G.R. No.

L-15895
November 29, 1920
RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Jose A. Espiritu for appellant.
Cohn, Fisher and DeWitt for appellee.
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.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life Assurance Company of
Canada through its office in Manila for a life annuity. Two days later he paid the sum of P6,000 to the manager of the company's Manila
office and was given a receipt reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia solicitada por dicho Don Joaquin
Herrer hoy, sujeta al examen medico y aprobacion de la Oficina Central de la Compaia.
The application was immediately forwarded to the head office of the company at Montreal, Canada. 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 of Herrer that the application had been accepted, is a disputed point, which will be discussed later.) On December 4, 1917, the
policy was issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila office of the company stating that
Herrer desired to withdraw his application. 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. This letter was received by Mr. Torres on the morning of
December 21, 1917. Mr. Herrer died on December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of acceptance of his application. To
resolve this question, we propose to go directly to the evidence of record.
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 introduced in evidence as Exhibit 3, of date November 26, 1917, and handed it to the local manager, Mr. E. E. White, for
signature. The witness admitted on cross-examination that after preparing the letter and giving it to he manager, he new nothing of what
became of it. The local manager, Mr. White, testified to having received the cablegram accepting the application of Mr. Herrer from the
home office on November 26, 1917. He said that on the same day he signed a letter notifying Mr. Herrer of this acceptance. The
witness further said that letters, after being signed, were sent to the chief clerk and placed on the mailing desk for transmission. The
witness could not tell if the letter had every actually been placed 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.
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 Title VIII of Book III and Section III of Title III of Book III, 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. 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. (I Joyce, The Law of Insurance, pp. 235, 244.)
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. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)
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.lawph!l.net
Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000 with legal interest from November
20, 1918, until paid, without special finding as to costs in either instance. So ordered.
G.R. No. L-44059 October 28, 1977
THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.
MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as beneficiary in the life insurance policy of a legally married
man claim the proceeds thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd., Policy No. 009929 on a whole-life for
P5,882.00 with a, rider for Accidental Death for the same amount Buenaventura C. Ebrado designated T. Ebrado as the revocable
beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a failing branch of a tree. As the policy was
in force, The Insular Life Assurance Co., Ltd. liable to pay the coverage in the total amount of P11,745.73, representing the face value
of the policy in the amount of P5,882.00 plus the additional benefits for accidental death also in the amount of P5,882.00 and the refund
of P18.00 paid for the premium due November, 1969, minus the unpaid premiums and interest thereon due for January and February,
1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated beneficiary therein, although she
admits that she and the insured Buenaventura C. Ebrado were merely living as husband and wife without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts that she is the one entitled to the
insurance proceeds, not the common-law wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance Co., Ltd. commenced an action for
Interpleader before the Court of First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a pre-trial order was entered reading as
follows: +.wph!1
During the pre-trial conference, the parties manifested to the court. that there is no possibility of amicable settlement.
Hence, the Court proceeded to have the parties submit their evidence for the purpose of the pre-trial and make
admissions for the purpose of pretrial. During this conference, parties Carponia T. Ebrado and Pascuala Ebrado
agreed and stipulated: 1) that the deceased Buenaventura Ebrado was married to Pascuala Ebrado with whom she
has six (legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2) that
during the lifetime of the deceased, he was insured with Insular Life Assurance Co. Under Policy No. 009929 whole
life plan, dated September 1, 1968 for the sum of P5,882.00 with the rider for accidental death benefit as evidenced
by Exhibits A for plaintiffs and Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during
the lifetime of Buenaventura Ebrado, he was living with his common-wife, Carponia Ebrado, with whom she had 2
children although he was not legally separated from his legal wife; 4) that Buenaventura in accident on October 21,
1969 as evidenced by the death Exhibit 3 and affidavit of the police report of his death Exhibit 5; 5) that complainant
Carponia Ebrado filed claim with the Insular Life Assurance Co. which was contested by Pascuala Ebrado who also
filed claim for the proceeds of said policy 6) that in view ofthe adverse claims the insurance company filed this action
against the two herein claimants Carponia and Pascuala Ebrado; 7) that there is now due from the Insular Life
Assurance Co. as proceeds of the policy P11,745.73; 8) that the beneficiary designated by the insured in the policy is
Carponia Ebrado and the insured made reservation to change the beneficiary but although the insured made the
option to change the beneficiary, same was never changed up to the time of his death and the wife did not have any
opportunity to write the company that there was reservation to change the designation of the parties agreed that a
decision be rendered based on and stipulation of facts as to who among the two claimants is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous memoranda from the receipt of this
order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T. Ebrado disqualified from becoming
beneficiary of the insured Buenaventura Cristor Ebrado and directing the payment of the insurance proceeds to the estate of the
deceased insured. The trial court held: +.wph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal conviction for adultery or concubinage
is not essential in order to establish the disqualification mentioned therein. Neither is it also necessary that a finding
of such guilt or commission of those acts be made in a separate independent action brought for the purpose. The
guilt of the donee (beneficiary) may be proved by preponderance of evidence in the same proceeding (the action
brought to declare the nullity of the donation).
It is, however, essential that such adultery or concubinage exists at the time defendant Carponia T. Ebrado was made
beneficiary in the policy in question for the disqualification and incapacity to exist and that it is only necessary that
such fact be established by preponderance of evidence in the trial. Since it is agreed in their stipulation above-quoted
that the deceased insured and defendant Carponia T. Ebrado were living together as husband and wife without being
legally married and that the marriage of the insured with the other defendant Pascuala Vda. de Ebrado was valid and
still existing at the time the insurance in question was purchased there is no question that defendant Carponia T.

Ebrado is disqualified from becoming the beneficiary of the policy in question and as such she is not entitled to the
proceeds of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976, the Appellate Court certified the case
to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new Insurance Code (PD No. 612, as amended)
does not contain any specific provision grossly resolutory of the prime question at hand. Section 50 of the Insurance Act which provides
that "(t)he insurance shag be applied exclusively to the proper interest of the person in whose name it is made" 1 cannot be validly
seized upon to hold that the mm includes the beneficiary. The word "interest" highly suggests that the provision refers only to the
"insured" and not to the beneficiary, since a contract of insurance is personal in character. 2 Otherwise, the prohibitory laws against illicit
relationships especially on property and descent will be rendered nugatory, as the same could easily be circumvented by modes of
insurance. Rather, the general rules of civil law should be applied to resolve this void in the Insurance Law. Article 2011 of the New Civil
Code states: "The contract of insurance is governed by special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code." When not otherwise specifically provided for by the Insurance Law, the contract of life insurance is governed
by the general rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code, "any person who is forbidden from
receiving any donation under Article 739 cannot be named beneficiary of a fife insurance policy by the person who cannot make a
donation to him. 4 Common-law spouses are, definitely, barred from receiving donations from each other. Article 739 of the new Civil
Code provides: +.wph!1
The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at the time of donation;
Those made between persons found guilty of the same criminal offense, in consideration thereof;
3. Those made to a public officer or his wife, descendants or ascendants by reason of his office.
In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or
donee; and the guilt of the donee may be proved by preponderance of evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned. Both are founded upon
the same consideration: liberality. A beneficiary is like a donee, because from the premiums of the policy which the insured pays out of
liberality, the beneficiary will receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739 of the
new Civil Code should equally operate in life insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who
cannot receive a donation cannot be named as beneficiary in the life insurance policy of the person who cannot make the
donation.5 Under American law, a policy of life insurance is considered as a testament and in construing it, the courts will, so far as
possible treat it as a will and determine the effect of a clause designating the beneficiary by rules under which wins are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a barrier between common law spouses in record to
Property relations since such hip ultimately encroaches upon the nuptial and filial rights of the legitimate family There is every reason to
hold that the bar in donations between legitimate spouses and those between illegitimate ones should be enforced in life insurance
policies since the same are based on similar consideration As above pointed out, a beneficiary in a fife insurance policy is no different
from a donee. Both are recipients of pure beneficence. So long as manage remains the threshold of family laws, reason and morality
dictate that the impediments imposed upon married couple should likewise be imposed upon extra-marital relationship. If legitimate
relationship is circumscribed by these legal disabilities, with more reason should an illicit relationship be restricted by these disabilities.
Thus, in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said: +.wph!1
If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of that court (Court of
Appeals), 'to prohibit donations in favor of the other consort and his descendants because of and undue and improper
pressure and influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que no se enganen
desponjandose el uno al otro por amor que han de consuno' (According to) the Partidas (Part IV, Tit. XI, LAW IV),
reiterating the rationale 'No Mutuato amore invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et
uxorem); then there is very reason to apply the same prohibitive policy to persons living together as husband and wife
without the benefit of nuptials. For it is not to be doubted that assent to such irregular connection for thirty years
bespeaks greater influence of one party over the other, so that the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32 ad Sabinum, fr. 1), 'it would not
be just that such donations should subsist, lest the condition 6f those who incurred guilt should turn out to be better.'
So long as marriage remains the cornerstone of our family law, reason and morality alike demand that the disabilities
attached to marriage should likewise attach to concubinage.
It is hardly necessary to add that even in the absence of the above pronouncement, any other conclusion cannot
stand the test of scrutiny. It would be to indict the frame of the Civil Code for a failure to apply a laudable rule to a
situation which in its essentials cannot be distinguished. Moreover, if it is at all to be differentiated the policy of the law
which embodies a deeply rooted notion of what is just and what is right would be nullified if such irregular relationship
instead of being visited with disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of statutory construction that what is
within the spirit of the law is as much a part of it as what is written, this is it. Otherwise the basic purpose discernible
in such codal provision would not be attained. Whatever omission may be apparent in an interpretation purely literal
of the language used must be remedied by an adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities mentioned in Article 739 may
effectuate. More specifically, with record to the disability on "persons who were guilty of adultery or concubinage at the time of the
donation," Article 739 itself provides: +.wph!1
In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or
donee; and the guilty of the donee may be proved by preponderance of evidence in the same action.
The underscored clause neatly conveys that no criminal conviction for the offense is a condition precedent. In fact, it cannot even be
from the aforequoted provision that a prosecution is needed. On the contrary, the law plainly states that the guilt of the party may be
proved "in the same acting for declaration of nullity of donation. And, it would be sufficient if evidence preponderates upon the guilt of
the consort for the offense indicated. The quantum of proof in criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between the insured and the beneficiary has been conveniently
supplied by the stipulations between the parties in the pre-trial conference of the case. It case agreed upon and stipulated therein that
the deceased insured Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate children; that during
his lifetime, the deceased insured was living with his common-law wife, Carponia Ebrado, with whom he has two children. These
stipulations are nothing less thanjudicial admissions which, as a consequence, no longer require proof and cannot be

contradicted. 8 A fortiori, on the basis of these admissions, a judgment may be validly rendered without going through the rigors of a trial
for the sole purpose of proving the illicit liaison between the insured and the beneficiary. In fact, in that pretrial, the parties even agreed
"that a decision be rendered based on this agreement and stipulation of facts as to who among the two claimants is entitled to the
policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T. Ebrado is hereby declared disqualified to be
the beneficiary of the late Buenaventura C. Ebrado in his life insurance policy. As a consequence, the proceeds of the policy are hereby
held payable to the estate of the deceased insured. Costs against Carponia T. Ebrado.
SO ORDERED.
G.R. No. L-19638
June 20, 1966
FILIPINAS COMPAIA DE SEGUROS, ET AL., petitioners and appellees,
vs.
HON. FRANCISCO Y. MANDANAS, in his capacity as Insurance Commissioner, respondent and appellant.
AGRICULTURAL FIRE INSURANCE & SURETY CO., INC., ET AL., intervenors and appellees.
Jalandoni and Jamir for petitioner and appellees.
Office of the Solicitor General Arturo A. Alafriz, 1st Assistant Solicitor General Esmeraldo Umali and Solicitor Comrade T. Limcaoco for
intervenors and appellees.
CONCEPCION, C.J.:
This is a special civil action for a declaratory relief Thirty-nine (39) non-life insurance companies instituted it, in the Court of First
Instance of Manila, to secure a declaration of legality of Article 22 of the Constitution of the Philippine Rating Bureau, of which they are
members, inasmuch as respondent Insurance Commissioner assails its validity upon the ground that it constitutes an illegal or undue
restraint of trade. Subsequently to the filing of the petition, twenty (20) other non-life insurance companies, likewise, members of said
Bureau, were allowed to intervene in support of the petition. After appropriate proceedings, said court rendered judgment declaring that
the aforementioned Article 22 is neither contrary to law nor against public policy, and that, accordingly, petitioners herein, as well as the
intervenors and other members of the aforementioned Bureau, may lawfully observe and enforce said Article, and are bound to comply
with the provisions thereof, without special pronouncement as to costs. Hence this appeal by respondent Insurance Commissioner, who
insists that the Article in question constitutes an illegal or undue restraint of trade and, hence, null and void.
The record discloses that on March 11, 1960, respondent wrote to said Bureau, a communication expressing his doubts of the validity
of said Article 22, reading:
xxx
xxx
xxx
In respect to the classes of insurance specified in the Objects of the Bureau1 and for Philippine business only, the members of
this Bureau agree not to represent nor to effect reinsurance with, nor to accept reinsurance from, any Company, Body, or
Underwriter licensed to do business in the Philippines not a Member in good standing of this Bureau.
and requesting that said provision, be, accordingly, repealed. On April 11, 1960, respondent wrote another letter to the Bureau inquiring
on the action taken on the subject-matter of his previous communication. In reply thereto, the Bureau advised respondent that the
suggestion to delete said Article 22 was still under consideration by a committee of said Bureau. Soon thereafter, or on May 9, 1961,
the latter was advised by respondent that, being an illegal agreement or combination in restraint of trade, said Article should not be
given force and effect; that failure to comply with this requirement would compel respondent to suspend the license issued to the
Bureau; and that the latter should circularize all of its members on this matter and advise them that "violation of this requirement by any
member of the Bureau" would also compel respondent "to suspend the certificate of authority of the company concerned to do business
in the Philippines". Thereupon, or on May 16, 1961, the present action was commenced.
Briefly, appellant maintains that, since, in the aforementioned Article 22, members of the Bureau "agree not to represent nor to effect
reinsurance with, nor to accept reinsurance from any company, body, or underwriter, licensed to do business in the Philippines not a
member in good standing of the Bureau", said provision is illegal as a combination in restraint of trade. As early as August 10, 1916, this
Court had had occasion to declare that the test on whether a given agreement constitutes an unlawful machination or a combination in
restraint of trade
... is, whether, under the particular circumstances of the case and the nature of the particular contract involved in it, the
contract is, or is not, unreasonable. (Ferrazini vs. Gsell, 34 Phil. 697, 712-13.)
This view was reiterated in Ollendorf vs. Abrahamson (38 Phil. 585) and Red Line Transportation Co. vs. Bachrach Motor Co. (67 Phil.
77), in the following language:
...The general tendency, we believe, of modern authority, is to make the test whether the restraint is reasonably necessary for
the protection of the contracting parties. If the contract is reasonably necessary to protect the interest of the parties, it will be
upheld.
xxx
xxx
xxx
...we adopt the modern rule that the validity of restraints upon trade or employment is to be determined by the intrinsic
reasonableness of the restriction in each case, rather than by any fixed rule, and that suchrestrictions may be upheld when not
contrary to the public welfare and not greater than is necessary to afford a fair and reasonable protection to the party in whose
favor it is imposed. (Ollendorf vs. Abrahamson, 38 Phil. 585.)
...The test of validity is whether under the particular circumstances of the case and considering the nature of the particular
contract involved, public interest and welfare are not involved and the restraint is not only reasonably necessary for the
protection of the contracting parties but will not affect the public interest or service. (Red Line Transportation Co. vs. Bachrach
Motor Co., 67 Phil. 77.) (See also, Del Castillo vs. Richmond, 45 Phil. 483.)
The issue in the case at bar hinges, therefore, on the purpose or effect of the disputed provision. The only evidence on this point is the
uncontradicted testimony of Salvador Estrada, Chairman of the Bureau when it was first organized and when he took the witness stand.
Briefly stated, he declared that the purpose of Article 22 is to maintain a high degree or standard of ethical practice, so that insurance
companies may earn and maintain the respect of the public, because the intense competition between the great number of non-life
insurance companies operating in the Philippines is conducive to unethical practices, oftentimes taking the form of underrating; that to
achieve this purpose it is highly desirable to have cooperative action between said companies in the compilation of their total
experience in the business, so that the Bureau could determine more accurately the proper rate of premium to be charged from the
insured; that, several years ago, the very Insurance Commissioner had indicated to the Bureau the necessity of doing something to
combat underrating, for, otherwise, he would urge the amendment of the law so that appropriate measures could be taken therefor by
his office; that much of the work of the Bureau has to do with rate-making and policy-wording; that rate-making is actually dependent
very much on statistics; that, unlike life insurance companies, which have tables of mortality to guide them in the fixing of rates, non-life
insurance companies have, as yet, no such guides; that, accordingly, non-life insurance companies need an adequate record of losses
and premium collections that will enable them to determine the amount of risk involved in each type of risk and, hence, to determine the
rates or premiums that should be charged in insuring every type of risk; that this information cannot be compiled without full cooperation

on the part of the companies concerned, which cannot be expected from non-members of the Bureau, over which the latter has no
control; and that, in addition to submitting information about their respective experience, said Bureau members must, likewise, share in
the rather appreciable expenses entailed in compiling the aforementioned data and in analyzing the same.1wph1.t
We find nothing unlawful, or immoral, or unreasonable, or contrary to public policy either in the objectives thus sought to be attained by
the Bureau, or in the means availed of to achieve said objectives, or in the consequences of the accomplishment thereof. The purpose
of said Article 22 is not to eliminate competition, but to promote ethical practices among non-life insurance companies, although,
incidentally it may discourage, and hence, eliminate unfair competition, through underrating, which in itself is eventually injurious to the
public. Indeed, in the words of Mr. Justice Brandeis:
... the legality of an agreement or regulation cannot be determined by so simple a test, as whether it restrains competition.
Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true
test of legality is whether the restraint imposed is such as merely regulates and promotes competition, or whether it is such as
may suppress or even destroy competition. Todetermine that question the court must ordinarily consider the facts peculiar to
the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the
restraint, and its effect, actual or probable. (Board of Trade of Chicago vs. U.S., 246 U.S. 231, 62 L. ed. 683 [1918].)
Thus, in Sugar Institute, Inc. vs. U.S. (297 U.S. 553), the Federal Supreme Court added:
The restrictions imposed by the Sherman Act are not mechanical or artificial. We have repeatedly said that they set up the
essential standard of reasonableness. Standard Oil Co. vs. United States, 221 U.S. 1, 55 L. ed. 619, 31 S. Ct. 502, 34 L.R.A.
(N.S.) 834, Ann. Cas. 1912D, 734; United States vs. American Tobacco Co., 221 U.S. 106, 55 L. ed. 663, 31 S. Ct. 632. They
are aimed at contracts and combinations which "by reason of intent or the inherent nature of the contemplated acts, prejudice
the public interests by undulyrestraining competition or unduly obstructing the course of trade." Nash vs. United States, 229
U.S. 373, 376, 57 L. ed. 1232, 1235, 33 S. Ct. 780; United States vs. American Linseed Oil Co., 262 U.S. 371, 388, 389, 67 L.
ed. 1035, 1040, 1041, 43 S. Ct. 607. Designed to frustrate unreasonable restraints, they do not prevent the adoption of
reasonable means to protect interstate commerce from destructive or injurious practices and to promote competition upon a
sound basis. Voluntary action to end abuses and to foster fair competitive opportunities in the public interest may be more
effective than legal processes. And cooperative endeavor may appropriately have wider objectives than merely the removal of
evils which are infractions of positive law.
Hence, the City Fiscal of Manila refused to prosecute criminally in Manila Fire Insurance Association for following a policy analogous to
that incorporated in the provision disputed in this case and the action of said official was sustained by the Secretary of Justice, upon the
ground that:
... combinations among insurance companies or their agents to fix and control rates of insurance do not constitute indictable
conspiracies, provided no unlawful means are used in accomplishing their purpose (41 C.J. 161; Aetna Ins. Co. vs.
Commonwealth, 106 Ky. 864, 51 SW 624; Queen Ins. Co. vs. State, 86 Tex. 250, 24 SW 397; I Joyce on Insurance, par. 329a).
Indeed, Mr. Estrada's testimony shows that the limitation upon reinsurance contained in the aforementioned Article 22 does not affect
the public at all, for, whether there is reinsurance or not, the liability of the insurer in favor of the insured is the same. Besides, there are
sufficient foreign reinsurance companies operating in the Philippines from which non-members of the Bureau may secure reinsurance.
What is more, whatever the Bureau may do in the matter of rate-fixing is not decisive insofar as the public is concerned, for no
insurance company in the Philippines may charge a rate of premium that has not been approved by the Insurance Commissioner.
In fact, respondent's Circular No. 54, dated February 261 1954, provides:
II. Non-life Insurance company or Group Association of such companies.
Every non-life insurance company or group or association of such companies doing business in the Philippines shall file with
the Insurance Commissioner for approval general basic schedules showing the premium rates on all classes of risk except
marine, as distinguished from inland marine insurable by such insurance company or association of insurance companies in
this country.
xxx
xxx
xxx
An insurance company or group of such companies may satisfy its obligation to make such filings by becoming a member of
or subscriber to a rating organization which makes such filing and by authorizing the insurance commissioner to accept such
filings of the rating organization on such company's or group's behalf.
III. Requiring Previous Application to and Approval by the Insurance Commissioner before any Change in the Rates Schedules
filed with Him Shall Take Effect.
No change in the schedules filed in compliance with the requirements of the next preceding paragraph shall be made except
upon application duly filed with and approved by the Insurance Commissioner. Said application shall state the changes
proposed and the date of their effectivity; all changes finally approved by the Insurance Commissioner shall be incorporated in
the old schedules or otherwise indicated as new in the new schedules.
IV. Empowering the Insurance Commissioner to Investigate All Non-Life Insurance Rates.
The Insurance Commissioner shall have power to examine any or all rates established by non-life insurance companies or
group or association of such insurance companies in the country. Should any rate appear, in the opinion of the Insurance
Commissioner, unreasonably high or not adequate to the financial safety or soundness to the company charging the same, or
pre-judicial to policy-holders, the Commissioner shall, in such case, hold a hearing and/or conduct an investigation. Should the
result of such hearing and/or investigation show that the rate is unreasonably high or low that it is not adequate to the financial
safety and soundness of the company charging the same, or is prejudicial to policy-holders, the Insurance Commissioner shall
direct a revision of the said rate in accordance with his findings. Any insurance company or group or association of insurance
companies may be required to publish the schedule of rates which may have been revised in accordance herewith.
The decision of the Insurance Commissioner shall be appealable within thirty days after it has been rendered to the Secretary of
Finance.
V. Prohibiting Non-life Insurance Companies and their Agents from Insuring Any Property in this Country at a Rate Different
from that in the Schedules; Unethical Practices.
No insurance company shall engage or participate in the insurance of any property located in the Philippines ... unless the
schedule of rates under which such property is insured has been filed and approved in accordance with the provisions of this
Circular. ... . (Emphasis ours.)
On the same date, the Constitution of the Bureau, containing a provision substantially identical to the one now under consideration, was
approved. Article 2 of said Constitution reads:
2. OBJECTS
The objects of the Bureau shall be:

a. To establish rates in respect of Fire, Earthquake, Riot and Civil Commotion, Automobile and Workmen's Compensation, and
whenever applicable, Marine Insurance business.
xxx
xxx
xxx
c. To file the rates referred to above, tariff rules, and all other conditions or data which may in any way affect premium rates
with the Office of the Insurance Commissioner on behalf of members for approval. (Emphasis ours.)
In compliance with the aforementioned Circular No. 54, in April, 1954, the Bureau applied for the license required therein, and
submitted with its application a copy of said Constitution. On April 28, 1954, respondent's office issued to the Bureau the license applied
for, certifying not only that it had complied with the requirements of Circular No. 54, but, also, that the license empowered it "to engage
in the making of rates or policy conditions to be used by insurance companies in the Philippines". Subsequently, thereafter, the Bureau
applied for and was granted yearly the requisite license to operate in accordance with the provisions of its Constitution. During all this
time, respondent's office did not question, but impliedly acknowledged, the legality of Article 22. It was not until March 11, 1960, that it
assailed its validity.
Respondent's contention is anchored mainly on Paramount Famous Lasky Corp. vs. U.S., 282 U.S. 30, but the same is not in point, not
only because it refers to the conditions under which movie film producers and distributors determine the terms under which theaters or
exhibitors may be allowed to run movie films thereby placing the exhibitors under the control of the producers or distributors and
giving the exhibitors, in effect, no choice as to what films and whose films they will show but, also, because there is, in the film
industry, no agency or officer with powers or functions comparable to those in the Insurance Commissioner, as regards the regulation of
the business concerned and of the transactions involved therein.
Wherefore, the decision appealed from should be, as it is hereby affirmed, without costs. It is so ordered
[G.R. No. 154514. July 28, 2005]
WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY CORPORATION AND THE
STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No. 60144, affirming
the Decision[2] dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there was no
violation of the Insurance Code and the respondents do not need license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The Steamship
Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer).
Subsequently, White Gold was issued a Certificate of Entry and Acceptance. [3] Pioneer also issued receipts evidencing payments for the
coverage. When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latters unpaid balance.
White Gold on the other hand, filed a complaint before the Insurance Commission claiming that Steamship Mutual violated Sections
186[4] and 187[5] of the Insurance Code, while Pioneer violated Sections 299,[6] 300[7] and 301[8] in relation to Sections 302 and 303,
thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to secure a license
because it was not engaged in the insurance business. It explained that Steamship Mutual was a Protection and Indemnity Club (P & I
Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a broker for Steamship Mutual because Steamship
Mutual was not engaged in the insurance business. Moreover, Pioneer was already licensed, hence, a separate license solely as
agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court distinguished
between P & I Clubs vis--vis conventional insurance. The appellate court also held that Pioneer merely acted as a collection agent of
Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES
ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN
INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT
STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN
CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT REMOVING] THE
OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in the
Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to do business in
the Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications issued by the Insurance
Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its assertion, it cites the
definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals[10] as an association composed of shipowners in general
who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning

that the members incur in favor of third parties. It stresses that as a P & I Club, Steamship Mutuals primary purpose is to solicit and
provide protection and indemnity coverage and for this purpose, it has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in the
Philippines. It is merely an association of vessel owners who have come together to provide mutual protection against liabilities
incidental to shipowning.[11] Respondents aver Hyopsung is inapplicable in this case because the issue in Hyopsung was the jurisdiction
of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an insurance business or transacting an insurance
business. These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other
legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an
insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the
provisions of this Code.
. . .
The same provision also provides, the fact that no profit is derived from the making of insurance contracts, agreements or
transactions, or that no separate or direct consideration is received therefor, shall not preclude the existence of an insurance business.
[12]

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.[13]
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.[14]
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses incident to a
marine adventure.[15] Section 99[16] 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. [17] Additionally, mutual insurance associations, or
clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the third party is anyone other than the P & I Club and the
members.[19] By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance
business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of authority mandated
by Section 187[20] of the Insurance Code. It maintains a resident agent in the Philippines to solicit insurance and to collect payments in
its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment of the calls.
Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer, must secure a license from the Insurance
Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance
company is allowed to engage in the insurance business without a license or a certificate of authority from the Insurance Commission.
[21]

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration[22] issued by the Insurance
Commission. It has been licensed to do or transact insurance business by virtue of the certificate of authority [23] issued by the same
agency. However, a Certification from the Commission states that Pioneer does not have a separate license to be an agent/broker of
Steamship Mutual.[24]
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:
SEC. 299 . . .
No 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.
SO ORDERED.

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents.
DECISION

YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health
Systems, Inc. In the standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver
disease, asthma or peptic ulcer? (If Yes, give details).[1]
The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health
Care Agreement No. P010194. Under the agreement, respondents husband was entitled to avail of hospitalization benefits, whether
ordinary or emergency, listed therein. He was also entitled to avail of out-patient benefits such as annual physical examinations,
preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from
March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one
month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care
agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis confinement that he
was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization
expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted at the
Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of April
13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital
where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against
petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for reimbursement of
her expenses plus moral damages and attorneys fees. After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering:
1.
Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus
interest, until the amount is fully paid to plaintiff who paid the same;
2.
Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3.
Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;
4.
Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.[3]
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner
Reverente.[4] Petitioners motion for reconsideration was denied.[5] Hence, petitioner brought the instant petition for review, raising the
primary argument that a health care agreement is not an insurance contract; hence the incontestability clause under the Insurance
Code[6] does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-ups and hospitalization which a member may
immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also points
out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike in an insurance
contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a period of one year, as
compared to insurance contracts which last longer,[7] petitioner argues that the incontestability clause does not apply, as the same
requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance company, which is governed by
the Insurance Commission, but a Health Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration
to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where
the following elements concur:
1.
2.
3.
4.

The insured has an insurable interest;

The insured is subject to a risk of loss by the happening of the designated peril;
The insurer assumes the risk;
Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and
5. In consideration of the insurers promise, the insured pays a premium.[8]
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a
person having an insurable interest against him, may be insured against. Every person has an insurable interest in the life
and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which death
or illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own health. The
health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. [9] Once the member incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for
the same to the extent agreed upon under the contract.

Petitioner argues that respondents husband concealed a material fact in his application. It appears that in the application for
health coverage, petitioners required respondents husband to sign an express authorization for any person, organization or entity that
has any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or
any other medical advice or examination.[10] Specifically, the Health Care Agreement signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application are
full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract of health
care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the mode of
payment applied for is actually paid during the lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that any physician is, by
these presents, expressly authorized to disclose or give testimony at anytime relative to any information acquired by him in his
professional capacity upon any question affecting the eligibility for health care coverage of the Proposed Members and that the
acceptance of any Agreement issued on this application shall be a ratification of any correction in or addition to this application as
stated in the space for Home Office Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicants
medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of __________ to give
to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization, consultation, treatment or any other
medical advice or examination. This authorization is in connection with the application for health care coverage only. A photographic
copy of this authorization shall be as valid as the original.[12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:
Failure to disclose or misrepresentation of any material information by the member in the application or medical examination, whether
intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of Philamcare shall be
limited to return of all Membership Fees paid. An undisclosed or misrepresented information is deemed material if its revelation would
have resulted in the declination of the applicant by Philamcare or the assessment of a higher Membership Fee for the benefit or
benefits applied for.[13]
The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely
depends on opinion rather than fact, especially coming from respondents husband who was not a medical doctor. Where matters of
opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are
untrue.[14] Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if
there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule
although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is
not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a case
and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since in such case the intent to
deceive the insurer is obvious and amounts to actual fraud.[15](Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract.
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:
[16]

1.
Prior notice of cancellation to insured;
2.
Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned;
3.
Must be in writing, mailed or delivered to the insured at the address shown in the policy;
4.
Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on
which cancellation is based.[18]
None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations on liability,
courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. [19] Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract the insurer.
[20]
By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture. [21] This is equally
applicable to Health Care Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar, must be
liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring
coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider.[22]
Anent the incontestability of the membership of respondents husband, we quote with approval the following findings of the trial
court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date of
issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma, and six months
from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired, the defense of
concealment or misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of their
marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the nature of a
contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted that respondent
paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses
incurred by respondent for the deceaseds hospitalization, medication and the professional fees of the attending physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December
14, 1995 is AFFIRMED.
SO ORDERED.

PHILIPPINE HEALTH CARE

PROVIDERS, INC.,
Petitioner,

G.R. No. 167330

Present:
PUNO, C.J., Chairperson,
CORONA,
CHICO-NAZARIO,*
LEONARDO-DE CASTRO and
BERSAMIN, JJ.**

- versus -

COMMISSIONER OF
INTERNAL REVENUE,
Respondent.

Promulgated:
September 18, 2009

x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15.
The State shall protect and promote the right to health of the people and instill health
consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11.
The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the people at
affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and
children. The State shall endeavor to provide free medical care to paupers.[1]
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July 14,
2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.[2]
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is [t]o establish, maintain, conduct and operate a
prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and
disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization. Individuals enrolled in its health care programs pay an annual membership fee
and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed
physicians, specialists and other professional technical staff participating in the group practice health delivery system
at a hospital or clinic owned, operated or accredited by it.
xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand
letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges
and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx
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 xxxx
xxx

xxx

xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the
protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency
VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting
to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully
paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest
from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No.
[231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is
ORDERED to DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST
assessment. He claimed that petitioners health care agreement was a contract of insurance subject to DST under
Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in the
nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp
tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late
payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of
the Tax Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx

xxx

xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners
health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity, citing Blue
Cross Healthcare, Inc. v. Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4] We also ruled that petitioners contention that it is a
health maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like
petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business
transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration,
asserting the following arguments:
(a)

The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged
in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider,
not an insurance company.

(b)

The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CAs disposition
that health care services are not in the nature of an insurance business.

(c)

Section 185 should be strictly construed.

(d)

Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light
of the amendments made in the DST law in 2002.

(e)

Assuming arguendo that petitioners agreements are contracts of indemnity, they are not those contemplated
under Section 185.

(f)

Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered
by Section 185.

(g)

The agreements do not fall under the phrase other branch of insurance mentioned in Section 185.

(h)

The June 12, 2008 decision should only apply prospectively.

(i)

Petitioner availed of the tax amnesty benefits under RA [5] 9480 for the taxable year 2005 and all prior
years. Therefore, the questioned assessments on the DST are now rendered moot and academic.[6]

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under RA 9480 [7] (also
known as the Tax Amnesty Act of 2007) by fully paying the amount of P5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005.[8]

We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June 30, 1987. [9] It is
engaged in the dispensation of the following medical services to individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family planning counseling,
consultation and advices on diet, exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete
blood count, and the like and
Curative medical services which pertain to the performing of other remedial and therapeutic processes in
the event of an injury or sickness on the part of the enrolled member.[10]
Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year basis. The
medical services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner, through
physicians, medical and dental practitioners under contract with it. It negotiates with such health care practitioners regarding payment
schemes, financing and other procedures for the delivery of health services. Except in cases of emergency, the professional services
are to be provided only by petitioner's physicians, i.e. those directly employed by it[11] or whose services are contracted by it.
[12]
Petitioner also provides hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray
facilities and general nursing care.[13] If and when a member avails of the benefits under the agreement, petitioner pays the participating
physicians and other health care providers for the services rendered, at pre-agreed rates.[14]
To avail of petitioners health care programs, the individual members are required to sign and execute a standard health care
agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the
various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical
services. Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health care
services being offered by petitioner at any time.
HEALTH MAINTENANCE ORGANIZATIONS ARE NOT ENGAGED IN THE
INSURANCE BUSINESS
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements
are treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility used in
the transaction of the business.[15]
Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to determine
whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of whether or not it is liable for
DST on its health care agreements.[16]
A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or
bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person,
association or company or corporation transacting the business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine,
inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the
duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations
guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other
public body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any
mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be
collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of
the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered
surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is
preferred over that which makes some words idle and nugatory. [17] This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute its every word.[18]
From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1) the
document must be a policy of insurance or an obligation in the nature of indemnity and (2) the maker should be transacting the
business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or The National Health Insurance Act of 1995), an HMO is an entity that
provides, offers or arranges for coverage of designated health services needed by plan members for a fixed prepaid
premium.[19] The payments do not vary with the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule
that it was not.
Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code) enumerates what constitutes doing an insurance
business or transacting an insurance business:
a)
b)

making or proposing to make, as insurer, any insurance contract;

making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety;

c)

doing any kind of business, including a reinsurance business, specifically recognized as constituting the
doing of an insurance business within the meaning of this Code;

d)

doing or proposing to do any business in substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is received therefore,
shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an
insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, [21] have determined that
HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss
(which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely
incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and
service is the principal purpose, then the business is not insurance.
Applying the principal object and purpose test, [22] there is significant American case law supporting the argument that a
corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health
services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association[23] wherein the Court of Appeals of the District of Columbia
Circuit held that Group Health Association should not be considered as engaged in insurance activities since it was created primarily for
the distribution of health care services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating security against loss from illness
or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its
members. xxx The functions of such an organization are not identical with those of insurance or indemnity
companies. The latter are concerned primarily, if not exclusively, with risk and the consequences of its descent, not
with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of
living. Hazard is predominant. On the other hand, the cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made possible by quantity purchasing and economies
in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the
service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an
everyday incident of living, like purchasing food and clothing or oil and gas, rather than merely protecting
against the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at sea,
fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the
temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the bringing of physician and patient
together, the preventive features, the regularization of service as well as payment, the substantial reduction
in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after the services is rendered. Except the last, these are not
distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference
between contracting in this way for the rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh all other
factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal
arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the
sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate
all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts,
particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it. The question turns, not on whether
risk is involved or assumed, but on whether that or something else to which it is related in the particular plan
is its principal object purpose.[24] (Emphasis supplied)
In California Physicians Service v. Garrison,[25] the California court felt that, after scrutinizing the plan of operation as a whole
of the corporation, it was service rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is not engaged in the insurance
business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining
its status. The question, more broadly, is whether, looking at the plan of operation as a whole, service rather
than indemnity is its principal object and purpose. Certainly the objects and purposes of the corporation
organized and maintained by the California physicians have a wide scope in the field of social service.Probably
there is no more impelling need than that of adequate medical care on a voluntary, low-cost basis for
persons of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably
this is service of a high order and not indemnity. [26] (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs
undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New Jersey[27] is clear on this point:
The basic distinction between medical service corporations and ordinary health and accident insurers is that
the former undertake to provide prepaid medical services through participating physicians, thus relieving
subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates contained in the policy.
xxx

xxx

xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who
will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the
medical service corporations plan, not only will the subscribers be deprived of the protection which they
might reasonably have expected would be provided, but the corporation will, in effect, be doing business
solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to
the more stringent financial requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to render health care services to
or for persons covered by a contract issued by health service corporation in return for which the health service
corporation agrees to make payment directly to the participating provider.[28] (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide
medical services as needed, with payment made directly to the provider of these services. [29] In short, even if petitioner assumes the
risk of paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be
considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case of emergency by nonparticipating health providers would still be incidental to petitioners purpose of providing and arranging for health care services and
does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a
system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services intended to keep
members from developing medical conditions or diseases. [30] As an HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are designed to prevent or to minimize the possibility of any assumption of
risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising from a
medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage.[31]
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services),
but these are incidental to the principal activity of providing them medical care. The insurance-like aspect of petitioners business is
miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance
services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the principal purpose test used in the above-quoted U.S. cases, we are not
saying that petitioners operations are identical in every respect to those of the HMOs or health providers which were parties to those
cases. What we are stating is that, for the purpose of determining what doing an insurance business means, we have to scrutinize the
operations of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into
account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance
business. Moreover, we are also not unmindful that there are other American authorities who have found particular HMOs to be
actually engaged in insurance activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it is not
supervised by the Insurance Commission but by the Department of Health. [33] In fact, in a letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not engaged in the insurance business. This determination of the commissioner must be
accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked to implement a statute is
accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind this rule was explained
in Nestle Philippines, Inc. v. Court of Appeals:[34]
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those
needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative
agency charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,
[35]
the Court stressed that executive officials are presumed to have familiarized themselves with all the considerations
pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious and competent
expert opinion thereon. The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed judgment, and the fact that they
frequently are the drafters of the law they interpret.[36]

A HEALTH CARE AGREEMENT IS NOT AN INSURANCE CONTRACT

CONTEMPLATED UNDER SECTION 185 OF THE NIRC OF 1997
Section 185 states that DST is imposed on all policies of insurance or obligations of the nature of indemnity for loss,
damage, or liability. In our decision dated June 12, 2008, we ruled that petitioners health care agreements are contracts of
indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or damage because, under the
said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related
expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the
monetary expense or liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the member
in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical
examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning
counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the
member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising
from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each
member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the
costs of the services even if they are significantly and substantially more than what the member has "prepaid."
Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing
a similar risk, that is, among all the other members of the health care program. This is insurance.[37]

We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or
bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person,
association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass,
steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing
authority.[38] This is because taxation is a destructive power which interferes with the personal and property rights of the people and
takes from them a portion of their property for the support of the government. [39] Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided.[40]
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of nonlife insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax
provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For
this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract
exists where the following elements concur:
1.

The insured has an insurable interest;

2.

The insured is subject to a risk of loss by the happening of the designed peril;

3.

The insurer assumes the risk;

4.
5.

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
In consideration of the insurers promise, the insured pays a premium.[41]

Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements
of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned above
would be an insurance contract. The primary purpose of the parties in making the contract may negate the
existence of an insurance contract. For example, a law firm which enters into contracts with clients whereby in
consideration of periodical payments, it promises to represent such clients in all suits for or against them, is not
engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On the
other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to
defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be
deemed as engaged in the business of insurance. Unlike the lawyers retainer contract, the essential purpose of such
a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of
actions for malpractice.[42] (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with,
there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioners physician or affiliated physician to him. In case of availment by a member of the benefits under the
agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner
who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does
not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to
any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms indemnify or
indemnity presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member merely
avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory services,
x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating
physician or hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by
petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, 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.
THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE
AGREEMENTS OF HMOS
Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements under Section
185 of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs
and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189
(otherwise known as the Internal Revenue Law of 1904) [46] enacted on July 2, 1904 and became effective on August 1, 1904. Except
for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things
mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such
instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make,
sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following:
xxx

xxx

xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association, company, or corporation transacting the business of
accident, fidelity, employers liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other
branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws
relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced as
Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of Act No.
2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No.
2711, otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified all the internal
revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the
provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as Section
234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered as Section 198.
And under Section 23 of EO[47] 273 dated July 25, 1987, it was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal
provision was retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA 9243[48] but
Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care
Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or
Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the
Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there
are 36 registered HMOs with a total enrollment of more than 2 million.[49]
We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law imposing
the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were
enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been the
intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many
opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an HMO.
[50]

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care
agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the
context of the provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it. [51] So potent indeed is the power that it was once opined that the power to tax involves the power to
destroy.[52]
Petitioner claims that the assessed DST to date which amounts to P376 million[53] is way beyond its net worth of P259 million.
Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner would be highly
oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage
private enterprise.[55] Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate
business.[56] As aptly held in Roxas, et al. v. CTA, et al.:[57]
[54]

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest
the tax collector kill the hen that lays the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax
imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is
counter-productive and ultimately subversive of the nations thrust towards a better economy which will ultimately benefit the majority of
our people.[59]
PETITIONERS TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot and
academic[60] when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5% of its net
worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480,
it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative
penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005
and prior years.[61]
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment
of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax
liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this case
as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of
petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found
to have been granted under circumstances amounting to tax fraud under Section 10 of said amnesty law.
[62]
(Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA 9480.
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.
[63]

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.
However, if other parties or another subject matter (even with the same parties and issues) is involved, the minute resolution is not
binding precedent. Thus, in CIR v. Baier-Nickel,[70] the Court noted that a previous case, CIR v. Baier-Nickel[71] involving the same
parties and the same issues, was previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining
the ruling of the CA. Nonetheless, the Court ruled that the previous case ha(d) no bearing on the latter case because the two
cases involved different subject matters as they were concerned with the taxable income of different taxable years.[72]
[69]

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.