COMMERCIAL LAW REVIEW (INSURANCE)
BUSMENTE
[G.R. No. 156167. May 16, 2005.]
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER
INSURANCE CORPORATION, respondent.
Facts: Gulf Resorts 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). In the first 4 policies issued, the risks of loss from earthquake
shock was extended only to petitioners two swimming pools. Gulf Resorts agreed to
insure with Phil Charter the properties covered by the AHAC policy provided that the
policy wording and rates in said policy be copied in the policy to be issued by Phil
Charter. Phil Charter issued Policy No. 31944 to Gulf Resorts covering the period of
March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium of
P45,159.92. the break-down of premiums shows that Gulf Resorts paid only P393.00
as premium against earthquake shock (ES). In Policy No. 31944 issued by defendant,
the shock endorsement provided that In consideration of the payment by the insured to
the company of the sum included additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this policy due to the
contrary, that this insurance covers loss or damage to shock to any of the property
insured by this Policy occasioned by or through or in consequence of earthquake
(Exhs. "1-D", "2-D", "3-A", "4-B", "5-A", "6-D" and "7-C"). In Exhibit "7-C" the word
"included" above the underlined portion was deleted. On July 16, 1990 an earthquake
struck Central Luzon and Northern Luzon and plaintiffs properties covered by Policy
No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa
Resort were damaged.
Petitioner advised respondent that it would be making a claim under its Insurance
Policy 31944 for damages on its properties. Respondent denied petitioners claim on
the ground that its insurance policy only afforded earthquake shock coverage to the two
swimming pools of the resort. The trial court ruled in favor of respondent. In its ruling,
the schedule clearly shows that petitioner paid only a premium of P393.00 against the
peril of earthquake shock, the same premium it had paid against earthquake shock only
on the two swimming pools in all the policies issued by AHAC.
Issue: Whether or not the policy covers only the two swimming pools owned by Gulf
Resorts and does not extend to all properties damaged therein
Held: YES. All the provisions and riders taken and interpreted together, indubitably
show the intention of the parties to extend earthquake shock coverage to the two
1 DIATO.2013400036
ATTY.
swimming pools only. An insurance premium is the consideration paid an insurer for
undertaking to indemnify the insured against a specified peril. In fire, casualty and
marine insurance, the premium becomes a debt as soon as the risk attaches. In the
subject policy, no premium payments were made with regard to earthquake shock
coverage except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is
consistent with the history of petitioners insurance policies with AHAC.
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:
[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. "C-1"; 'D-
1", "E" and "F-1"). "Item 5" in those policies referred to the two (2)
swimming pools only (Exhs. "1-B", "2-B", "3-B" and "F-2"); that
subsequently AHAC(AIU) issued in 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,
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. Premium P37,420.60 F/L
"H") which carried the entry under "Endorsement/Warranties at 2,061.52 - Typhoon
Time of Issue", which read "Endorsement to Include Earthquake 1,030.76 - EC
Shock (Exh. "6-B-1") in the amount of P10,700.00 and paid 393.00 - ES
P42,658.14 (Exhs. "6-A" and "6-B") as premium thereof, computed
as follows: EDCcaS Doc. Stamps 3,068.10

Item P7,691,000.00 on the Clubhouse only F.S.T. 776.89

@ .392%; Prem. Tax 409.05
1,500,000.00 on the furniture, etc. TOTAL 45,159.92;
contained in the building
above-mentioned@ .490%; that the above break-down of premiums shows that plaintiff paid
only P393.00 as premium against earthquake shock (ES); that in all
393,000.00 on the two swimming the six insurance policies (Exhs. "C", "D", "E", "F", "G" and "H"),
pools, only (against the the premium against the peril of earthquake shock is the same, that
peril of earthquake is P393.00 (Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-2";
shock only) @ 0.100% "F-02" and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC
116,600.00 other buildings include (Exhs. "C", "D", "E", "F", "G" and "H") and in Policy No. 31944
as follows: issued by defendant, the shock endorsement provide(sic):

a) Tilter House P19,800.00-0.551% In consideration of the payment by the insured to the

company of the sum included additional premium the
b) Power House P41,000.00-0.551% Company agrees, notwithstanding what is stated in the
printed conditions of this policy due to the contrary, that
c) House Shed P55,000.00-0.540% this insurance covers loss or damage to shock to any of the
P100,000.00 for furniture, fixtures, property insured by this Policy occasioned by or through or
lines air-con and in consequence of earthquake (Exhs. "1-D", "2-D", "3-A",
operating equipment "4-B", "5-A", "6-D" and "7-C"); cDCaTS
that plaintiff agreed to insure with defendant the properties covered that in Exhibit "7-C" the word "included" above the underlined
by AHAC (AIU) Policy No. 206-4568061-9 (Exh. "H") provided portion was deleted; that on July 16, 1990 an earthquake struck
that the policy wording and rates in said policy be copied in the Central Luzon and Northern Luzon and plaintiff's properties covered
policy to be issued by defendant; that defendant issued Policy No. by Policy No. 31944 issued by defendant, including the two
31944 to plaintiff covering the period of March 14, 1990 to March swimming pools in its Agoo Playa Resort were damaged. 2
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 After the earthquake, petitioner advised respondent that it would be making a claim
Policy No. 31944 (Exh. "I"), which is the policy in question, under its Insurance Policy No. 31944 for damages on its properties. Respondent
contained on the right-hand upper portion of page 7 thereof, the instructed petitioner to file a formal claim, then assigned the investigation of the claim to
following: 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
Rate-Various 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

2 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
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. 8Petitioner
and respondent failed to arrive at a settlement. 9 Thus, on January 24, 1991, petitioner
filed a complaint 10 with the regional trial court of Pasig praying for the payment of the
following:
1.) The sum of P5,427,779.00, representing losses
sustained by the insured properties, with interest
thereon, as computed under par. 29 of the policy
(Annex "B") until fully paid;
2.) The sum of P428,842.00 per month, representing
continuing losses sustained by plaintiff on account of
defendant's refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary
damages;
4.) The sum of P500,000.00 by way of attorney's fees
and expenses of litigation;
5.) Costs. 11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims. 12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium
of P393.00 against the peril of earthquake shock, the same premium
it paid against earthquake shock only on the two swimming pools in
all the policies issued by AHAC(AIU) (Exhibits "C", "D", "E", "F"
and "G"). From this fact the Court must consequently agree with the
position of defendant that the endorsement rider (Exhibit "7-C")
means that only the two swimming pools were insured against
earthquake shock. CSTHca
Plaintiff correctly points out that a policy of insurance is a contract
of adhesion hence, where the language used in an insurance contract
or application is such as to create ambiguity the same should be
resolved against the party responsible therefor, i.e., the insurance
3 DIATO.2013400036
ATTY. BUSMENTE
company which prepared the contract. To the mind of [the] Court,
the language used in the policy in litigation is clear and
unambiguous hence there is no need for interpretation or
construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2)
swimming pools had earthquake shock coverage and were heavily
damaged by the earthquake which struck on July 16, 1990.
Defendant having admitted that the damage to the swimming pools
was appraised by defendant's adjuster at P386,000.00, defendant
must, by virtue of the contract of insurance, pay plaintiff said
amount.
Because it is the finding of the Court as stated in the immediately
preceding paragraph that defendant is liable only for the damage
caused to the two (2) swimming pools and that defendant has made
known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed
for by plaintiff. As to the counterclaims of defendant, the Court does
not agree that the action filed by plaintiff is baseless and highly
speculative since such action is a lawful exercise of the plaintiff's
right to come to Court in the honest belief that their Complaint is
meritorious. The prayer, therefore, of defendant for damages is
likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay
plaintiffs the sum of THREE HUNDRED EIGHTY SIX
THOUSAND PESOS (P386,000.00) representing damage to the two
(2) swimming pools, with interest at 6% per annum from the date of
the filing of the Complaint until defendant's obligation to plaintiff is
fully paid.
No pronouncement as to costs. 13
Petitioner's Motion for Reconsideration was denied. Thus, petitioner filed an appeal with
the Court of Appeals based on the following assigned errors: 14
A. THE TRIAL COURT ERRED IN FINDING THAT
PLAINTIFF-APPELLANT CAN ONLY RECOVER FOR
THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER
ITS FIRE POLICY NO. 31944, CONSIDERING ITS
PROVISIONS, THE CIRCUMSTANCES SURROUNDING
THE ISSUANCE OF SAID POLICY AND THE
COMMERCIAL LAW REVIEW (INSURANCE)
ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE
EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING
PLAINTIFF-APPELLANT'S RIGHT TO RECOVER UNDER
DEFENDANT-APPELLEE'S POLICY (NO. 31944; EXH "I")
BY LIMITING ITSELF TO A CONSIDERATION OF THE
SAID POLICY ISOLATED FROM THE CIRCUMSTANCES
SURROUNDING ITS ISSUANCE AND THE ACTUATIONS
OF THE PARTIES AFTER THE EARTHQUAKE OF JULY
16, 1990. cHSIAC
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT
PLAINTIFF-APPELLANT IS ENTITLED TO THE
DAMAGES CLAIMED, WITH INTEREST COMPUTED AT
24% PER ANNUM ON CLAIMS ON PROCEEDS OF
POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower court's failure to
award it attorney's fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both
parties, We are not convinced that the last two (2) insurance
contracts (Exhs. "G" and "H"), which the plaintiff-appellant had
with AHAC (AIU) and upon which the subject insurance contract
with Philippine Charter Insurance Corporation is said to have been
based and copied (Exh. "I"), covered an extended earthquake shock
insurance on all the insured properties.
xxx xxx xxx
We also find that the Court a quo was correct in not granting the
plaintiff-appellant's prayer for the imposition of interest 24% on
the insurance claim and 6% on loss of income allegedly amounting
to P4,280,000.00. Since the defendant-appellant has expressed its
willingness to pay the damage caused on the two (2) swimming
pools, as the Court a quo and this Court correctly found it to be
liable only, it then cannot be said that it was in default and therefore
liable for interest.
4 DIATO.2013400036
ATTY. BUSMENTE
Coming to the defendant-appellant's prayer for an attorney's fees,
long-standing is the rule that the award thereof is subject to the
sound discretion of the court. Thus, if such discretion is well-
exercised, it will not be disturbed on appeal (Castro et al. v. CA, et
al., G.R. No. 115838, July 18, 2002). Moreover, being the award
thereof an exception rather than a rule, it is necessary for the court
to make findings of facts and law that would bring the case within
the exception and justify the grant of such award (Country Bankers
Insurance Corp. v. Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding
that the plaintiff-appellant's action is not baseless and highly
speculative, We find that the Court a quo did not err in granting the
same.
WHEREFORE, in view of all the foregoing, both appeals are hereby
DISMISSED and judgment of the Trial Court hereby
AFFIRMED in toto. No costs. 15
Petitioner filed the present petition raising the following issues: 16
A. WHETHER THE COURT OF APPEALS
CORRECTLY HELD THAT UNDER
RESPONDENT'S INSURANCE POLICY NO.
31944, ONLY THE TWO (2) SWIMMING POOLS,
RATHER THAN ALL THE PROPERTIES
COVERED THEREUNDER, ARE INSURED
AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS
CORRECTLY DENIED PETITIONER'S PRAYER
FOR DAMAGES WITH INTEREST THEREON AT
THE RATE CLAIMED, ATTORNEY'S FEES AND
EXPENSES OF LITIGATION. SDHETI
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
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

Coverage Endt., FEA Warranty & Annual Payment Agreement On Long Term On the other hand, respondent made the following counter arguments: 18
Policies." 17
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly
Third, that the qualification referring to the two swimming pools had already been extended coverage against earthquake shock to petitioner's insured properties other than
deleted in the earthquake shock endorsement. 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
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent provisions in its policy were practically identical to its earlier policies, and there was no
omission when it deleted the said qualification. increase in the premium paid. AHAC-AIU, in a letter 19 by its representative Manuel C.
Fifth, that the earthquake shock endorsement rider should be given precedence over the Quijano, categorically stated that its previous policy, from which respondent's policy
wording of the insurance policy, because the rider is the more deliberate expression of was copied, covered only earthquake shock for the two swimming pools.
the agreement of the contracting parties. Second, petitioner's payment of additional premium in the amount of P393.00 shows that
Sixth, that in their previous insurance policies, limits were placed on the the policy only covered earthquake shock damage on the two swimming pools. The
endorsements/warranties enumerated at the time of issue. 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
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor coverage of the other properties in the resort.
of petitioner and against respondent. It was respondent which caused the ambiguity
when it made the policy in issue. 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
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement earthquake shock coverage to all of petitioner's properties. As per its agreement with
should be interpreted as a caveat on the standard fire insurance policy, such as to remove petitioner, respondent copied its policy from the AHAC-AIU policy provided by
the two swimming pools from the coverage for the risk of fire. It should not be used to petitioner. Although the first five policies contained the said qualification in their rider's
limit the respondent's liability for earthquake shock to the two swimming pools only. 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
Ninth, there is no basis for the appellate court to hold that the additional premium was inadvertence did not make the policy incomplete, nor did it broaden the scope of the
not paid under the extended coverage. The premium for the earthquake shock coverage endorsement whose descriptive title was merely enumerated. Any ambiguity in the
was already included in the premium paid for the policy. policy can be easily resolved by looking at the other provisions, specially the
Tenth, the parties' contemporaneous and subsequent acts show that they intended to enumeration of the items insured, where only the two swimming pools were noted as
extend earthquake shock coverage to all insured properties. When it secured an covered for earthquake shock damage.
insurance policy from respondent, petitioner told respondent that it wanted an exact Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988,
replica of its latest insurance policy from American Home Assurance Company (AHAC- the phrase "Item 5 P393,000.00 on the two swimming pools only (against the peril
AIU), which covered all the resort's properties for earthquake shock damage and of earthquake shock only)" meant that only the swimming pools were insured for
respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner that earthquake damage. The same phrase is used in toto in the policies from 1989 to 1990,
it was covered for earthquake shock. Respondent's insurance adjuster, Bayne Adjusters the only difference being the designation of the two swimming pools as "Item 3."
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, Fifth, in order for the earthquake shock endorsement to be effective, premiums must be
it cannot deny that the insurance policy it issued to petitioner covered all of the paid for all the properties covered. In all of its seven insurance policies, petitioner only
properties within the resort. 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
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule addition, the use of the qualifier "ANY" instead of "ALL" to describe the property
45 of the Revised Rules of Court as its remedy, and there is no need for calibration of the covered was done deliberately to enable the parties to specify the properties included for
evidence in order to establish the facts upon which this petition is based. cDCSTA earthquake coverage.

5 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
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 Third, Policy Condition No. 6 stated:
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
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:
ITEM 3 393,000.00 On the two (2) swimming pools only
(against the peril of earthquake shock only) 20
Second, under the breakdown for premium payments, 21 it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
6 DIATO.2013400036
ATTY. BUSMENTE
xxx xxx xxx
3 393,000.00 0.100%-E/S 393.00 22
6. This insurance does not cover any loss or damage
occasioned by or through or in consequence, directly or
indirectly of any of the following occurrences, namely:
(a) Earthquake, volcanic eruption or other convulsion
of nature. 23
Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To
Include the Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED
AGGREGATE SUMS INSURED IN EXCESS OF FIVE MILLION
PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7
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
In consideration of the payment by the Insured to the Company of
the sum of P. . . . . . . . . . . . . . . . . additional premium the Company
agrees, notwithstanding what is stated in the printed conditions of
this Policy to the contrary, that this insurance covers loss or damage
(including loss or damage by fire) to any of the property insured by
this Policy occasioned by or through or in consequence of
Earthquake.
Provided always that all the conditions of this Policy shall apply
(except in so far as they may be hereby expressly varied) and that
any reference therein to loss or damage by fire should be deemed to
apply also to loss or damage occasioned by or through or in
consequence of Earthquake. 24
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope
of the earthquake shock coverage. Thus, the policy extended earthquake shock coverage
to all of the insured properties.
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

It is basic that all the provisions of the insurance policy should be examined and Q. Now Mr. Mantohac, will it be correct to state also
interpreted in consonance with each other. 25 All its parts are reflective of the true intent that insofar as your insurance policy during the period
of the parties. The policy cannot be construed piecemeal. Certain stipulations cannot be from March 4, 1984 to March 4, 1985 the coverage
segregated and then made to control; neither do particular words or phrases necessarily on earthquake shock was limited to the two
determine its character. Petitioner cannot focus on the earthquake shock endorsement to swimming pools only?
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 A. Yes, sir. It is limited to the two swimming pools,
coverage to the two swimming pools only. specifically shown in the warranty, there is a
provision here that it was only for item 5.
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 Q. More specifically Item 5 states the amount of
pools. Section 2(1) of the Insurance Code defines a contract of insurance as an P393,000.00 corresponding to the two swimming
agreement whereby one undertakes for a consideration to indemnify another against pools only?
loss, damage or liability arising from an unknown or contingent event. Thus, an A. Yes, sir.
insurance contract exists where the following elements concur:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,
1. The insured has an insurable interest; November 25, 1991
2. The insured is subject to a risk of loss by the pp. 23-26
happening of the designated peril;
Q. For the period from March 14, 1988 up to March
3. The insurer assumes the risk; 14, 1989, did you personally arrange for the
4. Such assumption of risk is part of a general scheme procurement of this policy?
to distribute actual losses among a large group of A. Yes, sir.
persons bearing a similar risk; and
Q. Did you also do this through your insurance
5. In consideration of the insurer's promise, the agency?
insured pays a premium. 26 (Emphasis ours)
A. If you are referring to Forte Insurance Agency,
An insurance premium is the consideration paid an insurer for undertaking to indemnify yes.
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, Q. Is Forte Insurance Agency a department or
no premium payments were made with regard to earthquake shock coverage, except on division of your company?
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 A. No, sir. They are our insurance agency.
petitioner's previous insurance policies from AHAC-AIU. As borne out by petitioner's Q. And they are independent of your company insofar
witnesses: HCEaDI as operations are concerned?
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, A. Yes, sir, they are separate entity.
November 25, 1991
Q. But insofar as the procurement of the insurance
pp. 12-13 policy is concerned they are of course subject to your
instruction, is that not correct?

7 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
A. Yes, sir. The final action is still with us although
they can recommend what insurance to take.
Q. In the procurement of the insurance police (sic)
from March 14, 1988 to March 14, 1989, did you
give written instruction to Forte Insurance Agency
advising it that the earthquake shock coverage must
extend to all properties of Agoo Playa Resort in La
Union?
A. No, sir. We did not make any written instruction,
although we made an oral instruction to that effect of
extending the coverage on (sic) the other properties of
the company.
Q. And that instruction, according to you, was very
important because in April 1987 there was an
earthquake tremor in La Union?
A. Yes, sir. TcIHDa
Q. And you wanted to protect all your properties
against similar tremors in the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did
you bother to check the provisions with respect to
your instructions that all properties must be covered
again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by
American Home Assurance Company marked Exhibit
"G"?
Atty. Mejia:
Yes.
Witness:
A. I examined the policy and seeing that the warranty
on the earthquake shock endorsement has no more
limitation referring to the two swimming pools only, I
was contented already that the previous limitation
8 DIATO.2013400036
ATTY. BUSMENTE
pertaining to the two swimming pools was already
removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended
Coverage Endorsement, FEA Warranty & Annual Payment Agreement on Long Term
Policies" 29 to the insurance policy as proof of the intent of the parties to extend the
coverage for earthquake shock. However, this phrase is merely an enumeration of the
descriptive titles of the riders, clauses, warranties or endorsements to which the policy is
subject, as required underSection 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification
limiting the coverage to the two swimming pools. The earthquake shock endorsement
cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter for
AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III 30
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to
H inclusive have been previously marked by counsel
for defendant as Exhibit[s] 1-6 inclusive. Did you
have occasion to review of (sic) these six (6) policies
issued by your company [in favor] of Agoo Playa
Resort?
WITNESS:
Yes[,] I remember having gone over these policies at
one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in
evidence as Exhibits C to H respectively carries an
earthquake shock endorsement[?] My question to you
is, on the basis on (sic) the wordings indicated in
Exhibits C to H respectively what was the extent of
the coverage [against] the peril of earthquake shock
as provided for in each of the six (6)
policies? ADaSET
COMMERCIAL LAW REVIEW (INSURANCE)
xxx xxx xxx
WITNESS:
The extent of the coverage is only up to the two (2)
swimming pools, sir.
Q. Is that for each of the six (6) policies namely:
Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage
against earthquake shock as provided for in each of
the six (6) policies extend to the two (2) swimming
pools only?
WITNESS:
Because it says here in the policies, in the
enumeration "Earthquake Shock Endorsement, in the
Clauses and Warranties: Item 5 only (Earthquake
Shock Endorsement)," sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock
endorsement on stand alone basis. For swimming
pools we do cover earthquake shock. For building we
covered it for full earthquake coverage which
includes earthquake shock. . .
COURT:
As far as earthquake shock endorsement you do not
have a specific coverage for other things other than
swimming pool? You are covering building? They are
covered by a general insurance?
9 DIATO.2013400036
ATTY. BUSMENTE
WITNESS:
Earthquake shock coverage could not stand alone. If
we are covering building or another we can issue
earthquake shock solely but that the moment I see
this, the thing that comes to my mind is either
insuring a swimming pool, foundations, they are
normally affected by earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. 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
WITNESS:
As I have mentioned earlier, earthquake shock
cannot stand alone without the other half of it. I
assure you that this one covers the two swimming
pools with respect to earthquake shock endorsement.
Based on it, if we are going to look at the premium
there has been no change with respect to the rates.
Everytime (sic) there is a renewal if the intention of
the insurer was to include the earthquake shock, I
think there is a substantial increase in the premium.
We are not only going to consider the two (2)
swimming pools of the other as stated in the policy.
As I see, there is no increase in the amount of the
premium. I must say that the coverage was not
broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
COMMERCIAL LAW REVIEW (INSURANCE)
WITNESS:
They are the same in the sence (sic), in the amount of
the coverage. If you are going to do some
computation based on the rates you will arrive at the
same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming
pools for fire insurance?
WITNESS:
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.
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:
As an insurance executive will you not attach any
significance to the deletion of the qualifying phrase
for the policies? SaHcAC
WITNESS:
My answer to that would be, the deletion of that
particular phrase is inadvertent. Being a company
underwriter, we do not cover. . it was inadvertent
10
ATTY. BUSMENTE
because of the previous policies that we have issued
with no specific attachments, premium rates and so
on. It was inadvertent, sir.
The Court also rejects 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:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of
yours Mr. Witness, what exactly did you tell Atty.
Omlas (sic) to copy from Exhibit "H" for purposes of
procuring the policy from Philippine Charter
Insurance Corporation?
A. I told him that the insurance that they will have to
get will have the same provisions as this American
Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit "H" of course?
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same except
that of the premium rates?
A. Yes, sir. He assured me that with regards to the
insurance premium rates that they will be charging
will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN,
January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you
made a comparison of the provisions and scope of
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
coverage of Exhibits "I" and "H" sometime in the
third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or
difference between the policy wordings as well as
scope of coverage of Exhibits "I" and "H"
respectively? IHaECA
A. No, sir, I did not discover any difference inasmuch
(sic) as I was assured already that the policy wordings
and rates were copied from the insurance policy I sent
them but it was only when this case erupted that we
discovered some discrepancies.
Q. With respect to the items declared for insurance
coverage did you notice any discrepancy at any time
between those indicated in Exhibit "I" and those
indicated in Exhibit "H" respectively?
A. With regard to the wordings I did not notice any
difference because it was exactly the same
P393,000.00 on the two (2) swimming pools only
against the peril of earthquake shock which I
understood before that this provision will have to be
placed here because this particular provision under
the peril of earthquake shock only is requested
because this is an insurance policy and therefore
cannot be insured against fire, so this has to be
placed.
The verbal assurances allegedly given by 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 In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot
swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
11
ATTY. BUSMENTE
pp. 22-26
Q. Do you recall the circumstances that led to your
discussion regarding the extent of coverage of the
policy issued by Philippine Charter Insurance
Corporation?
A. I remember that when I returned to the office after
the inspection, I got a photocopy of the insurance
coverage policy and it was indicated under Item 3
specifically that the coverage is only for earthquake
shock. Then, I remember I had a talk with Atty.
Umlas (sic), and I relayed to him what I had found
out in the policy and he confirmed to me indeed only
Item 3 which were the two swimming pools have
coverage for earthquake shock.
xxx xxx xxx
Q. Now, may we know from you Engr. de Leon your
basis, if any, for stating that except for the swimming
pools all affected items have no coverage for
earthquake shock?
xxx xxx xxx
A. I based my statement on my findings, because
upon my examination of the policy I found out that
under Item 3 it was specific on the wordings that on
the two swimming pools only, then enclosed in
parenthesis (against the peril[s] of earthquake shock
only), and secondly, when I examined the summary
of premium payment only Item 3 which refers to the
swimming pools have a computation for premium
payment for earthquake shock and all the other items
have no computation for payment of
premiums. TAcDHS
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
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
his signature or his "adhesion" thereto. Through the years, the courts have held that in
these type of contracts, the parties do not bargain on equal footing, the weaker party's
participation being reduced to the alternative to take it or leave it. Thus, these contracts
are viewed as traps for the weaker party whom the courts of justice must
protect. 32 Consequently, any ambiguity therein is resolved against the insurer, or
construed liberally in favor of the insured. 33
The case law will show that this Court will only rule out blind adherence to terms where
facts and circumstances will show that they are basically one-sided. 34 Thus, we have
called on lower courts to remain careful in scrutinizing the factual circumstances behind
each case to determine the efficacy of the claims of contending parties. In Development
Bank of the Philippines v. National Merchandising Corporation, et al., 35 the parties,
who were acute businessmen of experience, were presumed to have assented to the
assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner is not ambiguous. 37
cannot claim it did not know the provisions of the policy. From the inception of the IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
policy, petitioner had required the respondent to copy verbatim the provisions and terms for certiorari is dismissed. No costs. cIEHAC
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 SO ORDERED.
of petitioner's knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO
MANTOHAC 36
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of
policy you would want for those facilities in Agoo
Playa?
A. Yes, sir. I told him that I will agree to that renewal
of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or
exact provisions of the previous insurance policy we
had with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that
the provisions which you wanted in the American
Home Insurance policy are to be incorporated in the
PCIC policy?
12
ATTY. BUSMENTE
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine
Charter Insurance Corporation I specifically told him
that the policy and wordings shall be copied from the
AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy
No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was
variance in some terms, specifically in the replacement cost endorsement, but the
principal provisions of the policy remained essentially similar to AHAC-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
[G.R. No. 167330. September 18, 2009.]
PHILIPPINE HEALTH CARE PROVIDERS,
INC., petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
FACTS:
Petitioner is a domestic corporation whose primary purpose is to establish, maintain,
conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization. On January 27, 2000, respondent CIR sent
petitioner a formal deman letter and the corresponding assessment notices demanding
the payment of deficiency taxes, including surcharges and interest, for the taxable years
1996 and 1997 in the total amount of P224,702,641.18. The deficiency assessment was
imposed on petitioners health care agreement with the members of its health care
program pursuant to Section 185 of the 1997 Tax Code. Petitioner protested the
assessment in a letter dated February 23, 2000. As respondent did not act on the
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking
the cancellation of the deficiency VAT and DST assessments. On April 5, 2002, the
CTA rendered a decision, ordering the petitioner 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 appealed the CTA decision to the
(CA) insofar as it cancelled the DST assessment. He claimed that petitioners health
care agreement was a contract of insurance subject to DST under Section 185 of the
1997 Tax Code.
On August 16, 2004, the CA rendered its decision which held that petitioners health
care agreement was in the nature of a non-life insurance contract subject to DST.
Respondent is ordered to pay the deficiency Documentary Stamp Tax. Petitioner
moved for reconsideration but the CA denied it.
ISSUES:
(1) Whether or not Philippine Health Care Providers, Inc. engaged in insurance
business.
(2) Whether or not the agreements between petitioner and its members possess all
elements necessary in the insurance contract.
HELD:
NO. Health Maintenance Organizations are not engaged in the insurance business. The
SC said in 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. 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. Petitioner is
admittedly an HMO. Under RA 7878 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. The payments do not vary with the extent, frequency or type of
services provided. Section 2 (2) of PD 1460 enumerates what constitutes doing an
insurance business or transacting an insurance businesswhich are making or
proposing to make, as insurer, any insurance contract; making or proposing to make, as
surety, any contract of suretyship as a vocation and not as merely incidental to any
13
ATTY. BUSMENTE
other legitimate business or activity of the surety; 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; 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.
Overall, petitioner appears to provide insurance-type benefits to its members (with
respect to its curative medical services), but these are incidental to the principal activity
of providing them medical care. The insurance-like aspect of petitioners business is
miniscule compared to its noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance services, it cannot be considered as
being in the insurance business.
FACTS:
Philippine Health Care Providers, Inc. is a domestic corporation whose primary
purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice
health care delivery system or a health maintenance organization to take care of
the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization."
Individuals enrolled in its health care programs pay an annual membership fee and
are entitled to various preventive, diagnostic and curative medical services
provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.
January 27, 2000: 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
Petitioner protested the assessment in a letter dated February 23, 2000.
CIR 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.
CTA: PARTIALLY GRANTED
to pay VAT
DST assessment CANCELLED AND SET ASIDE
CIR: health care agreement was a contract of insurance subject to DST under
Section 185 of the 1997 Tax Code
CA: health care agreement was in the nature of a non-life insurance contract
subject to DST
Court Affirmed CA
ISSUE:
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
1. W/N the Philippine Health Care Providers, Inc (HMO) was engaged in the
business of insurance during the pertinent taxable years - NO
2. W/N the Philippine Health Care Providers, Inc enters into an insurance contract
- NO
HELD: motion for reconsideration is GRANTED
1. NO
P.D. 612 Insurance Code
Sec. 2 (2)
(2) The term "doing an insurance business" or "transacting an insurance business",
within the meaning of this Code, shall include:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making or proposing to make, as surety, any contract of suretyship as a vocation
and not as merely incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning of
this Code;
(d) doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code the fact that no profit is derived from
the making of insurance contracts, agreements or transactions or that no separate or
direct consideration is received therefor, shall not be deemed conclusive to show that
the making thereof does not constitute the doing or transacting of an insurance
business.
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
2. NO
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
14
ATTY. BUSMENTE
expenses up to, but not beyond, the schedule of rates contained in the policy
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
any indemnification resulting from the payment for services rendered in case of
emergency by non-participating health providers would still be incidental to
petitioners purpose of providing and arranging for health care services and does
not transform it into an insurer.
As an HMO, it is its obligation to maintain the good health of its members
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
Overall, petitioner appears to provide insurance-type benefits to its members (with
respect to its curative medical services), but these are incidental to the principal
activity of providing them medical care. The "insurance-like" aspect of petitioners
business is miniscule compared to its noninsurance activities. Therefore, since it
substantially provides health care services rather than insurance services, it cannot
be considered as being in the insurance business.
principal purpose test
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
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
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: - NOT present
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium.
no indemnity
member can take advantage of the bulk of the benefits anytime even in the absence
of any peril, loss or damage on his or her part.
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
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
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
HMO, undertakes a business risk when it offers to provide health services. 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.
In our jurisdiction, a commentator of our insurance laws has pointed out that, even
if a contract contains all the elements of an insurance contract, if its primary
purpose is the rendering of service, it is not a contract of insurance. The primary
purpose of the parties in making the contract may negate the existence of an
insurance contract.
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
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to
health of the people and instill health consciousness among
them. HAEIac
ARTICLE III
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and
comprehensive approach to health development which shall
endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There
shall be priority for the needs of the underprivileged sick,
elderly, disabled, women, and children. The State shall
endeavor to provide free medical care to paupers. 1
For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, Inc. 2
We recall the facts of this case, as follows:
15
ATTY. BUSMENTE
Petitioner is a domestic corporation whose primary purpose is "[t]o
establish, maintain, conduct and operate a prepaid group practice
health care delivery system or a health maintenance organization to
take care of the sick and disabled persons enrolled in the health care
plan and to provide for the administrative, legal, and financial
responsibilities of the organization". Individuals enrolled in its
health care programs pay an annual membership fee and are entitled
to various preventive, diagnostic and curative medical services
provided by its duly licensed physicians, specialists and other
professional technical staff participating in the group practice health
delivery system at a hospital or clinic owned, operated or accredited
by it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue
[CIR] sent petitioner a formal demand letter and the corresponding
assessment notices demanding the payment of deficiency taxes,
including surcharges and interest, for the taxable years 1996 and
1997 in the total amount of P224,702,641.18. . . .
The deficiency [documentary stamp tax (DST)] assessment was
imposed on petitioner's health care agreement with the members of
its health care program pursuant to Section 185 of the 1997 Tax
Code . . .
xxx xxx xxx
Petitioner protested the assessment in a letter dated February 23,
2000. As respondent did not act on the protest, petitioner filed a
petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive
portion of which read:
WHEREFORE, in view of the foregoing, the instant
Petition for Review is PARTIALLY GRANTED. Petitioner
is hereby ORDERED to PAY the deficiency VAT
amounting to P22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until fully paid for
the 1996 VAT deficiency and P31,094,163.87 inclusive of
25% surcharge plus 20% interest from January 20, 1998
until fully paid for the 1997 VAT deficiency. Accordingly,
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED
AND SET ASIDE. Respondent is ORDERED to DESIST
from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals
(CA)] insofar as it cancelled the DST assessment. He claimed that
petitioner's health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code. DIEAHc
On August 16, 2004, the CA rendered its decision. It held that
petitioner's health care agreement was in the nature of a non-life
insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The
Decision of the Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered petitioner
to desist from collecting the same is REVERSED and SET
ASIDE.
Respondent is ordered to pay the amounts of
P55,746,352.19 and P68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively,
plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248
and 249 of the Tax Code, until the same shall have been
fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence,
petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the
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
16
ATTY. BUSMENTE
organization (HMO) and not an insurance company is irrelevant because contracts
between companies like petitioner and the beneficiaries under their plans are treated
as insurance contracts. Moreover, DST is not a tax on the business transacted but an
excise on the privilege, opportunity or facility offered at exchanges for the
transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration
and supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National
Internal Revenue of 1997 is imposed only on a
company engaged in the business of fidelity bonds
and other insurance policies. Petitioner, as an HMO,
is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v.
Philippine National Bank, affirmed in effect the CA's
disposition that health care services are not in the
nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care
agreements from items subject to DST is clear,
especially in the light of the amendments made in the
DST law in 2002.
(e) Assuming arguendo that petitioner's agreements
are contracts of indemnity, they are not those
contemplated under Section 185.
(f) Assuming arguendo that petitioner's agreements
are akin to health insurance, health insurance is not
covered by Section 185.
(g) The agreements do not fall under the phrase
"other branch of insurance" mentioned in Section
185.
(h) The June 12, 2008 decision should only apply
prospectively.
(i) Petitioner availed of the tax amnesty benefits
under RA 5 9480 for the taxable year 2005 and all
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COMMERCIAL LAW REVIEW (INSURANCE)
prior years. Therefore, the questioned assessments on
the DST are now rendered moot and academic. 6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted
their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed
of a tax amnesty under RA 9480 7 (also known as the "Tax Amnesty Act of 2007")
by fully paying the amount of P5,127,149.08 representing 5% of its net worth as of
the year ending December 31, 2005. 8
We find merit in petitioner's motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987. 9 It is engaged in the dispensation of the
following medical services to individuals who enter into health care agreements
with it:
Preventive medical services such as periodic monitoring of health
problems, family planning counseling, consultation and advices on
diet, exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations,
x-rays, urinalysis, fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other
remedial and therapeutic processes in the event of an injury or
sickness on the part of the enrolled member. 10
Individuals enrolled in its health care program pay an annual membership fee.
Membership is on a year-to-year basis. The medical services are dispensed to
enrolled members in a hospital or clinic owned, operated or accredited by petitioner,
through physicians, medical and dental practitioners under contract with it. It
negotiates with such health care practitioners regarding payment schemes, financing
and other procedures for the delivery of health services. Except in cases of
emergency, the professional services are to be provided only by petitioner's
physicians, i.e., those directly employed by it 11 or whose services are contracted by
it. 12 Petitioner also provides hospital services such as room and board
accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care. 13 If and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care providers for the
services rendered, at pre-agreed rates. 14
17
ATTY. BUSMENTE
To avail of petitioner's health care programs, the individual members are required to
sign and execute a standard health care agreement embodying the terms and
conditions for the provision of the health care services. The same agreement
contains the various health care services that can be engaged by the enrolled
member, i.e., preventive, diagnostic and curative medical services. Except for the
curative aspect of the medical service offered, the enrolled member may actually
make use of the health care services being offered by petitioner at any time.
HEALTH MAINTENANCE ORGANIZATIONS
ARE NOT ENGAGED IN THE INSURANCE
BUSINESS
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO
and not an insurer because its agreements are treated as insurance contracts and the
DST is not a tax on the business but an excise on the privilege, opportunity or
facility used in the transaction of the business. 15
Petitioner, however, submits that it is of critical importance to characterize the
business it is engaged in, that is, to determine whether it is an HMO or an insurance
company, as this distinction is indispensable in turn to the issue of whether or not it
is liable for DST on its health care agreements. 16
A second hard look at the relevant law and jurisprudence convinces the Court that
the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997)
provides:
Section 185. Stamp tax on fidelity bonds and other insurance
policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or
company or corporation transacting the business
of accident, fidelity, employer's liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances,
conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein
specified, and on all obligations guaranteeing the validity or
legality of any bond or other obligations issued by any
province, city, municipality, or other public body or
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
organization, and on all obligations guaranteeing the title to
any real estate, or guaranteeing any mercantile credits, which
may be made or renewed by any such person, company or
corporation, there shall be collected a documentary stamp tax
of fifty centavos (P0.50) on each four pesos (P4.00), or
fractional part thereof, of the premium charged. (Emphasis
supplied) ECaITc
It is a cardinal rule in statutory construction that no word, clause, 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
ofinsurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health
Insurance Act of 1995"), an HMO is "an entity that provides, offers or arranges for
coverage of designated health services needed by plan members for a fixed prepaid
premium". 19 The payments do not vary with the extent, frequency or type of
services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance
during the pertinent taxable years?
We rule that it was not.
Section 2 (2) of PD 20 1460 (otherwise known as the Insurance Code) enumerates
what constitutes "doing an insurance business" or "transacting an insurance
business":
a) making or proposing to make, as insurer, any
insurance contract;
18
ATTY. BUSMENTE
b) making or proposing to make, as surety, any
contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity
of the surety;
c) doing any kind of business, including a reinsurance
business, specifically recognized as constituting the
doing of an insurance business within the meaning of
this Code;
d) doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no
profit is derived from the making of insurance contracts, agreements
or transactions or that no separate or direct consideration is received
therefore, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance
business. 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 accident more
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
truly they constitute the quantity purchase of well-rounded,
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.
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
19
ATTY. BUSMENTE
contingent service agreements. The fallacy is in looking only at the
risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is
involved or assumed, but on whether that or something else to
which it is related in the particular plan is its principal object
purpose. 24 (Emphasis supplied)
In California Physicians' Service v. Garrison, 25 the California court felt that, after
scrutinizing the plan of operation as a whole of the corporation, it was service rather
than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the
service is not engaged in the insurance business. Absence or
presence of assumption of risk or peril is not the sole test to be
applied in determining its status. The question, more broadly, is
whether, looking at the plan of operation as a whole, 'service'
rather than 'indemnity' is its principal object and purpose.
Certainly the objects and purposes of the corporation organized and
maintained by the California physicians have a wide scope in the
field of social service. Probably there is no more impelling need
than that of adequate medical care on a voluntary, low-cost
basis for persons of small income. The medical profession
unitedly is endeavoring to meet that need. Unquestionably this is
'service' of a high order and not 'indemnity'. 26 (Emphasis
supplied) EcDATH
American courts have pointed out that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision
of medical services through participating physicians while insurance companies
simply undertake to indemnify the insured for medical expenses incurred up to a
pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and
Blue Shield of New Jersey 27 is clear on this point:
The basic distinction between medical service corporations and
ordinary health and accident insurers is that the former undertake to
provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial
burden, while the latter only undertake to indemnify an insured for
medical expenses up to, but not beyond, the schedule of rates
contained in the policy.AcSCaI
xxx xxx xxx
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
The primary purpose of a medical service corporation, however, is
an undertaking to provide physicians who will render services to
subscribers on a prepaid basis. Hence, if there are no physicians
participating in the medical service corporation's plan, not only
will the subscribers be deprived of the protection which they
might reasonably have expected would be provided, but the
corporation will, in effect, be doing business solely as a health
and accident indemnity insurer without having qualified as such
and rendering itself subject to the more stringent financial
requirements of the General Insurance Laws. . . .
A participating provider of health care services is one who agrees in
writing to render health care services to or for persons covered by a
contract issued by health service corporation in return for which the
health service corporation agrees to make payment directly to
the participating provider. 28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the
primary purpose of the business to provide medical 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
20
ATTY. BUSMENTE
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
inNestle 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. InAsturias 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,
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
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
Under the health care agreement, the rendition of hospital, medical
and professional services to the member in case of sickness, injury
or emergency or his availment of so-called "out-patient services"
(including physical examination, x-ray and laboratory tests, medical
consultations, vaccine administration and family planning
counseling) is the contingent event which gives rise to liability on
the part of the member. In case of exposure of the member to
liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from
liability by paying for expenses arising from the stipulated
contingencies belies its claim that its services are prepaid. The
expenses to be incurred by each member cannot be predicted
beforehand, if they can be predicted at all. Petitioner assumes the
risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has
"prepaid". Petitioner does not bear the costs alone but distributes or
spreads them out among a large group of persons bearing a similar
risk, that is, among all the other members of the health care
program. This is insurance. 37
We reconsider. We shall quote once again the pertinent portion of Section 185:
21
ATTY. BUSMENTE
Section 185. Stamp tax on fidelity bonds and other insurance
policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or
company or corporation transacting the business of accident,
fidelity, employer's liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance), . . . (Emphasis
supplied)
In construing this provision, we should be guided by the principle that tax statutes
are strictly construed against the taxing authority. 38 This is because taxation is a
destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the
government. 39 Hence, tax laws may not be extended by implication beyond the
clear import of their language, nor their operation enlarged so as to embrace matters
not specifically provided. 40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a
health care agreement is in the nature of non-life insurance, which is primarily a
contract of indemnity. However, those cases did not involve the interpretation of a
tax provision. Instead, they dealt with the liability of a health service provider to a
member under the terms of their health care agreement. Such contracts, as contracts
of adhesion, are liberally interpreted in favor of the member and strictly against the
HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are
applicable here. cEaSHC
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. An insurance
contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the
happening of the designed peril;
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
DIATO.2013400036
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5. In consideration of the insurer's promise, the
insured pays a premium. 41
Do the agreements between petitioner and its members possess all these elements?
They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that,
even if a contract contains all the elements of an insurance contract, if its primary
purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all
the four elements mentioned above would be an insurance
contract.The primary purpose of the parties in making the
contract may negate the existence of an insurance contract. For
example, a law firm which enters into contracts with clients
whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged
in the insurance business. Its contracts are simply for the purpose of
rendering personal services. On the other hand, a contract by which
a corporation, in consideration of a stipulated amount, agrees at its
own expense to defend a physician against all suits for damages for
malpractice is one of insurance, and the corporation will be deemed
as engaged in the business of insurance. Unlike the lawyer's retainer
contract, the essential purpose of such a contract is not to render
personal services, but to indemnify against loss and damage
resulting from the defense of actions for malpractice. 42 (Emphasis
supplied)
Second. Not all the necessary elements of a contract of insurance are present in
petitioner's agreements. To begin with, there is no loss, damage or liability on the
part of the member that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined consideration in exchange
for the hospital, medical and professional services rendered by the petitioner's
physician or affiliated physician to him. In case of availment by a member of the
benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who
pays the participating physicians and other health care providers for the services
rendered at pre-agreed rates. The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a
monetary liability on the part of the member to any third party-provider of medical
22
ATTY. BUSMENTE
services which might in turn necessitate indemnification from petitioner. The terms
"indemnify" or "indemnity" presuppose that a liability or claim has already been
incurred. There is no indemnity precisely because the member merely avails of
medical services to be paid or already paid in advance at a pre-agreed price under
the agreements. 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 non-participating physician or hospital. However, this is only a
very minor part of the list of services available. The assumption of the expense by
petitioner is not confined to the happening of a contingency but includes incidents
even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program,
Inc., 43 although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from a non-designated doctor, this did
not make defendant an insurer. Citing Jordan, the Court determined that "the
primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services". 44 Since indemnity
of the insured was not the focal point of the agreement but the extension of medical
services to the member at an affordable cost, it did not partake of the nature of a
contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not
necessarily true that risk alone is sufficient to establish it. Almost anyone who
undertakes a contractual obligation always bears a certain degree of financial risk.
Consequently, there is a need to distinguish prepaid service contracts (like those of
petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide
health services: the risk that it might fail to earn a reasonable return on its
investment. But it is not the risk of the type peculiar only to insurance companies.
Insurance risk, also known as actuarial risk, is the risk that the cost of insurance
claims might be higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured. 45
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COMMERCIAL LAW REVIEW (INSURANCE)
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 legislative history. The text of Section 185 came into U.S. law as early
as 1904 when HMOs and health care agreements were not even in existence in this
jurisdiction. It was imposed under Section 116, Article XI of Act No.
1189(otherwise known as the "Internal Revenue Law of 1904") 46 enacted on July
2, 1904 and became effective on August 1, 1904. Except for the rate of tax, Section
185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of
Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116.There shall be levied, collected, and paid for and in
respect to the several bonds, debentures, or certificates of stock and
indebtedness, and other documents, instruments, matters, and things
mentioned and described in this section, or for or in respect to the
vellum, parchment, or paper upon which such instrument, matters,
or things or any of them shall be written or printed by any person or
persons who shall make, sign, or issue the same, on and after
January first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Third . . . (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,
23
ATTY. BUSMENTE
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. 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
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COMMERCIAL LAW REVIEW (INSURANCE)
Intercare). However, there are those who claim that Health Maintenance, Inc. is the
HMO industry pioneer, having set foot in the Philippines as early as 1965 and
having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly
and currently, there are 36 registered HMOs with a total enrollment of more than 2
million. 49
We can clearly see from these two histories (of the DST on the one hand and HMOs
on the other) that when the law imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various amendments to the DST
law were enacted, they were already in existence in the Philippines and the term had
in fact already been defined by RA 7875. If it bad been the intent of the legislature
to impose DST on health care agreements, it could have done so in clear and
categorical terms. It had many opportunities to do so. But it did not. The fact that
the NIRC contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known as such, belies any
legislative intent to impose it on them. As a matter of fact, petitioner was assessed
its DST liability only on January 27, 2000, after more than a decade in the
business as an HMO. 50
Considering that Section 185 did not change since 1904 (except for the rate of tax),
it would be safe to say that health care agreements were never, at any time,
recognized as insurance contracts or deemed engaged in the business of insurance
within the context of the provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty and is unlimited in
its range, acknowledging in its very nature no limits, so that security against its
abuse is to be found only in the responsibility of the legislature which imposes the
tax on the constituency who is to pay it. 51 So potent indeed is the power that it was
once opined that "the power to tax involves the power to destroy". 52
Petitioner claims that the assessed DST to date which amounts to P376 million 53 is
way beyond its net worth of P259 million. 54Respondent 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
24
ATTY. BUSMENTE
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to
the proprietary rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the "hen that lays
the golden egg". 58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of the nation's thrust
towards a better economy which will ultimately benefit the majority of our
people. 59
PETITIONER'S TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable
years 1996 and 1997 became moot and academic 60 when it availed of the tax
amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing
5% of its net worth as of the year ended December 31, 2005 and complied with all
requirements of the tax amnesty. Under Section 6 (a) of RA 9480, it is entitled to
immunity from payment of taxes as well as additions thereto, and the appurtenant
civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years. 61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty
entitles a taxpayer to immunity from payment of the tax involved,
including the civil, criminal, or administrative penalties provided
under the 1997 [NIRC], for tax liabilities arising in 2005 and the
preceding years.
In view of petitioner's availment of the benefits of [RA 9840], and
without conceding the merits of this case as discussed
above,respondent concedes that such tax amnesty extinguishes
the tax liabilities of petitioner. This admission, however, is not
meant to preclude a revocation of the amnesty granted in case it is
found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law. 62 (Emphasis supplied)
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
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 64in CIR v. Philippine National
Bank 65 that a health care agreement of Philamcare Health Systems is not an
insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of
this Court dismissing the appeal in Philippine National Bank (G.R. No.
148680). 66 Petitioner argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court should apply the CA
ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case. When we dismissed the petition,
we effectively affirmed the CA ruling being questioned. As a result, our ruling in
that case has already become final. 67 When a minute resolution denies or dismisses
a petition for failure to comply with formal and substantive requirements, the
challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained. 68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata. 69 However, if other parties or another subject
matter (even with the same parties and issues) is involved, the minute resolution is
not binding precedent. Thus, in CIR v. Baier-Nickel, 70 the Court noted that a
previous case, CIR v. Baier-Nickel 71 involving the same parties and the same
issues, was previously disposed of by the Court thru a minute resolution dated
February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that
the previous case "ha(d) no bearing" on the latter case because the two cases
involved different subject matters as they were concerned with the taxable income
of different taxable years. 72
Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph
of Section 14, Article VIII of the Constitution that the facts and the law on which
25
ATTY. BUSMENTE
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.
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COMMERCIAL LAW REVIEW (INSURANCE)
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.
[G.R. No. 113899. October 13, 1999.]
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner, vs.
COURT OF APPEALS AND MEDARDA V.
LEUTERIO, respondents.
SYNOPSIS
This is a petition for review under Rule 45 of the Rules of Court, assailing the decision
and resolution of the Court of Appeals dated May 17, 1994 and January 4, 1994,
respectively, in CA G.R. CV No. 18341. The appellate court affirmed in toto the
judgment of the Regional Trial Court of Misamis Oriental in an insurance claim filed
by private respondent against Great Pacific Life Assurance Co.
The Supreme Court found the petition not meritorious. Contrary to petitioner's
allegations, there was no sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the insured's widow who was not even sure
if the medicines taken by Dr. Leuterio were for hypertension, the petitioner had not
proven nor produced any witness who could attest to Dr. Leuterio's medical history.
Clearly, it had failed to establish that there was concealment made by the insured,
hence it cannot refuse payment of the claim.
SYLLABUS
26
ATTY. BUSMENTE
1. COMMERCIAL LAW; INSURANCE; MORTGAGE REDEMPTION
INSURANCE; RATIONALE. The rationale of a group insurance policy of
mortgagors, otherwise known as the "mortgage redemption insurance," is a
device for the protection of both the mortgagee and the mortgagor. On the part of
the mortgagee, it has to enter into such form of contract so that in the event of the
unexpected demise of the mortgagor during the subsistence of the mortgage
contract, the proceeds from such insurance will be applied to the payment of the
mortgage debt, thereby relieving the heirs of the mortgagor from paying the
obligation. In a similar vein, ample protection is given to the mortgagor under
such a concept so that in the event of death; the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage
indebtedness. Consequently, where the mortgagor pays the insurance premium
under the group insurance policy, making the loss payable to the mortgagee, the
insurance is on the mortgagor's interest, and the mortgagor continues to be a party
to the contract. In this type of policy insurance, the mortgagee is simply an
appointee of the insurance fund, such loss-payable clause does not make the
mortgagee a party to the contract.
2. ID.; ID.; ID.; INSURED MAY BE REGARDED AS REAL PARTY IN
INTEREST, ALTHOUGH HE HAS ASSIGNED THE POLICY FOR PURPOSE
OF COLLECTION, OR HAS ASSIGNED AS COLLATERAL SECURITY ANY
JUDGMENT HE MAY OBTAIN. The insured private respondent did not cede
to the mortgagee all his rights or interests in the insurance, the policy stating that:
"In the event of the debtor's death before his indebtedness with the Creditor
[DBP] shall have been fully paid, an amount to pay the outstanding indebtedness
shall first be paid to the creditor and the balance of sum assured, if there is any,
shall then be paid to the beneficiary/ies designated by the debtor." When DBP
submitted the insurance claim against petitioner, the latter denied payment
thereof, interposing the defense of concealment committed by the insured.
Thereafter, DBP collected the debt from the mortgagor and took the necessary
action of foreclosure on the residential lot of private respondent. In Gonzales La
O vs. Yek Tong Lin Fire & Marine Ins. Co. we held: "Insured, being the person
with whom the contract was made, is primarily the proper person to bring suit
thereon. . . . Subject to some exceptions, insured may thus sue, although the
policy is taken wholly or in part for the benefit of another person named or
unnamed, and although it is expressly made payable to another as his interest may
appear or otherwise. . . . Although a policy issued to a mortgagor is taken out for
the benefit of the mortgagee and is made payable to him, yet the mortgagor may
sue thereon in his own name, especially where the mortgagee's interest is less
than the full amount recoverable under the policy, . . . 'And in volume 33, page
82, of the same work, we read the following: `Insured may be regarded as the real
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
party in interest, although he has assigned the policy for the purpose of collection,
or has assigned as collateral security any judgment he may obtain." And since a
policy of insurance upon life or health may pass by transfer, will or succession to
any person, whether he has an insurable interest or not, and such person may
recover it whatever the insured might have recovered, the widow of the decedent
Dr. Leuterio may file the suit against the insurer, Grepalife.
3. ID.; ID.; ID.; FRAUDULENT INTENT ON THE PART OF THE INSURED
MUST BE ESTABLISHED TO ENTITLE THE INSURER TO RESCIND THE
CONTRACT. The question of whether there was concealment was aptly
answered by the appellate court, thus: "The insured, Dr. Leuterio, had answered
in his insurance application that he was in good health and that he had not
consulted a doctor for any of the enumerated ailments, including hypertension;
when he died the attending physician had certified in the death certificate that the
former died of cerebral hemorrhage, probably secondary to hypertension. From
this report, the appellant insurance company refused to pay the insurance claim.
Appellant alleged that the insured had concealed the fact that he had
hypertension. Contrary to appellant's allegations, there was no sufficient proof
that the insured had suffered from hypertension. Aside from the statement of the
insured's widow who was not even sure if the medicines taken by Dr. Leuterio
were for hypertension, the appellant had not proven nor produced any witness
who could attest to Dr. Leuterio's medical history . . . Appellant insurance
company had failed to establish that there was concealment made by the insured,
hence, it cannot refuse payment of the claim." The fraudulent intent on the part of
the insured must be established to entitle the insurer to rescind the contract.
Misrepresentation as a defense of the insurer to avoid liability is an affirmative
defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the insurer. In the case at bar, the petitioner failed to clearly
and satisfactorily establish its defense, and is therefore liable to pay the proceeds
of the insurance.
Facts: A contract of group life insurance was executed between Great Pacific Life
Assurance Corporation (Grepalife) and Development Bank of the Philippines (DBP).
Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP. On 11
November 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP
applied for membership in the group life insurance plan. In an application form, Dr.
Leuterio answered questions concerning his health condition as follows: "7. Have you
ever had, or consulted, a physician for a heart condition, high blood pressure, cancer,
diabetes, lung, kidney or stomach disorder or any other physical impairment? Answer:
No. If so give details ___________. 8. Are you now, to the best of your knowledge, in
good health? Answer: [ x ] Yes [ ] No." On 15 November 1983, Grepalife issued
27
ATTY. BUSMENTE
Certificate B-18558, as insurance coverage of Dr. Leuterio, to the extent of his DBP
mortgage indebtedness amounting to P86,200.00. On 6 August 1984, Dr. Leuterio died
due to "massive cerebral hemorrhage." Consequently, DBP submitted a death claim to
Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not physically
healthy when he applied for an insurance coverage on 15 November 1983. Grepalife
insisted that Dr. Leuterio did not disclose he had been suffering from hypertension,
which caused his death. Allegedly, such non- disclosure constituted concealment that
justified the denial of the claim. On 20 October 1986, the widow of the late Dr.
Leuterio, Medarda V. Leuterio, filed a complaint with the Regional Trial Court of
Misamis Oriental, Branch 18, against Grepalife for "Specific Performance with
Damages." During the trial, Dr. Hernando Mejia, who issued the death certificate, was
called to testify. Dr. Mejias findings, based partly from the information given by the
widow, stated that Dr. Leuterio complained of headaches presumably due to high blood
pressure. The inference was not conclusive because Dr. Leuterio was not autopsied,
hence, other causes were not ruled out. On 22 February 1988, the trial court rendered a
decision in favor of the widow and against Grepalife. On 17 May 1993, the Court of
Appeals sustained the trial courts decision. Grepalife filed the petition for review.
Issue: Whether Dr. Leuterio failed to disclose that he had hypertension, which might
have caused his death, and thus concealment can be interposed by Grepalife as a
defense to annul the insurance contract.
Held: Concealment exists where the assured had knowledge of a fact material to the
risk, and honesty, good faith, and fair dealing requires that he should communicate it to
the assured, but he designedly and intentionally withholds the same. Grepalife merely
relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported
by the information given by the widow of the decedent. Grepalife asserts that Dr.
Mejias technical diagnosis of the cause of death of Dr. Leuterio was a duly
documented hospital record, and that the widows declaration that her husband had
"possible hypertension several years ago" should not be considered as hearsay, but as
part of res gestae. On the contrary, the medical findings were not conclusive because
Dr. Mejia did not conduct an autopsy on the body of the decedent. As the attending
physician, Dr. Mejia stated that he had no knowledge of Dr. Leuterios any previous
hospital confinement. Dr. Leuterios death certificate stated that hypertension was only
"the possible cause of death." The widows statement, as to the medical history of her
husband, was due to her unreliable recollection of events. Hence, the statement of the
physician was properly considered by the trial court as hearsay. The insured, Dr.
Leuterio, had answered in his insurance application that he was in good health and that
he had not consulted a doctor or any of the enumerated ailments, including
hypertension; when he died the attending physician had certified in the death certificate
that the former died of cerebral hemorrhage, probably secondary to hypertension.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

Contrary to Grepalifes allegations, there was no sufficient proof that the insured had "7. Have you ever had, or consulted, a physician for a heart
suffered from hypertension. Aside from the statement of the insureds widow who was condition, high blood pressure, cancer, diabetes, lung, kidney
not even sure if the medicines taken by Dr. Leuterio were for hypertension, Grepalife or stomach disorder or any other physical impairment?
had not proven nor produced any witness who could attest to Dr. Leuterios medical Answer: No. If so give details ___________.
history. Grepalife had failed to establish that there was concealment made by the
insured, hence, it cannot refuse payment of the claim. The fraudulent intent on the part 8. Are you now, to the best of your knowledge, in good health?
of the insured must be established to entitle the insurer to rescind the contract.
Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense Answer: [ x ] Yes [ ] No." 4 cda
and the duty to establish such defense by satisfactory and convincing evidence rests On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance
upon the insurer. Herein, Grepalife failed to clearly and satisfactorily establish its coverage of Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting to
defense, and is therefore liable to pay the proceeds of the insurance. eighty-six thousand, two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage."
Consequently, DBP submitted a death claim to Grepalife. Grepalife denied the claim
This petition for review, under Rule 45 of the Rules of Court, assails the alleging that Dr. Leuterio was not physically healthy when he applied for an insurance
Decision 1 dated May 17, 1993, of the Court of Appeals and its Resolution 2 dated coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did not disclose he
January 4, 1994 in CA-G.R. CV No. 18341. The appellate court affirmed in toto the had been suffering from hypertension, which caused his death. Allegedly, such non-
judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance disclosure constituted concealment that justified the denial of the claim.
claim filed by private respondent against Great Pacific Life Assurance Co. The
dispositive portion of the trial court's decision reads: cdphil On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V.
Leuterio, filed a complaint with the Regional Trial Court of Misamis Oriental, Branch
"WHEREFORE, judgment is rendered adjudging the defendant 18, against Grepalife for "Specific Performance with Damages." 5 During the trial, Dr.
GREAT PACIFIC LIFE ASSURANCE CORPORATION as insurer Hernando Mejia, who issued the death certificate, was called to testify. Dr. Mejia's
under its Group policy No. G-1907, in relation to Certification B- findings, based partly from the information given by the respondent widow, stated that
18558 liable and ordered to pay to the DEVELOPMENT BANK OF Dr. Leuterio complained of headaches presumably due to high blood pressure. The
THE PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, inference was not conclusive because Dr. Leuterio was not autopsied, hence, other
the amount of EIGHTY SIX THOUSAND TWO HUNDRED causes were not ruled out. cdtai
PESOS (P86,200.00); dismissing the claims for damages, attorney's
fees and litigation expenses in the complaint and counterclaim, with On February 22, 1988, the trial court rendered a decision in favor of respondent widow
costs against the defendant and dismissing the complaint in respect and against Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court's
to the plaintiffs, other than the widow-beneficiary, for lack of cause decision. Hence, the present petition. Petitioners interposed the following assigned
of action." 3 errors:

The facts, as found by the Court of Appeals, are as follows: cdtai

A contract of group life insurance was executed between petitioner Great Pacific Life "1. THE LOWER COURT ERRED IN HOLDING
Assurance Corporation (hereinafter Grepalife) and Development Bank of the Philippines DEFENDANT-APPELLANT LIABLE TO THE
(hereinafter DBP). Grepalife agreed to insure the lives of eligible housing loan DEVELOPMENT BANK OF THE PHILIPPINES (DBP)
mortgagors of DBP. WHICH IS NOT A PARTY TO THE CASE FOR PAYMENT
OF THE PROCEEDS OF A MORTGAGE REDEMPTION
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP INSURANCE ON THE LIFE OF PLAINTIFF'S HUSBAND
applied for membership in the group life insurance plan. In an application form, Dr. WILFREDO LEUTERIO ONE OF ITS LOAN
Leuterio answered questions concerning his health condition as follows: BORROWERS, INSTEAD OF DISMISSING THE CASE

28 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
AGAINST DEFENDANT-APPELLANT [Petitioner
Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING
THE CASE FOR WANT OF JURISDICTION OVER THE
SUBJECT OR NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING
DEFENDANT-APPELLANT TO PAY TO DBP THE
AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY
EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL
AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH
ITS GROUP INSURANCE CONTRACT WITH
DEFENDANT-APPELLANT. dctai
4. THE LOWER COURT ERRED IN HOLDING THAT
THERE WAS NO CONCEALMENT OF MATERIAL
INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN
THE GROUP LIFE INSURANCE PLAN BETWEEN
DEFENDANT-APPELLANT OF THE INSURANCE CLAIM
ARISING FROM THE DEATH OF WILFREDO
LEUTERIO." 6
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding
petitioner liable to DBP as beneficiary in a group life
insurance contract from a complaint filed by the
widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding
that Dr. Leuterio concealed that he had hypertension,
which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding
Grepalife liable in the amount of eighty six thousand,
two hundred (P86,200.00) pesos without proof of the
actual outstanding mortgage payable by the
mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the payment thereof, interposing the defense of concealment committed by the insured.
real party in interest, hence the trial court acquired no jurisdiction over the case. It Thereafter, DBP collected the debt from the mortgagor and took the necessary action of
29
ATTY. BUSMENTE
argues that when the Court of Appeals affirmed the trial court's judgment, Grepalife was
held liable to pay the proceeds of insurance contract in favor of DBP, the indispensable
party who was not joined in the suit. prcd
To resolve the issue, we must consider the insurable interest in mortgaged properties and
the parties to this type of contract. The rationale of a group insurance policy of
mortgagors, otherwise known as the "mortgage redemption insurance," is a device for
the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it
has to enter into such form of contract so that in the event of the unexpected demise of
the mortgagor during the subsistence of the mortgage contract, the proceeds from such
insurance will be applied to the payment of the mortgage debt, thereby relieving the
heirs of the mortgagor from paying the obligation. 7 In a similar vein, ample protection
is given to the mortgagor under such a concept so that in the event of death; the
mortgage obligation will be extinguished by the application of the insurance proceeds to
the mortgage indebtedness. 8 Consequently, where the mortgagor pays the insurance
premium under the group insurance policy, making the loss payable to the mortgagee,
the insurance is on the mortgagor's interest, and the mortgagor continues to be a party to
the contract. In this type of policy insurance, the mortgagee is simply an appointee of the
insurance fund, such loss-payable clause does not make the mortgagee a party to the
contract. 9
Section 8 of the Insurance Code provides:
"Unless the policy provides, where a mortgagor of property effects
insurance in his own name providing that the loss shall be payable
to the mortgagee, or assigns a policy of insurance to a mortgagee,
the insurance is deemed to be upon the interest of the mortgagor,
who does not cease to be a party to the original contract, and any act
of his, prior to the loss, which would otherwise avoid the insurance,
will have the same effect, although the property is in the hands of
the mortgagee, but any act which, under the contract of insurance, is
to be performed by the mortgagor, may be performed by the
mortgagee therein named, with the same effect as if it had been
performed by the mortgagor." prcd
The insured private respondent did not cede to the mortgagee all his rights or interests in
the insurance, the policy stating that: "In the event of the debtor's death before his
indebtedness with the Creditor [DBP] shall have been fully paid, an amount to pay the
outstanding indebtedness shall first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the beneficiary/ies designated by the
debtor." 10 When DBP submitted the insurance claim against petitioner, the latter denied
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

foreclosure on the residential lot of private respondent. 11 In Gonzales La O vs. Yek possible cause of death." The private respondent's statement, as to the medical history of
Tong Lin Fire & Marine Ins. Co. 12 we held: her husband, was due to her unreliable recollection of events. Hence, the statement of
the physician was properly considered by the trial court as hearsay. cdtai
"Insured, being the person with whom the contract was made, is
primarily the proper person to bring suit thereon. . . . Subject to The question of whether there was concealment was aptly answered by the appellate
some exceptions, insured may thus sue, although the policy is taken court, thus:
wholly or in part for the benefit of another person named or
unnamed, and although it is expressly made payable to another as "The insured, Dr. Leuterio, had answered in his insurance
his interest may appear or otherwise. . . . Although a policy issued to application that he was in good health and that he had not consulted
a mortgagor is taken out for the benefit of the mortgagee and is a doctor or any of the enumerated ailments, including hypertension;
made payable to him, yet the mortgagor may sue thereon in his own when he died the attending physician had certified in the death
name, especially where the mortgagee's interest is less than the full certificate that the former died of cerebral hemorrhage, probably
amount recoverable under the policy, . . . .' secondary to hypertension. From this report, the appellant insurance
company refused to pay the insurance claim. Appellant alleged that
And in volume 33, page 82, of the same work, we read the the insured had concealed the fact that he had hypertension.
following:
Contrary to appellant's allegations, there was no sufficient proof that
'Insured may be regarded as the real party in interest, although he the insured had suffered from hypertension. Aside from the
has assigned the policy for the purpose of collection, or has assigned statement of the insured's widow who was not even sure if the
as collateral security any judgment he may obtain." 13 Cdpr medicines taken by Dr. Leuterio were for hypertension, the appellant
had not proven nor produced any witness who could attest to Dr.
And since a policy of insurance upon life or health may pass by transfer, will or Leuterio's medical history. . .
succession to any person, whether he has an insurable interest or not, and such person
may recover it whatever the insured might have recovered, 14 the widow of the decedent xxx xxx xxx
Dr. Leuterio may file the suit against the insurer, Grepalife.
Appellant insurance company had failed to establish that there was
The second assigned error refers to an alleged concealment that the petitioner interposed concealment made by the insured, hence, it cannot refuse payment
as its defense to annul the insurance contract. Petitioner contends that Dr. Leuterio failed of the claim." 17 prcd
to disclose that he had hypertension, which might have caused his death. Concealment
exists where the assured had knowledge of a fact material to the risk, and honesty, good The fraudulent intent on the part of the insured must be established to entitle the insurer
faith, and fair dealing requires that he should communicate it to the assured, but he to rescind the contract. 18 Misrepresentation as a defense of the insurer to avoid liability
designedly and intentionally withholds the same. 15 is an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the insurer. 19 In the case at bar, the petitioner failed to
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds
Mejia, as supported by the information given by the widow of the decedent. Grepalife of the insurance.
asserts that Dr. Mejia's technical diagnosis of the cause of death of Dr. Leuterio was a
duly documented hospital record, and that the widow's declaration that her husband had And that brings us to the last point in the review of the case at bar. Petitioner claims that
"possible hypertension several years ago" should not be considered as hearsay, but as there was no evidence as to the amount of Dr. Leuterio's outstanding indebtedness to
part of res gestae. DBP at the time of the mortgagor's death. Hence, for private respondent's failure to
establish the same, the action for specific performance should be dismissed. Petitioner's
On the contrary the medical findings were not conclusive because Dr. Mejia did not claim is without merit. A life insurance policy is a valued policy.20 Unless the interest of
conduct an autopsy on the body of the decedent. As the attending physician, Dr. Mejia a person insured is susceptible of exact pecuniary measurement, the measure of
stated that he had no knowledge of Dr. Leuterio's any previous hospital indemnity under a policy of insurance upon life or health is the sum fixed in the
confinement. 16 Dr. Leuterio's death certificate stated that hypertension was only "the

30 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
policy. 21 The mortgagor paid the premium according to the coverage of his insurance,
which states that:
"The policy states that upon receipt of due proof of the Debtor's
death during the terms of this insurance, a death benefit in the
amount of P86,200.00 shall be paid. cda
In the event of the debtor's death before his indebtedness with the
creditor shall have been fully paid, an amount to pay the outstanding
indebtedness shall first be paid to the Creditor and the balance of the
Sum Assured, if there is any shall then be paid to the beneficiary/ies
designated by the debtor." 22 (Emphasis omitted)
However, we noted that the Court of Appeals' decision was promulgated on May 17,
1993. In private respondent's memorandum, she states that DBP foreclosed in 1995 their
residential lot, in satisfaction of mortgagor's outstanding loan. Considering this
supervening event, the insurance proceeds shall inure to the benefit of the heirs of the
deceased person or his beneficiaries. Equity dictates that DBP should not unjustly enrich
itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot
collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds
now rightly belong to Dr. Leuterio's heirs represented by his widow, herein private
respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the
Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the
petitioner is ORDERED to pay the insurance proceeds amounting to Eighty-six
thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo
Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor's
indebtedness to Development Bank of the Philippines. Costs against petitioner. LLjur
SO ORDERED.
[G.R. No. 183526. August 25, 2009.]
VIOLETA R. LALICAN, petitioner, vs. THE INSULAR LIFE
ASSURANCE COMPANY LIMITED, AS REPRESENTED BY
THE PRESIDENT VICENTE R. AVILON, respondent.
Facts:
31
ATTY. BUSMENTE
Eulogio Lalican applied for an insurance policy with the Insular Life
amounting to Php 1,500,000. Under the terms of the policy, Eulogio was to pay the
premiums on a quarterly basis, having a grace period of 31 days, for the payment of
each premium subsequent to the first. If any premium was not paid on or before the due
date, the policy would be in default and if the premium remained unpaid until the end
of the grace period, the policy would automatically lapse and become void.
Eulogio paid the premiums due on the first two succeeding payment dates but
failed to pay subsequent premiums even after the lapse of the grace period thereby
rendering the policy void. He submitted an application for reinstatement of policy
through Josephine Malaluan, an agent of Insular Life, together with the payment of the
unpaid premiums. However, the Insular Life notified him that his application could not
be processed because he failed to pay the overdue interest of the unpaid premiums.
On Sept. 17, 1998, Eulogio submitted to Malaluans house a second
application for reinstatement including the payment for the overdue interest as well as
for the premiums due for April and July of that year, which was received by Malaluans
husband on her behalf and was thereby issued a receipt for the amount Eulogio
deposited. However, on that same day, Eulogio died of cardio-respiratory arrest
secondary to electrocution.
Violeta, Eulogios widow filed with the Insular Life a claim for payment of
the full proceeds of the policy but the latter informed her that the claim could not be
granted since at the time of Eulogios death, his policy has already lapsed and he failed
to reinstate the same. Violeta requested a reconsideration of her claim but the same was
also rejected. Therefore, she filed a complaint for death claim benefits with the RTC
alleging the unfair claim settlement practice of Insular Life and its deliberate failure to
act with reasonable promptness on her insurance claim. The trial court rendered a
decision in favour of Insular Life and after the former denied her motion for
reconsideration, she directly elevated her case to the Supreme Court via the petition for
review on Certiorari.
Issue:
Whether or not the policy of Eulogio was reinstated before his death.
Ruling:
To reinstate a policy means to restore the same to preium-paying status after it
has been permitted to lapse. Both the policy contract and application for reinstatement
provide for specific conditions for the reinstatement of a lapsed policy.
According to the Application for Reinstatement, the policy would only be
considered reinstated upon the approval of the application by Insular Life during the
applicants lifetime and good health and whatever amount the application paid in
connection was considered to be a deposit only until approval of said application.
Eulogios death rendered impossible full compliance with the conditions for
reinstatement of policy even though, before his death, he managed to file his
application for reinstatement and deposit the amount for payment of his overdue
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
premiums and interest thereon with Malaluan. As expressly provided on the policy
contract, agents of Insular Life have no authority to approve any application for
reinstatement. They still had to turn over to Insular Life the application for
reinstatement and accompanying deposit, for processing and approval of the latter.
Challenged in this Petition for Review on Certiorari 1 under Rule 45 of the Rules of
Court are the Decision 2 dated 30 August 2007 and the Orders dated 10 April
2008 3 and 3 July 2008 4 of the Regional Trial Court (RTC) of Gapan City, Branch 34,
in Civil Case No. 2177. In its assailed Decision, the RTC dismissed the claim for
death benefits filed by petitioner Violeta R. Lalican (Violeta) against respondent
Insular Life Assurance Company Limited (Insular Life); while in its questioned
Orders dated 10 April 2008 and 3 July 2008, respectively, the RTC declared the
finality of the aforesaid Decision and denied petitioner's Notice of Appeal.
The factual and procedural antecedents of the case, as culled from the records, are
as follows:
Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).
During his lifetime, Eulogio applied for an insurance policy with Insular Life. On
24 April 1997, Insular Life, through Josephine Malaluan (Malaluan), its agent in
Gapan City, issued in favor of Eulogio Policy No. 9011992, 5 which contained a 20-
Year Endowment Variable Income Package Flexi Plan worth P500,000.00, 6 with
two riders valued at P500,000.00 each. 7 Thus, the value of the policy amounted to
P1,500,000.00. Violeta was named as the primary beneficiary.
Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a
quarterly basis in the amount of P8,062.00, payable every 24 April, 24 July, 24
October and 24 January of each year, until the end of the 20-year period of the
policy. According to the Policy Contract, there was a grace period of 31 days for the
payment of each premium subsequent to the first. If any premium was not paid on
or before the due date, the policy would be in default, and if the premium remained
unpaid until the end of the grace period, the policy would automatically lapse and
become void. 8
Eulogio paid the premiums due on 24 July 1997 and 24 October 1997. However, he
failed to pay the premium due on 24 January 1998, even after the lapse of the grace
period of 31 days. Policy No. 9011992, therefore, lapsed and became void. EScAHT
Eulogio submitted to the Cabanatuan District Office of Insular Life, through
Malaluan, on 26 May 1998, an Application for Reinstatement 9 of Policy No.
32
ATTY. BUSMENTE
9011992, together with the amount of P8,062.00 to pay for the premium due on 24
January 1998. In a letter10 dated 17 July 1998, Insular Life notified Eulogio that his
Application for Reinstatement could not be fully processed because, although he
already deposited P8,062.00 as payment for the 24 January 1998 premium, he left
unpaid the overdue interest thereon amounting to P322.48. Thus, Insular Life
instructed Eulogio to pay the amount of interest and to file another application for
reinstatement. Eulogio was likewise advised by Malaluan to pay the premiums that
subsequently became due on 24 April 1998 and 24 July 1998, plus interest.
On 17 September 1998, Eulogio went to Malaluan's house and submitted a second
Application for Reinstatement 11 of Policy No. 9011992, including the amount of
P17,500.00, representing payments for the overdue interest on the premium for 24
January 1998, and the premiums which became due on 24 April 1998 and 24 July
1998. As Malaluan was away on a business errand, her husband received Eulogio's
second Application for Reinstatement and issued a receipt for the amount Eulogio
deposited.
A while later, on the same day, 17 September 1998, Eulogio died of cardio-
respiratory arrest secondary to electrocution.
Without knowing of Eulogio's death, Malaluan forwarded to the Insular Life
Regional Office in the City of San Fernando, on 18 September 1998, Eulogio's
second Application for Reinstatement of Policy No. 9011992 and P17,500.00
deposit. However, Insular Life no longer acted upon Eulogio's second Application
for Reinstatement, as the former was informed on 21 September 1998 that Eulogio
had already passed away.
On 28 September 1998, Violeta filed with Insular Life a claim for payment of the
full proceeds of Policy No. 9011992.
In a letter 12 dated 14 January 1999, Insular Life informed Violeta that her claim
could not be granted since, at the time of Eulogio's death, Policy No. 9011992 had
already lapsed, and Eulogio failed to reinstate the same. According to the
Application for Reinstatement, the policy would only be considered reinstated upon
approval of the application by Insular Life during the applicant's "lifetime and good
health", and whatever amount the applicant paid in connection thereto was
considered to be a deposit only until approval of said application. Enclosed with the
14 January 1999 letter of Insular Life to Violeta was DBP Check No. 0000309734,
for the amount of P25,417.00, drawn in Violeta's favor, representing the full refund
of the payments made by Eulogio on Policy No. 9011992.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
On 12 February 1998, Violeta requested a reconsideration of the disallowance of her
claim. In a letter 13 dated 10 March 1999, Insular Life stated that it could not find
any reason to reconsider its decision rejecting Violeta's claim. Insular Life again
tendered to Violeta the above-mentioned check in the amount of P25,417.00.
Violeta returned the letter dated 10 March 1999 and the check enclosed therein to
the Cabanatuan District Office of Insular Life. Violeta's counsel subsequently sent a
letter 14 dated 8 July 1999 to Insular Life, demanding payment of the full proceeds
of Policy No. 9011992. On 11 August 1999, Insular Life responded to the said
demand letter by agreeing to conduct a re-evaluation of Violeta's claim.IASTDE
Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with
the RTC, on 11 October 1999, a Complaint for Death Claim Benefit, 15 which was
docketed as Civil Case No. 2177. Violeta alleged that Insular Life engaged in unfair
claim settlement practice and deliberately failed to act with reasonable promptness
on her insurance claim. Violeta prayed that Insular Life be ordered to pay her death
claim benefits on Policy No. 9011992, in the amount of P1,500,000.00, plus
interests, attorney's fees, and cost of suit.
Insular Life filed with the RTC an Answer with Counterclaim, 16 asserting that
Violeta's Complaint had no legal or factual bases. Insular Life maintained that
Policy No. 9011992, on which Violeta sought to recover, was rendered void by the
non-payment of the 24 January 1998 premium and non-compliance with the
requirements for the reinstatement of the same. By way of counterclaim, Insular
Life prayed that Violeta be ordered to pay attorney's fees and expenses of litigation
incurred by the former.
Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements
for the reinstatement of Policy No. 9011992 had been complied with and the
defenses put up by Insular Life were purely invented and illusory.
After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular
Life.
The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio needed to
have the same reinstated:
[The] arguments [of Insular Life] are not without basis. When the
premiums for April 24 and July 24, 1998 were not paid by [Eulogio]
even after the lapse of the 31-day grace period, his insurance policy
necessarily lapsed. This is clear from the terms and conditions of the
33
ATTY. BUSMENTE
contract between [Insular Life] and [Eulogio] which are written in
[the] Policy provisions of Policy No. 9011992 . . . . 17
The RTC, taking into account the clear provisions of the Policy Contract between
Eulogio and Insular Life and the Application for Reinstatement Eulogio
subsequently signed and submitted to Insular Life, held that Eulogio was not able to
fully comply with the requirements for the reinstatement of Policy No. 9011992:
The well-settled rule is that a contract has the force of law between
the parties. In the instant case, the terms of the insurance contract
between [Eulogio] and [Insular Life] were spelled out in the policy
provisions of Insurance Policy No. 9011992. There is likewise no
dispute that said insurance contract is by nature a contract of
adhesion[,] which is defined as "one in which one of the contracting
parties imposes a ready-made form of contract which the other
party may accept or reject but cannot modify". (Polotan, Sr. vs. CA,
296 SCRA 247). ECaSIT
xxx xxx xxx
The New Lexicon Webster's Dictionary defines ambiguity as the
"quality of having more than one meaning" and "an idea, statement
or expression capable of being understood in more than one sense".
In Nacu vs. Court of Appeals, 231 SCRA 237 (1994), the Supreme
Court stated that[:]
"Any ambiguity in a contract, whose terms are susceptible
of different interpretations as a result thereby, must be read
and construed against the party who drafted it on the
assumption that it could have been avoided by the exercise
of a little care."
In the instant case, the dispute arises from the afore-quoted
provisions written on the face of the second application for
reinstatement. Examining the said provisions, the court finds the
same clearly written in terms that are simple enough to admit of
only one interpretation. They are clearly not ambiguous,
equivocal or uncertain that would need further construction.
The same are written on the very face of the application just
above the space where [Eulogio] signed his name. It is
inconceivable that he signed it without reading and
understanding its import.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
Similarly, the provisions of the policy provisions (sic) earlier
mentioned are written in simple and clear layman's language,
rendering it free from any ambiguity that would require a legal
interpretation or construction. Thus, the court believes that [Eulogio]
was well aware that when he filed the said application for
reinstatement, his lapsed policy was not automatically reinstated and
that its approval was subject to certain conditions. Nowhere in the
policy or in the application for reinstatement was it ever
mentioned that the payment of premiums would have the effect
of an automatic and immediate renewal of the lapsed policy.
Instead, what was clearly stated in the application for
reinstatement is that pending approval thereof, the premiums
paid would be treated as a "deposit only and shall not bind the
company until this application is finally approved during
my/our" lifetime and good health[.]" HSATIC
Again, the court finds nothing in the aforesaid provisions that would
even suggest an ambiguity either in the words used or in the manner
they were written. [Violeta] did not present any proof that [Eulogio]
was not conversant with the English language. Hence, his having
personally signed the application for reinstatement[,] which
consisted only of one page, could only mean that he has read its
contents and that he understood them. . . .
Therefore, consistent with the above Supreme Court ruling and
finding no ambiguity both in the policy provisions of Policy No.
9011992 and in the application for reinstatement subject of this case,
the court finds no merit in [Violeta's] contention that the policy
provision stating that [the lapsed policy of Eulogio] should be
reinstated during his lifetime is ambiguous and should be construed
in his favor. It is true that [Eulogio] submitted his application for
reinstatement, together with his premium and interest payments, to
[Insular Life] through its agent Josephine Malaluan in the morning
of September 17, 1998. Unfortunately, he died in the afternoon of
that same day. It was only on the following day, September 18, 1998
that Ms. Malaluan brought the said document to [the regional office
of Insular Life] in San Fernando, Pampanga for approval. As
correctly pointed out by [Insular Life] there was no more
application to approve because the applicant was already dead
and no insurance company would issue an insurance policy to a
dead person. 18(Emphases ours.)
34
ATTY. BUSMENTE
The RTC, in the end, explained that:
While the court truly empathizes with the [Violeta] for the loss of
her husband, it cannot express the same by interpreting the
insurance agreement in her favor where there is no need for such
interpretation. It is conceded that [Eulogio's] payment of overdue
premiums and interest was received by [Insular Life] through its
agent Ms. Malaluan. It is also true that [the] application for
reinstatement was filed by [Eulogio] a day before his
death. However, there is nothing that would justify a conclusion
that such receipt amounted to an automatic reinstatement of the
policy that has already lapsed. The evidence suggests clearly
that no such automatic renewal was contemplated in the
contract between [Eulogio] and [Insular Life]. Neither was it
shown that Ms. Malaluan was the officer authorized to approve
the application for reinstatement and that her receipt of the
documents submitted by [Eulogio] amounted to its
approval. 19 (Emphasis ours.)
The fallo of the RTC Decision thus reads:
WHEREFORE, all the foregoing premises considered and finding
that [Violeta] has failed to establish by preponderance of evidence
her cause of action against the defendant, let this case be, as it is
hereby DISMISSED. 20 cIDHSC
On 14 September 2007, Violeta filed a Motion for Reconsideration 21 of the afore-
mentioned RTC Decision. Insular Life opposed 22the said motion, averring that the
arguments raised therein were merely a rehash of the issues already considered and
addressed by the RTC. In an Order 23 dated 8 November 2007, the RTC denied
Violeta's Motion for Reconsideration, finding no cogent and compelling reason to
disturb its earlier findings. Per the Registry Return Receipt on record, the 8
November 2007 Order of the RTC was received by Violeta on 3 December 2007.
In the interim, on 22 November 2007, Violeta filed with the RTC a Reply 24 to the
Motion for Reconsideration, wherein she reiterated the prayer in her Motion for
Reconsideration for the setting aside of the Decision dated 30 August 2007. Despite
already receiving on 3 December 2007, a copy of the RTC Order dated 8 November
2007, which denied her Motion for Reconsideration, Violeta still filed with the RTC,
on 26 February 2008, a Reply Extended Discussion elaborating on the arguments
she had previously made in her Motion for Reconsideration and Reply.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
On 10 April 2008, the RTC issued an Order, 25 declaring that the Decision dated 30
August 2007 in Civil Case No. 2177 had already attained finality in view of
Violeta's failure to file the appropriate notice of appeal within the reglementary
period. Thus, any further discussions on the issues raised by Violeta in her Reply
and Reply Extended Discussion would be moot and academic.
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with
Motion, 26 praying that the Order dated 10 April 2008 be set aside and that she be
allowed to file an appeal with the Court of Appeals.
In an Order 27 dated 3 July 2008, the RTC denied Violeta's Notice of Appeal with
Motion given that the Decision dated 30 August 2007 had long since attained
finality.
Violeta directly elevated her case to this Court via the instant Petition for Review
on Certiorari, raising the following issues for consideration:
1. Whether or not the Decision of the court a
quo dated August 30, 2007, can still be reviewed
despite having allegedly attained finality and despite
the fact that the mode of appeal that has been availed
of by Violeta is erroneous?
2. Whether or not the Regional Trial Court in its
original jurisdiction has decided the case on a
question of law not in accord with law and applicable
decisions of the Supreme Court?
Violeta insists that her former counsel committed an honest mistake in filing a
Reply, instead of a Notice of Appeal of the RTC Decision dated 30 August 2007;
and in the computation of the reglementary period for appealing the said judgment.
Violeta claims that her former counsel suffered from poor health, which rapidly
deteriorated from the first week of July 2008 until the latter's death just shortly after
the filing of the instant Petition on 8 August 2008. In light of these circumstances,
Violeta entreats this Court to admit and give due course to her appeal even if the
same was filed out of time. IDTcHa
Violeta further posits that the Court should address the question of law arising in
this case involving the interpretation of the second sentence of Section 19 of the
Insurance Code, which provides:
35
ATTY. BUSMENTE
Section. 19. . . . [I]nterest in the life or health of a person
insured must exist when the insurance takes effect, but need
not exist thereafter or when the loss occurs.
On the basis thereof, Violeta argues that Eulogio still had insurable interest in his
own life when he reinstated Policy No. 9011992 just before he passed away on 17
September 1998. The RTC should have construed the provisions of the Policy
Contract and Application for Reinstatement in favor of the insured Eulogio and
against the insurer Insular Life, and considered the special circumstances of the
case, to rule that Eulogio had complied with the requisites for the reinstatement of
Policy No. 9011992 prior to his death, and that Violeta is entitled to claim the
proceeds of said policy as the primary beneficiary thereof.
The Petition lacks merit.
At the outset, the Court notes that the elevation of the case to us via the instant
Petition for Review on Certiorari is not justified. Rule 41, Section 1 of the Rules of
Court, 28 provides that no appeal may be taken from an order disallowing or
dismissing an appeal. In such a case, the aggrieved party may file a Petition
for Certiorari under Rule 65 of the Rules of Court. 29
Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had
long become final and executory. Violeta filed a Motion for Reconsideration
thereof, but the RTC denied the same in an Order dated 8 November 2007. The
records of the case reveal that Violeta received a copy of the 8 November 2007
Order on 3 December 2007. Thus, Violeta had 15 days 30 from said date of receipt,
or until 18 December 2007, to file a Notice of Appeal. Violeta filed a Notice of
Appeal only on 20 May 2008, more than five months after receipt of the RTC
Order dated 8 November 2007 denying her Motion for Reconsideration.
Violeta's claim that her former counsel's failure to file the proper remedy within the
reglementary period was an honest mistake, attributable to the latter's deteriorating
health, is unpersuasive.
Violeta merely made a general averment of her former counsel's poor health,
lacking relevant details and supporting evidence. By Violeta's own admission, her
former counsel's health rapidly deteriorated only by the first week of July 2008.
The events pertinent to Violeta's Notice of Appeal took place months before July
2008, i.e., a copy of the RTC Order dated 8 November 2007, denying Violeta's
Motion for Reconsideration of the Decision dated 30 August 2007, was received
on 3 December 2007; and Violeta's Notice of Appeal was filed on 20 May 2008.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
There is utter lack of proof to show that Violeta's former counsel was already
suffering from ill health during these times; or that the illness of Violeta's former
counsel would have affected his judgment and competence as a lawyer. aCTHEA
Moreover, the failure of her former counsel to file a Notice of Appeal within the
reglementary period binds Violeta, which failure the latter cannot now disown on
the basis of her bare allegation and self-serving pronouncement that the former was
ill. A client is bound by his counsel's mistakes and negligence. 31
The Court, therefore, finds no reversible error on the part of the RTC in denying
Violeta's Notice of Appeal for being filed beyond the reglementary period. Without
an appeal having been timely filed, the RTC Decision dated 30 August 2007 in Civil
Case No. 2177 already became final and executory.
A judgment becomes "final and executory" by operation of law. Finality becomes a
fact when the reglementary period to appeal lapses and no appeal is perfected within
such period. As a consequence, no court (not even this Court) can exercise appellate
jurisdiction to review a case or modify a decision that has become final. 32 When a
final judgment is executory, it becomes immutable and unalterable. It may no longer
be modified in any respect either by the court, which rendered it or even by this
Court. The doctrine is founded on considerations of public policy and sound
practice that, at the risk of occasional errors, judgments must become final at some
definite point in time. 33
The only recognized exceptions to the doctrine of immutability and unalterability
are the correction of clerical errors, the so-callednunc pro tunc entries, which cause
no prejudice to any party, and void judgments. 34 The instant case does not fall
under any of these exceptions.
Even if the Court ignores the procedural lapses committed herein, and proceeds to
resolve the substantive issues raised, the Petition must still fail.
Violeta makes it appear that her present Petition involves a question of law,
particularly, whether Eulogio had an existing insurable interest in his own life until
the day of his death.
An insurable interest is one of the most basic and essential requirements in an
insurance contract. In general, an insurable interest is that interest which a person is
deemed to have in the subject matter insured, where he has a relation or connection
36
ATTY. BUSMENTE
with or concern in it, such that the person will derive pecuniary benefit or advantage
from the preservation of the subject matter insured and will suffer pecuniary loss or
damage from its destruction, termination, or injury by the happening of the event
insured against. 35 The existence of an insurable interest gives a person the legal
right to insure the subject matter of the policy of insurance. 36 Section 10 of the
Insurance Code indeed provides that every person has an insurable interest in his
own life. 37 Section 19 of the same code also states that an interest in the life or
health of a person insured must exist when the insurance takes effect, but need not
exist thereafter or when the loss occurs. 38 aATHES
Upon more extensive study of the Petition, it becomes evident that the matter of
insurable interest is entirely irrelevant in the case at bar. It is actually beyond
question that while Eulogio was still alive, he had an insurable interest in his own
life, which he did insure under Policy No. 9011992. The real point of contention
herein is whether Eulogio was able to reinstate the lapsed insurance policy on his
life before his death on 17 September 1998.
The Court rules in the negative.
Before proceeding, the Court must correct the erroneous declaration of the RTC in
its 30 August 2007 Decision that Policy No. 9011992 lapsed because of Eulogio's
non-payment of the premiums which became due on 24 April 1998 and 24 July
1998. Policy No. 9011992 had lapsed and become void earlier, on 24 February
1998, upon the expiration of the 31-day grace period for payment of the premium,
which fell due on 24 January 1998, without any payment having been made.
That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogio's
filing of his first Application for Reinstatement with Insular Life, through Malaluan,
on 26 May 1998, constitutes an admission that Policy No. 9011992 had lapsed by
then. Insular Life did not act on Eulogio's first Application for Reinstatement, since
the amount Eulogio simultaneously deposited was sufficient to cover only the
P8,062.00 overdue premium for 24 January 1998, but not the P322.48 overdue
interests thereon. On 17 September 1998, Eulogio submitted a second Application
for Reinstatement to Insular Life, again through Malaluan, depositing at the same
time P17,500.00, to cover payment for the overdue interest on the premium for 24
January 1998, and the premiums that had also become due on 24 April 1998 and 24
July 1998. On the very same day, Eulogio passed away.
To reinstate a policy means to restore the same to premium-paying status after it has
been permitted to lapse. 39 Both the Policy Contract and the Application for
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
Reinstatement provide for specific conditions for the reinstatement of a lapsed
policy.
The Policy Contract between Eulogio and Insular Life identified the following
conditions for reinstatement should the policy lapse:
10.REINSTATEMENT
You may reinstate this policy at any time within three years after it
lapsed if the following conditions are met: (1) the policy has not
been surrendered for its cash value or the period of extension as a
term insurance has not expired; (2) evidence of insurability
satisfactory to [Insular Life] is furnished; (3) overdue premiums are
paid with compound interest at a rate not exceeding that which
would have been applicable to said premium and indebtedness in the
policy years prior to reinstatement; and (4) indebtedness which
existed at the time of lapsation is paid or renewed. 40
Additional conditions for reinstatement of a lapsed policy were stated in the
Application for Reinstatement which Eulogio signed and submitted, to wit:
I/We agree that said Policy shall not be considered reinstated until
this application is approved by the Company during my/our
lifetime and good health and until all other Company
requirements for the reinstatement of said Policy are fully
satisfied. EcHIAC
I/We further agree that any payment made or to be made in
connection with this application shall be considered as deposit
only and shall not bind the Company until this application is
finally approved by the Company during my/our lifetime and
good health. If this application is disapproved, I/We also agree to
accept the refund of all payments made in connection herewith,
without interest, and to surrender the receipts for such
payment. 41 (Emphases ours.)
In the instant case, Eulogio's death rendered impossible full compliance with the
conditions for reinstatement of Policy No. 9011992. True, Eulogio, before his death,
managed to file his Application for Reinstatement and deposit the amount for
payment of his overdue premiums and interests thereon with Malaluan; but Policy
No. 9011992 could only be considered reinstated after the Application for
Reinstatement had been processed and approved by Insular Life during Eulogio's
lifetime and good health.
37
ATTY. BUSMENTE
Relevant herein is the following pronouncement of the Court in Andres v. The
Crown Life Insurance Company, 42 citing McGuire v. The Manufacturer's Life
Insurance Co.: 43
"The stipulation in a life insurance policy giving the insured the
privilege to reinstate it upon written application does not give the
insured absolute right to such reinstatement by the mere filing of
an application. The insurer has the right to deny the
reinstatement if it is not satisfied as to the insurability of the
insured and if the latter does not pay all overdue premium and all
other indebtedness to the insurer. After the death of the insured
the insurance Company cannot be compelled to entertain an
application for reinstatement of the policy because the conditions
precedent to reinstatement can no longer be determined and
satisfied." (Emphases ours.)
It does not matter that when he died, Eulogio's Application for Reinstatement and
deposits for the overdue premiums and interests were already with Malaluan.
Insular Life, through the Policy Contract, expressly limits the power or authority of
its insurance agents, thus:
Our agents have no authority to make or modify this contract, to
extend the time limit for payment of premiums, to waive any
lapsation, forfeiture or any of our rights or requirements, such
powers being limited to our president, vice-president or persons
authorized by the Board of Trustees and only in
writing. 44 (Emphasis ours.)
Malaluan did not have the authority to approve Eulogio's Application for
Reinstatement. Malaluan still had to turn over to Insular Life Eulogio's Application
for Reinstatement and accompanying deposits, for processing and approval by the
latter.
The Court agrees with the RTC that the conditions for reinstatement under the
Policy Contract and Application for Reinstatement were written in clear and simple
language, which could not admit of any meaning or interpretation other than those
that they so obviously embody. A construction in favor of the insured is not called
for, as there is no ambiguity in the said provisions in the first place. The words
thereof are clear, unequivocal, and simple enough so as to preclude any mistake in
the appreciation of the same.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
Violeta did not adduce any evidence that Eulogio might have failed to fully
understand the import and meaning of the provisions of his Policy Contract and/or
Application for Reinstatement, both of which he voluntarily signed. While it is a
cardinal principle of insurance law that a policy or contract of insurance is to be
construed liberally in favor of the insured and strictly as against the insurer
company, yet, contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms, which the parties themselves have
used. If such terms are clear and unambiguous, they must be taken and understood
in their plain, ordinary and popular sense. 45 cISAHT
Eulogio's death, just hours after filing his Application for Reinstatement and
depositing his payment for overdue premiums and interests with Malaluan, does not
constitute a special circumstance that can persuade this Court to already consider
Policy No. 9011992 reinstated. Said circumstance cannot override the clear and
express provisions of the Policy Contract and Application for Reinstatement, and
operate to remove the prerogative of Insular Life thereunder to approve or
disapprove the Application for Reinstatement. Even though the Court commiserates
with Violeta, as the tragic and fateful turn of events leaves her practically empty-
handed, the Court cannot arbitrarily burden Insular Life with the payment of
proceeds on a lapsed insurance policy. Justice and fairness must equally apply to all
parties to a case. Courts are not permitted to make contracts for the parties. The
function and duty of the courts consist simply in enforcing and carrying out the
contracts actually made. 46
Policy No. 9011992 remained lapsed and void, not having been reinstated in
accordance with the Policy Contract and Application for Reinstatement before
Eulogio's death. Violeta, therefore, cannot claim any death benefits from Insular
Life on the basis of Policy No. 9011992; but she is entitled to receive the full refund
of the payments made by Eulogio thereon.
WHEREFORE, premises considered, the Court DENIES the instant Petition for
Review on Certiorari under Rule 45 of the Rules of Court. The Court AFFIRMS the
Orders dated 10 April 2008 and 3 July 2008 of the RTC of Gapan City, Branch 34,
in Civil Case No. 2177, denying petitioner Violeta R. Lalican's Notice of Appeal, on
the ground that the Decision dated 30 August 2007 subject thereof, was already final
and executory. No costs. SHTaID
SO ORDERED.
[G.R. No. L-44059. October 28, 1977.]
38
ATTY. BUSMENTE
THE INSULAR LIFE ASSURANCE COMPANY,
LTD., plaintiff-appellee, vs. CARPONIA T. EBRADO and
PASCUALA VDA. DE EBRADO, defendants-appellants.
Facts: On 1 September 1968, Buenaventura Cristor Ebrado was issued by the Insular
Life Assurance Co., Ltd., Policy 009929 on a whole-life plan for P5,882.00 with a rider
for Accidental Death Benefits for the same amount. Buenaventura C. Ebrado
designated Carponia T. Ebrado as the revocable beneficiary in his policy. He referred to
her as his wife. On 21 October 1969, Buenventura C. Ebrado died as a result of an
accident when he was hit by a falling branch of a tree. As the insurance policy was in
force, Insular Life stands liable to pay the coverage of the policy in an amount of
P11,745.73, representing the face value of the policy in the amount of P5,882.00 plus
the additional benefits for accidental death also in the amount of P5,882.00 and the
refund of P18.00 paid for the premium due November, 1969, minus the unpaid
premiums and interest thereon due for January and February, 1969, in the sum of
P36.27. Carponia T. Ebrado filed with the insurer a claim for the proceeds of the policy
as the designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the benefit of
marriage. Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased
insured. She asserts that she is the one entitled to the insurance proceeds, not the
common-law wife, Carponia T. Ebrado. In doubt as to whom the insurance proceeds
shall be paid, the insurer commenced an action for Interpleader before the Court of
First Instance of Rizal on 29 April 1970. On 25 September 1972, the trial court
rendered judgment declaring, among others, Carponia T. Ebrado disqualified from
becoming beneficiary of the insured Buenaventura Cristor Ebrado and directing the
payment of the insurance proceeds to the estate of the deceased insured. From this
judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on 11 July 1976,
the Appellate Court certified the case to the Supreme Court as involving only questions
of law.
Issue [1]: Whether a common-law wife named as beneficiary in the life insurance
policy of a legally married man can claim the proceeds thereof in case of death of the
latter.
Held[1]: NO. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or
even the new Insurance Code (PD 612, as amended) does not contain any specific
provision grossly resolutory of the prime question at hand. Section 50 of the Insurance
Act which provides that "(t)he insurance shall be applied exclusively to the proper
interest of the person in whose name it is made" cannot be validly seized upon to hold
that the same includes the beneficiary. The word "interest" highly suggests that the
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
provision refers only to the insured and not to the beneficiary, since a contract of
insurance is personal in character. Otherwise, the prohibitory laws against illicit
relationships especially on property and descent will be rendered nugatory, as the same
could easily be circumvented by modes of insurance. Rather, the general rules of civil
law should be applied to resolve this void in the Insurance Law. Article 2011 of the
New Civil Code states: "The contract of insurance is governed by special laws. Matters
not expressly provided for in such special laws shall be regulated by this Code." When
not otherwise specifically provided for by the Insurance Law, the contract of life
insurance is governed by the general rules of the civil law regulating contracts. And
under Article 2012 of the same Code, "any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life insurance policy by
the person who cannot make a donation to him." Common-law spouses are, definitely,
barred from receiving donations from each other. Article 739 of the new Civil Code
provides that "the following donations shall be void: (1) Those made between persons
who were guilty of adultery or concubinage at the time of donation; (2) Those made
between persons found guilty of the same criminal offense, in consideration thereof;
(3) Those made to a public officer or his wife, descendants or ascendants by reason of
his office. In the case referred to in No. 1, the action for declaration of nullity may be
brought by the spouse of the donor or donee; and the guilt of the donee may be proved
by preponderance of evidence in the same action." In essence, a life insurance policy is
no different from a civil donation insofar as the beneficiary is concerned. Both are
founded upon the same consideration: liberality. A beneficiary is like a donee, because
from the premiums of the policy which the insured pays out of liberality, the
beneficiary will receive the proceeds or profits of said insurance. As a consequence, the
proscription in Article 739 of the new Civil Code should equally operate in life
insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who
cannot receive a donation cannot be named as beneficiary in the life insurance policy
of the person who cannot make the donation. Under American law, a policy of life
insurance is considered as a testament and in construing it, the courts will, so far as
possible treat it as a will and determine the effect of a clause designating the
beneficiary by rules under which wills are interpreted. Policy considerations and
dictates of morality rightly justify the institution of a barrier between common-law
spouses in regard to property relations since such relationship ultimately encroaches
upon the nuptial and filial rights of the legitimate family. There is every reason to hold
that the bar in donations between legitimate spouses and those between illegitimate
ones should be enforced in life insurance policies since the same are based on similar
consideration. As pointed out, a beneficiary in a life insurance policy is no different
from a donee. Both the recipients of pure beneficence. So long as marriage remains the
threshold of family laws, reason and morality dictate that the impediments imposed
upon married couple should likewise be imposed upon extra-marital relationship. If
legitimate relationship is circumscribed by these legal disabilities, with more reason
39
ATTY. BUSMENTE
should an illicit relationship be restricted by these disabilities.
Issue [2]: Whether a conviction for adultery or concubinage is exacted before the
disabilities mentioned in Article 739 may effectuate.
Held [2]: NO. A conviction for adultery or concubinage is not exacted before the
disabilities mentioned in Article 739 may effectuate. More specifically, with regard to
the disability on "persons who were guilty of adultery or concubinage at the time of the
donation," Article 739 itself provides that "In the case referred to in No. 1, the action
for declaration of nullity may be brought by the spouse of the donor or donee; and the
guilt of the donee may be proved by preponderance of evidence in the same action."
The underscored clause neatly conveys that no criminal conviction for the
disqualifying offense is a condition precedent. In fact, it cannot even be gleaned from
the aforequoted provision that a criminal prosecution is needed. On the contrary, the
law plainly states that the guilt of the party may be proved "in the same action" for
declaration of nullity of donation. And, it would be sufficient if evidence preponderates
upon the guilt of the consort for the offense indicated. The quantum of proof in
criminal cases is not demanded. Herein, the requisite proof of common- law
relationship between the insured and the beneficiary has been conveniently supplied by
the stipulations between the parties in the pre-trial conference of the case. It was agreed
upon and stipulated therein that the deceased insured Buenaventura C. Ebrado was
married to Pascuala Ebrado with whom she has six legitimate children; that during his
lifetime, the deceased insured was living with his common-law wife, Carponia Ebrado,
with whom he has two children. These stipulations are nothing less than judicial
admissions which, as a consequence, no longer require proof and cannot be
contradicted. A fortiori, on the basis of these admissions, a judgment may be validly
rendered without going through the rigors of a trial for the sole purpose of proving the
illicit liaison between the insured and the beneficiary.
This is a novel question in insurance law: Can a common-law wife named as beneficiary
in the life insurance policy of a legally married man claim the proceeds thereof in case
of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Insular Life
Assurance Co., Ltd., Policy No. 009929 on a whole-life plan for P5,882.00 with a rider
for Accidental Death Benefits for the same amount. Buenaventura C. Ebrado designated
Carponia T. Ebrado as the revocable beneficiary in his policy. He referred to her as his
wife.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
On October 21, 1969, Buenventura C. Ebrado died as a result of an accident when he
was hit by a falling branch of a tree. As the insurance policy was in force, The Insular
Life Assurance Co., Ltd. stands liable to pay the coverage of the policy in an amount of
P11,745.73, representing the face value of the policy in the amount of P5,882.00 plus the
additional benefits for accidental death also in the amount of P5,882.00 and the refund
of P18.00 paid for the premium due November, 1969, minus the unpaid premiums and
interest thereon due for January and February, 1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the policy as the
designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the benefit of
marriage. Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased
insured. She asserts that she is the one entitled to the insurance proceeds, not the
common-law wife, Carponia T. Ebrado. LLjur
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for Interpleader before the Court of First
Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after
which, a pre-trial order was entered reading as follows:
"During the pre-trial conference, the parties manifested to the court
that there is no possibility of amicable settlement. Hence, the Court
proceeded to have the parties submit their evidence for the purposes
of the pre-trial and make admissions for the purpose of pre-trial.
During this conference, parties Carponia T. Ebrado and Pascuala
Ebrado agreed and stipulated: 1) that the deceased Buenaventura
Ebrado was married to Pascuala Ebrado with whom she has six
(legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo
and Helen, all surnamed Ebrado; 2) that during the lifetime of the
deceased, he was insured with Insular Life Assurance Co. Under
Policy No. 009929 whole life plan, dated September 1, 1968 for the
sum of P5,882.00 with the rider for accidental death benefit as
evidenced by Exhibits A for plaintiffs and Exhibit 1 for the
defendant Pascuala and Exhibit 7 for Carponia Ebrado; 3) that
during the lifetime of Buenaventura Ebrado, he was living with his
common-law wife, Carponia Ebrado, with whom she had 2 children
although he was not legally separated from his legal wife; 4) that
Buenaventura Ebrado died by accident on October 21, 1969 as
evidenced by the death certificate Exhibit 3 and affidavit of the
police report of his death Exhibit 5; 5) that complainant Carponia
Ebrado filed claim with the Insular Life Assurance Co. which was
40
ATTY. BUSMENTE
contested by Pascuala Ebrado who also filed claim for the proceeds
of said policy; 6) that in view of the adverse claims the insurance
company filed this action against the two herein claimants Carponia
and Pascuala Ebrado; 7) that there is now due from the Insular Life
Assurance Co. as proceeds of the policy P11,745.73; 8) that the
beneficiary designated by the insured in the policy is Carponia
Ebrado and the insured made reservation to change the beneficiary
but although the insured made the option to change the beneficiary,
same was never changed up to the time of his death and the legal
wife did not have any opportunity to write the company that there
was reservation to change the designation of the beneficiary; 9) the
parties agreed that a decision be rendered based on this agreement
and stipulation of facts as to who among the two claimants is
entitled to the policy.
"Upon motion of the parties, they are given ten (10) days to file their
simultaneous memoranda from the receipt of this order.
SO ORDERED."
On September 25, 1972, the trial court rendered judgment declaring, among others,
Carponia T. Ebrado disqualified from becoming beneficiary of the insured Buenaventura
Cristor Ebrado and directing the payment of the insurance proceeds to the estate of the
deceased insured. The trial court held:
"It is patent from the last paragraph of Art. 739 of the Civil Code
that a criminal conviction for adultery or concubinage is not
essential in order to establish the disqualification mentioned therein.
Neither is it also necessary that a finding of such guilt or
commission of those acts be made in a separate independent action
brought for the purpose. The guilt of the donee (beneficiary) may be
proved by preponderance of evidence in the same proceeding (the
action brought to declare the nullity of the donation).
It is, however, essential that such adultery or concubinage exists at
the time defendant Carponia T. Ebrado was made beneficiary in the
policy in question for the disqualification and incapacity to exist and
that it is only necessary that such fact be established by
preponderance of evidence in the trial. Since it is agreed in their
stipulation above-quoted that the deceased insured and defendant
Carponia T. Ebrado were living together as husband and wife
without being legally married and that the marriage of the insured
with the other defendant Pascuala Vda. de Ebrado was valid and still
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
existing at the time the insurance in question was purchased there is
no question that defendant Carponia T. Ebrado is disqualified from
becoming the beneficiary of the policy in question and as such she is
not entitled to the proceeds of the insurance upon the death of the
insured." Cdpr
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July
11, 1976, the Appellate Court certified the case to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the
new Insurance Code (PD No. 612, as amended) does not contain any specific
provision grossly resolutory of the prime question at hand. Section 50 of the
Insurance Act which provides that "(t)he insurance shall be applied exclusively to
the proper interest of the person in whose name it is made" 1 cannot be validly
seized upon to hold that the same includes the beneficiary. The word interest"
highly suggests that the provision refers only to the insured" and not to the
beneficiary, since a contract of insurance is personal in character. 2 Otherwise, the
prohibitory laws against illicit relationships especially on property and descent will
be rendered nugatory, as the same could easily be circumvented by modes of
insurance. Rather, the general rules of civil law should be applied to resolve this
void in the Insurance Law Article 2011 of the New Civil Code states: "The contract
of insurance is governed by special laws. Matters not expressly provided for in
such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is
governed by the general rules of the civil law regulating contracts. 3 And under
Article 2012 of the same Code, "any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life insurance policy
by the person who cannot make a donation to him." 4 Common-law spouses are,
definitely, barred from receiving donations from each other. Article 739 of the new
Civil Code provides:
"The following donations shall be void:
"1. Those made between persons who were guilty of adultery
or concubinage at the time of donation;
"Those made between persons found guilty of the same criminal
offense, in consideration thereof;
"3. Those made to a public officer or his wife, descendants or
ascendants by reason of his office.
41
ATTY. BUSMENTE
"In the case referred to in No. 1, the action for declaration of nullity
may be brought by the spouse of the donor or donee; and the guilt of
the donee may be proved by preponderance of evidence in the same
action."
2. In essence, a life insurance policy is no different from a civil donation insofar as
the beneficiary is concerned. Both are founded upon the same consideration:
liberality. A beneficiary is like a donee, because from the premiums of the policy
which the insured pays out of liberality, the beneficiary will receive the proceeds or
profits of said insurance. As a consequence, the proscription in Article 739 of the
new Civil Code should equally operate in life insurance contracts. The mandate of
Article 2012 cannot be laid aside: any person who cannot receive a donation
cannot be named as beneficiary in the life insurance policy of the person who
cannot make the donation. 5 Under American law, a policy of life insurance is
considered as a testament and in construing it, the courts will, so far as possible
treat it as a will and determine the effect of a clause designating the beneficiary by
rules under which wills are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a
barrier between common-law spouses in regard to property relations since such
relationship ultimately encroaches upon the nuptial and filial rights of the
legitimate family. There is every reason to hold that the bar in donations between
legitimate spouses and those between illegitimate ones should be enforced in life
insurance policies since the same are based on similar consideration. As above
pointed out, a beneficiary in a life insurance policy is no different from a donee.
Both the recipients of pure beneficence. So long as marriage remains the threshold
of family laws, reason and morality dictate that the impediments imposed upon
married couple should likewise be imposed upon extra-marital relationship. If
legitimate relationship is circumscribed by these legal disabilities, with more
reason should an illicit relationship be restricted by these disabilities. Thus,
in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said:
"If the policy of the law is, in the language of the opinion of the then
Justice J.B.L. Reyes of that court (Court of Appeals), `to prohibit
donations in favor of the other consort and his descendants because
of fear and undue and improper pressure and influence upon the
donor, a prejudice deeply rooted in our ancient law;" por-que no se
enganen desponjandose el uno al otro por amor que han de consuno'
(According to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating
the rationale `No Mutuato amore invicem spoliarentur' of the
Pandects (Bk, 24, Titl. 1 De donat, inter virum et uxorem); then
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

there is very reason to apply the same prohibitive policy to persons that the guilt of the party may be proved "in the same action" for declaration of nullity of
living together as husband and wife without the benefit of nuptials. donation. And, it would be sufficient if evidence preponderates upon the guilt of the
For it is not to be doubted that assent to such irregular connection consort for the offense indicated. The quantum of proof in criminal cases is not
for thirty years bespeaks greater influence of one party over the demanded.
other, so that the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already pointed out by In the case before Us, the requisite proof of common-law relationship between the
Ulpian (in his lib. 32 ad Sabinum, fr. 1), `it would not be just that insured and the beneficiary has been conveniently supplied by the stipulations between
such donations should subsist, lest the condition of those who the parties in the pre-trial conference of the case. It case agreed upon and stipulated
incurred guilt should turn out to be better.' So long as marriage therein that the deceased insured Buenaventura C. Ebrado was married to Pascuala
remains the cornerstone of our family law, reason and morality alike Ebrado with whom she has six legitimate children; that during his lifetime, the deceased
demand that the disabilities attached to marriage should likewise insured was living with his common-law wife, Carponia Ebrado, with whom he has two
attach to concubinage. children. These stipulations are nothing less than judicial admissions which, as a
consequence, no longer require proof and cannot be contradicted. 8 A fortiori, on the
It is hardly necessary to add that even in the absence of the above basis of these admissions, a judgment may be validly rendered without going through
pronouncement, any other conclusion cannot stand the test of the rigors of a trial for the sole purpose of proving the illicit liaison between the insured
scrutiny. It would be to indict the framers of the Civil Code for a and the beneficiary. In fact, in that pre-trial, the parties even agreed "that a decision be
failure to apply a laudable rule to a situation which in its essentials rendered based on this agreement and stipulation of facts as to who among the two
cannot be distinguished. Moreover, if it is at all to be differentiated claimants is entitled to the policy." Cdpr
the policy of the law which embodies a deeply rooted notion of what
is just and what is right would be nullified if such irregular ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed.
relationship instead of being visited with disabilities would be Carponia T. Ebrado is hereby declared disqualified to be the beneficiary of the late
attended with benefits. Certainly a legal norm should not be Buenaventura C. Ebrado in his life insurance policy. As a consequence, the proceeds of
susceptible to such a reproach. If there is every any occasion where the policy are hereby held payable to the estate of the deceased insured. Costs against
the principle of statutory construction that what is within the spirit Carponia T. Ebrado.
of the law is as much a part of it as what is written, this is it. SO ORDERED.
Otherwise the basic purpose discernible in such codal provision
would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied
by an adherence to its avowed objective." LLphil
4. We do not think that a conviction for adultery or concubinage is exacted before
the disabilities mentioned in Article 739 may effectuate. More specifically, with
regard to the disability on "persons who were guilty of adultery or concubinage at
the time of the donation," Article 739 itself provides:
"In the case referred to in No. 1, the action for declaration of nullity
may be brought by the spouse of the donor or donee; and the guilt of
the donee may be proved by preponderance of evidence in the same
action."
The underscored clause neatly conveys that no criminal conviction for the disqualifying
offense is a condition precedent. In fact, it cannot even be gleaned from the aforequoted
provision that a criminal prosecution is needed. On the contrary, the law plainly states

42 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

ADDITIONAL CASES
1. Filipino Merchants Insurance Co., Inc. v CA, 179 SCRA 638).

SYLLABUS

1. COMMERCIAL LAW; MARINE INSURANCE; "ALL RISKS POLICY;"

COVERS ALL LOSSES BY ANY KIND OF ACCIDENTS. An "all risks
policy" should be read literally as meaning all risks whatsoever and covering all
losses by an accidental cause of any kind. The terms "accident" and "accidental",
as used in insurance contracts, have not acquired any technical meaning. They are
construed by the courts in their ordinary and common acceptance. Thus, the terms
have been taken to mean that which happens by chance or fortuitously, without
intention and design, and which is unexpected, unusual and unforeseen. An
accident is an event that takes place without one's foresight or expectation; an
event that proceeds from an unknown cause, or is an unusual effect of a known
cause and, therefore, not expected.
2. ID.; INSURANCE; CONSIDERED CONTRACTS OF INDEMNITY; IF
TERMS ARE CLEAR, POLICY MUST BE UNDERSTOOD IN THEIR PLAIN,
ORDINARY AND POPULAR SENSE. Contracts of insurance are contracts of
indemnity upon the terms and conditions specified in the policy. The agreement
has the force of law between the parties. The terms of the policy constitute the
measure of the insurer's liability. If such terms are clear and unambiguous, they
must be taken and understood in their plain, ordinary and popular sense.
3. ID.; ID.; INSURABLE INTEREST, DEFINITION OF; KINDS. Section 13
of the Insurance Code defines insurable interest in property as every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the
insured. In principle, anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction whether he has

43 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
or has not any title in, or lien upon or possession of the property. Insurable
interest in property may consist in (a) an existing interest; (b) an inchoate interest
founded on an existing interest; or (c) an expectancy, coupled with an existing
interest in that out of which the expectancy arises.
4. ID.; ID.; VENDEE OF GOODS INSURED HAS AN EQUITABLE TITLE
EVEN BEFORE DELIVERY ON PERFORMANCE OF CONDITIONS OF
SALE. Herein private respondent, as vendee/consignee of the goods in transit
has such existing interest therein as may be the subject of a valid contract of
insurance. His interest over the goods is based on the perfected contract of sale.
The perfected contract of sale between him and the shipper of the goods operates
to vest in him an equitable title even before delivery or before he performed the
conditions of the sale. The contract of shipment, whether under F.O.B., C.I.F., or
C. & F. as in this case, is immaterial in the determination of whether the vendee
has an insurable interest or not in the goods in transit. The perfected contract of
sale even without delivery vests in the vendee an equitable title, an existing
interest over the goods sufficient to be the subject of insurance.
5. CIVIL LAW; SALES; DELIVERY OF GOODS ON BOARD THE
CARRYING VESSEL CONSIDERED AN ACTUAL DELIVERY. Article
1523 of the Civil Code provides that where, in pursuance of a contract of sale, the
seller is authorized or required to send the goods to the buyer, delivery of the
goods to a carrier, whether named by the buyer or not, for, the purpose of
transmission to the buyer is deemed to be a delivery of the goods to the buyer, the
exceptions to said rule not obtaining in the present case. The Court has heretofore
ruled that the delivery of the goods on board the carrying vessels partake of the
nature of actual delivery since, from that time, the foreign buyers assumed the
risks of loss of the goods and paid the insurance premium covering them.
6. COMMERCIAL LAW; CODE OF COMMERCE; C & F CONTRACTS
MEAN SELLER MUST PAY THE COSTS AND FREIGHT BUT BUYER
ASSUMES RISKS OF LOSS. C & F contracts are shipment contracts. The
term means that the price fixed includes in a lump sum the cost of the goods and
freight to the named destination. It simply means that the seller must pay the
costs and freight necessary to bring the goods to the named destination but the
risk of loss or damage to the goods is transferred from the seller to the buyer
when the goods pass the ship's rail in the port of shipment.
7. REMEDIAL LAW; APPEAL; ISSUE NOT RAISED IN THE COURT A QUO
CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL. It is a settled
rule that an issue which has not been raised in the court a quo cannot be raised for
the first time on appeal as it would be offensive to the basic rules of fair play,
44
ATTY. BUSMENTE
justice and due process. This is but a permuted restatement of the long settled rule
that when a party deliberately adopts a certain theory, and the case is tried and
decided upon that theory in the court below, he will not be permitted to change
his theory on appeal because, to permit him to do so, would be unfair to the
adverse party.
Facts:
Choa insured 600 tons of fishmeal for the sum of P267,653.59 from Bangkok, Thailand
to Manila against all risks under warehouse to warehouse terms. What was imported in
the SS Bougainville was 59.940 metric tons at $395.42 a ton. The cargo was unloaded
from the ship and 227 bags were found to be in bad condition by the arrastre.
Choa made a formal claim against the defendant Filipino Merchants Insurance
Company for P51,568.62 He also presented a claim against the ship, but the defendant
Filipino Merchants Insurance Company refused to pay the claim. The plaintiff brought
an action against the company and presented a third party complaint against the vessel
and the arrastre contractor.
The court below, after trial on the merits, rendered judgment in favor of private
respondent, for the sum of P51,568.62 with interest at legal rate.
The common carrier, Compagnie, was ordered to pay as a joint debtor.
On appeal, the respondent court affirmed the decision of the lower court insofar as the
award on the complaint is concerned and modified the same with regard to
the adjudication of the third-party complaint. A motion for reconsideration of the
aforesaid decision was denied. The AC made Filipino Merchants pay but absolved
the common carrier, Compagnie. Hence this petition.
Issues:
1. WON the "all risks" clause of the marine insurance policy held the petitioner liable
to the private respondent for the partial loss of the cargo, notwithstanding the clear
absence of proof of some fortuitous event, casualty, or accidental cause to which the
loss is attributable.
2. WON The Court of Appeals erred in not holding that the private respondent
had no insurable interest in the subject cargo, hence, the marine insurance policy taken
out by private respondent is null and void.
Held: No. No. Petition denied.
Ratio:
1. The "all risks clause" of the Institute Cargo Clauses read as follows:
5. This insurance is against all risks of loss or damage to the subject-matter insured
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

but shall in no case be deemed to extend to cover loss, damage, or expense proximately the goods to a carrier, for the purpose of transmission to the buyer is deemed to be
caused by delay or inherent vice or nature of the subject-matter insured. Claims a delivery of the goods to the buyer. The Court has heretofore ruled that the delivery of
recoverable hereunder shall be payable irrespective of percentage. the goods on board the carrying vessels partake of the nature of actual delivery since,
An "all risks policy" should be read literally as meaning all risks whatsoever and from that time, the foreign buyers assumed the risks of loss of the goods and paid the
covering all losses by an accidental cause of any kind. Accident is construed by the insurance premium covering them.
courts in their ordinary and common acceptance.
The very nature of the term "all risks" must be given a broad and comprehensive
meaning as covering any loss other than a willful and fraudulent act of the insured. [G.R. No. 85141. November 28, 1989.]
This is pursuant to the very purpose of an "all risks" insurance to give protection to the
insured in those cases where difficulties of logical explanation or some mystery
surround the loss or damage to property. FILIPINO MERCHANTS INSURANCE CO.,
Institute Cargo Clauses extends to all damages/losses suffered by the insured cargo INC., petitioner, vs.COURT OF APPEALS and CHOA TIEK
except (a) loss or damage or expense proximately caused by delay, and (b) loss or SENG, respondents.
damage or expense proximately caused by the inherent vice or nature of the subject
matter insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a This is a review of the decision of the Court of Appeals, promulgated on July 19, 1988,
covered peril, but under an "all risks" policy the burden is not on the insured to prove the dispositive part of which reads: LLpr
the precise cause of loss or damage for which it seeks compensation. The insured under
an "all risks insurance policy" has the initial burden of proving that the cargo was in "WHEREFORE, the judgment appealed from is affirmed insofar as
good condition when the policy attached and that the cargo was damaged when it orders defendant Filipino Merchants Insurance Company to pay
unloaded from the vessel. The burden then shifts to the insurer to show the exception to the plaintiff the sum of P51,568.62 with interest at legal rate from
the coverage. This creates a special type of insurance which extends coverage to risks the date of filing of the complaint, and is modified with respect to
not usually contemplated and avoids putting upon the insured the burden of the third party complaint in that (1) third party defendant E. Razon,
establishing that the loss was due to the peril falling within the policy's coverage; the Inc. is ordered to reimburse third party plaintiff the sum of
insurer can avoid coverage upon demonstrating that a specific provision expressly P25,471.80 with legal interest from the date of payment until the
excludes the loss from coverage. date of reimbursement, and (2) the third-party complaint against
Under an 'all risks' policy, it was sufficient to show that there was damage occasioned third party defendant Compagnie Maritime Des Chargeurs Reunis is
by some accidental cause of any kind, and there is no necessity to point to any dismissed." 1
particular cause. The facts as found by the trial court and adopted by the Court of Appeals are as follows:
2. Section 13 of the Insurance Code- anyone has an insurable interest in property who
derives a benefit from its existence or would suffer loss from its destruction "This is an action brought by the consignee of the shipment of
Insurable interest in property may consist in (a) an existing interest; (b) an inchoate fishmeal loaded on board the vessel SS Bougainville and unloaded
interest founded on an existing interest; or (c) an expectancy, coupled with an existing at the Port of Manila on or about December 11, 1976 and seeks to
interest in that out of which the expectancy arises. recover from the defendant insurance company the amount of
Choa, as vendee/consignee of the goods in transit, has such existing interest as may be P51,568.62 representing damages to said shipment which has been
the subject of a valid contract of insurance. His interest over the goods is based on the insured by the defendant insurance company under Policy No. M-
perfected contract of sale. The perfected contract of sale between him and the shipper 2678. The defendant brought a third party complaint against third
of the goods operates to vest in him an equitable title even before delivery or before party defendants Compagnie Maritime Des Chargeurs Reunis and/or
conditions have been performed. E. Razon, Inc. seeking judgment against the third (sic) defendants in
Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract case judgment is rendered against the third party plaintiff. It appears
of sale, the seller is authorized or required to send the goods to the buyer, delivery of from the evidence presented that in December 1976, plaintiff

45 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
insured said shipment with defendant insurance company under said
cargo Policy No. M-2678 for the sum of P267,653.59 for the goods
described as 600 metric tons of fishmeal in new gunny bags of 90
kilos each from Bangkok, Thailand to Manila against all risks under
warehouse to warehouse terms. Actually, what was imported was
59.940 metric tons not 600 tons at $395.42 a ton CNF Manila. The
fishmeal in 666 new gunny bags were unloaded from the ship on
December 11, 1976 at Manila unto the arrastre contractor E. Razon,
Inc. and defendant's surveyor ascertained and certified that in such
discharge 105 bags were in bad order condition as jointly surveyed
by the ship's agent and the arrastre contractor. The condition of the
bad order was reflected in the turn over survey report of Bad Order
cargoes Nos. 120320 to 120322, as Exhibit C-4 consisting of three
(3) pages which are also Exhibits 4, 5 and 6-Razon. The cargo was
also surveyed by the arrastre contractor before delivery of the cargo
to the consignee and the condition of the cargo on such delivery was
reflected in E. Razon's Bad Order Certificate No. 14859, 14863 and
14869 covering a total of 227 bags in bad order condition.
Defendant's surveyor has conducted a final and detailed survey of
the cargo in the warehouse for which he prepared a survey report
Exhibit F with the findings on the extent of shortage or loss on the
bad order bags totalling 227 bags amounting to 12,148 kilos, Exhibit
F-1. Based on said computation the plaintiff made a formal claim
against the defendant Filipino Merchants Insurance Company for
P51,568.62 (Exhibit C) the computation of which claim is contained
therein. A formal claim statement was also presented by the plaintiff
against the vessel dated December 21, 1976, Exhibit B, but the
defendant Filipino Merchants Insurance Company refused to pay the
claim. Consequently, the plaintiff brought an action against said
defendant as adverted to above and defendant presented a third party
complaint against the vessel and the arrastre contractor." 2
The court below, after trial on the merits, rendered judgment in favor of private
respondent, the decretal portion whereof reads:
"WHEREFORE, on the main complaint, judgment is hereby
rendered in favor of the plaintiff and against the defendant Filipino
Merchant's (sic) Insurance Co., ordering the defendants to pay the
plaintiff the following amount:
"The sum of P51,568.62 with interest at legal rate from the date of
the filing of the complaint;
46
ATTY. BUSMENTE
"On the third party complaint, the third party defendant Compagnie
Maritime Des Chargeurs Reunis and third party defendant E. Razon,
Inc. are ordered to pay to the third party plaintiff jointly and
severally reimbursement of the amounts paid by the third party
plaintiff with legal interest from the date of such payment until the
date of such reimbursement.
"Without pronouncement as to costs." 3
On appeal, the respondent court affirmed the decision of the lower court insofar as the
award on the complaint is concerned and modified the same with regard to the
adjudication of the third-party complaint. A motion for reconsideration of the aforesaid
decision was denied, hence this petition with the following assignment of errors: Cdpr
"1. The Court of Appeals erred in its interpretation and
application of the 'all risks' clause of the marime insurance
policy when it held the petitioner liable to the private
respondent for the partial loss of the cargo, notwithstanding
the clear absence of proof of some fortuitous event, casualty,
or accidental cause to which the loss is attributable, thereby
contradicting the very precedents cited by it in its decision as
well as a prior decision of the same Division of the said court
(then composed of Justices Cacdac, Castro-Bartolome, and
Pronove);
"2. The Court of Appeals erred in not holding that the private
respondent had no insurable interest in the subject cargo,
hence, the marine insurance policy taken out by private
respondent is null and void;
"3. The Court of Appeals erred in not holding that the private
respondent was guilty of fraud in not disclosing the fact, it
being bound out of utmost good faith to do so, that it had no
insurable interest in the subject cargo, which bars its recovery
on the policy." 4
On the first assignment of error, petitioner contends that an "all risks" marine policy has
a technical meaning in insurance in that before a claim can be compensable it is essential
that there must be "some fortuity," "casualty" or "accidental cause" to which the alleged
loss is attributable and the failure of herein private respondent, upon whom lay the
burden, to adduce evidence showing that the alleged loss to the cargo in question was
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

due to a fortuitous event precludes his right to recover from the insurance policy. We coverage. 10 As we held in Paris-Manila Perfumery Co. vs. Phoenix Assurance Co.,
find said contention untenable. Ltd. 11 the basic rule is that the insurance company has the burden of proving that the
loss is caused by the risks excepted and for want of such proof, the company is
The "all risks clause" of the Institute Cargo Clauses read as follows: liable. Cdpr
"5. This insurance is against all risks of logs or damage to the Coverage under an "all risks" provision of a marine insurance policy creates a special
subject-matter insured but shall in no case be deemed to type of insurance which extends coverage to risks not usually contemplated and avoids
extend to cover loss, damage, or expense proximately caused putting upon the insured the burden of establishing that the loss was due to the peril
by delay or inherent vice or nature of the subject-matter falling within the policy's coverage; the insurer can avoid coverage upon demonstrating
insured. Claims recoverable hereunder shall be payable that a specific provision expressly excludes the loss from coverage. 12 A marine
irrespective of percentage." 5 insurance policy providing that the insurance was to be "against all risks" must be
An "all risks policy" should be read literally as meaning all risks whatsoever and construed as creating a special insurance and extending to other risks than are usually
covering all losses by an accidental cause of any kind. The terms "accident" and contemplated, and covers all losses except such as arise from the fraud of the
"accidental", as used in insurance contracts, have not acquired any technical meaning. insured. 13 The burden of the insured, therefore, is to prove merely that the goods he
They are construed by the courts in their ordinary and common acceptance. Thus, the transported have been lost, destroyed or deteriorated. Thereafter, the burden is shifted to
terms have been taken to mean that which happens by chance or fortuitously, without the insurer to prove that the loss was due to excepted perils. To impose on the insured
intention and design, and which is unexpected, unusual and unforeseen. An accident is the burden of proving the precise cause of the loss or damage would be inconsistent with
an event that takes place without one's foresight or expectation; an event that proceeds the broad protective purpose of "all risks" insurance.
from an unknown cause, or is an unusual effect of a known cause and, therefore, not In the present case, there being no showing that the loss was caused by any of the
expected. 6 excepted perils, the insurer is liable under the policy. As aptly stated by the respondent
The very nature of the term "all risks" must be given a broad and comprehensive Court of Appeals, upon due consideration of the authorities and jurisprudence it
meaning as covering any loss other than a wilful and fraudulent act of the insured. 7 This discussed
is pursuant to the very purpose of an "all risks" insurance to give protection to the ". . . it is believed that in the absence of any showing that the
insured in those cases where difficulties of logical explanation or some mystery losses/damages were caused by an excepted peril, i.e. delay or the
surround the loss or damage to property. 8 An "all risks" policy has been evolved to inherent vice or nature of the subject matter insured, and there is no
grant greater protection than that afforded by the "perils clause," in order to assure that such showing, the lower court did not err in holding that the loss
no loss can happen through the incidence of a cause neither insured against nor creating was covered by the policy.
liability in the ship; it is written against all losses, that is, attributable to external
causes. 9 "There is no evidence presented to show that the condition of the
gunny bags in which the fishmeal was packed was such that they
The term "all risks" cannot be given a strained technical meaning, the language of the could not hold their contents in the course of the necessary transit,
clause under the Institute Cargo Clauses being unequivocal and clear, to the effect that it much less any evidence that the bags of cargo had burst as the result
extends to all damages/losses suffered by the insured cargo except (a) loss or damage or of the weakness of the bags themselves. Had there been such a
expense proximately caused by delay, and (b) loss or damage or expense proximately showing that spillage would have been a certainty, there may have
caused by the inherent vice or nature of the subject matter insured. been good reason to plead that there was no risk covered by the
Generally, the burden of proof is upon the insured to show that a loss arose from a policy (See Berk vs. Style [1956] cited in Marine Insurance Claims,
covered peril, but under an "all risks" policy the burden is not on the insured to prove the ibid, p. 125). Under an 'all risks' policy, it was sufficient to show that
precise cause of loss or damage for which it seeks compensation. The insured under an there was damage occasioned by some accidental cause of any kind,
"all risks insurance policy" has the initial burden of proving that the cargo was in good and there is no necessity to point to any particular cause." 14
condition when the policy attached and that the cargo was damaged when unloaded from
the vessel; thereafter, the burden then shifts to the insurer to show the exception to the

47 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

Contracts of insurance are contracts of indemnity upon the terms and conditions destination but the risk of loss or damage to the goods is transferred from the seller to
specified in the policy. The agreement has the force of law between the parties. The the buyer when the goods pass the ship's rail in the port of shipment. 22
terms of the policy constitute the measure of the insurer's liability. If such terms are clear
and unambiguous, they must be taken and understood in their plain, ordinary and
popular sense. 15 Moreover, the issue of lack of insurable interest was not among the defenses averred in
Anent the issue of insurable interest, we uphold the ruling of the respondent court that petitioner's answer. It was neither an issue agreed upon by the parties at the pre-trial
private respondent, as consignee of the goods in transit under an invoice containing the conference nor was it raised during the trial in the court below. It is a settled rule that an
terms under "C & F Manila," has insurable interest in said goods. issue which has not been raised in the court a quo cannot be raised for the first time on
appeal as it would be offensive to the basic rules of fair play, justice and due
Section 13 of the Insurance Code defines insurable interest in property as every interest process. 23 This is but a permuted restatement of the long settled rule that when a party
in property, whether real or personal, or any relation thereto, or liability in respect deliberately adopts a certain theory, and the case is tried and decided upon that theory in
thereof, of such nature that a contemplated peril might directly damnify the insured. In the court below, he will not be permitted to change his theory on appeal because, to
principle, anyone has an insurable interest in property who derives a benefit from its permit him to do so, would be unfair to the adverse party. 24
existence or would suffer loss from its destruction whether he has or has not any title in,
or lien upon or possession of the property.16 Insurable interest in property may consist If despite the fundamental doctrines just stated, we nevertheless decided to indite a
in (a) an existing interest; (b) an inchoate interest founded on an existing interest; or (c) disquisition on the issue of insurable interest raised by petitioner, it was to put at rest all
an expectancy, coupled with an existing interest in that out of which the expectancy doubts on the matter under the facts in this case and also to dispose of petitioner's third
arises. 17 assignment of error which consequently needs no further discussion. llcd

Herein private respondent, as vendee/consignee of the goods in transit has such existing WHEREFORE, the instant petition is DENIED and the assailed decision of the
interest therein as may be the subject of a valid contract of insurance. His interest over respondent Court of Appeals is AFFIRMED in toto.
the goods is based on the perfected contract of sale. 18 The perfected contract of sale SO ORDERED.
between him and the shipper of the goods operates to vest in him an equitable title even
before delivery or before he performed the conditions of the sale. 19 The contract of
shipment, whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the 2. Amando Geogonia v. Court of Appeals (241 SCRA 152, 161 {1995}
determination of whether the vendee has an insurable interest or not in the goods in
transit. The perfected contract of sale even without delivery vests in the vendee an Facts:
equitable title, an existing interest over the goods sufficient to be the subject of Geagonia, owner of a store, obtained from Country Bankers fire insurance policy for
insurance. P100,000.00. The 1 year policy and covered thestock trading of dry goods.
The policy noted the requirement that
Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of "3. The insured shall give notice to the Company of any insurance
sale, the seller is authorized or required to send the goods to the buyer, delivery of the or insurances already effected, or which may subsequently be effected, covering any of
goods to a carrier, whether named by the buyer or not, for, the purpose of transmission to the property or properties consisting of stocks in trade, goods in process and/or
the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule inventories only hereby insured, and unless notice be given and the particulars of such
not obtaining in the present case. The Court has heretofore ruled that the delivery of the insurance or insurances be stated therein or endorsed in this policy pursuant to Section
goods on board the carrying vessels partake of the nature of actual delivery since, from 50 of the Insurance Code, by or on behalf of the Company before the occurrence of any
that time, the foreign buyers assumed the risks of loss of the goods and paid the loss or damage, all benefits under this policy shall be deemed forfeited, provided
insurance premium covering them. 20 however, that this condition shall not apply when the total insurance
C & F contracts are shipment contracts. The term means that the price fixed includes in a or insurances in force at the time of the loss or damage is not more than P200,000.00."
lump sum the cost of the goods and freight to the named destination. 21 It simply means The petitioners stocks were destroyed by fire. He then filed a claim which was
that the seller must pay the costs and freight necessary to bring the goods to the named subsequently denied because the petitioners stocks were covered by two other

48 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
fire insurance policies for Php 200,000 issued by PFIC. The basis of the private
respondent's denial was the petitioner's alleged violation of Condition 3 of the policy.
Geagonia then filed a complaint against the private respondent in the Insurance
Commission for the recovery of P100,000.00 under fire insurance policy and damages.
He claimed that he knew the existence of the other two policies. But, he said that he
had no knowledge of the provision in the private respondent's policy requiring him to
inform it of the prior policies and this requirement was not mentioned to him by the
private respondent's agent.
The Insurance Commission found that the petitioner did not violate Condition 3 as he
had no knowledge of the existence of the two fire insurance policies obtained from the
PFIC; that it was Cebu Tesing Textiles w/c procured the PFIC policies w/o informing
him or securing his consent; and that Cebu Tesing Textile, as his creditor, had insurable
interest on the stocks.
The Insurance Commission then ordered the respondent company to pay complainant
the sum of P100,000.00 with interest and attorneys fees.
CA reversed the decision of the Insurance Commission because it found that the
petitioner knew of the existence of the two other policies issued by the PFIC.
Issues:
1. WON the petitioner had not disclosed the two insurance policies when he obtained
the fire insurance and thereby violated Condition 3 of the policy.
2. WON he is prohibited from recovering
Held: Yes. No. Petition Granted
Ratio:
1. The court agreed with the CA that the petitioner knew of the prior policies issued by
the PFIC. His letter of 18 January 1991 to the private respondent conclusively proves
this knowledge. His testimony to the contrary before the Insurance Commissioner and
which the latter relied upon cannot prevail over a written admission made ante litem
motam. It was, indeed, incredible that he did not know about the prior policies since
these policies were not new or original.
2. Stated differently, provisions, conditions or exceptions in policies which tend to
work a forfeiture of insurance policies should be construed most strictly against those
for whose benefits they are inserted, and most favorably toward those against whom
they are intended to operate.
With these principles in mind, Condition 3 of the subject policy is not totally free
from ambiguity and must be meticulously analyzed. Such analysis leads us to conclude
that (a) the prohibition applies only to double insurance, and (b) the nullity of the
policy shall only be to the extent exceeding P200,000.00 of the total policies obtained.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if
49
ATTY. BUSMENTE
the total insurance in force at the time of loss does not exceed P200,000.00, the private
respondent was amenable to assume a co-insurer's liability up to a loss not exceeding
P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the
rationale behind the incorporation of "other insurance" clause in fire policies is to
prevent over-insurance and thus avert the perpetration of fraud. When a property owner
obtains insurance policies from two or more insurers in a total amount that exceeds the
property's value, the insured may have an inducement to destroy the property for the
purpose of collecting the insurance. The public as well as the insurer is interested in
preventing a situation in which a fire would be profitable to the insured.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE; "OTHER INSURANCE" CLAUSE AS
A CONDITION; ALLOWED TO PREVENT AN INCREASE IN THE MORAL
HAZARD. The Insurance Commission found that the petitioner had no
knowledge of the previous two policies. The Court of Appeals disagreed and
found otherwise in view of the explicit admission by the petitioner in his letter to
the private respondent of 18 January 1991, which was quoted in the challenged
decision of the Court of Appeals. These divergent findings of fact constitute an
exception to the general rule that in petitions for review under Rule 45, only
questions of law are involved and findings of fact by the Court of Appeals are
conclusive and binding upon this Court. We agree with the Court of Appeals that
the petitioner knew of the prior policies issued by the PFIC. His letter of 18
January 1991 to the private respondent conclusively proves this knowledge. His
testimony to the contrary before the Insurance Commissioner and which the latter
relied upon cannot prevail over a written admission made ante litem motam. It
was, indeed, incredible that he did not know about the prior policies since these
policies were not new or original. Policy No. GA-28144 was a renewal of Policy
No. F-24758, while Policy No. GA-28146 had been renewed twice, the previous
policy being F-24792. Condition 3 of the private respondent's Policy No. F-14622
is a condition which is nor proscribed by law. Its incorporation in the policy is
allowed by Section 75 of the Insurance Code which provides that "[a] policy may
declare that a violation of specified provisions thereof shall avoid it, otherwise
the breach of an immaterial provision does not avoid the policy." Such a
condition is a provision which invariably appears in fire insurance policies and is
intended to prevent an increase in the moral hazard. It is commonly known as the
additional or "other insurance" clause and has been upheld as valid and as a
warranty that no other insurance exists. Its violation would thus avoid the policy.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
However, in order to constitute a violation, the other insurance must be upon the
same subject matter, the same interest therein, and the same risk.
2. ID.; ID.; ID.; CONCEPT; GENERAL INSURANCE AND SURETY
CORP. v. NG HUA (106 PHIL. 1117); NOT APPLICABLE IN CASE AT
BAR. It must, however, be underscored that unlike the "other insurance"
clauses involved in General Insurance and Surety Corp. v. Ng Hua (106 Phil.
1117 [1960]) or in Pioneer Insurance & Surety Corp. vs. Yap, (61 SCRA 426
[1974]) which read: "The insured shall give notice to the company of any
insurance already effected, or which may subsequently be effected covering any
of the property hereby insured, and unless such notice be given and the
particulars of such insurance or insurances be stated in or endorsed on this Policy
by or on behalf of the Company before the occurrence of any loss or damage, all
benefits under this Policy shall be forfeited." or in the 1930 case of Santa Ana vs.
Commercial Union Assurance Co.(55 Phil 329, 334 [1930]) which provided "that
any outstanding insurance upon the whole or a portion of the objects thereby
assured must be declared by the insured in writing and he must cause the
company to add or insert it in the policy, without which such policy shall be null
and void, and the insured will not be entitled to indemnity in case of
loss," Condition 3 in the private respondent's policy No. F-14622 does not
absolutely declare void any violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or insurances in force at the
time of the loss damage is not more than P200,000.00."
3. ID.; ID.; CONTRACT THEREOF MUST BE LIBERALLY
CONSTRUED. It is a cardinal rule on insurance that a policy or insurance
contract is to be interpreted liberally in favor of the insured and strictly against
the company, the reason being, undoubtedly, to afford the greatest protection
which the insured was endeavoring to secure when he applied for insurance. It is
also a cardinal principle of law that forfeitures are not favored and that any
construction which would result in the forfeiture of the policy benefits for the
person claiming thereunder, will be avoided, if it is possible to construe the policy
in a manner which would permit recovery, as, for example, by finding a waiver
for such forfeiture. Stated differently, provisions, conditions or exceptions in
policies which tend to work a forfeiture of insurance policies should be construed
most strictly against those for whose benefits they are inserted, and most
favorably toward those against whom they are intended to operate. The reason for
this is that, except for riders which may later be inserted, the insured sees the
contract already in its final form and has had no voice in the selection or
arrangement of the words employed therein. On the other hand, the language of
the contract was carefully chosen and deliberated upon by experts and legal
advisers who had acted exclusively in the interest of the insurers and the technical
50
ATTY. BUSMENTE
language employed therein is rarely understood by ordinary laymen.
4. ID.; ID.; INSURABLE INTEREST; EXTENT THEREOF BY MORTGAGEE
AND MORTGAGOR; RULE. As to a mortgaged property, the mortgagor and
the mortgagee have each an independent insurable interest therein and both
interests may be covered by one policy, or each may take out a separate policy
covering his interest, either at the same or at separate times. The mortgagor's
insurable interest covers the full value of the mortgaged property, even though the
mortgage debt is equivalent to the full value of the property. The mortgagee's
insurable interest is to the extent of the debt, since the property is relied upon as
security thereof, and in insuring he is not insuring the property but his interest or
lien thereon. His insurable interest is prima facie the value mortgaged and
extends only to the amount of the debt, not exceeding the value of the mortgaged
property. Thus, separate insurances covering different insurable interests may be
obtained by the mortgagor and the mortgagee.
5. ID.; ID.; RULE WHEN A MORTGAGOR OBTAINED THEREOF FOR THE
BENEFIT OF THE MORTGAGEE. A mortgagor may, however, take out
insurance for the benefit of the mortgagee, which is the usual practice. The
mortgagee may be made the beneficial payee in several ways. He may become
the assignee of the policy with the consent of the insurer; or the mere pledgee
without such consent; or the original policy may contain a mortgage clause; or a
rider making the policy payable to the mortgagee "as his interest may appear"
may be attached; or a "standard mortgage clause," containing a collateral
independent contract between the mortgagee and insurer, may be attached; or the
policy, though by its terms payable absolutely to the mortgagor, may have been
procured by a mortgagor under a contract duty to insure for the mortgagee's
benefit, in which case the mortgagee acquires an equitable lien upon the
proceeds. In the policy obtained by the mortgagor with loss payable clause in
favor of the mortgagee as his interest may appear, the mortgagee is only a
beneficiary under the contract, and recognized as such by the insurer but not
made a party to the contract itself. Hence, any act of the mortgagor which defeats
his right will also defeat the right of the mortgagee. This kind of policy covers
only such interest as the mortgagee has at the issuing of the policy. On the other
hand, a mortgagee may also procure a policy as a contracting party in accordance
with the terms of an agreement by which the mortgagor is to pay the premiums
upon such insurance. It has been noted, however, that although the mortgagee is
himself the insured, as where he applies for a policy, fully informs the authorized
agent of his interest, pays the premiums, and obtains a policy on the assurance
that it insures him, the policy is in fact in the form used to insure a mortgagor
with loss payable clause.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
6. ID.; ID.; DOUBLE INSURANCE; DOES NOT EXIST WHEN TWO (2)
POLICIES DO NOT COVER THE SAME INTEREST; CASE AT BAR. We
are of the opinion that Condition 3 of the subject policy is not totally free from
ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us
to conclude that (a) the prohibition applies only to double insurance, and (b) the
nullity of the policy shall only be to the extent exceeding P200,000.00 of the total
policies obtained. The first conclusion is supported by the portion of the condition
referring to other insurance "covering any of the property or properties consisting
of stocks in trade, goods in process and/or inventories only hereby insured," and
the portion regarding the insured's declaration on the subheading CO-
INSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the sum of
P50,000.00. A double insurance exists where the same person is insured by
several insurers separately in respect of the same subject and interest. As earlier
stated, the insurable interests of a mortgagor and a mortgagee on the mortgaged
property are distinct and separate. Since the two policies of the PFIC do not cover
the same interest as that covered by the policy of the private respondent, no
double insurance exists. The non-disclosure then of the former policies was not
fatal to the petitioner's right to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not
apply if the total insurance in force at the time of loss does not exceed
P200,000.00, the private respondent was amenable to assume a co-insurer's
liability up to a loss not exceeding to P200,000.00. What it had in mind was to
discourage over-insurance. Indeed, the rationale behind the incorporation of
"other insurance" clause in fire policies is to prevent over-insurance and thus
avert the perpetration of fraud. When a property owner obtains insurance from
two or more insurers in a total amount that exceeds the property's value, the
insured may have an inducement to destroy the property for the purpose of
collecting the insurance. The public as well as the insurer is interested in
preventing a situation in which a fire would be profitable to the insured.
FIRST DIVISION
[G.R. No. 114427. February 6, 1995.]
ARMANDO GEAGONIA, petitioner, vs. COURT OF APPEALS
and COUNTRY BANKERS INSURANCE
CORPORATION, respondents.
51
ATTY. BUSMENTE
For our review under Rule 45 of the Rules of Court is the decision1 of the Court of
Appeals in CA-G.R. SP No. 31916, entitled "Country Bankers Insurance
Corporation versus Armando Geagonia," reversing the decision of the Insurance
Commission in I.C. Case No. 3340 which awarded the claim of petitioner Armando
Geagonia against private respondent Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San
Francisco, Agusan del Sur. On 22 December 1989, he obtained from the private
respondent fire insurance policy No. F-146222for P100,000.00. The period of the
policy was from 22 December 1989 to 22 December 1990 and covered the
following: "Stock-in-trade consisting principally of dry goods such as RTW's for
men and women wear and other usual to assured's business."cdasia
The petitioner declared in the policy under the subheading entitled CO-
INSURANCE that Mercantile Insurance Co., Inc. was the co-insurer for
P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks
amounting to P392,130.50, itemized as follows:
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
========
P392,130.50
The policy contained the following condition:
"3. The insured shall give notice to the
Company of any insurance or insurances
already effected, or which may subsequently
be effected, covering any of the property or
properties consisting of stocks in trade,
goods in process and/or inventories only
hereby insured, and unless notice be given
and the particulars of such insurance or
insurances be stated therein or endorsed in
this policy pursuant to Section 50 of
the Insurance Code, by or on behalf of the
Company before the occurrence of any loss
or damage, all benefits under this policy
shall be deemed forfeited, provided however,
that this condition shall not apply when the
total insurance or insurances in force at the
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
time of the loss or damage is not more than
P200,000.00."cdasia
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the
public market of San Francisco, Agusan del Sur. The petitioner's insured stocks-in-
trade were completely destroyed prompting him to file with the private respondent a
claim under the policy. On 28 December 1990, the private respondent denied the
claim because it found that at the time of the loss the petitioner's stocks-in-trade
were likewise covered by fire insurance policies No. GA-28146 and No. GA-28144,
for P100,000.00 each, issued by the Cebu Branch of the Philippines First Insurance
Co., Inc. (hereinafter PFIC). 3 These policies indicate that the insured was "Messrs.
Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading:
"MORTGAGEE: Loss, if any, shall be
payable to Messrs.
Cebu Tesing Textiles, Cebu City as their
interest may appear subject to the terms of
this policy. CO-INSURANCE
DECLARED:
P100,000. Phils. First CEB/F-24758" 4
The basis of the private respondent's denial was the petitioner's alleged violation of
Condition 3 of the policy.
The petitioner then filed a complaint5 against the private respondent with the
Insurance Commission (Case No. 3340) for the recovery of P100,000.00 under fire
insurance policy No. F-14622 and for attorney's fees and costs of litigation. He
attached as Annex "M" 6 thereof his letter of 18 January 1991 which asked for the
reconsideration of the denial. He admitted in the said letter that at the time he
obtained the private respondent's fire insurance policy he knew that the two policies
issued by the PFIC were already in existence; however, he had no knowledge of the
provision in the private respondent's policy requiring him to inform it of the prior
policies; this requirement was not mentioned to him by the private respondent's
agent; and had it been so mentioned, he would not have withheld such information.
He further asserted that the total of the amounts claimed under the three policies
was below the actual value of his stocks at the time of loss, which was
P1,000,000.00
In its answer,7 the private respondent specifically denied the allegations in the
complaint and set up as its principal defense the violation of Condition 3 of the
policy.
52
ATTY. BUSMENTE
In its decision of 21 June 1993,8 the Insurance Commission found that the petitioner
did not violate Condition 3 as he had no knowledge of the existence of the two fire
insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles which
procured the PFIC policies without informing him or securing his consent; and that
Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These
findings were based on the petitioner's testimony that he came to know of the PFIC
policies only when he filed his claim with the private respondent and that Cebu
Tesing Textile obtained them and paid for their premiums without informing him
thereof. The Insurance Commission then decreed:cdasia
"WHEREFORE, judgment is hereby rendered ordering the
respondent company to pay complainant the sum of P100,000.00
with legal interest from the time the complaint was filed until fully
satisfied plus the amount of P10,000.00 as attorney's fees. With
costs. The compulsory counterclaim of respondent is hereby
dismissed."
Its motion for the reconsideration of the decision9 having been denied by the
Insurance Commission in its resolution of 20 August 1993,10 the private respondent
appealed to the Court of Appeals by way of a petition for review. The petition was
docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision
of the Insurance Commission because it found that the petitioner knew of the
existence of the two other policies issued by the PFIC. It said:
"It is apparent from the face of Fire Policy GA 28146/Fire Policy
No. 28144 that the insurance was taken in the name of private
respondent [petitioner herein]. The policy states that 'DISCOUNT
MART (MR. ARMANDO GEAGONIA, PROP)' was assured and
that 'TESING TEXTILES' [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private
respondent, not by the Tesing Textiles which is alleged to have taken
out the other insurances without the knowledge of private
respondent. This is shown by Premium Invoices nos. 46632 and
46630. (Annexes M and N). In both invoices, Tesing Textiles is
indicated to be only the mortgagee of the goods insured but the
party to which they were issued were the 'DISCOUNT MART (MR.
ARMANDO GEAGONIA).'
It is clear that it was the private respondent [petitioner herein] who
took out the policies on the same property subject of the insurance
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
with petitioner. Hence, in failing to disclose the existence of these
insurances private respondent violated Condition No. 3 of Fire
Policy No. 14622. . . .
Indeed private respondent's allegation of lack of knowledge of the
previous insurances is belied by his letter to petitioner [of 18
January 1991. The body of the letter reads as follows:]cdasia
xxx xxx xxx
'Please be informed that I have no knowledge of the
provision requiring me to inform your office about my
prior insurance under FGA-28146 and F-CEB-24758. Your
representative did not mention about said requirement at
the time he was convincing me to insure with you. If he
only did or even inquired if I had other existing policies
covering my establishment, I would have told him so. You
will note that at the time he talked to me until I decided to
insure with your company the two policies aforementioned
were already in effect. Therefore I would have no reason to
withhold such information and I would have no reason to
withhold such information and I would have desisted to
part with my hard earned peso to pay the insurance
premiums [if] I know I could not recover anything.
Sir, I am only an ordinary businessman interested in
protecting my investments. The actual value of my stocks
damaged by the fire was estimated by the Police
Department to be P1,000,000.00 (Please see xerox copy of
Police Report Annex "A"). My Income Statement as of
December 31, 1989 or five months before the fire, shows
my merchandise inventory was already some
P595,455,75. . . . These will support my claim that the
amount under the three policies are much below the value
of my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did not
know that there were other insurances taken on the stock-in-trade
and seriously puts in question his credibility."cdasia
53
ATTY. BUSMENTE
His motion to reconsider the adverse decision having been denied, the petitioner
filed the instant petition. He contends therein that the Court of Appeals acted with
grave abuse of discretion amounting to lack of excess of jurisdiction:
"A . . . WHEN IT REVERSED THE FINDINGS
OF FACTS OF THE INSURANCE COMMISSION,
A QUASI-JUDICIAL BODY CHARGED WITH
THE DUTY OF DETERMINING INSURANCE
CLAIM AND WHOSE DECISION IS ACCORDED
RESPECT AND EVEN FINALITY BY THE
COURTS;
B . . . WHEN IT CONSIDERED AS EVIDENCE
MATTERS WHICH WERE NOT PRESENTED AS
EVIDENCE DURING THE HEARING OR TRIAL;
AND
C . . . WHEN IT DISMISSED THE CLAIM OF
THE PETITIONER HEREIN AGAINST THE
PRIVATE RESPONDENT."
The chief issues that crop up from the first and third grounds are (a) whether the
petitioner had prior knowledge of the two insurance policies issued by the PFIC
when he obtained the fire insurance policy from the private respondent, thereby, for
not disclosing such fact, violating Condition 3 of the policy, and (b) if he had,
whether he is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the
petitioner's letter of reconsideration of 18 January 1991, is without merit. The
petitioner claims that the said letter was not offered in evidence and thus should not
have been considered in deciding the case. However, as correctly pointed out by the
Court of Appeals, a copy of this letter was attached to the petitioner's complaint in
I.C. Case No. 3340 as Annex "M" thereof and made an integral part of the
complaint. 12It has attained the status of a judicial admission and since its due
execution and authenticity was not denied by the other party, the petitioner is bound
by it even if it were not introduced as an independent evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had no
knowledge of the previous two policies. The Court of Appeals disagreed and found
otherwise in view of the explicit admission by the petitioner in his letter to the
private respondent of 18 January 1991, which was quoted in the challenged decision
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
of the Court of Appeals. These divergent findings of fact constitute an exception to
the general rule that in petitions for review under Rule 45, only questions of law are
involved and findings of fact by the Court of Appeals are conclusive and binding
upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior policies
issued by the PFIC. His letter of 18 January 1991 to the private respondent
conclusively proves this knowledge. His testimony to the contrary before the
Insurance Commissioner and which the latter relied upon cannot prevail over a
written admission made ante litem motam. It was, indeed, incredible that he did not
know about the prior policies since these policies were not new or original. Policy
No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146
had been renewed twice, the previous policy being F-24792. cdasia
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is
not proscribed by law. Its incorporation in the policy is allowed by Section 75 of
the Insurance Code 15 which provides that "[a] policy may declare that a violation
of specified provisions thereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid the policy." Such a condition is a provision which
invariably appears in fire insurance policies and is intended to prevent an increase in
the moral hazard. It is commonly known as the additional or "other insurance"
clause and has been upheld as valid and as a warranty that no other insurance exists.
Its violation would thus avoid the policy. 16However, in order to constitute a
violation, the other insurance must be upon the same subject matter, the same
interest therein, and the same risk. 17
As to a mortgaged property, the mortgagor and the mortgagee have each an
independent insurable interest therein and both interests may be covered by one
policy, or each may take out a separate policy covering his interest, either at the
same or at separate times. 18 The mortgagor's insurable interest covers the full
value of the mortgaged property, even though the mortgage debt is equivalent to the
full value of the property. 19 The mortgagee's insurable interest is to the extent of
the debt, since the property is relied upon as security thereof, and in insuring he is
not insuring the property but his interest or lien thereon. His insurable interest
is prima facie the value mortgaged and extends only the amount of the debt, not
exceeding the value of the mortgaged property.20 Thus, separate insurances
covering different insurable interests may be obtained by the mortgagor and the
mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee,
which is the usual practice. The mortgagee may be made the beneficial payee in
several ways. He may become the assignee of the policy with the consent of the
54
ATTY. BUSMENTE
insurer; or the mere pledgee without such consent; or the original policy may
contain a mortgage clause; or a rider making the policy payable to the mortgagee
"as his interest may appear" may be attached; or a "standard mortgage clause,"
containing a collateral independent contract between the mortgagee and insurer,
may be attached; or the policy, though by its terms payable absolutely to the
mortgagor, may have been procured by a mortgagor under a contract duty to insure
for the mortgagee's benefit, in which case the mortgagee acquires an equitable lien
upon the proceeds. 21
In the policy obtained by the mortgagor with loss payable clause in favor of the
mortgagee as his interest may appear, the mortgagee is only a beneficiary under the
contract, and recognized as such by the insurer but not made a party to the contract
itself. Hence, any act of the mortgagor which defeats his right will also defeat the
right of the mortgagee.22 This kind of policy covers only such interest as the
mortgagee has at the issuing of the policy. 23
On the other hand, a mortgagee may also procure a policy as a contracting party in
accordance with the terms of an agreement by which the mortgagor is to pay the
premiums upon such insurance. 24 It has been noted, however, that although the
mortgagee is himself the insured, as where he applies for a policy, fully informs the
authorized agent of his interest, pays the premiums, and obtains a policy on the
assurance that it insures him, the policy is in fact in the form used to insure a
mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the assured
and contain a mortgage clause which reads:cdasia
"Loss, if any, shall be payable to MESSRS. TESING TEXTILES,
Cebu City as their interest may appear subject to the terms of the
policy."
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved
in General Insurance and Surety Corp. vs. Ng Hua 26 or inPioneer Insurance &
Surety Corp. vs. Yap, 27 which read:
"The insured shall give notice to the company of any insurance or
insurances already effected, or which may subsequently be effected
covering any of the property hereby insured, and unless such notice
be given and the particulars of such insurance or insurances be
stated in or endorsed on this Policy by or on behalf of the Company
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
before the occurrence of any loss or damage, all benefits under this
Policy shall be forfeited."
or in the 1930 case of Santa Ana vs. Commercial Union Assurance Co. 28which
provided "that any outstanding insurance upon the whole or a portion of the objects
thereby assured must be declared by the insured in writing and he must cause the
company to add or insert it in the policy, without which such policy shall be null
and void, and the insured will not be entitled to indemnity in case of
loss," Condition 3 in the private respondent's policy No. F-14622 does not
absolutely declare void any violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or insurances in force at the time
of the loss or damage is not more than P200,000.00."cdasia
It is a cardinal rule on insurance that a policy or insurance contract is to be
interpreted liberally in favor of the insured and strictly against the company, the
reason being, undoubtedly, to afford the greatest protection which the insured was
endeavoring to secure when he applied for insurance. It is also a cardinal principle
of law that forfeitures are not favored and that any construction which would result
in the forfeiture of the policy benefits for the person claiming thereunder, will be
avoided, if it is possible to construe the policy in a manner which would permit
recovery, as, for example, by finding a waiver for such forfeiture. 29Stated
differently, provisions, conditions or exceptions in policies which tend to work a
forfeiture of insurance policies should be construed most strictly against those for
whose benefits they are inserted, and most favorably toward those against whom
they are intended to operate. 30The reason for this is that, except for riders which
may later be inserted, the insured sees the contract already in its final form and has
had no voice in the selection or arrangement of the words employed therein. On the
other hand, the language of the contract was carefully chosen and deliberated upon
by experts and legal advisers who had acted exclusively in the interest of the
insurers and the technical language employed therein is rarely understood by
ordinary laymen. 31
With these principles in mind, we are of the opinion that Condition 3 of the subject
policy is not totally free from ambiguity and must, perforce, be meticulously
analyzed. Such analysis leads us to conclude that (a) the prohibition applies only to
double insurance, and (b) the nullity of the policy shall only be to the extent
exceeding P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of the condition referring to other
insurance "covering any of the property or properties consisting of stocks in trade,
goods in process and/or inventories only hereby insured," and the portion regarding
the insured's declaration on the subheading CO-INSURANCE that the co-insurer is
55
ATTY. BUSMENTE
Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists
where the same person is insured by several insurers separately in respect of the
same subject and interest. As earlier stated, the insurable interests of a mortgagor
and a mortgagee on the mortgaged property are distinct and separate. Since the two
policies of the PFIC do not cover the same interest as that covered by the policy of
the private respondent, no double insurance exists. The non-disclosure then of the
former policies was not fatal to the petitioner's right to recover on the private
respondent's policy. cdasia
Furthermore, by stating within Condition 3 itself that such condition shall not apply
if the total insurance in force at the time of loss does not exceed P200,000.00, the
private respondent was amenable to assume a co-insurer's liability up to a loss not
exceeding P200,000.00. What it had in mind was to discourage over-insurance.
Indeed, the rationale behind the incorporation of "other insurance" clause in fire
policies is to prevent over-insurance and thus avert the perpetration of fraud. When
a property owner obtains insurance policies from two or more insurers in a total
amount that exceeds the property's value, the insured may have an inducement to
destroy the property for the purpose of collecting the insurance. The public as well
as the insurer is interested in preventing a situation in which a fire would be
profitable to the insured. 32
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court
of Appeals in CA-G.R. SP No. 31916 is SET ASIDE and the decision of the
Insurance Commission in Case No. 3340 is REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.
SO ORDERED.
3. Great pacific Life Assurance corp. v Court of Appeals (316 SCRA 677
*repeated case
4. Cha v. CA, 277 SCRA 690 {1997}.
G.R. No. 124520 August 18, 1997
Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO.,
INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION,
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
respondents.
Facts: Petitioner spouses Nilo Cha and Stella Uy-Cha, as lessees entered into a lease
contract with private respondent CKS Development Corporation as lessor. A stipulation
of the lease contract provides that the Lessee is not allowed to insure against fire the
chattels, merchandise, textiles, goods and effects placed at any stall or store or space in
the leased premises without first obtaining the written consent and approval of the
Lessor. If the Lessee violates this the policy is deemed assigned and transferred to the
Lessor for his own benefit.
Petitioner took out a policy of fire insurance over the merchandise inside the leased
premises with United Insurance without consent of CKS.
On the day the lease contract was to expire a fire broke out inside the leased premises.
CKS, wrote a letter to United asking that the proceeds of the fire insurance be paid
directly to CKS. United refused. Hence, the latter filed a complaint against the Cha
spouses and United.
RTC ruled in favor of CKS. CA affirmed, hence the petition.
Issue: Whether or not CKS can recover from the insurance policy.
Held: No. Section 18 of the Insurance Code provides that: No contract or policy of
insurance on property shall be enforceable except for the benefit of some person having
an insurable interest in the property insured.
In the present case, it cannot be denied that CKS has no insurable interest in the goods
and merchandise inside the leased premises under the provisions of Section 17 of the
Insurance Code: The measure of an insurable interest in property is the extent to
which the insured might be damnified by loss or injury thereof. Therefore, CKS
cannot be validly a beneficiary of the fire insurance policy taken by petitioner-spouses.
The insurable interest remains with the Cha spouses.
The stipulation in the lease contract is void for being contrary to law and public
policy. This is in keeping with the provision under Sec. 25 of the Insurance Code
that: Every stipulation in a policy of Insurance for the payment of loss, whether
the person insured has or has not any interest in the property insured or that the
policy shall be received as proof of such interest and every policy executed by way
of gaming or wagering is void.
SYNOPSIS
56
ATTY. BUSMENTE
Spouses Nilo Cha and Stella Uy-Cha entered into a lease contract with private
respondent CKS Development Corporation as lessor. One of the stipulations in the
lease contract was a prohibition on taking fire insurance by the lessee without the
approval of the lessor. In case the lessee shall obtain insurance without the consent of
the lessor then the policy shall be deemed assigned and transferred to the lessor.
Notwithstanding this stipulation, the spouses Cha insured against loss by fire their
merchandise inside the leased premises. On the day the lease contract was to expire,
fire broke out inside the leased premises. CKS Development learned of the insurance
procured without its consent by the Cha spouses. CKS Development, therefore,
claimed the proceeds of the insurance from the insurer, but was refused by the latter.
CKS Development filed a complaint against the Cha spouses and the insurer and won
its case. On appeal, the Court of Appeals affirmed the decision of the trial court
ordering the insurer to pay the proceeds of the insurance directly; to CKS Development
Corporation. Hence, this petition for review on certiorari. TEHIaD
The decision of the Court of Appeals was set aside and a new decision was entered
awarding the proceeds of the fire insurance policy to herein petitioners Nilo Cha and
Stella Uy-Cha. The Supreme Court ruled that CKS Development Corporation could
not, under the Insurance Code, be validly a beneficiary of the fire insurance policy
taken by the petitioners over their merchandise. The insurable interest over said
merchandise remains with the insured. The automatic assignment of the policy to CKS
under the provision of the lease contract previously quoted is void for being contrary to
law and/or public policy. The insurer cannot be compelled to pay the proceeds of the
fire insurance policy to a person who has no insurable interest in the property insured.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE CODE; INSURABLE INTEREST; LESSOR
HAS NO INSURABLE INTEREST IN GOODS AND MERCHANDISE INSIDE THE
LEASED PREMISES UNDER THE PROVISIONS OF SECTION 17 OF THE
INSURANCE CODE; CASE AT BAR. A non-life insurance policy such as the fire
insurance policy taken by petitioner-spouses over their merchandise is primarily a
contract of indemnity. Insurable interest in the property insured must exist at the time
the insurance takes effect and at the time the loss occurs. The basis of such requirement
of insurable interest in property insured is based on sound public policy: to prevent a
person from taking out an insurance policy on property upon which he has no insurable
interest and collecting the proceeds of said policy in case of loss of the property. . . . .
In the present case, it cannot be denied that CKS has no insurable interest in the goods
and merchandise inside the leased premises under the provisions of Section 17 of the
Insurance Code. . . . Therefore, respondent CKS cannot, under the Insurance Code a
special law be validly a beneficiary of the fire insurance policy taken by the
petitioner-spouses over their merchandise. This insurable interest over said
merchandise remains with the insured, the Cha spouses.
2. ID.; ID.; AUTOMATIC ASSIGNMENT OF THE INSURANCE POLICY TO THE
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LESSOR UNDER THE PROVISION OF THE LEASE CONTRACT IS VOID FOR
BEING CONTRARY TO LAW AND/OR PUBLIC POLICY. The automatic
assignment of the policy to CKS under the provision of the lease contract previously
quoted is void for being contrary to law and/or public policy. The proceeds of the fire
insurance policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha
(herein co-petitioners). The insurer (United) cannot be compelled to pay the proceeds
of the fire insurance policy to a person (CKS) who has no insurable interest in the
property insured. CTEaDc
PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set
aside a decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease
contract with private respondent CKS Development Corporation (hereinafter CKS), as
lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles,
goods and effects placed at any stall or store or space in the leased premises without first
obtaining the written consent and approval of the LESSOR. If the LESSEE obtain(s) the
insurance thereof without the consent of the LESSOR then the policy is deemed
assigned and transferred to the LESSOR for its own benefit; . . . 1
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured
against loss by fire the merchandise inside the leased premises for Five Hundred
Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter United)
without the written consent of private respondent CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased
premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its
consent), it wrote the insurer (United) a demand letter asking that the proceeds of the
insurance contract (between the Cha spouses and United) be paid directly to CKS, based
on its lease contract with the Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha
spouses and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision *
ordering therein defendant United to pay CKS the amount of P335,063.11 and defendant
Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as attorney's fees and
costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision
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ATTY. BUSMENTE
** dated 11 January 1996, affirming the trial court decision, deleting however the
awards for exemplary damages and attorney's fees. A motion for reconsideration by
United was denied on 29 March 1996.
In the present petition, the following errors are assigned by petitioners to the Court of
Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE
THAT THE STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR
BEING CONTRARY TO LAW, MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE
CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING
THE PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED
OUT IN FAVOR OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF
AN INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID
POLICY IN CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF
AN INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID
FOR BEING WITHOUT CONSIDERATION AND FOR BEING TOTALLY
DEPENDENT ON THE WILL OF THE RESPONDENT CORPORATION. 2
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18
of the lease contract entered into between CKS and the Cha spouses is valid insofar as it
provides that any fire insurance policy obtained by the lessee (Cha spouses) over their
merchandise inside the leased premises is deemed assigned or transferred to the lessor
(CKS) if said policy is obtained without the prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract
cannot be contrary to law, morals, good customs, public order or public policy. 3
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except for
the benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses
over their merchandise is primarily a contract of indemnity. Insurable interest in the
property insured must exist at the time the insurance takes effect and at the time the loss
occurs. 4 The basis of such requirement of insurable interest in property insured is based
on sound public policy: to prevent a person from taking out an insurance policy on
property upon which he has no insurable interest and collecting the proceeds of said
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policy in case of loss of the property. In such a case, the contract of insurance is a mere
wager which is void under Section 25 of the Insurance Code, which provides:
Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the
person insured has or has not any interest in the property insured, or that the policy shall
be received as proof of such interest, and every policy executed by way of gaming or
wagering, is void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods
and merchandise inside the leased premises under the provisions of Section 17 of the
Insurance Code which provide:
Sec. 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss of injury thereof.
Therefore, respondent CKS cannot, under the Insurance Code a special law be
validly a beneficiary of the fire insurance policy taken by the petitioner-spouses over
their merchandise. This insurable interest over said merchandise remains with the
insured, the Cha spouses. The automatic assignment of the policy to CKS under the
provision of the lease contract previously quoted is void for being contrary to law and/or
public policy. The proceeds of the fire insurance policy thus rightfully belong to the
spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot
be compelled to pay the proceeds of the fire insurance policy to a person (CKS) who has
no insurable interest in the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that the Cha
spouses obtained a fire insurance policy over their own merchandise, without the
consent of CKS, is a separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET
ASIDE and a new decision is hereby entered, awarding the proceeds of the fire
insurance policy to petitioners Nilo Cha and Stella Uy-Cha.
SO ORDERED.
Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.
5. UCPB General Insurance Co., Inc. v. Masagana Telemart, Inc. (308 SCRA
259
10% of the total amount due. 7
The Court of Appeals held that following previous practise, respondent was allowed a
sixty (60) to ninety (90) day credit term for the renewal of its policies, and that the
acceptance of the late premium payment suggested an understanding that payment
could be made later.
Hence, this appeal.
By resolution adopted on March 24, 1999, we required respondent to comment on the
petition, not to file a motion to dismiss within ten (10) days from notice. 8 On April 22,
1999, respondent filed its comment. 9
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ATTY. BUSMENTE
Respondent submits that the Court of Appeals correctly ruled that no timely notice of
non-renewal was sent. The notice of non-renewal sent to broker Zuellig which claimed
that it verbally notified the insurance agency but not respondent itself did not suffice.
Respondent submits further that the Court of Appeals did not err in finding that there
existed a sixty (60) to ninety (90) days credit agreement between UCPB and Masagana,
and that, finally, the Supreme Court could not review factual findings of the lower
court affirmed by the Court of Appeals. 10
We give due course to the appeal.
The basic issue raised is whether the fire insurance policies issued by petitioner to the
respondent covering the period May 22, 1991 to May 22, 1992, had expired on the
latter date or had been extended or renewed by an implied credit arrangement though
actual payment of premium was tendered on a later date after the occurrence of the risk
(fire) insured against.
The answer is easily found in the Insurance Code. No, an insurance policy, other than
life, issued originally or on renewal, is not valid and binding until actual payment of
the premium. Any agreement to the contrary is void. 11 The parties may not agree
expressly or impliedly on the extension of creditor time to pay the premium and
consider the policy binding before actual payment.
The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 12 cited by the Court of
Appeals, is not applicable. In that case, payment of the premium was in fact actually
made on December 24, 1981, and the fire occurred on January 18, 1982. Here, the
payment of the premium for renewal of the policies was tendered on July 13, 1992, a
month after the fire occurred on June 13, 1992. The assured did not even give the
insurer a notice of loss within a reasonable time after occurrence of the fire.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the
Court of Appeals in CA-G.R. CV No. 42321. In lieu thereof the Court renders
judgment dismissing respondent's complaint and petitioner's counterclaims thereto filed
with the Regional Trial Court, Branch 58, Makati City, in Civil Case No. 92-2023.
Without costs.
UCPB General Insurance vs. Masagana Telamart Inc. [GR 137172, 15 June 1999]
First Division, Pardo (J): 4 concur
Facts: On 15 April 1991, UCPB General Insurance Co. Inc. (UCPBGen) issued 5
insurance policies covering Masagana Telamart, Inc.'s various property described
therein against fire, for the period from 22 May 1991 to 22 May 1992. In March 1992,
UCPBGen evaluated the policies and decided not to renew them upon expiration of
their terms on 22 May 1992. UCPBGen advised Masagana's broker, Zuellig Insurance
Brokers, Inc. of its intention not to renew the policies. On 6 April 1992, UCPBGen
gave written notice to Masagana of the non-renewal of the policies at the address stated
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in the policies. On 13 June 1992, fire razed Masagana's property covered by three of
the insurance policies UCPBGen issued. On 13 July 1992, Masagana presented to
UCPBGen's cashier at its head office 5 manager's checks in the total amount of
P225,753.95, representing premium for the renewal of the policies from 22 May 1992
to 22 May 1993. No notice of loss was filed by Masagana under the policies prior to 14
July 1992. On 14 July 1992, Masagana filed with UCPBGen its formal claim for
indemnification of the insured property razed by fire. On the same day, 14 July 1992,
UCPBGen returned to Masagana the 5 manager's checks that it tendered, and at the
same time rejected Masagana's claim for the reasons (a) that the policies had expired
and were not renewed, and (b) that the fire occurred on 13 June 1992, before
Masagana's tender of premium payment. On 21 July 1992, Masagana filed with the
Regional Trial Court, Branch 58, Makati City, a civil complaint against UCPBGen for
recovery of P18,645,000.00, representing the face value of the policies covering
Masagana's insured property razed by fire, and for attorney's fees. On 23 October 1992,
after its motion to dismiss had been denied, UCPBGen filed an answer to the
complaint. It alleged that the complaint "fails to state a cause of action"; that
UCPBGen was not liable to Masagana for insurance proceeds under the policies
because at the time of the loss of Masagana's property due to fire, the policies had long
expired and were not renewed. After due trial, on 10 March 1993, the Regional Trial
Court, Branch 58, Makati, rendered decision, (1) authorizing and allowing Masagana to
consign/deposit with this Court the sum of P225,753.95 (refused by UCPBGen) as full
payment of the corresponding premiums for the replacement-renewal policies; (2)
declaring Masagana to have fully complied with its obligation to pay the premium
thereby rendering the replacement-renewal policy effective and binding for the
duration 22 May 1992 until 22 May 1993; and, ordering UCPBGen to deliver forthwith
to Masagana the said replacement-renewal policies; (3) declaring two of the policies in
force from 22 August 1991 up to 23 August 1992 and 9 August 1991 to 9 August 1992,
respectively; and (4) ordering UCPBGen to pay Masagana the sums of: (a)
P18,645,000.00 representing the latter's claim for indemnity under three policies and/or
its replacement-renewal policies; (b) 25% of the total amount due as and for attorney's
fees; (c) P25,000.00 as necessary litigation expenses; and, (d) the costs of suit. In due
time, UCPBGen appealed to the Court of Appeals. On 7 September 1998, the Court of
Appeals promulgated its decision affirming that of the Regional Trial Court with the
modification that item 3 of the dispositive portion was deleted, and the award of
attorney's fees was reduced to 10% of the total amount due. The Court of Appeals held
that following previous practise, Masagana was allowed a 60 to 90 day credit term for
the renewal of its policies, and that the acceptance of the late premium payment
suggested an understanding that payment could be made later. UCPBGen appealed.
Issue: Whether the fire insurance policies issued by UCPBGen to the Masagana
covering the period 22 May
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ATTY. BUSMENTE
1991 to 22 May 1992, had expired on the latter date or had been extended or renewed
by an implied credit arrangement though actual payment of premium was tendered on a
latter date after the occurrence of the risk (fire) insured against.
Held: The answer is easily found in the Insurance Code. No, an insurance policy, other
than life, issued originally or on renewal, is not valid and binding until actual payment
of the premium. Any agreement to the contrary is void. The parties may not agree
expressly or impliedly on the extension of credit or time to pay the premium and
consider the policy binding before actual payment. The case of Malayan Insurance Co.,
Inc. vs. Cruz-Arnaldo is not applicable. In that case, payment of the premium was in
fact actually made on 24 December 1981, and the fire occurred on 18 January 1982.
Here, the payment of the premium for renewal of the policies was tendered on 13 July
1992, a month after the fire occurred on 13 June 1992. The assured did not even give
the insurer a notice of loss within a reasonable time after occurrence of the fire. Hence,
the Supreme Court reversed and set aside the decision of the Court of Appeals in CA-
GR CV 42321. In lieu thereof, the Court rendered judgment dismissing Masagana's
complaint and UCPBGen's counterclaims thereto filed with the Regional Trial Court,
Branch 58, Makati City, in Civil Case 92-2023, without costs.
UCPB General Insurance vs. Masagana Telamart Inc. [GR 137172, 14 April 2001]
Resolution En Banc, Davide Jr (CJ): 9 concur, 2 file separate dissenting opinions to
which 3 joined
Facts: In the Supreme Court's decision of 15 June 1999, it reversed and set aside the
decision of the Court of Appeals, which affirmed with modification the judgment of the
trial court (a) allowing Masagana to consign the sum of P225,753.95 as full payment of
the premiums for the renewal of the five insurance policies on Masagana's properties;
(b) declaring the replacement-renewal policies effective and binding from 22 May
1992 until 22 May 1993; and (c) ordering UCPBGen to pay Masagana 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 Masagana.
Masagana seasonably filed a motion for the reconsideration of the adverse verdict.
Issue [1]: Whether there are exceptions to Section 77, to allow Masagana to recover
from UCPBGen.
Held [1]: YES. 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
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second is that covered by Section 78 of the Insurance Code, which provides that "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 the Court 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. Further, in Tuscany, the Court also
quoted with approval the following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its decision that "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." By
the approval of the aforequoted findings and conclusion of the Court of Appeals,
Tuscany has also provided a fourth exception to Section 77, namely, that the insurer
may grant credit extension for the payment of the premium. This simply means that if
the insurer has granted the insured a credit term for the payment of the premium and
loss occurs before the expiration of the term, recovery on the policy should be allowed
even though the premium is paid after the loss but within the credit term. Moreover,
there is nothing in Section 77 which prohibits the parties in an insurance contract to
provide a credit term within which to pay the premiums. That agreement is not against
the law, morals, good customs, public order or public policy. The agreement binds the
parties. Herein, it would be unjust and inequitable if recovery on the policy would not
be permitted against UCPBGen, 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 Masagana relied in
good faith on such practice. Estoppel then is the fifth exception to Section
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ATTY. BUSMENTE
PARDO, J.:
The case is an appeal via certiorari seeking to set aside the decision of the Court of
Appeals, 1 affirming with modification that of the Regional Trial Court, Branch 58,
Makati, ordering petitioner to pay respondent the sum of P18,645,000.00, as the
proceeds of the insurance coverage of respondent's property razed by fire; 25% of the
total amount due as attorney's fees and P25,000.00 as litigation expenses, and costs.
The facts are undisputed and may be related as follows:
On April 15, 1991, petitioner issued five (5) insurance policies covering respondent's
various property described therein against fire, for the period from May 22, 1991 to May
22, 1992.
In March 1992, petitioner evaluated the policies and decided not to renew them upon
expiration of their terms on May 22, 1992. Petitioner advised respondent's broker,
Zuellig Insurance Brokers, Inc. of its intention not to renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of the non-renewal of the
policies at the address stated in the policies.
On June 13, 1992, fire razed respondent's property covered by three of the insurance
policies petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at its head office five (5)
manager's checks in the total amount of P225,753.95, representing premium for the
renewal of the policies from May 22, 1992 to May 22, 1993. No notice of loss was filed
by respondent under the policies prior to July 14, 1992.
On July 14, 1992, respondent filed with petitioner its formal claim for indemnification of
the insured property razed by fire.
On the same day, July 14, 1992, petitioner returned to respondent the five (5) manager's
checks that it tendered, and at the same time rejected respondent's claim for the reasons
(a) that the policies had expired and were not renewed, and (b) that the fire occurred on
June 13, 1992, before respondent's tender of premium payment.
On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati
City, a civil complaint against petitioner for recovery of P18,645,000.00, representing
the face value of the policies covering respondent's insured property razed by fire, and
for attorney's fees. 2
On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an
answer to the complaint. It alleged that the complaint "fails to state a cause of action";
that petitioner was not liable to respondent for insurance proceeds under the policies
because at the time of the loss of respondent's property due to fire, the policies had long
expired and were not renewed. 3
After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati,
rendered decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and against the defendant, as follows:
(1) Authorizing and allowing the plaintiff to consign/deposit with this Court the sum of
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P225,753.95 (refused by the defendant) as full payment of the corresponding premiums
for the replacement-renewal policies for Exhibits A, B, C, D and E;
(2) Declaring plaintiff to have fully complied with its obligation to pay the premium
thereby rendering the replacement-renewal policy of Exhibits A, B, C, D and E effective
and binding for the duration May 22, 1992 until May 22, 1993; and, ordering defendant
to deliver forthwith to plaintiff the said replacement-renewal policies;
(3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992 and
August 9, 1991 to August 9, 1992, respectively; and
(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00 representing
the latter's claim for indemnity under Exhibits A, B & C and/or its replacement-renewal
policies; (b) 25% of the total amount due as and for attorney's fees; (c) P25,000.00 as
necessary litigation expenses; and, (d) the costs of suit.
All other claims and counterclaims asserted by the parties are denied and/or dismissed,
including plaintiff's claim for interests.
SO ORDERED.
Makati, Metro-Manila, March 10, 1993.
ZOSIMO Z. ANGELES.
Judge. 4
In due time, petitioner appealed to the Court of Appeals. 5
On September 7, 1998, the Court of Appeals promulgated its decision 6 affirming that of
the Regional Trial Court with the modification that item No. 3 of the dispositive portion
was deleted, and the award of attorney's fees was reduced to
6. Phil. Pryce Assurance Corp. v. CA, 230 SCRA 164 {1994}.
SECOND DIVISION
[G.R. No. 107062. February 21, 1994.]
PHILIPPINE PRYCE ASSURANCE
CORPORATION, petitioner, vs.THE COURT OF APPEALS,
(Fourteenth Division) and GEGROCO, INC., respondents.
Lessons Applicable: Acceptance by obligee by surety bond (Insurance)
Laws Applicable: Sec. 177 of the Insurance Code
FACTS:
Gegroco, Inc filed for a collection of the issued surety bond for P500K and
P1M by Interworld Assurance Corporation (now Philippine Pryce Assurance
61
ATTY. BUSMENTE
Corporation) in behalf of its principal Sagum General Merchandise
RTC: favored Gegroco, Inc
CA: affirmed RTC
Interworld: checks issued by its principal which were supposed to pay for the
premiums bounced and it was not yet authorized by the Insurance Commission to
issue surety bonds
ISSUE: W/N Interworld Assurance Corp. should be liable for the surety bond that it
issued as payment for the premium
HELD: YES. RTC and CA: confirmed
Interworld did not and never attempted to pay the requisite docket fee and was not
present during the scheduled pre-trial so it is as if third-party complaint was never
filed
Sec. 177. The surety is entitled to payment of the premium as soon as the
contract of suretyship or bond is perfected and delivered to the obligor. No
contract of suretyship or bonding shall be valid and binding unless and until the
premium therefor has been paid, except where the obligee has accepted the bond,
in which case the bond becomes valid and enforceable irrespective of whether or
not the premium has been paid by the obligor to the surety
Interworld's defense that it did not have authority to issue a Surety Bond when it
did is an admission of fraud committed against Gegroco. No person can claim
benefit from the wrong he himself committed. A representation made is rendered
conclusive upon the person making it and cannot be denied or disproved as against
the person relying thereon.
Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get
a favorable decision from the Regional Trial Court and then again in the Court of
Appeals. 1 These are non-appearance during the pre-trial despite due notice, and non-
payment of docket fees upon filing of its third-party complaint. Just how strict should
these rules be applied is a crucial issue in this present dispute.
Petitioner, Interworld Assurance Corporation (the company now carries the corporate
name Philippine Pryce Assurance Corporation), was the butt of the complaint for
collection of sum of money, filed on May 13, 1988 by respondent, Gegroco, Inc. before
the Makati Regional Trial Court, Branch 138. The complaint alleged that petitioner
issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated October 7,
1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED
THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS,
respectively.
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On June 16, 1988, summons, together with the copy of the complaint, was served on
petitioner. Within the reglementary period, two successive motions were filed by
petitioner praying for a total of thirty (30) days extension within which to file a
responsive pleading. LexLib
In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted
having executed the said bonds, but denied liability because allegedly 1) the checks
which were to pay for the premiums bounced and were dishonored hence there is no
contract to speak of between petitioner and its supposed principal; and 2) that the bonds
were merely to guarantee payment of its principal's obligation, thus, excussion is
necessary. After the issues had been joined, the case was set for pre-trial conference on
September 29, 1988. The petitioner received its notice on September 9, 1988, while the
notice addressed to its counsel was returned to the trial court with the notation "Return
to Sender, Unclaimed." 2
On the scheduled date for pre-trial conference, only the counsel for petitioner appeared
while both the representative of respondent and its counsel were present. The counsel for
petitioner manifested that he was unable to contract the Vice-President for operations of
petitioner, although his client intended to file a third party complaint against its
principal. Hence, the pre-trial was re-set to October 14, 1988. 3
On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party
Complaint" with the Third-Party Complaint attached. On this same day, in the presence
of the representative for both petitioner and respondent and their respective counsel, the
pre-trial conference was re-set to December 1, 1988. Meanwhile on November 29, 1988,
the court admitted the Third Party Complaint and ordered service of summons on third
party defendants. 4
On scheduled conference in December, petitioner and its counsel did not appear
notwithstanding their notice in open court. 5 The pre-trial was nevertheless re-set to
February 1, 1989. However, when the case was called for pre-trial conference on
February 1, 1989, petitioner was again not represented by its officer or its counsel,
despite being duly notified. Hence, upon motion of respondent, petitioner was
considered as in default and respondent was allowed to present evidence ex-parte, which
was calendared on February 24, 1989. 6 Petitioner received a copy of the Order of
Default and a copy of the Order setting the reception of respondent's evidence ex-parte,
both dated February 1, 1989, on February 15, 1989. 7
On March 6, 1989, a decision was rendered by the trial court; the dispositive portion
reads:
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendant Interworld Assurance
Corporation to pay the amount of P1,500,000.00 representing the
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ATTY. BUSMENTE
principal of the amount due, plus legal interest thereon from April 7,
1988, until date of payment; and P20,000.00 as and for attorney's
fees." 8
Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having
been denied, it elevated its case to the Court of Appeals which however, affirmed the
decision of the trial court as well as the latter's order denying petitioner's motion for
reconsideration. llcd
Before us, petitioner assigns as errors the following:
I. The respondent Court of Appeals gravely erred in declaring
that the case was already ripe for pre-trial conference when the
trial court set it for the holding thereof.
II. The respondent Court of Appeals gravely erred in affirming
the decision of the trial court by relying on the ruling laid
down by this Honorable Court in the case of Manchester
Development Corporation v. Court of Appeals, 149 SCRA
562, and disregarding the doctrine laid down in the case of Sun
Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274.llcd
III. The respondent Court of Appeals gravely erred in
declaring that it would be useless and a waste of time to
remand the case for further proceedings as defendant-appellant
has no meritorious defense.
We do not find any reversible error in the conclusion reached by the court a quo.
Relying on Section 1, Rule 20 of the Rules of Court, petitioner argues that since the last
pleading, which was supposed to be the third-party defendant's answer has not been
filed, the case is not yet ripe for pre-trial. This argument must fail on three points. First,
the trial court asserted, and we agree, that no answer to the third party complaint is
forthcoming as petitioner never initiated the service of summons on the third party
defendant. The court further said:
". . . Defendant's claim that it was not aware of the Order admitting
the third-party complaint is preposterous. Sec. 8, Rule 13 of the
Rules, provides:
'Completeness of service . . . Service by registered mail
is complete upon actual receipt by the addressee, but if he
fails to claim his mail from the post office within five (5)
days from the date of first notice of the postmaster, service
shall take effect at the expiration of such time." 9
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
Moreover, we observed that all copies of notices and orders issued by the court for
petitioner's counsel were returned with the notation "Return to Sender, Unclaimed." Yet
when he chose to, he would appear in court despite supposed lack of notice.
Second, in the regular course of events, the third-party defendant's answer would have
been regarded as the last pleading referred to in Sec. 1, Rule 20. However, petitioner
cannot just disregard the court's order to be present during the pre-trial and give a flimsy
excuse, such as that the answer has yet to be filed. cdphil
The pre-trial is mandatory in any action, the main objective being to simplify, abbreviate
and expedite trial, if not to fully dispense with it. Hence, consistent with its mandatory
character the Rules oblige not only the lawyers but the parties as well to appear for this
purpose before the Court 10 and when a party fails to appear at a pre-trial conference he
may be non-suited or considered as in default. 11
Records show that even at the very start, petitioner could have been declared as in
default since it was not properly represented during the first scheduled pre-trial on
September 29, 1988. Nothing in the record is attached which would show that
petitioner's counsel had a special authority to act in behalf of his client other than as its
lawyer. LLpr
We have said that in those instances where a party may not himself be present at the pre-
trial, and another person substitutes for him, or his lawyer undertakes to appear not only
as an attorney but in substitution of the client's person, it is imperative for that
representative or the lawyer to have "special authority" to enter into agreements which
otherwise only the client has the capacity to make.12
Third, the Court of Appeals properly considered the third-party complaint as a mere
scrap of paper due to petitioner's failure to pay the requisite docket fees. Said the court a
quo:
"A third-party complaint is one of the pleadings for which Clerks of
Court of Regional Trial Courts are mandated to collect docket fees
pursuant to Section 5, Rule 141 of the Rules of Court. The record is
bereft of any showing tha(t) the appellant paid the corresponding
docket fees on its third-party complaint. Unless and until the
corresponding docket fees are paid, the trial court would not acquire
jurisdiction over the third-party complaint (Manchester
Development Corporation vs. Court of Appeals, 149 SCRA 562).
The third-party complaint was thus reduced to a mere scrap of paper
not worthy of the trial court's attention. Hence, the trial court can
and correctly set the case for pre-trial on the basis of the complaint,
the answer and the answer to the counterclaim." 13
63
ATTY. BUSMENTE
It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd.
(SIOL) v. Asuncion 14 or that in Manchester Development Corp. v. C.A.15 was applied.
Sun Insurance and Manchester are mere reiteration of old jurisprudential
pronouncements on the effect of non-payment of docket fees. 16 In previous cases, we
have consistently ruled that the court cannot acquire jurisdiction over the subject matter
of a case, unless the docket fees are paid. LLjur
Moreover, the principle laid down in Manchester could have very well been applied in
Sun Insurance. We then said:
"The principle in Manchester [Manchester Development Corp. v.
C.A., 149 SCRA 562 (1987)] could very well be applied in the
present case. The pattern and the intent to defraud the government of
the docket fee due it is obvious not only in the filing of the original
complaint but also in the filing of the second amended complaint.
xxx xxx xxx
"In the present case, a more liberal interpretation of the rules is
called for considering that, unlike Manchester, private respondent
demonstrated his willingness to abide by the rules by paying the
additional docket fees as required. The promulgation of the decision
in Manchester must have had that sobering influence on private
respondent who thus paid the additional docket fee as ordered by the
respondent court. It triggered his change of stance by manifesting
his willingness to pay such additional docket fees as may be
ordered. 17
Thus, we laid down the rules as follows:
1. It is not simply the filing of the complaint or appropriate
initiatory pleading, but the payment of the prescribed docket
fee, that vests a trial court with jurisdiction over the subject-
matter or nature of the action. Where the filing of the initiatory
pleading is not accompanied by payment of the docket fee, the
court may allow payment of the fee within a reasonable time,
but in no case beyond the applicable prescriptive or
reglementary period.
2. The same rule applies to permissive counterclaims, third-
party claims and similar pleadings, which shall not be
considered filed until and unless the filing fee prescribed
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
therefor is paid. The court may also allow payment of said fee
within a prescriptive or reglementary period.
3. Where the trial court acquires jurisdiction over a claim by
the filing of the appropriate pleading and payment of the
prescribed filing fee, but subsequently, the judgment awards a
claim nor specified in the pleading, or if specified the same has
not been left for determination by the court, the additional
filing fee therefor shall constitute a lien on the judgment. It
shall be the responsibility of the clerk of court or his duly
authorized deputy to enforce said lien and assess and collect
the additional fee. 18
It should be remembered that both in Manchester and Sun Insurance, plaintiffs therein
paid docket fees upon filing of their respective pleadings, although the amount tendered
were found to be insufficient considering the amounts of the reliefs sought in their
complaints. In the present case, petitioner did not and never attempted to pay the
requisite docket fee. Neither is there any showing that petitioner even manifested to be
given time to pay the requisite docket fee, as in fact it was not present during the
scheduled pre-trial on December 1, 1988 and then again on February 1, 1989. Perforce,
it is as if the third-party complaint was never filed. cdll
Finally, there is reason to believe that partitioner does not really have a good defense.
Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its
principal which were supposed to pay for the premiums, bounced, hence there is no
contract of surety to speak of; and 2) that as early as 1986 and covering the time of the
Surety Bond, Interworld Assurance Company (now Phil. Pryce) was not yet authorized
by the Insurance Commission to issue such bonds. LLjur
The Insurance Code states that:
"SECTION 177. The surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is
perfected and delivered to the obligor. No contract of
suretyship or bonding shall be valid and binding unless and
until the premium therefor has been paid, except where the
obligee has accepted the bond, in which case the bond
becomes valid and enforceable irrespective of whether or not
the premium has been paid by the obligor to the surety. . . ."
(emphasis added)
The above provision outrightly negates petitioner's first defense. In a desperate
attempt to escape liability, petitioner further asserts that the above provision is not
64
ATTY. BUSMENTE
applicable because the respondent allegedly had not accepted the surety bond, hence
could not have delivered the goods to Sagum Enterprises. This statement clearly
intends to muddle the facts as found by the trial court and which are on
record. cdrep
In the first place, petitioner, in its answer, admitted to have issued the bonds subject
matter of the original action. 19 Secondly, the testimony of Mr. Leonardo T. Guzman,
witness for the respondent, reveals the following:
"Q. What are the conditions and terms of sales you
extended to Sagum General Merchandise?
A. First, we required him to submit to us Surety Bond
to guaranty payment of the spare parts to be
purchased. Then we sell to them on 90 days credit.
Also, we required them to issue post-dated checks.
Q. Did Sagum General Merchandise comply with
your surety bond requirement?
A. Yes. They submitted to us and which we have
accepted two surety bonds.
Q Will you please present to us the aforesaid surety
bonds?
A. Interworld Assurance Corp. Surety Bond No. 0029
for P500,000 dated July 24, 1987 and Interworld
Assurance Corp. Surety Bond No. 0037 for
P1,000.000 dated October 7, 1987." 20
Likewise attached to the record are exhibits C to C-18 21 consisting of delivery
invoices addressed to Sagum General Merchandise proving that parts were
purchased, delivered and received. cdll
On the other hand, petitioner's defense that it did not have authority to issue a Surety
Bond when it did is an admission of fraud committed against respondent. No person can
claim benefit from the wrong he himself committed. A representation made is rendered
conclusive upon the person making it and cannot be denied or disproved as against the
person relying thereon. 22
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals
dismissing the petition before them and affirming the decision of the trial court and its
order denying petitioner's Motion for Reconsideration are hereby AFFIRMED. The
present petition is DISMISSED for lack of merit.
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
SO ORDERED.
||| (Philippine Pryce Assurance Corp. v. Court of Appeals, G.R. No. 107062, [February
21, 1994])
7. Philamcare health systems, Inc. v. Court of appeals and Julita trios,
G.R.no. 125678, March 18, 2002
[G.R. No. 125678. March 18, 2002.]
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
Alvin B. Cunada for petitioner.
Ronald O. Layawen for private respondent.
SYNOPSIS
Ernani Trinos, deceased husband of respondent Julita Trinos, was issued a Health Care
Agreement for a health coverage with petitioner. During the period of his coverage, he
suffered a heart attack and was confined in the hospital. Respondent tried to claim the
benefits under the health care agreement, but petitioner denied her claim. Thus,
respondent paid the hospitalization expenses herself.
Respondent then filed with the RTC an action for damages against petitioner and its
president, Dr. Benito Reverente. The court ruled in favor of Julita and awarded damages.
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all
awards for damages and absolved petitioner Reverente. Hence, petitioner brought the
instant petition for review, raising the primary argument that a health care agreement is
not an insurance contract. IAaCST
In affirming the decision of the Court of Appeals, the Supreme Court ruled that an
insurance contract exists when the following elements concur: (1) the insured has an
insurable interest; (2) the insured is subject to a risk of loss by the happening of the
designated peril; (3) the insurer assumes the risk; (4) such assumption of risk is part of a
general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and (5) in consideration of the insurer's promise, the insured pays a
premium.
65
ATTY. BUSMENTE
The health care agreement was in the nature of a non-life insurance, which is primarily a
contract of indemnity.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE LAW; CONTRACT OF INSURANCE;
DEFINED. 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.
2. ID.; ID.; ID.; ELEMENTS. An insurance contract exists where the following
elements concur: 1. The insured has an insurable interest; 2. The insured is subject
to a risk of loss by the happening of the designated peril; 3. The insurer assumes
the risk; 4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and 5. In
consideration of the insurer's promise, the insured pays a premium.
3. ID.; ID.; ID.; INSURABLE INTEREST, CONSTRUED; CASE AT BAR.
Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest
against him, may be insured against. Every person has an insurable interest in the
life andhealth of himself. Section 10 provides: "Every person has an insurable
interest in the life and health: (1) of himself, of his spouse and of his children; (2)
of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest; (3) of any person under a legal obligation to him
for the payment of money, respecting property or service, of which death or illness
might delay or prevent the performance; and (4) of any person upon whose life any
estate or interest vested in him depends." In the case at bar, the insurable interest of
respondent's husband in obtaining the health care agreement was his own health.
The health care agreement was in the nature of non-life insurance, which is
primarily a contract of indemnity. 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.
4. ID.; ID.; ID.; CONCEALMENT; AVOIDS A POLICY; EXCEPTION; CASE AT
BAR. The answer assailed by petitioner was in response to the question relating
to the medical history of the applicant. This largely depends on opinion rather than
fact, especially coming from respondent's husband who was not a medical doctor.
Where matters of opinion or judgment are called for, answers made in good faith
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

and without intent to deceive will not avoid a policy even though they are untrue. 8. ID.; ID.; ID.; TERMS AND PHRASEOLOGY CONTAINED THEREIN MUST
Thus, "(A)lthough false, a representation of the expectation, intention, belief, BE STRICTLY INTERPRETED AGAINST THE INSURER AND LIBERALLY
opinion, or judgment of the insured will not avoid the policy if there is no actual IN FAVOR OF THE INSURED; CASE AT BAR. When the terms of insurance
fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of contract contain limitations on liability, courts should construe them in such a way
premium, and this is likewise the rule although the statement is material to the risk, as to preclude the insurer from non-compliance with his obligation. Being a
if the statement is obviously of the foregoing character, since in such case the contract of adhesion, the terms of an insurance contract are to be construed strictly
insurer is not justified in relying upon such statement, but is obligated to make against the party which prepared the contract the insurer. By reason of the
further inquiry. There is a clear distinction between such a case and one in which exclusive control of the insurance company over the terms and phraseology of the
the insured is fraudulently and intentionally states to be true, as a matter of insurance contract, ambiguity must be strictly interpreted against the insurer and
expectation or belief, that which he then knows, to be actually untrue, or the liberally in favor of the insured, especially to avoid forfeiture. This is equally
impossibility of which is shown by the facts within his knowledge, since in such applicable to Health Care Agreements. The phraseology used in medical or
case the intent to deceive the insurer is obvious and amounts to actual hospital service contracts, such as the one at bar, must be liberally construed in
fraud." CAacTH favor of the subscriber, and if doubtful or reasonably susceptible of two
interpretations the construction conferring coverage is to be adopted, and
5. ID.; ID.; ID.; ID.; MUST BE ESTABLISHED BY SATISFACTORY AND exclusionary clauses of doubtful import should be strictly construed against the
CONVINCING EVIDENCE BY INSURER. The fraudulent intent on the part provider.
of the insured must be established to warrant rescission of the insurance contract.
Concealment as a defense for the health care provider or insurer to avoid liability is
an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer.
DECISION
6. ID.; ID.; ID.; HEALTH CARE AGREEMENT; HEALTH CARE PROVIDER,
WHEN LIABLE; CASE AT BAR. In any case, with or without the authority to
investigate, petitioner is liable for claims made under the contract. Having assumed
a responsibility under the agreement, petitioner is bound to answer the same to the YNARES-SANTIAGO, J p:
extent agreed upon. In the end, the liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by the agreement Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care
or whenever he avails of the covered benefits which he has prepaid. coverage with petitioner Philamcare Health Systems, Inc. In the standard application
form, he answered no to the following question:
7. ID.; ID.; ID.; RESCISSION OF; CONDITIONS; NOT FULFILLED IN CASE
AT BAR. Under Section 27 of the Insurance Code, "a concealment entitles the Have you or any of your family members ever consulted or been
injured party to rescind a contract of insurance." The right to rescind should be treated for high blood pressure, heart trouble, diabetes, cancer, liver
exercised previous to the commencement of an action on the contract. In this case, disease, asthma or peptic ulcer? (If Yes, give details). 1
no rescission was made. Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following conditions: 1. Prior The application was approved for a period of one year from March 1, 1988 to March 1,
notice of cancellation to insured; 2. Notice must be based on the occurrence after 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the
effective date of the policy of one or more of the grounds mentioned; 3. Must be in agreement, respondent's husband was entitled to avail of hospitalization benefits,
writing, mailed or delivered to the insured at the address shown in the policy; 4. whether ordinary or emergency, listed therein. He was also entitled to avail of "out-
Must state the grounds relied upon provided in Section 64 of the Insurance patient benefits" such as annual physical examinations, preventive health care and other
Code and upon request of insured, to furnish facts on which cancellation is based. out-patient services.
None of the above pre-conditions was fulfilled in this case.

66 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
Upon the termination of the agreement, the same was extended for another year from
March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount
of coverage was increased to a maximum sum of P75,000.00 per disability. 2
During the period of his coverage, Ernani suffered a heart attack and was confined at the reconsideration was denied. 5 Hence, petitioner brought the instant petition for review,
Manila Medical Center (MMC) for one month beginning March 9, 1990. While her
husband was in the hospital, respondent tried to claim the benefits under the health care hence the "incontestability clause" under theInsurance Code 6 does not apply.
agreement. However, petitioner denied her claim saying that the Health Care Agreement
was void. According to petitioner, there was a concealment regarding Ernani's medical
history. Doctors at the MMC allegedly discovered at the time of Ernani's confinement
that he was hypertensive, diabetic and asthmatic, contrary to his answer in the
application form. Thus, respondent paid the hospitalization expenses herself, amounting out that only medical and hospitalization benefits are given under the agreement without
to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical
therapist at home. Later, he was admitted at the Chinese General Hospital. Due to
financial difficulties, however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was
constrained to bring him back to the Chinese General Hospital where he died on the
same day. THcaDA
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch where the following elements concur:
44, an action for damages against petitioner and its president, Dr. Benito Reverente,
which was docketed as Civil Case No. 90-53795. She asked for reimbursement of her
expenses plus moral damages and attorney's fees. After trial, the lower court ruled
against petitioners, viz:
WHEREFORE, in view of the foregoing, the Court renders
judgment in favor of the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital
coverage of the late Ernani Trinos in the amount of P76,000.00
plus interest, until the amount is fully paid to plaintiff who
paid the same;
2. Defendants to pay the reduced amount of moral damages of
P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as
exemplary damages to plaintiff;
4. Defendants to pay attorney's fees of P20,000.00, plus costs
of suit.
67
ATTY. BUSMENTE
SO ORDERED. 3
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all
awards for damages and absolved petitioner Reverente. 4 Petitioner's motion for
raising the primary argument that a health care agreement is not an insurance contract;
Petitioner argues that the agreement grants "living benefits," such as medical check-ups
and hospitalization which a member may immediately enjoy so long as he is alive upon
effectivity of the agreement until its expiration one-year thereafter. Petitioner also points
any indemnification, unlike in an insurance contract where the insured is indemnified for
his loss. Moreover, since Health Care Agreements are only for a period of one year, as
compared to insurance contracts which last longer, 7 petitioner argues that the
incontestability clause does not apply, as the same requires an effectivity period of at
least two years. Petitioner further argues that it is not an insurance company, which is
governed by the Insurance Commission, but a Health Maintenance Organization under
the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event. An insurance contract exists
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the
happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme
to distribute actual losses among a large group of
persons bearing a similar risk; and
5. In consideration of the insurer's promise, the
insured pays a premium. 8
Section 3 of the Insurance Code states that any contingent or unknown event, whether
past or future, which may damnify a person having an insurable interest against him,
may be insured against. Every person has an insurable interest in the life and health of
himself. Section 10 provides:
Every person has an insurable interest in the life and health:
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in
part for education or support, or in whom he has a
pecuniary interest;
(3) of any person under a legal obligation to him for
the payment of money, respecting property or service,
of which death or illness might delay or prevent the
performance; and
(4) of any person upon whose life any estate or
interest vested in him depends.
In the case at bar, the insurable interest of respondent's husband in obtaining the health
care agreement was his own health. The health care agreement was in the nature of non-
life insurance, which is primarily a contract of indemnity. 9Once 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. cDTHIE
Petitioner argues that respondent's husband concealed a material fact in his application.
It appears that in the application for health coverage, petitioners required respondent's
husband to sign an express authorization for any person, organization or entity that has
any record or knowledge of his health to furnish any and all information relative to any
hospitalization, consultation, treatment or any other medical advice or
examination. 10 Specifically, the Health Care Agreement signed by respondent's
husband states:
We hereby declare and agree that all statement and answers
contained herein and in any addendum annexed to this application
are full, complete and true and bind all parties-in-interest under the
Agreement herein applied for, that there shall be no contract of
health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of
payment applied for is actually paid during the lifetime and good
health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare
unless set out in writing in the application; that any physician is, by
these presents, expressly authorized to disclose or give testimony at
anytime relative to any information acquired by him in his
professional capacity upon any question affecting the eligibility for
health care coverage of the Proposed Members and that the
acceptance of any Agreement issued on this application shall be a
68
ATTY. BUSMENTE
ratification of any correction in or addition to this application as
stated in the space for Home Office Endorsement. 11 (Emphasis
ours)
In addition to the above condition, petitioner additionally required the applicant for
authorization to inquire about the applicant's medical history, thus:
I hereby authorize any person, organization, or entity that has any
record or knowledge of my health and/or that of ________ to give to
the PhilamCare Health Systems, Inc. any and all information
relative to any hospitalization, consultation, treatment or any other
medical advice or examination. This authorization is in connection
with the application for health care coverage only. A photographic
copy of this authorization shall be as valid as the
original. 12 (Emphasis ours)
Petitioner cannot rely on the stipulation regarding "Invalidation of Agreement" which
reads:
Failure to disclose or misrepresentation of any material information
by the member in the application or medical examination, whether
intentional or unintentional, shall automatically invalidate the
Agreement from the very beginning and liability of Philamcare shall
be limited to return of all Membership Fees paid. An undisclosed or
misrepresented information is deemed material if its revelation
would have resulted in the declination of the applicant by
Philamcare or the assessment of a higher Membership Fee for the
benefit or benefits applied for. 13
The answer assailed by petitioner was in response to the question relating to the medical
history of the applicant. This largely depends on opinion rather than fact, especially
coming from respondent's husband who was not a medical doctor. Where matters of
opinion or judgment are called for, answers made in good faith and without intent to
deceive will not avoid a policy even though they are untrue.14 Thus,
(A)lthough false, a representation of the expectation, intention,
belief, opinion, or judgment of the insured will not avoid the policy
if there is no actual fraud in inducing the acceptance of the risk, or
its acceptance at a lower rate of premium, and this is likewise the
rule although the statement is material to the risk, if the statement is
obviously of the foregoing character, since in such case the insurer
is not justified in relying upon such statement, but is obligated to
make further inquiry.There is a clear distinction between such a case
and one in which the insured is fraudulently and intentionally states
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown
by the facts within his knowledge, since in such case the intent to
deceive the insurer is obvious and amounts to actual
fraud. 15 (Emphasis ours)
The fraudulent intent on the part of the insured must be established to warrant rescission
of the insurance contract. 16 Concealment as a defense for the health care provider or
insurer to avoid liability is an affirmative defense and the duty to establish such defense Anent the incontestability of the membership of respondent's husband, we quote with
by satisfactory and convincing evidence rests upon the provider or insurer. In any case,
with or without the authority to investigate, petitioner is liable for claims made under the
contract. Having assumed a responsibility under the agreement, petitioner is bound to
answer the same to the extent agreed upon. In the end, the liability of the health care
provider attaches once the member is hospitalized for the disease or injury covered by
the agreement or whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to
rescind a contract of insurance." The right to rescind should be exercised previous to the
commencement of an action on the contract. 17 In this case, no rescission was made.
Besides, the cancellation of health care agreements as in insurance policies require the
concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after
effective date of the policy of one or more of the
grounds mentioned;
3. Must be in writing, mailed or delivered to the
insured at the address shown in the policy;
4. Must state the grounds relied upon provided
in Section 64 of the Insurance Code and upon request
of insured, to furnish facts on which cancellation is
based. 18
None of the above pre-conditions was fulfilled in this case. When the terms of insurance
contract contain limitations on liability, courts should construe them in such a way as to
preclude the insurer from non-compliance with his obligation. 19Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the party
which prepared the contract the insurer. 20By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity
69
ATTY. BUSMENTE
must be strictly interpreted against the insurer and liberally in favor of the insured,
especially to avoid forfeiture. 21 This is equally applicable to Health Care Agreements.
The phraseology used in medical or hospital service contracts, such as the one at bar,
must be liberally construed in favor of the subscriber, and if doubtful or reasonably
susceptible of two interpretations the construction conferring coverage is to be adopted,
and exclusionary clauses of doubtful import should be strictly construed against the
provider. 22
approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant
Philamcare Health Systems Inc. had twelve months from the date of
issuance of the Agreement within which to contest the membership
of the patient if he had previous ailment of asthma, and six months
from the issuance of the agreement if the patient was sick of
diabetes or hypertension. The periods having expired, the defense of
concealment or misrepresentation no longer lie. 23
Finally, petitioner alleges that respondent was not the legal wife of the deceased member
considering that at the time of their marriage, the deceased was previously married to
another woman who was still alive. The health care agreement is in the nature of a
contract of indemnity. Hence, payment should be made to the party who incurred the
expenses. It is not controverted that respondent paid all the hospital and medical
expenses. She is therefore entitled to reimbursement. The records adequately prove the
expenses incurred by respondent for the deceased's hospitalization, medication and the
professional fees of the attending physicians. 24
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision
of the Court of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
||| (Philamcare Health Systems, Inc. v. Court of Appeals, G.R. No. 125678, [March 18,
2002], 429 PHIL 82-95)
8. Sunlife Assurance Company of Canada v. CA and Rolando and Bernarda bacani,
246 SCRA 268
G.R. No. 105135 June 22, 1995
SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA
DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
BACANI, respondents.
QUIASON, J.:
This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court
to reverse and set aside the Decision dated February 21, 1992 of the Court of Appeals in
CA-G.R. CV No. 29068, and its Resolution dated April 22, 1992, denying
reconsideration thereof.
We grant the petition.
I condition (Rollo, p. 62).
On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself
from petitioner. He was issued Policy No. 3-903-766-X valued at P100,000.00, with
double indemnity in case of accidental death. The designated beneficiary was his
mother, respondent Bernarda Bacani.
On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a
claim with petitioner, seeking the benefits of the insurance policy taken by her son.
Petitioner conducted an investigation and its findings prompted it to reject the claim.
In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not
disclose material facts relevant to the issuance of the policy, thus rendering the contract
of insurance voidable. A check representing the total premiums paid in the amount of
P10,172.00 was attached to said letter.
Petitioner claimed that the insured gave false statements in his application when he
answered the following questions:
5. Within the past 5 years have you:
a) consulted any doctor or other health practitioner?
b) submitted to:
EGG?
X-rays?
blood tests?
other tests?
c) attended or been admitted to any hospital or other medical facility?
6. Have you ever had or sought advice for:
xxx xxx xxx
b) urine, kidney or bladder disorder? (Rollo, p. 53)
The deceased answered question No. 5(a) in the affirmative but limited his answer to a
consultation with a certain Dr. Reinaldo D. Raymundo of the Chinese General Hospital
on February 1986, for cough and flu complications. The other questions were answered
in the negative (Rollo, p. 53).
Petitioner discovered that two weeks prior to his application for insurance, the insured
was examined and confined at the Lung Center of the Philippines, where he was
diagnosed for renal failure. During his confinement, the deceased was subjected to
urinalysis, ultra-sonography and hematology tests.
70
ATTY. BUSMENTE
On November 17, 1988, respondent Bernarda Bacani and her husband, respondent
Rolando Bacani, filed an action for specific performance against petitioner with the
Regional Trial Court, Branch 191, Valenzuela, Metro Manila. Petitioner filed its answer
with counterclaim and a list of exhibits consisting of medical records furnished by the
Lung Center of the Philippines.
On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for
Summary Judgment" where they manifested that they "have no evidence to refute the
documentary evidence of concealment/misrepresentation by the decedent of his health
Petitioner filed its Request for Admissions relative to the authenticity and due execution
of several documents as well as allegations regarding the health of the insured. Private
respondents failed to oppose said request or reply thereto, thereby rendering an
admission of the matters alleged.
Petitioner then moved for a summary judgment and the trial court decided in favor of
private respondents. The dispositive portion of the decision is reproduced as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendant, condemning the latter to pay the former the amount of One Hundred
Thousand Pesos (P100,000.00) the face value of insured's Insurance Policy No.
3903766, and the Accidental Death Benefit in the amount of One Hundred Thousand
Pesos (P100,000.00) and further sum of P5,000.00 in the concept of reasonable
attorney's fees and costs of suit.
Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).
In ruling for private respondents, the trial court concluded that the facts concealed by the
insured were made in good faith and under a belief that they need not be disclosed.
Moreover, it held that the health history of the insured was immaterial since the
insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial
court. The appellate court ruled that petitioner cannot avoid its obligation by claiming
concealment because the cause of death was unrelated to the facts concealed by the
insured. It also sustained the finding of the trial court that matters relating to the health
history of the insured were irrelevant since petitioner waived the medical examination
prior to the approval and issuance of the insurance policy. Moreover, the appellate court
agreed with the trial court that the policy was "non-medical" (Rollo, pp. 4-5).
Petitioner's motion for reconsideration was denied; hence, this petition.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate court are binding on
this Court is not absolute and admits of exceptions, such as when the judgment is based
on a misappreciation of the facts (Geronimo v. Court of Appeals, 224 SCRA 494
[1993]).
In weighing the evidence presented, the trial court concluded that indeed there was
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COMMERCIAL LAW REVIEW (INSURANCE)
concealment and misrepresentation, however, the same was made in "good faith" and the
facts concealed or misrepresented were irrelevant since the policy was "non-medical".
We disagree.
Section 26 of The Insurance Code is explicit in requiring a party to a contract of
insurance to communicate to the other, in good faith, all facts within his knowledge
which are material to the contract and as to which he makes no warranty, and which the
other has no means of ascertaining. Said Section provides:
A neglect to communicate that which a party knows and ought to communicate, is called
concealment.
Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his
inquiries (The Insurance Code, Sec. 31).
The terms of the contract are clear. The insured is specifically required to disclose to the
insurer matters relating to his health.
The information which the insured failed to disclose were material and relevant to the
approval and issuance of the insurance policy. The matters concealed would have
definitely affected petitioner's action on his application, either by approving it with the
corresponding adjustment for a higher premium or rejecting the same. Moreover, a
disclosure may have warranted a medical examination of the insured by petitioner in
order for it to reasonably assess the risk involved in accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality
of the information withheld does not depend on the state of mind of the insured. Neither
does it depend on the actual or physical events which ensue.
Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact
that he was hospitalized for two weeks prior to filing his application for insurance, raises
grave doubts about his bonafides. It appears that such concealment was deliberate on his
part.
The argument, that petitioner's waiver of the medical examination of the insured
debunks the materiality of the facts concealed, is untenable. We reiterate our ruling in
Saturnino v. Philippine American Life Insurance Company, 7 SCRA 316 (1963), that " . .
. the waiver of a medical examination [in a non-medical insurance contract] renders even
more material the information required of the applicant concerning previous condition of
health and diseases suffered, for such information necessarily constitutes an important
factor which the insurer takes into consideration in deciding whether to issue the policy
or not . . . "
Moreover, such argument of private respondents would make Section 27 of the
Insurance Code, which allows the injured party to rescind a contract of insurance where
there is concealment, ineffective (See Vda. de Canilang v. Court of Appeals, supra).
Anent the finding that the facts concealed had no bearing to the cause of death of the
insured, it is well settled that the insured need not die of the disease he had failed to
71
ATTY. BUSMENTE
disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in
forming his estimates of the risks of the proposed insurance policy or in making
inquiries (Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48
[1960]).
We, therefore, rule that petitioner properly exercised its right to rescind the contract of
insurance by reason of the concealment employed by the insured. It must be emphasized
that rescission was exercised within the two-year contestability period as recognized in
Section 48 of The Insurance Code.
WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is
REVERSED and SET ASIDE.
SO ORDERED.
Padilla, Davide, Jr., Bellosillo and Kapunan, JJ., concur.
G.R. No. 105135 June 22, 1995
SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA
BACANI, respondents.
Principle found in the case:
Element of concealment non disclosure of material fact that could mislead the insurer
and affect in forming his estimates of the proposed insurance policy or in making
inquiries.
Facts:
Robert John B. Bacani procured a life insurance contract for himself from Sunlife. He
was issued a Policy valued at
P100,000.00, with double indemnity in case of accidental death. The designated
beneficiary was his mother, Bernarda Bacani. In his application for insurance Robert
was asked if within 5 years he (a) consulted any doctor or other health practitioner (b)
subjected to different test i.e. blood, x-rays etc. (c) attended or been admitted to any
hospital or other medical facility. Robert answered yes in letter a. but limited his answer
to a consultation with a certain Dr. Reinaldo D. Raymundo of the Chinese General
Hospital on February 1986, for cough and flu complications.
Sunlife discovered that two weeks prior to Roberts application for insurance, that
Robert was examined and confined at the Lung Center of the Philippines, where he was
diagnosed for renal failure. During his confinement, the deceased was subjected to
urinalysis, ultra sonography and hematology tests. Robert died in a plane crash.
Bernarda filed a claim with sunlife, seeking the benefits of the insurance policy taken by
her son. Sunlife conducted an investigation and its findings prompted it to reject the
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COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

claim. Sunlife informed Bernarda that Robert did not disclose material facts relevant to
the issuance of the policy, thus rendering the contract of insurance voidable. A check It is well settled that the insured need not die of the disease he had failed to disclose to
representing the total premiums paid in the amount of P10,172.00 was attached to said the insurer. It is sufficient that his non-disclosure misled the insurer in forming his
letter. estimates of the risks of the proposed insurance policy or in making inquiries. Thus, "
good faith" is no defense in concealment. The insured's failure to disclose the fact that he
Bernarda subsequently filed an action for specific performance against Sunlife. Sunlife was hospitalized for two weeks prior to filing his application for insurance, raises grave
filed a counter claim and a list of exhibits consisting of medical records furnished by the doubts about his bonafides. It appears that such concealment was deliberate on his part.
Lung Center of the Philippines. Bernarda filed a "Proposed Stipulation with Prayer for
Summary Judgment" where they manifested that they "have no evidence to refute the 9. General Insurance and Surety Corporation v. Ng, G.R. No. L-14373, Jan. 30,
documentary evidence of concealment/misrepresentation by the decedent of his health 1960
condition. Sunlife also filed a motion for summary judgment.
[G.R. No. L-14373. January 30, 1960.]
Trial court ruled in favor of Bernarda and concluded that although there was
concealment and misrepresentation the facts concealed by the insured were made in
good faith and under a belief that they need not be disclosed. Moreover, It held that the GENERAL INSURANCE & SURETY
health history of the insured was immaterial since the insurance policy was "non- CORPORATION, petitioner, vs. NG HUA, respondent.
medical". Court of Appeals affirmed the decision and stated that the cause of death was
unrelated to the facts concealed by the insured.
Jos P. Bengzon, Guido Advncula and Potenciano Villegas, Jr. for petitioner.
Issue: WON there was concealment and can good faith be used as a defense.
Crispn D. Baizas for respondent.
Ruling: Yes there was concealment and No the defense of good faith is not applicable.

Rationale: SYLLABUS
Section 26 of The Insurance Code requires a party to a contract of insurance to
communicate to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and which the other has INSURANCE; CO-INSURANCE; BREACH OF WARRANTY. Violation of a
no means of ascertaining and thus it provides that A neglect to communicate that which warranty that there were no other insurances on the property insured entitles the
a party knows and ought to communicate, is called concealment. insurer to rescind.

Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his DECISION
inquiries. The information which the insured failed to disclose were material and
relevant to the approval and issuance of the insurance policy. The matters concealed
would have definitely affected Sunlife's action on Roberts application, either by
approving it with the corresponding adjustment for a higher premium or rejecting the BENGZON, J p:
same.

Moreover, a disclosure may have warranted a medical examination of the insured by Suit to recover on a fire insurance policy. The insurer presented several defenses in
Sunlife in order for it to reasonably assess the risk involved in accepting the application. the Manila court of first instance. After trial, it was required to pay.

72 DIATO.2013400036
COMMERCIAL LAW REVIEW (INSURANCE)
On appeal to the Court of Appeals, the judgment was affirmed.
This is now a revision on certiorari, upon the insurer's insistence on two of its main
defenses: prescription and breach of warranty.
The principal facts on which adjudication may rest are these:
On April 15, 1952, the defendant General Insurance & Surety Corporation issued its
Insurance Policy No. 471, insuring against fire, for one year, the stock in trade of
the Central Pomade Factory owned by Ng Hua, the insured. The next day, the
Pomade Factory building burned, resulting in destruction by fire of the insured
properties. Ng Hua claimed indemnity from the insurer. The policy covered
damages up to P10,000.00; but after some negotiations and upon suggestion of the
Manila Adjustment Company, he reduced the claim to P5,000.00. Nevertheless, the
defendant insurer refused to pay for various reasons, namely (a) action was not filed
in time; (b) violation of warranty; (c) submission of fraudulent claim; and (d) failure
to pay the premium.
The aforesaid Policy No. 471 contains this stipulation printed on the back thereof;
"3. The Insured shall give notice to the company of any
insurance or insurances already effected, or which may
subsequently be effected, covering any of the property hereby
insured, and unless such notice be given and the particulars of
such insurance or insurances be stated in or endorsed on this
Policy by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this
Policy shall be forfeited." (Italics Ours.)
The face of the policy bore the annotation: "Co-Insurance Declared NIL"
It is undenied that Ng Hua had obtained fire insurance on the same goods, for the
same period of time, in the amount of P20,000.00 from General Indemnity Co.
However, the Court of Appeals, referring to the annotation and overruling the
defense, held there was no violation of the above clause, inasmuch as "co-insurance
exists when a condition of the policy requires the insured to bear ratable proportion
of the loss when the value of the insured property exceeds the face value of the
policy," hence there is no co-insurance here.
Discussion Undoubtedly, co-insurance exists under the condition described by
the appellate court. But that is one kind of co-insurance. It is not the only situation
where co-insurance exists. Other insurers of the same property against the same
73
ATTY. BUSMENTE
hazard are sometimes referred to as co-insurers and the ensuing combination as co-
insurance. 1 And considering the terms of the policy which required the insured to
declare other insurances, the statement in question must be deemed to be a
statement (warranty) binding on both insurer and insured, that there were no other
insurance on the property. Remember it runs "Co-Insurance declared"; emphasis on
the last word. If "Co-insurance" means what the Court of Appeals says, the
annotation served no purpose. It would even be contrary to the policy itself, which
in its clause No. 17 made the insured a co-insurer for the excess of the value of the
property over the amount of the policy.
The annotation then, must be deemed to be a warranty that the property was not
insured by any other policy. Violation thereof entitles the insurer to rescind. (Sec.
69. Insurance Act) Such misrepresentation is fatal in the light of our views in Santa
Ana vs. Commercial Union Assurance Company, Ltd., 55 Phil. 329. The materiality
of non-disclosure of other insurance policies is not open to doubt.
Furthermore, even if the annotation were overlooked, the defendant insurer would
still be free from liability because there is no question that the policy issued by
General Indemnity has not been stated in nor endorsed on Policy No. 471 of
defendant. And as stipulated in the above-quoted provisions of such policy "all
benefit under this policy shall be forfeited." 2
To avoid the disastrous effect of the misrepresentation or concealment of the other
insurance policy, Ng Hua alleges "actual knowledge" on the part of General
Insurance of the fact that he had taken out additional insurance with General
Indemnity. He does not say when such knowledge was acquired or imparted. If
General Insurance knew before issuing its policy or before the fire, such knowledge
might overcome the insurer's defense. 3 However, the Court of Appeals found no
evidence of such knowledge. We have read the pages of the stenographic notes cited
by Ng Hua and all we gather is evidence of the existence of the insurance with
General Indemnity Company. As to knowledge of General Insurance before
issuance of its policy or the fire, there was none.
Indeed, this concealment and violation was expressly set up as a special defense in
the answer. Yet plaintiff did not, in avoidance, reply nor assert such knowledge. And
it is doubtful whether evidence on the point would be admissible under the
pleadings. (See Rule 11, sec. 1.)
All the above considerations lead to the conclusion that the defendant insurer
successfully established its defense of warranty breach or concealment of the other
insurance and/or violation of the provision of the policy abovementioned.
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COMMERCIAL LAW REVIEW (INSURANCE) ATTY. BUSMENTE

Having reached this conclusion, we deem it unnecessary to discuss the other

defenses.

Wherefore, the judgment under review will be revoked, and the defendant insurer
(herein petitioner) acquitted from all the liability under the policy. Costs against
respondent. So ordered.

Pars, C. J., Padilla, Montemayor, Bautista Angelo, Labrador, Concepcin, Reyes,

J. B. L., Endencia and Barrera, JJ., concur.
||| (General Insurance & Surety Corp. v. Ng Hua, G.R. No. L-14373, [January 30, 1960],
106 PHIL 1117-1121)

74 DIATO.2013400036