Insurance

THE INSURANCE CODE OF THE PHILIPPINES
Victor Kenner S. Galang
RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant,
vs. SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
G.R. No. L-15895; November 29, 1920
MALCOLM, J.:
This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to
recover from the defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life
annuity. The trial court gave judgment for the defendant. Plaintiff appeals.
FACTS:
1. Joaquin Herrer applied for a life annuity to the Sun Life Assurance Company of Canada (through
the Manila office) on September 24, 1917.
2. Two days later, Herrer paid the sum of P6,000 to the manager of the Manila office and was given
a receipt.
3. The application was immediately forwarded to the head office of the company at Montreal,
Canada.
4. On November 26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on
the same day the cable was received notice was sent by the Manila office to Herrer that the application had
been accepted, is a disputed point, which will be discussed later.)
5. On December 4, 1917, the policy was issued at Montreal.
6. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila office of the company stating
that Herrer desired to withdraw his application.
7. The following day the local office replied to Mr. Torres, stating that the policy had been issued, and
called attention to the notification of November 26, 1917.
8. Mr. Herrer died on December 20, 1917.
9. This letter (No. 7) was received by Mr. Torres on the morning of December 21, 1917.
ISSUE:
Whether or not the contract of insurance between Herrer and Sun Life Assurance Company of Canada has
been perfected. Whether or not Herrer received notice of acceptance of his application to perfect the
contract of Insurance.
HELD:
I. The letter of November 26, 1917, notifying Mr. Herrer that his application had been accepted,
was prepared and signed in the local office of the insurance company, was placed in the
ordinary channels for transmission, but as far as we know, was never actually mailed and
thus was never received by the applicant.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time
of the trial testified that he prepared the letter (November 26, 1917) and handed it to the local
manager (Mr. E. E. White) for signature. And after preparing the letter and giving it to the
manager, he new nothing of what became of it. Mr. White, testified to having received the
cablegram accepting the application of Mr. Herrer from the home office on November 26, 1917
and that he signed a letter notifying Mr. Herrer of this acceptance. The letters were then sent
to the chief clerk and placed on the mailing desk for transmission. The witness could not tell
if the letter had ever been actually in the mails. Mr. Tuason, who was the chief clerk, on
November 26, 1917, was not called as a witness. For the defense, attorney Manuel Torres
testified to having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer
mentioned his application for a life annuity, and that he said that the only document relating
to the transaction in his possession was the provisional receipt. Rafael Enriquez, the
administrator of the estate, testified that he had gone through the effects of the deceased and
had found no letter of notification from the insurance company to Mr. Herrer. Our deduction
from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr.
Herrer that his application had been accepted, was prepared and signed in the local office of
the insurance company, was placed in the ordinary channels for transmission, but as far as we
know, was never actually mailed and thus was never received by the applicant.
II. When the special law on the subject of insurance is deficient in enunciating the principles
governing acceptance, the subject-matter of the Civil code, if there be any, would be controlling
Not forgetting our conclusion of fact, it next becomes necessary to determine the law which
should be applied to the facts. In order to reach our legal goal, the obvious signposts along the
way must be noticed. Until quite recently, all of the provisions concerning life insurance in the
Philippines were found in the Code of Commerce and the Civil Code. In the Code of the
Commerce, there formerly existed provisions which dealt with insurance contracts. In the Civil
Code there formerly existed and presumably still exist, Chapters II and IV, entitled insurance
contracts and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915, there
was, however, in force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and
health insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of
Book III of the code of Commerce. The law of insurance is consequently now found in the
Insurance Act and the Civil Code. While, as just noticed, the Insurance Act deals with life
insurance, it is silent as to the methods to be followed in order that there may be a contract of
insurance. On the other hand, the Civil Code, in article 1802, not only describes a contact of life
annuity markedly similar to the one we are considering, but in two other articles, gives strong
clues as to the proper disposition of the case. For instance, article 16 of the Civil Code provides
that "In matters which are governed by special laws, any deficiency of the latter shall be
supplied by the provisions of this Code." On the supposition, therefore, which is incontestable,
that the special law on the subject of insurance is deficient in enunciating the principles
governing acceptance, the subject-matter of the Civil code, if there be any, would be
controlling.
III. The law applicable to the case is found to be the second paragraph of article 1262 of the Civil
Code providing that an acceptance made by letter shall not bind the person making the offer
except from the time it came to his knowledge. We hold that the contract for a life annuity in
the case at bar was not perfected because it has not been proved satisfactorily that the
acceptance of the application ever came to the knowledge of the applicant
In the Civil Code is found Article 1262 providing that "Consent is shown by the concurrence
of offer and acceptance with respect to the thing and the consideration which are to constitute
the contract. An acceptance made by letter shall not bind the person making the offer except
from the time it came to his knowledge. The contract, in such case, is presumed to have been
entered into at the place where the offer was made." This latter article is in opposition to the
provisions of article 54 of the Code of Commerce. If no mistake has been made in announcing
the successive steps by which we reach a conclusion, then the only duty remaining is for the
court to apply the law as it is found. The legislature in its wisdom having enacted a new law
on insurance, and expressly repealed the provisions in the Code of Commerce on the same
subject, and having thus left a void in the commercial law, it would seem logical to make use
of the only pertinent provision of law found in the Civil code, closely related to the chapter
concerning life annuities. The Civil Code rule, that an acceptance made by letter shall bind the
person making the offer only from the date it came to his knowledge, may not be the best
expression of modern commercial usage. Still it must be admitted that its enforcement avoids
uncertainty and tends to security. Not only this, but in order that the principle may not be
taken too lightly, let it be noticed that it is identical with the principles announced by a
considerable number of respectable courts in the United States. The courts who take this view
have expressly held that an acceptance of an offer of insurance not actually or constructively
communicated to the proposer does not make a contract. Only the mailing of acceptance, it has
been said, completes the contract of insurance, as the locus poenitentiae is ended when the
acceptance has passed beyond the control of the party.
In resume, therefore, the law applicable to the case is found to be the second paragraph of
article 1262 of the Civil Code providing that an acceptance made by letter shall not bind the
person making the offer except from the time it came to his knowledge.
The pertinent fact is, that according to the provisional receipt, three things had to be
accomplished by the insurance company before there was a contract: (1) There had to be a
medical examination of the applicant; (2) there had to be approval of the application by the
head office of the company; and (3) this approval had in some way to be communicated by the
company to the applicant. The further admitted facts are that the head office in Montreal did
accept the application, did cable the Manila office to that effect, did actually issue the policy
and did, through its agent in Manila, actually write the letter of notification and place it in the
usual channels for transmission to the addressee. The fact as to the letter of notification thus
fails to concur with the essential elements of the general rule pertaining to the mailing and
delivery of mail matter as announced by the American courts, namely, when a letter or other
mail matter is addressed and mailed with postage prepaid there is a rebuttable presumption
of fact that it was received by the addressee as soon as it could have been transmitted to him
in the ordinary course of the mails. But if any one of these elemental facts fails to appear, it is
fatal to the presumption. For instance, a letter will not be presumed to have been received by
the addressee unless it is shown that it was deposited in the post-office, properly addressed
and stamped. We hold that the contract for a life annuity in the case at bar was not perfected
because it has not been proved satisfactorily that the acceptance of the application ever came
to the knowledge of the applicant.
II
ETERNAL GARDENS MEMORIAL PARK CORPORATION vs

THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY,
Second Division
G.R. No. 166245; April 9, 2008
VELASCO, JR., J.:
FACTS:
1. Philippine American Life Insurance Company (Philamlife) entered into an agreement (Creditor
Group Life Policy) with Eternal Gardens Memorial Park Corporation (Eternal) (December 10,
1980).
a. The clients of Eternal who purchased burial lots from it on installment basis would be
insured by Philamlife. The amount of insurance coverage depended upon the existing
balance of the purchased burial lots. The policy was to be effective for a period of one year,
renewable on a yearly basis.
b. The relevant provisions of the policy are:
i. ELIGIBILITY; Any Lot Purchaser of the Assured who is at least 18 but not more
than 65 years of age, is indebted to the Assured for the unpaid balance of his loan
with the Assured, and is accepted for Life Insurance coverage by the Company on
its effective date is eligible for insurance under the Policy.
ii. EVIDENCE OF INSURABILITY; No medical examination shall be required for
amounts of insurance up to P50,000.00. However, a declaration of good health
shall be required for all Lot Purchasers as part of the application. The Company
reserves the right to require further evidence of insurability satisfactory to the
Company in respect of the following: (1) Any amount of insurance in excess of
P50,000.00; (2) Any lot purchaser who is more than 55 years of age.
iii. LIFE INSURANCE BENEFIT; The Life Insurance coverage of any Lot Purchaser at
any time shall be the amount of the unpaid balance of his loan (including arrears
up to but not exceeding 2 months) as reported by the Assured to the Company or
the sum of P100,000.00, whichever is smaller. Such benefit shall be paid to the
Assured if the Lot Purchaser dies while insured under the Policy.
iv. EFFECTIVE DATE OF BENEFIT; The insurance of any eligible Lot Purchaser shall
be effective on the date he contracts a loan with the Assured. However, there shall
be no insurance if the application of the Lot Purchaser is not approved by the
Company.
2. Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers,
together with a copy of the application of each purchaser, and the amounts of the respective unpaid
balances of all insured lot purchasers.
3. Eternal complied by submitting a letter dated December 29, 1982, containing a list of insurable
balances of its lot buyers for October 1982.
a. One of those included in the list as new business was a certain John Chuang. His balance
of payments was PhP 100,000.
b. On August 2, 1984, Chuang died.
4. Eternal sent a letter dated August 20, 1984 to Philamlife, which served as an insurance claim for
Chuangs death. Attached to the claim were the following documents: (1) Chuangs Certificate of
Death; (2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3)
Certificate of Claimant; (4) Certificate of Attending Physician; and (5) Assureds Certificate. In
reply, Philamlife wrote Eternal a letter on November 12, 1984,[6] requiring Eternal to submit the
following documents relative to its insurance claim for Chuangs death: (1) Certificate of Claimant
(with form attached); (2) Assureds Certificate (with form attached); (3) Application for Insurance
accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account
showing the unpaid balance of Chuang before his death.Eternal transmitted the required
documents through a letter dated November 14, 1984, which was received by Philamlife on
November 15, 1984.
5. After more than a year, Philamlife had not furnished Eternal with any reply to the latters insurance
claim. This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000
on April 25, 1986. Philamlife denied Eternals insurance claim in a letter (May 20, 1986) a portion of
which reads:
a. The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal
Gardens Memorial Park in October 1982 for the total maximum insurable amount of
P100,000.00 each. No application for Group Insurance was submitted in our office prior to
his death on August 2, 1984. In accordance with our Creditors Group Life Policy No. P-
1920, under Evidence of Insurability provision, a declaration of good health shall be
required for all Lot Purchasers as party of the application. We cite further the provision on
Effective Date of Coverage under the policy which states that there shall be no insurance
if the application is not approved by the Company. Since no application had been
submitted by the Insured/Assured, prior to his death, for our approval but was submitted
instead on November 15, 1984, after his death, Mr. John Uy Chuang was not covered under
the Policy. We wish to point out that Eternal Gardens being the Assured was a party to the
Contract and was therefore aware of these pertinent provisions. With regard to our
acceptance of premiums, these do not connote our approval per se of the insurance
coverage but are held by us in trust for the payor until the prerequisites for insurance
coverage shall have been met. We will however, return all the premiums which have been
paid in behalf of John Uy Chuang.
6. Eternal filed a case before the RTC of Makati for a sum of money against Philamlife.
7. The RTC decided in favor of Eternal ordering PHILAMLIFE to pay P100,000. The RTC found that
Eternal submitted Chuangs application for insurance which he accomplished before his death. Due
to Philamlifes inaction from the submission of the requirements of the group insurance as well as
Philamlifes acceptance of the premiums during the same period, Philamlife was deemed to have
approved Chuangs application. The RTC said that since the contract is a group life insurance, once
proof of death is submitted, payment must follow.
8. The CA reversed the decision of the RTC and dismissed the case because Chuangs application was
not enclosed in Eternals letter dated December 29, 1982. The non-accomplishment of the submitted
application form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being
no application form, Chuang was not covered by Philamlifes insurance.
CONTENTIONS:
9. Eternal claims that the evidence that it presented before the trial court supports its contention that
it submitted a copy of the insurance application of Chuang before his death through its letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. It was noted at the bottom of said letter that the corresponding
Phil-Am Life Insurance Application Forms & Cert. were enclosed in the letter that was apparently
received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy of the
insurance application which was signed by Chuang himself and executed before his death.
10. Philamlife claims that the evidence presented by Eternal is insufficient, arguing that Eternal must
present evidence showing that Philamlife received a copy of Chuangs insurance application.
11. The evidence on record supports Eternals position.
ISSUE:
Whether or not there is a valid insurance coverage pertaining to John Chuang pursuant to the Creditor
Group Life Policy between Eternal and Philamlife.
HELD:
I. Such stamp of receipt has the effect of acknowledging receipt of the letter together with the
attachments. Such receipt is an admission by Philamlife against its own interest.
The letter (December 29, 1982) which Philamlife stamped as received, states that the insurance
forms for the attached list of burial lot buyers were attached to the letter. Such stamp of receipt
has the effect of acknowledging receipt of the letter together with the attachments. Such receipt
is an admission by Philamlife against its own interest. The burden of evidence has shifted to
Philamlife, which must prove that the letter did not contain Chuangs insurance application.
However, Philamlife failed to do so; thus, Philamlife is deemed to have received Chuangs
insurance application. To reiterate, it was Philamlifes bounden duty to make sure that before a
transmittal letter is stamped as received, the contents of the letter are correct and accounted
for. Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the reliability
and credibility of the witnesses, because it has the opportunity to observe firsthand the
witnesses demeanor, conduct, and attitude. Findings of the trial court on such matters are
binding and conclusive on the appellate court, unless some facts or circumstances of weight
and substance have been overlooked, misapprehended, or misinterpreted,[14] that, if
considered, might affect the result of the case. An examination of the testimonies of the
witnesses mentioned by Philamlife, however, reveals no overlooked facts of substance and
value. Philamlife primarily claims that Eternal did not even know where the original insurance
application of Chuang was, as shown by the testimony of Edilberto Mendoza. In other words,
the witness admitted not knowing where the original insurance application was, but believed
that the application was transmitted to Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or
two insurance application forms were accomplished and the testimony of Mendoza on who
actually filled out the application form, these are minor inconsistencies that do not affect the
credibility of the witnesses. Minor inconsistencies are too trivial to affect the credibility of
witnesses, and these may even serve to strengthen their credibility as these negate any
suspicion that the testimonies have been rehearsed. Minor discrepancies or inconsistencies do
not impair the essential integrity of the prosecutions evidence as a whole or reflect on the
witnesses honesty. The test is whether the testimonies agree on essential facts and whether the
respective versions corroborate and substantially coincide with each other so as to make a
consistent and coherent whole. In the present case, the number of copies of the insurance
application that Chuang executed is not at issue, neither is whether the insurance application
presented by Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of Eternals witnesses.
II. An insurance contract is a contract of adhesion which must be construed liberally in favor of
the insured and strictly against the insurer in order to safeguard the latters interest
However, the question arises as to whether Philamlife assumed the risk of loss without
approving the application. YES. Philamlife and Eternal entered into an agreement
denominated as Creditor Group Life Policy. In the policy, it is provided that: EFFECTIVE
DATE OF BENEFIT; The insurance of any eligible Lot Purchaser shall be effective on the date
he contracts a loan with the Assured. However, there shall be no insurance if the application of
the Lot Purchaser is not approved by the Company. An examination of the above provision would
show ambiguity between its two sentences. The first sentence appears to state that the
insurance coverage of the clients of Eternal already became effective upon contracting a loan
with Eternal while the second sentence appears to require Philamlife to approve the insurance
contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which must be

construed liberally in favor of the insured and strictly against the insurer in order to safeguard
the latters interest. Indemnity and liability insurance policies are construed in accordance with
the general rule of resolving any ambiguity therein in favor of the insured, where the contract
or policy is prepared by the insurer. A contract of insurance, being a contract of adhesion, par
excellence, any ambiguity therein should be resolved against the insurer; in other words, it
should be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be construed in
such a way as to preclude the insurer from noncompliance with its obligations.
When the terms of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his obligation. Being
a contract of adhesion, the terms of an insurance contract are to be construed strictly against
the party which prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally in favor of the insured, especially to
avoid forfeiture. Clearly, the vague contractual provision, in Creditor Group Life Policy must
be construed in favor of the insured and in favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that
upon a partys purchase of a memorial lot on installment from Eternal, an insurance contract
covering the lot purchaser is created and the same is effective, valid, and binding until
terminated by Philamlife by disapproving the insurance application. The second sentence of
Creditor Group Life Policy No. P-1920 on the Effective Date of Benefit is in the nature of a
resolutory condition which would lead to the cessation of the insurance contract. Moreover,
the mere inaction of the insurer on the insurance application must not work to prejudice the
insured; it cannot be interpreted as a termination of the insurance contract. The termination
of the insurance contract by the insurer must be explicit and unambiguous. As a final note, to
characterize the insurer and the insured as contracting parties on equal footing is inaccurate
at best. Insurance contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More often than not, insurance
contracts are contracts of adhesion containing technical terms and conditions of the industry,
confusing if at all understandable to laypersons, that are imposed on those who wish to avail
of insurance. As such, insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the insurer and the insured are to be
delineated. Hence, in order to protect the interest of insurance applicants, insurance companies
must be obligated to act with haste upon insurance applications, to either deny or approve the
same, or otherwise be bound to honor the application as a valid, binding, and effective
insurance contract.
WHEREFORE, we GRANT the petition. The decision of the CA is REVERSED and SET ASIDE. The
Decision of the RTC is MODIFIED. Philamlife is hereby ORDERED:
III
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS,
respondents.
G.R. No. 125678 March 18, 2002
FIRST DIVISION
YNARES-SANTIAGO, J.:
FACTS:
1. Ernani Trinos (deceased husband of respondent Julita Trinos), applied for a health care coverage
with 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).
2. 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, Trinos
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. The agreement 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.
3. 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 Ernani’s medical history. Doctors at the MMC
allegedly discovered at the time of Ernani’s confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus, respondent paid the
hospitalization expenses herself, amounting 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.
4. Julita Trinos then filed a case for damages against petitioner with the RTC of Manila where she
asked for reimbursement of her expenses plus moral damages and attorney’s fees. After trial, the
lower court ruled against petitioners.
5. On appeal, the CA affirmed the decision of the trial court but deleted all awards for damages and
absolved petitioner Reverente. Petitioner’s motion for reconsideration was denied. 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 does not apply.
6. PHILAMCARE 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,
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.
ISSUE:
Whether or not a Health Care agreement is considered as an insurance contract.
HELD:
I. The insurable interest of respondent’s husband in obtaining the health care agreement was his
own health. The health care agreement was in the nature of non-life insurance, which is
primarily a contract of indemnity. Once the member incurs hospital, medical or any other
expense arising from sickness, injury or other stipulated contingent, the health care provider
must pay for the same to the extent agreed upon under the contract.
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 insurer’s promise, the insured pays a premium.8
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or
future, which may damnify a person having an insurable interest against him, may be insured
against.
Every person has an insurable interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance;
and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondent’s husband in obtaining the health care
agreement was his own health. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity. Once the member incurs hospital,
medical or any other expense arising from sickness, injury or other stipulated contingent, the
health care provider must pay for the same to the extent agreed upon under the contract.
II. The answer assailed by petitioner was in response to the question relating to the medical
history of the applicant. This largely depends on opinion rather than fact, especially coming
from respondent’s husband who was not a medical doctor. Where matters of opinion or
judgment are called for, answers made in good faith and without intent to deceive will not
avoid a policy even though they are untrue.
Petitioner argues that respondent’s husband concealed a material fact in his application. It
appears that in the application for health coverage, petitioners required respondent’s husband
to sign an express authorization for any person, organization or entity that has any record or
knowledge of his health to furnish any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination. Specifically, the Health
Care Agreement signed by respondent’s husband states: We hereby declare and agree that all statement
and answers contained herein and in any addendum annexed to this application are full, complete and true and bind
all parties in interest under the Agreement herein applied for, that there shall be no contract of health care coverage
unless and until an Agreement is issued on this application and the full Membership Fee according to the mode of
payment applied for is actually paid during the lifetime and good health of proposed Members; that no information
acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the
application; that any physician is, by these presents, expressly authorized to disclose or give testimony at anytime
relative to any information acquired by him in his professional capacity upon any question affecting the eligibility
for health care coverage of the Proposed Members and that the acceptance of any Agreement issued on this
application shall be a 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 applicant’s medical history, thus: I hereby authorize any person,
organization, or entity that has any record or knowledge of my health and/or that of __________ to give to the
PhilamCare Health Systems, Inc. any and all information relative to any hospitalization, consultation, treatment
or any other medical advice or examination. This authorization is in connection with the application for health care
coverage only. A photographic copy of this authorization shall be as valid as the original.12 (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.
The answer assailed by petitioner was in response to the question relating to the medical
history of the applicant. This largely depends on opinion rather than fact, especially coming
from respondent’s husband who was not a medical doctor. Where matters of opinion or
judgment are called for, answers made in good faith and without intent to deceive will not
avoid a policy even though they are untrue. 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. 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.
Anent the incontestability of the membership of respondent’s 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.
III. Respondent, although alleged to be not the legal wife of the deceased, is entitled to
reimbursement because a health care agreement is in the nature of a contract of indemnity.
Hence, payment should be made to the party who incurred the expenses.
Finally, petitioner alleges that respondent was not the legal wife of the deceased member
considering that at the time of their marriage, the deceased was previously married to
another woman who was still alive. The health care agreement is in the nature of a contract of
indemnity. Hence, payment should be made to the party who incurred the expenses. It is not
controverted that respondent paid all the hospital and medical expenses. She is therefore
entitled to reimbursement. The records adequately prove the expenses incurred by respondent
for the deceased’s hospitalization, medication and the professional fees of the attending
physicians.
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.
Davide, Jr., C.J., Puno, and Kapunan, JJ., concur.

IV
PHILIPPINE HEALTH CARE PROVIDERS, INC., vs COMMISSIONER OF INTERNAL REVENUE,

G.R. No. 167330; September 18, 2009
SPECIAL FIRST DIVISION
CORONA, J.:
FACTS:
1. Philippine Health Care Providers Inc. is a domestic corporation whose primary purpose is [t]o
establish, maintain, conduct and operate a prepaid group practice health care delivery system or a
health maintenance organization to take care of the sick and disabled persons enrolled in the health
care plan and to provide for the administrative, legal, and financial responsibilities of the
organization. Individuals enrolled in its health care programs pay an annual membership fee and
are entitled to various preventive, diagnostic and curative medical services provided by its duly
licensed physicians, specialists and other professional technical staff participating in the group
practice health delivery system at a hospital or clinic owned, operated or accredited by it.
2. The Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of deficiency taxes, including
surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18.
3. The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax
Code.
4. Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act
on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.
5. On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25%
surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and
P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the
1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect.
The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET
ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.
6. 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.
7. 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.
8. Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
9. 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. The 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.
10. Petitioner filed the present motion for reconsideration and supplemental motion for
reconsideration, asserting the following arguments: (1) 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; (2) 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;
(3) Section 185 should be strictly construed; (4) 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; (5) Assuming arguendo that petitioners agreements are contracts of indemnity, they are
not those contemplated under Section 185; (6) Assuming arguendo that petitioners agreements are
akin to health insurance, health insurance is not covered by Section 185; (7) The agreements do not
fall under the phrase other branch of insurance mentioned in Section 185; (8) The June 12, 2008
decision should only apply prospectively; (8) 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]
11. Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda
on June 8, 2009.
12. 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]
ISSUE:
Whether or not Philippine Health Care Providers is liable for the Documentary Stamp Tax under Section
185 of the NIRC.
HELD:
We find merit in petitioners motion for reconsideration.
I. Applying the principal object and purpose test, 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.
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. 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.
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.
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. 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.
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. 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.
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. 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,
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 wherein the Court of Appeals
of the District of Columbia Circuit held that Group Health Association should not be
considered as engaged in insurance activities since it was created primarily for the distribution
of health care services rather than the assumption of insurance risk; Although Group 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.
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)
II. 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.
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. 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.
III. 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.
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.
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. 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: 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]
IV. 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. We reconsider. In construing Section 185, we should be guided by the principle that
tax statutes are strictly construed against the taxing authority. 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.
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. 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.
Second. Not all the necessary elements of a contract of insurance are present in petitioners
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays
petitioner a predetermined consideration in exchange for the hospital, medical and
professional services rendered by the petitioners physician or affiliated physician to him. In
case of availment by a member of the benefits under the agreement, petitioner does not
reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the
petitioner who pays the participating physicians and other health care providers for the
services rendered at pre-agreed rates. The member does not make any such payment. In other
words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the
part of the member to any third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms indemnify or indemnity presuppose
that a liability or claim has already been incurred. There is no indemnity precisely because the
member merely avails of medical services to be paid or already paid in advance at a pre-agreed
price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and
consultations, vaccine administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care
from a non-participating physician or hospital. However, this is only a very minor part of the
list of services available. The assumption of the expense by petitioner is not confined to the
happening of a contingency but includes incidents even in the absence of illness or injury. In
Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,[43] although the
health care contracts called for the defendant to partially reimburse a subscriber for treatment
received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan,
the Court determined that the primary activity of the defendant (was) the provision of
podiatric services to subscribers in consideration of prepayment for such services.[44] Since
indemnity of the insured was not the focal point of the agreement but the extension of medical
services to the member at an affordable cost, it did not partake of the nature of a contract of
insurance
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that
risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation
always bears a certain degree of financial risk. Consequently, there is a need to distinguish
prepaid service contracts (like those of petitioner) from the usual insurance contracts. Indeed,
petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the
risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the
type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the
risk that the cost of insurance claims might be higher than the premiums paid. The amount of
premium is calculated on the basis of assumptions made relative to the insured.[45] However,
assuming that petitioners commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still
will not qualify as an insurance contract because petitioners objective is to provide medical
services at reduced cost, not to distribute risk like an insurer. In sum, an examination of
petitioners agreements with its members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.
V. 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.
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. 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. 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.
VI. 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. 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.: 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. 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]
VII. 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. 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.
FORTUNE INSURANCE AND SURETY CO., INC. vs. COURT OF APPEALS and PRODUCERS BANK
OF THE PHILIPPINES, respondents.
G.R. No. 115278; May 23, 1995
FIRST DIVISION
DAVIDE, JR., J.:
FACTS:
1. Producers Bank of the Philippines (hereinafter Producers) filed a case before the RTC of Makati
against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter Fortune) for a complaint for
recovery of the sum of P725,000.00 under the policy issued by Fortune.
a. The sum was allegedly lost during a robbery of Producer's armored vehicle while it was
in transit to transfer the money from its Pasay City Branch to its head office in Makati.
2. After joinder of issues, the parties asked the trial court to render judgment based on the following
stipulation of facts:
a. The plaintiff was insured by the defendants and an insurance policy was issued, the duplicate
original;
b. An armored car of the plaintiff, while in the process of transferring cash in the sum of P725,000.00
under the custody of its teller, Maribeth Alampay, from its Pasay Branch to its Head Office at 8737
Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was robbed of the said cash. The robbery
took place while the armored car was traveling along Taft Avenue in Pasay City;
c. The said armored car was driven by Benjamin Magalong Y de Vera, escorted by Security Guard
Saturnino Atiga Y Rosete. Driver Magalong was assigned by PRC Management Systems with the
plaintiff by virtue of an Agreement executed on August 7, 1983;
d. The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the plaintiff by
virtue of a contract of Security Service executed on October 25, 1982;
e. After an investigation conducted by the Pasay police authorities, the driver Magalong and guard
Atiga were charged, together with Edelmer Bantigue Y Eulalio, Reynaldo Aquino and John Doe,
with violation of P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of Pasay City.
f. The Fiscal of Pasay City then filed an information charging the aforesaid persons with the said crime
before Branch 112 of the Regional Trial Court of Pasay City. A copy of the said information is hereto
attached as Exhibit "E." The case is still being tried as of this date;
g. Demands were made by the plaintiff upon the defendant to pay the amount of the loss of
P725,000.00, but the latter refused to pay as the loss is excluded from the coverage of the
insurance policy; (b)any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or authorized representative of
the Insured whether acting alone or in conjunction with others;
h. The plaintiff opposes the contention of the defendant and contends that Atiga and
Magalong are not its "officer, employee, trustee or authorized representative at the time
of the robbery.
3. The RTC rendered its decision in favor of Producers and against Fortune. The trial court ruled that
Magalong and Atiga were not employees or representatives of Producers. The Court is satisfied
that;
a. Magalong and Atiga are not employees because they were not selected by Produces as they
were offered by PRC Management and by Unicorn Security and which latter firms
assigned them to plaintiff. The wages and salaries of both Magalong and Atiga are
presumably paid by their respective firms, which alone wields the power to dismiss them.
Magalong and Atiga are not authorized representatives because they were merely an
assigned armored car driver and security guard. It was teller Alampay who had "custody"
of the cash being transferred along a specified money route, and hence plaintiff's then
designated "messenger" adverted to in the policy.
4. Fortune appealed this decision to the Court of Appeals. In its decision, it affirmed the decision. It
held that Magalong and Atiga were neither employees nor authorized representatives of Producers
because it has no power to hire or to dismiss said driver and security guard under the contracts
except only to ask for their replacements from the contractors.
5. Fortune filed this petition for review on certiorari. It alleges that the loss falls within the general
exceptions clause considering that driver Magalong and security guard Atiga were Producers'
authorized representatives or employees in the transfer of the money and payroll from its branch
office in Pasay City to its head office in Makati.
6. According to Fortune, when Producers commissioned a guard and a driver to transfer its funds
from one branch to another, they effectively and necessarily became its authorized representatives
in the care and custody of the money. Assuming that they could not be considered authorized
representatives, they were, nevertheless, employees of Producers. It asserts that the existence of an
employer-employee relationship "is determined by law and being such, it cannot be the subject of
agreement." Thus, if there was in reality an employer-employee relationship between Producers,
on the one hand, and Magalong and Atiga, on the other, the provisions in the contracts of Producers
with PRC Management System for Magalong and with Unicorn Security Services for Atiga which
state that Producers is not their employer and that it is absolved from any liability as an employer,
would not obliterate the relationship. Fortune thus contends that Magalong and Atiga were
employees of Producers, following the ruling in International Timber Corp. vs. NLRC 7 that a
finding that a contractor is a "labor-only" contractor is equivalent to a finding that there is an
employer-employee relationship between the owner of the project and the employees of the "labor-
only" contractor.
7. Producers contends that Magalong and Atiga were not its employees since it had nothing to do
with their selection and engagement, the payment of their wages, their dismissal, and the control
of their conduct. Since under Producers' contract with PRC Management Systems it is the latter
which assigned Magalong as the driver of Producers' armored car and was responsible for his
faithful discharge of his duties and responsibilities, and since Producers paid the monthly
compensation of P1,400.00 per driver to PRC Management Systems and not to Magalong, it is clear
that Magalong was not Producers' employee. As to Atiga, Producers relies on the provision of its
contract with Unicorn Security Services which provides that the guards of the latter "are in no sense
employees of the CLIENT."
ISSUE:
Whether or not the loss of P725,000.00 of Producers Bank of the Philippines is excluded from the coverage
of the insurance policy (any loss caused by any dishonest, fraudulent or criminal act of the insured or any
officer, employee, partner, director, trustee or authorized representative of the Insured whether acting
alone or in conjunction with others)
HELD:
I. It should be noted that the insurance policy entered into by the parties is a theft or robbery
insurance policy which is a form of casualty insurance. Section 174 of the Insurance Code
provides:
Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or
mishap, excluding certain types of loss which by law or custom are considered as falling
exclusively within the scope of insurance such as fire or marine. It includes, but is not limited
to, employer's liability insurance, public liability insurance, motor vehicle liability insurance,
plate glass insurance, burglary and theft insurance, personal accident and health insurance as
written by non-life insurance companies, and other substantially similar kinds of insurance.
(emphases supplied).
Except with respect to compulsory motor vehicle liability insurance, the Insurance Code
contains no other provisions applicable to casualty insurance or to robbery insurance in
particular. These contracts are, therefore, governed by the general provisions applicable to all
types of insurance. Outside of these, the rights and obligations of the parties must be
determined by the terms of their contract, taking into consideration its purpose and always in
accordance with the general principles of insurance law.
It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to
defraud the insurer — the moral hazard — is so great that insurers have found it necessary to
fill up their policies with countless restrictions, many designed to reduce this hazard. Seldom
does the insurer assume the risk of all losses due to the hazards insured against." 10 Persons
frequently excluded under such provisions are those in the insured's service and employment.
The purpose of the exception is to guard against liability should the theft be committed by one
having unrestricted access to the property. In such cases, the terms specifying the excluded
classes are to be given their meaning as understood in common speech. 13 The terms "service"
and "employment" are generally associated with the idea of selection, control, and
compensation.
A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved
against the insurer, 15 or it should be construed liberally in favor of the insured and strictly
against the insurer. 16 Limitations of liability should be regarded with extreme jealousy and
must be construed in such a way, as to preclude the insurer from non-compliance with its
obligation. 17 It goes without saying then that if the terms of the contract are clear and
unambiguous, there is no room for construction and such terms cannot be enlarged or
diminished by judicial construction. An insurance contract is a contract of indemnity upon the
terms and conditions specified therein. 19 It is settled that the terms of the policy constitute the
measure of the insurer's liability. 20 In the absence of statutory prohibition to the contrary,
insurance companies have the same rights as individuals to limit their liability and to impose
whatever conditions they deem best upon their obligations not inconsistent with public policy.
II. Magalong and Atiga were, in respect of the transfer of Producer's money from its Pasay City
branch to its head office in Makati, its "authorized representatives" who served as such with
its teller Maribeth Alampay
With the foregoing principles in mind, it may now be asked whether Magalong and Atiga
qualify as employees or authorized representatives of Producers under paragraph (b) of the
general exceptions clause of the policy. It is clear to us that insofar as Fortune is concerned, it
was its intention to exclude and exempt from protection and coverage losses arising from
dishonest, fraudulent, or criminal acts of persons granted or having unrestricted access to
Producers' money or payroll. When it used then the term "employee," it must have had in mind
any person who qualifies as such as generally and universally understood, or jurisprudentially
established in the light of the four standards in the determination of the employer-employee
relationship, or as statutorily declared even in a limited sense as in the case of Article 106 of
the Labor Code which considers the employees under a "labor-only" contract as employees of
the party employing them and not of the party who supplied them to the employer.
Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security
Services are "labor-only" contracts. Producers, however, insists that by the express terms
thereof, it is not the employer of Magalong. Notwithstanding such express assumption of PRC
Management Systems and Unicorn Security Services that the drivers and the security guards
each shall supply to Producers are not the latter's employees, it may, in fact, be that it is because
the contracts are, indeed, "labor-only" contracts. Whether they are is, in the light of the criteria
provided for in Article 106 of the Labor Code, a question of fact. Since the parties opted to
submit the case for judgment on the basis of their stipulation of facts which are strictly limited
to the insurance policy, the contracts with PRC Management Systems and Unicorn Security
Services, the complaint for violation of P.D. No. 532, and the information therefor filed by the
City Fiscal of Pasay City, there is a paucity of evidence as to whether the contracts between
Producers and PRC Management Systems and Unicorn Security Services are "labor-only"
contracts. (it did not rule whether or not it is a labor-only contract).
But even granting for the sake of argument that these contracts were not "labor-only" contracts,
and PRC Management Systems and Unicorn Security Services were truly independent
contractors, we are satisfied that Magalong and Atiga were, in respect of the transfer of
Producer's money from its Pasay City branch to its head office in Makati, its "authorized
representatives" who served as such with its teller Maribeth Alampay. Howsoever viewed,
Producers entrusted the three with the specific duty to safely transfer the money to its head
office, with Alampay to be responsible for its custody in transit; Magalong to drive the armored
vehicle which would carry the money; and Atiga to provide the needed security for the money,
the vehicle, and his two other companions. In short, for these particular tasks, the three acted
as agents of Producers. A "representative" is defined as one who represents or stands in the
place of another; one who represents others or another in a special capacity, as an agent, and
is interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the
insurance policy.
WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-
G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court of Makati
in Civil Case No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No. 1817 is
DISMISSED.
No pronouncement as to costs.
SO ORDERED.
VI
SUN INSURANCE OFFICE, LTD., vs. THE HON. COURT OF APPEALS and NERISSA LIM, respondents.
G.R. No. 92383; July 17, 1992
FIRST DIVISION
CRUZ, J.:
FACTS:
1. Sun Insurance Office, LTD, issued Personal Accident Policy to Felix Lim, Jr. with a face value of
P200,000.00. Two months later, he was dead with a bullet wound in his head. As beneficiary, his
wife Nerissa Lim sought payment on the policy but her claim was rejected. Sun Insurance agreed
that there was no suicide. It argued, however that there was no accident either.
2. Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6,
1982, at about 10 o'clock in the evening, after his mother's birthday party. According to Nalagon,
Lim was in a happy mood (but not drunk) and was playing with his handgun, from which he had
previously removed the magazine. As she watched television, he stood in front of her and pointed
the gun at her. She pushed it aside and said it might he loaded. He assured her it was not and then
pointed it to his temple. The next moment there was an explosion and Lim slumped to the floor.
He was dead before he fell.
3. The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained.
4. The decision was affirmed on appeal, and the motion for reconsideration was denied.
5. The petitioner then came to this Court to fault the Court of Appeals for approving the payment of
the claim and the award of damages.
ISSUE:
Whether or not the death of Lim should be considered as an accident (to be covered by the personal accident
policy)
HELD:
I. An accident is an event which happens without any human agency or, if happening through
human agency, an event which, under the circumstances, is unusual to and not expected by the
person to whom it happens. It has also been defined as an injury which happens by reason of
some violence or casualty to the injured without his design, consent, or voluntary co-
operation.
The words "accident" and "accidental" have never acquired any technical signification in law,
and when used in an insurance contract are to be construed and considered according to the
ordinary understanding and common usage and speech of people generally. In-substance,
the courts are practically agreed that the words "accident" and "accidental" mean that which
happens by chance or fortuitously, without intention or design, and which is unexpected,
unusual, and unforeseen. The definition that has usually been adopted by the courts is that an
accident is an event that takes place without one's foresight or expectation — an event that
proceeds from an unknown cause, or is an unusual effect of a known case, and therefore not
expected. An accident is an event which happens without any human agency or, if happening
through human agency, an event which, under the circumstances, is unusual to and not
expected by the person to whom it happens. It has also been defined as an injury which happens
by reason of some violence or casualty to the injured without his design, consent, or voluntary
co-operation.
In light of these definitions, the Court is convinced that the incident that resulted in Lim's
death was indeed an accident. The petitioner says that "there is no accident when a deliberate
act is performed unless some additional, unexpected, independent and unforeseen happening
occurs which produces or brings about their injury or death." There was such a happening.
This was the firing of the gun, which was the additional unexpected and independent and
unforeseen occurrence that led to the insured person's death.
The petitioner also cites one of the four exceptions provided for in the insurance contract and
contends that the private petitioner's claim is barred by such provision. It is there stated:
Exceptions — The company shall not be liable in respect of Bodily injury consequent upon The
insured person attempting to commit suicide or willfully exposing himself to needless peril
except in an attempt to save human life. To repeat, the parties agree that Lim did not commit
suicide. Nevertheless, the petitioner contends that the insured willfully exposed himself to
needless peril and thus removed himself from the coverage of the insurance policy.
II. It should be noted at the outset that suicide and willful exposure to needless peril are in pari
materia because they both signify a disregard for one's life. The only difference is in degree, as
suicide imports a positive act of ending such life whereas the second act indicates a reckless
risking of it that is almost suicidal in intent.
To illustrate, a person who walks a tightrope one thousand meters above the ground and
without any safety device may not actually be intending to commit suicide, but his act is
nonetheless suicidal. He would thus be considered as "willfully exposing himself to needless
peril" within the meaning of the exception in question. The petitioner maintains that by the
mere act of pointing the gun to hip temple, Lim had willfully exposed himself to needless peril
and so came under the exception. The theory is that a gun is per se dangerous and should
therefore be handled cautiously in every case. That posture is arguable. But what is not is that,
as the secretary testified, Lim had removed the magazine from the gun and believed it was no
longer dangerous. He expressly assured her that the gun was not loaded. It is submitted that
Lim did not willfully expose himself to needless peril when he pointed the gun to his temple
because the fact is that he thought it was not unsafe to do so. The act was precisely intended
to assure Nalagon that the gun was indeed harmless. The contrary view is expressed by the
petitioner thus; Accident insurance policies were never intended to reward the insured for his
tendency to show off or for his miscalculations. They were intended to provide for
contingencies. Hence, when I miscalculate and jump from the Quezon Bridge into the Pasig
River in the belief that I can overcome the current, I have wilfully exposed myself to peril and
must accept the consequences of my act. If I drown I cannot go to the insurance company to
ask them to compensate me for my failure to swim as well as I thought I could. The insured in
the case at bar deliberately put the gun to his head and pulled the trigger. He wilfully exposed
himself to peril.
The Court certainly agrees that a drowned man cannot go to the insurance company to ask for
compensation. That might frighten the insurance people to death. We also agree that under the
circumstances narrated, his beneficiary would not be able to collect on the insurance policy for
it is clear that when he braved the currents below, he deliberately exposed himself to a known
peril. The private respondent maintains that Lim did not. That is where she says the analogy
fails. The petitioner's hypothetical swimmer knew when he dived off the Quezon Bridge
that the currents below were dangerous. By contrast, Lim did not know that the gun he put
to his head was loaded. Lim was unquestionably negligent and that negligence cost him his
own life. But it should not prevent his widow from recovering from the insurance policy he
obtained precisely against accident. There is nothing in the policy that relieves the insurer
of the responsibility to pay the indemnity agreed upon if the insured is shown to have
contributed to his own accident. Indeed, most accidents are caused by negligence. There are
only four exceptions (1. bodily injury, 2. bodily injury or Death Disablement or Medical Expenses consequent upon or
contributed to by the Insured Person; 3. Death Disablement or Medical Expenses consequent upon or contributed to by the Insured
Person being pregnant or suffering from sickness or disease not resulting from bodily injury or suffering from bodily injury due
to a gradually operating cause; 4. Risks of Murder and Assault) expressly made in the contract to relieve the
insurer from liability, and none of these exceptions is applicable in the case at bar. It bears
noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the
assured. There is no reason to deviate from this rule, especially in view of the circumstances of
this case as above analyzed.
III. We hold therefore that the award of moral and exemplary damages and of attorney's fees is
unjust and so must be disapproved.
On the second assigned error, however, the Court must rule in favor of the petitioner. The basic
issue raised in this case is, as the petitioner correctly observed, one of first impression. It is
evident that the petitioner was acting in good faith when it resisted the private respondent's
claim on the ground that the death of the insured was covered by the exception. The issue was
indeed debatable and was clearly not raised only for the purpose of evading a legitimate
obligation. We hold therefore that the award of moral and exemplary damages and of
attorney's fees is unjust and so must be disapproved. In order that a person may be made liable
to the payment of moral damages, the law requires that his act be wrongful. The adverse result
of an action does not per se make the act wrongful and subject the act or to the payment of
moral damages. The law could not have meant to impose a penalty on the right to litigate; such
right is so precious that moral damages may not be charged on those who may exercise it
erroneously. For these the law taxes costs. The fact that the results of the trial were adverse to
Barreto did not alone make his act in bringing the action wrongful because in most cases one
party will lose; we would be imposing an unjust condition or limitation on the right to litigate.
We hold that the award of moral damages in the case at bar is not justified by the facts had
circumstances as well as the law. If a party wins, he cannot, as a rule, recover attorney's fees
and litigation expenses, since it is not the fact of winning alone that entitles him to recover such
damages of the exceptional circumstances enumerated in Art. 2208. Otherwise, every time a
defendant wins, automatically the plaintiff must pay attorney's fees thereby putting a premium
on the right to litigate which should not be so. For those expenses, the law deems the award of
costs as sufficient.
WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it

holds the petitioner liable to the private respondent in the sum of P200,000.00 representing the
face value of the insurance contract, with interest at the legal rate from the date of the filing of
the complaint until the full amount is paid, but MODIFIED with the deletion of all awards for
damages, including attorney's fees, except the costs of the suit.
VII
WILLIAM TIU, doing business under the name and style of D Rough Riders, and VIRGILIO TE LAS PIAS, vs.
PEDRO A. ARRIESGADO, BENJAMIN CONDOR, SERGIO PEDRANO and PHILIPPINE PHOENIX
SURETY AND INSURANCE, INC.,
[G.R. No. 138060. September 1, 2004]
CALLEJO, SR., J.:
FACTS:
1. The Cargo Truck was loaded with firewood in Bogo, Cebu and left for Cebu City. Upon reaching
Sitio Aggies, Poblacion, Compostela, Cebu, just as the truck passed over a bridge, one of its rear
tires exploded.
a. The driver (Sergio Pedrano) then parked along the right side of the national highway and
removed the damaged tire to have it vulcanized at a nearby shop, about 700 meters away.
b. Pedrano left his helper, Jose Mitante, Jr. to keep watch over the stalled vehicle, and
instructed the latter to place a spare tire six fathoms away behind the stalled truck to serve
as a warning for oncoming vehicles. The trucks tail lights were also left on. It was about
12:00 a.m., March 16, 1987.
2. At about 4:45 a.m., D Rough Riders passenger bus driven by Virgilio Laspias was cruising along
the national highway and was also bound for Cebu City. Among its passengers were the Spouses
Arriesgado (right side; (3) or (4) places from the front seat. As the bus was approaching the bridge,
Laspias saw the stalled truck, which was then about 25 meters away. He applied the breaks and
tried to swerve to the left to avoid hitting the truck. But it was too late; the bus rammed into the
trucks left rear. The impact damaged the right side of the bus and left several passengers injured.
Pedro Arriesgado lost consciousness and suffered a fracture in his right colles.[6] His wife, Felisa,
was brought to the Danao City Hospital. She was later transferred to the Southern Island Medical
Center where she died shortly thereafter.
3. Pedro A. Arriesgado then filed a complaint for breach of contract of carriage, damages and
attorneys fees before the RTC of Cebu against the Tiu, D Rough Riders bus operator William Tiu
and his driver, Virgilio Te Laspias on May 27, 1987.
4. The respondent alleged that the passenger bus in question was cruising at a fast and high speed
along the national road, and that petitioner Laspias did not take precautionary measures to avoid
the accident.
5. Tiu filed a Third-Party Complaint against the following: respondent Philippine Phoenix Surety and
Insurance, Inc. (PPSII), petitioner Tius insurer; respondent Benjamin Condor, the registered owner
of the cargo truck; and respondent Sergio Pedrano, the driver of the truck.
a. They alleged that petitioner Laspias was negotiating the uphill climb along the national
highway of Sitio Aggies, Poblacion, Compostela, in a moderate and normal speed. It was
further alleged that the truck was parked in a slanted manner, its rear portion almost in
the middle of the highway, and that no early warning device was displayed. Petitioner
Laspias promptly applied the brakes and swerved to the left to avoid hitting the truck
head-on, but despite his efforts to avoid damage to property and physical injuries on the
passengers, the right side portion of the bus hit the cargo trucks left rear. The petitioners
further alleged.
6. After the parties presented their respective evidence, the trial court ruled in favor of Arriesgado.
a. Tiu was engaged in business as a common carrier, in view of his admission that D Rough
Rider passenger bus which figured in the accident was owned by him; that he had been
engaged in the transportation business for 25 years with a sole proprietorship; and that he
owned 34 buses. The trial court ruled that if petitioner Laspias had not been driving at a
fast pace, he could have easily swerved to the left to avoid hitting the truck, thus, averting
the unfortunate incident. It then concluded that petitioner Laspias was negligent.
b. The trial court also ruled that the absence of an early warning device near the place where
the truck was parked was not sufficient to impute negligence on the part of respondent
Pedrano, since the tail lights of the truck were fully on, and the vicinity was well lighted
by street lamps.[16] It also found that the testimony of petitioner Tiu, that he based the
selection of his driver Laspias on efficiency and in-service training, and that the latter had
been so far an efficient and good driver for the past six years of his employment, was
insufficient to prove that he observed the diligence of a good father of a family in the
selection and supervision of his employees.
7. After the petitioners motion for reconsideration of the said decision was denied, the petitioners
elevated the case to the Court of Appeals.
8. The appellate court rendered judgment affirming the trial courts decision with the modification
that the awards for moral and exemplary damages were reduced to P25,000.
a. According to the appellate court, the action of respondent Arriesgado was based not on
quasi-delict but on breach of contract of carriage. As a common carrier, it was incumbent
upon petitioner Tiu to prove that extraordinary diligence was observed in ensuring the
safety of passengers during transportation. Since the latter failed to do so, he should be
held liable for respondent Arriesgados claim. The CA also ruled that no evidence was
presented against the respondent PPSII, and as such, it could not be held liable for
respondent Arriesgados claim, nor for contribution, indemnification and/or
reimbursement in case the petitioners were adjudged liable.
9. Tiu now come to this Court and ascribe the following errors committed by the appellate court:
THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING PHILIPPINE PHOENIX
SURETY AND INSURANCE, INC. LIABLE TO RESPONDENT PEDRO A. ARRIESGADO OR TO
PETITIONER WILLIAM TIU. Tiu contend that PPSII admitted in its answer that while it had
attended to and settled the claims of the other injured passengers, respondent Arriesgados claim
remained unsettled as it was beyond the scheduled indemnity under the insurance contract. The
petitioners argue that said respondent PPSII should have settled the said claim in accordance with
the scheduled indemnity instead of just denying the same.
10. Respondent PPSII, for its part, alleges that contrary to the allegation of petitioner Tiu, it settled all
the claims of those injured in accordance with the insurance contract. It further avers that it did not
deny Arriesgados claim, and emphasizes that its liability should be within the scheduled limits of
indemnity under the said contract. The respondent concludes that while it is true that insurance
contracts are contracts of indemnity, the measure of the insurers liability is determined by the
insureds compliance with the terms thereof.
Issue:
Held:
The trial court in this case did not rule on the liability of respondent PPSII, while the appellate court ruled
that, as no evidence was presented against it, the insurance company is not liable. A perusal of the records
will show that when the Tiu filed the Third-Party Complaint against PPSII, they failed to attach a copy of
the terms of the insurance contract itself. Only Certificate of Cover No. 054940[51] issued in favor of Mr.
William Tiu, Lahug, Cebu City signed by Cosme H. Boniel was appended to the third-party complaint. The
date of issuance, July 22, 1986, the period of insurance, from July 22, 1986 to July 22, 1987, as well as the
following items, were also indicated therein: In its Answer to the Third-Party Complaint, the respondent
PPSII admitted the existence of the contract of insurance, in view of its failure to specifically deny the same
as required under then Section 8(a), Rule 8 of the Rules of Court,54 which reads: Sec. 8. How to contest
genuineness of such documents. When an action or defense is founded upon a written instrument copied
in or attached to the corresponding pleading as provided in the preceding section, the genuineness and
due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically
denies them, and sets forth what he claims to be the facts; but the requirement of an oath does not apply
when the adverse party does not appear to be a party to the instrument or when compliance with an order
for inspection of the original instrument is refused.
In fact, respondent PPSII did not dispute the existence of such contract, and admitted that it was liable
thereon. It claimed, however, that it had attended to and settled the claims of those injured during the
incident, and set up the following as special affirmative defenses:
Third party defendant Philippine Phoenix Surety and Insurance, Inc. hereby reiterates and incorporates by
way of reference the preceding paragraphs and further states THAT:-
8. It has attended to the claims of Vincent Canales, Asuncion Batiancila and Neptali Palces who sustained
injuries during the incident in question. In fact, it settled financially their claims per vouchers duly signed
by them and they duly executed Affidavit[s] of Desistance to that effect, xerox copies of which are hereto
attached as Annexes 1, 2, 3, 4, 5, and 6 respectively;
9. With respect to the claim of plaintiff, herein answering third party defendant through its authorized
insurance adjuster attended to said claim. In fact, there were negotiations to that effect. Only that it cannot
accede to the demand of said claimant considering that the claim was way beyond the scheduled indemnity
as per contract entered into with third party plaintiff William Tiu and third party defendant (Philippine
Phoenix Surety and Insurance, Inc.). Third party Plaintiff William Tiu knew all along the limitation as
earlier stated, he being an old hand in the transportation business; 55
Considering the admissions made by respondent PPSII, the existence of the insurance contract and the
salient terms thereof cannot be dispatched. It must be noted that after filing its answer, respondent PPSII
no longer objected to the presentation of evidence by respondent Arriesgado and the insured petitioner
Tiu. Even in its Memorandum56 before the Court, respondent PPSII admitted the existence of the contract,
but averred as follows:
Petitioner Tiu is insisting that PPSII is liable to him for contribution, indemnification and/or
reimbursement. This has no basis under the contract. Under the contract, PPSII will pay all sums necessary
to discharge liability of the insured subject to the limits of liability but not to exceed the limits of liability as
so stated in the contract. Also, it is stated in the contract that in the event of accident involving indemnity
to more than one person, the limits of liability shall not exceed the aggregate amount so specified by law
to all persons to be indemnified.57
As can be gleaned from the Certificate of Cover, such insurance contract was issued pursuant to the
Compulsory Motor Vehicle Liability Insurance Law. It was expressly provided therein that the limit of the
insurers liability for each person was P12,000, while the limit per accident was pegged at P50,000. An
insurer in an indemnity contract for third party liability is directly liable to the injured party up to the extent
specified in the agreement but it cannot be held solidarily liable beyond that amount.58 The respondent
PPSII could not then just deny petitioner Tius claim; it should have paid P12,000 for the death of Felisa
Arriesgado,59 and respondent Arriesgados hospitalization expenses of P1,113.80, which the trial court
found to have been duly supported by receipts. The total amount of the claims, even when added to that
of the other injured passengers which the respondent PPSII claimed to have settled,60 would not exceed
the P50,000 limit under the insurance agreement.
Indeed, the nature of Compulsory Motor Vehicle Liability Insurance is such that it is primarily intended to
provide compensation for the death or bodily injuries suffered by innocent third parties or passengers as a
result of the negligent operation and use of motor vehicles. The victims and/or their dependents are
assured of immediate financial assistance, regardless of the financial capacity of motor vehicle owners.61
As the Court, speaking through Associate Justice Leonardo A. Quisumbing, explained in Government
Service Insurance System v. Court of Appeals:62
However, although the victim may proceed directly against the insurer for indemnity, the third party
liability is only up to the extent of the insurance policy and those required by law. While it is true that
where the insurance contract provides for indemnity against liability to third persons, and such persons
can directly sue the insurer, the direct liability of the insurer under indemnity contracts against third party
liability does not mean that the insurer can be held liable in solidum with the insured and/or the other
parties found at fault. For the liability of the insurer is based on contract; that of the insured carrier or
vehicle owner is based on tort.
Obviously, the insurer could be held liable only up to the extent of what was provided for by the contract
of insurance, in accordance with the CMVLI law. At the time of the incident, the schedule of indemnities
for death and bodily injuries, professional fees and other charges payable under a CMVLI coverage was
provided for under the Insurance Memorandum Circular (IMC) No. 5-78 which was approved on
November 10, 1978. As therein provided, the maximum indemnity for death was twelve thousand
(P12,000.00) pesos per victim. The schedules for medical expenses were also provided by said IMC,
specifically in paragraphs (C) to (G).63
Petitioner Laspias
Was negligent in driving
The Ill-fated bus
In his testimony before the trial court, petitioner Laspias claimed that he was traversing the two-lane road
at Compostela, Cebu at a speed of only forty (40) to fifty (50) kilometers per hour before the incident
occurred.[23] He also admitted that he saw the truck which was parked in an oblique position at about 25
meters before impact,[24] and tried to avoid hitting it by swerving to the left. However, even in the absence
of expert evidence, the damage sustained by the truck[25] itself supports the finding of both the trial court
and the appellate court, that the D Rough Rider bus driven by petitioner Laspias was traveling at a fast
pace. Since he saw the stalled truck at a distance of 25 meters, petitioner Laspias had more than enough
time to swerve to his left to avoid hitting it; that is, if the speed of the bus was only 40 to 50 kilometers per
hour as he claimed. As found by the Court of Appeals, it is easier to believe that petitioner Laspias was
driving at a very fast speed, since at 4:45 a.m., the hour of the accident, there were no oncoming vehicles at
the opposite direction. Petitioner Laspias could have swerved to the left lane with proper clearance, and,
thus, could have avoided the truck.[26] Instinct, at the very least, would have prompted him to apply the
breaks to avert the impending disaster which he must have foreseen when he caught sight of the stalled
truck. As we had occasion to reiterate:
A man must use common sense, and exercise due reflection in all his acts; it is his duty to be cautious,
careful and prudent, if not from instinct, then through fear of recurring punishment. He is responsible for
such results as anyone might foresee and for acts which no one would have performed except through
culpable abandon. Otherwise, his own person, rights and property, and those of his fellow beings, would
ever be exposed to all manner of danger and injury.[27]
We agree with the following findings of the trial court, which were affirmed by the CA on appeal:
A close study and evaluation of the testimonies and the documentary proofs submitted by the parties which
have direct bearing on the issue of negligence, this Court as shown by preponderance of evidence that
defendant Virgilio Te Laspias failed to observe extraordinary diligence as a driver of the common carrier
in this case. It is quite hard to accept his version of the incident that he did not see at a reasonable distance
ahead the cargo truck that was parked when the Rough Rider [Bus] just came out of the bridge which is on
an (sic) [more] elevated position than the place where the cargo truck was parked. With its headlights fully
on, defendant driver of the Rough Rider was in a vantage position to see the cargo truck ahead which was
parked and he could just easily have avoided hitting and bumping the same by maneuvering to the left
without hitting the said cargo truck. Besides, it is (sic) shown that there was still much room or space for
the Rough Rider to pass at the left lane of the said national highway even if the cargo truck had occupied
the entire right lane thereof. It is not true that if the Rough Rider would proceed to pass through the left
lane it would fall into a canal considering that there was much space for it to pass without hitting and
bumping the cargo truck at the left lane of said national highway. The records, further, showed that there
was no incoming vehicle at the opposite lane of the national highway which would have prevented the
Rough Rider from not swerving to its left in order to avoid hitting and bumping the parked cargo truck.
But the evidence showed that the Rough Rider instead of swerving to the still spacious left lane of the
national highway plowed directly into the parked cargo truck hitting the latter at its rear portion; and thus,
the (sic) causing damages not only to herein plaintiff but to the cargo truck as well.[28]
Indeed, petitioner Laspias negligence in driving the bus is apparent in the records. By his own admission,
he had just passed a bridge and was traversing the highway of Compostela, Cebu at a speed of 40 to 50
kilometers per hour before the collision occurred. The maximum speed allowed by law on a bridge is only
30 kilometers per hour.[29] And, as correctly pointed out by the trial court, petitioner Laspias also violated
Section 35 of the Land Transportation and Traffic Code, Republic Act No. 4136, as amended:
Sec. 35. Restriction as to speed. (a) Any person driving a motor vehicle on a highway shall drive the same
at a careful and prudent speed, not greater nor less than is reasonable and proper, having due regard for
the traffic, the width of the highway, and or any other condition then and there existing; and no person
shall drive any motor vehicle upon a highway at such speed as to endanger the life, limb and property of
any person, nor at a speed greater than will permit him to bring the vehicle to a stop within the assured
clear distance ahead.[30]
Under Article 2185 of the Civil Code, a person driving a vehicle is presumed negligent if at the time of the
mishap, he was violating any traffic regulation.[31]
Petitioner Tiu failed to

Overcome the presumption
Of negligence against him as
One engaged in the business
Of common carriage
The rules which common carriers should observe as to the safety of their passengers are set forth in the
Civil Code, Articles 1733,[32] 1755[33] and 1756.[34] In this case, respondent Arriesgado and his deceased
wife contracted with petitioner Tiu, as owner and operator of D Rough Riders bus service, for
transportation from Maya, Daanbantayan, Cebu, to Cebu City for the price of P18.00.[35] It is undisputed
that the respondent and his wife were not safely transported to the destination agreed upon. In actions for
breach of contract, only the existence of such contract, and the fact that the obligor, in this case the common
carrier, failed to transport his passenger safely to his destination are the matters that need to be proved.[36]
This is because under the said contract of carriage, the petitioners assumed the express obligation to
transport the respondent and his wife to their destination safely and to observe extraordinary diligence
with due regard for all circumstances.[37] Any injury suffered by the passengers in the course thereof is
immediately attributable to the negligence of the carrier.[38] Upon the happening of the accident, the
presumption of negligence at once arises, and it becomes the duty of a common carrier to prove that he
observed extraordinary diligence in the care of his passengers.[39] It must be stressed that in requiring the
highest possible degree of diligence from common carriers and in creating a presumption of negligence
against them, the law compels them to curb the recklessness of their drivers.[40]
While evidence may be submitted to overcome such presumption of negligence, it must be shown that the
carrier observed the required extraordinary diligence, which means that the carrier must show the utmost
diligence of very cautious persons as far as human care and foresight can provide, or that the accident was
caused by fortuitous event.[41] As correctly found by the trial court, petitioner Tiu failed to conclusively
rebut such presumption. The negligence of petitioner Laspias as driver of the passenger bus is, thus,
binding against petitioner Tiu, as the owner of the passenger bus engaged as a common carrier.[42]
The Doctrine of
Last Clear Chance
Is Inapplicable in the
Case at Bar
Contrary to the petitioners contention, the principle of last clear chance is inapplicable in the instant case,
as it only applies in a suit between the owners and drivers of two colliding vehicles. It does not arise where
a passenger demands responsibility from the carrier to enforce its contractual obligations, for it would be
inequitable to exempt the negligent driver and its owner on the ground that the other driver was likewise
guilty of negligence.[43] The common law notion of last clear chance permitted courts to grant recovery to
a plaintiff who has also been negligent provided that the defendant had the last clear chance to avoid the
casualty and failed to do so. Accordingly, it is difficult to see what role, if any, the common law of last clear
chance doctrine has to play in a jurisdiction where the common law concept of contributory negligence as
an absolute bar to recovery by the plaintiff, has itself been rejected, as it has been in Article 2179 of the Civil
Code.[44]
Thus, petitioner Tiu cannot escape liability for the death of respondent Arriesgados wife due to the
negligence of petitioner Laspias, his employee, on this score.
Respondents Pedrano and

Condor were likewise
Negligent
In Phoenix Construction, Inc. v. Intermediate Appellate Court,[45] where therein respondent Dionisio
sustained injuries when his vehicle rammed against a dump truck parked askew, the Court ruled that the
improper parking of a dump truck without any warning lights or reflector devices created an unreasonable
risk for anyone driving within the vicinity, and for having created such risk, the truck driver must be held
responsible. In ruling against the petitioner therein, the Court elucidated, thus:
In our view, Dionisios negligence, although later in point of time than the truck drivers negligence, and
therefore closer to the accident, was not an efficient intervening or independent cause. What the petitioners
describe as an intervening cause was no more than a foreseeable consequence of the risk created by the
negligent manner in which the truck driver had parked the dump truck. In other words, the petitioner
truck driver owed a duty to private respondent Dionisio and others similarly situated not to impose upon
them the very risk the truck driver had created. Dionisios negligence was not that of an independent and
overpowering nature as to cut, as it were, the chain of causation in fact between the improper parking of
the dump truck and the accident, nor to sever the juris vinculum of liability.
We hold that private respondent Dionisios negligence was only contributory, that the immediate and
proximate cause of the injury remained the truck drivers lack of due care.[46]
In this case, both the trial and the appellate courts failed to consider that respondent Pedrano was also
negligent in leaving the truck parked askew without any warning lights or reflector devices to alert
oncoming vehicles, and that such failure created the presumption of negligence on the part of his employer,
respondent Condor, in supervising his employees properly and adequately. As we ruled in Poblete v.
Fabros:[47]
It is such a firmly established principle, as to have virtually formed part of the law itself, that the negligence
of the employee gives rise to the presumption of negligence on the part of the employer. This is the
presumed negligence in the selection and supervision of employee. The theory of presumed negligence, in
contrast with the American doctrine of respondeat superior, where the negligence of the employee is
conclusively presumed to be the negligence of the employer, is clearly deducible from the last paragraph
of Article 2180 of the Civil Code which provides that the responsibility therein mentioned shall cease if the
employers prove that they observed all the diligence of a good father of a family to prevent damages. [48]
The petitioners were correct in invoking respondent Pedranos failure to observe Article IV, Section 34(g)
of the Rep. Act No. 4136, which provides:
(g) Lights when parked or disabled. Appropriate parking lights or flares visible one hundred meters away
shall be displayed at a corner of the vehicle whenever such vehicle is parked on highways or in places that
are not well-lighted or is placed in such manner as to endanger passing traffic.
The manner in which the truck was parked clearly endangered oncoming traffic on both sides, considering
that the tire blowout which stalled the truck in the first place occurred in the wee hours of the morning.
The Court can only now surmise that the unfortunate incident could have been averted had respondent
Condor, the owner of the truck, equipped the said vehicle with lights, flares, or, at the very least, an early
warning device.[49] Hence, we cannot subscribe to respondents Condor and Pedranos claim that they
should be absolved from liability because, as found by the trial and appellate courts, the proximate cause
of the collision was the fast speed at which petitioner Laspias drove the bus. To accept this proposition
would be to come too close to wiping out the fundamental principle of law that a man must respond for
the foreseeable consequences of his own negligent act or omission. Indeed, our law on quasi-delicts seeks
to reduce the risks and burdens of living in society and to allocate them among its members. To accept this
proposition would be to weaken the very bonds of society.[50]
Damages to be
Awarded
The trial court correctly awarded moral damages in the amount of P50,000 in favor of respondent
Arriesgado. The award of exemplary damages by way of example or correction of the public good,64 is
likewise in order. As the Court ratiocinated in Kapalaran Bus Line v. Coronado:65
While the immediate beneficiaries of the standard of extraordinary diligence are, of course, the passengers
and owners of cargo carried by a common carrier, they are not the only persons that the law seeks to benefit.
For if common carriers carefully observed the statutory standard of extraordinary diligence in respect of
their own passengers, they cannot help but simultaneously benefit pedestrians and the passengers of other
vehicles who are equally entitled to the safe and convenient use of our roads and highways. The law seeks
to stop and prevent the slaughter and maiming of people (whether passengers or not) on our highways
and buses, the very size and power of which seem to inflame the minds of their drivers. Article 2231 of the
Civil Code explicitly authorizes the imposition of exemplary damages in cases of quasi-delicts if the
defendant acted with gross negligence.66
The respondent Pedro A. Arriesgado, as the surviving spouse and heir of Felisa Arriesgado, is entitled to
indemnity in the amount of P50,000.00.67
The petitioners, as well as the respondents Benjamin Condor and Sergio Pedrano are jointly and severally
liable for said amount, conformably with the following pronouncement of the Court in Fabre, Jr. vs. Court
of Appeals:68
The same rule of liability was applied in situations where the negligence of the driver of the bus on which
plaintiff was riding concurred with the negligence of a third party who was the driver of another vehicle,
thus causing an accident. In Anuran v. Buo, Batangas Laguna Tayabas Bus Co. v. Intermediate Appellate
Court, and Metro Manila Transit Corporation v. Court of Appeals, the bus company, its driver, the operator
of the other vehicle and the driver of the vehicle were jointly and severally held liable to the injured
passenger or the latters heirs. The basis of this allocation of liability was explained in Viluan v. Court of
Appeals, thus:
Nor should it make difference that the liability of petitioner [bus owner] springs from contract while that
of respondents [owner and driver of other vehicle] arises from quasi-delict. As early as 1913, we already
ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that in case of injury to a passenger due to the negligence of
the driver of the bus on which he was riding and of the driver of another vehicle, the drivers as well as the
owners of the two vehicles are jointly and severally liable for damages. Some members of the Court, though,
are of the view that under the circumstances they are liable on quasi-delict.69
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision of the Court
of Appeals is AFFIRMED with MODIFICATIONS:
(1) Respondent Philippine Phoenix Surety and Insurance, Inc. and petitioner William Tiu are ORDERED to
pay, jointly and severally, respondent Pedro A. Arriesgado the total amount of P13,113.80;
(2) The petitioners and the respondents Benjamin Condor and Sergio Pedrano are ORDERED to pay, jointly
and severally, respondent Pedro A. Arriesgado P50,000.00 as indemnity; P26,441.50 as actual damages;
P50,000.00 as moral damages; P50,000.00 as exemplary damages; and P20,000.00 as attorneys fees.
SO ORDERED.
Austria-Martinez, (Acting Chairman), Tinga, and Chico-Nazario, JJ., concur.

Puno J., (Chairman), on official leave.
VIII
FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR, LEONILA M.

MALLARI, GILDA ANTONIO and the minors LEAH, LOPE, JR., and ELVIRA, all surnamed MAGLANA,
herein represented by their mother, FIGURACION VDA. DE MAGLANA vs HONORABLE FRANCISCO Z.
CONSOLACION, Presiding Judge of Davao City, Branch II, and AFISCO INSURANCE CORPORATION,
G.R. No. 60506 August 6, 1992
ROMERO, J.:
FACTS:
1. Lope Maglana (employee of the Bureau of Customs whose work station was at Lasa, Davao City)
died on the spot when he met an accident while on her way to his work station. The PUJ jeep that
bumped the deceased was driven by Pepito Into, operated and owned by defendant Destrajo.
a. The PUJ jeep was overtaking another passenger jeep that was going towards the city
poblacion. While overtaking, the PUJ jeep of defendant Destrajo running abreast with the
overtaken jeep, bumped the motorcycle driven by the deceased who was going towards
the direction of Lasa, Davao City. The point of impact was on the lane of the motorcycle
and the deceased was thrown from the road and met his untimely death.
2. The heirs of Maglana filed an action for damages and attorney's fees against operator Patricio
Destrajo and the Afisco Insurance Corporation (AFISCO for brevity) before the then CFI of Davao.
An information for homicide thru reckless imprudence was also filed against Pepito Into.
3. During the pendency of the civil case, Into was convicted of the crime. No appeal was interposed
by accused who later applied for probation.
4. The lower court then rendered a decision finding that Destrajo had not exercised sufficient
diligence as the operator of the jeepney. The court then ordered the defendant to pay the plaintiff
and the defendant insurance company to reimburse Destrajo with whatever amounts the latter
shall have paid only up to the extent of its insurance coverage.
5. Maglana then filed a motion for the reconsideration contending that AFISCO should not merely be
held secondarily liable because the Insurance Code provides that the insurer's liability is "direct
and primary and/or jointly and severally with the operator of the vehicle, although only up to the
extent of the insurance coverage." Hence, they argued that the P20,000.00 coverage of the insurance
policy issued by AFISCO, should have been awarded in their favor.
6. AFISCO argued that since the Insurance Code does not expressly provide for a solidary obligation,
the presumption is that the obligation is joint.
7. The lower court denied the motion for reconsideration ruling that since the insurance contract "is
in the nature of suretyship, then the liability of the insurer is secondary only up to the extent of the
insurance coverage."
8. Petitioners filed a second motion for reconsideration reiterating that the liability of the insurer is
direct, primary and solidary with the jeepney operator because the petitioners became direct
beneficiaries under the provision of the policy which, in effect, is a stipulation pour autrui. 6 This
motion was likewise denied for lack of merit.
9. Hence, petitioners filed the instant petition for certiorari which, although it does not seek the
reversal of the lower court's decision in its entirety, prays for the setting aside or modification of
the second paragraph of the dispositive portion of said decision. Petitioners reassert their position
that the insurance company is directly and solidarily liable with the negligent operator up to the
extent of its insurance coverage.
ISSUE:
Whether or not the AFISCO’s (Insurance Company) liability should be driect and solidary with the
negligent operator up to the extent of its insurance coverage.
HELD:
I. Where an insurance policy insures directly against liability, the insurer's liability accrues
immediately upon the occurrence of the injury or even upon which the liability depends, and
does not depend on the recovery of judgment by the injured party against the insured."
The particular provision of the insurance policy on which petitioners base their claim is as
follows: Sec. 1 — LIABILITY TO THE PUBLIC; The Company will, subject to the Limits of
Liability, pay all sums necessary to discharge liability of the insured in respect of death of or
bodily injury to any THIRD PART. In the event of the death of any person entitled to indemnity
under this Policy, the Company will, in respect of the liability incurred to such person
indemnify his personal representatives in terms of, and subject to the terms and conditions
hereof. The above-quoted provision leads to no other conclusion but that AFISCO can be held
directly liable by petitioners. Where an insurance policy insures directly against liability, the
insurer's liability accrues immediately upon the occurrence of the injury or even upon which
the liability depends, and does not depend on the recovery of judgment by the injured party
against the insured." 8 The underlying reason behind the third party liability (TPL) of the
Compulsory Motor Vehicle Liability Insurance is "to protect injured persons against the
insolvency of the insured who causes such injury, and to give such injured person a certain
beneficial interest in the proceeds of the policy . . ." 9 Since petitioners had received from
AFISCO the sum of P5,000.00 under the no-fault clause, AFISCO's liability is now limited to
P15,000.00.
II. While it is true that where the insurance contract provides for indemnity against liability to
third persons, such third persons can directly sue the insurer, however, the direct liability of
the insurer under indemnity contracts against third party liability does not mean that the
insurer can be held solidarily liable with the insured and/or the other parties found at fault.
The liability of the insurer is based on contract; that of the insured is based on tort.
However, we cannot agree that AFISCO is likewise solidarily liable with Destrajo. In Malayan
Insurance Co., Inc. v. Court of Appeals, 10 this Court had the opportunity to resolve the issue
as to the nature of the liability of the insurer and the insured vis-a-vis the third party injured
in an accident. We categorically ruled thus: While it is true that where the insurance contract
provides for indemnity against liability to third persons, such third persons can directly sue
the insurer, however, the direct liability of the insurer under indemnity contracts against third
party liability does not mean that the insurer can be held solidarily liable with the insured
and/or the other parties found at fault. The liability of the insurer is based on contract; that
of the insured is based on tort. In the case at bar, petitioner as insurer of Sio Choy, is liable to
respondent Vallejos (the injured third party), but it cannot, as incorrectly held by the trial court,
be made "solidarily" liable with the two principal tortfeasors, namely respondents Sio Choy
and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said, two (2)
respondents by reason of the indemnity contract against third party liability — under which
an insurer can be directly sued by a third party — this will result in a violation of the principles
underlying solidary obligation and insurance contracts. (emphasis supplied)
The Court then proceeded to distinguish the extent of the liability and manner of enforcing the
same in ordinary contracts from that of insurance contracts. While in solidary obligations, the
creditor may enforce the entire obligation against one of the solidary debtors, in an insurance
contract, the insurer undertakes for a consideration to indemnify the insured against loss,
damage or liability arising from an unknown or contingent event. 11 Thus, petitioner therein,
which, under the insurance contract is liable only up to P20,000.00, can not be made solidarily
liable with the insured for the entire obligation of P29,013.00 otherwise there would result "an
evident breach of the concept of solidary obligation."
Similarly, petitioners in this case cannot validly claim that AFISCO, whose liability under the
insurance policy is also P20,000.00, can be held solidarily liable with Destrajo for the total
amount of P53,901.70 in accordance with the decision of the lower court. Since under both the
law and the insurance policy, AFISCO's liability is only up to P20,000.00, the second paragraph
of the dispositive portion of the decision in question may have unwittingly sown confusion
among the petitioners and their counsel. What should have been clearly stressed as to leave no
room for doubt was the liability of AFISCO under the explicit terms of the insurance contract.
In fine, we conclude that the liability of AFISCO based on the insurance contract is direct, but
not solidary with that of Destrajo which is based on Article 2180 of the Civil Code. 12 As such,
petitioners have the option either to claim the P15,000 from AFISCO and the balance from
Destrajo or enforce the entire judgment from Destrajo subject to reimbursement from AFISCO
to the extent of the insurance coverage
While the petition seeks a definitive ruling only on the nature of AFISCO's liability, we noticed
that the lower court erred in the computation of the probable loss of income. Using the formula:
2/3 of (80-56) x P12,000.00, it awarded P28,800.00. 13 Upon recomputation, the correct amount
is P192,000.00. Being a "plain error," we opt to correct the same. 14 Furthermore, in accordance
with prevailing jurisprudence, the death indemnity is hereby increased to P50,000.00.
WHEREFORE, premises considered, the present petition is hereby GRANTED. The award of
P28,800.00 representing loss of income is INCREASED to P192,000.00 and the death indemnity
of P12,000.00 to P50,000.00.
IX
JEWEL VILLACORTA, assisted by her husband, GUERRERO VILLACORTA, petitioner, vs.THE

INSURANCE COMMISSION and EMPIRE INSURANCE COMPANY, respondents
FIRST DIVISION
G.R. No. L-54171 October 28, 1980
TEEHANKEE, Acting C.J.:
FACTS:
1. Jewel Villacorta was the owner of a Colt Lancer insured with Empire Insurance Company under
Private Car Policy No. MBI/PC-0704 for P35,000.00 — Own Damage; P30,000.00 — Theft; and
P30,000.00 — Third Party Liability, effective May 16, 1977 to May 16, 1978.
2. On May 9, 1978, the vehicle was brought to the Sunday Machine Works, Inc., for general check-up
and repairs.
3. While it was in the custody of the Sunday Machine Works, the car was allegedly taken by six (6)
persons and driven out to Montalban, Rizal. While travelling, the car figured in an accident, hitting
and bumping a gravel and sand truck parked at the right side of the road going south. The gravel
and sand truck veered to the right side of the pavement going south and the car veered to the right
side of the pavement going north. The driver, Benito Mabasa, and one of the passengers died and
the other four sustained physical injuries. The car, as well, suffered extensive damage.
4. Villacorta filed a claim for total loss with the Empire but the claim was denied.
5. Hence, complainant, was compelled to institute the present action.
a. The comprehensive motor car insurance policy for P35,000.00 issued by respondent
Empire Insurance Company admittedly undertook to indemnify the petitioner-insured
against loss or damage to the car (a) by accidental collision or overturning, or collision or
overturning consequent upon mechanical breakdown or consequent upon wear and tear;
(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;
and (c) by malicious act.
6. Respondent insurance commission, however, dismissed petitioner's complaint for recovery of the
total loss of the vehicle against private respondent, sustaining respondent insurer's contention that
the accident did not fall within the provisions of the policy either for the Own Damage or Theft
coverage, invoking the policy provision on "Authorized Driver" clause. Respondent commission
upheld private respondent's contention on the "Authorized Driver" clause "AUTHORIZED
DRIVER: Any of the following: (a) The insured or (b) Any person driving on the Insured's Order, or with his permission: Provided,
that the person driving is permitted, in accordance with the licensing or other laws or regulations, to drive the Scheduled Vehicle, or
has been permitted and is not disqualified by order of a Court of Law or by reason or any enactment or regulation in that behalf." in
this wise: With the declarations of complainant and her husband, we hold that the person who
drove the vehicle, in the person of Benito Mabasa, is not an authorized driver of the complainant.
Apparently, this is a violation of the 'Authorized Driver' clause of the policy. Also, the assertion
that the car was not stolen and therefore not covered by the Theft clause is sustained. In other
words, there must have been shown a felonious intent upon the part of the taker of the car, and the
intent must be an intent permanently to deprive the insured of his car," and that "Such was not the
case in this instance. The fact that the car was taken by one of the residents of the Sunday Machine
Works, and the withholding of the same, for a joy ride should not be construed to mean 'taking'
under Art. 308 of the Revised Penal Code. If at all there was a 'taking', the same was merely
temporary in nature. A temporary taking is held not a taking insured against
ISSUE:
Whether or not Villacorta may claim the total loss with the insurance company.
HELD:
I. Respondent commission's ruling that the person who drove the vehicle in the person of Benito
Mabasa, who, according to its finding, was one of the residents of the Sunday Machine Works,
Inc. to whom the car had been entrusted for general check-up and repairs was not an
"authorized driver" of petitioner-complainant is too restrictive and contrary to the
established principle th
First, respondent commission's ruling that the person who drove the vehicle in the person of
Benito Mabasa, who, according to its finding, was one of the residents of the Sunday Machine
Works, Inc. to whom the car had been entrusted for general check-up and repairs was not an
"authorized driver" of petitioner-complainant is too restrictive and contrary to the established
principle that insurance contracts, being contracts of adhesion where the only participation of
the other party is the signing of his signature or his "adhesion" thereto, "obviously call for
greater strictness and vigilance on the part of courts of justice with a view of protecting the
weaker party from abuse and imposition, and prevent their becoming traps for the unwary.
The main purpose of the "authorized driver" clause, as may be seen from its text, supra, is that
a person other than the insured owner, who drives the car on the insured's order, such as his
regular driver, or with his permission, such as a friend or member of the family or the
employees of a car service or repair shop must be duly licensed drivers and have no
disqualification to drive a motor vehicle. A car owner who entrusts his car to an established
car service and repair shop necessarily entrusts his car key to the shop owner and employees
who are presumed to have the insured's permission to drive the car for legitimate purposes of
checking or road-testing the car. The mere happenstance that the employee(s) of the shop owner
diverts the use of the car to his own illicit or unauthorized purpose in violation of the trust
reposed in the shop by the insured car owner does not mean that the "authorized driver" clause
has been violated such as to bar recovery, provided that such employee is duly qualified to
drive under a valid driver's license. The situation is no different from the regular or family
driver, who instead of carrying out the owner's order to fetch the children from school takes
out his girl friend instead for a joy ride and instead wrecks the car. There is no question of his
being an "authorized driver" which allows recovery of the loss although his trip was for a
personal or illicit purpose without the owner's authorization.
II. Where a car is admittedly as in this case unlawfully and wrongfully taken by some people, be
they employees of the car shop or not to whom it had been entrusted, and taken on a long trip
to Montalban without the owner's consent or knowledge, such taking constitutes or partakes
of the nature of theft as defined in Article 308 of the Revised Penal Code
Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the
theft clause, not the "authorized driver" clause, that applies), where a car is admittedly as in
this case unlawfully and wrongfully taken by some people, be they employees of the car shop
or not to whom it had been entrusted, and taken on a long trip to Montalban without the
owner's consent or knowledge, such taking constitutes or partakes of the nature of theft as
defined in Article 308 of the Revised Penal Code, viz. "Who are liable for theft. — Theft is
committed by any person who, with intent to gain but without violence against or intimidation
of persons nor force upon things, shall take personal property of another without the latter's
consent," for purposes of recovering the loss under the policy in question.
The Court rejects respondent commission's premise that there must be an intent on the part of
the taker of the car "permanently to deprive the insured of his car" and that since the taking
here was for a "joy ride" and "merely temporary in nature," a "temporary taking is held not a
taking insured against. The evidence does not warrant respondent commission's findings that
it was a mere "joy ride". From the very investigator's report cited in its comment, 3 the police
found from the waist of the car driver Benito Mabasa Bartolome who smashed the car and was
found dead right after the incident "one cal. 45 Colt. and one apple type grenade," hardly the
materials one would bring along on a "joy ride". Then, again, it is equally evident that the
taking proved to be quite permanent rather than temporary, for the car was totally smashed in
the fatal accident and was never returned in serviceable and useful condition to petitioner-
owner. Assuming, despite the totally inadequate evidence, that the taking was "temporary"
and for a "joy ride", the Court sustains as the better view that which holds that when a person,
either with the object of going to a certain place, or learning how to drive, or enjoying a free
ride, takes possession of a vehicle belonging to another, without the consent of its owner, he is
guilty of theft because by taking possession of the personal property belonging to another and
using it, his intent to gain is evident since he derives therefrom utility, satisfaction, enjoyment
and pleasure. Justice Ramon C. Aquino cites in his work Groizard who holds that the use of a
thing constitutes gain and Cuello Calon who calls it "hurt de uso. "
The insurer must therefore indemnify the petitioner-owner for the total loss of the insured car
in the sum of P35,000.00 under the theft clause of the policy, subject to the filing of such claim
for reimbursement or payment as it may have as subrogee against the Sunday Machine Works,
Inc. ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered
sentencing private respondent to pay petitioner the sum of P35,000.00 with legal interest from
the filing of the complaint until full payment is made and to pay the costs of suit.
ANDREW PALERMO, plaintiff-appellee, vs. PYRAMID INSURANCE CO., INC., defendant- appellant.
G.R. No. L-36480 May 31, 1988
GRIÑO-AQUINO, J:
FACTS:
1. Palermo insured the brand new Nissan Cedric de Luxe Sedan car with the defendant insurance
company against any loss or damage for P 20,000.00 and against third party liability for P 10,000.00.
Plaintiff paid the defendant P 361.34 premium for one year, March 12, 1968 to March 12, 1969, for
which defendant issued Private Car Comprehensive Policy No. MV-1251.
2. The automobile was, however, mortgaged by the plaintiff with the vendor, Ng Sam Bok Motors
Co., to secure the payment of the balance of the purchase price, which explains why the registration
certificate in the name of the plaintiff remains in the hands of the mortgagee, Ng Sam Bok Motors
Co.
3. The plaintiff met a violent accident. The La Carlota City fire engine crashed head on, and as a
consequence, the plaintiff sustained physical injuries, his father, Cesar Palermo, who was with am
in the car at the time was likewise seriously injured and died shortly thereafter, and the car in
question was totally wrecked.
4. The defendant was immediately notified of the occurrence, and upon its orders, the damaged car
was towed from the scene of the accident to the compound of Ng Sam Bok Motors in Bacolod City
where it remains deposited up to the present time.
5. The insurance policy, Exhibit "A," grants an option unto the defendant, in case of accident either to
indemnify the plaintiff for loss or damage to the car in cash or to replace the damaged car. The
defendant, however, refused to take either of the above-mentioned alternatives for the reason as
alleged, that the insured himself had violated the terms of the policy when he drove the car in
question with an expired driver's license.
1. Andrew Palermo (insured) filed a complaint in the CFI of Negros Occidental against Pyramid
Insurance Co., Inc., for payment of his claim under a Private Car Comprehensive Policy MV-1251
issued by the defendant.
2. Pyramid Insurance Co., Inc., alleged that it disallowed the claim because at the time of the accident,
the insured was driving his car with an expired driver's license.
3. The court ordered the defendant "to pay the plaintiff the sum of P20,000.00, value of the insurance
of the motor vehicle in question and to pay the costs."
4. On November 26, 1969, the plaintiff filed a "Motion for Immediate Execution Pending Appeal." It
was opposed by the defendant, but was granted by the trial court on December 15, 1969.
ISSUE:
Whether or not Palermo may claim under the Private Car Comprehensive Policy despite the fact that the
was driving with an expired license; Whether or not Palermo is an authorized driver within the
contemplation of the policy.
HELD:
I. The driver of the insured motor vehicle at the time of the accident was, the insured himself,
hence an "authorized driver" under the policy.
AUTHORIZED DRIVER: Any of the following: (a) The Insured and (b) Any person driving on
the Insured's order or with his permission. Provided that the person driving is permitted in
accordance with the licensing or other laws or regulations to drive the Motor Vehicle and is
not disqualified from driving such motor vehicle by order of a Court of law or by reason of
any enactment or regulation in that behalf.
There is no merit in the appellant's allegation that the plaintiff was not authorized to drive the
insured motor vehicle because his driver's license had expired. The driver of the insured motor
vehicle at the time of the accident was, the insured himself, hence an "authorized driver" under
the policy.
While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the
highway without a license or with an expired license, an infraction of the Motor Vehicle Law
on the part of the insured, is not a bar to recovery under the insurance contract. It however
renders him subject to the penal sanctions of the Motor Vehicle Law. The requirement that the
driver be "permitted in accordance with the licensing or other laws or regulations to drive the
Motor Vehicle and is not disqualified from driving such motor vehicle by order of a Court of
Law or by reason of any enactment or regulation in that behalf," applies only when the driver"
is driving on the insured's order or with his permission." It does not apply when the person
driving is the insured himself.
This view may be inferred from the decision of this Court in Villacorta vs. Insurance
Commission, 100 SCRA 467, where it was held that: The main purpose of the "authorized
driver" clause, as may be seen from its text, is that a person other than the insured owner, who
drives the car on the insured's order, such as his regular driver, or with his permission, such
as a friend or member of the family or the employees of a car service or repair shop, must be
duly licensed drivers and have no disqualification to drive a motor vehicle. In an American
case, where the insured herself was personally operating her automobile but without a license
to operate it, her license having expired prior to the issuance of the policy, the Supreme Court
of Massachusetts was more explicit... Operating an automobile on a public highway without a
license, which act is a statutory crime is not precluded by public policy from enforcing a policy
indemnifying her against liability for bodily injuries The inflicted by use of the automobile."
(Drew C. Drewfield McMahon vs. Hannah Pearlman, et al., 242 Mass. 367, 136 N.E. 154, 23
A.L.R. 1467.)
WHEREFORE, the appealed decision is affirmed with costs against the defendant-appellant.
SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

XI
FILIPINAS COMPAÑIA DE SEGUROS vs. CHRISTERN, HUENEFELD and CO., INC., respondent.
EN BANC
G.R. No. L-2294; May 25, 1951
PARAS, C.J.:
FACTS:
1. Christern Huenefeld after payment of corresponding premium, obtained (October 1, 1941) from
the Filipinas Cia. de Seguros, fire policy No. 29333 in the sum of P1000,000, covering merchandise
contained in a building located at Binondo Manila.
2. On February 27, 1942, or during the Japanese military occupation, the building and insured
merchandise were burned. In due time the Christern submitted to the Filipinas its claim under the
policy. The salvage goods were sold at public auction and, after deducting their value, the total
loss suffered by the respondent was fixed at P92,650.
3. The petitioner refused to pay the claim on the ground that the policy in favor of the Christern had
ceased to be in force on the date the United States declared war against Germany, the respondent
Corporation (though organized under and by virtue of the laws of the Philippines) being controlled
by the German subjects and the petitioner being a company under American jurisdiction when said
policy was issued on October 1, 1941. The petitioner, however, in pursuance of the order of the
Director of Bureau of Financing, Philippine Executive Commission, dated April 9, 1943, paid to the
respondent the sum of P92,650 on April 19, 1943.
4. Filipinas then filed before the CFI of Manila an action for for the purpose of recovering from
Chirstern P92,650 because the policy between them has ceased to be effective because of the
outbreak of the war between the United States and Germany on December 10, 1941, and that the
payment made by the petitioner to the respondent corporation during the Japanese military
occupation was under pressure.
5. The CFI of Manila dismissed the action. Upon appeal to the Court of Appeals, the judgment of the
Court of First Instance of Manila was affirmed, with costs. The case is now before us on appeal by
certiorari from the decision of the Court of Appeals.
ISSUE: Whether or not Christern Corporation (german) became an enemy corporation of Filipinas
HELD:
I. There is no question that majority of the stockholders of the respondent corporation were
German subjects. This being so, we have to rule that said respondent became an enemy
corporation upon the outbreak of the war between the United States and Germany.
The Court of Appeals overruled the contention of the petitioner that the respondent
corporation became an enemy when the United States declared war against Germany, relying
on English and American cases which held that a corporation is a citizen of the country or state
by and under the laws of which it was created or organized. It rejected the theory that
nationality of private corporation is determine by the character or citizenship of its controlling
stockholders.
The English and American cases relied upon by the Court of Appeals have lost their force in
view of the latest decision of the Supreme Court of the United States in Clark vs. Uebersee
Finanz Korporation, decided on December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp.
148-153, in which the controls test has been adopted. In "Enemy Corporation" by Martin
Domke, a paper presented to the Second International Conference of the Legal Profession held
at the Hague (Netherlands) in August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations has been discussion
in many countries, belligerent and neutral. A corporation was subject to enemy legislation
when it was controlled by enemies, namely managed under the influence of individuals or
corporations, themselves considered as enemies. It was the English courts which first the
Daimler case applied this new concept of "piercing the corporate veil," which was adopted by
the peace of Treaties of 1919 and the Mixed Arbitral established after the First World War. The
United States of America did not adopt the control test during the First World War. Courts
refused to recognized the concept whereby American-registered corporations could be
considered as enemies and thus subject to domestic legislation and administrative measures
regarding enemy property. World War II revived the problem again. It was known that
German and other enemy interests were cloaked by domestic corporation structure. It was not
only by legal ownership of shares that a material influence could be exercised on the
management of the corporation but also by long term loans and other factual situations. For
that reason, legislation on enemy property enacted in various countries during World War II
adopted by statutory provisions to the control test and determined, to various degrees, the
incidents of control. Court decisions were rendered on the basis of such newly enacted
statutory provisions in determining enemy character of domestic corporation. The United
States did not, in the amendments of the Trading with the Enemy Act during the last war,
include as did other legislations the applications of the control test and again, as in World War
I, courts refused to apply this concept whereby the enemy character of an American or neutral-
registered corporation is determined by the enemy nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and other
administrative practice in the treatment of foreign-owned property in the United States
allowed to large degree the determination of enemy interest in domestic corporations and thus
the application of the control test. Court decisions sanctioned such administrative practice
enacted under the First War Powers Act of 1941, and more recently, on December 8, 1947, the
Supreme Court of the United States definitely approved of the control theory. In Clark vs.
Uebersee Finanz Korporation, A. G., dealing with a Swiss corporation allegedly controlled by
German interest, the Court: "The property of all foreign interest was placed within the reach of
the vesting power (of the Alien Property Custodian) not to appropriate friendly or neutral
assets but to reach enemy interest which masqueraded under those innocent fronts. . . . The
power of seizure and vesting was extended to all property of any foreign country or national
so that no innocent appearing device could become a Trojan horse." It becomes unnecessary,
therefore, to dwell at length on the authorities cited in support of the appealed decision.
However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz., (Supp.
9) 299, we already held that China Banking Corporation came within the meaning of the word
"enemy" as used in the Trading with the Enemy Acts of civilized countries not only because it
was incorporated under the laws of an enemy country but because it was controlled by
enemies.
II. The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone
except a public enemy may be insured." It stands to reason that an insurance policy ceases to
be allowable as soon as an insured becomes a public enemy.
Effect of war, generally. — All intercourse between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by the law of nations. Such prohibition includes
all negotiations, commerce, or trading with the enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of voluntary submission to it; or receiving its
protection; also all acts concerning the transmission of money or goods; and all contracts
relating thereto are thereby nullified. It further prohibits insurance upon trade with or by the
enemy, upon the life or lives of aliens engaged in service with the enemy; this for the reason
that the subjects of one country cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien subjects, or to do anything detrimental

too their country's interest. The purpose of war is to cripple the power and exhaust the
resources of the enemy, and it is inconsistent that one country should destroy its enemy's
property and repay in insurance the value of what has been so destroyed, or that it should in
such manner increase the resources of the enemy, or render it aid, and the commencement of
war determines, for like reasons, all trading intercourse with the enemy, which prior thereto
may have been lawful. All individuals therefore, who compose the belligerent powers, exist,
as to each other, in a state of utter exclusion, and are public enemies. (6 Couch, Cyc. of Ins.
Law, pp. 5352-5353.)
III. In the case of an ordinary fire policy, which grants insurance only from year, or for some other
specified term it is plain that when the parties become alien enemies, the contractual tie is
broken and the contractual rights of the parties, so far as not vested. lost. (Vance, the Law on
Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the insurance
policy issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had
ceased to be valid and enforcible, and since the insured goods were burned after December 10,
1941, and during the war, the respondent was not entitled to any indemnity under said policy
from the petitioner. However, elementary rules of justice (in the absence of specific provision
in the Insurance Law) require that the premium paid by the respondent for the period covered
by its policy from December 11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the question
of whether the policy in question became null and void upon the declaration of war between
the United States and Germany on December 10, 1941, and its judgment in favor of the
respondent corporation was predicated on its conclusion that the policy did not cease to be in
force. The Court of Appeals necessarily assumed that, even if the payment by the petitioner to
the respondent was involuntary, its action is not tenable in view of the ruling on the validity
of the policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted to
by the appellee was not unjust but the exercise of its lawful right to claim for and received the
payment of the insurance policy," and that the ruling of the Bureau of Financing to the effect
that "the appellee was entitled to payment from the appellant was, well founded." Factually,
there can be no doubt that the Director of the Bureau of Financing, in ordering the petitioner
to pay the claim of the respondent, merely obeyed the instruction of the Japanese Military
Administration, as may be seen from the following: "In view of the findings and conclusion of
this office contained in its decision on Administrative Case dated February 9, 1943 copy of
which was sent to your office and the concurrence therein of the Financial Department of the
Japanese Military Administration, and following the instruction of said authority, you are
hereby ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of
said claim, however, should be made by means of crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under the
circumstances on this case. However, the petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943, in accordance with
the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay to
the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in Philippine
currency, that should be returned by the petitioner for the unexpired term of the policy in question,
beginning December 11, 1941. Without costs. So ordered.
Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.
XII
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION,

respondent.
DECISION
SECOND DIVISION
[G.R. No. 156167. May 16, 2005]
PUNO, J.:
FACTS:
1. Gulf Resorts Inc. is the owner of the Plaza Resort situated at Agoo, La Union and had its properties
in said resort insured originally with the American Home Assurance Company (AHAC-AIU).
a. In the first four insurance policies issued by AHAC-AIU from 1984-1988 the risk of loss
from earthquake shock was extended only to plaintiffs two swimming pools, thus,
earthquake shock endt. Subsequently, AHAC(AIU) issued in plaintiffs favor Policy
covering the period 1988 to 1989 and in said policy the earthquake endorsement clause
was deleted and the entry under Endorsements/Warranties at the time of issue read that
plaintiff renewed its policy with AHAC (AIU) for the period of 1989 to 1990 under Policy
No. 206-4568061-9 which carried the entry under Endorsement/Warranties at Time of
Issue, which read Endorsement to Include Earthquake Shock in the amount of P10,700.00
and paid P42,658.14 as premium.
2. Gulf Resorts Inc. agreed to insure with PCIC the properties covered by AHAC (AIU) Policy No.
206-4568061-9 provided that the policy wording and rates in said policy be copied in the policy to
be issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of
1990 to 1991 for P10,700,600.00 for a total premium of P45,159.92; that in the computation of the
premium, defendants Policy No. 31944, which is the policy in question, contained on the right-
hand upper portion of page 7 thereof, the following: that the above break-down of premiums
shows that plaintiff paid only P393.00 as premium against earthquake shock (ES); that in all the six
insurance policies (Exhs. C, D, E, F, G and H), the premium against the peril of earthquake shock
is the same, that is P393.00; issued by AHAC and in Policy No. 31944 issued by defendant, the
shock endorsement provide(sic): In consideration of the payment by the insured to the company
of the sum included additional premium the Company agrees, notwithstanding what is stated in
the printed conditions of this policy due to the contrary, that this insurance covers loss or damage
to shock to any of the property insured by this Policy occasioned by or through or in consequence
of earthquake; that in Exhibit 7-C the word included above the underlined portion was deleted;
3. On July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and plaintiffs properties
covered by Policy No. 31944 issued by defendant, including the two swimming pools in its Agoo
Playa Resort were damaged.
4. After the earthquake, Gulf advised PCIC that it would be making a claim under its Insurance
Policy No. 31944 for damages on its properties.
5. PCIC instructed Gulf to file a formal claim, then assigned the investigation of the claim to an
independent claims adjuster, Bayne Adjusters and Surveyors, Inc.[3] On July 30, 1990, respondent,
through its adjuster, requested petitioner to submit various documents in support of its claim. On
August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon,[4]
rendered a preliminary report[5] finding extensive damage caused by the earthquake to the
clubhouse and to the two swimming pools. Mr. de Leon stated that except for the swimming pools,
all affected items have no coverage for earthquake shocks.
6. Gulf then filed its formal demand for settlement of the damage to all its properties in the Agoo
Playa Resort.
7. PCIC denied Gulf’s claim on the ground that its insurance policy only afforded earthquake shock
coverage to the two swimming pools of the resort. Petitioner and respondent failed to arrive at a
settlement.
8.Gulf filed a complaint with the regional trial court of Pasig praying for the payment of the
insurance coverage.
9. PCIC then filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.
10. RTC then ruled In favor of PCIC. The above schedule clearly shows that plaintiff paid only a
premium of P393.00 against the peril of earthquake shock, the same premium it paid against
earthquake shock only on the two swimming pools in all the policies issued by AHAC(AIU)
(Exhibits C, D, E, F and G). From this fact the Court must consequently agree with the position of
defendant that the endorsement rider (Exhibit 7-C) means that only the two swimming pools were
insured against earthquake shock.
11. Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court
of Appeals. The appellate court affirmed the decision of the trial court and held that the last two
(2) insurance contracts which Gulf had with AHAC (AIU) and upon which the subject insurance
contract with PCIC is said to have been based and copied, had no extended earthquake shock
insurance on all the insured properties.
ISSUE:
Whether or not the Insurance Policy No. 31944 covered only two swimming pools rather than all the
properties covered thereunder, are insured against the risk of earthquake shock.
HELD:
We hold that the petition is devoid of merit.
I. It is basic that all the provisions of the insurance policy should be examined and interpreted
in consonance with each other.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as
included, Second, under the breakdown for premium payments, Third, Policy Condition No.
6 stated: This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:-- (a)
Earthquake, volcanic eruption or other convulsion of nature; Fourth, the rider attached to the
policy, titled Extended Coverage Endorsement (To Include the Perils of Explosion, Aircraft,
Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON LONG TERM POLICIES; THE INSURED UNDER

THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN EXCESS OF FIVE
MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF THE NET
PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE INSURANCE
UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM; Earthquake
Endorsement; In consideration of the payment by the Insured to the Company of the sum of P. . . . . . .
. . . . . . . . . . additional premium the Company agrees, notwithstanding what is stated in the printed
conditions of this Policy to the contrary, that this insurance covers loss or damage (including loss or
damage by fire) to any of the property insured by this Policy occasioned by or through or in consequence
of Earthquake. Provided always that all the conditions of this Policy shall apply (except in so far
as they may be hereby expressly varied) and that any reference therein to loss or damage by
fire should be deemed to apply also to loss or damage occasioned by or through or in
consequence of Earthquake.
Gulf contends that pursuant to this rider, no qualifications were placed on the scope of the
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the
insured properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other. All its parts are reflective of the true intent of the parties. The
policy cannot be construed piecemeal. Certain stipulations cannot be segregated and then
made to control; neither do particular words or phrases necessarily determine its character.
Petitioner cannot focus on the earthquake shock endorsement to the exclusion of the other
provisions. All the provisions and riders, taken and interpreted together, indubitably show the
intention of the parties to extend earthquake shock coverage to the two swimming pools only.
II. A careful examination of the premium recapitulation will show that it is the clear intent of
the parties to extend earthquake shock coverage only to the two swimming pools.
A careful examination of the premium recapitulation will show that it is the clear intent of the
parties to extend earthquake shock coverage only to the two swimming pools. Section 2(1) of
the Insurance Code defines a contract of insurance as an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.
An insurance premium is the consideration paid an insurer for undertaking to indemnify the
insured against a specified peril.[27] In fire, casualty, and marine insurance, the premium
payable becomes a debt as soon as the risk attaches.[28] In the subject policy, no premium
payments were made with regard to earthquake shock coverage, except on the two swimming
pools. There is no mention of any premium payable for the other resort properties with regard
to earthquake shock. This is consistent with the history of petitioners previous insurance
policies from AHAC-AIU.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance
Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage
Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies[29] to the
insurance policy as proof of the intent of the parties to extend the coverage for earthquake
shock. However, this phrase is merely an enumeration of the descriptive titles of the riders,
clauses, warranties or endorsements to which the policy is subject, as required under Section
50, paragraph 2 of the Insurance Code. We also hold that no significance can be placed on the
deletion of the qualification limiting the coverage to the two swimming pools. The earthquake
shock endorsement cannot stand alone.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely
on the general rule that insurance contracts are contracts of adhesion which should be liberally
construed in favor of the insured and strictly against the insurer company which usually
prepares it.[31] A contract of adhesion is one wherein a party, usually a corporation, prepares
the stipulations in the contract, while the other party merely affixes his signature or his
"adhesion" thereto. Through the years, the courts have held that in these type of contracts, the
parties do not bargain on equal footing, the weaker party's participation being reduced to the
alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party
whom the courts of justice must protect.[32] Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the insured. The case law will show that
this Court will only rule out blind adherence to terms where facts and circumstances will show
that they are basically one-sided.[34] Thus, we have called on lower courts to remain careful in
scrutinizing the factual circumstances behind each case to determine the efficacy of the claims
of contending parties. In Development Bank of the Philippines v. National Merchandising
Corporation, et al.,[35] the parties, who were acute businessmen of experience, were presumed
to have assented to the assailed documents with full knowledge. We cannot apply the general
rule on contracts of adhesion to the case at bar. Petitioner cannot claim it did not know the
provisions of the policy. From the inception of the policy, petitioner had required the
respondent to copy verbatim the provisions and terms of its latest insurance policy from
AHAC-AIU.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-
4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some
terms, specifically in the replacement cost endorsement, but the principal provisions of the
policy remained essentially similar to AHAC-AIUs policy. Consequently, we cannot apply the
"fine print" or "contract of adhesion" rule in this case as the parties intent to limit the coverage
of the policy to the two swimming pools only is not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is
dismissed. No costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

XIII
WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY
CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA)
LTD., respondents.
FIRST DIVISION
[G.R. No. 154514. July 28, 2005]
QUISUMBING, J.:
FACTS:
1. 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).
2. 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.
4. Steamship Mutual filed a case against White Gold for collection of sum of money to recover the
latters unpaid balance.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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 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.
10. 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.
ISSUE:
Whether or not Steamship Mutual, a P & I Club, is engaged in the insurance business in the Philippines;
Whether or not Pioneer need a license as an insurance agent/broker for Steamship Mutual.
HELD:
I. The test to determine if a contract is an insurance contract or not, depends on the nature of the
promise, the act required to be performed, and the exact nature of the agreement in the light of
the occurrence, contingency, or circumstances under which the performance becomes requisite.
It is not by what it is called.
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a

consideration to indemnify another against loss, damage or liability arising from an unknown
or contingent event.
In particular, a marine insurance undertakes to indemnify the assured against marine losses,
such as the losses incident to a marine adventure. Section 99 of the Insurance Code enumerates
the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are
both the insurer and insured. In it, the members all contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid, and where
the profits are divided among themselves, in proportion to their interest. Additionally, mutual
insurance associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.
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. 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.
II. Although Pioneer is already licensed as an insurance company, it needs a separate license to
act as insurance agent for Steamship Mutual
Does Pioneer, as agent/broker of Steamship Mutual, need a special license? Pioneer is the
resident agent of Steamship Mutual as evidenced by the certificate of registration[22] issued
by the Insurance Commission. It has been licensed to do or transact insurance business by
virtue of the certificate of authority[23] issued by the same agency. However, a Certification
from the Commission states that Pioneer does not have a separate license to be an agent/broker
of Steamship Mutual. Although Pioneer is already licensed as an insurance company, it needs
a separate license to act as insurance agent for Steamship Mutual. Section 299 of the Insurance
Code clearly states:cNo person shall act as an insurance agent or as an insurance broker in the
solicitation or procurement of applications for insurance, or receive for services in obtaining
insurance, any commission or other compensation from any insurance company doing
business in the Philippines or any agent thereof, without first procuring a license so to act from
the Commissioner, which must be renewed annually on the first day of January, or within six
months thereafter. Finally, White Gold seeks revocation of Pioneers certificate of authority and
removal of its directors and officers. Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of
Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND
SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and
Surety Corporation are ORDERED to obtain licenses and to secure proper authorizations to do business as
insurer and insurance agent, respectively. The petitioners prayer for the revocation of Pioneers Certificate
of Authority and removal of its directors and officers, is DENIED. Costs against respondents.
XIII
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF APPEALS AND MEDARDA V.
LEUTERIO, respondents.
DECISION
SECOND DIVISION
[G.R. No. 113899. October 13, 1999]
QUISUMBING, J.:
FACTS:
1. A contract of group life insurance was executed between Great Pacific Life Assurance Corporation
(hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP). Grepalife
agreed to insure the lives of eligible housing loan mortgagors of DBP.
2. Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for membership in the
group life insurance plan. In an application form, Dr. Leuterio answered questions concerning his
health condition as follows:
a. 7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure,
cancer, diabetes, lung, kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details ___________.
b. 8. Are you now, to the best of your knowledge, in good health? Answer: [ x ] Yes [ ] No.[4]
3. Grepalife issued the insurance coverage of Dr. Leuterio, to the extent of his DBP mortgage
indebtedness amounting to P86,200.00 pesos.
4. Dr. Leuterio died (Auguts 6, 1984) due to massive cerebral hemorrhage.
5. DBP submitted a death claim to Grepalife.
6. Grepalife denied the claim because Dr. Leuterio was not physically healthy when he applied for
an insurance coverage. Grepalife insisted that Dr. Leuterio did not disclose he had been suffering
from hypertension, which caused his death. Allegedly, such non-disclosure constituted
concealment that justified the denial of the claim.
7. The widow of the late Dr. Leuterio, Medarda V. Leuterio, filed a complaint with the Regional Trial
Court of Misamis Oriental, against Grepalife for Specific Performance with Damages.
8. During the trial, Dr. Hernando Mejia, who issued the death certificate, was called to testify. Dr.
Mejias findings, based partly from the information given by the respondent widow, stated that Dr.
Leuterio complained of headaches presumably due to high blood pressure. The inference was not
conclusive because Dr. Leuterio was not autopsied, hence, other causes were not ruled out.
9. The RTC rendered a decision in favor of widow and against Grepalife.
10. The Court of Appeals sustained the trial courts decision. Hence, the present petition.
11. Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party
in interest, hence the trial court acquired no jurisdiction over the case. It argues that when the Court
of Appeals affirmed the trial courts judgment, Grepalife was held liable to pay the proceeds of
insurance contract in favor of DBP, the indispensable party who was not joined in the suit.
ISSUES:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in a group
life insurance contract from a complaint filed by the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty six
thousand, two hundred (P86,200.00) pesos without proof of the actual outstanding mortgage
payable by the mortgagor to DBP.
HELD:
I. The rationale of a group insurance policy of mortgagors, otherwise known as the mortgage
redemption insurance, is a device for the protection of both the mortgagee and the mortgagor.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the
parties to this type of contract. The rationale of a group insurance policy of mortgagors,
otherwise known as the mortgage redemption insurance, is a device for the protection of both
the mortgagee and the mortgagor. On the part of the mortgagee, it has to enter into such form
of contract so that in the event of the unexpected demise of the mortgagor during the
subsistence of the mortgage contract, the proceeds from such insurance will be applied to the
payment of the mortgage debt, thereby relieving the heirs of the mortgagor from paying the
obligation. In a similar vein, ample protection is given to the mortgagor under such a concept
so that in the event of death; the mortgage obligation will be extinguished by the application
of the insurance proceeds to the mortgage indebtedness. Consequently, where the mortgagor
pays the insurance premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagors interest, and the mortgagor continues to be a
party to the contract. In this type of policy insurance, the mortgagee is simply an appointee
of the insurance fund, such loss-payable clause does not make the mortgagee a party to the
contract.
Section 8 of the Insurance Code provides: Unless the policy provides, where a mortgagor of
property effects insurance in his own name providing that the loss shall be payable to the
mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon
the interest of the mortgagor, who does not cease to be a party to the original contract, and any
act of his, prior to the loss, which would otherwise avoid the insurance, will have the same
effect, although the property is in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor, may be performed by the
mortgagee therein named, with the same effect as if it had been performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in the
insurance, the policy stating that: In the event of the debtors death before his indebtedness
with the Creditor (DBP) shall have been fully paid, an amount to pay the outstanding
indebtedness shall first be paid to the creditor and the balance of sum assured, if there is any,
shall then be paid to the beneficiary/ies designated by the debtor. When DBP submitted the
insurance claim against petitioner, the latter denied payment thereof, interposing the defense
of concealment committed by the insured. Thereafter, DBP collected the debt from the
mortgagor and took the necessary action of foreclosure on the residential lot of private
respondent. Insured, being the person with whom the contract was made, is primarily the
proper person to bring suit thereon. Subject to some exceptions, insured may thus sue,
although the policy is taken wholly or in part for the benefit of another person named or
unnamed, and although it is expressly made payable to another as his interest may appear or
otherwise. Although a policy issued to a mortgagor is taken out for the benefit of the mortgagee
and is made payable to him, yet the mortgagor may sue thereon in his own name, especially
where the mortgagees interest is less than the full amount recoverable under the policy.
Insured may be regarded as the real party in interest, although he has assigned the policy for
the purpose of collection, or has assigned as collateral security any judgment he may obtain.
And since a policy of insurance upon life or health may pass by transfer, will or succession to
any person, whether he has an insurable interest or not, and such person may recover it
whatever the insured might have recovered, the widow of the decedent Dr. Leuterio may file
the suit against the insurer, Grepalife.
II. Concealment exists where the assured had knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that he should communicate it to the assured,
but he designedly and intentionally withholds the same
The second assigned error refers to an alleged concealment that the petitioner interposed as its
defense to annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose
that he had hypertension, which might have caused his death. Concealment exists where the
assured had knowledge of a fact material to the risk, and honesty, good faith, and fair dealing
requires that he should communicate it to the assured, but he designedly and intentionally
withholds the same. Petitioner merely relied on the testimony of the attending physician, Dr.
Hernando Mejia, as supported by the information given by the widow of the decedent.
Grepalife asserts that Dr. Mejias technical diagnosis of the cause of death of Dr. Leuterio was
a duly documented hospital record, and that the widows declaration that her husband had
possible hypertension several years ago should not be considered as hearsay, but as part of res
gestae. On the contrary the medical findings were not conclusive because Dr. Mejia did not
conduct an autopsy on the body of the decedent. As the attending physician, Dr. Mejia stated
that he had no knowledge of Dr. Leuterios any previous hospital confinement.[16] Dr.
Leuterios death certificate stated that hypertension was only the possible cause of death. The
private respondents statement, as to the medical history of her husband, was due to her
unreliable recollection of events. Hence, the statement of the physician was properly
considered by the trial court as hearsay.
The insured, Dr. Leuterio, had answered in his insurance application that he was in good
health and that he had not consulted a doctor or any of the enumerated ailments, including
hypertension; when he died the attending physician had certified in the death certificate that
the former died of cerebral hemorrhage, probably secondary to hypertension. From this report,
the appellant insurance company refused to pay the insurance claim. Appellant alleged that
the insured had concealed the fact that he had hypertension. Contrary to appellants allegations,
there was no sufficient proof that the insured had suffered from hypertension. Aside from the
statement of the insureds widow who was not even sure if the medicines taken by Dr. Leuterio
were for hypertension, the appellant had not proven nor produced any witness who could
attest to Dr. Leuterios medical history. Appellant insurance company had failed to establish
that there was concealment made by the insured, hence, it cannot refuse payment of the claim.
The fraudulent intent on the part of the insured must be established to entitle the insurer to
rescind the contract.[18] Misrepresentation as a defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the insurer.[19] In the case at bar, the petitioner failed to clearly and
satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance.
III. A life insurance policy is a valued policy.[20] Unless the interest of a person insured is
susceptible of exact pecuniary measurement, the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the policy.
And that brings us to the last point in the review of the case at bar. Petitioner claims that there
was no evidence as to the amount of Dr. Leuterios outstanding indebtedness to DBP at the time
of the mortgagors death. Hence, for private respondents failure to establish the same, the action
for specific performance should be dismissed. Petitioners claim is without merit. A life
insurance policy is a valued policy.[20] Unless the interest of a person insured is susceptible of
exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life
or health is the sum fixed in the policy.[21] The mortgagor paid the premium according to the
coverage of his insurance, which states that: The policy states that upon receipt of due proof of
the Debtors death during the terms of this insurance, a death benefit in the amount of
P86,200.00 shall be paid. In the event of the debtors death before his indebtedness with the
creditor shall have been fully paid, an amount to pay the outstanding indebtedness shall first
be paid to the Creditor and the balance of the Sum Assured, if there is any shall then be paid
to the beneficiary/ies designated by the debtor.[22] (Emphasis omitted) However, we noted
that the Court of Appeals decision was promulgated on May 17, 1993. In private respondents
memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of
mortgagors outstanding loan. Considering this supervening event, the insurance proceeds
shall inure to the benefit of the heirs of the deceased person or his beneficiaries. Equity dictates
that DBP should not unjustly enrich itself at the expense of another (Nemo cum alterius
detrimenio protest). Hence, it cannot collect the insurance proceeds, after it already foreclosed
on the mortgage. The proceeds now rightly belong to Dr. Leuterios heirs represented by his
widow, herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in CA-
G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the insurance
proceeds amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the insured,
Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of mortgagors
indebtedness to Development Bank of the Philippines. Costs against petitioner.
XV
ARMANDO GEAGONIA, petitioner, vs. COURT OF APPEALS and COUNTRY BANKERS INSURANCE
CORPORATION, respondents.
G.R. No. 114427 February 6, 1995
DAVIDE, JR., J.:
FACTS:
1. Geagonia is the owner of Norman's Mart located in the public market of San Francisco, Agusan del
Sur.
2. He obtained from Country Bankers Insurance Corporation fire insurance policy for P100,000.00.
The period of the policy was from 22 December 1989 to 22 December 1990 and covered the
following: "Stock-in-trade consisting principally of dry goods such as RTW's for men and women
wear and other usual to assured's business."
3. Geagonia declared in the policy under the subheading entitled CO-INSURANCE that Mercantile
Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his
inventory stocks amounting to P392,130.50,
4. The policy contained the following condition: 3. The insured shall give notice to the Company of any
insurance or insurances already affected, or which may subsequently be effected, covering any of the property
or properties consisting of stocks in trade, goods in process and/or inventories only hereby insured, and unless
such notice be given and the particulars of such insurance or insurances be stated therein or endorsed in this
policy pursuant to Section 50 of the Insurance Code, by or on behalf of the Company before the occurrence of
any loss or damage, all benefits under this policy shall be deemed forfeited, provided however, that this
condition shall not apply when the total insurance or insurances in force at the time of the loss or damage is
not more than P200,000.00.
5. A fire of accidental origin (27 May 1990) broke out at around 7:30 p.m. at the public market of San
Francisco, Agusan del Sur.
6. The petitioner's insured stock-in-trade were completely destroyed prompting him to file with the
private respondent a claim under the policy.
7. On 28 December 1990, the private respondent denied the claim because it found that at the time of
the loss the petitioner's stocks-in-trade were likewise covered by two fire insurance policies
(P100,000.00 each) issued by the Cebu Branch of the Philippines First Insurance Co., Inc.
(hereinafter PFIC). These policies indicate that the insured was "Messrs. Discount Mart (Mr.
Armando Geagonia, Prop.)" with a mortgage clause reading: MORTGAGE: Loss, if any shall be
payable to Messrs. Cebu Tesing Textiles, Cebu City as their interest may appear subject to the terms
of this policy. CO-INSURANCE DECLARED: P100,000. — Phils. First CEB/F 24758.4. The basis of
the private respondent's denial was the petitioner's alleged violation of Condition 3 of the
policy.
8. The petitioner then filed a complaint against the private respondent with the Insurance
Commission (Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No. F-
14622 and for attorney's fees and costs of litigation. He attached as Annex "AM"6 thereof his letter
of 18 January 1991 which asked for the reconsideration of the denial. He admitted in the said letter
that at the time he obtained the private respondent's fire insurance policy he knew that the two
policies issued by the PFIC were already in existence; however, he had no knowledge of the
provision in the private respondent's policy requiring him to inform it of the prior policies; this
requirement was not mentioned to him by the private respondent's agent; and had it been
mentioned, he would not have withheld such information. He further asserted that the total of the
amounts claimed under the three policies was below the actual value of his stocks at the time of
loss, which was P1,000,000.00. In its answer,7 the private respondent specifically denied the
allegations in the complaint and set up as its principal defense the violation of Condition 3 of the
policy.
9. The Insurance Commission found that the petitioner did not violate Condition 3 as he had no
knowledge of the existence of the two fire insurance policies obtained from the PFIC; that it was
Cebu Tesing Textiles which procured the PFIC policies without informing him or securing his
consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These
findings were based on the petitioner's testimony that he came to know of the PFIC policies only
when he filed his claim with the private respondent and that Cebu Tesing Textile obtained them
and paid for their premiums without informing him thereof.
10. Its motion for the reconsideration of the decision having been denied by the Insurance Commission
in its resolution of 20 August 1993, 10 the private respondent appealed to the Court of Appeals by
way of a petition for review.
11. The Court of Appeals reversed the decision of the Insurance Commission because it found that the
petitioner knew of the existence of the two other policies issued by the PFIC. It said: It is apparent
from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was taken in the
name of petitioner herein]. In addition, the premiums on both policies were paid for by private
respondent, not by the Tesing Textiles which is alleged to have taken out the other insurance
without the knowledge of private respondent. In is clear that it was the petitioner who took out
the policies on the same property subject of the insurance with petitioner. Hence, in failing to
disclose the existence of these insurances private respondent violated Condition No. 3.
12. His motion to reconsider the adverse decision having been denied, the petitioner filed the instant
petition.
ISSUE:
Whether or not petitioner had prior knowledge of the two insurance policies issued by the PFIC when he
obtained the fire insurance policy from the private respondent, thereby, for not disclosing such fact,
violating Condition 3 of the policy, and (b) if he had, whether he is precluded from recovering therefrom.
HELD:
I. Petitioner knew of the prior policies issued by the PFIC. His letter of 18 January 1991 to the
private respondent conclusively proves this knowledge
We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the
PFIC. His letter of 18 January 1991 to the private respondent conclusively proves this
knowledge. His testimony to the contrary before the Insurance Commissioner and which the
latter relied upon cannot prevail over a written admission made ante litem motam. It was,
indeed, incredible that he did not know about the prior policies since these policies were not
new or original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No.
GA-28146 had been renewed twice, the previous policy being F-24792. Condition 3 of the
private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its
incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides
that "[a] policy may declare that a violation of specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision does not avoid the policy." Such a condition
is a provision which invariably appears in fire insurance policies and is intended to prevent an
increase in the moral hazard. It is commonly known as the additional or "other insurance"
clause and has been upheld as valid and as a warranty that no other insurance exists. Its
violation would thus avoid the policy. 16 However, in order to constitute a violation, the other
insurance must be upon same subject matter, the same interest therein, and the same risk.
As to a mortgaged property, the mortgagor and the mortgagee have each an independent
insurable interest therein and both interests may be one policy, or each may take out a separate
policy covering his interest, either at the same or at separate times. 18 The mortgagor's
insurable interest covers the full value of the mortgaged property, even though the mortgage
debt is equivalent to the full value of the property.19 The mortgagee's insurable interest is to
the extent of the debt, since the property is relied upon as security thereof, and in insuring he
is not insuring the property but his interest or lien thereon. His insurable interest is prima facie
the value mortgaged and extends only to the amount of the debt, not exceeding the value of
the mortgaged property. 20 Thus, separate insurances covering different insurable interests
may be obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the
usual practice. The mortgagee may be made the beneficial payee in several ways. He may
become the assignee of the policy with the consent of the insurer; or the mere pledgee without
such consent; or the original policy may contain a mortgage clause; or a rider making the policy
payable to the mortgagee "as his interest may appear" may be attached; or a "standard
mortgage clause," containing a collateral independent contract between the mortgagee and
insurer, may be attached; or the policy, though by its terms payable absolutely to the
mortgagor, may have been procured by a mortgagor under a contract duty to insure for the
mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the proceeds.
In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as
his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized
as such by the insurer but not made a party to the contract himself. Hence, any act of the
mortgagor which defeats his right will also defeat the right of the mortgagee. 22 This kind of
policy covers only such interest as the mortgagee has at the issuing of the policy. On the other
hand, a mortgagee may also procure a policy as a contracting party in accordance with the
terms of an agreement by which the mortgagor is to pay the premiums upon such insurance.
24 It has been noted, however, that although the mortgagee is himself the insured, as where he
applies for a policy, fully informs the authorized agent of his interest, pays the premiums, and
obtains on the assurance that it insures him, the policy is in fact in the form used to insure a
mortgagor with loss payable clause.
The fire insurance policies issued by the PFIC name the petitioner as the assured and contain
a mortgage clause which reads: Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu
City as their interest may appear subject to the terms of this policy. This is clearly a simple loss
payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in General
Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27
which read: The insured shall give notice to the company of any insurance or insurances
already effected, or which may subsequently be effected covering any of the property hereby
insured, and unless such notice be given and the particulars of such insurance or insurances
be stated in or endorsed on this Policy by or on behalf of the Company before the occurrence
of any loss or damage, all benefits under this Policy shall be forfeited; or in the 1930 case of
Santa Ana vs. Commercial Union Assurance Co. 28 which provided "that any outstanding
insurance upon the whole or a portion of the objects thereby assured must be declared by the
insured in writing and he must cause the company to add or insert it in the policy, without
which such policy shall be null and void, and the insured will not be entitled to indemnity in
case of loss," Condition 3 in the private respondent's policy No. F-14622 does not absolutely
declare void any violation thereof. It expressly provides that the condition "shall not apply
when the total insurance or insurances in force at the time of the loss or damage is not more
than P200,000.00." It is a cardinal rule on insurance that a policy or insurance contract is to be
interpreted liberally in favor of the insured and strictly against the company, the reason being,
undoubtedly, to afford the greatest protection which the insured was endeavoring to secure
when he applied for insurance. It is also a cardinal principle of law that forfeitures are not
favored and that any construction which would result in the forfeiture of the policy benefits
for the person claiming thereunder, will be avoided, if it is possible to construe the policy in a
manner which would permit recovery, as, for example, by finding a waiver for such forfeiture.
29 Stated differently, provisions, conditions or exceptions in policies which tend to work a

forfeiture of insurance policies should be construed most strictly against those for whose
benefits they are inserted, and most favorably toward those against whom they are intended
to operate. 30 The reason for this is that, except for riders which may later be inserted, the
insured sees the contract already in its final form and has had no voice in the selection or
arrangement of the words employed therein. On the other hand, the language of the contract
was carefully chosen and deliberated upon by experts and legal advisers who had acted
exclusively in the interest of the insurers and the technical language employed therein is rarely
understood by ordinary laymen. 31
II. With these principles in mind, we are of the opinion that Condition 3 of the subject policy is
not totally free from ambiguity and must, perforce, be meticulously analyzed. Such analysis
leads us to conclude that (a) the prohibition applies only to double insurance, and (b) the
nullity of the policy shall only be to the extent exceeding P200,000.00 of the total policies
obtained.
The first conclusion is supported by the portion of the condition referring to other insurance
"covering any of the property or properties consisting of stocks in trade, goods in process
and/or inventories only hereby insured," and the portion regarding the insured's declaration
on the subheading CO-INSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the
sum of P50,000.00. A double insurance exists where the same person is insured by several
insurers separately in respect of the same subject and interest. As earlier stated, the insurable
interests of a mortgagor and a mortgagee on the mortgaged property are distinct and separate.
Since the two policies of the PFIC do not cover the same interest as that covered by the policy
of the private respondent, no double insurance exists. The non-disclosure then of the former
policies was not fatal to the petitioner's right to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total
insurance in force at the time of loss does not exceed P200,000.00, the private respondent was
amenable to assume a co-insurer's liability up to a loss not exceeding P200,000.00. What it had
in mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of
"other insurance" clause in fire policies is to prevent over-insurance and thus avert the
perpetration of fraud. When a property owner obtains insurance policies from two or more
insurers in a total amount that exceeds the property's value, the insured may have an
inducement to destroy the property for the purpose of collecting the insurance. The public as
well as the insurer is interested in preventing a situation in which a fire would be profitable to
the insured.32
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R.
SP No. 31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340 is
REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.

XVI
CHERIE PALILEO vs. BEATRIZ COSIO

EN BANC
G.R. No. L-7667; November 28, 1955
BAUTISTA ANGELO, J.:
FACTS:
1. Palileo filed a complaint against Cosio in the CFI of Manila praying that (1) the transaction entered
into between them on December 18, 1951 be declared as one of loan, and the document executed
covering the transaction as one of equitable mortgage to secure the payment of said loan; (2) the
Cosio be ordered to credit to Palileo with the necessary amount from the sum received by the Cosio
from the Associated Insurance & Surety Co., Inc. and to apply the same to the payment of Palileo’s
obligation thus considering it as fully paid; and (3) the Cosio be ordered to pay to Palileo the
difference between the alleged indebtedness of Palileo and the sum received by Cosio from the
aforementioned insurance company, plus the sum allegedly paid to defendant as interest on the
alleged indebtedness.
2. Cosio filed her answer setting up as special defense that the transaction entered into between the
plaintiff and defendant is one of sale with option to repurchase but that the period for repurchase
had expired without plaintiff having returned the price agreed upon as a result of which the
ownership of the property had become consolidated in the defendant. Defendant also set up certain
counterclaims which involve a total amount of P4,900.
3. The case was set for trial on the merits, but because of several postponements asked by the parties,
the same has to be set anew for trial on January 12, 1954. On this date, neither the defendant nor
her counsel appeared, even if the latter had been notified of the postponement almost a month
earlier, and so the court received the evidence of the plaintiff. On January 18, 1954, the court, having
in view the evidence presented, rendered judgment granting the relief prayed for in the complaint.
4. The original counsel for the defendant was substituted and the new counsel immediately moved
that the judgment be set aside on the ground that, due to mistake or excusable negligence,
defendant was unable to present her evidence and the decision was contrary to law, and this
motion having been denied, defendant took the present appeal.
ISSUE:
Whether the lower court committed a grave abuse of discretion in not reopening the case to give defendant
an opportunity to present her evidence considering that the failure of her original counsel to appear was
due to mistake or execusable negligence which ordinary prudence could not have guarded against.
The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said counsel
showed interest in the early disposal of this case by moving the court to have it set for trial. The first date
set was April 7, 1953, but no hearing was had on that date because plaintiff had moved to postpone it. The
case was next set for hearing on April 28, 1953, but on motion again of plaintiff, the hearing was transferred
to November 6, 1953. Then, upon petition of defendant, the trial had to be moved to December 15, 1953,
and because Atty. Guerrero could not appear on said date because of a case he had in Cebu City, the hearing
was postponed to January 18, 1954.
And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was
appointed Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden and
unexpected that Atty. Guerrero, after taking his oath, was unable to wind up his private cases or make any
preparation at all. It is averred that "The days that followed his appointment were very busy days for
defendant's former counsel. There was an immediate need for clearing the backlog of official business,
including the reorganization of the Department of Foreign Affairs and our Foreign Service, and more
importantly, he had to assist the Secretary of Foreign Affairs in negotiations of national importance like the
Japanese reparations, and the revision of the trade agreement with the United States, that, Atty. Guerrero
had to work as much as fourteen hours daily . . . Because of all these unavoidable confusion that followed
in the wake of Atty. Guerrero's sudden and unexpected appointment, the trial of this case scheduled for
January 18, 1954 escaped his memory, and consequently, Atty. Guerrero and the defendant were unable to
appear when the case was called for trial." These reasons, — it is intimated, — constitute excusable
negligence which ordinary prudence could not have guarded against and should have been considered by
the trial court as sufficient justification to grant the petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of
mistake or excusable negligence is addressed to the sound discretion of the court (see Coombs vs. Santos,
24 Phil., 446; Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the exercise of such discretion is
ordinarily not to be disturbed unless it is shown that the court has gravely abused such discretion. (See Tell
vs. Tell, 48 Phil., 70; Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil., 203; Manzanares vs.
Moreta, 38 Phil., 821; Salva vs. Palacio and Leuterio, 90 Phil., 731.) In denying the motion for reopening the
trial court said: "After going over the same arguments, this Court is of the opinion, and so holds that the
decision of this Court of January 18, 1954 should not be disturbed." Considering the stature, ability and
experience of counsel Leon Ma. Guerrero, and the fact that he was given almost one month notice before
the date set for trial, we are persuaded to conclude that the trial court did not abuse its discretion in refusing
to reconsider its decision.
Coming now to the merits of the case, we note that the lower court made the following findings: On
December 18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the following
conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250 a month; (b) that
defendant shall deduct from the loan certain obligations of plaintiff to third persons amounting to P4,550,
plus the sum of P250 as interest for the first month; and (c) that after making the above deductions,
defendant shall deliver to plaintiff only the balance of the loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00
corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is more
than the maximum interest authorized by law. To secure the payment of the aforesaid loan, defendant
required plaintiff to sign a document known as "Conditional Sale of Residential Building", purporting to
convey to defendant, with right to repurchase, a two-story building of strong materials belonging to
plaintiff. This document did not express the true intention of the parties which was merely to place said
property as security for the payment of the loan.
After the execution of the aforesaid document, defendant insured the building against fire with the
Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued in
the name of defendant. The building was partly destroyed by fire and, after proper demand, defendant
collected from the insurance company an indemnity of P13,107.00. Plaintiff demanded from defendant that
she be credited with the necessary amount to pay her obligation out of the insurance proceeds but
defendant refused to do so. And on the strength of these facts, the court rendered decision the dispositive
part of which reads as follows:
Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant, as
shown in Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by the
defendant to plaintiff; ordering the defendant to credit the sum of P13,107 received by the defendant from
the Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in the sum of P12,000.00
as stated in the complaint, thus considering the agreement of December 18, 1951 between the herein
plaintiff and defendant completely paid and leaving still a balance in the sum of P1,107 from the insurance
collected by defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine months as
interest on the sum of P12,000 loaned to plaintiff and the legal interest allowed by law in this transaction
does not exceed 12 per cent per annum, or the sum of P1,440 for one year, so the herein plaintiff and
overpaid the sum of P810 to the defendant, which this Court hereby likewise orders the said defendant to
refund to herein plaintiff, plus the balance of P1,107 representing the difference of the sum loan of P12,000
and the collected insurance of P13,107 from the insurance company abovementioned to which the herein
plaintiff is entitled to receive, and to pay the costs.
The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully
compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107
representing the difference of the loan of P12,000 and the sum of P13,107 collected by said defendant from
the insurance company notwithstanding the fact that it was not proven that the insurance was taken for
the benefit of the mortgagor?
Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an
insurance taken by a mortgagee independently of the mortgagor. The rule is that "where a mortgagee,
independently of the mortgagor, insures the mortgaged property in his own name and for his own interest,
he is entitled to the insurance proceeds in case of loss, but in such case, he is not allowed to retain his claim
against the mortgagor, but is passed by subrogation to the insurer to the extent of the money paid." (Vance
on Insurance, 2d ed., p. 654)Or, stated in another way, "the mortgagee may insure his interest in the
property independently of the mortgagor. In that event, upon the destruction of the property the insurance
money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the
mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his claim against the
mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance money paid." (Vance
on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by this Court in a case that arose in this
jurisdiction. In the case mentioned, an insurance contract was taken out by the mortgagee upon his own
interest, it being stipulated that the proceeds would be paid to him only and when the case came up for
decision, this Court held that the mortgagee, in case of loss, may only recover upon the policy to the extent
of his credit at the time of the loss. It was declared that the mortgaged had no right of action against the
mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40 Phil., 674.)
It is true that there are authorities which hold that "If a mortgagee procures insurance on his separate
interest at his own expense and for his own benefit, without any agreement with the mortgagor with respect
thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance proceeds
applied in reduction of the mortgage debt" (19 R.C.L., p. 405), and that, furthermore, the mortgagee "has
still a right to recover his whole debt of the mortgagor." (King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk
F. Ins. Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington
Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster vs. Equitable Mut. F. Ins.
Co., 2 Gray 216.) But these authorities merely represent the minority view (See case note, 3 Lawyers' Report
Annotated, new series, p. 79). "The general rule and the weight of authority is, that the insurer is thereupon
subrogated to the rights of the mortgagee under the mortgage. This is put upon the analogy of the situation
of the insurer to that of a surety." (Jones on Mortgages, Vol. I, pp. 671-672.)
Considering the foregoing rules, it would appear that the lower court erred in declaring that the proceeds
of the insurance taken out by the defendant on the property mortgaged inured to the benefit of the plaintiff
and in ordering said defendant to deliver to the plaintiff the difference between her indebtedness and the
amount of insurance received by the defendant, for, in the light of the majority rule we have above
enunciated, the correct solution should be that the proceeds of the insurance should be delivered to the
defendant but that her claim against the plaintiff should be considered assigned to the insurance company
who is deemed subrogated to the rights of the defendant to the extent of the money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as
follows:(1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely an
equitable mortgage intended to secure the payment of the loan of P12,000;(2) that the proceeds of the
insurance amounting to P13,107.00 was properly collected by defendant who is not required to account for
it to the plaintiff; (3) that the collection of said insurance proceeds shall not be deemed to have compensated
the obligation of the plaintiff to the defendant, but bars the latter from claiming its payment from the
former; and (4) defendant shall pay to the plaintiff the sum of P810.00 representing the overpayment made
by plaintiff by way of interest on the loan. No pronouncement as to costs.
Bengzon, Montemayor, Reyes, A., Jugo, Labrador , Concepcion, and Reyes, J.B.L., JJ., concur.

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THE INSURANCE CODE OF THE PHILIPPINES

Victor Kenner S. Galang

ETERNAL GARDENS MEMORIAL PARK CORPORATION vs

It must be remembered that an insurance contract is a contract of adhesion which must be

Whether or not a Health Care agreement is considered as an insurance contract.

An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

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

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

Anent the incontestability of the membership of respondent’s husband, we quote with

Davide, Jr., C.J., Puno, and Kapunan, JJ., concur.

PHILIPPINE HEALTH CARE PROVIDERS, INC., vs COMMISSIONER OF INTERNAL REVENUE,

We find merit in petitioners motion for reconsideration.

V. THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE

Furthermore, militating in convincing fashion against the imposition of DST on petitioners

VI. THE POWER TO TAX IS NOT THE POWER TO DESTROY

VII. PETITIONERS TAX LIABILITY WAS EXTINGUISHED UNDER THE PROVISIONS OF RA

IS THE COURT BOUND BY A MINUTE RESOLUTION IN ANOTHER CASE?

WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it

Petitioner Tiu failed to

Respondents Pedrano and

Austria-Martinez, (Acting Chairman), Tinga, and Chico-Nazario, JJ., concur.

FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR, LEONILA M.

JEWEL VILLACORTA, assisted by her husband, GUERRERO VILLACORTA, petitioner, vs.THE

Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

insurance the commerce or property of belligerent, alien subjects, or to do anything detrimental

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION,

We hold that the petition is devoid of merit.

ANNUAL PAYMENT AGREEMENT ON LONG TERM POLICIES; THE INSURED UNDER

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a

29 Stated differently, provisions, conditions or exceptions in policies which tend to work a

Costs against private respondent Country Bankers Insurance Corporation.

CHERIE PALILEO vs. BEATRIZ COSIO

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