INSURANCE | B2015

PHILIPPINE HEALTH CARE PROVIDERS v.

CIR
June 12, 2008
Corona, J
SUMMARY: Petitioner, a health maintenance organization, was assessed by the CIR with tax
defciencies, which include the DST for the years !!" and !!#$ The DST was im%osed on
%etitioner&s health care agreements with its members, which were considered by the CIR as
insurance contracts$ Petitioner argues that such agreements are not contracts of insurance
but contracts for the %ro'ision on a %re%aid basis of medical ser'ices, and thus, not sub(ect
to DST$
DOCTRINE: )nder the law, a contract of insurance is an agreement whereby one
underta*es for a consideration to indemnify another against loss, damage or liability from an
un*nown or contingent e'ent$ Contracts between com%anies li*e %etitioner and the
benefciaries under the %lans are treated as insurance contracts$
FACTS:
Petitioner is a domestic cor%oration whose %rimary %ur%ose is +to establish, maintain,
conduct and o%erate a %re%aid grou% %ractice health care deli'ery system or a health
maintenance organization to ta*e care of the sic* and disabled %ersons enrolled in the
health care %lan and to %ro'ide for the administrati'e, legal, and fnancial res%onsibilities of
the organization$ ,or an annual membershi% fee, indi'idual members are entitled to 'arious
%re'enti'e, diagnostic, and curati'e medical ser'ices %ro'ided by the licensed %hysicians of
the %etitioner cor%oration$
-n .anuary /000, res%ondent Commission on Internal Re'enue 1CIR2 sent a formal
demand letter to %etitioner and the corres%onding assessment notices demanding the
%ayment of defciency taxes 134T and DST2 for !!" and !!#$ The defciency DDST
assessment was im%osed on %etitioner&s health care agreements with the members of its
health care %rogram %ursuant to Section 56 of the !!# Tax Code$
Petitioner %rotested the assessment, but since res%ondent did not act, %etitioner fled
a %etition for re'iew in the Court of Tax 4%%eals 1CT42 see*ing the cancellation of the
defciency assessments$ The CT4 ordered %etitioner to %ay a reduced defciency 34T but
cancelled the defciency DST assessment for !!" and !!#$
Res%ondent a%%ealed, claiming that %etitioner&s health care agreement was a
contract of insurance sub(ect to DST$ In /007, the Court of 4%%eals held that %etitioner&s
health care agreements was in the nature of non8life insurance contracts sub(ect to DST$
Petitioner argued that its health care agreement is not a contract of insurance but a
contract for the %ro'ision on a %re%aid basis of medical ser'ices$ It said that it is a health
maintenance organization regulated by the De%artment of 9ealth, not an insurance
com%any under the (urisdiction of the Insurance Commission$
ISSUE: Is a health care agreement in the nature of an insurance contract and therefore
sub(ect to the documentary stam% tax 1DST2 im%osed under Section 56 of R4 57/7 1Tax
Code of !!#2:
RATIO: ;<S$
8 )nder the law, a contract of insurance is an agreement whereby one underta*es for a
consideration to indemnify another against loss, damage or liability from an un*nown
or contingent e'ent$
8 Petitioner&s health care agreement is %rimarily a contract of indemnity$ Blue Cross
Healthcare Inc., vs. Olivares holds that a healthcare agreement is in the nature of a
non8life insurance %olicy$
8 The term +loss= or +damage= is broad enough to co'er the monetary ex%ense or
liability a member will incur in case of illness or in(ury$ 4lso in case of ex%osure of a
member to liability, he would be entitled to indemnifcation by %etitioner$
,urthermore, the fact that %etitioner must relie'e its member form liability by %aying
for ex%enses arising from the sti%ulated contingencies belies its claim that its
ser'ices are %re%aid$
8 Petitioner does not bear the costs alone but distributes or s%reads them out among a
large grou% of %ersons bearing a similar ris*, that is, among all the other members of
the health care %rogram$ This is insurance$
8 The case of Philamcare Health Systems, Inc. v CA also holds that +the health care
agreement was in the nature of a non8life insurance, which is %rimarily a contract of
indemnity=$
8 Petitioner&s contention that it is a health maintenance organization and not a n
insurance com%any is irrele'ant$ Contracts between com%anies li*e %etitioner and
the benefciaries under the %lans are treated as insurance contracts$
8 The DST is not a tax on the business transacted but an excise on the %ri'ilege,
o%%ortunity, or facility o>ered at exchanges for the transaction of the business$
PHILIPPINE HEALTH CARE PROVIDERS v.
CIR
Setem!er 18, 200"
Corona, J.
SUMMARY: This case is a resolution on the motion for reconsideration fled by %etitioner in
the /005 case$
DOCTRINE: +Princi%al ob(ect and %ur%ose test=? whether the assum%tion of ris* and
indemnifcation of loss are the %rinci%al ob(ect and %ur%ose of the organization or whether
they are merely incidental to its business$ If these are the %rinci%al ob(ects, the business is
that of insurance$ @ut if they are merely incidental and ser'ice is the %rinci%al %ur%ose, then
the business is not insurance$ In our (urisdiction, e'en if a contract contains all the elements
of an insurance contract, if its %rimary %ur%ose is the rendering of ser'ice, it is not a contract
of insurance$
FACTS: 1same facts as the /005 case2
ISSUE: Is a health care agreement in the nature of an insurance contract and therefore
sub(ect to the documentary stam% tax 1DST2 im%osed under Section 56 of R4 57/7 1Tax
Code of !!#2:
RATIO: A-$
8 9ealth maintenance organizations are not engaged in the insurance business
o It is a cardinal rule of statutory construction that no word, clause, sentence,
%ro'ision or %art of a statute shall be considered sur%lusage or su%erBuous,
meaningless, 'oid and insignifcant$ ,rom the language of Section 56, two
reCuisites must concur before the DST can a%%ly? 12 the document must be a
%olicy of insurance or an obligation in the nature of indemnity and 1/2 the
ma*er should be transacting the business ofD insurance$
o Petitioner is an 9E-, an entity that %ro'ides, o>ers or arranges for co'erage
of designated health ser'ices needed by %lan members for a fxed %re%aid
%remium$ The %ayments do not 'ary with the extent, freCuency or ty%e of
ser'ice %ro'ided$ Petitioner, as an 9E-, was not engaged in the business of
insurance during !!" and !!#$
o Section /1/2 of the Insurance Code enumerates what constitutes +doing an
insurance business=?
12 Ea*ing or %ro%osing to ma*e, as insurer, any insurance contract
1/2 Ea*ing or %ro%osing to ma*e, as surety, any contract of suretyshi% as a
'ocation and not as merely incidental to any other legitimate business
or acti'ity of the sirety
1F2 Doing any *ind of business, including a reinsurance business,
s%ecifcally recognized as constituting the doing of an insurance
business within the meaning of this Code
172 Doing or %ro%osing to do any business in substance eCui'alent to any
of the foregoing in a manner designed to e'ade the %ro'isions of this
Code
o )S courts? 9E-s are not in the insurance business$
o +Princi%al ob(ect and %ur%ose test=? whether the assum%tion of ris* and
indemnifcation of loss are the %rinci%al ob(ect and %ur%ose of the organization
or whether they are merely incidental to its business$ If these are the %rinci%al
ob(ects, the business is that of insurance$ @ut if they are merely incidental and
ser'ice is the %rinci%al %ur%ose, then the business is not insurance$
o )S Courts? the main di>erence between an 9E- and an insurance com%any is
that 9E-s underta*e to %ro'ide or arrange for the %ro'ision of medical
ser'ices through %artici%ating %hysicians while insurance com%anies sim%ly
underta*e to indemnify the insured for medical ex%enses incurred u% to a %re8
agreed limit$
o ,or the %ur%oses of determining what +doing an insurance business= means,
was ha'e to scrutinize the o%erations of the business as a whole and not its
mere com%onents$
8 4 health case agreement is not an insurance contract contem%lated under Section
56 of the !!# Tax Code
o Section 56 of the !!# Tax Code, as a tax statute, must be strictly construed
against the taxing authority$
o Since the Blue Cross and Philamcare cases cited in the /005 decisions did not
in'ol'e the inter%retation of tax %ro'isions, they are not a%%licable in the case
at bar$
o Section /12 of the Insurance Code defnes a contract of insurance as an
agreement whereby one underta*es for a consideration to indemnify another
against loss, damage, or liability arising from an un*nown or contingent e'ent$
The following are its elements?
$ The insured has an insurable interest
/$ The insured is sub(ect to a ris* of loss by the ha%%ening of the designed
%eril
F$ The insurer assumes the ris*
7$ Such assum%tion of ris* is %art of a general scheme to distribute actual
losses among a large grou% of %ersons bearing a similar ris*
6$ In consideration of the insurer&s %romise, the insured %ays a %remium$
o Aot all the necessary elements of a contract of insurance are %resent in
%etitioner&s agreements$ There is no loss, damage or liability on the %art of the
member that should be indemnifed by %etitioner as 9E-$
o 4lthough ris* is a %rimary element of an insurance contract, it is not
necessarily true that ris* alone is suGcient to establish it$ 4lmost anyone who
underta*es a contractual obligation always bears a certain degree of fnancial
ris*$ Insurance ris*, or actuarial ris*, is the ris* that the cost of insurance
claims might be higher than the %remiums %aid$
o In our (urisdiction, e'en if a contract contains all the elements of an insurance
contract, if its %rimary %ur%ose is the rendering of ser'ice, it is not a contract
of insurance$
8 There was no legislati'e intent to im%ose DST on health care agreements of 9E-s
o The DST history and the 9E- history clearly show that when the law im%osing
the DST was frst %assed, 9E-s were un*nown in the Phili%%ines$ 9owe'er,
when the 'arious amendments to the DST law were enacted, they were
already in existence in the Phili%%ines$ If it had been the intent of the
legislature to im%ose DST on health care agreements, it could ha'e done so in
clear and categorical terms$ It had many o%%ortunities to do so$ @ut it did not$
8 Petitioner&s tax liability was extinguished under R4 !570, by their a'ailing of the tax
amnesty thru %ayment of 6H of their net worth as of the year /006$

PHIL HEALTH CARE PROVIDERS V. COMMISSIONER OF INTERNAL REVENUE
G.R. NO. 167330 (09/1/09!
,4CTS?
Petitioner is a domestic cor%oration whose %rimary %ur%ose is Ito establish,
maintain, conduct and o%erate a %re%aid grou% %ractice health care deli'ery system
or a health maintenance organization to ta*e care of the sic* and disabled %ersons
enrolled in the health care %lan and to %ro'ide for the administrati'e, legal, and
fnancial res%onsibilities of the organization$I Indi'iduals enrolled in its health care
%rograms %ay an annual membershi% fee and are entitled to 'arious %re'enti'e,
diagnostic and curati'e medical ser'ices %ro'ided by its duly licensed %hysicians,
s%ecialists and other %rofessional technical sta> %artici%ating in the grou% %ractice
health deli'ery system at a hos%ital or clinic owned, o%erated or accredited by it$
Res%ondent Commissioner of Internal Re'enue JCIRK sent %etitioner a formal
demand letter and the corres%onding assessment notices demanding the %ayment
of defciency taxes, including surcharges and interest, for the taxable years !!"
and !!#$
The defciency Jdocumentary stam% tax 1DST2K assessment was im%osed on
%etitioner&s health care agreement with the members of its health care %rogram$
Res%ondent a%%ealed the CT4 decision to the JCourt of 4%%eals 1C42K insofar as it
cancelled the DST assessment$ 9e claimed that %etitioner&s health care agreement
was a contract of insurance sub(ect to DST under Section 56 of the !!# Tax Code$
-n 4ugust ", /007, the C4 rendered its decision$ It held that %etitioner&s health
care agreement was in the nature of a non8life insurance contract sub(ect to DST$
Petitioner mo'ed for reconsideration but the C4 denied it$ 9ence, %etitioner fled
this case$

ISSUE:
Is the %etitioner engaged in the insurance business:

SC RULING:

The mere %resence of ris* would be insuGcient to o'erride the %rimary %ur%ose of
the business to %ro'ide medical ser'ices as needed, with %ayment made directly to
the %ro'ider of these ser'ices$/! In short, e'en if %etitioner assumes the ris* of
%aying the cost of these ser'ices e'en if signifcantly more than what the member
has %re%aid, it ne'ertheless cannot be considered as being engaged in the
insurance business$
In our (urisdiction, a commentator of our insurance laws has %ointed out that, e'en
if a contract contains all the elements of an insurance contract, if its %rimary
%ur%ose is the rendering of ser'ice, it is not a contract of insurance?
It does not necessarily follow howe'er, that a contract containing all the four
elements mentioned abo'e would be an insurance contract$ T"# $%&'(%) $*%$+,#
+- ."# $(%.&#, &/ '(0&/1 ."# 2+/.%(2. '() /#1(.# ."# #3&,.#/2# +- (/
&/,*%(/2# 2+/.%(2.$ ,or exam%le, a law frm which enters into contracts with
clients whereby in consideration of %eriodical %ayments, it %romises to re%resent
such clients in all suits for or against them, is not engaged in the insurance
business$ Its contracts are sim%ly for the %ur%ose of rendering %ersonal ser'ices$ -n
the other hand, a contract by which a cor%oration, in consideration of a sti%ulated
amount, agrees at its own ex%ense to defend a %hysician against all suits for
damages for mal%ractice is one of insurance, and the cor%oration will be deemed as
engaged in the business of insurance$ )nli*e the lawyer&s retainer contract, the
essential %ur%ose of such a contract is not to render %ersonal ser'ices, but to
indemnify against loss and damage resulting from the defense of actions for
mal%ractice$
4lthough ris* is a %rimary element of an insurance contract, it is not necessarily
true that ris* alone is suGcient to establish it$ 4lmost anyone who underta*es a
contractual obligation always bears a certain degree of fnancial ris*$ ConseCuently,
there is a need to distinguish %re%aid ser'ice contracts 1li*e those of %etitioner2
from the usual insurance contracts$