[G.R. No. 151890. June 20, 2006.]
The
PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner,
vs. TRANS-ASIA SHIPPING LINES, INC., respondent.
[G.R. No. 151991. June 20, 2006.]
TRANS-ASIA SHIPPING LINES, INC., petitioner, vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., respondent.
DECISION
CHICO-NAZARIO, J p:
This is a consolidation of two separate Petitions for Review on
Certiorari filed by petitioner Prudential Guarantee and
Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890 and Trans-Asia
Shipping Lines, Inc. (TRANS-ASIA) in G.R. No. 151991, assailing
the Decision 1 dated 6 November 2001 of the Court of Appeals in
CA G.R. CV No. 68278, which reversed the Judgment 2 dated 6
June 2000 of the Regional Trial Court (RTC), Branch 13, Cebu City
in Civil Case No. CEB-20709. The 29 January 2002 Resolution 3 of
the Court of Appeals, denying PRUDENTIAL's Motion for
Reconsideration and TRANS-ASIA's Partial Motion for
Reconsideration of the 6 November 2001 Decision, is likewise
sought to be annulled and set aside.
The Facts
The material antecedents as found by the court a quo and
adopted by the appellate court are as follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia
Korea. In consideration of payment of
premiums, defendant [PRUDENTIAL]
insured M/V Asia Korea for loss/damage
of the hull and machinery arising from
perils, inter alia, of fire and explosion for
the sum of P40 Million, beginning [from]
the period [of] July 1, 1993 up to July 1,
1994. This is evidenced by Marine Policy
No. MH93/1363 (Exhibits "A" to "A-11").
On October 25, 1993, while the policy was
in force, a fire broke out while [M/V Asia
Korea was] undergoing repairs at the port
of Cebu. On October 26, 1993 plaintiff
[TRANS-ASIA] filed its notice of claim for
damage sustained by the vessel. This is
evidenced by a letter/formal claim of
even date (Exhibit "B"). Plaintiff [TRANS-
ASIA] reserved its right to subsequently
notify defendant [PRUDENTIAL] as to the
full amount of the claim upon final survey
and determination by average adjuster
Richard Hogg International (Phil.) of the
damage sustained by reason of fire. An
adjuster's report on the fire in question
was submitted by Richard Hogg
International together with the U-Marine
Surveyor Report (Exhibits "4" to "4-115").
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a
document denominated "Loan and Trust
receipt", a portion of which read (sic):
"Received from Prudential Guarantee and Assurance, Inc., the sum of
PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without interest
under Policy No. MH 93/1353 [sic], repayable only in the event and to the
extent that any net recovery is made by Trans-Asia Shipping Corporation,
from any person or persons, corporation or corporations, or other
parties, on account of loss by any casualty for which they may be liable
occasioned by the 25 October 1993: Fire on Board." (Exhibit "4")
In a letter dated 21 April 1997 defendant [PRUDENTIAL]
1
denied plaintiff's claim (Exhibit "5").
letter reads:
"After a careful review and evaluation of your claim arising from the
above-captioned incident, it has been ascertained that you are in breach
of policy conditions, among them "WARRANTED VESSEL CLASSED AND
CLASS MAINTAINED". Accordingly, we regret to advise that your claim is
not compensable and hereby DENIED."
This was followed by defendant's letter dated 21 July 1997
requesting the return or
payment of the
P3,000,000.00 within a
period of ten (10) days
from receipt of the letter
(Exhibit "6"). 4
Following this development, on 13 August 1997, TRANS-ASIA
filed a Complaint 5 for Sum of Money against PRUDENTIAL with
the RTC of Cebu City, docketed as Civil Case No. CEB-20709,
wherein TRANS-ASIA sought the amount of P8,395,072.26 from
PRUDENTIAL, alleging that the same represents the balance of
the indemnity due upon the insurance policy in the total amount
of P11,395,072.26. TRANS-ASIA similarly sought interest at 42%
per annum citing Section 243 6 of Presidential Decree No. 1460,
otherwise known as the "Insurance Code," as amended.
In its Answer, 7 PRUDENTIAL denied the material allegations of
the Complaint and interposed the defense that TRANS-ASIA
breached insurance policy conditions, in particular:
"WARRANTED VESSEL CLASSED AND CLASS MAINTAINED."
PRUDENTIAL further alleged that it acted as facts and law require
and incurred no liability to TRANS-ASIA; that TRANS-ASIA has no
cause of action; and, that its claim has been effectively waived
and/or abandoned, or it is estopped from pursuing the same. By
way of a counterclaim, PRUDENTIAL sought a refund of
P3,000,000.00, which it allegedly advanced to TRANS-ASIA by
way of a loan without interest and without prejudice to the final
evaluation of the claim, including the amounts of P500,000.00, for
survey fees and P200,000.00, representing attorney's fees.
The Ruling of the Trial Court
On 6 June 2000, the court a quo rendered Judgment 8 finding for
(therein defendant) PRUDENTIAL. It ruled that a determination
of the parties' liabilities hinged on whether TRANS-ASIA violated
and breached the policy conditions on WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED. It interpreted the provision
to mean that TRANS-ASIA is required to maintain the vessel at a
certain class at all times pertinent during the life of the policy.
According to the court a quo, TRANS-ASIA failed to prove
compliance of the terms of the warranty, the violation thereof
entitled PRUDENTIAL, the insured party, to rescind the contract. 9
Further, citing Section 107 10 of the Insurance Code, the court a
quo ratiocinated that the concealment made by TRANS-ASIA that
the vessel was not adequately maintained to preserve its class
was a material concealment sufficient to avoid the policy and,
thus, entitled the injured party to rescind the contract. The court
a quo found merit in PRUDENTIAL's contention that there was
nothing in the adjustment of the particular average submitted by
the adjuster that would show that TRANS-ASIA was not in breach
of the policy. Ruling on the denominated loan and trust receipt,
the court a quo said that in substance and in form, the same is a
receipt for a loan. It held that if TRANS-ASIA intended to receive
the amount of P3,000,000.00 as advance payment, it should have
so clearly stated as such.
The court a quo did not award PRUDENTIAL's claim for
P500,000.00, representing expert survey fees on the ground of
lack of sufficient basis in support thereof. Neither did it award
attorney's fees on the rationalization that the instant case does
not fall under the exceptions stated in Article 2208 11 of the Civil
Code. However, the court a quo granted PRUDENTIAL's
counterclaim stating that there is factual and legal basis for
TRANS-ASIA to return the amount of P3,000,000.00 by way of
loan without interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE, judgment is hereby rendered DISMISSING
the complaint for its failure to prove a
cause of action.
On defendant's counterclaim, plaintiff is directed to return
the sum of P3,000,000.00 representing
the loan extended to it by the defendant,
within a period of ten (10) days from and
after this judgment shall have become
final and executory. 12
The Ruling of the Court of Appeals
On appeal by TRANS-ASIA, the Court of Appeals, in its assailed
Decision of 6 November 2001, reversed the 6 June 2000
Judgment of the RTC.
On the issue of TRANS-ASIA's alleged breach of warranty of the
policy condition CLASSED AND CLASS MAINTAINED, the Court of
Appeals ruled that PRUDENTIAL, as the party asserting the non-
compensability of the loss had the burden of proof to show that
TRANS-ASIA breached the warranty, which burden it failed to
discharge. PRUDENTIAL cannot rely on the lack of certification to
the effect that TRANS-ASIA was CLASSED AND CLASS
MAINTAINED as its sole basis for reaching the conclusion that the
warranty was breached. The Court of Appeals opined that the
lack of a certification does not necessarily mean that the
warranty was breached by TRANS-ASIA. Instead, the Court of
Appeals considered PRUDENTIAL's admission that at the time the
insurance contract was entered into between the parties, the
vessel was properly classed by Bureau Veritas, a classification
society recognized by the industry. The Court of Appeals similarly
gave weight to the fact that it was the responsibility of Richards
Hogg International (Phils.) Inc., the average adjuster hired by
PRUDENTIAL, to secure a copy of such certification to support its
conclusion that mere absence of a certification does not warrant
denial of TRANS-ASIA's claim under the insurance policy.
In the same token, the Court of Appeals found the subject
warranty allegedly breached by TRANS-ASIA to be a rider which,
while contained in the policy, was inserted by PRUDENTIAL
without the intervention of TRANS-ASIA. As such, it partakes of a
nature of a contract d'adhesion which should be construed
against PRUDENTIAL, the party which drafted the contract.
Likewise, according to the Court of Appeals, PRUDENTIAL's
renewal of the insurance policy from noon of 1 July 1994 to noon
of 1 July 1995, and then again, until noon of 1 July 1996 must be
deemed a waiver by PRUDENTIAL of any breach of warranty
committed by TRANS-ASIA.
Further, the Court of Appeals, contrary to the ruling of the court a
quo, interpreted the transaction between PRUDENTIAL and
TRANS-ASIA as one of subrogation, instead of a loan. The Court of
2
Appeals concluded that TRANS-ASIA has no obligation to pay
back the amount of P3,000.000.00 to PRUDENTIAL based on its
finding that the aforesaid amount was PRUDENTIAL's partial
payment to TRANS-ASIA's claim under the policy. Finally, the
Court of Appeals denied TRANS-ASIA's prayer for attorney's fees,
but held TRANS-ASIA entitled to double interest on the policy for
the duration of the delay of payment of the unpaid balance, citing
Section 244 13 of the Insurance Code.
Finding for therein appellant TRANS-ASIA, the Court of Appeals
ruled in this wise:
WHEREFORE, the foregoing consideration, We find for
Appellant. The instant appeal is
ALLOWED and the Judgment appealed
from REVERSED. The P3,000,000.00
initially paid by appellee Prudential
Guarantee Assurance Incorporated to
appellant Trans-Asia and covered by a
"Loan and Trust Receipt" dated 29 May
1995 is HELD to be in partial settlement
of the loss suffered by appellant and
covered by Marine Policy No. MH93/1363
issued by appellee. Further, appellee is
hereby ORDERED to pay appellant the
additional amount of P8,395,072.26
representing the balance of the loss
suffered by the latter as recommended by
the average adjuster Richard Hogg
International (Philippines) in its Report,
with double interest starting from the
time Richard Hogg's Survey Report was
completed, or on 13 August 1996, until
the same is fully paid.
All other claims and counterclaims are hereby DISMISSED.
All costs against appellee. 14
Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA
filed a Motion for Reconsideration and Partial Motion for
Reconsideration thereon, respectively, which motions were
denied by the Court of Appeals in the Resolution dated 29
January 2002.
The Issues
Aggrieved, PRUDENTIAL filed before this Court a Petition for
Review, docketed as G.R. No. 151890, relying on the following
grounds, viz:
I.
THE AWARD IS GROSSLY UNCONSCIONABLE.
II.
THE COURT OF APPEALS ERRED IN HOLDING THAT
THERE WAS NO VIOLATION BY TRANS-
ASIA OF A MATERIAL WARRANTY,
NAMELY, WARRANTY CLAUSE NO. 5, OF
THE INSURANCE POLICY.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT
PRUDENTIAL, AS INSURER HAD THE
BURDEN OF PROVING THAT THE
ASSURED, TRANS-ASIA, VIOLATED A
MATERIAL WARRANTY.
IV.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
WARRANTY CLAUSE EMBODIED IN THE
INSURANCE POLICY CONTRACT WAS A
MERE RIDER.
V.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
ALLEGED RENEWALS OF THE POLICY
CONSTITUTED A WAIVER ON THE PART
OF PRUDENTIAL OF THE BREACH OF
THE WARRANTY BY TRANS-ASIA.
VI.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
"LOAN AND TRUST RECEIPT" EXECUTED
BY TRANS-ASIA IS AN ADVANCE ON THE
POLICY, THUS CONSTITUTING PARTIAL
PAYMENT THEREOF.
VII.
3
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
ACCEPTANCE BY PRUDENTIAL OF THE
FINDINGS OF RICHARDS HOGG IS
INDICATIVE OF A WAIVER ON THE PART
OF PRUDENTIAL OF ANY VIOLATION BY
TRANS-ASIA OF THE WARRANTY.
VIII.
THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE
TRIAL COURT, IN FINDING THAT
PRUDENTIAL "UNJUSTIFIABLY
REFUSED" TO PAY THE CLAIM AND IN
ORDERING PRUDENTIAL TO PAY TRANS-
ASIA P8,395,072.26 PLUS DOUBLE
INTEREST FROM 13 AUGUST 1996,
UNTIL [THE] SAME IS FULLY PAID. 15
Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of
Appeals filed a Petition for Review docketed as G.R. No. 151991,
raising the following grounds for the allowance of the petition, to
wit:
I.
THE HONORABLE COURT OF APPEALS ERRED IN NOT
AWARDING ATTORNEY'S FEES TO
PETITIONER TRANS-ASIA ON THE
GROUND THAT SUCH CAN ONLY BE
AWARDED IN THE CASES ENUMERATED
IN ARTICLE 2208 OF THE CIVIL CODE,
AND THERE BEING NO BAD FAITH ON
THE PART OF RESPONDENT
PRUDENTIAL IN DENYING HEREIN
PETITIONER TRANS-ASIA'S INSURANCE
CLAIM.
II.
THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION
DATED 06 NOVEMBER 2001 SHOULD BE
CONSTRUED TO MEAN DOUBLE
INTEREST BASED ON THE LEGAL
INTEREST OF 12%, OR INTEREST AT THE
RATE OF 24% PER ANNUM. 16
In our Resolution of 2 December 2002, we granted TRANS-ASIA's Q To refer you (sic) the "policy warranty condition," I am
Motion for Consolidation 17 of G.R. Nos. 151890 and 151991; 18 showing to you a policy
hence, the instant consolidated petitions. here marked as Exhibits
"1", "1-A" series, please
In sum, for our main resolution are: (1) the liability, if any, of
point to the warranty in the
PRUDENTIAL to TRANS-ASIA arising from the subject insurance policy which you said was
contract; (2) the liability, if any, of TRANS-ASIA to PRUDENTIAL breached or violated by the
arising from the transaction between the parties as evidenced by plaintiff which constituted
a document denominated as "Loan and Trust Receipt," dated 29 your basis for denying the
May 1995; and (3) the amount of interest to be imposed on the claim as you testified.
liability, if any, of either or both parties.
Ruling of the Court
Prefatorily, it must be emphasized that in a petition for review,
only questions of law, and not questions of fact, may be raised. 19
This rule may be disregarded only when the findings of fact of the A Warranted Vessel Classed and Class Maintained.
Court of Appeals are contrary to the findings and conclusions of
the trial court, or are not supported by the evidence on record. 20
In the case at bar, we find an incongruence between the findings
of fact of the Court of Appeals and the court a quo, thus, in our
determination of the issues, we are constrained to assess the
evidence adduced by the parties to make appropriate findings of ATTY. LIM
facts as are necessary.
I.

A. PRUDENTIAL failed to establish that TRANS-ASIA violated and

breached the policy condition on WARRANTED VESSEL CLASSED Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is
AND CLASS MAINTAINED, as contained in the subject insurance the second page of the policy below the printed words: "Clauses,
contract. Endorsements, Special Conditions and Warranties," below this are several
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that typewritten clauses and the witness pointed out in particular the clause
TRANS-ASIA violated an express and material warranty in the reading: "Warranted Vessel Classed and Class Maintained."
COURT
subject insurance contract, i.e., Marine Insurance Policy No.
MH93/1363, specifically Warranty Clause No. 5 thereof, which
stipulates that the insured vessel, "M/V ASIA KOREA" is required
to be CLASSED AND CLASS MAINTAINED. According to
PRUDENTIAL, on 25 October 1993, or at the time of the
occurrence of the fire, "M/V ASIA KOREA" was in violation of the Q Will you explain that particular phrase?
warranty as it was not CLASSED AND CLASS MAINTAINED.
PRUDENTIAL submits that Warranty Clause No. 5 was a
condition precedent to the recovery of TRANS-ASIA under the
policy, the violation of which entitled PRUDENTIAL to rescind the
contract under Sec. 74 21 of the Insurance Code. A Yes, a warranty is a condition that has to be complied
The warranty condition CLASSED AND CLASS MAINTAINED was with by the insured. When
explained by PRUDENTIAL's Senior Manager of the Marine and we say a class warranty, it
Aviation Division, Lucio Fernandez. The pertinent portions of his must be entered in the
testimony on direct examination is reproduced hereunder, viz: classification society.
ATTY. LIM

COURT
Q Please tell the court, Mr. Witness, the result of the
evaluation of this claim,
what final action was
taken?

Slowly.
WITNESS

A It was eventually determined that there was a breach of

the policy condition, and
basically there is a breach
of policy warranty (continued)
condition and on that basis A A classification society is an organization which sets
the claim was denied. certain standards for a
vessel to maintain in order
to maintain their
membership in the
classification society. So, if

4
 they failed to meet that would be successful in claiming on the policy. It follows that
standard, they are PRUDENTIAL bears the burden of evidence to establish the fact of
considered not members of breach.
that class, and thus
In our rule on evidence, TRANS-ASIA, as the plaintiff below,
breaching the warranty,
that requires them to necessarily has the burden of proof to show proof of loss, and the
maintain membership or to coverage thereof, in the subject insurance policy. However, in the
maintain their class on that course of trial in a civil case, once plaintiff makes out a prima
classification society. And it facie case in his favor, the duty or the burden of evidence shifts to
is not sufficient that the defendant to controvert plaintiff's prima facie case, otherwise, a
member of this verdict must be returned in favor of plaintiff. 23 TRANS-ASIA was
classification society at the able to establish proof of loss and the coverage of the loss, i.e., 25
time of a loss, their
October 1993: Fire on Board. Thereafter, the burden of evidence
membership must be
continuous for the whole shifted to PRUDENTIAL to counter TRANS-ASIA's case, and to
length of the policy such prove its special and affirmative defense that TRANS-ASIA was in
that during the effectivity of violation of the particular condition on CLASSED AND CLASS
the policy, their MAINTAINED.
classification is suspended, We sustain the findings of the Court of Appeals that PRUDENTIAL
and then thereafter, they was not successful in discharging the burden of evidence that
get reinstated, that again TRANS-ASIA breached the subject policy condition on CLASSED
still a breach of the
AND CLASS MAINTAINED.
warranty that they
maintained their class (sic).
Our maintaining team Foremost, PRUDENTIAL, through the Senior Manager of its
membership in the Marine and Aviation Division, Lucio Fernandez, made a
classification society categorical admission that at the time of the procurement of the
thereby maintaining the insurance contract in July 1993, TRANS-ASIA's vessel, "M/V Asia
standards of the vessel Korea" was properly classed by Bureau Veritas, thus:
(sic). Q Kindly examine the records particularly the policy, please
tell us if you know whether
M/V Asia Korea was classed
at the time (sic) policy was
procured perthe (sic)
insurance was procured
ATTY. LIM that Exhibit "1" on 1st July
1993 (sic).

Q Can you mention some classification societies that you

know? WITNESS

A Well we have the Bureau Veritas, American Bureau of A I recall that they were classed.
Shipping, D&V Local
Classification Society, The
Philippine Registration of
Ships Society, China
Classification, NKK and
Company Classification ATTY. LIM
Society, and many others,
we have among others,
there are over 20
worldwide. 22

Q With what classification society?

At the outset, it must be emphasized that the party which alleges

a fact as a matter of defense has the burden of proving it.
PRUDENTIAL, as the party which asserted the claim that TRANS- A I believe with Bureau Veritas. 24
ASIA breached the warranty in the policy, has the burden of
evidence to establish the same. Hence, on the part of
PRUDENTIAL lies the initiative to show proof in support of its
defense; otherwise, failing to establish the same, it remains self-
serving. Clearly, if no evidence on the alleged breach of TRANS-
As found by the Court of Appeals and as supported by the
ASIA of the subject warranty is shown, a fortiori, TRANS-ASIA
records, Bureau Veritas is a classification society recognized in
5
the marine industry. As it is undisputed that TRANS-ASIA was
properly classed at the time the contract of insurance was
entered into, thus, it becomes incumbent upon PRUDENTIAL to
show evidence that the status of TRANS-ASIA as being properly
CLASSED by Bureau Veritas had shifted in violation of the
warranty. Unfortunately, PRUDENTIAL failed to support the
allegation.
We are in accord with the ruling of the Court of Appeals that the
lack of a certification in PRUDENTIAL's records to the effect that
TRANS-ASIA's "M/V Asia Korea" was CLASSED AND CLASS
MAINTAINED at the time of the occurrence of the fire cannot be
tantamount to the conclusion that TRANS-ASIA in fact breached
the warranty contained in the policy. With more reason must we
sustain the findings of the Court of Appeals on the ground that as
admitted by PRUDENTIAL, it was likewise the responsibility of
the average adjuster, Richards Hogg International (Phils.), Inc., to
secure a copy of such certification, and the alleged breach of
TRANS-ASIA cannot be gleaned from the average adjuster's
survey report, or adjustment of particular average per "M/V Asia
Korea" of the 25 October 1993 fire on board.
We are not unmindful of the clear language of Sec. 74 of the
Insurance Code which provides that, "the violation of a material
warranty, or other material provision of a policy on the part of
either party thereto, entitles the other to rescind." It is generally
accepted that "[a] warranty is a statement or promise set forth in
the policy, or by reference incorporated therein, the untruth or
non-fulfillment of which in any respect, and without reference to
whether the insurer was in fact prejudiced by such untruth or
non-fulfillment, renders the policy voidable by the insurer." 25
However, it is similarly indubitable that for the breach of a
warranty to avoid a policy, the same must be duly shown by the
party alleging the same. We cannot sustain an allegation that is
unfounded. Consequently, PRUDENTIAL, not having shown that
TRANS-ASIA breached the warranty condition, CLASSED AND
CLASS MAINTAINED, it remains that TRANS-ASIA must be
allowed to recover its rightful claims on the policy.
B. Assuming arguendo that TRANS-ASIA violated the policy
condition on WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED, PRUDENTIAL made a valid waiver of the same.
The Court of Appeals, in reversing the Judgment of the RTC which
held that TRANS-ASIA breached the warranty provision on
CLASSED AND CLASS MAINTAINED, underscored that
PRUDENTIAL can be deemed to have made a valid waiver of
TRANS-ASIA's breach of warranty as alleged, ratiocinating, thus:
Third, after the loss, Prudential renewed the insurance policy of Trans-
Asia for two (2) consecutive years, from noon of 01 July 1994 to noon of
01 July 1995, and then again until noon of 01 July 1996. This renewal is
deemed a waiver of any breach of warranty. 26
PRUDENTIAL finds fault with the ruling of the appellate court
when it ruled that the renewal policies are deemed a waiver of
TRANS-ASIA's alleged breach, averring herein that the
subsequent policies, designated as MH94/1595 and MH95/1788
show that they were issued only on 1 July 1994 and 3 July 1995,
respectively, prior to the time it made a request to TRANS-ASIA
that it be furnished a copy of the certification specifying that the
insured vessel "M/V Asia Korea" was CLASSED AND CLASS
MAINTAINED. PRUDENTIAL posits that it came to know of the
breach by TRANS-ASIA of the subject warranty clause only on 21
April 1997. On even date, PRUDENTIAL sent TRANS-ASIA a letter
of denial, advising the latter that their claim is not compensable.
In fine, PRUDENTIAL would have this Court believe that the
issuance of the renewal policies cannot be a waiver because they
were issued without knowledge of the alleged breach of warranty
committed by TRANS-ASIA. 27
We are not impressed. We do not find that the Court of Appeals
was in error when it held that PRUDENTIAL, in renewing TRANS-
ASIA's insurance policy for two consecutive years after the loss
6
covered by Policy No. MH93/1363, was considered to have
waived TRANS-ASIA's breach of the subject warranty, if any.
Breach of a warranty or of a condition renders the contract
defeasible at the option of the insurer; but if he so elects, he may
waive his privilege and power to rescind by the mere expression
of an intention so to do. In that event his liability under the policy
continues as before. 28 There can be no clearer intention of the
waiver of the alleged breach than the renewal of the policy
insurance granted by PRUDENTIAL to TRANS-ASIA in
MH94/1595 and MH95/1788, issued in the years 1994 and 1995,
respectively.
To our mind, the argument is made even more credulous by
PRUDENTIAL's lack of proof to support its allegation that the
renewals of the policies were taken only after a request was
made to TRANS-ASIA to furnish them a copy of the certificate
attesting that "M/V Asia Korea" was CLASSED AND CLASS
MAINTAINED. Notwithstanding PRUDENTIAL's claim that no
certification was issued to that effect, it renewed the policy,
thereby, evidencing an intention to waive TRANS-ASIA's alleged
breach. Clearly, by granting the renewal policies twice and
successively after the loss, the intent was to benefit the insured,
TRANS-ASIA, as well as to waive compliance of the warranty.
The foregoing finding renders a determination of whether the
subject warranty is a rider, moot, as raised by the PRUDENTIAL
in its assignment of errors. Whether it is a rider will not
effectively alter the result for the reasons that: (1) PRUDENTIAL
was not able to discharge the burden of evidence to show that
TRANS-ASIA committed a breach, thereof; and (2) assuming
arguendo the commission of a breach by TRANS-ASIA, the same
was shown to have been waived by PRUDENTIAL.
II.
A. The amount of P3,000,000.00 granted by PRUDENTIAL to
TRANS-ASIA via a transaction between the parties evidenced by a
document denominated as "Loan and Trust Receipt," dated 29
May 1995 constituted partial payment on the policy.
It is undisputed that TRANS-ASIA received from PRUDENTIAL
the amount of P3,000,000.00. The same was evidenced by a
transaction receipt denominated as a "Loan and Trust Receipt,"
dated 29 May 1995, reproduced hereunder:
LOAN AND TRUST RECEIPT
Claim File No. MH-93-025 May 29, 1995
P3,000,000.00
Check No. PCIB066755
Received FROM PRUDENTIAL GUARANTEE AND
ASSURANCE INC., the sum of PESOS
THREE MILLION ONLY (P3,000,000.00)
as a loan without interest, under Policy
No. MH93/1353, repayable only in the
event and to the extent that any net
recovery is made by TRANS ASIA
SHIPPING CORP., from any person or
persons, corporation or corporations, or
other parties, on account of loss by any
 casualty for which they may be liable,
occasioned by the 25 October 1993: Fire
on Board.
As security for such repayment, we hereby pledge to
PRUDENTIAL GUARANTEE AND
ASSURANCE INC. whatever recovery we
may make and deliver to it all documents
necessary to prove our interest in said
property. We also hereby agree to
promptly prosecute suit against such
persons, corporation or corporations
through whose negligence the aforesaid
loss was caused or who may otherwise be
responsible therefore, with all due
diligence, in our own name, but at the
expense of and under the exclusive
direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION 29
PRUDENTIAL largely contends that the "Loan and Trust Receipt"
executed by the parties evidenced a loan of P3,000,000.00 which
it granted to TRANS-ASIA, and not an advance payment on the
policy or a partial payment for the loss. It further submits that it
is a customary practice for insurance companies in this country
to extend loans gratuitously as part of good business dealing with
their assured, in order to afford their assured the chance to
continue business without embarrassment while awaiting
outcome of the settlement of their claims. 30 According to
PRUDENTIAL, the "Trust and Loan Agreement" did not subrogate
to it whatever rights and/or actions TRANS-ASIA may have
against third persons, and it cannot by no means be taken that by
virtue thereof, PRUDENTIAL was granted irrevocable power of
attorney by TRANS-ASIA, as the sole power to prosecute lies
solely with the latter.
The Court of Appeals held that the real character of the
transaction between the parties as evidenced by the "Loan and
Trust Receipt" is that of an advance payment by PRUDENTIAL of
TRANS-ASIA's claim on the insurance, thus:
The Philippine Insurance Code (PD 1460 as amended) was
derived from the old Insurance Law Act
No. 2427 of the Philippine Legislature
during the American Regime. The
Insurance Act was lifted verbatim from
the law of California, except Chapter V
thereof, which was taken largely from the
insurance law of New York. Therefore,
ruling case law in that jurisdiction is to Us
persuasive in interpreting provisions of
our own Insurance Code. In addition, the
application of the adopted statute should
correspond in fundamental points with
the application in its country of origin . . . .
7
xxx xxx xxx
Likewise, it is settled in that jurisdiction that the (sic)
notwithstanding recitals in the Loan
Receipt that the money was intended as a
loan does not detract from its real
character as payment of claim, thus:
"The receipt of money by the insured employers from a
surety company for losses
on account of forgery of
drafts by an employee
where no provision or
repayment of the money
was made except upon
condition that it be
recovered from other
parties and neither interest
nor security for the
asserted debts was
provided for, the money
constituted the payment of
a liability and not a mere
loan, notwithstanding
recitals in the written
receipt that the money was
intended as a mere loan."
What is clear from the wordings of the so-called "Loan and
Trust Receipt Agreement" is that
appellant is obligated to hand over to
appellee "whatever recovery (Trans Asia)
may make and deliver to (Prudential) all
documents necessary to prove its interest
in the said property." For all intents and
purposes therefore, the money receipted
is payment under the policy, with
Prudential having the right of subrogation
to whatever net recovery Trans-Asia may
obtain from third parties resulting from
the fire. In the law on insurance,
subrogation is an equitable assignment to
the insurer of all remedies which the
insured may have against third person
whose negligence or wrongful act caused
the loss covered by the insurance policy,
which is created as the legal effect of
payment by the insurer as an assignee in
equity. The loss in the first instance is that
of the insured but after reimbursement or
compensation, it becomes the loss of the
insurer. It has been referred to as the
doctrine of substitution and rests on the
principle that substantial justice should
be attained regardless of form, that is, its
basis is the doing of complete, essential,
and perfect justice between all the parties
without regard to form. 31
We agree. Notwithstanding its designation, the tenor of the "Loan
and Trust Receipt" evidences that the real nature of the
transaction between the parties was that the amount of
P3,000,000.00 was not intended as a loan whereby TRANS-ASIA
is obligated to pay PRUDENTIAL, but rather, the same was a
partial payment or an advance on the policy of the claims due to
TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an advance
payment to TRANS-ASIA by PRUDENTIAL, subrogating the
former to the extent of "any net recovery made by TRANS ASIA
SHIPPING CORP., from any person or persons, corporation or
corporations, or other parties, on account of loss by any casualty
for which they may be liable, occasioned by the 25 October 1993:
Fire on Board." 32
Second, we find that per the "Loan and Trust Receipt," even as
TRANS-ASIA agreed to "promptly prosecute suit against such
persons, corporation or corporations through whose negligence
the aforesaid loss was caused or who may otherwise be
responsible therefore, with all due diligence" in its name, the
prosecution of the claims against such third persons are to be
carried on "at the expense of and under the exclusive direction
and control of PRUDENTIAL GUARANTEE AND ASSURANCE INC."
33 The clear import of the phrase "at the expense of and under the
exclusive direction and control" as used in the "Loan and Trust
Receipt" grants solely to PRUDENTIAL the power to prosecute,
even as the same is carried in the name of TRANS-ASIA, thereby
making TRANS-ASIA merely an agent of PRUDENTIAL, the
principal, in the prosecution of the suit against parties who may
have occasioned the loss.
Third, per the subject "Loan and Trust Receipt," the obligation of
TRANS-ASIA to repay PRUDENTIAL is highly speculative and
contingent, i.e., only in the event and to the extent that any net
recovery is made by TRANS-ASIA from any person on account of
loss occasioned by the fire of 25 October 1993. The transaction,
therefore, was made to benefit TRANS-ASIA, such that, if no
recovery from third parties is made, PRUDENTIAL cannot be
repaid the amount. Verily, we do not think that this is constitutive
of a loan. 34 The liberality in the tenor of the "Loan and Trust
Receipt" in favor of TRANS-ASIA leads to the conclusion that the
amount of P3,000,000.00 was a form of an advance payment on
TRANS-ASIA's claim on MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of
P8,395,072.26, representing the balance of the loss suffered by TRANS-
ASIA and covered by Marine Policy No. MH93/1363.
Our foregoing discussion supports the conclusion that TRANS-
ASIA is entitled to the unpaid claims covered by Marine Policy No.
MH93/1363, or a total amount of P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the
form of attorney's fees equivalent to 10% of P8,395,072.26.
The Court of Appeals denied the grant of attorney's fees. It held
that attorney's fees cannot be awarded absent a showing of bad
faith on the part of PRUDENTIAL in rejecting TRANS-ASIA's
claim, notwithstanding that the rejection was erroneous.
According to the Court of Appeals, attorney's fees can be awarded
only in the cases enumerated in Article 2208 of the Civil Code
which finds no application in the instant case.
We disagree. Sec. 244 of the Insurance Code grants damages
consisting of attorney's fees and other expenses incurred by the
insured after a finding by the Insurance Commissioner or the
Court, as the case may be, of an unreasonable denial or
withholding of the payment of the claims due. Moreover, the law
imposes an interest of twice the ceiling prescribed by the
Monetary Board on the amount of the claim due the insured from
the date following the time prescribed in Section 242 35 or in
Section 243, 36 as the case may be, until the claim is fully satisfied.
8
Finally, Section 244 considers the failure to pay the claims within
the time prescribed in Sections 242 or 243, when applicable, as
prima facie evidence of unreasonable delay in payment.
To the mind of this Court, Section 244 does not require a showing
of bad faith in order that attorney's fees be granted. As earlier
stated, under Section 244, a prima facie evidence of unreasonable
delay in payment of the claim is created by failure of the insurer
to pay the claim within the time fixed in both Sections 242 and
243 of the Insurance Code. As established in Section 244, by
reason of the delay and the consequent filing of the suit by the
insured, the insurers shall be adjudged to pay damages which
shall consist of attorney's fees and other expenses incurred by
the insured. 37
Section 244 reads:
In case of any litigation for the enforcement of any policy or
contract of insurance, it shall be the duty
of the Commissioner or the Court, as the
case may be, to make a finding as to
whether the payment of the claim of the
insured has been unreasonably denied or
withheld; and in the affirmative case, the
insurance company shall be adjudged to
pay damages which shall consist of
attorney's fees and other expenses
incurred by the insured person by reason
of such unreasonable denial or
withholding of payment plus interest of
twice the ceiling prescribed by the
Monetary Board of the amount of the
claim due the insured, from the date
following the time prescribed in section
two hundred forty-two or in section two
hundred forty-three, as the case may be,
until the claim is fully satisfied; Provided,
That the failure to pay any such claim
within the time prescribed in said
sections shall be considered prima facie
evidence of unreasonable delay in
payment.
Sections 243 and 244 of the Insurance Code apply when the court
finds an unreasonable delay or refusal in the payment of the
insurance claims.
In the case at bar, the facts as found by the Court of Appeals, and
confirmed by the records show that there was an unreasonable
delay by PRUDENTIAL in the payment of the unpaid balance of
P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day after
the occurrence of the fire in "M/V Asia Korea", TRANS-ASIA filed
its notice of claim. On 13 August 1996, the adjuster, Richards
Hogg International (Phils.), Inc., completed its survey report
recommending the amount of P11,395,072.26 as the total
indemnity due to TRANS-ASIA. 38 On 21 April 1997, PRUDENTIAL,
in a letter 39 addressed to TRANS-ASIA denied the latter's claim
for the amount of P8,395,072.26 representing the balance of the
total indemnity. On 21 July 1997, PRUDENTIAL sent a second
letter 40 to TRANS-ASIA seeking a return of the amount of
P3,000,000.00. On 13 August 1997, TRANS-ASIA was constrained
to file a complaint for sum of money against PRUDENTIAL
praying, inter alia, for the sum of P8,395,072.26 representing the
balance of the proceeds of the insurance claim.
As can be gleaned from the foregoing, there was an unreasonable
delay on the part of PRUDENTIAL to pay TRANS-ASIA, as in fact,
it refuted the latter's right to the insurance claims, from the time
proof of loss was shown and the ascertainment of the loss was
made by the insurance adjuster. Evidently, PRUDENTIAL's
unreasonable delay in satisfying TRANS-ASIA's unpaid claims
compelled the latter to file a suit for collection.
Succinctly, an award equivalent to ten percent (10%) of the
unpaid proceeds of the policy as attorney's fees to TRANS-ASIA is
reasonable under the circumstances, or otherwise stated, ten
percent (10%) of P8,395,072.26. In the case of Cathay Insurance,
Co., Inc. v. Court of Appeals, 41 where a finding of an unreasonable
delay under Section 244 of the Insurance Code was made by this
Court, we grant an award of attorney's fees equivalent to ten
percent (10%) of the total proceeds. We find no reason to deviate
from this judicial precedent in the case at bar.
C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as
attorney's fees) shall be imposed double interest in accordance with
Section 244 of the Insurance Code.
Section 244 of the Insurance Code is categorical in imposing an
interest twice the ceiling prescribed by the Monetary Board due
the insured, from the date following the time prescribed in
Section 242 or in Section 243, as the case may be, until the claim
is fully satisfied. In the case at bar, we find Section 243 to be
applicable as what is involved herein is a marine insurance,
clearly, a policy other than life insurance.
Section 243 is hereunder reproduced:
SEC. 243. The amount of any loss or damage for which an
insurer may be liable, under any policy
other than life insurance policy, shall be
paid within thirty days after proof of loss
is received by the insurer and
ascertainment of the loss or damage is
made either by agreement between the
insured and the insurer or by arbitration;
but if such ascertainment is not had or
made within sixty days after such receipt
by the insurer of the proof of loss, then
the loss or damage shall be paid within
ninety days after such receipt. Refusal or
failure to pay the loss or damage within
the time prescribed herein will entitle the
assured to collect interest on the proceeds
of the policy for the duration of the delay
at the rate of twice the ceiling prescribed
by the Monetary Board, unless such
failure or refusal to pay is based on the
ground that the claim is fraudulent.
As specified, the assured is entitled to interest on the proceeds
for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board except when the failure or
refusal of the insurer to pay was founded on the ground that the
claim is fraudulent.
D. The term "double interest" as used in the Decision of the Court of
Appeals must be interpreted to mean 24% per annum.
PRUDENTIAL assails the award of interest, granted by the Court
of Appeals, in favor of TRANS-ASIA in the assailed Decision of 6
November 2001. It is PRUDENTIAL's stance that the award is
extortionate and grossly unsconscionable. In support thereto,
PRUDENTIAL makes a reference to TRANS-ASIA's prayer in the
Complaint filed with the court a quo wherein the latter sought,
"interest double the prevailing rate of interest of 21% per annum
now obtaining in the banking business or plus 42% per annum
pursuant to Article 243 of the Insurance Code . . . ." 42
The contention fails to persuade. It is settled that an award of
double interest is lawful and justified under Sections 243 and 244
of the Insurance Code. 43 In Finman General Assurance
Corporation v. Court of Appeals, 44 this Court held that the
payment of 24% interest per annum is authorized by the
Insurance Code. 45 There is no gainsaying that the term "double
9
interest" as used in Sections 243 and 244 can only be interpreted
to mean twice 12% per annum or 24% per annum interest, thus:
The term "ceiling prescribed by the Monetary Board"
means the legal rate of interest of twelve
per centum per annum (12%) as
prescribed by the Monetary Board in C.B.
Circular No. 416, pursuant to P.D. No. 116,
amending the Usury Law; so that when
Sections 242, 243 and 244 of the
Insurance Code provide that the insurer
shall be liable to pay interest "twice the
ceiling prescribed by the Monetary
Board", it means twice 12% per annum or
24% per annum interest on the proceeds
of the insurance. 46
E. The payment of double interest should be counted from 13 September
1996.
The Court of Appeals, in imposing double interest for the
duration of the delay of the payment of the unpaid balance due
TRANS-ASIA, computed the same from 13 August 1996 until such
time when the amount is fully paid. Although not raised by the
parties, we find the computation of the duration of the delay
made by the appellate court to be patently erroneous.
To be sure, Section 243 imposes interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board. Significantly, Section 243
mandates the payment of any loss or damage for which an
insurer may be liable, under any policy other than life insurance
policy, within thirty days after proof of loss is received by the
insurer and ascertainment of the loss or damage is made either
by agreement between the insured and the insurer or by
arbitration. It is clear that under Section 243, the insurer has until
the 30th day after proof of loss and ascertainment of the loss or
damage to pay its liability under the insurance, and only after
such time can the insurer be held to be in delay, thereby
necessitating the imposition of double interest.
In the case at bar, it was not disputed that the survey report on
the ascertainment of the loss was completed by the adjuster,
Richard Hoggs International (Phils.), Inc. on 13 August 1996.
PRUDENTIAL had thirty days from 13 August 1996 within which
to pay its liability to TRANS-ASIA under the insurance policy, or
until 13 September 1996. Therefore, the double interest can
begin to run from 13 September 1996 only.
IV.
A. An interest of 12% per annum is similarly imposed on the TOTAL
amount of liability adjudged in section III herein, computed from the time
of finality of judgment until the full satisfaction thereof in conformity with
this Court's ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.
This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, 47
inscribed the rule of thumb 48 in the application of interest to be
imposed on obligations, regardless of their source. Eastern
emphasized beyond cavil that when the judgment of the court
awarding a sum of money becomes final and executory, the rate
of legal interest, regardless of whether the obligation involves a
loan or forbearance of money, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance 49 of credit.
We find application of the rule in the case at bar proper, thus, a
rate of 12% per annum from the finality of judgment until the full
satisfaction thereof must be imposed on the total amount of
liability adjudged to PRUDENTIAL. It is clear that the interim
period from the finality of judgment until the satisfaction of the
same is deemed equivalent to a forbearance of credit, hence, the
imposition of the aforesaid interest.
Fallo
WHEREFORE, the Petition in G.R. No. 151890 is DENIED.
However, the Petition in G.R. No. 151991 is GRANTED, thus, we
award the grant of attorney's fees and make a clarification that
the term "double interest" as used in the 6 November 2001
Decision of the Court of Appeals in CA-G.R. CV No. 68278 should
be construed to mean interest at the rate of 24% per annum, with
a further clarification, that the same should be computed from 13
September 1996 until fully paid. The Decision and Resolution of
the Court of Appeals, in CA-G.R. CV No. 68278, dated 6 November
2001 and 29 January 2002, respectively, are, thus, MODIFIED in
the following manner, to wit:
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the
amount of P8,395,072.26,
representing the balance of
the loss suffered by TRANS-
ASIA and covered by
Marine Policy No.
MH93/1363;

2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA

damages in the form of
attorney's fees equivalent
to 10% of the amount of
P8,395,072.26;

3. The aggregate amount (P8,395,072.26 plus 10% thereof

as attorney's fees) shall be
imposed double interest at
the rate of 24% per annum
to be computed from 13
September 1996 until fully
paid; and

4. An interest of 12% per annum is similarly imposed on

the TOTAL amount of
liability adjudged as
abovestated in paragraphs
(1), (2), and (3) herein,
computed from the time of
finality of judgment until
the full satisfaction thereof.

No costs.
SO ORDERED.
||| (Prudential Guarantee and Assurance, Inc. v. Trans-asia

Shipping Lines, Inc., G.R. No. 151890, 151991, [June 20, 2006])

10
 [G.R. No. 167330. September 18, 2009.]
PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
RESOLUTION
CORONA, J p:
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. HAEIac
ARTICLE III
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
11
participating in the group practice health
delivery system at a hospital or clinic
owned, operated or accredited by it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal
Revenue [CIR] sent petitioner a formal
demand letter and the corresponding
assessment notices demanding the
payment of deficiency taxes, including
surcharges and interest, for the taxable
years 1996 and 1997 in the total amount
of P224,702,641.18. . . .
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 . . .
xxx xxx xxx
Petitioner protested the assessment in a letter dated
February 23, 2000. As respondent did not
act on the protest, petitioner filed a
petition for review in the Court of Tax
Appeals (CTA) seeking the cancellation of
the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the
dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition
for Review is PARTIALLY
GRANTED. Petitioner is
hereby ORDERED to PAY
the deficiency VAT
amounting to
P22,054,831.75 inclusive of
25% surcharge plus 20%
interest from January 20,
1997 until fully paid for the
1996 VAT deficiency and
P31,094,163.87 inclusive of
25% surcharge plus 20%
 interest from January 20, SO ORDERED.
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 Petitioner moved for reconsideration but the CA denied it.
deficiency DST assessment Hence, petitioner filed this case.
against petitioner is hereby
CANCELLED AND SET
ASIDE. Respondent is
ORDERED to DESIST from
collecting the said DST
deficiency tax. xxx xxx xxx

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.
DIEAHc
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.
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. Olivares 3 and Philamcare Health
Systems, Inc. v. CA. 4 We 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.

Respondent is ordered to pay the amounts of

(c)Section 185 should be strictly construed.
P55,746,352.19 and
P68,450,258.73 as
deficiency Documentary
Stamp Tax for 1996 and
1997, respectively, plus
25% surcharge for late
payment and 20% interest (d)Legislative intent to exclude health care agreements
per annum from January 27, from items subject to DST is
2000, pursuant to Sections clear, especially in the light
248 and 249 of the Tax of the amendments made in
Code, until the same shall the DST law in 2002.
have been fully paid.

12
(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 RA 5
9480 for the taxable year
2005 and all prior years.
Therefore, the questioned
assessments on the DST are
now rendered moot and
academic. 6
Oral arguments were held in Baguio City on April 22, 2009. The
parties submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first
time that it availed of a tax amnesty under RA 9480 7 (also known
as the "Tax Amnesty Act of 2007") by fully paying the amount of
P5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005. 8
We find merit in petitioner's motion for reconsideration.
Petitioner was formally registered and incorporated with the
Securities and Exchange Commission on June 30, 1987. 9 It is
engaged in the dispensation of the following medical services to
individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health
problems, family planning counseling, consultation and advices on diet,
exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-
rays, urinalysis, fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other
remedial and therapeutic processes in the event of an injury or sickness
on the part of the enrolled member. 10
Individuals enrolled in its health care program pay an annual
membership fee. Membership is on a year-to-year basis. The
medical services are dispensed to enrolled members in a hospital
or clinic owned, operated or accredited by petitioner, through
physicians, medical and dental practitioners under contract with
it. It negotiates with such health care practitioners regarding
payment schemes, financing and other procedures for the
13
delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's
physicians, i.e., those directly employed by it 11 or whose services
are contracted by it. 12 Petitioner also provides hospital services
such as room and board accommodation, laboratory services,
operating rooms, x-ray facilities and general nursing care. 13 If and
when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care
providers for the services rendered, at pre-agreed rates. 14
To avail of 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
(P0.50) on each four pesos (P4.00), or
fractional part thereof, of the premium
charged. (Emphasis supplied) ECaITc
It is a cardinal rule in statutory construction that no word, clause, consideration is received therefore, shall
sentence, provision or part of a statute shall be considered not be deemed conclusive to show that
surplusage or superfluous, meaningless, void and insignificant. the making thereof does not constitute
the doing or transacting of an insurance
To this end, a construction which renders every word operative is
business. IHCSTE
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 Various courts in the United States, whose jurisprudence has a
document must be a policy of insurance or an obligation in the persuasive effect on our decisions, 21 have determined that HMOs
nature of indemnity and (2) the maker should be transacting are not in the insurance business. One test that they have applied
the business of accident, fidelity, employer's liability, plate, is whether the assumption of risk and indemnification of loss
glass, steam boiler, burglar, elevator, automatic sprinkler, or (which are elements of an insurance business) are the principal
other branch of insurance (except life, marine, inland, and fire object and purpose of the organization or whether they are
insurance). merely incidental to its business. If these are the principal
Petitioner is admittedly an HMO. Under RA 7875 (or "The objectives, the business is that of insurance. But if they are
National Health Insurance Act of 1995"), an HMO is "an entity merely incidental and service is the principal purpose, then the
that provides, offers or arranges for coverage of designated business is not insurance.
health services needed by plan members for a fixed prepaid Applying the "principal objects and purpose test", 22 there is
premium". 19 The payments do not vary with the extent, significant American case law supporting the argument that a
frequency or type of services provided. corporation (such as an HMO, whether or not organized for
The question is: was petitioner, as an HMO, engaged in the profit), whose main object is to provide the members of a group
business of insurance during the pertinent taxable years? with health services, is not engaged in the insurance business.
We rule that it was not. The rule was enunciated in Jordan v. Group Health Association 23
Section 2 (2) of PD 20 1460 (otherwise known as the Insurance wherein the Court of Appeals of the District of Columbia Circuit
Code) enumerates what constitutes "doing an insurance held that Group Health Association should not be considered as
business" or "transacting an insurance business": engaged in insurance activities since it was created primarily for
a)making or proposing to make, as insurer, any insurance the distribution of health care services rather than the
contract; assumption of insurance risk.
. . . 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
b)making or proposing to make, as surety, any contract of by its members. . . . The functions of such
suretyship as a vocation an organization are not identical with
and not as merely those of insurance or indemnity
incidental to any other companies. The latter are concerned
legitimate business or primarily, if not exclusively, with risk and
activity of the surety; 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
c)doing any kind of business, including a reinsurance principally with getting service
business, specifically rendered to its members and doing so
recognized as constituting at lower prices made possible by
the doing of an insurance quantity purchasing and economies in
business within the operation. Its primary purpose is to
meaning of this Code; 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
d)doing or proposing to do any business in substance clothing or oil and gas, rather than
equivalent to any of the merely protecting against the financial
foregoing in a manner loss caused by extraordinary and
designed to evade the unusual occurrences, such as death,
provisions of this Code. 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
In the application of the provisions of this Code, the fact features of the cooperative are the
that no profit is derived from the making rendering of service, its extension, the
of insurance contracts, agreements or bringing of physician and patient
transactions or that no separate or direct together, the preventive features, the

14
 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 there 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
15
meet that need. Unquestionably this is
'service' of a high order and not
'indemnity'. 26 (Emphasis supplied) EcDATH
American courts have pointed out that the main difference
between an HMO and an insurance company is that HMOs
undertake to provide or arrange for the provision of medical
services through participating physicians while insurance
companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. Somerset
Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield
of New Jersey 27 is clear on this point:
The basic distinction between medical service corporations
and ordinary health and accident insurers
is that the former undertake to provide
prepaid medical services through
participating physicians, thus relieving
subscribers of any further financial
burden, while the latter only undertake to
indemnify an insured for medical
expenses up to, but not beyond, the
schedule of rates contained in the policy.
AcSCaI
xxx xxx xxx
The primary purpose of a medical service corporation,
however, is an undertaking to provide
physicians who will render services to
subscribers on a prepaid basis. Hence, if
there are no physicians participating
in the medical service corporation's
plan, not only will the subscribers be
deprived of the protection which they
might reasonably have expected would
be provided, but the corporation will,
in effect, be doing business solely as a
health and accident indemnity insurer
without having qualified as such and
rendering itself subject to the more
stringent financial requirements of the
General Insurance Laws. . . .
A participating provider of health care services is one who
agrees in writing to render health care
services to or for persons covered by a
contract issued by health service
corporation in return for which the
health service corporation agrees to
make payment directly to the
participating provider. 28 (Emphasis
supplied)
Consequently, the mere presence of risk would be insufficient to
override the primary purpose of the business to provide medical specialized capabilities by the
services as needed, with payment made directly to the provider administrative agency charged with
of these services. 29 In short, even if petitioner assumes the risk of implementing a particular statute. In
Asturias Sugar Central, Inc. vs.
paying the cost of these services even if significantly more than
Commissioner of Customs, 35 the Court
what the member has prepaid, it nevertheless cannot be stressed that executive officials are
considered as being engaged in the insurance business. presumed to have familiarized
By the same token, any indemnification resulting from the themselves with all the considerations
payment for services rendered in case of emergency by non- pertinent to the meaning and purpose of
participating health providers would still be incidental to the law, and to have formed an
petitioner's purpose of providing and arranging for health care independent, conscientious and
services and does not transform it into an insurer. To fulfill its competent expert opinion thereon. The
courts give much weight to the
obligations to its members under the agreements, petitioner is
government agency officials charged with
required to set up a system and the facilities for the delivery of the implementation of the law, their
such medical services. This indubitably shows that competence, expertness, experience and
indemnification is not its sole object. informed judgment, and the fact that they
In fact, a substantial portion of petitioner's services covers frequently are the drafters of the law they
preventive and diagnostic medical services intended to keep interpret. 36
members from developing medical conditions or diseases. 30 As an
HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are designed
to prevent or to minimize the possibility of any assumption
of risk on its part. Thus, its undertaking under its agreements is
A HEALTH CARE AGREEMENT IS NOT AN
not to indemnify its members against any loss or damage arising
INSURANCE CONTRACT CONTEMPLATED
from a medical condition but, on the contrary, to provide the
UNDER SECTION 185 OF THE NIRC OF 1997
health and medical services needed to prevent such loss or
Section 185 states that DST is imposed on "all policies of
damage. 31
insurance . . . or obligations of the nature of indemnity for loss,
Overall, petitioner appears to provide insurance-type benefits to
damage, or liability. . . ." In our decision dated June 12, 2008, we
its members (with respect to its curative medical services), but
ruled that petitioner's health care agreements are contracts of
these are incidental to the principal activity of providing them
indemnity and are therefore insurance contracts:
medical care. The "insurance-like" aspect of petitioner's business It is . . . incorrect to say that the health care agreement is
is miniscule compared to its non-insurance activities. Therefore, not based on loss or damage because,
since it substantially provides health care services rather than under the said agreement, petitioner
insurance services, it cannot be considered as being in the assumes the liability and indemnifies its
insurance business. SAaTHc member for hospital, medical and related
It is important to emphasize that, in adopting the "principal expenses (such as professional fees of
purpose test" used in the above-quoted U.S. cases, we are not physicians). The term "loss or damage" is
broad enough to cover the monetary
saying that petitioner's operations are identical in every respect
expense or liability a member will incur in
to those of the HMOs or health providers which were parties to case of illness or injury. cSIHCA
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 Under the health care agreement, the rendition of hospital,
engaged in the insurance business. Moreover, we are also not medical and professional services to the
member in case of sickness, injury or
unmindful that there are other American authorities who have
emergency or his availment of so-called
found particular HMOs to be actually engaged in insurance "out-patient services" (including physical
activities. 32 examination, x-ray and laboratory tests,
Lastly, it is significant that petitioner, as an HMO, is not part of medical consultations, vaccine
the insurance industry. This is evident from the fact that it is not administration and family planning
supervised by the Insurance Commission but by the Department counseling) is the contingent event which
of Health. 33 In fact, in a letter dated September 3, 2000, the gives rise to liability on the part of the
Insurance Commissioner confirmed that petitioner is not member. In case of exposure of the
member to liability, he would be entitled
engaged in the insurance business. This determination of the
to indemnification by petitioner.
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 Furthermore, the fact that petitioner must relieve its
The rationale for this rule relates not only to the emergence member from liability by paying for
of the multifarious needs of a modern or expenses arising from the stipulated
modernizing society and the contingencies belies its claim that its
establishment of diverse administrative services are prepaid. The expenses to be
agencies for addressing and satisfying incurred by each member cannot be
those needs; it also relates to the predicted beforehand, if they can be
accumulation of experience and growth of predicted at all. Petitioner assumes the

16
 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), . . . (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. cEaSHC
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;
17
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 Revenue Law of 1904") 46 enacted on July 2, 1904 and became
rates. The member does not make any such payment. effective on August 1, 1904. Except for the rate of tax, Section 185
In other words, there is nothing in petitioner's agreements that of the NIRC of 1997 is a verbatim reproduction of the pertinent
gives rise to a monetary liability on the part of the member to any portion of Section 116, to wit:
third party-provider of medical services which might in turn ARTICLE XI
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 Stamp Taxes on Specified Objects
agreements. EScAHT Section 116.There shall be levied, collected, and paid for
Third. According to the agreement, a member can take advantage and in respect to the several bonds,
of the bulk of the benefits anytime, e.g., laboratory services, x-ray, debentures, or certificates of stock and
routine annual physical examination and consultations, vaccine indebtedness, and other documents,
administration as well as family planning counseling, even in the instruments, matters, and things
absence of any peril, loss or damage on his or her part. mentioned and described in this section,
or for or in respect to the vellum,
Fourth. In case of emergency, petitioner is obliged to reimburse
parchment, or paper upon which such
the member who receives care from a non-participating instrument, matters, or things or any of
physician or hospital. However, this is only a very minor part of them shall be written or printed by any
the list of services available. The assumption of the expense by person or persons who shall make, sign,
petitioner is not confined to the happening of a contingency but or issue the same, on and after January
includes incidents even in the absence of illness or injury. first, nineteen hundred and five, the
In Michigan Podiatric Medical Association v. National Foot Care several taxes following:
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 xxx xxx xxx
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, Third . . . (c) on all policies of insurance or bond or
obligation of the nature of indemnity
it is not necessarily true that risk alone is sufficient to establish it.
for loss, damage, or liability made or
Almost anyone who undertakes a contractual obligation always renewed by any person, association,
bears a certain degree of financial risk. Consequently, there is a company, or corporation transacting
need to distinguish prepaid service contracts (like those of the business of accident, fidelity,
petitioner) from the usual insurance contracts. employer's liability, plate glass, steam
Indeed, petitioner, as an HMO, undertakes a business risk when it boiler, burglar, elevator, automatic
offers to provide health services: the risk that it might fail to earn sprinkle, or other branch of insurance
a reasonable return on its investment. But it is not the risk of the (except life, marine, inland, and fire
insurance) . . . (Emphasis supplied) TSacCH
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 On February 27, 1914, Act No. 2339 (the Internal Revenue Law of
medical services to its members can be construed as an 1914) was enacted revising and consolidating the laws relating to
acceptance of the risk that it will shell out more than the prepaid internal revenue. The aforecited pertinent portion of Section 116,
fees, it still will not quality as an insurance contract because Article XI of Act No. 1189 was completely reproduced as Section
petitioner's objective is to provide medical services at reduced 30 (l), Article III of Act No. 2339. The very detailed and exclusive
cost, not to distribute risk like an insurer. enumeration of items subject to DST was thus retained.
In sum, an examination of petitioner's agreements with its On December 31, 1916, Section 30 (I), Article III of Act No. 2339
members leads us to conclude that it is not an insurance contract was again reproduced as Section 1604 (I), Article IV of Act No.
within the context of our Insurance Code. 2657 (Administrative Code). Upon its amendment on March 10,
THERE WAS NO LEGISLATIVE INTENT TO 1917, the pertinent DST provision became Section 1449 (l) of Act
IMPOSE DST ON HEALTH CARE No. 2711, otherwise known as the Administrative Code of 1917.
AGREEMENTS OF HMOs Section 1449 (1) eventually became Sec. 222 of Commonwealth
Furthermore, militating in convincing fashion against the Act No. 466 (the NIRC of 1939), which codified all the internal
imposition of DST on petitioner's health care agreements under revenue laws of the Philippines. In an amendment introduced by
Section 185 of the NIRC of 1997 is the provision's legislative RA 40 on October 1, 1946, the DST rate was increased but the
history. The text of Section 185 came into U.S. law as early as provision remained substantially the same.
1904 when HMOs and health care agreements were not even in Thereafter, on June 3, 1977, the same provision with the same
existence in this jurisdiction. It was imposed under Section 116, DST rate was reproduced in PD 1158 (NIRC of 1977) as Section
Article XI of Act No. 1189 (otherwise known as the "Internal 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and

18
October 10, 1984 respectively, the DST rate was again increased.
Effective January 1, 1986, pursuant to Section 45 of PD 1994,
Section 234 of the NIRC of 1977 was renumbered as Section 198.
And under Section 23 of EO 47 273 dated July 25, 1987, it was
again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was
amended but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of
1977 by RA 8424 (or the NIRC of 1997), the subject legal
provision was retained as the present Section 185. In 2004,
amendments to the DST provisions were introduced by RA 9243
48 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the
Philippines with the formation of Bancom Health Care
Corporation in 1974. The same pioneer HMO was later
reorganized and renamed Integrated Health Care Services, Inc.
(or Intercare). However, there are those who claim that Health
Maintenance, Inc. is the HMO industry pioneer, having set foot in
the Philippines as early as 1965 and having been formally
incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment
of more than 2 million. 49
We can clearly see from these two histories (of the DST on the
one hand and HMOs on the other) that when the law imposing
the DST was first passed, HMOs were yet unknown in the
Philippines. However, when the various amendments to the DST
law were enacted, they were already in existence in the
Philippines and the term had in fact already been defined by RA
7875. If it bad been the intent of the legislature to impose DST on
health care agreements, it could have done so in clear and
categorical terms. It had many opportunities to do so. But it did
not. The fact that the NIRC contained no specific provision on the
DST liability of health care agreements of HMOs at a time they
were already known as such, belies any legislative intent to
impose it on them. As a matter of fact, petitioner was assessed
its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO. 50
Considering that Section 185 did not change since 1904 (except
for the rate of tax), it would be safe to say that health care
agreements were never, at any time, recognized as insurance
contracts or deemed engaged in the business of insurance within
the context of the provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty
and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency who is to pay it. 51 So potent indeed is the power that
it was once opined that "the power to tax involves the power to
destroy". 52
Petitioner claims that the assessed DST to date which amounts to
P376 million 53 is way beyond its net worth of P259 million. 54
Respondent never disputed these assertions. Given the realities
on the ground, imposing the DST on petitioner would be highly
oppressive. It is not the purpose of the government to throttle
private business. On the contrary, the government ought to
encourage private enterprise. 55 Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a
legitimate business. 56 As aptly held in Roxas, et al. v. CTA, et al.: 57
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised
with caution to minimize injury to the
proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly,
lest the tax collector kill the "hen that lays
the golden egg". 58
19
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
academic 60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paid P5,127,149.08 representing 5% of its
net worth as of the year ended December 31, 2005 and complied
with all requirements of the tax amnesty. Under Section 6 (a) of
RA 9480, it is entitled to immunity from payment of taxes as well
as additions thereto, and the appurtenant civil, criminal or
administrative penalties under the 1997 NIRC, as amended,
arising from the failure to pay any and all internal revenue taxes
for taxable year 2005 and prior years. 61
Far from disagreeing with petitioner, respondent manifested in
its memorandum:
Section 6 of [RA 9840] provides that availment of tax
amnesty entitles a taxpayer to immunity
from payment of the tax involved,
including the civil, criminal, or
administrative penalties provided under
the 1997 [NIRC], for tax liabilities arising
in 2005 and the preceding years.
In view of 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. acIHDA
IS THE COURT BOUND BY A MINUTE
RESOLUTION IN ANOTHER CASE?
Petitioner raises another interesting issue in its motion for
reconsideration: whether this Court is bound by the ruling of the
CA 64 in CIR v. Philippine National Bank 65 that a health care
agreement of Philamcare Health Systems is not an insurance
contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001
minute resolution of this Court dismissing the appeal in
Philippine National Bank (G.R. No. 148680). 66 Petitioner argues
that the dismissal of G.R. No. 148680 by minute resolution was a
judgment on the merits; hence, the Court should apply the CA
ruling there that a health care agreement is not an insurance
contract.
It is true that, although contained in a minute resolution, our
dismissal of the petition was a disposition of the merits of the
case. When we dismissed the petition, we effectively affirmed the
CA ruling being questioned. As a result, our ruling in that case has
already become final. 67 When a minute resolution denies or
dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together with
its findings of fact and legal conclusions, are deemed sustained. 68
But what is its effect on other cases?
With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res judicata. 69
However, if other parties or another subject matter (even with
the same parties and issues) is involved, the minute resolution is
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. IESTcD
No costs.
SO ORDERED.
||| (Philippine Health Care Providers, Inc. v. Commissioner of

not binding precedent. Thus, in CIR v. Baier-Nickel, 70 the Court Internal Revenue, G.R. No. 167330 (Resolution), [September 18,
noted that a previous case, CIR v. Baier-Nickel 71 involving the 2009], 616 PHIL 387-423)
same parties and the same issues, was previously disposed of
by the Court thru a minute resolution dated February 17, 2003
sustaining the ruling of the CA. Nonetheless, the Court ruled that
the previous case "ha(d) no bearing" on the latter case because
the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years. 72
Besides, there are substantial, not simply formal, distinctions
between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII
of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly
applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the
justices, unlike a decision. It does not require the certification of
the Chief Justice. Moreover, unlike decisions, minute resolutions
are not published in the Philippine Reports. Finally, the proviso of
Section 4 (3) of Article VIII speaks of a decision. 73 Indeed, as a
rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice. cEATSI
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

20
 [G.R. No. 141658. March 18, 2005.] not liable to tax as money
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE lenders or real estate
PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, brokers for making or
negotiating loans secured
INC., THE PHILIPPINE AMERICAN ASSURANCE COMPANY,
by real property. (Ruling,
INC., and THE PHILIPPINE AMERICAN GENERAL INSURANCE February 28, 1920; BIR
CO., INC., respondents. 135.2)" (The Internal
DECISION Revenue Law, Annotated,
CARPIO, J p: 2nd ed., 1929, by B.L. Meer,
The Case page 143)
Before the Court is a petition for review 1 assailing the Decision 2
of 7 January 2000 of the Court of Appeals in CA-G.R. SP No.
36816. The Court of Appeals affirmed the Decision 3 of 5 January
1995 of the Court of Tax Appeals ("CTA") in CTA Cases Nos. 2514,
2515 and 2516. The CTA ordered the Commissioner of Internal The same rule has been applied to banks.
Revenue ("petitioner") to refund a total of P29,575.02 to
respondent companies ("respondents").
Antecedent Facts
Respondents are domestic corporations licensed to transact
insurance business in the country. From August 1971 to
September 1972, respondents paid the Bureau of Internal "For making investments on salary loans, banks will not be
Revenue under protest the 3% tax imposed on lending investors required to pay the money
lender's tax imposed by this
by Section 195-A 4 of Commonwealth Act No. 466 ("CA 466"), as
subsection, for the reason
amended by Republic Act No. 6110 ("RA 6110") and other laws. that money lending is
CA 466 was the National Internal Revenue Code ("NIRC") considered a mere incident
applicable at the time. aDcEIH of the banking business.
Respondents paid the following amounts: P7,985.25 from [See Ruling No. 43, (October
Philippine American ("PHILAM") Accident Insurance Company; 8, 1926) 25 Off. Gaz. 1326)"
P7,047.80 from PHILAM Assurance Company; and P14,541.97 (The Internal Revenue Law,
from PHILAM General Insurance Company. These amounts Annotated, id.).
represented 3% of each company's interest income from
mortgage and other loans. Respondents also paid the taxes
required of insurance companies under CA 466.
On 31 January 1973, respondents sent a letter-claim to petitioner
seeking a refund of the taxes paid under protest. When The term "money lenders" was later changed to "lending
respondents did not receive a response, each respondent filed on investors" but the definition of the term
26 April 1973 a petition for review with the CTA. These three remains the same. [Sec. 1464(x), Rev.
petitions, which were later consolidated, argued that respondents Adm. Code, as finally amended by Com.
were not lending investors and as such were not subject to the Act No. 215, and Sec. 1465(v) of the same
Code, as finally amended by Act No. 3963]
3% lending investors' tax under Section 195-A.
The same law is embodied in the present
The CTA archived respondents' case for several years while National Internal Revenue Code (Com. Act
another case with a similar issue was pending before the higher No. 466) without change, except in the
courts. When respondents' case was reinstated, the CTA ruled amount of the tax. [See Secs.
that respondents were entitled to their refund. 182(A)(3)(dd) and 194(u), National
The Ruling of the Court of Tax Appeals Internal Revenue Code.] jur2005cda
The CTA held that respondents are not taxable as lending
investors because the term "lending investors" does not embrace
insurance companies. The CTA traced the history of the tax on
lending investors, as follows:
Originally, a person who was engaged in lending money at
It is a well-settled rule that an administrative interpretation
interest was taxed as a money lender.
of a law which has been followed and
[Sec. 1464(x), Rev. Adm. Code] The term
applied for a long time, and thereafter the
money lenders was defined as including
law is re-enacted without substantial
"all persons who make a practice of
change, such administrative
lending money for themselves or others at
interpretation is deemed to have received
interest." [Sec. 1465(v), id.] Under this
legislative approval. In short, the
law, an insurance company was not
administrative interpretation becomes
considered a money lender and was not
part of the law as it is presumed to carry
taxable as such. To quote from an old BIR
out the legislative purpose. 5
Ruling:

"The lending of money at interest by insurance companies

constitutes a necessary
incident of their regular
business. For this reason,
insurance companies are
21
The CTA held that the practice of lending money at interest is
part of the insurance business. CA 466 already taxes the
insurance business. The CTA pointed out that the law recognizes
and even regulates this practice of lending money by insurance
companies.
The CTA observed that CA 466 also treated differently insurance
companies from lending investors in regard to fixed taxes. Under
Section 182(A)(3)(gg), insurance companies were subject to the
same fixed tax as banks and finance companies. The CTA
reasoned that insurance companies were grouped with banks
and finance companies because the latter's lending activities
were also integral to their business. In contrast, lending investors
were taxed at a different fixed tax under Section 182(A)(3)(dd) of
CA 466. The CTA stated that "insurance companies . . . had never
been required by respondent [CIR] to pay the fixed tax imposed
on lending investors . . ." 6
The dispositive portion of the Decision of 5 January 1995 of the
Court of Tax Appeals ("CTA Decision") reads:
WHEREFORE, premises considered, petitioners Philippine
American Accident Insurance Co.,
Philippine American Assurance Co., and
Philippine American General Insurance
Co., Inc. are not taxable on their lending
transactions independently of their
insurance business. Accordingly,
respondent is hereby ordered to refund to
petitioner[s] the sum of P7,985.25,
P7,047.80 and P14,541.97 in CTA Cases
No. 2514, 2515 and 2516, respectively
representing the fixed and percentage
taxes when (sic) paid by petitioners as
lending investor from August 1971 to
September 1972.
No pronouncement as to cost. EDATSC
SO ORDERED. 7
Dissatisfied, petitioner elevated the matter to the Court of
Appeals. 8
The Ruling of the Court of Appeals
The Court of Appeals ruled that respondents are not taxable as
lending investors. In its Decision of 7 January 2000 ("CA
Decision"), the Court of Appeals affirmed the ruling of the CTA,
thus:
WHEREFORE, premises considered, the petition is
DISMISSED, hereby AFFIRMING the
decision, dated January 5, 1995, of the
Court of Tax Appeals in CTA Cases Nos.
2514, 2515 and 2516.
WHETHER RESPONDENT INSURANCE COMPANIES ARE
SUBJECT TO THE 3% PERCENTAGE TAX
AS LENDING INVESTORS UNDER
SECTIONS 182(A)(3)(DD) AND 195-A,
RESPECTIVELY IN RELATION TO
SECTION 194(U), ALL OF THE NIRC. 10
The Ruling of the Court
The petition lacks merit.
On the Additional Issue Raised by Petitioner
Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on
lending investors, depending on their location. 11 The sole
question before the CTA was whether respondents were subject
to the percentage tax on lending investors under Section 195-A.
Petitioner raised for the first time the issue of the fixed tax in the
Petition for Review 12 petitioner filed before the Court of Appeals.
Ordinarily, a party cannot raise for the first time on appeal an
issue not raised in the trial court. 13 The Court of Appeals should
not have taken cognizance of the issue on respondents' supposed
liability under Section 182(A)(3)(dd). However, we cannot
entirely fault the Court of Appeals or petitioner. Even if the
percentage tax on lending investors was the sole issue before it,
the CTA ordered petitioner to refund to the PHILAM companies
"the fixed and percentage taxes [t]hen paid by petitioners as
lending investor." 14 Although the amounts for refund consisted
only of what respondents paid as percentage taxes, the CTA
Decision also ordered the refund to respondents of the fixed tax
on lending investors. Respondents in their pleadings deny any
liability under Section 182(A)(3)(dd), on the same ground that
they are not lending investors.
The question of whether respondents should pay the fixed tax
under Section 182(A)(3)(dd) revolves around the same issue of
whether respondents are taxable as lending investors. In similar
circumstances, the Court has held that an appellate court may
consider an unassigned error if it is closely related to an error
that was properly assigned. 15 This rule properly applies to the
present case. Thus, we shall consider and rule on the issue of
whether respondents are subject to the fixed tax under Section
182(A)(3)(dd).
Whether Insurance Companies are
Taxable as Lending Investors
Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section
194(u) of CA 466, petitioner argues that insurance companies are
subject to two fixed taxes and two percentage taxes. Petitioner
alleges that:
As a lending investor, an insurance company is subject to
an annual fixed tax of P500.00 and
another P500.00 under Section 182
(A)(3)(dd) and (gg) of the Tax Code. As an
underwriter, an insurance company is
subject to the 3% tax of the total
premiums collected and another 3% on
the gross receipts as a lending investor
under Sections 255 and 195-A,
respectively of the same Code. . . . 16

SO ORDERED. 9

Petitioner also contends that the refund granted to respondents

is in the nature of a tax exemption, and cannot be allowed unless
Petitioner appealed the CA Decision to this Court. granted explicitly and categorically.
The Issues The rule that tax exemptions should be construed strictly against
Petitioner raises the sole issue: the taxpayer presupposes that the taxpayer is clearly subject to

22
the tax being levied against him. Unless a statute imposes a tax Section 195-A of CA 466 provides:
clearly, expressly and unambiguously, what applies is the equally Sec. 195-A. Percentage tax on dealers in securities; lending
well-settled rule that the imposition of a tax cannot be presumed. investors. — Dealers in securities and
17 Where there is doubt, tax laws must be construed strictly
lending investors shall pay a tax
equivalent to three per centum on their
against the government and in favor of the taxpayer. 18 This is
gross income.
because taxes are burdens on the taxpayer, and should not be
unduly imposed or presumed beyond what the statutes expressly
and clearly import. 19

Section 182(A)(3)(dd) of CA 466 also provides:
Sec. 182. Fixed taxes. — (A) On business . . .
xxx xxx xxx
(3) Other fixed taxes. — The following fixed taxes shall be
collected as follows, the amount stated
being for the whole year, when not
otherwise specified;
xxx xxx xxx
Neither Section 182(A)(3)(dd) nor Section 195-A mentions
insurance companies. Section 182(A)(3)(dd) provides for the
taxation of lending investors in different localities. Section 195-A
refers to dealers in securities and lending investors. The burden
is thus on petitioner to show that insurance companies are
lending investors for purposes of taxation.
In this case, petitioner does not dispute that respondents are in
the insurance business. Petitioner merely alleges that the
definition of lending investors under CA 466 is broad enough to
encompass insurance companies. Petitioner insists that because
of Section 194(u), the two principal activities of the insurance
business, namely, underwriting and investment, are separately
taxable. 20
Section 194(u) of CA 466 states:
(u) "Lending investor" includes all persons who make a
practice of lending money for themselves
or others at interest.

(dd) Lending investors —

xxx xxx xxx

As can be seen, Section 194(u) does not tax the practice of

1. In chartered cities and first class municipalities, five lending per se. It merely defines what lending investors are. The
hundred
question is whether the lending activities of insurance companies
pesos;
make them lending investors for purposes of taxation.
We agree with the CTA and Court of Appeals that it does not.
Insurance companies cannot be considered lending investors
under CA 466, as amended.
Definition of Lending
2. In second and third class municipalities, two hundred Investors under CA 466 Does
and fifty Not Include Insurance
pesos; Companies.
The definition in Section 194(u) of CA 466 is not broad enough to
include the business of insurance companies. The Insurance Code
of 1978 21 is very clear on what constitutes an insurance
company. It provides that an insurer or insurance company "shall
3. In fourth and fifth class municipalities and municipal include all individuals, partnerships, associations or corporations
districts, one . . . engaged as principals in the insurance business, excepting
hundred and mutual benefit associations." 22 More specifically, respondents fall
twenty-five under the category of insurance corporations as defined in
pesos; Section 185 of the Insurance Code, thus:
Provided, SECTION 185. Corporations formed or organized to save
That lending any person or persons or other
investors corporations harmless from loss, damage,
who do or liability arising from any unknown or
business as future or contingent event, or to
such in more indemnify or to compensate any person
than one or persons or other corporations for any
province shall such loss, damage, or liability, or to
pay a tax of guarantee the performance of or
five hundred compliance with contractual obligations
pesos. or the payment of debts of others shall be
known as "insurance corporations."

23
Plainly, insurance companies and lending investors are different Section 182(A)(3) of CA 466 accorded different tax treatments to
enterprises in the eyes of the law. Lending investors cannot, for a lending investors and insurance companies. The relevant
consideration, hold anyone harmless from loss, damage or portions of Section 182 state:
liability, nor provide compensation or indemnity for loss. The Sec. 182. Fixed taxes. — (A) On business . . .
underwriting of risks is the prerogative of insurers, the great
majority of which are incorporated insurance companies 23 like
respondents.
Granting of Mortgage and
other Loans are Investment (3) Other fixed taxes. — The following fixed taxes shall be
Practices that are Part of the collected as follows, the amount stated
Insurance Business. being for the whole year, when not
True, respondents granted mortgage and other kinds of loans. otherwise specified;
However, this was not done independently of respondents'
insurance business. The granting of certain loans is one of several
means of investment allowed to insurance companies. No less
than the Insurance Code mandates and regulates this practice. 24
Unlike the practice of lending investors, the lending activities of
xxx xxx xxx
insurance companies are circumscribed and strictly regulated by
the State. Insurance companies cannot freely lend to "themselves
(dd) Lending investors —
or others" as lending investors can, 25 nor can insurance
companies grant simply any kind of loan. Even prior to 1978, the
Insurance Code prescribed strict rules for the granting of loans by
insurance companies. 26 These provisions on mortgage, collateral
and policy loans were reiterated in the Insurance Code of 1978
and are still in force today. 1. In chartered cities and first class municipalities, five
Petitioner concedes that respondents' investment practices are hundred
as much a part of the insurance business as the task of pesos;
underwriting. Nevertheless, petitioner argues that such
investment practices are separately taxable under CA 466.
The CTA and the Court of Appeals found that the investment of
premiums and other funds received by respondents — through
the granting of mortgage and other loans — was necessary to 2. In second and third class municipalities, two hundred
respondents' business and hence, should not be taxed separately. and fifty
Insurance companies are required by law to possess and pesos;
maintain substantial legal reserves to meet their obligations to
policyholders. 27 This obviously cannot be accomplished through
the collection of premiums alone, as the legal reserves and capital
and surplus insurance companies are obligated to maintain run
into millions of pesos. As such, the creation of "investment 3. In fourth and fifth class municipalities and municipal
income" has long been held to be generally, if not necessarily, districts, one
essential to the business of insurance. 28 hundred and
The creation of investment income in the manner sanctioned by twenty-five
the laws on insurance is thus part of the business of insurance, pesos;
and the fruits of these investments are essentially income from Provided,
the insurance business. This is particularly true if the invested That lending
investors
assets are held either as reserved funds to provide for policy
who do
obligations or as capital and surplus to provide an extra margin business as
of safety which will be attractive to insurance buyers. 29 such in more
The Court has also held that when a company is taxed on its main than one
business, it is no longer taxable further for engaging in an activity province shall
or work which is merely a part of, incidental to and is necessary pay a tax of
to its main business. 30 Respondents already paid percentage and five hundred
fixed taxes on their insurance business. To require them to pay pesos.
percentage and fixed taxes again for an activity which is
necessarily a part of the same business, the law must expressly
require such additional payment of tax. There is, however, no
provision of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require xxx xxx xxx
insurance companies to pay double percentage and fixed taxes.
They merely tax lending investors, not lending activities. (gg) Banks, insurance companies, finance and investment
Respondents were not transformed into lending investors by the companies doing business in the
mere fact that they granted loans, as these investments were part Philippines and franchise grantees, five
of, incidental and necessary to their insurance business. hundred pesos.
Different Tax Treatment of
Insurance Companies and
Lending Investors.

24
 xxx xxx xxx (Emphasis supplied.)
The separate provisions on lending investors and insurance
companies demonstrate an intention to treat these businesses
differently. If Congress intended insurance companies to be taxed
as lending investors, there would be no need for Section
182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient.
That insurance companies were included with banks, finance and
investment companies also supports the CTA's conclusion that
insurance companies had more in common with the latter
enterprises than with lending investors. As the CTA pointed out,
banks also regularly lend money at interest, but are not taxable as
lending investors.
We find no merit in petitioner's contention that Congress
intended to subject respondents to two percentage taxes and two
fixed taxes. Petitioner's argument goes against the doctrine of
strict interpretation of tax impositions.
Petitioner's argument is likewise not in accord with existing
jurisprudence. In Commissioner of Internal Revenue v. Michel J.
Lhuillier Pawnshop, Inc., 31 the Court ruled that the different tax
treatment accorded to pawnshops and lending investors in the
NIRC of 1977 and the NIRC of 1986 showed "the intent of
Congress to deal with both subjects differently." The same
reasoning applies squarely to the present case.
Even the current tax law does not treat insurance companies as
lending investors. Under Section 108(A) 32 of the NIRC of 1997,
lending investors and non-life insurance companies, except for
their crop insurances, are subject to value-added tax ("VAT"). Life
insurance companies are exempt from VAT, but are subject to
percentage tax under Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466
failed to mention insurance companies already implies the
latter's exclusion from the coverage of these provisions. When a
statute enumerates the things upon which it is to operate,
everything else by implication must be excluded from its
operation and effect. 33
Definition of Lending
Investors in CA 466 is Not
New.
Petitioner does not dispute that it issued a ruling in 1920 to the
effect that the lending of money at interest was a necessary
incident of the insurance business, and that insurance companies
were thus not subject to the tax on money lenders. Petitioner
argues only that the 1920 ruling does not apply to the instant
case because RA 6110 introduced the definition of lending
investors to CA 466 only in 1969.
The subject definition was actually introduced much earlier, at a
time when lending investors were still referred to as money
lenders. Sections 45 and 46 of the Internal Revenue Law of 1914
34 ("1914 Tax Code") state:
SECTION 45. Amount of Tax on Business. — Fixed taxes on
business shall be collected as follows, the
amount stated being for the whole year,
when not otherwise specified:
xxx xxx xxx
(x) Money lenders, eighty pesos;
25
xxx xxx xxx
SECTION 46. Words and Phrases Defined. — In applying the
provisions of the preceding section words
and phrases shall be taken in the sense
and extension indicated below:
xxx xxx xxx
"Money lender" includes all persons who make a practice of
lending money for themselves or others at
interest. (Emphasis supplied)
As can be seen, the definitions of "money lender" under the 1914
Tax Code and "lending investor" under CA 466 are identical. The
term "money lender" was merely changed to "lending investor"
when Act No. 3963 amended the Revised Administrative Code in
1932. 35 This same definition of lending investor has since
appeared in Section 194(u) of CA 466 and later tax laws.
Note that insurance companies were not included among the
businesses subject to an annual fixed tax under the 1914 Tax
Code. 36 That Congress later saw the need to introduce Section
182(A)(3)(gg) in CA 466 bolsters our view that there was no
legislative intent to tax insurance companies as lending investors.
If insurance companies were already taxed as lending investors,
there would have been no need for a separate provision
specifically requiring insurance companies to pay fixed taxes.
The Court Accords Great
Weight to the Factual Findings
of the CTA.
Dedicated exclusively to the study and consideration of tax
problems, the CTA has necessarily developed an expertise in the
subject of taxation that this Court has recognized time and again.
For this reason, the findings of fact of the CTA, particularly when
affirmed by the Court of Appeals, are generally conclusive on this
Court absent grave abuse of discretion or palpable error, 37 which
are not present in this case.
WHEREFORE, we DENY the instant petition and AFFIRM the
Decision of 7 January 2000 of the Court of Appeals in CA-G.R. SP
No. 36816.
SO ORDERED.
||| (CIR v. Philippine American Accident Insurance Co., Inc., G.R. No.
141658, [March 18, 2005], 493 PHIL 785-803)
 [G.R. No. 185565. November 26, 2014.]
LOADSTAR SHIPPING COMPANY, INCORPORATED and
LOADSTAR INTERNATIONAL SHIPPING COMPANY,
INCORPORATED, petitioners, vs. MALAYAN INSURANCE
COMPANY, INCORPORATED, respondent.
DECISION
REYES, J p:
This is a Petition for Review on Certiorari 1 filed by Loadstar
Shipping Company, Incorporated and Loadstar International
Shipping Company, Incorporated (petitioners) against Malayan
Insurance Company, Incorporated (Malayan) seeking to set aside
the Decision 2 dated April 14, 2008 and Resolution 3 dated
December 11, 2008 of the Court of Appeals (CA) in CA-G.R. CV No.
82758, which reversed and set aside the Decision 4 dated March
31, 2004 of the Regional Trial Court of Manila, Branch 34, in Civil
Case No. 01-101885.
The facts as found by the CA, are as follows:
Loadstar International Shipping, Inc. (Loadstar Shipping)
and Philippine Associated Smelting and
Refining Corporation (PASAR) entered
into a Contract of Affreightment for
domestic bulk transport of the latter's
copper concentrates for a period of one
year from November 1, 1998 to October
31, 1999. The contract was extended up
to the end of October 2000.
On September 10, 2000, 5,065.47 wet metric tons (WMT) of
copper concentrates were loaded in Cargo
Hold. Nos. 1 and 2 of MV "Bobcat", a
marine vessel owned by Loadstar
International Shipping Co., Inc. (Loadstar
International) and operated by Loadstar
Shipping under a charter party
agreement. The shipper and consignee
under the Bill of Lading are Philex Mining
Corporation (Philex) and PASAR,
respectively. The cargo was insured with
Malayan Insurance Company, Inc.
(Malayan) under Open Policy No.
M/OP/2000/001-582. P & I Association is
the third party liability insurer of
Loadstar Shipping.
On said date (September 10, 2000), MV "Bobcat" sailed
from Poro Point, San Fernando, La Union
bound for Isabel, Leyte. On September 12,
2000, while in the vicinity of Cresta de
Gallo, the vessel's chief officer on routine
inspection found a crack on starboard
side of the main deck which caused
seawater to enter and wet the cargo
inside Cargo Hold No. 2 forward/aft. The
cracks at the top deck starboard side of
Cargo Hold No. 2, measuring 1.21 meters
long x 0.39 meters wide, and at top deck
aft section starboard side on other point,
measuring 0.82 meters long x 0.32 meters
wide, were welded.
26
Immediately after the vessel arrived at Isabel, Leyte
anchorage area, on September 13, 2000,
PASAR and Philex's representatives
boarded and inspected the vessel and
undertook sampling of the copper
concentrates. In its preliminary report
dated September 15, 2000, the Elite
Adjusters and Surveyor, Inc. (Elite
Surveyor) confirmed that samples of
copper concentrates from Cargo Hold No.
2 were contaminated by seawater.
Consequently, PASAR rejected 750 MT of
the 2,300 MT cargo discharged from
Cargo Hold No. 2.
On November 6, 2000, PASAR sent a formal notice of claim
in the amount of [P]37,477,361.31 to
Loadstar Shipping. In its final report
dated November 16, 2000, Elite Surveyor
recommended payment to the assured the
amount of [P]32,351,102.32 as adjusted.
On the basis of such recommendation,
Malayan paid PASAR the amount of
[P]32,351,102.32. TAcSCH
Meanwhile, on November 24, 2000, Malayan wrote
Loadstar Shipping informing the latter of
a prospective buyer for the damaged
copper concentrates and the opportunity
to nominate/refer other salvage buyers to
PASAR. On November 29, 2000, Malayan
wrote Loadstar Shipping informing the
latter of the acceptance of PASAR's
proposal to take the damaged copper
concentrates at a residual value of
US$90,000.00. On December 9, 2000,
Loadstar Shipping wrote Malayan
requesting for the reversal of its decision
to accept PASAR's proposal and the
conduct of a public bidding to allow
Loadstar Shipping to match or top
PASAR's bid by 10%.
On January 23, 2001, PASAR signed a subrogation receipt in
favor of Malayan. To recover the amount
paid and in the exercise of its right of
subrogation, Malayan demanded
reimbursement from Loadstar Shipping,
which refused to comply. Consequently,
on September 19, 2001, Malayan
instituted with the RTC a complaint for
damages. The complaint was later
amended to include Loadstar
International as party defendant.
In its amended complaint, Malayan mainly alleged that as a
direct and natural consequence of the
unseaworthiness of the vessel, PASAR
 suffered loss of the cargo. It prayed for the
amount of [P]33,934,948.75, representing
actual damages plus legal interest from
date of filing of the complaint until fully
paid, and attorney's fees in the amount of
not less than [P]500,000.00. It also sought
to declare the bill of lading as void since it
violates the provisions of Articles 1734
and 1745 of the Civil Code.
On October 30, 2002, Loadstar Shipping and Loadstar
International filed their answer with
counterclaim, denying plaintiff-
appellant's allegations and averring as
follows: that they are not engaged in the
business as common carriers but as
private carriers; that the vessel was
seaworthy and defendants-appellees
exercised the required diligence under
the law; that the entry of water into Cargo
Hold No. 2 must have been caused by
force majeure or heavy weather; that due
to the inherent nature of the cargo and
the use of water in its production process,
the same cannot be considered damaged
or contaminated; that defendants-
appellees were denied reasonable
opportunity to participate in the salvage
sale; that the claim had prescribed in
accordance with the bill of lading
provisions and the Code of Commerce;
that plaintiff-appellant's claim is
excessive, grossly overstated,
unreasonable and unsubstantiated; that
their liability, if any, should not exceed
the CIF value of the lost/damaged cargo
as set forth in the bill of lading, charter
party or customary rules of trade; and
that the arbitration clause in the contract
of affreightment should be followed.
After trial, and considering that the bill of lading, which was
marked as Exhibit "B", is unreadable, the
RTC issued on February 17, 2004 an
order directing the counsel for Malayan to
furnish it with a clearer copy of the same
within three (3) days from receipt of the
order. On February 23, 2004, Malayan
filed a compliance attaching thereto copy
of the bill of lading.
On March 31, 2004, the RTC rendered a judgment
dismissing the complaint as well as the
counterclaim. The RTC was convinced
that the vessel was seaworthy at the time
of loading and that the damage was
attributable to the perils of the sea
(natural disaster) and not due to the fault
or negligence of Loadstar Shipping.
27
The RTC found that although contaminated by seawater,
the copper concentrates can still be used.
It gave credence to the testimony of
Francisco Esguerra, defendants-appellees'
expert witness, that despite high chlorine
content, the copper concentrates remain
intact and will not lose their value. The
gold and silver remain with the
grains/concentrates even if soaked with
seawater and does not melt. The RTC
observed that the purchase agreement
between PASAR and Philex contains a
penalty clause and has no rejection clause.
Despite this agreement, the parties failed
to sit down and assess the penalty.
The RTC also found that defendants-appellees were not
afforded the opportunity to object or
participate or nominate a participant in
the sale of the contaminated copper
concentrates to lessen the damages to be
paid. No record was presented to show
that a public bidding was conducted.
Malayan sold the contaminated copper
concentrates to PASAR at a low price then
paid PASAR the total value of the
damaged concentrate without deducting
anything from the claim.
Finally, the RTC denied the prayer to declare the Bill of
Lading null and void for lack of basis
because what was attached to Malayan's
compliance was still an unreadable
machine copy thereof. 5 (Citations
omitted)
Ruling of the CA
On April 14, 2008, the CA rendered its Decision, 6 the dispositive
portion of which reads:
WHEREFORE, the appeal is GRANTED. The Decision dated
March 31, 2004 of the RTC, Branch 34,
Manila in Civil Case No. 01-101885, is
REVERSED and SET ASIDE. In lieu
thereof, a new judgment is entered,
ORDERINGdefendants-appellees to pay
plaintiff-appellant P33,934,948.75 as
actual damages, plus legal interest at 6%
annually from the date of the trial court's
decision. Upon the finality of the decision,
the total amount of the judgment shall
earn annual interest at 12% until full
payment.
SO ORDERED. 7
On December 11, 2008, the CA modified the above decision
through a Resolution, 8 the fallo thereof states:
WHEREFORE, the Motion for Reconsideration is PARTLY GRANTED. The
decision of this Court dated April 14, 2008 is PARTIALLY
RECONSIDERED and MODIFIED. Defendants-appellees are ORDERED to REVERSIBLE ERROR IN RULING THAT
pay to plaintiff-appellant P33,934,948.74 as actual damages, less RESPONDENT'S PAYMENT TO PASAR, ON
US$90,000.00, computed at the exchange rate prevailing on November THE BASIS OF THE LATTER'S
29, 2000, plus legal interest at 6% annually from the date of the trial FRAUDULENT CLAIM, ENTITLED
court's decision. Upon the finality of the decision, the total amount of the RESPONDENT AUTOMATIC RIGHT OF
judgment shall earn annual interest at 12% until full payment. RECOVERY BY VIRTUE OF
SO ORDERED. 9 SUBROGATION. 13
The CA discussed that the amount of US$90,000.00 should have
been deducted from Malayan's claim against the petitioners in
order to prevent undue enrichment on the part of Malayan.
Otherwise, Malayan would recover from the petitioners not
merely the entire amount of P33,934,948.74 as actual damages,
Ruling of the Court
but would also end up unjustly enriching itself in the amount of
I. Proof of actual damages
US$90,000.00 — the residual value of the subject copper
concentrates it sold to Philippine Associated Smelting and
Refining Corporation (PASAR) on November 29, 2000. 10 It is not disputed that the copper concentrates carried by M/V
Issues Bobcat from Poro Point, La Union to Isabel, Leyte were indeed
In sum, the grounds presented by the petitioners for the Court's contaminated with seawater. The issue lies on whether such
consideration are the following: contamination resulted to damage, and the costs thereof, if any,
I. incurred by the insured PASAR.
The petitioners argued that the copper concentrates, despite
being dampened with seawater, is neither subject to penalty nor
rejection. Under the Philex Mining Corporation (Philex)-PASAR
Purchase Contract Agreement, there is no rejection clause.
Instead, there is a pre-agreed formula for the imposition of
penalty in case other elements exceeding the provided minimum
THE [CA] HAS NO BASIS IN REVERSING THE DECISION OF level would be found on the concentrates. 14 Since the chlorine
THE TRIAL COURT. THERE IS NOTHING content on the copper concentrates is still below the minimum
IN THE DECISION OF THE HONORABLE
level provided under the Philex-PASAR purchase contract, no
COURT THAT REVERSED THE FACTUAL
FINDINGS AND CONCLUSIONS OF THE penalty may be imposed against the petitioners. 15
TRIAL COURT, THAT THERE WAS NO Malayan opposed the petitioners' invocation of the Philex-PASAR
ACTUAL LOSS OR DAMAGE TO THE purchase agreement, stating that the contract involved in this
CARGO OF COPPER CONCENTRATES case is a contract of affreightment between the petitioners and
WHICH WOULD MAKE LOADSTAR AS PASAR, not the agreement between Philex and PASAR, which was
THE SHIPOWNER LIABLE FOR A CARGO a contract for the sale of copper concentrates. 16
CLAIM. CONSEQUENTLY, THERE IS NO On this score, the Court agrees with Malayan that contrary to the
BASIS FOR THE COURT TO ORDER
trial court's disquisition, the petitioners cannot validly invoke the
LOADSTAR TO PAY ACTUAL DAMAGES IN
THE AMOUNT OF PHP33 MILLION. 11 penalty clause under the Philex-PASAR purchase agreement,
where penalties are to be imposed by the buyer PASAR against
the seller Philex if some elements exceeding the agreed
limitations are found on the copper concentrates upon delivery.
The petitioners are not privy to the contract of sale of the copper
concentrates. The contract between PASAR and the petitioners is
II. a contract of carriage of goods and not a contract of sale.
Therefore, the petitioners and PASAR are bound by the laws on
transportation of goods and their contract of affreightment. Since
the Contract of Affreightment 17 between the petitioners and
PASAR is silent as regards the computation of damages, whereas
the bill of lading presented before the trial court is
M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE
undecipherable, the New Civil Code and the Code of Commerce
COURT HAD NO BASIS IN RULING THAT shall govern the contract between the parties.
IT IS A COMMON CARRIER. THE Malayan paid PASAR the amount of P32,351,102.32 covering the
DECISION OF THE TRIAL COURT IS latter's claim of damage to the cargo. 18 This is based on the
BEREFT OF ANY CATEGORICAL FINDING recommendation of Elite Adjustors and Surveyors, Inc. (Elite)
THAT M/V BOBCAT IS A COMMON which both Malayan and PASAR agreed to. The computation of
CARRIER. 12 Elite is presented as follows:
Computation of Loss Payable. We computed for the
insured value of the loss and loss payable,
based on the following pertinent data:

III.

1) Total quantity shipped - 5,065.47

and at risk
(Risk Note and B/L) 4,568.907

THE HONORABLE COURT OF APPEALS COMMITTED A 2) Total sum insured - [P]212,0

28
 (Risk Note and Endorsement)
3) Quantity damaged:
(Pasar Laboratory Cert. &
discharge & sampling Cert.
dated September 21, 2000)
Computation:
Total sum insured, x Qty. damaged
Total Qty. in DMT (DMT)
[P]212,032,203.77 x 696.336 DMT
4,568.907 DMT
Insured value of damage
Based on the preceding computation, the sum of P32,315,312.32
represents damages for the total loss of that portion of the cargo
which were contaminated with seawater and not merely the
depreciation in its value. Strangely though, after claiming
damages for the total loss of that portion, PASAR bought back the
contaminated copper concentrates from Malayan at the price of
US$90,000.00. The fact of repurchase is enough to conclude that
the contamination of the copper concentrates cannot be
considered as total loss on the part of PASAR.
The following provisions of the Code of Commerce state how
damages on goods delivered by the carrier should be appraised:
Article 361. The merchandise shall be transported at the
risk and venture of the shipper, if the
contrary has not been expressly
stipulated. As a consequence, all the
losses and deteriorations which the goods
may suffer during the transportation by
reason of fortuitous event, force majeure,
or the inherent nature and defect of the
goods, shall be for the account and risk of
the shipper. Proof of these accidents is
incumbent upon the carrier. cSaCDT
Article 362. Nevertheless, the carrier shall be liable for the
losses and damages resulting from the
causes mentioned in the preceding article
if it is proved, as against him, that they
arose through his negligence or by reason
of his having failed to take the
precautions which usage has established
among careful persons, unless the shipper
has committed fraud in the bill of lading,
representing the goods to be of a kind or
quality different from what they really
were.
If, notwithstanding the precautions referred to in this
article, the goods transported run the risk
of being lost, on account of their nature or
by reason of unavoidable accident, there
being no time for their owners to dispose
of them, the carrier may proceed to sell
them, placing them for this purpose at the
disposal of the judicial authority or of the
officials designated by special provisions.
xxx xxx xxx
777.290 wet metric
Article 364.tons
If the effect of the damage referred to in Article
or is merely a diminution in the value of
361
696.336 dry metric tons the goods, the obligation of the carrier
shall be reduced to the payment of the
amount which, in the judgment of experts,
constitutes such difference in value.
= Insured value of damage
(DMT)
= If, in consequence
Article 365. [P]32,315,312.32
of the damage, the goods are
rendered useless for sale and
= consumption[P]32,315,312.32
for the purposes
19 for which
they are properly destined, the consignee
shall not be bound to receive them, and he
may have them in the hands of the carrier,
demanding of the latter their value at the
current price on that day.
If among the damaged goods there should be some pieces
in good condition and without any defect,
the foregoing provision shall be
applicable with respect to those damaged
and the consignee shall receive those
which are sound, this segregation to be
made by distinct and separate pieces and
without dividing a single object, unless
the consignee proves the impossibility of
conveniently making use of them in this
form.
The same rule shall be applied to merchandise in bales or
packages, separating those parcels which
appear sound.
From the above-cited provisions, if the goods are delivered but
arrived at the destination in damaged condition, the remedies to
be pursued by the consignee depend on the extent of damage on
the goods.
If the goods are rendered useless for sale, consumption or for the
intended purpose, the consignee may reject the goods and
demand the payment of such goods at their market price on that
day pursuant to Article 365. In case the damaged portion of the
goods can be segregated from those delivered in good condition,
the consignee may reject those in damaged condition and accept
merely those which are in good condition. But if the consignee is
able to prove that it is impossible to use those goods which were
delivered in good condition without the others, then the entire
shipment may be rejected. To reiterate, under Article 365, the
nature of damage must be such that the goods are rendered
useless for sale, consumption or intended purpose for the
consignee to be able to validly reject them.
If the effect of damage on the goods consisted merely of
diminution in value, the carrier is bound to pay only the
difference between its price on that day and its depreciated value
as provided under Article 364.
29
Malayan, as the insurer of PASAR, neither stated nor proved that
the goods are rendered useless or unfit for the purpose intended
by PASAR due to contamination with seawater. Hence, there is no
basis for the goods' rejection under Article 365 of the Code of
Commerce. Clearly, it is erroneous for Malayan to reimburse
PASAR as though the latter suffered from total loss of goods in
the absence of proof that PASAR sustained such kind of loss.
Otherwise, there will be no difference in the indemnification of
goods which were not delivered at all; or delivered but rendered
useless, compared against those which were delivered albeit,
there is diminution in value.
Malayan also failed to establish the legal basis of its decision to
sell back the rejected copper concentrates to PASAR. It cannot be
ascertained how and when Malayan deemed itself as the owner of
the rejected copper concentrates to have these validly disposed
of. If the goods were rejected, it only means there was no
acceptance on the part of PASAR from the carrier. Furthermore,
PASAR and Malayan simply agreed on the purchase price of
US$90,000.00 without any allegation or proof that the said price
was the depreciated value based on the appraisal of experts as
provided under Article 364 of the Code of Commerce.
II. Subrogation of Malayan to the
rights of PASAR
Malayan's claim against the petitioners is based on subrogation
to the rights possessed by PASAR as consignee of the allegedly
damaged goods. The right of subrogation stems from Article 2207
of the New Civil Code which states:
Art. 2207. If the plaintiff's property has been insured, and
he has received indemnity from the
insurance company for the injury or loss
arising out of the wrong or breach of
contract complained of, the insurance
company shall be subrogated to the rights
of the insured against the wrongdoer or
the person who has violated the contract.
If the amount paid by the insurance
company does not fully cover the injury
or loss, the aggrieved party shall be
entitled to recover the deficiency from the
person causing the loss or injury.
"The right of subrogation is not dependent upon, nor does it grow
out of, any privity of contract or upon written assignment of
claim. It accrues simply upon payment of the insurance claim by
the insurer." 20 The right of subrogation is however, not absolute.
"There are a few recognized exceptions to this rule. For instance,
if the assured by his own act releases the wrongdoer or third
party liable for the loss or damage, from liability, the insurer's
right of subrogation is defeated. . . . Similarly, where the insurer
pays the assured the value of the lost goods without notifying the
carrier who has in good faith settled the assured's claim for loss,
the settlement is binding on both the assured and the insurer,
and the latter cannot bring an action against the carrier on his
right of subrogation. . . . And where the insurer pays the assured
for a loss which is not a risk covered by the policy, thereby
effecting 'voluntary payment,' the former has no right of
subrogation against the third party liable for the loss . . . ." 21
The rights of a subrogee cannot be superior to the rights
possessed by a subrogor. "Subrogation is the substitution of one
person in the place of another with reference to a lawful claim or
right, so that he who is substituted succeeds to the rights of the
other in relation to a debt or claim, including its remedies or
securities. The rights to which the subrogee succeeds are the
same as, but not greater than, those of the person for whom he is
30
substituted, that is, he cannot acquire any claim, security or
remedy the subrogor did not have. In other words, a subrogee
cannot succeed to a right not possessed by the subrogor. A
subrogee in effect steps into the shoes of the insured and can
recover only if the insured likewise could have recovered." 22
Consequently, an insurer indemnifies the insured based on the
loss or injury the latter actually suffered from. If there is no loss
or injury, then there is no obligation on the part of the insurer to
indemnify the insured. Should the insurer pay the insured and it
turns out that indemnification is not due, or if due, the amount
paid is excessive, the insurer takes the risk of not being able to
seek recompense from the alleged wrongdoer. This is because the
supposed subrogor did not possess the right to be indemnified
and therefore, no right to collect is passed on to the subrogee.
As regards the determination of actual damages, "[i]t is axiomatic
that actual damages must be proved with reasonable degree of
certainty and a party is entitled only to such compensation for
the pecuniary loss that was duly proven." 23 Article 2199 of the
New Civil Code speaks of how actual damages are awarded:
Art. 2199. Except as provided by law or by stipulation, one
is entitled to an adequate compensation
only for such pecuniary loss suffered by
him as he has duly proved. Such
compensation is referred to as actual or
compensatory damages.
Whereas the CA modified its Decision dated April 14, 2008 by
deducting the amount of US$90,000.00 from the award, the same
is still iniquitous for the petitioners because PASAR and Malayan
never proved the actual damages sustained by PASAR. It is a
flawed notion to merely accept that the salvage value of the goods
is US$90,000.00, since the price was arbitrarily fixed between
PASAR and Malayan. Actual damages to PASAR, for example,
could include the diminution in value as appraised by experts or
the expenses which PASAR incurred for the restoration of the
copper concentrates to its former condition, if there is damage
and rectification is still possible.
It is also noteworthy that when the expert witness for the
petitioners, Engineer Francisco Esguerra (Esguerra), testified as
regards the lack of any adverse effect of seawater on copper
concentrates, Malayan never presented evidence of its own in
refutation to Esguerra's testimony. And, even if the Court will
disregard the entirety of his testimony, the effect on Malayan's
cause of action is nil. As Malayan is claiming for actual damages, it
bears the burden of proof to substantiate its claim.
"The burden of proof is on the party who would be defeated if no
evidence would be presented on either side. The burden is to
establish one's case by a preponderance of evidence which means
that the evidence, as a whole, adduced by one side, is superior to
that of the other. Actual damages are not presumed. The claimant
must prove the actual amount of loss with a reasonable degree of
certainty premised upon competent proof and on the best
evidence obtainable. Specific facts that could afford a basis for
measuring whatever compensatory or actual damages are borne
must be pointed out. Actual damages cannot be anchored on
mere surmises, speculations or conjectures." 24
Having ruled that Malayan did not adduce proof of pecuniary loss
to PASAR for which the latter was questionably indemnified,
there is no necessity to expound further on the other issues
raised by the petitioners and Malayan in this case.
WHEREFORE, the petition is GRANTED. The Decision dated April
14, 2008 and Resolution dated December 11, 2008 of the Court of
Appeals in CA-G.R. CV No. 82758 are hereby REVERSED and SET
ASIDE. The Decision dated March 31, 2004 of the Regional Trial
Court of Manila, Branch 34 in Civil Case No. 01-101885 is
REINSTATED.
SO ORDERED.
||| (Loadstar Shipping Co., Inc. v. Malayan Insurance Co., Inc., G.R.

No. 185565, [November 26, 2014])

31
 [G.R. No. L-31845. April 30, 1979.] REJECTION TO APPLICANT. — The failure of the insurance
GREAT PACIFIC LIFE ASSURANCE COMPANY, company's agent to communicate to the applicant the rejection of
petitioner, vs. HONORABLE COURT the insurance application would not have any adverse effect on
OF APPEALS, respondents. the allegedly perfected temporary contract. In the first place,
there was no contract perfected between the parties who had no
meeting of their minds. Private respondent, being an authorized
agent is indubitably aware that said company does not offer the
life insurance applied for. When he filed the insurance application
in dispute he was therefore only taking a chance that the
[G.R. No. L-31878. April 30, 1979.]
company will approve the recommendation of the agent for the
LAPULAPU D. MONDRAGON, petitioner, vs. COURT OF
acceptance and approval of the application in question. Secondly,
APPEALS and NGO HING, respondents.
having an insurable interest on the life of his daughter, aside from
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna &
being an insurance agent and office associate of the branch, the
Manalo for petitioner Company.
applicant must have known and followed the progress on the
Voltaire Garcia for petitioner Mondragon.
processing of such application and could not pretend ignorance
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.
of the Company's rejection of the 20-year endowment life
SYNOPSIS
insurance application.
Private respondent, a duly authorized agent of Pacific Life,
5. ID.; CONCEALMENT OF MATERIAL FACT. — The contract of
applied for a 20-year endowment policy on the life of his one-
insurance is one of perfect good faith (uberrima fides meaning
year old daughter, a mongoloid. He did not divulge each physical
good faith; absolute and perfect candor or openness and
defect of his daughter. He paid the premium and was issued a
honestly; the absence of any concealment or deception, however
binding deposit receipt. However, despite the branch manager's
slight [Black's Law Dictionary, 2nd Edition], not for the insured
favorable recommendation, the Company disapproved the
alone but equally so for the insurer. Concealment is a neglect to
application, because a 20-year endowment plan is not available
communicate that which a party knows and ought to
for minors. Instead, it offered the Juvenile Triple Action Plan. The
communicate (Section 25, Act 2427). Whether intentional or
manager wrote back and again strongly recommended the
unintentional, the concealment entities the insurer to rescind the
approval of the application. At this point, the child died of
contract of insurance.
influenza with complication of broncho-pneumonia.
6. ID.; ID.; CASE AT BAR. — The failure of the father who applied
In a suit filed by private respondent to recover the proceeds of
for a life insurance policy on the life of his daughter to divulge the
the insurance, the trial court rendered judgment adverse to both
fact that his daughter is a mongoloid, a congenital physical defect
petitioners. The Court of Appeals in its amended decision
that could never be disguised, constitutes such concealment as to
affirmed the trial court's decision in toto.
render the policy void. And where the applicant himself is an
The decisive issues in these cases are: (1) whether the binding
insurance agent, he ought to know, as he surely must have
deposit receipt constituted a temporary contract of the life
known, his duty and responsibility to supply such a material fact,
insurance in question; and (2) whether private respondent
and his failure to divulge such significant fact is deemed to have
concealed the state of health and physical condition of his child.
been done in bad faith.
The Supreme Court held that a "binding receipt" does not insure
DECISION
by itself; that no insurance contract was perfected between the
DE CASTRO, J p:
parties with the non-compliance of the conditions provided in the
The two above-entitled cases were ordered consolidated by the
binding receipt and concealment having been committed by
Resolution of this Court dated April 29, 1970, (Rollo, No. L-31878,
private respondent.
p. 58), because the petitioners in both cases seek similar relief,
SYLLABUS
through these petitions for certiorari by way of appeal, from the
1. INSURANCE CONTRACT; "BINDING DEPOSIT RECEIPT." —
amended decision of respondent Court of Appeals which affirmed
Where the binding deposit receipt is intended to be merely a
in toto the decision of the Court of First Instance of Cebu,
provisional or temporary insurance contract, and that the receipt
ordering "the defendants (herein petitioners Great Pacific Life
merely acknowledged, on behalf of the insurance company, that
Assurance Company and Mondragon) jointly and severally to pay
the latter's branch office had received from the applicant the
plaintiff (herein private respondent Ngo Hing) the amount of
insurance premium and had accepted the application subject for
P50,000.00 with interest at 6% from the date of the filing of the
processing by the insurance company, such binding deposit
complaint, and the sum of P10,000.00 as attorney's fees plus
receipt does not become in force until the application is
costs of suits."
approved.
In its original decision, the respondent Court of Appeals set aside
2. ID.; PERFECTION OF CONTRACT. — A binding deposit receipt
the appealed decision of the Court of First Instance of Cebu, and
which is merely conditional does not insure outright. Thus, where
absolved the petitioners from liability on the insurance policy,
an agreement is made between the applicant and the agent, no
but ordered the reimbursement to appellee (herein private
liability will attack until the principal approves the risk and a
respondent) the amount of P1,077.75, without interest.
receipt is given by the agent. The acceptance is merely
It appears that on March 14, 1957, private respondent Ngo Hing
conditional, and is subordinated to the act of the company in
filed an application with the Great Pacific Life Assurance
approving or rejecting the application.
Company (hereinafter referred to as Pacific Life) for a twenty-
3. ID.; ID.; MEETING OF THE MIND. — A contract of insurance,
year endowment policy in the amount of P50,000.00 on the life of
like other contracts, must be assented to by both parties either in
his one-year old daughter Helen Go. Said respondent supplied the
person or by their agents. The contract, to be binding from the
essential data which petitioner Lapulapu D. Mondragon, Branch
date of the application, must have been a completed contract, one
Manager of the Pacific Life in Cebu City wrote on the
that leaves nothing to be done, nothing to be completed, nothing
corresponding form in his own handwriting (Exhibit I-M).
to be passed upon, or determined, before it shall take effect.
Mondragon finally type-wrote the data on the application form
There can be no contract of insurance unless the minds of the
which was signed by private respondent Ngo Hing. The latter
parties have met in agreement.
paid the annual premium, the sum of P1,077.75 going over to the
4. ID.; ID.; FAILURE OF AGENT TO COMMUNICATE THE
32
Company, but he retained the amount of P1,317.00 as his
commission for being a duly authorized agent of Pacific Life.
Upon the payment of the insurance premium, 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 life insurance on the ground that Pacific
Life is the only insurance company not selling 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 broncho-pneumonia.
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
referred 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, shall have received the
premium deposit . . . and the insurance
application, ON or PRIOR to the date of
medical examination . . . said insurance
shall 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.
33
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 refunded; and (3) that if the applicant is not
insurable according to the standard rates, and the company
disapproves the application, the insurance applied for shall not
be in force at any time, and the premium paid shall be returned to
the applicant.
Clearly implied from the aforesaid conditions is that the binding
deposit receipt in question is merely an acknowledgment, on
behalf of the company, that the latter's branch office had received
from the applicant the insurance premium and had accepted the
application subject for processing by the insurance company; and
that the latter will either approve or reject the same on the basis
of whether or not the applicant is "insurable on standard rates."
Since petitioner Pacific Life disapproved the insurance
application of respondent Ngo Hing, the binding deposit receipt
in question had never become in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is,
manifestly, merely conditional and does not insure outright. As
held by this Court, where an agreement is made between the
applicant and the agent, no liability shall attach until the principal
approves the risk and a receipt is given by the agent. The
acceptance is merely conditional, and is subordinated to the act
of the company in approving or rejecting the application. Thus, in
life insurance, a "binding slip" or "binding receipt" does not
insure by itself (De Lim vs. Sun Life Assurance Company of
Canada, 41 Phil. 264).
It bears repeating that through the intra-company
communication of April 30, 1957 (Exhibit 3-M), Pacific Life
disapproved the insurance application in question on the ground
that it is not offering the twenty-year endowment insurance
policy to children less than seven years of age. What it offered
instead is another plan known as the Juvenile Triple Action,
which private respondent failed to accept. In the absence of a
meeting of the minds between petitioner Pacific Life and private
respondent Ngo Hing over the 20-year endowment life insurance
in the amount of P50,000.00 in favor of the latter's one-year old
daughter, and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt, there
could have been no insurance contract duly perfected between
them. Accordingly, the deposit paid by private respondent shall
have to be refunded by Pacific Life. LLphil
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
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."
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 the first place, there was no
contract perfected between the parties who had no meeting of
their minds. Private respondent, 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 bad
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 office 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 convinced
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 implicitly 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
34
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 physical condition of his
daughter Helen Go. When private respondent 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 disguised. Nonetheless, private respondent, in
apparent bad faith, withheld the fact material to the risk to be
assumed by the insurance company. As an insurance agent of
Pacific Life, he ought to know, as he surely must have known, his
duty and responsibility to supply such a material fact. Had he
divulged said significant fact in the insurance application form,
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
deception, however slight [Black's Law Dictionary, 2nd Edition],
not for the insured 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 and 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;
Saturnino vs. Philippine American Life Insurance Company, 7
SCRA 316). Private respondent appears guilty thereof. prcd
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 committed 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.
||| (Great Pacific Life Assurance Co. v. Court of Appeals, G.R. No. L-
31845, L-31878, [April 30, 1979])
 [G.R. No. 156167. May 16, 2005.] 393,000.00 — on the two swimming
 pools, only (against
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER the
 peril of
INSURANCE CORPORATION, respondent. earthquake
 shock only) @
0.100%
DECISION
PUNO, J p:
Before the Court is the petition for certiorari under Rule 45 of the
Revised Rules of Court by petitioner GULF RESORTS, INC., against
respondent PHILIPPINE CHARTER INSURANCE CORPORATION.
Petitioner assails the appellate court decision 1 which dismissed 116,600.00 — other buildings include
 as follows:
its two appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and
respondent on the scope of the insurance company's liability for
earthquake damage to petitioner's properties. Petitioner avers
that, pursuant to its earthquake shock endorsement rider,
a) Tilter House — P19,800.00-0.551%
Insurance Policy No. 31944 covers all damages to the properties
within its resort caused by earthquake. Respondent contends that
the rider limits its liability for loss to the two swimming pools of
petitioner.
The facts as established by the court a quo, and affirmed by the
appellate court are as follows: b) Power House — P41,000.00-0.551%
[P]laintiff is the owner of the Plaza Resort situated at Agoo,
La Union and had its properties in said
resort insured originally with the
American Home Assurance Company
(AHAC-AIU). In the first four insurance
policies issued by AHAC-AIU from 1984- c) House Shed — P55,000.00-0.540%
P100,000.00 for
85; 1985-86; 1986-1987; and 1987-88 furniture, fixtures,
 lines
(Exhs. "C", "D", "E" and "F"; also Exhs. "1", air-con and
 operating
"2", "3" and "4" respectively), the risk of equipment
loss from earthquake shock was extended
only to plaintiff's two swimming pools,
thus, "earthquake shock endt." (Item 5
only) (Exhs. "C-1"; "D-1," and "E" and two
(2) swimming pools only (Exhs. "C-1"; 'D-
1", "E" and "F-1"). "Item 5" in those that plaintiff agreed to insure with defendant the properties
policies referred to the two (2) swimming covered by AHAC (AIU) Policy No. 206-
pools only (Exhs. "1-B", "2-B", "3-B" and 4568061-9 (Exh. "H") provided that the
"F-2"); that subsequently AHAC(AIU) policy wording and rates in said policy be
issued in plaintiff's favor Policy No. 206- copied in the policy to be issued by
4182383-0 covering the period March 14, defendant; that defendant issued Policy
1988 to March 14, 1989 (Exhs. "G" also No. 31944 to plaintiff covering the period
"G-1") and in said policy the earthquake of March 14, 1990 to March 14, 1991 for
endorsement clause as indicated in P10,700,600.00 for a total premium of
Exhibits "C-1", "D-1", Exhibits "E" and "F- P45,159.92 (Exh. "I"); that in the
1" was deleted and the entry under computation of the premium, defendant's
Endorsements/Warranties at the time of Policy No. 31944 (Exh. "I"), which is the
issue read that plaintiff renewed its policy policy in question, contained on the right-
with AHAC (AIU) for the period of March hand upper portion of page 7 thereof, the
14, 1989 to March 14, 1990 under Policy following:
No. 206-4568061-9 (Exh. "H") which
carried the entry under
"Endorsement/Warranties at Time of
Issue", which read "Endorsement to
Include Earthquake Shock (Exh. "6-B-1")
in the amount of P10,700.00 and paid Rate-Various
P42,658.14 (Exhs. "6-A" and "6-B") as
premium thereof, computed as follows:
EDCcaS

Premium — P37,420.60 F/L
 2,061.52 -

Typhoon
 1,030.76 -
Item P7,691,000.00 — on the Clubhouse only
 @ .392%; EC
 393.00 - ES

1,500,000.00 — on the furniture, etc.
 contained in the Doc. Stamps 3,068.10

building
 above-
mentioned@ .490%;

35
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that
plaintiff paid only P393.00 as premium
against earthquake shock (ES); that in all
the six insurance policies (Exhs. "C", "D",
"E", "F", "G" and "H"), the premium
against the peril of earthquake shock is
the same, that is P393.00 (Exhs. "C" and
"1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-
02" and "4-A-1"; "G-2" and "5-C-1"; "6-C-
1"; issued by AHAC (Exhs. "C", "D", "E",
"F", "G" and "H") and in Policy No. 31944
issued by defendant, the shock
endorsement provide(sic):
In consideration of the payment by the insured to the
company of the sum
included additional
premium the Company
agrees, notwithstanding
what is stated in the printed
conditions of this policy due
to the contrary, that this
insurance covers loss or
damage to shock to any of
the property insured by this
Policy occasioned by or
through or in consequence
of earthquake (Exhs. "1-D",
"2-D", "3-A", "4-B", "5-A",
"6-D" and "7-C"); cDCaTS
that in Exhibit "7-C" the word "included" above the
underlined portion was deleted; that on
July 16, 1990 an earthquake struck
Central Luzon and Northern Luzon and
plaintiff's properties covered by Policy
No. 31944 issued by defendant, including
the two swimming pools in its Agoo Playa
Resort were damaged. 2
After the earthquake, petitioner advised respondent that it would
be making a claim under its Insurance Policy No. 31944 for
damages on its properties. Respondent instructed petitioner to
file a formal claim, then assigned the investigation of the claim to
36
an independent claims adjuster, Bayne Adjusters and Surveyors,
Inc. 3 On July 30, 1990, respondent, through its adjuster,
requested petitioner to submit various documents in support of
its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc.,
through its Vice-President A.R. de Leon, 4 rendered a preliminary
report 5 finding extensive damage caused by the earthquake to
the clubhouse and to the two swimming pools. Mr. de Leon stated
that "except for the swimming pools, all affected items have no
coverage for earthquake shocks." 6 On August 11, 1990, petitioner
filed its formal demand 7 for settlement of the damage to all its
properties in the Agoo Playa Resort. On August 23, 1990,
respondent denied petitioner's claim on the ground that its
insurance policy only afforded earthquake shock coverage to the
two swimming pools of the resort. 8 Petitioner and respondent
failed to arrive at a settlement. 9 Thus, on January 24, 1991,
petitioner filed a complaint 10 with the regional trial court of Pasig
praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained
by the insured properties,
with interest thereon, as
computed under par. 29 of
the policy (Annex "B") until
fully paid;
2.) The sum of P428,842.00 per month, representing
continuing losses sustained
by plaintiff on account of
defendant's refusal to pay
the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorney's fees and
expenses of litigation;
5.) Costs. 11
Respondent filed its Answer with Special and Affirmative
Defenses with Compulsory Counterclaims. 12
On February 21, 1994, the lower court after trial ruled in favor of
the respondent, viz:
The above schedule clearly shows that plaintiff paid only a
premium of P393.00 against the peril of
earthquake shock, the same premium it
paid against earthquake shock only on the
two swimming pools in all the policies
issued by AHAC(AIU) (Exhibits "C", "D",
"E", "F" and "G"). From this fact the Court
must consequently agree with the
position of defendant that the
endorsement rider (Exhibit "7-C") means
that only the two swimming pools were
 insured against earthquake shock. CSTHca
Plaintiff correctly points out that a policy of insurance is a
contract of adhesion hence, where the
language used in an insurance contract or
application is such as to create ambiguity
the same should be resolved against the
party responsible therefor, i.e., the
insurance company which prepared the
contract. To the mind of [the] Court, the
language used in the policy in litigation is
clear and unambiguous hence there is no
need for interpretation or construction
but only application of the provisions
therein.
From the above observations the Court finds that only the
two (2) swimming pools had earthquake
shock coverage and were heavily
damaged by the earthquake which struck
on July 16, 1990. Defendant having
admitted that the damage to the
swimming pools was appraised by
defendant's adjuster at P386,000.00,
defendant must, by virtue of the contract
of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the
immediately preceding paragraph that
defendant is liable only for the damage
caused to the two (2) swimming pools
and that defendant has made known to
plaintiff its willingness and readiness to
settle said liability, there is no basis for
the grant of the other damages prayed for
by plaintiff. As to the counterclaims of
defendant, the Court does not agree that
the action filed by plaintiff is baseless and
highly speculative since such action is a
lawful exercise of the plaintiff's right to
come to Court in the honest belief that
their Complaint is meritorious. The
prayer, therefore, of defendant for
damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to
pay plaintiffs the sum of THREE
HUNDRED EIGHTY SIX THOUSAND PESOS
(P386,000.00) representing damage to
the two (2) swimming pools, with interest
at 6% per annum from the date of the
filing of the Complaint until defendant's
obligation to plaintiff is fully paid.
37
No pronouncement as to costs. 13
Petitioner's Motion for Reconsideration was denied. Thus,
petitioner filed an appeal with the Court of Appeals based on the
following assigned errors: 14
A. THE TRIAL COURT ERRED IN FINDING THAT
PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO
SWIMMING POOLS UNDER ITS FIRE
POLICY NO. 31944, CONSIDERING ITS
PROVISIONS, THE CIRCUMSTANCES
SURROUNDING THE ISSUANCE OF SAID
POLICY AND THE ACTUATIONS OF THE
PARTIES SUBSEQUENT TO THE
EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING
PLAINTIFF-APPELLANT'S RIGHT TO
RECOVER UNDER DEFENDANT-
APPELLEE'S POLICY (NO. 31944; EXH "I")
BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID POLICY
ISOLATED FROM THE CIRCUMSTANCES
SURROUNDING ITS ISSUANCE AND THE
ACTUATIONS OF THE PARTIES AFTER
THE EARTHQUAKE OF JULY 16, 1990. cHSIAC
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT
PLAINTIFF-APPELLANT IS ENTITLED TO
THE DAMAGES CLAIMED, WITH
INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF
POLICY.
On the other hand, respondent filed a partial appeal, assailing the
lower court's failure to award it attorney's fees and damages on
its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial
court and ruled, thus:
However, after carefully perusing the documentary
evidence of both parties, We are not
convinced that the last two (2) insurance
contracts (Exhs. "G" and "H"), which the
plaintiff-appellant had with AHAC (AIU)
and upon which the subject insurance
contract with Philippine Charter
Insurance Corporation is said to have
been based and copied (Exh. "I"), covered
an extended earthquake shock insurance
on all the insured properties.
 xxx xxx xxx
We also find that the Court a quo was correct in not
granting the plaintiff-appellant's prayer
for the imposition of interest — 24% on
the insurance claim and 6% on loss of
income allegedly amounting
P4,280,000.00. Since the defendant-
appellant has expressed its willingness to
pay the damage caused on the two (2)
swimming pools, as the Court a quo and
this Court correctly found it to be liable
only, it then cannot be said that it was in
default and therefore liable for interest.
Coming to the defendant-appellant's prayer for an
attorney's fees, long-standing is the rule
that the award thereof is subject to the
sound discretion of the court. Thus, if
such discretion is well-exercised, it will
not be disturbed on appeal (Castro et al. v.
CA, et al., G.R. No. 115838, July 18, 2002).
Moreover, being the award thereof an
exception rather than a rule, it is
necessary for the court to make findings
of facts and law that would bring the case
within the exception and justify the grant
of such award (Country Bankers
Insurance Corp. v. Lianga Bay and
Community Multi-Purpose Coop., Inc., G.R.
No. 136914, January 25, 2002). Therefore,
holding that the plaintiff-appellant's
action is not baseless and highly
speculative, We find that the Court a quo
did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are
hereby DISMISSED and judgment of the
Trial Court hereby AFFIRMED in toto. No
costs. 15
Petitioner filed the present petition raising the following issues: 16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD
THAT UNDER
RESPONDENT'S
INSURANCE POLICY NO.
31944, ONLY THE TWO (2)
SWIMMING POOLS,
RATHER THAN ALL THE
PROPERTIES COVERED
THEREUNDER, ARE
INSURED AGAINST THE
RISK OF EARTHQUAKE
SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY
DENIED PETITIONER'S
PRAYER FOR DAMAGES
WITH INTEREST THEREON
AT THE RATE CLAIMED,
ATTORNEY'S FEES AND
EXPENSES OF LITIGATION.
SDHETI
to
Petitioner contends:
First, that the policy's earthquake shock endorsement clearly
covers all of the properties insured and not only the swimming
pools. It used the words "any property insured by this policy,"
and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the
earthquake shock endorsement is confirmed in the body of the
insurance policy itself, which states that it is "[s]ubject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock
Endt., Extended Coverage Endt., FEA Warranty & Annual Payment
Agreement On Long Term Policies." 17
Third, that the qualification referring to the two swimming pools
had already been deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only
made an inadvertent omission when it deleted the said
qualification.
Fifth, that the earthquake shock endorsement rider should be
given precedence over the wording of the insurance policy,
because the rider is the more deliberate expression of the
agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed
on the endorsements/warranties enumerated at the time of
issue.
Seventh, any ambiguity in the earthquake shock endorsement
should be resolved in favor of petitioner and against respondent.
It was respondent which caused the ambiguity when it made the
policy in issue.
Eighth, the qualification of the endorsement limiting the
earthquake shock endorsement should be interpreted as a caveat
on the standard fire insurance policy, such as to remove the two
swimming pools from the coverage for the risk of fire. It should
not be used to limit the respondent's liability for earthquake
shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the
additional premium was not paid under the extended coverage.
The premium for the earthquake shock coverage was already
included in the premium paid for the policy.
Tenth, the parties' contemporaneous and subsequent acts show
that they intended to extend earthquake shock coverage to all
insured properties. When it secured an insurance policy from
respondent, petitioner told respondent that it wanted an exact
replica of its latest insurance policy from American Home
Assurance Company (AHAC-AIU), which covered all the resort's
properties for earthquake shock damage and respondent agreed.
After the July 16, 1990 earthquake, respondent assured
petitioner that it was covered for earthquake shock.
Respondent's insurance adjuster, Bayne Adjusters and Surveyors,
Inc., likewise requested petitioner to submit the necessary
documents for its building claims and other repair costs. Thus,
under the doctrine of equitable estoppel, it cannot deny that the
insurance policy it issued to petitioner covered all of the
properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by
certiorari under Rule 45 of the Revised Rules of Court as its
remedy, and there is no need for calibration of the evidence in
order to establish the facts upon which this petition is based. cDCSTA
On the other hand, respondent made the following counter
arguments: 18
38
First, none of the previous policies issued by AHAC-AIU from of the phrase "Item 5 Only" after the descriptive name or title of
1983 to 1990 explicitly extended coverage against earthquake the Earthquake Shock Endorsement. However, the words of the
shock to petitioner's insured properties other than on the two policy reflect the parties' clear intention to limit earthquake
swimming pools. Petitioner admitted that from 1984 to 1988, shock coverage to the two swimming pools.
only the two swimming pools were insured against earthquake Before petitioner accepted the policy, it had the opportunity to
shock. From 1988 until 1990, the provisions in its policy were read its conditions. It did not object to any deficiency nor did it
practically identical to its earlier policies, and there was no institute any action to reform the policy. The policy binds the
increase in the premium paid. AHAC-AIU, in a letter 19 by its petitioner.
representative Manuel C. Quijano, categorically stated that its Eighth, there is no basis for petitioner to claim damages,
previous policy, from which respondent's policy was copied, attorney's fees and litigation expenses. Since respondent was
covered only earthquake shock for the two swimming pools. willing and able to pay for the damage caused on the two
Second, petitioner's payment of additional premium in the swimming pools, it cannot be considered to be in default, and
amount of P393.00 shows that the policy only covered therefore, it is not liable for interest.
earthquake shock damage on the two swimming pools. The We hold that the petition is devoid of merit.
amount was the same amount paid by petitioner for earthquake In Insurance Policy No. 31944, four key items are important in
shock coverage on the two swimming pools from 1990-1991. No the resolution of the case at bar.
additional premium was paid to warrant coverage of the other First, in the designation of location of risk, only the two
properties in the resort. swimming pools were specified as included, viz:
Third, the deletion of the phrase pertaining to the limitation of ITEM 3 — 393,000.00 — On the two (2) swimming pools
the earthquake shock endorsement to the two swimming pools in only (against the peril of earthquake
the policy schedule did not expand the earthquake shock shock only) 20
coverage to all of petitioner's properties. As per its agreement
with petitioner, respondent copied its policy from the AHAC-AIU
policy provided by petitioner. Although the first five policies
contained the said qualification in their rider's title, in the last
two policies, this qualification in the title was deleted. AHAC-AIU, Second, under the breakdown for premium payments, 21 it was
through Mr. J. Baranda III, stated that such deletion was a mere stated that:
inadvertence. This inadvertence did not make the policy PREMIUM RECAPITULATION
incomplete, nor did it broaden the scope of the endorsement
whose descriptive title was merely enumerated. Any ambiguity in
the policy can be easily resolved by looking at the other
provisions, specially the enumeration of the items insured, where
only the two swimming pools were noted as covered for
ITEM NOS. AMOUNT RATES PREMIUM
earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies
from 1984 through 1988, the phrase "Item 5 — P393,000.00 —
on the two swimming pools only (against the peril of earthquake
shock only)" meant that only the swimming pools were insured
for earthquake damage. The same phrase is used in toto in the xxx xxx xxx
policies from 1989 to 1990, the only difference being the
designation of the two swimming pools as "Item 3." 3 393,000.00 0.100%-E/S 393.00 22
Fifth, in order for the earthquake shock endorsement to be Third, Policy Condition No. 6 stated:
effective, premiums must be paid for all the properties covered. 6. This insurance does not cover any loss or damage
In all of its seven insurance policies, petitioner only paid P393.00 occasioned by or through or in
as premium for coverage of the swimming pools against consequence, directly or indirectly of any
of the following occurrences, namely: —
earthquake shock. No other premium was paid for earthquake
shock coverage on the other properties. In addition, the use of the
qualifier "ANY" instead of "ALL" to describe the property covered
was done deliberately to enable the parties to specify the
properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement (a) Earthquake, volcanic eruption or other convulsion of
that all of its properties must be included in the earthquake shock nature. 23
coverage. Petitioner's own evidence shows that it only required
respondent to follow the exact provisions of its previous policy
from AHAC-AIU. Respondent complied with this requirement.
Respondent's only deviation from the agreement was when it
modified the provisions regarding the replacement cost
Fourth, the rider attached to the policy, titled "Extended Coverage
endorsement. With regard to the issue under litigation, the riders
Endorsement (To Include the Perils of Explosion, Aircraft, Vehicle
of the old policy and the policy in issue are identical.
and Smoke)," stated, viz:
Seventh, respondent did not do any act or give any assurance to ANNUAL PAYMENT AGREEMENT ON
LONG TERM
petitioner as would estop it from maintaining that only the two POLICIES
swimming pools were covered for earthquake shock. The
adjuster's letter notifying petitioner to present certain
documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
cDTSHE

Petitioner anchors its claims on AHAC-AIU's inadvertent deletion THE INSURED UNDER THIS POLICY HAVING ESTABLISHED

39
 AGGREGATE SUMS INSURED IN EXCESS 2. The insured is subject to a risk of loss by the happening
OF FIVE MILLION PESOS, IN of the designated peril;
CONSIDERATION OF A DISCOUNT OF 5%
OR 7 1/2% OF THE NET PREMIUM . . .
POLICY HEREBY UNDERTAKES TO
CONTINUE THE INSURANCE UNDER THE
ABOVE NAMED . . . AND TO PAY THE
PREMIUM. CIAacS 3. The insurer assumes the risk;

Earthquake Endorsement 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

In consideration of the payment by the Insured to the

Company of the sum of P. . . . . . . . . . . . . . . . .
additional premium the Company agrees,
notwithstanding what is stated in the
printed conditions of this Policy to the 5. In consideration of the insurer's promise, the insured
contrary, that this insurance covers loss pays a premium. 26
or damage (including loss or damage by (Emphasis ours)
fire) to any of the property insured by this
Policy occasioned by or through or in
consequence of Earthquake.

An insurance premium is the consideration paid an insurer for

Provided always that all the conditions of this Policy shall
apply (except in so far as they may be
hereby expressly varied) and that any
reference therein to loss or damage by
fire should be deemed to apply also to
loss or damage occasioned by or through
or in consequence of Earthquake. 24
undertaking to indemnify the insured against a specified peril. 27
In fire, casualty, and marine insurance, the premium payable
becomes a debt as soon as the risk attaches. 28 In the subject
policy, no premium payments were made with regard to
earthquake shock coverage, except on the two swimming pools.
There is no mention of any premium payable for the other resort
properties with regard to earthquake shock. This is consistent
with the history of petitioner's previous insurance policies from
AHAC-AIU. As borne out by petitioner's witnesses: HCEaDI
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,
November 25, 1991

Petitioner contends that pursuant to this rider, no qualifications

were placed on the scope of the earthquake shock coverage. Thus,
the policy extended earthquake shock coverage to all of the
insured properties. pp. 12-13
It is basic that all the provisions of the insurance policy should be
examined and interpreted in consonance with each other. 25 All its
parts are reflective of the true intent of the parties. The policy
cannot be construed piecemeal. Certain stipulations cannot be
segregated and then made to control; neither do particular words Q. Now Mr. Mantohac, will it be correct to state also that
or phrases necessarily determine its character. Petitioner cannot insofar as your insurance
focus on the earthquake shock endorsement to the exclusion of policy during the period
the other provisions. All the provisions and riders, taken and from March 4, 1984 to
interpreted together, indubitably show the intention of the March 4, 1985 the coverage
parties to extend earthquake shock coverage to the two on earthquake shock was
swimming pools only. limited to the two
swimming pools only?
A careful examination of the premium recapitulation will show
that it is the clear intent of the parties to extend earthquake
shock coverage only to the two swimming pools. Section 2(1) of
the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from A. Yes, sir. It is limited to the two swimming pools,
an unknown or contingent event. Thus, an insurance contract specifically shown in the
exists where the following elements concur: warranty, there is a
1. The insured has an insurable interest; provision here that it was
only for item 5.

40
Q. More specifically Item 5 states the amount of A. Yes, sir, they are separate entity.
P393,000.00 corresponding
to the two swimming pools
only?

Q. But insofar as the procurement of the insurance policy is

concerned they are of
course subject to your
A. Yes, sir. instruction, is that not
correct?

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,

November 25, 1991 A. Yes, sir. The final action is still with us although they can
recommend what insurance
to take.

pp. 23-26

Q. In the procurement of the insurance police (sic) from

March 14, 1988 to March
14, 1989, did you give
written instruction to Forte
Q. For the period from March 14, 1988 up to March 14, Insurance Agency advising
1989, did you personally it that the earthquake shock
arrange for the coverage must extend to all
procurement of this policy? properties of Agoo Playa
Resort in La Union?

A. Yes, sir.
A. No, sir. We did not make any written instruction,
although we made an oral
instruction to that effect of
extending the coverage on
(sic) the other properties of
Q. Did you also do this through your insurance agency? the company.

A. If you are referring to Forte Insurance Agency, yes. Q. And that instruction, according to you, was very
important because in April
1987 there was an
earthquake tremor in La
Union?

Q. Is Forte Insurance Agency a department or division of

your company?

A. Yes, sir. TcIHDa

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

Q. And you wanted to protect all your properties against

similar tremors in the
[future], is that correct?
Q. And they are independent of your company insofar as
operations are concerned?

A. Yes, sir.

41
Q. Now, after this policy was delivered to you did you pp. 9-12
bother to check the
provisions with respect to
your instructions that all
properties must be covered
again by earthquake shock
endorsement? Atty. Mejia:

A. Are you referring to the insurance policy issued by We respectfully manifest that the same exhibits C to H inclusive have
American Home Assurance been previously marked by counsel for defendant as Exhibit[s] 1-6
Company marked Exhibit inclusive. Did you have occasion to review of (sic) these six (6) policies
"G"? issued by your company [in favor] of Agoo Playa Resort?
WITNESS:

Atty. Mejia:
Yes[,] I remember having gone over these policies at one point of time,
sir.
Q. Now, wach (sic) of these six (6) policies marked in
evidence as Exhibits C to H
respectively carries an
Yes. earthquake shock
Witness: endorsement[?] My
question to you is, on the
basis on (sic) the wordings
indicated in Exhibits C to H
respectively what was the
extent of the coverage
A. I examined the policy and seeing that the warranty on [against] the peril of
the earthquake shock earthquake shock as
endorsement has no more provided for in each of the
limitation referring to the six (6) policies? ADaSET
two swimming pools only, I
was contented already that
the previous limitation
pertaining to the two
swimming pools was
already removed. xxx xxx xxx

WITNESS:

Petitioner also cited and relies on the attachment of the phrase

"Subject to: Other Insurance Clause, Typhoon Endorsement,
Earthquake Shock Endorsement, Extended Coverage The extent of the coverage is only up to the two (2) swimming pools, sir.
Endorsement, FEA Warranty & Annual Payment Agreement on Q. Is that for each of the six (6) policies namely: Exhibits C,
Long Term Policies" 29 to the insurance policy as proof of the D, E, F, G and H?
intent of the parties to extend the coverage for earthquake shock.
However, this phrase is merely an enumeration of the descriptive
titles of the riders, clauses, warranties or endorsements to which
the policy is subject, as required under Section 50, paragraph 2 of
the Insurance Code. A. Yes, sir.
We also hold that no significance can be placed on the deletion of
the qualification limiting the coverage to the two swimming
pools. The earthquake shock endorsement cannot stand alone. As
explained by the testimony of Juan Baranda III, underwriter for
AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III 30 ATTY. MEJIA:

TSN, August 11, 1992 What is your basis for stating that the coverage against earthquake shock
as provided for in each of the six (6) policies extend to the two (2)
swimming pools only?
42
 earthquake shock to all the
properties indicated in the
respective schedules
attached to said policies,
what can you say about that
testimony of plaintiff's
WITNESS: witness? aSADIC

Because it says here in the policies, in the enumeration "Earthquake WITNESS:

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

As I have mentioned earlier, earthquake shock cannot stand alone

Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone
basis. For swimming pools we do cover earthquake shock. For building
we covered it for full earthquake coverage which includes earthquake
shock. . .
COURT:
without the other half of it. I assure you that this one covers the two
swimming pools with respect to earthquake shock endorsement. Based
on it, if we are going to look at the premium there has been no change
with respect to the rates. Everytime (sic) there is a renewal if the
intention of the insurer was to include the earthquake shock, I think there
is a substantial increase in the premium. We are not only going to
consider the two (2) swimming pools of the other as stated in the policy.
As I see, there is no increase in the amount of the premium. I must say
that the coverage was not broaden (sic) to include the other items.
COURT:

They are the same, the premium rates?

WITNESS:

As far as earthquake shock endorsement you do not have a specific

coverage for other things other than swimming pool? You are covering
building? They are covered by a general insurance?
WITNESS: They are the same in the sence (sic), in the amount of the coverage. If you
are going to do some computation based on the rates you will arrive at
the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN,
September 7, 1992

Earthquake shock coverage could not stand alone. If we are covering

building or another we can issue earthquake shock solely but that the
moment I see this, the thing that comes to my mind is either insuring a
swimming pool, foundations, they are normally affected by earthquake
but not by fire, sir. pp. 4-6
DIRECT EXAMINATION OF JUAN BARANDA III
TSN,
August 11, 1992

ATTY. ANDRES:

pp. 23-25

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

insurance?
Q. Plaintiff's witness, Mr. Mantohac testified and he alleged WITNESS:
that only Exhibits C, D, E
and F inclusive [remained]
its coverage against
earthquake shock to two
(2) swimming pools only
but that Exhibits G and H No, we don't, sir.
respectively entend the Q. That is why the phrase "earthquake shock to the two (2)
coverage against swimming pools only" was

43
 placed, is it not? A. I told him that the insurance that they will have to get
will have the same
provisions as this American
Home Insurance Policy No.
206-4568061-9.

A. Yes, sir.

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

ATTY. ANDRES:

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

Will you not also agree with me that these exhibits, Exhibits G and H
which you have pointed to during your direct-examination, the phrase
"Item no. 5 only" meaning to (sic) the two (2) swimming pools was
deleted from the policies issued by AIU, is it not?
xxx xxx xxx Q. So, all the provisions here will be the same except that of
the premium rates?
ATTY. ANDRES:

A. Yes, sir. He assured me that with regards to the insurance

As an insurance executive will you not attach any significance to the premium rates that they
deletion of the qualifying phrase for the policies? SaHcAC will be charging will be
WITNESS: limited to this one. I (sic)
can even be lesser.

My answer to that would be, the deletion of that particular phrase is

inadvertent. Being a company underwriter, we do not cover. . it was CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,
inadvertent because of the previous policies that we have issued with no January 14, 1992
specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioner's contention that respondent's
contemporaneous and subsequent acts to the issuance of the
insurance policy falsely gave the petitioner assurance that the
coverage of the earthquake shock endorsement included all its pp. 12-14
properties in the resort. Respondent only insured the properties
as intended by the petitioner. Petitioner's own witness testified
to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN,
January 14, 1992
Atty. Mejia:

pp. 4-5
Q. Will it be correct to state[,] Mr. Witness, that you made a
comparison of the
provisions and scope of
coverage of Exhibits "I" and
"H" sometime in the third
Q. Just to be clear about this particular answer of yours Mr. week of March, 1990 or
Witness, what exactly did thereabout?
you tell Atty. Omlas (sic) to
copy from Exhibit "H" for
purposes of procuring the
policy from Philippine
Charter Insurance
Corporation? A. Yes, sir, about that time.

44
Q. And at that time did you notice any discrepancy or TSN, January 26, 1993
difference between the
policy wordings as well as
scope of coverage of
Exhibits "I" and "H"
respectively? IHaECA
pp. 22-26

A. No, sir, I did not discover any difference inasmuch (sic)

as I was assured already
that the policy wordings
and rates were copied from
the insurance policy I sent
them but it was only when
this case erupted that we
discovered some
discrepancies.
Q. Do you recall the circumstances that led to your
discussion regarding the
extent of coverage of the
policy issued by Philippine
Charter Insurance
Corporation?

A. I remember that when I returned to the office after the

inspection, I got a
Q. With respect to the items declared for insurance photocopy of the insurance
coverage did you notice any coverage policy and it was
discrepancy at any time indicated under Item 3
between those indicated in specifically that the
Exhibit "I" and those coverage is only for
indicated in Exhibit "H" earthquake shock. Then, I
respectively? remember I had a talk with
Atty. Umlas (sic), and I
relayed to him what I had
found out in the policy and
he confirmed to me indeed
only Item 3 which were the
A. With regard to the wordings I did not notice any two swimming pools have
difference because it was coverage for earthquake
exactly the same shock.
P393,000.00 on the two (2)
swimming pools only
against the peril of
earthquake shock which I
understood before that this
provision will have to be xxx xxx xxx
placed here because this
particular provision under Q. Now, may we know from you Engr. de Leon your basis, if
the peril of earthquake any, for stating that except
shock only is requested for the swimming pools all
because this is an insurance affected items have no
policy and therefore cannot coverage for earthquake
be insured against fire, so shock?
this has to be placed.

xxx xxx xxx

The verbal assurances allegedly given by respondent's
representative Atty. Umlas were not proved. Atty. Umlas A. I based my statement on my findings, because upon my
categorically denied having given such assurances. examination of the policy I
Finally, petitioner puts much stress on the letter of respondent's found out that under Item 3
independent claims adjuster, Bayne Adjusters and Surveyors, Inc. it was specific on the
But as testified to by the representative of Bayne Adjusters and wordings that on the two
Surveyors, Inc., respondent never meant to lead petitioner to swimming pools only, then
believe that the endorsement for earthquake shock covered enclosed in parenthesis
properties other than the two swimming pools, viz: (against the peril[s] of
earthquake shock only),
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
and secondly, when I
Adjusters and Surveyors, Inc.)
examined the summary of
premium payment only
Item 3 which refers to the
swimming pools have a
45
 computation for premium policy under Philippine
payment for earthquake Charter Insurance
shock and all the other Corporation as long as it
items have no computation will follow the same or
for payment of premiums. exact provisions of the
TAcDHS
previous insurance policy
we had with American
Home Assurance
Corporation.

In sum, there is no ambiguity in the terms of the contract and its

riders. Petitioner cannot rely on the general rule that insurance
contracts are contracts of adhesion which should be liberally
construed in favor of the insured and strictly against the insurer Q. Did you take any step Mr. Witness to ensure that the
company which usually prepares it. 31 A contract of adhesion is provisions which you
one wherein a party, usually a corporation, prepares the wanted in the American
stipulations in the contract, while the other party merely affixes Home Insurance policy are
to be incorporated in the
his signature or his "adhesion" thereto. Through the years, the
PCIC policy?
courts have held that in these type of contracts, the parties do not
bargain on equal footing, the weaker party's participation being
reduced to the alternative to take it or leave it. Thus, these
contracts are viewed as traps for the weaker party whom the
courts of justice must protect. 32 Consequently, any ambiguity
therein is resolved against the insurer, or construed liberally in A. Yes, sir.
favor of the insured. 33
The case law will show that this Court will only rule out blind
adherence to terms where facts and circumstances will show that
they are basically one-sided. 34 Thus, we have called on lower
courts to remain careful in scrutinizing the factual circumstances Q. What steps did you take?
behind each case to determine the efficacy of the claims of
contending parties. In Development Bank of the Philippines v.
National Merchandising Corporation, et al., 35 the parties, who
were acute businessmen of experience, were presumed to have
assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the A. When I examined the policy of the Philippine Charter
case at bar. Petitioner cannot claim it did not know the provisions Insurance Corporation I
specifically told him that
of the policy. From the inception of the policy, petitioner had
the policy and wordings
required the respondent to copy verbatim the provisions and shall be copied from the
terms of its latest insurance policy from AHAC-AIU. The AIU Policy No. 206-
testimony of Mr. Leopoldo Mantohac, a direct participant in 4568061-9.
securing the insurance policy of petitioner, is reflective of
petitioner's knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC 36

Respondent, in compliance with the condition set by the

petitioner, copied AIU Policy No. 206-4568061-9 in drafting its
Insurance Policy No. 31944. It is true that there was variance in
some terms, specifically in the replacement cost endorsement,
TSN, September 23, 1991 but the principal provisions of the policy remained essentially
similar to AHAC-AIU's policy. Consequently, we cannot apply the
"fine print" or "contract of adhesion" rule in this case as the
parties' intent to limit the coverage of the policy to the two
swimming pools only is not ambiguous. 37
pp. 20-21 IN VIEW WHEREOF, the judgment of the Court of Appeals is
affirmed. The petition for certiorari is dismissed. No costs. cIEHAC
SO ORDERED.
||| (Gulf Resorts Inc. v. Phil. Charter Insurance Corp., G.R. No.

156167, [May 16, 2005], 497 PHIL 837-863)

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

A. Yes, sir. I told him that I will agree to that renewal of this
46
 [G.R. No. 137172. April 4, 2001.]
UCPB GENERAL INSURANCE CO., INC., petitioner, vs.
MASAGANA TELAMART, INC., respondent.
RESOLUTION
DAVIDE, JR., C .J p:
In our decision of 15 June 1999 in this case, we reversed and set
aside the assailed decision 1 of the Court of Appeals, which
affirmed with modification the judgment of the trial court (a)
allowing Respondent to consign the sum of P225,753.95 as full
payment of the premiums for the renewal of the five insurance
policies on Respondent's properties; (b) declaring the
replacement-renewal policies effective and binding from 22 May
1992 until 22 May 1993; and (c) ordering Petitioner to pay
Respondent P18,645,000.00 as indemnity for the burned
properties covered by the renewal-replacement policies. The
modification consisted in the (1) deletion of the trial court's
declaration that three of the policies were in force from August
1991 to August 1992; and (2) reduction of the award of the
attorney's fees from 25% to 10% of the total amount due the
Respondent. AcTDaH
The material operative facts upon which the appealed judgment
was based are summarized by the Court of Appeals in its assailed
decision as follows:
Plaintiff [herein Respondent] obtained from defendant
[herein Petitioner] five (5) insurance
policies (Exhibits "A" to "E", Record, pp.
158-175) on its properties [in Pasay City
and Manila] . . . .
All five (5) policies reflect on their face the effectivity term:
"from 4:00 P.M. of 22 May 1991 to 4:00
P.M. of 22 May 1992." On June 13, 1992,
plaintiffs properties located at 2410-2432
and 2442-2450 Taft Avenue, Pasay City
were razed by fire. On July 13, 1992,
plaintiff tendered, and defendant
accepted, five (5) Equitable Bank
Manager's Checks in the total amount of
P225,753.45 as renewal premium
payments for which Official Receipt Direct
Premium No. 62926 (Exhibit "Q", Record,
p. 191) was issued by defendant. On July
14, 1992, Masagana made its formal
demand for indemnification for the
burned insured properties. On the same
day, defendant returned the five (5)
manager's checks stating in its letter
(Exhibit "R" / "8", Record, p. 192) that it
was rejecting Masagana's claim on the
following grounds:
"a) Said policies expired last May 22, 1992 and were not
renewed for
another term;
b) Defendant had put plaintiff and its alleged broker on
notice of non-
renewal
earlier; and
47
c) The properties covered by the said policies were burned
in a fire that
took place
last June 13,
1992, or
before tender
of premium
payment."
(Record, p. 5)
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioner's stand that
Respondent's tender of payment of the premiums on 13 July
1992 did not result in the renewal of the policies, having been
made beyond the effective date of renewal as provided under
Policy Condition No. 26, which states:
26. Renewal Clause. — Unless the company at least forty
five days in advance of the end of the
policy period mails or delivers to the
assured at the address shown in the
policy notice of its intention not to renew
the policy or to condition its renewal
upon reduction of limits or elimination of
coverages, the assured shall be entitled to
renew the policy upon payment of the
premium due on the effective date of
renewal.
Both the Court of Appeals and the trial court found that
sufficient proof exists that Respondent, which had
procured insurance coverage from Petitioner for a number
of years, had been granted a 60 to 90-day credit term for
the renewal of the policies. Such a practice had existed up
to the time the claims were filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to
May 22, 1991 was issued on May 7, 1990
but premium was paid more than 90 days
later on August 31, 1990 under O.R. No.
4771 (Exhs. "T" and "T-1"). Fire Insurance
Policy No. 34660 for Insurance Risk
Coverage from May 22, 1990 to May 22,
1991 was issued by UCPB on May 4, 1990
but premium was collected by UCPB only
on July 13, 1990 or more than 60 days
later under O.R. No. 46487 (Exhs. "V" and
"V-1"). And so were as other policies: Fire
Insurance Policy No. 34657 covering risks
from May 22, 1990 to May 22, 1991 was
issued on May 7, 1990 but premium
therefor was paid only on July 19, 1990
under O.R. No. 46583 (Exhs. "W" and "W-
1"). Fire Insurance Policy No. 34661
covering risks from May 22, 1990 to May
22, 1991 was issued on May 3, 1990 but
premium was paid only on July 19, 1990
under O.R. No. 46582 (Exhs. "X" and "X-
1"). Fire Insurance Policy No. 34688 for
insurance coverage from May 22, 1990 to
May 22, 1991 was issued on May 7, 1990
 but premium was paid only on July 19,
1990 under O.R. No. 46585 (Exhs. "Y" and
"Y-1"). Fire Insurance Policy No. 29126 to
cover insurance risks from May 22, 1989
to May 22, 1990 was issued on May 22,
1989 but premium therefor was collected
only on July 25, 1990[sic] under O.R. No.
40799 (Exhs. "AA" and "AA-1"). Fire
Insurance Policy No. HO/F-26408
covering risks from January 12, 1989 to
January 12, 1990 was issued to Intratrade
Phils. (Masagana's sister company) dated
December 10, 1988 but premium therefor
was paid only on February 15, 1989
under O.R. No. 38075 (Exhs. "BB" and
"BB-1"). Fire Insurance Policy No. 29128
was issued on May 22, 1989 but premium
was paid only on July 25, 1989 under O.R.
No. 40800 for insurance coverage from
May 22, 1989 to May 22, 1990 (Exhs. "CC"
and "CC-1"). Fire Insurance Policy No.
29127 was issued on May 22, 1989 but
premium was paid only on July 17, 1989
under O.R. No. 40682 for insurance risk
coverage from May 22, 1989 to May 22,
1990 (Exhs. "DD" and "DD-1"). Fire
Insurance Policy No. HO/F-29362 was
issued on June 15, 1989 but premium was
paid only on February 13, 1990 under
O.R. No. 39233 for insurance coverage
from May 22, 1989 to May 22, 1990 (Exhs.
"EE" and "EE-1"). Fire Insurance Policy
No. 26303 was issued on November 22,
1988 but premium therefor was collected
only on March 15, 1989 under O.R. NO.
38573 for insurance risks coverage from
December 15, 1988 to December 15, 1989
(Exhs. "FF" and "FF-1"). HIcTDE
Moreover, according to the Court of Appeals the following
circumstances constitute preponderant proof that no timely
notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit
"11", Record, p. 350) from Ultramar
Reinsurance Brokers that plaintiff's
reinsurance facility had been confirmed
up to 67.5% only on April 15, 1992 as
indicated on Exhibit "11". Apparently, the
notice of non-renewal (Exhibit "7,"
Record, p. 320) was sent not earlier than
said date, or within 45 days from the
expiry dates of the policies as provided
under Policy Condition No. 26; (2)
Defendant insurer unconditionally
accepted, and issued an official receipt
for, the premium payment on July 1[3],
1992 which indicates defendant's
willingness to assume the risk despite
only a 67.5% reinsurance cover[age]; and
(3) Defendant insurer appointed Esteban
Adjusters and Valuers to investigate
plaintiff's claim as shown by the letter
dated July 17, 1992 (Exhibit "11", Record,
p. 254).
In our decision of 15 June 1999, we defined the main issue to be
48
"whether the fire insurance policies issued by petitioner to the
respondent covering the period from May 22, 1991 to May 22,
1992 . . . had been extended or renewed by an implied credit
arrangement though actual payment of premium was tendered
on a later date and after the occurrence of the (fire) risk insured
against." We resolved this issue in the negative in view of Section
77 of the Insurance Code and our decisions in Valenzuela v. Court
of Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of
Appeals; 3 and Tibay v. Court of Appeals. 4 Accordingly, we
reversed and set aside the decision of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of
the adverse verdict. It alleges in the motion that we had made in
the decision our own findings of facts, which are not in accord
with those of the trial court and the Court of Appeals. The courts
below correctly found that no notice of non-renewal was made
within 45 days before 22 May 1992, or before the expiration date
of the fire insurance policies. Thus, the policies in question were
renewed by operation of law and were effective and valid on 30
June 1992 when the fire occurred, since the premiums were paid
within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may
neither agree expressly or impliedly on the extension of credit or
time to pay the premium nor consider a policy binding before
actual payment. It urges the Court to take judicial notice of the
fact that despite the express provision of Section 77 of the
Insurance Code, extension of credit terms in premium payment
has been the prevalent practice in the insurance industry. Most
insurance companies, including Petitioner, extend credit terms
because Section 77 of the Insurance Code is not a prohibitive
injunction but is merely designed for the protection of the parties
to an insurance contract. The Code itself, in Section 78, authorizes
the validity of a policy notwithstanding non-payment of
premiums.
Respondent also asserts that the principle of estoppel applies to
Petitioner. Despite its awareness of Section 77 Petitioner
persuaded and induced Respondent to believe that payment of
premium on the 60- to 90-day credit term was perfectly alright;
in fact it accepted payments within 60 to 90 days after the due
dates. By extending credit and habitually accepting payments 60
to 90 days from the effective dates of the policies, it has implicitly
agreed to modify the tenor of the insurance policy and in effect
waived the provision therein that it would pay only for the loss or
damage in case the same occurred after payment of the premium.
Petitioner filed an opposition to the Respondent's motion for
reconsideration. It argues that both the trial court and the Court
of Appeals overlooked the fact that on 6 April 1992 Petitioner
sent by ordinary mail to Respondent a notice of non-renewal and
sent by personal delivery a copy thereof to Respondent's broker,
Zuellig. Both courts likewise ignored the fact that Respondent
was fully aware of the notice of non-renewal. A reading of Section
66 of the Insurance Code readily shows that in order for an
insured to be entitled to a renewal of a non-life policy, payment of
the premium due on the effective date of renewal should first be
made. Respondent's argument that Section 77 is not a prohibitive
provision finds no authoritative support.
Upon a meticulous review of the records and reevaluation of the
issues raised in the motion for reconsideration and the pleadings
filed thereafter by the parties, we resolved to grant the motion
for reconsideration. The following facts, as found by the trial
court and the Court of Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies
to the Respondent, and
these policies were
annually renewed.
2. Petitioner had been granting Respondent a 60- to policy issued by an insurance company is
90-day credit term valid and binding unless and until the
within which to pay the premium thereof has been paid.
(Emphasis supplied)
premiums on the
renewed policies. AaITCS

It can be seen at once that Section 77 does not restate the portion
of Section 72 expressly permitting an agreement to extend the
3. There was no valid notice of non-renewal of the
period to pay the premium. But are there exceptions to Section
policies in question, as
77?
there is no proof at all
The answer is in the affirmative.
that the notice sent by
The first exception is provided by Section 77 itself, and that is, in
ordinary mail was
case of a life or industrial life policy whenever the grace period
received by Respondent,
provision applies.
and the copy thereof
The second is that covered by Section 78 of the Insurance Code,
allegedly sent to Zuellig
which provides:
was ever transmitted to
SECTION 78. Any acknowledgment in a policy or contract of
Respondent. insurance of the receipt of premium is
conclusive evidence of its payment, so far
as to make the policy binding,
notwithstanding any stipulation therein
that it shall not be binding until premium
is actually paid.
4. The premiums for the policies in question in the
aggregate amount of
P225,753.95 were paid
by Respondent within
the 60- to 90-day credit
term and were duly A third exception was laid down in Makati Tuscany Condominium
accepted and received Corporation vs. Court of Appeals, 5 wherein we ruled that Section
by Petitioner's cashier. 77 may not apply if the parties have agreed to the payment in
installments of the premium and partial payment has been made
at the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the
premiums were paid on installments. The
records clearly show that the petitioners
The instant case has to rise or fall on the core issue of whether and private respondent intended subject
Section 77 of the Insurance Code of 1978 (P.D. No. 1460) must be insurance policies to be binding and
effective notwithstanding the staggered
strictly applied to Petitioner's advantage despite its practice of
payment of the premiums. The initial
granting a 60- to 90-day credit term for the payment of insurance contract entered into in 1982
premiums. was renewed in 1983, then in 1984. In
Section 77 of the Insurance Code of 1978 provides: those three years, the insurer accepted all
SECTION 77. An insurer is entitled to payment of the the installment payments. Such
premium as soon as the thing insured is acceptance of payments speaks loudly of
exposed to the peril insured against. the insurer's intention to honor the
Notwithstanding any agreement to the policies it issued to petitioner. Certainly,
contrary, no policy or contract of basic principles of equity and fairness
insurance issued by an insurance would not allow the insurer to continue
company is valid and binding unless and collecting and accepting the premiums,
until the premium thereof has been paid, although paid on installments, and later
except in the case of a life or an industrial deny liability on the lame excuse that the
life policy whenever the grace period premiums were not prepaid in full. TASCEc
provision applies.

Not only that. In Tuscany, we also quoted with approval the

This Section is a reproduction of Section 77 of P.D. No. 612 (The
Insurance Code) promulgated on 18 December 1974. In turn, this
Section has its source in Section 72 of Act No. 2427 otherwise
known as the Insurance Act as amended by R.A. No. 3540,
approved on 21 June 1963, which read:
SECTION 72. An insurer is entitled to payment of premium
as soon as the thing insured is exposed to
the peril insured against, unless there is
clear agreement to grant the insured
credit extension of the premium due. No
following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its decision:
While the import of Section 77 is that prepayment of
premiums is strictly required as a
condition to the validity of the contract,
We are not prepared to rule that the
request to make installment payments
duly approved by the insurer would
prevent the entire contract of insurance
from going into effect despite payment

49
 and acceptance of the initial premium or
first installment. Section 78 of the
Insurance Code in effect allows waiver by
the insurer of the condition of
prepayment by making an
acknowledgment in the insurance policy
of receipt of premium as conclusive
evidence of payment so far as to make the
policy binding despite the fact that
premium is actually unpaid. Section 77
merely precludes the parties from
stipulating that the policy is valid even if
premiums are not paid, but does not
expressly prohibit an agreement granting
credit extension, and such an agreement
is not contrary to morals, good customs,
public order or public policy (De Leon,
The Insurance Code, p. 175). So is an
understanding to allow insured to pay
premiums in installments not so
prescribed. At the very least, both parties
should be deemed in estoppel to question
the arrangement they have voluntarily
accepted.
By the approval of the aforequoted findings and conclusion of the
Court of Appeals, Tuscany has provided a fourth exception to
Section 77, namely, that the insurer may grant credit extension
for the payment of the premium. This simply means that if the
insurer has granted the insured a credit term for the payment of
the premium and loss occurs before the expiration of the term,
recovery on the policy should be allowed even though the
premium is paid after the loss but within the credit term.
Moreover, there is nothing in Section 77 which prohibits the
parties in an insurance contract to provide a credit term within
which to pay the premiums. That agreement is not against the
law, morals, good customs, public order or public policy. The
agreement binds the parties. Article 1306 of the Civil Code
provides:
ARTICLE 1306. The contracting parties may establish such
stipulations clauses, terms and conditions
as they may deem convenient, provided
they are not contrary to law, morals, good
customs, public order, or public policy.
Finally in the instant case, it would be unjust and inequitable if
recovery on the policy would not be permitted against Petitioner,
which had consistently granted a 60- to 90-day credit term for
the payment of premiums despite its full awareness of Section 77.
Estoppel bars it from taking refuge under said Section, since
Respondent relied in good faith on such practice. Estoppel then is
the fifth exception to Section 77.
WHEREFORE, the Decision in this case of 15 June 1999 is
RECONSIDERED and SET ASIDE, and a new one is hereby entered
DENYING the instant petition for failure of Petitioner to
sufficiently show that a reversible error was committed by the
Court of Appeals in its challenged decision, which is hereby
AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.
Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-
Reyes, Ynares-Santiago, De Leon, Jr. and Sandoval-Gutierrez, JJ.,
concur.
50
Vitug, J., Please see separate opinion.
Melo, J., I join the dissents of Justices Vitug and Pardo.
Pardo, J., I dissent. See attached.
Puno and Quisumbing, JJ., I join the dissent of J. Pardo.
Separate Opinions
VITUG, J .:
An essential characteristic of an insurance is its being
synallagmatic, a highly reciprocal contract where the rights and
obligations of the parties correlate and mutually correspond. The
insurer assumes the risk of loss which an insured might suffer in
consideration of premium payments under a risk-distributing
device. Such assumption of risk is a component of a general
scheme to distribute actual losses among a group of persons,
bearing similar risks, who make ratable contributions to a fund
from which the losses incurred due to exposures to the peril
insured against are assured and compensated.
It is generally recognized that the business of insurance is one
imbued with public interest. 1 For the general good and mutual
protection of all the parties, it is aptly subjected to regulation and
control by the State by virtue of an exercise of its police power. 2
The State may regulate in various respects the relations between
the insurer and the insured, including the internal affairs of an
insurance company, without being violative of due process. 3
A requirement imposed by way of State regulation upon insurers
is the maintenance of an adequate legal reserve in favor of those
claiming under their policies. 4 The law generally mandates that
insurance companies should retain an amount sufficient to
guarantee the security of its policyholders in the remote future,
as well as the present, and to cover any contingencies that may
arise or may be fairly anticipated. The integrity of this legal
reserve is threatened and undermined if a credit arrangement on
the payment of premium were to be sanctioned. Calculations and
estimations of liabilities under the risk insured against are
predicated on the basis of the payment of premiums, the vital
element that establishes the juridical relation between the
insured and the insurer. By legislative fiat, any agreement to the
contrary notwithstanding, the payment of premium is a condition
precedent to, and essential for, the efficaciousness of the
insurance contract, except (a) in case of life or industrial life
insurance where a grace period applies, or (b) in case of a written
acknowledgment by the insurer of the receipt of premium, such
as by a deposit receipt, the written acknowledgment being
conclusive evidence of the premium payment so far as to make
the policy binding. 5
Section 77 of the Insurance Code provides:
"SECTION 77. An insurer is entitled to payment of the
premium as soon as the thing insured 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."
This provision amended Section 72 of the then Insurance Act by
deleting the phrase, "unless there is a clear agreement to grant
the insured credit extension of the premium due," and adding at
the beginning of the second sentence the phrase,
"[n]otwithstanding any agreement to the contrary." Commenting
on the new provision, Dean Hernando B. Perez states:
"Under the former rule, whenever the insured was granted
credit extension of the premium due or
given a period of time to pay the premium
on the policy issued, such policy was
binding although premiums had not been
paid (Section 72, Insurance Act; 6 Couch
2d. 67). This rule was changed when the
present provision eliminated the portion
concerning credit agreement, and added
the phrase 'notwithstanding any
agreement to the contrary' which
precludes the parties from stipulating
that the policy is valid even if premiums
are not paid. Hence, under the present
law, the policy is not valid and binding
unless and until the premium is paid
(Arce vs. Capital Insurance & Surety Co.,
Inc., 117 SCRA 63). If the insurer wants to
favor the insured by making the policy
binding notwithstanding the non-
payment of premium, a mere credit
agreement would not be sufficient. The
remedy would be for the insurer to
acknowledge in the policy that premiums
were paid although they were not, in
which case the policy becomes binding
because such acknowledgment is a
conclusive evidence of payment of
premium (Section 78). Thus, the Supreme
Court took note that under the present
law, Section 77 of the Insurance Code of
1978 has deleted the clause 'unless there
is a clear agreement to grant the insured
credit extension of the premium due'
(Velasco vs. Apostol, 173 SCRA 228)." 6
By weight of authority, estoppel cannot create a contract of
insurance, 7 neither can it be successfully invoked to create a
primary liability, 8 nor can it give validity to what the law so
proscribes as a matter of public policy. 9 So essential is the
premium payment to the creation of the vinculum juris between
the insured and the insurer that it would be doubtful to have that
payment validly excused even for a fortuitous event. 10
The law, however, neither requires for the establishment of the
juridical tie, nor measures the strength of such tie by, any specific
amount of premium payment. A part payment of the premium, if
accepted by the insurer, can thus perfect the contract and bring
the parties into an obligatory relation. 11 Such a payment puts the
contract into full binding force, not merely pro tanto, thereby
entitling and obligating the parties by their agreement. Hence, in
case of loss, full recovery less the unpaid portion of the premium
(by the operative act of legal compensation), can be had by the
insured and, correlatively, if no loss occurs the insurer can
demand the payment of the unpaid balance of the premium. 12
In the instant case, no juridical tie appears to have been
established under any of the situations hereinabove discussed.
ICTHDE
WHEREFORE, I vote to deny the motion for reconsideration.
Melo, J., concurs.
PARDO, J ., dissenting:
The majority resolved to grant respondent's motion for
reconsideration of the Court's decision promulgated on June 15,
1999. By this somersault, petitioner must now pay respondent's
claim for insurance proceeds amounting to P18,645,000.00,
exclusive of interests, plus 25% of the amount due as attorney's
fees, P25,000.00 as litigation expenses, and costs of suit, covering
51
its Pasay City property razed by fire. What an undeserved largess!
Indeed, an unjust enrichment at the expense of petitioner; even
the award of attorney's fees is bloated to 25% of the amount due.
We cannot give our concurrence. We beg to dissent. We find
respondent's claim to be fraudulent:
First: Respondent Masagana surreptitiously tried to pay the
overdue premiums before giving written notice to petitioner of
the occurrence of the fire that razed the subject property. This
failure to give notice of the fire immediately upon its occurrence
blatantly showed the fraudulent character of its claim. The fire
totally destroyed the property on June 13, 1992; the written
notice of loss was given only more than a month later, on July 14,
1992, the day after respondent surreptitiously paid the overdue
premiums. Respondent very well knew that the policy was not
renewed on time. Hence, the surreptitious attempt to pay
overdue premiums. Such act revealed a reprehensible disregard
of the principle that insurance is a contract uberrima fides, the
most abundant good faith. 1 Respondent is required by law and by
express terms of the policy to give immediate written notice of
loss. This must be complied with in the utmost good faith.
Another badge of fraud is that respondent deviated from its
previous practice of coursing its premium payments through its
brokers. This time, respondent Masagana went directly to
petitioner and paid through its cashier with manager's checks.
Naturally, the cashier routinely accepted the premium payment
because he had no written notice of the occurrence of the fire.
Such fact was concealed by the insured and not revealed to
petitioner at the time of payment.
Indeed, if as contended by respondent, there was a clear
agreement regarding the grant of a credit extension, respondent
would have given immediate written notice of the fire that razed
the property. This clearly showed respondent's attempt to
deceive petitioner into believing that the subject property still
existed and the risk insured against had not happened.
Second: The claim for insurance benefits must fall as well because
the failure to give timely written notice of the fire was a material
misrepresentation affecting the risk insured against.
Section 1 of the policy provides:
"All benefits under the policy shall be forfeited if the claim
be in any respect fraudulent, or if any
false declaration be made or used in
support thereof, or if any false declaration
be made or used in support thereof, or if
any fraudulent means or devices are used
by the insured or any one acting on his
behalf to obtain any benefit under the
policy." 2
In the factual milieu, the purported practice of giving 60 to 90-
day credit extension for payment of premiums was a disputed
fact. But it is a given fact that the written notice of loss was not
immediately given. It was given only the day after the attempt to
pay the delayed premiums.
At any rate, the purported credit was a mere verbal
understanding of the respondent Masagana of an agreement
between the insurance company (petitioner) and the insurance
brokers of respondent Masagana. The president of respondent
Masagana admitted that the insurance policy did not contain any
proviso pertaining to the grant of credit within which to pay the
premiums. Respondent Masagana merely deduced that a credit
agreement existed based on previous years' practice that they
had of delayed payments accepted by the insurer as reflected on
the face of the receipts issued by UCPB evidencing the payment of
premiums. SIaHDA
"Q: You also claim that you have 60 to 90 days credit of the premium payments by the insurance brokers of
arrangement with UCPB; is respondent Masagana.
that correct?, "Q: You also identified several receipts; here; official
receipts issued by UCPB
General Insurance
Company, Inc., which has
been previously marked as
Exhibits "F", "G", "H", "I",
A: Yes, ma'am. and "J" for the plaintiff; is
that correct?

Q: I'm showing to you the policy which had previously been

marked in evidence as
Exhibit "A", "B", "C", "D", &
"E"' for the plaintiff and
likewise, marked as exhibits
"1", "2", "3", "4", & "5" for
the defendant. Could you
show us, Mr. witness where
in these policies does it
show that you are actually
given 60 to 90 days credit
arrangement with UCPB?
A: Yes.
Q: And, you would agree with me that the dates indicated in
these particular Official
Receipts (O. R.), merely
indicated the dates when
UCPB General Insurance
Company issued these
receipts? Do you admit that,
Mr. Witness?

A: Well, it's verbal with your company, and Ansons

Insurance Brokerage. It is
not written.
A: That was written in the receipts.

Q: It is not written in the policy?

Q: But, you would also agree that this did not necessarily
show the dates when you
actually forwarded the
checks to your broker,
Anson Insurance Agency,
A: Yes. for payment to UCPB
General Insurance Co. Inc.,
isn't it?

Q: You merely have verbal agreement with Ansons

Insurance Brokerage?
A: The actual support of this would be the cash voucher of
the company, Masagana
Telamart Inc., the date
when they picked up the
check from the company.
A: Yes; as shown in our mode of payment; in our vouchers
and the receipts issued by
the insurance company." 3

Q: And are these cash voucher with you?

It must be stressed that a verbal understanding of respondent

Masagana cannot amend an insurance policy. In insurance
practice, amendments or even corrections to a policy are done by
written endorsements or tickets appended to the policy. A: I don't know if it is in the folder or in our folder, now.
However, the date on the face of the receipts does not refer to the
date of actual remittance by respondent Masagana to UCPB of the
premium payments, but merely to the date of remittance to UCPB

52
Q: So, you are not certain, whether or not you actually
delivered the checks
covered by these Official
Receipts to UCPB General
Insurance, on the dates
indicated?
A: I would suppose it is few days earlier, when they picked
up the payment in our
office." 4
Hence, what has been established was the grant of credit to the
insurance brokers, not to the assured. The insurance company
recognized the payment to the insurance brokers as payment to
itself, though the actual remittance of the premium payments to
the principal might be made later. Once payment of premiums is
made to the insurance broker, the assured would be covered by a
valid and binding insurance policy, provided the loss occurred
after payment to the broker has been made.
Assuming arguendo that the 60 to 90 day-credit-term has been
agreed between the parties, respondent could not still invoke
estoppel to back up its claim. "Estoppel is unavailing in this case,"
5 thus spoke the Supreme Court through the pen of Justice Hilario
G. Davide, Jr., now Chief Justice. Mutatis mutandi, he may well be
speaking of this case. He added that "[E]stoppel can not give
validity to an act that is prohibited by law or against public
policy." 6 The actual payment of premiums is a condition
precedent to the validity of an insurance contract other than life
insurance policy. 7 Any agreement to the contrary is void as
against the law and public policy. Section 77 of the Insurance
Code provides:
"An insurer is entitled to payment of the premium as soon
as the thing insured 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." [Emphasis
supplied] EAIaHD
An incisive reading of the afore-cited provision would show that
the emphasis was on the conclusiveness of the acknowledgment
in the policy of the receipt of premium, notwithstanding the
absence of actual payment of premium, because of estoppel.
Under the doctrine of estoppel, an admission or representation is
rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. "A
party may not go back on his own acts and representations to the
prejudice of the other party who relied upon them." 8
This is the only case of estoppel which the law considers a valid
53
exception to the mandatory requirement of pre-payment of
premium. The law recognized that the contracting parties, in
entering a contract of insurance, are free to enter into
stipulations and make personal undertakings so long as they are
not contrary to law or public policy. However, the law is clear in
providing that the acknowledgment must be contained in the
policy or contract of insurance. Anything short of it would not fall
under the exception so provided in Section 78.
Hence, because of respondent's failure to pay the premiums prior
to the occurrence of the fire insured against, no valid and binding
insurance policy was created to cover the loss and destruction of
the property. The fire took place on June 13, 1992, twenty-two
(22) days after the expiration of the policy of fire insurance. The
tender of payment of premiums was made only thirty (30) days
after the occurrence of the fire, or on July 13, 1992. Respondent
Masagana did not give immediate notice to petitioner of the fire
as it occurred as required in the insurance policy. Respondent
Masagana tried to tender payment of the premiums overdue
surreptitiously before giving notice of the occurrence of the fire.
More importantly, the parties themselves expressly stipulated
that the insurance policy would not be binding on the insurer
unless the premiums thereon had been paid in full. Section 2 of
the policy provides:
"2. This policy including any renewal and/or endorsement
thereon is not in force until the premium
has been fully paid and duly receipted by
the Company in the manner provided
therein.
"Any supplementary agreement seeking to amend this
condition prepared by agent, broker or
company official, shall be deemed invalid
and of no effect.
"No payment in respect of any premium shall be deemed to
be payment to the Company unless a
printed form of receipt for the same
signed by an Official or duly appointed
Agent of the Company shall have been
given to the Insured, except when such
printed receipt is not available at the time
of payment and the company or its
representative accepts the premium in
which case a temporary receipt other
than the printed form may be issued in
lieu thereof. "Except only on those specific
cases where corresponding rules and
regulations which now we are or may
hereafter be in force provide for the
payment of the stipulated premiums in
periodic installments at fixed percentages,
it is hereby declared, agreed and
warranted that this policy shall be
deemed effective valid and binding upon
the Company when the premiums thereof
have actually been paid in full and duly
acknowledged in a receipt signed by any
authorized official or
representative/agent of the Company in
such manner as provided herein." 9
[emphasis supplied]
Thus, the insurance policy, including any renewal thereof or any
endorsements thereon shall not come in force until the premiums
have been fully paid and duly received by the insurance
Company. No payment in respect of any premiums shall be
deemed to be payment to the Insurance Company unless a
printed form of receipt for the same signed by an Official or duly
appointed Agent of the Company shall be given to the insured.
The case of Tibay v. Court of Appeals 10 is in point. The issue
raised therein was: "May a fire insurance policy be valid, binding
and enforceable upon mere partial payment of premium?" In the
said case, Fortune Life and General Insurance Co., Inc. issued Fire
Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or
Nicolas Roraldo, on a two-storey residential building located at
5855 Zobel Street, Makati City, together with all the personal
effects therein, The insurance was for P600,000.00, covering the
period from 23 January 1987 to 23 January 1988. On 23 January
1987, of the total premium of P2,983.50, Violeta Tibay only paid
P600.00, thus leaving a substantial balance unpaid. On March 8,
1987, the insured building was completely destroyed by fire. Two
days later, or on 10 March 1987, Violeta Tibay paid the balance of
the premium. On the same day, she filed with Fortune a claim for
will lapse and be forfeited by its own terms. 15
With regard to the contention that the absence of notice of non-
renewal of the policy resulted to the automatic renewal of the
insurance policy, we find the contention untenable. As above
discussed, the law provides that only upon payment of the
insurance premium will the insurance policy bind the insurer to
the peril insured against and hold it liable under the policy in
case of loss.
Even in the absence of notice of non-renewal, the assured would
be bound by the law that a non life insurance policy takes effect
only on the date payment of the premium was made.
Verily, it is elemental law that the payment of premium is a
mandatory requisite to make the policy of insurance effective. If
the premium is not paid in the manner prescribed in the policy as
intended by the parties, the policy is void and ineffective. 16
Basically a contract of indemnity, an insurance contract is the law
between the parties. Its terms and conditions constitute the
measure of the insurer's liability and compliance therewith is a
condition precedent to the insured's right to recovery from the
insurer. 17
||| (UCPB General Insurance Co., Inc. v. Masagana Telemart, Inc.,

the proceeds of the fire insurance policy. G.R. No. 137172 (Resolution), [April 4, 2001])
In denying the claim of insurance, the Court ruled that "by
express agreement of the parties, no vinculum juris or bond of
law was to be established until full payment was effected prior to
the occurrence of the risk insured against. 11 As expressly
stipulated in the contract, full payment must be made before the
risk occurs for the policy to be considered effective and in force.
"No vinculum juris whereby the insurer bound itself to indemnify
the assured according to law ever resulted from the fractional
payment of premium." 12
The majority cited the case of Makati Tuscany Condominium
Corp. vs. Court of Appeals 13 to support the contention that the
insurance policies subject of the instant case were valid and
effective. However, the factual situation in that case was different
from the case at bar.
In Tuscany, the Court held that the insurance policies were valid
and binding because there was partial payment of the premiums
and a clear understanding between the parties that they had
intended the insurance policies to be binding and effective
notwithstanding the staggered payment of the premiums. On the
basis of equity and fairness, the Court ruled that there was a
perfected contract of insurance upon the partial payment of the
premiums, notwithstanding the provisions of Section 77 to the
contrary. The Court would not allow the insurer to continue
collecting and accepting the premiums, although paid on
installments, and later deny liability on the lame excuse that the
premiums were not prepaid in full. IaDSEA
There is no dispute that like in any other contract, the parties to a
contract of insurance enjoy the freedom to stipulate on the terms
and conditions that will govern their agreement so long as they
are not contrary to law, morals, good customs, public order or
public policy. However, the agreement containing such terms and
conditions must be clear and definite.
In the case at bar, there was no clear and definite agreement
between petitioner and respondent on the grant of a credit
extension; neither was there partial payment of premiums for
petitioner to invoke the exceptional doctrine in Tuscany.
Hence, the circumstances in the above cited case are totally
different from the case at bar, and consequently, not applicable
herein.
Insurance is an aleatory contract whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. 14 The
consideration is the premium, which must be paid at the time and
in the manner specified in the policy, and if not so paid, the policy

54
 G.R. No. 195872. March 12, 2014.]
FORTUNE MEDICARE, INC., petitioner, vs. DAVID ROBERT U.
AMORIN, respondent.
DECISION
REYES, J p:
This is a petition for review on certiorari 1 under Rule 45 of the
Rules of Court, which challenges the Decision 2 dated September
27, 2010 and Resolution 3 dated February 24, 2011 of the Court of
Appeals (CA) in CA-G.R. CV No. 87255.
The Facts
David Robert U. Amorin (Amorin) was a cardholder/member of
Fortune Medicare, Inc. (Fortune Care), a corporation engaged in
providing health maintenance services to its members. The terms
of Amorin's medical coverage were provided in a Corporate
Health Program Contract 4 (Health Care Contract) which was
executed on January 6, 2000 by Fortune Care and the House of
Representatives, where Amorin was a permanent employee. HSaEAD
While on vacation in Honolulu, Hawaii, United States of America
(U.S.A.) in May 1999, Amorin underwent an emergency surgery,
specifically appendectomy, at the St. Francis Medical Center,
causing him to incur professional and hospitalization expenses of
US$7,242.35 and US$1,777.79, respectively. He attempted to
recover from Fortune Care the full amount thereof upon his
return to Manila, but the company merely approved a
reimbursement of P12,151.36, an amount that was based on the
average cost of appendectomy, net of medicare deduction, if the
procedure were performed in an accredited hospital in Metro
Manila. 5 Amorin received under protest the approved amount,
but asked for its adjustment to cover the total amount of
professional fees which he had paid, and eighty percent (80%) of
the approved standard charges based on "American standard",
considering that the emergency procedure occurred in the U.S.A.
To support his claim, Amorin cited Section 3, Article V on Benefits
and Coverages of the Health Care Contract, to wit:
A. EMERGENCY CARE IN ACCREDITED HOSPITAL. Whether
as an in-patient or out-patient, the
member shall be entitled to full coverage
under the benefits provisions of the
Contract at any FortuneCare accredited
hospitals subject only to the pertinent
provision of Article VII
(Exclusions/Limitations) hereof. For
emergency care attended by non affiliated
physician (MSU), the member shall be
reimbursed 80% of the professional fee
which should have been paid, had the
member been treated by an affiliated
physician. The availment of emergency
care from an unaffiliated physician shall
not invalidate or diminish any claim if it
shall be shown to have been reasonably
impossible to obtain such emergency care
from an affiliated physician.
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL DIESaC
1. Whether as an in-patient or out-patient, FortuneCare
shall reimburse the total hospitalization
cost including the professional fee (based
on the total approved charges) to a
member who receives emergency care in
a non-accredited hospital. The above
55
coverage applies only to Emergency
confinement within Philippine Territory.
However, if the emergency
confinement occurs in a foreign
territory, Fortune Care will be
obligated to reimburse or pay eighty
(80%) percent of the approved
standard charges which shall cover the
hospitalization costs and professional
fees. . . . 6
Still, Fortune Care denied Amorin's request, prompting the latter
to file a complaint 7 for breach of contract with damages with the
Regional Trial Court (RTC) of Makati City.
For its part, Fortune Care argued that the Health Care Contract
did not cover hospitalization costs and professional fees incurred
in foreign countries, as the contract's operation was confined to
Philippine territory. 8 Further, it argued that its liability to Amorin
was extinguished upon the latter's acceptance from the company
of the amount of P12,151.36. DTAaCE
The RTC Ruling
On May 8, 2006, the RTC of Makati, Branch 66 rendered its
Decision 9 dismissing Amorin's complaint. Citing Section 3, Article
V of the Health Care Contract, the RTC explained:
Taking the contract as a whole, the Court is convinced that
the parties intended to use the Philippine
standard as basis. Section 3 of the
Corporate Health Care Program Contract
provides that:
xxx xxx xxx
On the basis of the clause providing for reimbursement
equivalent to 80% of the professional fee
which should have been paid, had the
member been treated by an affiliated
physician, the Court concludes that the
basis for reimbursement shall be
Philippine rates. That provision, taken
with Article V of the health program
contract, which identifies affiliated
hospitals as only those accredited clinics,
hospitals and medical centers located
"nationwide" only point to the Philippine
standard as basis for reimbursement.
The clause providing for reimbursement in case of
emergency operation in a foreign
territory equivalent to 80% of the
approved standard charges which shall
cover hospitalization costs and
professional fees, can only be reasonably
construed in connection with the
preceding clause on professional fees to
give meaning to a somewhat vague clause.
A particular clause should not be studied
as a detached and isolated expression, but
the whole and every part of the contract
must be considered in fixing the meaning
of its parts. 10
In the absence of evidence to the contrary, the trial court Contract should be based on the expenses for hospital and
considered the amount of P12,15[1].36 already paid by Fortune professional fees which he actually incurred, and should not be
Care to Amorin as equivalent to 80% of the hospitalization and limited by the amount that he would have incurred had his
professional fees payable to the latter had he been treated in an emergency treatment been performed in an accredited hospital
affiliated hospital. 11 EHaDIC in the Philippines.
Dissatisfied, Amorin appealed the RTC decision to the CA. We emphasize that for purposes of determining the liability of a
The CA Ruling health care provider to its members, jurisprudence holds that a
On September 27, 2010, the CA rendered its Decision 12 granting health care agreement is in the nature of non-life insurance,
the appeal. Thus, the dispositive portion of its decision reads: which is primarily a contract of indemnity. Once the member
WHEREFORE, all the foregoing premises considered, the instant appeal is incurs hospital, medical or any other expense arising from
hereby GRANTED. The May 8, 2006 assailed Decision of the Regional Trial sickness, injury or other stipulated contingent, the health care
Court (RTC) of Makati City, Branch 66 is hereby REVERSED and SET provider must pay for the same to the extent agreed upon under
ASIDE, and a new one entered ordering Fortune Medicare, Inc. to
the contract. 18
reimburse [Amorin] 80% of the total amount of the actual hospitalization
expenses of $7,242.35 and professional fee of $1,777.79 paid by him to St. To aid in the interpretation of health care agreements, the Court
Francis Medical Center pursuant to Section 3, Article V of the Corporate laid down the following guidelines in Philamcare Health Systems
Health Care Program Contract, or their peso equivalent at the time the v. CA: 19
amounts became due, less the [P]12,151.36 already paid by Fortunecare. When the terms of insurance contract contain
SO ORDERED. 13 limitations on liability, courts should
In so ruling, the appellate court pointed out that, first, health care construe them in such a way as to
agreements such as the subject Health Care Contract, being like preclude the insurer from non-
compliance with his obligation. Being
insurance contracts, must be liberally construed in favor of the
a contract of adhesion, the terms of
subscriber. In case its provisions are doubtful or reasonably an insurance contract are to be
susceptible of two interpretations, the construction conferring construed strictly against the party
coverage is to be adopted and exclusionary clauses of doubtful which prepared the contract — the
import should be strictly construed against the provider. 14 insurer. By reason of the exclusive
Second, the CA explained that there was nothing under Article V control of the insurance company over
of the Health Care Contract which provided that the Philippine the terms and phraseology of the
standard should be used even in the event of an emergency insurance contract, ambiguity must be
strictly interpreted against the insurer
confinement in a foreign territory. 15
and liberally in favor of the insured,
Fortune Care's motion for reconsideration was denied in a especially to avoid forfeiture. This is
Resolution 16 dated February 24, 2011. Hence, the filing of the equally applicable to Health Care
present petition for review on certiorari. Agreements. The phraseology used
The Present Petition in medical or hospital service
Fortune Care cites the following grounds to support its petition: contracts, such as the one at bar,
cHaCAS
must be liberally construed in favor
I. The CA gravely erred in concluding that the phrase of the subscriber, and if doubtful or
"approved standard reasonably susceptible of two
charges" is subject to interpretations the construction
interpretation, and that conferring coverage is to be
it did not automatically adopted, and exclusionary clauses
mean "Philippine of doubtful import should be
strictly construed against the
Standard"; and
provider. 20 (Citations omitted and
emphasis ours) ISDHEa

II. The CA gravely erred in denying Fortune Care's

motion for
reconsideration, which
in effect affirmed its Consistent with the foregoing, we reiterated in Blue Cross Health
decision that the Care, Inc. v. Spouses Olivares: 21
In Philamcare Health Systems, Inc. v. CA, we ruled that a
American Standard Cost
health care agreement is in the nature of a
shall be applied in the non-life insurance. It is an established
payment of medical and rule in insurance contracts that when
hospitalization expenses their terms contain limitations on liability,
and professional fees they should be construed strictly against
incurred by the the insurer. These are contracts of
respondent. 17 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.

The Court's Ruling

The petition is bereft of merit. DcHaET
The Court finds no cogent reason to disturb the CA's finding that
Fortune Care's liability to Amorin under the subject Health Care xxx xxx xxx

56
. . . [L]imitations of liability on the part of the insurer or
health care provider must be construed in
such a way as to preclude it from evading
its obligations. Accordingly, they should
be scrutinized by the courts with
"extreme jealousy" and "care" and with
a "jaundiced eye." . . . . 22 (Citations
omitted and emphasis supplied)
In the instant case, the extent of Fortune Care's liability to Amorin
under the attendant circumstances was governed by Section 3
(B), Article V of the subject Health Care Contract, considering that
the appendectomy which the member had to undergo qualified as
an emergency care, but the treatment was performed at St.
Francis Medical Center in Honolulu, Hawaii, U.S.A., a non-
accredited hospital. We restate the pertinent portions of Section
3 (B):
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL ECaTAI
1. Whether as an in-patient or out-patient, FortuneCare
shall reimburse the total hospitalization
cost including the professional fee (based
on the total approved charges) to a
member who receives emergency care in
a non-accredited hospital. The above
coverage applies only to Emergency
confinement within Philippine Territory.
However, if the emergency
confinement occurs in foreign
territory, Fortune Care will be
obligated to reimburse or pay eighty
(80%) percent of the approved
standard charges which shall cover the
hospitalization costs and professional
fees. . . . 23 (Emphasis supplied) ICAcaH
The point of dispute now concerns the proper interpretation of
the phrase "approved standard charges", which shall be the base
for the allowable 80% benefit. The trial court ruled that the
phrase should be interpreted in light of the provisions of Section
3 (A), i.e., to the extent that may be allowed for treatments
performed by accredited physicians in accredited hospitals. As
the appellate court however held, this must be interpreted in its
literal sense, guided by the rule that any ambiguity shall be
strictly construed against Fortune Care, and liberally in favor of
Amorin.
The Court agrees with the CA. As may be gleaned from the Health
Care Contract, the parties thereto contemplated the possibility of
emergency care in a foreign country. As the contract recognized
Fortune Care's liability for emergency treatments even in foreign
territories, it expressly limited its liability only insofar as the
percentage of hospitalization and professional fees that must be
paid or reimbursed was concerned, pegged at a mere 80% of the
approved standard charges.
The word "standard" as used in the cited stipulation was vague
and ambiguous, as it could be susceptible of different meanings.
Plainly, the term "standard charges" could be read as referring to
the "hospitalization costs and professional fees" which were
57
specifically cited as compensable even when incurred in a foreign
country. Contrary to Fortune Care's argument, from nowhere in
the Health Care Contract could it be reasonably deduced that
these "standard charges" referred to the "Philippine standard", or
that cost which would have been incurred if the medical services
were performed in an accredited hospital situated in the
Philippines. The RTC ruling that the use of the "Philippine
standard" could be inferred from the provisions of Section 3 (A),
which covered emergency care in an accredited hospital, was
misplaced. Evidently, the parties to the Health Care Contract
made a clear distinction between emergency care in an
accredited hospital, and that obtained from a non-accredited
hospital. The limitation on payment based on "Philippine
standard" for services of accredited physicians was expressly
made applicable only in the case of an emergency care in an
accredited hospital.
The proper interpretation of the phrase "standard charges" could
instead be correlated with and reasonably inferred from the
other provisions of Section 3 (B), considering that Amorin's case
fell under the second case, i.e., emergency care in a non-
accredited hospital. Rather than a determination of Philippine or
American standards, the first part of the provision speaks of the
full reimbursement of "the total hospitalization cost including
the professional fee (based on the total approved charges) to a
member who receives emergency care in a non-accredited
hospital" within the Philippines. Thus, for emergency care in non-
accredited hospitals, this cited clause declared the standard in the
determination of the amount to be paid, without any reference to
and regardless of the amounts that would have been payable if
the treatment was done by an affiliated physician or in an
affiliated hospital. For treatments in foreign territories, the only
qualification was only as to the percentage, or 80% of that
payable for treatments performed in non-accredited hospital. EcIDaA
All told, in the absence of any qualifying word that clearly limited
Fortune Care's liability to costs that are applicable in the
Philippines, the amount payable by Fortune Care should not be
limited to the cost of treatment in the Philippines, as to do so
would result in the clear disadvantage of its member. If, as
Fortune Care argued, the premium and other charges in the
Health Care Contract were merely computed on assumption and
risk under Philippine cost and, that the American cost standard
or any foreign country's cost was never considered, such
limitations should have been distinctly specified and clearly
reflected in the extent of coverage which the company voluntarily
assumed. This was what Fortune Care found appropriate when in
its new health care agreement with the House of Representatives,
particularly in their 2006 agreement, the provision on emergency
care in non-accredited hospitals was modified to read as follows:
However, if the emergency confinement occurs in a
foreign territory, Fortunecare will be
obligated to reimburse or pay one
hundred (100%) percent under
approved Philippine Standard
covered charges for hospitalization
costs and professional fees but not to
exceed maximum allowable coverage,
payable in pesos at prevailing
currency exchange rate at the time of
availment in said territory where
he/she is confined. . . . 24
Settled is the rule that ambiguities in a contract are interpreted
against the party that caused the ambiguity. "[A]ny ambiguity in a
contract whose terms are susceptible of different interpretations
must be read against the party who drafted it." 25 ETaHCD
WHEREFORE, the petition is DENIED. The Decision dated
September 27, 2010 and Resolution dated February 24, 2011 of
the Court of Appeals in CA-G.R. CV No. 87255 are AFFIRMED.
SO ORDERED. IcCDAS
||| (Fortune Medicare, Inc. v. Amorin, G.R. No. 195872, [March 12,

2014])

58
 [G.R. No. 109937. March 21, 1994.]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B.
DANS, represented by CANDIDA G. DANS, and the DBP
MORTGAGE REDEMPTION INSURANCE POOL, respondents.
DECISION
QUIASON, J p:
This is a petition for review on certiorari under Rule 45 of the
Revised Rules of Court to reverse and set aside the decision of the
Court of Appeals in CA-G.R CV No. 26434 and its resolution
denying reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.
I
of contract between it and the deceased. The trial court declared
DBP in estoppel for having led Dans into applying for MRI and
actually collecting the premium and the service fee, despite
knowledge of his age ineligibility. The dispositive portion of the
decision read as follows:
"WHEREFORE, in view of
the foregoing consideration and in the
furtherance of justice and equity, the
Court finds judgment for the plaintiff and
against Defendant DBP, ordering the
latter:

In May 1987, Juan B. Dans, together with his wife Candida, his son
and daughter-in-law, applied for a loan of P500,000.00 with the 1. To return
and reimburse plaintiff the
Development Bank of the Philippines (DBP), Basilan Branch. As
amount of P139,500.00 plus
the principal mortgagor, Dans, then 76 years of age, was advised legal rate of interest as
by DBP to obtain a mortgage redemption insurance (MRI) with amortization payment paid
the DBP Mortgage Redemption Insurance Pool (DBP MRI Pool). under protest;
A loan, in the reduced amount of P300,000.00, was approved by
DBP on August 4, 1987 and released on August 11, 1987. From
the proceeds of the loan, DBP deducted the amount of P1,476.00
as payment for the MRI premium. On August 15, 1987, Dans
accomplished and submitted the "MRI Application for Insurance"
2. To consider
and the "Health Statement for DBP MRI Pool."
the mortgage loan of
On August 20, 1987, the MRI premium of Dans, less the DBP P300,000.00 including all
service fee of 10 percent, was credited by DBP to the savings interest accumulated or
account of the DBP MRI Pool. Accordingly, the DBP MRI Pool was otherwise to have been
advised of the credit. Cdpr settled, satisfied or set-off
On September 3, 1987, Dans died of cardiac arrest. The DBP, by virtue of the insurance
upon notice, relayed this information to the DBP MRI Pool. On coverage of the late Juan B.
September 23, 1987, the DBP MRI Pool notified DBP that Dans Dans; .
was not eligible for MRI coverage, being over the acceptance age
limit of 60 years at the time of application. LibLex
On October 21, 1987, DBP apprised Candida Dans of the
disapproval of her late husband's MRI application. The DBP
offered to refund the premium of P1,476.00 which the deceased 3. To pay
had paid, but Candida Dans refused to accept the same, plaintiff the amount of
demanding payment of the face value of the MRI or an amount P10,000.00 as attorney's
equivalent to the loan. She, likewise, refused to accept anex gratia fees;
settlement of P30,000.00, which the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans
as administratrix, filed a complaint with the Regional Trial Court,
Branch I, Basilan, against DBP and the insurance pool for
"Collection of Sum of Money with Damages." Respondent Estate 4. To pay
alleged that Dans became insured by the DBP MRI Pool when plaintiff the amount of
DBP, with full knowledge of Dans' age at the time of application, P10,000.00 as costs of
required him to apply for MRI, and later collected the insurance litigation and other
premium thereon. Respondent Estate therefore prayed: (1) that expenses, and other relief
the sum of P139,500.00, which it paid under protest for the loan, just and equitable.
be reimbursed; (2) that the mortgage debt of the deceased be
declared fully paid; and (3) that damages be awarded. LexLib
The DBP and the DBP MRI Pool separately filed their answers,
with the former asserting a cross-claim against the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the The Counterclaims of
documents and exhibits submitted by respondent Estate. As a Defendants DBP and DBP-MRI POOL are
result of these admissions, the trial court narrowed down the hereby dismissed. The Cross-claim of
issues and, without opposition from the parties, found the case defendant DBP is likewise dismissed"
ripe for summary judgment. Consequently, the trial court ordered (Rollo, p. 79)
the parties to submit their respective position papers and
documentary evidence, which may serve as basis for the
judgment. cdrep
On March 10, 1990, the trial court rendered a decision in favor of
respondent Estate and against DBP. The DBP MRI Pool, however, The DBP appealed to the Court of Appeals. In a decision dated
was absolved from liability, after the trial court found no privity September 7, 1992, the appellate court affirmed in toto the

59
decision of the trial court. The DBP's motion for reconsideration
was denied in a resolution dated April 20, 1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a
"Health Statement for DBP Pool" (Exh. "5-Bank") with the
following declaration:
"I hereby declare and agree
that all the statements and answers
contained herein are true, complete and
correct to the best of my knowledge and
belief and form part of my application for
insurance. It is understood and agreed
that no insurance coverage shall be
effected unless and until this application
is approved and the full premium is paid
during my continued good health"
(Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall
take effect: (1) when the application shall be approved by the
insurance pool; and (2) when the full premium is paid during the
continued good health of the applicant. These two conditions,
being joined conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged
with the DBP MRI Pool. The pool, however, did not approve the
application of Dans. There is also no showing that it accepted the
sum of P1,476.00, which DBP credited to its account with full
knowledge that it was payment for Dan's premium. There was, as
a result, no perfected contract of insurance; hence, the DBP MRI
Pool cannot be held liable on a contract that does not exist.
The liability of DBP is another matter. prcd
It was DBP, as a matter of policy and practice, that required Dans,
the borrower, to secure MRI coverage. Instead of allowing Dans
to look for his own insurance carrier or some other form of
insurance policy, DBP compelled him to apply with the DBP MRI
Pool for MRI coverage. When Dan's loan was released on August
11, 1987, DBP already deducted from the proceeds thereof the
MRI premium. Four days latter, DBP made Dans fill up and sign
his application for MRI, as well as his health statement. The DBP
later submitted both the application form and health statement to
the DBP MRI Pool at the DBP Main Building, Makati Metro Manila.
As service fee, DBP deducted 10 percent of the premium collected
by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as
a lender, and the second as an insurance agent.
As an insurance agent, DBP made Dans go through the motion of
applying for said insurance, thereby leading him and his family to
believe that they had already fulfilled all the requirements for the
MRI and that the issuance of their policy was forthcoming.
Apparently, DBP had full knowledge that Dan's application was
never going to be approved. The maximum age for MRI
acceptance is 60 years as clearly and specifically provided in
Article 1 of the Group Mortgage Redemption Insurance Policy
signed in 1984 by all the insurance companies concerned (Exh.
"1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent
who acts as such is not personally liable to the party with whom
he contracts, unless he expressly binds himself or exceeds the
limits of his authority without giving such party sufficient notice
of his powers."
The DBP is not authorized to accept applications for MRI when its
clients are more than 60 years of age (Exh. "1-Pool"). Knowing all
60
the while that Dans was ineligible for MRI coverage because of
his advanced age, DBP exceeded the scope of its authority when it
accepted Dan's application for MRI by collecting the insurance
premium, and deducting its agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority
depends upon whether the third person is aware of the limits of
the agent's powers. There is no showing that Dans knew of the
limitation on DBP's authority to solicit applications for MRI. LLphil
If the third person dealing with an agent is unaware of the limits
of the authority conferred by the principal on the agent and he
(third person) has been deceived by the non-disclosure thereof
by the agent, then the latter is liable for damages to him (V
Tolentino, Commentaries and Jurisprudence on the Civil Code of
the Philippines, p. 422 [1992], citing Sentencia [Cuba] of
September 25, 1907). The rule that the agent is liable when he
acts without authority is founded upon the supposition that there
has been some wrong or omission on his part either in
misrepresenting, or in affirming, or concealing the authority
under which he assumes to act (Francisco, V., Agency 307 [1952],
citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-
disclosure of the limits of the agency carries with it the
implication that a deception was perpetrated on the unsuspecting
client, the provisions of Articles 19, 20 and 21 of the Civil Code of
the Philippines come into play.
Article 19 provides:
"Every person must, in the
exercise of his rights and in the
performance of his duties, act with justice
give everyone his due and observe
honesty and good faith." LexLib
Article 20 provides:
"Every person who,
contrary to law, willfully or negligently
causes damage to another, shall
indemnify the latter for the same."
Article 21 provides:
"Any person, who willfully
causes loss or injury to another in a
manner that is contrary to morals, good
customs or public policy shall compensate
the latter for the damage."
The DBP's liability, however, cannot be for the entire value of the
insurance policy. To assume that were it not for DBP's
concealment of the limits of its authority, Dans would have
secured an MRI from another insurance company, and therefore
would have been fully insured by the time he died, is highly
speculative. Considering his advanced age, there is no absolute
certainty that Dans could obtain an insurance coverage from
another company. It must also be noted that Dans died almost
immediately, i.e., on the nineteenth day after applying for the
MRI, and on the twenty-third day from the date of release of his
loan. LLphil
One is entitles to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved (Civil Code
of the Philippines, Art. 2199). Damages, to be recoverable, must
not only be capable of proof, but must be actually proved with a
reasonable degree of certainty (Refractories Corporation v.
Intermediate Appellate Court, 176 SCRA 539 [1989]; Choa Tek
Hee v. Philippine Publishing Co., 34 Phil. 447 [1916]). Speculative
damages are too remote to be included in an accurate estimate of
damages (Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844
[1918]).
While Dans is not entitled to compensatory damages, he is
entitled to moral damages. No proof of pecuniary loss is required
in the assessment of said kind of damages (Civil Code of
Philippines, Art. 2216). The same may be recovered in acts
referred to in Article 2219 of the Civil Code.
The assessment of moral damages is left to the discretion of the
court according to the circumstances of each case (Civil Code of
the Philippines, Art. 2216). Considering that DBP had offered to
pay P30,000.00 to respondent Estate in ex gratia settlement of its
claim and that DBP's non-disclosure of the limits of its authority
amounted to a deception to its client, an award of moral damages
in the amount of P50,000.00 would be reasonable.
The award of attorney's fees is also just and equitable under the
circumstances (Civil Code of the Philippines, Article 2208 [11]).
LLphil

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

No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to
REIMBURSE respondent Estate of Juan B. Dans the amount of
P1,476.00 with legal interest from the date of the filing of the
complaint until fully paid; and (2) to PAY said Estate the amount
of Fifty Thousand Pesos (P50,000.00) as moral damages and the
amount of Ten Thousand Pesos (P10,000.00) as attorney's fees.
With costs against petitioner.
SO ORDERED.
||| (DBP v. Court of Appeals, G.R. No. 109937, [March 21, 1994])

61
 [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.
Jose S. Suarez for petitioner.
Eligio G. Guzman for respondents.
SYLLABUS
1.COMMERCIAL LAWS; INSURANCE CONTRACTS; COMMON
CARRIER LIABILITY INSURANCE; INSURER WHO REPRESENTS
INSURABILITY OF VEHICLE ESTOPPED FROM DENYING
LIABILITY THEREON. — After petitioner FIELDMEN'S Insurance
Co., Inc., had led the insured Federico Songco to believe that he
could qualify under the common carrier liability insurance policy,
and to enter into contract of insurance paying the premiums due,
it could not, thereafter, in any litigation arising out of such
representation, be permitted to change its stand to the detriment
of the heirs of the insured. As estoppel is primarily based on the
doctrine of good faith and the avoidance of harm that will befall
the innocent party due to its injurious reliance, the failure to
apply it in this case would result in a gross travesty of justice.
2.ID.; ID.; ID.; INSURER ESTOPPED FROM ASSERTING BREACH
OF IMPOSSIBLE CONDITION IN THE CONTRACT. — Why liability
under the terms of the policy 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."
DECISION
FERNANDO, J p:
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
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
62
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 degrees." 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 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.
The basis for the favorable judgment is the doctrine announced in
Qua Chee Gan vs. Law Union Bank 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, his
is a case where the doctrine of estoppel undeniably calls for
application. After petitioner FIELDMEN'S Insurance Co., Inc., had
led the insured Federico Songco to believe that he could qualify
under the common carrier liability insurance policy, and to enter
into contract of insurance paying the premiums due, it could not,
thereafter, in any litigation arising out of such representation, be
permitted to change its stand to the detriment of the heirs of the
insured. As estoppel is primarily based on the doctrine of good
faith and the avoidance of harm that will befall the innocent party
due to 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. It 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
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.
||| (Fieldmen's Insurance Co., Inc. v. Vda. de Songco, G.R. No. L-

hospital and medical expenses the defendant company was being 24833, [September 23, 1968])
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 under-noted
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
concentrations 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' (contracts d'
adhesion), in contrast to these entered into by parties bargaining
on an equal footing, such contracts (of which policies of insurance
and international bills of lading are prime example) 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 (uberrima 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

63
 [G.R. No. 119599. March 20, 1997.]
MALAYAN INSURANCE CORPORATION, petitioner, vs. THE
HON. COURT OF APPEALS and TKC MARKETING
CORPORATION, respondents.
Quasha & Ancheta Pena & Nolasco for petitioner.
Lasam and Associates for private respondent.
Balgos and Perez co-counsel for private respondent.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE; MARINE INSURANCE; FREE
FROM CAPTURE AND SEIZURE CLAUSE; "ARRESTS" CAUSED BY
ORDINARY JUDICIAL PROCESS, INCLUDED AMONG THE
COVERED RISKS. — With the incorporation of subsection 1.1 of
Section 1 of the Institute War Clauses, however, this Court agrees
with the Court of Appeals and the private respondent that
"arrest" caused by ordinary judicial process is deemed included
among the covered risks. This interpretation becomes inevitable
when subsection 1.1. of Section 1 of the Institute War Clauses
provided that "this insurance covers the risks excluded from the
Standard Form of English Marine Policy by the clause 'warranted
free of capture, seizure, arrest, etc. . . ." or the F. C. & S. Clause.
Jurisprudentially, "arrest" caused by ordinary judicial process is
also a risk excluded from the Standard Form of English Marine
Policy by the F. C. & S. Clause. Petitioner cannot adopt the
argument that the "arrest" caused by ordinary Judicial process is
not included in the covered risk simply because the F. C. & S.
Clause under the Institute War Clauses can only be operative in
case of hostilities or warlike operations on account of its heading
"Institute War Clauses." This Court agrees with the Court of
Appeals when it held that ". . . Although the F.C. & S. Clause may
have originally been inserted in marine policies to protect against
risks of war, (see generally G. Gilmore & C. Black., The Law of
Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation
in recent years to include seizure or detention by civil authorities
seems consistent with the general purposes of the clause, . . ." In
fact, petitioner itself averred that subsection 1.1 of Section 1 of
the Institute War Clauses included "arrest" even if it were not a
result of hostilities or warlike operations. In this regard, since
what was also excluded in the deleted F. C. & S. Clause was
"arrest" occasioned by ordinary judicial process, logically, such
"arrest" would now become a covered risk under subsection 1.1
of Section 1 of the Institute War Clauses, regardless of whether or
not said "arrest" by civil authorities occurred in a state of war.
2. STATUTORY CONSTRUCTION; STRAINED INTERPRETATION
LEADING TO ABSURD CONCLUSION MUST BE AVOIDED. — It has
been held that a strained interpretation which is unnatural and
forced, as to lead to an absurd conclusion or to render the policy
nonsensical, should, by all means, be avoided.
3. COMMERCIAL LAW; INSURANCE; POLICIES CONSTRUED
STRICTLY AGAINST THE INSURER — Likewise, it must be borne
in mind that such contracts are invariably prepared by the
companies and must be accepted by the insured in the form in
which they are written. Any construction of a marine policy
rendering it void should be avoided. Such policies will, therefore,
be construed strictly against the, company in order to avoid a
forfeiture, unless no other result is possible from the language
used.
4. ID.; ID.; MARINE INSURANCE; EXCEPTION OR EXEMPTION OF
COVERAGE MUST BE EXPRESSED IN CLEAR LANGUAGE; CASE AT
BAR. — If a marine insurance company desires to limit or restrict
the operation of the general provisions of its contract by special
proviso, exception, or exemption, it should express such
limitation in clear and unmistakable language. Obviously, the
deletion of the F.C. & S. Clause and the consequent incorporation
of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo)
gave rise to ambiguity. If the risk of arrest occasioned by ordinary
judicial process was expressly indicated as an exception in the
64
subject policies, there would have been no controversy with
respect to the interpretation of the subject clauses.
5. ID.; ID.; EXCEPTIONS TO GENERAL COVERAGE ARE
CONSTRUED MOST STRONGLY AGAINST THE INSURER. — Be
that as it may, exceptions to the general coverage are construed
most strongly against the company. Even an express exception in
a policy is to be construed against the underwriters by whom the
policy is named, and for whose benefit the exception is
introduced.
6. ID.; ID.; SHOULD BE INTERPRETED TO CARRY OUT THE
PURPOSE FOR WHICH THE PARTIES ENTERED INTO THE
CONTRACT. — An insurance contract should be so interpreted as
to carry out the purpose for which the parties entered into the
contract which is, to insure against risks of loss or damage to the
goods. Such interpretation should result from the natural and
reasonable meaning of language in the policy. Where restrictive
provisions are open to two interpretations, that which is most
favorable to the insured is adopted.
7. ID.; ID.; BEING A CONTRACT OF ADHESION, ANY AMBIGUITY
SHOULD BE RESOLVED AGAINST THE INSURER. — Indemnity
and liability insurance policies are construed in accordance with
the general rule of resolving any ambiguity therein in favor of the
insured, where the contract or policy is prepared by the insurer.
A contract of insurance, being a contract of adhesion, par
excellence, any ambiguity therein should be resolved against the
insurer; in other words, it should be construed liberally in favor
of the insured and strictly against the insurer. Limitations of
liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from non-
compliance with its obligations.
DECISION
ROMERO, J p:
Assailed in this petition for review on certiorari is the decision of
the Court of Appeals in CA-G.R. No. 43023 1 which affirmed, with
slight modification, the decision of the Regional Trial Court of
Cebu, Branch 15.
Private respondent TKC Marketing Corp. was the
owner/consignee of some 3,189.171 metric tons of soya bean
meal which was loaded on board the ship MV Al Kaziemah on or
about September 8, 1989 for carriage from the port of Rio del
Grande, Brazil, to the port of Manila. Said cargo was insured
against the risk of loss by petitioner Malayan Insurance
Corporation for which it issued two (2) Marine Cargo Policy Nos.
M/LP 97800305 amounting to P18,986,902.45 and M/LP
97800306 amounting to P1,195,005.45, both dated September
1989.
While the vessel was docked in Durban, South Africa on
September 11, 1989 enroute to Manila, the civil authorities
arrested and detained it because of a lawsuit on a question of
ownership and possession. As a result, private respondent
notified petitioner on October 4, 1989 of the arrest of the vessel
and made a formal claim for the amount of US$916,886.66,
representing the dollar equivalent on the policies, for non-
delivery of the cargo. Private respondent likewise sought the
assistance of petitioner on what to do with the cargo.
Petitioner replied that the arrest of the vessel by civil authority
was not a peril covered by the policies. Private respondent,
accordingly, advised petitioner that it might tranship the cargo
and requested an extension of the insurance coverage until actual
transshipment, which extension was approved upon payment of
additional premium. The insurance coverage was extended under
the same terms and conditions embodied in the original policies
while in the process of making arrangements for the
transshipment of the cargo from Durban to Manila, covering the
period October 4-December 19, 1989.
However, on December 11, 1989, the cargo was sold in Durban,
South Africa, for US$154.40 per metric ton or a total of
P10,304,231.75 due to its perishable nature which could no
longer stand a voyage of twenty days to Manila and another
twenty days for the discharge thereof. On January 5, 1990, private
respondent forthwith reduced its claim to US$448,806.09 (or its
peso equivalent of P9,879,928.89 at the exchange rate of
P22.0138 per $1.00) representing private respondent's loss after
the proceeds of the sale were deducted from the original claim of
$916,886.66 or P20,184,159.55.
Petitioner maintained its position that the arrest of the vessel by
civil authorities on a question of ownership was an excepted risk
under the marine insurance policies. This prompted private
respondent to file a complaint for damages praying that aside
from its claim, it be reimbursed the amount of P128,770.88 as
legal expenses and the interest it paid for the loan it obtained to
finance the shipment totalling P942,269.30. In addition, private
respondent asked for moral damages amounting to P200,000.00,
exemplary damages amounting to P200,000.00 and attorney's
fees equivalent to 30% of what will be awarded by the court.
The lower court decided in favor of private respondent and
required petitioner to pay, aside from the insurance claim,
consequential and liquidated damages amounting to
P1,024,233.88, exemplary damages amounting to P100,000.00,
reimbursement in the amount equivalent to 10% of whatever is
recovered as attorney's fees as well as the costs of the suit. On
private respondent's motion for reconsideration, petitioner was
also required to further pay interest at the rate of 12% per
annum on all amounts due and owing to the private respondent
by virtue of the lower court decision counted from the inception
of this case until the same is paid.
On appeal, the Court of Appeals affirmed the decision of the lower
court stating that with the deletion of Clause 12 of the policies
issued to private respondent, the same became automatically
covered under subsection 1.1 of Section 1 of the Institute War
Clauses. The arrests, restraints or detainments contemplated in
the former clause were those effected by political or executive
acts. Losses occasioned by riot or ordinary judicial processes
were not covered therein. In other words, arrest, restraint or
detainment within the meaning of Clause 12 (or F.C. & S. Clause)
rules out detention by ordinary legal processes. Hence, arrests by
civil authorities, such as what happened in the instant case, is an
excepted risk under Clause 12 of the Institute Cargo Clause or the
F.C. & S. Clause. However, with the deletion of Clause 12 of the
Institute Cargo Clause and the consequent adoption or institution
of the Institute War Clauses (Cargo), the arrest and seizure by
judicial processes which were excluded under the former policy
became one of the covered risks.
The appellate court added that the failure to deliver the
consigned goods in the port of destination is a loss compensable,
not only under the Institute War Clause but also under the Theft,
Pilferage, and Non-delivery Clause (TNPD) of the insurance
policies, as read in relation to Section 130 of the Insurance Code
and as held in Williams v. Cole. 2
Furthermore, the appellate court contended that since the vessel
was prevented at an intermediate port from completing the
voyage due to its seizure by civil authorities, a peril insured
against, the liability of petitioner continued until the goods could
have been transhipped. But due to the perishable nature of the
goods, it had to be promptly sold to minimize loss. Accordingly,
the sale of the goods being reasonable and justified, it should not
operate to discharge petitioner from its contractual liability.
Hence this petition, claiming that the Court of Appeals erred:
1. In ruling that the arrest of the vessel was a risk covered
under the subject insurance policies.
65
2. In ruling that there was constructive total loss over the
cargo.
3. In ruling that petitioner was in bad faith in declining
private respondent's claim.
4. In giving undue reliance to the doctrine that insurance
policies are strictly construed against the
insurer.
In assigning the first error, petitioner submits the following: (a)
an arrest by civil authority is not compensable since the term
"arrest" refers to "political or executive acts" and does not
include a loss caused by riot or by ordinary judicial process as in
this case; (b) the deletion of the Free from Capture or Seizure
Clause would leave the assured covered solely for the perils
specified by the wording of the policy itself; (c) the rationale for
the exclusion of an arrest pursuant to judicial authorities is to
eliminate collusion between unscrupulous assured and civil
authorities.
As to the second assigned error, petitioner submits that any loss
which private respondent may have incurred was in the nature
and form of unrecovered acquisition value brought about by a
voluntary sacrifice sale and not by arrest, detention or seizure of
the ship.
As to the third issue, petitioner alleges that its act of rejecting the
claim was a result of its honest belief that the arrest of the vessel
was not a compensable risk under the policies issued. In fact,
petitioner supported private respondent by accommodating the
latter's request for an extension of the insurance coverage,
notwithstanding that it was then under no legal obligation to do
so. cdasia
Private respondent, on the other hand, argued that when it
appealed its case to the Court of Appeals, petitioner did not raise
as an issue the award of exemplary damages. It cannot now, for
the first time, raise the same before this Court. Likewise,
petitioner cannot submit for the first time on appeal its argument
that it was wrong for the Court of Appeals to have ruled the way
it did based on facts that would need inquiry into the evidence.
Even if inquiry into the facts were possible, such was not
necessary because the coverage as ruled upon by the Court of
Appeals is evident from the very terms of the policies.
It also argued that petitioner, being the sole author of the policies,
"arrests" should be strictly interpreted against it because the rule
is that any ambiguity is to be taken contra proferentum. Risk
policies should be construed reasonably and in a manner as to
make effective the intentions and expectations of the parties. It
added that the policies clearly stipulate that they cover the risks
of non-delivery of an entire package and that it was petitioner
itself that invited and granted the extensions and collected
premiums thereon.
The resolution of this controversy hinges on the interpretation of
the "Perils" clause of the subject policies in relation to the
excluded risks or warranty specifically stated therein.
By way of a historical background, marine insurance developed
as an all-risk coverage, using the phrase "perils of the sea" to
encompass the wide and varied range of risks that were covered.
3 The subject policies contain the "Perils" clause which is a air forces in association with power.
standard form in any marine insurance policy. Said clause reads:
"Touching the adventures which the said MALAYAN
INSURANCE CO., are content to bear, and
to take upon them in this voyage; they are
of the Seas; Men-of-War, Fire, Enemies,
Pirates, Rovers, Thieves, Jettisons, Letters Further warranted free from the consequences of civil war,
of Mart and Counter Mart, Surprisals, revolution, insurrection, or civil strike
Takings of the Sea, Arrests, Restraints and arising therefrom or piracy.
Detainments of all Kings, Princess and
Peoples, of what Nation, condition, or
quality soever, Barratry of the Master and
Mariners, and of all other Perils, Losses,
and Misfortunes, that have come to hurt,
detriment, or damage of the said goods Should Clause 12 be deleted, the relevant current institute war clauses
and merchandise or any part thereof . shall be deemed to form part of this insurance." (Emphasis supplied)
AND in case of any loss or misfortune it However, the F. C. & S. Clause was deleted from the policies.
shall be lawful to the ASSURED, their Consequently, the Institute War Clauses (Cargo) was deemed
factors, servants and assigns, to sue, incorporated which, in subsection 1.1 of Section 1, provides:
labour, and travel for, in and about the "1. This insurance covers:
defence, safeguards, and recovery of the
said goods and merchandises, and ship, &
c., or any part thereof, without prejudice
to this INSURANCE; to the charges
whereof the said COMPANY, will
contribute according to the rate and
1.1 The risks excluded from the standard form of English
quantity of the sum herein INSURED. AND
Marine Policy by the clause warranted
it is expressly declared and agreed that no
free of capture, seizure, arrest, restraint
acts of the Insurer or Insured in
or detainment, and the consequences
recovering, saving, or preserving the
thereof of hostilities or warlike
Property insured shall be considered as a
operations, whether there be a
Waiver, or Acceptance of Abandonment.
declaration of war or not; but this
And it is agreed by the said COMPANY,
warranty shall not exclude collision,
that this writing or Policy of INSURANCE
contact with any fixed or floating object
shall be of as much Force and Effect as the
(other than a mine or torpedo), stranding,
surest Writing or Policy of INSURANCE
heavy weather or fire unless caused
made in LONDON. And so the said
directly (and independently of the nature
MALAYAN INSURANCE COMPANY, INC.,
on voyage or service which the vessel
are contented, and do hereby promise and
concerned or, in the case of a collision any
bind themselves, their Heirs, Executors,
other vessel involved therein is
Goods and Chattel, to the ASSURED, his or
performing) by a hostile act by or against
their Executors, Administrators, or
a belligerent power; and for the purpose
Assigns, for the true Performance of the
of this warranty 'power' includes any
Premises; confessing themselves paid the
authority maintaining naval, military or
Consideration due unto them for this
air forces in association with a power.
INSURANCE at and after the rate
Further warranted free from the
arranged." (Emphasis supplied)
consequences of civil war, revolution,
rebellion, insurrection, or civil strike
arising therefrom, or piracy."

The exception or limitation to the "Perils" clause and the "All

other perils" clause in the subject policies is specifically referred
to as Clause 12 called the "Free from Capture & Seizure Clause" or
the F.C. & S. Clause which reads, thus:
"Warranted free of capture, seizure, arrest, restraint or
detainment, and the consequences
thereof or of any attempt thereat; also
from the consequences of hostilities and
warlike operations, whether there be a
declaration of war or not; but this
warranty shall not exclude collision,
contact with any fixed or floating object
(other than a mine or torpedo), stranding,
heavy weather or fire unless caused
directly (and independently of the nature
of the voyage or service which the vessel
concerned or, in the case of a collision,
any other vessel involved therein is
performing) by a hostile act by or against
a belligerent power and for the purpose of
this warranty 'power' includes any
authorities maintaining naval, military or
66
According to petitioner, the automatic incorporation of
subsection 1.1 of section 1 of the Institute War Clauses (Cargo),
among others, means that any "capture, arrest, detention, etc."
pertained exclusively to warlike operations if this Court strictly
construes the heading of the said Clauses. However, it also claims
that the parties intended to include arrests, etc. even if it were
not the result of hostilities or warlike operations. It further claims
that on the strength of jurisprudence on the matter, the term
"arrests" would only cover those arising from political or
executive acts, concluding that whether private respondent's
claim is anchored on subsection 1.1 of Section 1 of the Institute
War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the
vessel by judicial authorities is an excluded risk. 4
This Court cannot agree with petitioner's assertions, particularly
when it alleges that in the "Perils" Clause, it assumed the risk of
arrest caused solely by executive or political acts of the
government of the seizing state and thereby excludes "arrests"
caused by ordinary legal processes, such as in the instant case.
With the incorporation of subsection 1.1 of Section 1 of the
Institute War Clauses, however, this Court agrees with the Court
of Appeals and the private respondent that "arrest" caused by
ordinary judicial process is deemed included among the covered
risks. This interpretation becomes inevitable when subsection 1.1
of Section 1 of the Institute War Clauses provided that "this
insurance covers the risks excluded from the Standard Form of
English Marine Policy by the clause 'Warranted free of capture,
seizure, arrest, etc. . . .'" or the F.C. & S. Clause. Jurisprudentially,
"arrests" caused by ordinary judicial process is also a risk
excluded from the Standard Form of English Marine Policy by the
F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by
ordinary judicial process is not included in the covered risk
simply because the F.C. & S. Clause under the Institute War
Clauses can only be operative in case of hostilities or warlike
operations on account of its heading "Institute War Clauses." This
Court agrees with the Court of Appeals when it held that ". . .
Although the F.C. & S. Clause may have originally been inserted in
marine policies to protect against risks of war, (see generally G.
Gilmore & C. Black, The Law of Admiralty Section 2-9, at 71-73
[2d Ed. 1975]), its interpretation in recent years to include
seizure or detention by civil authorities seems consistent with
the general purposes of the clause, . . ." 5 In fact, petitioner itself
averred that subsection 1.1 of Section 1 of the Institute War
Clauses included "arrest" even if it were not a result of hostilities
or warlike operations. 6 In this regard, since what was also
excluded in the deleted F.C. & S. Clause was "arrest" occasioned
by ordinary judicial process, logically, such "arrest" would now
become a covered risk under subsection 1.1 of Section 1 of the
Institute War Clauses, regardless of whether or not said "arrest"
by civil authorities occurred in a state of war.
Petitioner itself seems to be confused about the application of the
F.C. & S. Clause as well as that of subsection 1.1 of Section 1 of the
Institute War Clauses (Cargo). It stated that "the F.C. & S. Clause
was "originally incorporated in insurance policies to eliminate
the risks of warlike operations". It also averred that the F.C. & S.
Clause applies even if there be no war or warlike operations . . ." 7
In the same vein, it contended that subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo) "pertained exclusively to
warlike operations" and yet it also stated that "the deletion of the
F.C. & S. Clause and the consequent incorporation of subsection
1.1 of Section 1 of the Institute War Clauses (Cargo) was to
include "arrest, etc. even if it were not a result of hostilities or
warlike operations." 8
This Court cannot help the impression that petitioner is overly
straining its interpretation of the provisions of the policy in order
to avoid being liable for private respondent's claim.
This Court finds it pointless for petitioner to maintain its position
that it only insures risks of "arrest" occasioned by executive or
political acts of government which is interpreted as not referring
to those caused by ordinary legal processes as contained in the
"Perils" Clause; deletes the F.C. & S. Clause which excludes risks
of arrest occasioned by executive or political acts of the
government and naturally, also those caused by ordinary legal
processes; and, thereafter incorporates subsection 1.1 of Section
1 of the Institute War Clauses which now includes in the coverage
risks of arrest due to executive or political acts of a government
but then still excludes "arrests" occasioned by ordinary legal
processes when subsection 1.1 of Section 1 of said Clauses should
also have included "arrests" previously excluded from the
coverage of the F.C. & S. Clause.
It has been held that a strained interpretation which is unnatural
and forced, as to lead to an absurd conclusion or to render the
policy nonsensical, should, by all means, be avoided. 9 Likewise, it
67
must be borne in mind that such contracts are invariably
prepared by the companies and must be accepted by the insured
in the form in which they are written. 10 Any construction of a
marine policy rendering it void should be avoided. 11 Such policies
will, therefore, be construed strictly against the company in order
to avoid a forfeiture, unless no other result is possible from the
language used. 12
If a marine insurance company desires to limit or restrict the
operation of the general provisions of its contract by special
proviso, exception, or exemption, it should express such
limitation in clear and unmistakable language. 13 Obviously, the
deletion of the F.C. & S. Clause and the consequent incorporation
of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo)
gave rise to ambiguity. If the risk of arrest occasioned by ordinary
judicial process was expressly indicated as an exception in the
subject policies, there would have been no controversy with
respect to the interpretation of the subject clauses.
Be that as it may, exceptions to the general coverage are
construed most strongly against the company. 14 Even an express
exception in a policy is to be construed against the underwriters
by whom the policy is framed, and for whose benefit the
exception is introduced. 15
An insurance contract should be so interpreted as to carry out the
purpose for which the parties entered into the contract which is,
to insure against risks of loss or damage to the goods. Such
interpretation should result from the natural and reasonable
meaning of language in the policy. 16 Where restrictive provisions
are open to two interpretations, that which is most favorable to
the insured is adopted. 17
Indemnity and liability insurance policies are construed in
accordance with the general rule of resolving any ambiguity
therein in favor of the insured, where the contract or policy is
prepared by the insurer. 18 A contract of insurance, being a
contract of adhesion, par excellence, any ambiguity therein
should be resolved against the insurer; in other words, it should
be construed liberally in favor of the insured and strictly against
the insurer. Limitations of liability should be regarded with
extreme jealousy and must be construed in such a way as to
preclude the insurer from noncompliance with its obligations. 19
In view of the foregoing, this Court sees no need to discuss the
other issues presented.
WHEREFORE, the petition for review is DENIED and the decision
of the Court of Appeals is AFFIRMED.
SO ORDERED.
||| (Malayan Insurance Corp. v. Court of Appeals, G.R. No. 119599,
[March 20, 1997], 336 PHIL 977-989)
 [G.R. No. 166245. April 8, 2008.]
ETERNAL GARDENS MEMORIAL PARK CORPORATION,
petitioner, vs. THE PHILIPPINE AMERICAN LIFE INSURANCE
COMPANY, respondent.
DECISION
VELASCO, JR., J p:
The Case
Central to this Petition for Review on Certiorari under Rule 45
which seeks to reverse and set aside the November 26, 2004
Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is
the query: May the inaction of the insurer on the insurance
application be considered as approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life
Insurance Company (Philamlife) entered into an agreement
denominated as Creditor Group Life Policy No. P-1920 2 with
petitioner Eternal Gardens Memorial Park Corporation (Eternal).
Under the policy, the clients of Eternal who purchased burial lots
from it on installment basis would be insured by Philamlife. The
amount of insurance coverage depended upon the existing
balance of the purchased burial lots. The policy was to be
effective for a period of one year, renewable on a yearly basis. SacTCA
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not
more than 65 years of age, is indebted to
the Assured for the unpaid balance of his
loan with the Assured, and is accepted for
Life Insurance coverage by the Company
on its effective date is eligible for
insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of
insurance up to P50,000.00. However, a
declaration of good health shall be
required for all Lot Purchasers as part of
the application. The Company reserves
the right to require further evidence of
insurability satisfactory to the Company
in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age. cCHETI
68
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any
time shall be the amount of the unpaid
balance of his loan (including arrears up
to but not exceeding 2 months) as
reported by the Assured to the Company
or the sum of P100,000.00, whichever is
smaller. Such benefit shall be paid to the
Assured if the Lot Purchaser dies while
insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be
effective on the date he contracts a loan
with the Assured. However, there shall be
no insurance if the application of the Lot
Purchaser is not approved by the
Company. 3
Eternal was required under the policy to submit to Philamlife a
list of all new lot purchasers, together with a copy of the
application of each purchaser, and the amounts of the respective
unpaid balances of all insured lot purchasers. In relation to the
instant petition, Eternal complied by submitting a letter dated
December 29, 1982, 4 containing a list of insurable balances of its
lot buyers for October 1982. One of those included in the list as
"new business" was a certain John Chuang. His balance of
payments was PhP100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 1984 5 to Philamlife, which
served as an insurance claim for Chuang's death. Attached to the
claim were the following documents: (1) Chuang's Certificate of
Death; (2) Identification Certificate stating that Chuang is a
naturalized Filipino Citizen; (3) Certificate of Claimant; (4)
Certificate of Attending Physician; and (5) Assured's Certificate.
cAHIST
In reply, Philamlife wrote Eternal a letter on November 12, 1984,
6 requiring Eternal to submit the following documents relative to
its insurance claim for Chuang's death: (1) Certificate of Claimant
(with form attached); (2) Assured's Certificate (with form
attached); (3) Application for Insurance accomplished and signed
by the insured, Chuang, while still living; and (4) Statement of
Account showing the unpaid balance of Chuang before his death.
Eternal transmitted the required documents through a letter
dated November 14, 1984, 7 which was received by Philamlife on
November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with
any reply to the latter's insurance claim. This prompted Eternal
to demand from Philamlife the payment of the claim for
PhP100,000 on April 25, 1986. 8
In response to Eternal's demand, Philamlife denied Eternal's
insurance claim in a letter dated May 20, 1986, 9 a portion of
which reads:
The deceased was 59 years old when he entered into
 Contract #9558 and 9529 with Eternal
Gardens Memorial Park in October 1982
for the total maximum insurable amount
of P100,000.00 each. No application for
Group Insurance was submitted in our
office prior to his death on August 2,
1984. CacTIE
In accordance with our Creditor's Group Life Policy No. P-
1920, under Evidence of Insurability
provision, "a declaration of good health
shall be required for all Lot Purchasers as
party of the application." We cite further
the provision on Effective Date of
Coverage under the policy which states
that "there shall be no insurance if the
application is not approved by the
Company." Since no application had been
submitted by the Insured/Assured, prior
to his death, for our approval but was
submitted instead on November 15, 1984,
after his death, Mr. John Uy Chuang was
not covered under the Policy. We wish to
point out that Eternal Gardens being the
Assured was a party to the Contract and
was therefore aware of these pertinent
provisions.
With regard to our acceptance of premiums, these do not
connote our approval per se of the
insurance coverage but are held by us in
trust for the payor until the prerequisites
for insurance coverage shall have been
met. We will however, return all the
premiums which have been paid in behalf
of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional
Trial Court (RTC) for a sum of money against Philamlife, docketed
as Civil Case No. 14736. The trial court decided in favor of
Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of Plaintiff ETERNAL,
against Defendant PHILAMLIFE, ordering
the Defendant PHILAMLIFE, to pay the
sum of P100,000.00, representing the
proceeds of the Policy of John Uy Chuang,
plus legal rate of interest, until fully paid;
and, to pay the sum of P10,000.00 as
attorney's fees. aIHCSA
SO ORDERED.
The RTC found that Eternal submitted Chuang's application for
69
insurance which he accomplished before his death, as testified to
by Eternal's witness and evidenced by the letter dated December
29, 1982, stating, among others: "Encl: Phil-Am Life Insurance
Application Forms & Cert." 10 It further ruled that due to
Philamlife's inaction from the submission of the requirements of
the group insurance on December 29, 1982 to Chuang's death on
August 2, 1984, as well as Philamlife's acceptance of the
premiums during the same period, Philamlife was deemed to
have approved Chuang's application. The RTC said that since the
contract is a group life insurance, once proof of death is
submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil
Case No. 57810 is REVERSED and SET ASIDE, and the complaint is
DISMISSED. No costs.
SO ORDERED. 11
The CA based its Decision on the factual finding that Chuang's
application was not enclosed in Eternal's letter dated December
29, 1982. It further ruled that the non-accomplishment of the
submitted application form violated Section 26 of the Insurance
Code. Thus, the CA concluded, there being no application form,
Chuang was not covered by Philamlife's insurance.
Hence, we have this petition with the following grounds: cHDEaC
The Honorable Court of Appeals has decided a question of
substance, not therefore determined by
this Honorable Court, or has decided it in
a way not in accord with law or with the
applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to
respondent
PhilamLife
before the
death of John
Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional
Trial Court
dated May 29,
1996.
The Court's Ruling
As a general rule, this Court is not a trier of facts and will not re-
examine factual issues raised before the CA and first level courts,
considering their findings of facts are conclusive and binding on
this Court. However, such rule is subject to exceptions, as
enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation,
 surmises or conjectures; (2) when the attitude. Findings of the trial court on such matters are binding
inference made is manifestly mistaken, and conclusive on the appellate court, unless some facts or
absurd or impossible; (3) when there is circumstances of weight and substance have been overlooked,
grave abuse of discretion; (4) when the
misapprehended, or misinterpreted, 14 that, if considered, might
judgment is based on a misapprehension
of facts; (5) when the findings of facts are affect the result of the case. 15
conflicting; (6) when in making its An examination of the testimonies of the witnesses mentioned by
findings the [CA] went beyond the issues Philamlife, however, reveals no overlooked facts of substance and
of the case, or its findings are contrary to value.
the admissions of both the appellant and Philamlife primarily claims that Eternal did not even know where
the appellee; (7) when the findings [of the original insurance application of Chuang was, as shown by the
the CA] are contrary to the trial court; testimony of Edilberto Mendoza:
(8) when the findings are conclusions Atty. Arevalo:
without citation of specific evidence on
which they are based; (9) when the facts
set forth in the petition as well as in the
petitioner's main and reply briefs are not
disputed by the respondent; (10) when
the findings of fact are premised on the
Q Where is the original of the application form which is
supposed absence of evidence and
required in case of new
contradicted by the evidence on record;
coverage?
and (11) when the Court of Appeals
manifestly overlooked certain relevant
facts not disputed by the parties, which, if
properly considered, would justify a
different conclusion. 12 (Emphasis
supplied.) aHDTAI
[Mendoza:]

In the instant case, the factual findings of the RTC were reversed
A It is [a] standard operating procedure for the new client
by the CA; thus, this Court may review them. to fill up two copies of this
Eternal claims that the evidence that it presented before the trial form and the original of this
court supports its contention that it submitted a copy of the is submitted to Philamlife
insurance application of Chuang before his death. In Eternal's together with the monthly
letter dated December 29, 1982, a list of insurable interests of remittances and the second
buyers for October 1982 was attached, including Chuang in the copy is remained or
list of new businesses. Eternal added it was noted at the bottom retained with the marketing
department of Eternal
of said letter that the corresponding "Phil-Am Life Insurance
Gardens. EHSITc
Application Forms & Cert." were enclosed in the letter that was
apparently received by Philamlife on January 15, 1983. Finally,
Eternal alleged that it provided a copy of the insurance
application which was signed by Chuang himself and executed
before his death.
Atty. Miranda:
On the other hand, Philamlife claims that the evidence presented
by Eternal is insufficient, arguing that Eternal must present
evidence showing that Philamlife received a copy of Chuang's
insurance application. CDISAc
The evidence on record supports Eternal's position. We move to strike out the answer as it is not responsive as counsel is
The fact of the matter is, the letter dated December 29, 1982, merely asking for the location and does not [ask] for the number of copy.
which Philamlife stamped as received, states that the insurance Atty. Arevalo:
forms for the attached list of burial lot buyers were attached to
the letter. Such stamp of receipt has the effect of acknowledging
receipt of the letter together with the attachments. Such receipt is
an admission by Philamlife against its own interest. 13 The burden
of evidence has shifted to Philamlife, which must prove that the
Q Where is the original?
letter did not contain Chuang's insurance application. However,
Philamlife failed to do so; thus, Philamlife is deemed to have
received Chuang's insurance application.
To reiterate, it was Philamlife's bounden duty to make sure that
before a transmittal letter is stamped as received, the contents of
the letter are correct and accounted for. [Mendoza:]
Philamlife's allegation that Eternal's witnesses ran out of
credibility and reliability due to inconsistencies is groundless.
The trial court is in the best position to determine the reliability
and credibility of the witnesses, because it has the opportunity to
observe firsthand the witnesses' demeanor, conduct, and
A As far as I remember I do not know where the original
70
 but when I submitted with
that payment together with
the new clients all the
originals I see to it before I
sign the transmittal letter
the originals are attached
therein. 16
In other words, the witness admitted not knowing where the
original insurance application was, but believed that the
application was transmitted to Philamlife as an attachment to a
transmittal letter. HTCAED
As to the seeming inconsistencies between the testimony of
Manuel Cortez on whether one or two insurance application
forms were accomplished and the testimony of Mendoza on who
actually filled out the application form, these are minor
inconsistencies that do not affect the credibility of the witnesses.
Thus, we ruled in People v. Paredes that minor inconsistencies
are too trivial to affect the credibility of witnesses, and these may
even serve to strengthen their credibility as these negate any
suspicion that the testimonies have been rehearsed. 17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the
essential integrity of the prosecution's
evidence as a whole or reflect on the
witnesses' honesty. The test is whether
the testimonies agree on essential facts
and whether the respective versions
corroborate and substantially coincide
with each other so as to make a consistent
and coherent whole. 18
In the present case, the number of copies of the insurance
application that Chuang executed is not at issue, neither is
whether the insurance application presented by Eternal has been
falsified. Thus, the inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of Eternal's witnesses. CIAcSa
However, the question arises as to whether Philamlife assumed
the risk of loss without approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an
agreement denominated as Creditor Group Life Policy No. P-1920
dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be
effective on the date he contracts a loan
with the Assured. However, there shall be
no insurance if the application of the Lot
Purchaser is not approved by the
Company. IcDESA
An examination of the above provision would show ambiguity
between its two sentences. The first sentence appears to state
that the insurance coverage of the clients of Eternal already
71
became effective upon contracting a loan with Eternal while the
second sentence appears to require Philamlife to approve the
insurance contract before the same can become effective.
It must be remembered that an insurance contract is a contract of
adhesion which must be construed liberally in favor of the
insured and strictly against the insurer in order to safeguard the
latter's interest. Thus, in Malayan Insurance Corporation v. Court
of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in
accordance with the general rule of
resolving any ambiguity therein in favor
of the insured, where the contract or
policy is prepared by the insurer. A
contract of insurance, being a contract
of adhesion, par excellence, any
ambiguity therein should be resolved
against the insurer; in other words, it
should be construed liberally in favor of
the insured and strictly against the
insurer. Limitations of liability should be
regarded with extreme jealousy and must
be construed in such a way as to preclude
the insurer from noncompliance with its
obligations. 19 (Emphasis supplied.) TECcHA
In the more recent case of Philamcare Health Systems, Inc. v.
Court of Appeals, we reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations
on liability, courts should construe them
in such a way as to preclude the insurer
from non-compliance with his obligation.
Being a contract of adhesion, the terms of
an insurance contract are to be construed
strictly against the party which prepared
the contract, the insurer. By reason of the
exclusive control of the insurance
company over the terms and phraseology
of the insurance contract, ambiguity must
be strictly interpreted against the insurer
and liberally in favor of the insured,
especially to avoid forfeiture. 20
Clearly, the vague contractual provision, in Creditor Group Life
Policy No. P-1920 dated December 10, 1980, must be construed
in favor of the insured and in favor of the effectivity of the
insurance contract.
On the other hand, the seemingly conflicting provisions must be
harmonized to mean that upon a party's purchase of a memorial
lot on installment from Eternal, an insurance contract covering
the lot purchaser is created and the same is effective, valid, and
binding until terminated by Philamlife by disapproving the
insurance application. The second sentence of Creditor Group
Life Policy No. P-1920 on the Effective Date of Benefit is in the
nature of a resolutory condition which would lead to the
cessation of the insurance contract. Moreover, the mere inaction
of the insurer on the insurance application must not work to
prejudice the insured; it cannot be interpreted as a termination of
the insurance contract. The termination of the insurance contract
by the insurer must be explicit and unambiguous. aHTEIA
As a final note, to characterize the insurer and the insured as
contracting parties on equal footing is inaccurate at best.
Insurance contracts are wholly prepared by the insurer with vast
amounts of experience in the industry purposefully used to its
advantage. More often than not, insurance contracts are contracts
of adhesion containing technical terms and conditions of the
industry, confusing if at all understandable to laypersons, that are
imposed on those who wish to avail of insurance. As such,
insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the insurer
and the insured are to be delineated. Hence, in order to protect
the interest of insurance applicants, insurance companies must
be obligated to act with haste upon insurance applications, to
either deny or approve the same, or otherwise be bound to honor
the application as a valid, binding, and effective insurance
contract. 21
WHEREFORE, we GRANT the petition. The November 26, 2004
CA Decision in CA-G.R. CV No. 57810 is REVERSED and SET
ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch
138 is MODIFIED. Philamlife is hereby ORDERED: THIAaD
(1) To pay Eternal the amount of PhP100,000 representing the
proceeds of the Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%)
per annum of PhP100,000 from the time of extra judicial demand
by Eternal until Philamlife's receipt of the May 29, 1996 RTC
Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent
(12%) per annum of PhP100,000 from June 17, 1996 until full
payment of this award; and
(4) To pay Eternal attorney's fees in the amount of PhP10,000.
TIEHSA

No costs.
SO ORDERED
||| (Eternal Gardens Memorial Park Corp. v. Philippine American

Life Insurance Co., G.R. No. 166245, [April 8, 2008], 574 PHIL
161-174)

72