Manuel Paguyo in the satisfaction of the Notice of Garnishment
FIRST DIVISION pursuant to a Decision of this Court which has become final
REPUBLIC OF THE G.R. No. 156956
PHILIPPINES, Represented
by EDUARDO T. MALINIS, Present:
in His Capacity as Insurance
Commissioner, PANGANIBAN, CJ, Chairperson,
Petitioner, YNARES-SANTIAGO,
AUSTRIA-MARTINEZ,
CALLEJO, SR., and
- versus - CHICO-NAZARIO, JJ
DEL MONTE MOTORS, INC., Promulgated:
Respondent. October 9, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- x
DECISION
PANGANIBAN, CJ:
The securities required by the Insurance Code to be deposited with the Insurance
Commissioner are intended to answer for the claims of all policy holders in the event
that the depositing insurance company becomes insolvent or otherwise unable to
satisfy their claims. The security deposit must be ratably distributed among all the
insured who are entitled to their respective shares; it cannot be garnished or levied
upon by a single claimant, to the detriment of the others.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to
reverse the January 16, 2003 Order[2] of the Regional Court (RTC) of Quezon City
(Branch 221) in Civil Case No. Q-97-30412. The RTC found Insurance Commissioner
Eduardo T. Malinis guilty of indirect contempt for refusing to comply with
the December 18, 2002 Resolution[3] of the lower court. The January 16, 2003 Order
states in full:
On January 8, 2003, [respondent] filed a Motion to Cite
Commissioner Eduardo T. Malinis of the Office of the Insurance
Commission in Contempt of Court because of his failure and refusal
to obey the lawful order of this court embodied in a Resolution
dated December 18, 2002 directing him to allow the withdrawal of
the security deposit of Capital Insurance and Surety Co. (CISCO) in
the amount of P11,835,375.50 to be paid to Sheriff
and executory.
During the hearing of the Motion set last January 10, 2003,
Commissioner Malinis or his counsel or his duly authorized
representative failed to appear despite notice in utter disregard of
the order of this Court. However, Commissioner Malinis filed
on January 15, 2003 a written Comment reiterating the same
grounds already passed upon and rejected by this Court. This Court
finds no lawful justification or excuse for
Commissioner Malinisrefusal to implement the lawful orders of
this Court.
Wherefore, premises considered and after due hearing,
Commissioner Eduardo T. Malinis is hereby declared guilty of
Indirect Contempt of Court pursuant to Section 3 [of] Rule 71 of the
1997 Rules of Civil Procedure for willfully disobeying and refusing
to implement and obey a lawful order of this Court.[4]
The Facts
On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412,
finding the defendants (Vilfran Liner, Inc., Hilaria Villegas and Maura Villegas) jointly
and severally liable to pay Del Monte Motors, Inc., P11,835,375.50 representing the
balance of Vilfran Liners service contracts with respondent. The trial court further
ordered the execution of the Decision against the counterbond posted
by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and Surety Co., Inc.
(CISCO).
On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent,
claiming that the latter had no record or document regarding the alleged issuance of
the counterbond; thus, the bond was not valid and enforceable.
On June 13, 2002, the RTC granted the Motion for Execution and issued the
corresponding Writ. Armed with this Writ, Sheriff Manuel S. Paguyo proceeded to
levy on the properties of CISCO. He also issued a Notice of Garnishment on several
depository banks of the insurance company. Moreover, he served a similar notice on
the Insurance Commission, so as to enforce the Writ on the security deposit filed by
CISCO with the Commission in accordance with Section 203 of the Insurance Code.
On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled that
the Notice of Garnishment served by Sheriff Paguyo on the insurance commission
was valid. The trial court added that the letter and spirit of the law made the security
deposit answerable for contractual obligations incurred by CISCO under the
insurance contracts the latter had entered into. The RTC resolved thus:
Furthermore, the Commissioner of the Office of the Insurance
Commission is hereby ordered to comply with its obligations under
the Insurance Code by upholding the integrity and efficacy of bonds
validly issued by duly accredited Bonding and Insurance
Companies; and to safeguard the public interest by insuring the
faithful performance to enforce contractual obligations under
existing bonds. Accordingly said office is ordered to
withdrawfrom the security deposit of Capital Insurance & Surety
Company, Inc. the amount of P11,835.50 to be paid to Sheriff
Manuel S. Paguyo in satisfaction of the Notice of Garnishment
served on August 16, 2002.[5]
On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo
T. Malinis in contempt of court for his refusal to obey the December 18, 2002
Resolution of the trial court.
Ruling of the Trial Court
The RTC held Insurance Commissioner Malinis in contempt for his refusal to
implement its Order. It explained that the commissioner had no legal justification for
his refusal to allow the withdrawal of CISCOs security deposit.
Hence, this Petition.[6]
Issues
Petitioner raises this sole issue for the Courts consideration:
Whether or not the security deposit held by the Insurance
Commissioner pursuant to Section 203 of the Insurance Code may
be levied or garnished in favor of only one insured.[7]
The Courts Ruling
The Petition is meritorious.
Preliminary Issue:
Propriety of Review
Before discussing the principal issue, the Court will first dispose of the question
of mootness.
Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the
treasurer of the Philippines a letter dated March 26, 2003, stating that the former
had no objection to the release of the security deposit to Del Monte Motors. Portions
of the fund were consequently released to respondent in July, October, and
December 2003. Thus, the issue arises: whether these circumstances render the case
moot.
Petitioner, however, contends that the partial releases should not be
construed as an abandonment of its stand that security deposits under Section 203
of the Insurance Code are exempt from levy and garnishment. The Republic claims
that the releases were made pursuant to the commissioners power of control over
the fund, not to the lower courts Order of garnishment. Petitioner further invokes
the jurisdiction of this Court to put to rest the principal issue of whether security
deposits made with the Insurance Commission may be levied and garnished.
The issue is not totally moot. To stress, only a portion of respondents claim was
satisfied, and the Insurance Commission has required CISCO to replenish the latters
security deposit. Respondent, therefore, may one day decide to further garnish the
security deposit, once replenished. Moreover, after the questioned Order of the
lower court was issued, similar claims on the security deposits of various insurance
companies have been made before the Insurance Commission. To set aside the
resolution of the issue will only postpone a task that is certain to crop up in the future.
Besides, the business of insurance is imbued with public interest. It is subject to
regulation by the State, with respect not only to the relations between the insurer
and the insured, but also to the internal affairs of insurance companies.[8] As this case
is undeniably endowed with public interest and involves a matter of public policy,
this Court shall not shirk from its duty to educate the bench and the bar by
formulating guiding and controlling principles, precepts, doctrines and rules. [9]
Principal Issue:
Exemption of Security Deposit
from Levy or Garnishment

Section 203 of the Insurance Code provides as follows:
Sec. 203. Every domestic insurance company shall, to the extent of
an amount equal in value to twenty-five per centum of the
minimum paid-up capital required under section one hundred
eighty-eight, invest its funds only in securities, satisfactory to the
Commissioner, consisting of bonds or other evidences of debt of
the Government of the Philippines or its political subdivisions or
instrumentalities, or of government-owned or controlled
corporations and entities, including the Central Bank of the
Philippines: Provided, That such investments shall at all times be
maintained free from any lien or encumbrance; and Provided,
further, That such securities shall be deposited with and held by the
Commissioner for the faithful performance by the depositing
insurer of all its obligations under its insurance contracts. The
provisions of section one hundred ninety-two shall, so far as
practicable, apply to the securities deposited under this section.
Except as otherwise provided in this Code, no judgment creditor or
other claimant shall have the right to levy upon any of the
securities of the insurer held on deposit pursuant to the
requirement of the Commissioner. (Emphasis supplied)
Respondent notes that Section 203 does not provide for an absolute
prohibition on the levy and garnishment of the security deposit. It contends that the
law requires the deposit, precisely to ensure faithful performance of all the
obligations of the depositing insurer under the latters various insurance
contracts. Hence, respondent claims that the security deposit should be answerable
for the counterbondissued by CISCO.
The Court is not convinced. As worded, the law expressly and clearly states
that the security deposit shall be (1) answerable for all the obligations of the
depositing insurer under its insurance contracts; (2) at all times free from any liens
or encumbrance; and (3) exempt from levy by any claimant.
To be sure, CISCO, though presently under conservatorship, has valid
outstanding policies. Its policy holders have a right under the law to be equally
protected by its security deposit. To allow the garnishment of that deposit would
impair the fund by decreasing it to less than the percentage of paid-up capital that
the law requires to be maintained. Further, this move would create, in favor of
respondent, a preference of credit over the other policy holders and beneficiaries.
Our Insurance Code is patterned after that of California.[10] Thus, the ruling
of the states Supreme Court on a similar concept as that of the security deposit is
instructive. Engwicht v. Pacific States Life Assurance Co.[11] held that the money
required to be deposited by a mutual assessment insurance company with the state
treasurer was a trust fund to be ratably distributed amongst all the claimants entitled
to share in it. Such a distribution cannot be had except in an action in the nature of a
creditors bill, upon the hearing of which, and with all the parties interested in the
fund before it, the court may make equitable distribution of the fund, and appoint a
receiver to carry that distribution into effect.[12]
Basic is the statutory construction rule that provisions of a statute should be
construed in accordance with the purpose for which it was enacted.[13] That is, the
securities are held as a contingency fund to answer for the claims against the
insurance company by all its policy holders and their beneficiaries. This step is taken
in the event that the company becomes insolvent or otherwise unable to satisfy the
claims against it. Thus, a single claimant may not lay stake on the securities to the
exclusion of all others. The other parties may have their own claims against the
insurance company under other insurance contracts it has entered into.
Respondents Inchoate Right
The right to lay claim on the fund is dependent on the solvency of the insurer
and is subject to all other obligations of the company arising from its insurance
contracts. Thus, respondents interest is merely inchoate. Being a mere expectancy,
it has no attribute of property. At this time, it is nonexistent and may never
exist.[14] Hence, it would be premature to make the security deposit answerable
for CISCOs present obligation to Del Monte Motors.
Moreover, since insolvency proceedings against CISCO have yet to be
conducted, it would be impossible to establish at this time which claimants are
entitled to the security deposit and in what pro-rated amounts. Only after all other
claimants under subsisting policies issued by CISCO have been heard can respondents
share be determined.
Powers of the Commissioner
The Insurance Code has vested the Office of the Insurance Commission with
both regulatory and adjudicatory authority over insurance matters.[15]
The general regulatory authority of the insurance commissioner is described
in Section 414 of the Code as follows:
 Sec. 414. The Insurance Commissioner shall have the duty
to see that all laws relating to insurance, insurance companies and
other insurance matters, mutual benefit associations, and trusts for
charitable uses are faithfully executed and to perform the duties
imposed upon him by this Code, and shall, notwithstanding any
existing laws to the contrary, have sole and exclusive authority to
regulate the issuance and sale of variable contracts as defined in
section two hundred thirty-two and to provide for the licensing of
persons selling such contracts, and to issue such reasonable rules
and regulations governing the same.
The Commissioner may issue such rulings, instructions,
circulars, orders and decisions as he may deem necessary to
secure the enforcement of the provisions of this Code, subject to
the approval of the Secretary of Finance. Except as otherwise
specified, decisions made by the Commissioner shall
be appealable to the Secretary of Finance. (Emphasis supplied)
Pursuant to these regulatory powers, the commissioner is authorized to (1)
issue (or to refuse to issue) certificates of authority to persons or entities desiring to
engage in insurance business in the Philippines;[16] (2) revoke or suspend these
certificates of authority upon finding grounds for the revocation or suspension;[17] (3)
impose upon insurance companies, their directors and/or officers and/or agents
appropriate penalties -- fines, suspension or removal from office -- for failing to
comply with the Code or with any of the commissioners orders, instructions,
regulations or rulings, or for otherwise conducting business in an unsafe or unsound
manner.[18]
Included in the above regulatory responsibilities is the duty to hold the security
deposits under Sections 191[19] and 203 of the Code, for the benefit and security of
all policy holders. In relation to these provisions, Section 192 of the Insurance Code
states:
Sec. 192. The Commissioner shall hold the securities, deposited as
aforesaid, for the benefit and security of all the policyholders of the
company depositing the same, but shall as long as the company is
solvent, permit the company to collect the interest or dividends on
the securities so deposited, and, from time to time, with his assent,
to withdraw any of such securities, upon depositing with said
Commissioner other like securities, the market value of which shall
be equal to the market value of such as may be withdrawn. In the
event of any company ceasing to do business in the Philippines the
securities deposited as aforesaid shall be returned upon the
companys making application therefor and proving to the
satisfaction of the Commissioner that it has no further liability
under any of its policies in the Philippines. (Emphasis supplied)
Undeniably, the insurance commissioner has been given a wide latitude of
discretion to regulate the insurance industry so as to protect the insuring public. The
law specifically confers custody over the securities upon the commissioner, with
whom these investments are required to be deposited. An implied trust[20] is created
by the law for the benefit of all claimants under subsisting insurance contracts issued
by the insurance company.[21]
As the officer vested with custody of the security deposit, the insurance
commissioner is in the best position to determine if and when it may be released
without prejudicing the rights of other policy holders. Before allowing the withdrawal
or the release of the deposit, the commissioner must be satisfied that the conditions
contemplated by the law are met and all policy holders protected.
Commissioners Actions
Entitled to Great Respect
In this case, Commissioner Malinis refused to release the security deposit of
CISCO. Believing that the funds were exempt from execution as provided by law, he
sought to protect other policy holders.His interpretation of the provisions of the law
carries great weight and consideration,[22] as he is the head of a specialized body
tasked with the regulation of insurance matters and primarily charged with the
implementation of the Insurance Code.
The emergence of the multifarious needs of modern society necessitates the
establishment of diverse administrative agencies. In addressing these needs, the
administrative agencies charged with applying and implementing particular statutes
have accumulated experience and specialized capabilities. Thus, in a long line of
cases, this Court has recognized that their construction of a statute is entitled to great
respect and should ordinarily be controlling, unless clearly shown to be in sharp
conflict with the governing statute or the Constitution and other laws.[23]
Clearly, then, the trial court erred in issuing the Writ of Garnishment against
the security deposit of CISCO. It follows that without the issuance of a valid order,
the insurance commissioner could not have been in contempt of court.[24]
WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No
costs.
SO ORDERED.
 SPECIAL FIRST DIVISION
We recall the facts of this case, as follows:

PHILIPPINE HEALTH CARE G.R. No. 167330 Petitioner is a domestic corporation whose primary purpose is [t]o
PROVIDERS, INC., establish, maintain, conduct and operate a prepaid group practice
Petitioner, Present: health care delivery system or a health maintenance organization
to take care of the sick and disabled persons enrolled in the health
PUNO, C.J., Chairperson, care plan and to provide for the administrative, legal, and financial
CORONA, responsibilities of the organization. Individuals enrolled in its
- v e r s u s - CHICO-NAZARIO,* health care programs pay an annual membership fee and are
LEONARDO-DE CASTRO and entitled to various preventive, diagnostic and curative medical
BERSAMIN, JJ.** services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice
COMMISSIONER OF health delivery system at a hospital or clinic owned, operated or
INTERNAL REVENUE, accredited by it.
Respondent. Promulgated:
September 18, 2009 xxx xxx xxx

x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x On January 27, 2000, respondent Commissioner of Internal

Revenue [CIR] sent petitioner a formal demand letter and the
RESOLUTION corresponding assessment notices demanding the payment of
CORONA, J.: deficiency taxes, including surcharges and interest, for the taxable
years 1996 and 1997 in the total amount of P224,702,641.18. xxxx

ARTICLE II The deficiency [documentary stamp tax (DST)] assessment

Declaration of Principles and State Policies was imposed on petitioners health care agreement with the
members of its health care program pursuant to Section 185 of the
Section 15. The State shall protect and promote the right 1997 Tax Code xxxx
to health of the people and instill health consciousness among
them. xxx xxx xxx

ARTICLE XIII Petitioner protested the assessment in a letter dated

Social Justice and Human Rights February 23, 2000. As respondent did not act on the protest,
petitioner filed a petition for review in the Court of Tax Appeals
Section 11. The State shall adopt an integrated and (CTA) seeking the cancellation of the deficiency VAT and DST
comprehensive approach to health development which shall assessments.
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 On April 5, 2002, the CTA rendered a decision, the
to paupers.[1] dispositive portion of which read:
For resolution are a motion for reconsideration and supplemental motion
for reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by WHEREFORE, in view of the foregoing,
petitioner Philippine Health Care Providers, Inc.[2] the instant Petition for Review is PARTIALLY
 GRANTED. Petitioner is hereby ORDERED to PAY
the deficiency VAT amounting to P22,054,831.75
inclusive of 25% surcharge plus 20% interest from
January 20, 1997 until fully paid for the 1996 VAT
deficiency and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20,
1998 until fully paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. [231]-88
is declared void and without force and effect. The
1996 and 1997 deficiency DST assessment
against petitioner is hereby CANCELLED AND SET
ASIDE. Respondent is ORDERED to DESIST from
collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of
Appeals (CA)] insofar as it cancelled the DST assessment. He
claimed that petitioners health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held
that petitioners health care agreement was in the nature of a non-
life insurance contract subject to DST.
WHEREFORE, the petition for review is
GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the
1996 and 1997 deficiency documentary stamp
tax assessment and ordered petitioner to desist
from collecting the same is REVERSED and SET
ASIDE.
Respondent is ordered to pay the
amounts of P55,746,352.19 and P68,450,258.73
as deficiency Documentary Stamp Tax for 1996
and 1997, respectively, plus 25% surcharge for
late payment and 20% interest per annum from
January 27, 2000, pursuant to Sections 248 and
249 of the Tax Code, until the same shall have
been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied
it. Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed
the CAs decision. We held that petitioners health care agreement during the
pertinent period was in the nature of non-life insurance which is a contract of
indemnity, citing Blue Cross Healthcare, Inc. v. Olivares[3] and Philamcare Health
Systems, Inc. v. CA.[4] We also ruled that petitioners contention that it is a health
maintenance organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the beneficiaries under
their plans are treated as insurance contracts. Moreover, DST is not a tax on the
business transacted but an excise on the privilege, opportunity or facility offered at
exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration
and supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of
1997 is imposed only on a company engaged in the
business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not
an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National
Bank, affirmed in effect the CAs disposition that health
care services are not in the nature of an insurance
business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items
subject to DST is clear, especially in the light of the
amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts
of indemnity, they are not those contemplated under
Section 185.
(f) Assuming arguendo that petitioners agreements are akin to
health insurance, health insurance is not covered by
Section 185.
 (g) The agreements do not fall under the phrase other branch of
insurance mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA[5] 9480
for the taxable year 2005 and all prior years. Therefore,
the questioned assessments on the DST are now rendered
moot and academic.[6]
Oral arguments were held in Baguio City on April 22, 2009. The parties
submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it
availed of a tax amnesty under RA 9480[7] (also known as the Tax Amnesty Act of
2007) by fully paying the amount of P5,127,149.08 representing 5% of its net worth
as of the year ending December 31, 2005.[8]
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987.[9] It is engaged in the dispensation of the
following medical services to individuals who enter into health care agreements with
it:
Preventive medical services such as periodic monitoring
of health problems, family planning counseling, consultation and
advices on diet, exercise and other healthy habits, and
immunization;
Diagnostic medical services such as routine physical
examinations, x-rays, urinalysis, fecalysis, complete blood count,
and the like and
Curative medical services which pertain to the performing
of other remedial and therapeutic processes in the event of an
injury or sickness on the part of the enrolled member.[10]
Individuals enrolled in its health care program pay an annual membership
fee. Membership is on a year-to-year basis. The medical services are dispensed to
enrolled members in a hospital or clinic owned, operated or accredited by petitioner,
through physicians, medical and dental practitioners under contract with it. It
negotiates with such health care practitioners regarding payment schemes, financing
and other procedures for the delivery of health services. Except in cases of
emergency, the professional services are to be provided only by petitioner's
physicians, i.e. those directly employed by it[11] or whose services are contracted by
it.[12] Petitioner also provides hospital services such as room and board
accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.[13] If and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care providers for the
services rendered, at pre-agreed rates.[14]
To avail of petitioners health care programs, the individual members are
required to sign and execute a standard health care agreement embodying the terms
and conditions for the provision of the health care services. The same agreement
contains the various health care services that can be engaged by the enrolled
member, i.e., preventive, diagnostic and curative medical services. Except for the
curative aspect of the medical service offered, the enrolled member may actually
make use of the health care services being offered by petitioner at any time.
HEALTH MAINTENANCE
ORGANIZATIONS ARE NOT
ENGAGED IN THE INSURANCE
BUSINESS
We said in our June 12, 2008 decision that it is irrelevant that petitioner is
an HMO and not an insurer because its agreements are treated as insurance
contracts and the DST is not a tax on the business but an excise on the privilege,
opportunity or facility used in the transaction of the business.[15]
Petitioner, however, submits that it is of critical importance to characterize
the business it is engaged in, that is, to determine whether it is an HMO or an
insurance company, as this distinction is indispensable in turn to the issue of whether
or not it is liable for DST on its health care agreements.[16]
A second hard look at the relevant law and jurisprudence convinces the
Court that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997)
provides:
Section 185. Stamp tax on fidelity bonds and other
insurance policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or liability
made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life,
 marine, inland, and fire insurance), and all bonds, undertakings, or
recognizances, conditioned for the performance of the duties of
any office or position, for the doing or not doing of anything therein
specified, and on all obligations guaranteeing the validity or legality
of any bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all
obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or
renewed by any such person, company or corporation, there shall
be collected a documentary stamp tax of fifty centavos (P0.50) on
each four pesos (P4.00), or fractional part thereof, of the premium
charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders every
word operative is preferred over that which makes some words idle and
nugatory.[17] This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the
statute its every word.[18]
From the language of Section 185, it is evident that two requisites must
concur before the DST can apply, namely: (1) the document must be a policy of
insurance or an obligation in the nature of indemnity and (2) the maker should be
transacting the business of accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except
life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or The National Health
Insurance Act of 1995), an HMO is an entity that provides, offers or arranges for
coverage of designated health services needed by plan members for a fixed prepaid
premium.[19] The payments do not vary with the extent, frequency or type of services
provided.
The question is: was petitioner, as an HMO, engaged in the business of
insurance during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code)
enumerates what constitutes doing an insurance business or transacting an
insurance business:
a) making or proposing to make, as insurer, any
insurance contract;
b) making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to
any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance
business, specifically recognized as constituting the doing
of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed
to evade the provisions of this Code.
In the application of the provisions of this Code, the fact
that no profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive
to show that the making thereof does not constitute the doing or
transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive
effect on our decisions,[21] have determined that HMOs are not in the insurance
business. One test that they have applied is whether the assumption of risk and
indemnification of loss (which are elements of an insurance business) are the
principal object and purpose of the organization or whether they are merely
incidental to its business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal purpose, then
the business is not insurance.
Applying the principal object and purpose test, [22] there is significant
American case law supporting the argument that a corporation (such as an HMO,
whether or not organized for profit), whose main object is to provide the members
of a group with health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association[23] wherein
the Court of Appeals of the District of Columbia Circuit held that Group Health
Association should not be considered as engaged in insurance activities since it was
created primarily for the distribution of health care services rather than the
assumption of insurance risk.
xxx Although Group Healths activities may be considered in one
aspect as creating security against loss from illness or accident
more truly they constitute the quantity purchase of well-rounded,
continuous medical service by its members. xxx The functions of
such an organization are not identical with those of insurance or
indemnity companies. The latter are concerned primarily, if not
exclusively, with risk and the consequences of its descent, not with
service, or its extension in kind, quantity or distribution; with the
unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned
principally with getting service rendered to its members and
doing so at lower prices made possible by quantity purchasing
and economies in operation. Its primary purpose is to reduce the
cost rather than the risk of medical care; to broaden the service
to the individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of living, like
purchasing food and clothing or oil and gas, rather than merely
protecting against the financial loss caused by extraordinary and
unusual occurrences, such as death, disaster at sea, fire and
tornado. It is, in this instance, to take care of colds, ordinary aches
and pains, minor ills and all the temporary bodily discomforts as
well as the more serious and unusual illness. To summarize, the
distinctive features of the cooperative are the rendering of
service, its extension, the bringing of physician and patient
together, the preventive features, the regularization of service as
well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for;
not, except incidentally to these features, the indemnification for
cost after the services is rendered. Except the last, these are not
distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference between
contracting in this way for the rendering of service, even on the
contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered.
That an incidental element of risk distribution or
assumption may be present should not outweigh all other factors.
If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and
economic function becomes faint, if not extinct. This is especially
true when the contract is for the sale of goods or services on
contingency. But obviously it was not the purpose of the insurance
statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf
practically all contracts, particularly conditional sales and
contingent service agreements. The fallacy is in looking only at the
risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is
involved or assumed, but on whether that or something else to
which it is related in the particular plan is its principal object
purpose.[24] (Emphasis supplied)
In California Physicians Service v. Garrison,[25] the California court felt that,
after scrutinizing the plan of operation as a whole of the corporation, it was service
rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding
that the service is not engaged in the insurance business. Absence
or presence of assumption of risk or peril is not the sole test to be
applied in determining its status. The question, more broadly, is
whether, looking at the plan of operation as a whole, service
rather than indemnity is its principal object and
purpose. Certainly the objects and purposes of the corporation
organized and maintained by the California physicians have a wide
scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary,
low-cost basis for persons of small income. The medical
profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not
indemnity.[26] (Emphasis supplied)
American courts have pointed out that the main difference between an
HMO and an insurance company is that HMOs undertake to provide or arrange for
the provision of medical services through participating physicians while insurance
companies simply undertake to indemnify the insured for medical expenses incurred
up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross
and Blue Shield of New Jersey[27] is clear on this point:
The basic distinction between medical service
corporations and ordinary health and accident insurers is that the
former undertake to provide prepaid medical services through
participating physicians, thus relieving subscribers of any further
financial burden, while the latter only undertake to indemnify an
insured for medical expenses up to, but not beyond, the schedule
of rates contained in the policy.
xxx xxx xxx
The primary purpose of a medical service corporation,
however, is an undertaking to provide physicians who will render
services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporations plan,
 not only will the subscribers be deprived of the protection which
they might reasonably have expected would be provided, but the
corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and
rendering itself subject to the more stringent financial
requirements of the General Insurance Laws.
A participating provider of health care services is one who
agrees in writing to render health care services to or for persons
covered by a contract issued by health service corporation in
return for which the health service corporation agrees to make
payment directly to the participating provider.[28] (Emphasis
supplied)
Consequently, the mere presence of risk would be insufficient to override
the primary purpose of the business to provide medical services as needed, with
payment made directly to the provider of these services. [29] In short, even if
petitioner assumes the risk of paying the cost of these services even if significantly
more than what the member has prepaid, it nevertheless cannot be considered as
being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for
services rendered in case of emergency by non-participating health providers would
still be incidental to petitioners purpose of providing and arranging for health care
services and does not transform it into an insurer. To fulfill its obligations to its
members under the agreements, petitioner is required to set up a system and the
facilities for the delivery of such medical services. This indubitably shows that
indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and
diagnostic medical services intended to keep members from developing medical
conditions or diseases.[30] As an HMO, it is its obligation to maintain the good health
of its members. Accordingly, its health care programs are designed to prevent or to
minimize the possibility of any assumption of risk on its part. Thus, its undertaking
under its agreements is not to indemnify its members against any loss or damage
arising from a medical condition but, on the contrary, to provide the health and
medical services needed to prevent such loss or damage.[31]
Overall, petitioner appears to provide insurance-type benefits to its
members (with respect to its curative medical services), but these are incidental to
the principal activity of providing them medical care. The insurance-like aspect of
petitioners business is miniscule compared to its noninsurance activities. Therefore,
since it substantially provides health care services rather than insurance services, it
cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the principal purpose test used
in the above-quoted U.S. cases, we are not saying that petitioners operations are
identical in every respect to those of the HMOs or health providers which were
parties to those cases. What we are stating is that, for the purpose of determining
what doing an insurance business means, we have to scrutinize the operations of the
business as a whole and not its mere components. This is of course only prudent and
appropriate, taking into account the burdensome and strict laws, rules and
regulations applicable to insurers and other entities engaged in the insurance
business. Moreover, we are also not unmindful that there are other American
authorities who have found particular HMOs to be actually engaged in insurance
activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance
industry. This is evident from the fact that it is not supervised by the Insurance
Commission but by the Department of Health.[33] In fact, in a letter dated September
3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the
insurance business. This determination of the commissioner must be accorded great
weight. It is well-settled that the interpretation of an administrative agency which is
tasked to implement a statute is accorded great respect and ordinarily controls the
interpretation of laws by the courts. The reason behind this rule was explained
in Nestle Philippines, Inc. v. Court of Appeals:[34]
The rationale for this rule relates not only to the
emergence of the multifarious needs of a modern or modernizing
society and the establishment of diverse administrative agencies
for addressing and satisfying those needs; it also relates to the
accumulation of experience and growth of specialized capabilities
by the administrative agency charged with implementing a
particular statute. In Asturias Sugar Central, Inc. vs. Commissioner
of Customs,[35] the Court stressed that executive officials are
presumed to have familiarized themselves with all the
considerations pertinent to the meaning and purpose of the law,
and to have formed an independent, conscientious and competent
expert opinion thereon. The courts give much weight to the
government agency officials charged with the implementation of
the law, their competence, expertness, experience and informed
judgment, and the fact that they frequently are the drafters of the
law they interpret.[36]
A HEALTH CARE AGREEMENT
IS NOT AN INSURANCE
CONTRACT CONTEMPLATED
UNDER SECTION 185 OF THE
NIRC OF 1997
Section 185 states that DST is imposed on all policies of insurance or
obligations of the nature of indemnity for loss, damage, or liability. In our decision
dated June 12, 2008, we ruled that petitioners health care agreements are contracts
of indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not
based on loss or damage because, under the said agreement,
petitioner assumes the liability and indemnifies its member for
hospital, medical and related expenses (such as professional fees
of physicians). The term "loss or damage" is broad enough to cover
the monetary expense or liability a member will incur in case of
illness or injury.
Under the health care agreement, the rendition of
hospital, medical and professional services to the member in case
of sickness, injury or emergency or his availment of so-called "out-
patient services" (including physical examination, x-ray and
laboratory tests, medical consultations, vaccine administration and
family planning counseling) is the contingent event which gives rise
to liability on the part of the member. In case of exposure of the
member to liability, he would be entitled to indemnification by
petitioner.
Furthermore, the fact that petitioner must relieve its
member from liability by paying for expenses arising from the
stipulated contingencies belies its claim that its services are
prepaid. The expenses to be incurred by each member cannot be
predicted beforehand, if they can be predicted at all. Petitioner
assumes the risk of paying for the costs of the services even if they
are significantly and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but distributes
or spreads them out among a large group of persons bearing a
similar risk, that is, among all the other members of the health care
program. This is insurance.[37]
We reconsider. We shall quote once again the pertinent portion of Section
185:
Section 185. Stamp tax on fidelity bonds and other
insurance policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company
or corporation transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax
statutes are strictly construed against the taxing authority.[38] This is because taxation
is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the
government.[39] Hence, tax laws may not be extended by implication beyond the clear
import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.[40]
We are aware that, in Blue Cross and Philamcare, the Court pronounced
that a health care agreement is in the nature of non-life insurance, which is primarily
a contract of indemnity. However, those cases did not involve the interpretation of a
tax provision. Instead, they dealt with the liability of a health service provider to a
member under the terms of their health care agreement. Such contracts, as contracts
of adhesion, are liberally interpreted in favor of the member and strictly against the
HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are
applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. An insurance
contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of
the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons
bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a
premium.[41]
 Do the agreements between petitioner and its members possess all these
elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed
out that, even if a contract contains all the elements of an insurance contract, if its
primary purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract
containing all the four elements mentioned above would be an
insurance contract. The primary purpose of the parties in making
the contract may negate the existence of an insurance contract.
For example, a law firm which enters into contracts with clients
whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged
in the insurance business. Its contracts are simply for the purpose
of rendering personal services. On the other hand, a contract by
which a corporation, in consideration of a stipulated amount,
agrees at its own expense to defend a physician against all suits for
damages for malpractice is one of insurance, and the corporation
will be deemed as engaged in the business of insurance. Unlike the
lawyers retainer contract, the essential purpose of such a contract
is not to render personal services, but to indemnify against loss and
damage resulting from the defense of actions for
malpractice.[42](Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are
present in petitioners agreements. To begin with, there is no loss, damage or liability
on the part of the member that should be indemnified by petitioner as an
HMO. Under the agreement, the member pays petitioner a predetermined
consideration in exchange for the hospital, medical and professional services
rendered by the petitioners physician or affiliated physician to him. In case of
availment by a member of the benefits under the agreement, petitioner does not
reimburse or indemnify the member as the latter does not pay any third
party. Instead, it is the petitioner who pays the participating physicians and other
health care providers for the services rendered at pre-agreed rates. The member
does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to
a monetary liability on the part of the member to any third party-provider of medical
services which might in turn necessitate indemnification from petitioner. The terms
indemnify or indemnity presuppose that a liability or claim has already been
incurred. There is no indemnity precisely because the member merely avails of
medical services to be paid or already paid in advance at a pre-agreed price under
the agreements.
Third. According to the agreement, a member can take advantage of the
bulk of the benefits anytime, e.g. laboratory services, x-ray, routine annual physical
examination and consultations, vaccine administration as well as family planning
counseling, even in the absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member
who receives care from a non-participating physician or hospital. However, this is
only a very minor part of the list of services available. The assumption of the expense
by petitioner is not confined to the happening of a contingency but includes incidents
even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program,
[43]
Inc., although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from a non-designated doctor, this did
not make defendant an insurer. Citing Jordan, the Court determined that the primary
activity of the defendant (was) the provision of podiatric services to subscribers in
consideration of prepayment for such services.[44] Since indemnity of the insured was
not the focal point of the agreement but the extension of medical services to the
member at an affordable cost, it did not partake of the nature of a contract of
insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not
necessarily true that risk alone is sufficient to establish it. Almost anyone who
undertakes a contractual obligation always bears a certain degree of financial
risk. Consequently, there is a need to distinguish prepaid service contracts (like those
of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to
provide health services: the risk that it might fail to earn a reasonable return on its
investment. But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is the risk that the cost of
insurance claims might be higher than the premiums paid. The amount of premium
is calculated on the basis of assumptions made relative to the insured. [45]
However, assuming that petitioners commitment to provide medical
services to its members can be construed as an acceptance of the risk that it will shell
out more than the prepaid fees, it still will not qualify as an insurance contract
because petitioners objective is to provide medical services at reduced cost, not to
distribute risk like an insurer.
 In sum, an examination of petitioners agreements with its members leads
us to conclude that it is not an insurance contract within the context of our Insurance
Code.
THERE WAS NO LEGISLATIVE
INTENT TO IMPOSE DST ON
HEALTH CARE AGREEMENTS
OF HMOS
Furthermore, militating in convincing fashion against the imposition of DST on
petitioners health care agreements under Section 185 of the NIRC of 1997 is the
provisions legislative history. The text of Section 185 came into U.S. law as early as
1904 when HMOs and health care agreements were not even in existence in this
jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise
known as the Internal Revenue Law of 1904)[46] enacted on July 2, 1904 and became
effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of
1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid
for and in respect to the several bonds, debentures, or certificates
of stock and indebtedness, and other documents, instruments,
matters, and things mentioned and described in this section, or for
or in respect to the vellum, parchment, or paper upon which such
instrument, matters, or things or any of them shall be written or
printed by any person or persons who shall make, sign, or issue the
same, on and after January first, nineteen hundred and five, the
several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of
the nature of indemnity for loss, damage, or liability made or
renewed by any person, association, company, or corporation
transacting the business of accident, fidelity, employers liability,
plate glass, steam boiler, burglar, elevator, automatic sprinkle, or
other branch of insurance (except life, marine, inland, and fire
insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was
enacted revising and consolidating the laws relating to internal revenue. The
aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely
reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and
exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced
as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its
amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l)
of Act No. 2711, otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466
(the NIRC of 1939), which codified all the internal revenue laws of the Philippines. In
an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased
but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again
increased.
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC
of 1977 was renumbered as Section 198. And under Section 23 of EO[47] 273 dated
July 25, 1987, it was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only
with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or
the NIRC of 1997), the subject legal provision was retained as the present Section
185. In 2004, amendments to the DST provisions were introduced by RA 9243[48] but
Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines
with the formation of Bancom Health Care Corporation in 1974. The same pioneer
HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or
Intercare). However, there are those who claim that Health Maintenance, Inc. is the
HMO industry pioneer, having set foot in the Philippines as early as 1965 and having
been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2
million.[49]
We can clearly see from these two histories (of the DST on the one hand and
HMOs on the other) that when the law imposing the DST was first passed, HMOs
were yet unknown in the Philippines. However, when the various amendments to the
DST law were enacted, they were already in existence in the Philippines and the term
had in fact already been defined by RA 7875. If it had been the intent of the
legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact
that the NIRC contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known as such, belies any
legislative intent to impose it on them. As a matter of fact, petitioner was assessed
its DST liability only on January 27, 2000, after more than a decade in the business
as an HMO.[50]
Considering that Section 185 did not change since 1904 (except for the rate
of tax), it would be safe to say that health care agreements were never, at any time,
recognized as insurance contracts or deemed engaged in the business of insurance
within the context of the provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is
to be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.[51] So potent indeed is the power that it was once
opined that the power to tax involves the power to destroy.[52]
Petitioner claims that the assessed DST to date which amounts to P376 million[53] is
way beyond its net worth of P259 million.[54] Respondent never disputed these
assertions. Given the realities on the ground, imposing the DST on petitioner would
be highly oppressive. It is not the purpose of the government to throttle private
business. On the contrary, the government ought to encourage private
enterprise.[55] Petitioner, just like any concern organized for a lawful economic
activity, has a right to maintain a legitimate business.[56] As aptly held in Roxas, et al.
v. CTA, et al.:[57]
The power of taxation is sometimes called also the power
to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the
hen that lays the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not
be allowed. It is counter-productive and ultimately subversive of the nations thrust
towards a better economy which will ultimately benefit the majority of our people.[59]
PETITIONERS TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for
taxable years 1996 and 1997 became moot and academic[60] when it availed of the
tax amnesty under RA 9480 on December 10, 2007. It
paid P5,127,149.08 representing 5% of its net worth as of the year ended December
31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a)
of RA 9480, it is entitled to immunity from payment of taxes as well as additions
thereto, and the appurtenant civil, criminal or administrative penalties under the
1997 NIRC, as amended, arising from the failure to pay any and all internal revenue
taxes for taxable year 2005 and prior years.[61]
Far from disagreeing with petitioner, respondent manifested in its
memorandum:
Section 6 of [RA 9840] provides that availment of tax
amnesty entitles a taxpayer to immunity from payment of the tax
involved, including the civil, criminal, or administrative penalties
provided under the 1997 [NIRC], for tax liabilities arising in 2005
and the preceding years.
In view of petitioners availment of the benefits of [RA
9840], and without conceding the merits of this case as discussed
above, respondent concedes that such tax amnesty extinguishes
the tax liabilities of petitioner. This admission, however, is not
meant to preclude a revocation of the amnesty granted in case it is
found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.[62] (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered
by the tax amnesty program under RA 9480.[63] There is no other conclusion to draw
than that petitioners liability for DST for the taxable years 1996 and 1997 was totally
extinguished by its availment of the tax amnesty under RA 9480.
IS THE COURT BOUND BY A
MINUTE RESOLUTION IN
ANOTHER CASE?
Petitioner raises another interesting issue in its motion for reconsideration: whether
this Court is bound by the ruling of the CA[64] in CIR v. Philippine National Bank[65] that
a health care agreement of Philamcare Health Systems is not an insurance contract
for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of
this Court dismissing the appeal in Philippine National Bank (G.R. No.
148680).[66] Petitioner argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court should apply the CA ruling
there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a result, our ruling in that case
has already become final.[67] When a minute resolution denies or dismisses a petition
for failure to comply with formal and substantive requirements, the challenged
decision, together with its findings of fact and legal conclusions, are deemed
sustained.[68] But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning
the same parties, it constitutes res judicata.[69] However, if other parties or another
subject matter (even with the same parties and issues) is involved, the minute
resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,[70] the Court noted
that a previous case, CIR v. Baier-Nickel[71] involving the same parties and the same
issues, was previously disposed of by the Court thru a minute resolution dated
February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled
that the previous case ha(d) no bearing on the latter case because the two cases
involved different subject matters as they were concerned with the taxable income
of different taxable years.[72]
Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph
of Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision.[73] Indeed, as a rule, this Court lays down doctrines or principles of law
which constitute binding precedent in a decision duly signed by the members of the
Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since
petitioners liability for DST on its health care agreement was not the subject matter
of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in
that case (which is not even binding precedent) in its favor. Nonetheless, in view of
the reasons already discussed, this does not detract in any way from the fact that
petitioners health care agreements are not subject to DST.
A FINAL NOTE
Taking into account that health care agreements are clearly not within the
ambit of Section 185 of the NIRC and there was never any legislative intent to impose
the same on HMOs like petitioner, the same should not be arbitrarily and unjustly
included in its coverage.
It is a matter of common knowledge that there is a great social need for
adequate medical services at a cost which the average wage earner can afford. HMOs
arrange, organize and manage health care treatment in the furtherance of the goal
of providing a more efficient and inexpensive health care system made possible by
quantity purchasing of services and economies of scale. They offer advantages over
the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their
members from exposure to the high cost of hospitalization and other medical
expenses brought about by a fluctuating economy.Accordingly, they play an
important role in society as partners of the State in achieving its constitutional
mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.[74] Its imposition will elevate the cost of health care services. This will in turn
necessitate an increase in the membership fees, resulting in either placing health
services beyond the reach of the ordinary wage earner or driving the industry to the
ground. At the end of the day, neither side wins, considering the indispensability of
the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16,
2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting
the said tax.
No costs.
SO ORDERED.
 FIRST DIVISION
[G.R. No. 154514. July 28, 2005]
WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND
SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision[1] dated July 30, 2002 of the Court
of Appeals in CA-G.R. SP No. 60144, affirming the Decision[2] dated May 3, 2000 of
the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that
there was no violation of the Insurance Code and the respondents do not need
license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and
indemnity coverage for its vessels from The Steamship Mutual Underwriting
Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and
Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of
Entry and Acceptance.[3] Pioneer also issued receipts evidencing payments for the
coverage. When White Gold failed to fully pay its accounts, Steamship Mutual
refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of
sum of money to recover the latters unpaid balance. White Gold on the other hand,
filed a complaint before the Insurance Commission claiming that Steamship Mutual
violated Sections 186[4] and 187[5] of the Insurance Code, while Pioneer violated
Sections 299,[6] 300[7] and 301[8] in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no
need for Steamship Mutual to secure a license because it was not engaged in the
insurance business. It explained that Steamship Mutual was a Protection and
Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual because Steamship Mutual
was not engaged in the insurance business. Moreover, Pioneer was already licensed,
hence, a separate license solely as agent/broker of Steamship Mutual was already
superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In
its decision, the appellate court distinguished between P & I Clubs vis--
vis conventional insurance. The appellate court also held that Pioneer merely acted
as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by
the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT
DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT
NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT
PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT
PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club,
engaged in the insurance business in the Philippines? (2) Does Pioneer need a license
as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual
admits it does not have a license to do business in the Philippines although Pioneer
is its resident agent. This relationship is reflected in the certifications issued by the
Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the
insurance business. To buttress its assertion, it cites the definition of a P & I Club
in Hyopsung Maritime Co., Ltd. v. Court of Appeals[10] as an association composed of
shipowners in general who band together for the specific purpose of providing
insurance cover on a mutual basis against liabilities incidental to shipowning that the
members incur in favor of third parties. It stresses that as a P & I Club, Steamship
Mutuals primary purpose is to solicit and provide protection and indemnity coverage
and for this purpose, it has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not
engaged in the insurance business in the Philippines. It is merely an association of
vessel owners who have come together to provide mutual protection against
liabilities incidental to shipowning.[11] Respondents aver Hyopsung is inapplicable in
this case because the issue in Hyopsung was the jurisdiction of the court
over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an
insurance business or transacting an insurance business. These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or
activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the
meaning of this Code;
 (d) doing or proposing to do any business in substance equivalent to any of Pioneer does not have a separate license to be an agent/broker of Steamship
the foregoing in a manner designed to evade the provisions of this Code. Mutual.[24]
... Although Pioneer is already licensed as an insurance company, it needs a
The same provision also provides, the fact that no profit is derived from the separate license to act as insurance agent for Steamship Mutual. Section 299 of the
making of insurance contracts, agreements or transactions, or that no separate or Insurance Code clearly states:
direct consideration is received therefor, shall not preclude the existence of an SEC. 299 . . .
insurance business.[12] No person shall act as an insurance agent or as an insurance broker in the
The test to determine if a contract is an insurance contract or not, depends on solicitation or procurement of applications for insurance, or receive for services in
the nature of the promise, the act required to be performed, and the exact nature of obtaining insurance, any commission or other compensation from any insurance
the agreement in the light of the occurrence, contingency, or circumstances under company doing business in the Philippines or any agent thereof, without first
which the performance becomes requisite. It is not by what it is called.[13] procuring a license so to act from the Commissioner, which must be renewed
Basically, an insurance contract is a contract of indemnity. In it, one undertakes annually on the first day of January, or within six months thereafter. . .
for a consideration to indemnify another against loss, damage or liability arising from Finally, White Gold seeks revocation of Pioneers certificate of authority and
an unknown or contingent event.[14] removal of its directors and officers. Regrettably, we are not the forum for these
In particular, a marine insurance undertakes to indemnify the assured against issues.
marine losses, such as the losses incident to a marine adventure. [15] Section 99[16] of WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30,
the Insurance Code enumerates the coverage of marine insurance. 2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the
Relatedly, a mutual insurance company is a cooperative enterprise where the Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual
members are both the insurer and insured. In it, the members all contribute, by a Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety
system of premiums or assessments, to the creation of a fund from which all losses Corporation are ORDERED to obtain licenses and to secure proper authorizations to
and liabilities are paid, and where the profits are divided among themselves, in do business as insurer and insurance agent, respectively. The petitioners prayer for
proportion to their interest.[17] Additionally, mutual insurance associations, or clubs, the revocation of Pioneers Certificate of Authority and removal of its directors and
provide three types of coverage, namely, protection and indemnity, war risks, and officers, is DENIED. Costs against respondents.
defense costs.[18] SO ORDERED.
A P & I Club is a form of insurance against third party liability, where the third
party is anyone other than the P & I Club and the members. [19] By definition then,
Steamship Mutual as a P & I Club is a mutual insurance association engaged in the
marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit
without the requisite certificate of authority mandated by Section 187[20] of the
Insurance Code. It maintains a resident agent in the Philippines to solicit insurance
and to collect payments in its behalf. We note that Steamship Mutual even renewed
its P & I Club cover until it was cancelled due to non-payment of the calls. Thus, to
continue doing business here, Steamship Mutual or through its agent Pioneer, must
secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is
necessary. Thus, no insurer or insurance company is allowed to engage in the
insurance business without a license or a certificate of authority from the Insurance
Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the
certificate of registration[22] issued by the Insurance Commission. It has been licensed
to do or transact insurance business by virtue of the certificate of authority [23] issued
by the same agency. However, a Certification from the Commission states that
 Republic of the Philippines insured failed to inform Fidelity of his other insurance coverages with Country
SUPREME COURT Bankers Insurance and Development Insurance.
Manila
Verendia appealed to the then Intermediate Appellate Court and in a decision
THIRD DIVISION
promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa,
Bartolome, and Ejercito (P), JJ.), the appellate court reversed for the following
G.R. No. 75605 January 22, 1993
reasons: (a) there was no misrepresentation concerning the lease for the contract
RAFAEL (REX) VERENDIA, petitioner,
was signed by Marcelo Garcia in the name of Roberto Garcia; and (b) Paragraph 3
vs.
of the policy contract requiring Verendia to give notice to Fidelity of other contracts
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES, respondents.
of insurance was waived by Fidelity as shown by its conduct in attempting to settle
G.R. No. 76399 January 22, 1993
the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).
FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,
vs. Fidelity received a copy of the appellate court's decision on April 4, 1986, but
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents. instead of directly filing a motion for reconsideration within 15 days therefrom,
B.L. Padilla for petitioner. Fidelity filed on April 21, 1986, a motion for extension of 3 days within which to file
Sabino Padilla, Jr. for Fidelity & Surety, Co. a motion for reconsideration. The motion for extension was not filed on April 19,
1986 which was the 15th day after receipt of the decision because said 15th day
MELO, J.: was a Saturday and of course, the following day was a Sunday (p. 14., Rollo of G.R.
The two consolidated cases involved herein stemmed from the issuance by Fidelity No. 75605). The motion for extension was granted by the appellate court on April
and Surety Insurance Company of the Philippines (Fidelity for short) of its Fire 30, 1986 (p. 15. ibid.), but Fidelity had in the meantime filed its motion for
Insurance Policy No. F-18876 effective between June 23, 1980 and June 23, 1981 reconsideration on April 24, 1986 (p. 16, ibid.).
covering Rafael (Rex) Verendia's residential building located at Tulip Drive, Beverly
Verendia filed a motion to expunge from the record Fidelity's motion for
Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as beneficiary was
reconsideration on the ground that the motion for extension was filed out of time
the Monte de Piedad & Savings Bank. Verendia also insured the same building with
because the 15th day from receipt of the decision which fell on a Saturday was
two other companies, namely, The Country Bankers Insurance for P56,000.00 under
ignored by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate
Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development Insurance
Court has personnel receiving pleadings even on Saturdays.
for P400,000.00 under Policy No. F-48867 expiring on June 30, 198l.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion
While the three fire insurance policies were in force, the insured property was
for reconsideration was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the
completely destroyed by fire on the early morning of December 28, 1980. Fidelity
petition herein docketed as G.R. No. 75605 was initiated. Subsequently, or more
was accordingly informed of the loss and despite demands, refused payment under
specifically on October 21, 1986, the appellate court denied Fidelity's motion for
its policy, thus prompting Verendia to file a complaint with the then Court of First
reconsideration and account thereof. Fidelity filed on March 31, 1986, the petition
Instance of Quezon City, praying for payment of P385,000.00, legal interest
for review on certiorari now docketed as G.R. No. 76399. The two petitions, inter-
thereon, plus attorney's fees and litigation expenses. The complaint was later
related as they are, were consolidated
amended to include Monte de Piedad as an "unwilling defendant" (P. 16, Record).
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Answering the complaint, Fidelity, among other things, averred that the policy was
Before we can even begin to look into the merits of the main case which is the
avoided by reason of over-insurance; that Verendia maliciously represented that
petition for review on certiorari, we must first determine whether the decision of
the building at the time of the fire was leased under a contract executed on June
the appellate court may still be reviewed, or whether the same is beyond further
25, 1980 to a certain Roberto Garcia, when actually it was a Marcelo Garcia who
judicial scrutiny. Stated otherwise, before anything else, inquiry must be made into
was the lessee.
the issue of whether Fidelity could have legally asked for an extension of the 15-
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, day reglementary period for appealing or for moving for reconsideration.
ruling in favor of Fidelity. In sustaining the defenses set up by Fidelity, the trial court
As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine
ruled that Paragraph 3 of the policy was also violated by Verendia in that the
that the pendency of a motion for extension of time to perfect an appeal does not
suspend the running of the period sought to be extended (Garcia vs. Buenaventura
74 Phil. 611 [1944]). To the same effect were the rulings in Gibbs vs. CFI of
Manila (80 Phil. 160 [1948]) Bello vs. Fernando (4 SCRA 138 [1962]), and Joe vs.
King (20 SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not expressly
prohibit the filing of a motion for extension of time to file a motion for
reconsideration in regard to a final order or judgment, magistrates, including those
in the Court of Appeals, held sharply divided opinions on whether the period for
appealing which also includes the period for moving to reconsider may be
extended. The matter was not definitely settled until this Court issued its
Resolution in Habaluyas Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring
that beginning one month from the promulgation of the resolution on May 30, 1986
— (Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that
. . . the rule shall be strictly enforced that no motion for extension
of time to file a motion for new trial or reconsideration shall be
filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before June 30,
1986, although, of course, Verendia's motion to expunge the motion for
reconsideration was not finally disposed until July 22, 1986, or after the dictum
in Habaluyas had taken effect. Seemingly, therefore, the filing of the motion for
extension came before its formal proscription under Habaluyas, for which reason
we now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not
the contract of lease submitted by Verendia to support his claim on the fire
insurance policy constitutes a false declaration which would forfeit his benefits
under Section 13 of the policy and (b) whether or not, in submitting the subrogation
receipt in evidence, Fidelity had in effect agreed to settle Verendia's claim in the
amount stated in said receipt.1
Verging on the factual, the issue of the veracity or falsity of the lease contract could
have been better resolved by the appellate court for, in a petition for review
on certiorari under Rule 45, the jurisdiction of this Court is limited to the review of
errors of law. The appellate court's findings of fact are, therefore, conclusive upon
this Court except in the following cases: (1) when the conclusion is a finding grounded
entirely on speculation, surmises, or conjectures; (2) when the inference made is
manifestly absurd, mistaken, or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the judgment is premised on a
misapprehension of facts; (5) when the findings of fact are conflicting; and (6) when
the Court of Appeals in making its findings went beyond the issues of the case and
the same are contrary to the admissions of both appellant and appellee (Ronquillo v.
Court of Appeals, 195 SCRA 433 [1991]). In view of the conflicting findings of the trial
court and the appellate court on important issues in these consolidated cases and it
appearing that the appellate court judgment is based on a misapprehension of facts,
this Court shall review the evidence on record.
The contract of lease upon which Verendia relies to support his claim for insurance
benefits, was entered into between him and one Robert Garcia, married to Helen
Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after the effectivity of the
insurance policy. When the rented residential building was razed to the ground on
December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within
the premises. However, according to the investigation report prepared by Pat.
Eleuterio M. Buenviaje of the Antipolo police, the building appeared to have "no
occupant" and that Mr. Roberto Garcia was "renting on the otherside (sic) portion of
said compound"
Marcelo Garcia, whom he considered as the real lessee, was occupying the building
when it was burned (TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an
adjuster was able to locate him. Robert Garcia then executed an affidavit before the
National Intelligence and Security Authority (NISA) to the effect that he was not the
lessee of Verendia's house and that his signature on the contract of lease was a
complete forgery. Thus, on the strength of these facts, the adjuster submitted a
report dated December 4, 1981 recommending the denial of Verendia's claim (Exh.
"2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who
signed the lease contract. According to Verendia, it was signed by Marcelo Garcia,
cousin of Robert, who had been paying the rentals all the while. Verendia, however,
failed to explain why Marcelo had to sign his cousin's name when he in fact was
paying for the rent and why he (Verendia) himself, the lessor, allowed such a ruse.
Fidelity's conclusions on these proven facts appear, therefore, to have sufficient
bases; Verendia concocted the lease contract to deflect responsibility for the fire
towards an alleged "lessee", inflated the value of the property by the alleged monthly
rental of P6,500 when in fact, the Provincial Assessor of Rizal had assessed the
property's fair market value to be only P40,300.00, insured the same property with
two other insurance companies for a total coverage of around P900,000, and created
a dead-end for the adjuster by the disappearance of Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the
parties (Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms
and conditions constitute the measure of the insurer's liability and compliance
therewith is a condition precedent to the insured's right to recovery from the insurer
(Oriental Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991],
citing Perla Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). As
it is also a contract of adhesion, an insurance contract should be liberally construed
in favor of the insured and strictly against the insurer company which usually
prepares it (Western Guaranty Corporation vs. Court of Appeals, 187 SCRA 652
[1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia
used a false lease contract to support his claim under Fire Insurance Policy No. F-
18876, the terms of the policy should be strictly construed against the insured.
Verendia failed to live by the terms of the policy, specifically Section 13 thereof which
is expressed in terms that are clear and unambiguous, that all benefits under the
policy shall be forfeited "If the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any fraudulent means or devises
are used by the Insured or anyone acting in his behalf to obtain any benefit under the
policy". Verendia, having presented a false declaration to support his claim for
benefits in the form of a fraudulent lease contract, he forfeited all benefits therein
by virtue of Section 13 of the policy in the absence of proof that Fidelity waived such
provision (Pacific Banking Corporation vs. Court of Appeals, supra). Worse yet, by
presenting a false lease contract, Verendia, reprehensibly disregarded the principle
that insurance contracts are uberrimae fidae and demand the most abundant good
faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).
There is also no reason to conclude that by submitting the subrogation receipt as
evidence in court, Fidelity bound itself to a "mutual agreement" to settle Verendia's
claims in consideration of the amount of P142,685.77. While the said receipt appears
to have been a filled-up form of Fidelity, no representative of Fidelity had signed it.
It is even incomplete as the blank spaces for a witness and his address are not filled
up. More significantly, the same receipt states that Verendia had received the
aforesaid amount. However, that Verendia had not received the amount stated
therein, is proven by the fact that Verendia himself filed the complaint for the full
amount of P385,000.00 stated in the policy. It might be that there had been efforts
to settle Verendia's claims, but surely, the subrogation receipt by itself does not
prove that a settlement had been arrived at and enforced. Thus, to interpret Fidelity's
presentation of the subrogation receipt in evidence as indicative of its accession to
its "terms" is not only wanting in rational basis but would be substituting the will of
the Court for that of the parties.
WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No.
76399 is GRANTED and the decision of the then Intermediate Appellate Court under
review is REVERSED and SET ASIDE and that of the trial court is hereby REINSTATED
and UPHELD.
SO ORDERED.
THIRD DIVISION
[G.R. No. 112360. July 18, 2000]
RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF
APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court seeking to annul and set aside the July 15, 1993 Decision[1] and
October 22, 1993 Resolution[2] of the Court of Appeals[3] in CA-G.R. CV NO.
28779, which modified the Ruling[4] of the Regional Trial Court of Pasig,
Branch 161, in Civil Case No. 46106.
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance)
issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills,
Inc. (Transworld), initially for One Million (P1,000,000.00) Pesos and
eventually increased to One Million Five Hundred Thousand
(P1,500,000.00) Pesos, covering the period from August 14, 1980 to March
13, 1981.
Pertinent portions of subject policy on the buildings insured, and location
thereof, read:
"On stocks of finished and/or unfinished products, raw materials
and supplies of every kind and description, the properties of the
Insureds and/or held by them in trust, on commission or on joint
account with others and/or for which they (sic) responsible in
case of loss whilst contained and/or stored during the currency of
this Policy in the premises occupied by them forming part of the
buildings situate (sic) within own Compound at MAGDALO
STREET, BARRIO UGONG, PASIG, METRO MANILA, PHILIPPINES,
BLOCK NO. 601.
xxx...............xxx...............xxx
Said building of four-span lofty one storey in height with
mezzanine portions is constructed of reinforced concrete and
hollow blocks and/or concrete under galvanized iron roof and
occupied as hosiery mills, garment and lingerie factory, transistor-
stereo assembly plant, offices, warehouse and caretaker's
quarters.
'Bounds in front partly by one-storey concrete building under
galvanized iron roof occupied as canteen and guardhouse, partly
by building of two and partly one storey constructed of concrete
below, timber above undergalvanized iron roof occupied as
garage and quarters and partly by open space and/or tracking/
packing, beyond which is the aforementioned Magdalo Street; on
its right and left by driveway, thence open spaces, and at the rear
by open spaces.'"[5]
The same pieces of property insured with the petitioner were also insured
with New India Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld, razing
the middle portion of its four-span building and partly gutting the left and
right sections thereof. A two-storey building (behind said four-span
building) where fun and amusement machines and spare parts were
stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance
Company and New India Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance
companies an action for collection of sum of money and damages,
docketed as Civil Case No. 46106 before Branch 161 of the then Court of
First Instance of Rizal; praying for judgment ordering Rizal Insurance and
New India to pay the amount of P2,747, 867.00 plus legal
interest, P400,000.00 as attorney's fees, exemplary damages, expenses of
litigation of P50,000.00 and costs of suit.[6]
Petitioner Rizal Insurance countered that its fire insurance policy sued
upon covered only the contents of the four-span building, which was partly
burned, and not the damage caused by the fire on the two-storey annex
building.[7]
On January 4, 1990, the trial court rendered its decision; disposing as
follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co.,
Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to
pay Transwrold (sic) Knitting Mills, Inc. the amount of P826,
500.00 representing the actual value of the losses suffered by it;
and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."[8]
Both the petitioner, Rizal Insurance Company, and private respondent,
Transworld Knitting Mills, Inc., went to the Court of Appeals, which came
out with its decision of July 15, 1993 under attack, the decretal portion of
which reads:
"WHEREFORE, and upon all the foregoing, the decision of the
court below is MODIFIED in that defendant New India Assurance
Company has and is hereby required to pay plaintiff-appellant the
amount of P1,818,604.19 while the other Rizal Surety has to pay
the plaintiff-appellant P470,328.67, based on the actual losses
sustained by plaintiff Transworld in the fire, totalling
P2,790,376.00 as against the amounts of fire insurance coverages
respectively extended by New India in the amount of
P5,800,000.00 and Rizal Surety and Insurance Company in the
amount of P1,500,000.00.
No costs.
SO ORDERED."[9]
On August 20, 1993, from the aforesaid judgment of the Court of Appeals
New India appealed to this Court theorizing inter alia that the private
respondent could not be compensated for the loss of the fun and
amusement machines and spare parts stored at the two-storey building
because it (Transworld) had no insurable interest in said goods or items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No.
L-111118 (New India Assurance Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed a
Motion for Reconsideration before the Court of Appeals, and on October
22, 1993, the Court of Appeals reconsidered its decision of July 15, 1993, as
regards the imposition of interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only
insofar as the imposition of legal interest is concerned, that, on
the assessment against New India Assurance Company on the
amount of P1,818,604.19 and that against Rizal Surety &
Insurance Company on the amount of P470,328.67, from May 26,
1982 when the complaint was filed until payment is made. The
rest of the said decision is retained in all other respects.
SO ORDERED."[10]
Undaunted, petitioner Rizal Surety & Insurance Company found its way to
this Court via the present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE
ANNEX BUILDING WHERE THE BULK OF THE BURNED PROPERTIES
WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE
INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED
IN NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL
SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY
SHOW THAT THE PREMISES OCCUPIED BY TRANSWORLD, WHERE
THE INSURED PROPERTIES WERE LOCATED, SUSTAINED PARTIAL
DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT
TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH
MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN
NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL
AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS
ATTORNEY'S FEES AND EXPENSES OF LITIGATION (ART. 2208 PARS.
4 and 11, CIVIL CODE).[11]
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon
protected only the contents of the main building (four-span),[12] and did
not include those stored in the two-storey annex building. On the other
hand, the private respondent theorized that the so called "annex" was not
an annex but was actually an integral part of the four-span building[13] and
therefore, the goods and items stored therein were covered by the same
fire insurance policy.
Resolution of the issues posited here hinges on the proper interpretation
of the stipulation in subject fire insurance policy regarding its coverage,
which reads:
"xxx contained and/or stored during the currency of this Policy in
the premises occupied by them forming part of the buildings
situate (sic) within own Compound xxx"
Therefrom, it can be gleaned unerringly that the fire insurance policy in
question did not limit its coverage to what were stored in the four-span
building. As opined by the trial court of origin, two requirements must
concur in order that the said fun and amusement machines and spare parts
would be deemed protected by the fire insurance policy under scrutiny, to
wit:
"First, said properties must be contained and/or stored in the
areas occupied by Transworld and second, said areas must form
part of the building described in the policy xxx"[14]
'Said building of four-span lofty one storey in
height with mezzanine portions is constructed
of reinforced concrete and hollow blocks and/or
concrete under galvanized iron roof and
occupied as hosiery mills, garment and lingerie
factory, transistor-stereo assembly plant,
offices, ware house and caretaker's quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings
by the Court of Appeals are conclusive on the parties and not reviewable
by this Court, and the same carry even more weight when the Court of
Appeals has affirmed the findings of fact arrived at by the lower court. [15]
In the case under consideration, both the trial court and the Court of
Appeals found that the so called "annex " was not an annex building but an
integral and inseparable part of the four-span building described in the
policy and consequently, the machines and spare parts stored therein
were covered by the fire insurance in dispute. The letter-report of the
Manila Adjusters and Surveyor's Company, which petitioner itself cited and
invoked, describes the "annex" building as follows:
"Two-storey building constructed of partly timber and partly
concrete hollow blocks under g.i. roof which is adjoining and
intercommunicating with the repair of the first right span of the
lofty storey building and thence by property fence wall."[16]
Verily, the two-storey building involved, a permanent structure which
adjoins and intercommunicates with the "first right span of the lofty storey
building",[17] formed part thereof, and meets the requisites for
compensability under the fire insurance policy sued upon.
So also, considering that the two-storey building aforementioned was
already existing when subject fire insurance policy contract was entered
into on January 12, 1981, having been constructed sometime in
1978,[18] petitioner should have specifically excluded the said two-storey
building from the coverage of the fire insurance if minded to exclude the
same but if did not, and instead, went on to provide that such fire
insurance policy covers the products, raw materials and supplies stored
within the premises of respondent Transworld which was an integral part
of the four-span building occupied by Transworld, knowing fully well the
existence of such building adjoining and intercommunicating with the right
section of the four-span building.
After a careful study, the Court does not find any basis for disturbing what
the lower courts found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building
insured thereby. Article 1377 of the New Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against
the petitioner, Rizal Surety Insurance Company, whose lawyer or managers
drafted the fire insurance policy contract under scrutiny. Citing the
aforecited provision of law in point, the Court in Landicho vs. Government
Service Insurance System,[19] ruled:
"This is particularly true as regards insurance policies, in respect of
which it is settled that the 'terms in an insurance policy, which are
ambiguous, equivocal, or uncertain x x x are to be construed
strictly and most strongly against the insurer, and liberally in favor
of the insured so as to effect the dominant purpose of indemnity
or payment to the insured, especially where forfeiture is involved'
(29 Am. Jur., 181), and the reason for this is that the 'insured
usually has no voice in the selection or arrangement of the words
employed and that the language of the contract is selected with
great care and deliberation by experts and legal advisers
employed by, and acting exclusively in the interest of, the
insurance company.' (44 C.J.S., p. 1174).""[20]
Equally relevant is the following disquisition of the Court in Fieldmen's
Insurance Company, Inc. vs. Vda. De Songco,[21] to wit:
"'This rigid application of the rule on ambiguities has become
necessary in view of current business practices. The courts cannot
ignore that nowadays monopolies, cartels and concentration of
 capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared
'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative
to 'take it or leave it' labelled since Raymond Saleilles 'contracts by
adherence' (contrats [sic] d'adhesion), in contrast to these entered
into by parties bargaining on an equal footing, such contracts (of
which policies of insurance and international bills of lading are
prime example) obviously call for greater strictness and vigilance
on the part of courts of justice with a view to protecting the
weaker party from abuses and imposition, and prevent their
becoming traps for the unwary (New Civil Code, Article 24; Sent. of
Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.)'" [22]
The issue of whether or not Transworld has an insurable interest in the fun
and amusement machines and spare parts, which entitles it to be
indemnified for the loss thereof, had been settled in G.R. No. L-111118,
entitled New India Assurance Company, Ltd., vs. Court of Appeals, where
the appeal of New India from the decision of the Court of Appeals under
review, was denied with finality by this Court on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the premises,
precludes the relitigation of a particular fact or issue in another action
between the same parties based on a different claim or cause of action.
"xxx the judgment in the prior action operates as estoppel only as to those
matters in issue or points controverted, upon the determination of which
the finding or judgment was rendered. In fine, the previous judgment is
conclusive in the second case, only as those matters actually and directly
controverted and determined and not as to matters merely involved
therein."[23]
Applying the abovecited pronouncement, the Court, in Smith Bell and
Company (Phils.), Inc. vs. Court of Appeals,[24] held that the issue of
negligence of the shipping line, which issue had already been passed upon
in a case filed by one of the insurers, is conclusive and can no longer be
relitigated in a similar case filed by another insurer against the same
shipping line on the basis of the same factual circumstances. Ratiocinating
further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai
Maru') had been negligent, or so negligent as to have proximately
caused the collision between them, was an issue that was actually,
directly and expressly raised, controverted and litigated in C.A.-
G.R. No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision
and held the 'Don Carlos' to have been negligent rather than the
'Yotai Maru' and, as already noted, that Decision was affirmed by
this Court in G.R. No. L-48839 in a Resolution dated 6 December
1987. The Reyes Decision thus became final and executory
approximately two (2) years before the Sison Decision, which is
assailed in the case at bar, was promulgated. Applying the rule of
conclusiveness of judgment, the question of which vessel had been
negligent in the collision between the two (2) vessels, had long
been settled by this Court and could no longer be relitigated in
C.A.-G.R. No. 61206-R. Private respondent Go Thong was certainly
bound by the ruling or judgment of Reyes, L.B., J. and that of this
Court. The Court of Appeals fell into clear and reversible error
when it disregarded the Decision of this Court affirming the Reyes
Decision."[25]
The controversy at bar is on all fours with the aforecited case. Considering
that private respondent's insurable interest in, and compensability for the
loss of subject fun and amusement machines and spare parts, had been
adjudicated, settled and sustained by the Court of Appeals in CA-G.R. CV
NO. 28779, and by this Court in G.R. No. L-111118, in a Resolution, dated
February 2, 1994, the same can no longer be relitigated and passed upon
in the present case. Ineluctably, the petitioner, Rizal Surety Insurance
Company, is bound by the ruling of the Court of Appeals and of this Court
that the private respondent has an insurable interest in the aforesaid fun
and amusement machines and spare parts; and should be indemnified for
the loss of the same.
So also, the Court of Appeals correctly adjudged petitioner liable for the
amount of P470,328.67, it being the total loss and damage suffered by
Transworld for which petitioner Rizal Insurance is liable.[26]
All things studiedly considered and viewed in proper perspective, the Court
is of the irresistible conclusion, and so finds, that the Court of Appeals
erred not in holding the petitioner, Rizal Surety Insurance Company, liable
for the destruction and loss of the insured buildings and articles of the
private respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated
October 22, 1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are
AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
 FIRST DIVISION
[G.R. No. 125678. March 18, 2002]
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA
TRINOS, respondents.
DECISION
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a
health care coverage with petitioner Philamcare Health Systems, Inc. In the standard
application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high
blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic
ulcer? (If Yes, give details).[1]
The application was approved for a period of one year from March 1, 1988 to
March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondents husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein. He was also
entitled to avail of out-patient benefits such as annual physical examinations,
preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another
year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1,
1990. The amount of coverage was increased to a maximum sum of P75,000.00 per
disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning March 9,
1990. While her husband was in the hospital, respondent tried to claim the benefits
under the health care agreement.However, petitioner denied her claim saying that
the Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history. Doctors at the MMC allegedly
discovered at the time of Ernanis confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus, respondent paid the
hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical
therapist at home. Later, he was admitted at the Chinese General Hospital. Due to
financial difficulties, however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent
was constrained to bring him back to the Chinese General Hospital where he died on
the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr. Benito
Reverente, which was docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and attorneys fees. After trial,
the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late
Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully
paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to
plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to
plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.[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] Petitioners
motion for reconsideration was denied.[5] Hence, petitioner brought the instant
petition for review, raising the primary argument that a health care agreement is not
an insurance contract; hence the incontestability clause under the Insurance
Code[6] does not apply.
Petitioner argues that the agreement grants living benefits, such as medical
check-ups and hospitalization which a member may immediately enjoy so long as he
is alive upon effectivity of the agreement until its expiration one-year
thereafter. Petitioner also points out that only medical and hospitalization benefits
are given under the agreement without any indemnification, unlike in an insurance
contract where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts
which last longer,[7] petitioner argues that the incontestability clause does not apply,
as the same requires an effectivity period of at least two years. Petitioner further
argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the
Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. An insurance
contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the
designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium.[8]
Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest
against him, may be insured against. Every person has an insurable interest in the life
and health of himself.Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
 (2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of
money, respecting property or service, of which death or illness
might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondents husband in obtaining
the health care agreement was his own health. The health care agreement was in the
nature of non-life insurance, which is primarily a contract of indemnity. [9] Once the
member incurs hospital, medical or any other expense arising from sickness, injury
or other stipulated contingent, the health care provider must pay for the same to the
extent agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondents husband to sign an express authorization for any person,
organization or entity that has any record or knowledge of his health to furnish any
and all information relative to any hospitalization, consultation, treatment or any
other medical advice or examination.[10] Specifically, the Health Care Agreement
signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and
in any addendum annexed to this application are full, complete and true and bind
all parties in interest under the Agreement herein applied for, that there shall be no
contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied
for is actually paid during the lifetime and good health of proposed Members; that
no information acquired by any Representative of PhilamCare shall be binding upon
PhilamCare unless set out in writing in the application; that any physician is, by
these presents, expressly authorized to disclose or give testimony at anytime
relative to any information acquired by him in his professional capacity upon any
question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this application shall
be a ratification of any correction in or addition to this application as stated in the
space for Home Office Endorsement.[11](Underscoring ours)
In addition to the above condition, petitioner additionally required the
applicant for authorization to inquire about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare
Health Systems, Inc. any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination. This
authorization is in connection with the application for health care coverage only. A
photographic copy of this authorization shall be as valid as the
original.[12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement
which reads:
Failure to disclose or misrepresentation of any material information by the member
in the application or medical examination, whether intentional or unintentional,
shall automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed
or misrepresented information is deemed material if its revelation would have
resulted in the declination of the applicant by Philamcare or the assessment of a
higher Membership Fee for the benefit or benefits applied for. [13]
The answer assailed by petitioner was in response to the question relating to
the medical history of the applicant. This largely depends on opinion rather than fact,
especially coming from respondents husband who was not a medical doctor. Where
matters of opinion or judgment are called for, answers made in good faith and
without intent to deceive will not avoid a policy even though they are untrue. [14] Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in
inducing the acceptance of the risk, or its acceptance at a lower rate of premium,
and this is likewise the rule although the statement is material to the risk, if the
statement is obviously of the foregoing character, since in such case the insurer is
not justified in relying upon such statement, but is obligated to make further
inquiry. There is a clear distinction between such a case and one in which the
insured is fraudulently and intentionally states to be true, as a matter of
expectation or belief, that which he then knows, to be actually untrue, or the
impossibility of which is shown by the facts within his knowledge, since in such case
the intent to deceive the insurer is obvious and amounts to actual
fraud.[15] (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.[16] Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and the duty to establish
such defense by satisfactory and convincing evidence rests upon the provider or
insurer. In any case, with or without the authority to investigate, petitioner is liable
for claims made under the contract. Having assumed a responsibility under the
agreement, petitioner is bound to answer the same to the extent agreed upon. In the
end, the liability of the health care provider attaches once the member is hospitalized
for the disease or injury covered by the agreement or whenever he avails of the
covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured
party to rescind a contract of insurance. The right to rescind should be exercised
previous to the commencement of an action on the contract. [17] In this case, no
rescission was made. Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one
or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the
policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code
and upon request of insured, to furnish facts on which cancellation is based.[18]
None of the above pre-conditions was fulfilled in this case. When the terms of
insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his
obligation.[19] Being a contract of adhesion, the terms of an insurance contract are to
be construed strictly against the party which prepared the contract the insurer. [20] By
reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured, especially to avoid forfeiture. [21] This
is equally applicable to Health Care Agreements. The phraseology used in medical or
hospital service contracts, such as the one at bar, must be liberally construed in favor
of the subscriber, and if doubtful or reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and exclusionary clauses of
doubtful import should be strictly construed against the provider.[22]
Anent the incontestability of the membership of respondents husband, we
quote with approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health
Systems Inc. had twelve months from the date of issuance of the Agreement within
which to contest the membership of the patient if he had previous ailment of
asthma, and six months from the issuance of the agreement if the patient was sick
of diabetes or hypertension. The periods having expired, the defense of
concealment or misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the
deceased member considering that at the time of their marriage, the deceased was
previously married to another woman who was still alive. The health care agreement
is in the nature of a contract of indemnity. Hence, payment should be made to the
party who incurred the expenses. It is not controverted that respondent paid all the
hospital and medical expenses. She is therefore entitled to reimbursement. The
records adequately prove the expenses incurred by respondent for the deceaseds
hospitalization, medication and the professional fees of the attending physicians. [24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed
decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.