Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION 

G.R. No. 92492 June 17, 1993

THELMA VDA. DE CANILANG, petitioner,

vs.
HON. COURT OF APPEALS and GREAT PACIFIC LIFE ASSURANCE CORPORATION, respondents.

Simeon C. Sato for petitioner.

FELICIANO, J.:

On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as suffering from "sinus
tachycardia." The doctor prescribed the following fro him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug.
Mr. Canilang consulted the same doctor again on 3 August 1982 and this time was found to have "acute bronchitis."

On next day, 4 August 1982, Jaime Canilang applied for a "non-medical" insurance policy with respondent Great
Pacific Life Assurance Company ("Great Pacific") naming his wife, Thelma Canilang, as his beneficiary.  Jaime 1

Canilang was issued ordinary life insurance Policy No. 345163, with the face value of P19,700, effective as of 9
August 1982.

On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and "chronic anemia."  Petitioner,
2

widow and beneficiary of the insured, filed a claim with Great Pacific which the insurer denied on 5 December 1983
upon the ground that the insured had concealed material information from it.

Petitioner then filed a complaint against Great Pacific with the Insurance Commission for recovery of the insurance
proceeds. During the hearing called by the Insurance Commissioner, petitioner testified that she was not aware of
any serious illness suffered by her late husband  and that, as far as she knew, her husband had died because of a
3

kidney disorder.  A deposition given by Dr. Wilfredo Claudio was presented by petitioner. There Dr. Claudio stated
4

that he was the family physician of the deceased Jaime Canilang  and that he had previously treated him for "sinus
5

tachycardia" and "acute bronchitis."  Great Pacific for its part presented Dr. Esperanza Quismorio, a physician
6

and a medical underwriter working for Great Pacific.  She testified that the deceased's insurance application had
7

been approved on the basis of his medical declaration.  She explained that as a rule, medical examinations are
8

required only in cases where the applicant has indicated in his application for insurance coverage that he has
previously undergone medical consultation and hospitalization. 9

In a decision dated 5 November 1985, Insurance Commissioner Armando Ansaldo ordered Great Pacific to pay
P19,700 plus legal interest and P2,000.00 as attorney's fees after holding that:

1. the ailment of Jaime Canilang was not so serious that, even if it had been disclosed, it would not have affected
Great Pacific's decision to insure him;

2. Great Pacific had waived its right to inquire into the health condition of the applicant by the issuance of the policy
despite the lack of answers to "some of the pertinent questions" in the insurance application;

3. there was no intentional concealment on the part of the insured Jaime Canilang as he had thought that he was
merely suffering from a minor ailment and simple cold;   and 10

4. Batas Pambansa Blg. 847 which voids an insurance contract, whether or not concealment was intentionally
made, was not applicable to Canilang's case as that law became effective only on 1 June 1985.

On appeal by Great Pacific, the Court of Appeals reversed and set aside the decision of the Insurance
Commissioner and dismissed Thelma Canilang's complaint and Great Pacific's counterclaim. The Court of
Appealed found that the use of the word "intentionally" by the Insurance Commissioner in defining and resolving the
issue agreed upon by the parties at pre-trial before the Insurance Commissioner was not supported by the
evidence; that the issue agreed upon by the parties had been whether the deceased insured, Jaime Canilang, made
a material concealment as the state of his health at the time of the filing of insurance application, justifying
respondent's denial of the claim. The Court of Appeals also found that the failure of Jaime Canilang to disclose
previous medical consultation and treatment constituted material information which should have been
communicated to Great Pacific to enable the latter to make proper inquiries. The Court of Appeals finally held that
the Ng Gan Zee case which had involved misrepresentation was not applicable in respect of the case at bar which
involves concealment.

1
Petitioner Thelma Canilang is now before this Court on a Petition for Review on Certiorari alleging that:

1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not holding that the issue in the case
agreed upon between the parties before the Insurance Commission is whether or not Jaime Canilang "intentionally"
made material concealment in stating his state of health;

2. . . . at any rate, the non-disclosure of certain facts about his previous health conditions does not amount to fraud
and private respondent is deemed to have waived inquiry thereto.  11

The medical declaration which was set out in the application for insurance executed by Jaime Canilang read as
follows:

MEDICAL DECLARATION

I hereby declare that:

(1) I have not been confined in any hospital, sanitarium or infirmary, nor receive any medical or surgical
advice/attention within the last five (5) years.

(2) I have never been treated nor consulted a physician for a heart condition, high blood pressure, cancer, diabetes,
lung, kidney, stomach disorder, or any other physical impairment.

(3) I am, to the best of my knowledge, in good health.

EXCEPTIONS:

________________________________________________________________________________

GENERAL DECLARATION

I hereby declare that all the foregoing answers and statements are complete, true and correct. I hereby agree that if
there be any fraud or misrepresentation in the above statements material to the risk, the INSURANCE COMPANY
upon discovery within two (2) years from the effective date of insurance shall have the right to declare such
insurance null and void. That the liabilities of the Company under the said Policy/TA/Certificate shall accrue and
begin only from the date of commencement of risk stated in the Policy/TA/Certificate, provided that the first premium
is paid and the Policy/TA/Certificate is delivered to, and accepted by me in person, when I am in actual good health.

Signed at Manila his 4th day of August, 1992.

Illegible
——————————
Signature of Applicant.  12

We note that in addition to the negative statements made by Mr. Canilang in paragraph 1 and 2 of the medical
declaration, he failed to disclose in the appropriate space, under the caption "Exceptions," that he had twice
consulted Dr. Wilfredo B. Claudio who had found him to be suffering from "sinus tachycardia" and "acute bronchitis."

The relevant statutory provisions as they stood at the time Great Pacific issued the contract of insurance and at the
time Jaime Canilang died, are set out in P.D. No. 1460, also known as the Insurance Code of 1978, which went into
effect on 11 June 1978. These provisions read as follows:

Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.

xxx xxx xxx

Sec. 28. Each party to a contract of insurance must communicate to the other, in good faith, all factors  within his
knowledge which are material to the contract and as to which he makes no warranty, and which the other has not
the means of ascertaining. (Emphasis supplied)

Under the foregoing provisions, the information concealed must be information which the concealing party knew and
"ought to [have] communicate[d]," that is to say, information which was "material to the contract." The test of
materiality is contained in Section 31 of the Insurance Code of 1978 which reads:

2
Sec. 31. Materially is to be determined not by the event, but solely by the probable and reasonable influence of the
facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries. (Emphasis supplied)

"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per minute."    The symptoms of
13

this condition include pounding in the chest and sometimes faintness and weakness of the person affected. The
following elaboration was offered by Great Pacific and set out by the Court of Appeals in its Decision:

Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per minute. (Harrison' s Principles of
Internal Medicine, 8th ed. [1978], p. 1193.) It is, among others, a common reaction to heart disease, including
myocardial infarction, and heart failure per se. (Henry J.L. Marriot, M.D., Electrocardiography, 6th ed., [1977], p.
127.) The medication prescribed by Dr. Claudio for treatment of Canilang's ailment on June 18, 1982, indicates the
condition that said physician was trying to manage. Thus, he prescribed Trazepam, (Philippine Index of Medical
Specialties (PIMS), Vol. 14, No. 3, Dec. 1985, p. 112) which is anti-anxiety, anti-convulsant, muscle-relaxant;
and Aptin, (Idem, p. 36) a cardiac drug, for palpitations and nervous heart. Such treatment could have been a very
material information to the insurer in determining the action to be take on Canilang's application for life insurance
coverage.  14

We agree with the Court of Appeals that the information which Jaime Canilang failed to disclose was material to the
ability of Great Pacific to estimate the probable risk he presented as a subject of life insurance. Had Canilang
disclosed his visits to his doctor, the diagnosis made and medicines prescribed by such doctor, in the insurance
application, it may be reasonably assumed that Great Pacific would have made further inquiries and would have
probably refused to issue a non-medical insurance policy or, at the very least, required a higher premium for the
same coverage.   The materiality of the information withheld by Great Pacific did not depend upon the state of mind
15

of Jaime Canilang. A man's state of mind or subjective belief is not capable of proof in our judicial process, except
through proof of external acts or failure to act from which inferences as to his subjective belief may be reasonably
drawn. Neither does materiality depend upon the actual or physical events which ensue. Materiality relates rather to
the "probable and reasonable influence of the facts" upon the party to whom the communication should have been
made, in assessing the risk involved in making or omitting to make further inquiries and in accepting the application
for insurance; that "probable and reasonable influence of the facts" concealed must, of course, be determined
objectively, by the judge ultimately.

The insurance Great Pacific applied for was a "non-medical" insurance policy. In Saturnino v. Philippine-American
Life Insurance Company,   this Court held that:
16

. . . if anything, the waiver of medical examination [in a non-medical insurance contract] renders even more material
the information required of the applicant concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer takes into consideration in deciding
whether to issue the policy or not . . . .   (Emphasis supplied)
17

The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain information to the
insurer was not "intentional" in nature, for the reason that Jaime Canilang believed that he was suffering from minor
ailment like a common cold. Section 27 of the Insurance Code of 1978 as it existed from 1974 up to 1985, that is,
throughout the time range material for present purposes, provided that:

Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.

The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:

Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to rescind a contract of
insurance. (Emphasis supplied)

Upon the other hand, in 1985, the Insurance Code of 1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance Code of 1978 so as to read as follows:

Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of
insurance. (Emphasis supplied)

The unspoken theory of the Insurance Commissioner appears to have been that by deleting the phrase "intentional
or unintentional," the Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874) intended to limit the kinds of
concealment which generate a right to rescind on the part of the injured party to "intentional concealments." This
argument is not persuasive. As a simple matter of grammar, it may be noted that "intentional" and "unintentional"
cancel each other out. The net result therefore of the phrase "whether intentional or unitentional" is precisely  to
leave unqualified the term "concealment." Thus, Section 27 of the Insurance Code of 1978 is properly read as
referring to "any concealment" without regard to whether such concealment is intentional or unintentional. The
phrase "whether intentional or unintentional" was in fact superfluous. The deletion of the phrase "whether intentional

3
or unintentional" could not have had the effect of imposing an affirmative requirement that a concealment must be
intentional if it is to entitle the injured party to rescind a contract of insurance. The restoration in 1985 by B.P. Blg.
874 of the phrase "whether intentional or unintentional" merely underscored the fact that all throughout (from 1914
to 1985), the statute did not require proof that concealment must be "intentional" in order to authorize rescission by
the injured party.

In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such that the failure to
communicate must have been intentional rather than merely inadvertent. For Jaime Canilang could not have been
unaware that his heart beat would at times rise to high and alarming levels and that he had consulted a doctor twice
in the two (2) months before applying for non-medical insurance. Indeed, the last medical consultation took place
just the day before the insurance application was filed. In all probability, Jaime Canilang went to visit his doctor
precisely because of the discomfort and concern brought about by his experiencing "sinus tachycardia."

We find it difficult to take seriously the argument that Great Pacific had waived inquiry into the concealment by
issuing the insurance policy notwithstanding Canilang's failure to set out answers to some of the questions in the
insurance application. Such failure precisely constituted concealment on the part of Canilang. Petitioner's argument,
if accepted, would obviously erase Section 27 from the Insurance Code of 1978.

It remains only to note that the Court of Appeals finding that the parties had not agreed in the pretrial before the
Insurance Commission that the relevant issue was whether or not Jaime Canilang had intentionally concealed
material information from the insurer, was supported by the evidence of record, i.e., the Pre-trial Order itself dated
17 October 1984 and the Minutes of the Pre-trial Conference dated 15 October 1984, which "readily shows that the
word "intentional" does not appear in the statement or definition of the issue in the said Order and Minutes."  18

WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the Court of Appeals dated
16 October 1989 in C.A.-G.R. SP No. 08696 is hereby AFFIRMED. No pronouncement as to the costs.

SO ORDERED.

Bidin, Davide, Jr., Romero and Melo, JJ., concur.

4
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-34200 September 30, 1982

REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitioners-appellants,

vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST INSTANCE OF RIZAL, BRANCH V, QUEZON
CITY, respondents-appellees.

K.V. Faylona for petitioners-appellants.

L. L. Reyes for respondents-appellees.

VASQUEZ, J.:

The question of law raised in this case that justified a direct appeal from a decision of the Court of First Instance Rizal,
Branch V, Quezon City, to be taken directly to the Supreme Court is whether or not the acceptance by the private
respondent insurance corporation of the premium and the issuance of the corresponding certificate of insurance should
be deemed a waiver of the exclusionary condition of overage stated in the said certificate of insurance.

The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied with respondent insurance
corporation for insurance coverage against accident and injuries. She filled up the blank application form given to her
and filed the same with the respondent insurance corporation. In the said application form which was dated April 15,
1969, she gave the date of her birth as July 11, 1904. On the same date, she paid the sum of P20.00 representing the
premium for which she was issued the corresponding receipt signed by an authorized agent of the respondent insurance
corporation. (Rollo, p. 27.) Upon the filing of said application and the payment of the premium on the policy applied for,
the respondent insurance corporation issued to Carmen O. Lapuz its Certificate of Insurance No. 128866. (Rollo, p. 28.)
The policy was to be effective for a period of 90 days.

On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O. Lapuz died in a vehicular
accident in the North Diversion Road.

On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the named beneficiary in the policy,
filed her claim for the proceeds of the insurance, submitting all the necessary papers and other requisites with the
private respondent. Her claim having been denied, Regina L. Edillon instituted this action in the Court of First Instance of
Rizal on August 27, 1969.

In resisting the claim of the petitioner, the respondent insurance corporation relies on a provision contained in the
Certificate of Insurance, excluding its liability to pay claims under the policy in behalf of "persons who are under the age
of sixteen (16) years of age or over the age of sixty (60) years ..." It is pointed out that the insured being over sixty (60)
years of age when she applied for the insurance coverage, the policy was null and void, and no risk on the part of the
respondent insurance corporation had arisen therefrom.

The trial court sustained the contention of the private respondent and dismissed the complaint; ordered the petitioner
to pay attorney's fees in the sum of ONE THOUSAND (P1,000.00) PESOS in favor of the private respondent; and ordered
the private respondent to return the sum of TWENTY (P20.00) PESOS received by way of premium on the insurancy
policy. It was reasoned out that a policy of insurance being a contract of adhesion, it was the duty of the insured to know
the terms of the contract he or she is entering into; the insured in this case, upon learning from its terms that she could
not have been qualified under the conditions stated in said contract, what she should have done is simply to ask for a
refund of the premium that she paid. It was further argued by the trial court that the ruling calling for a liberal
interpretation of an insurance contract in favor of the insured and strictly against the insurer may not be applied in the
present case in view of the peculiar facts and circumstances obtaining therein.

We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was not concealed to the insurance
company. Her application for insurance coverage which was on a printed form furnished by private respondent and
which contained very few items of information clearly indicated her age of the time of filing the same to be almost 65
years of age. Despite such information which could hardly be overlooked in the application form, considering its

5
prominence thereon and its materiality to the coverage applied for, the respondent insurance corporation received her
payment of premium and issued the corresponding certificate of insurance without question. The accident which
resulted in the death of the insured, a risk covered by the policy, occurred on May 31, 1969 or FORTY-FIVE (45) DAYS
after the insurance coverage was applied for. There was sufficient time for the private respondent to process the
application and to notice that the applicant was over 60 years of age and thereby cancel the policy on that ground if it
was minded to do so. If the private respondent failed to act, it is either because it was willing to waive such
disqualification; or, through the negligence or incompetence of its employees for which it has only itself to blame, it
simply overlooked such fact. Under the circumstances, the insurance corporation is already deemed in estoppel. It
inaction to revoke the policy despite a departure from the exclusionary condition contained in the said policy
constituted a waiver of such condition, as was held in the case of "Que Chee Gan vs. Law Union Insurance Co., Ltd.,", 98
Phil. 85. This case involved a claim on an insurance policy which contained a provision as to the installation of fire
hydrants the number of which depended on the height of the external wan perimeter of the bodega that was insured.
When it was determined that the bodega should have eleven (11) fire hydrants in the compound as required by the
terms of the policy, instead of only two (2) that it had, the claim under the policy was resisted on that ground. In ruling
that the said deviation from the terms of the policy did not prevent the claim under the same, this Court stated the
following:

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of
the so-called fire hydrants warranty, for the reason that knowing fully an that the number of hydrants demanded
therein never existed from the very beginning, the appellant nevertheless issued the policies in question subject to such
warranty, and received the corresponding premiums. It would be perilously close to conniving at fraud upon the insured
to allow appellant to claim now as void ab initio the policies that it had issued to the plaintiff without warning of their
fatal defect, of which it was informed, and after it had misled the defendant into believing that the policies were
effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there were only
two fire hydrants installed by Que Chee Gan and two others nearby, owned by the municipality of Tabaco, contrary to
the requirements of the warranty in question. Such fact appears from positive testimony for the insured that appellant's
agents inspected the premises; and the simple denials of appellant's representative (Jamiczon) can not overcome that
proof. That such inspection was made it moreover rendered probable by its being a prerequisite for the fixing of the
discount on the premium to which the insured was entitled, since the discount depended on the number of hydrants,
and the fire fighting equipment available (See"'Scale of Allowances" to which the policies were expressly made subject).
The law, supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as
follows:

It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing
facts which, if insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of
conditions in the contract inconsistent with the known facts, and the insurer is stopped thereafter from asserting the
breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary, that
an insurance company intends to execute a valid contract in return for the premium received; and when the policy
contains a condition which renders it voidable at its inception, and this result is known to the insurer, it will be presumed
to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured
into thinking he is insured when in fact he is not, and to have taken is money without consideration.' (29 Am. Jur.,
Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a policy of
insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be
valid and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to
be abhorent to fairminded men. It would be to allow the company to treat the policy as valid long enough to get the
premium on it, and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of
the parties. To hold that a literal construction of the policy expressed the true intention of the company would be to
indict it, for fraudulent purposes and designs which we cannot believe it to be guilty of (Wilson vs. Commercial Union
Assurance Co.,  96 Atl. 540, 543544).

A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134, which
involved a violation of the provision of the policy requiring the payment of premiums before the insurance shall become
effective. The company issued the policy upon the execution of a promissory note for the payment of the premium. A

6
check given subsequent by the insured as partial payment of the premium was dishonored for lack of funds. Despite
such deviation from the terms of the policy, the insurer was held liable.

Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic Era to pay the insurance
premium within thirty (30) days from the effective date of policy. By so doing, it has impliedly agreed to modify the
tenor of the insurance policy and in effect, waived the provision therein that it would only pay for the loss or damage in
case the same occurs after the payment of the premium. Considering that the insurance policy is silent as to the mode of
payment, Capital Insurance is deemed to have accepted the promissory note in payment of the premium. This rendered
the policy immediately operative on the date it was delivered. The view taken in most cases in the United States:

... is that although one of conditions of an insurance policy is that "it shall not be valid or binding until the first premium
is paid", if it is silent as to the mode of payment, promissory notes received by the company must be deemed to have
been accepted in payment of the premium. In other words, a requirement for the payment of the first or initial premium
in advance or actual cash may be waived by acceptance of a promissory note...

WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu thereof, the private respondent
insurance corporation is hereby ordered to pay to the petitioner the sum of TEN THOUSAND (P10,000.00) PESOS as
proceeds of Insurance Certificate No. 128866 with interest at the legal rate from May 31, 1969 until fully paid, the
further sum of TWO THOUSAND (P2,000.00) PESOS as and for attorney's fees, and the costs of suit.

SO ORDERED

7
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 186983               February 22, 2012

MA. LOURDES S. FLORENDO, Petitioner,

vs.
PHILAM PLANS, INC., PERLA ABCEDE MA. CELESTE ABCEDE, Respondents.

DECISION

ABAD, J.:

This case is about an insured’s alleged concealment in his pension plan application of his true state of health and its
effect on the life insurance portion of that plan in case of death.

The Facts and the Case

On October 23, 1997 Manuel Florendo filed an application for comprehensive pension plan with respondent Philam
Plans, Inc. (Philam Plans) after some convincing by respondent Perla Abcede. The plan had a pre-need price of
₱997,050.00, payable in 10 years, and had a maturity value of ₱2,890,000.00 after 20 years. 1 Manuel signed the
application and left to Perla the task of supplying the information needed in the application. 2 Respondent Ma. Celeste
Abcede, Perla’s daughter, signed the application as sales counselor. 3

Aside from pension benefits, the comprehensive pension plan also provided life insurance coverage to Florendo. 4 This
was covered by a Group Master Policy that Philippine American Life Insurance Company (Philam Life) issued to Philam
Plans.5 Under the master policy, Philam Life was to automatically provide life insurance coverage, including accidental
death, to all who signed up for Philam Plans’ comprehensive pension plan. 6 If the plan holder died before the maturity of
the plan, his beneficiary was to instead receive the proceeds of the life insurance, equivalent to the pre-need price.
Further, the life insurance was to take care of any unpaid premium until the pension plan matured, entitling the
beneficiary to the maturity value of the pension plan. 7

On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584 8 to Manuel, with petitioner Ma. Lourdes
S. Florendo, his wife, as beneficiary. In time, Manuel paid his quarterly premiums. 9

Eleven months later or on September 15, 1998, Manuel died of blood poisoning. Subsequently, Lourdes filed a claim
with Philam Plans for the payment of the benefits under her husband’s plan. 10 Because Manuel died before his pension
plan matured and his wife was to get only the benefits of his life insurance, Philam Plans forwarded her claim to Philam
Life.11

On May 3, 1999 Philam Plans wrote Lourdes a letter, 12 declining her claim. Philam Life found that Manuel was on
maintenance medicine for his heart and had an implanted pacemaker. Further, he suffered from diabetes mellitus and
was taking insulin. Lourdes renewed her demand for payment under the plan 13 but Philam Plans rejected it, 14 prompting
her to file the present action against the pension plan company before the Regional Trial Court (RTC) of Quezon City. 15

On March 30, 2006 the RTC rendered judgment, 16 ordering Philam Plans, Perla and Ma. Celeste, solidarily, to pay Lourdes
all the benefits from her husband’s pension plan, namely: ₱997,050.00, the proceeds of his term insurance, and
₱2,890,000.00 lump sum pension benefit upon maturity of his plan; ₱100,000.00 as moral damages; and to pay the costs
of the suit. The RTC ruled that Manuel was not guilty of concealing the state of his health from his pension plan
application.

On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision, 17 holding that insurance policies are
traditionally contracts uberrimae fidae or contracts of utmost good faith. As such, it required Manuel to disclose to
Philam Plans conditions affecting the risk of which he was aware or material facts that he knew or ought to know. 18

Issues Presented

The issues presented in this case are:

1. Whether or not the CA erred in finding Manuel guilty of concealing his illness when he kept blank and did not answer
questions in his pension plan application regarding the ailments he suffered from;

8
2. Whether or not the CA erred in holding that Manuel was bound by the failure of respondents Perla and Ma. Celeste to
declare the condition of Manuel’s health in the pension plan application; and

3. Whether or not the CA erred in finding that Philam Plans’ approval of Manuel’s pension plan application and
acceptance of his premium payments precluded it from denying Lourdes’ claim.

Rulings of the Court

One. Lourdes points out that, seeing the unfilled spaces in Manuel’s pension plan application relating to his medical
history, Philam Plans should have returned it to him for completion. Since Philam Plans chose to approve the application
just as it was, it cannot cry concealment on Manuel’s part. Further, Lourdes adds that Philam Plans never queried
Manuel directly regarding the state of his health. Consequently, it could not blame him for not mentioning it. 19

But Lourdes is shifting to Philam Plans the burden of putting on the pension plan application the true state of Manuel’s
health. She forgets that since Philam Plans waived medical examination for Manuel, it had to rely largely on his stating
the truth regarding his health in his application. For, after all, he knew more than anyone that he had been under
treatment for heart condition and diabetes for more than five years preceding his submission of that application. But he
kept those crucial facts from Philam Plans.

Besides, when Manuel signed the pension plan application, he adopted as his own the written representations and
declarations embodied in it. It is clear from these representations that he concealed his chronic heart ailment and
diabetes from Philam Plans. The pertinent portion of his representations and declarations read as follows:

I hereby represent and declare to the best of my knowledge that:

xxxx

(c) I have never been treated for heart condition, high blood pressure, cancer, diabetes, lung, kidney or stomach
disorder or any other physical impairment in the last five years.

(d) I am in good health and physical condition.

If your answer to any of the statements above reveal otherwise, please give details in the space provided for:

Date of confinement : ____________________________

Name of Hospital or Clinic : ____________________________

Name of Attending Physician : ____________________________

Findings : ____________________________

Others: (Please specify) : ____________________________

x x x x.20 (Emphasis supplied)

Since Manuel signed the application without filling in the details regarding his continuing treatments for heart condition
and diabetes, the assumption is that he has never been treated for the said illnesses in the last five years preceding his
application. This is implicit from the phrase "If your answer to any of the statements above (specifically, the statement: I
have never been treated for heart condition or diabetes) reveal otherwise, please give details in the space provided for."
But this is untrue since he had been on "Coumadin," a treatment for venous thrombosis, 21 and insulin, a drug used in the
treatment of diabetes mellitus, at that time. 22

Lourdes insists that Manuel had concealed nothing since Perla, the soliciting agent, knew that Manuel had a pacemaker
implanted on his chest in the 70s or about 20 years before he signed up for the pension plan. 23 But by its tenor, the
responsibility for preparing the application belonged to Manuel. Nothing in it implies that someone else may provide the
information that Philam Plans needed. Manuel cannot sign the application and disown the responsibility for having it
filled up. If he furnished Perla the needed information and delegated to her the filling up of the application, then she
acted on his instruction, not on Philam Plans’ instruction.

Lourdes next points out that it made no difference if Manuel failed to reveal the fact that he had a pacemaker implant in
the early 70s since this did not fall within the five-year timeframe that the disclosure contemplated. 24 But a pacemaker is
an electronic device implanted into the body and connected to the wall of the heart, designed to provide regular, mild,
electric shock that stimulates the contraction of the heart muscles and restores normalcy to the heartbeat. 25 That

9
Manuel still had his pacemaker when he applied for a pension plan in October 1997 is an admission that he remained
under treatment for irregular heartbeat within five years preceding that application.

Besides, as already stated, Manuel had been taking medicine for his heart condition and diabetes when he submitted his
pension plan application. These clearly fell within the five-year period. More, even if Perla’s knowledge of Manuel’s
pacemaker may be applied to Philam Plans under the theory of imputed knowledge, 26 it is not claimed that Perla was
aware of his two other afflictions that needed medical treatments. Pursuant to Section 27 27 of the Insurance Code,
Manuel’s concealment entitles Philam Plans to rescind its contract of insurance with him.

Two. Lourdes contends that the mere fact that Manuel signed the application in blank and let Perla fill in the required
details did not make her his agent and bind him to her concealment of his true state of health. Since there is no evidence
of collusion between them, Perla’s fault must be considered solely her own and cannot prejudice Manuel. 28

But Manuel forgot that in signing the pension plan application, he certified that he wrote all the information stated in it
or had someone do it under his direction. Thus:

APPLICATION FOR PENSION PLAN

(Comprehensive)

I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program described herein in accordance with the
General Provisions set forth in this application and hereby certify that the date and other information stated herein are
written by me or under my direction. x x x. 29 (Emphasis supplied)

Assuming that it was Perla who filled up the application form, Manuel is still bound by what it contains since he certified
that he authorized her action. Philam Plans had every right to act on the faith of that certification.

Lourdes could not seek comfort from her claim that Perla had assured Manuel that the state of his health would not
hinder the approval of his application and that what is written on his application made no difference to the insurance
company. But, indubitably, Manuel was made aware when he signed the pension plan application that, in granting the
same, Philam Plans and Philam Life were acting on the truth of the representations contained in that application. Thus:

DECLARATIONS AND REPRESENTATIONS

xxxx

I agree that the insurance coverage of this application is based on the truth of the foregoing representations and is
subject to the provisions of the Group Life Insurance Policy issued by THE PHILIPPINE AMERICAN LIFE INSURANCE CO. to
PHILAM PLANS, INC.30 (Emphasis supplied)

As the Court said in New Life Enterprises v. Court of Appeals: 31

It may be true that x x x insured persons may accept policies without reading them, and that this is not negligence per
se. But, this is not without any exception. It is and was incumbent upon petitioner Sy to read the insurance contracts,
and this can be reasonably expected of him considering that he has been a businessman since 1965 and the contract
concerns indemnity in case of loss in his money-making trade of which important consideration he could not have been
unaware as it was precisely the reason for his procuring the same. 32

The same may be said of Manuel, a civil engineer and manager of a construction company. 33 He could be expected to
know that one must read every document, especially if it creates rights and obligations affecting him, before signing the
same. Manuel is not unschooled that the Court must come to his succor. It could reasonably be expected that he would
not trifle with something that would provide additional financial security to him and to his wife in his twilight years.

Three. In a final attempt to defend her claim for benefits under Manuel’s pension plan, Lourdes points out that any
defect or insufficiency in the information provided by his pension plan application should be deemed waived after the
same has been approved, the policy has been issued, and the premiums have been collected. 34

The Court cannot agree. The comprehensive pension plan that Philam Plans issued contains a one-year incontestability
period. It states:

VIII. INCONTESTABILITY

After this Agreement has remained in force for one (1) year, we can no longer contest for health reasons any claim for
insurance under this Agreement, except for the reason that installment has not been paid (lapsed), or that you are not
insurable at the time you bought this pension program by reason of age. If this Agreement lapses but is reinstated

10
afterwards, the one (1) year contestability period shall start again on the date of approval of your request for
reinstatement.35 1âwphi1

The above incontestability clause precludes the insurer from disowning liability under the policy it issued on the ground
of concealment or misrepresentation regarding the health of the insured after a year of its issuance.

Since Manuel died on the eleventh month following the issuance of his plan, 36 the one year incontestability period has
not yet set in. Consequently, Philam Plans was not barred from questioning Lourdes’ entitlement to the benefits of her
husband’s pension plan.

WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of Appeals in CA-G.R. CV 87085 dated
December 18, 2007.

SO ORDERED.

11
 FIRST DIVISION

G.R. No. 125678      March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

YNARES-SANTIAGO, J.:

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

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

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued
Health Care Agreement No. P010194. Under the agreement, respondent’s husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient
benefits" such as annual physical examinations, preventive health care and other out-patient services.

Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990,
then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per
disability.2

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC)
for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits
under the health care agreement. However, petitioner denied her claim saying that the Health Care Agreement was
void. According to petitioner, there was a concealment regarding 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.

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

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

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of
P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;

2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of  P10,000.00 as exemplary damages to plaintiff;

4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.

SO ORDERED.3

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved
petitioner Reverente.4 Petitioner’s motion for reconsideration was denied. 5 Hence, petitioner brought the instant

12
petition for review, raising the primary argument that a health care agreement is not an insurance contract; hence the
"incontestability clause" under the Insurance Code 6 does not apply.1âwphi1.nêt

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

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

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

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

5. In consideration of the 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.9 Once the member incurs hospital, medical or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract.

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

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

13
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. 13

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

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

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

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

1. Prior notice of cancellation to insured;

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

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

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

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

14
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. 23

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

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

SO ORDERED.

15
 FIRST DIVISION

G.R. No. 119176      March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE COMPANY, INC.) and THE
COURT OF APPEALS, respondents.

KAPUNAN, J.:

This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of
Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax
Appeals in C.T.A. Case No. 4583.

The facts of the case are undisputed.

Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance Company, Inc.) is a
domestic corporation registered with the Securities and Exchange Commission and engaged in life insurance business. In
the years prior to 1984, private respondent issued a special kind of life insurance policy known as the "Junior Estate
Builder Policy," the distinguishing feature of which is a clause providing for an automatic increase in the amount of life
insurance coverage upon attainment of a certain age by the insured without the need of issuing a new policy. The clause
was to take effect in the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only on the
initial sum assured.

In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of  P100.00 per share or a total
par value of P5,000,000.00. The actual value of said shares, represented by its book value, was P19,307,500.00.
Documentary stamp taxes were paid based only on the par value of P5,000,000.00 and not on the book
value.1âwphi1.nêt

Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of
(a) P464,898.75, corresponding to the amount of automatic increase of the sum assured on the policy issued by
respondent, and (b) P78,991.25 corresponding to the book value in excess of the par value of the stock dividends. The
computation of the deficiency documentary stamp taxes is as follows:

On Policies Issued:

Total policy issued during the year P1,360,054,000.00

Documentary stamp tax due thereon  

(P1,360,054,000.00 divided by P200.00
multiplied by P0.35) P 2,380,094.50

Less: Payment P 1,915,495.75

Deficiency P 464,598.75

Add: Compromise Penalty 300.00

-----------------------

TOTAL AMOUNT DUE & P 464,898.75

COLLECTIBLE

16
Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court of
Tax Appeals, docketed as CTA Case No. 4583.

On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock
dividends, as well as on the insurance policy. The dispositive portion of the CTA’s decision reads:

WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and P78,991.25 or a
total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to
desist from collecting said deficiency documentary stamp taxes for the same are considered withdrawn.

SO ORDERED.1

Petitioner appealed the CTA’s decision to the Court of Appeals. On November 18, 1994, the Court of Appeals
promulgated a decision affirming the CTA’s decision insofar as it nullified the deficiency assessment on the insurance
policy, but reversing the same with regard to the deficiency assessment on the stock dividends. The CTA ruled that the
correct basis of the documentary stamp tax due on the stock dividends is the actual value or book value represented by
the shares. The dispositive portion of the Court of Appeals’ decision states:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax
assessment on the stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies.
Consequently, private respondent is ordered to pay the petitioner herein the sum of  P78,991.25, representing
documentary stamp tax on the stock dividends it issued. No costs pronouncement.

SO ORDERED.2

A motion for reconsideration of the decision having been denied, 3 both the Commissioner of Internal Revenue and
private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No.
118043, private respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the
deficiency tax assessment on the stock dividends. The Commissioner of Internal Revenue, on his part, filed the present
petition questioning that portion of the Court of Appeals’ decision which invalidated the deficiency assessment on the
insurance policy, attributing the following errors:

THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE
POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF
THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.

THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE
INSURANCE ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE
CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A
SINGULAR TRANSACTION.4

Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:

Sec. 173. Stamp taxes upon documents, instruments and papers.  - Upon documents, instruments, loan agreements,
and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident
thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the
corresponding documentary stamp taxes prescribed in the following section of this Title, by the person making, signing,
issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred
when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and  at the same
time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption
from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. (As
amended by PD No. 1994) The basis for the value of documentary stamp taxes to be paid on the insurance policy is
Section 183 of the National Internal Revenue Code which states in part:

The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National
Internal Revenue Code which states in part:

Sec. 183. Stamp tax on life insurance policies.  - On all policies of insurance or other instruments by whatever name the
same may be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a
documentary stamp tax of thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof,  of the
amount insured by any such policy.

17
Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and distinct from the
main agreement and involves another transaction; and that, while no new policy was issued, the original policy was
essentially re-issued when the additional obligation was assumed upon the effectivity of this "automatic increase clause"
in 1984; hence, a deficiency assessment based on the additional insurance not covered in the main policy is in order.

The Court of Appeals sustained the CTA’s ruling that there was only one transaction involved in the issuance of the
insurance policy and that the "automatic increase clause" is an integral part of that policy.

The petition is impressed with merit.

Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of
insurance is set forth.5 Section 50 of the same Code provides that the policy, which is required to be in printed form, may
contain any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of
insurance.6 It is thus clear that any rider, clause, warranty or endorsement pasted or attached to the policy is considered
part of such policy or contract of insurance.

The subject insurance policy at the time it was issued contained an "automatic increase clause." Although the clause was
to take effect only in 1984, it was written into the policy at the time of its issuance. The distinctive feature of the "junior
estate builder policy" called the "automatic increase clause" already formed part and parcel of the insurance contract,
hence, there was no need for an execution of a separate agreement for the increase in the coverage that took effect in
1984 when the assured reached a certain age.

It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or
transaction had and the tax base for the computation of documentary stamp taxes on life insurance policies under
Section 183 is the amount fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary
measurement.7 What then is the amount fixed in the policy? Logically, we believe that the amount fixed in the policy is
the figure written on its face and whatever increases will take effect in the future by reason of the "automatic increase
clause" embodied in the policy without the need of another contract.

Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of
its effectivity, as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus,
the amount insured by the policy at the time of its issuance necessarily included the additional sum covered by the
automatic increase clause because it was already determinable at the time the transaction was entered into and formed
part of the policy.

The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article 1181, 8 by which
the increase of the insurance coverage shall depend upon the happening of the event which constitutes the obligation.
In the instant case, the additional insurance that took effect in 1984 was an obligation subject to a suspensive
obligation,9 but still a part of the insurance sold to which private respondent was liable for the payment of the
documentary stamp tax.

The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original
insurance coverage, but on the increase of the amount insured upon the effectivity of the "Junior Estate Builder Policy."

Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited, 10 tax laws
cannot be circumvented in order to evade the payment of just taxes. In the case at bar, to claim that the increase in the
amount insured (by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should
not be included in the computation of the documentary stamp taxes due on the policy would be a clear evasion of the
law requiring that the tax be computed on the basis of the amount insured by the policy.

WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDE insofar as it
affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed on
private respondent in the amount of P464,898.75 corresponding to the increase in 1984 of the sum under the policy
issued by respondent.

SO ORDERED.

18