rights of the
people and takes from them a portion of their property for the
support of the government.39 Hence, tax laws may not be
extended by implication beyond the clear import of their
language, nor their operation enlarged so as to embrace matters
not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court
pronounced that a health care agreement is in the nature of non-
life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax
provision. Instead, they dealt with the liability of a health service
provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are
liberally interpreted in favor of the member and strictly against
the HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the
designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons bearing
a similar risk and

5. In consideration of the insurer’s promise, the insured pays a
premium.41
Do the agreements between petitioner and its members possess
all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws
has pointed out that, even if a contract contains all the elements
of an insurance contract, if its primary purpose is the rendering
of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing
all the four elements mentioned above would be an insurance
contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract.
For example, a law firm which enters into contracts with clients
whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not
engaged in the insurance business. Its contracts are simply for
the purpose of rendering personal services. On the other hand,
a contract by which a corporation, in consideration of a
stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of
insurance, and the corporation will be deemed as engaged in
the business of insurance. Unlike the lawyer’s retainer contract,
the essential purpose of such a contract is not to render personal
services, but to indemnify against loss and damage resulting
from the defense of actions for malpractice.42 (Emphasis
supplied)
Second. Not all the necessary elements of a contract of
insurance are present in petitioner’s agreements. To begin with,
there is no loss, damage or liability on the part of the member
that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined
consideration in exchange for the hospital, medical and
professional services rendered by the petitioner’s physician or
affiliated physician to him. In case of availment by a member of
the benefits under the agreement, petitioner does not reimburse
or indemnify the member as the latter does not pay any third
party. Instead, it is the petitioner who pays the participating
physicians and other health care providers for the services
rendered at pre-agreed rates. The member does not make any
such payment.
In other words, there is nothing in petitioner's agreements that
gives rise to a monetary liability on the part of the member to any
third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms
"indemnify" or "indemnity" presuppose that a liability or claim has
already been incurred. There is no indemnity precisely because
the member merely avails of medical services to be paid or
already paid in advance at a pre-agreed price under the
agreements.
Third. According to the agreement, a member can take
advantage of the bulk of the benefits anytime, e.g. laboratory
services, x-ray, routine annual physical examination and
consultations, vaccine administration as well as family planning
counseling, even in the absence of any peril, loss or damage on
his or her part.
8
Fourth. In case of emergency, petitioner is obliged to reimburse
the member who receives care from a non-participating
physician or hospital. However, this is only a very minor part of
the list of services available. The assumption of the expense by
petitioner is not confined to the happening of a contingency but
includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care
Program, Inc.,43 although the health care contracts called for the
defendant to partially reimburse a subscriber for treatment
received from a non-designated doctor, this did not make
defendant an insurer. Citing Jordan, the Court determined that
"the primary activity of the defendant (was) the provision of
podiatric services to subscribers in consideration of prepayment
for such services."44 Since indemnity of the insured was not the
focal point of the agreement but the extension of medical
services to the member at an affordable cost, it did not partake
of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance
contract, it is not necessarily true that risk alone is sufficient to
establish it. Almost anyone who undertakes a contractual
obligation always bears a certain degree of financial risk.
Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance
contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when
it offers to provide health services: the risk that it might fail to
earn a reasonable return on its investment. But it is not the risk
of the type peculiar only to insurance companies. Insurance risk,
also known as actuarial risk, is the risk that the cost of insurance
claims might be higher than the premiums paid. The amount of
premium is calculated on the basis of assumptions made relative
to the insured.45
However, assuming that petitioner’s commitment to provide
medical services to its members can be construed as an
acceptance of the risk that it will shell out more than the prepaid
fees, it still will not qualify as an insurance contract because
petitioner’s objective is to provide medical services at reduced
cost, not to distribute risk like an insurer.
In sum, an examination of petitioner’s agreements with its
members leads us to conclude that it is not an insurance contract
within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health
Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the
imposition of DST on petitioner’s health care agreements under
Section 185 of the NIRC of 1997 is the provision’s legislative
history. The text of Section 185 came into U.S. law as early as
1904 when HMOs and health care agreements were not even in
existence in this jurisdiction. It was imposed under Section 116,
Article XI of Act No. 1189 (otherwise known as the "Internal
Revenue Law of 1904")46enacted on July 2, 1904 and became
effective on August 1, 1904. Except for the rate of tax, Section
185 of the NIRC of 1997 is a verbatim reproduction of the
pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in
respect to the several bonds, debentures, or certificates of stock
and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in
respect to the vellum, parchment, or paper upon which such
instrument, matters, or things or any of them shall be written or
printed by any person or persons who shall make, sign, or issue
the same, on and after January first, nineteen hundred and five,
the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or
obligation of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association,
company, or corporation transacting the business of
accident, fidelity, employer’s liability, plate glass, steam
boiler, burglar, elevator, automatic sprinkle, or other branch
of insurance (except life, marine, inland, and fire
insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law
of 1914) was enacted revising and consolidating the laws
relating to internal revenue. The aforecited pertinent portion of
Section 116, Article XI of Act No. 1189 was completely
reproduced as Section 30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items subject to DST was
thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339
was again reproduced as Section 1604 (l), Article IV of Act No.
2657 (Administrative Code). Upon its amendment on March 10,
1917, the pertinent DST provision became Section 1449 (l) of
Act No. 2711, otherwise known as the Administrative Code of
1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth
Act No. 466 (the NIRC of 1939), which codified all the internal
revenue laws of the Philippines. In an amendment introduced by
RA 40 on October 1, 1946, the DST rate was increased but the
provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same
DST rate was reproduced in PD 1158 (NIRC of 1977) as Section
234. Under PDs 1457 and 1959, enacted on June 11, 1978 and
October 10, 1984 respectively, the DST rate was again
increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994,
Section 234 of the NIRC of 1977 was renumbered as Section
198. And under Section 23 of EO47 273 dated July 25, 1987, it
was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was
amended but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of
1977 by RA 8424 (or the NIRC of 1997), the subject legal
provision was retained as the present Section 185. In 2004,
amendments to the DST provisions were introduced by RA
924348 but Section 185 was untouched.
9
On the other hand, the concept of an HMO was introduced in
the Philippines with the formation of Bancom Health Care
Corporation in 1974. The same pioneer HMO was later
reorganized and renamed Integrated Health Care Services, Inc.
(or Intercare). However, there are those who claim that Health
Maintenance, Inc. is the HMO industry pioneer, having set foot
in the Philippines as early as 1965 and having been formally
incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment
of more than 2 million.49
We can clearly see from these two histories (of the DST on the
one hand and HMOs on the other) that when the law imposing
the DST was first passed, HMOs were yet unknown in the
Philippines. However, when the various amendments to the DST
law were enacted, they were already in existence in the
Philippines and the term had in fact already been defined by RA
7875. If it had been the intent of the legislature to impose DST
on health care agreements, it could have done so in clear and
categorical terms. It had many opportunities to do so. But it did
not. The fact that the NIRC contained no specific provision on
the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to
impose it on them. As a matter of fact, petitioner was
assessed its DST liability only on January 27, 2000, after
more than a decade in the business as an HMO.50
Considering that Section 185 did not change since 1904 (except
for the rate of tax), it would be safe to say that health care
agreements were never, at any time, recognized as insurance
contracts or deemed engaged in the business of insurance
within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty
and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency who is to pay it.51 So potent indeed is the power
that it was once opined that "the power to tax involves the power
to destroy."52
Petitioner claims that the assessed DST to date which amounts
to ₱376 million53 is way beyond its net worth of ₱259
million.54 Respondent never disputed these assertions. Given
the realities on the ground, imposing the DST on petitioner
would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the
government ought to encourage private enterprise. 55 Petitioner,
just like any concern organized for a lawful economic activity,
has a right to maintain a legitimate business. 56 As aptly held
in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill
the "hen that lays the golden egg."58
Legitimate enterprises enjoy the constitutional protection not to
be taxed out of existence. Incurring losses because of a tax
imposition may be an acceptable consequence but killing the

business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of the
nation’s thrust towards a better economy which will ultimately
benefit the majority of our people.59
Petitioner’s Tax Liability Was Extinguished Under The
Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST
assessment for taxable years 1996 and 1997 became moot and
academic60 when it availed of the tax amnesty under RA 9480
on December 10, 2007. It paid ₱5,127,149.08 representing 5%
of its net worth as of the year ended December 31, 2005 and
complied with all requirements of the tax amnesty. Under
Section 6(a) of RA 9480, it is entitled to immunity from payment
of taxes as well as additions thereto, and the appurtenant civil,
criminal or administrative penalties under the 1997 NIRC, as
amended, arising from the failure to pay any and all internal
revenue taxes for taxable year 2005 and prior years.61
Far from disagreeing with petitioner, respondent manifested in
its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty
entitles a taxpayer to immunity from payment of the tax involved,
including the civil, criminal, or administrative penalties provided
under the 1997 [NIRC], for tax liabilities arising in 2005 and the
preceding years.
In view of petitioner’s availment of the benefits of [RA 9840], and
without conceding the merits of this case as discussed
above, respondent concedes that such tax amnesty
extinguishes the tax liabilities of petitioner. This admission,
however, is not meant to preclude a revocation of the amnesty
granted in case it is found to have been granted under
circumstances amounting to tax fraud under Section 10 of said
amnesty law.62 (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the
taxes covered by the tax amnesty program under RA
9480.63 There is no other conclusion to draw than that
petitioner’s liability for DST for the taxable years 1996 and 1997
was totally extinguished by its availment of the tax amnesty
under RA 9480.
Is The Court Bound By A Minute Resolution In Another
Case?
Petitioner raises another interesting issue in its motion for
reconsideration: whether this Court is bound by the ruling of the
CA64 in CIR v. Philippine National Bank65 that a health care
agreement of Philamcare Health Systems is not an insurance
contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001
minute resolution of this Court dismissing the appeal
in Philippine National Bank (G.R. No. 148680).66 Petitioner
argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is
not an insurance contract.
It is true that, although contained in a minute resolution, our
dismissal of the petition was a disposition of the merits of the
10
case. When we dismissed the petition, we effectively affirmed
the CA ruling being questioned. As a result, our ruling in that
case has already become final.67 When a minute resolution
denies or dismisses a petition for failure to comply with formal
and substantive requirements, the challenged decision, together
with its findings of fact and legal conclusions, are deemed
sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res
judicata.69 However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute
resolution is not binding precedent. Thus, in CIR v. Baier-
Nickel,70 the Court noted that a previous case, CIR v. Baier-
Nickel71 involving the same parties and the same issues,
was previously disposed of by the Court thru a minute resolution
dated February 17, 2003 sustaining the ruling of the CA.
Nonetheless, the Court ruled that the previous case "ha(d) no
bearing" on the latter case because the two cases involved
different subject matters as they were concerned with the
taxable income of different taxable years.72
Besides, there are substantial, not simply formal, distinctions
between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII
of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly
applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the
justices, unlike a decision. It does not require the certification of
the Chief Justice. Moreover, unlike decisions, minute resolutions
are not published in the Philippine Reports. Finally, the proviso
of Section 4(3) of Article VIII speaks of a decision.73Indeed, as a
rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680
and since petitioner’s liability for DST on its health care
agreement was not the subject matter of G.R. No. 148680,
petitioner cannot successfully invoke the minute resolution in
that case (which is not even binding precedent) in its favor.
Nonetheless, in view of the reasons already discussed, this does
not detract in any way from the fact that petitioner’s health care
agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not
within the ambit of Section 185 of the NIRC and there was never
any legislative intent to impose the same on HMOs like
petitioner, the same should not be arbitrarily and unjustly
included in its coverage.
It is a matter of common knowledge that there is a great social
need for adequate medical services at a cost which the average
wage earner can afford. HMOs arrange, organize and manage
health care treatment in the furtherance of the goal of providing
a more efficient and inexpensive health care system made
possible by quantity purchasing of services and economies of
scale. They offer advantages over the pay-for-service system
(wherein individuals are charged a fee each time they receive
medical services), including the ability to control costs. They

protect their members from exposure to the high cost of
hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in
society as partners of the State in achieving its constitutional
mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the
premium charged.74 Its imposition will elevate the cost of health
care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services
beyond the reach of the ordinary wage earner or driving the
industry to the ground. At the end of the day, neither side wins,
considering the indispensability of the services offered by
HMOs.
WHEREFORE, the motion for reconsideration
is GRANTED. The August 16, 2004 decision of the Court of
Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED and SET
ASIDE. Respondent is ordered to desist from collecting the said
tax. No costs. SO ORDERED.
G.R. No. L-67835 October 12, 1987
MALAYAN INSURANCE CO., INC. (MICO), petitioner, vs.
GREGORIA CRUZ ARNALDO, in her capacity as the
INSURANCE COMMISSIONER, and CORONACION
PINCA, respondents.
CRUZ, J.:
When a person's house is razed, the fire usually burns down the
efforts of a lifetime and forecloses hope for the suddenly somber
future. The vanished abode becomes a charred and painful
memory. Where once stood a home, there is now, in the sighing
wisps of smoke, only a gray desolation. The dying embers leave
ashes in the heart.
For peace of mind and as a hedge against possible loss, many
people now secure fire insurance. This is an aleatory contract.
By such insurance, the insured in effect wagers that his house
will be burned, with the insurer assuring him against the loss, for
a fee. If the house does burn, the insured, while losing his house,
wins the wagers. The prize is the recompense to be given by the
insurer to make good the loss the insured has sustained.
It would be a pity then if, having lost his house, the insured were
also to lose the payment he expects to recover for such loss.
Sometimes it is his fault that he cannot collect, as where there
is a defect imputable to him in the insurance contract.
Conversely, the reason may be an unjust refusal of the insurer
to acknowledge a just obligation, as has happened many times.
In the instant case the private respondent has been sustained
by the Insurance Commission in her claim for compensation for
her burned property. The petitioner is now before us to dispute
the decision, 1 on the ground that there was no valid insurance
contract at the time of the loss.
The chronology of the relevant antecedent facts is as follows:
11
On June 7, 1981, the petitioner (hereinafter called (MICO)
issued to the private respondent, Coronacion Pinca, Fire
Insurance Policy No. F-001-17212 on her property for the
amount of P14,000.00 effective July 22, 1981, until July 22,
1982. 2
On October 15,1981, MICO allegedly cancelled the policy for
non-payment, of the premium and sent the corresponding notice
to Pinca. 3
On December 24, 1981, payment of the premium for Pinca was
received by DomingoAdora, agent of MICO. 4
On January 15, 1982, Adora remitted this payment to
MICO,together with other payments. 5
6
On January 18, 1982, Pinca's property was completely burned.
On February 5, 1982, Pinca's payment was returned by MICO
to Adora on the ground that her policy had been cancelled
earlier. But Adora refused to accept it. 7
In due time, Pinca made the requisite demands for payment,
which MICO rejected. She then went to the Insurance
Commission. It is because she was ultimately sustained by the
public respondent that the petitioner has come to us for relief.
From the procedural viewpoint alone, the petition must be
rejected. It is stillborn.
The records show that notice of the decision of the public
respondent dated April 5, 1982, was received by MICO on April
10, 1982. 8 On April 25, 1982, it filed a motion for
reconsideration, which was denied on June 4, 1982. 9 Notice of
this denial was received by MICO on June 13, 1982, as
evidenced by Annex "1" duly authenticated by the Insurance
Commission. 10 The instant petition was filed with this Court on
July 2, 1982. 11
The position of the petition is that the petition is governed by
Section 416 0f the Insurance Code giving it thirty days wthin
which to appeal by certiorari to this Court. Alternatively, it also
invokes Rule 45 of the Rules of Court. For their part, the public
and private respondents insist that the applicable law is B.P.
129, which they say governs not only courts of justice but also
quasi-judicial bodies like the Insurance Commission. The period
for appeal under this law is also fifteen days, as under Rule 45.
The pivotal date is the date the notice of the denial of the motion
for reconsideration was received by MICO.
MICO avers this was June 18, 1982, and offers in evidence its
Annex "B," 12 which is a copy of the Order of June 14, 1982,
with a signed rubber-stamped notation on the upper left-hand
corner that it was received on June 18, 1982, by its legal
department. It does not indicate from whom. At the bottom,
significantly, there is another signature under which are the
ciphers "6-13-82," for which no explanation has been given.
Against this document, the private respodent points in her Annex
"1," 13 the authenticated copy of the same Order with a rubber-
stamped notation at the bottom thereof indicating that it was
received for the Malayan Insurance Co., Inc. by J. Gotladera on
"6-13-82." The signature may or may not habe been written by

the same person who signed at the bottom of the petitioner's
Annex "B."
Between the two dates, the court chooses to believe June 13,
1982, not only because the numbers "6-13-82" appear on both
annexes but also because it is the date authenticated by the
administrative division of the Insurance Commission. Annex "B"
is at worst self-serving; at best, it might only indicate that it was
received on June 18, 1982, by the legal department of MICO,
after it had been received earlier by some other of its personnel
on June 13, 1982. Whatever the reason for the delay in
transmitting it to the legal department need not detain us here.
Under Section 416 of the Insurance Code, the period for appeal
is thirty days from notice of the decision of the Insurance
Commission. The petitioner filed its motion for reconsideration
on April 25, 1981, or fifteen days such notice, and the
reglementary period began to run again after June 13, 1981,
date of its receipt of notice of the denial of the said motion for
reconsideration. As the herein petition was filed on July 2, 1981,
or nineteen days later, there is no question that it is tardy by four
days.
Counted from June 13, the fifteen-day period prescribed under
Rule 45, assuming it is applicable, would end on June 28, 1982,
or also four days from July 2, when the petition was filed.
If it was filed under B.P. 129, then, considering that the motion
for reconsideration was filed on the fifteenth day after MICO
received notice of the decision, only one more day would have
remained for it to appeal, to wit, June 14, 1982. That would make
the petition eighteen days late by July 2.
Indeed, even if the applicable law were still R.A. 5434, governing
appeals from administrative bodies, the petition would still be
tardy. The law provides for a fixed period of ten days from notice
of the denial of a seasonable motion for reconsideration within
which to appeal from the decision. Accordingly, that ten-day
period, counted from June 13, 1982, would have ended on June
23, 1982, making the petition filed on July 2, 1982, nine
days late.
Whichever law is applicable, therefore, the petition can and
should be dismissed for late filing.
On the merits, it must also fail. MICO's arguments that there was
no payment of premium and that the policy had been cancelled
before the occurence of the loss are not acceptable. Its
contention that the claim was allowed without proof of loss is
also untenable.
The petitioner relies heavily on Section 77 of the Insurance Code
providing that:
SEC. 77. An insurer is entitled to payment of the premium as
soon as the thing is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy whenever
the grace period provision applies.
The above provision is not applicable because payment of the
premium was in fact eventually made in this case. Notably, the
12
premium invoice issued to Pinca at the time of the delivery of the
policy on June 7, 1981 was stamped "Payment Received" of the
amoung of P930.60 on "12-24-81" by Domingo Adora. 14 This
is important because it suggests an understanding between
MICO and the insured that such payment could be made later,
as agent Adora had assured Pinca. In any event, it is not denied
that this payment was actually made by Pinca to Adora, who
remitted the same to MICO.
The payment was made on December 24, 1981, and the fire
occured on January 18, 1982. One wonders: suppose the
payment had been made and accepted in, say, August 1981,
would the commencement date of the policy have been changed
to the date of the payment, or would the payment have
retroacted to July 22, 1981? If MICO accepted the payment in
December 1981 and the insured property had not been burned,
would that policy not have expired just the same on July 22,
1982, pursuant to its original terms, and not on December 24,
1982?
It would seem from MICO's own theory, that the policy would
have become effective only upon payment, if accepted and so
would have been valid only from December 24, 1981m but only
up to July 22, 1981, according to the original terms. In others
words, the policy would have run for only eight months although
the premium paid was for one whole year.
It is not disputed that the preium was actually paid by Pinca to
Adora on December 24, 1981, who received it on behalf of
MICO, to which it was remitted on January 15, 1982. What is
questioned is the validity of Pinca's payment and of Adora's
authority to receive it.
MICO's acknowledgment of Adora as its agent defeats its
contention that he was not authorized to receive the premium
payment on its behalf. It is clearly provided in Section 306 of the
Insurance Code that:
SEC. 306. xxx xxx xxx
Any insurance company which delivers to an insurance agant or
insurance broker a policy or contract of insurance shall be
demmed to have authorized such agent or broker to receive on
its behalf payment of any premium which is due on such policy
or contract of insurance at the time of its issuance or delivery or
which becomes due thereon.
And it is a well-known principle under the law of agency that:
Payment to an agent having authority to receive or collect
payment is equivalent to payment to the principal himself; such
payment is complete when the money delivered is into the
agent's hands and is a discharge of the indebtedness owing to
the principal. 15
There is the petitioner's argument, however, that Adora was not
authorized to accept the premium payment because six months
had elapsed since the issuance by the policy itself. It is argued
that this prohibition was binding upon Pinca, who made the
payment to Adora at her own riskl as she was bound to first
check his authority to receive it. 16
MICO is taking an inconsistent stand. While contending that
acceptance of the premium payment was prohibited by the

policy, it at the same time insists that the policy never came into
force because the premium had not been paid. One surely,
cannot have his cake and eat it too.
We do not share MICO's view that there was no existing
insurance at the time of the loss sustained by Pinca because her
policy never became effective for non-payment of premium.
Payment was in fact made, rendering the policy operative as of
June 22, 1981, and removing it from the provisions of Article 77,
Thereafter, the policy could be cancelled on any of the
supervening grounds enumerated in Article 64 (except
"nonpayment of premium") provided the cancellation was made
in accordance therewith and with Article 65.
Section 64 reads as follows:
SEC. 64. No policy of insurance other than life shall be cancelled
by the insurer except upon prior notice thereof to the insured,
and no notice of cancellation shall be effective unless it is based
on the occurrence, after the effective date of the policy, of one
or more of the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the hazard
insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful, or reckless acts or commissions
increasing the hazard insured against;
(e) physical changes in the property insured which result in the
property becoming uninsurable;or
(f) a determination by the Commissioner that the continuation of
the policy would violate or would place the insurer in violation of
this Code.
As for the method of cancellation, Section 65 provides as
follows:
SEC. 65. All notices of cancellation mentioned in the preceding
section shall be in writing, mailed or delivered to the named
insured at the address shown in the policy, and shall state (a)
which of the grounds set forth in section sixty-four is relied upon
and (b) that, upon written request of the named insured, the
insurer will furnish the facts on which the cancellation is based.
A valid cancellation must, therefore, require concurrence of the
following conditions:
(1) There must be prior notice of cancellation to the insured; 17
(2) The notice must be based on the occurrence, after the
effective date of the policy, of one or more of the grounds
mentioned;18
(3) The notice must be (a) in writing, (b) mailed, or delivered to
the named insured, (c) at the address shown in the policy; 19
(4) It must state (a) which of the grounds mentioned in Section
64 is relied upon and (b) that upon written request of the insured,
the insurer will furnish the facts on which the cancellation is
based. 20
13
MICO's claims it cancelled the policy in question on October 15,
1981, for non-payment of premium. To support this assertion, it
presented one of its employees, who testified that "the original
of the endorsement and credit memo" — presumably meaning
the alleged cancellation — "were sent the assured by mail
through our mailing section" 21However, there is no proof that
the notice, assuming it complied with the other requisites
mentioned above, was actually mailed to and received by Pinca.
All MICO's offers to show that the cancellation was
communicated to the insured is its employee's testimony that the
said cancellation was sent "by mail through our mailing section."
without more. The petitioner then says that its "stand is
enervated (sic) by the legal presumption of regularity and due
performance of duty." 22 (not realizing perhaps that "enervated"
means "debilitated" not "strengthened").
On the other hand, there is the flat denial of Pinca, who says she
never received the claimed cancellation and who, of course, did
not have to prove such denial Considering the strict language of
Section 64 that no insurance policy shall be cancelled except
upon prior notice, it behooved MICO's to make sure that the
cancellation was actually sent to and received by the insured.
The presumption cited is unavailing against the positive duty
enjoined by Section 64 upon MICO and the flat denial made by
the private respondent that she had received notice of the
claimed cancellation.
It stands to reason that if Pinca had really received the said
notice, she would not have made payment on the original policy
on December 24, 1981. Instead, she would have asked for a
new insurance, effective on that date and until one year later,
and so taken advantage of the extended period. The Court finds
that if she did pay on that date, it was because she honestly
believed that the policy issued on June 7, 1981, was still in effect
and she was willing to make her payment retroact to July 22,
1981, its stipulated commencement date. After all, agent Adora
was very accomodating and had earlier told her "to call him up
any time" she was ready with her payment on the policy earlier
issued. She was obviously only reciprocating in kind when she
paid her premium for the period beginning July 22, 1981, and
not December 24, 1981.
MICO's suggests that Pinca knew the policy had already been
cancelled and that when she paid the premium on December 24,
1981, her purpose was "to renew it." As this could not be done
by the agent alone under the terms of the original policy, the
renewal thereof did not legally bind MICO. which had not ratified
it. To support this argument, MICO's cites the following
exchange:
Q: Now, Madam Witness, on December 25th you made the
alleged payment. Now, my question is that, did it not come to
your mind that after the lapse of six (6) months, your policy was
cancelled?
A: I have thought of that but the agent told me to call him up at
anytime.
Q: So if you thought that your policy was already intended to
revive cancelled policy?
A: Misleading, Your Honor.

Hearing Officer: The testimony of witness is that, she thought of
that.
Q: I will revise the question. Now, Mrs. Witness, you stated that
you thought the policy was cancelled. Now, when you made the
payment of December 24, 1981, your intention was to revive the
policy if it was already cancelled?
A: Yes, to renew it. 23
A close study of the above transcript will show that Pinca meant
to renew the policy if it had really been already cancelled but not
if it was stffl effective. It was all conditional. As it has not been
shown that there was a valid cancellation of the policy, there was
consequently no need to renew it but to pay the premium
thereon. Payment was thus legally made on
the original transaction and it could be, and was, validly received
on behalf of the insurer by its agent Adora. Adora. incidentally,
had not been informed of the cancellation either and saw no
reason not to accept the said payment.
The last point raised by the petitioner should not pose much
difficulty. The valuation fixed in fire insurance policy is
conclusive in case of total loss in the absence of fraud, 24 which
is not shown here. Loss and its amount may be determined on
the basis of such proof as may be offered by the insured, which
need not be of such persuasiveness as is required in judicial
proceedings. 25 If, as in this case, the insured files notice and
preliminary proof of loss and the insurer fails to specify to the
former all the defects thereof and without unnecessary delay, all
objections to notice and proof of loss are deemed waived under
Section 90 of the Insurance Code.
The certification 26 issued by the Integrated National Police,
Lao-ang, Samar, as to the extent of Pinca's loss should be
considered sufficient. Notably,MICO submitted no evidence to
the contrary nor did it even question the extent of the loss in its
answer before the Insurance Commission. It is also worth
observing that Pinca's property was not the only building bumed
in the fire that razed the commercial district of Lao-ang, Samar,
on January 18, 1982. 27
There is nothing in the Insurance Code that makes the
participation of an adjuster in the assessment of the loss
imperative or indespensable, as MICO suggests. Section 325,
which it cites, simply speaks of the licensing and duties of
adjusters.
We see in this cases an obvious design to evade or at least
delay the discharge of a just obligation through efforts bordering
on bad faith if not plain duplicity, We note that the motion for
reconsideration was filed on the fifteenth day from notice of the
decision of the Insurance Commission and that there was a
feeble attempt to show that the notice of denial of the said motion
was not received on June 13, 1982, to further hinder the
proceedings and justify the filing of the petition with this Court
fourteen days after June 18, 1982. We also look askance at the
alleged cancellation, of which the insured and MICO's agent
himself had no knowledge, and the curious fact that although
Pinca's payment was remitted to MICO's by its agent on January
15, 1982, MICO sought to return it to Adora only on February 5,
1982, after it presumably had learned of the occurrence of the
loss insured against on January 18, 1982. These circumstances
14
make the motives of the petitioner highly suspect, to say the
least, and cast serious doubts upon its candor and bona fides.
WHEREFORE, the petition is DENIED. The decision of the
Insurance Commission dated April 10, 1981, and its Order of
June 4, 1981, are AFFIRMED in full, with costs against the
petitioner. This decision is immediately executory. SO
ORDERED.
G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE
COMPANY, petitioner, vs. HONORABLE COURT OF
APPEALS, respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU D. MONDRAGON, petitioner, vs.
HON. COURT OF APPEALS and NGO HING, respondents.
DE CASTRO, J.:
The two above-entitled cases were ordered consolidated by the
Resolution of this Court dated April 29, 1970, (Rollo, No. L-
31878, p. 58), because the petitioners in both cases seek similar
relief, through these petitions for certiorari by way of appeal,
from the amended decision of respondent Court of Appeals
which affirmed in toto the decision of the Court of First Instance
of Cebu, ordering "the defendants (herein petitioners Great
Pacific Ligfe Assurance Company and Mondragon) jointly and
severally to pay plaintiff (herein private respondent Ngo Hing)
the amount of P50,000.00 with interest at 6% from the date of
the filing of the complaint, and the sum of P1,077.75, without
interest.
It appears that on March 14, 1957, private respondent Ngo Hing
filed an application with the Great Pacific Life Assurance
Company (hereinafter referred to as Pacific Life) for a twenty-
year endownment policy in the amount of P50,000.00 on the life
of his one-year old daughter Helen Go. Said respondent
supplied the essential data which petitioner Lapulapu D.
Mondragon, Branch Manager of the Pacific Life in Cebu City
wrote on the corresponding form in his own handwriting (Exhibit
I-M). Mondragon finally type-wrote the data on the application
form which was signed by private respondent Ngo Hing. The
latter paid the annual premuim the sum of P1,077.75 going over
to the Company, but he reatined the amount of P1,317.00 as his
commission for being a duly authorized agebt of Pacific Life.
Upon the payment of the insurance premuim, the binding
deposit receipt (Exhibit E) was issued to private respondent Ngo
Hing. Likewise, petitioner Mondragon handwrote at the bottom
of the back page of the application form his strong
recommendation for the approval of the insurance application.
Then on April 30, 1957, Mondragon received a letter from Pacific
Life disapproving the insurance application (Exhibit 3-M). The
letter stated that the said life insurance application for 20-year
endowment plan is not available for minors below seven years
old, but Pacific Life can consider the same under the Juvenile
Triple Action Plan, and advised that if the offer is acceptable, the
Juvenile Non-Medical Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was
allegedly not communicated by petitioner Mondragon to private
respondent Ngo Hing. Instead, on May 6, 1957, Mondragon
wrote back Pacific Life again strongly recommending the
approval of the 20-year endowment insurance plan to children,
pointing out that since 1954 the customers, especially the
Chinese, were asking for such coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957
Helen Go died of influenza with complication of
bronchopneumonia. Thereupon, private respondent sought the
payment of the proceeds of the insurance, but having failed in
his effort, he filed the action for the recovery of the same before
the Court of First Instance of Cebu, which rendered the adverse
decision as earlier refered to against both petitioners.
The decisive issues in these cases are: (1) whether the binding
deposit receipt (Exhibit E) constituted a temporary contract of
the life insurance in question; and (2) whether private
respondent Ngo Hing concealed the state of health and physical
condition of Helen Go, which rendered void the aforesaid Exhibit
E.
1. At the back of Exhibit E are condition precedents required
before a deposit is considered a BINDING RECEIPT. These
conditions state that:
A. If the Company or its agent, shan have received the premium
deposit ... and the insurance application, ON or PRIOR to the
date of medical examination ... said insurance shan be in force
and in effect from the date of such medical examination, for such
period as is covered by the deposit ..., PROVIDED the company
shall be satisfied that on said date the applicant was insurable
on standard rates under its rule for the amount of insurance and
the kind of policy requested in the application.
D. If the Company does not accept the application on standard
rate for the amount of insurance and/or the kind of policy
requested in the application but issue, or offers to issue a policy
for a different plan and/or amount ..., the insurance shall not be
in force and in effect until the applicant shall have accepted the
policy as issued or offered by the Company and shall have paid
the full premium thereof. If the applicant does not accept the
policy, the deposit shall be refunded.
E. If the applicant shall not have been insurable under Condition
A above, and the Company declines to approve the application
the insurance applied for shall not have been in force at any time
and the sum paid be returned to the applicant upon the
surrender of this receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that the
binding deposit receipt is intended to be merely a provisional or
temporary insurance contract and only upon compliance of the
following conditions: (1) that the company shall be satisfied that
the applicant was insurable on standard rates; (2) that if the
company does not accept the application and offers to issue a
policy for a different plan, the insurance contract shall not be
binding until the applicant accepts the policy offered; otherwise,
the deposit shall be reftmded; and (3) that if the applicant is not
ble according to the standard rates, and the company
disapproves the application, the insurance applied for shall not
15
be in force at any time, and the premium paid shall be returned
to the applicant.
Clearly implied from the aforesaid conditions is that the binding
deposit receipt in question is merely an acknowledgment, on
behalf of the company, that the latter's branch office had
received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance
company; and that the latter will either approve or reject the
same on the basis of whether or not the applicant is "insurable
on standard rates." Since petitioner Pacific Life disapproved the
insurance application of respondent Ngo Hing, the binding
deposit receipt in question had never become in force at any
time.
Upon this premise, the binding deposit receipt (Exhibit E) is,
manifestly, merely conditional and does not insure outright. As
held by this Court, where an agreement is made between the
applicant and the agent, no liability shall attach until the principal
approves the risk and a receipt is given by the agent. The
acceptance is merely conditional and is subordinated to the act
of the company in approving or rejecting the application. Thus,
in life insurance, a "binding slip" or "binding receipt" does not
insure by itself (De Lim vs. Sun Life Assurance Company of
Canada, 41 Phil. 264).
It bears repeating that through the intra-company
communication of April 30, 1957 (Exhibit 3-M), Pacific Life
disapproved the insurance application in question on the ground
that it is not offering the twenty-year endowment insurance
policy to children less than seven years of age. What it offered
instead is another plan known as the Juvenile Triple Action,
which private respondent failed to accept. In the absence of a
meeting of the minds between petitioner Pacific Life and private
respondent Ngo Hing over the 20-year endowment life
insurance in the amount of P50,000.00 in favor of the latter's
one-year old daughter, and with the non-compliance of the
abovequoted conditions stated in the disputed binding deposit
receipt, there could have been no insurance contract duly
perfected between thenl Accordingly, the deposit paid by private
respondent shall have to be refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of
Canada, supra, "a contract of insurance, like other contracts,
must be assented to by both parties either in person or by their
agents ... The contract, to be binding from the date of the
application, must have been a completed contract, one that
leaves nothing to be dione, nothing to be completed, nothing to
be passed upon, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties
have met in agreement."
We are not impressed with private respondent's contention that
failure of petitioner Mondragon to communicate to him the
rejection of the insurance application would not have any
adverse effect on the allegedly perfected temporary contract
(Respondent's Brief, pp. 13-14). In this first place, there was no
contract perfected between the parties who had no meeting of
their minds. Private respondet, being an authorized insurance
agent of Pacific Life at Cebu branch office, is indubitably aware
that said company does not offer the life insurance applied for.
When he filed the insurance application in dispute, private

respondent was, therefore, only taking the chance that Pacific
Life will approve the recommendation of Mondragon for the
acceptance and approval of the application in question along
with his proposal that the insurance company starts to offer the
20-year endowment insurance plan for children less than seven
years. Nonetheless, the record discloses that Pacific Life had
rejected the proposal and recommendation. Secondly, having
an insurable interest on the life of his one-year old daughter,
aside from being an insurance agent and an offense associate
of petitioner Mondragon, private respondent Ngo Hing must
have known and followed the progress on the processing of
such application and could not pretend ignorance of the
Company's rejection of the 20-year endowment life insurance
application.
At this juncture, We find it fit to quote with approval, the very apt
observation of then Appellate Associate Justice Ruperto G.
Martin who later came up to this Court, from his dissenting
opinion to the amended decision of the respondent court which
completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum
of rejection (Exhibit 3-M) nor the reply thereto of appellant
Mondragon reiterating the desire for applicant's father to have
the application considered as one for a 20-year endowment plan
was ever duly communicated to Ngo; Hing, father of the minor
applicant. I am not quite conninced that this was so. Ngo Hing,
as father of the applicant herself, was precisely the "underwriter
who wrote this case" (Exhibit H-1). The unchallenged statement
of appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-
M), specifically admits that said Ngo Hing was "our associate"
and that it was the latter who "insisted that the plan be placed
on the 20-year endowment plan." Under these circumstances, it
is inconceivable that the progress in the processing of the
application was not brought home to his knowledge. He must
have been duly apprised of the rejection of the application for a
20-year endowment plan otherwise Mondragon would not have
asserted that it was Ngo Hing himself who insisted on the
application as originally filed, thereby implictly declining the offer
to consider the application under the Juvenile Triple Action Plan.
Besides, the associate of Mondragon that he was, Ngo Hing
should only be presumed to know what kind of policies are
available in the company for minors below 7 years old. What he
and Mondragon were apparently trying to do in the premises
was merely to prod the company into going into the business of
issuing endowment policies for minors just as other insurance
companies allegedly do. Until such a definite policy is however,
adopted by the company, it can hardly be said that it could have
been bound at all under the binding slip for a plan of insurance
that it could not have, by then issued at all. (Amended Decision,
Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this
Court is of the firm belief that private respondent had deliberately
concealed the state of health and piysical condition of his
daughter Helen Go. Wher private regpondeit supplied the
required essential data for the insurance application form, he
was fully aware that his one-year old daughter is typically a
mongoloid child. Such a congenital physical defect could never
be ensconced nor disguished. Nonetheless, private respondent,
in apparent bad faith, withheld the fact materal to the risk to be
assumed by the insurance compary. As an insurance agent of
16
Pacific Life, he ought to know, as he surely must have known.
his duty and responsibility to such a material fact. Had he
diamond said significant fact in the insurance application fom
Pacific Life would have verified the same and would have had
no choice but to disapprove the application outright.
The contract of insurance is one of perfect good faith uberrima
fides meaning good faith, absolute and perfect candor or
openness and honesty; the absence of any concealment or
demotion, however slight [Black's Law Dictionary, 2nd Edition],
not for the alone but equally so for the insurer (Field man's
Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70).
Concealment is a neglect to communicate that which a partY
knows aDd Ought to communicate (Section 25, Act No. 2427).
Whether intentional or unintentional the concealment entitles the
insurer to rescind the contract of insurance (Section 26, Id.: Yu
Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino
vs. Philippine American Life Insurance Company, 7 SCRA 316).
Private respondent appears guilty thereof.
We are thus constrained to hold that no insurance contract was
perfected between the parties with the noncompliance of the
conditions provided in the binding receipt, and concealment, as
legally defined, having been comraitted by herein private
respondent.
WHEREFORE, the decision appealed from is hereby set aside,
and in lieu thereof, one is hereby entered absolving petitioners
Lapulapu D. Mondragon and Great Pacific Life Assurance
Company from their civil liabilities as found by respondent Court
and ordering the aforesaid insurance company to reimburse the
amount of P1,077.75, without interest, to private respondent,
Ngo Hing. Costs against private respondent. SO ORDERED.
G.R. No. L-24833 September 23, 1968
FIELDMEN'S INSURANCE CO., INC., petitioner, vs.
MERCEDES VARGAS VDA. DE SONGCO, ET AL. and
COURT OF APPEALS, respondents.
FERNANDO, J.:
An insurance firm, petitioner Fieldmen's Insurance Co., Inc., was
not allowed to escape liability under a common carrier insurance
policy on the pretext that what was insured, not once but twice,
was a private vehicle and not a common carrier, the policy being
issued upon the insistence of its agent who discounted fears of
the insured that his privately owned vehicle might not fall within
its terms, the insured moreover being "a man of scant
education," finishing only the first grade. So it was held in a
decision of the lower court thereafter affirmed by respondent
Court of Appeals. Petitioner in seeking the review of the above
decision of respondent Court of Appeals cannot be so sanguine
as to entertain the belief that a different outcome could be
expected. To be more explicit, we sustain the Court of Appeals.
The facts as found by respondent Court of Appeals, binding
upon us, follow: "This is a peculiar case. Federico Songco of
Floridablanca, Pampanga, a man of scant education being only
a first grader ..., owned a private jeepney with Plate No. 41-289
for the year 1960. On September 15, 1960, as such private

vehicle owner, he was induced by Fieldmen's Insurance
Company Pampanga agent Benjamin Sambat to apply for a
Common Carrier's Liability Insurance Policy covering his motor
vehicle ... Upon paying an annual premium of P16.50, defendant
Fieldmen's Insurance Company, Inc. issued on September 19,
1960, Common Carriers Accident Insurance Policy No. 45-HO-
4254 ... the duration of which will be for one (1) year, effective
September 15, 1960 to September 15, 1961. On September 22,
1961, the defendant company, upon payment of the
corresponding premium, renewed the policy by extending the
coverage from October 15, 1961 to October 15, 1962. This time
Federico Songco's private jeepney carried Plate No. J-68136-
Pampanga-1961. ... On October 29, 1961, during the effectivity
of the renewed policy, the insured vehicle while being driven by
Rodolfo Songco, a duly licensed driver and son of Federico (the
vehicle owner) collided with a car in the municipality of Calumpit,
province of Bulacan, as a result of which mishap Federico
Songco (father) and Rodolfo Songco (son) died, Carlos Songco
(another son), the latter's wife, Angelita Songco, and a family
friend by the name of Jose Manuel sustained physical injuries of
varying degree." 1
It was further shown according to the decision of respondent
Court of Appeals: "Amor Songco, 42-year-old son of deceased
Federico Songco, testifying as witness, declared that when
insurance agent Benjamin Sambat was inducing his father to
insure his vehicle, he butted in saying: 'That cannot be, Mr.
Sambat, because our vehicle is an "owner" private vehicle and
not for passengers,' to which agent Sambat replied: 'whether our
vehicle was an "owner" type or for passengers it could be
insured because their company is not owned by the Government
and the Government has nothing to do with their company. So
they could do what they please whenever they believe a vehicle
is insurable' ... In spite of the fact that the present case was filed
and tried in the CFI of Pampanga, the defendant company did
not even care to rebut Amor Songco's testimony by calling on
the witness-stand agent Benjamin Sambat, its Pampanga Field
Representative." 2
The plaintiffs in the lower court, likewise respondents here, were
the surviving widow and children of the deceased Federico
Songco as well as the injured passenger Jose Manuel. On the
above facts they prevailed, as had been mentioned, in the lower
court and in the respondent Court of Appeals.1awphîl.nèt
The basis for the favorable judgment is the doctrine announced
in Qua Chee Gan v. Law Union and Rock Insurance Co.,
Ltd., 3 with Justice J. B. L. Reyes speaking for the Court. It is now
beyond question that where inequitable conduct is shown by an
insurance firm, it is "estopped from enforcing forfeitures in its
favor, in order to forestall fraud or imposition on the insured." 4
As much, if not much more so than the Qua Chee Gan decision,
this is a case where the doctrine of estoppel undeniably calls for
application. After petitioner Fieldmen's Insurance Co., Inc. had
led the insured Federico Songco to believe that he could qualify
under the common carrier liability insurance policy, and to enter
into contract of insurance paying the premiums due, it could not,
thereafter, in any litigation arising out of such representation, be
permitted to change its stand to the detriment of the heirs of the
insured. As estoppel is primarily based on the doctrine of good
faith and the avoidance of harm that will befall the innocent party
17
due to its injurious reliance, the failure to apply it in this case
would result in a gross travesty of justice.
That is all that needs be said insofar as the first alleged error of
respondent Court of Appeals is concerned, petitioner being
adamant in its far-from-reasonable plea that estoppel could not
be invoked by the heirs of the insured as a bar to the alleged
breach of warranty and condition in the policy. lt would now rely
on the fact that the insured owned a private vehicle, not a
common carrier, something which it knew all along when not
once but twice its agent, no doubt without any objection in its
part, exerted the utmost pressure on the insured, a man of scant
education, to enter into such a contract.
Nor is there any merit to the second alleged error of respondent
Court that no legal liability was incurred under the policy by
petitioner. Why liability under the terms of the policy 5 was
inescapable was set forth in the decision of respondent Court of
Appeals. Thus: "Since some of the conditions contained in the
policy issued by the defendant-appellant were impossible to
comply with under the existing conditions at the time and
'inconsistent with the known facts,' the insurer 'is estopped from
asserting breach of such conditions.' From this jurisprudence,
we find no valid reason to deviate and consequently hold that
the decision appealed from should be affirmed. The injured
parties, to wit, Carlos Songco, Angelito Songco and Jose
Manuel, for whose hospital and medical expenses the defendant
company was being made liable, were passengers of the
jeepney at the time of the occurrence, and Rodolfo Songco, for
whose burial expenses the defendant company was also being
made liable was the driver of the vehicle in question. Except for
the fact, that they were not fare paying passengers, their status
as beneficiaries under the policy is recognized therein." 6
Even if it be assumed that there was an ambiguity, an excerpt
from the Qua Chee Gan decision would reveal anew the
weakness of petitioner's contention. Thus: "Moreover, taking
into account the well known rule that ambiguities or obscurities
must be strictly interpreted against the party that caused them,
the 'memo of warranty' invoked by appellant bars the latter from
questioning the existence of the appliances called for in the
insured premises, since its initial expression, 'the undernoted
appliances for the extinction of fire being kept on the premises
insured hereby, ... it is hereby warranted ...,' admits of
interpretation as an admission of the existence of such
appliances which appellant cannot now contradict, should the
parol evidence rule apply." 7
To the same effect is the following citation from the same leading
case: "This rigid application of the rule on ambiguities has
become necessary in view of current business practices. The
courts cannot ignore that nowadays monopolies, cartels and
concentration of capital, endowed with overwhelming economic
power, manage to impose upon parties dealing with them
cunningly prepared 'agreements' that the weaker party may not
change one whit, his participation in the 'agreement' being
reduced to the alternative to 'take it or leave it' labelled since
Raymond Saleilles 'contracts by adherence' (contrats
d'adhesion), in contrast to those entered into by parties
bargaining on an equal footing, such contracts (of which policies
of insurance and international bills of lading are prime examples)
obviously call for greater strictness and vigilance on the part of

courts of justice with a view to protecting the weaker party from
abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code. Article 24; Sent. of Supreme Court of
Spain, 13 Dec. 1934, 27 February 1942)." 8
The last error assigned which would find fault with the decision
of respondent Court of Appeals insofar as it affirmed the lower
court award for exemplary damages as well as attorney's fees
is, on its face, of no persuasive force at all.
The conclusion that inescapably emerges from the above is the
correctness of the decision of respondent Court of Appeals
sought to be reviewed. For, to borrow once again from the
language of the Qua Chee Gan opinion: "The contract of
insurance is one of perfect good faith (uberima fides) not for the
insured alone,but equally so for the insurer; in fact, it is more so
for the latter, since its dominant bargaining position carries with
it stricter responsibility."9
This is merely to stress that while the morality of the business
world is not the morality of institutions of rectitude like the pulpit
and the academe, it cannot descend so low as to be another
name for guile or deception. Moreover, should it happen thus,
no court of justice should allow itself to lend its approval and
support.
We have no choice but to recognize the monetary responsibility
of petitioner Fieldmen's Insurance Co., Inc. It did not succeed in
its persistent effort to avoid complying with its obligation in the
lower court and the Court of Appeals. Much less should it find
any receptivity from us for its unwarranted and unjustified plea
to escape from its liability.
WHEREFORE, the decision of respondent Court of Appeals of
July 20, 1965, is affirmed in its entirety. Costs against petitioner
Fieldmen's Insurance Co., Inc.
G.R. No. 154514. July 28, 2005
WHITE GOLD MARINE SERVICES, INC., Petitioners, vs.
PIONEER INSURANCE AND SURETY CORPORATION AND
THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION
(BERMUDA) LTD., Respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision1 dated July 30,
2002 of the Court of Appeals in CA-G.R. SP No. 60144, affirming
the Decision2 dated May 3, 2000 of the Insurance Commission
in I.C. Adm. Case No. RD-277. Both decisions held that there
was no violation of the Insurance Code and the respondents do
not need license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a
protection and indemnity coverage for its vessels from The
Steamship Mutual Underwriting Association (Bermuda) Limited
(Steamship Mutual) through Pioneer Insurance and Surety
Corporation (Pioneer). Subsequently, White Gold was issued a
Certificate of Entry and Acceptance.3Pioneer also issued
18
receipts evidencing payments for the coverage. When White
Gold failed to fully pay its accounts, Steamship Mutual refused
to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for
collection of sum of money to recover the latter’s unpaid
balance. White Gold on the other hand, filed a complaint before
the Insurance Commission claiming that Steamship Mutual
violated Sections 1864 and 1875 of the Insurance Code, while
Pioneer violated Sections 299,63007 and 3018 in relation to
Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that
there was no need for Steamship Mutual to secure a license
because it was not engaged in the insurance business. It
explained that Steamship Mutual was a Protection and
Indemnity Club (P & I Club). Likewise, Pioneer need not obtain
another license as insurance agent and/or a broker for
Steamship Mutual because Steamship Mutual was not engaged
in the insurance business. Moreover, Pioneer was already
licensed, hence, a separate license solely as agent/broker of
Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance
Commissioner. In its decision, the appellate court distinguished
between P & I Clubs vis-à-vis conventional insurance. The
appellate court also held that Pioneer merely acted as a
collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly
committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT
RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN
THE PHILIPPINES ON THE GROUND THAT IT COURSED . . .
ITS TRANSACTIONS THROUGH ITS AGENT AND/OR
BROKER HENCE AS AN INSURER IT NEED NOT SECURE A
LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE
RECORD IS BEREFT OF ANY EVIDENCE THAT
RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE
BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT
RESPONDENT PIONEER NEED NOT SECURE A LICENSE
WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER
OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE
LICENSE OF RESPONDENT PIONEER AND [IN NOT
REMOVING] THE OFFICERS AND DIRECTORS OF
RESPONDENT PIONEER.9
Simply, the basic issues before us are (1) Is Steamship Mutual,
a P & I Club, engaged in the insurance business in the

Philippines? (2) Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club.
Steamship Mutual admits it does not have a license to do
business in the Philippines although Pioneer is its resident
agent. This relationship is reflected in the certifications issued
by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is
engaged in the insurance business. To buttress its assertion, it
cites the definition of a P & I Club in Hyopsung Maritime Co.,
Ltd. v. Court of Appeals10 as "an association composed of
shipowners in general who band together for the specific
purpose of providing insurance cover on a mutual basis against
liabilities incidental to shipowning that the members incur in
favor of third parties." It stresses that as a P & I Club, Steamship
Mutual’s primary purpose is to solicit and provide protection and
indemnity coverage and for this purpose, it has engaged the
services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P &
I Club, it is not engaged in the insurance business in the
Philippines. It is merely an association of vessel owners who
have come together to provide mutual protection against
liabilities incidental to shipowning.11 Respondents
aver Hyopsung is inapplicable in this case because the issue
in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes
"doing an insurance business" or "transacting an insurance
business". These are:
(a) making or proposing to make, as insurer, any insurance
contract;
(b) making, or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance
business within the meaning of this Code;
(d) doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is
derived from the making of insurance contracts, agreements or
transactions, or that no separate or direct consideration is
received therefor, shall not preclude the existence of an
insurance business.12
The test to determine if a contract is an insurance contract or
not, depends on the nature of the promise, the act required to
be performed, and the exact nature of the agreement in the light
of the occurrence, contingency, or circumstances under which
the performance becomes requisite. It is not by what it is
called.13
19
Basically, an insurance contract is a contract of indemnity. In it,
one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent
event.14
In particular, a marine insurance undertakes to indemnify the
assured against marine losses, such as the losses incident to a
marine adventure.15 Section 9916 of the Insurance Code
enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative
enterprise where the members are both the insurer and insured.
In it, the members all contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and
liabilities are paid, and where the profits are divided among
themselves, in proportion to their interest.17 Additionally, mutual
insurance associations, or clubs, provide three types of
coverage, namely, protection and indemnity, war risks, and
defense costs.18
A P & I Club is "a form of insurance against third party liability,
where the third party is anyone other than the P & I Club and the
members."19 By definition then, Steamship Mutual as a P & I
Club is a mutual insurance association engaged in the marine
insurance business.
The records reveal Steamship Mutual is doing business in the
country albeit without the requisite certificate of authority
mandated by Section 18720 of the Insurance Code. It maintains
a resident agent in the Philippines to solicit insurance and to
collect payments in its behalf. We note that Steamship Mutual
even renewed its P & I Club cover until it was cancelled due to
non-payment of the calls. Thus, to continue doing business here,
Steamship Mutual or through its agent Pioneer, must secure a
license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation
by the State is necessary. Thus, no insurer or insurance
company is allowed to engage in the insurance business without
a license or a certificate of authority from the Insurance
Commission.21
Does Pioneer, as agent/broker of Steamship Mutual, need a
special license?
Pioneer is the resident agent of Steamship Mutual as evidenced
by the certificate of registration22 issued by the Insurance
Commission. It has been licensed to do or transact insurance
business by virtue of the certificate of authority23 issued by the
same agency. However, a Certification from the Commission
states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.24
Although Pioneer is already licensed as an insurance company,
it needs a separate license to act as insurance agent for
Steamship Mutual. Section 299 of the Insurance Code clearly
states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance
broker in the solicitation or procurement of applications for
insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance

company doing business in the Philippines or any agent thereof,
without first procuring a license so to act from the Commissioner,
which must be renewed annually on the first day of January, or
within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneer’s certificate of
authority and removal of its directors and officers. Regrettably,
we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The
Decision dated July 30, 2002 of the Court of Appeals affirming
the Decision dated May 3, 2000 of the Insurance Commission is
hereby REVERSED AND SET ASIDE. The Steamship Mutual
Underwriting Association (Bermuda) Ltd., and Pioneer
Insurance and Surety Corporation are ORDERED to obtain
licenses and to secure proper authorizations to do business as
insurer and insurance agent, respectively. The petitioner’s
prayer for the revocation of Pioneer’s Certificate of Authority and
removal of its directors and officers, is DENIED. Costs against
respondents. SO ORDERED.
G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos,
applied for a health care coverage with petitioner Philamcare
Health Systems, Inc. In the standard application form, he
answered no to the following question:
Have you or any of your family members ever consulted or been
treated for high blood pressure, heart trouble, diabetes, cancer,
liver disease, asthma or peptic ulcer? (If Yes, give details). 1
The application was approved for a period of one year from
March 1, 1988 to March 1, 1989. Accordingly, he was issued
Health Care Agreement No. P010194. Under the agreement,
respondent’s husband was entitled to avail of hospitalization
benefits, whether ordinary or emergency, listed therein. He was
also entitled to avail of "out-patient benefits" such as annual
physical examinations, preventive health care and other out-
patient services.
Upon the termination of the agreement, the same was extended
for another year from March 1, 1989 to March 1, 1990, then from
March 1, 1990 to June 1, 1990. The amount of coverage was
increased to a maximum sum of P75,000.00 per disability.2
During the period of his coverage, Ernani suffered a heart attack
and was confined at the Manila Medical Center (MMC) for one
month beginning March 9, 1990. While her husband was in the
hospital, respondent tried to claim the benefits under the health
care agreement. However, petitioner denied her claim saying
that the Health Care Agreement was void. According to
petitioner, there was a concealment regarding Ernani’s medical
history. Doctors at the MMC allegedly discovered at the time of
Ernani’s confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus,
20
respondent paid the hospitalization expenses herself,
amounting to about P76,000.00.
After her husband was discharged from the MMC, he was
attended by a physical therapist at home. Later, he was admitted
at the Chinese General Hospital. Due to financial difficulties,
however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very
weak. Respondent was constrained to bring him back to the
Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial
Court of Manila, Branch 44, an action for damages against
petitioner and its president, Dr. Benito Reverente, which was
docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and
attorney’s fees. After trial, the lower court ruled against
petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders
judgment in favor of the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital
coverage of the late Ernani Trinos in the amount of P76,000.00
plus interest, until the amount is fully paid to plaintiff who paid
the same;
2. Defendants to pay the reduced amount of moral damages of
P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as
exemplary damages to plaintiff;
4. Defendants to pay attorney’s fees of P20,000.00, plus costs
of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the decision of the trial
court but deleted all awards for damages and absolved
petitioner Reverente.4 Petitioner’s motion for reconsideration
was denied.5 Hence, petitioner brought the instant petition for
review, raising the primary argument that a health care
agreement is not an insurance contract; hence the
"incontestability clause" under the Insurance Code6 does not
apply.
Petitioner argues that the agreement grants "living benefits,"
such as medical check-ups and hospitalization which a member
may immediately enjoy so long as he is alive upon effectivity of
the agreement until its expiration one-year thereafter. Petitioner
also points out that only medical and hospitalization benefits are
given under the agreement without any indemnification, unlike
in an insurance contract where the insured is indemnified for his
loss. Moreover, since Health Care Agreements are only for a
period of one year, as compared to insurance contracts which
last longer,7 petitioner argues that the incontestability clause
does not apply, as the same requires an effectivity period of at
least two years. Petitioner further argues that it is not an
insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the
authority of the Department of Health.

Section 2 (1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the
designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons bearing
a similar risk; and
5. In consideration of the insurer’s promise, the insured pays a
premium.8
Section 3 of the Insurance Code states that any contingent or
unknown event, whether past or future, which may damnify a
person having an insurable interest against him, may be insured
against. Every person has an insurable interest in the life
and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for
education or support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment
of money, respecting property or service, of which death or
illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested
in him depends.
In the case at bar, the insurable interest of respondent’s
husband in obtaining the health care agreement was his own
health. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity. 9 Once the
member incurs hospital, medical or any other expense arising
from sickness, injury or other stipulated contingent, the health
care provider must pay for the same to the extent agreed upon
under the contract.
Petitioner argues that respondent’s husband concealed a
material fact in his application. It appears that in the application
for health coverage, petitioners required respondent’s husband
to sign an express authorization for any person, organization or
entity that has any record or knowledge of his health to furnish
any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or
examination.10 Specifically, the Health Care Agreement signed
by respondent’s husband states:
We hereby declare and agree that all statement and answers
contained herein and in any addendum annexed to this
application are full, complete and true and bind all parties in
interest under the Agreement herein applied for, that there shall
be no contract of health care coverage unless and until an
Agreement is issued on this application and the full Membership
21
Fee according to the mode of payment applied for is actually
paid during the lifetime and good health of proposed Members;
that no information acquired by any Representative of
PhilamCare shall be binding upon PhilamCare unless set out in
writing in the application; that any physician is, by these
presents, expressly authorized to disclose or give testimony at
anytime relative to any information acquired by him in his
professional capacity upon any question affecting the eligibility
for health care coverage of the Proposed Members and that the
acceptance of any Agreement issued on this application shall be
a ratification of any correction in or addition to this application as
stated in the space for Home Office
Endorsement.11 (Underscoring ours)
In addition to the above condition, petitioner additionally required
the applicant for authorization to inquire about the applicant’s
medical history, thus:
I hereby authorize any person, organization, or entity that has
any record or knowledge of my health and/or that of __________
to give to the PhilamCare Health Systems, Inc. any and all
information relative to any hospitalization, consultation,
treatment or any other medical advice or examination. This
authorization is in connection with the application for health care
coverage only. A photographic copy of this authorization shall
be as valid as the original.12 (Underscoring ours)
Petitioner cannot rely on the stipulation regarding "Invalidation
of agreement" which reads:
Failure to disclose or misrepresentation of any material
information by the member in the application or medical
examination, whether intentional or unintentional, shall
automatically invalidate the Agreement from the very beginning
and liability of Philamcare shall be limited to return of all
Membership Fees paid. An undisclosed or misrepresented
information is deemed material if its revelation would have
resulted in the declination of the applicant by Philamcare or the
assessment of a higher Membership Fee for the benefit or
benefits applied for.13
The answer assailed by petitioner was in response to the
question relating to the medical history of the applicant. This
largely depends on opinion rather than fact, especially coming
from respondent’s husband who was not a medical doctor.
Where matters of opinion or judgment are called for, answers
made in good faith and without intent to deceive will not avoid a
policy even though they are untrue.14 Thus,
(A)lthough false, a representation of the expectation, intention,
belief, opinion, or judgment of the insured will not avoid the
policy if there is no actual fraud in inducing the acceptance of
the risk, or its acceptance at a lower rate of premium, and this is
likewise the rule although the statement is material to the risk, if
the statement is obviously of the foregoing character, since in
such case the insurer is not justified in relying upon such
statement, but is obligated to make further inquiry. There is a
clear distinction between such a case and one in which the
insured is fraudulently and intentionally states to be true, as a
matter of expectation or belief, that which he then knows, to be
actually untrue, or the impossibility of which is shown by the facts
within his knowledge, since in such case the intent to deceive

the insurer is obvious and amounts to actual
fraud.15(Underscoring ours)
The fraudulent intent on the part of the insured must be
established to warrant rescission of the insurance
contract.16 Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer. In any
case, with or without the authority to investigate, petitioner is
liable for claims made under the contract. Having assumed a
responsibility under the agreement, petitioner is bound to
answer the same to the extent agreed upon. In the end, the
liability of the health care provider attaches once the member is
hospitalized for the disease or injury covered by the agreement
or whenever he avails of the covered benefits which he has
prepaid.
Under Section 27 of the Insurance Code, "a concealment
entitles the injured party to rescind a contract of insurance." The
right to rescind should be exercised previous to the
commencement of an action on the contract. 17In this case, no
rescission was made. Besides, the cancellation of health care
agreements as in insurance policies require the concurrence of
the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date
of the policy of one or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the
address shown in the policy;
4. Must state the grounds relied upon provided in Section 64 of
the Insurance Code and upon request of insured, to furnish facts
on which cancellation is based.18
None of the above pre-conditions was fulfilled in this case. When
the terms of insurance contract contain limitations on liability,
courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation.19 Being a
contract of adhesion, the terms of an insurance contract are to
be construed strictly against the party which prepared the
contract – the insurer.20 By reason of the exclusive control of the
insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured, especially to
avoid forfeiture.21 This is equally applicable to Health Care
Agreements. The phraseology used in medical or hospital
service contracts, such as the one at bar, must be liberally
construed in favor of the subscriber, and if doubtful or
reasonably susceptible of two interpretations the construction
conferring coverage is to be adopted, and exclusionary clauses
of doubtful import should be strictly construed against the
provider.22
Anent the incontestability of the membership of respondent’s
husband, we quote with approval the following findings of the
trial court:
(U)nder the title Claim procedures of expenses, the defendant
Philamcare Health Systems Inc. had twelve months from the
22
date of issuance of the Agreement within which to contest the
membership of the patient if he had previous ailment of asthma,
and six months from the issuance of the agreement if the patient
was sick of diabetes or hypertension. The periods having
expired, the defense of concealment or misrepresentation no
longer lie.23
Finally, petitioner alleges that respondent was not the legal wife
of the deceased member considering that at the time of their
marriage, the deceased was previously married to another
woman who was still alive. The health care agreement is in the
nature of a contract of indemnity. Hence, payment should be
made to the party who incurred the expenses. It is not
controverted that respondent paid all the hospital and medical
expenses. She is therefore entitled to reimbursement. The
records adequately prove the expenses incurred by respondent
for the deceased’s hospitalization, medication and the
professional fees of the attending physicians.24
WHEREFORE, in view of the foregoing, the petition is DENIED.
The assailed decision of the Court of Appeals dated December
14, 1995 is AFFIRMED. SO ORDERED.
G.R. No. 169737 February 12, 2008
BLUE CROSS HEALTH CARE, INC., petitioner, vs.
NEOMI* and DANILO OLIVARES, respondents.
DECISION
CORONA, J.:
This is a petition for review on certiorari 1 of a decision2 and
resolution3 of the Court of Appeals (CA) dated July 29, 2005 and
September 21, 2005, respectively, in CA-G.R. SP No. 84163
which affirmed the decision of the Regional Trial Court (RTC),
Makati City, Branch 61 dated February 2, 2004 in Civil Case No.
03-1153,4 which in turn reversed the decision of the Metropolitan
Trial Court (MeTC), Makati City, Branch 66 dated August 5,
2003 in Civil Case No. 80867.5
Respondent Neomi T. Olivares applied for a health care
program with petitioner Blue Cross Health Care, Inc., a health
maintenance firm. For the period October 16, 2002 to October
15, 2003,6 she paid the amount of P11,117. For the same
period, she also availed of the additional service of limitless
consultations for an additional amount of P1,000. She paid
these amounts in full on October 17, 2002. The application was
approved on October 22, 2002. In the health care agreement,
ailments due to "pre-existing conditions" were excluded from the
coverage.7
On November 30, 2002, or barely 38 days from the effectivity of
her health insurance, respondent Neomi suffered a stroke and
was admitted at the Medical City which was one of the hospitals
accredited by petitioner. During her confinement, she underwent
several laboratory tests. On December 2, 2002, her attending
physician, Dr. Edmundo Saniel,8 informed her that she could be
discharged from the hospital. She incurred hospital expenses
amounting to P34,217.20. Consequently, she requested from
the representative of petitioner at Medical City a letter of
authorization in order to settle her medical bills. But petitioner

refused to issue the letter and suspended payment pending the
submission of a certification from her attending physician that
the stroke she suffered was not caused by a pre-existing
condition.9
She was discharged from the hospital on December 3, 2002. On
December 5, 2002, she demanded that petitioner pay her
medical bill. When petitioner still refused, she and her husband,
respondent Danilo Olivares, were constrained to settle the
bill.10 They thereafter filed a complaint for collection of sum of
money against petitioner in the MeTC on January 8, 2003. 11 In
its answer dated January 24, 2003, petitioner maintained that it
had not yet denied respondents' claim as it was still awaiting Dr.
Saniel's report.
In a letter to petitioner dated February 14, 2003, Dr. Saniel
stated that:
This is in response to your letter dated February 13, 2003.
[Respondent] Neomi T. Olivares called by phone on January 29,
2003. She stated that she is invoking patient-physician
confidentiality. That she no longer has any relationship with
[petitioner]. And that I should not release any medical
information concerning her neurologic status to anyone without
her approval. Hence, the same day I instructed my secretary to
inform your office thru Ms. Bernie regarding [respondent's]
wishes.
xxx xxx xxx12
In a decision dated August 5, 2003, the MeTC dismissed the
complaint for lack of cause of action. It held:
xxx the best person to determine whether or not the stroke she
suffered was not caused by "pre-existing conditions" is her
attending physician Dr. Saniel who treated her and conducted
the test during her confinement. xxx But since the evidence on
record reveals that it was no less than [respondent Neomi]
herself who prevented her attending physician from issuing the
required certification, petitioner cannot be faulted from
suspending payment of her claim, for until and unless it can be
shown from the findings made by her attending physician that
the stroke she suffered was not due to pre-existing conditions
could she demand entitlement to the benefits of her policy.13
On appeal, the RTC, in a decision dated February 2, 2004,
reversed the ruling of the MeTC and ordered petitioner to pay
respondents the following amounts: (1) P34,217.20
representing the medical bill in Medical City and P1,000 as
reimbursement for consultation fees, with legal interest from the
filing of the complaint until fully paid; (2) P20,000 as moral
damages; (3) P20,000 as exemplary damages; (4) P20,000 as
attorney's fees and (5) costs of suit.14 The RTC held that it was
the burden of petitioner to prove that the stroke of respondent
Neomi was excluded from the coverage of the health care
program for being caused by a pre-existing condition. It was not
able to discharge that burden.15
Aggrieved, petitioner filed a petition for review under Rule 42 of
the Rules of Court in the CA. In a decision promulgated on July
29, 2005, the CA affirmed the decision of the RTC. It denied
reconsideration in a resolution promulgated on September 21,
2005. Hence this petition which raises the following issues: (1)
23
whether petitioner was able to prove that respondent Neomi's
stroke was caused by a pre-existing condition and therefore was
excluded from the coverage of the health care agreement and
(2) whether it was liable for moral and exemplary damages and
attorney's fees.
The health care agreement defined a "pre-existing condition" as:
x x x a disability which existed before the commencement date
of membership whose natural history can be clinically
determined, whether or not the Member was aware of such
illness or condition. Such conditions also include disabilities
existing prior to reinstatement date in the case of lapse of an
Agreement. Notwithstanding, the following disabilities but not to
the exclusion of others are considered pre-existing conditions
including their complications when occurring during the first year
of a Member’s coverage:
I. Tumor of Internal Organs
II. Hemorrhoids/Anal Fistula
III. Diseased tonsils and sinus conditions requiring surgery
IV. Cataract/Glaucoma
V. Pathological Abnormalities of nasal septum or turbinates
VI. Goiter and other thyroid disorders
VII. Hernia/Benign prostatic hypertrophy
VIII. Endometriosis
IX. Asthma/Chronic Obstructive Lung disease
X. Epilepsy
XI. Scholiosis/Herniated disc and other Spinal column
abnormalities
XII. Tuberculosis
XIII. Cholecysitis
XIV. Gastric or Duodenal ulcer
XV. Hallux valgus
XVI. Hypertension and other Cardiovascular diseases
XVII. Calculi
XVIII. Tumors of skin, muscular tissue, bone or any form of blood
dyscracias
XIX. Diabetes Mellitus
XX. Collagen/Auto-Immune disease
After the Member has been continuously covered for 12 months,
this pre-existing provision shall no longer be applicable except
for illnesses specifically excluded by an endorsement and made
part of this Agreement.16
Under this provision, disabilities which existed before the
commencement of the agreement are excluded from its
coverage if they become manifest within one year from its

effectivity. Stated otherwise, petitioner is not liable for pre-
existing conditions if they occur within one year from the time the
agreement takes effect.
Petitioner argues that respondents prevented Dr. Saniel from
submitting his report regarding the medical condition of Neomi.
Hence, it contends that the presumption that evidence willfully
suppressed would be adverse if produced should apply in its
favor.17
Respondents counter that the burden was on petitioner to prove
that Neomi's stroke was excluded from the coverage of their
agreement because it was due to a pre-existing condition. It
failed to prove this.18
We agree with respondents.
In Philamcare Health Systems, Inc. v. CA,19 we ruled that a
health care agreement is in the nature of a non-life
insurance.20 It is an established rule in insurance contracts that
when their terms contain limitations on liability, they should be
construed strictly against the insurer. These are contracts of
adhesion the terms of which must be interpreted and enforced
stringently against the insurer which prepared the contract. This
doctrine is equally applicable to health care agreements. 21
Petitioner never presented any evidence to prove that
respondent Neomi's stroke was due to a pre-existing condition.
It merely speculated that Dr. Saniel's report would be adverse to
Neomi, based on her invocation of the doctor-patient privilege.
This was a disputable presumption at best.
Section 3 (e), Rule 131 of the Rules of Court states:
Sec. 3. Disputable presumptions. ― The following presumptions
are satisfactory if uncontradicted, but may be contradicted and
overcome by other evidence:
xxx xxx xxx
(e) That evidence willfully suppressed would be adverse if
produced.
Suffice it to say that this presumption does not apply if (a) the
evidence is at the disposal of both parties; (b) the suppression
was not willful; (c) it is merely corroborative or cumulative and
(d) the suppression is an exercise of a privilege.22 Here,
respondents' refusal to present or allow the presentation of Dr.
Saniel's report was justified. It was privileged communication
between physician and patient.
Furthermore, as already stated, limitations of liability on the part
of the insurer or health care provider must be construed in such
a way as to preclude it from evading its obligations. Accordingly,
they should be scrutinized by the courts with "extreme
jealousy"23 and "care" and with a "jaundiced eye."24 Since
petitioner had the burden of proving exception to liability, it
should have made its own assessment of whether respondent
Neomi had a pre-existing condition when it failed to obtain the
attending physician's report. It could not just passively wait for
Dr. Saniel's report to bail it out. The mere reliance on a
disputable presumption does not meet the strict standard
required under our jurisprudence.
24
Next, petitioner argues that it should not be held liable for moral
and exemplary damages, and attorney's fees since it did not act
in bad faith in denying respondent Neomi's claim. It insists that
it waited in good faith for Dr. Saniel's report and that, based on
general medical findings, it had reasonable ground to believe
that her stroke was due to a pre-existing condition, considering
it occurred only 38 days after the coverage took effect.25
We disagree.
The RTC and CA found that there was a factual basis for the
damages adjudged against petitioner. They found that it was
guilty of bad faith in denying a claim based merely on its own
perception that there was a pre-existing condition:
[Respondents] have sufficiently shown that [they] were forced to
engage in a dispute with [petitioner] over a legitimate claim while
[respondent Neomi was] still experiencing the effects of a stroke
and forced to pay for her medical bills during and after her
hospitalization despite being covered by [petitioner’s] health
care program, thereby suffering in the process extreme mental
anguish, shock, serious anxiety and great stress. [They] have
shown that because of the refusal of [petitioner] to issue a letter
of authorization and to pay [respondent Neomi's] hospital bills,
[they had] to engage the services of counsel for a fee
of P20,000.00. Finally, the refusal of petitioner to pay
respondent Neomi's bills smacks of bad faith, as its refusal
[was] merely based on its own perception that a stroke is a pre-
existing condition. (emphasis supplied)
This is a factual matter binding and conclusive on this
Court.26 We see no reason to disturb these findings.
WHEREFORE, the petition is hereby DENIED. The July 29,
2005 decision and September 21, 2005 resolution of the Court
of Appeals in CA-G.R. SP No. 84163 are AFFIRMED.
Treble costs against petitioner. SO ORDERED.
[G.R. No. 112329. January 28, 2000]
VIRGINIA A. PEREZ, petitioner, vs. COURT OF APPEALS
and BF LIFEMAN INSURANCE
CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts, must be
assented to by both parties, either in person or through their
agents and so long as an application for insurance has not been
either accepted or rejected, it is merely a proposal or an offer to
make a contract.
Petitioner Virginia A. Perez assails the decision of respondent
Court of Appeals dated July 9, 1993 in CA-G.R. CV 35529
entitled, "BF Lifeman Insurance Corporations, Plaintiff-Appellant
versus Virginia A. Perez, Defendant-Appellee," which declared
Insurance Policy 056300 for P50,000.00 issued by private
respondent corporation in favor of the deceased Primitivo B.
Perez, null and void and rescinded, thereby reversing the

decision rendered by the Regional Trial Court of Manila, Branch
XVI.
The facts of the case as summarized by respondent Court of
Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF Lifeman
Insurance Corporation since 1980 for P20,000.00. Sometime in
October 1987, an agent of the insurance corporation, Rodolfo
Lalog, visited Perez in Guinayangan, Quezon and convinced
him to apply for additional insurance coverage of P50,000.00, to
avail of the ongoing promotional discount of P400.00 if the
premium were paid annually.
On October 20, 1987, Primitivo B. Perez accomplished an
application form for the additional insurance coverage
of P50,000.00. On the same day, petitioner Virginia A. Perez,
Primitivos wife, paid P2,075.00 to Lalog. The receipt issued by
Lalog indicated the amount received was a indemnity under the SARDI or in the total amount
"deposit."[1] Unfortunately, Lalog lost the application form
accomplished by Perez and so on October 28, 1987, he asked
the latter to fill up another application form. [2] On November 1,
1987, Perez was made to undergo the required medical
examination, which he passed.[3]
Pursuant to the established procedure of the company, Lalog
forwarded the application for additional insurance of Perez,
together with all its supporting papers, to the office of BF Lifeman
Insurance Corporation at Gumaca, Quezon which office was
supposed to forward the papers to the Manila office.
On November 25, 1987, Perez died in an accident. He was riding
in a banca which capsized during a storm. At the time of his
death, his application papers for the additional insurance
of P50,000.00 were still with the Gumaca office. Lalog testified
that when he went to follow up the papers, he found them still in
the Gumaca office and so he personally brought the papers to
the Manila office of BF Lifeman Insurance Corporation. It was
only on November 27, 1987 that said papers were received in
Manila.
Without knowing that Perez died on November 25, 1987, BF
Lifeman Insurance Corporation approved the application and
issued the corresponding policy for the P50,000.00 on
December 2, 1987.[4] Ncm
Petitioner Virginia Perez went to Manila to claim the benefits
under the insurance policies of the deceased. She was
paid P40,000.00 under the first insurance policy for P20,000.00
(double indemnity in case of accident) but the insurance
company refused to pay the claim under the additional policy
coverage of P50,000.00, the proceeds of which amount
to P150,000.00 in view of a triple indemnity rider on the
insurance policy. In its letter of January 29, 1988 to Virginia A.
Perez, the insurance company maintained that the insurance
for P50,000.00 had not been perfected at the time of the death
of Primitivo Perez. Consequently, the insurance company
refunded the amount of P2,075.00 which Virginia Perez had
paid.
On September 21, 1990, private respondent BF Lifeman
Insurance Corporation filed a complaint against Virginia A.
25
Perez seeking the rescission and declaration of nullity of the
insurance contract in question.
Petitioner Virginia A. Perez, on the other hand, averred that the
deceased had fulfilled all his prestations under the contract and
all the elements of a valid contract are present. She then filed a
counterclaim against private respondent for the collection
of P150,000.00 as actual damages, P100,000.00 as exemplary
damages, P30,000.00 as attorneys fees and P10,000.00 as
expenses for litigation.
On October 25, 1991, the trial court rendered a decision in favor
of petitioner, the dispositive portion of which reads as follows:
WHEREFORE PREMISES CONSIDERED, judgment is hereby
rendered in favor of defendant Virginia A. Perez, ordering the
plaintiff BF Lifeman Insurance Corporation to pay to her the face
value of BF Lifeman Insurance Policy No. 056300, plus double
of P150,000.00 (any refund made and/or premium deficiency to
be deducted therefrom).
SO ORDERED.[5]
The trial court, in ruling for petitioner, held that the premium for
the additional insurance of P50,000.00 had been fully paid and
even if the sum of P2,075.00 were to be considered merely as
partial payment, the same does not affect the validity of the
policy. The trial court further stated that the deceased had fully
complied with the requirements of the insurance company. He
paid, signed the application form and passed the medical
examination. He should not be made to suffer the subsequent
delay in the transmittal of his application form to private
respondents head office since these were no longer within his
control.
The Court of Appeals, however, reversed the decision of the trial
court saying that the insurance contract for P50,000.00 could
not have been perfected since at the time that the policy was
issued, Primitivo was already dead.[6] Citing the provision in the
application form signed by Primitivo which states that: Ncmmis
"x x x there shall be no contract of insurance unless and until a
policy is issued on this application and that the policy shall not
take effect until the first premium has been paid and the policy
has been delivered to and accepted by me/us in person while
I/we, am/are in good health"
the Court of Appeals held that the contract of insurance had to
be assented to by both parties and so long as the application for
insurance has not been either accepted or rejected, it is merely
an offer or proposal to make a contract.
Petitioners motion for reconsideration having been denied by
respondent court, the instant petition for certiorari was filed on
the ground that there was a consummated contract of insurance
between the deceased and BF Lifeman Insurance Corporation
and that the condition that the policy issued by the corporation
be delivered and received by the applicant in good health, is
potestative, being dependent upon the will of the insurance
company, and is therefore null and void.
The petition is bereft of merit.

Insurance is a contract whereby, for a stipulated consideration,
one party undertakes to compensate the other for loss on a
specified subject by specified perils.[7] A contract, on the other
hand, is a meeting of the minds between two persons whereby
one binds himself, with respect to the other to give something or
to render some service.[8] Under Article 1318 of the Civil Code,
there is no contract unless the following requisites concur:
(1).......Consent of the contracting parties;
(2).......Object certain which is the subject matter of the contract;
(3).......Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute
the contract. The offer must be certain and the acceptance
absolute.
When Primitivo filed an application for insurance,
paid P2,075.00 and submitted the results of his medical
examination, his application was subject to the acceptance of
private respondent BF Lifeman Insurance Corporation. The
perfection of the contract of insurance between the deceased
and respondent corporation was further conditioned upon
compliance with the following requisites stated in the application
form:
"there shall be no contract of insurance unless and until a policy
is issued on this application and that the said policy shall not
take effect until the premium has been paid and the policy
delivered to and accepted by me/us in person while I/We,
am/are in good health."[9] Scnc m
The assent of private respondent BF Lifeman Insurance
Corporation therefore was not given when it merely received the
application form and all the requisite supporting papers of the
applicant. Its assent was given when it issues a corresponding
policy to the applicant. Under the abovementioned provision, it
is only when the applicant pays the premium and receives and
accepts the policy while he is in good health that the contract of
insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on
November 25, 1987, his application papers for additional
insurance coverage were still with the branch office of
respondent corporation in Gumaca and it was only two days
later, or on November 27, 1987, when Lalog personally
delivered the application papers to the head office in Manila.
Consequently, there was absolutely no way the acceptance of
the application could have been communicated to the applicant
for the latter to accept inasmuch as the applicant at the time was
already dead. In the case of Enriquez vs. Sun Life Assurance
Co. of Canada,[10] recovery on the life insurance of the deceased
was disallowed on the ground that the contract for annuity was
not perfected since it had not been proved satisfactorily that the
acceptance of the application ever reached the knowledge of the
applicant.
Petitioner insists that the condition imposed by respondent
corporation that a policy must have been delivered to and
accepted by the proposed insured in good health is potestative
26
being dependent upon the will of the corporation and is therefore
null and void.
We do not agree.
A potestative condition depends upon the exclusive will of one
of the parties. For this reason, it is considered void. Article 1182
of the New Civil Code states: When the fulfillment of the
condition depends upon the sole will of the debtor, the
conditional obligation shall be void.
In the case at bar, the following conditions were imposed by the
respondent company for the perfection of the contract of
insurance:
(a).......a policy must have been issued;
(b).......the premiums paid; and
(c).......the policy must have been delivered to and accepted by
the applicant while he is in good health.
The condition imposed by the corporation that the policy must
have been delivered to and accepted by the applicant while he
is in good health can hardly be considered as a potestative or
facultative condition. On the contrary, the health of the applicant
at the time of the delivery of the policy is beyond the control or
will of the insurance company. Rather, the condition is a
suspensive one whereby the acquisition of rights depends upon
the happening of an event which constitutes the condition. In this
case, the suspensive condition was the policy must have been
delivered and accepted by the applicant while he is in good
health. There was non-fulfillment of the condition, however,
inasmuch as the applicant was already dead at the time the
policy was issued. Hence, the non-fulfillment of the condition
resulted in the non-perfection of the contract. Sdaa miso
As stated above, a contract of insurance, like other contracts,
must be assented to by both parties either in person or by their
agents. So long as an application for insurance has not been
either accepted or rejected, it is merely an offer or proposal to
make a contract. The contract, to be binding from the date of
application, must have been a completed contract, one that
leaves nothing to be done, nothing to be completed, nothing to
be passed upon, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties
have met in agreement.[11]
Prescinding from the foregoing, respondent corporation cannot
be held liable for gross negligence. It should be noted that an
application is a mere offer which requires the overt act of the
insurer for it to ripen into a contract. Delay in acting on the
application does not constitute acceptance even though the
insured has forwarded his first premium with his application. The
corporation may not be penalized for the delay in the processing
of the application papers. Moreover, while it may have taken
some time for the application papers to reach the main office, in
the case at bar, the same was acted upon less than a week after
it was received. The processing of applications by respondent
corporation normally takes two to three weeks, the longest being
a month.[12] In this case, however, the requisite medical
examination was undergone by the deceased on November 1,
1987; the application papers were forwarded to the head office

on November 27, 1987; and the policy was issued on December
2, 1987. Under these circumstances, we hold that the delay
could not be deemed unreasonable so as to constitute gross
negligence.
A final note. It has not escaped our notice that the Court of
Appeals declared Insurance Policy 056300 for P50,000.00 null
and void and rescinded. The Court of Appeals corrected this in
its Resolution of the motion for reconsideration filed by
petitioner, thus:
"Anent the appearance of the word rescinded in the dispositive
portion of the decision, to which defendant-appellee attaches
undue significance and makes capital of, it is clear that the use
of the words and rescinded is, as it is hereby declared, a
superfluity. It is apparent from the context of the decision that
the insurance policy in question was found null and void, and did
not have to be rescinded."[13]
True, rescission presupposes the existence of a valid contract.
A contract which is null and void is no contract at all and hence
could not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of Appeals in CA-
G.R. CV No. 35529 is AFFIRMED insofar as it declared Insurance Policy
No. 056300 for P50,000.00 issued by BF Lifeman Insurance Corporation
of no force and effect and hence null and void. No costs. SO ORDERED.
G.R. No. L-2294 May 25, 1951
FILIPINAS COMPAÑIA DE SEGUROS, petitioner, vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern
Huenefeld, & Co., Inc., after payment of corresponding
premium, obtained from the petitioner ,Filipinas Cia. de Seguros,
fire policy No. 29333 in the sum of P1000,000, covering
merchandise contained in a building located at No. 711 Roman
Street, Binondo Manila. On February 27, 1942, or during the
Japanese military occupation, the building and insured
merchandise were burned. In due time the respondent
submitted to the petitioner its claim under the policy. The
salvage goods were sold at public auction and, after deducting
their value, the total loss suffered by the respondent was fixed
at P92,650. The petitioner refused to pay the claim on the
ground that the policy in favor of the respondent had ceased to
be in force on the date the United States declared war against
Germany, the respondent Corporation (though organized under
and by virtue of the laws of the Philippines) being controlled by
the German subjects and the petitioner being a company under
American jurisdiction when said policy was issued on October 1,
1941. The petitioner, however, in pursuance of the order of the
Director of Bureau of Financing, Philippine Executive
Commission, dated April 9, 1943, paid to the respondent the
sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of
First Instance of Manila for the purpose of recovering from the
respondent the sum of P92,650 above mentioned. The theory of
the petitioner is that the insured merchandise were burned up
after the policy issued in 1941 in favor of the respondent
27
corporation has ceased to be effective because of the outbreak
of the war between the United States and Germany on
December 10, 1941, and that the payment made by the
petitioner to the respondent corporation during the Japanese
military occupation was under pressure. After trial, the Court of
First Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court of
Appeals, the judgment of the Court of First Instance of Manila
was affirmed, with costs. The case is now before us on appeal
by certiorari from the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner
that the respondent corporation became an enemy when the
United States declared war against Germany, relying on English
and American cases which held that a corporation is a citizen of
the country or state by and under the laws of which it was
created or organized. It rejected the theory that nationality of
private corporation is determine by the character or citizenship
of its controlling stockholders.
There is no question that majority of the stockholders of the
respondent corporation were German subjects. This being so,
we have to rule that said respondent became an enemy
corporation upon the outbreak of the war between the United
States and Germany. The English and American cases relied
upon by the Court of Appeals have lost their force in view of the
latest decision of the Supreme Court of the United States in
Clark vs. Uebersee Finanz Korporation, decided on December
8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp. 148-153, in
which the controls test has been adopted. In "Enemy
Corporation" by Martin Domke, a paper presented to the Second
International Conference of the Legal Profession held at the
Hague (Netherlands) in August. 1948 the following enlightening
passages appear:
Since World War I, the determination of enemy nationality of
corporations has been discussion in many countries, belligerent
and neutral. A corporation was subject to enemy legislation
when it was controlled by enemies, namely managed under the
influence of individuals or corporations, themselves considered
as enemies. It was the English courts which first
the Daimler case applied this new concept of "piercing the
corporate veil," which was adopted by the peace of Treaties of
1919 and the Mixed Arbitral established after the First World
War.
The United States of America did not adopt the control test
during the First World War. Courts refused to recognized the
concept whereby American-registered corporations could be
considered as enemies and thus subject to domestic legislation
and administrative measures regarding enemy property.
World War II revived the problem again. It was known that
German and other enemy interests were cloaked by domestic
corporation structure. It was not only by legal ownership of
shares that a material influence could be exercised on the
management of the corporation but also by long term loans and
other factual situations. For that reason, legislation on enemy
property enacted in various countries during World War II
adopted by statutory provisions to the control test and
determined, to various degrees, the incidents of control. Court
decisions were rendered on the basis of such newly enacted

statutory provisions in determining enemy character of domestic
corporation.
The United States did not, in the amendments of the Trading
with the Enemy Act during the last war, include as did other
legislations the applications of the control test and again, as in
World War I, courts refused to apply this concept whereby the
enemy character of an American or neutral-registered
corporation is determined by the enemy nationality of the
controlling stockholders.
Measures of blocking foreign funds, the so-called freezing
regulations, and other administrative practice in the treatment of
foreign-owned property in the United States allowed to large
degree the determination of enemy interest in domestic
corporations and thus the application of the control test. Court
decisions sanctioned such administrative practice enacted
under the First War Powers Act of 1941, and more recently, on
December 8, 1947, the Supreme Court of the United States
definitely approved of the control theory. In Clark vs. Uebersee
Finanz Korporation, A. G., dealing with a Swiss corporation
allegedly controlled by German interest, the Court: "The
property of all foreign interest was placed within the reach of the
vesting power (of the Alien Property Custodian) not to
appropriate friendly or neutral assets but to reach enemy interest
which masqueraded under those innocent fronts. . . . The power
of seizure and vesting was extended to all property of any
foreign country or national so that no innocent appearing device
could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the
authorities cited in support of the appealed decision. However,
we may add that, in Haw Pia vs. China Banking Corporation,* 45
Off Gaz., (Supp. 9) 299, we already held that China Banking
Corporation came within the meaning of the word "enemy" as
used in the Trading with the Enemy Acts of civilized countries
not only because it was incorporated under the laws of an enemy
country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in
section 8, provides that "anyone except a public enemy may be
insured." It stands to reason that an insurance policy ceases to
be allowable as soon as an insured becomes a public enemy.
Effect of war, generally. — All intercourse between citizens of
belligerent powers which is inconsistent with a state of war is
prohibited by the law of nations. Such prohibition includes all
negotiations, commerce, or trading with the enemy; all acts
which will increase, or tend to increase, its income or resources;
all acts of voluntary submission to it; or receiving its protection;
also all acts concerning the transmission of money or goods;
and all contracts relating thereto are thereby nullified. It further
prohibits insurance upon trade with or by the enemy, upon the
life or lives of aliens engaged in service with the enemy; this for
the reason that the subjects of one country cannot be permitted
to lend their assistance to protect by insurance the commerce or
property of belligerent, alien subjects, or to do anything
detrimental too their country's interest. The purpose of war is to
cripple the power and exhaust the resources of the enemy, and
it is inconsistent that one country should destroy its enemy's
property and repay in insurance the value of what has been so
destroyed, or that it should in such manner increase the
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resources of the enemy, or render it aid, and the
commencement of war determines, for like reasons, all trading
intercourse with the enemy, which prior thereto may have been
lawful. All individuals therefore, who compose the belligerent
powers, exist, as to each other, in a state of utter exclusion, and
are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants insurance only
from year, or for some other specified term it is plain that when
the parties become alien enemies, the contractual tie is broken
and the contractual rights of the parties, so far as not vested.
lost.
The respondent having become an enemy corporation on
December 10, 1941, the insurance policy issued in its favor on
October 1, 1941, by the petitioner (a Philippine corporation) had
ceased to be valid and enforcible, and since the insured goods
were burned after December 10, 1941, and during the war, the
respondent was not entitled to any indemnity under said policy
from the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require that
the premium paid by the respondent for the period covered by
its policy from December 11, 1941, should be returned by the
petitioner.
The Court of Appeals, in deciding the case, stated that the main
issue hinges on the question of whether the policy in question
became null and void upon the declaration of war between the
United States and Germany on December 10, 1941, and its
judgment in favor of the respondent corporation was predicated on
its conclusion that the policy did not cease to be in force. The Court
of Appeals necessarily assumed that, even if the payment by the
petitioner to the respondent was involuntary, its action is not tenable
in view of the ruling on the validity of the policy. As a matter of fact,
the Court of Appeals held that "any intimidation resorted to by the
appellee was not unjust but the exercise of its lawful right to claim
for and received the payment of the insurance policy," and that the
ruling of the Bureau of Financing to the effect that "the appellee was
entitled to payment from the appellant was, well founded." Factually,
there can be no doubt that the Director of the Bureau of Financing,
in ordering the petitioner to pay the claim of the respondent, merely
obeyed the instruction of the Japanese Military Administration, as
may be seen from the following: "In view of the findings and
conclusion of this office contained in its decision on Administrative
Case dated February 9, 1943 copy of which was sent to your office
and the concurrence therein of the Financial Department of the
Japanese Military Administration, and following the instruction of
said authority, you are hereby ordered to pay the claim of Messrs.
Christern, Huenefeld & Co., Inc. The payment of said claim,
however, should be made by means of crossed check."
It results that the petitioner is entitled to recover what paid to the
respondent under the circumstances on this case. However, the
petitioner will be entitled to recover only the equivalent, in actual
Philippines currency of P92,650 paid on April 19, 1943, in
accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the
respondent corporation is ordered to pay to the petitioner the sum
of P77,208.33, Philippine currency, less the amount of the premium,
in Philippine currency, that should be returned by the petitioner for
the unexpired term of the policy in question, beginning December
11, 1941. Without costs. So ordered.