Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-47593 December 29, 1943
THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,
vs.
SERAFIN D. FELICIANO ET AL., respondents.
Manuel Roxas and Araneta, Zaragoza, Araneta and Bautista for petitioner.
Deflfin Joven and Pablo Lorenzo for respondents.
Ramirez and Ortigas as amici curiae.
OZAETA, J.:
In a four-to-three decision promulgated on September 13, 1941, 1 this Court affirmed the judgment of the Court of
Appeals in favor of the respondents and against the petitioner for the sum of P25,000, representing the value of two
insurance policies issued by the petitioner on the life of Evaristo Feliciano. A motion to reconsider and set aside said
decision has been filed by the petitioner, and both parties have submitted exhaustive and luminous written arguments
in support of their respective contentions.
The facts of the case are set forth in the majority and dissenting opinions heretofore handed down by this Court, the
salient points of which may be briefly restated as follows:
Evaristo Feliciano, who died on September 29, 1935, was suffering with advanced pulmonary tuberculosis when he
signed his applications for insurance with the petitioner on October 12, 1934. On that same date Doctor Trepp, who
had taken X-ray pictures of his lungs, informed the respondent Dr. Serafin D. Feliciano, brother of Evaristo, that the
latter "was already in a very serious ad practically hopeless condition." Nevertheless the question contained in the
application "Have you ever suffered from any ailment or disease of the lungs, pleurisy, pneumonia or asthma?"
appears to have been answered , "No" And above the signature of the applicant, following the answers to the
various questions propounded to him, is the following printed statement:1awphil.net
I declare on behalf of myself and of any person who shall have or claim any interest in any policy issued
hereunder, that each of the above answers is full, complete and true, and that to the best of my knowledge
and belief I am a proper subject for life insurance. (Exhibit K.)
The false answer above referred to, as well as the others, was written by the Company's soliciting agent Romulo M.
David, in collusion with the medical examiner Dr. Gregorio Valdez, for the purpose of securing the Company's
approval of the application so that the policy to be issued thereon might be credited to said agent in connection with
the inter-provincial contest which the Company was then holding among its soliciting agents to boost the sales of its
policies. Agent David bribed Medical Examiner Valdez with money which the former borrowed from the applicant's
mother by way of advanced payment on the premium, according to the finding of the Court of Appeals. Said court
also found that before the insured signed the application he, as well as the members of his family, told the agent and
the medical examiner that he had been sick and coughing for some time and that he had gone three times to the
Santol Sanatorium and had X-ray pictures of his lungs taken; but that in spite of such information the agent and the
medical examiner told them that the applicant was a fit subject for insurance.
Each of the policies sued upon contains the following stipulations:
This policy and the application herefor constitute the entire contract between the parties hereto. . . . Only
the President, or the Manager, acting jointly with the Secretary or Assistant Secretary (and then only in
writing signed by them) have power in behalf of the Company to issue permits, or to modify this or any
contract, or to extend the same time for making any premium payment, and the Company shall not be
bound by any promise or representation heretofore or hereafter given by any person other than the above-
named officials, and by them only in writing and signed conjointly as stated.
The application contains, among others, the following statements:
 18. I [the applicant] hereby declare that all the above statements and answers as well as all those that I
may make to the Company's Medical Examiner in continuation of this application, to be complete, true and
correct to the best of my knowledge and belief, and I hereby agree as follows:
1. That his declaration, with the answers to be given by me to the Medical Examiner, shall be the basis of
the policy and form part of same.
xxx xxx xxx
3. That the said policy shall not take effect until the first premium has been paid and the policy has been
delivered to and accepted by me, while I am in good health.
4. That the agent taking this application has no authority to make, modify or discharge contracts, or to
waive any of the Company's rights or requirements.
5. My acceptance of any policy issued on this application will constitute a ratification by me of any
corrections in or additions to this application made by the Company in the space provided "For Home
Office Corrections or Additions Only." I agree that photographic copy of this applications as corrected or
added to shall constitute sufficient notice to me of the changes made. (Emphasis added.)
The petitioner insists that upon the facts of the case the policies in question are null and void ab initio and that all
that the respondents are entitled to is the refund of the premiums paid thereon. After a careful re-examination of the
facts and the law, we are persuaded that petitioner's contention is correct. To the reasons adduced in the dissenting
opinion heretofore published, we only desire to add the following considerations:
When Evaristo Feliciano, the applicant for insurance, signed the application in blank and authorized the soliciting
agent and/or medical examiner of the Company to write the answers for him, he made them his own agents for that
purpose, and he was responsible for their acts in that connection. If they falsified the answers for him, he could not
evade the responsibility for he falsification. He was not supposed to sign the application in blank. He knew that the
answers to the questions therein contained would be "the basis of the policy," and for that every reason he was
required with his signature to vouch for truth thereof.
Moreover, from the facts of the case we cannot escape the conclusion that the insured acted in connivance with the
soliciting agent and the medical examiner of the Company in accepting the policies in question. Above the signature
of the applicant is the printed statement or representation: " . . . I am a proper subject for life insurance." In another
sheet of the same application and above another signature of the applicant was also printed this statement: "That the
said policy shall not take effect until he first premium has been paid and the policy as been delivered to and
accepted by me, while I am in good health." When the applicant signed the application he was "having difficulty in
breathing, . . . with a very high fever." He had gone three times to the Santol Sanatorium and had X-ray pictures
taken of his lungs. He therefore knew that he was not "a proper subject for life insurance." When he accepted the
policy, he knew that he was not in good health. Nevertheless, he not only accepted the first policy of P20,000 but
then and there applied for and later accepted another policy of P5,000.
We cannot bring ourselves to believe that the insured did not take the trouble to read the answers contained in the
photostatic copy of the application attached to and made a part of the policy before he accepted it and paid the
premium thereon. He must have notice that the answers to the questions therein asked concerning his clinical history
were false, and yet he accepted the first policy and applied for another. In any event, he obligated himself to read the
policy when he subscribed to this statement: "My acceptance of any policy issued on this application will constitute
a ratification by me of any corrections in or additions to this application made by the Company . . ." By accepting
the policy he became charged with knowledge of its contents, whether he actually read it or not. He could not
ostrich-like hide his head from it in order to avoid his part of the bargain and at the same time claim the benefit
thereof. He knew, or was chargeable with knowledge, from the very terms of the two policies sued upon (one of
which is printed in English and the other in Spanish) that the soliciting agent and the medical examiner had no
power to bind the Company by any verbal promise or oral representation. The insured, therefore, had no right to rely
and we cannot believe he relied in good faith upon the oral representation. The insured, therefore, had no right
to rely and we cannot believe he relied in good faith upon the oral representation of said agent and medical
examiner that he (the applicant) was a fit subject for insurance notwithstanding that he had been and was still
suffering with advanced pulmonary tuberculosis.
From all the facts and circumstances of this case, we are constrained to conclude that the insured was a
coparticipant, and coresponsible with Agent David and Medical Examiner Valdez, in the fraudulent procurement of
the policies in question and that by reason thereof said policies are void ab initio.
Wheretofore, the motion for reconsideration is sustained and the judgment of the Court of Appeals is hereby
reversed. Let another judgment be entered in favor of the respondents and against the petitioner for the refund of the
premiums amounting to P1,389, with legal interest thereon from the date of the complaint, and without any finding
as to costs.
Separate Opinions
YULO, C.J., concurring:
I can find no quarrel with the legal considerations and conclusions set forth in the original decision promulgated by
this Court. As general rules of law they find full support not only in reason and in logic, but also in simple human
sense of justice. More so, modern and complicated practices attendant to the ever growing trade in life insurance
demand the strictest accountability by insurance companies for acts of their authorized agents. In this way only may
the State afford reasonable protection to the unwary public from abuse by such organizations as may be found to be
of questionable moral standards.
But a careful consideration of the evidentiary facts as set forth in the decision of the Court of Appeals leads me to
conclude that the ends of justice would not be serve by the application to the present case of the rules so enunciated.
Rather, to serve the ends of justice the case of the respondents should be removed from the protection of such rules.
The subject of the insurance policies under consideration is the life of the assured. It is contended by his
beneficiaries that they took these policies on the basis of a life expectancy of a person gravely stricken with
tuberculosis. They have consistently made protestations that they had so informed the agents of the insurance
company. But the policies were issued upon the life of the assured, as a perfectly normal and healthy person. The
error is vital and goes to the very existence of the contract itself. Who is responsible for the error?
The direct cause, of course, is the false recitals in the application for insurance. While it is true that it was the agents
of the insurance company who filled out such application, yet it was the assured who, by signing the application in
blank, made it possible for the said agents to procure the issuance of the policies on the basis of false information, in
order to suit their own purposes. Upon the admitted facts, I am of the opinion that in justice and in equity, the
responsibility for the falsifications made by the insurance agents in the preparation of the insurance application
should be laid at the door of the assured and his beneficiaries.
I vote with the majority in granting the motion for reconsideration and in reversing the decision under review.
HONTIVEROS, J., dissenting:
The reasons given in the dissenting opinion in this case, as published in the Official Gazette of October 4, 1941 (pp.
2847 to 2855), supplemented by those in the resolution of the majority on the motion for reconsideration, do not
seem to me sufficient to overthrow the decision rendered by the Court of First Instance, confirmed by the Court of
Appeals, and sustained by this Supreme court in its decision of September 18, 1941. The alleged connivance
between the insured Evaristo Feliciano, the agent Romulo M. David, and the medical examiner Dr. Gregorio Valdez
not only does not clearly appear of record, but on the contrary is denied in the finding of facts of the court a quo and
of the Court of Appeals which cannot be reviewed or altered by this Court.
The mere fact that the insured signed at the bottom of the application for insurance when some of its lines intended
for answers to certain questions were still in blank, answers which according to the evidence and to the findings of
the two inferior courts he had grounds to believe will be made in accordance with the information which he and his
family had given to agent David and to Dr. Valdez, does not convert these two persons into agents of the insured in a
way as to make the latter responsible for the acts of the former. That the photostatic copies of said forms which are
attached to the policies object of this case are almost illegible, is a fact which should be taken into account, together
with the other fact that Evaristo Feliciano does not know English, the language in which those documents are
written. In support of this dissenting opinion, the following authorities may be cited:
The mere failure of the insured to inform himself of the insertion of false answers in the application which
has been filled out by the agent of the insurer does not convict him of lack of good faith. (Vol. 5, Cooley's
Briefs on Insurance, 2nd Ed., p. 4136, and many cases cited.)
The insured is not chargeable with such negligence as will render him liable for false answers inserted by
the agent merely because he signed the application in blank and trusted the agent to fill out by the agent,
without reading it. (Id., p. 4136, and many cases cited.)
An illiterate person or one who does not understand the English language (as is the case with Evaristo
Feliciano) is not guilty of inexcusable negligence in failing to read the application or having it read to him,
nor can it be said that such person deliberately made a false statement because he did not read over the
application. (81 ALR 865, 866, W. 117 ALR 796.)
Nor can it be said that the assured, who has fully, frankly, truthfully, and in good faith answered all the
required questions, is guilty of negligence in signing, without reading, the application which is thereupon
prepared by the agent. He is justified in assuming that the agent, has, with equal good faith, truthfully
recorded the answers give. He may well say to the Company: 'You accredited this man to me as your
representative, and I signed the application thus prepared by him, relying upon the character which you
gave him, when you commissioned him to come to me as your agent. If he acted dishonestly in the matter,
you, and not I, must suffer the consequences . . .! (Germania Life Ins. Co. vs. Lunkeheimer [1931] Ind.,
538; 26 N. E., 1052)
In such case the acceptance of the policy, with this application attached, does not require the insured to
institute an investigation into its provisions, or the conditions upon which is was issued, to ascertain
whether the agent has acted in good faith, since, under such circumstances, the insured may rely upon the
presumption that he has been honestly dealt with the insurer. (Otto vs. Hartford Ins. Co., 38 Minn., 423).
Besides, the principles that the insured is not bound to know the contents of the application, and may rely
on the agent's assurances that his answers have been correctly written will, of course, apply with special
force where the insured is illiterate and unable to read, or is ignorant of the language. (Vol. 5, Cooley's
Briefs on Insurance, 2nd Ed. p. 4138, cases cited.)
And also where the photostatic copies of the application embodied in the policy are practically illegible, the
insured is not bound to know the contents of the application. (New York Ins. Co. vs. Holpem D.C. 57 Fed.
2nd, 200).
According to the great weight of authority, if an agent of the insurer, after obtaining from an applicant for
insurance a correct and truthful answer to interrogations contained in the application for insurance, without
knowledge of the applicant fills in false answers, either fraudulently or otherwise, the insurer cannot assert
the falsity of such answers as a defense to the liability on the policy and this is generally without regard to
the subject matter of the answers or the nature of the agent's duties or limitations on his authority, at least if
not brought to the attention of the applicant. It is equally well settled that if a correct representation is made
in a written application, or the insurance agent issuing the policy is appraised of the true facts concerning
the matter in question, as for instance the title to the insured premises, but the agent inserts an incorrect
statement in the policy, the insurer cannot rely upon the error in avoidance of its liability". Home Ins. Co.
vs. Mendenhall, 154 Ill., 452, 45 NE., 1078, 36 LRA., 374; Phoenix Ins. Co. vs. Tucker, 92 Ill., 64, 34 Am
Rep., 106; Commercial Ins. Co. vs. Spanknoble, 52 Ill., 53, 4 Am. Report, 582; Young vs. Hartford F. Ins.
Co. 45 Iowa, 377, 24 Am. Rep., 754; Welsh vs. London Assur. 151 Pa., 607, 25 A, 142, 21 Am St. Rep., 726
(Taken from Am Juris. on Insurance Vol. 29, par. 843).
An insured may be justified in signing an application in blank at the request of the insurer's agent, who
agrees to fill it in from data furnished by the insured or from an old application. In fact, an insurer cannot
urge the falsity of representations contained in the policy issued, or in the application, where such
representations were inserted therein, either by the company or its agent, after the application was signed,
without the knowledge or consent of the insured, who has made no such representations. (Couch on
Insurance, Vol. 4, par. 842 b.)
I believe that the motion for reconsideration presented in this case should be denied, not only because of the weighty
reasons relied upon in the decision which it attacks, but also because a dangerous precedent would otherwise be
established, for, with the destruction of the confidence which the public has hitherto reposed in the duly accredited
agents of insurance companies and in their examining physicians, this branch of the economic life of the people will
have to be unfavorably affected.

FIRST DIVISION
[G.R. No. 154514. July 28, 2005]
WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY
CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION
(BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No.
60144, affirming the Decision[2] dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277.
Both decisions held that there was no violation of the Insurance Code and the respondents do not need license as
insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels
from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer
Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and
Acceptance.[3] Pioneer also issued receipts evidencing payments for the coverage. When White Gold failed to fully
pay its accounts, Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the
latters unpaid balance. White Gold on the other hand, filed a complaint before the Insurance Commission claiming
that Steamship Mutual violated Sections 186 [4] and 187[5] of the Insurance Code, while Pioneer violated Sections
299,[6] 300[7] and 301[8] in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to
secure a license because it was not engaged in the insurance business. It explained that Steamship Mutual was a
Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as insurance agent
and/or a broker for Steamship Mutual because Steamship Mutual was not engaged in the insurance business.
Moreover, Pioneer was already licensed, hence, a separate license solely as agent/broker of Steamship Mutual was
already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court
distinguished between P & I Clubs vis--vis conventional insurance. The appellate court also held that Pioneer merely
acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING
BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS
THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE
TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT
RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A
LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN
NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business
in the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to
do business in the Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications
issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its
assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals [10] as an
association composed of shipowners in general who band together for the specific purpose of providing insurance
cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of third parties. It
stresses that as a P & I Club, Steamship Mutuals primary purpose is to solicit and provide protection and indemnity
coverage and for this purpose, it has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance
business in the Philippines. It is merely an association of vessel owners who have come together to provide mutual
protection against liabilities incidental to shipowning. [11] Respondents aver Hyopsung is inapplicable in this case
because the issue in Hyopsung was the jurisdiction of the court over Hyopsung.
 Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an insurance business or transacting an
insurance business. These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to
any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of
an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.

The same provision also provides, the fact that no profit is derived from the making of insurance contracts,
agreements or transactions, or that no separate or direct consideration is received therefor, shall not preclude the
existence of an insurance business.[12]
The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act
required to be performed, and the exact nature of the agreement in the light of the occurrence, contingency, or
circumstances under which the performance becomes requisite. It is not by what it is called. [13]
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. [14]
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses
incident to a marine adventure.[15] Section 99[16] of the Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and
insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a fund from
which all losses and liabilities are paid, and where the profits are divided among themselves, in proportion to their
interest.[17] Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection
and indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the third party is anyone other than the
P & I Club and the members. [19] By definition then, Steamship Mutual as a P & I Club is a mutual insurance
association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of
authority mandated by Section 187[20] of the Insurance Code. It maintains a resident agent in the Philippines to solicit
insurance and to collect payments in its behalf. We note that Steamship Mutual even renewed its P & I Club cover
until it was cancelled due to non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or
through its agent Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or
insurance company is allowed to engage in the insurance business without a license or a certificate of authority from
the Insurance Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration [22] issued by the
Insurance Commission. It has been licensed to do or transact insurance business by virtue of the certificate of
authority[23] issued by the same agency. However, a Certification from the Commission states that Pioneer does not
have a separate license to be an agent/broker of Steamship Mutual. [24]
Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance
agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications
for insurance, or receive for services in obtaining insurance, any commission or other compensation from any
insurance company doing business in the Philippines or any agent thereof, without first procuring a license so to act
from the Commissioner, which must be renewed annually on the first day of January, or within six months
thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and
officers. Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of
Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET
ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety
Corporation are ORDERED to obtain licenses and to secure proper authorizations to do business as insurer and
insurance agent, respectively. The petitioners prayer for the revocation of Pioneers Certificate of Authority and
removal of its directors and officers, is DENIED. Costs against respondents.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 125678 March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner
Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:

Have you or any of your family members ever consulted or been treated for high blood pressure, heart
trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details). 1

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was
issued Health Care Agreement No. P010194. Under the agreement, respondents husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient
benefits" such as annual physical examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1,
1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of
P75,000.00 per disability.2

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center
(MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim
the benefits under the health care agreement. However, petitioner denied her claim saying that the Health Care
Agreement was void. According to petitioner, there was a concealment regarding Ernanis medical history. Doctors
at the MMC allegedly discovered at the time of Ernanis confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization expenses herself,
amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was
admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband
home again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was
constrained to bring him back to the Chinese General Hospital where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages
against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She
asked for reimbursement of her expenses plus moral damages and attorneys fees. After trial, the lower court ruled
against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos,
ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of
P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and
absolved petitioner Reverente.4 Petitioners motion for reconsideration was denied.5 Hence, petitioner brought the
instant petition for review, raising the primary argument that a health care agreement is not an insurance contract;
hence the "incontestability clause" under the Insurance Code6 does not apply.1wphi1.nt

Petitioner argues that the agreement grants "living benefits," such as medical check-ups and hospitalization which a
member may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year
thereafter. Petitioner also points out that only medical and hospitalization benefits are given under the agreement
without any indemnification, unlike in an insurance contract where the insured is indemnified for his loss. Moreover,
since Health Care Agreements are only for a period of one year, as compared to insurance contracts which last
longer,7 petitioner argues that the incontestability clause does not apply, as the same requires an effectivity period of
at least two years. Petitioner further argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the Department of Health.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons
bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium.

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may
damnify a person having an insurable interest against him, may be insured against. Every person has an insurable
interest in the life and health of himself. Section 10 provides:

Every person has an insurable interest in the life and health:

(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary
interest;
(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which
death or illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own
health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of
indemnity.9 Once the member incurs hospital, medical or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract.

Petitioner argues that respondents husband concealed a material fact in his application. It appears that in the
application for health coverage, petitioners required respondents husband to sign an express authorization for any
person, organization or entity that has any record or knowledge of his health to furnish any and all information
relative to any hospitalization, consultation, treatment or any other medical advice or examination. 10 Specifically, the
Health Care Agreement signed by respondents husband states:

We hereby declare and agree that all statement and answers contained herein and in any addendum annexed
to this application are full, complete and true and bind all parties in interest under the Agreement herein
applied for, that there shall be no contract of health care coverage unless and until an Agreement is issued
on this application and the full Membership Fee according to the mode of payment applied for is actually
paid during the lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the
application; that any physician is, by these presents, expressly authorized to disclose or give testimony at
anytime relative to any information acquired by him in his professional capacity upon any question
affecting the eligibility for health care coverage of the Proposed Members and that the acceptance of any
Agreement issued on this application shall be a ratification of any correction in or addition to this
application as stated in the space for Home Office Endorsement. 11 (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about
the applicants medical history, thus:

I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or
that of __________ to give to the PhilamCare Health Systems, Inc. any and all information relative to any
hospitalization, consultation, treatment or any other medical advice or examination. This authorization is in
connection with the application for health care coverage only. A photographic copy of this authorization
shall be as valid as the original.12 (Underscoring ours)

Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:

Failure to disclose or misrepresentation of any material information by the member in the application or
medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement
from the very beginning and liability of Philamcare shall be limited to return of all Membership Fees paid.
 An undisclosed or misrepresented information is deemed material if its revelation would have resulted in
the declination of the applicant by Philamcare or the assessment of a higher Membership Fee for the benefit
or benefits applied for.13

The answer assailed by petitioner was in response to the question relating to the medical history of the applicant.
This largely depends on opinion rather than fact, especially coming from respondents husband who was not a
medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent
to deceive will not avoid a policy even though they are untrue.14 Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured
will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance
at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the
statement is obviously of the foregoing character, since in such case the insurer is not justified in relying
upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a
case and one in which the insured is fraudulently and intentionally states to be true, as a matter of
expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is
shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and
amounts to actual fraud.15 (Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance
contract.16 Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative
defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or
insurer. In any case, with or without the authority to investigate, petitioner is liable for claims made under the
contract. Having assumed a responsibility under the agreement, petitioner is bound to answer the same to the extent
agreed upon. In the end, the liability of the health care provider attaches once the member is hospitalized for the
disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid.

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of
insurance." The right to rescind should be exercised previous to the commencement of an action on the contract.17 In
this case, no rescission was made. Besides, the cancellation of health care agreements as in insurance policies
require the concurrence of the following conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds
mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to
furnish facts on which cancellation is based.18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations
on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his
obligation.19 Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the
party which prepared the contract the insurer.20 By reason of the exclusive control of the insurance company over
the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. 21 This is equally applicable to Health Care
Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally
construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction
conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed
against the provider.22
Anent the incontestability of the membership of respondents husband, we quote with approval the following
findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve
months from the date of issuance of the Agreement within which to contest the membership of the patient if
he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was
sick of diabetes or hypertension. The periods having expired, the defense of concealment or
misrepresentation no longer lie.23

Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time
of their marriage, the deceased was previously married to another woman who was still alive. The health care
agreement is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the
expenses. It is not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled
to reimbursement. The records adequately prove the expenses incurred by respondent for the deceaseds
hospitalization, medication and the professional fees of the attending physicians.24

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals
dated December 14, 1995 is AFFIRMED.

SO ORDERED.

FIRST DIVISION

BLUE CROSS HEALTH CARE, G.R. No. 169737

INC.,
Petitioner, Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.

NEOMI* and DANILO OLIVARES,

Respondents. Promulgated:

February 12, 2008

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DECISION

CORONA, J.:

This is a petition for review on certiorari [1] of a decision[2] and resolution[3] of the Court of Appeals (CA) dated July
29, 2005 and September 21, 2005, respectively, in CA-G.R. SP No. 84163 which affirmed the decision of the
Regional Trial Court (RTC), Makati City, Branch 61 dated February 2, 2004 in Civil Case No. 03-1153, [4] which in
turn reversed the decision of the Metropolitan Trial Court (MeTC), Makati City, Branch 66 dated August 5, 2003 in
Civil Case No. 80867.[5]

Respondent Neomi T. Olivares applied for a health care program with petitioner Blue Cross Health Care, Inc., a
health maintenance firm. For the period October 16, 2002 to October 15, 2003, [6] she paid the amount
of P11,117. For the same period, she also availed of the additional service of limitless consultations for an additional
amount of P1,000.She paid these amounts in full on October 17, 2002. The application was approved on October 22,
2002. In the health care agreement, ailments due to pre-existing conditions were excluded from the coverage. [7]
On November 30, 2002, or barely 38 days from the effectivity of her health insurance, respondent Neomi suffered a
stroke and was admitted at the Medical City which was one of the hospitals accredited by petitioner. During her
confinement, she underwent several laboratory tests. On December 2, 2002, her attending physician, Dr. Edmundo
Saniel,[8]informed her that she could be discharged from the hospital. She incurred hospital expenses amounting
to P34,217.20. Consequently, she requested from the representative of petitioner at Medical City a letter of
authorization in order to settle her medical bills. But petitioner refused to issue the letter and suspended payment
pending the submission of a certification from her attending physician that the stroke she suffered was not caused by
a pre-existing condition.[9]

She was discharged from the hospital on December 3, 2002. On December 5, 2002, she demanded that
petitioner pay her medical bill. When petitioner still refused, she and her husband, respondent Danilo Olivares, were
constrained to settle the bill.[10] They thereafter filed a complaint for collection of sum of money against petitioner in
the MeTC on January 8, 2003. [11] In its answer dated January 24, 2003, petitioner maintained that it had not yet
denied respondents' claim as it was still awaiting Dr. Saniel's report.

In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:
This is in response to your letter dated February 13, 2003. [Respondent] Neomi T. Olivares called
by phone on January 29, 2003. She stated that she is invoking patient-physician confidentiality.
That she no longer has any relationship with [petitioner]. And that I should not release any
medical information concerning her neurologic status to anyone without her approval.Hence, the
same day I instructed my secretary to inform your office thru Ms. Bernie regarding [respondent's]
wishes.

xxx xxx xxx[12]

In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of cause of action. It held:

xxx the best person to determine whether or not the stroke she suffered was not caused by pre-
existing conditions is her attending physician Dr. Saniel who treated her and conducted the test
during her confinement. xxx But since the evidence on record reveals that it was no less than
[respondent Neomi] herself who prevented her attending physician from issuing the required
certification, petitioner cannot be faulted from suspending payment of her claim, for until and
unless it can be shown from the findings made by her attending physician that the stroke she
suffered was not due to pre-existing conditions could she demand entitlement to the benefits of her
policy.[13]

On appeal, the RTC, in a decision dated February 2, 2004, reversed the ruling of the MeTC and ordered
petitioner to pay respondents the following amounts: (1) P34,217.20 representing the medical bill in Medical City
and P1,000 as reimbursement for consultation fees, with legal interest from the filing of the complaint until fully
paid; (2) P20,000 as moral damages; (3) P20,000 as exemplary damages; (4) P20,000 as attorney's fees and (5) costs
of suit.[14] The RTC held that it was the burden of petitioner to prove that the stroke of respondent Neomi was
excluded from the coverage of the health care program for being caused by a pre-existing condition. It was not able
to discharge that burden.[15]

Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of Court in the CA. In a decision
promulgated on July 29, 2005, the CA affirmed the decision of the RTC. It denied reconsideration in a resolution
promulgated on September 21, 2005. Hence this petition which raises the following issues: (1) whether petitioner
was able to prove that respondent Neomi's stroke was caused by a pre-existing condition and therefore was excluded
from the coverage of the health care agreement and (2) whether it was liable for moral and exemplary damages and
attorney's fees.

The health care agreement defined a pre-existing condition as:

x x x a disability which existed before the commencement date of membership whose natural
history can be clinically determined, whether or not the Member was aware of such illness or
condition. Such conditions also include disabilities existing prior to reinstatement date in the case
of lapse of an Agreement. Notwithstanding, the following disabilities but not to the exclusion of
others are considered pre-existing conditions including their complications when occurring during
the first year of a Members coverage:

I. Tumor of Internal Organs

II. Hemorrhoids/Anal Fistula
III. Diseased tonsils and sinus conditions requiring surgery
IV. Cataract/Glaucoma
V. Pathological Abnormalities of nasal septum or turbinates
VI. Goiter and other thyroid disorders
VII. Hernia/Benign prostatic hypertrophy
VIII. Endometriosis
IX. Asthma/Chronic Obstructive Lung disease
X. Epilepsy
XI. Scholiosis/Herniated disc and other Spinal column abnormalities
XII. Tuberculosis
XIII. Cholecysitis
XIV. Gastric or Duodenal ulcer
XV. Hallux valgus
XVI. Hypertension and other Cardiovascular diseases
XVII. Calculi
XVIII. Tumors of skin, muscular tissue, bone or any form of blood dyscracias
XIX. Diabetes Mellitus
XX. Collagen/Auto-Immune disease

After the Member has been continuously covered for 12 months, this pre-existing provision shall
no longer be applicable except for illnesses specifically excluded by an endorsement and made
part of this Agreement.[16]

Under this provision, disabilities which existed before the commencement of the agreement are
excluded from its coverage if they become manifest within one year from its effectivity. Stated
otherwise, petitioner is not liable for pre-existing conditions if they occur within one year from the
time the agreement takes effect.

Petitioner argues that respondents prevented Dr. Saniel from submitting his report regarding the medical
condition of Neomi. Hence, it contends that the presumption that evidence willfully suppressed would be adverse if
produced should apply in its favor.[17]

Respondents counter that the burden was on petitioner to prove that Neomi's stroke was excluded from the
coverage of their agreement because it was due to a pre-existing condition. It failed to prove this.[18]

We agree with respondents.

In Philamcare Health Systems, Inc. v. CA,[19] we ruled that a health care agreement is in the nature of a non-
life insurance.[20] It is an established rule in insurance contracts that when their terms contain limitations on liability,
they should be construed strictly against the insurer. These are contracts of adhesion the terms of which must be
interpreted and enforced stringently against the insurer which prepared the contract. This doctrine is equally
applicable to health care agreements.[21]

Petitioner never presented any evidence to prove that respondent Neomi's stroke was due to a pre-existing condition.
It merely speculated that Dr. Saniel's report would be adverse to Neomi, based on her invocation of the doctor-
patient privilege. This was a disputable presumption at best.

Section 3 (e), Rule 131 of the Rules of Court states:

Sec. 3. Disputable presumptions. The following presumptions are satisfactory if uncontradicted,

but may be contradicted and overcome by other evidence:
xxx xxx xxx

(e) That evidence willfully suppressed would be adverse if produced.

Suffice it to say that this presumption does not apply if (a) the evidence is at the disposal of both parties; (b) the
suppression was not willful; (c) it is merely corroborative or cumulative and (d) the suppression is an exercise of a
privilege.[22] Here, respondents' refusal to present or allow the presentation of Dr. Saniel's report was justified. It was
privileged communication between physician and patient.

Furthermore, as already stated, limitations of liability on the part of the insurer or health care provider must be
construed in such a way as to preclude it from evading its obligations. Accordingly, they should be scrutinized by the
courts with extreme jealousy[23] and care and with a jaundiced eye.[24] Since petitioner had the burden of proving
exception to liability, it should have made its own assessment of whether respondent Neomi had a pre-existing
condition when it failed to obtain the attending physician's report. It could not just passively wait for Dr. Saniel's
report to bail it out. The mere reliance on a disputable presumption does not meet the strict standard required under
our jurisprudence.

Next, petitioner argues that it should not be held liable for moral and exemplary damages, and attorney's
fees since it did not act in bad faith in denying respondent Neomi's claim. It insists that it waited in good faith for Dr.
Saniel's report and that, based on general medical findings, it had reasonable ground to believe that her stroke was
due to a pre-existing condition, considering it occurred only 38 days after the coverage took effect.[25]

We disagree.

The RTC and CA found that there was a factual basis for the damages adjudged against petitioner. They
found that it was guilty of bad faith in denying a claim based merely on its own perception that there was a pre-
existing condition:
[Respondents] have sufficiently shown that [they] were forced to engage in a dispute with
[petitioner] over a legitimate claim while [respondent Neomi was] still experiencing the effects of
a stroke and forced to pay for her medical bills during and after her hospitalization despite being
covered by [petitioners] health care program, thereby suffering in the process extreme mental
anguish, shock, serious anxiety and great stress. [They] have shown that because of the refusal of
[petitioner] to issue a letter of authorization and to pay [respondent Neomi's] hospital bills, [they
had] to engage the services of counsel for a fee of P20,000.00. Finally, the refusal of petitioner
to pay respondent Neomi's bills smacks of bad faith, as its refusal [was] merely based on its
own perception that a stroke is a pre-existing condition. (emphasis supplied)

This is a factual matter binding and conclusive on this Court.[26] We see no reason to disturb these findings.

WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision and September 21, 2005
resolution of the Court of Appeals in CA-G.R. SP No. 84163 are AFFIRMED.

Treble costs against petitioner.

 SO ORDERED

SPECIAL FIRST DIVISION

PHILIPPINE HEALTH CARE G.R. No. 167330

PROVIDERS, INC.,
Petitioner, Present:

PUNO, C.J., Chairperson,

CORONA,
- v e r s u s - CHICO-NAZARIO,*
LEONARDO-DE CASTRO and
BERSAMIN, JJ.**

COMMISSIONER OF
INTERNAL REVENUE,
Respondent. Promulgated:
September 18, 2009

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R ES OLUTION
CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies
 Section 15. The State shall protect and promote the right to health of the people and
instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social services
available to all the people at affordable cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide
free medical care to paupers.[1]
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10,
2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc. [2]

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is [t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance organization
to take care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization. Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner
a formal demand letter and the corresponding assessment notices demanding the payment of
deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total
amount of P224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners
health care agreement with the members of its health care program pursuant to Section 185 of the
1997 Tax Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did
not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA)
seeking the cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for

Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the
deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus
20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January
20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling
No. [231]-88 is declared void and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED AND
SET ASIDE. Respondent is ORDERED to DESIST from collecting the said
DST deficiency tax.

SO ORDERED.
 Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioners health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioners health care
agreement was in the nature of a non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of

the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997
deficiency documentary stamp tax assessment and ordered petitioner to desist
from collecting the same is REVERSED and SET ASIDE.

Respondent is ordered to pay the amounts of P55,746,352.19

and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per annum
from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until
the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this
case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held
that petitioners health care agreement during the pertinent period was in the nature of non-life insurance which is a
contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares [3] and Philamcare Health Systems, Inc. v. CA.
[4]
We also ruled that petitioners contention that it is a health maintenance organization (HMO) and not an insurance
company is irrelevant because contracts between companies like petitioner and the beneficiaries under their plans
are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for
reconsideration, asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a
company engaged in the business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the
CAs disposition that health care services are not in the nature of an insurance business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are not those
contemplated under Section 185.

(f) Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is
not covered by Section 185.
 (g) The agreements do not fall under the phrase other branch of insurance mentioned in Section
185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA[5] 9480 for the taxable year 2005 and all
prior years. Therefore, the questioned assessments on the DST are now rendered moot
and academic.[6]

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on
June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under
RA 9480[7] (also known as the Tax Amnesty Act of 2007) by fully paying the amount of P5,127,149.08 representing
5% of its net worth as of the year ending December 31, 2005.[8]

We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June
30, 1987.[9] It is engaged in the dispensation of the following medical services to individuals who enter into health
care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family

planning counseling, consultation and advices on diet, exercise and other healthy habits, and
immunization;

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

fecalysis, complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and
therapeutic processes in the event of an injury or sickness on the part of the enrolled member. [10]
Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-
year basis. The medical services are dispensed to enrolled members in a hospital or clinic owned, operated or
accredited by petitioner, through physicians, medical and dental practitioners under contract with it. It negotiates
with such health care practitioners regarding payment schemes, financing and other procedures for the delivery of
health services. Except in cases of emergency, the professional services are to be provided only by petitioner's
physicians, i.e. those directly employed by it [11] or whose services are contracted by it. [12] Petitioner also provides
hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray facilities and
general nursing care.[13] If and when a member avails of the benefits under the agreement, petitioner pays the
participating physicians and other health care providers for the services rendered, at pre-agreed rates.[14]

To avail of petitioners health care programs, the individual members are required to sign and execute a
standard health care agreement embodying the terms and conditions for the provision of the health care
services. The same agreement contains the various health care services that can be engaged by the enrolled
member, i.e., preventive, diagnostic and curative medical services. Except for the curative aspect of the medical
service offered, the enrolled member may actually make use of the health care services being offered by petitioner at
any time.

HEALTH MAINTENANCE ORGANIZATIONS ARE

NOT ENGAGED IN THE INSURANCE BUSINESS

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer
because its agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on
the privilege, opportunity or facility used in the transaction of the business.[15]
 Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in,
that is, to determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the
issue of whether or not it is liable for DST on its health care agreements. [16]

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of
petitioner are meritorious.

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

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability
made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the
duties of any office or position, for the doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond or other obligations issued by any
province, city, municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be
made or renewed by any such person, company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part
thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute
shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which
renders every word operative is preferred over that which makes some words idle and nugatory. [17] This principle is
expressed in the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives effect to the
whole of the statute its every word.[18]
From the language of Section 185, it is evident that two requisites must concur before the DST can apply,
namely: (1) the document must be a policy of insurance or an obligation in the nature of indemnity and (2) the
maker should be transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or The National Health Insurance Act of 1995), an
HMO is an entity that provides, offers or arranges for coverage of designated health services needed by plan
members for a fixed prepaid premium.[19] The payments do not vary with the extent, frequency or type of services
provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent
taxable years? We rule that it was not.

Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code) enumerates what constitutes doing an
insurance business or transacting an insurance business:

a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized as

constituting the doing of an insurance business within the meaning of this Code;

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

a manner designed to evade the provisions of this Code.
 In the application of the provisions of this Code, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, [21] have
determined that HMOs are not in the insurance business. One test that they have applied is whether the assumption
of risk and indemnification of loss (which are elements of an insurance business) are the principal object and
purpose of the organization or whether they are merely incidental to its business. If these are the principal
objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose,
then the business is not insurance.

Applying the principal object and purpose test, [22] there is significant American case law supporting the
argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to provide
the members of a group with health services, is not engaged in the insurance business.

The rule was enunciated in Jordan v. Group Health Association[23] wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health Association should not be considered as engaged in insurance
activities since it was created primarily for the distribution of health care services rather than the assumption of
insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating security
against loss from illness or accident more truly they constitute the quantity purchase of well-
rounded, continuous medical service by its members. xxx The functions of such an organization
are not identical with those of insurance or indemnity companies. The latter are concerned
primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its
extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of
living. Hazard is predominant. On the other hand, the cooperative is concerned principally
with getting service rendered to its members and doing so at lower prices made possible by
quantity purchasing and economies in operation. Its primary purpose is to reduce the cost
rather than the risk of medical care; to broaden the service to the individual in kind and
quantity; to enlarge the number receiving it; to regularize it as an everyday incident of
living, like purchasing food and clothing or oil and gas, rather than merely protecting
against the financial loss caused by extraordinary and unusual occurrences, such as death,
disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and
pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual
illness. To summarize, the distinctive features of the cooperative are the rendering of service,
its extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after the services is rendered. Except the last,
these are not distinctive or generally characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting merely to stand its cost when or after it
is rendered.

That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between insurance
or indemnity and other types of legal arrangement and economic function becomes faint, if not
extinct. This is especially true when the contract is for the sale of goods or services on
contingency. But obviously it was not the purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk. That view would cause them to engulf
practically all contracts, particularly conditional sales and contingent service agreements. The
fallacy is in looking only at the risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is involved or assumed, but on
 whether that or something else to which it is related in the particular plan is its principal
object purpose.[24] (Emphasis supplied)

In California Physicians Service v. Garrison,[25] the California court felt that, after scrutinizing the plan of
operation as a whole of the corporation, it was service rather than indemnity which stood as its principal purpose.

There is another and more compelling reason for holding that the service is not engaged
in the insurance business. Absence or presence of assumption of risk or peril is not the sole test
to be applied in determining its status. The question, more broadly, is whether, looking at the
plan of operation as a whole, service rather than indemnity is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not indemnity.[26] (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an insurance company is
that HMOs undertake to provide or arrange for the provision of medical services through participating physicians
while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-
agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey [27] is clear
on this point:

The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical services through
participating physicians, thus relieving subscribers of any further financial burden, while the
latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the
schedule of rates contained in the policy.

xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to
provide physicians who will render services to subscribers on a prepaid basis. Hence, if there are
no physicians participating in the medical service corporations plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected would
be provided, but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering itself subject to the
more stringent financial requirements of the General Insurance Laws.

A participating provider of health care services is one who agrees in writing to render
health care services to or for persons covered by a contract issued by health service corporation in
return for which the health service corporation agrees to make payment directly to the
participating provider.[28] (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made directly to the provider of these services. [29] In
short, even if petitioner assumes the risk of paying the cost of these services even if significantly more than what the
member has prepaid, it nevertheless cannot be considered as being engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of
emergency by non-participating health providers would still be incidental to petitioners purpose of providing and
arranging for health care services and does not transform it into an insurer. To fulfill its obligations to its members
under the agreements, petitioner is required to set up a system and the facilities for the delivery of such medical
services. This indubitably shows that indemnification is not its sole object.
 In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services
intended to keep members from developing medical conditions or diseases. [30] As an HMO, it is its obligation to
maintain the good health of its members. Accordingly, its health care programs are designed to prevent or to
minimize thepossibility of any assumption of risk on its part. Thus, its undertaking under its agreements is not to
indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to provide
the health and medical services needed to prevent such loss or damage.[31]
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them medical
care. The insurance-like aspect of petitioners business is miniscule compared to its noninsurance
activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be
considered as being in the insurance business.

It is important to emphasize that, in adopting the principal purpose test used in the above-quoted U.S. cases,
we are not saying that petitioners operations are identical in every respect to those of the HMOs or health providers
which were parties to those cases. What we are stating is that, for the purpose of determining what doing an
insurance business means, we have to scrutinize the operations of the business as a whole and not its mere
components. This is of course only prudent and appropriate, taking into account the burdensome and strict laws,
rules and regulations applicable to insurers and other entities engaged in the insurance business. Moreover, we are
also not unmindful that there are other American authorities who have found particular HMOs to be actually
engaged in insurance activities.[32]

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from
the fact that it is not supervised by the Insurance Commission but by the Department of Health. [33] In fact, in a letter
dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance
business.This determination of the commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a statute is accorded great respect and
ordinarily controls the interpretation of laws by the courts. The reason behind this rule was explained in Nestle
Philippines, Inc. v. Court of Appeals:[34]

The rationale for this rule relates not only to the emergence of the multifarious needs of a
modern or modernizing society and the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to the accumulation of experience and growth
of specialized capabilities by the administrative agency charged with implementing a particular
statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,[35] the Court stressed that
executive officials are presumed to have familiarized themselves with all the considerations
pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious
and competent expert opinion thereon. The courts give much weight to the government agency
officials charged with the implementation of the law, their competence, expertness, experience and
informed judgment, and the fact that they frequently are the drafters of the law they interpret.[36]
A HEALTH CARE AGREEMENT IS NOT AN INSURANCE CONTRACT
CONTEMPLATED UNDER SECTION 185 OF THE NIRC OF 1997

Section 185 states that DST is imposed on all policies of insurance or obligations of the nature of indemnity
for loss, damage, or liability. In our decision dated June 12, 2008, we ruled that petitioners health care agreements
are contracts of indemnity and are therefore insurance contracts:

It is incorrect to say that the health care agreement is not based on loss or damage
because, under the said agreement, petitioner assumes the liability and indemnifies its member for
hospital, medical and related expenses (such as professional fees of physicians). The term "loss or
damage" is broad enough to cover the monetary expense or liability a member will incur in case of
illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of so-called "out-
patient services" (including physical examination, x-ray and laboratory tests, medical
consultations, vaccine administration and family planning counseling) is the contingent event
 which gives rise to liability on the part of the member. In case of exposure of the member to
liability, he would be entitled to indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The
expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted
at all. Petitioner assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid." Petitioner does not bear
the costs alone but distributes or spreads them out among a large group of persons bearing a
similar risk, that is, among all the other members of the health care program. This is insurance. [37]

We reconsider. We shall quote once again the pertinent portion of Section 185:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly construed
against the taxing authority.[38] This is because taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property for the support of the government.
[39]
Hence, tax laws may not be extended by implication beyond the clear import of their language, nor their operation
enlarged so as to embrace matters not specifically provided.[40]

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in
the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the
interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a member under
the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of
the member and strictly against the HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designed peril;

3. The insurer assumes the risk;

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

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

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a
contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties in
making the contract may negate the existence of an insurance contract. For example, a law
 firm which enters into contracts with clients whereby in consideration of periodical payments, it
promises to represent such clients in all suits for or against them, is not engaged in the insurance
business. Its contracts are simply for the purpose of rendering personal services. On the other
hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own
expense to defend a physician against all suits for damages for malpractice is one of insurance,
and the corporation will be deemed as engaged in the business of insurance. Unlike the lawyers
retainer contract, the essential purpose of such a contract is not to render personal services, but to
indemnify against loss and damage resulting from the defense of actions for malpractice.
[42]
(Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To
begin with, there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as
an HMO. Under the agreement, the member pays petitioner a predetermined consideration in exchange for the
hospital, medical and professional services rendered by the petitioners physician or affiliated physician to him. In
case of availment by a member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians
and other health care providers for the services rendered at pre-agreed rates. The member does not make any such
payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part
of the member to any third party-provider of medical services which might in turn necessitate indemnification from
petitioner. The terms indemnify or indemnity presuppose that a liability or claim has already been incurred. There is
no indemnity precisely because the member merely avails of medical services to be paid or already paid in advance
at a pre-agreed price under the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine
administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her
part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-
participating physician or hospital. However, this is only a very minor part of the list of services available. The
assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents
even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,[43] although the health
care contracts called for the defendant to partially reimburse a subscriber for treatment received from a non-
designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined that the primary
activity of the defendant (was) the provision of podiatric services to subscribers in consideration of prepayment for
such services.[44] Since indemnity of the insured was not the focal point of the agreement but the extension of
medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is
sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of
financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from
the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk
that it might fail to earn a reasonable return on its investment.But it is not the risk of the type peculiar only to
insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might
be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative
to the insured.[45]
However, assuming that petitioners commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an
insurance contract because petitioners objective is to provide medical services at reduced cost, not to distribute risk
like an insurer.
 In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an
insurance contract within the context of our Insurance Code.

THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE AGREEMENTS OF

HMOS

Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements
under Section 185 of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S.
law as early as 1904 when HMOs and health care agreements were not even in existence in this jurisdiction. It was
imposed under Section 116, Article XI of Act No. 1189 (otherwise known as the Internal Revenue Law of 1904)
[46]
enacted on July 2, 1904 and became effective on August 1, 1904. Except for the rate of tax, Section 185 of the
NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several
bonds, debentures, or certificates of stock and indebtedness, and other documents, instruments,
matters, and things mentioned and described in this section, or for or in respect to the vellum,
parchment, or paper upon which such instrument, matters, or things or any of them shall be written
or printed by any person or persons who shall make, sign, or issue the same, on and after January
first, nineteen hundred and five, the several taxes following:

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employers liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act
No. 1189 was completely reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive
enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article
IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision
became Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which
codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946,
the DST rate was increased but the provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977)
as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST
rate was again increased.

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered as
Section 198. And under Section 23 of EO [47] 273 dated July 25, 1987, it was again renumbered and became Section
185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the
subject legal provision was retained as the present Section 185. In 2004, amendments to the DST provisions were
introduced by RA 9243[48] but Section 185 was untouched.
 On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom
Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health
Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO
industry pioneer, having set foot in the Philippines as early as 1965 and having been formally incorporated in
1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a total enrollment of
more than 2 million.[49]

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when
the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in fact
already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did
not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs
at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact,
petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as
an HMO.[50]

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say
that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the
business of insurance within the context of the provision.

THE POWER TO TAX IS NOT

THE POWER TO DESTROY

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its
very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature
which imposes the tax on the constituency who is to pay it. [51] So potent indeed is the power that it was once opined
that the power to tax involves the power to destroy.[52]

Petitioner claims that the assessed DST to date which amounts to P376 million[53] is way beyond its net worth
of P259 million.[54] Respondent never disputed these assertions.Given the realities on the ground, imposing the DST
on petitioner would be highly oppressive. It is not the purpose of the government to throttle private business. On the
contrary, the government ought to encourage private enterprise. [55] Petitioner, just like any concern organized for a
lawful economic activity, has a right to maintain a legitimate business. [56] As aptly held in Roxas, et al. v. CTA, et al.:
[57]

The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg.
[58]

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because
of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and
should not be allowed. It is counter-productive and ultimately subversive of the nations thrust towards a better
economy which will ultimately benefit the majority of our people.[59]

PETITIONERS TAX LIABILITY

WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997
became moot and academic[60] when it availed of the tax amnesty under RA 9480 on December 10, 2007. It
paid P5,127,149.08 representing 5% of its net worth as of the year ended December 31, 2005 and complied with all
requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as
well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as
amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. [61]
 Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to
immunity from payment of the tax involved, including the civil, criminal, or administrative
penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding
years.

In view of petitioners availment of the benefits of [RA 9840], and without conceding the
merits of this case as discussed above, respondent concedes that such tax amnesty extinguishes
the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of
the amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.[62] (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program
under RA 9480.[63] There is no other conclusion to draw than that petitioners liability for DST for the taxable years
1996 and 1997 was totally extinguished by its availment of the tax amnesty under RA 9480.

IS THE COURT BOUND BY A MINUTE RESOLUTION

IN ANOTHER CASE?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling
of the CA[64] in CIR v. Philippine National Bank [65] that a health care agreement of Philamcare Health Systems is not
an insurance contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the appeal
in Philippine National Bank (G.R. No. 148680).[66]Petitioner argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a health care
agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits
of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our
ruling in that case has already become final. [67] When a minute resolution denies or dismisses a petition for failure to
comply with formal and substantive requirements, the challenged decision, together with its findings of fact and
legal conclusions, are deemed sustained.[68] But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it constitutes res
judicata.[69] However, if other parties or another subject matter (even with the same parties and issues) is involved,
the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,[70] the Court noted that a previous
case, CIR v. Baier-Nickel[71] involving the same parties and the same issues, was previously disposed of by the
Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled
that the previous case ha(d) no bearing on the latter case because the two cases involved different subject matters
as they were concerned with the taxable income of different taxable years. [72]

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision.
The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts
and the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions, not to
minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices, unlike a
decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are
not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.
[73]
Indeed, as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on
its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the
minute resolution in that case (which is not even binding precedent) in its favor. Nonetheless, in view of the reasons
already discussed, this does not detract in any way from the fact that petitioners health care agreements are not
subject to DST.
A FINAL NOTE
Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC
and there was never any legislative intent to impose the same on HMOs like petitioner, the same should not be
arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services at a cost
which the average wage earner can afford. HMOs arrange, organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and inexpensive health care system made possible by quantity
purchasing of services and economies of scale. They offer advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive medical services), including the ability to control costs. They
protect their members from exposure to the high cost of hospitalization and other medical expenses brought about by
a fluctuating economy. Accordingly, they play an important role in society as partners of the State in achieving its
constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. [74] Its imposition will
elevate the cost of health care services. This will in turn necessitate an increase in the membership fees, resulting in
either placing health services beyond the reach of the ordinary wage earner or driving the industry to the ground. At
the end of the day, neither side wins, considering the indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court
of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from
collecting the said tax.
No costs.

SO ORDERED.

THIRD DIVISION

REPUBLIC OF THE PHILIPPINES, G.R. No. 158085

Represented by the COMMISSIONER
OF INTERNAL REVENUE, Present:
Petitioner,
Panganiban, J.,
Chairman,
Sandoval-Gutierrez
- versus - Corona,
Carpio Morales, and
Garcia, JJ
SUNLIFE ASSURANCE Promulgated:
COMPANY OF CANADA,
Respondent. October 14, 2005

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

H aving satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this Court that it is a
bona fide cooperative, respondent is entitled to exemption from the payment of taxes on life insurance premiums
and documentary stamps. Not being governed by the Cooperative Code of the Philippines, it is not required to be
registered with the Cooperative Development Authority in order to avail itself of the tax exemptions. Significantly,
neither the Tax Code nor the Insurance Code mandates this administrative registration.

The Case

Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, seeking to nullify the January 23,
2003 Decision[2] and the April 21, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 69125. The
dispositive portion of the Decision reads as follows:

WHEREFORE, the petition for review is hereby DENIED.[4]

The Facts

The antecedents, as narrated by the CA, are as follows:

Sun Life is a mutual life insurance company organized and existing under the laws of
Canada. It is registered and authorized by the Securities and Exchange Commission and the
Insurance Commission to engage in business in the Philippines as a mutual life insurance company
with principal office at Paseo de Roxas, Legaspi Village, Makati City.

On October 20, 1997, Sun Life filed with the [Commissioner of Internal Revenue] (CIR)
its insurance premium tax return for the third quarter of 1997 and paid the premium tax in the
amount of P31,485,834.51. For the period covering August 21 to December 18, 1997, petitioner
filed with the CIR its [documentary stamp tax (DST)] declaration returns and paid the total amount
of P30,000,000.00.

On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its decision in Insular
Life Assurance Co. Ltd. v. [CIR], which held that mutual life insurance companies are purely
cooperative companies and are exempt from the payment of premium tax and DST. This
pronouncement was later affirmed by this court in [CIR] v. Insular Life Assurance Company, Ltd.
Sun Life surmised that[,] being a mutual life insurance company, it was likewise exempt from the
payment of premium tax and DST. Hence, on August 20, 1999, Sun Life filed with the CIR an
administrative claim for tax credit of its alleged erroneously paid premium tax and DST for the
aforestated tax periods.
 For failure of the CIR to act upon the administrative claim for tax credit and with the 2-
year period to file a claim for tax credit or refund dwindling away and about to expire, Sun Life
filed with the CTA a petition for review on August 23, 1999. In its petition, it prayed for the
issuance of a tax credit certificate in the amount of P61,485,834.51 representing P31,485,834.51 of
erroneously paid premium tax for the third quarter of 1997 and P30,000[,000].00 of DST on
policies of insurance from August 21 to December 18, 1997. Sun Life stood firm on its contention
that it is a mutual life insurance company vested with all the characteristic features and elements of
a cooperative company or association as defined in [S]ection 121 of the Tax Code. Primarily, the
management and affairs of Sun Life were conducted by its members; secondly, it is operated with
money collected from its members; and, lastly, it has for its purpose the mutual protection of its
members and not for profit or gain.
In its answer, the CIR, then respondent, raised as special and affirmative defenses the
following:
7. Petitioners (Sun Lifes) alleged claim for refund is subject to
administrative routinary investigation/examination by respondents (CIRs)
Bureau.
8. Petitioner must prove that it falls under the exception provided for
under Section 121 (now 123) of the Tax Code to be exempted from premium tax
and be entitled to the refund sought.
9. Claims for tax refund/credit are construed strictly against the
claimants thereof as they are in the nature of exemption from payment of tax.
10. In an action for tax credit/refund, the burden is upon the taxpayer to
establish its right thereto, and failure to sustain this burden is fatal to said claim
x x x.
11. It is incumbent upon petitioner to show that it has complied with
the provisions of Section 204[,] in relation to Section 229, both in the 1997 Tax
Code.

On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely from its
earlier findings in Insular Life Assurance Company, Ltd. v. [CIR], which it found to be on all
fours with the present action, the CTA ruled:

The [CA] has already spoken. It ruled that a mutual life insurance
company is a purely cooperative company[;] thus, exempted from the payment
of premium and documentary stamp taxes. Petitioner Sun Life is without doubt a
mutual life insurance company. x x x.

xxxxxxxxx

Being similarly situated with Insular, Petitioner at bar is entitled to the

same interpretation given by this Court in the earlier cases of The Insular Life
Assurance Company, Ltd. vs. [CIR] (CTA Case Nos. 5336 and 5601) and by the
[CA] in the case entitled [CIR] vs. The Insular Life Assurance Company, Ltd.,
C.A. G.R. SP No. 46516, September 29, 1998. Petitioner Sun Life as a mutual
life insurance company is[,] therefore[,] a cooperative company or association
and is exempted from the payment of premium tax and [DST] on policies of
insurance pursuant to Section 121 (now Section 123) and Section 199[1]) (now
Section 199[a]) of the Tax Code.

Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought
to have registered, foremost, with the Cooperative Development Authority before it could enjoy
the exemptions from premium tax and DST extended to purely cooperative companies or
associations under [S]ections 121 and 199 of the Tax Code. For its failure to register, it could not
avail of the exemptions prayed for. Moreover, the CIR alleged that Sun Life failed to prove that
ownership of the company was vested in its members who are entitled to vote and elect the Board
of Trustees among [them]. The CIR further claimed that change in the 1997 Tax Code subjecting
 mutual life insurance companies to the regular corporate income tax rate reflected the legislatures
recognition that these companies must be earning profits.

Notwithstanding these arguments, the CTA denied the CIRs motion for reconsideration.

Thwarted anew but nonetheless undaunted, the CIR comes to this court via this petition
on the sole ground that:

The Tax Court erred in granting the refund[,] because respondent does not fall
under the exception provided for under Section 121 (now 123) of the Tax Code
to be exempted from premium tax and DST and be entitled to the refund.

The CIR repleads the arguments it raised with the CTA and proposes further that the [CA]
decision in [CIR] v. Insular Life Assurance Company, Ltd. is not controlling and cannot constitute res
judicata in the present action. At best, the pronouncements are merely persuasive as the decisions of the
Supreme Court alone have a universal and mandatory effect.[5]

Ruling of the Court of Appeals

In upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation duly licensed to
engage in mutual life insurance business in the Philippines. Thus, respondent was deemed exempt from premium
and documentary stamp taxes, because its affairs are managed and conducted by its members with money collected
from among themselves, solely for their own protection, and not for profit. Its members or policyholders constituted
both insurer and insured who contribute, by a system of premiums or assessments, to the creation of a fund from
which all losses and liabilities were paid. The dividends it distributed to them were not profits, but returns of
amounts that had been overcharged them for insurance.

For having satisfactorily shown with substantial evidence that it had erroneously paid and seasonably filed its claim
for premium and documentary stamp taxes, respondent was entitled to a refund, the CA ruled.

Hence, this Petition.[6]

The Issues

Petitioner raises the following issues for our consideration:

I.

Whether or not respondent is a purely cooperative company or association under Section 121 of
the National Internal Revenue Code and a fraternal or beneficiary society, order or cooperative
company on the lodge system or local cooperation plan and organized and conducted solely by the
members thereof for the exclusive benefit of each member and not for profit under Section 199 of
the National Internal Revenue Code.

II.

Whether or not registration with the Cooperative Development Authority is a sine qua
non requirement to be entitled to tax exemption.

III.

Whether or not respondent is exempted from payment of tax on life insurance premiums and
documentary stamp tax.[7]

We shall tackle the issues seriatim.

The Courts Ruling
The Petition has no merit.
First Issue:
Whether Respondent Is a Cooperative

The Tax Code defines a cooperative as an association conducted by the members thereof with the money collected
from among themselves and solely for their own protection and not for profit. [8] Without a doubt, respondent is a
cooperative engaged in a mutual life insurance business.

First, it is managed by its members. Both the CA and the CTA found that the management and affairs of respondent
were conducted by its member-policyholders.[9]

A stock insurance company doing business in the Philippines may alter its organization and transform itself into a
mutual insurance company.[10] Respondent has been mutualized or converted from a stock life insurance company to
a nonstock mutual life insurance corporation[11] pursuant to Section 266 of the Insurance Code of 1978. [12] On the
basis of its bylaws, its ownership has been vested in its member-policyholders who are each entitled to one vote;
[13]
and who, in turn, elect from among themselves the members of its board of trustees. [14] Being the governing body
of a nonstock corporation, the board exercises corporate powers, lays down all corporate business policies, and
assumes responsibility for the efficiency of management.[15]

Second, it is operated with money collected from its members. Since respondent is composed entirely of members
who are also its policyholders, all premiums collected obviously come only from them.[16]

The member-policyholders constitute both insurer and insured [17] who contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid. [18] The premiums[19] pooled into
this fund are earmarked for the payment of their indemnity and benefit claims.

Third, it is licensed for the mutual protection of its members, not for the profit of anyone.

As early as October 30, 1947, the director of commerce had already issued a license to respondent -- a corporation
organized and existing under the laws of Canada -- to engage in business in the Philippines. [20] Pursuant to Section
225 of Canadas Insurance Companies Act, the Canadian minister of state (for finance and privatization) also
declared in its Amending Letters Patent that respondent would be a mutual company effective June 1, 1992. [21] In the
Philippines, the insurance commissioner also granted it annual Certificates of Authority to transact life insurance
business, the most relevant of which were dated July 1, 1997 and July 1, 1998.[22]

A mutual life insurance company is conducted for the benefit of its member-policyholders, [23] who pay into its
capital by way of premiums. To that extent, they are responsible for the payment of all its losses. [24] The cash paid in
for premiums and the premium notes constitute their assets x x x. [25] In the event that the company itself fails before
the terms of the policies expire, the member-policyholders do not acquire the status of creditors. [26] Rather, they
simply become debtors for whatever premiums that they have originally agreed to pay the company, if they have not
yet paid those amounts in full, for [m]utual companies x x x depend solely upon x x x premiums. [27] Only when the
premiums will have accumulated to a sum larger than that required to pay for company losses will the member-
policyholders be entitled to a pro rata division thereof as profits.[28]

Contributing to its capital, the member-policyholders of a mutual company are obviously also its owners.
[29]
Sustaining a dual relationship inter se, they not only contribute to the payment of its losses, but are also entitled
to a proportionate share[30] and participate alike[31] in its profits and surplus.

Where the insurance is taken at cost, it is important that the rates of premium charged by a mutual company be
larger than might reasonably be expected to carry the insurance, in order to constitute a margin of safety. The table
of mortality used will show an admittedly higher death rate than will probably prevail; the assumed interest rate on
the investments of the company is made lower than is expected to be realized; and the provision for contingencies
and expenses, made greater than would ordinarily be necessary. [32] This course of action is taken, because a mutual
company has no capital stock and relies solely upon its premiums to meet unexpected losses, contingencies and
expenses.
Certainly, many factors are considered in calculating the insurance premium. Since they vary with the kind of
insurance taken and with the group of policyholders insured, any excess in the amount anticipated by a mutual
company to cover the cost of providing for the insurance over its actual realized cost will also vary. If a member-
policyholder receives an excess payment, then the apportionment must have been based upon a calculation of the
actual cost of insurance that the company has provided for that particular member-policyholder. Accordingly, in
apportioning divisible surpluses, any mutual company uses a contribution method that aims to distribute those
surpluses among its member-policyholders, in the same proportion as they have contributed to the surpluses by their
payments.[33]

Sharing in the common fund, any member-policyholder may choose to withdraw dividends in cash or to apply them
in order to reduce a subsequent premium, purchase additional insurance, or accelerate the payment period. Although
the premium made at the beginning of a year is more than necessary to provide for the cost of carrying the
insurance, the member-policyholder will nevertheless receive the benefit of the overcharge by way of dividends, at
the end of the year when the cost is actually ascertained. The declaration of a dividend upon a policy reduces pro
tanto the cost of insurance to the holder of the policy. That is its purpose and effect.[34]

A stipulated insurance premium cannot be increased, but may be lessened annually by so much as the experience of
the preceding year has determined it to have been greater than the cost of carrying the insurance x x x. [35] The
difference between that premium and the cost of carrying the risk of loss constitutes the so-called dividend which,
however, is not in any real sense a dividend. [36] It is a technical term that is well understood in the insurance business
to be widely different from that to which it is ordinarily attached.

The so-called dividend that is received by member-policyholders is not a portion of profits set aside for distribution
to the stockholders in proportion to their subscription to the capital stock of a corporation. [37] One, a mutual company
has no capital stock
to which subscription is necessary; there are no stockholders to speak of, but only members. And , two, the amount
they receive does not partake of the nature of a profit or income. The quasi-appearance of profit will not change its
character. It remains an overpayment, a benefit to which the member-policyholder is equitably entitled.[38]

Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its own members. It does not
operate for profit, but for the mutual benefit of its member-policyholders. They receive their insurance at cost, while
reasonably and properly guarding and maintaining the stability and solvency of the company. [39] The economic
benefits filter to the cooperative members. Either equally or proportionally, they are distributed among members in
correlation with the resources of the association utilized. [40]

It does not follow that because respondent is registered as a nonstock corporation and thus exists for a purpose other
than profit, the company can no longer make any profits. [41] Earning profits is merely its secondary, not primary,
purpose. In fact, it may not lawfully engage in any business activity for profit, for to do so would change or
contradict its nature[42] as a non-profit entity.[43] It may, however, invest its corporate funds in order to earn additional
income for paying its operating expenses and meeting benefit claims. Any excess profit it obtains as an incident to
its operations can only be used, whenever necessary or proper, for the furtherance of the purpose for which it was
organized.[44]

Second Issue:
Whether CDA Registration Is Necessary

Under the Tax Code although respondent is a cooperative, registration with the Cooperative Development Authority
(CDA)[45] is not necessary in order for it to be exempt from the payment of both percentage taxes on insurance
premiums, under Section 121; and documentary stamp taxes on policies of insurance or annuities it grants, under
Section 199.

First, the Tax Code does not require registration with the CDA. No tax provision requires a mutual life insurance
company to register with that agency in order to enjoy exemption from both percentage and documentary stamp
taxes.

A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the submission of the
Certificate of Registration with the CDA,[46]before the issuance of a tax exemption certificate. That provision cannot
prevail over the clear absence of an equivalent requirement under the Tax Code. One, as we will explain below, the
Circular does not apply to respondent, but only to cooperatives that need to be registered under the Cooperative
Code. Two, it is a mere issuance directing all internal revenue officers to publicize a new tax legislation. Although
the Circular does not derogate from their authority to implement the law, it cannot add a registration requirement,
[47]
when there is none under the law to begin with.

Second, the provisions of the Cooperative Code of the Philippines [48] do not apply. Let us trace the Codes
development in our history.

As early as 1917, a cooperative company or association was already defined as one conducted by the members
thereof with money collected from among themselves and solely for their own protection and not profit. [49] In 1990,
it was further defined by the Cooperative Code as a duly registered association of persons, with a common bond of
interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles.[50]

The Cooperative Code was actually an offshoot of the old law on cooperatives. In 1973, Presidential Decree (PD)
No. 175 was
signed into law by then President Ferdinand E. Marcos in order to strengthen the cooperative movement. [51] The
promotion of cooperative development was one of the major programs of the New Society under his administration.
It sought to improve the countrys trade and commerce by enhancing agricultural production, cottage industries,
community development, and agrarian reform through cooperatives.[52]

The whole cooperative system, with its vertical and horizontal linkages -- from the market cooperative of
agricultural products to cooperative rural banks, consumer cooperatives and cooperative insurance -- was envisioned
to offer considerable economic opportunities to people who joined cooperatives. [53] As an effective instrument in
redistributing income and wealth,[54] cooperatives were promoted primarily to support the agrarian reform program
of the government.[55]

Notably, the cooperative under PD 175 referred only to an organization composed primarily of small producers and
consumers who voluntarily joined to form a business enterprise that they themselves owned, controlled, and
patronized.[56] The Bureau of Cooperatives Development -- under the Department of Local Government and
Community Development (later Ministry of Agriculture) [57] -- had the authority to register, regulate and supervise
only the following cooperatives: (1) barrio associations involved in the issuance of certificates of land transfer; (2)
local or primary cooperatives composed of natural persons and/or barrio associations; (3) federations composed of
cooperatives that may or may not perform business activities; and (4) unions of cooperatives that did not perform
any business activities.[58] Respondent does not fall under any of the above-mentioned types of cooperatives required
to be registered under PD 175.

When the Cooperative Code was enacted years later, all cooperatives that were registered under PD 175 and
previous laws were also deemed registered with the CDA. [59] Since respondent was not required to be registered
under the old law on cooperatives, it followed that it was not required to be registered even under the new law.

Furthermore, only cooperatives to be formed or organized under the Cooperative Code needed registration with the
CDA.[60] Respondent already existed before the passage of the new law on cooperatives. It was not even required to
organize under the Cooperative Code, not only because it performed a different set of functions, but also because it
did not operate to serve the same objectives under the new law -- particularly on productivity, marketing and credit
extension.[61]

The insurance against losses of the members of a cooperative referred to in Article 6(7) of the Cooperative Code is
not the same as the life insurance provided by respondent to member-policyholders. The former is a function of a
service cooperative,[62] the latter is not. Cooperative insurance under the Code is limited in scope and local in
character. It is not the same as mutual life insurance.

We have already determined that respondent is a cooperative. The distinguishing feature of a cooperative
enterprise[63] is the mutuality of cooperation among its member-policyholders united for that purpose. [64] So long as
respondent meets this essential feature, it does not even have to use [65] and carry the name of a cooperative to operate
its mutual life insurance business. Gratia argumenti that registration is mandatory, it cannot deprive respondent of
its tax exemption privilege merely because it failed to register. The nature of its operations is clear; its purpose well-
defined. Exemption when granted cannot prevail over administrative convenience.

Third, not even the Insurance Code requires registration with the CDA. The provisions of this Code primarily govern
insurance contracts; only if a particular matter in question is not specifically provided for shall the provisions of the
Civil Code on contracts and special laws govern.[66]

True, the provisions of the Insurance Code relative to the organization and operation of an insurance company also
apply to cooperative insurance entities organized under the Cooperative Code. [67] The latter law, however, does not
apply to respondent, which already existed as a cooperative company engaged in mutual life insurance prior to the
laws passage of that law. The statutes prevailing at the time of its organization and mutualization were the Insurance
Code and the Corporation Code, which imposed no registration requirement with the CDA.

Third Issue:
Whether Respondent Is Exempted
from Premium Taxes and DST

Having determined that respondent is a cooperative that does not have to be registered with the CDA, we hold that it
is entitled to exemption from both premium taxes and documentary stamp taxes (DST).
The Tax Code is clear. On the one hand, Section 121 of the Code exempts cooperative companies from the 5 percent
percentage tax on insurance premiums. On the other hand, Section 199 also exempts from the DST, policies of
insurance or annuities made or granted by cooperative companies. Being a cooperative, respondent is thus exempt
from both types of taxes.

It is worthy to note that while RA 8424 amending the Tax Code has deleted the income tax of 10 percent imposed
upon the gross investment income of mutual life insurance companies -- domestic [68] and foreign[69] -- the provisions
of Section 121 and 199 remain unchanged.[70]

Having been seasonably filed and amply substantiated, the claim for exemption in the amount of P61,485,834.51,
representing percentage taxes on insurance premiums and documentary stamp taxes on policies of insurance or
annuities that were paid by respondent in 1997, is in order. Thus, the grant of a tax credit certificate to respondent as
ordered by the appellate court was correct.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution
are AFFIRMED. No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION
[G.R. No. 156167. May 16, 2005]
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE
CORPORATION, respondent.
DECISION
PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner GULF
RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner assails
the appellate court decision[1] which dismissed its two appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the insurance companys
liability for earthquake damage to petitioners properties. Petitioner avers that, pursuant to its earthquake shock
endorsement rider, Insurance Policy No. 31944 covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort insured
originally with the American Home Assurance Company (AHAC-AIU). In the first four insurance policies issued by
AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs. 1, 2, 3 and 4
respectively), the risk of loss from earthquake shock was extended only to plaintiffs two swimming pools, thus,
earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and two (2) swimming pools only (Exhs. C-1; D-1, E
and F-1). Item 5 in those policies referred to the two (2) swimming pools only (Exhs. 1-B, 2-B, 3-B and F-2); that
subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-4182383-0 covering the period March 14, 1988
to March 14, 1989 (Exhs. G also G-1) and in said policy the earthquake endorsement clause as indicated in Exhibits
C-1, D-1, Exhibits E and F-1 was deleted and the entry under Endorsements/Warranties at the time of issue read that
plaintiff renewed its policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under Policy No.
206-4568061-9 (Exh. H) which carried the entry under Endorsement/Warranties at Time of Issue, which read
Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00 and paid P42,658.14 (Exhs. 6-
A and 6-B) as premium thereof, computed as follows:

Item -P7,691,000.00 - on the Clubhouse only

@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:

a) Tilter House- P19,800.00- 0.551%

b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment

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

Premium - P37,420.60 F/L

2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;

that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against earthquake shock
(ES); that in all the six insurance policies (Exhs. C, D, E, F, G and H), the premium against the peril of earthquake
shock is the same, that is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-
1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy No. 31944 issued by defendant, the shock
endorsement provide(sic):

In consideration of the payment by the insured to the company of the sum included additional premium the
Company agrees, notwithstanding what is stated in the printed conditions of this policy due to the contrary, that this
insurance covers loss or damage to shock to any of the property insured by this Policy occasioned by or through or
in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-C);

that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16, 1990 an earthquake
struck Central Luzon and Northern Luzon and plaintiffs properties covered by Policy No. 31944 issued by
defendant, including the two swimming pools in its Agoo Playa Resort were damaged. [2]

After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance Policy
No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim, then assigned the
investigation of the claim to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc. [3] On July 30,
1990, respondent, through its adjuster, requested petitioner to submit various documents in support of its claim. On
August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon, [4]rendered a
preliminary 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 petitioners 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 defendants refusal to pay the claims;

3.) The sum of P500,000.00, by way of exemplary damages;

4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;

5.) Costs.[11]

Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims. [12]
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of earthquake
shock, the same premium it paid against earthquake shock only on the two swimming pools in all the policies issued
by AHAC(AIU) (Exhibits C, D, E, F and G). From this fact the Court must consequently agree with the position of
defendant that the endorsement rider (Exhibit 7-C) means that only the two swimming pools were insured against
earthquake shock.

Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the language used in an
insurance contract or application is such as to create ambiguity the same should be resolved against the party
responsible therefor, i.e., the insurance company which prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and unambiguous hence there is no need for interpretation or
construction but only application of the provisions therein.

From the above observations the Court finds that only the two (2) swimming pools had earthquake shock coverage
and were heavily damaged by the earthquake which struck on July 16, 1990. Defendant having admitted that the
damage to the swimming pools was appraised by defendants adjuster at P386,000.00, defendant must, by virtue of
the contract of insurance, pay plaintiff said amount.

Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is liable only
for the damage caused to the two (2) swimming pools and that defendant has made known to plaintiff its willingness
and readiness to settle said liability, there is no basis for the grant of the other damages prayed for by plaintiff. As to
the counterclaims of defendant, the Court does not agree that the action filed by plaintiff is baseless and highly
speculative since such action is a lawful exercise of the plaintiffs right to come to Court in the honest belief that their
Complaint is meritorious. The prayer, therefore, of defendant for damages is likewise denied.

WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE HUNDRED
EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two (2) swimming pools, with
interest at 6% per annum from the date of the filing of the Complaint until defendants obligation to plaintiff is fully
paid.

No pronouncement as to costs.[13]

Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of Appeals
based on the following assigned errors:[14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY RECOVER FOR
THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING
ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND THE
ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO RECOVER

UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS
ISSUANCE AND THE ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.

C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED TO THE
DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON PROCEEDS
OF POLICY.

On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it attorneys fees
and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not convinced that the last two
(2) insurance contracts (Exhs. G and H), which the plaintiff-appellant had with AHAC (AIU) and upon which the
subject insurance contract with Philippine Charter Insurance Corporation is said to have been based and copied
(Exh. I), covered an extended earthquake shock insurance on all the insured properties.

xxx

We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the imposition of
interest 24% on the insurance claim and 6% on loss of income allegedly amounting to 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-appellants prayer for an attorneys fees, long-standing is the rule that the award thereof is
subject to the sound discretion of the court. Thus, if such discretion is well-exercised, it will not be disturbed on
appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception
rather than a rule, it is necessary for the court to make findings of facts and law that would bring the case within the
exception and justify the grant of such award (Country Bankers Insurance Corp. v. Lianga Bay and Community
Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiff-appellants
action is not baseless and highly speculative, We find that the Court a quo did not err in granting the same.

WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the Trial Court
hereby AFFIRMED in toto. No costs.[15]

Petitioner filed the present petition raising the following issues: [16]
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS
INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER THAN ALL
THE PROPERTIES COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF
EARTHQUAKE SHOCK.

B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR

DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS FEES AND
EXPENSES OF LITIGATION.

Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties insured and not only
the swimming pools. It used the words any property insured by this policy, and it should be interpreted as all
inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the body
of the insurance policy itself, which states that it is [s]ubject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement
On Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already been deleted in the earthquake
shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it deleted the
said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the
insurance policy, because the rider is the more deliberate expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties enumerated
at the time of issue.
 Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner and
against respondent. It was respondent which caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be interpreted
as a caveat on the standard fire insurance policy, such as to remove the two swimming pools from the coverage for
the risk of fire. It should not be used to limit the respondents liability for earthquake shock to the two swimming
pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under the
extended coverage. The premium for the earthquake shock coverage was already included in the premium paid for
the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend earthquake shock
coverage to all insured properties. When it secured an insurance policy from respondent, petitioner told respondent
that it wanted an exact replica of its latest insurance policy from American Home Assurance Company (AHAC-
AIU), which covered all the resorts properties for earthquake shock damage and respondent agreed. After the July
16, 1990 earthquake, respondent assured petitioner that it was covered for earthquake shock. Respondents insurance
adjuster, Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the necessary documents for
its building claims and other repair costs. Thus, under the doctrine of equitable estoppel, it cannot deny that the
insurance policy it issued to petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the Revised
Rules of Court as its remedy, and there is no need for calibration of the evidence in order to establish the facts upon
which this petition is based.
On the other hand, respondent made the following counter arguments:[18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended coverage
against earthquake shock to petitioners insured properties other than on the two swimming pools. Petitioner admitted
that from 1984 to 1988, only the two swimming pools were insured against earthquake shock. From 1988 until 1990,
the provisions in its policy were practically identical to its earlier policies, and there was no increase in the premium
paid. AHAC-AIU, in a letter[19] by its representative Manuel C. Quijano, categorically stated that its previous policy,
from which respondents policy was copied, covered only earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy only
covered earthquake shock damage on the two swimming pools. The amount was the same amount paid by petitioner
for earthquake shock coverage on the two swimming pools from 1990-1991. No additional premium was paid to
warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the two
swimming pools in the policy schedule did not expand the earthquake shock coverage to all of petitioners properties.
As per its agreement with petitioner, respondent copied its policy from the AHAC-AIU policy provided by
petitioner. Although the first five policies contained the said qualification in their riders title, in the last two policies,
this qualification in the title was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a
mere inadvertence. This inadvertence did not make the policy incomplete, nor did it broaden the scope of the
endorsement whose descriptive title was merely enumerated. Any ambiguity in the policy can be easily resolved by
looking at the other provisions, specially the enumeration of the items insured, where only the two swimming pools
were noted as covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase Item
5 P393,000.00 on the two swimming pools only (against the peril of earthquake shock only) meant that only the
swimming pools were insured for earthquake damage. The same phrase is used in toto in the policies from 1989 to
1990, the only difference being the designation of the two swimming pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the
properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium for coverage of
the swimming pools against earthquake shock. No other premium was paid for earthquake shock coverage on the
other properties. In addition, the use of the qualifier ANY instead of ALL to describe the property covered was done
deliberately to enable the parties to specify the properties included for earthquake coverage.
 Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included in the
earthquake shock coverage. Petitioners own evidence shows that it only required respondent to follow the exact
provisions of its previous policy from AHAC-AIU. Respondent complied with this requirement. Respondents only
deviation from the agreement was when it modified the provisions regarding the replacement cost endorsement.
With regard to the issue under litigation, the riders of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from maintaining
that only the two swimming pools were covered for earthquake shock. The adjusters letter notifying petitioner to
present certain documents for its building claims and repair costs was given to petitioner before the adjuster knew
the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after the
descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy reflect the parties
clear intention to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any
deficiency nor did it institute any action to reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since
respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot be considered
to be in default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock only)[20]

Second, under the breakdown for premium payments,[21] it was stated that:
PREMIUM RECAPITULATION

ITEM NOS. AMOUNT RATES PREMIUM

xxx

3 393,000.00 0.100%-E/S 393.00[22]

Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or
indirectly of any of the following occurrences, namely:--

(a) Earthquake, volcanic eruption or other convulsion of nature. [23]

Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the Perils of
Explosion, Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN EXCESS
OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM
x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x
x AND TO PAY THE PREMIUM.
 Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . . additional
premium the Company agrees, notwithstanding what is stated in the printed conditions of this Policy to the contrary,
that this insurance covers loss or damage (including loss or damage by fire) to any of the property insured by this
Policy occasioned by or through or in consequence of Earthquake.

Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby expressly
varied) and that any reference therein to loss or damage by fire should be deemed to apply also to loss or damage
occasioned by or through or in consequence of Earthquake.[24]

Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the earthquake
shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance with
each other.[25] All its parts are reflective of the true intent of the parties. The policy cannot be construed piecemeal.
Certain stipulations cannot be segregated and then made to control; neither do particular words or phrases
necessarily determine its character. Petitioner cannot focus on the earthquake shock endorsement to the exclusion of
the other provisions. All the provisions and riders, taken and interpreted together, indubitably show the intention of
the parties to extend earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the parties to extend
earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code defines a contract
of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event. Thus, an insurance contract exists where the following
elements concur:
1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;

3. The insurer assumes the risk;

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

5. In consideration of the insurer's promise, the insured pays a premium.[26] (Emphasis ours)

An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured against a
specified peril.[27] In fire, casualty, and marine insurance, the premium payable becomes a debt as soon as the risk
attaches.[28] In the subject policy, no premium payments were made with regard to earthquake shock coverage,
except on the two swimming pools. There is no mention of any premium payable for the other resort properties with
regard to earthquake shock. This is consistent with the history of petitioners previous insurance policies from
AHAC-AIU. As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the
period from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the
two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a
provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming pools
only?
 A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the
procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to your
instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give
written instruction to Forte Insurance Agency advising it that the earthquake shock coverage must
extend to all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect of
extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there was an
earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to your
instructions that all properties must be covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance Company marked
Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no more
limitation referring to the two swimming pools only, I was contented already that the previous
limitation pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA Warranty & Annual
Payment Agreement on Long Term Policies [29] to the insurance policy as proof of the intent of the parties to extend
the coverage for earthquake shock. However, this phrase is merely an enumeration of the descriptive titles of the
riders, clauses, warranties or endorsements to which the policy is subject, as required under Section 50, paragraph 2
of the Insurance Code.
 We also hold that no significance can be placed on the deletion of the qualification limiting the coverage to the
two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the testimony of Juan
Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]
TSN, August 11, 1992
pp. 9-12

Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously marked by
counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these six
(6) policies issued by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries an
earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated
in Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake
shock as provided for in each of the six (6) policies?
xxx

WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as provided for in each of
the six (6) policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in the
Clauses and Warranties: Item 5 only (Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools
we do cover earthquake shock. For building we covered it for full earthquake coverage which
includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for other things other
than swimming pool? You are covering building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or another we can
issue earthquake shock solely but that the moment I see this, the thing that comes to my mind is
 either insuring a swimming pool, foundations, they are normally affected by earthquake but not by
fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25

Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive
[remained] its coverage against earthquake shock to two (2) swimming pools only but that Exhibits
G and H respectively entend the coverage against earthquake shock to all the properties indicated in
the respective schedules attached to said policies, what can you say about that testimony of plaintiffs
witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I
assure you that this one covers the two swimming pools with respect to earthquake shock
endorsement. Based on it, if we are going to look at the premium there has been no change with
respect to the rates. Everytime (sic) there is a renewal if the intention of the insurer was to include
the earthquake shock, I think there is a substantial increase in the premium. We are not only going to
consider the two (2) swimming pools of the other as stated in the policy. As I see, there is no
increase in the amount of the premium. I must say that the coverage was not broaden (sic) to include
the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are going to do some
computation based on the rates you will arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6

ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to
during your direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2) swimming
pools was deleted from the policies issued by AIU, is it not?
xxx

ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of the qualifying
phrase for the policies?
 WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company
underwriter, we do not cover. . it was inadvertent because of the previous policies that we have
issued with no specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts to the
issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the earthquake shock
endorsement included all its properties in the resort. Respondent only insured the properties as intended by the
petitioner. Petitioners own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5

Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty.
Omlas (sic) to copy from Exhibit H for purposes of procuring the policy from Philippine Charter
Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as this American
Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging will
be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14

Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of
coverage of Exhibits I and H sometime in the third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as
scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy
wordings and rates were copied from the insurance policy I sent them but it was only when this case
erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time
between those indicated in Exhibit I and those indicated in Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the
same P393,000.00 on the two (2) swimming pools only against the peril of earthquake shock which
I understood before that this provision will have to be placed here because this particular provision
under the peril of earthquake shock only is requested because this is an insurance policy and
therefore cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved. Atty. Umlas
categorically denied having given such assurances.
 Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne Adjusters
and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors, Inc., respondent
never meant to lead petitioner to believe that the endorsement for earthquake shock covered properties other than the
two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26

Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the
policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance
coverage policy and it was indicated under Item 3 specifically that the coverage is only for
earthquake shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I
had found out in the policy and he confirmed to me indeed only Item 3 which were the two
swimming pools have coverage for earthquake shock.
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the
swimming pools all affected items have no coverage for earthquake shock?
A. I based my statement on my findings, because upon my examination of the policy I found out that
under Item 3 it was specific on the wordings that on the two swimming pools only, then enclosed in
parenthesis (against the peril[s] of earthquake shock only), and secondly, when I examined the
summary of premium payment only Item 3 which refers to the swimming pools have a computation
for premium payment for earthquake shock and all the other items have no computation for payment
of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the general
rule that insurance contracts are contracts of adhesion which should be liberally construed in favor of the insured
and strictly against the insurer company which usually prepares it. [31] A contract of adhesion is one wherein a party,
usually a corporation, prepares the stipulations in the contract, while the other party merely affixes his signature or
his "adhesion" thereto. Through the years, the courts have held that in these type of contracts, the parties do not
bargain on equal footing, the weaker party's participation being reduced to the alternative to take it or leave it. Thus,
these contracts are viewed as traps for the weaker party whom the courts of justice must protect. [32] Consequently,
any ambiguity therein is resolved against the insurer, or construed liberally in favor of the insured. [33]
The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided. [34] Thus, we have called on lower courts to remain careful
in scrutinizing the factual circumstances behind each case to determine the efficacy of the claims of contending
parties. In Development Bank of the Philippines v. National Merchandising Corporation, et al.,[35] the parties,
who were acute businessmen of experience, were presumed to have assented to the assailed documents with full
knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it did not
know the provisions of the policy. From the inception of the policy, petitioner had required the respondent to
copy verbatim the provisions and terms of its latest insurance policy from AHAC-AIU. The testimony of Mr.
Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner, is reflective of petitioners
knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
TSN, September 23, 1991
pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo
Playa?
 A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or exact provisions of the previous insurance policy
we had with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American
Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him
that the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-9 in
drafting its Insurance Policy No. 31944. It is true that there was variance in some terms, specifically in the
replacement cost endorsement, but the principal provisions of the policy remained essentially similar to AHAC-
AIUs policy. Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this case as the parties
intent to limit the coverage of the policy to the two swimming pools only is not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is
dismissed. No costs.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-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.

Office of the Legal Counsel for petitioner.

Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance Pool.

QUIASON, J.:

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.

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 Development Bank of the Philippines (DBP), Basilan Branch. As the principal mortgagor,
Dans, then 76 years of age, was advised by DBP to obtain a mortgage redemption insurance (MRI) with the DBP
Mortgage Redemption Insurance Pool (DBP MRI Pool).

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" and the "Health Statement
for DBP MRI Pool."

On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was credited by DBP to the
savings account of the DBP MRI Pool. Accordingly, the DBP MRI Pool was advised of the credit.

On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this information to the DBP MRI
Pool. On September 23, 1987, the DBP MRI Pool notified DBP that Dans was not eligible for MRI coverage, being
over the acceptance age limit of 60 years at the time of application.

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 had paid, but Candida Dans refused to accept
the same, demanding payment of the face value of the MRI or an amount equivalent to the loan. She, likewise,
refused to accept an ex gratia 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 alleged that Dans became insured by the DBP MRI Pool when DBP, with full
knowledge of Dans' age at the time of application, required him to apply for MRI, and later collected the insurance
premium thereon. Respondent Estate therefore prayed: (1) that the sum of P139,500.00, which it paid under protest
for the loan, be reimbursed; (2) that the mortgage debt of the deceased be declared fully paid; and (3) that damages
be awarded.

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 documents and exhibits submitted by respondent
Estate. As a result of these admissions, the trial court narrowed down the issues and, without opposition from the
parties, found the case ripe for summary judgment. Consequently, the trial court ordered the parties to submit their
respective position papers and documentary evidence, which may serve as basis for the judgment.

On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and against DBP. The DBP MRI
Pool, however, was absolved from liability, after the trial court found no privity 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:

1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of interest as
amortization payment paid under protest;

2. To consider the mortgage loan of P300,000.00 including all interest accumulated or otherwise to
have been settled, satisfied or set-off by virtue of the insurance coverage of the late Juan B. Dans;

3. To pay plaintiff the amount of P10,000.00 as attorney's fees;

4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other expenses, and other
relief just and equitable.

The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed. The Cross-
claim of Defendant DBP is likewise dismissed (Rollo, p. 79)

The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the appellate court affirmed in
toto the 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 MRI 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.

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 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.

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.

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.

One is entitled 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]).

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.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-15895 November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

Jose A. Espiritu for appellant.

Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to recover from
the defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life annuity. The trial court
gave judgment for the defendant. Plaintiff appeals.

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life Assurance
Company of Canada through its office in Manila for a life annuity. Two days later he paid the sum of P6,000 to the
manager of the company's Manila office and was given a receipt reading as follows:

MANILA, I. F., 26 de septiembre, 1917.

PROVISIONAL RECEIPT Pesos 6,000

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia solicitada por
dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina Central de la Compaia.

The application was immediately forwarded to the head office of the company at Montreal, Canada. On November
26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on the same day the cable was
received notice was sent by the Manila office of Herrer that the application had been accepted, is a disputed point,
which will be discussed later.) On December 4, 1917, the policy was issued at Montreal. On December 18, 1917,
attorney Aurelio A. Torres wrote to the Manila office of the company stating that Herrer desired to withdraw his
application. The following day the local office replied to Mr. Torres, stating that the policy had been issued, and
called attention to the notification of November 26, 1917. This letter was received by Mr. Torres on the morning of
December 21, 1917. Mr. Herrer died on December 20, 1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of acceptance of his
application. To resolve this question, we propose to go directly to the evidence of record.

The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial testified
that he prepared the letter introduced in evidence as Exhibit 3, of date November 26, 1917, and handed it to the local
manager, Mr. E. E. White, for signature. The witness admitted on cross-examination that after preparing the letter
and giving it to he manager, he new nothing of what became of it. The local manager, Mr. White, testified to having
received the cablegram accepting the application of Mr. Herrer from the home office on November 26, 1917. He
said that on the same day he signed a letter notifying Mr. Herrer of this acceptance. The witness further said that
letters, after being signed, were sent to the chief clerk and placed on the mailing desk for transmission. The witness
could not tell if the letter had every actually been placed in the mails. Mr. Tuason, who was the chief clerk, on
November 26, 1917, was not called as a witness. For the defense, attorney Manuel Torres testified to having
prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application for a life
annuity, and that he said that the only document relating to the transaction in his possession was the provisional
receipt. Rafael Enriquez, the administrator of the estate, testified that he had gone through the effects of the deceased
and had found no letter of notification from the insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr. Herrer
that his application had been accepted, was prepared and signed in the local office of the insurance company, was
placed in the ordinary channels for transmission, but as far as we know, was never actually mailed and thus was
never received by the applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should be applied to the
facts. In order to reach our legal goal, the obvious signposts along the way must be noticed.

Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code of
Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of Book III and
Section III of Title III of Book III, which dealt with insurance contracts. In the Civil Code there formerly existed and
presumably still exist, Chapters II and IV, entitled insurance contracts and life annuities, respectively, of Title XII of
Book IV. On the after July 1, 1915, there was, however, in force the Insurance Act. No. 2427. Chapter IV of this Act
concerns life and health insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of
Book III of the code of Commerce. The law of insurance is consequently now found in the Insurance Act and the
Civil Code.

While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be followed in
order that there may be a contract of insurance. On the other hand, the Civil Code, in article 1802, not only describes
a contact of life annuity markedly similar to the one we are considering, but in two other articles, gives strong clues
as to the proper disposition of the case. For instance, article 16 of the Civil Code provides that "In matters which are
governed by special laws, any deficiency of the latter shall be supplied by the provisions of this Code." On the
supposition, therefore, which is incontestable, that the special law on the subject of insurance is deficient in
enunciating the principles governing acceptance, the subject-matter of the Civil code, if there be any, would be
controlling. In the Civil Code is found article 1262 providing that "Consent is shown by the concurrence of offer and
acceptance with respect to the thing and the consideration which are to constitute the contract. An acceptance made
by letter shall not bind the person making the offer except from the time it came to his knowledge. The contract, in
such case, is presumed to have been entered into at the place where the offer was made." This latter article is in
opposition to the provisions of article 54 of the Code of Commerce.

If no mistake has been made in announcing the successive steps by which we reach a conclusion, then the only duty
remaining is for the court to apply the law as it is found. The legislature in its wisdom having enacted a new law on
insurance, and expressly repealed the provisions in the Code of Commerce on the same subject, and having thus left
a void in the commercial law, it would seem logical to make use of the only pertinent provision of law found in the
Civil code, closely related to the chapter concerning life annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from the date it
came to his knowledge, may not be the best expression of modern commercial usage. Still it must be admitted that
its enforcement avoids uncertainty and tends to security. Not only this, but in order that the principle may not be
taken too lightly, let it be noticed that it is identical with the principles announced by a considerable number of
respectable courts in the United States. The courts who take this view have expressly held that an acceptance of an
offer of insurance not actually or constructively communicated to the proposer does not make a contract. Only the
mailing of acceptance, it has been said, completes the contract of insurance, as the locus poenitentiae is ended when
the acceptance has passed beyond the control of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262 of the Civil
Code providing that an acceptance made by letter shall not bind the person making the offer except from the time it
came to his knowledge. The pertinent fact is, that according to the provisional receipt, three things had to be
accomplished by the insurance company before there was a contract: (1) There had to be a medical examination of
the applicant; (2) there had to be approval of the application by the head office of the company; and (3) this approval
had in some way to be communicated by the company to the applicant. The further admitted facts are that the head
office in Montreal did accept the application, did cable the Manila office to that effect, did actually issue the policy
and did, through its agent in Manila, actually write the letter of notification and place it in the usual channels for
transmission to the addressee. The fact as to the letter of notification thus fails to concur with the essential elements
of the general rule pertaining to the mailing and delivery of mail matter as announced by the American courts,
namely, when a letter or other mail matter is addressed and mailed with postage prepaid there is a rebuttable
presumption of fact that it was received by the addressee as soon as it could have been transmitted to him in the
ordinary course of the mails. But if any one of these elemental facts fails to appear, it is fatal to the presumption. For
instance, a letter will not be presumed to have been received by the addressee unless it is shown that it was deposited
in the post-office, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)

We hold that the contract for a life annuity in the case at bar was not perfected because it has not been proved
satisfactorily that the acceptance of the application ever came to the knowledge of the applicant.lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000 with legal
interest from November 20, 1918, until paid, without special finding as to costs in either instance. So ordered.