On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a

document denominated "Loan and

Trust receipt", a portion of which read
(sic):

[G.R. No. 151890. June 20, 2006.]

PRUDENTIAL GUARANTEE and ASSURANCE INC.,
petitioner, vs. TRANS-ASIA SHIPPING LINES, INC.,
respondent.
[G.R. No. 151991. June 20, 2006.]
TRANS-ASIA SHIPPING LINES, INC., petitioner, vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC.,
respondent.
DECISION
CHICO-NAZARIO, J p:
This is a consolidation of two separate Petitions for Review
on Certiorari filed by petitioner Prudential Guarantee and
Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890 and TransAsia Shipping Lines, Inc. (TRANS-ASIA) in G.R. No. 151991,
assailing the Decision 1 dated 6 November 2001 of the Court
of Appeals in CA G.R. CV No. 68278, which reversed the
Judgment 2 dated 6 June 2000 of the Regional Trial Court
(RTC), Branch 13, Cebu City in Civil Case No. CEB-20709. The
29 January 2002 Resolution 3 of the Court of Appeals,
denying PRUDENTIAL's Motion for Reconsideration and
TRANS-ASIA's Partial Motion for Reconsideration of the 6
November 2001 Decision, is likewise sought to be annulled
and set aside.
The Facts
The material antecedents as found by the court a quo and
adopted by the appellate court are as follows:

"Received from Prudential Guarantee and Assurance, Inc., the sum

of PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without
interest under Policy No. MH 93/1353 [sic], repayable only in the
event and to the extent that any net recovery is made by Trans-Asia
Shipping Corporation, from any person or persons, corporation or
corporations, or other parties, on account of loss by any casualty
for which they may be liable occasioned by the 25 October 1993:
Fire on Board." (Exhibit "4")
In a letter dated 21 April 1997 defendant
[PRUDENTIAL] denied plaintiff's claim
(Exhibit "5"). The letter reads:

"After a careful review and evaluation of your claim arising from the
above-captioned incident, it has been ascertained that you are in
breach of policy conditions, among them "WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED". Accordingly, we regret to
advise that your claim is not compensable and hereby DENIED."
This was followed by defendant's letter dated 21 July
1997
requesting
the
return or payment of the
P3,000,000.00 within a
period of ten (10) days
from receipt of the letter
(Exhibit "6"). 4

Plaintiff [TRANS-ASIA] is the owner of the vessel M/V

Asia Korea. In consideration of
payment of premiums, defendant
[PRUDENTIAL] insured M/V Asia Korea
for loss/damage of the hull and
machinery arising from perils, inter
alia, of fire and explosion for the sum
of P40 Million, beginning [from] the
period [of] July 1, 1993 up to July 1,
1994. This is evidenced by Marine
Policy No. MH93/1363 (Exhibits "A" to
"A-11"). On October 25, 1993, while
the policy was in force, a fire broke out
while
[M/V
Asia
Korea
was]
undergoing repairs at the port of
Cebu. On October 26, 1993 plaintiff
[TRANS-ASIA] filed its notice of claim
for damage sustained by the vessel.
This is evidenced by a letter/formal
claim of even date (Exhibit "B").
Plaintiff [TRANS-ASIA] reserved its
right to subsequently notify defendant
[PRUDENTIAL] as to the full amount of
the claim upon final survey and
determination by average adjuster
Richard Hogg International (Phil.) of
the damage sustained by reason of
fire. An adjuster's report on the fire in
question was submitted by Richard
Hogg International together with the
U-Marine Surveyor Report (Exhibits "4"
to "4-115").

Following this development, on 13 August 1997, TRANS-ASIA

filed a Complaint 5 for Sum of Money against PRUDENTIAL
with the RTC of Cebu City, docketed as Civil Case No. CEB20709, wherein TRANS-ASIA sought the amount of
P8,395,072.26 from PRUDENTIAL, alleging that the same
represents the balance of the indemnity due upon the
insurance policy in the total amount of P11,395,072.26.
TRANS-ASIA similarly sought interest at 42% per annum
citing Section 243 6 of Presidential Decree No. 1460,
otherwise known as the "Insurance Code," as amended.
In its Answer, 7 PRUDENTIAL denied the material allegations
of the Complaint and interposed the defense that TRANSASIA breached insurance policy conditions, in particular:
"WARRANTED VESSEL CLASSED AND CLASS MAINTAINED."
PRUDENTIAL further alleged that it acted as facts and law
require and incurred no liability to TRANS-ASIA; that TRANSASIA has no cause of action; and, that its claim has been
effectively waived and/or abandoned, or it is estopped from
pursuing the same. By way of a counterclaim, PRUDENTIAL
sought a refund of P3,000,000.00, which it allegedly
advanced to TRANS-ASIA by way of a loan without interest

and without prejudice to the final evaluation of the claim,

including the amounts of P500,000.00, for survey fees and
P200,000.00, representing attorney's fees.
The Ruling of the Trial Court
On 6 June 2000, the court a quo rendered Judgment 8
finding for (therein defendant) PRUDENTIAL. It ruled that a
determination of the parties' liabilities hinged on whether
TRANS-ASIA violated and breached the policy conditions on
WARRANTED VESSEL CLASSED AND CLASS MAINTAINED. It
interpreted the provision to mean that TRANS-ASIA is
required to maintain the vessel at a certain class at all times
pertinent during the life of the policy. According to the court
a quo, TRANS-ASIA failed to prove compliance of the terms
of the warranty, the violation thereof entitled PRUDENTIAL,
the insured party, to rescind the contract. 9
Further, citing Section 107 10 of the Insurance Code, the
court a quo ratiocinated that the concealment made by
TRANS-ASIA that the vessel was not adequately maintained
to preserve its class was a material concealment sufficient
to avoid the policy and, thus, entitled the injured party to
rescind the contract. The court a quo found merit in
PRUDENTIAL's contention that there was nothing in the
adjustment of the particular average submitted by the
adjuster that would show that TRANS-ASIA was not in
breach of the policy. Ruling on the denominated loan and
trust receipt, the court a quo said that in substance and in
form, the same is a receipt for a loan. It held that if TRANSASIA intended to receive the amount of P3,000,000.00 as
advance payment, it should have so clearly stated as such.
The court a quo did not award PRUDENTIAL's claim for
P500,000.00, representing expert survey fees on the ground
of lack of sufficient basis in support thereof. Neither did it
award attorney's fees on the rationalization that the instant
case does not fall under the exceptions stated in Article
2208 11 of the Civil Code. However, the court a quo granted
PRUDENTIAL's counterclaim stating that there is factual and
legal basis for TRANS-ASIA to return the amount of
P3,000,000.00 by way of loan without interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE,

On appeal by TRANS-ASIA, the Court of Appeals, in its

assailed Decision of 6 November 2001, reversed the 6 June
2000 Judgment of the RTC.
On the issue of TRANS-ASIA's alleged breach of warranty of
the policy condition CLASSED AND CLASS MAINTAINED, the
Court of Appeals ruled that PRUDENTIAL, as the party
asserting the non-compensability of the loss had the
burden of proof to show that TRANS-ASIA breached the
warranty, which burden it failed to discharge. PRUDENTIAL
cannot rely on the lack of certification to the effect that
TRANS-ASIA was CLASSED AND CLASS MAINTAINED as its
sole basis for reaching the conclusion that the warranty was
breached. The Court of Appeals opined that the lack of a
certification does not necessarily mean that the warranty
was breached by TRANS-ASIA. Instead, the Court of Appeals
considered PRUDENTIAL's admission that at the time the
insurance contract was entered into between the parties,
the vessel was properly classed by Bureau Veritas, a
classification society recognized by the industry. The Court
of Appeals similarly gave weight to the fact that it was the
responsibility of Richards Hogg International (Phils.) Inc., the
average adjuster hired by PRUDENTIAL, to secure a copy of
such certification to support its conclusion that mere
absence of a certification does not warrant denial of TRANSASIA's claim under the insurance policy.
In the same token, the Court of Appeals found the subject
warranty allegedly breached by TRANS-ASIA to be a rider
which, while contained in the policy, was inserted by
PRUDENTIAL without the intervention of TRANS-ASIA. As
such, it partakes of a nature of a contract d'adhesion which
should be construed against PRUDENTIAL, the party which
drafted the contract. Likewise, according to the Court of
Appeals, PRUDENTIAL's renewal of the insurance policy
from noon of 1 July 1994 to noon of 1 July 1995, and then
again, until noon of 1 July 1996 must be deemed a waiver by
PRUDENTIAL of any breach of warranty committed by
TRANS-ASIA.
Further, the Court of Appeals, contrary to the ruling of the
court a quo, interpreted the transaction between
PRUDENTIAL and TRANS-ASIA as one of subrogation,
instead of a loan. The Court of Appeals concluded that
TRANS-ASIA has no obligation to pay back the amount of
P3,000.000.00 to PRUDENTIAL based on its finding that the
aforesaid amount was PRUDENTIAL's partial payment to
TRANS-ASIA's claim under the policy. Finally, the Court of
Appeals denied TRANS-ASIA's prayer for attorney's fees, but
held TRANS-ASIA entitled to double interest on the policy
for the duration of the delay of payment of the unpaid
balance, citing Section 244 13 of the Insurance Code.

judgment
is
hereby
rendered
DISMISSING the complaint for its
failure to prove a cause of action.

On defendant's counterclaim, plaintiff is directed to

return the sum of P3,000,000.00
representing the loan extended to it
by the defendant, within a period of
ten (10) days from and after this
judgment shall have become final and
executory. 12

Finding for therein appellant TRANS-ASIA, the Court of

Appeals ruled in this wise:
WHEREFORE, the foregoing consideration, We find for
Appellant. The instant appeal is
ALLOWED and the Judgment appealed
from REVERSED. The P3,000,000.00
initially paid by appellee Prudential
Guarantee Assurance Incorporated to

The Ruling of the Court of Appeals

appellant Trans-Asia and covered by a

"Loan and Trust Receipt" dated 29
May 1995 is HELD to be in partial
settlement of the loss suffered by
appellant and covered by Marine
Policy No. MH93/1363 issued by
appellee. Further, appellee is hereby
ORDERED to pay appellant the
additional amount of P8,395,072.26
representing the balance of the loss
suffered
by
the
latter
as
recommended
by
the
average
adjuster Richard Hogg International
(Philippines) in its Report, with double
interest starting from the time Richard
Hogg's Survey Report was completed,
or on 13 August 1996, until the same
is fully paid.

OF THE INSURANCE POLICY.

III.

THE COURT OF APPEALS ERRED IN HOLDING THAT

PRUDENTIAL, AS INSURER HAD THE
BURDEN OF PROVING THAT THE
ASSURED, TRANS-ASIA, VIOLATED A
MATERIAL WARRANTY.

IV.
All other claims and counterclaims are hereby
DISMISSED.
THE COURT OF APPEALS ERRED IN HOLDING THAT
THE WARRANTY CLAUSE EMBODIED IN
THE INSURANCE POLICY CONTRACT
WAS A MERE RIDER.

All costs against appellee. 14

V.

Not satisfied with the judgment, PRUDENTIAL and TRANSASIA filed a Motion for Reconsideration and Partial Motion
for Reconsideration thereon, respectively, which motions
were denied by the Court of Appeals in the Resolution
dated 29 January 2002.
The Issues
Aggrieved, PRUDENTIAL filed before this Court a Petition for
Review, docketed as G.R. No. 151890, relying on the
following grounds, viz:

THE COURT OF APPEALS ERRED IN HOLDING THAT

THE ALLEGED RENEWALS OF THE
POLICY CONSTITUTED A WAIVER ON
THE PART OF PRUDENTIAL OF THE
BREACH OF THE WARRANTY BY
TRANS-ASIA.

I.

THE AWARD IS GROSSLY UNCONSCIONABLE.

VI.

II.

THE COURT OF APPEALS ERRED IN HOLDING THAT

THE "LOAN AND TRUST RECEIPT"
EXECUTED BY TRANS-ASIA IS AN
ADVANCE ON THE POLICY, THUS
CONSTITUTING PARTIAL PAYMENT
THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT

THERE WAS NO VIOLATION BY TRANSASIA OF A MATERIAL WARRANTY,
NAMELY, WARRANTY CLAUSE NO. 5,

VII.

THE "DOUBLE INTEREST" REFERRED TO IN THE

DECISION DATED 06 NOVEMBER 2001
SHOULD BE CONSTRUED TO MEAN
DOUBLE INTEREST BASED ON THE
LEGAL INTEREST OF 12%, OR INTEREST
AT THE RATE OF 24% PER ANNUM. 16

THE COURT OF APPEALS ERRED IN HOLDING THAT

THE ACCEPTANCE BY PRUDENTIAL OF
THE FINDINGS OF RICHARDS HOGG IS
INDICATIVE OF A WAIVER ON THE
PART OF PRUDENTIAL OF ANY
VIOLATION BY TRANS-ASIA OF THE
WARRANTY.

In our Resolution of 2 December 2002, we granted TRANSASIA's Motion for Consolidation 17 of G.R. Nos. 151890 and
151991; 18 hence, the instant consolidated petitions.
In sum, for our main resolution are: (1) the liability, if any, of
PRUDENTIAL to TRANS-ASIA arising from the subject
insurance contract; (2) the liability, if any, of TRANS-ASIA to
PRUDENTIAL arising from the transaction between the
parties as evidenced by a document denominated as "Loan
and Trust Receipt," dated 29 May 1995; and (3) the amount
of interest to be imposed on the liability, if any, of either or
both parties.
Ruling of the Court
Prefatorily, it must be emphasized that in a petition for
review, only questions of law, and not questions of fact,
may be raised. 19 This rule may be disregarded only when
the findings of fact of the Court of Appeals are contrary to
the findings and conclusions of the trial court, or are not
supported by the evidence on record. 20 In the case at bar,
we find an incongruence between the findings of fact of the
Court of Appeals and the court a quo, thus, in our
determination of the issues, we are constrained to assess
the evidence adduced by the parties to make appropriate
findings of facts as are necessary.
I.

VIII.

THE COURT OF APPEALS ERRRED (sic) IN REVERSING

THE TRIAL COURT, IN FINDING THAT
PRUDENTIAL
"UNJUSTIFIABLY
REFUSED" TO PAY THE CLAIM AND IN
ORDERING PRUDENTIAL TO PAY
TRANS-ASIA
P8,395,072.26
PLUS
DOUBLE INTEREST FROM 13 AUGUST
1996, UNTIL [THE] SAME IS FULLY
PAID. 15

Similarly, TRANS-ASIA, disagreeing in the ruling of the Court

of Appeals filed a Petition for Review docketed as G.R. No.
151991, raising the following grounds for the allowance of
the petition, to wit:

A. PRUDENTIAL failed to establish that TRANS-ASIA violated

and breached the policy condition on WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED, as contained in the
subject insurance contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits
that TRANS-ASIA violated an express and material warranty
in the subject insurance contract, i.e., Marine Insurance
Policy No. MH93/1363, specifically Warranty Clause No. 5
thereof, which stipulates that the insured vessel, "M/V ASIA
KOREA" is required to be CLASSED AND CLASS
MAINTAINED. According to PRUDENTIAL, on 25 October
1993, or at the time of the occurrence of the fire, "M/V ASIA
KOREA" was in violation of the warranty as it was not
CLASSED AND CLASS MAINTAINED. PRUDENTIAL submits
that Warranty Clause No. 5 was a condition precedent to
the recovery of TRANS-ASIA under the policy, the violation
of which entitled PRUDENTIAL to rescind the contract under
Sec. 74 21 of the Insurance Code.
The warranty condition CLASSED AND CLASS MAINTAINED
was explained by PRUDENTIAL's Senior Manager of the
Marine and Aviation Division, Lucio Fernandez. The
pertinent portions of his testimony on direct examination is
reproduced hereunder, viz:

I.

THE HONORABLE COURT OF APPEALS ERRED IN NOT

AWARDING ATTORNEY'S FEES TO
PETITIONER TRANS-ASIA ON THE
GROUND THAT SUCH CAN ONLY BE
AWARDED
IN
THE
CASES
ENUMERATED IN ARTICLE 2208 OF
THE CIVIL CODE, AND THERE BEING
NO BAD FAITH ON THE PART OF
RESPONDENT
PRUDENTIAL
IN
DENYING HEREIN PETITIONER TRANSASIA'S INSURANCE CLAIM.

II.

ATTY. LIM

A Yes, a warranty is a condition that has to be

complied with by the
insured. When we say a
class warranty, it must be
entered
in
the
classification society.

Q Please tell the court, Mr. Witness, the result of the

evaluation of this claim,
what final action was
taken?

COURT

A It was eventually determined that there was a

breach of the policy
condition, and basically
there is a breach of policy
warranty condition and
on that basis the claim
was denied.

Slowly.
WITNESS

(continued)
A A classification society is an organization which sets
certain standards for a
vessel to maintain in
order to maintain their
membership
in
the
classification society. So,
if they failed to meet that
standard,
they
are
considered not members
of that class, and thus
breaching the warranty,
that requires them to
maintain membership or
to maintain their class on
that classification society.
And it is not sufficient
that the member of this
classification society at
the time of a loss, their
membership must be
continuous for the whole
length of the policy such
that during the effectivity
of the policy, their
classification
is
suspended, and then
thereafter,
they
get
reinstated, that again still
a breach of the warranty
that they maintained
their class (sic). Our
maintaining
team
membership
in
the
classification
society
thereby maintaining the
standards of the vessel
(sic).

Q To refer you (sic) the "policy warranty condition," I

am showing to you a
policy here marked as
Exhibits "1", "1-A" series,
please point to the
warranty in the policy
which you said was
breached or violated by
the
plaintiff
which
constituted your basis for
denying the claim as you
testified.

A Warranted Vessel Classed and Class Maintained.

ATTY. LIM

Witness pointing, Your Honor, to that portion in Exhibit "1-A" which

is the second page of the policy below the printed words: "Clauses,
Endorsements, Special Conditions and Warranties," below this are
several typewritten clauses and the witness pointed out in
particular the clause reading: "Warranted Vessel Classed and Class
Maintained."
COURT

Q Will you explain that particular phrase?

ATTY. LIM

categorical admission that at the time of the procurement

of the insurance contract in July 1993, TRANS-ASIA's vessel,
"M/V Asia Korea" was properly classed by Bureau Veritas,
thus:
Q Kindly examine the records particularly the policy,
please tell us if you know
whether M/V Asia Korea
was classed at the time
(sic) policy was procured
perthe (sic) insurance
was procured that Exhibit
"1" on 1st July 1993 (sic).

Q Can you mention some classification societies that

you know?

A Well we have the Bureau Veritas, American Bureau

of Shipping, D&V Local
Classification Society, The
Philippine Registration of
Ships
Society,
China
Classification, NKK and
Company Classification
Society, and many others,
we have among others,
there
are
over
20
worldwide. 22

WITNESS

A I recall that they were classed.

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

alleges a fact as a matter of defense has the burden of
proving it. PRUDENTIAL, as the party which asserted the
claim that TRANS-ASIA breached the warranty in the policy,
has the burden of evidence to establish the same. Hence,
on the part of PRUDENTIAL lies the initiative to show proof
in support of its defense; otherwise, failing to establish the
same, it remains self-serving. Clearly, if no evidence on the
alleged breach of TRANS-ASIA of the subject warranty is
shown, a fortiori, TRANS-ASIA would be successful in
claiming on the policy. It follows that PRUDENTIAL bears the
burden of evidence to establish the fact of breach.
In our rule on evidence, TRANS-ASIA, as the plaintiff below,
necessarily has the burden of proof to show proof of loss,
and the coverage thereof, in the subject insurance policy.
However, in the course of trial in a civil case, once plaintiff
makes out a prima facie case in his favor, the duty or the
burden of evidence shifts to defendant to controvert
plaintiff's prima facie case, otherwise, a verdict must be
returned in favor of plaintiff. 23 TRANS-ASIA was able to
establish proof of loss and the coverage of the loss, i.e., 25
October 1993: Fire on Board. Thereafter, the burden of
evidence shifted to PRUDENTIAL to counter TRANS-ASIA's
case, and to prove its special and affirmative defense that
TRANS-ASIA was in violation of the particular condition on
CLASSED AND CLASS MAINTAINED.
We sustain the findings of the Court of Appeals that
PRUDENTIAL was not successful in discharging the burden
of evidence that TRANS-ASIA breached the subject policy
condition on CLASSED AND CLASS MAINTAINED.

ATTY. LIM

Q With what classification society?

A I believe with Bureau Veritas. 24

As found by the Court of Appeals and as supported by the

records, Bureau Veritas is a classification society recognized
in the marine industry. As it is undisputed that TRANS-ASIA
was properly classed at the time the contract of insurance
was entered into, thus, it becomes incumbent upon
PRUDENTIAL to show evidence that the status of TRANSASIA as being properly CLASSED by Bureau Veritas had
shifted in violation of the warranty. Unfortunately,
PRUDENTIAL failed to support the allegation.
We are in accord with the ruling of the Court of Appeals that
the lack of a certification in PRUDENTIAL's records to the
effect that TRANS-ASIA's "M/V Asia Korea" was CLASSED
AND CLASS MAINTAINED at the time of the occurrence of
the fire cannot be tantamount to the conclusion that
TRANS-ASIA in fact breached the warranty contained in the
policy. With more reason must we sustain the findings of
the Court of Appeals on the ground that as admitted by
PRUDENTIAL, it was likewise the responsibility of the

Foremost, PRUDENTIAL, through the Senior Manager of its

Marine and Aviation Division, Lucio Fernandez, made a

average adjuster, Richards Hogg International (Phils.), Inc.,

to secure a copy of such certification, and the alleged
breach of TRANS-ASIA cannot be gleaned from the average
adjuster's survey report, or adjustment of particular
average per "M/V Asia Korea" of the 25 October 1993 fire on
board.
We are not unmindful of the clear language of Sec. 74 of the
Insurance Code which provides that, "the violation of a
material warranty, or other material provision of a policy on
the part of either party thereto, entitles the other to
rescind." It is generally accepted that "[a] warranty is a
statement or promise set forth in the policy, or by reference
incorporated therein, the untruth or non-fulfillment of
which in any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or nonfulfillment, renders the policy voidable by the insurer." 25
However, it is similarly indubitable that for the breach of a
warranty to avoid a policy, the same must be duly shown by
the party alleging the same. We cannot sustain an allegation
that is unfounded. Consequently, PRUDENTIAL, not having
shown that TRANS-ASIA breached the warranty condition,
CLASSED AND CLASS MAINTAINED, it remains that TRANSASIA must be allowed to recover its rightful claims on the
policy.
B. Assuming arguendo that TRANS-ASIA violated the policy
condition on WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED, PRUDENTIAL made a valid waiver of the
same.
The Court of Appeals, in reversing the Judgment of the RTC
which held that TRANS-ASIA breached the warranty
provision on CLASSED AND CLASS MAINTAINED,
underscored that PRUDENTIAL can be deemed to have
made a valid waiver of TRANS-ASIA's breach of warranty as
alleged, ratiocinating, thus:

years after the loss covered by Policy No. MH93/1363, was

considered to have waived TRANS-ASIA's breach of the
subject warranty, if any. Breach of a warranty or of a
condition renders the contract defeasible at the option of
the insurer; but if he so elects, he may waive his privilege
and power to rescind by the mere expression of an
intention so to do. In that event his liability under the policy
continues as before. 28 There can be no clearer intention of
the waiver of the alleged breach than the renewal of the
policy insurance granted by PRUDENTIAL to TRANS-ASIA in
MH94/1595 and MH95/1788, issued in the years 1994 and
1995, respectively.
To our mind, the argument is made even more credulous by
PRUDENTIAL's lack of proof to support its allegation that the
renewals of the policies were taken only after a request was
made to TRANS-ASIA to furnish them a copy of the
certificate attesting that "M/V Asia Korea" was CLASSED
AND CLASS MAINTAINED. Notwithstanding PRUDENTIAL's
claim that no certification was issued to that effect, it
renewed the policy, thereby, evidencing an intention to
waive TRANS-ASIA's alleged breach. Clearly, by granting the
renewal policies twice and successively after the loss, the
intent was to benefit the insured, TRANS-ASIA, as well as to
waive compliance of the warranty.
The foregoing finding renders a determination of whether
the subject warranty is a rider, moot, as raised by the
PRUDENTIAL in its assignment of errors. Whether it is a
rider will not effectively alter the result for the reasons that:
(1) PRUDENTIAL was not able to discharge the burden of
evidence to show that TRANS-ASIA committed a breach,
thereof; and (2) assuming arguendo the commission of a
breach by TRANS-ASIA, the same was shown to have been
waived by PRUDENTIAL.
II.

Third, after the loss, Prudential renewed the insurance policy of

Trans-Asia for two (2) consecutive years, from noon of 01 July 1994
to noon of 01 July 1995, and then again until noon of 01 July 1996.
This renewal is deemed a waiver of any breach of warranty. 26

A. The amount of P3,000,000.00 granted by PRUDENTIAL to

TRANS-ASIA via a transaction between the parties evidenced
by a document denominated as "Loan and Trust Receipt,"
dated 29 May 1995 constituted partial payment on the
policy.
It is undisputed that TRANS-ASIA received from
PRUDENTIAL the amount of P3,000,000.00. The same was
evidenced by a transaction receipt denominated as a "Loan
and Trust Receipt," dated 29 May 1995, reproduced
hereunder:

PRUDENTIAL finds fault with the ruling of the appellate

court when it ruled that the renewal policies are deemed a
waiver of TRANS-ASIA's alleged breach, averring herein that
the subsequent policies, designated as MH94/1595 and
MH95/1788 show that they were issued only on 1 July 1994
and 3 July 1995, respectively, prior to the time it made a
request to TRANS-ASIA that it be furnished a copy of the
certification specifying that the insured vessel "M/V Asia
Korea" was CLASSED AND CLASS MAINTAINED. PRUDENTIAL
posits that it came to know of the breach by TRANS-ASIA of
the subject warranty clause only on 21 April 1997. On even
date, PRUDENTIAL sent TRANS-ASIA a letter of denial,
advising the latter that their claim is not compensable. In
fine, PRUDENTIAL would have this Court believe that the
issuance of the renewal policies cannot be a waiver because
they were issued without knowledge of the alleged breach
of warranty committed by TRANS-ASIA. 27
We are not impressed. We do not find that the Court of
Appeals was in error when it held that PRUDENTIAL, in
renewing TRANS-ASIA's insurance policy for two consecutive

LOAN AND TRUST RECEIPT

Claim File No. MH-93-025 May 29, 1995

P3,000,000.00

Check No. PCIB066755

Received

FROM PRUDENTIAL GUARANTEE AND

ASSURANCE INC., the sum of PESOS
THREE MILLION ONLY (P3,000,000.00)
as a loan without interest, under
Policy No. MH93/1353, repayable only
in the event and to the extent that any
net recovery is made by TRANS ASIA
SHIPPING CORP., from any person or
persons, corporation or corporations,
or other parties, on account of loss by
any casualty for which they may be
liable, occasioned by the 25 October
1993: Fire on Board.

PRUDENTIAL of TRANS-ASIA's claim on the insurance, thus:

The Philippine Insurance Code (PD 1460 as amended)
was derived from the old Insurance
Law Act No. 2427 of the Philippine
Legislature during the American
Regime. The Insurance Act was lifted
verbatim from the law of California,
except Chapter V thereof, which was
taken largely from the insurance law
of New York. Therefore, ruling case
law in that jurisdiction is to Us
persuasive in interpreting provisions
of our own Insurance Code. In
addition, the application of the
adopted statute should correspond in
fundamental
points
with
the
application in its country of origin . . . .

As security for such repayment, we hereby pledge to

PRUDENTIAL
GUARANTEE
AND
ASSURANCE INC. whatever recovery
we may make and deliver to it all
documents necessary to prove our
interest in said property. We also
hereby agree to promptly prosecute
suit against such persons, corporation
or corporations through whose
negligence the aforesaid loss was
caused or who may otherwise be
responsible therefore, with all due
diligence, in our own name, but at the
expense of and under the exclusive
direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE INC.

xxx xxx xxx

Likewise, it is settled in that jurisdiction that the (sic)
notwithstanding recitals in the Loan
Receipt that the money was intended
as a loan does not detract from its real
character as payment of claim, thus:

"The receipt of money by the insured employers from

a surety company for
losses on account of
forgery of drafts by an
employee
where
no
provision or repayment
of the money was made
except upon condition
that it be recovered from
other parties and neither
interest nor security for
the asserted debts was
provided for, the money
constituted the payment
of a liability and not a
mere
loan,
notwithstanding recitals
in the written receipt that
the money was intended
as a mere loan."

PRUDENTIAL largely contends that the "Loan and Trust

Receipt" executed by the parties evidenced a loan of
P3,000,000.00 which it granted to TRANS-ASIA, and not an
advance payment on the policy or a partial payment for the
loss. It further submits that it is a customary practice for
insurance companies in this country to extend loans
gratuitously as part of good business dealing with their
assured, in order to afford their assured the chance to
continue business without embarrassment while awaiting
outcome of the settlement of their claims. 30 According to
PRUDENTIAL, the "Trust and Loan Agreement" did not
subrogate to it whatever rights and/or actions TRANS-ASIA
may have against third persons, and it cannot by no means
be taken that by virtue thereof, PRUDENTIAL was granted
irrevocable power of attorney by TRANS-ASIA, as the sole
power to prosecute lies solely with the latter.
The Court of Appeals held that the real character of the
transaction between the parties as evidenced by the "Loan
and Trust Receipt" is that of an advance payment by

What is clear from the wordings of the so-called "Loan

and Trust Receipt Agreement" is that

appellant is obligated to hand over to
appellee "whatever recovery (Trans
Asia) may make and deliver to
(Prudential) all documents necessary
to prove its interest in the said
property." For all intents and purposes
therefore, the money receipted is
payment under the policy, with
Prudential having the right of
subrogation to whatever net recovery
Trans-Asia may obtain from third
parties resulting from the fire. In the
law on insurance, subrogation is an
equitable assignment to the insurer of
all remedies which the insured may
have against third person whose
negligence or wrongful act caused the
loss covered by the insurance policy,
which is created as the legal effect of
payment by the insurer as an assignee
in equity. The loss in the first instance
is that of the insured but after
reimbursement or compensation, it
becomes the loss of the insurer. It has
been referred to as the doctrine of
substitution and rests on the principle
that substantial justice should be
attained regardless of form, that is, its
basis is the doing of complete,
essential, and perfect justice between
all the parties without regard to form.

direction and control" as used in the "Loan and Trust

Receipt" grants solely to PRUDENTIAL the power to
prosecute, even as the same is carried in the name of
TRANS-ASIA, thereby making TRANS-ASIA merely an agent
of PRUDENTIAL, the principal, in the prosecution of the suit
against parties who may have occasioned the loss.
Third, per the subject "Loan and Trust Receipt," the
obligation of TRANS-ASIA to repay PRUDENTIAL is highly
speculative and contingent, i.e., only in the event and to the
extent that any net recovery is made by TRANS-ASIA from
any person on account of loss occasioned by the fire of 25
October 1993. The transaction, therefore, was made to
benefit TRANS-ASIA, such that, if no recovery from third
parties is made, PRUDENTIAL cannot be repaid the amount.
Verily, we do not think that this is constitutive of a loan. 34
The liberality in the tenor of the "Loan and Trust Receipt" in
favor of TRANS-ASIA leads to the conclusion that the
amount of P3,000,000.00 was a form of an advance
payment on TRANS-ASIA's claim on MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of
P8,395,072.26, representing the balance of the loss suffered by
TRANS-ASIA and covered by Marine Policy No. MH93/1363.

Our foregoing discussion supports the conclusion that

TRANS-ASIA is entitled to the unpaid claims covered by
Marine Policy No. MH93/1363, or a total amount of
P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in
the form of attorney's fees equivalent to 10% of P8,395,072.26.

31

The Court of Appeals denied the grant of attorney's fees. It

held that attorney's fees cannot be awarded absent a
showing of bad faith on the part of PRUDENTIAL in rejecting
TRANS-ASIA's claim, notwithstanding that the rejection was
erroneous. According to the Court of Appeals, attorney's
fees can be awarded only in the cases enumerated in Article
2208 of the Civil Code which finds no application in the
instant case.
We disagree. Sec. 244 of the Insurance Code grants
damages consisting of attorney's fees and other expenses
incurred by the insured after a finding by the Insurance
Commissioner or the Court, as the case may be, of an
unreasonable denial or withholding of the payment of the
claims due. Moreover, the law imposes an interest of twice
the ceiling prescribed by the Monetary Board on the
amount of the claim due the insured from the date
following the time prescribed in Section 242 35 or in Section
243, 36 as the case may be, until the claim is fully satisfied.
Finally, Section 244 considers the failure to pay the claims
within the time prescribed in Sections 242 or 243, when
applicable, as prima facie evidence of unreasonable delay in
payment.
To the mind of this Court, Section 244 does not require a
showing of bad faith in order that attorney's fees be
granted. As earlier stated, under Section 244, a prima facie
evidence of unreasonable delay in payment of the claim is
created by failure of the insurer to pay the claim within the
time fixed in both Sections 242 and 243 of the Insurance

We agree. Notwithstanding its designation, the tenor of the

"Loan and Trust Receipt" evidences that the real nature of
the transaction between the parties was that the amount of
P3,000,000.00 was not intended as a loan whereby TRANSASIA is obligated to pay PRUDENTIAL, but rather, the same
was a partial payment or an advance on the policy of the
claims due to TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an advance
payment to TRANS-ASIA by PRUDENTIAL, subrogating the
former to the extent of "any net recovery made by TRANS
ASIA SHIPPING CORP., from any person or persons,
corporation or corporations, or other parties, on account of
loss by any casualty for which they may be liable,
occasioned by the 25 October 1993: Fire on Board." 32
Second, we find that per the "Loan and Trust Receipt," even
as TRANS-ASIA agreed to "promptly prosecute suit against
such persons, corporation or corporations through whose
negligence the aforesaid loss was caused or who may
otherwise be responsible therefore, with all due diligence"
in its name, the prosecution of the claims against such third
persons are to be carried on "at the expense of and under
the exclusive direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE INC." 33 The clear import of
the phrase "at the expense of and under the exclusive

Code. As established in Section 244, by reason of the delay

and the consequent filing of the suit by the insured, the
insurers shall be adjudged to pay damages which shall
consist of attorney's fees and other expenses incurred by
the insured. 37
Section 244 reads:

TRANS-ASIA, as in fact, it refuted the latter's right to the

insurance claims, from the time proof of loss was shown
and the ascertainment of the loss was made by the
insurance adjuster. Evidently, PRUDENTIAL's unreasonable
delay in satisfying TRANS-ASIA's unpaid claims compelled
the latter to file a suit for collection.
Succinctly, an award equivalent to ten percent (10%) of the
unpaid proceeds of the policy as attorney's fees to TRANSASIA is reasonable under the circumstances, or otherwise
stated, ten percent (10%) of P8,395,072.26. In the case of
Cathay Insurance, Co., Inc. v. Court of Appeals, 41 where a
finding of an unreasonable delay under Section 244 of the
Insurance Code was made by this Court, we grant an award
of attorney's fees equivalent to ten percent (10%) of the
total proceeds. We find no reason to deviate from this
judicial precedent in the case at bar.

In case of any litigation for the enforcement of any

policy or contract of insurance, it shall
be the duty of the Commissioner or
the Court, as the case may be, to make
a finding as to whether the payment
of the claim of the insured has been
unreasonably denied or withheld; and
in the affirmative case, the insurance
company shall be adjudged to pay
damages which shall consist of
attorney's fees and other expenses
incurred by the insured person by
reason of such unreasonable denial or
withholding of payment plus interest
of twice the ceiling prescribed by the
Monetary Board of the amount of the
claim due the insured, from the date
following the time prescribed in
section two hundred forty-two or in
section two hundred forty-three, as
the case may be, until the claim is fully
satisfied; Provided, That the failure to
pay any such claim within the time
prescribed in said sections shall be
considered prima facie evidence of
unreasonable delay in payment.

C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof

as attorney's fees) shall be imposed double interest in accordance
with Section 244 of the Insurance Code.

Section 244 of the Insurance Code is categorical in imposing

an interest twice the ceiling prescribed by the Monetary
Board due the insured, from the date following the time
prescribed in Section 242 or in Section 243, as the case may
be, until the claim is fully satisfied. In the case at bar, we
find Section 243 to be applicable as what is involved herein
is a marine insurance, clearly, a policy other than life
insurance.
Section 243 is hereunder reproduced:
SEC. 243. The amount of any loss or damage for which
an insurer may be liable, under any
policy other than life insurance policy,
shall be paid within thirty days after
proof of loss is received by the insurer
and ascertainment of the loss or
damage is made either by agreement
between the insured and the insurer
or by arbitration; but if such
ascertainment is not had or made
within sixty days after such receipt by
the insurer of the proof of loss, then
the loss or damage shall be paid
within ninety days after such receipt.
Refusal or failure to pay the loss or
damage within the time prescribed
herein will entitle the assured to
collect interest on the proceeds of the
policy for the duration of the delay at
the rate of twice the ceiling prescribed
by the Monetary Board, unless such
failure or refusal to pay is based on
the ground that the claim is
fraudulent.

Sections 243 and 244 of the Insurance Code apply when the
court finds an unreasonable delay or refusal in the payment
of the insurance claims.
In the case at bar, the facts as found by the Court of
Appeals, and confirmed by the records show that there was
an unreasonable delay by PRUDENTIAL in the payment of
the unpaid balance of P8,395,072.26 to TRANS-ASIA. On 26
October 1993, a day after the occurrence of the fire in "M/V
Asia Korea", TRANS-ASIA filed its notice of claim. On 13
August 1996, the adjuster, Richards Hogg International
(Phils.), Inc., completed its survey report recommending the
amount of P11,395,072.26 as the total indemnity due to
TRANS-ASIA. 38 On 21 April 1997, PRUDENTIAL, in a letter 39
addressed to TRANS-ASIA denied the latter's claim for the
amount of P8,395,072.26 representing the balance of the
total indemnity. On 21 July 1997, PRUDENTIAL sent a second
letter 40 to TRANS-ASIA seeking a return of the amount of
P3,000,000.00. On 13 August 1997, TRANS-ASIA was
constrained to file a complaint for sum of money against
PRUDENTIAL praying, inter alia, for the sum of
P8,395,072.26 representing the balance of the proceeds of
the insurance claim.
As can be gleaned from the foregoing, there was an
unreasonable delay on the part of PRUDENTIAL to pay

As specified, the assured is entitled to interest on the

proceeds for the duration of the delay at the rate of twice
the ceiling prescribed by the Monetary Board except when

10

the failure or refusal of the insurer to pay was founded on

the ground that the claim is fraudulent.

under Section 243, the insurer has until the 30th day after
proof of loss and ascertainment of the loss or damage to
pay its liability under the insurance, and only after such
time can the insurer be held to be in delay, thereby
necessitating the imposition of double interest.
In the case at bar, it was not disputed that the survey report
on the ascertainment of the loss was completed by the
adjuster, Richard Hoggs International (Phils.), Inc. on 13
August 1996. PRUDENTIAL had thirty days from 13 August
1996 within which to pay its liability to TRANS-ASIA under
the insurance policy, or until 13 September 1996. Therefore,
the double interest can begin to run from 13 September
1996 only.
IV.

D. The term "double interest" as used in the Decision of the Court

of Appeals must be interpreted to mean 24% per annum.

PRUDENTIAL assails the award of interest, granted by the

Court of Appeals, in favor of TRANS-ASIA in the assailed
Decision of 6 November 2001. It is PRUDENTIAL's stance
that the award is extortionate and grossly unsconscionable.
In support thereto, PRUDENTIAL makes a reference to
TRANS-ASIA's prayer in the Complaint filed with the court a
quo wherein the latter sought, "interest double the
prevailing rate of interest of 21% per annum now obtaining
in the banking business or plus 42% per annum pursuant to
Article 243 of the Insurance Code . . . ." 42
The contention fails to persuade. It is settled that an award
of double interest is lawful and justified under Sections 243
and 244 of the Insurance Code. 43 In Finman General
Assurance Corporation v. Court of Appeals, 44 this Court
held that the payment of 24% interest per annum is
authorized by the Insurance Code. 45 There is no gainsaying
that the term "double interest" as used in Sections 243 and
244 can only be interpreted to mean twice 12% per annum
or 24% per annum interest, thus:

A. An interest of 12% per annum is similarly imposed on the TOTAL

amount of liability adjudged in section III herein, computed from
the time of finality of judgment until the full satisfaction thereof in
conformity with this Court's ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals.

This Court in Eastern Shipping Lines, Inc. v. Court of

Appeals, 47 inscribed the rule of thumb 48 in the application
of interest to be imposed on obligations, regardless of their
source. Eastern emphasized beyond cavil that when the
judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, regardless of
whether the obligation involves a loan or forbearance of
money, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance 49 of credit.
We find application of the rule in the case at bar proper,
thus, a rate of 12% per annum from the finality of judgment
until the full satisfaction thereof must be imposed on the
total amount of liability adjudged to PRUDENTIAL. It is clear
that the interim period from the finality of judgment until
the satisfaction of the same is deemed equivalent to a
forbearance of credit, hence, the imposition of the aforesaid
interest.
Fallo
WHEREFORE, the Petition in G.R. No. 151890 is DENIED.
However, the Petition in G.R. No. 151991 is GRANTED, thus,
we award the grant of attorney's fees and make a
clarification that the term "double interest" as used in the 6
November 2001 Decision of the Court of Appeals in CA-G.R.
CV No. 68278 should be construed to mean interest at the
rate of 24% per annum, with a further clarification, that the
same should be computed from 13 September 1996 until
fully paid. The Decision and Resolution of the Court of
Appeals, in CA-G.R. CV No. 68278, dated 6 November 2001
and 29 January 2002, respectively, are, thus, MODIFIED in
the following manner, to wit:

The term "ceiling prescribed by the Monetary Board"

means the legal rate of interest of
twelve per centum per annum (12%)
as prescribed by the Monetary Board
in C.B. Circular No. 416, pursuant to
P.D. No. 116, amending the Usury
Law; so that when Sections 242, 243
and 244 of the Insurance Code
provide that the insurer shall be liable
to pay interest "twice the ceiling
prescribed by the Monetary Board", it
means twice 12% per annum or 24%
per annum interest on the proceeds
of the insurance. 46

E. The payment of double interest should be counted from 13

September 1996.

The Court of Appeals, in imposing double interest for the

duration of the delay of the payment of the unpaid balance
due TRANS-ASIA, computed the same from 13 August 1996
until such time when the amount is fully paid. Although not
raised by the parties, we find the computation of the
duration of the delay made by the appellate court to be
patently erroneous.
To be sure, Section 243 imposes interest on the proceeds of
the policy for the duration of the delay at the rate of twice
the ceiling prescribed by the Monetary Board. Significantly,
Section 243 mandates the payment of any loss or damage
for which an insurer may be liable, under any policy other
than life insurance policy, within thirty days after proof of
loss is received by the insurer and ascertainment of the loss
or damage is made either by agreement between the
insured and the insurer or by arbitration. It is clear that

1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the

amount of P8,395,072.26,
representing the balance
of the loss suffered by
TRANS-ASIA and covered
by Marine Policy No.
MH93/1363;

11

2. PRUDENTIAL is DIRECTED further to PAY TRANSASIA damages in the

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

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

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

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

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

No costs.
SO ORDERED.
||| (Prudential Guarantee and Assurance, Inc. v. Trans-asia
Shipping Lines, Inc., G.R. No. 151890, 151991, [June 20,
2006])

12

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.

[G.R. No. 167330. September 18, 2009.]

PHILIPPINE HEALTH CARE PROVIDERS, INC.,
petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
RESOLUTION
CORONA, J p:
ARTICLE II

Declaration of Principles and State Policies

Section 15.The State shall protect and promote the

right to health of the people and instill
health consciousness among them.

xxx xxx xxx

HAEIac

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. . . .

ARTICLE III

Social Justice and Human Rights

Section 11.The State shall adopt an integrated and

comprehensive approach to health
development which shall endeavor to
make essential goods, health and
other social services available to all
the people at affordable cost. There
shall be priority for the needs of the
underprivileged sick, elderly, disabled,
women, and children. The State shall
endeavor to provide free medical care
to paupers. 1

The

deficiency

[documentary stamp tax (DST)]

assessment
was
imposed
on
petitioner's health care agreement
with the members of its health care
program pursuant to Section 185 of
the 1997 Tax Code . . .

xxx xxx xxx

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 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.

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

13

On April 5, 2002, the CTA rendered a decision, the

dispositive portion of which read:

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.

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.

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.

SO ORDERED.

Respondent appealed the CTA decision to the [Court

of Appeals (CA)] insofar as it cancelled
the DST assessment. He claimed that
petitioner's health care agreement
was a contract of insurance subject to
DST under Section 185 of the 1997 Tax
Code. DIEAHc

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the

petition and affirmed the CA's decision. We held that
petitioner's health care agreement during the pertinent
period was in the nature of non-life insurance which is a
contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares 3 and Philamcare Health Systems, Inc. v. CA. 4 We
also ruled that petitioner's contention that it is a health
maintenance organization (HMO) and not an insurance
company is irrelevant because contracts between
companies like petitioner and the beneficiaries under their
plans are treated as insurance contracts. Moreover, DST is

On August 16, 2004, the CA rendered its decision. It

held that petitioner's health care
agreement was in the nature of a nonlife insurance contract subject to DST.

14

(g)The agreements do not fall under the phrase "other

branch of insurance"
mentioned in Section
185.

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.

(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

(b)The Court, in dismissing the appeal in CIR v.

Philippine National Bank,
affirmed in effect the CA's
disposition that health
care services are not in
the
nature
of
an
insurance business.

Oral arguments were held in Baguio City on April 22, 2009.

The parties submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the
first time that it availed of a tax amnesty under RA 9480 7
(also known as the "Tax Amnesty Act of 2007") by fully
paying the amount of P5,127,149.08 representing 5% of its
net worth as of the year ending December 31, 2005. 8
We find merit in petitioner's motion for reconsideration.
Petitioner was formally registered and incorporated with
the Securities and Exchange Commission on June 30, 1987. 9
It is engaged in the dispensation of the following medical
services to individuals who enter into health care
agreements with it:

(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.

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

(e)Assuming arguendo that petitioner's agreements

are
contracts
of
indemnity, they are not
those
contemplated
under Section 185.

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

(f)Assuming arguendo that petitioner's agreements are

akin to health insurance,
health insurance is not
covered by Section 185.

15

or organization, and on all obligations

guaranteeing the title to any real
estate, or guaranteeing any mercantile
credits, which may be made or
renewed by any such person,
company or corporation, there shall
be collected a documentary stamp tax
of fifty centavos (P0.50) on each four
pesos (P4.00), or fractional part
thereof, of the premium charged.
(Emphasis supplied) ECaITc

contracted by it. 12 Petitioner also provides hospital services

such as room and board accommodation, laboratory
services, operating rooms, x-ray facilities and general
nursing care. 13 If and when a member avails of the benefits
under the agreement, petitioner pays the participating
physicians and other health care providers for the services
rendered, at pre-agreed rates. 14
To avail of petitioner's health care programs, the individual
members are required to sign and execute a standard
health care agreement embodying the terms and conditions
for the provision of the health care services. The same
agreement contains the various health care services that
can be engaged by the enrolled member, i.e., preventive,
diagnostic and curative medical services. Except for the
curative aspect of the medical service offered, the enrolled
member may actually make use of the health care services
being offered by petitioner at any time.
HEALTH MAINTENANCE ORGANIZATIONS
ARE NOT ENGAGED IN THE INSURANCE
BUSINESS
We said in our June 12, 2008 decision that it is irrelevant
that petitioner is an HMO and not an insurer because its
agreements are treated as insurance contracts and the DST
is not a tax on the business but an excise on the privilege,
opportunity or facility used in the transaction of the
business. 15
Petitioner, however, submits that it is of critical importance
to characterize the business it is engaged in, that is, to
determine whether it is an HMO or an insurance company,
as this distinction is indispensable in turn to the issue of
whether or not it is liable for DST on its health care
agreements. 16
A second hard look at the relevant law and jurisprudence
convinces the Court that the arguments of petitioner are
meritorious.
Section 185 of the National Internal Revenue Code of 1997
(NIRC of 1997) provides:

It is a cardinal rule in statutory construction that no word,

clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void
and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes
some words idle and nugatory. 17 This principle is expressed
in the maxim Ut magis valeat quam pereat, that is, we
choose the interpretation which gives effect to the whole of
the statute its every word. 18
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply, namely:
(1) the document must be a policy of insurance or an
obligation in the nature of indemnity and (2) the
maker should be transacting the business of
accident, fidelity, employer's liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire
insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The
National Health Insurance Act of 1995"), an HMO is "an
entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a
fixed prepaid premium". 19 The payments do not vary with
the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the
business of insurance during the pertinent taxable years?
We rule that it was not.
Section 2 (2) of PD 20 1460 (otherwise known as the
Insurance Code) enumerates what constitutes "doing an
insurance business" or "transacting an insurance business":

Section 185.Stamp tax on fidelity bonds and other

insurance policies. On all policies
of
insurance
or
bonds
or
obligations of the nature of
indemnity for loss, damage, or
liability made or renewed by
any person, association or
company
or
corporation
transacting the business of
accident, fidelity, employer's liability,
plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or
other branch
of insurance
(except life, marine, inland,
and fire insurance), and all bonds,
undertakings,
or
recognizances,
conditioned for the performance of
the duties of any office or position, for
the doing or not doing of anything
therein
specified,
and
on
all
obligations guaranteeing the validity
or legality of any bond or other
obligations issued by any province,
city, municipality, or other public body

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;

16

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;

accident more truly they constitute

the quantity purchase of wellrounded, continuous medical service
by its members. . . . 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.

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. IHCSTE

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 objects 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.
. . . Although Group Health's activities may be
considered in one aspect as creating
security against loss from illness or

17

That an incidental element of risk distribution or

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

American courts have pointed out that the main difference

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

basic

distinction between medical service

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

xxx xxx xxx

The primary purpose of a medical service corporation,

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

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)

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)

EcDATH

18

Consequently, the mere presence of risk would be

insufficient to override the primary purpose of the business
to provide medical services as needed, with payment made
directly to the provider of these services. 29 In short, even if
petitioner assumes the risk of paying the cost of these
services even if significantly more than what the member
has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.
By the same token, any indemnification resulting from the
payment for services rendered in case of emergency by
non-participating health providers would still be incidental
to petitioner's purpose of providing and arranging for
health care services and does not transform it into an
insurer. To fulfill its obligations to its members under the
agreements, petitioner is required to set up a system and
the facilities for the delivery of such medical services. This
indubitably shows that indemnification is not its sole object.
In fact, a substantial portion of petitioner's services covers
preventive and diagnostic medical services intended to keep
members from developing medical conditions or diseases.
30 As an HMO, it is its obligation to maintain the good health
of its members. Accordingly, its health care
programs are designed to prevent or to minimize
the possibility of any assumption of risk on its
part. Thus, its undertaking under its agreements is not to
indemnify its members against any loss or damage arising
from a medical condition but, on the contrary, to provide
the health and medical services needed to prevent such
loss or damage. 31
Overall, petitioner appears to provide insurance-type
benefits to its members (with respect to its curative
medical services), but these are incidental to the principal
activity of providing them medical care. The "insurance-like"
aspect of petitioner's business is miniscule compared to its
non-insurance activities. Therefore, since it substantially
provides health care services rather than insurance
services, it cannot be considered as being in the insurance
business. SAaTHc
It is important to emphasize that, in adopting the "principal
purpose test" used in the above-quoted U.S. cases, we are
not saying that petitioner's operations are identical in every
respect to those of the HMOs or health providers which
were parties to those cases. What we are stating is that, for
the purpose of determining what "doing an insurance
business" means, we have to scrutinize the operations of
the business as a whole and not its mere components. This
is of course only prudent and appropriate, taking into
account the burdensome and strict laws, rules and
regulations applicable to insurers and other entities
engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities
who have found particular HMOs to be actually engaged in
insurance activities. 32
Lastly, it is significant that petitioner, as an HMO, is not part
of the insurance industry. This is evident from the fact that
it is not supervised by the Insurance Commission but by the
Department of Health. 33 In fact, in a letter dated September

3, 2000, the Insurance Commissioner confirmed that

petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great
weight. It is well-settled that the interpretation of an
administrative agency which is tasked to implement a
statute is accorded great respect and ordinarily controls the
interpretation of laws by the courts. The reason behind this
rule was explained in Nestle Philippines, Inc. v. Court of
Appeals: 34
The rationale for this rule relates not only to the
emergence of the multifarious needs
of a modern or modernizing society
and the establishment of diverse
administrative agencies for addressing
and satisfying those needs; it also
relates to the accumulation of
experience and growth of specialized
capabilities by the administrative
agency charged with implementing a
particular statute. In Asturias Sugar
Central, Inc. vs. Commissioner of
Customs, 35 the Court stressed that
executive officials are presumed to
have familiarized themselves with all
the considerations pertinent to the
meaning and purpose of the law, and
to have formed an independent,
conscientious and competent expert
opinion thereon. The courts give much
weight to the government agency
officials
charged
with
the
implementation of the law, their
competence, expertness, experience
and informed judgment, and the fact
that they frequently are the drafters of
the law they interpret. 36

A HEALTH CARE AGREEMENT IS NOT AN

INSURANCE CONTRACT CONTEMPLATED
UNDER SECTION 185 OF THE NIRC OF 1997
Section 185 states that DST is imposed on "all policies of
insurance . . . or obligations of the nature of indemnity for
loss, damage, or liability. . . ." In our decision dated June 12,
2008, we ruled that petitioner's health care agreements are
contracts of indemnity and are therefore insurance
contracts:
It is . . . incorrect to say that the health care agreement
is not based on loss or damage
because, under the said agreement,
petitioner assumes the liability and
indemnifies its member for hospital,
medical and related expenses (such as
professional fees of physicians). The
term "loss or damage" is broad
enough to cover the monetary
expense or liability a member will
incur in case of illness or injury. cSIHCA

19

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.

taxing authority. 38 This is because taxation is a destructive

power which interferes with the personal and property
rights of the people and takes from them a portion of their
property for the support of the government. 39 Hence, tax
laws may not be extended by implication beyond the clear
import of their language, nor their operation enlarged so as
to embrace matters not specifically provided. 40
We are aware that, in Blue Cross and Philamcare, the Court
pronounced that a health care agreement is in the nature of
non-life insurance, which is primarily a contract of
indemnity. However, those cases did not involve the
interpretation of a tax provision. Instead, they dealt with the
liability of a health service provider to a member under the
terms of their health care agreement. Such contracts, as
contracts of adhesion, are liberally interpreted in favor of
the member and strictly against the HMO. For this reason,
we reconsider our ruling that Blue Cross and Philamcare
are applicable here. cEaSHC
Section 2 (1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An
insurance contract exists where the following elements
concur:

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

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;

We reconsider. We shall quote once again the pertinent

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

4.Such assumption of risk is part of a general scheme

to distribute actual losses
among a large group of
persons bearing a similar
risk and

5.In consideration of the insurer's promise, the

insured pays a premium.
41

Do the agreements between petitioner and its members

possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance

In construing this provision, we should be guided by the

principle that tax statutes are strictly construed against the

20

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:

agreements. EScAHT
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 nonparticipating physician or hospital. However, this is only a
very minor part of the list of services available. The
assumption of the expense by petitioner is not confined to
the happening of a contingency but includes incidents even
in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot
Care Program, Inc., 43 although the health care contracts
called for the defendant to partially reimburse a subscriber
for treatment received from a non-designated doctor, this
did not make defendant an insurer. Citing Jordan, the Court
determined that "the primary activity of the defendant (was)
the provision of podiatric services to subscribers in
consideration of prepayment for such services". 44 Since
indemnity of the insured was not the focal point of the
agreement but the extension of medical services to the
member at an affordable cost, it did not partake of the
nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance
contract, it is not necessarily true that risk alone is sufficient
to establish it. Almost anyone who undertakes a contractual
obligation always bears a certain degree of financial risk.
Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance
contracts.
Indeed, petitioner, as an HMO, undertakes a business risk
when it offers to provide health services: the risk that it
might fail to earn a reasonable return on its investment. But
it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is
the risk that the cost of insurance claims might be higher
than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the
insured. 45
However, assuming that petitioner's commitment to
provide medical services to its members can be construed
as an acceptance of the risk that it will shell out more than
the prepaid fees, it still will not quality as an insurance
contract because petitioner's objective is to provide medical
services at reduced cost, not to distribute risk like an
insurer.
In sum, an examination of petitioner's agreements with its
members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.
THERE WAS NO LEGISLATIVE INTENT TO
IMPOSE DST ON HEALTH CARE
AGREEMENTS OF HMOs
Furthermore, militating in convincing fashion against the
imposition of DST on petitioner's health care agreements
under Section 185 of the NIRC of 1997 is the provision's

It does not necessarily follow however, that a contract

containing all the four elements
mentioned above would be an
insurance contract. The primary
purpose of the parties in
making
the
contract
may
negate the existence of an
insurance contract. For example, a
law firm which enters into contracts
with clients whereby in consideration
of periodical payments, it promises to
represent such clients in all suits for or
against them, is not engaged in the
insurance business. Its contracts are
simply for the purpose of rendering
personal services. On the other hand,
a contract by which a corporation, in
consideration of a stipulated amount,
agrees at its own expense to defend a
physician against all suits for damages
for malpractice is one of insurance,
and the corporation will be deemed as
engaged in the business of insurance.
Unlike the lawyer's retainer contract,
the essential purpose of such a
contract is not to render personal
services, but to indemnify against loss
and damage resulting from the
defense of actions for malpractice. 42
(Emphasis supplied)

Second. Not all the necessary elements of a contract of

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

21

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:

2339. The very detailed and exclusive enumeration of items

subject to DST was thus retained.
On December 31, 1916, Section 30 (I), Article III of Act No.
2339 was again reproduced as Section 1604 (I), 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 bad been the
intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical
terms. It had many opportunities to do so. But it did not.
The fact that the NIRC contained no specific provision on
the DST liability of health care agreements of HMOs at a
time they were already known as such, belies any legislative
intent to impose it on them. As a matter of fact,
petitioner was assessed its DST liability only on
January 27, 2000, after more than a decade in
the business as an HMO. 50

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 . . . (c) on all policies of insurance or

bond or obligation of the
nature of indemnity for loss,
damage, or liability made or
renewed
by
any
person,
association,
company,
or
corporation
transacting
the
business of accident, fidelity,
employer's liability, plate glass,
steam boiler, burglar, elevator,
automatic sprinkle, or other
branch of insurance (except
life, marine, inland, and fire
insurance) . . . (Emphasis supplied)
TSacCH

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.

22

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

taxes for taxable year 2005 and prior years. 61

Far from disagreeing with petitioner,
manifested in its memorandum:

respondent

Section 6 of [RA 9840] provides that availment of tax

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

In view of petitioner's availment of the benefits of [RA

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

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

Furthermore, we held in a recent case that DST is one of the

taxes covered by the tax amnesty program under RA 9480.
63 There is no other conclusion to draw than that petitioner's
liability for DST for the taxable years 1996 and 1997 was
totally extinguished by its availment of the tax amnesty
under RA 9480. acIHDA
IS THE COURT BOUND BY A MINUTE
RESOLUTION IN ANOTHER CASE?
Petitioner raises another interesting issue in its motion for
reconsideration: whether this Court is bound by the ruling
of the CA 64 in CIR v. Philippine National Bank 65 that a health
care agreement of Philamcare Health Systems is not an
insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29,
2001 minute resolution of this Court dismissing the appeal
in Philippine National Bank (G.R. No. 148680). 66 Petitioner
argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care
agreement is not an insurance contract.
It is true that, although contained in a minute resolution,
our dismissal of the petition was a disposition of the merits
of the case. When we dismissed the petition, we effectively
affirmed the CA ruling being questioned. As a result, our
ruling in that case has already become final. 67 When a
minute resolution denies or dismisses a petition for failure
to comply with formal and substantive requirements, the
challenged decision, together with its findings of fact and

Legitimate enterprises enjoy the constitutional protection

not to be taxed out of existence. Incurring losses because of
a tax imposition may be an acceptable consequence but
killing the business of an entity is another matter and
should not be allowed. It is counter-productive and
ultimately subversive of the nation's thrust towards a better
economy which will ultimately benefit the majority of our
people. 59
PETITIONER'S TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the
DST assessment for taxable years 1996 and 1997 became
moot and academic 60 when it availed of the tax amnesty
under RA 9480 on December 10, 2007. It paid P5,127,149.08
representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of
the tax amnesty. Under Section 6 (a) of RA 9480, it is entitled
to immunity from payment of taxes as well as additions
thereto, and the appurtenant civil, criminal or
administrative penalties under the 1997 NIRC, as amended,
arising from the failure to pay any and all internal revenue

23

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. cEATSI
Accordingly, since petitioner was not a party in G.R. No.
148680 and since petitioner's liability for DST on its health
care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute
resolution in that case (which is not even binding precedent)
in its favor. Nonetheless, in view of the reasons already
discussed, this does not detract in any way from the fact
that petitioner's health care agreements are not subject to
DST.
A FINAL NOTE
Taking into account that health care agreements are clearly
not within the ambit of Section 185 of the NIRC and there
was never any legislative intent to impose the same on
HMOs like petitioner, the same should not be arbitrarily and
unjustly included in its coverage.
It is a matter of common knowledge that there is a great
social need for adequate medical services at a cost which
the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and
inexpensive health care system made possible by quantity
purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive medical
services), including the ability to control costs. They protect

their members from exposure to the high cost of

hospitalization and other medical expenses brought about
by a fluctuating economy. Accordingly, they play an
important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens
with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of
the premium charged. 74 Its imposition will elevate the cost
of health care services. This will in turn necessitate an
increase in the membership fees, resulting in either placing
health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of
the day, neither side wins, considering the indispensability
of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is
GRANTED. The August 16, 2004 decision of the Court of
Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment
against petitioner is hereby CANCELLED and SET ASIDE.
Respondent is ordered to desist from collecting the said tax.
IESTcD

No costs.
SO ORDERED.
||| (Philippine Health Care Providers, Inc. v. Commissioner of
Internal Revenue, G.R. No. 167330 (Resolution), [September
18, 2009], 616 PHIL 387-423)

24

1465(v), id.] Under this law, an

insurance
company
was
not
considered a money lender and was
not taxable as such. To quote from an
old BIR Ruling:

[G.R. No. 141658. March 18, 2005.]

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. THE PHILIPPINE AMERICAN ACCIDENT
INSURANCE COMPANY, INC., THE PHILIPPINE
AMERICAN ASSURANCE COMPANY, INC., and THE
PHILIPPINE AMERICAN GENERAL INSURANCE CO.,
INC., respondents.
DECISION
CARPIO, J p:
The Case
Before the Court is a petition for review 1 assailing the
Decision 2 of 7 January 2000 of the Court of Appeals in CAG.R. SP No. 36816. The Court of Appeals affirmed the
Decision 3 of 5 January 1995 of the Court of Tax Appeals
("CTA") in CTA Cases Nos. 2514, 2515 and 2516. The CTA
ordered the Commissioner of Internal Revenue
("petitioner") to refund a total of P29,575.02 to respondent
companies ("respondents").
Antecedent Facts
Respondents are domestic corporations licensed to transact
insurance business in the country. From August 1971 to
September 1972, respondents paid the Bureau of Internal
Revenue under protest the 3% tax imposed on lending
investors by Section 195-A 4 of Commonwealth Act No. 466
("CA 466"), as amended by Republic Act No. 6110 ("RA
6110") and other laws. CA 466 was the National Internal
Revenue Code ("NIRC") applicable at the time. aDcEIH
Respondents paid the following amounts: P7,985.25 from
Philippine American ("PHILAM") Accident Insurance
Company; P7,047.80 from PHILAM Assurance Company;
and P14,541.97 from PHILAM General Insurance Company.
These amounts represented 3% of each company's interest
income from mortgage and other loans. Respondents also
paid the taxes required of insurance companies under CA
466.
On 31 January 1973, respondents sent a letter-claim to
petitioner seeking a refund of the taxes paid under protest.
When respondents did not receive a response, each
respondent filed on 26 April 1973 a petition for review with
the CTA. These three petitions, which were later
consolidated, argued that respondents were not lending
investors and as such were not subject to the 3% lending
investors' tax under Section 195-A.
The CTA archived respondents' case for several years while
another case with a similar issue was pending before the
higher courts. When respondents' case was reinstated, the
CTA ruled that respondents were entitled to their refund.
The Ruling of the Court of Tax Appeals
The CTA held that respondents are not taxable as lending
investors because the term "lending investors" does not
embrace insurance companies. The CTA traced the history
of the tax on lending investors, as follows:

"The lending of money at interest by insurance

companies constitutes a
necessary incident of
their regular business.
For
this
reason,
insurance companies are
not liable to tax as money
lenders or real estate
brokers for making or
negotiating loans secured
by real property. (Ruling,
February 28, 1920; BIR
135.2)"
(The
Internal
Revenue Law, Annotated,
2nd ed., 1929, by B.L.
Meer, page 143)

The same rule has been applied to banks.

"For making investments on salary loans, banks will

not be required to pay
the money lender's tax
imposed
by
this
subsection,
for
the
reason
that
money
lending is considered a
mere incident of the
banking business. [See
Ruling No. 43, (October 8,
1926) 25 Off. Gaz. 1326)"
(The Internal Revenue
Law, Annotated, id.).

The term "money lenders" was later changed to

"lending investors" but the definition
of the term remains the same. [Sec.
1464(x), Rev. Adm. Code, as finally
amended by Com. Act No. 215, and
Sec. 1465(v) of the same Code, as
finally amended by Act No. 3963] The
same law is embodied in the present
National Internal Revenue Code (Com.
Act No. 466) without change, except in
the amount of the tax. [See Secs.
182(A)(3)(dd) and 194(u), National

Originally, a person who was engaged in lending

money at interest was taxed as a
money lender. [Sec. 1464(x), Rev. Adm.
Code] The term money lenders was
defined as including "all persons who
make a practice of lending money for
themselves or others at interest." [Sec.

25

Internal Revenue Code.]

SO ORDERED. 7

jur2005cda

It is a well-settled rule that an administrative

interpretation of a law which has been
followed and applied for a long time,
and thereafter the law is re-enacted
without substantial change, such
administrative
interpretation
is
deemed to have received legislative
approval. In short, the administrative
interpretation becomes part of the law
as it is presumed to carry out the
legislative purpose. 5

Dissatisfied, petitioner elevated the matter to the Court of

Appeals. 8
The Ruling of the Court of Appeals
The Court of Appeals ruled that respondents are not
taxable as lending investors. In its Decision of 7 January
2000 ("CA Decision"), the Court of Appeals affirmed the
ruling of the CTA, thus:
WHEREFORE, premises considered, the petition is
DISMISSED, hereby AFFIRMING the
decision, dated January 5, 1995, of the
Court of Tax Appeals in CTA Cases
Nos. 2514, 2515 and 2516.

The CTA held that the practice of lending money at interest

is part of the insurance business. CA 466 already taxes the
insurance business. The CTA pointed out that the law
recognizes and even regulates this practice of lending
money by insurance companies.
The CTA observed that CA 466 also treated differently
insurance companies from lending investors in regard to
fixed taxes. Under Section 182(A)(3)(gg), insurance
companies were subject to the same fixed tax as banks and
finance companies. The CTA reasoned that insurance
companies were grouped with banks and finance
companies because the latter's lending activities were also
integral to their business. In contrast, lending investors
were taxed at a different fixed tax under Section 182(A)(3)
(dd) of CA 466. The CTA stated that "insurance companies . .
. had never been required by respondent [CIR] to pay the
fixed tax imposed on lending investors . . ." 6
The dispositive portion of the Decision of 5 January 1995 of
the Court of Tax Appeals ("CTA Decision") reads:
WHEREFORE,

SO ORDERED. 9

Petitioner appealed the CA Decision to this Court.

The Issues
Petitioner raises the sole issue:
WHETHER RESPONDENT INSURANCE COMPANIES ARE
SUBJECT TO THE 3% PERCENTAGE TAX
AS LENDING INVESTORS UNDER
SECTIONS 182(A)(3)(DD) AND 195-A,
RESPECTIVELY IN RELATION TO
SECTION 194(U), ALL OF THE NIRC. 10

The Ruling of the Court

The petition lacks merit.
On the Additional Issue Raised by Petitioner
Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax
on lending investors, depending on their location. 11 The
sole question before the CTA was whether respondents
were subject to the percentage tax on lending investors
under Section 195-A. Petitioner raised for the first time the
issue of the fixed tax in the Petition for Review 12 petitioner
filed before the Court of Appeals.
Ordinarily, a party cannot raise for the first time on appeal
an issue not raised in the trial court. 13 The Court of Appeals
should not have taken cognizance of the issue on
respondents' supposed liability under Section 182(A)(3)(dd).
However, we cannot entirely fault the Court of Appeals or
petitioner. Even if the percentage tax on lending investors
was the sole issue before it, the CTA ordered petitioner to
refund to the PHILAM companies "the fixed and percentage
taxes [t]hen paid by petitioners as lending investor." 14
Although the amounts for refund consisted only of what

premises
considered,
petitioners
Philippine
American
Accident
Insurance Co., Philippine American
Assurance
Co.,
and
Philippine
American General Insurance Co., Inc.
are not taxable on their lending
transactions independently of their
insurance
business.
Accordingly,
respondent is hereby ordered to
refund to petitioner[s] the sum of
P7,985.25, P7,047.80 and P14,541.97
in CTA Cases No. 2514, 2515 and 2516,
respectively representing the fixed
and percentage taxes when (sic) paid
by petitioners as lending investor from
August 1971 to September 1972.

No pronouncement as to cost. EDATSC

26

be collected as follows, the amount

stated being for the whole year, when
not otherwise specified;

respondents paid as percentage taxes, the CTA Decision

also ordered the refund to respondents of the fixed tax on
lending investors. Respondents in their pleadings deny any
liability under Section 182(A)(3)(dd), on the same ground
that they are not lending investors.
The question of whether respondents should pay the fixed
tax under Section 182(A)(3)(dd) revolves around the same
issue of whether respondents are taxable as lending
investors. In similar circumstances, the Court has held that
an appellate court may consider an unassigned error if it is
closely related to an error that was properly assigned. 15
This rule properly applies to the present case. Thus, we shall
consider and rule on the issue of whether respondents are
subject to the fixed tax under Section 182(A)(3)(dd).
Whether Insurance Companies are
Taxable as Lending Investors
Invoking Sections 195-A and 182(A)(3)(dd) in relation to
Section 194(u) of CA 466, petitioner argues that insurance
companies are subject to two fixed taxes and two
percentage taxes. Petitioner alleges that:

xxx xxx xxx

(dd) Lending investors

1. In chartered cities and first class municipalities, five

hundred
pesos;

2. In second and third class municipalities, two

hundred
and
fifty
pesos;

As a lending investor, an insurance company is subject

to an annual fixed tax of P500.00 and
another P500.00 under Section 182 (A)
(3)(dd) and (gg) of the Tax Code. As an
underwriter, an insurance company is
subject to the 3% tax of the total
premiums collected and another 3%
on the gross receipts as a lending
investor under Sections 255 and 195A, respectively of the same Code. . . . 16

3. In fourth and fifth class municipalities and municipal

districts, one
hundred
and twentyfive pesos;
Provided,
That lending
investors
who
do
business as
such
in
more than
one
province
shall pay a
tax of five
hundred
pesos.

Petitioner also contends that the refund granted to

respondents is in the nature of a tax exemption, and cannot
be allowed unless granted explicitly and categorically.
The rule that tax exemptions should be construed strictly
against the taxpayer presupposes that the taxpayer is
clearly subject to the tax being levied against him. Unless a
statute imposes a tax clearly, expressly and unambiguously,
what applies is the equally well-settled rule that the
imposition of a tax cannot be presumed. 17 Where there is
doubt, tax laws must be construed strictly against the
government and in favor of the taxpayer. 18 This is because
taxes are burdens on the taxpayer, and should not be
unduly imposed or presumed beyond what the statutes
expressly and clearly import. 19

Section 195-A of CA 466 provides:

Sec. 195-A. Percentage tax on dealers in securities;

lending investors. Dealers in
securities and lending investors shall
pay a tax equivalent to three per
centum on their gross income.

Section 182(A)(3)(dd) of CA 466 also provides:

Sec. 182. Fixed taxes. (A) On business . . .

xxx xxx xxx

(3) Other fixed taxes. The following fixed taxes shall

Neither Section 182(A)(3)(dd) nor Section 195-A mentions

27

insurance companies. Section 182(A)(3)(dd) provides for the

taxation of lending investors in different localities. Section
195-A refers to dealers in securities and lending investors.
The burden is thus on petitioner to show that insurance
companies are lending investors for purposes of taxation.
In this case, petitioner does not dispute that respondents
are in the insurance business. Petitioner merely alleges that
the definition of lending investors under CA 466 is broad
enough to encompass insurance companies. Petitioner
insists that because of Section 194(u), the two principal
activities of the insurance business, namely, underwriting
and investment, are separately taxable. 20
Section 194(u) of CA 466 states:

Plainly, insurance companies and lending investors are

different enterprises in the eyes of the law. Lending
investors cannot, for a consideration, hold anyone harmless
from loss, damage or liability, nor provide compensation or
indemnity for loss. The underwriting of risks is the
prerogative of insurers, the great majority of which are
incorporated insurance companies 23 like respondents.
Granting of Mortgage and
other Loans are Investment
Practices that are Part of the
Insurance Business.
True, respondents granted mortgage and other kinds of
loans. However, this was not done independently of
respondents' insurance business. The granting of certain
loans is one of several means of investment allowed to
insurance companies. No less than the Insurance Code
mandates and regulates this practice. 24
Unlike the practice of lending investors, the lending
activities of insurance companies are circumscribed and
strictly regulated by the State. Insurance companies cannot
freely lend to "themselves or others" as lending investors
can, 25 nor can insurance companies grant simply any kind
of loan. Even prior to 1978, the Insurance Code prescribed
strict rules for the granting of loans by insurance
companies. 26 These provisions on mortgage, collateral and
policy loans were reiterated in the Insurance Code of 1978
and are still in force today.
Petitioner concedes that respondents' investment practices
are as much a part of the insurance business as the task of
underwriting. Nevertheless, petitioner argues that such
investment practices are separately taxable under CA 466.
The CTA and the Court of Appeals found that the
investment of premiums and other funds received by
respondents through the granting of mortgage and other
loans was necessary to respondents' business and
hence, should not be taxed separately.
Insurance companies are required by law to possess and
maintain substantial legal reserves to meet their obligations
to policyholders. 27 This obviously cannot be accomplished
through the collection of premiums alone, as the legal
reserves and capital and surplus insurance companies are
obligated to maintain run into millions of pesos. As such,
the creation of "investment income" has long been held to
be generally, if not necessarily, essential to the business of
insurance. 28
The creation of investment income in the manner
sanctioned by the laws on insurance is thus part of the
business of insurance, and the fruits of these investments
are essentially income from the insurance business. This is
particularly true if the invested assets are held either as
reserved funds to provide for policy obligations or as capital
and surplus to provide an extra margin of safety which will
be attractive to insurance buyers. 29
The Court has also held that when a company is taxed on its
main business, it is no longer taxable further for engaging in
an activity or work which is merely a part of, incidental to
and is necessary to its main business. 30 Respondents

(u) "Lending investor" includes all persons who make a

practice of lending money for
themselves or others at interest.

xxx xxx xxx

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

lending per se. It merely defines what lending investors are.
The question is whether the lending activities of insurance
companies make them lending investors for purposes of
taxation.
We agree with the CTA and Court of Appeals that it does
not. Insurance companies cannot be considered lending
investors under CA 466, as amended.
Definition of Lending
Investors under CA 466 Does
Not Include Insurance
Companies.
The definition in Section 194(u) of CA 466 is not broad
enough to include the business of insurance companies.
The Insurance Code of 1978 21 is very clear on what
constitutes an insurance company. It provides that an
insurer or insurance company "shall include all individuals,
partnerships, associations or corporations . . . engaged as
principals in the insurance business, excepting mutual
benefit associations." 22 More specifically, respondents fall
under the category of insurance corporations as defined in
Section 185 of the Insurance Code, thus:
SECTION 185. Corporations formed or organized to
save any person or persons or other
corporations harmless from loss,
damage, or liability arising from any
unknown or future or contingent
event, or to indemnify or to
compensate any person or persons or
other corporations for any such loss,
damage, or liability, or to guarantee
the performance of or compliance
with contractual obligations or the
payment of debts of others shall be
known as "insurance corporations."

28

That lending
investors
who
do
business as
such
in
more than
one
province
shall pay a
tax of five
hundred
pesos.

already paid percentage and fixed taxes on their insurance

business. To require them to pay percentage and fixed
taxes again for an activity which is necessarily a part of the
same business, the law must expressly require such
additional payment of tax. There is, however, no provision
of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require
insurance companies to pay double percentage and fixed
taxes. They merely tax lending investors, not lending
activities. Respondents were not transformed into lending
investors by the mere fact that they granted loans, as these
investments were part of, incidental and necessary to their
insurance business.
Different Tax Treatment of
Insurance Companies and
Lending Investors.
Section 182(A)(3) of CA 466 accorded different tax
treatments to lending investors and insurance companies.
The relevant portions of Section 182 state:

xxx xxx xxx

(gg) Banks,

Sec. 182. Fixed taxes. (A) On business . . .

(3) Other fixed taxes. The following fixed taxes shall

be collected as follows, the amount
stated being for the whole year, when
not otherwise specified;

insurance companies, finance and

investment companies doing business
in the Philippines and franchise
grantees, five hundred pesos.

xxx xxx xxx (Emphasis supplied.)

The separate provisions on lending investors and insurance

companies demonstrate an intention to treat these
businesses differently. If Congress intended insurance
companies to be taxed as lending investors, there would be
no need for Section 182(A)(3)(gg). Section 182(A)(3)(dd)
would have been sufficient. That insurance companies were
included with banks, finance and investment companies
also supports the CTA's conclusion that insurance
companies had more in common with the latter enterprises
than with lending investors. As the CTA pointed out, banks
also regularly lend money at interest, but are not taxable as
lending investors.
We find no merit in petitioner's contention that Congress
intended to subject respondents to two percentage taxes
and two fixed taxes. Petitioner's argument goes against the
doctrine of strict interpretation of tax impositions.
Petitioner's argument is likewise not in accord with existing
jurisprudence. In Commissioner of Internal Revenue v.
Michel J. Lhuillier Pawnshop, Inc., 31 the Court ruled that the
different tax treatment accorded to pawnshops and lending
investors in the NIRC of 1977 and the NIRC of 1986 showed
"the intent of Congress to deal with both subjects
differently." The same reasoning applies squarely to the
present case.
Even the current tax law does not treat insurance
companies as lending investors. Under Section 108(A) 32 of
the NIRC of 1997, lending investors and non-life insurance
companies, except for their crop insurances, are subject to
value-added tax ("VAT"). Life insurance companies are
exempt from VAT, but are subject to percentage tax under
Section 123 of the NIRC of 1997.

xxx xxx xxx

(dd) Lending investors

1. In chartered cities and first class municipalities, five

hundred
pesos;

2. In second and third class municipalities, two

hundred
and
fifty
pesos;

3. In fourth and fifth class municipalities and municipal

districts, one
hundred
and twentyfive pesos;
Provided,

29

1914 Tax Code and "lending investor" under CA 466 are

identical. The term "money lender" was merely changed to
"lending investor" when Act No. 3963 amended the Revised
Administrative Code in 1932. 35 This same definition of
lending investor has since appeared in Section 194(u) of CA
466 and later tax laws.
Note that insurance companies were not included among
the businesses subject to an annual fixed tax under the
1914 Tax Code. 36 That Congress later saw the need to
introduce Section 182(A)(3)(gg) in CA 466 bolsters our view
that there was no legislative intent to tax insurance
companies as lending investors. If insurance companies
were already taxed as lending investors, there would have
been no need for a separate provision specifically requiring
insurance companies to pay fixed taxes.
The Court Accords Great
Weight to the Factual Findings
of the CTA.
Dedicated exclusively to the study and consideration of tax
problems, the CTA has necessarily developed an expertise
in the subject of taxation that this Court has recognized
time and again. For this reason, the findings of fact of the
CTA, particularly when affirmed by the Court of Appeals, are
generally conclusive on this Court absent grave abuse of
discretion or palpable error, 37 which are not present in this
case.
WHEREFORE, we DENY the instant petition and AFFIRM the
Decision of 7 January 2000 of the Court of Appeals in CAG.R. SP No. 36816.
SO ORDERED.
||| (CIR v. Philippine American Accident Insurance Co., Inc.,
G.R. No. 141658, [March 18, 2005], 493 PHIL 785-803)

Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA

466 failed to mention insurance companies already implies
the latter's exclusion from the coverage of these provisions.
When a statute enumerates the things upon which it is to
operate, everything else by implication must be excluded
from its operation and effect. 33
Definition of Lending
Investors in CA 466 is Not
New.
Petitioner does not dispute that it issued a ruling in 1920 to
the effect that the lending of money at interest was a
necessary incident of the insurance business, and that
insurance companies were thus not subject to the tax on
money lenders. Petitioner argues only that the 1920 ruling
does not apply to the instant case because RA 6110
introduced the definition of lending investors to CA 466 only
in 1969.
The subject definition was actually introduced much earlier,
at a time when lending investors were still referred to as
money lenders. Sections 45 and 46 of the Internal Revenue
Law of 1914 34 ("1914 Tax Code") state:
SECTION 45. Amount of Tax on Business. Fixed
taxes on business shall be collected as
follows, the amount stated being for
the whole year, when not otherwise
specified:

xxx xxx xxx

(x) Money lenders, eighty pesos;

xxx xxx xxx

SECTION 46. Words and Phrases Defined. In
applying the provisions of the
preceding section words and phrases
shall be taken in the sense and
extension indicated below:

xxx xxx xxx

"Money lender" includes all persons who make a
practice of lending money for
themselves or others at interest.
(Emphasis supplied)

As can be seen, the definitions of "money lender" under the

30

enter and wet the cargo inside Cargo

Hold No. 2 forward/aft. The cracks at
the top deck starboard side of Cargo
Hold No. 2, measuring 1.21 meters
long x 0.39 meters wide, and at top
deck aft section starboard side on
other point, measuring 0.82 meters
long x 0.32 meters wide, were welded.

[G.R. No. 185565. November 26, 2014.]

LOADSTAR SHIPPING COMPANY, INCORPORATED
and LOADSTAR INTERNATIONAL SHIPPING
COMPANY, INCORPORATED, petitioners, vs.
MALAYAN INSURANCE COMPANY, INCORPORATED,
respondent.
DECISION
REYES, J p:
This is a Petition for Review on Certiorari 1 filed by Loadstar
Shipping Company, Incorporated and Loadstar International
Shipping Company, Incorporated (petitioners) against
Malayan Insurance Company, Incorporated (Malayan)
seeking to set aside the Decision 2 dated April 14, 2008 and
Resolution 3 dated December 11, 2008 of the Court of
Appeals (CA) in CA-G.R. CV No. 82758, which reversed and
set aside the Decision 4 dated March 31, 2004 of the
Regional Trial Court of Manila, Branch 34, in Civil Case No.
01-101885.
The facts as found by the CA, are as follows:
Loadstar

Immediately after the vessel arrived at Isabel, Leyte

anchorage area, on September 13,
2000,
PASAR
and
Philex's
representatives
boarded
and
inspected the vessel and undertook
sampling of the copper concentrates.
In its preliminary report dated
September 15, 2000, the Elite
Adjusters and Surveyor, Inc. (Elite
Surveyor) confirmed that samples of
copper concentrates from Cargo Hold
No. 2 were contaminated by seawater.
Consequently, PASAR rejected 750 MT
of the 2,300 MT cargo discharged from
Cargo Hold No. 2.

International Shipping, Inc. (Loadstar

Shipping) and Philippine Associated
Smelting and Refining Corporation
(PASAR) entered into a Contract of
Affreightment for domestic bulk
transport of the latter's copper
concentrates for a period of one year
from November 1, 1998 to October 31,
1999. The contract was extended up
to the end of October 2000.

On November 6, 2000, PASAR sent a formal notice of

claim
in
the
amount
of
[P]37,477,361.31 to Loadstar Shipping.
In its final report dated November 16,
2000, Elite Surveyor recommended
payment to the assured the amount of
[P]32,351,102.32 as adjusted. On the
basis of such recommendation,
Malayan paid PASAR the amount of
[P]32,351,102.32. TAcSCH

On September 10, 2000, 5,065.47 wet metric tons

(WMT) of copper concentrates were
loaded in Cargo Hold. Nos. 1 and 2 of
MV "Bobcat", a marine vessel owned
by Loadstar International Shipping
Co., Inc. (Loadstar International) and
operated by Loadstar Shipping under
a charter party agreement. The
shipper and consignee under the Bill
of
Lading
are
Philex
Mining
Corporation (Philex) and PASAR,
respectively. The cargo was insured
with Malayan Insurance Company, Inc.
(Malayan) under Open Policy No.
M/OP/2000/001-582. P & I Association
is the third party liability insurer of
Loadstar Shipping.

Meanwhile, on November 24, 2000, Malayan wrote

Loadstar Shipping informing the latter
of a prospective buyer for the
damaged copper concentrates and
the opportunity to nominate/refer
other salvage buyers to PASAR. On
November 29, 2000, Malayan wrote
Loadstar Shipping informing the latter
of the acceptance of PASAR's proposal
to take the damaged copper
concentrates at a residual value of
US$90,000.00. On December 9, 2000,
Loadstar Shipping wrote Malayan
requesting for the reversal of its
decision to accept PASAR's proposal
and the conduct of a public bidding to
allow Loadstar Shipping to match or
top PASAR's bid by 10%.

On said date (September 10, 2000), MV "Bobcat" sailed

from Poro Point, San Fernando, La
Union bound for Isabel, Leyte. On
September 12, 2000, while in the
vicinity of Cresta de Gallo, the vessel's
chief officer on routine inspection
found a crack on starboard side of the
main deck which caused seawater to

31

On January 23, 2001, PASAR signed a subrogation

receipt in favor of Malayan. To recover
the amount paid and in the exercise of
its right of subrogation, Malayan
demanded
reimbursement
from
Loadstar Shipping, which refused to
comply. Consequently, on September
19, 2001, Malayan instituted with the
RTC a complaint for damages. The
complaint was later amended to
include Loadstar International as party
defendant.

arbitration clause in the contract of

affreightment should be followed.

After trial, and considering that the bill of lading, which

was marked as Exhibit "B", is
unreadable, the RTC issued on
February 17, 2004 an order directing
the counsel for Malayan to furnish it
with a clearer copy of the same within
three (3) days from receipt of the
order. On February 23, 2004, Malayan
filed a compliance attaching thereto
copy of the bill of lading.

In its amended complaint, Malayan mainly alleged that

as a direct and natural consequence
of the unseaworthiness of the vessel,
PASAR suffered loss of the cargo. It
prayed
for
the
amount
of
[P]33,934,948.75, representing actual
damages plus legal interest from date
of filing of the complaint until fully
paid, and attorney's fees in the
amount of not less than [P]500,000.00.
It also sought to declare the bill of
lading as void since it violates the
provisions of Articles 1734 and 1745 of
the Civil Code.

On March 31, 2004, the RTC rendered a judgment

dismissing the complaint as well as
the counterclaim. The RTC was
convinced that the vessel was
seaworthy at the time of loading and
that the damage was attributable to
the perils of the sea (natural disaster)
and not due to the fault or negligence
of Loadstar Shipping.

The RTC found that although contaminated by

seawater, the copper concentrates can
still be used. It gave credence to the
testimony of Francisco Esguerra,
defendants-appellees' expert witness,
that despite high chlorine content, the
copper concentrates remain intact
and will not lose their value. The gold
and
silver
remain
with
the
grains/concentrates even if soaked
with seawater and does not melt. The
RTC observed that the purchase
agreement between PASAR and Philex
contains a penalty clause and has no
rejection
clause.
Despite
this
agreement, the parties failed to sit
down and assess the penalty.

On October 30, 2002, Loadstar Shipping and Loadstar

International filed their answer with
counterclaim,
denying
plaintiffappellant's allegations and averring as
follows: that they are not engaged in
the business as common carriers but
as private carriers; that the vessel was
seaworthy and defendants-appellees
exercised the required diligence under
the law; that the entry of water into
Cargo Hold No. 2 must have been
caused by force majeure or heavy
weather; that due to the inherent
nature of the cargo and the use of
water in its production process, the
same cannot be considered damaged
or contaminated; that defendantsappellees were denied reasonable
opportunity to participate in the
salvage sale; that the claim had
prescribed in accordance with the bill
of lading provisions and the Code of
Commerce; that plaintiff-appellant's
claim is excessive, grossly overstated,
unreasonable and unsubstantiated;
that their liability, if any, should not
exceed the CIF value of the
lost/damaged cargo as set forth in the
bill of lading, charter party or
customary rules of trade; and that the

The RTC also found that defendants-appellees were

not afforded the opportunity to object
or
participate or
nominate
a
participant in the sale of the
contaminated copper concentrates to
lessen the damages to be paid. No
record was presented to show that a
public
bidding
was
conducted.
Malayan sold the contaminated

32

copper concentrates to PASAR at a low

price then paid PASAR the total value
of the damaged concentrate without
deducting anything from the claim.

(PASAR) on November 29, 2000. 10

Issues
In sum, the grounds presented by the petitioners for the
Court's consideration are the following:
I.

Finally, the RTC denied the prayer to declare the Bill of

Lading null and void for lack of basis
because what was attached to
Malayan's compliance was still an
unreadable machine copy thereof. 5
(Citations omitted)

THE [CA] HAS NO BASIS IN REVERSING THE DECISION

OF THE TRIAL COURT. THERE IS
NOTHING IN THE DECISION OF THE
HONORABLE COURT THAT REVERSED
THE
FACTUAL
FINDINGS
AND
CONCLUSIONS OF THE TRIAL COURT,
THAT THERE WAS NO ACTUAL LOSS
OR DAMAGE TO THE CARGO OF
COPPER
CONCENTRATES
WHICH
WOULD MAKE LOADSTAR AS THE
SHIPOWNER LIABLE FOR A CARGO
CLAIM. CONSEQUENTLY, THERE IS NO
BASIS FOR THE COURT TO ORDER
LOADSTAR TO PAY ACTUAL DAMAGES
IN THE AMOUNT OF PHP33 MILLION. 11

Ruling of the CA
On April 14, 2008, the CA rendered its Decision, 6 the
dispositive portion of which reads:
WHEREFORE, the appeal is GRANTED. The Decision
dated March 31, 2004 of the RTC,
Branch 34, Manila in Civil Case No. 01101885, is REVERSED and SET
ASIDE. In lieu thereof, a new
judgment
is
entered,
ORDERINGdefendants-appellees to
pay plaintiff-appellant P33,934,948.75
as actual damages, plus legal interest
at 6% annually from the date of the
trial court's decision. Upon the finality
of the decision, the total amount of
the judgment shall earn annual
interest at 12% until full payment.

II.

M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE

COURT HAD NO BASIS IN RULING
THAT IT IS A COMMON CARRIER. THE
DECISION OF THE TRIAL COURT IS
BEREFT OF ANY CATEGORICAL
FINDING THAT M/V BOBCAT IS A
COMMON CARRIER. 12

SO ORDERED. 7

On December 11, 2008, the CA modified the above decision

through a Resolution, 8 the fallo thereof states:
WHEREFORE, the Motion for Reconsideration is PARTLY
GRANTED. The decision of this Court dated April 14, 2008 is
PARTIALLY RECONSIDERED and MODIFIED. Defendantsappellees are ORDERED to pay to plaintiff-appellant
P33,934,948.74 as actual damages, less US$90,000.00, computed at
the exchange rate prevailing on November 29, 2000, plus legal
interest at 6% annually from the date of the trial court's decision.
Upon the finality of the decision, the total amount of the judgment
shall earn annual interest at 12% until full payment.
SO ORDERED. 9

III.

The CA discussed that the amount of US$90,000.00 should

have been deducted from Malayan's claim against the
petitioners in order to prevent undue enrichment on the
part of Malayan. Otherwise, Malayan would recover from
the petitioners not merely the entire amount of
P33,934,948.74 as actual damages, but would also end up
unjustly enriching itself in the amount of US$90,000.00
the residual value of the subject copper concentrates it sold
to Philippine Associated Smelting and Refining Corporation

THE HONORABLE COURT OF APPEALS COMMITTED A

REVERSIBLE ERROR IN RULING THAT
RESPONDENT'S PAYMENT TO PASAR,
ON THE BASIS OF THE LATTER'S
FRAUDULENT
CLAIM,
ENTITLED
RESPONDENT AUTOMATIC RIGHT OF
RECOVERY
BY
VIRTUE
OF
SUBROGATION. 13

33

Ruling of the Court

I. Proof of actual damages
It is not disputed that the copper concentrates carried by
M/V Bobcat from Poro Point, La Union to Isabel, Leyte were
indeed contaminated with seawater. The issue lies on
whether such contamination resulted to damage, and the
costs thereof, if any, incurred by the insured PASAR.
The petitioners argued that the copper concentrates,
despite being dampened with seawater, is neither subject
to penalty nor rejection. Under the Philex Mining
Corporation (Philex)-PASAR Purchase Contract Agreement,
there is no rejection clause. Instead, there is a pre-agreed
formula for the imposition of penalty in case other
elements exceeding the provided minimum level would be
found on the concentrates. 14 Since the chlorine content on
the copper concentrates is still below the minimum level
provided under the Philex-PASAR purchase contract, no
penalty may be imposed against the petitioners. 15
Malayan opposed the petitioners' invocation of the PhilexPASAR purchase agreement, stating that the contract
involved in this case is a contract of affreightment between
the petitioners and PASAR, not the agreement between
Philex and PASAR, which was a contract for the sale of
copper concentrates. 16
On this score, the Court agrees with Malayan that contrary
to the trial court's disquisition, the petitioners cannot validly
invoke the penalty clause under the Philex-PASAR purchase
agreement, where penalties are to be imposed by the buyer
PASAR against the seller Philex if some elements exceeding
the agreed limitations are found on the copper
concentrates upon delivery. The petitioners are not privy to
the contract of sale of the copper concentrates. The
contract between PASAR and the petitioners is a contract of
carriage of goods and not a contract of sale. Therefore, the
petitioners and PASAR are bound by the laws on
transportation of goods and their contract of affreightment.
Since the Contract of Affreightment 17 between the
petitioners and PASAR is silent as regards the computation
of damages, whereas the bill of lading presented before the
trial court is undecipherable, the New Civil Code and the
Code of Commerce shall govern the contract between the
parties.
Malayan paid PASAR the amount of P32,351,102.32 covering
the latter's claim of damage to the cargo. 18 This is based on
the recommendation of Elite Adjustors and Surveyors, Inc.
(Elite) which both Malayan and PASAR agreed to. The
computation of Elite is presented as follows:
Computation of Loss Payable. We computed for
the insured value of the loss and loss
payable, based on the following
pertinent data:

1)

Total quantity shipped

and at risk

(Risk Note and B/L)

4,568.907

2)

Total sum insured

(Risk Note and Endorsement)

- [P]212,0

3)

Quantity damaged:

777.290 w

(Pasar Laboratory Cert. &

696.336 d

discharge & sampling Cert.

dated September 21, 2000)
Computation:
Total sum insured,
Total Qty. in DMT
[P]212,032,203.77
4,568.907 DMT

x
x

Qty. damaged
(DMT)
696.336 DMT

Insured value of damage

Based on the preceding computation, the sum of

P32,315,312.32 represents damages for the total loss of
that portion of the cargo which were contaminated with
seawater and not merely the depreciation in its value.
Strangely though, after claiming damages for the total loss
of that portion, PASAR bought back the contaminated
copper concentrates from Malayan at the price of
US$90,000.00. The fact of repurchase is enough to conclude
that the contamination of the copper concentrates cannot
be considered as total loss on the part of PASAR.
The following provisions of the Code of Commerce state
how damages on goods delivered by the carrier should be
appraised:
Article 361. The merchandise shall be transported at
the risk and venture of the shipper, if
the contrary has not been expressly
stipulated. As a consequence, all the
losses and deteriorations which the
goods may suffer during the
transportation by reason of fortuitous
event, force majeure, or the inherent
nature and defect of the goods, shall
be for the account and risk of the
shipper. Proof of these accidents is
incumbent upon the carrier. cSaCDT

Article 362. Nevertheless, the carrier shall be liable for

the losses and damages resulting
from the causes mentioned in the
preceding article if it is proved, as
against him, that they arose through
his negligence or by reason of his
having failed to take the precautions
which usage has established among
careful persons, unless the shipper
has committed fraud in the bill of
lading, representing the goods to be
- 5,065.47 wet metric tons
of a kind or quality different from
what they really were.

34

If, notwithstanding the precautions referred to in this

article, the goods transported run the
risk of being lost, on account of their
nature or by reason of unavoidable
accident, there being no time for their
owners to dispose of them, the carrier
may proceed to sell them, placing
them for this purpose at the disposal
of the judicial authority or of the
officials
designated
by
special
provisions.

From the above-cited provisions, if the goods are delivered

but arrived at the destination in damaged condition, the
remedies to be pursued by the consignee depend on the
extent of damage on the goods.
If the goods are rendered useless for sale, consumption or
for the intended purpose, the consignee may reject the
goods and demand the payment of such goods at their
market price on that day pursuant to Article 365. In case the
damaged portion of the goods can be segregated from
those delivered in good condition, the consignee may reject
those in damaged condition and accept merely those which
are in good condition. But if the consignee is able to prove
that it is impossible to use those goods which were
delivered in good condition without the others, then the
entire shipment may be rejected. To reiterate, under Article
365, the nature of damage must be such that the goods are
rendered useless for sale, consumption or intended
purpose for the consignee to be able to validly reject them.
If the effect of damage on the goods consisted merely of
diminution in value, the carrier is bound to pay only the
difference between its price on that day and its depreciated
value as provided under Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved
that the goods are rendered useless or unfit for the
purpose intended by PASAR due to contamination with
seawater. Hence, there is no basis for the goods' rejection
under Article 365 of the Code of Commerce. Clearly, it is
erroneous for Malayan to reimburse PASAR as though the
latter suffered from total loss of goods in the absence of
proof that PASAR sustained such kind of loss. Otherwise,
there will be no difference in the indemnification of goods
which were not delivered at all; or delivered but rendered
useless, compared against those which were delivered
albeit, there is diminution in value.
Malayan also failed to establish the legal basis of its
decision to sell back the rejected copper concentrates to
PASAR. It cannot be ascertained how and when Malayan
deemed itself as the owner of the rejected copper
concentrates to have these validly disposed of. If the goods
were rejected, it only means there was no acceptance on
the part of PASAR from the carrier. Furthermore, PASAR and
Malayan simply agreed on the purchase price of
US$90,000.00 without any allegation or proof that the said
price was the depreciated value based on the appraisal of
experts as provided under Article 364 of the Code of
Commerce.
II. Subrogation of Malayan to therights of
PASAR

xxx xxx xxx

Article 364. If the effect of the damage referred to in
Article 361 is merely a diminution in
the value of the goods, the obligation
of the carrier shall be reduced to the
payment of the amount which, in the
judgment of experts, constitutes such
difference in value.

Article 365. If, in consequence of the damage, the

goods are rendered useless for sale
and consumption for the purposes for
which they are properly destined, the
consignee shall not be bound to
receive them, and he may have them
in the hands of the carrier, demanding
of the latter their value at the current
price on that day.

If among the damaged goods there should be some

pieces in good condition and without
any defect, the foregoing provision
shall be applicable with respect to
those damaged and the consignee
shall receive those which are sound,
this segregation to be made by distinct
and separate pieces and without
dividing a single object, unless the
consignee proves the impossibility of
conveniently making use of them in
this form.

Malayan's claim against the petitioners is based on

subrogation to the rights possessed by PASAR as consignee
of the allegedly damaged goods. The right of subrogation
stems from Article 2207 of the New Civil Code which states:

The same rule shall be applied to merchandise in

bales or packages, separating those
parcels which appear sound.

Art. 2207. If the plaintiff's property has been insured,

and he has received indemnity from
the insurance company for the injury
or loss arising out of the wrong or
breach of contract complained of, the

35

insurance
company
shall
be
subrogated to the rights of the
insured against the wrongdoer or the
person who has violated the contract.
If the amount paid by the insurance
company does not fully cover the
injury or loss, the aggrieved party shall
be entitled to recover the deficiency
from the person causing the loss or
injury.

to such compensation for the pecuniary loss that was duly

proven." 23 Article 2199 of the New Civil Code speaks of how
actual damages are awarded:
Art. 2199. Except as provided by law or by stipulation,
one is entitled to an adequate
compensation only for such pecuniary
loss suffered by him as he has duly
proved.
Such
compensation
is
referred to as actual or compensatory
damages.

"The right of subrogation is not dependent upon, nor does

it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer." 20 The right of subrogation is
however, not absolute. "There are a few recognized
exceptions to this rule. For instance, if the assured by his
own act releases the wrongdoer or third party liable for the
loss or damage, from liability, the insurer's right of
subrogation is defeated. . . . Similarly, where the insurer
pays the assured the value of the lost goods without
notifying the carrier who has in good faith settled the
assured's claim for loss, the settlement is binding on both
the assured and the insurer, and the latter cannot bring an
action against the carrier on his right of subrogation. . . .
And where the insurer pays the assured for a loss which is
not a risk covered by the policy, thereby effecting 'voluntary
payment,' the former has no right of subrogation against
the third party liable for the loss . . . ." 21
The rights of a subrogee cannot be superior to the rights
possessed by a subrogor. "Subrogation is the substitution
of one person in the place of another with reference to a
lawful claim or right, so that he who is substituted succeeds
to the rights of the other in relation to a debt or claim,
including its remedies or securities. The rights to which the
subrogee succeeds are the same as, but not greater than,
those of the person for whom he is substituted, that is, he
cannot acquire any claim, security or remedy the subrogor
did not have. In other words, a subrogee cannot succeed to
a right not possessed by the subrogor. A subrogee in effect
steps into the shoes of the insured and can recover only if
the insured likewise could have recovered." 22
Consequently, an insurer indemnifies the insured based on
the loss or injury the latter actually suffered from. If there is
no loss or injury, then there is no obligation on the part of
the insurer to indemnify the insured. Should the insurer pay
the insured and it turns out that indemnification is not due,
or if due, the amount paid is excessive, the insurer takes the
risk of not being able to seek recompense from the alleged
wrongdoer. This is because the supposed subrogor did not
possess the right to be indemnified and therefore, no right
to collect is passed on to the subrogee.
As regards the determination of actual damages, "[i]t is
axiomatic that actual damages must be proved with
reasonable degree of certainty and a party is entitled only

Whereas the CA modified its Decision dated April 14, 2008

by deducting the amount of US$90,000.00 from the award,
the same is still iniquitous for the petitioners because
PASAR and Malayan never proved the actual damages
sustained by PASAR. It is a flawed notion to merely accept
that the salvage value of the goods is US$90,000.00, since
the price was arbitrarily fixed between PASAR and Malayan.
Actual damages to PASAR, for example, could include the
diminution in value as appraised by experts or the expenses
which PASAR incurred for the restoration of the copper
concentrates to its former condition, if there is damage and
rectification is still possible.
It is also noteworthy that when the expert witness for the
petitioners, Engineer Francisco Esguerra (Esguerra), testified
as regards the lack of any adverse effect of seawater on
copper concentrates, Malayan never presented evidence of
its own in refutation to Esguerra's testimony. And, even if
the Court will disregard the entirety of his testimony, the
effect on Malayan's cause of action is nil. As Malayan is
claiming for actual damages, it bears the burden of proof to
substantiate its claim.
"The burden of proof is on the party who would be defeated
if no evidence would be presented on either side. The
burden is to establish one's case by a preponderance of
evidence which means that the evidence, as a whole,
adduced by one side, is superior to that of the other. Actual
damages are not presumed. The claimant must prove the
actual amount of loss with a reasonable degree of certainty
premised upon competent proof and on the best evidence
obtainable. Specific facts that could afford a basis for
measuring whatever compensatory or actual damages are
borne must be pointed out. Actual damages cannot be
anchored on mere surmises, speculations or conjectures." 24
Having ruled that Malayan did not adduce proof of
pecuniary loss to PASAR for which the latter was
questionably indemnified, there is no necessity to expound
further on the other issues raised by the petitioners and
Malayan in this case.
WHEREFORE, the petition is GRANTED. The Decision
dated April 14, 2008 and Resolution dated December 11,
2008 of the Court of Appeals in CA-G.R. CV No. 82758 are
hereby REVERSED and SET ASIDE. The Decision dated
March 31, 2004 of the Regional Trial Court of Manila, Branch
34 in Civil Case No. 01-101885 is REINSTATED.

36

SO ORDERED.
||| (Loadstar Shipping Co., Inc. v. Malayan Insurance Co., Inc.,
G.R. No. 185565, [November 26, 2014])

37

GREAT

[G.R. No. L-31845. April 30, 1979.]

PACIFIC
LIFE
ASSURANCE
COMPANY,
petitioner,
vs.
HONORABLE
COURT
OF
APPEALS, respondents.

acceptance is merely conditional, and is subordinated to the

act of the company in approving or rejecting the
application.
3. ID.; ID.; MEETING OF THE MIND. A contract of
insurance, like other contracts, must be assented to by both
parties either in person or by their agents. The contract, to
be binding from the date of the application, must have been
a completed contract, one that leaves nothing to be done,
nothing to be completed, nothing to be passed upon, or
determined, before it shall take effect. There can be no
contract of insurance unless the minds of the parties have
met in agreement.
4. ID.; ID.; FAILURE OF AGENT TO COMMUNICATE THE
REJECTION TO APPLICANT. The failure of the insurance
company's agent to communicate to the applicant the
rejection of the insurance application would not have any
adverse effect on the allegedly perfected temporary
contract. In the first place, there was no contract perfected
between the parties who had no meeting of their minds.
Private respondent, being an authorized agent is
indubitably aware that said company does not offer the life
insurance applied for. When he filed the insurance
application in dispute he was therefore only taking a chance
that the company will approve the recommendation of the
agent for the acceptance and approval of the application in
question. Secondly, having an insurable interest on the life
of his daughter, aside from being an insurance agent and
office associate of the branch, the applicant must have
known and followed the progress on the processing of such
application and could not pretend ignorance of the
Company's rejection of the 20-year endowment life
insurance application.
5. ID.; CONCEALMENT OF MATERIAL FACT. The contract
of insurance is one of perfect good faith (uberrima fides
meaning good faith; absolute and perfect candor or
openness and honestly; the absence of any concealment or
deception, however slight [Black's Law Dictionary, 2nd
Edition], not for the insured alone but equally so for the
insurer. Concealment is a neglect to communicate that
which a party knows and ought to communicate (Section 25,
Act 2427). Whether intentional or unintentional, the
concealment entities the insurer to rescind the contract of
insurance.
6. ID.; ID.; CASE AT BAR. The failure of the father who
applied for a life insurance policy on the life of his daughter
to divulge the fact that his daughter is a mongoloid, a
congenital physical defect that could never be disguised,
constitutes such concealment as to render the policy void.
And where the applicant himself is an insurance agent, he
ought to know, as he surely must have known, his duty and
responsibility to supply such a material fact, and his failure
to divulge such significant fact is deemed to have been
done in bad faith.
DECISION
DE CASTRO, J p:
The two above-entitled cases were ordered consolidated by
the Resolution of this Court dated April 29, 1970, (Rollo, No.

[G.R. No. L-31878. April 30, 1979.]

LAPULAPU D. MONDRAGON, petitioner, vs. COURT
OF APPEALS and NGO HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar,
Luna & Manalo for petitioner Company.
Voltaire Garcia for petitioner Mondragon.
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.
SYNOPSIS
Private respondent, a duly authorized agent of Pacific Life,
applied for a 20-year endowment policy on the life of his
one-year old daughter, a mongoloid. He did not divulge
each physical defect of his daughter. He paid the premium
and was issued a binding deposit receipt. However, despite
the branch manager's favorable recommendation, the
Company disapproved the application, because a 20-year
endowment plan is not available for minors. Instead, it
offered the Juvenile Triple Action Plan. The manager wrote
back and again strongly recommended the approval of the
application. At this point, the child died of influenza with
complication of broncho-pneumonia.
In a suit filed by private respondent to recover the proceeds
of the insurance, the trial court rendered judgment adverse
to both petitioners. The Court of Appeals in its amended
decision affirmed the trial court's decision in toto.
The decisive issues in these cases are: (1) whether the
binding deposit receipt constituted a temporary contract of
the life insurance in question; and (2) whether private
respondent concealed the state of health and physical
condition of his child.
The Supreme Court held that a "binding receipt" does not
insure by itself; that no insurance contract was perfected
between the parties with the non-compliance of the
conditions provided in the binding receipt and concealment
having been committed by private respondent.
SYLLABUS
1. INSURANCE CONTRACT; "BINDING DEPOSIT RECEIPT."
Where the binding deposit receipt is intended to be merely
a provisional or temporary insurance contract, and that the
receipt merely acknowledged, on behalf of the insurance
company, that the latter's branch office had received from
the applicant the insurance premium and had accepted the
application subject for processing by the insurance
company, such binding deposit receipt does not become in
force until the application is approved.
2. ID.; PERFECTION OF CONTRACT. A binding deposit
receipt which is merely conditional does not insure outright.
Thus, where an agreement is made between the applicant
and the agent, no liability will attack until the principal
approves the risk and a receipt is given by the agent. The

38

L-31878, p. 58), because the petitioners in both cases seek

similar relief, through these petitions for certiorari by way of
appeal, from the amended decision of respondent Court of
Appeals which affirmed in toto the decision of the Court of
First Instance of Cebu, ordering "the defendants (herein
petitioners Great Pacific Life Assurance Company and
Mondragon) jointly and severally to pay plaintiff (herein
private respondent Ngo Hing) the amount of P50,000.00
with interest at 6% from the date of the filing of the
complaint, and the sum of P10,000.00 as attorney's fees
plus costs of suits."
In its original decision, the respondent Court of Appeals set
aside the appealed decision of the Court of First Instance of
Cebu, and absolved the petitioners from liability on the
insurance policy, but ordered the reimbursement to
appellee (herein private respondent) the amount of
P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo
Hing filed an application with the Great Pacific Life
Assurance Company (hereinafter referred to as Pacific Life)
for a twenty-year endowment policy in the amount of
P50,000.00 on the life of his one-year old daughter Helen
Go. Said respondent supplied the essential data which
petitioner Lapulapu D. Mondragon, Branch Manager of the
Pacific Life in Cebu City wrote on the corresponding form in
his own handwriting (Exhibit I-M). Mondragon finally typewrote the data on the application form which was signed by
private respondent Ngo Hing. The latter paid the annual
premium, the sum of P1,077.75 going over to the Company,
but he retained the amount of P1,317.00 as his commission
for being a duly authorized agent of Pacific Life. Upon the
payment of the insurance premium, the binding deposit
receipt (Exhibit E) was issued to private respondent Ngo
Hing. Likewise, petitioner Mondragon handwrote at the
bottom of the back page of the application form his strong
recommendation for the approval of the insurance
application. Then on April 30, 1957, Mondragon received a
letter from Pacific Life disapproving the insurance
application (Exhibit 3-M). The letter stated that the said life
insurance application for 20-year endowment plan is not
available for minors below seven years old, but Pacific Life
can consider the same under the Juvenile Triple Action Plan,
and advised that if the offer is acceptable, the Juvenile NonMedical Declaration be sent to the Company.
The non-acceptance of the insurance plan by Pacific Life
was allegedly not communicated by petitioner Mondragon
to private respondent Ngo Hing. Instead, on May 6, 1957,
Mondragon wrote back Pacific Life again strongly
recommending the approval of the 20-year endowment life
insurance on the ground that Pacific Life is the only
insurance company not selling the 20-year endowment
insurance plan to children, pointing out that since 1954 the
customers, especially the Chinese, were asking for such
coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957
Helen Go died of influenza with complication of bronchopneumonia. Thereupon, private respondent sought the

payment of the proceeds of the insurance, but having failed

in his effort, he filed the action for the recovery of the same
before the Court of First Instance of Cebu, which rendered
the adverse decision as earlier referred to against both
petitioners.
The decisive issues in these cases are: (1) whether the
binding deposit receipt (Exhibit E) constituted a temporary
contract of the life insurance in question; and (2) whether
private respondent Ngo Hing concealed the state of health
and physical condition of Helen Go, which rendered void
the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required
before a deposit is considered a BINDING RECEIPT. These
conditions state that:
"A. If the Company or its agent, shall have received the
premium deposit . . . and the
insurance application, ON or PRIOR to
the date of medical examination . . .
said insurance shall be in force and in
effect from the date of such medical
examination, for such period as is
covered by the deposit . . ., PROVIDED
the company shall be satisfied that on
said date the applicant was insurable
on standard rates under its rule for
the amount of insurance and the kind
of policy requested in the application.

D. If the Company does not accept the application on

standard rate for the amount of
insurance and/or the kind of policy
requested in the application but issue,
or offers to issue a policy for a
different plan and/or amount . . ., the
insurance shall not be in force and in
effect until the applicant shall have
accepted the policy as issued or
offered by the Company and shall
have paid the full premium thereof. If
the applicant does not accept the
policy, the deposit shall be refunded.

E. If the applicant shall not have been insurable under

Condition A above, and the Company
declines to approve the application,
the insurance applied for shall not
have been in force at any time and the
sum paid be returned to the applicant
upon the surrender of this receipt."
(Emphasis Ours).

39

The aforequoted provisions printed on Exhibit E show that

the binding deposit receipt is intended to be merely a
provisional or temporary insurance contract and only upon
compliance of the following conditions: (1) that the
company shall be satisfied that the applicant was insurable
on standard rates; (2) that if the company does not accept
the application and offers to issue a policy for a different
plan, the insurance contract shall not be binding until the
applicant accepts the policy offered; otherwise, the deposit
shall be refunded; and (3) that if the applicant is not
insurable according to the standard rates, and the company
disapproves the application, the insurance applied for shall
not be in force at any time, and the premium paid shall be
returned to the applicant.
Clearly implied from the aforesaid conditions is that the
binding deposit receipt in question is merely an
acknowledgment, on behalf of the company, that the
latter's branch office had received from the applicant the
insurance premium and had accepted the application
subject for processing by the insurance company; and that
the latter will either approve or reject the same on the basis
of whether or not the applicant is "insurable on standard
rates." Since petitioner Pacific Life disapproved the
insurance application of respondent Ngo Hing, the binding
deposit receipt in question had never become in force at
any time.
Upon this premise, the binding deposit receipt (Exhibit E) is,
manifestly, merely conditional and does not insure outright.
As held by this Court, where an agreement is made
between the applicant and the agent, no liability shall attach
until the principal approves the risk and a receipt is given by
the agent. The acceptance is merely conditional, and is
subordinated to the act of the company in approving or
rejecting the application. Thus, in life insurance, a "binding
slip" or "binding receipt" does not insure by itself (De Lim
vs. Sun Life Assurance Company of Canada, 41 Phil. 264).
It bears repeating that through the intra-company
communication of April 30, 1957 (Exhibit 3-M), Pacific Life
disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment
insurance policy to children less than seven years of age.
What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to
accept. In the absence of a meeting of the minds between
petitioner Pacific Life and private respondent Ngo Hing over
the 20-year endowment life insurance in the amount of
P50,000.00 in favor of the latter's one-year old daughter,
and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt,
there could have been no insurance contract duly perfected
between them. Accordingly, the deposit paid by private
respondent shall have to be refunded by Pacific Life. LLphil
As held in De Lim vs. Sun Life Assurance Company of
Canada, supra, "a contract of insurance, like other contracts,
must be assented to by both parties either in person or by
their agents. . . . The contract, to be binding from the date of
the application, must have been a completed contract, one

that leaves nothing to be done, nothing to be completed,

nothing to be passed upon, or determined, before it shall
take effect. There can be no contract of insurance unless
the minds of the parties have met in agreement."
We are not impressed with private respondent's contention
that failure of petitioner Mondragon to communicate to him
the rejection of the insurance application would not have
any adverse effect on the allegedly perfected temporary
contract (Respondent's Brief, pp. 13-14). In the first place,
there was no contract perfected between the parties who
had no meeting of their minds. Private respondent, being
an authorized insurance agent of Pacific Life at Cebu branch
office, is indubitably aware that said company does not
offer the life insurance applied for. When he filed the
insurance application in dispute, private respondent was,
therefore, only taking the chance that Pacific Life will
approve the recommendation of Mondragon for the
acceptance and approval of the application in question
along with his proposal that the insurance company starts
to offer the 20-year endowment insurance plan for children
less than seven years. Nonetheless, the record discloses
that Pacific Life bad rejected the proposal and
recommendation. Secondly, having an insurable interest on
the life of his one-year old daughter, aside from being an
insurance agent and an office associate of petitioner
Mondragon, private respondent Ngo Hing must have known
and followed the progress on the processing of such
application and could not pretend ignorance of the
Company's rejection of the 20-year endowment life
insurance application.
At this juncture, We find it fit to quote with approval, the
very apt observation of then Appellate Associate Justice
Ruperto G. Martin who later came up to this Court, from his
dissenting opinion to the amended decision of the
respondent court which completely reversed the original
decision, the following:
Of course, there is the insinuation that neither the
memorandum of rejection (Exhibit 3M) nor the reply thereto of appellant
Mondragon reiterating the desire for
applicant's father to have the
application considered as one for a
20-year endowment plan was ever
duly communicated to Ngo Hing,
father of the minor applicant. I am not
quite convinced that this was so. Ngo
Hing, as father of the applicant herself,
was precisely the "underwriter who
wrote this case" (Exhibit H-1). The
unchallenged statement of appellant
Mondragon in his letter of May 6,
1957) (Exhibit 4-M), specifically admits
that said Ngo Hing was "our associate"
and that it was the latter who "insisted
that the plan be placed on the 20-year
endowment plan." Under these
circumstances, it is inconceivable that
the progress in the processing of the
application was not brought home to
his knowledge. He must have been

40

duly apprised of the rejection of the

application for a 20-year endowment
plan otherwise Mondragon would not
have asserted that it was Ngo Hing
himself
who
insisted
on
the
application as originally filed thereby
implicitly declining the offer to
consider the application under the
Juvenile Triple Action Plan. Besides,
the associate of Mondragon that he
was, Ngo Hing should only be
presumed to know what kind of
policies are available in the company
for minors below 7 years old. What he
and Mondragon were apparently
trying to do in the premises was
merely to prod the company into
going into the business of issuing
endowment policies for minors just as
other insurance companies allegedly
do. Until such a definite policy is,
however, adopted by the company, it
can hardly be said that it could have
been bound at all under the binding
slip for a plan of insurance that it
could not have, by then, issued at all."
(Amended Decision, Rollo, pp. 52-53).

Saturnino vs. Philippine American Life Insurance Company,

7 SCRA 316). Private respondent appears guilty thereof. prcd
We are thus constrained to hold that no insurance contract
was perfected between the parties with the noncompliance
of the conditions provided in the binding receipt, and
concealment, as legally defined, having been committed by
herein private respondent.
WHEREFORE, the decision appealed from is hereby set
aside, and in lieu thereof, one is hereby entered absolving
petitioners Lapulapu D. Mondragon and Great Pacific Life
Assurance Company from their civil liabilities as found by
respondent Court and ordering the aforesaid insurance
company to reimburse the amount of P1,077.75, without
interest, to private respondent, Ngo Hing. Costs against
private respondent.
SO ORDERED.
||| (Great Pacific Life Assurance Co. v. Court of Appeals, G.R.
No. L-31845, L-31878, [April 30, 1979])

2. Relative to the second issue of alleged concealment, this

Court is of the firm belief that private respondent had
deliberately concealed the state of health and physical
condition of his daughter Helen Go. When private
respondent supplied the required essential data for the
insurance application form, he was fully aware that his oneyear old daughter is typically a mongoloid child. Such a
congenital physical defect could never be ensconced nor
disguised. Nonetheless, private respondent, in apparent
bad faith, withheld the fact material to the risk to be
assumed by the insurance company. As an insurance agent
of Pacific Life, he ought to know, as he surely must have
known, his duty and responsibility to supply such a material
fact. Had he divulged said significant fact in the insurance
application form, Pacific Life would have verified the same
and would have had no choice but to disapprove the
application outright.
The contract of insurance is one of perfect good faith
(uberrima fides meaning good faith; absolute and perfect
candor or openness and honesty; the absence of any
concealment or deception, however slight [Black's Law
Dictionary, 2nd Edition], not for the insured alone but
equally so for the insurer (Field man's Insurance Co., Inc. vs.
Vda de Songco, 25 SCRA 70). Concealment is a neglect to
communicate that which a party knows and ought to
communicate (Section 25, Act No. 2427). Whether
intentional or unintentional the concealment entitles the
insurer to rescind the contract of insurance (Section 26, id.:
Yu Pang Cheng vs. Court of Appeals, et al., 105 Phil. 930;

41

Item P7,691,000.00 on the Clubhouse only @ .

392%;

[G.R. No. 156167. May 16, 2005.]

GULF RESORTS, INC., petitioner, vs. PHILIPPINE
CHARTER INSURANCE CORPORATION, respondent.
DECISION
PUNO, J p:
Before the Court is the petition for certiorari under Rule 45
of the Revised Rules of Court by petitioner GULF RESORTS,
INC., against respondent PHILIPPINE CHARTER INSURANCE
CORPORATION. Petitioner assails the appellate court
decision 1 which dismissed its two appeals and affirmed the
judgment of the trial court.
For review are the warring interpretations of petitioner and
respondent on the scope of the insurance company's
liability for earthquake damage to petitioner's properties.
Petitioner avers that, pursuant to its earthquake shock
endorsement rider, 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:

1,500,000.00 on the furniture, etc. contained in the

building abovementioned@ .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:

[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 plaintiff's two swimming pools,
thus, "earthquake shock endt." (Item 5
only) (Exhs. "C-1"; "D-1," and "E" and
two (2) swimming pools only (Exhs. "C1"; 'D-1", "E" and "F-1"). "Item 5" in
those policies referred to the two (2)
swimming pools only (Exhs. "1-B", "2B", "3-B" and "F-2"); that subsequently
AHAC(AIU) issued in plaintiff's 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-B1") in the amount of P10,700.00 and
paid P42,658.14 (Exhs. "6-A" and "6-B")
as premium thereof, computed as
follows: EDCcaS

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,
defendant's Policy No. 31944 (Exh. "I"),
which is the policy in question,
contained on the right-hand upper
portion of page 7 thereof, the
following:

42

Rate-Various

Premium P37,420.60

by or through or in
consequence
of
earthquake (Exhs. "1-D",
"2-D", "3-A", "4-B", "5-A",
"6-D" and "7-C"); cDCaTS
F/L 2,061.52
Typhoon 1,030.76
EC 393.00 - ES

that in Exhibit "7-C" the word "included" above the

underlined portion was deleted; that
on July 16, 1990 an earthquake struck
Central Luzon and Northern Luzon
and plaintiff's properties covered by
Policy No. 31944 issued by defendant,
including the two swimming pools in
its Agoo Playa Resort were damaged. 2

Doc. Stamps 3,068.10

F.S.T. 776.89

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 petitioner's claim on the ground that its insurance
policy only afforded earthquake shock coverage to the two
swimming pools of the resort. 8 Petitioner and respondent
failed to arrive at a settlement. 9 Thus, on January 24, 1991,
petitioner filed a complaint 10 with the regional trial court of
Pasig praying for the payment of the following:

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-B2"; "F-02" and "4-A-1"; "G-2" and "5-C1"; "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):

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;

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

2.) The sum of P428,842.00 per month, representing

continuing
losses
sustained by plaintiff on
account of defendant's
refusal to pay the claims;

43

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

damages;

which struck on July 16, 1990.

Defendant having admitted that the
damage to the swimming pools was
appraised by defendant's adjuster at
P386,000.00, defendant must, by
virtue of the contract of insurance, pay
plaintiff said amount.

4.) The sum of P500,000.00 by way of attorney's fees

and
expenses
of
litigation;

Because it is the finding of the Court as stated in the

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

5.) Costs. 11

Respondent filed its Answer with Special and Affirmative

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

WHEREFORE,

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.

premises considered, defendant is

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

No pronouncement as to costs. 13

Petitioner's Motion for Reconsideration was denied. Thus,

petitioner filed an appeal with the Court of Appeals based
on the following assigned errors: 14
A. THE

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

44

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

We also find that the Court a quo was correct in not

granting
the
plaintiff-appellant's
prayer for the imposition of interest
24% on the insurance claim and 6% on
loss of income allegedly amounting to
P4,280,000.00. Since the defendantappellant has expressed its willingness
to pay the damage caused on the two
(2) swimming pools, as the Court a
quo and this Court correctly found it
to be liable only, it then cannot be said
that it was in default and therefore
liable for interest.

COURT ERRED IN DETERMINING

PLAINTIFF-APPELLANT'S RIGHT TO
RECOVER
UNDER
DEFENDANTAPPELLEE'S POLICY (NO. 31944; EXH
"I") BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID POLICY
ISOLATED
FROM
THE
CIRCUMSTANCES SURROUNDING ITS
ISSUANCE AND THE ACTUATIONS OF
THE PARTIES AFTER THE EARTHQUAKE
OF JULY 16, 1990. cHSIAC

Coming to the defendant-appellant's prayer for an

attorney's fees, long-standing is the
rule that the award thereof is subject
to the sound discretion of the court.
Thus, if such discretion is wellexercised, 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 plaintiffappellant's action is not baseless and
highly speculative, We find that the
Court a quo did not err in granting the
same.

C. THE TRIAL COURT ERRED IN NOT HOLDING THAT

PLAINTIFF-APPELLANT IS ENTITLED TO
THE DAMAGES CLAIMED, WITH
INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF
POLICY.

On the other hand, respondent filed a partial appeal,

assailing the lower court's failure to award it attorney's fees
and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of
the trial court and ruled, thus:

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

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.

Petitioner filed the present petition raising the following

issues: 16
A. WHETHER THE COURT OF APPEALS CORRECTLY
HELD
THAT
UNDER
RESPONDENT'S
INSURANCE POLICY NO.
31944, ONLY THE TWO (2)
SWIMMING
POOLS,
RATHER THAN ALL THE
PROPERTIES
COVERED
THEREUNDER,
ARE
INSURED AGAINST THE

xxx xxx xxx

45

RISK OF
SHOCK.

EARTHQUAKE

Tenth, the parties' contemporaneous and subsequent acts

show that they intended to extend earthquake shock
coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told
respondent that it wanted an exact replica of its latest
insurance policy from American Home Assurance Company
(AHAC-AIU), which covered all the resort's properties for
earthquake shock damage and respondent agreed. After
the July 16, 1990 earthquake, respondent assured petitioner
that it was covered for earthquake shock. Respondent's
insurance adjuster, Bayne Adjusters and Surveyors, Inc.,
likewise requested petitioner to submit the necessary
documents for its building claims and other repair costs.
Thus, under the doctrine of equitable estoppel, it cannot
deny that the insurance policy it issued to petitioner
covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for
review by certiorari under Rule 45 of the Revised Rules of
Court as its remedy, and there is no need for calibration of
the evidence in order to establish the facts upon which this
petition is based. cDCSTA
On the other hand, respondent made the following counter
arguments: 18
First, none of the previous policies issued by AHAC-AIU from
1983 to 1990 explicitly extended coverage against
earthquake shock to petitioner's 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 respondent's policy was copied, covered only
earthquake shock for the two swimming pools.
Second, petitioner's 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 petitioner's properties. As per its
agreement with petitioner, respondent copied its policy
from the AHAC-AIU policy provided by petitioner. Although
the first five policies contained the said qualification in their
rider's title, in the last two policies, this qualification in the
title was deleted. AHAC-AIU, 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

B. WHETHER THE COURT OF APPEALS CORRECTLY

DENIED
PETITIONER'S
PRAYER FOR DAMAGES
WITH INTEREST THEREON
AT THE RATE CLAIMED,
ATTORNEY'S FEES AND
EXPENSES
OF
LITIGATION. SDHETI

Petitioner contends:
First, that the policy's earthquake shock endorsement
clearly covers all of the properties insured and not only the
swimming pools. It used the words "any property insured
by this policy," and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the
earthquake shock endorsement is confirmed in the body of
the insurance policy itself, which states that it is "[s]ubject
to: Other Insurance Clause, Typhoon Endorsement,
Earthquake Shock Endt., Extended Coverage Endt., FEA
Warranty & Annual Payment Agreement On Long Term
Policies." 17
Third, that the qualification referring to the two swimming
pools had already been deleted in the earthquake shock
endorsement.
Fourth, it is unbelievable for respondent to claim that it only
made an inadvertent omission when it deleted the said
qualification.
Fifth, that the earthquake shock endorsement rider should
be given precedence over the wording of the insurance
policy, because the rider is the more deliberate expression
of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were
placed on the endorsements/warranties enumerated at the
time of issue.
Seventh, any ambiguity in the earthquake shock
endorsement should be resolved in favor of petitioner and
against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the
earthquake shock endorsement should be interpreted as a
caveat on the standard fire insurance policy, such as to
remove the two swimming pools from the coverage for the
risk of fire. It should not be used to limit the respondent's
liability for earthquake shock to the two swimming pools
only.
Ninth, there is no basis for the appellate court to hold that
the additional premium was not paid under the extended
coverage. The premium for the earthquake shock coverage
was already included in the premium paid for the policy.

46

ITEM 3 393,000.00 On the two (2) swimming

pools only (against the peril of
earthquake shock only) 20

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. Petitioner's own evidence
shows that it only required respondent to follow the exact
provisions of its previous policy from AHAC-AIU.
Respondent complied with this requirement. Respondent's
only deviation from the agreement was when it modified
the provisions regarding the replacement cost
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 adjuster's letter notifying petitioner
to present certain documents for its building claims and
repair costs was given to petitioner before the adjuster
knew the full coverage of its policy. cDTSHE

Second, under the breakdown for premium payments, 21 it

was stated that:
PREMIUM RECAPITULATION

ITEM NOS. AMOUNT RATES PREMIUM

xxx xxx 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:

Petitioner anchors its claims on AHAC-AIU's 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,
attorney's 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:

ANNUAL PAYMENT AGREEMENT ONLONG TERM

POLICIES

THE

47

INSURED

UNDER THIS POLICY HAVING

ESTABLISHED
AGGREGATE
SUMS
INSURED IN EXCESS OF FIVE MILLION
PESOS, IN CONSIDERATION OF A
DISCOUNT OF 5% OR 7 1/2% OF THE
NET PREMIUM . . . POLICY HEREBY
UNDERTAKES TO CONTINUE THE
INSURANCE UNDER THE ABOVE
NAMED . . . AND TO PAY THE
PREMIUM. CIAacS

Earthquake Endorsement

2. The insured is subject to a risk of loss by the

happening
of
the
designated peril;

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.

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

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

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
petitioner's previous insurance policies from AHAC-AIU. As
borne out by petitioner's witnesses: HCEaDI

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:

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?

1. The insured has an insurable interest;

48

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.

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

Q. And they are independent of your company insofar

as
operations
are
concerned?
Q. More specifically Item 5 states the amount of
P393,000.00
corresponding to the two
swimming pools only?

A. Yes, sir, they are separate entity.

A. Yes, sir.

Q. But insofar as the procurement of the insurance

policy is concerned they
are of course subject to
your instruction, is that
not correct?

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,

November 25, 1991

A. Yes, sir. The final action is still with us although they

can recommend what
insurance to take.

pp. 23-26

Q. For the period from March 14, 1988 up to March 14,

1989, did you personally
arrange
for
the
procurement
of
this
policy?

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. Yes, sir.

A. No, sir. We did not make any written instruction,

although we made an
oral instruction to that
effect of extending the
coverage on (sic) the
other properties of the
company.

Q. Did you also do this through your insurance

agency?

A. If you are referring to Forte Insurance Agency, yes.

Q. And that instruction, according to you, was very

important because in
April 1987 there was an
earthquake tremor in La

Q. Is Forte Insurance Agency a department or division

of your company?

49

Union?

the previous limitation

pertaining to the two
swimming pools was
already removed.

A. Yes, sir. TcIHDa

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:

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?

DIRECT EXAMINATION OF JUAN BARANDA III 30

TSN, August 11, 1992

A. Are you referring to the insurance policy issued by

American
Home
Assurance
Company
marked Exhibit "G"?

pp. 9-12

Atty. Mejia:
Atty. Mejia:

Yes.
Witness:

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:

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

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

50

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? ADaSET

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:

xxx xxx xxx

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:

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?

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 IIITSN,
August 11, 1992

A. Yes, sir.

pp. 23-25
ATTY. MEJIA:

Q. Plaintiff's 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 plaintiff's
witness? aSADIC

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:

51

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:

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 xxx xxx
ATTY. ANDRES:

They are the same, the premium rates?

WITNESS:

As an insurance executive will you not attach any significance to

the deletion of the qualifying phrase for the policies? SaHcAC
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 IIITSN,
September 7, 1992

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.

ATTY. ANDRES:

The Court also rejects petitioner's contention that

respondent's contemporaneous and subsequent acts to the
issuance of the insurance policy falsely gave the petitioner
assurance that the coverage of the earthquake shock
endorsement included all its properties in the resort.
Respondent only insured the properties as intended by the
petitioner. Petitioner's own witness testified to this
agreement, viz:

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

insurance?
WITNESS:

pp. 4-5

pp. 4-6

CROSS EXAMINATION OF LEOPOLDO MANTOHACTSN,

January 14, 1992

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?

No, we don't, sir.

Q. That is why the phrase "earthquake shock to the
two (2) swimming pools
only" was placed, is it
not?

A. Yes, sir.
A. I told him that the insurance that they will have to
get will have the same

52

provisions
as
this
American
Home
Insurance Policy No. 2064568061-9.

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? IHaECA

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

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

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. 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.

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?

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,

January 14, 1992

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.

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?

53

basis, if any, for stating

that except for the
swimming
pools
all
affected items have no
coverage for earthquake
shock?

The verbal assurances allegedly given by respondent's

representative Atty. Umlas were not proved. Atty. Umlas
categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of
respondent's 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:

xxx xxx xxx

DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne

Adjusters and Surveyors, Inc.)

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. TAcDHS

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.

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

xxx xxx xxx

Q. Now, may we know from you Engr. de Leon your

54

A. Yes, sir.

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 petitioner's knowledge,
viz:

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.

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC 36

TSN, September 23, 1991

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-AIU's policy.
Consequently, we cannot apply the "fine print" or "contract
of adhesion" rule in this case as the parties' intent to limit
the coverage of the policy to the two swimming pools only is
not ambiguous. 37
IN VIEW WHEREOF, the judgment of the Court of Appeals is
affirmed. The petition for certiorari is dismissed. No costs.

pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of

policy you would want for
those facilities in Agoo
Playa?

cIEHAC

SO ORDERED.
||| (Gulf Resorts Inc. v. Phil. Charter Insurance Corp., G.R. No.
156167, [May 16, 2005], 497 PHIL 837-863)

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?

55

for another
term;

[G.R. No. 137172. April 4, 2001.]

UCPB GENERAL INSURANCE CO., INC., petitioner,
vs. MASAGANA TELAMART, INC., respondent.
RESOLUTION
DAVIDE, JR., C .J p:
In our decision of 15 June 1999 in this case, we reversed and
set aside the assailed decision 1 of the Court of Appeals,
which affirmed with modification the judgment of the trial
court (a) allowing Respondent to consign the sum of
P225,753.95 as full payment of the premiums for the
renewal of the five insurance policies on Respondent's
properties; (b) declaring the replacement-renewal policies
effective and binding from 22 May 1992 until 22 May 1993;
and (c) ordering Petitioner to pay Respondent
P18,645,000.00 as indemnity for the burned properties
covered by the renewal-replacement policies. The
modification consisted in the (1) deletion of the trial court's
declaration that three of the policies were in force from
August 1991 to August 1992; and (2) reduction of the award
of the attorney's fees from 25% to 10% of the total amount
due the Respondent. AcTDaH
The material operative facts upon which the appealed
judgment was based are summarized by the Court of
Appeals in its assailed decision as follows:

b) Defendant had put plaintiff and its alleged broker

on notice of
non-renewal
earlier; and

c) The properties covered by the said policies were

burned in a
fire
that
took place
last June 13,
1992,
or
before
tender
of
premium
payment."

Plaintiff [herein Respondent] obtained from defendant

[herein Petitioner] five (5) insurance
policies (Exhibits "A" to "E", Record, pp.
158-175) on its properties [in Pasay
City and Manila] . . . .

(Record, p. 5)

Hence Masagana filed this case.

The Court of Appeals disagreed with Petitioner's stand that
Respondent's tender of payment of the premiums on 13
July 1992 did not result in the renewal of the policies, having
been made beyond the effective date of renewal as
provided under Policy Condition No. 26, which states:

All five (5) policies reflect on their face the effectivity

term: "from 4:00 P.M. of 22 May 1991
to 4:00 P.M. of 22 May 1992." On June
13, 1992, plaintiffs properties located
at 2410-2432 and 2442-2450 Taft
Avenue, Pasay City were razed by fire.
On July 13, 1992, plaintiff tendered,
and defendant accepted, five (5)
Equitable Bank Manager's Checks in
the total amount of P225,753.45 as
renewal premium payments for which
Official Receipt Direct Premium No.
62926 (Exhibit "Q", Record, p. 191) was
issued by defendant. On July 14, 1992,
Masagana made its formal demand
for indemnification for the burned
insured properties. On the same day,
defendant returned the five (5)
manager's checks stating in its letter
(Exhibit "R" / "8", Record, p. 192) that it
was rejecting Masagana's claim on the
following grounds:

26. Renewal Clause. Unless the company at least

forty five days in advance of the end of
the policy period mails or delivers to
the assured at the address shown in
the policy notice of its intention not to
renew the policy or to condition its
renewal upon reduction of limits or
elimination of coverages, the assured
shall be entitled to renew the policy
upon payment of the premium due on
the effective date of renewal.

Both the Court of Appeals and the trial court found that
sufficient proof exists that Respondent, which had
procured insurance coverage from Petitioner for a
number of years, had been granted a 60 to 90-day
credit term for the renewal of the policies. Such a
practice had existed up to the time the claims were
filed. Thus:

"a) Said policies expired last May 22, 1992 and were
not renewed

56

Fire Insurance Policy No. 34658 covering May 22, 1990

to May 22, 1991 was issued on May 7,
1990 but premium was paid more
than 90 days later on August 31, 1990
under O.R. No. 4771 (Exhs. "T" and "T1"). Fire Insurance Policy No. 34660 for
Insurance Risk Coverage from May 22,
1990 to May 22, 1991 was issued by
UCPB on May 4, 1990 but premium
was collected by UCPB only on July 13,
1990 or more than 60 days later under
O.R. No. 46487 (Exhs. "V" and "V-1").
And so were as other policies: Fire
Insurance Policy No. 34657 covering
risks from May 22, 1990 to May 22,
1991 was issued on May 7, 1990 but
premium therefor was paid only on
July 19, 1990 under O.R. No. 46583
(Exhs. "W" and "W-1"). Fire Insurance
Policy No. 34661 covering risks from
May 22, 1990 to May 22, 1991 was
issued on May 3, 1990 but premium
was paid only on July 19, 1990 under
O.R. No. 46582 (Exhs. "X" and "X-1").
Fire Insurance Policy No. 34688 for
insurance coverage from May 22, 1990
to May 22, 1991 was issued on May 7,
1990 but premium was paid only on
July 19, 1990 under O.R. No. 46585
(Exhs. "Y" and "Y-1"). Fire Insurance
Policy No. 29126 to cover insurance
risks from May 22, 1989 to May 22,
1990 was issued on May 22, 1989 but
premium therefor was collected only
on July 25, 1990[sic] under O.R. No.
40799 (Exhs. "AA" and "AA-1"). Fire
Insurance Policy No. HO/F-26408
covering risks from January 12, 1989
to January 12, 1990 was issued to
Intratrade Phils. (Masagana's sister
company) dated December 10, 1988
but premium therefor was paid only
on February 15, 1989 under O.R. No.
38075 (Exhs. "BB" and "BB-1"). Fire
Insurance Policy No. 29128 was issued
on May 22, 1989 but premium was
paid only on July 25, 1989 under O.R.
No. 40800 for insurance coverage
from May 22, 1989 to May 22, 1990
(Exhs. "CC" and "CC-1"). Fire Insurance
Policy No. 29127 was issued on May
22, 1989 but premium was paid only
on July 17, 1989 under O.R. No. 40682
for insurance risk coverage from May
22, 1989 to May 22, 1990 (Exhs. "DD"
and "DD-1"). Fire Insurance Policy No.
HO/F-29362 was issued on June 15,
1989 but premium was paid only on
February 13, 1990 under O.R. No.
39233 for insurance coverage from
May 22, 1989 to May 22, 1990 (Exhs.
"EE" and "EE-1"). Fire Insurance Policy
No. 26303 was issued on November
22, 1988 but premium therefor was

collected only on March 15, 1989

under O.R. NO. 38573 for insurance
risks coverage from December 15,
1988 to December 15, 1989 (Exhs. "FF"
and "FF-1"). HIcTDE

Moreover, according to the Court of Appeals the following

circumstances constitute preponderant proof that no timely
notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation
(Exhibit "11", Record, p. 350) from
Ultramar Reinsurance Brokers that
plaintiff's reinsurance facility had been
confirmed up to 67.5% only on April
15, 1992 as indicated on Exhibit "11".
Apparently, the notice of non-renewal
(Exhibit "7," Record, p. 320) was sent
not earlier than said date, or within 45
days from the expiry dates of the
policies as provided under Policy
Condition No. 26; (2) Defendant
insurer unconditionally accepted, and
issued an official receipt for, the
premium payment on July 1[3], 1992
which
indicates
defendant's
willingness to assume the risk despite
only a 67.5% reinsurance cover[age];
and (3) Defendant insurer appointed
Esteban Adjusters and Valuers to
investigate plaintiff's claim as shown
by the letter dated July 17, 1992
(Exhibit "11", Record, p. 254).

In our decision of 15 June 1999, we defined the main issue

to be "whether the fire insurance policies issued by
petitioner to the respondent covering the period from May
22, 1991 to May 22, 1992 . . . had been extended or
renewed by an implied credit arrangement though actual
payment of premium was tendered on a later date and
after the occurrence of the (fire) risk insured against." We
resolved this issue in the negative in view of Section 77 of
the Insurance Code and our decisions in Valenzuela v. Court
of Appeals; 2 South Sea Surety and Insurance Co., Inc. v.
Court of Appeals; 3 and Tibay v. Court of Appeals. 4
Accordingly, we reversed and set aside the decision of the
Court of Appeals.
Respondent seasonably filed a motion for the
reconsideration of the adverse verdict. It alleges in the
motion that we had made in the decision our own findings
of facts, which are not in accord with those of the trial court
and the Court of Appeals. The courts below correctly found
that no notice of non-renewal was made within 45 days
before 22 May 1992, or before the expiration date of the
fire insurance policies. Thus, the policies in question were

57

renewed by operation of law and were effective and valid

on 30 June 1992 when the fire occurred, since the
premiums were paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties
may neither agree expressly or impliedly on the extension
of credit or time to pay the premium nor consider a policy
binding before actual payment. It urges the Court to take
judicial notice of the fact that despite the express provision
of Section 77 of the Insurance Code, extension of credit
terms in premium payment has been the prevalent practice
in the insurance industry. Most insurance companies,
including Petitioner, extend credit terms because Section 77
of the Insurance Code is not a prohibitive injunction but is
merely designed for the protection of the parties to an
insurance contract. The Code itself, in Section 78, authorizes
the validity of a policy notwithstanding non-payment of
premiums.
Respondent also asserts that the principle of estoppel
applies to Petitioner. Despite its awareness of Section 77
Petitioner persuaded and induced Respondent to believe
that payment of premium on the 60- to 90-day credit term
was perfectly alright; in fact it accepted payments within 60
to 90 days after the due dates. By extending credit and
habitually accepting payments 60 to 90 days from the
effective dates of the policies, it has implicitly agreed to
modify the tenor of the insurance policy and in effect
waived the provision therein that it would pay only for the
loss or damage in case the same occurred after payment of
the premium.
Petitioner filed an opposition to the Respondent's motion
for reconsideration. It argues that both the trial court and
the Court of Appeals overlooked the fact that on 6 April
1992 Petitioner sent by ordinary mail to Respondent a
notice of non-renewal and sent by personal delivery a copy
thereof to Respondent's broker, Zuellig. Both courts
likewise ignored the fact that Respondent was fully aware of
the notice of non-renewal. A reading of Section 66 of the
Insurance Code readily shows that in order for an insured
to be entitled to a renewal of a non-life policy, payment of
the premium due on the effective date of renewal should
first be made. Respondent's argument that Section 77 is not
a prohibitive provision finds no authoritative support.

2. Petitioner had been granting Respondent a

60- to 90-day credit
term within which to
pay the premiums on
the renewed policies.
AaITCS

3. There was no valid notice of non-renewal of

the
policies
in
question, as there is
no proof at all that the
notice
sent
by
ordinary mail was
received
by
Respondent, and the
copy thereof allegedly
sent to Zuellig was
ever transmitted to
Respondent.

4. The premiums for the policies in question in

the aggregate amount
of P225,753.95 were
paid by Respondent
within the 60- to 90day credit term and
were duly accepted
and
received
by
Petitioner's cashier.

The instant case has to rise or fall on the core issue of

whether Section 77 of the Insurance Code of 1978 (P.D. No.
1460) must be strictly applied to Petitioner's advantage
despite its practice of granting a 60- to 90-day credit term
for the payment of premiums.
Section 77 of the Insurance Code of 1978 provides:

Upon a meticulous review of the records and reevaluation

of the issues raised in the motion for reconsideration and
the pleadings filed thereafter by the parties, we resolved to
grant the motion for reconsideration. The following facts, as
found by the trial court and the Court of Appeals, are
indeed duly established:
1. For years, Petitioner had been issuing fire
policies
to
the
Respondent,
and
these policies were
annually renewed.

SECTION 77. An insurer is entitled to payment of the

premium as soon as the thing insured
is exposed to the peril insured against.
Notwithstanding any agreement to the
contrary, no policy or contract of
insurance issued by an insurance
company is valid and binding unless
and until the premium thereof has
been paid, except in the case of a life
or an industrial life policy whenever
the grace period provision applies.

58

petitioner. Certainly, basic principles

of equity and fairness would not allow
the insurer to continue collecting and
accepting the premiums, although
paid on installments, and later deny
liability on the lame excuse that the
premiums were not prepaid in full.

This Section is a reproduction of Section 77 of P.D. No. 612

(The Insurance Code) promulgated on 18 December 1974.
In turn, this Section has its source in Section 72 of Act No.
2427 otherwise known as the Insurance Act as amended by
R.A. No. 3540, approved on 21 June 1963, which read:
SECTION 72. An insurer is entitled to payment of
premium as soon as the thing insured
is exposed to the peril insured against,
unless there is clear agreement to
grant the insured credit extension of
the premium due. No policy issued by
an insurance company is valid and
binding unless and until the premium
thereof has been paid. (Emphasis
supplied)

TASCEc

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

following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its
decision:
While the import of Section 77 is that prepayment of
premiums is strictly required as a
condition to the validity of the
contract, We are not prepared to rule
that the request to make installment
payments duly approved by the
insurer would prevent the entire
contract of insurance from going into
effect
despite
payment
and
acceptance of the initial premium or
first installment. Section 78 of the
Insurance Code in effect allows waiver
by the insurer of the condition of
prepayment
by
making
an
acknowledgment in the insurance
policy of receipt of premium as
conclusive evidence of payment so far
as to make the policy binding despite
the fact that premium is actually
unpaid. Section 77 merely precludes
the parties from stipulating that the
policy is valid even if premiums are
not paid, but does not expressly
prohibit an agreement granting credit
extension, and such an agreement is
not contrary to morals, good customs,
public order or public policy (De Leon,
The Insurance Code, p. 175). So is an
understanding to allow insured to pay
premiums in installments not so
prescribed. At the very least, both
parties should be deemed in estoppel
to question the arrangement they
have voluntarily accepted.

It can be seen at once that Section 77 does not restate the

portion of Section 72 expressly permitting an agreement to
extend the period to pay the premium. But are there
exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that
is, in case of a life or industrial life policy whenever the
grace period provision applies.
The second is that covered by Section 78 of the Insurance
Code, which provides:
SECTION 78. Any acknowledgment in a policy or
contract of insurance of the receipt of
premium is conclusive evidence of its
payment, so far as to make the policy
binding,
notwithstanding
any
stipulation therein that it shall not be
binding until premium is actually paid.

A third exception was laid down in Makati Tuscany

Condominium Corporation vs. Court of Appeals, 5 wherein
we ruled that Section 77 may not apply if the parties have
agreed to the payment in installments of the premium and
partial payment has been made at the time of loss. We said
therein, thus:
We hold that the subject policies are valid even if the
premiums were paid on installments.
The records clearly show that the
petitioners and private respondent
intended subject insurance policies to
be
binding
and
effective
notwithstanding
the
staggered
payment of the premiums. The initial
insurance contract entered into in
1982 was renewed in 1983, then in
1984. In those three years, the insurer
accepted all the installment payments.
Such acceptance of payments speaks
loudly of the insurer's intention to
honor the policies it issued to

By the approval of the aforequoted findings and conclusion

of the Court of Appeals, Tuscany has provided a fourth
exception to Section 77, namely, that the insurer may grant
credit extension for the payment of the premium. This
simply means that if the insurer has granted the insured a
credit term for the payment of the premium and loss occurs
before the expiration of the term, recovery on the policy
should be allowed even though the premium is paid after

59

the loss but within the credit term.

Moreover, there is nothing in Section 77 which prohibits the
parties in an insurance contract to provide a credit term
within which to pay the premiums. That agreement is not
against the law, morals, good customs, public order or
public policy. The agreement binds the parties. Article 1306
of the Civil Code provides:

of its police power. 2 The State may regulate in various

respects the relations between the insurer and the insured,
including the internal affairs of an insurance company,
without being violative of due process. 3
A requirement imposed by way of State regulation upon
insurers is the maintenance of an adequate legal reserve in
favor of those claiming under their policies. 4 The law
generally mandates that insurance companies should retain
an amount sufficient to guarantee the security of its
policyholders in the remote future, as well as the present,
and to cover any contingencies that may arise or may be
fairly anticipated. The integrity of this legal reserve is
threatened and undermined if a credit arrangement on the
payment of premium were to be sanctioned. Calculations
and estimations of liabilities under the risk insured against
are predicated on the basis of the payment of premiums,
the vital element that establishes the juridical relation
between the insured and the insurer. By legislative fiat, any
agreement to the contrary notwithstanding, the payment of
premium is a condition precedent to, and essential for, the
efficaciousness of the insurance contract, except (a) in case
of life or industrial life insurance where a grace period
applies, or (b) in case of a written acknowledgment by the
insurer of the receipt of premium, such as by a deposit
receipt, the written acknowledgment being conclusive
evidence of the premium payment so far as to make the
policy binding. 5

ARTICLE 1306. The contracting parties may establish

such stipulations clauses, terms and
conditions as they may deem
convenient, provided they are not
contrary to law, morals, good customs,
public order, or public policy.

Finally in the instant case, it would be unjust and

inequitable if recovery on the policy would not be permitted
against Petitioner, which had consistently granted a 60- to
90-day credit term for the payment of premiums despite its
full awareness of Section 77. Estoppel bars it from taking
refuge under said Section, since Respondent relied in good
faith on such practice. Estoppel then is the fifth exception to
Section 77.
WHEREFORE, the Decision in this case of 15 June 1999 is
RECONSIDERED and SET ASIDE, and a new one is hereby
entered DENYING the instant petition for failure of
Petitioner to sufficiently show that a reversible error was
committed by the Court of Appeals in its challenged
decision, which is hereby AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.
Bellosillo, Kapunan, Mendoza, Panganiban, Buena,
Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr. and SandovalGutierrez, JJ., concur.
Vitug, J., Please see separate opinion.
Melo, J., I join the dissents of Justices Vitug and Pardo.
Pardo, J., I dissent. See attached.
Puno and Quisumbing, JJ., I join the dissent of J. Pardo.

Section 77 of the Insurance Code provides:

"SECTION 77. An insurer is entitled to payment of the

premium as soon as the thing insured
is exposed to the peril insured against.
Notwithstanding any agreement to the
contrary, no policy or contract of
insurance issued by an insurance
company is valid and binding unless
and until the premium thereof has
been paid, except in the case of a life
or an industrial life policy whenever
the grace period provision applies."

Separate Opinions
VITUG, J .:
An essential characteristic of an insurance is its being
synallagmatic, a highly reciprocal contract where the rights
and obligations of the parties correlate and mutually
correspond. The insurer assumes the risk of loss which an
insured might suffer in consideration of premium payments
under a risk-distributing device. Such assumption of risk is a
component of a general scheme to distribute actual losses
among a group of persons, bearing similar risks, who make
ratable contributions to a fund from which the losses
incurred due to exposures to the peril insured against are
assured and compensated.
It is generally recognized that the business of insurance is
one imbued with public interest. 1 For the general good and
mutual protection of all the parties, it is aptly subjected to
regulation and control by the State by virtue of an exercise

This provision amended Section 72 of the then Insurance

Act by deleting the phrase, "unless there is a clear
agreement to grant the insured credit extension of the
premium due," and adding at the beginning of the second
sentence the phrase, "[n]otwithstanding any agreement to
the contrary." Commenting on the new provision, Dean
Hernando B. Perez states:
"Under the former rule, whenever the insured was
granted credit extension of the
premium due or given a period of
time to pay the premium on the policy
issued, such policy was binding
although premiums had not been paid
(Section 72, Insurance Act; 6 Couch 2d.
67). This rule was changed when the

60

present provision eliminated the

portion concerning credit agreement,
and
added
the
phrase
'notwithstanding any agreement to
the contrary' which precludes the
parties from stipulating that the policy
is valid even if premiums are not paid.
Hence, under the present law, the
policy is not valid and binding unless
and until the premium is paid (Arce vs.
Capital Insurance & Surety Co., Inc.,
117 SCRA 63). If the insurer wants to
favor the insured by making the policy
binding notwithstanding the nonpayment of premium, a mere credit
agreement would not be sufficient.
The remedy would be for the insurer
to acknowledge in the policy that
premiums were paid although they
were not, in which case the policy
becomes binding because such
acknowledgment is a conclusive
evidence of payment of premium
(Section 78). Thus, the Supreme Court
took note that under the present law,
Section 77 of the Insurance Code of
1978 has deleted the clause 'unless
there is a clear agreement to grant the
insured credit extension of the
premium due' (Velasco vs. Apostol,
173 SCRA 228)." 6

PARDO, J ., dissenting:
The majority resolved to grant respondent's motion for
reconsideration of the Court's decision promulgated on
June 15, 1999. By this somersault, petitioner must now pay
respondent's claim for insurance proceeds amounting to
P18,645,000.00, exclusive of interests, plus 25% of the
amount due as attorney's fees, P25,000.00 as litigation
expenses, and costs of suit, covering its Pasay City property
razed by fire. What an undeserved largess! Indeed, an
unjust enrichment at the expense of petitioner; even the
award of attorney's fees is bloated to 25% of the amount
due.
We cannot give our concurrence. We beg to dissent. We find
respondent's claim to be fraudulent:
First: Respondent Masagana surreptitiously tried to pay the
overdue premiums before giving written notice to petitioner
of the occurrence of the fire that razed the subject property.
This failure to give notice of the fire immediately upon its
occurrence blatantly showed the fraudulent character of its
claim. The fire totally destroyed the property on June 13,
1992; the written notice of loss was given only more than a
month later, on July 14, 1992, the day after respondent
surreptitiously paid the overdue premiums. Respondent
very well knew that the policy was not renewed on time.
Hence, the surreptitious attempt to pay overdue premiums.
Such act revealed a reprehensible disregard of the principle
that insurance is a contract uberrima fides, the most
abundant good faith. 1 Respondent is required by law and
by express terms of the policy to give immediate written
notice of loss. This must be complied with in the utmost
good faith.
Another badge of fraud is that respondent deviated from its
previous practice of coursing its premium payments
through its brokers. This time, respondent Masagana went
directly to petitioner and paid through its cashier with
manager's checks. Naturally, the cashier routinely accepted
the premium payment because he had no written notice of
the occurrence of the fire. Such fact was concealed by the
insured and not revealed to petitioner at the time of
payment.
Indeed, if as contended by respondent, there was a clear
agreement regarding the grant of a credit extension,
respondent would have given immediate written notice of
the fire that razed the property. This clearly showed
respondent's attempt to deceive petitioner into believing
that the subject property still existed and the risk insured
against had not happened.
Second: The claim for insurance benefits must fall as well
because the failure to give timely written notice of the fire
was a material misrepresentation affecting the risk insured
against.
Section 1 of the policy provides:

By weight of authority, estoppel cannot create a contract of

insurance, 7 neither can it be successfully invoked to create
a primary liability, 8 nor can it give validity to what the law so
proscribes as a matter of public policy. 9 So essential is the
premium payment to the creation of the vinculum juris
between the insured and the insurer that it would be
doubtful to have that payment validly excused even for a
fortuitous event. 10
The law, however, neither requires for the establishment of
the juridical tie, nor measures the strength of such tie by,
any specific amount of premium payment. A part payment
of the premium, if accepted by the insurer, can thus perfect
the contract and bring the parties into an obligatory
relation. 11 Such a payment puts the contract into full
binding force, not merely pro tanto, thereby entitling and
obligating the parties by their agreement. Hence, in case of
loss, full recovery less the unpaid portion of the premium
(by the operative act of legal compensation), can be had by
the insured and, correlatively, if no loss occurs the insurer
can demand the payment of the unpaid balance of the
premium. 12
In the instant case, no juridical tie appears to have been
established under any of the situations hereinabove
discussed. ICTHDE
WHEREFORE, I vote to deny the motion for reconsideration.
Melo, J., concurs.

"All benefits under the policy shall be forfeited if the

claim be in any respect fraudulent, or
if any false declaration be made or
used in support thereof, or if any false
declaration be made or used in
support thereof, or if any fraudulent

61

means or devices are used by the

insured or any one acting on his
behalf to obtain any benefit under the
policy." 2

Q: It is not written in the policy?

A: Yes.

In the factual milieu, the purported practice of giving 60 to

90-day credit extension for payment of premiums was a
disputed fact. But it is a given fact that the written notice of
loss was not immediately given. It was given only the day
after the attempt to pay the delayed premiums.
At any rate, the purported credit was a mere verbal
understanding of the respondent Masagana of an
agreement between the insurance company (petitioner)
and the insurance brokers of respondent Masagana. The
president of respondent Masagana admitted that the
insurance policy did not contain any proviso pertaining to
the grant of credit within which to pay the premiums.
Respondent Masagana merely deduced that a credit
agreement existed based on previous years' practice that
they had of delayed payments accepted by the insurer as
reflected on the face of the receipts issued by UCPB
evidencing the payment of premiums. SIaHDA

Q: You merely have verbal agreement with Ansons

Insurance Brokerage?

A: Yes; as shown in our mode of payment; in our

vouchers
and
the
receipts issued by the
insurance company." 3

It must be stressed that a verbal understanding of

respondent Masagana cannot amend an insurance policy.
In insurance practice, amendments or even corrections to a
policy are done by written endorsements or tickets
appended to the policy.
However, the date on the face of the receipts does not refer
to the date of actual remittance by respondent Masagana to
UCPB of the premium payments, but merely to the date of
remittance to UCPB of the premium payments by the
insurance brokers of respondent Masagana.

"Q: You also claim that you have 60 to 90 days credit

arrangement with UCPB;
is that correct?,

A: Yes, ma'am.

"Q: You also identified several receipts; here; official

receipts issued by UCPB
General
Insurance
Company, Inc., which has
been previously marked
as Exhibits "F", "G", "H",
"I", and "J" for the
plaintiff; is that correct?

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

been marked in evidence
as Exhibit "A", "B", "C",
"D", & "E"' for the plaintiff
and likewise, marked as
exhibits "1", "2", "3", "4",
& "5" for the defendant.
Could you show us, Mr.
witness where in these
policies does it show that
you are actually given 60
to
90
days
credit
arrangement with UCPB?

A: Yes.

Q: And, you would agree with me that the dates

indicated
in
these
particular
Official
Receipts (O. R.), merely
indicated the dates when
UCPB General Insurance
Company issued these
receipts? Do you admit
that, Mr. Witness?

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

Insurance Brokerage. It is
not written.

62

A: That was written in the receipts.

Hence, what has been established was the grant of credit to

the insurance brokers, not to the assured. The insurance
company recognized the payment to the insurance brokers
as payment to itself, though the actual remittance of the
premium payments to the principal might be made later.
Once payment of premiums is made to the insurance
broker, the assured would be covered by a valid and
binding insurance policy, provided the loss occurred after
payment to the broker has been made.
Assuming arguendo that the 60 to 90 day-credit-term has
been agreed between the parties, respondent could not still
invoke estoppel to back up its claim. "Estoppel is unavailing
in this case," 5 thus spoke the Supreme Court through the
pen of Justice Hilario G. Davide, Jr., now Chief Justice.
Mutatis mutandi, he may well be speaking of this case. He
added that "[E]stoppel can not give validity to an act that is
prohibited by law or against public policy." 6 The actual
payment of premiums is a condition precedent to the
validity of an insurance contract other than life insurance
policy. 7 Any agreement to the contrary is void as against the
law and public policy. Section 77 of the Insurance Code
provides:

Q: But, you would also agree that this did not

necessarily show the
dates when you actually
forwarded the checks to
your
broker,
Anson
Insurance Agency, for
payment
to
UCPB
General Insurance Co.
Inc., isn't it?

A: The actual support of this would be the cash

voucher of the company,
Masagana Telamart Inc.,
the date when they
picked up the check from
the company.

"An insurer is entitled to payment of the premium as

soon as the thing insured is exposed
to
the
peril
insured
against.
Notwithstanding any agreement to the
contrary, no policy or contract of
insurance issued by an insurance
company is valid and binding unless
and until the premium thereof has
been paid, except in the case of a life
or an industrial life policy whenever
the grace period provision applies."
[Emphasis supplied] EAIaHD

Q: And are these cash voucher with you?

A: I don't know if it is in the folder or in our folder,

now.

Q: So, you are not certain, whether or not you actually

delivered
the
checks
covered by these Official
Receipts to UCPB General
Insurance, on the dates
indicated?

An incisive reading of the afore-cited provision would show

that the emphasis was on the conclusiveness of the
acknowledgment in the policy of the receipt of premium,
notwithstanding the absence of actual payment of
premium, because of estoppel. Under the doctrine of
estoppel, an admission or representation is rendered
conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon.
"A party may not go back on his own acts and
representations to the prejudice of the other party who
relied upon them." 8
This is the only case of estoppel which the law considers a
valid exception to the mandatory requirement of prepayment of premium. The law recognized that the
contracting parties, in entering a contract of insurance, are
free to enter into stipulations and make personal
undertakings so long as they are not contrary to law or
public policy. However, the law is clear in providing that the
acknowledgment must be contained in the policy or
contract of insurance. Anything short of it would not fall
under the exception so provided in Section 78.

A: I would suppose it is few days earlier, when they

picked up the payment in
our office." 4

63

"No payment in respect of any premium shall be

deemed to be payment to the
Company unless a printed form of
receipt for the same signed by an
Official or duly appointed Agent of the
Company shall have been given to the
Insured, except when such printed
receipt is not available at the time of
payment and the company or its
representative accepts the premium in
which case a temporary receipt other
than the printed form may be issued
in lieu thereof. "Except only on those
specific cases where corresponding
rules and regulations which now we
are or may hereafter be in force
provide for the payment of the
stipulated premiums in periodic
installments at fixed percentages, it is
hereby
declared,
agreed
and
warranted that this policy shall be
deemed effective valid and binding
upon the Company when the
premiums thereof have actually been
paid in full and duly acknowledged in
a receipt signed by any authorized
official or representative/agent of the
Company in such manner as provided
herein." 9 [emphasis supplied]

Hence, because of respondent's failure to pay the

premiums prior to the occurrence of the fire insured
against, no valid and binding insurance policy was created
to cover the loss and destruction of the property. The fire
took place on June 13, 1992, twenty-two (22) days after the
expiration of the policy of fire insurance. The tender of
payment of premiums was made only thirty (30) days after
the occurrence of the fire, or on July 13, 1992. Respondent
Masagana did not give immediate notice to petitioner of the
fire as it occurred as required in the insurance policy.
Respondent Masagana tried to tender payment of the
premiums overdue surreptitiously before giving notice of
the occurrence of the fire. More importantly, the parties
themselves expressly stipulated that the insurance policy
would not be binding on the insurer unless the premiums
thereon had been paid in full. Section 2 of the policy
provides:
"2. This

policy

including any renewal and/or

endorsement thereon is not in force
until the premium has been fully paid
and duly receipted by the Company in
the manner provided therein.

"Any supplementary agreement seeking to amend this

condition prepared by agent, broker
or company official, shall be deemed
invalid and of no effect.

Thus, the insurance policy, including any renewal thereof or

any endorsements thereon shall not come in force until the
premiums have been fully paid and duly received by the
insurance Company. No payment in respect of any
premiums shall be deemed to be payment to the Insurance
Company unless a printed form of receipt for the same
signed by an Official or duly appointed Agent of the
Company shall be given to the insured.
The case of Tibay v. Court of Appeals 10 is in point. The issue
raised therein was: "May a fire insurance policy be valid,
binding and enforceable upon mere partial payment of
premium?" In the said case, Fortune Life and General
Insurance Co., Inc. issued Fire Insurance Policy No. 136171
in favor of Violeta R. Tibay and/or Nicolas Roraldo, on a twostorey residential building located at 5855 Zobel Street,
Makati City, together with all the personal effects therein,
The insurance was for P600,000.00, covering the period
from 23 January 1987 to 23 January 1988. On 23 January
1987, of the total premium of P2,983.50, Violeta Tibay only
paid P600.00, thus leaving a substantial balance unpaid. On
March 8, 1987, the insured building was completely
destroyed by fire. Two days later, or on 10 March 1987,
Violeta Tibay paid the balance of the premium. On the same
day, she filed with Fortune a claim for the proceeds of the
fire insurance policy.
In denying the claim of insurance, the Court ruled that "by
express agreement of the parties, no vinculum juris or bond

64

of law was to be established until full payment was effected

prior to the occurrence of the risk insured against. 11 As
expressly stipulated in the contract, full payment must be
made before the risk occurs for the policy to be considered
effective and in force. "No vinculum juris whereby the
insurer bound itself to indemnify the assured according to
law ever resulted from the fractional payment of premium."

made.
Verily, it is elemental law that the payment of premium is a
mandatory requisite to make the policy of insurance
effective. If the premium is not paid in the manner
prescribed in the policy as intended by the parties, the
policy is void and ineffective. 16
Basically a contract of indemnity, an insurance contract is
the law between the parties. Its terms and conditions
constitute the measure of the insurer's liability and
compliance therewith is a condition precedent to the
insured's right to recovery from the insurer. 17
||| (UCPB General Insurance Co., Inc. v. Masagana Telemart,
Inc., G.R. No. 137172 (Resolution), [April 4, 2001])

12

The majority cited the case of Makati Tuscany

Condominium Corp. vs. Court of Appeals 13 to support the
contention that the insurance policies subject of the instant
case were valid and effective. However, the factual situation
in that case was different from the case at bar.
In Tuscany, the Court held that the insurance policies were
valid and binding because there was partial payment of the
premiums and a clear understanding between the parties
that they had intended the insurance policies to be binding
and effective notwithstanding the staggered payment of the
premiums. On the basis of equity and fairness, the Court
ruled that there was a perfected contract of insurance upon
the partial payment of the premiums, notwithstanding the
provisions of Section 77 to the contrary. The Court would
not allow the insurer to continue collecting and accepting
the premiums, although paid on installments, and later
deny liability on the lame excuse that the premiums were
not prepaid in full. IaDSEA
There is no dispute that like in any other contract, the
parties to a contract of insurance enjoy the freedom to
stipulate on the terms and conditions that will govern their
agreement so long as they are not contrary to law, morals,
good customs, public order or public policy. However, the
agreement containing such terms and conditions must be
clear and definite.
In the case at bar, there was no clear and definite
agreement between petitioner and respondent on the grant
of a credit extension; neither was there partial payment of
premiums for petitioner to invoke the exceptional doctrine
in Tuscany.
Hence, the circumstances in the above cited case are totally
different from the case at bar, and consequently, not
applicable herein.
Insurance is an aleatory contract whereby one undertakes
for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent
event. 14 The consideration is the premium, which must be
paid at the time and in the manner specified in the policy,
and if not so paid, the policy will lapse and be forfeited by
its own terms. 15
With regard to the contention that the absence of notice of
non-renewal of the policy resulted to the automatic renewal
of the insurance policy, we find the contention untenable.
As above discussed, the law provides that only upon
payment of the insurance premium will the insurance policy
bind the insurer to the peril insured against and hold it
liable under the policy in case of loss.
Even in the absence of notice of non-renewal, the assured
would be bound by the law that a non life insurance policy
takes effect only on the date payment of the premium was

65

B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL

G.R. No. 195872. March 12, 2014.]

FORTUNE MEDICARE, INC., petitioner, vs. DAVID
ROBERT U. AMORIN, respondent.
DECISION
REYES, J p:
This is a petition for review on certiorari 1 under Rule 45 of
the Rules of Court, which challenges the Decision 2 dated
September 27, 2010 and Resolution 3 dated February 24,
2011 of the Court of Appeals (CA) in CA-G.R. CV No. 87255.
The Facts
David Robert U. Amorin (Amorin) was a cardholder/member
of Fortune Medicare, Inc. (Fortune Care), a corporation
engaged in providing health maintenance services to its
members. The terms of Amorin's medical coverage were
provided in a Corporate Health Program Contract 4 (Health
Care Contract) which was executed on January 6, 2000 by
Fortune Care and the House of Representatives, where
Amorin was a permanent employee. HSaEAD
While on vacation in Honolulu, Hawaii, United States of
America (U.S.A.) in May 1999, Amorin underwent an
emergency surgery, specifically appendectomy, at the St.
Francis Medical Center, causing him to incur professional
and hospitalization expenses of US$7,242.35 and
US$1,777.79, respectively. He attempted to recover from
Fortune Care the full amount thereof upon his return to
Manila, but
the
company
merely approved a
reimbursement of P12,151.36, an amount that was based
on the average cost of appendectomy, net of medicare
deduction, if the procedure were performed in an
accredited hospital in Metro Manila. 5 Amorin received
under protest the approved amount, but asked for its
adjustment to cover the total amount of professional fees
which he had paid, and eighty percent (80%) of the
approved standard charges based on "American standard",
considering that the emergency procedure occurred in the
U.S.A. To support his claim, Amorin cited Section 3, Article V
on Benefits and Coverages of the Health Care Contract, to
wit:
A. EMERGENCY

DIESaC

1. Whether

as an in-patient or out-patient,
FortuneCare shall reimburse the total
hospitalization cost including the
professional fee (based on the total
approved charges) to a member who
receives emergency care in a nonaccredited
hospital.
The
above
coverage applies only to Emergency
confinement
within
Philippine
Territory.
However,
if
the
emergency confinement occurs
in a foreign territory, Fortune
Care will be obligated to
reimburse or pay eighty (80%)
percent
of
the
approved
standard charges which shall
cover the hospitalization costs
and professional fees. . . . 6

Still, Fortune Care denied Amorin's request, prompting the

latter to file a complaint 7 for breach of contract with
damages with the Regional Trial Court (RTC) of Makati City.
For its part, Fortune Care argued that the Health Care
Contract did not cover hospitalization costs and
professional fees incurred in foreign countries, as the
contract's operation was confined to Philippine territory. 8
Further, it argued that its liability to Amorin was
extinguished upon the latter's acceptance from the
company of the amount of P12,151.36. DTAaCE
The RTC Ruling
On May 8, 2006, the RTC of Makati, Branch 66 rendered its
Decision 9 dismissing Amorin's complaint. Citing Section 3,
Article V of the Health Care Contract, the RTC explained:

CARE IN ACCREDITED HOSPITAL.

Whether as an in-patient or outpatient, the member shall be entitled
to full coverage under the benefits
provisions of the Contract at any
FortuneCare
accredited
hospitals
subject only to the pertinent provision
of Article VII (Exclusions/Limitations)
hereof. For emergency care attended
by non affiliated physician (MSU), the
member shall be reimbursed 80% of
the professional fee which should
have been paid, had the member
been treated by an affiliated
physician.
The
availment
of
emergency care from an unaffiliated
physician shall not invalidate or
diminish any claim if it shall be shown
to have been reasonably impossible to
obtain such emergency care from an
affiliated physician.

Taking the contract as a whole, the Court is convinced

that the parties intended to use the
Philippine standard as basis. Section 3
of the Corporate Health Care Program
Contract provides that:

xxx xxx xxx

On

66

the

basis of the clause providing for

reimbursement equivalent to 80% of
the professional fee which should
have been paid, had the member
been treated by an affiliated physician,
the Court concludes that the basis for
reimbursement shall be Philippine
rates. That provision, taken with
Article V of the health program
contract, which identifies affiliated

hospitals as only those accredited

clinics, hospitals and medical centers
located "nationwide" only point to the
Philippine standard as basis for
reimbursement.

Fortune Care's motion for reconsideration was denied in a

Resolution 16 dated February 24, 2011. Hence, the filing of
the present petition for review on certiorari.
The Present Petition
Fortune Care cites the following grounds to support its
petition: cHaCAS
I. The CA gravely erred in concluding that the
phrase
"approved
standard charges" is
subject
to
interpretation,
and
that
it
did
not
automatically
mean
"Philippine Standard";
and

The clause providing for reimbursement in case of

emergency operation in a foreign
territory equivalent to 80% of the
approved standard charges which
shall cover hospitalization costs and
professional fees, can only be
reasonably construed in connection
with the preceding clause on
professional fees to give meaning to a
somewhat vague clause. A particular
clause should not be studied as a
detached and isolated expression, but
the whole and every part of the
contract must be considered in fixing
the meaning of its parts. 10

II. The CA gravely erred in denying Fortune

Care's
motion
for
reconsideration, which
in effect affirmed its
decision
that
the
American
Standard
Cost shall be applied
in the payment of
medical
and
hospitalization
expenses
and
professional
fees
incurred
by
the
respondent. 17

In the absence of evidence to the contrary, the trial court

considered the amount of P12,15[1].36 already paid by
Fortune Care to Amorin as equivalent to 80% of the
hospitalization and professional fees payable to the latter
had he been treated in an affiliated hospital. 11 EHaDIC
Dissatisfied, Amorin appealed the RTC decision to the CA.
The CA Ruling
On September 27, 2010, the CA rendered its Decision 12
granting the appeal. Thus, the dispositive portion of its
decision reads:
WHEREFORE, all the foregoing premises considered, the instant
appeal is hereby GRANTED. The May 8, 2006 assailed Decision of
the Regional Trial Court (RTC) of Makati City, Branch 66 is hereby
REVERSED and SET ASIDE, and a new one entered ordering Fortune
Medicare, Inc. to reimburse [Amorin] 80% of the total amount of
the actual hospitalization expenses of $7,242.35 and professional
fee of $1,777.79 paid by him to St. Francis Medical Center pursuant
to Section 3, Article V of the Corporate Health Care Program
Contract, or their peso equivalent at the time the amounts became
due, less the [P]12,151.36 already paid by Fortunecare.
SO ORDERED. 13

The Court's Ruling

The petition is bereft of merit. DcHaET
The Court finds no cogent reason to disturb the CA's finding
that Fortune Care's liability to Amorin under the subject
Health Care Contract should be based on the expenses for
hospital and professional fees which he actually incurred,
and should not be limited by the amount that he would
have incurred had his emergency treatment been
performed in an accredited hospital in the Philippines.
We emphasize that for purposes of determining the liability
of a health care provider to its members, jurisprudence
holds that a health care agreement is in the nature of nonlife insurance, which is primarily a contract of indemnity.
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. 18
To aid in the interpretation of health care agreements, the
Court laid down the following guidelines in Philamcare
Health Systems v. CA: 19

In so ruling, the appellate court pointed out that, first,

health care agreements such as the subject Health Care
Contract, being like insurance contracts, must be liberally
construed in favor of the subscriber. In case its provisions
are 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. 14 Second,
the CA explained that there was nothing under Article V of
the Health Care Contract which provided that the Philippine
standard should be used even in the event of an emergency
confinement in a foreign territory. 15

When the terms of insurance contract contain

67

limitations on liability, courts

should construe them in such a
way as to preclude the insurer
from non-compliance with his
obligation. Being a contract of
adhesion, the terms of an
insurance contract are to be
construed strictly against
the party which prepared
the contract the insurer.
By reason of the exclusive control
of the insurance company over the
terms and phraseology of the
insurance contract, ambiguity must
be strictly interpreted against the
insurer and liberally in favor of the
insured,
especially
to
avoid
forfeiture. 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. 20 (Citations

obligations. Accordingly, they should

be scrutinized by the courts with
"extreme jealousy" and "care"
and with a "jaundiced eye." . . . . 22

(Citations omitted and emphasis

supplied)

In the instant case, the extent of Fortune Care's liability to

Amorin under the attendant circumstances was governed
by Section 3 (B), Article V of the subject Health Care
Contract, considering that the appendectomy which the
member had to undergo qualified as an emergency care,
but the treatment was performed at St. Francis Medical
Center in Honolulu, Hawaii, U.S.A., a non-accredited
hospital. We restate the pertinent portions of Section 3 (B):
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
ECaTAI

1. Whether

omitted and emphasis ours)

ISDHEa

Consistent with the foregoing, we reiterated in Blue Cross

Health Care, Inc. v. Spouses Olivares: 21
In Philamcare Health Systems, Inc. v. CA, we ruled that
a health care agreement is in the
nature of a non-life insurance. 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.

as an in-patient or out-patient,
FortuneCare shall reimburse the total
hospitalization cost including the
professional fee (based on the total
approved charges) to a member who
receives emergency care in a nonaccredited
hospital.
The
above
coverage applies only to Emergency
confinement
within
Philippine
Territory.
However,
if
the
emergency confinement occurs
in foreign territory, Fortune
Care will be obligated to
reimburse or pay eighty (80%)
percent
of
the
approved
standard charges which shall
cover the hospitalization costs
and professional fees. . . . 23

(Emphasis supplied) ICAcaH

The point of dispute now concerns the proper

interpretation of the phrase "approved standard charges",
which shall be the base for the allowable 80% benefit. The
trial court ruled that the phrase should be interpreted in
light of the provisions of Section 3 (A), i.e., to the extent that
may be allowed for treatments performed by accredited
physicians in accredited hospitals. As the appellate court
however held, this must be interpreted in its literal sense,
guided by the rule that any ambiguity shall be strictly
construed against Fortune Care, and liberally in favor of
Amorin.
The Court agrees with the CA. As may be gleaned from the
Health Care Contract, the parties thereto contemplated the
possibility of emergency care in a foreign country. As the

xxx xxx xxx

. . . [L]imitations of liability on the part of the insurer or
health care provider must be
construed in such a way as to
preclude
it
from
evading
its

68

contract recognized Fortune Care's liability for emergency

treatments even in foreign territories, it expressly limited its
liability only insofar as the percentage of hospitalization and
professional fees that must be paid or reimbursed was
concerned, pegged at a mere 80% of the approved standard
charges.
The word "standard" as used in the cited stipulation was
vague and ambiguous, as it could be susceptible of different
meanings. Plainly, the term "standard charges" could be
read as referring to the "hospitalization costs and
professional fees" which were specifically cited as
compensable even when incurred in a foreign country.
Contrary to Fortune Care's argument, from nowhere in the
Health Care Contract could it be reasonably deduced that
these "standard charges" referred to the "Philippine
standard", or that cost which would have been incurred if
the medical services were performed in an accredited
hospital situated in the Philippines. The RTC ruling that the
use of the "Philippine standard" could be inferred from the
provisions of Section 3 (A), which covered emergency care in
an accredited hospital, was misplaced. Evidently, the parties
to the Health Care Contract made a clear distinction
between emergency care in an accredited hospital, and that
obtained from a non-accredited hospital. The limitation on
payment based on "Philippine standard" for services of
accredited physicians was expressly made applicable only in
the case of an emergency care in an accredited hospital.
The proper interpretation of the phrase "standard charges"
could instead be correlated with and reasonably inferred
from the other provisions of Section 3 (B), considering that
Amorin's case fell under the second case, i.e., emergency
care in a non-accredited hospital. Rather than a
determination of Philippine or American standards, the first
part of the provision speaks of the full reimbursement of
"the total hospitalization cost including the
professional fee (based on the total approved charges)
to a member who receives emergency care in a nonaccredited hospital" within the Philippines. Thus, for
emergency care in non-accredited hospitals, this cited
clause declared the standard in the determination of the
amount to be paid, without any reference to and regardless
of the amounts that would have been payable if the
treatment was done by an affiliated physician or in an
affiliated hospital. For treatments in foreign territories, the
only qualification was only as to the percentage, or 80% of
that payable for treatments performed in non-accredited
hospital. EcIDaA
All told, in the absence of any qualifying word that clearly
limited Fortune Care's liability to costs that are applicable in
the Philippines, the amount payable by Fortune Care should
not be limited to the cost of treatment in the Philippines, as
to do so would result in the clear disadvantage of its
member. If, as Fortune Care argued, the premium and
other charges in the Health Care Contract were merely
computed on assumption and risk under Philippine cost
and, that the American cost standard or any foreign
country's cost was never considered, such limitations

should have been distinctly specified and clearly reflected in

the extent of coverage which the company voluntarily
assumed. This was what Fortune Care found appropriate
when in its new health care agreement with the House of
Representatives, particularly in their 2006 agreement, the
provision on emergency care in non-accredited hospitals
was modified to read as follows:
However, if the emergency confinement occurs in a
foreign territory, Fortunecare will
be obligated to reimburse or pay
one hundred (100%) percent
under approved Philippine
Standard covered charges for
hospitalization
costs
and
professional fees but not to exceed
maximum allowable coverage,
payable in pesos at prevailing
currency exchange rate at the time
of availment in said territory where
he/she is confined. . . . 24

Settled is the rule that ambiguities in a contract are

interpreted against the party that caused the ambiguity.
"[A]ny ambiguity in a contract whose terms are susceptible
of different interpretations must be read against the party
who drafted it." 25 ETaHCD
WHEREFORE, the petition is DENIED. The Decision dated
September 27, 2010 and Resolution dated February 24,
2011 of the Court of Appeals in CA-G.R. CV No. 87255 are
AFFIRMED.
SO ORDERED. IcCDAS
||| (Fortune Medicare, Inc. v. Amorin, G.R. No. 195872,
[March 12, 2014])

69

[G.R. No. 109937. March 21, 1994.]

DEVELOPMENT BANK OF THE PHILIPPINES,
petitioner, vs. COURT OF APPEALS and the ESTATE
OF THE LATE JUAN B. DANS, represented by
CANDIDA G. DANS, and the DBP MORTGAGE
REDEMPTION INSURANCE POOL, respondents.
DECISION
QUIASON, J p:
This is a petition for review on certiorari under Rule 45 of
the Revised Rules of Court to reverse and set aside the
decision of the Court of Appeals in CA-G.R CV No. 26434 and
its resolution denying reconsideration thereof.
We affirm the decision of the Court of Appeals with
modification.
I

reimbursed; (2) that the mortgage debt of the deceased be

declared fully paid; and (3) that damages be awarded. LexLib
The DBP and the DBP MRI Pool separately filed their
answers, with the former asserting a cross-claim against the
latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the
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. cdrep
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:

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. Cdpr
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. LibLex
On October 21, 1987, DBP apprised Candida Dans of the
disapproval of her late husband's MRI application. The DBP
offered to refund the premium of P1,476.00 which the
deceased 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 anex 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

"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 setoff 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

70

fees;

to its account with full knowledge that it was payment for

Dan's premium. There was, as a result, no perfected
contract of insurance; hence, the DBP MRI Pool cannot be
held liable on a contract that does not exist.
The liability of DBP is another matter. prcd
It was DBP, as a matter of policy and practice, that required
Dans, the borrower, to secure MRI coverage. Instead of
allowing Dans to look for his own insurance carrier or some
other form of insurance policy, DBP compelled him to apply
with the DBP MRI Pool for MRI coverage. When Dan's loan
was released on August 11, 1987, DBP already deducted
from the proceeds thereof the MRI premium. Four days
latter, DBP made Dans fill up and sign his application for
MRI, as well as his health statement. The DBP later
submitted both the application form and health statement
to the DBP MRI Pool at the DBP Main Building, Makati Metro
Manila. As service fee, DBP deducted 10 percent of the
premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the
first as a lender, and the second as an insurance agent.
As an insurance agent, DBP made Dans go through the
motion of applying for said insurance, thereby leading him
and his family to believe that they had already fulfilled all
the requirements for the MRI and that the issuance of their
policy was forthcoming. Apparently, DBP had full knowledge
that Dan's application was never going to be approved. The
maximum age for MRI acceptance is 60 years as clearly and
specifically provided in Article 1 of the Group Mortgage
Redemption Insurance Policy signed in 1984 by all the
insurance companies concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the
agent who acts as such is not personally liable to the party
with whom he contracts, unless he expressly binds himself
or exceeds the limits of his authority without giving such
party sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI
when its clients are more than 60 years of age (Exh. "1Pool"). 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. LLphil
If the third person dealing with an agent is unaware of the
limits of the authority conferred by the principal on the
agent and he (third person) has been deceived by the nondisclosure 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

4. To
pay
plaintiff 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 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

71

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 nondisclosure 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:

(Refractories Corporation v. Intermediate Appellate Court,

176 SCRA 539 [1989]; Choa Tek Hee v. Philippine Publishing
Co., 34 Phil. 447 [1916]). Speculative damages are too
remote to be included in an accurate estimate of damages
(Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844
[1918]).
While Dans is not entitled to compensatory damages, he is
entitled to moral damages. No proof of pecuniary loss is
required in the assessment of said kind of damages (Civil
Code of Philippines, Art. 2216). The same may be recovered
in acts referred to in Article 2219 of the Civil Code.
The assessment of moral damages is left to the discretion of
the court according to the circumstances of each case (Civil
Code of the Philippines, Art. 2216). Considering that DBP
had offered to pay P30,000.00 to respondent Estate in ex
gratia settlement of its claim and that DBP's non-disclosure
of the limits of its authority amounted to a deception to its
client, an award of moral damages in the amount of
P50,000.00 would be reasonable.
The award of attorney's fees is also just and equitable
under the circumstances (Civil Code of the Philippines,
Article 2208 [11]). LLphil
WHEREFORE, the decision of the Court of Appeals in CA
G.R.-CV No. 26434 is MODIFIED and petitioner DBP is
ORDERED: (1) to REIMBURSE respondent Estate of Juan B.
Dans the amount of P1,476.00 with legal interest from the
date of the filing of the complaint until fully paid; and (2) to
PAY said Estate the amount of Fifty Thousand Pesos
(P50,000.00) as moral damages and the amount of Ten
Thousand Pesos (P10,000.00) as attorney's fees. With costs
against petitioner.
SO ORDERED.
||| (DBP v. Court of Appeals, G.R. No. 109937, [March 21,
1994])

"Every person must, in

the exercise of his rights and in the
performance of his duties, act with
justice give everyone his due and
observe honesty and good faith." LexLib

Article 20 provides:

"Every
person
who,
contrary to law, willfully or negligently
causes damage to another, shall
indemnify the latter for the same."

Article 21 provides:
"Any person, who willfully
causes loss or injury to another in a
manner that is contrary to morals,
good customs or public policy shall
compensate the latter for the
damage."

The DBP's liability, however, cannot be for the entire value

of the insurance policy. To assume that were it not for DBP's
concealment of the limits of its authority, Dans would have
secured an MRI from another insurance company, and
therefore would have been fully insured by the time he
died, is highly speculative. Considering his advanced age,
there is no absolute certainty that Dans could obtain an
insurance coverage from another company. It must also be
noted that Dans died almost immediately, i.e., on the
nineteenth day after applying for the MRI, and on the
twenty-third day from the date of release of his loan. LLphil
One is entitles to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved (Civil
Code of the Philippines, Art. 2199). Damages, to be
recoverable, must not only be capable of proof, but must be
actually proved with a reasonable degree of certainty

72

[G.R. No. L-24833. September 23, 1968.]

FIELDMEN'S INSURANCE CO., INC., petitioner, vs.
MERCEDES VARGAS VDA. DE SONGCO, Et Al. and
COURT OF APPEALS, respondents.
Jose S. Suarez for petitioner.
Eligio G. Guzman for respondents.
SYLLABUS
1.COMMERCIAL LAWS; INSURANCE CONTRACTS; COMMON
CARRIER LIABILITY INSURANCE; INSURER WHO REPRESENTS
INSURABILITY OF VEHICLE ESTOPPED FROM DENYING
LIABILITY THEREON. After petitioner FIELDMEN'S
Insurance Co., Inc., had led the insured Federico Songco to
believe that he could qualify under the common carrier
liability insurance policy, and to enter into contract of
insurance paying the premiums due, it could not, thereafter,
in any litigation arising out of such representation, be
permitted to change its stand to the detriment of the heirs
of the insured. As estoppel is primarily based on the
doctrine of good faith and the avoidance of harm that will
befall the innocent party due to its injurious reliance, the
failure to apply it in this case would result in a gross travesty
of justice.
2.ID.; ID.; ID.; INSURER ESTOPPED FROM ASSERTING
BREACH OF IMPOSSIBLE CONDITION IN THE CONTRACT.
Why liability under the terms of the policy was inescapable
was set forth in the decision of respondent Court of
Appeals: Thus: "Since some of the conditions contained in
the policy issued by the defendant-appellant were
impossible to comply with under the existing conditions at
the time and 'inconsistent with the known facts,' the insurer
'is estopped from asserting breach of such conditions. From
this jurisprudence, we find no valid reason to deviate and
consequently hold that the decision appealed from should
be affirmed. The injured parties, to wit, Carlos Songco,
Angelito Songco and Jose Manuel, for whose hospital and
medical expenses the defendant company was being made
liable, were passengers of the jeepney at the time of the
occurrence, and Rodolfo Songco, for whose burial expenses
the defendant company was also being made liable, was the
driver of the vehicle in question. Except for the fact that
they were not fare-paying passengers, their status as
beneficiaries under the policy is recognized therein."
DECISION
FERNANDO, J p:
An insurance firm, petitioner FIELDMEN'S Insurance Co.,
Inc., was not allowed to escape liability under a common
carrier insurance policy on the pretext that what was
insured, not once but twice, was a private vehicle and not a
common carrier, the policy being issued upon the insistence
of its agent who discounted fears of the insured that his
privately owned vehicle might not fall within its terms, the
insured moreover being "a man of scant education",
finishing only the first grade. So it was held in a decision of
the lower court thereafter affirmed by respondent Court of
Appeals. Petitioner in seeking the review of the above
decision of respondent Court of Appeals cannot be
sanguine as to entertain the belief that a different outcome
could be expected. To be more explicit, we sustain the

Court of Appeals.
The facts as found by respondent Court of Appeals, binding
upon us, follow: "This is a peculiar case. Federico Songco of
Floridablanca, Pampanga, a man of scant education, being
only a first grader . . ., owned a private jeepney with Plate
No. 41-289 for the year 1960. On September 15, 1960, as
such private vehicle owner, he was induced by FIELDMEN'S
Insurance Company Pampanga agent Benjamin Sambat to
apply for a Common Carrier's Liability Insurance Policy
covering his motor vehicle .. Upon paying an annual
premium of P16.50, defendant FIELDMEN'S Insurance
Company Inc. issued on September 19, 1960, Common
Carriers Accident Insurance Policy No. 45-HO-4254 . . . the
duration of which will be for one (1) year, effective
September 15, 1960 to September 15, 1961. On September
22, 1961, the defendant company, upon payment of the
corresponding premium, renewed the policy by extending
the coverage from October 15, 1961 to October 15, 1962.
This time Federico Songco's private jeepney carried Plate
No. J-68136- Pampanga - 1961 . . . On October 29, 1961,
during the effectivity of the renewed policy, the insured
vehicle while being driven by Rodolfo Songco, a duly
licensed driver and son of Federico (the vehicle owner)
collided with a car in the municipality of Calumpit, province
of Bulacan, as a result of which mishap Federico Songco
(father) and Rodolfo Songco (son) died, Carlos Songco
(another son), the latter's wife, Angelita Songco, and a
family friend by the name of Jose Manuel sustained physical
injuries of varying degrees." 1
It was further shown according to the decision of
respondent Court of Appeals: "Amor Songco, 42-year-old
son of deceased Federico Songco, testifying as witness,
declared that when insurance agent Benjamin Sambat was
inducing his father to insure his vehicle, he butted in saying:
'That cannot be, Mr. Sambat, because our vehicle is an
'owner' private vehicle and not for passengers,' to which
agent Sambat replied: 'whether our vehicle was an 'owner'
type or for passengers it could be insured because their
company is not owned by the Government and the
Government has nothing to do with their company. So they
could do what they please whenever they believe a vehicle
is insurable' . . . In spite of the fact that the present case was
filed and tried in the CFI Pampanga, the defendant company
did not even care to rebut Amor Songco's testimony by
calling on the witness-stand agent Benjamin Sambat, its
Pampanga Field Representative." 2
The plaintiffs in the lower court, likewise respondents here,
were the surviving widow and children of the deceased
Federico Songco as well as the injured passenger Jose
Manuel. On the above facts they prevailed, as had been
mentioned, in the lower court and in the respondent Court
of Appeals.
The basis for the favorable judgment is the doctrine
announced in Qua Chee Gan vs. Law Union Bank and Rock
Insurance Co., Ltd., 3 with Justice J.B.L. Reyes speaking for
the Court. It is now beyond question that where inequitable
conduct is shown by an insurance firm, it is "estopped from

73

enforcing forfeitures in its favor, in order to forestall fraud

or imposition on the insured." 4
As much, if not much more so than the Qua Chee Gan
decision, his is a case where the doctrine of estoppel
undeniably calls for application. After petitioner FIELDMEN'S
Insurance Co., Inc., had led the insured Federico Songco to
believe that he could qualify under the common carrier
liability insurance policy, and to enter into contract of
insurance paying the premiums due, it could not, thereafter,
in any litigation arising out of such representation, be
permitted to change its stand to the detriment of the heirs
of the insured. As estoppel is primarily based on the
doctrine of good faith and the avoidance of harm that will
befall the innocent party due to its injurious reliance, the
failure to apply it in this case would result in a gross travesty
of justice.
That is all that needs be said insofar as the first alleged
error of respondent Court of Appeals is concerned,
petitioner being adamant in its far-from-reasonable plea
that estoppel could not be invoked by the heirs of the
insured as a bar to the alleged breach of warranty and
condition in the policy. It would now rely on the fact that the
insured owned a private vehicle, not a common carrier,
something which it knew all along, when not once but twice
its agent, no doubt without any objection in its part, exerted
the utmost pressure on the insured, a man of scant
education, to enter into such a contract.
Nor is there any merit to the second alleged error of
respondent Court that no legal liability was incurred under
the policy by petitioner. Why liability under the terms of the
policy 5 was inescapable was set forth in the decision of
respondent Court of Appeals. Thus: "Since some of the
conditions contained in the policy issued by the defendantappellant were impossible to comply with under the
existing conditions at the time and 'inconsistent with the
known facts,' the insurer 'is estopped from asserting breach
of such conditions.' From this jurisprudence, we find no
valid reason to deviate and consequently hold that the
decision appealed from should be affirmed. The injured
parties, to wit, Carlos Songco, Angelito Songco and Jose
Manuel, for whose hospital and medical expenses the
defendant company was being made liable, were
passengers of the jeepney at the time of the occurrence,
and Rodolfo Songco, for whose burial expenses the
defendant company was also being made liable was the
driver of the vehicle in question. Except for the fact, that
they were not fare-paying passengers, their status as
beneficiaries under the policy is recognized therein." 6
Even if it be assumed that there was an ambiguity, an
excerpt from the Qua Chee Gan decision would reveal anew
the weakness of petitioner's contention. Thus: "Moreover,
taking into account the well known rule that ambiguities or
obscurities must be strictly interpreted against the party
that caused them, the 'memo of warranty' invoked by
appellant bars the latter from questioning the existence of
the appliances called for in the insured premises, since its
initial expression, 'the under-noted appliances for the

extinction of fire being kept on the premises insured

hereby, . . . it is hereby warranted . . .', admits of
interpretation as an admission of the existence of such
appliances which appellant cannot now contradict, should
the parol evidence rule apply." 7
To the same effect is the following citation from the same
leading case: "This rigid application of the rule on
ambiguities has become necessary in view of current
business practices. The courts cannot ignore that nowadays
monopolies, cartels and concentrations of capital, endowed
with overwhelming economic power, manage to impose
upon parties dealing with them cunningly prepared
'agreements' that the weaker party may not change one
whit, his participation in the 'agreement' being reduced to
the alternative to 'take it or leave it' labelled since Raymond
Saleilles 'contracts by adherence' (contracts d' adhesion), in
contrast to these entered into by parties bargaining on an
equal footing, such contracts (of which policies of insurance
and international bills of lading are prime example)
obviously call for greater strictness and vigilance on the part
of courts of justice with a view to protecting the weaker
party from abuses and imposition, and prevent their
becoming traps for the unwary (New Civil Code, Article 24;
Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February
1942)." 8
The last error assigned which would find fault with the
decision of respondent Court of Appeals insofar as it
affirmed the lower court award for exemplary damages as
well as attorney's fees is, on its face, of no persuasive force
at all.
The conclusion that inescapably emerges from the above is
the correctness of the decision of respondent Court of
Appeals sought to be reviewed. For, to borrow once again
from the language of the Qua Chee Gan opinion: "The
contract of insurance is one of perfect good faith (uberrima
fides) not for the insured alone, but equally so for the
insurer; in fact, it is more so for the latter, since its
dominant bargaining, position carries with it stricter
responsibility." 9
This is merely to stress that while the morality of the
business world is not the morality of institutions of
rectitude like the pulpit and the academe, it cannot descend
so low as to be another name for guile or deception.
Moreover, should it happen thus, no court of justice should
allow itself to lend its approval and support.
We have no choice but to recognize the monetary
responsibility of petitioner FIELDMEN'S Insurance Co., Inc. It
did not succeed in its persistent effort to avoid complying
with its obligation in the lower court and the Court of
Appeals. Much less should it find any receptivity from us for
its unwarranted and unjustified plea to escape from its
liability.
WHEREFORE, the decision of respondent Court of Appeals
of July 20, 1965, is affirmed in its entirety. Costs against
petitioner FIELDMEN'S Insurance Co., Inc.
||| (Fieldmen's Insurance Co., Inc. v. Vda. de Songco, G.R. No.
L-24833, [September 23, 1968])

74

[G.R. No. 119599. March 20, 1997.]

MALAYAN INSURANCE CORPORATION, petitioner, vs.
THE HON. COURT OF APPEALS and TKC
MARKETING CORPORATION, respondents.
Quasha & Ancheta Pena & Nolasco for petitioner.
Lasam and Associates for private respondent.
Balgos and Perez co-counsel for private respondent.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE; MARINE INSURANCE;
FREE FROM CAPTURE AND SEIZURE CLAUSE; "ARRESTS"
CAUSED BY ORDINARY JUDICIAL PROCESS, INCLUDED
AMONG THE COVERED RISKS. With the incorporation of
subsection 1.1 of Section 1 of the Institute War Clauses,
however, this Court agrees with the Court of Appeals and
the private respondent that "arrest" caused by ordinary
judicial process is deemed included among the covered
risks. This interpretation becomes inevitable when
subsection 1.1. of Section 1 of the Institute War Clauses
provided that "this insurance covers the risks excluded from
the Standard Form of English Marine Policy by the clause
'warranted free of capture, seizure, arrest, etc. . . ." or the F.
C. & S. Clause. Jurisprudentially, "arrest" caused by ordinary
judicial process is also a risk excluded from the Standard
Form of English Marine Policy by the F. C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest"
caused by ordinary Judicial process is not included in the
covered risk simply because the F. C. & S. Clause under the
Institute War Clauses can only be operative in case of
hostilities or warlike operations on account of its heading
"Institute War Clauses." This Court agrees with the Court of
Appeals when it held that ". . . Although the F.C. & S. Clause
may have originally been inserted in marine policies to
protect against risks of war, (see generally G. Gilmore & C.
Black., The Law of Admiralty Section 2-9, at 71-73 [2d Ed.
1975]), its interpretation in recent years to include seizure
or detention by civil authorities seems consistent with the
general purposes of the clause, . . ." In fact, petitioner itself
averred that subsection 1.1 of Section 1 of the Institute War
Clauses included "arrest" even if it were not a result of
hostilities or warlike operations. In this regard, since what
was also excluded in the deleted F. C. & S. Clause was
"arrest" occasioned by ordinary judicial process, logically,
such "arrest" would now become a covered risk under
subsection 1.1 of Section 1 of the Institute War Clauses,
regardless of whether or not said "arrest" by civil authorities
occurred in a state of war.
2. STATUTORY CONSTRUCTION; STRAINED INTERPRETATION
LEADING TO ABSURD CONCLUSION MUST BE AVOIDED.
It has been held that a strained interpretation which is
unnatural and forced, as to lead to an absurd conclusion or
to render the policy nonsensical, should, by all means, be
avoided.
3. COMMERCIAL LAW; INSURANCE; POLICIES CONSTRUED
STRICTLY AGAINST THE INSURER Likewise, it must be
borne in mind that such contracts are invariably prepared
by the companies and must be accepted by the insured in
the form in which they are written. Any construction of a

marine policy rendering it void should be avoided. Such

policies will, therefore, be construed strictly against the,
company in order to avoid a forfeiture, unless no other
result is possible from the language used.
4. ID.; ID.; MARINE INSURANCE; EXCEPTION OR EXEMPTION
OF COVERAGE MUST BE EXPRESSED IN CLEAR LANGUAGE;
CASE AT BAR. If a marine insurance company desires to
limit or restrict the operation of the general provisions of its
contract by special proviso, exception, or exemption, it
should express such limitation in clear and unmistakable
language. Obviously, the deletion of the F.C. & S. Clause and
the consequent incorporation of subsection 1.1 of Section 1
of the Institute War Clauses (Cargo) gave rise to ambiguity.
If the risk of arrest occasioned by ordinary judicial process
was expressly indicated as an exception in the subject
policies, there would have been no controversy with respect
to the interpretation of the subject clauses.
5. ID.; ID.; EXCEPTIONS TO GENERAL COVERAGE ARE
CONSTRUED MOST STRONGLY AGAINST THE INSURER.
Be that as it may, exceptions to the general coverage are
construed most strongly against the company. Even an
express exception in a policy is to be construed against the
underwriters by whom the policy is named, and for whose
benefit the exception is introduced.
6. ID.; ID.; SHOULD BE INTERPRETED TO CARRY OUT THE
PURPOSE FOR WHICH THE PARTIES ENTERED INTO THE
CONTRACT. An insurance contract should be so
interpreted as to carry out the purpose for which the
parties entered into the contract which is, to insure against
risks of loss or damage to the goods. Such interpretation
should result from the natural and reasonable meaning of
language in the policy. Where restrictive provisions are
open to two interpretations, that which is most favorable to
the insured is adopted.
7. ID.; ID.; BEING A CONTRACT OF ADHESION, ANY
AMBIGUITY SHOULD BE RESOLVED AGAINST THE INSURER.
Indemnity and liability insurance policies are construed
in accordance with the general rule of resolving any
ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of
insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in
other words, it should be construed liberally in favor of the
insured and strictly against the insurer. Limitations of
liability should be regarded with extreme jealousy and must
be construed in such a way as to preclude the insurer from
non-compliance with its obligations.
DECISION
ROMERO, J p:
Assailed in this petition for review on certiorari is the
decision of the Court of Appeals in CA-G.R. No. 43023 1
which affirmed, with slight modification, the decision of the
Regional Trial Court of Cebu, Branch 15.
Private respondent TKC Marketing Corp. was the
owner/consignee of some 3,189.171 metric tons of soya
bean meal which was loaded on board the ship MV Al
Kaziemah on or about September 8, 1989 for carriage from

75

the port of Rio del Grande, Brazil, to the port of Manila. Said
cargo was insured against the risk of loss by petitioner
Malayan Insurance Corporation for which it issued two (2)
Marine Cargo Policy Nos. M/LP 97800305 amounting to
P18,986,902.45 and M/LP 97800306 amounting to
P1,195,005.45, both dated September 1989.
While the vessel was docked in Durban, South Africa on
September 11, 1989 enroute to Manila, the civil authorities
arrested and detained it because of a lawsuit on a question
of ownership and possession. As a result, private
respondent notified petitioner on October 4, 1989 of the
arrest of the vessel and made a formal claim for the
amount of US$916,886.66, representing the dollar
equivalent on the policies, for non-delivery of the cargo.
Private respondent likewise sought the assistance of
petitioner on what to do with the cargo.
Petitioner replied that the arrest of the vessel by civil
authority was not a peril covered by the policies. Private
respondent, accordingly, advised petitioner that it might
tranship the cargo and requested an extension of the
insurance coverage until actual transshipment, which
extension was approved upon payment of additional
premium. The insurance coverage was extended under the
same terms and conditions embodied in the original
policies while in the process of making arrangements for
the transshipment of the cargo from Durban to Manila,
covering the period October 4-December 19, 1989.
However, on December 11, 1989, the cargo was sold in
Durban, South Africa, for US$154.40 per metric ton or a
total of P10,304,231.75 due to its perishable nature which
could no longer stand a voyage of twenty days to Manila
and another twenty days for the discharge thereof. On
January 5, 1990, private respondent forthwith reduced its
claim to US$448,806.09 (or its peso equivalent of
P9,879,928.89 at the exchange rate of P22.0138 per $1.00)
representing private respondent's loss after the proceeds of
the sale were deducted from the original claim of
$916,886.66 or P20,184,159.55.
Petitioner maintained its position that the arrest of the
vessel by civil authorities on a question of ownership was
an excepted risk under the marine insurance policies. This
prompted private respondent to file a complaint for
damages praying that aside from its claim, it be reimbursed
the amount of P128,770.88 as legal expenses and the
interest it paid for the loan it obtained to finance the
shipment totalling P942,269.30. In addition, private
respondent asked for moral damages amounting to
P200,000.00,
exemplary
damages
amounting
to
P200,000.00 and attorney's fees equivalent to 30% of what
will be awarded by the court.
The lower court decided in favor of private respondent and
required petitioner to pay, aside from the insurance claim,
consequential and liquidated damages amounting to
P1,024,233.88,
exemplary
damages
amounting
to
P100,000.00, reimbursement in the amount equivalent to
10% of whatever is recovered as attorney's fees as well as
the costs of the suit. On private respondent's motion for

reconsideration, petitioner was also required to further pay

interest at the rate of 12% per annum on all amounts due
and owing to the private respondent by virtue of the lower
court decision counted from the inception of this case until
the same is paid.
On appeal, the Court of Appeals affirmed the decision of the
lower court stating that with the deletion of Clause 12 of the
policies issued to private respondent, the same became
automatically covered under subsection 1.1 of Section 1 of
the Institute War Clauses. The arrests, restraints or
detainments contemplated in the former clause were those
effected by political or executive acts. Losses occasioned by
riot or ordinary judicial processes were not covered therein.
In other words, arrest, restraint or detainment within the
meaning of Clause 12 (or F.C. & S. Clause) rules out
detention by ordinary legal processes. Hence, arrests by
civil authorities, such as what happened in the instant case,
is an excepted risk under Clause 12 of the Institute Cargo
Clause or the F.C. & S. Clause. However, with the deletion of
Clause 12 of the Institute Cargo Clause and the consequent
adoption or institution of the Institute War Clauses (Cargo),
the arrest and seizure by judicial processes which were
excluded under the former policy became one of the
covered risks.
The appellate court added that the failure to deliver the
consigned goods in the port of destination is a loss
compensable, not only under the Institute War Clause but
also under the Theft, Pilferage, and Non-delivery Clause
(TNPD) of the insurance policies, as read in relation to
Section 130 of the Insurance Code and as held in Williams v.
Cole. 2
Furthermore, the appellate court contended that since the
vessel was prevented at an intermediate port from
completing the voyage due to its seizure by civil authorities,
a peril insured against, the liability of petitioner continued
until the goods could have been transhipped. But due to the
perishable nature of the goods, it had to be promptly sold
to minimize loss. Accordingly, the sale of the goods being
reasonable and justified, it should not operate to discharge
petitioner from its contractual liability.
Hence this petition, claiming that the Court of Appeals
erred:
1. In ruling that the arrest of the vessel was a risk
covered under the subject insurance
policies.

2. In ruling that there was constructive total loss over

the cargo.

3. In ruling that petitioner was in bad faith in declining

private respondent's claim.

76

4. In giving undue reliance to the doctrine that

insurance
policies
are
strictly
construed against the insurer.

clause which is a standard form in any marine insurance

policy. Said clause reads:
"Touching the adventures which the said MALAYAN
INSURANCE CO., are content to bear,
and to take upon them in this voyage;
they are of the Seas; Men-of-War, Fire,
Enemies, Pirates, Rovers, Thieves,
Jettisons, Letters of Mart and Counter
Mart, Surprisals, Takings of the Sea,
Arrests, Restraints and Detainments of
all Kings, Princess and Peoples, of
what Nation, condition, or quality
soever, Barratry of the Master and
Mariners, and of all other Perils,
Losses, and Misfortunes, that have
come to hurt, detriment, or damage of
the said goods and merchandise or
any part thereof . AND in case of any
loss or misfortune it shall be lawful to
the ASSURED, their factors, servants
and assigns, to sue, labour, and travel
for, in and about the defence,
safeguards, and recovery of the said
goods and merchandises, and ship, &
c., or any part thereof, without
prejudice to this INSURANCE; to the
charges whereof the said COMPANY,
will contribute according to the rate
and quantity of the sum herein
INSURED. AND it is expressly declared
and agreed that no acts of the Insurer
or Insured in recovering, saving, or
preserving the Property insured shall
be considered as a Waiver, or
Acceptance of Abandonment. And it is
agreed by the said COMPANY, that this
writing or Policy of INSURANCE shall
be of as much Force and Effect as the
surest Writing or Policy of INSURANCE
made in LONDON. And so the said
MALAYAN INSURANCE COMPANY,
INC., are contented, and do hereby
promise and bind themselves, their
Heirs, Executors, Goods and Chattel,
to the ASSURED, his or their Executors,
Administrators, or Assigns, for the true
Performance
of
the
Premises;
confessing themselves paid the
Consideration due unto them for this
INSURANCE at and after the rate
arranged." (Emphasis supplied)

In assigning the first error, petitioner submits the following:

(a) an arrest by civil authority is not compensable since the
term "arrest" refers to "political or executive acts" and does
not include a loss caused by riot or by ordinary judicial
process as in this case; (b) the deletion of the Free from
Capture or Seizure Clause would leave the assured covered
solely for the perils specified by the wording of the policy
itself; (c) the rationale for the exclusion of an arrest
pursuant to judicial authorities is to eliminate collusion
between unscrupulous assured and civil authorities.
As to the second assigned error, petitioner submits that any
loss which private respondent may have incurred was in the
nature and form of unrecovered acquisition value brought
about by a voluntary sacrifice sale and not by arrest,
detention or seizure of the ship.
As to the third issue, petitioner alleges that its act of
rejecting the claim was a result of its honest belief that the
arrest of the vessel was not a compensable risk under the
policies issued. In fact, petitioner supported private
respondent by accommodating the latter's request for an
extension of the insurance coverage, notwithstanding that it
was then under no legal obligation to do so. cdasia
Private respondent, on the other hand, argued that when it
appealed its case to the Court of Appeals, petitioner did not
raise as an issue the award of exemplary damages. It
cannot now, for the first time, raise the same before this
Court. Likewise, petitioner cannot submit for the first time
on appeal its argument that it was wrong for the Court of
Appeals to have ruled the way it did based on facts that
would need inquiry into the evidence. Even if inquiry into
the facts were possible, such was not necessary because
the coverage as ruled upon by the Court of Appeals is
evident from the very terms of the policies.
It also argued that petitioner, being the sole author of the
policies, "arrests" should be strictly interpreted against it
because the rule is that any ambiguity is to be taken contra
proferentum. Risk policies should be construed reasonably
and in a manner as to make effective the intentions and
expectations of the parties. It added that the policies clearly
stipulate that they cover the risks of non-delivery of an
entire package and that it was petitioner itself that invited
and granted the extensions and collected premiums
thereon.
The resolution of this controversy hinges on the
interpretation of the "Perils" clause of the subject policies in
relation to the excluded risks or warranty specifically stated
therein.
By way of a historical background, marine insurance
developed as an all-risk coverage, using the phrase "perils
of the sea" to encompass the wide and varied range of risks
that were covered. 3 The subject policies contain the "Perils"

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

other perils" clause in the subject policies is specifically
referred to as Clause 12 called the "Free from Capture &
Seizure Clause" or the F.C. & S. Clause which reads, thus:
"Warranted free of capture, seizure, arrest, restraint or
detainment, and the consequences
thereof or of any attempt thereat; also
from the consequences of hostilities

77

and warlike operations, whether there

be a declaration of war or not; but this
warranty shall not exclude collision,
contact with any fixed or floating
object (other than a mine or torpedo),
stranding, heavy weather or fire
unless
caused
directly
(and
independently of the nature of the
voyage or service which the vessel
concerned or, in the case of a collision,
any other vessel involved therein is
performing) by a hostile act by or
against a belligerent power and for
the purpose of this warranty 'power'
includes any authorities maintaining
naval, military or air forces in
association with power.

consequences of civil war, revolution,

rebellion, insurrection, or civil strike
arising therefrom, or piracy."

According to petitioner, the automatic incorporation of

subsection 1.1 of section 1 of the Institute War Clauses
(Cargo), among others, means that any "capture, arrest,
detention, etc." pertained exclusively to warlike operations
if this Court strictly construes the heading of the said
Clauses. However, it also claims that the parties intended to
include arrests, etc. even if it were not the result of
hostilities or warlike operations. It further claims that on the
strength of jurisprudence on the matter, the term "arrests"
would only cover those arising from political or executive
acts, concluding that whether private respondent's claim is
anchored on subsection 1.1 of Section 1 of the Institute War
Clauses (Cargo) or the F.C. & S. Clause, the arrest of the
vessel by judicial authorities is an excluded risk. 4
This Court cannot agree with petitioner's assertions,
particularly when it alleges that in the "Perils" Clause, it
assumed the risk of arrest caused solely by executive or
political acts of the government of the seizing state and
thereby excludes "arrests" caused by ordinary legal
processes, such as in the instant case.
With the incorporation of subsection 1.1 of Section 1 of the
Institute War Clauses, however, this Court agrees with the
Court of Appeals and the private respondent that "arrest"
caused by ordinary judicial process is deemed included
among the covered risks. This interpretation becomes
inevitable when subsection 1.1 of Section 1 of the Institute
War Clauses provided that "this insurance covers the risks
excluded from the Standard Form of English Marine Policy
by the clause 'Warranted free of capture, seizure, arrest, etc.
. . .'" or the F.C. & S. Clause. Jurisprudentially, "arrests"
caused by ordinary judicial process is also a risk excluded
from the Standard Form of English Marine Policy by the F.C.
& S. Clause.

Further warranted free from the consequences of civil

war, revolution, insurrection, or civil
strike arising therefrom or piracy.

Should Clause 12 be deleted, the relevant current institute war

clauses shall be deemed to form part of this insurance." (Emphasis
supplied)

However, the F. C. & S. Clause was deleted from the policies.

Consequently, the Institute War Clauses (Cargo) was
deemed incorporated which, in subsection 1.1 of Section 1,
provides:
"1. This insurance covers:

1.1 The risks excluded from the standard form of

English Marine Policy by the clause
warranted free of capture, seizure,
arrest, restraint or detainment, and
the
consequences
thereof
of
hostilities or warlike operations,
whether there be a declaration of war
or not; but this warranty shall not
exclude collision, contact with any
fixed or floating object (other than a
mine or torpedo), stranding, heavy
weather or fire unless caused directly
(and independently of the nature on
voyage or service which the vessel
concerned or, in the case of a collision
any other vessel involved therein is
performing) by a hostile act by or
against a belligerent power; and for
the purpose of this warranty 'power'
includes any authority maintaining
naval, military or air forces in
association with a power. Further
warranted
free
from
the

Petitioner cannot adopt the argument that the "arrest"

caused by ordinary judicial process is not included in the
covered risk simply because the F.C. & S. Clause under the
Institute War Clauses can only be operative in case of
hostilities or warlike operations on account of its heading
"Institute War Clauses." This Court agrees with the Court of
Appeals when it held that ". . . Although the F.C. & S. Clause
may have originally been inserted in marine policies to
protect against risks of war, (see generally G. Gilmore & C.
Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed.
1975]), its interpretation in recent years to include seizure
or detention by civil authorities seems consistent with the
general purposes of the clause, . . ." 5 In fact, petitioner itself
averred that subsection 1.1 of Section 1 of the Institute War
Clauses included "arrest" even if it were not a result of
hostilities or warlike operations. 6 In this regard, since what
was also excluded in the deleted F.C. & S. Clause was

78

"arrest" occasioned by ordinary judicial process, logically,

such "arrest" would now become a covered risk under
subsection 1.1 of Section 1 of the Institute War Clauses,
regardless of whether or not said "arrest" by civil authorities
occurred in a state of war.
Petitioner itself seems to be confused about the application
of the F.C. & S. Clause as well as that of subsection 1.1 of
Section 1 of the Institute War Clauses (Cargo). It stated that
"the F.C. & S. Clause was "originally incorporated in
insurance policies to eliminate the risks of warlike
operations". It also averred that the F.C. & S. Clause applies
even if there be no war or warlike operations . . ." 7 In the
same vein, it contended that subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo) "pertained exclusively to
warlike operations" and yet it also stated that "the deletion
of the F.C. & S. Clause and the consequent incorporation of
subsection 1.1 of Section 1 of the Institute War Clauses
(Cargo) was to include "arrest, etc. even if it were not a
result of hostilities or warlike operations." 8
This Court cannot help the impression that petitioner is
overly straining its interpretation of the provisions of the
policy in order to avoid being liable for private respondent's
claim.
This Court finds it pointless for petitioner to maintain its
position that it only insures risks of "arrest" occasioned by
executive or political acts of government which is
interpreted as not referring to those caused by ordinary
legal processes as contained in the "Perils" Clause; deletes
the F.C. & S. Clause which excludes risks of arrest
occasioned by executive or political acts of the government
and naturally, also those caused by ordinary legal
processes; and, thereafter incorporates subsection 1.1 of
Section 1 of the Institute War Clauses which now includes in
the coverage risks of arrest due to executive or political acts
of a government but then still excludes "arrests" occasioned
by ordinary legal processes when subsection 1.1 of Section
1 of said Clauses should also have included "arrests"
previously excluded from the coverage of the F.C. & S.
Clause.
It has been held that a strained interpretation which is
unnatural and forced, as to lead to an absurd conclusion or
to render the policy nonsensical, should, by all means, be
avoided. 9 Likewise, it must be borne in mind that such
contracts are invariably prepared by the companies and
must be accepted by the insured in the form in which they
are written. 10 Any construction of a marine policy rendering
it void should be avoided. 11 Such policies will, therefore, be
construed strictly against the company in order to avoid a
forfeiture, unless no other result is possible from the
language used. 12
If a marine insurance company desires to limit or restrict
the operation of the general provisions of its contract by
special proviso, exception, or exemption, it should express
such limitation in clear and unmistakable language. 13
Obviously, the deletion of the F.C. & S. Clause and the
consequent incorporation of subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo) gave rise to ambiguity. If

the risk of arrest occasioned by ordinary judicial process

was expressly indicated as an exception in the subject
policies, there would have been no controversy with respect
to the interpretation of the subject clauses.
Be that as it may, exceptions to the general coverage are
construed most strongly against the company. 14 Even an
express exception in a policy is to be construed against the
underwriters by whom the policy is framed, and for whose
benefit the exception is introduced. 15
An insurance contract should be so interpreted as to carry
out the purpose for which the parties entered into the
contract which is, to insure against risks of loss or damage
to the goods. Such interpretation should result from the
natural and reasonable meaning of language in the policy. 16
Where restrictive provisions are open to two
interpretations, that which is most favorable to the insured
is adopted. 17
Indemnity and liability insurance policies are construed in
accordance with the general rule of resolving any ambiguity
therein in favor of the insured, where the contract or policy
is prepared by the insurer. 18 A contract of insurance, being a
contract of adhesion, par excellence, any ambiguity therein
should be resolved against the insurer; in other words, it
should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in
such a way as to preclude the insurer from noncompliance
with its obligations. 19
In view of the foregoing, this Court sees no need to discuss
the other issues presented.
WHEREFORE, the petition for review is DENIED and the
decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
||| (Malayan Insurance Corp. v. Court of Appeals, G.R. No.
119599, [March 20, 1997], 336 PHIL 977-989)

79

1. Any amount of insurance in excess of P50,000.00.

[G.R. No. 166245. April 8, 2008.]

ETERNAL GARDENS MEMORIAL PARK
CORPORATION, petitioner, vs. THE PHILIPPINE
AMERICAN LIFE INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J p:
The Case
Central to this Petition for Review on Certiorari under Rule
45 which seeks to reverse and set aside the November 26,
2004 Decision 1 of the Court of Appeals (CA) in CA-G.R. CV
No. 57810 is the query: May the inaction of the insurer on
the insurance application be considered as approval of the
application?
The Facts
On December 10, 1980, respondent Philippine American
Life Insurance Company (Philamlife) entered into an
agreement denominated as Creditor Group Life Policy No.
P-1920 2 with petitioner Eternal Gardens Memorial Park
Corporation (Eternal). Under the policy, the clients of
Eternal who purchased burial lots from it on installment
basis would be insured by Philamlife. The amount of
insurance coverage depended upon the existing balance of
the purchased burial lots. The policy was to be effective for
a period of one year, renewable on a yearly basis. SacTCA
The relevant provisions of the policy are:

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

cCHETI

LIFE INSURANCE BENEFIT.

The Life Insurance coverage of any Lot Purchaser at

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

ELIGIBILITY.

EFFECTIVE DATE OF BENEFIT.

Any Lot Purchaser of the Assured who is at least 18
but not more than 65 years of age, is
indebted to the Assured for the
unpaid balance of his loan with the
Assured, and is accepted for Life
Insurance coverage by the Company
on its effective date is eligible for
insurance under the Policy.

The insurance of any eligible Lot Purchaser shall be

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

EVIDENCE OF INSURABILITY.

Eternal was required under the policy to submit to

Philamlife a list of all new lot purchasers, together with a
copy of the application of each purchaser, and the amounts
of the respective unpaid balances of all insured lot
purchasers. In relation to the instant petition, Eternal
complied by submitting a letter dated December 29, 1982, 4
containing a list of insurable balances of its lot buyers for
October 1982. One of those included in the list as "new
business" was a certain John Chuang. His balance of
payments was PhP100,000. On August 2, 1984, Chuang
died.
Eternal sent a letter dated August 20, 1984 5 to Philamlife,
which served as an insurance claim for Chuang's death.
Attached to the claim were the following documents: (1)
Chuang's Certificate of Death; (2) Identification Certificate

No medical examination shall be required for amounts

of insurance up to P50,000.00.
However, a declaration of good health
shall be required for all Lot Purchasers
as part of the application. The
Company reserves the right to require
further
evidence
of insurability
satisfactory to the Company in respect
of the following:

80

in trust for the payor until the

prerequisites for insurance coverage
shall have been met. We will however,
return all the premiums which have
been paid in behalf of John Uy
Chuang.

stating that Chuang is a naturalized Filipino Citizen; (3)

Certificate of Claimant; (4) Certificate of Attending Physician;
and (5) Assured's Certificate. cAHIST
In reply, Philamlife wrote Eternal a letter on November 12,
1984, 6 requiring Eternal to submit the following documents
relative to its insurance claim for Chuang's death: (1)
Certificate of Claimant (with form attached); (2) Assured's
Certificate (with form attached); (3) Application for
Insurance accomplished and signed by the insured, Chuang,
while still living; and (4) Statement of Account showing the
unpaid balance of Chuang before his death.
Eternal transmitted the required documents through a
letter dated November 14, 1984, 7 which was received by
Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal
with any reply to the latter's insurance claim. This prompted
Eternal to demand from Philamlife the payment of the claim
for PhP100,000 on April 25, 1986. 8
In response to Eternal's demand, Philamlife denied Eternal's
insurance claim in a letter dated May 20, 1986, 9 a portion of
which reads:

Consequently, Eternal filed a case before the Makati City

Regional Trial Court (RTC) for a sum of money against
Philamlife, docketed as Civil Case No. 14736. The trial court
decided in favor of Eternal, the dispositive portion of which
reads:
WHEREFORE,

The deceased was 59 years old when he entered into

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

premises considered, judgment is

hereby rendered in favor of Plaintiff
ETERNAL,
against
Defendant
PHILAMLIFE, ordering the Defendant
PHILAMLIFE, to pay the sum of
P100,000.00,
representing
the
proceeds of the Policy of John Uy
Chuang, plus legal rate of interest,
until fully paid; and, to pay the sum of
P10,000.00 as attorney's fees. aIHCSA

SO ORDERED.

The RTC found that Eternal submitted Chuang's application

for insurance which he accomplished before his death, as
testified to by Eternal's witness and evidenced by the letter
dated December 29, 1982, stating, among others: "Encl:
Phil-Am Life Insurance Application Forms & Cert." 10 It
further ruled that due to Philamlife's inaction from the
submission of the requirements of the group insurance on
December 29, 1982 to Chuang's death on August 2, 1984, as
well as Philamlife's acceptance of the premiums during the
same period, Philamlife was deemed to have approved
Chuang's application. The RTC said that since the contract is
a group life insurance, once proof of death is submitted,
payment must follow.
Philamlife appealed to the CA, which ruled, thus:

In accordance with our Creditor's Group Life Policy No.

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

WHEREFORE, the decision of the Regional Trial Court of Makati in

Civil Case No. 57810 is REVERSED and SET ASIDE, and the
complaint is DISMISSED. No costs.
SO ORDERED. 11

The CA based its Decision on the factual finding that

Chuang's application was not enclosed in Eternal's letter
dated December 29, 1982. It further ruled that the nonaccomplishment of the submitted application form violated

With regard to our acceptance of premiums, these do

not connote our approval per se of the
insurance coverage but are held by us

81

contrary to the trial court; (8)

when the findings are conclusions
without citation of specific evidence
on which they are based; (9) when the
facts set forth in the petition as well as
in the petitioner's main and reply
briefs are not disputed by the
respondent; (10) when the findings of
fact are premised on the supposed
absence of evidence and contradicted
by the evidence on record; and (11)
when the Court of Appeals manifestly
overlooked certain relevant facts not
disputed by the parties, which, if
properly considered, would justify a
different conclusion. 12 (Emphasis
supplied.) aHDTAI

Section 26 of the Insurance Code. Thus, the CA concluded,

there being no application form, Chuang was not covered
by Philamlife's insurance.
Hence, we have this petition with the following grounds: cHDEaC
The Honorable Court of Appeals has decided a
question of substance, not therefore
determined by this Honorable Court,
or has decided it in a way not in
accord with law or with the applicable
jurisprudence, in holding that:

I. The

application

for

insurance

was not duly

submitted to
respondent
PhilamLife
before the
death
of
John
Chuang;

In the instant case, the factual findings of the RTC were

reversed by the CA; thus, this Court may review them.
Eternal claims that the evidence that it presented before the
trial court supports its contention that it submitted a copy
of the insurance application of Chuang before his death. In
Eternal's letter dated December 29, 1982, a list of insurable
interests of buyers for October 1982 was attached,
including Chuang in the list of new businesses. Eternal
added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms &
Cert." were enclosed in the letter that was apparently
received by Philamlife on January 15, 1983. Finally, Eternal
alleged that it provided a copy of the insurance application
which was signed by Chuang himself and executed before
his death.

II. There was no valid insurance coverage; and

III. Reversing and setting aside the Decision of the

Regional
Trial Court
dated May
29, 1996.

On the other hand, Philamlife claims that the evidence

presented by Eternal is insufficient, arguing that Eternal
must present evidence showing that Philamlife received a
copy of Chuang's insurance application. CDISAc
The evidence on record supports Eternal's position.
The fact of the matter is, the letter dated December 29,
1982, which Philamlife stamped as received, states that the
insurance forms for the attached list of burial lot buyers
were attached to the letter. Such stamp of receipt has the
effect of acknowledging receipt of the letter together with
the attachments. Such receipt is an admission by Philamlife
against its own interest. 13 The burden of evidence has
shifted to Philamlife, which must prove that the letter did
not contain Chuang's insurance application. However,
Philamlife failed to do so; thus, Philamlife is deemed to have
received Chuang's insurance application.
To reiterate, it was Philamlife's bounden duty to make sure
that before a transmittal letter is stamped as received, the
contents of the letter are correct and accounted for.
Philamlife's allegation that Eternal's witnesses ran out of
credibility and reliability due to inconsistencies is
groundless. The trial court is in the best position to

The Court's Ruling

As a general rule, this Court is not a trier of facts and will
not re-examine factual issues raised before the CA and first
level courts, considering their findings of facts are
conclusive and binding on this Court. However, such rule is
subject to exceptions, as enunciated in Sampayan v. Court
of Appeals:
(1) when the findings are grounded entirely on
speculation, surmises or conjectures;
(2) when the inference made is
manifestly mistaken, absurd or
impossible; (3) when there is grave
abuse of discretion; (4) when the
judgment
is
based
on
a
misapprehension of facts; (5) when
the findings of facts are conflicting; (6)
when in making its findings the [CA]
went beyond the issues of the case, or
its findings are contrary to the
admissions of both the appellant and
the appellee; (7) when the
findings
[of
the
CA]
are

82

Q Where is the original?

determine the reliability and credibility of the witnesses,

because it has the opportunity to observe firsthand the
witnesses' demeanor, conduct, and attitude. Findings of the
trial court on such matters are binding and conclusive on
the appellate court, unless some facts or circumstances of
weight
and
substance
have
been
overlooked,
misapprehended, or misinterpreted, 14 that, if considered,
might affect the result of the case. 15
An examination of the testimonies of the witnesses
mentioned by Philamlife, however, reveals no overlooked
facts of substance and value.
Philamlife primarily claims that Eternal did not even know
where the original insurance application of Chuang was, as
shown by the testimony of Edilberto Mendoza:

[Mendoza:]

A As far as I remember I do not know where the

original but when I
submitted
with
that
payment together with
the new clients all the
originals I see to it before
I sign the transmittal
letter the originals are
attached therein. 16

Atty. Arevalo:

Q Where is the original of the application form which

is required in case of new
coverage?

In other words, the witness admitted not knowing where

the original insurance application was, but believed that the
application was transmitted to Philamlife as an attachment
to a transmittal letter. HTCAED
As to the seeming inconsistencies between the testimony of
Manuel Cortez on whether one or two insurance application
forms were accomplished and the testimony of Mendoza on
who actually filled out the application form, these are minor
inconsistencies that do not affect the credibility of the
witnesses. Thus, we ruled in People v. Paredes that minor
inconsistencies are too trivial to affect the credibility of
witnesses, and these may even serve to strengthen their
credibility as these negate any suspicion that the
testimonies have been rehearsed. 17
We reiterated the above ruling in Merencillo v. People:

[Mendoza:]

A It is [a] standard operating procedure for the new

client to fill up two copies
of this form and the
original
of
this
is
submitted to Philamlife
together
with
the
monthly remittances and
the second copy is
remained or retained
with
the
marketing
department of Eternal
Gardens. EHSITc

Minor discrepancies or inconsistencies do not impair

the
essential
integrity
of
the
prosecution's evidence as a whole or
reflect on the witnesses' honesty. The
test is whether the testimonies agree
on essential facts and whether the
respective versions corroborate and
substantially coincide with each other
so as to make a consistent and
coherent whole. 18

Atty. Miranda:

In the present case, the number of copies of the insurance

application that Chuang executed is not at issue, neither is
whether the insurance application presented by Eternal has
been falsified. Thus, the inconsistencies pointed out by
Philamlife are minor and do not affect the credibility of
Eternal's witnesses. CIAcSa
However, the question arises as to whether Philamlife
assumed the risk of loss without approving the application.

We move to strike out the answer as it is not responsive as counsel

is merely asking for the location and does not [ask] for the number
of copy.
Atty. Arevalo:

83

limitations on liability, courts should

construe them in such a way as to
preclude the insurer from noncompliance with his obligation. Being
a contract of adhesion, the terms of
an insurance contract are to be
construed strictly against the party
which prepared the contract, the
insurer. By reason of the exclusive
control of the insurance company over
the terms and phraseology of the
insurance contract, ambiguity must be
strictly interpreted against the insurer
and liberally in favor of the insured,
especially to avoid forfeiture. 20

This question must be answered in the affirmative.

As earlier stated, Philamlife and Eternal entered into an
agreement denominated as Creditor Group Life Policy No.
P-1920 dated December 10, 1980. In the policy, it is
provided that:
EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be

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

Clearly, the vague contractual provision, in Creditor Group

Life Policy No. P-1920 dated December 10, 1980, must be
construed in favor of the insured and in favor of the
effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions
must be harmonized to mean that upon a party's purchase
of a memorial lot on installment from Eternal, an insurance
contract covering the lot purchaser is created and the same
is effective, valid, and binding until terminated by Philamlife
by disapproving the insurance application. The second
sentence of Creditor Group Life Policy No. P-1920 on the
Effective Date of Benefit is in the nature of a resolutory
condition which would lead to the cessation of the
insurance contract. Moreover, the mere inaction of the
insurer on the insurance application must not work to
prejudice the insured; it cannot be interpreted as a
termination of the insurance contract. The termination of
the insurance contract by the insurer must be explicit and
unambiguous. aHTEIA
As a final note, to characterize the insurer and the insured
as contracting parties on equal footing is inaccurate at best.
Insurance contracts are wholly prepared by the insurer with
vast amounts of experience in the industry purposefully
used to its advantage. More often than not, insurance
contracts are contracts of adhesion containing technical
terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those
who wish to avail of insurance. As such, insurance contracts
are imbued with public interest that must be considered
whenever the rights and obligations of the insurer and the
insured are to be delineated. Hence, in order to protect the
interest of insurance applicants, insurance companies must
be obligated to act with haste upon insurance applications,
to either deny or approve the same, or otherwise be bound
to honor the application as a valid, binding, and effective
insurance contract. 21
WHEREFORE, we GRANT the petition. The November 26,
2004 CA Decision in CA-G.R. CV No. 57810 is REVERSED and
SET ASIDE. The May 29, 1996 Decision of the Makati City
RTC, Branch 138 is MODIFIED. Philamlife is hereby

An examination of the above provision would show

ambiguity between its two sentences. The first sentence
appears to state that the insurance coverage of the clients
of Eternal already became effective upon contracting a loan
with Eternal while the second sentence appears to require
Philamlife to approve the insurance contract before the
same can become effective.
It must be remembered that an insurance contract is a
contract of adhesion which must be construed liberally in
favor of the insured and strictly against the insurer in order
to safeguard the latter's interest. Thus, in Malayan
Insurance Corporation v. Court of Appeals, this Court held
that:
Indemnity

and liability insurance policies are

construed in accordance with the
general rule of resolving any
ambiguity therein in favor of the
insured, where the contract or policy
is prepared by the insurer. A
contract of insurance, being a
contract
of
adhesion,
par
excellence,
any
ambiguity
therein should be resolved
against the insurer; in other
words, it should be construed liberally
in favor of the insured and strictly
against the insurer. Limitations of
liability should be regarded with
extreme jealousy and must be
construed in such a way as to
preclude
the
insurer
from
noncompliance with its obligations. 19
(Emphasis supplied.) TECcHA

In the more recent case of Philamcare Health Systems, Inc.

v. Court of Appeals, we reiterated the above ruling, stating
that:
When the terms of insurance contract contain

84

ORDERED: THIAaD
(1) To pay Eternal the amount of PhP100,000 representing
the proceeds of the Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent
(6%) per annum of PhP100,000 from the time of extra
judicial demand by Eternal until Philamlife's receipt of the
May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent
(12%) per annum of PhP100,000 from June 17, 1996 until

full payment of this award; and

(4) To pay Eternal attorney's fees in the amount of
PhP10,000. TIEHSA
No costs.
SO ORDERED
||| (Eternal Gardens Memorial Park Corp. v. Philippine
American Life Insurance Co., G.R. No. 166245, [April 8,
2008], 574 PHIL 161-174)

85