Cases 1-12

Actions; Appeals; Pleadings and Practice; In a petition for review, only questions of
law, and not questions of fact, may be raised.It must be emphasized that in a
petition for review, only questions of law, and not questions of fact, may be raised.
This rule may be disregarded only when the findings of fact of the Court of Appeals
are contrary to the findings and conclusions of the trial court, or are not supported by
the evidence on record. In the case at bar, we find an incongruence between the
findings of fact of the Court of Appeals and the court a quo, thus, in our determination
of the issues, we are constrained to assess the evidence adduced by the parties to
make appropriate findings of facts as are necessary.
Same; Evidence; Burden of Proof; The party which alleges a fact as a matter of
defense has the burden of proving it.It must be emphasized that the party which
alleges a fact as a matter of de_______________
once plaintiff makes out a prima facie case in his favor, the duty or the burden of
evidence shifts to defendant to controvert plaintiffs prima facie case, otherwise, a
verdict must be returned in favor of plaintiff. TRANS-ASIA was able to establish proof
of loss and the coverage of the loss, i.e.,25 October 1993: Fire on Board. Thereafter,
the burden of evidence shifted to PRUDENTIAL to counter TRANS-ASIAs case, and
to prove its special and affirmative defense that TRANS-ASIA was in violation of the
particular condition on CLASSED AND CLASS MAINTAINED.
Insurance Law; Maritime Law; Bureau Veritas is a classification society recognized in
the marine industry.As found by the Court of Appeals and as supported by the
records, Bureau Veritas is a classification society recognized in the marine industry. As
it is undisputed that TRANS-ASIA was properly classed at the time the contract of
insurance was entered into, thus, it becomes incumbent upon PRUDENTIAL to show
evidence that the status of TRANS-ASIA as being properly CLASSED by Bureau
Veritas had shifted in violation of the warranty. Unfortunately, PRUDENTIAL failed to
support the allegation.
413
* FIRST DIVISION.
412
VOL. 491, JUNE 20, 2006
413
412
Prudential Guarantee and Assurance, Inc. vs. Trans-Asia Shipping Lines, Inc.
SUPREME COURT REPORTS ANNOTATED
fense has the burden of proving it. PRUDENTIAL, as the party which asserted the
claim that TRANS-ASIA breached the warranty in the policy, has the burden of
evidence to establish the same. Hence, on the part of PRUDENTIAL lies the initiative
to show proof in support of its defense; otherwise, failing to establish the same, it
remains self-serving. Clearly, if no evidence on the alleged breach of TRANS-ASIA of
the subject warranty is shown, a fortiori, TRANSASIA would be successful in claiming
on the policy. It follows that PRUDENTIAL bears the burden of evidence to establish
the fact of breach.
Same; Same; Same; Burden of Evidence; In the course of trial in a civil case, once
plaintiff makes out a prima facie case in his favor, the duty or the burden of evidence
shifts to defendant to controvert plaintiffs prima facie case, otherwise, a verdict must
be returned in favor of plaintiff.In our rule on evidence, TRANS-ASIA, as the plaintiff
below, necessarily has the burden of proof to show proof of loss, and the coverage
thereof, in the subject insurance policy. However, in the course of trial in a civil case,
Same; Same; Warranties; It is generally accepted that a warranty is a statement or

promise set forth in the policy, or by reference incorporated therein, the untruth or nonfulfillment of which in any respect, and without reference to whether the insurer was in
fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by the
insurer; For the breach of warranty to avoid a policy, the same must be duly shown by
the party alleging the same.We are not unmindful of the clear language of Sec. 74
of the Insurance Code which provides that, the violation of a material warranty, or
other material provision of a policy on the part of either party thereto, entitles the other
to rescind. It is generally accepted that [a] warranty is a statement or promise set
forth in the policy, or by reference incorporated therein, the untruth or non-fulfillment of
which in any respect, and without reference to whether the insurer was in fact
prejudiced by such untruth or non-fulfillment, renders the policy voidable by the
insurer. However, it is similarly indubitable that for the breach of a warranty to avoid a
policy, the same must be duly shown by the party alleging the same. We cannot
sustain an allegation that is unfounded. Consequently, PRUDENTIAL, not having
shown that TRANS-ASIA breached the warranty condition, CLASSED AND CLASS
MAINTAINED, it remains that TRANSASIA must be allowed to recover its rightful

claims on the policy.
Same; Same; Same; Waivers; Breach of warranty or of a condition renders the
contract defeasible at the option of the insurer, but if he so elects, he may waive his
privilege and power to rescind by the mere expression of an intention to do so in
which event his liability under the policy continues as before.We do not find that the
Court of Appeals was in error when it held that PRUDENTIAL, in renewing TRANSASIAs insurance policy for two consecutive years after the loss covered by Policy No.
MH93/1363, was considered to have waived TRANS-ASIAs breach of the subject
warranty, if any. Breach of a warranty or of a condition renders the contract defeasible
at the option of the insurer; but if he so elects, he may waive his privilege and power
to rescind by the mere expression of an intention so to do. In that event his liability
under the policy continues as before. There can be no clearer intention of the waiver
of the alleged breach than the renewal of the policy insurance granted by
PRUDENTIAL to TRANS-ASIA in MH94/1595 and MH95/1788, issued in the years
1994 and 1995, respectively. To our mind, the argument is made even more credulous
by PRUDENTIALs lack of proof to sup-
TRANSASIAs claim on the insurance, thus: x x x We agree. Notwithstanding its

designation, the tenor of the Loan and Trust Receipt evidences that the real nature
of the transaction between the parties was that the amount of P3,000,000.00 was not
intended as a loan whereby TRANS-ASIA is obligated to pay PRUDENTIAL, but
rather, the same was a partial payment or an advance on the policy of the claims due
to TRANS-ASIA.
Same; Same; Same; Words and Phrases; The clear import of the phrase at the
expense of and under the exclusive direction and control as used in the Loan and
Trust Receipt grants solely to the insurer the power to prosecute, even as the same is
carried in the name of the insured, thereby making the latter merely an agent of the
former, the principal, in the prosecution of the suit against parties who may have
occasioned the loss.We find that per the Loan and Trust Receipt, even as TRANSASIA agreed to promptly prosecute suit against such persons, corporation or
corporations through whose negligence the aforesaid loss was caused or who may
otherwise be responsible therefore, with all due diligence in its name, the prosecution
of the claims against such third persons are to be carried on at the expense of and
under the exclusive direction and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC. The clear
414
415
414
VOL. 491, JUNE 20, 2006
415
port its allegation that the renewals of the policies were taken only after a request was
made to TRANS-ASIA to furnish them a copy of the certificate attesting that M/V Asia
Korea was CLASSED AND CLASS MAINTAINED. Notwithstanding PRUDENTIALs
claim that no certification was issued to that effect, it renewed the policy, thereby,
evidencing an intention to waive TRANS-ASIAs alleged breach. Clearly, by granting
the renewal policies twice and successively after the loss, the intent was to benefit the
insured, TRANSASIA, as well as to waive compliance of the warranty.
Same; Same; Loan and Trust Receipts; Notwithstanding its designation, the tenor of
the Loan and Trust Receipt evidences that the real nature of the transaction between
the parties was that the amount indicated therein was not intended as a loan whereby
the insured is obligated to pay the insurer, but rather, the same was a partial payment
or an advance on the policy of the claims due the former.The Court of Appeals held
that the real character of the transaction between the parties as evidenced by the
Loan and Trust Receipt is that of an advance payment by PRUDENTIAL of
import of the phrase at the expense of and under the exclusive direction and control
as used in the Loan and Trust Receipt grants solely to PRUDENTIAL the power to
prosecute, even as the same is carried in the name of TRANS-ASIA, thereby making
TRANS-ASIA merely an agent of PRUDENTIAL, the principal, in the prosecution of
the suit against parties who may have occasioned the loss.
Same; Same; Same; The liberality in the tenor of the Loan and Trust Receipt in favor
of the insured leads to the conclusion that the amount indicated therein was a form of
an advance payment on the insureds claim.Per the subject Loan and Trust
Receipt, the obligation of TRANS-ASIA to repay PRUDENTIAL is highly speculative
and contingent, i.e., only in the event and to the extent that any net recovery is made
by TRANS-ASIA from any person on account of loss occasioned by the fire of 25
October 1993. The transaction, therefore, was made to benefit TRANS-ASIA, such
that, if no recovery from third parties is made, PRUDENTIAL cannot be repaid the
amount. Verily, we do not think that this is constitutive of a loan. The liberality in the
tenor of the Loan and Trust Receipt in favor of TRANS-ASIA leads to the conclusion
that the amount of P3,000,000.00 was a form of an advance payment on TRANSASIAs claim on MH93/1353.
Same; Insurance Code; Damages; Attorneys Fees; Section 244 of the Insurance
Code grants damages consisting of attorneys fees and other expenses incurred by
the insured after a finding by the Insurance Commissioner or the Court, as the case
may be, of an unreasonable denial or withholding of the payment of the claims due;
Section 244 does not require a showing of bad faith in order that attorneys fees be
granted.The Court of Appeals denied the grant of attorneys fees. It held that
attorneys fees cannot be awarded absent a showing of bad faith on the part of
PRUDENTIAL in rejecting TRANS-ASIAs claim, notwithstanding that the rejection was
erroneous. According to the Court of Appeals, attorneys fees can be awarded only in
the cases enumerated in Article 2208 of the Civil Code which finds no application in
the instant case. We disagree. Sec. 244 of the Insurance Code grants damages
consisting of attorneys fees and other expenses incurred by the insured after a finding
by the Insurance Commissioner or the Court, as the case may be, of an unreasonable
denial or withholding of the payment of the claims due. Moreover, the law imposes an
interest of twice the ceiling pre-
Same; Same; Same; Interests; Marine Insurance; Section 244 of the Insurance Code
is categorical in imposing an interest twice the ceiling prescribed by the Monetary
Board due the insured, from the date following the time prescribed in Section 242 or in
Section 243, as the case may be, until the claim is fully satisfied.Section 244 of the
Insurance Code is categorical in imposing an interest twice the ceiling prescribed by
the Monetary Board due the insured, from the date following the time prescribed in
Section 242 or in Section 243, as the case may be, until the claim is fully satisfied. In
the case at bar, we find Section 243 to be applicable as what is involved herein is a
marine insurance, clearly, a policy other than life insurance. Section 243 is hereunder
reproduced: SEC. 243. The amount of any loss or damage for which an insurer may
be liable, under any policy other than life insurance policy, shall be paid within thirty
days after proof of loss is received by the insurer and ascertainment of the loss or
damage is made either by agreement between the insured and the insurer or by
arbitration; but if such ascertainment is not had or made within sixty days after such
receipt by the insurer of the proof of loss, then the loss or damage shall be paid within
ninety days after such receipt. Refusal or failure to pay the loss or damage within the
time prescribed herein will entitle the assured to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or refusal to pay is based on the ground that the
claim is fraudulent.
416
417
416
VOL. 491, JUNE 20, 2006
417
scribed by the Monetary Board on the amount of the claim due the insured from the
date following the time prescribed in Section 242 or in Section 243, as the case may
be, until the claim is fully satisfied. Finally, Section 244 considers the failure to pay the
claims within the time prescribed in Sections 242 or 243, when applicable, as prima
facie evidence of unreasonable delay in payment. To the mind of this Court, Section
244 does not require a showing of bad faith in order that attorneys fees be granted.
As earlier stated, under Section 244, a prima facie evidence of unreasonable delay in
payment of the claim is created by failure of the insurer to pay the claim within the
time fixed in both Sections 242 and 243 of the Insurance Code. As established in
Section 244, by reason of the delay and the consequent filing of the suit by the
insured, the insurers shall be adjudged to pay damages which shall consist of
attorneys fees and other expenses incurred by the insured.
Same; Same; Same; Same; There is no gainsaying that the term double interest as
used in Sections 243 and 244 can only be interpreted to mean twice 12% per annum
or 24% per annum interest.PRUDENTIAL assails the award of interest, granted by
the Court of Appeals, in favor of TRANS-ASIA in the assailed Decision of 6 No-vember
2001. It is PRUDENTIALs stance that the award is extortionate and grossly
unsconscionable. In support thereto, PRUDENTIAL makes a reference to TRANSASIAs prayer in the Complaint filed with the court a quo wherein the latter sought,
interest double the prevailing rate of interest of 21% per annum now obtaining in the
banking business or plus 42% per annum pursuant to Article 243 of the Insurance
Code x x x. The contention fails to persuade. It is settled that an award of double
interest is lawful and justified under Sections 243 and 244 of the Insurance Code. In
Finman General Assurance Corporation v. Court of Appeals, 361 SCRA 214 (2001),
this Court held that the payment of 24% interest per annum is authorized by the
Insurance Code. There is no gainsaying that the term double interest as used in
Sections 243 and 244 can only be interpreted to mean twice 12% per annum or 24%
per annum interest, thus: The term ceiling prescribed by the Monetary Board means
the legal rate of interest of twelve per centum per annum (12%) as prescribed by the
Monetary Board in C.B. Circular No. 416, pursuant to P.D. No. 116, amending the
Usury Law; so that when Sections 242, 243 and 244 of the Insurance Code provide
that the insurer shall be liable to pay interest twice the ceiling prescribed by the
Monetary Board, it means twice 12% per annum or 24% per annum interest on the
proceeds of the insurance.
Same; Same; Same; Same; Under Section 243, the insurer has until the 30th day
after proof of loss and ascertainment of the loss or damage to pay its liability under the
insurance, and only after such time can the insurer be held to be in delay, thereby
necessitating the imposition of double interest.The Court of Appeals, in imposing
double interest for the duration of the delay of the payment of the unpaid balance due
TRANS-ASIA, computed the same from 13 August 1996 until such time when the
amount is fully paid. Although not raised by the parties, we find the computation of the
duration of the delay made by the appellate court to be patently erroneous. To be sure,
Section 243 imposes interest on the proceeds of the policy for the duration of the
delay at the rate of twice the ceiling prescribed by the Monetary Board. Significantly,
Section 243 mandates the pay-
Same; Same; Same; Same; Eastern Shipping Lines, Inc. v. Court of Appeals, 234
SCRA 78 (1994), emphasized beyond cavil that when the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal interest,
regardless of whether the obligation involves a loan or forbearance of money, shall be
12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.This Court in Eastern
Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 78 (1994), inscribed the rule of
thumb in the application of interest to be imposed on obligations, regardless of their
source. Eastern emphasized beyond cavil that when the judgment of the court
deemed to be by then an equivalent to a forbearance of credit. We find application of
the rule in the case at bar proper, thus, a rate of 12% per annum from the finality of
judgment until the full satisfaction thereof must be imposed on the total amount of
liability adjudged to PRUDENTIAL. It is clear that the interim period from the finality of
judgment until the satisfaction of the same is deemed equivalent to a forbearance of
credit, hence, the imposition of the aforesaid interest. [Prudential Guarantee and
Assurance, Inc. vs. Trans-Asia Shipping Lines, Inc., 491 SCRA 411(2006)]
Republic of the Philippines
SUPREME COURT
Manila
418
FIRST DIVISION
418
G.R. No. 151890
June 20, 2006

ment of any loss or damage for which an insurer may be liable, under any policy other
than life insurance policy, within thirty days after proof of loss is received by the insurer
and ascertainment of the loss or damage is made either by agreement between the
insured and the insurer or by arbitration. It is clear that under Section 243, the insurer
has until the 30th day after proof of loss and ascertainment of the loss or damage to
pay its liability under the insurance, and only after such time can the insurer be held to
be in delay, thereby necessitating the imposition of double interest. In the case at bar,
it was not disputed that the survey report on the ascertainment of the loss was
completed by the adjuster, Richard Hoggs International (Phils.), Inc. on 13 August
1996. PRUDENTIAL had thirty days from 13 August 1996 within which to pay its
liability to TRANS-ASIA under the insurance policy, or until 13 September 1996.
Therefore, the double interest can begin to run from 13 September 1996 only.
PRUDENTIAL
GUARANTEE
and
ASSURANCE
vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent.
INC., petitioner,
x- - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 151991
June 20, 2006
TRANS-ASIA
SHIPPING
LINES,
INC., petitioner,
vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.
DECISION
CHICO-NAZARIO, J:
This is a consolidation of two separate Petitions for Review on Certiorari filed by
petitioner Prudential Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No.
151890 and Trans-Asia Shipping Lines, Inc. (TRANS-ASIA) in G.R. No. 151991,
assailing the Decision1 dated 6 November 2001 of the Court of Appeals in CA G.R. CV
No. 68278, which reversed the Judgment2 dated 6 June 2000 of the Regional Trial
Court (RTC), Branch 13, Cebu City in Civil Case No. CEB-20709. The 29 January
2002 Resolution3 of the Court of Appeals, denying PRUDENTIALs Motion for
Reconsideration and TRANS-ASIAs Partial Motion for Reconsideration of the 6
November 2001 Decision, is likewise sought to be annulled and set aside.
The Facts
The material antecedents as found by the court a quo and adopted by the appellate
court are as follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of
payment of premiums, defendant [PRUDENTIAL] insured M/V Asia Korea for
loss/damage of the hull and machinery arising from perils, inter alia, of fire and
explosion for the sum of P40 Million, beginning [from] the period [of] July 1, 1993 up to
July 1, 1994. This is evidenced by Marine Policy No. MH93/1363 (Exhibits "A" to "A11"). On October 25, 1993, while the policy was in force, a fire broke out while [M/V
Asia Korea was] undergoing repairs at the port of Cebu. On October 26, 1993 plaintiff
[TRANS-ASIA] filed its notice of claim for damage sustained by the vessel. This is
evidenced by a letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA]
reserved its right to subsequently notify defendant [PRUDENTIAL] as to the full
amount of the claim upon final survey and determination by average adjuster Richard
Hogg International (Phil.) of the damage sustained by reason of fire. An adjusters
report on the fire in question was submitted by Richard Hogg International together
with the U-Marine Surveyor Report (Exhibits "4" to "4-115").
In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiffs claim

(Exhibit "5"). The letter reads:
"After a careful review and evaluation of your claim arising from the above-captioned
incident, it has been ascertained that you are in breach of policy conditions, among
them "WARRANTED VESSEL CLASSED AND CLASS MAINTAINED". Accordingly,
we regret to advise that your claim is not compensable and hereby DENIED."
This was followed by defendants letter dated 21 July 1997 requesting the return or
payment of the P3,000,000.00 within a period of ten (10) days from receipt of the letter
(Exhibit "6").4
Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint 5 for
Sum of Money against PRUDENTIAL with the RTC of Cebu City, docketed as Civil
Case No. CEB-20709, wherein TRANS-ASIA sought the amount of P8,395,072.26
from PRUDENTIAL, alleging that the same represents the balance of the indemnity
due upon the insurance policy in the total amount of P11,395,072.26. TRANS-ASIA
similarly sought interest at 42% per annum citing Section 243 6 of Presidential Decreee
No. 1460, otherwise known as the "Insurance Code," as amended.
In its Answer,7 PRUDENTIAL denied the material allegations of the Complaint and
interposed the defense that TRANS-ASIA breached insurance policy conditions, in
particular: "WARRANTED VESSEL CLASSED AND CLASS MAINTAINED."
PRUDENTIAL further alleged that it acted as facts and law require and incurred no
liability to TRANS-ASIA; that TRANS-ASIA has no cause of action; and, that its claim
has been effectively waived and/or abandoned, or it is estopped from pursuing the
same. By way of a counterclaim, PRUDENTIAL sought a refund of P3,000,000.00,
which it allegedly advanced to TRANS-ASIA by way of a loan without interest and
without prejudice to the final evaluation of the claim, including the amounts of
P500,000.00, for survey fees and P200,000.00, representing attorneys fees.
The Ruling of the Trial Court
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan

and Trust receipt", a portion of which read (sic):
"Received from Prudential Guarantee and Assurance, Inc., the sum of PESOS
THREE MILLION ONLY (P3,000,000.00) as a loan without interest under Policy No.
MH 93/1353 [sic], repayable only in the event and to the extent that any net recovery
is made by Trans-Asia Shipping Corporation, from any person or persons, corporation
or corporations, or other parties, on account of loss by any casualty for which they
may be liable occasioned by the 25 October 1993: Fire on Board." (Exhibit "4")
On 6 June 2000, the court a quo rendered Judgment 8 finding for (therein defendant)
PRUDENTIAL. It ruled that a determination of the parties liabilities hinged on whether
TRANS-ASIA violated and breached the policy conditions on WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED. It interpreted the provision to mean that
TRANS-ASIA is required to maintain the vessel at a certain class at all times pertinent
during the life of the policy. According to the court a quo, TRANS-ASIA failed to prove
compliance of the terms of the warranty, the violation thereof entitled PRUDENTIAL,
the insured party, to rescind the contract.9
Further, citing Section 10710 of the Insurance Code, the court a quo ratiocinated that
the concealment made by TRANS-ASIA that the vessel was not adequately
maintained to preserve its class was a material concealment sufficient to avoid the
policy and, thus, entitled the injured party to rescind the contract. The court a quo
found merit in PRUDENTIALs contention that there was nothing in the adjustment of
the particular average submitted by the adjuster that would show that TRANS-ASIA
was not in breach of the policy. Ruling on the denominated loan and trust receipt, the
court a quo said that in substance and in form, the same is a receipt for a loan. It held
that if TRANS-ASIA intended to receive the amount of P3,000,000.00 as advance
payment, it should have so clearly stated as such.
The court a quo did not award PRUDENTIALs claim for P500,000.00, representing
expert survey fees on the ground of lack of sufficient basis in support thereof. Neither
did it award attorneys fees on the rationalization that the instant case does not fall
under the exceptions stated in Article 220811 of the Civil Code. However, the court a
quo granted PRUDENTIALs counterclaim stating that there is factual and legal basis
for TRANS-ASIA to return the amount of P3,000,000.00 by way of loan without
interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its failure
to prove a cause of action.
On defendants counterclaim, plaintiff is directed to return the sum of P3,000,000.00
representing the loan extended to it by the defendant, within a period of ten (10) days
from and after this judgment shall have become final and executory.12
The Ruling of the Court of Appeals
On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6
November 2001, reversed the 6 June 2000 Judgment of the RTC.
On the issue of TRANS-ASIAs alleged breach of warranty of the policy condition
CLASSED AND CLASS MAINTAINED, the Court of Appeals ruled that PRUDENTIAL,
as the party asserting the non-compensability of the loss had the burden of proof to
show that TRANS-ASIA breached the warranty, which burden it failed to discharge.
PRUDENTIAL cannot rely on the lack of certification to the effect that TRANS-ASIA
was CLASSED AND CLASS MAINTAINED as its sole basis for reaching the
conclusion that the warranty was breached. The Court of Appeals opined that the lack
of a certification does not necessarily mean that the warranty was breached by
TRANS-ASIA. Instead, the Court of Appeals considered PRUDENTIALs admission
that at the time the insurance contract was entered into between the parties, the
vessel was properly classed by Bureau Veritas, a classification society recognized by
the industry. The Court of Appeals similarly gave weight to the fact that it was the
responsibility of Richards Hogg International (Phils.) Inc., the average adjuster hired
by PRUDENTIAL, to secure a copy of such certification to support its conclusion that
mere absence of a certification does not warrant denial of TRANS-ASIAs claim under
the insurance policy.
In the same token, the Court of Appeals found the subject warranty allegedly
breached by TRANS-ASIA to be a rider which, while contained in the policy, was
inserted by PRUDENTIAL without the intervention of TRANS-ASIA. As such, it
partakes of a nature of a contract dadhesion which should be construed against
PRUDENTIAL, the party which drafted the contract. Likewise, according to the Court
of Appeals, PRUDENTIALs renewal of the insurance policy from noon of 1 July 1994
to noon of 1 July 1995, and then again, until noon of 1 July 1996 must be deemed a
waiver by PRUDENTIAL of any breach of warranty committed by TRANS-ASIA.
Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the
transaction between PRUDENTIAL and TRANS-ASIA as one of subrogation, instead
of a loan. The Court of Appeals concluded that TRANS-ASIA has no obligation to pay
back the amount of P3,000.000.00 to PRUDENTIAL based on its finding that the
aforesaid amount was PRUDENTIALs partial payment to TRANS-ASIAs claim under
the policy. Finally, the Court of Appeals denied TRANS-ASIAs prayer for attorneys
fees, but held TRANS-ASIA entitled to double interest on the policy for the duration of
the delay of payment of the unpaid balance, citing Section 244 13 of the Insurance
Code.
Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise:
WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal
is ALLOWED and the Judgment appealed from REVERSED. The P3,000,000.00
initially paid by appellee Prudential Guarantee Assurance Incorporated to appellant
Trans-Asia and covered by a "Loan and Trust Receipt" dated 29 May 1995 is HELD to
be in partial settlement of the loss suffered by appellant and covered by Marine Policy
No. MH93/1363 issued by appellee. Further, appellee is hereby ORDERED to pay
appellant the additional amount of P8,395,072.26 representing the balance of the loss
suffered by the latter as recommended by the average adjuster Richard Hogg
International (Philippines) in its Report, with double interest starting from the time
Richard Hoggs Survey Report was completed, or on 13 August 1996, until the same
is fully paid.
All other claims and counterclaims are hereby DISMISSED.
All costs against appellee.14
VI.
Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for
Reconsideration and Partial Motion for Reconsideration thereon, respectively, which
motions were denied by the Court of Appeals in the Resolution dated 29 January
2002.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND TRUST
RECEIPT" EXECUTED BY TRANS-ASIA IS AN ADVANCE ON THE POLICY, THUS
CONSTITUTING PARTIAL PAYMENT THEREOF.
VII.
The Issues
Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as
G.R. No. 151890, relying on the following grounds, viz:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY

PRUDENTIAL OF THE FINDINGS OF RICHARDS HOGG IS INDICATIVE OF A
WAIVER ON THE PART OF PRUDENTIAL OF ANY VIOLATION BY TRANS-ASIA OF
THE WARRANTY.
I.
VIII.
THE AWARD IS GROSSLY UNCONSCIONABLE.
II.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO
VIOLATION BY TRANS-ASIA OF A MATERIAL WARRANTY, NAMELY, WARRANTY
CLAUSE NO. 5, OF THE INSURANCE POLICY.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS INSURER
HAD THE BURDEN OF PROVING THAT THE ASSURED, TRANS-ASIA, VIOLATED
A MATERIAL WARRANTY.
IV.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY CLAUSE
EMBODIED IN THE INSURANCE POLICY CONTRACT WAS A MERE RIDER.
THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT, IN

FINDING THAT PRUDENTIAL "UNJUSTIFIABLY REFUSED" TO PAY THE CLAIM
AND IN ORDERING PRUDENTIAL TO PAY TRANS-ASIA P8,395,072.26 PLUS
DOUBLE INTEREST FROM 13 AUGUST 1996, UNTIL [THE] SAME IS FULLY PAID. 15
Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a
Petition for Review docketed as G.R. No. 151991, raising the following grounds for the
allowance of the petition, to wit:
I.
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING
ATTORNEYS FEES TO PETITIONER TRANS-ASIA ON THE GROUND THAT SUCH
CAN ONLY BE AWARDED IN THE CASES ENUMERATED IN ARTICLE 2208 OF
THE CIVIL CODE, AND THERE BEING NO BAD FAITH ON THE PART OF
RESPONDENT PRUDENTIAL IN DENYING HEREIN PETITIONER TRANS-ASIAS
INSURANCE CLAIM.
II.
V.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED RENEWALS
OF THE POLICY CONSTITUTED A WAIVER ON THE PART OF PRUDENTIAL OF
THE BREACH OF THE WARRANTY BY TRANS-ASIA.
THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06

NOVEMBER 2001 SHOULD BE CONSTRUED TO MEAN DOUBLE INTEREST
BASED ON THE LEGAL INTEREST OF 12%, OR INTEREST AT THE RATE OF 24%
PER ANNUM.16
In our Resolution of 2 December 2002, we granted TRANS-ASIAs Motion for

Consolidation17 of G.R. Nos. 151890 and 151991;18 hence, the instant consolidated
petitions.
In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANSASIA arising from the subject insurance contract; (2) the liability, if any, of TRANSASIA to PRUDENTIAL arising from the transaction between the parties as evidenced
by a document denominated as "Loan and Trust Receipt," dated 29 May 1995; and (3)
the amount of interest to be imposed on the liability, if any, of either or both parties.
Ruling of the Court
Prefatorily, it must be emphasized that in a petition for review, only questions of law,
and not questions of fact, may be raised. 19 This rule may be disregarded only when
the findings of fact of the Court of Appeals are contrary to the findings and conclusions
of the trial court, or are not supported by the evidence on record. 20 In the case at bar,
we find an incongruence between the findings of fact of the Court of Appeals and the
court a quo, thus, in our determination of the issues, we are constrained to assess the
evidence adduced by the parties to make appropriate findings of facts as are
necessary.
I.
A. PRUDENTIAL failed to establish that TRANS-ASIA violated and
breached the policy condition on WARRANTED VESSEL CLASSED AND
CLASS MAINTAINED, as contained in the subject insurance contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated
an express and material warranty in the subject insurance contract, i.e., Marine
Insurance Policy No. MH93/1363, specifically Warranty Clause No. 5 thereof, which
stipulates that the insured vessel, "M/V ASIA KOREA" is required to be CLASSED
AND CLASS MAINTAINED. According to PRUDENTIAL, on 25 October 1993, or at
the time of the occurrence of the fire, "M/V ASIA KOREA" was in violation of the
warranty as it was not CLASSED AND CLASS MAINTAINED. PRUDENTIAL submits
that Warranty Clause No. 5 was a condition precedent to the recovery of TRANS-ASIA
under the policy, the violation of which entitled PRUDENTIAL to rescind the contract
under Sec. 7421 of the Insurance Code.
ATTY. LIM
Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final
action was taken?
A It was eventually determined that there was a breach of the policy condition, and
basically there is a breach of policy warranty condition and on that basis the claim was
denied.
Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here
marked as Exhibits "1", "1-A" series, please point to the warranty in the policy which
you said was breached or violated by the plaintiff which constituted your basis for
denying the claim as you testified.
A Warranted Vessel Classed and Class Maintained.
ATTY. LIM
Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page
of the policy below the printed words: "Clauses, Endorsements, Special Conditions
and Warranties," below this are several typewritten clauses and the witness pointed
out in particular the clause reading: "Warranted Vessel Classed and Class
Maintained."
COURT
Q Will you explain that particular phrase?
A Yes, a warranty is a condition that has to be complied with by the insured. When we
say a class warranty, it must be entered in the classification society.
COURT
Slowly.
WITNESS
The warranty condition CLASSED AND CLASS MAINTAINED was explained by

PRUDENTIALs Senior Manager of the Marine and Aviation Division, Lucio
Fernandez. The pertinent portions of his testimony on direct examination is
reproduced hereunder, viz:
(continued)
A A classification society is an organization which sets certain standards for a vessel

to maintain in order to maintain their membership in the classification society. So, if
they failed to meet that standard, they are considered not members of that class, and
thus breaching the warranty, that requires them to maintain membership or to maintain
their class on that classification society. And it is not sufficient that the member of this
classification society at the time of a loss, their membership must be continuous for
the whole length of the policy such that during the effectivity of the policy, their
classification is suspended, and then thereafter, they get reinstated, that again still a
breach of the warranty that they maintained their class (sic). Our maintaining team
membership in the classification society thereby maintaining the standards of the
vessel (sic).
ATTY. LIM
Q Can you mention some classification societies that you know?
A Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local
Classification Society, The Philippine Registration of Ships Society, China
Classification, NKK and Company Classification Society, and many others, we have
among others, there are over 20 worldwide. 22
We sustain the findings of the Court of Appeals that PRUDENTIAL was not successful
in discharging the burden of evidence that TRANS-ASIA breached the subject policy
condition on CLASSED AND CLASS MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager of its Marine and Aviation
Division, Lucio Fernandez, made a categorical admission that at the time of the
procurement of the insurance contract in July 1993, TRANS-ASIAs vessel, "M/V Asia
Korea" was properly classed by Bureau Veritas, thus:
Q Kindly examine the records particularly the policy, please tell us if you know whether
M/V Asia Korea was classed at the time (sic) policy was procured perthe (sic)
insurance was procured that Exhibit "1" on 1st July 1993 (sic).
WITNESS
A I recall that they were classed.
ATTY. LIM
Q With what classification society?
At the outset, it must be emphasized that the party which alleges a fact as a matter of
defense has the burden of proving it. PRUDENTIAL, as the party which asserted the
claim that TRANS-ASIA breached the warranty in the policy, has the burden of
evidence to establish the same. Hence, on the part of PRUDENTIAL lies the initiative
to show proof in support of its defense; otherwise, failing to establish the same, it
remains self-serving. Clearly, if no evidence on the alleged breach of TRANS-ASIA of
the subject warranty is shown, a fortiori, TRANS-ASIA would be successful in claiming
on the policy. It follows that PRUDENTIAL bears the burden of evidence to establish
the fact of breach.
In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the
burden of proof to show proof of loss, and the coverage thereof, in the subject
insurance policy. However, in the course of trial in a civil case, once plaintiff makes out
a prima facie case in his favor, the duty or the burden of evidence shifts to defendant
to controvert plaintiffs prima facie case, otherwise, a verdict must be returned in favor
of plaintiff.23 TRANS-ASIA was able to establish proof of loss and the coverage of the
loss, i.e., 25 October 1993: Fire on Board. Thereafter, the burden of evidence shifted
to PRUDENTIAL to counter TRANS-ASIAs case, and to prove its special and
affirmative defense that TRANS-ASIA was in violation of the particular condition on
CLASSED AND CLASS MAINTAINED.
A I believe with Bureau Veritas.24

As found by the Court of Appeals and as supported by the records, Bureau Veritas is a
classification society recognized in the marine industry. As it is undisputed that
TRANS-ASIA was properly classed at the time the contract of insurance was entered
into, thus, it becomes incumbent upon PRUDENTIAL to show evidence that the status
of TRANS-ASIA as being properly CLASSED by Bureau Veritas had shifted in
violation of the warranty. Unfortunately, PRUDENTIAL failed to support the allegation.
We are in accord with the ruling of the Court of Appeals that the lack of a certification
in PRUDENTIALs records to the effect that TRANS-ASIAs "M/V Asia Korea" was
CLASSED AND CLASS MAINTAINED at the time of the occurrence of the fire cannot
be tantamount to the conclusion that TRANS-ASIA in fact breached the warranty
contained in the policy. With more reason must we sustain the findings of the Court of
Appeals on the ground that as admitted by PRUDENTIAL, it was likewise the
responsibility of the average adjuster, Richards Hogg International (Phils.), Inc., to
secure a copy of such certification, and the alleged breach of TRANS-ASIA cannot be
gleaned from the average adjusters survey report, or adjustment of particular average
per "M/V Asia Korea" of the 25 October 1993 fire on board.
We are not unmindful of the clear language of Sec. 74 of the Insurance Code which
provides that, "the violation of a material warranty, or other material provision of a
policy on the part of either party thereto, entitles the other to rescind." It is generally
accepted that "[a] warranty is a statement or promise set forth in the policy, or by
reference incorporated therein, the untruth or non-fulfillment of which in any respect,
and without reference to whether the insurer was in fact prejudiced by such untruth or
non-fulfillment, renders the policy voidable by the insurer." 25 However, it is similarly
indubitable that for the breach of a warranty to avoid a policy, the same must be duly
shown by the party alleging the same. We cannot sustain an allegation that is
unfounded. Consequently, PRUDENTIAL, not having shown that TRANS-ASIA
breached the warranty condition, CLASSED AND CLASS MAINTAINED, it remains
that TRANS-ASIA must be allowed to recover its rightful claims on the policy.
B. Assuming arguendo that TRANS-ASIA violated the policy condition on
WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, PRUDENTIAL made a
valid waiver of the same.
The Court of Appeals, in reversing the Judgment of the RTC which held that TRANSASIA breached the warranty provision on CLASSED AND CLASS MAINTAINED,
underscored that PRUDENTIAL can be deemed to have made a valid waiver of
TRANS-ASIAs breach of warranty as alleged, ratiocinating, thus:
Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2)
consecutive years, from noon of 01 July 1994 to noon of 01 July 1995, and then again
until noon of 01 July 1996. This renewal is deemed a waiver of any breach of
warranty.26
consecutive years after the loss covered by Policy No. MH93/1363, was considered to
have waived TRANS-ASIAs breach of the subject warranty, if any. Breach of a
warranty or of a condition renders the contract defeasible at the option of the insurer;
but if he so elects, he may waive his privilege and power to rescind by the mere
expression of an intention so to do. In that event his liability under the policy continues
as before.28 There can be no clearer intention of the waiver of the alleged breach than
the renewal of the policy insurance granted by PRUDENTIAL to TRANS-ASIA in
MH94/1595 and MH95/1788, issued in the years 1994 and 1995, respectively.
To our mind, the argument is made even more credulous by PRUDENTIALs lack of
proof to support its allegation that the renewals of the policies were taken only after a
request was made to TRANS-ASIA to furnish them a copy of the certificate attesting
that "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED. Notwithstanding
PRUDENTIALs claim that no certification was issued to that effect, it renewed the
policy, thereby, evidencing an intention to waive TRANS-ASIAs alleged breach.
Clearly, by granting the renewal policies twice and successively after the loss, the
intent was to benefit the insured, TRANS-ASIA, as well as to waive compliance of the
warranty.
The foregoing finding renders a determination of whether the subject warranty is a
rider, moot, as raised by the PRUDENTIAL in its assignment of errors. Whether it is a
rider will not effectively alter the result for the reasons that: (1) PRUDENTIAL was not
able to discharge the burden of evidence to show that TRANS-ASIA committed a
breach, thereof; and (2) assuming arguendo the commission of a breach by TRANSASIA, the same was shown to have been waived by PRUDENTIAL.
II.
PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the
renewal policies are deemed a waiver of TRANS-ASIAs alleged breach, averring
herein that the subsequent policies, designated as MH94/1595 and MH95/1788 show
that they were issued only on 1 July 1994 and 3 July 1995, respectively, prior to the
time it made a request to TRANS-ASIA that it be furnished a copy of the certification
specifying that the insured vessel "M/V Asia Korea" was CLASSED AND CLASS
MAINTAINED. PRUDENTIAL posits that it came to know of the breach by TRANSASIA of the subject warranty clause only on 21 April 1997. On even date,
PRUDENTIAL sent TRANS-ASIA a letter of denial, advising the latter that their claim is
not compensable. In fine, PRUDENTIAL would have this Court believe that the
issuance of the renewal policies cannot be a waiver because they were issued without
knowledge of the alleged breach of warranty committed by TRANS-ASIA. 27
We are not impressed. We do not find that the Court of Appeals was in error when it
held that PRUDENTIAL, in renewing TRANS-ASIAs insurance policy for two
A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a

transaction between the parties evidenced by a document denominated as "Loan and
Trust Receipt," dated 29 May 1995 constituted partial payment on the policy.
It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of
P3,000,000.00. The same was evidenced by a transaction receipt denominated as a
"Loan and Trust Receipt," dated 29 May 1995, reproduced hereunder:
LOAN AND TRUST RECEIPT
Claim File No. MH-93-025
P3,000,000.00
Check No. PCIB066755
May
29,
1995
Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of

PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without interest, under
Policy No. MH93/1353, repayable only in the event and to the extent that any net
recovery is made by TRANS ASIA SHIPPING CORP., from any person or persons,
corporation or corporations, or other parties, on account of loss by any casualty for
which they may be liable, occasioned by the 25 October 1993: Fire on Board.
As security for such repayment, we hereby pledge to PRUDENTIAL GUARANTEE
AND ASSURANCE INC. whatever recovery we may make and deliver to it all
documents necessary to prove our interest in said property. We also hereby agree to
promptly prosecute suit against such persons, corporation or corporations through
whose negligence the aforesaid loss was caused or who may otherwise be
responsible therefore, with all due diligence, in our own name, but at the expense of
and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION29
PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by the
parties evidenced a loan of P3,000,000.00 which it granted to TRANS-ASIA, and not
an advance payment on the policy or a partial payment for the loss. It further submits
that it is a customary practice for insurance companies in this country to extend loans
gratuitously as part of good business dealing with their assured, in order to afford their
assured the chance to continue business without embarrassment while awaiting
outcome of the settlement of their claims. 30According to PRUDENTIAL, the "Trust and
Loan Agreement" did not subrogate to it whatever rights and/or actions TRANS-ASIA
may have against third persons, and it cannot by no means be taken that by virtue
thereof, PRUDENTIAL was granted irrevocable power of attorney by TRANS-ASIA, as
the sole power to prosecute lies solely with the latter.
The Court of Appeals held that the real character of the transaction between the
parties as evidenced by the "Loan and Trust Receipt" is that of an advance payment
by PRUDENTIAL of TRANS-ASIAs claim on the insurance, thus:
The Philippine Insurance Code (PD 1460 as amended) was derived from the old
Insurance Law Act No. 2427 of the Philippine Legislature during the American
Regime. The Insurance Act was lifted verbatim from the law of California, except
Chapter V thereof, which was taken largely from the insurance law of New York.
Therefore, ruling case law in that jurisdiction is to Us persuasive in interpreting
provisions of our own Insurance Code. In addition, the application of the adopted
statute should correspond in fundamental points with the application in its country of
origin x x x.
xxxx
Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the
Loan Receipt that the money was intended as a loan does not detract from its real
character as payment of claim, thus:
"The receipt of money by the insured employers from a surety company for losses on
account of forgery of drafts by an employee where no provision or repayment of the
money was made except upon condition that it be recovered from other parties and
neither interest nor security for the asserted debts was provided for, the money
constituted the payment of a liability and not a mere loan, notwithstanding recitals in
the written receipt that the money was intended as a mere loan."
What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement"
is that appellant is obligated to hand over to appellee "whatever recovery (Trans Asia)
may make and deliver to (Prudential) all documents necessary to prove its interest in
the said property." For all intents and purposes therefore, the money receipted is
payment under the policy, with Prudential having the right of subrogation to whatever
net recovery Trans-Asia may obtain from third parties resulting from the fire. In the law
on insurance, subrogation is an equitable assignment to the insurer of all remedies
which the insured may have against third person whose negligence or wrongful act
caused the loss covered by the insurance policy, which is created as the legal effect of
payment by the insurer as an assignee in equity. The loss in the first instance is that of
the insured but after reimbursement or compensation, it becomes the loss of the
insurer. It has been referred to as the doctrine of substitution and rests on the principle
that substantial justice should be attained regardless of form, that is, its basis is the
doing of complete, essential, and perfect justice between all the parties without regard
to form.31
We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt"
evidences that the real nature of the transaction between the parties was that the
amount of P3,000,000.00 was not intended as a loan whereby TRANS-ASIA is
obligated to pay PRUDENTIAL, but rather, the same was a partial payment or an
advance on the policy of the claims due to TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA
by PRUDENTIAL, subrogating the former to the extent of "any net recovery made by
TRANS ASIA SHIPPING CORP., from any person or persons, corporation or
corporations, or other parties, on account of loss by any casualty for which they may
be liable, occasioned by the 25 October 1993: Fire on Board."32
Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed
to "promptly prosecute suit against such persons, corporation or corporations through
whose negligence the aforesaid loss was caused or who may otherwise be
responsible therefore, with all due diligence" in its name, the prosecution of the claims
against such third persons are to be carried on "at the expense of and under the
exclusive direction and control of PRUDENTIAL GUARANTEE AND ASSURANCE
INC."33 The clear import of the phrase "at the expense of and under the exclusive
direction and control" as used in the "Loan and Trust Receipt" grants solely to
PRUDENTIAL the power to prosecute, even as the same is carried in the name of
TRANS-ASIA, thereby making TRANS-ASIA merely an agent of PRUDENTIAL, the
principal, in the prosecution of the suit against parties who may have occasioned the
loss.
Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA to
repay PRUDENTIAL is highly speculative and contingent, i.e., only in the event and to
the extent that any net recovery is made by TRANS-ASIA from any person on account
of loss occasioned by the fire of 25 October 1993. The transaction, therefore, was
made to benefit TRANS-ASIA, such that, if no recovery from third parties is made,
PRUDENTIAL cannot be repaid the amount. Verily, we do not think that this is
constitutive of a loan.34 The liberality in the tenor of the "Loan and Trust Receipt" in
favor of TRANS-ASIA leads to the conclusion that the amount of P3,000,000.00 was a
form of an advance payment on TRANS-ASIAs claim on MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26,
representing the balance of the loss suffered by TRANS-ASIA and covered by Marine
Policy No. MH93/1363.
Our foregoing discussion supports the conclusion that TRANS-ASIA is entitled to the
unpaid claims covered by Marine Policy No. MH93/1363, or a total amount of
P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the form of
attorneys fees equivalent to 10% of P8,395,072.26.
The Court of Appeals denied the grant of attorneys fees. It held that attorneys fees
cannot be awarded absent a showing of bad faith on the part of PRUDENTIAL in
rejecting TRANS-ASIAs claim, notwithstanding that the rejection was erroneous.
According to the Court of Appeals, attorneys fees can be awarded only in the cases
enumerated in Article 2208 of the Civil Code which finds no application in the instant
case.
We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorneys
fees and other expenses incurred by the insured after a finding by the Insurance
Commissioner or the Court, as the case may be, of an unreasonable denial or
withholding of the payment of the claims due. Moreover, the law imposes an interest
of twice the ceiling prescribed by the Monetary Board on the amount of the claim due
the insured from the date following the time prescribed in Section 242 35 or in Section
243,36 as the case may be, until the claim is fully satisfied. Finally, Section 244
considers the failure to pay the claims within the time prescribed in Sections 242 or
243, when applicable, as prima facie evidence of unreasonable delay in payment.
To the mind of this Court, Section 244 does not require a showing of bad faith in order
that attorneys fees be granted. As earlier stated, under Section 244, a prima facie
evidence of unreasonable delay in payment of the claim is created by failure of the
insurer to pay the claim within the time fixed in both Sections 242 and 243 of the
Insurance Code. As established in Section 244, by reason of the delay and the
consequent filing of the suit by the insured, the insurers shall be adjudged to pay
damages which shall consist of attorneys fees and other expenses incurred by the
insured.37
Section 244 reads:
In case of any litigation for the enforcement of any policy or contract of insurance, it
shall be the duty of the Commissioner or the Court, as the case may be, to make a
finding as to whether the payment of the claim of the insured has been unreasonably
denied or withheld; and in the affirmative case, the insurance company shall be
adjudged to pay damages which shall consist of attorneys fees and other expenses
incurred by the insured person by reason of such unreasonable denial or withholding
of payment plus interest of twice the ceiling prescribed by the Monetary Board of the
amount of the claim due the insured, from the date following the time prescribed in
section two hundred forty-two or in section two hundred forty-three, as the case may
be, until the claim is fully satisfied; Provided, That the failure to pay any such claim
within the time prescribed in said sections shall be considered prima facie evidence of
unreasonable delay in payment.
Sections 243 and 244 of the Insurance Code apply when the court finds an
unreasonable delay or refusal in the payment of the insurance claims.
In the case at bar, the facts as found by the Court of Appeals, and confirmed by the
records show that there was an unreasonable delay by PRUDENTIAL in the payment
of the unpaid balance of P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day
after the occurrence of the fire in "M/V Asia Korea", TRANS-ASIA filed its notice of
claim. On 13 August 1996, the adjuster, Richards Hogg International (Phils.), Inc.,
completed its survey report recommending the amount of P11,395,072.26 as the total
indemnity due to TRANS-ASIA.38 On 21 April 1997, PRUDENTIAL, in a
letter39 addressed to TRANS-ASIA denied the latters claim for the amount of
P8,395,072.26 representing the balance of the total indemnity. On 21 July 1997,
PRUDENTIAL sent a second letter40 to TRANS-ASIA seeking a return of the amount of
P3,000,000.00. On 13 August 1997, TRANS-ASIA was constrained to file a complaint
for sum of money against PRUDENTIAL praying, inter alia, for the sum of
P8,395,072.26 representing the balance of the proceeds of the insurance claim.
As can be gleaned from the foregoing, there was an unreasonable delay on the part of
PRUDENTIAL to pay TRANS-ASIA, as in fact, it refuted the latters right to the
insurance claims, from the time proof of loss was shown and the ascertainment of the
loss was made by the insurance adjuster. Evidently, PRUDENTIALs unreasonable
delay in satisfying TRANS-ASIAs unpaid claims compelled the latter to file a suit for
collection.
Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the
policy as attorneys fees to TRANS-ASIA is reasonable under the circumstances, or
otherwise stated, ten percent (10%) of P8,395,072.26. In the case of Cathay
Insurance, Co., Inc. v. Court of Appeals,41 where a finding of an unreasonable delay
under Section 244 of the Insurance Code was made by this Court, we grant an award
of attorneys fees equivalent to ten percent (10%) of the total proceeds. We find no
reason to deviate from this judicial precedent in the case at bar.
C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorneys fees)
shall be imposed double interest in accordance with Section 244 of the Insurance
Code.
Section 244 of the Insurance Code is categorical in imposing an interest twice the
ceiling prescribed by the Monetary Board due the insured, from the date following the
time prescribed in Section 242 or in Section 243, as the case may be, until the claim is
fully satisfied. In the case at bar, we find Section 243 to be applicable as what is
involved herein is a marine insurance, clearly, a policy other than life insurance.
Section 243 is hereunder reproduced:
SEC. 243. The amount of any loss or damage for which an insurer may be liable,
under any policy other than life insurance policy, shall be paid within thirty days after
proof of loss is received by the insurer and ascertainment of the loss or damage is
made either by agreement between the insured and the insurer or by arbitration; but if
such ascertainment is not had or made within sixty days after such receipt by the
insurer of the proof of loss, then the loss or damage shall be paid within ninety days
after such receipt. Refusal or failure to pay the loss or damage within the time
prescribed herein will entitle the assured to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or refusal to pay is based on the ground that the
claim is fraudulent.
As specified, the assured is entitled to interest on the proceeds for the duration of the
delay at the rate of twice the ceiling prescribed by the Monetary Board except when
the failure or refusal of the insurer to pay was founded on the ground that the claim is
fraudulent.
D. The term "double interest" as used in the Decision of the Court of Appeals must be
interpreted to mean 24% per annum.
PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor
of TRANS-ASIA in the assailed Decision of 6 November 2001. It is PRUDENTIALs
stance that the award is extortionate and grossly unsconscionable. In support thereto,
PRUDENTIAL makes a reference to TRANS-ASIAs prayer in the Complaint filed with
the court a quo wherein the latter sought, "interest double the prevailing rate of
interest of 21% per annum now obtaining in the banking business or plus 42% per
annum pursuant to Article 243 of the Insurance Code x x x."42
The contention fails to persuade. It is settled that an award of double interest is lawful
and justified under Sections 243 and 244 of the Insurance Code.43 In Finman General
Assurance Corporation v. Court of Appeals,44 this Court held that the payment of 24%
interest per annum is authorized by the Insurance Code. 45 There is no gainsaying that
the term "double interest" as used in Sections 243 and 244 can only be interpreted to
mean twice 12% per annum or 24% per annum interest, thus:
The term "ceiling prescribed by the Monetary Board" means the legal rate of interest
of twelve per centum per annum (12%) as prescribed by the Monetary Board in C.B.
Circular No. 416, pursuant to P.D. No. 116, amending the Usury Law; so that when
Sections 242, 243 and 244 of the Insurance Code provide that the insurer shall be
liable to pay interest "twice the ceiling prescribed by the Monetary Board", it means
twice 12% per annum or 24% per annum interest on the proceeds of the insurance.46
E. The payment of double interest should be counted from 13 September 1996.
The Court of Appeals, in imposing double interest for the duration of the delay of the
payment of the unpaid balance due TRANS-ASIA, computed the same from 13 August
1996 until such time when the amount is fully paid. Although not raised by the parties,
we find the computation of the duration of the delay made by the appellate court to be
patently erroneous.
To be sure, Section 243 imposes interest on the proceeds of the policy for the duration
of the delay at the rate of twice the ceiling prescribed by the Monetary Board.
Significantly, Section 243 mandates the payment of any loss or damage for which an
insurer may be liable, under any policy other than life insurance policy, within thirty
days after proof of loss is received by the insurer and ascertainment of the loss or
damage is made either by agreement between the insured and the insurer or by
arbitration. It is clear that under Section 243, the insurer has until the 30th day after
proof of loss and ascertainment of the loss or damage to pay its liability under the
insurance, and only after such time can the insurer be held to be in delay, thereby
necessitating the imposition of double interest.
WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in
G.R. No. 151991 is GRANTED, thus, we award the grant of attorneys fees and make
a clarification that the term "double interest" as used in the 6 November 2001 Decision
of the Court of Appeals in CA GR CV No. 68278 should be construed to mean interest
at the rate of 24% per annum, with a further clarification, that the same should be
computed from 13 September 1996 until fully paid. The Decision and Resolution of the
Court of Appeals, in CA-G.R. CV No. 68278, dated 6 November 2001 and 29 January
2002, respectively, are, thus, MODIFIED in the following manner, to wit:
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of
P8,395,072.26, representing the balance of the loss suffered by TRANSASIA and covered by Marine Policy No. MH93/1363;
2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the
form of attorneys fees equivalent to 10% of the amount of P8,395,072.26;
In the case at bar, it was not disputed that the survey report on the ascertainment of
the loss was completed by the adjuster, Richard Hoggs International (Phils.), Inc. on
13 August 1996. PRUDENTIAL had thirty days from 13 August 1996 within which to
pay its liability to TRANS-ASIA under the insurance policy, or until 13 September
1996. Therefore, the double interest can begin to run from 13 September 1996 only.
3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorneys

fees) shall be imposed double interest at the rate of 24% per annum to be
computed from 13 September 1996 until fully paid; and
IV.
A. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability
adjudged in section III herein, computed from the time of finality of judgment until the
full satisfaction thereof in conformity with this Courts ruling in Eastern Shipping Lines,
Inc. v. Court of Appeals.
This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, 47 inscribed the rule of
thumb48 in the application of interest to be imposed on obligations, regardless of their
source. Eastern emphasized beyond cavil that when the judgment of the court
deemed to be by then an equivalent to a forbearance49 of credit.
4. An interest of 12% per annum is similarly imposed on the TOTAL amount

of liability adjudged as abovestated in paragraphs (1), (2), and (3) herein,
computed from the time of finality of judgment until the full satisfaction
thereof.
No costs.
SO ORDERED.
We find application of the rule in the case at bar proper, thus, a rate of 12% per annum
from the finality of judgment until the full satisfaction thereof must be imposed on the
total amount of liability adjudged to PRUDENTIAL. It is clear that the interim period
from the finality of judgment until the satisfaction of the same is deemed equivalent to
a forbearance of credit, hence, the imposition of the aforesaid interest.
Statutory Construction; 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.It is a cardinal rule in statutory
construction that no word, clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which
makes some words idle and nugatory. This principle is expressed in the maxim Ut
magis valeat quam pereat,
Fallo
_______________
**Designated Acting Chairperson of the Second Division per Special Order No. 690
dated September 4, 2009.
*** Designated additional Member of the Second Division per Special Order No. 691
dated September 4, 2009.
* SPECIAL FIRST DIVISION.
414
414
be considered as being engaged in the insurance business.The mere presence of

risk would be insufficient to override the primary purpose of the business to provide
medical services as needed, with payment made directly to the provider of these
services. In short, even if petitioner assumes the risk of paying the cost of these
services even if significantly more than what the member has prepaid, it nevertheless
cannot be considered as being engaged in the insurance business.
Administrative Agencies; 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.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. 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 com415

Philippine Health Care Providers Inc. vs. Commission on Internal Revenue
VOL. 600, SEPTEMBER 18, 2009
that is, we choose the interpretation which gives effect to the whole of the statuteits
every word.
415
Health Maintenance Organizations; Various courts in the United States, whose

jurisprudence has a persuasive effect on our decisions, have determined that Health
Maintenance Organizations (HMOs) are not in the insurance business.Various
courts in the United States, whose jurisprudence has a persuasive effect on our
decisions, have determined that HMOs are not in the insurance business. One test
that they have applied is whether the assumption of risk and indemnification of loss
(which are elements of an insurance business) are the principal object and purpose of
the organization or whether they are merely incidental to its business. If these are the
principal objectives, the business is that of insurance. But if they are merely incidental
and service is the principal purpose, then the business is not insurance. Applying the
principal object and purpose test, there is significant American case law supporting
the argument that a corporation (such as an HMO, whether or not organized for profit),
whose main object is to provide the members of a group with health services, is not
engaged in the insurance business.
Insurance Law; 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
missioner 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 Nestl Philippines, Inc. v. Court of Appeals, 203
SCRA 504 (1991): 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, 29 SCRA 617 (1969) 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.
Taxation; 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.In construing this provision, we should be guided by the principle that tax
statutes are strictly construed against the taxing authority. This is because taxation is
a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the
government. 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.
Contracts; Insurance Law; Even if a contract contains all the elements of a contract, if
its primary purpose is the rendering of service; it is not a contract of insurance.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
416
416
Same; Same; Although risk is a primary element of an insurance contract, it is not

necessarily true that risk alone is sufficient to establish it.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.
Health Maintenance Organizations; Documentary Stamp Tax; If it had been the intent
of the legislature to impose Documentary Stamp Tax (DST) on health care
agreements, it could have done so in clear and categorical terms.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.
417

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.

417
Taxation; 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.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. So potent indeed is the
power that it was once opined that the power to tax involves the power to destroy.
Petitioner claims that the assessed DST to date which amounts to P376 million 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. Petitioner, just like
any concern organized for a lawful economic activity, has a right to maintain a
legitimate business. As aptly held in Roxas, et al. v. CTA, et al., 23 SCRA 276 (1968):
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.
Same; Documentary Stamp Tax; We held in a recent case that Documentary Stamp
Tax (DST) is one of the taxes covered by the tax amnesty program under RA 9480.
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.
Judgments; 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.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. When a minute
Revenue Code (NIRC) and there was never any legislative intent to impose the same
on Health Maintenance Organization (HMO) like petitioner, the same should not be
arbitrarily and unjustly included in its coverage.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.
[Philippine Health Care Providers Inc. vs. Commission on Internal Revenue, 600
SCRA 413(2009)]
SUPREME COURT
Manila
SPECIAL FIRST DIVISION
418
G.R. No. 167330
418
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION

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. But what is its effect on other cases?
Health Maintenance Organizations; Taxation; Taking into account that health care
agreements are clearly not within the ambit of Section 185 of the National Internal
September 18, 2009
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
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.
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
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. Olivares3 and Philamcare Health Systems, Inc. v. CA.4We
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:
(i) Petitioner availed of the tax amnesty benefits under RA5 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 94807 (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.
(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.
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:
(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.
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;
(c) Section 185 should be strictly construed.
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,

fecalysis, complete blood count, and the like and
(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.
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 it11 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
four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis
supplied)
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.
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
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
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, 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
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.
A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.
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 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates
what constitutes "doing an insurance business" or "transacting an insurance
business:"
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
a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or
activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the
meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of

the foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from
the making of insurance contracts, agreements or transactions or that no separate or
direct consideration is received therefore, shall not be deemed conclusive to show that
the making thereof does not constitute the doing or transacting of an insurance
business.
Various courts in the United States, whose jurisprudence has a persuasive effect on
our decisions,21 have determined that HMOs are not in the insurance business. One
test that they have applied is whether the assumption of risk and indemnification of
loss (which are elements of an insurance business) are the principal object and
purpose of the organization or whether they are merely incidental to its business. If
these are the principal objectives, the business is that of insurance. But if they are
merely incidental and service is the principal purpose, then the business is not
insurance.
Applying the "principal object and purpose test,"22 there is significant American case
law supporting the argument that a corporation (such as an HMO, whether or not
organized for profit), whose main object is to provide the members of a group with
health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association23 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 Jersey27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical
services through participating physicians, thus relieving subscribers of any further
financial burden, while the latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates contained in the policy.
xxx
xxx
xxx
The primary purpose of a medical service corporation, however, is an undertaking to

provide physicians who will render services to subscribers on a prepaid basis. Hence,
if there are no physicians participating in the medical service corporations
plan, not only will the subscribers be deprived of the protection which they
might reasonably have expected would be provided, but the corporation will, in
effect, be doing business solely as a health and accident indemnity
insurer without having qualified as such and rendering itself subject to the more
stringent financial requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to render
health care services to or for persons covered by a contract issued by health service
corporation in return for which the health service corporation agrees to make
payment directly to the participating provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary
purpose of the business to provide medical services as needed, with payment made
directly to the provider of these services.29 In short, even if petitioner assumes the risk
of paying the cost of these services even if significantly more than what the member
has prepaid, it nevertheless cannot be considered as being engaged in the insurance
business.
By the same token, any indemnification resulting from the payment for services
rendered in case of emergency by non-participating health providers would still be
incidental to petitioners purpose of providing and arranging for health care services
and does not transform it into an insurer. To fulfill its obligations to its members under
the agreements, petitioner is required to set up a system and the facilities for the
delivery of such medical services. This indubitably shows that indemnification is not its
sole object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic
medical services intended to keep members from developing medical conditions or
diseases.30 As an HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are designed to prevent or to
minimize the possibility of any assumption of risk on its part. Thus, its
undertaking under its agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to provide the health
and medical services needed to prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members (with
respect to its curative medical services), but these are incidental to the principal
activity of providing them medical care. The "insurance-like" aspect of petitioners
business is miniscule compared to its noninsurance activities. Therefore, since it
substantially provides health care services rather than insurance services, it cannot be
considered as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the
above-quoted U.S. cases, we are not saying that petitioners operations are identical
in every respect to those of the HMOs or health providers which were parties to those
cases. What we are stating is that, for the purpose of determining what "doing an
insurance business" means, we have to scrutinize the operations of the business as a
whole and not its mere components. This is of course only prudent and appropriate,
taking into account the burdensome and strict laws, rules and regulations applicable to
insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular
HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry.
This is evident from the fact that it is not supervised by the Insurance Commission but
by the Department of Health.33 In fact, in a letter dated September 3, 2000, the
Insurance Commissioner confirmed that petitioner is not engaged in the insurance
business. This determination of the commissioner must be accorded great weight. It is
well-settled that the interpretation of an administrative agency which is tasked to
implement a statute is accorded great respect and ordinarily controls the interpretation
of laws by the courts. The reason behind this rule was explained in Nestle Philippines,
Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs
of a modern or modernizing society and the establishment of diverse administrative
agencies for addressing and satisfying those needs; it also relates to the accumulation
of experience and growth of specialized capabilities by the administrative agency
charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs.
Commissioner of Customs,35the 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 bondsor 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.39Hence, tax laws may not be extended by implication beyond the clear
import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health
care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. However, those cases did not involve the interpretation of a tax provision.
Instead, they dealt with the liability of a health service provider to a member under the
terms of their health care agreement. Such contracts, as contracts of adhesion, are
liberally interpreted in favor of the member and strictly against the HMO. For this
reason, we reconsider our ruling that Blue Crossand Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. An insurance contract
exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium.41
Do the agreements between petitioner and its members possess all these elements?
They do not.
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.
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:
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.
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
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)
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.1avvphi1
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 EO47 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 924348 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
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.
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
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
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
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.
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 million53 is
way beyond its net worth ofP259 million.54 Respondent never disputed these
assertions. Given the realities on the ground, imposing the DST on petitioner would be
highly oppressive. It is not the purpose of the government to throttle private business.
On the contrary, the government ought to encourage private enterprise.55 Petitioner,
just like any concern organized for a lawful economic activity, has a right to maintain a
legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the
"hen that lays the golden egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of the nations thrust
towards a better economy which will ultimately benefit the majority of our people.59
Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable
years 1996 and 1997 became moot and academic60 when it availed of the tax amnesty
under RA 9480 on December 10, 2007. It paidP5,127,149.08 representing 5% of its
net worth as of the year ended December 31, 2005 and complied with all
requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to
immunity from payment of taxes as well as additions thereto, and the appurtenant
civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years.61
Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to
immunity from payment of the tax involved, including the civil, criminal, or
administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in
2005 and the preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without conceding
the merits of this case as discussed above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of petitioner. This admission, however, is
not meant to preclude a revocation of the amnesty granted in case it is found to have
been granted under circumstances amounting to tax fraud under Section 10 of said
amnesty law.62(Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax
amnesty program under RA 9480.63 There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996 and 1997 was totally
extinguished by its availment of the tax amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether
this Court is bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a
health care agreement of Philamcare Health Systems is not an insurance contract for
purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of
this Court dismissing the appeal in Philippine National Bank (G.R. No.
148680).66 Petitioner argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court should apply the CA ruling
there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a result, our ruling in that case
has already become final.67 When a minute resolution denies or dismisses a petition
for failure to comply with formal and substantive requirements, the challenged
decision, together with its findings of fact and legal conclusions, are deemed
sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata.69 However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute resolution is not
binding precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous
case, CIR v. Baier-Nickel71 involving the same parties and the same issues, was
previously disposed of by the Court thru a minute resolution dated February 17, 2003
sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case
"ha(d) no bearing" on the latter case because the two cases involved different
subject matters as they were concerned with the taxable income of different taxable
years.72
Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph of
Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision.73 Indeed, as a rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the members of the Court
and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners
liability for DST on its health care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute resolution in that case
(which is not even binding precedent) in its favor. Nonetheless, in view of the reasons
already discussed, this does not detract in any way from the fact that petitioners
health care agreements are not subject to DST.
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.
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-
Taxation; Appeals; Ordinarily, a party cannot raise for the first time on appeal an issue
not raised in the trial court.Section 182(A)(3)(dd) of CA 466 imposes an annual fixed
tax on lending investors, depending on their location. The sole question before the
CTA was whether respondents were subject to the percentage tax on lending
investors under Section 195-A. Petitioner raised for the first time the issue of the fixed
tax in the Petition for Review petitioner filed before the Court of Appeals. Ordinarily, a
party cannot raise for the first time on appeal an issue not raised in the trial court. The
Court of Appeals should not have taken cognizance of the issue on respondents
supposed liability under Section 182(A)(3)(dd). However, we cannot entirely fault the
Court of Appeals or petitioner. Even if the percentage tax on lending investors was the
sole issue before it, the CTA ordered petitioner to refund to the PHILAM companies
the fixed and percentage taxes [t]hen paid by petitioners as lending investor.
Although the amounts for refund consisted only of what respondents paid as
percentage taxes, the CTA Decision also ordered the refund to respondents of the
fixed tax on lending investors. Respondents in their pleadings deny any liability under
Section 182(A)(3)(dd), on the same ground that they are not lending investors.
Same; Same; An appellate court may consider an unassigned error if it is closely
related to an error that was properly assigned.The question of whether respondents
should pay the fixed tax under Section 182(A)(3)(dd) revolves around the same issue
of whether respondents are taxable as lending investors. In similar circumstances, the
Court has held that an appellate court may consider an unassigned error if it is closely
related to an error that was properly assigned. This rule properly applies to the present
case. Thus, we
_______________
* FIRST DIVISION.
669
VOL. 453, MARCH 18, 2005
burdens on the taxpayer, and should not be unduly imposed or presumed beyond
what the statutes expressly and clearly import.
Same; Insurance Companies; Lending Investors; Commonwealth Act (C.A.) No. 466;
Words and Phrases; Section 194(u) of C.A. No. 466 does not tax the practice of
lending per seit merely defines what lending investors are; Insurance companies
cannot be considered lending investors under CA 466, as amended.Petitioner does
not dispute that respondents are in the insurance business. Petitioner merely alleges
that the definition of lending investors under CA 466 is broad enough to encompass
insurance companies. Petitioner insists that because of Section 194(u), the two
principal activities of the insurance business, namely, underwriting and investment, are
separately taxable. Section 194(u) of CA 466 states: (u) Lending investor includes all
persons who make a practice of lending money for themselves or others at interest. x
x x As can be seen, Section 194(u) does not tax the practice of lending per se. It
merely defines what lending investors are. The question is whether the lending
activities of insurance companies make them lending investors for purposes of
taxation. We agree with the CTA and Court of Appeals that it does not. Insurance
companies cannot be considered lending investors under CA 466, as amended.
Same; Same; Same; Same; Plainly, insurance companies and lending investors are
different enterprises in the eyes of the law.The definition in Section 194(u) of CA 466
is not broad enough to include
670
669
Commissioner of Internal Revenue vs. Philippine American Accident Insurance
Company, Inc.
670
shall consider and rule on the issue of whether respondents are subject to the fixed
tax under Section 182(A)(3)(dd).

Company, Inc.
Same; Statutory Construction; The rule that tax exemptions should be construed
strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax
being levied against himunless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.The rule that tax exemptions should be construed strictly
against the taxpayer presupposes that the taxpayer is clearly subject to the tax being
levied against him. Unless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed. Where there is doubt, tax laws must be construed strictly
against the government and in favor of the taxpayer. This is because taxes are
the business of insurance companies. The Insurance Code of 1978 is very clear on
what constitutes an insurance company. It provides that an insurer or insurance
company shall include all individuals, partnerships, associations or corporations x x x
engaged as principals in the insurance business, excepting mutual benefit
associations. More specifically, respondents fall under the category of insurance
corporations as defined in Section 185 of the Insurance Code, thus: SECTION 185.
Corporations formed or organized to save any person or persons or other corporations
harmless from loss, damage, or liability arising from any unknown or future or
contingent event, or to indemnify or to compensate any person or persons or other
corporations for any such loss, damage, or liability, or to guarantee the performance of
or compliance with contractual obligations or the payment of debts of others shall be

known as insurance corporations. Plainly, insurance companies and lending
investors are different enterprises in the eyes of the law. Lending investors cannot, for
a consideration, hold anyone harmless from loss, damage or liability, nor provide
compensation or indemnity for loss. The underwriting of risks is the prerogative of
insurers, the great majority of which are incorporated insurance companies like
respondents.
Same; Same; Same; Same; The creation of investment income has long been held
to be generally, if not necessarily, essential to the business of insurance.Insurance
companies are required by law to possess and maintain substantial legal reserves to
meet their obligations to policyholders. This obviously cannot be accomplished
through the collection of premiums alone, as the legal reserves and capital and
surplus insurance companies are obligated to maintain run into millions of pesos. As
such, the creation of investment income has long been held to be generally, if not
necessarily, essential to the business of insurance. The creation of investment income
in the manner sanctioned by the laws on insurance is thus part of the business of
insurance, and the fruits of these investments are essentially income from the
insurance business. This is particularly true if the invested assets are held either as
reserved funds to provide for policy obligations or as capital and surplus to provide an
extra margin of safety which will be attractive to insurance buyers.
which is necessarily a part of the same business, the law must expressly require such
additional payment of tax. There is, however, no provision of law requiring such
additional payment of tax.
Same; Same; Same; Same; Sections 195-A and 182(A)(3)(dd) of CA 466 do not
require insurance companies to pay double percentage and fixed taxes.Sections
195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to pay double
percentage and fixed taxes. They merely tax lending investors, not lending activities.
Respondents were not transformed into lending investors by the mere fact that they
granted loans, as these investments were part of, incidental and necessary to their
insurance business.
Same; Same; Same; Same; When a company is taxed on its main business, it is no
longer taxable further for engaging in an activity or work which is merely a part of,
incidental to and is neces-
Same; Same; Same; Same; Section 182(A)(3) of CA 466 accorded different tax
treatments to lending investors and insurance companiesthe separate provisions on
lending investors and insurance companies demonstrate an intention to treat these
businesses differently.Section 182(A)(3) of CA 466 accorded different tax treatments
to lending investors and insurance companies. The relevant portions of Section 182
state: x x x The separate provisions on lending investors and insurance companies
demonstrate an intention to treat these businesses differently. If Congress intended
insurance companies to be taxed as lending investors, there would be no need for
Section 182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient. That
insurance companies were included with banks, finance and investment companies
also supports the CTAs conclusion that insurance companies had more in common
with the latter enterprises than with lending investors. As the CTA pointed out, banks
also regularly lend money at interest, but are not taxable as lending investors.
671
672
VOL. 453, MARCH 18, 2005
672
671

Company, Inc.

Company, Inc.
sary to its main businessto require them to pay percentage and fixed taxes again for
an activity which is necessarily a part of the same business, the law must expressly
require such additional payment of tax.The Court has also held that when a
company is taxed on its main business, it is no longer taxable further for engaging in
an activity or work which is merely a part of, incidental to and is necessary to its main
business. Respondents already paid percentage and fixed taxes on their insurance
business. To require them to pay percentage and fixed taxes again for an activity
Same; Same; Same; Same; The fact that Sections 195-A and 182(A)(3)(dd) of CA 466
failed to mention insurance companies already implies the latters exclusion from the
coverage of these provisions.The fact that Sections 195-A and 182(A)(3)(dd) of CA
466 failed to mention insurance companies already implies the latters exclusion from
the coverage of these provisions. When a statute enumerates the things upon which it
is to operate, everything else by implication must be excluded from its operation and
effect.
Same; Same; Same; Same; Words and Phrases; The definitions of money lender
under the 1914 Tax Code and lending investor under CA 466 are identicalthe term
money lender was merely changed to lending investor when Act No. 3963
amended the Revised Administrative Code in 1932.The subject definition was
actually introduced much earlier, at a time when lending investors were still referred to
as money lenders. Sections 45 and 46 of the Internal Revenue Law of 1914 (1914
Tax Code) state: SECTION 45. Amount of Tax on Business.Fixed taxes on
business shall be collected as follows, the amount stated being for the whole year,
when not otherwise specified: x x x (x) Money lenders, eighty pesos; x x x SECTION
46. Words and Phrases Defined.In applying the provisions of the preceding section
words and phrases shall be taken in the sense and extension indicated below: x x x
Money lender includes all persons who make a practice of lending money for
themselves or others at interest. (Emphasis supplied) As can be seen, the definitions
of money lender under the 1914 Tax Code and lending investor under CA 466 are
identical. The term money lender was merely changed to lending investor when Act
No. 3963 amended the Revised Administrative Code in 1932. This same definition of
lending investor has since appeared in Section 194(u) of CA 466 and later tax laws.
Same; Same; Same; Same; That Congress later saw the need to introduce Section
182(A)(3)(gg) in CA 466 bolsters the view that there was no legislative intent to tax
insurance companies as lending investors.Note that insurance companies were not
included among the businesses subject to an annual fixed tax under the 1914 Tax
Code. That Congress later saw the need to introduce Section 182(A)(3)(gg) in CA 466
bolsters our view that there was no legislative intent to tax insurance companies as
lending investors. If insurance companies were already taxed as lending investors,
there would have been
673
Dedicated exclusively to the study and consideration of tax problems, the CTA has
necessarily developed an expertise in the subject of taxation that this Court has
recognized time and again. For this reason, the findings of fact of the CTA, particularly
when affirmed by the Court of Appeals, are generally conclusive on this Court absent
grave abuse of discretion or palpable error, which are not present in this case.
[Commissioner of Internal Revenue vs. Philippine American Accident Insurance
Company, Inc., 453 SCRA 668(2005)]

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 141658
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., THE
PHILIPPINE AMERICAN ASSURANCE COMPANY, INC., and THE PHILIPPINE
AMERICAN GENERAL INSURANCE CO., INC.,Respondents.
VOL. 453, MARCH 18, 2005

673
Company, Inc.
no need for a separate provision specifically requiring insurance companies to pay
fixed taxes.
Same; Administrative Law; Court of Tax Appeals; Dedicated exclusively to the study
and consideration of tax problems, the CTA has necessarily developed an expertise in
the subject of taxation that the Supreme Court has recognized time and again.
March 18, 2005
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the Decision2 of 7 January 2000 of
the Court of Appeals in CA-G.R. SP No. 36816. The Court of Appeals affirmed the
Decision3 of 5 January 1995 of the Court of Tax Appeals ("CTA") in CTA Cases Nos.
2514, 2515 and 2516. The CTA ordered the Commissioner of Internal Revenue
("petitioner") to refund a total of P29,575.02 to respondent companies ("respondents").
Antecedent Facts
Respondents are domestic corporations licensed to transact insurance business in the
country. From August 1971 to September 1972, respondents paid the Bureau of
Internal Revenue under protest the 3% tax imposed on lending investors by Section
195-A4 of Commonwealth Act No. 466 ("CA 466"), as amended by Republic Act No.
6110 ("RA 6110") and other laws. CA 466 was the National Internal Revenue Code
("NIRC") applicable at the time.
"The lending of money at interest by insurance companies

constitutes a necessary incident of their regular business. For this
reason, insurance companies are not liable to tax as money
lenders or real estate brokers for making or negotiating loans
secured by real property. (Ruling, February 28, 1920; BIR 135.2)"
(The Internal Revenue Law, Annotated, 2nd ed., 1929, by B.L.
Meer, page 143)
The same rule has been applied to banks.
Respondents paid the following amounts: P7,985.25 from Philippine American

("PHILAM") Accident Insurance Company; P7,047.80 from PHILAM Assurance
Company; and P14,541.97 from PHILAM General Insurance Company. These
amounts represented 3% of each companys interest income from mortgage and other
loans. Respondents also paid the taxes required of insurance companies under CA
466.
On 31 January 1973, respondents sent a letter-claim to petitioner seeking a refund of
the taxes paid under protest. When respondents did not receive a response, each
respondent filed on 26 April 1973 a petition for review with the CTA. These three
petitions, which were later consolidated, argued that respondents were not lending
investors and as such were not subject to the 3% lending investors tax under Section
195-A.
The CTA archived respondents case for several years while another case with a
similar issue was pending before the higher courts. When respondents case was
reinstated, the CTA ruled that respondents were entitled to their refund.
The Ruling of the Court of Tax Appeals
The CTA held that respondents are not taxable as lending investors because the term
"lending investors" does not embrace insurance companies. The CTA traced the
history of the tax on lending investors, as follows:
Originally, a person who was engaged in lending money at interest was
taxed as a money lender. [Sec. 1464(x), Rev. Adm. Code] The term money
lenders was defined as including "all persons who make a practice of
lending money for themselves or others at interest." [Sec. 1465(v), id.]
Under this law, an insurance company was not considered a money lender
and was not taxable as such. To quote from an old BIR Ruling:
"For making investments on salary loans, banks will not be

required to pay the money lenders tax imposed by this
subsection, for the reason that money lending is considered a
mere incident of the banking business. [See Ruling No. 43,
(October 8, 1926) 25 Off. Gaz. 1326)" (The Internal Revenue Law,
Annotated, id.)
The term "money lenders" was later changed to "lending investors" but the
definition of the term remains the same. [Sec. 1464(x), Rev. Adm. Code, as
finally amended by Com. Act No. 215, and Sec. 1465(v) of the same Code,
as finally amended by Act No. 3963] The same law is embodied in the
present National Internal Revenue Code (Com. Act No. 466) without
change, except in the amount of the tax. [See Secs. 182(A) (3) (dd) and
194(u), National Internal Revenue Code.]
It is a well-settled rule that an administrative interpretation of a law which
has been followed and applied for a long time, and thereafter the law is reenacted without substantial change, such administrative interpretation is
deemed to have received legislative approval. In short, the administrative
interpretation becomes part of the law as it is presumed to carry out the
legislative purpose.5
The CTA held that the practice of lending money at interest is part of the insurance
business. CA 466 already taxes the insurance business. The CTA pointed out that the
law recognizes and even regulates this practice of lending money by insurance
companies.
The CTA observed that CA 466 also treated differently insurance companies from
lending investors in regard to fixed taxes. Under Section 182(A)(3)(gg), insurance
companies were subject to the same fixed tax as banks and finance companies. The
CTA reasoned that insurance companies were grouped with banks and finance
companies because the latters lending activities were also integral to their business.
In contrast, lending investors were taxed at a different fixed tax under Section 182(A)
(3)(dd) of CA 466. The CTA stated that "insurance companies xxx had never been
required by respondent [CIR] to pay the fixed tax imposed on lending investors xxx."6
WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO

THE 3% PERCENTAGE TAX AS LENDING INVESTORS UNDER
SECTIONS 182(A)(3)(DD) AND 195-A, RESPECTIVELY IN RELATION TO
SECTION 194(U), ALL OF THE NIRC.10
The dispositive portion of the Decision of 5 January 1995 of the Court of Tax Appeals
("CTA Decision") reads:
WHEREFORE, premises considered, petitioners Philippine American
Accident Insurance Co., Philippine American Assurance Co., and Philippine
American General Insurance Co., Inc. are not taxable on their lending
transactions independently of their insurance business. Accordingly,
respondent is hereby ordered to refund to petitioner[s] the sum
of P7,985.25, P7,047.80 and P14,541.97 in CTA Cases No. 2514, 2515 and
2516, respectively representing the fixed and percentage taxes when (sic)
paid by petitioners as lending investor from August 1971 to September
1972.
No pronouncement as to cost.
SO ORDERED.
Dissatisfied, petitioner elevated the matter to the Court of Appeals.8

The Ruling of the Court of Appeals
The Court of Appeals ruled that respondents are not taxable as lending investors. In
its Decision of 7 January 2000 ("CA Decision"), the Court of Appeals affirmed the
ruling of the CTA, thus:
WHEREFORE, premises considered, the petition is DISMISSED, hereby
AFFIRMING the decision, dated January 5, 1995, of the Court of Tax
Appeals in CTA Cases Nos. 2514, 2515 and 2516.
SO ORDERED.9
The Ruling of the Court

The petition lacks merit.
On the Additional Issue Raised by Petitioner
Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on lending investors,
depending on their location.11 The sole question before the CTA was whether
respondents were subject to the percentage tax on lending investors under Section
195-A. Petitioner raised for the first time the issue of the fixed tax in the Petition for
Review12 petitioner filed before the Court of Appeals.
Ordinarily, a party cannot raise for the first time on appeal an issue not raised in the
trial court.13 The Court of Appeals should not have taken cognizance of the issue on
respondents supposed liability under Section 182(A)(3)(dd). However, we cannot
entirely fault the Court of Appeals or petitioner. Even if the percentage tax on lending
investors was the sole issue before it, the CTA ordered petitioner to refund to the
PHILAM companies "the fixed and percentage taxes [t]hen paid by petitioners as
lending investor."14 Although the amounts for refund consisted only of what
respondents paid as percentage taxes, the CTA Decision also ordered the refund to
respondents of the fixed tax on lending investors. Respondents in their pleadings deny
any liability under Section 182(A)(3)(dd), on the same ground that they are not lending
investors.
The question of whether respondents should pay the fixed tax under Section 182(A)
(3)(dd) revolves around the same issue of whether respondents are taxable as lending
investors. In similar circumstances, the Court has held that an appellate court may
consider an unassigned error if it is closely related to an error that was properly
assigned.15 This rule properly applies to the present case. Thus, we shall consider and
rule on the issue of whether respondents are subject to the fixed tax under Section
182(A)(3)(dd).
Petitioner appealed the CA Decision to this Court.

The Issues
Petitioner raises the sole issue:
Whether Insurance Companies are

Taxable as Lending Investors
Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section 194(u) of CA 466,

petitioner argues that insurance companies are subject to two fixed taxes and two
percentage taxes. Petitioner alleges that:
As a lending investor, an insurance company is subject to an annual fixed
tax of P500.00 and anotherP500.00 under Section 182 (A)(3)(dd) and (gg)
of the Tax Code. As an underwriter, an insurance company is subject to the
3% tax of the total premiums collected and another 3% on the gross
receipts as a lending investor under Sections 255 and 195-A, respectively of
the same Code. xxx16
Petitioner also contends that the refund granted to respondents is in the nature of a
tax exemption, and cannot be allowed unless granted explicitly and categorically.
The rule that tax exemptions should be construed strictly against the taxpayer
presupposes that the taxpayer is clearly subject to the tax being levied against him.
Unless a statute imposes a tax clearly, expressly and unambiguously, what applies is
the equally well-settled rule that the imposition of a tax cannot be presumed.17Where
there is doubt, tax laws must be construed strictly against the government and in favor
of the taxpayer.18This is because taxes are burdens on the taxpayer, and should not
be unduly imposed or presumed beyond what the statutes expressly and clearly
import.19
Section 182(A)(3)(dd) of CA 466 also provides:
2. In second and third class municipalities, two hundred and fifty

pesos;
3. In fourth and fifth class municipalities and municipal districts,
one hundred and twenty-five pesos; Provided, That lending
investors who do business as such in more than one province
shall pay a tax of five hundred pesos.
Section 195-A of CA 466 provides:
Sec. 195-A. Percentage tax on dealers in securities; lending investors.
Dealers in securities and lending investors shall pay a tax equivalent to
three per centum on their gross income.
Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies.
Section 182(A)(3)(dd) provides for the taxation of lending investors in different
localities. Section 195-A refers to dealers in securities and lending investors. The
burden is thus on petitioner to show that insurance companies are lending investors
for purposes of taxation.
In this case, petitioner does not dispute that respondents are in the insurance
business. Petitioner merely alleges that the definition of lending investors under CA
466 is broad enough to encompass insurance companies. Petitioner insists that
because of Section 194(u), the two principal activities of the insurance business,
namely, underwriting and investment, are separately taxable.20
Sec. 182. Fixed taxes. (A) On business xxx

Section 194(u) of CA 466 states:
xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as
follows, the amount stated being for the whole year, when not otherwise
specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred
pesos;
(u) "Lending investor" includes all persons who make a practice of lending
money for themselves or others at interest.
xxx
As can be seen, Section 194(u) does not tax the practice of lending per se. It merely
defines what lending investors are. The question is whether the lending activities of
insurance companies make them lending investors for purposes of taxation.
We agree with the CTA and Court of Appeals that it does not. Insurance companies
cannot be considered lending investors under CA 466, as amended.
Definition of Lending
Investors under CA 466 Does
Not Include Insurance
Companies.
The definition in Section 194(u) of CA 466 is not broad enough to include the business
of insurance companies. The Insurance Code of 197821 is very clear on what
constitutes an insurance company. It provides that an insurer or insurance company
"shall include all individuals, partnerships, associations or corporations xxx engaged
as principals in the insurance business, excepting mutual benefit associations."22 More
specifically, respondents fall under the category of insurance corporations as defined
in Section 185 of the Insurance Code, thus:
SECTION 185. Corporations formed or organized to save any person or
persons or other corporations harmless from loss, damage, or liability
arising from any unknown or future or contingent event, or to indemnify or to
compensate any person or persons or other corporations for any such loss,
damage, or liability, or to guarantee the performance of or compliance with
contractual obligations or the payment of debts of others shall be known as
"insurance corporations."
Plainly, insurance companies and lending investors are different enterprises in the
eyes of the law. Lending investors cannot, for a consideration, hold anyone harmless
from loss, damage or liability, nor provide compensation or indemnity for loss. The
underwriting of risks is the prerogative of insurers, the great majority of which are
incorporated insurance companies23 like respondents.
Granting of Mortgage and
other Loans are Investment
Practices that are Part of the
Insurance Business.
True, respondents granted mortgage and other kinds of loans. However, this was not
done independently of respondents insurance business. The granting of certain loans
is one of several means of investment allowed to insurance companies. No less than
the Insurance Code mandates and regulates this practice.24
Unlike the practice of lending investors, the lending activities of insurance companies
are circumscribed and strictly regulated by the State. Insurance companies cannot
freely lend to "themselves or others" as lending investors can,25 nor can insurance
companies grant simply any kind of loan. Even prior to 1978, the Insurance Code
prescribed strict rules for the granting of loans by insurance companies.26 These
provisions on mortgage, collateral and policy loans were reiterated in the Insurance
Code of 1978 and are still in force today.
Petitioner concedes that respondents investment practices are as much a part of the
insurance business as the task of underwriting. Nevertheless, petitioner argues that
such investment practices are separately taxable under CA 466.
The CTA and the Court of Appeals found that the investment of premiums and other
funds received by respondents through the granting of mortgage and other loans
was necessary to respondents business and hence, should not be taxed separately.
Insurance companies are required by law to possess and maintain substantial legal
reserves to meet their obligations to policyholders.27 This obviously cannot be
accomplished through the collection of premiums alone, as the legal reserves and
capital and surplus insurance companies are obligated to maintain run into millions of
pesos. As such, the creation of "investment income" has long been held to be
generally, if not necessarily,essential to the business of insurance.28
The creation of investment income in the manner sanctioned by the laws on insurance
is thus part of the business of insurance, and the fruits of these investments are
essentially income from the insurance business. This is particularly true if the invested
assets are held either as reserved funds to provide for policy obligations or as capital
and surplus to provide an extra margin of safety which will be attractive to insurance
buyers.29
The Court has also held that when a company is taxed on its main business, it is no
longer taxable further for engaging in an activity or work which is merely a part of,
incidental to and is necessary to its main business.30Respondents already paid
percentage and fixed taxes on their insurance business. To require them to pay
percentage and fixed taxes again for an activity which is necessarily a part of the
same business, the law must expressly require such additional payment of tax. There
is, however, no provision of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to
pay double percentage and fixed taxes. They merely tax lending investors, not lending
activities. Respondents were not transformed into lending investors by the mere fact
that they granted loans, as these investments were part of, incidental and necessary
to their insurance business.
Different Tax Treatment of
Insurance Companies and
Lending Investors.
Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors and
insurance companies. The relevant portions of Section 182 state:
We find no merit in petitioners contention that Congress intended to subject

respondents to two percentage taxes and two fixed taxes. Petitioners argument goes
against the doctrine of strict interpretation of tax impositions.
Sec. 182. Fixed taxes. (A) On business xxx

(3) Other fixed taxes. The following fixed taxes shall be collected as
follows, the amount stated being for the whole year, when not otherwise
specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred
pesos;
2. In second and third class municipalities, two hundred and fifty
pesos;
3. In fourth and fifth class municipalities and municipal districts,
one hundred and twenty-five pesos; Provided, That lending
investors who do business as such in more than one province
shall pay a tax of five hundred pesos.
Petitioners argument is likewise not in accord with existing jurisprudence.

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,31 the
Court ruled that the different tax treatment accorded to pawnshops and lending
investors in the NIRC of 1977 and the NIRC of 1986 showed "the intent of Congress
to deal with both subjects differently." The same reasoning applies squarely to the
present case.
Even the current tax law does not treat insurance companies as lending investors.
Under Section 108(A)32 of the NIRC of 1997, lending investors and non-life insurance
companies, except for their crop insurances, are subject to value-added tax ("VAT").
Life insurance companies are exempt from VAT, but are subject to percentage tax
under Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention
insurance companies already implies the latters exclusion from the coverage of these
provisions. When a statute enumerates the things upon which it is to operate,
everything else by implication must be excluded from its operation and effect. 33
Definition of Lending
Investors in CA 466 is Not
New.
xxx
(gg) Banks, insurance companies, finance and investment companies doing
business in the Philippines and franchise grantees, five hundred pesos.
xxx (Emphasis supplied.)
The separate provisions on lending investors and insurance companies demonstrate
an intention to treat these businesses differently. If Congress intended insurance
companies to be taxed as lending investors, there would be no need for Section
182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient. That insurance
companies were included with banks, finance and investment companies also
supports the CTAs conclusion that insurance companies had more in common with
the latter enterprises than with lending investors. As the CTA pointed out, banks also
regularly lend money at interest, but are not taxable as lending investors.
Petitioner does not dispute that it issued a ruling in 1920 to the effect that the lending
of money at interest was a necessary incident of the insurance business, and that
insurance companies were thus not subject to the tax on money lenders. Petitioner
argues only that the 1920 ruling does not apply to the instant case because RA 6110
introduced the definition of lending investors to CA 466 only in 1969.
The subject definition was actually introduced much earlier, at a time when lending
investors were still referred to as money lenders. Sections 45 and 46 of the Internal
Revenue Law of 191434 ("1914 Tax Code") state:
SECTION 45. Amount of Tax on Business. Fixed taxes on business shall
be collected as follows, the amount stated being for the whole year, when
not otherwise specified:
xxx
(x) Money lenders, eighty pesos;

xxx
SECTION 46. Words and Phrases Defined. In applying the provisions of
the preceding section words and phrases shall be taken in the sense and
extension indicated below:
xxx
"Money lender" includes all persons who make a practice of lending
money for themselves or others at interest. (Emphasis supplied)
As can be seen, the definitions of "money lender" under the 1914 Tax Code and
"lending investor" under CA 466 are identical. The term "money lender" was merely
changed to "lending investor" when Act No. 3963 amended the Revised Administrative
Code in 1932.35 This same definition of lending investor has since appeared in Section
194(u) of CA 466 and later tax laws.
Note that insurance companies were not included among the businesses subject to an
annual fixed tax under the 1914 Tax Code.36 That Congress later saw the need to
introduce Section 182(A)(3)(gg) in CA 466 bolsters our view that there was no
legislative intent to tax insurance companies as lending investors. If insurance
companies were already taxed as lending investors, there would have been no need
for a separate provision specifically requiring insurance companies to pay fixed taxes.
The Court Accords Great
Weight to the Factual Findings
of the CTA.
Dedicated exclusively to the study and consideration of tax problems, the CTA has
necessarily developed an expertise in the subject of taxation that this Court has
recognized time and again. For this reason, the findings of fact of the CTA, particularly
when affirmed by the Court of Appeals, are generally conclusive on this Court absent
grave abuse of discretion or palpable error,37 which are not present in this case.
WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7 January
2000 of the Court of Appeals in CA-G.R. SP No. 36816.
Mercantile Law; Common Carriers; Code of Commerce; If the goods are rendered
useless for sale, consumption or for the intended purpose, the consignee may reject
the goods and demand the payment of such goods at their market price on that day
pursuant to Article 365. In case the damaged portion of the goods can be segregated
from those delivered in good condition, the consignee may reject those in damaged
condition and accept merely those which are in good condition.If the goods are
delivered but arrived at the destination in damaged condition, the remedies to be
pursued by the consignee depend on the extent of damage on the goods. If the goods
are rendered useless for sale, consumption or for the intended purpose, the
consignee may reject the goods and demand the payment of such goods at their
market price on that day pursuant to Article 365. In case the damaged portion of the
goods can be segregated from those delivered in good condition, the consignee may
reject those in damaged condition and accept merely those which are in good
condition. But if the consignee is able to prove that it is impossible to use those goods
which were delivered in good condition without the others,
_______________
* THIRD DIVISION.
628
SO ORDERED.
VOL. 742, NOVEMBER 26, 2014.
628
VOL. 742, NOVEMBER 26, 2014.
Loadstar Shipping Company, Incorporated vs. Malayan Insurance Company,

Incorporated
629
then the entire shipment may be rejected. To reiterate, under Article 365, the nature of
damage must be such that the goods are rendered useless for sale, consumption or
intended purpose for the consignee to be able to validly reject them. If the effect of
damage on the goods consisted merely of diminution in value, the carrier is bound to
pay only the difference between its price on that day and its depreciated value as
provided under Article 364.
Same; Insurance Law; Right of Subrogation; The right of subrogation is not dependent
upon, nor does it grow out of, any privity of contract or upon written assignment of
claim. It accrues simply upon payment of the insurance claim by the insurer.The
right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract or upon written assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer. The right of subrogation is however, not absolute.
There are a few recognized exceptions to this rule. For instance, if the assured by his
own act releases the wrongdoer or third party liable for the loss or damage, from
liability, the insurers right of subrogation is defeated. x x x Similarly, where the insurer
pays the assured the value of the lost goods without notifying the carrier who has in
good faith settled the assureds claim for loss, the settlement is binding on both the
assured and the insurer, and the latter cannot bring an action against the carrier on his
right of subrogation. x x x And where the insurer pays the assured for a loss which is
not a risk covered by the policy, thereby effecting voluntary payment, the former has
no right of subrogation against the third party liable for the loss x x x.
Same; Same; Same; Words and Phrases; Subrogation is the substitution of one
person in the place of another with reference to a lawful claim or right, so that he who
is substituted succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities.The rights of a subrogee cannot be superior to
the rights possessed by a subrogor. Subrogation is the substitution of one person in
the place of another with reference to a lawful claim or right, so that he who is
substituted succeeds to the rights of the other in relation to a debt or claim, including
its remedies or securities. The rights to which the subrogee succeeds are the same
as, but not greater than, those of the person for whom he is substituted, that is, he
cannot acquire any claim, security or remedy the subrogor did not have. In other
words, a subrogee cannot succeed to a right not
629
Loadstar Shipping Company, Incorporated vs. Malayan Insurance Company,

Incorporated
possessed by the subrogor. A subrogee in effect steps into the shoes of the insured
and can recover only if the insured likewise could have recovered.
Same; Same; Same; An insurer indemnifies the insured based on the loss or injury the
latter actually suffered from.An insurer indemnifies the insured based on the loss or
injury the latter actually suffered from. If there is no loss or injury, then there is no
obligation on the part of the insurer to indemnify the insured. Should the insurer pay
the insured and it turns out that indemnification is not due, or if due, the amount paid
is excessive, the insurer takes the risk of not being able to seek recompense from the
alleged wrongdoer. This is because the supposed subrogor did not possess the right
to be indemnified and therefore, no right to collect is passed on to the subrogee.
Civil Law; Damages; Actual Damages; It is axiomatic that actual damages must be
proved with reasonable degree of certainty and a party is entitled only to such
compensation for the pecuniary loss that was duly proven.As regards the
determination of actual damages, [i]t is axiomatic that actual damages must be
compensation for the pecuniary loss that was duly proven.
Same; Same; Same; The claimant must prove the actual amount of loss with a
reasonable degree of certainty premised upon competent proof and on the best
evidence obtainable.The burden of proof is on the party who would be defeated if
no evidence would be presented on either side. The burden is to establish ones case
by a preponderance of evidence which means that the evidence, as a whole, adduced
by one side, is superior to that of the other. Actual damages are not presumed. The
claimant must prove the actual amount of loss with a reasonable degree of certainty
premised upon competent proof and on the best evidence obtainable. Specific facts
that could afford a basis for measuring whatever compensatory or actual damages are
borne must be pointed out. Actual damages cannot be anchored on mere surmises,
speculations or conjectures. [Loadstar Shipping Company, Incorporated vs. Malayan
Insurance Company, Incorporated, 742 SCRA 627(2014)]
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 185565
November 26, 2014
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR

INTERNATIONAL SHIPPING COMPANY, INCORPORATED, Petitioners,
vs.
MALAYAN INSURANCE COMPANY, INCORPORATED, Respondent.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari1 filed by Loadstai Shipping Company,
Incorporated and Loadstar International Shipping Company, Incorporated (petitioners)
against Malayan Insurance Company, Incorporated (Malayan) seeking to set aside the
Decision2 dated April 14, 2008 and Resolution3 dated December 11, 2008 of the Court
of Appeals (CA) in CA-G.R. CV No. 82758, which reversed and set aside the
Decision4 dated March 31, 2004 of the Regional Trial Court of Manila, Branch 34, in
Civil Case No. 01-101885.
The facts as found by the CA, are as follows:
Loadstar International Shipping, Inc.(Loadstar Shipping) and Philippine Associated
Smelting and Refining Corporation (PASAR) entered into a Contract of Affreightment
for domestic bulk transport of the latters copper concentrates for a period of one year
from November 1, 1998 to October 31, 1999. The contract was extended up to the
end of October 2000.
On September 10, 2000, 5,065.47 wet metric tons (WMT) of copper concentrates
were loaded in Cargo Hold Nos. 1 and 2 of MV "Bobcat", a marine vessel owned by
Loadstar International Shipping Co., Inc. (Loadstar International) and operated by
Loadstar Shipping under a charter party agreement. The shipper and consignee under
the Bill of Lading are Philex Mining Corporation (Philex) and PASAR, respectively. The
cargo was insured with Malayan Insurance Company, Inc. (Malayan) under Open
Policy No. M/OP/2000/001-582. P & I Association is the third party liability insurer of
Loadstar Shipping.
On said date (September 10, 2000), MV "Bobcat" sailed from Poro Point, San
Fernando, La Union bound for Isabel, Leyte. On September 12, 2000, while in the
vicinity of Cresta de Gallo, the vessels chief officer on routine inspection found a
crack on starboard sideof the main deck which caused seawater to enter and wet the
cargo inside Cargo Hold No. 2 forward/aft. The cracks at the top deck starboard side
of Cargo Hold No. 2, measuring 1.21 meters long x 0.39 meters wide, and at top deck
aft section starboard side on other point, measuring 0.82 meters long x 0.32 meters
wide, were welded.
Immediately after the vessel arrived at Isabel, Leyte anchorage area, on September
13, 2000, PASAR and Philexs representatives boarded and inspected the vessel and
undertook sampling of the copper concentrates. In its preliminary report dated
September 15, 2000, the Elite Adjusters and Surveyor, Inc. (Elite Surveyor) confirmed
that samples of copper concentrates from Cargo Hold No. 2 were contaminated by
seawater. Consequently, PASAR rejected 750 MT of the 2,300 MT cargo discharged
from Cargo Hold No. 2.
On November 6, 2000, PASAR sent a formal notice of claim in the amount of
[P]37,477,361.31 to Loadstar Shipping. In its final report dated November 16, 2000,
Elite Surveyor recommended payment to the assured the amount of [P]32,351,102.32
as adjusted. On the basis of such recommendation, Malayan paid PASAR the amount
of [P]32,351,102.32.
Meanwhile, on November 24, 2000, Malayan wrote Loadstar Shipping informing the
latter of a prospective buyer for the damaged copper concentrates and the opportunity
to nominate/refer other salvage buyers to PASAR. On November 29, 2000, Malayan
wrote Loadstar Shipping informing the latter of the acceptance of PASARs proposal to
take the damaged copper concentrates at a residual value of US$90,000.00. On
December 9, 2000, Loadstar Shipping wrote Malayan requesting for the reversal of its
decision to accept PASARs proposal and the conduct of a public bidding to allow
Loadstar Shipping to match or top PASARs bid by 10%.
On January 23, 2001, PASAR signed a subrogation receipt in favor of Malayan. To
recover the amount paid and in the exercise of its right of subrogation, Malayan
demanded reimbursement from Loadstar Shipping, which refused to comply.
Consequently, on September 19, 2001, Malayan instituted with the RTC a complaint
for damages. The complaint was later amended to include Loadstar International as
party defendant.
In its amended complaint, Malayan mainly alleged that as a direct and natural
consequence of the unseaworthiness of the vessel, PASAR suffered loss of the cargo.
It prayed for the amount of [P]33,934,948.75, representing actual damages plus legal
interest fromdate of filing of the complaint until fully paid, and attorneys fees in the
amount of not less than [P]500,000.00. It also sought to declare the bill of lading as
void since it violates the provisions of Articles 1734 and 1745 of the Civil Code.
On October 30, 2002, Loadstar Shipping and Loadstar International filed their answer
with counterclaim, denying plaintiff appellants allegations and averring as follows: that
they are not engaged in the business as common carriers but as private carriers; that
the vessel was seaworthy and defendants-appellees exercised the required diligence
under the law; that the entry of water into Cargo Hold No. 2 must have been caused
by force majeureor heavy weather; that due to the inherent nature of the cargo and
the use of water in its production process, the same cannot be considered damaged
or contaminated; that defendants-appellees were denied reasonable opportunity to
participate in the salvage sale; that the claim had prescribed in accordance with the
bill of lading provisions and the Code of Commerce; that plaintiff-appellants claim is
excessive, grossly overstated, unreasonable and unsubstantiated; that their liability, if
any, should not exceed the CIFvalue of the lost/damaged cargo as set forth in the bill
of lading, charter party or customary rules of trade; and that the arbitration clause in
the contract of affreightment should be followed.
Finally, the RTC denied the prayer to declare the Bill of Lading null and void for lack of
basis because what was attached to Malayans compliance was still an unreadable
machine copy thereof.5 (Citations omitted)
After trial, and considering that the billof lading, which was marked as Exhibit "B", is
unreadable, the RTC issued on February 17, 2004 an order directing the counsel for
Malayan to furnish it with a clearer copy of the same within three (3) days from receipt
of the order. On February 23, 2004, Malayan filed a compliance attaching thereto copy
of the bill of lading.
SO ORDERED.7
On March 31, 2004, the RTC rendered a judgment dismissing the complaint as well as
the counterclaim. The RTC was convinced that the vessel was seaworthy at the time
of loading and that the damage was attributable to the perils of the sea (natural
disaster) and not due to the fault or negligence of Loadstar Shipping.
The RTC found that although contaminated by seawater, the copper concentrates can
still be used. Itgave credence to the testimony of Francisco Esguerra, defendantsappellees expert witness, that despite high chlorine content, the copper concentrates
remain intact and will not lose their value. The gold and silver remain with the
grains/concentrates even if soaked with seawater and does not melt. The RTC
observed that the purchase agreement between PASAR and Philex contains a penalty
clause and has no rejection clause. Despite this agreement, the parties failed to sit
down and assess the penalty.
The RTC also found that defendants-appellees were not afforded the opportunity to
object or participate or nominate a participant in the sale of the contaminated copper
concentrates to lessen the damages to be paid. No record was presented to show that
a public bidding was conducted. Malayan sold the contaminated copper concentrates
to PASAR at a low price then paid PASAR the total value of the damaged concentrate
without deducting anything from the claim.
Ruling of the CA
On April 14, 2008, the CA rendered its Decision,6 the dispositive portion of which
reads: WHEREFORE, the appeal is GRANTED. The Decision dated March 31, 2004
of the RTC, Branch 34, Manila in Civil Case No. 01-101885, is REVERSED and SET
ASIDE. In lieu thereof, a new judgment is entered, ORDERING defendants-appellees
to pay plaintiff-appellant P33,934,948.75 as actual damages, plus legal interest at 6%
annually from the date of the trial courts decision. Upon the finality of the decision, the
total amount of the judgment shall earn annual interest at 12% until full payment.
On December 11, 2008, the CA modified the above decision through a

Resolution,8 the fallo thereof states:
WHEREFORE, the Motion for Reconsiderationis PARTLY GRANTED. The decision of
this Court dated April 14, 2008 is PARTIALLY RECONSIDERED and MODIFIED.
Defendants-appellees are ORDERED to pay to plaintiff-appellant P33,934,948.74 as
actual damages, less US$90,000.00, computed at the exchange rate prevailing on
November 29, 2000, plus legal interest at 6% annually from the date of the trial courts
decision. Upon the finality of the decision, the total amount of the judgment shall earn
annual interest at 12% until full payment.
SO ORDERED.9
The CA discussed that the amount of US$90,000.00 should have been deducted from
Malayans claim against the petitioners in order to prevent undue enrichment on the
part of Malayan. Otherwise, Malayan would recover from the petitioners not merely
the entire amount of 33,934,948.74 as actual damages, but would also end up unjustly
enriching itself in the amount of US$90,000.00 the residual value of the subject
copper concentrates it sold to Philippine Associated Smelting and Refining
Corporation (PASAR) on November 29, 2000.10 Issues
In sum, the grounds presented by the petitioners for the Courts consideration are the
following:
I.
THE [CA] HAS NO BASIS IN REVERSING THE DECISION OF THE TRIAL COURT.
THERE IS NOTHING IN THE DECISION OF THE HONORABLE COURT THAT
REVERSED THE FACTUAL FINDINGS AND CONCLUSIONS OF THE TRIAL
COURT, THAT THERE WAS NO ACTUAL LOSS OR DAMAGE TO THE CARGO OF
COPPER CONCENTRATES WHICH WOULD MAKE LOADSTAR AS THE
SHIPOWNER LIABLE FOR A CARGO CLAIM. CONSEQUENTLY, THERE IS NO
BASIS FOR THE COURT TO ORDER LOADSTAR TO PAY ACTUAL DAMAGES IN
THE AMOUNT OF PHP33 MILLION.11
II.
M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE COURT HAD NO BASIS
IN RULING THAT IT IS A COMMON CARRIER. THE DECISION OF THE TRIAL
COURT IS BEREFT OF ANY CATEGORICAL FINDING THAT M/V BOBCAT IS A
COMMON CARRIER.12
III.
THE HONORABLE COURT OFAPPEALS COMMITTED A REVERSIBLE ERROR IN
RULING THAT RESPONDENTS PAYMENT TO PASAR, ON THE BASIS OF THE
LATTERS FRAUDULENT CLAIM, ENTITLED RESPONDENT AUTOMATIC RIGHT
OF RECOVERY BY VIRTUE OF SUBROGATION.13
Ruling of the Court
I. Proof of actual damages
It is not disputed that the copper concentrates carried by M/V Bobcat from Poro Point,
La Union to Isabel, Leyte were indeed contaminated with seawater. The issue lies on
whether such contamination resulted to damage, and the costs thereof, if any,incurred
by the insured PASAR.
The petitioners argued that the copper concentrates, despite being dampened with
seawater, is neither subject to penalty nor rejection. Under the Philex Mining
Corporation (Philex)-PASAR Purchase Contract Agreement, there is no rejection
clause. Instead, there is a pre-agreed formula for the imposition of penalty in case
other elements exceeding the provided minimum level would be found on the
concentrates.14 Since the chlorine content on the copper concentrates is still below the
minimum level provided under the Philex-PASAR purchase contract, no penalty may
be imposed against the petitioners.15
Malayan opposed the petitioners invocation of the Philex-PASAR purchase

agreement, stating that the contract involved in this case is a contract of affreightment
between the petitioners and PASAR, not the agreement between Philex and PASAR,
which was a contract for the sale of copper concentrates.16
On this score, the Court agrees withMalayan that contrary to the trial courts
disquisition, the petitioners cannot validly invoke the penalty clause under the PhilexPASAR purchase agreement, where penalties are to be imposed by the buyer PASAR
against the seller Philex if some elements exceeding the agreed limitations are found
on the copper concentrates upon delivery. The petitioners are not privy tothe contract
of sale of the copper concentrates. The contract between PASAR and the petitioners
is a contract of carriage of goods and not a contract of sale. Therefore, the petitioners
and PASAR are bound by the laws on transportation of goods and their contract of
affreightment. Since the Contract of Affreightment17 between the petitioners and
PASAR is silent as regards the computation of damages, whereas the bill of lading
presented before the trial court is undecipherable, the New Civil Code and the Code
ofCommerce shall govern the contract between the parties.
Malayan paid PASAR the amount of 32,351,102.32 covering the latters claim of
damage to the cargo.18 This is based on the recommendation of Elite Adjustors and
Surveyors, Inc. (Elite) which both Malayan and PASAR agreed to. The computation of
Elite is presented as follows:
Computation of Loss Payable.We computed for the insured value of the loss and loss
payable, based on the following pertinent data:
1) Total quantity shipped - 5,065.47 wet metric tons and at risk or (Risk Note
and B/L) 4,568.907 dry metric tons
2) Total sum insured - [P]212,032,203.77 (Risk Note and Endorsement)
3) Quantity damaged: 777.290 wet metric tons or (Pasar Laboratory Cert. &
696.336 dry metric tons discharge & sampling Cert.dated September 21,
2000)
Computation:
Total sum insured x Qty. damaged= Insured value of damage
Total Qty. in DMT (DMT) (DMT)
[P] 212,032,203.77 x 696.336 DMT = [P]32,315,312.32

4,568.907 DMT
Insured value of damage = [P] 32,315,312.3219
Based on the preceding computation, the sum of P32,315,312.32 represents
damages for the total loss ofthat portion of the cargo which were contaminated with
seawater and not merely the depreciation in its value. Strangely though, after claiming
damages for the total loss of that portion, PASAR bought back the contaminated
copper concentrates from Malayan at the price of US$90,000.00. The fact of
repurchase is enough to conclude that the contamination of the copper concentrates
cannot be considered as total loss on the part of PASAR.
The following provisions of the Code of Commerce state how damages on goods
delivered by the carrier should be appraised:
Article 361. The merchandise shall be transported at the risk and venture of the
shipper, if the contrary has not been expressly stipulated. As a consequence, all the
losses and deteriorations which the goods may suffer during the transportation by
reason of fortuitous event, force majeure, or the inherent nature and defect of the
goods, shall be for the account and risk of the shipper. Proof of these accidents is
incumbent upon the carrier.
Article 362. Nevertheless, the carrier shall be liable for the losses and damages
resulting from the causes mentioned in the preceding article if it is proved, as against
him, that they arose through his negligence or by reason of his having failed to take
the precautions which usage has established among careful persons, unless the
shipper has committed fraud in the bill of lading, representing the goods to be of a
kind or quality different from what they really were.
If, notwithstanding the precautions referred to in this article, the goods transported run
the risk of being lost, on account of their nature or by reason of unavoidable accident,
there being no time for their owners to dispose of them, the carrier may proceed to sell
them, placing them for this purpose at the disposal of the judicial authority or of the
officials designated by special provisions.
xxxx
Article 364. If the effect of the damage referred to in Article 361 is merely a diminution
in the value of the goods, the obligation of the carrier shall be reduced to the payment
of the amount which, in the judgment of experts, constitutes such difference in value.
Article 365. If, in consequence of the damage, the goods are rendered useless for
sale and consumption for the purposes for which they are properly destined, the
consignee shall not be bound to receive them, and he may have them in the hands of
the carrier, demanding of the latter their value at the current price on that day.
If among the damaged goods there should be some pieces in good condition and
without any defect, the foregoing provision shall be applicable with respect to those
damaged and the consignee shall receive those which are sound, this segregation to
be made by distinct and separate pieces and without dividing a single object, unless
the consignee proves the impossibility of conveniently making use of them in this
form.
The same rule shall be applied to merchandise in bales or packages, separating those
parcels which appear sound.
From the above-cited provisions, if the goods are delivered but arrived at the
destination in damaged condition, the remedies to be pursued by the consignee
depend on the extent of damage on the goods.
If the goods are rendered useless for sale, consumption or for the intended purpose,
the consignee may reject the goods and demand the payment of such goods at their
marketprice on that day pursuant to Article 365. In case the damaged portion of the
goods can be segregated from those delivered in good condition, the consignee may
reject those in damaged condition and accept merely those which are in good
condition. But if the consignee is able to prove that it is impossible to use those goods
which were delivered in good condition without the others, then the entire shipment
may be rejected. To reiterate, under Article 365, the nature of damage must be such
that the goods are rendered useless for sale, consumption or intended purpose for the
consignee to be able to validly reject them.
If the effect of damage on the goods consisted merely of diminution in value, the
carrier is bound to pay only the difference between its price on that day and its
depreciated value as provided under Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved that the goods are
rendered useless or unfit for the purpose intended by PASAR due to contamination
with seawater. Hence, there is no basis for the goods rejection under Article 365 of
the Code of Commerce. Clearly, it is erroneous for Malayan to reimburse PASAR as
though the latter suffered from total loss of goods in the absence of proof that PASAR
sustained such kind of loss. Otherwise, there will be no difference inthe
indemnification of goods which were not delivered at all; or delivered but rendered
useless, compared against those which were delivered albeit, there is diminution in
value.
Malayan also failed to establish the legal basis of its decision to sell back the rejected
copper concentrates to PASAR. It cannot be ascertained how and when Malayan
deemed itself asthe owner of the rejected copper concentrates to have these validly
disposed of. If the goods were rejected, it only means there was no acceptance on the
part of PASAR from the carrier. Furthermore, PASAR and Malayan simply agreed on
the purchase price of US$90,000.00 without any allegation or proof that the said price
was the depreciated value based on the appraisal of experts as provided under Article
364 of the Code of Commerce.
II. Subrogation of Malayan to the rights of PASAR
Malayans claim against the petitioners is based on subrogation to the rights
possessed by PASAR as consignee of the allegedly damaged goods. The right of
subrogation stems from Article 2207 of the New Civil Code which states:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrong doer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the
loss or injury.
"The right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract or upon written assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer."20 The right of subrogation is however, not absolute.
"There are a few recognized exceptions to this rule. For instance, if the assured by his
own act releases the wrongdoer or third party liable for the loss or damage, from
liability, the insurers right of subrogation is defeated. x x x Similarly, where the insurer
pays the assured the value of the lostgoods without notifying the carrier who has in
good faith settled the assureds claim for loss, the settlement is binding on both the
assured and the insurer, and the latter cannot bring an action against the carrier on his
right of subrogation. x x x And where the insurer pays the assured for a loss which is
not a risk covered by the policy, thereby effecting voluntary payment, the former has
no right of subrogation against the third party liable for the loss x x x."21
The rights of a subrogee cannot be superior to the rights possessed by a subrogor.

"Subrogation is the substitution of one person in the place of another with reference to
a lawful claim or right, so that he who is substituted succeeds to the rights of the other
in relation to a debt or claim, including its remedies or securities. The rights to which
the subrogee succeeds are the same as, but not greaterthan, those of the person for
whom he is substituted, that is, he cannot acquire any claim, security or remedy the
subrogor did not have. In other words, a subrogee cannot succeed to a right not
possessed by the subrogor. A subrogee in effect steps into the shoes of the insured
and can recover only ifthe insured likewise could have recovered."22 Consequently, an
insurer indemnifies the insured based on the loss or injury the latter actually suffered
from. If there is no loss or injury, then there is no obligation on the part of the insurer to
indemnify the insured. Should the insurer pay the insured and it turns out that
indemnification is not due, or if due, the amount paid is excessive, the insurer takes
the risk of not being able to seek recompense from the alleged wrongdoer. This is
because the supposed subrogor did not possessthe right to be indemnified and
therefore, no right to collect is passed on to the subrogee. As regards the
determination of actual damages, "[i]t is axiomatic that actual damages must be
compensation for the pecuniary loss that was duly proven."23 Article 2199 of the New
Civil Code speaks of how actual damages are awarded:
Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved.
Such compensation is referred to as actual or compensatory damages.
Whereas the CA modified its Decision dated April 14, 2008 by deducting the amount
of US$90,000.00 fromthe award, the same is still iniquitous for the petitioners because
PASAR and Malayan never proved the actual damages sustained by PASAR. It is a
flawed notion to merely accept that the salvage value of the goods is US$90,000.00,
since the price was arbitrarily fixed between PASAR and Malayan. Actual damages to
PASAR, for example, could include the diminution in value as appraised by experts or
the expenses which PASAR incurred for the restoration of the copper concentrates to
its former condition, ifthere is damage and rectification is still possible.
It is also note worthy that when the expert witness for the petitioners, Engineer
Francisco Esguerra (Esguerra), testified as regards the lack of any adverse effect of
seawater on copper concentrates, Malayan never presented evidence of its own in
refutation to Esguerras testimony. And, even if the Court will disregard the entirety of
his testimony, the effect on Malayans cause of action is nil. As Malayan is claiming for
actual damages, it bears the burden of proof to substantiate its claim.
"The burden of proof is on the party who would be defeated if no evidence would be
presented on either side. The burden is to establish ones case by a preponderance of
evidence which means that the evidence, as a whole, adduced by one side, is
superior tothat of the other. Actual damages are not presumed. The claimant must
prove the actual amount of loss with a reasonable degree of certainty premised upon
competent proof and on the best evidence obtainable. Specific facts that could afford
a basis for measuring whatever compensatory or actual damages are borne must be
pointed out. Actual damages cannot be anchored on mere surmises, speculations or
conjectures."24
which private respondent failed to accept. In the absence of a meeting of the minds
between petitioner Pacific Life and private respondent Ngo Hing over the 20-year
endowment life insurance in the amount of P50,000.00 in favor of the latters one-year
old daughter, and with the non-compliance of the abovequoted conditions stated in the
disputed binding deposit receipt, there could have been no insurance contract duly
perfected between them. Accordingly, the deposit paid by private respondent shall
have to be refunded by Pacific Life.
Having ruled that Malayan did not adduce proof of pecuniary loss to PASAR for which
the latter was questionably indemnified, there is no necessity to expound further on
the other issues raised by the petitioners and Malayan in this case.
Same; Same; Completed Contract; Concept Of; Contract of insurance must be

completed contract to be binding.As held in De Lim vs. Sun Life Assurance
Company of Canada, supra, a contract
WHEREFORE, the petition is GRANTED. The Decision dated April 14, 2008 and
Resolution dated December 11, 2008 of the Court of Appeals in CA-G.R. CV No.
82758 are hereby REVERSED and SET ASIDE. The Decision dated March 31, 2004
of the Regional Trial Comi of Manila, Branch 34 in Civil Case No. 01-101885 is
REINSTATED.
545
VOL. 89, APRIL 30, 1979

545
SO ORDERED.
Insurance; Binding deposit receipt; Concept and Nature; When binding deposit receipt
not effective.Clearly implied from the aforesaid conditions is that the binding deposit
receipt in question is merely an acknowledgment, on behalf of the company, that the
latters branch office had received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance company; and that
the latter will either approve or reject the same on the basis of whether or not the
applicant is insurable on standard rates. Since petitioner Pacific Life disapproved the
insurance application of respondent Ngo Hing, the binding deposit receipt in question
had never become in force at any time. Upon this premise, the binding deposit receipt
(Exhibit E) is, manifestly, merely conditional and does not insure outright. As held by
this Court, where an agreement is made between the applicant and the agent, no
liability shall attach until the principal approves the risk and a receipt is given by the
agent. The acceptance is merely conditional, and is subordinated to the act of the
company in approving or rejecting the application. Thus, in life insurance, a binding
slip or binding receipt does not insure by itself.
Same; Same; No insurance contract between private person and insurance company
for non-acceptance of alternative insurance plan of the company and non-compliance
of conditions in binding deposit receipt; Refund of deposit proper.It bears repeating
that through the intra-company communication of April 30, 1957 (Exhibit 3-M), Pacific
Life disapproved the insurance application in question on the ground that it is not
offering the twenty-year endowment insurance policy to children less than seven years
of age. What it offered instead is another plan known as the Juvenile Triple Action,
Great Pacific Life Assurance Company vs. Court of Appeals

of insurance, like otter contracts, must be asserted to by both parties either in parson
or by their agents. x x x. The contract, to be binding from the date of the application,
must have been a completed contract, one that leaves nothing to be done, nothing to
be completed, nothing to be passed upon, or determined, before it shall take effect.
There can be no contract of insurance unless the minds of the parties have met in
agreement.
Same; Concealment; Nature and kind of concealment which renders ineffective
application for insurance coverage; Duties required of insurance agents.Relative to
the second issue of alleged concealment, this Court is of the firm belief that private
respondent had deliberately concealed the state of health and physical condition of his
daughter Helen Go. When private respondent supplied the required essential data for
the insurance application form, he was fully aware that his one-year old daughter is
typically a mongoloid child. Such a congenital physical defect could never be
ensconced nor disguised. Nonetheless, private respondent, in apparent bad faith,
withheld the fact material to the risk to be assumed by the insurance company. As an
insurance agent of Pacific Life, he ought to know, as he surely must have known, his
duty and responsibility to supply such a material fact. Had he divulged said significant
fact in the insurance application form. Pacific Life would have verified the same and
would have had no choice but to disapprove the application outright.
Same; Same; Nature and effect of concealment on insurance contract.The contract

of insurance is one of perfect good faith (uberrima fides meaning good faith; absolute
and perfect candor or openness and honesty; the absence of any concealment or
deception, however slight [Blacks Law Dictionary, 2nd Edition], not for the insured
alone but equally so for the insurer Fieldmans Insurance Co., Inc. vs. Vda. de
Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a party
known and ought to communicate (Section 25, Act No. 2427). Whether intentional or
unintentional, the concealment entitles the insurer to rescind the contract of insurance
(Section 26, Id.; Yu Pang Cheng vs. Court of Appeals, et al., 105 Phil. 930; Saturnino
vs. Philippine American Life Insurance Company, 7 SCRA 316). Private respondent
appears guilty thereof.
[Great Pacific Life Assurance Company vs. Court of Appeals, 89 SCRA 543(1979)]

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU D. MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for
petitioner Company.
Voltaire Garcia for petitioner Mondragon.
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.
DE CASTRO, J.:
The two above-entitled cases were ordered consolidated by the Resolution of this
Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both
cases seek similar relief, through these petitions for certiorari by way of appeal, from
the amended decision of respondent Court of Appeals which affirmed in toto the
decision of the Court of First Instance of Cebu, ordering "the defendants (herein
petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly and
severally to pay plaintiff (herein private respondent Ngo Hing) the amount of
P50,000.00 with interest at 6% from the date of the filing of the complaint, and the
sum of P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo Hing filed an application
with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life)
for a twenty-year endownment policy in the amount of P50,000.00 on the life of his
one-year old daughter Helen Go. Said respondent supplied the essential data which
petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City
wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon
finally type-wrote the data on the application form which was signed by private
respondent Ngo Hing. The latter paid the annual premuim the sum of P1,077.75 going
over to the Company, but he reatined the amount of P1,317.00 as his commission for
being a duly authorized agebt of Pacific Life. Upon the payment of the insurance
premuim, the binding deposit receipt (Exhibit E) was issued to private respondent Ngo
Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the
application form his strong recommendation for the approval of the insurance
application. Then on April 30, 1957, Mondragon received a letter from Pacific Life
disapproving the insurance application (Exhibit 3-M). The letter stated that the said life
insurance application for 20-year endowment plan is not available for minors below
seven years old, but Pacific Life can consider the same under the Juvenile Triple
Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical
Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on
May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the
approval of the 20-year endowment insurance plan to children, pointing out that since
1954 the customers, especially the Chinese, were asking for such coverage (Exhibit 4M).
It was when things were in such state that on May 28, 1957 Helen Go died of
influenza with complication of bronchopneumonia. Thereupon, private respondent
sought the payment of the proceeds of the insurance, but having failed in his effort, he
filed the action for the recovery of the same before the Court of First Instance of Cebu,
which rendered the adverse decision as earlier refered to against both petitioners.
application and offers to issue a policy for a different plan, the insurance contract shall
not be binding until the applicant accepts the policy offered; otherwise, the deposit
shall be reftmded; and (3) that if the applicant is not ble according to the standard
rates, and the company disapproves the application, the insurance applied for shall
not be in force at any time, and the premium paid shall be returned to the applicant.
The decisive issues in these cases are: (1) whether the binding deposit receipt
(Exhibit E) constituted a temporary contract of the life insurance in question; and (2)
whether private respondent Ngo Hing concealed the state of health and physical
condition of Helen Go, which rendered void the aforesaid Exhibit E.
Clearly implied from the aforesaid conditions is that the binding deposit receipt in
question is merely an acknowledgment, on behalf of the company, that the latter's
branch office had received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance company; and that
the latter will either approve or reject the same on the basis of whether or not the
applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved the
insurance application of respondent Ngo Hing, the binding deposit receipt in question
had never become in force at any time.
1. At the back of Exhibit E are condition precedents required before a deposit is

considered a BINDING RECEIPT. These conditions state that:
A. If the Company or its agent, shan have received the premium
deposit ... and the insurance application, ON or PRIOR to the
date of medical examination ... said insurance shan be in force
and in effect from the date of such medical examination, for such
period as is covered by the deposit ...,PROVIDED the company
shall be satisfied that on said date the applicant was insurable on
standard rates under its rule for the amount of insurance and the
kind of policy requested in the application.
D. If the Company does not accept the application on standard
rate for the amount of insurance and/or the kind of policy
requested in the application but issue, or offers to issue a policy
for a different plan and/or amount ..., the insurance shall not be in
force and in effect until the applicant shall have accepted the
policy as issued or offered by the Company and shall have paid
the full premium thereof. If the applicant does not accept the
policy, the deposit shall be refunded.
E. If the applicant shall not have been insurable under Condition
A above, and the Company declines to approve the application
the insurance applied for shall not have been in force at any time
and the sum paid be returned to the applicant upon the surrender
of this receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that the binding deposit receipt
is intended to be merely a provisional or temporary insurance contract and only upon
compliance of the following conditions: (1) that the company shall be satisfied that the
applicant was insurable on standard rates; (2) that if the company does not accept the
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an agreement is
made between the applicant and the agent, no liability shall attach until the principal
approves the risk and a receipt is given by the agent. The acceptance is merely
conditional and is subordinated to the act of the company in approving or rejecting the
application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure
by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).
It bears repeating that through the intra-company communication of April 30, 1957
(Exhibit 3-M), Pacific Life disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment insurance policy to children
less than seven years of age. What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to accept. In the absence of a
meeting of the minds between petitioner Pacific Life and private respondent Ngo Hing
over the 20-year endowment life insurance in the amount of P50,000.00 in favor of the
latter's one-year old daughter, and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt, there could have been no
insurance contract duly perfected between thenl Accordingly, the deposit paid by
private respondent shall have to be refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented to by both parties either in person or
by their agents ... The contract, to be binding from the date of the application, must
have been a completed contract, one that leaves nothing to be dione, nothing to be
completed, nothing to be passed upon, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties have met in
agreement."
We are not impressed with private respondent's contention that failure of petitioner
Mondragon to communicate to him the rejection of the insurance application would not
have any adverse effect on the allegedly perfected temporary contract (Respondent's
Brief, pp. 13-14). In this first place, there was no contract perfected between the
parties who had no meeting of their minds. Private respondet, being an authorized
insurance agent of Pacific Life at Cebu branch office, is indubitably aware that said
company does not offer the life insurance applied for. When he filed the insurance
application in dispute, private respondent was, therefore, only taking the chance that
Pacific Life will approve the recommendation of Mondragon for the acceptance and
approval of the application in question along with his proposal that the insurance
company starts to offer the 20-year endowment insurance plan for children less than
seven years. Nonetheless, the record discloses that Pacific Life had rejected the
proposal and recommendation. Secondly, having an insurable interest on the life of his
one-year old daughter, aside from being an insurance agent and an offense associate
of petitioner Mondragon, private respondent Ngo Hing must have known and followed
the progress on the processing of such application and could not pretend ignorance of
the Company's rejection of the 20-year endowment life insurance application.
At this juncture, We find it fit to quote with approval, the very apt observation of then
Appellate Associate Justice Ruperto G. Martin who later came up to this Court, from
his dissenting opinion to the amended decision of the respondent court which
completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum
of rejection (Exhibit 3-M) nor the reply thereto of appellant
Mondragon reiterating the desire for applicant's father to have the
application considered as one for a 20-year endowment plan was
ever duly communicated to Ngo; Hing, father of the minor
applicant. I am not quite conninced that this was so. Ngo Hing, as
father of the applicant herself, was precisely the "underwriter who
wrote this case" (Exhibit H-1). The unchallenged statement of
appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M),
specifically admits that said Ngo Hing was "our associate" and
that it was the latter who "insisted that the plan be placed on the
20-year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the
application was not brought home to his knowledge. He must
have been duly apprised of the rejection of the application for a
20-year endowment plan otherwise Mondragon would not have
asserted that it was Ngo Hing himself who insisted on the
application as originally filed, thereby implictly declining the offer
to consider the application under the Juvenile Triple Action Plan.
Besides, the associate of Mondragon that he was, Ngo Hing
should only be presumed to know what kind of policies are

available in the company for minors below 7 years old. What he
and Mondragon were apparently trying to do in the premises was
merely to prod the company into going into the business of
issuing endowment policies for minors just as other insurance
companies allegedly do. Until such a definite policy is however,
adopted by the company, it can hardly be said that it could have
been bound at all under the binding slip for a plan of insurance
that it could not have, by then issued at all. (Amended Decision,
Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this Court is of the firm belief
that private respondent had deliberately concealed the state of health and piysical
condition of his daughter Helen Go. Wher private regpondeit supplied the required
essential data for the insurance application form, he was fully aware that his one-year
old daughter is typically a mongoloid child. Such a congenital physical defect could
never be ensconced nor disguished. Nonetheless, private respondent, in apparent
bad faith, withheld the fact materal to the risk to be assumed by the insurance
compary. As an insurance agent of Pacific Life, he ought to know, as he surely must
have known. his duty and responsibility to such a material fact. Had he diamond said
significant fact in the insurance application fom Pacific Life would have verified the
same and would have had no choice but to disapprove the application outright.
The contract of insurance is one of perfect good faith uberrima fides meaning good
faith, absolute and perfect candor or openness and honesty; the absence of any
concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not for
the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de
Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a partY
knows aDd Ought to communicate (Section 25, Act No. 2427). Whether intentional or
unintentional the concealment entitles the insurer to rescind the contract of insurance
(Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino
vs. Philippine American Life Insurance Company, 7 SCRA 316). Private respondent
appears guilty thereof.
We are thus constrained to hold that no insurance contract was perfected between the
parties with the noncompliance of the conditions provided in the binding receipt, and
concealment, as legally defined, having been comraitted by herein private respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof,
one is hereby entered absolving petitioners Lapulapu D. Mondragon and Great Pacific
Life Assurance Company from their civil liabilities as found by respondent Court and
ordering the aforesaid insurance company to reimburse the amount of P1,077.75,
without interest, to private respondent, Ngo Hing. Costs against private respondent.
SO ORDERED.
other. All its parts are reflective of the true intent of the parties. The policy cannot be
construed piecemeal. Certain stipulations cannot be segregated and then made to
control; neither do particular words or phrases necessarily determine its character.
Petitioner cannot focus on the earthquake shock endorsement to the exclusion of the
other provisions. All the provisions and riders, taken and interpreted together,
indubitably show the intention of the parties to extend earthquake shock coverage to
the two swimming pools only.
Same; Elements; Words and Phrases; A contract of insurance is an agreement
damage or liability arising from an unknown or contingent event.A careful
examination of the premium recapitulation will show that it is the clear intent of the
parties to extend earthquake shock coverage only to the two swimming pools. Section
2(1) of the Insurance Code defines a contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an un_______________
* SECOND DIVISION.
551
VOL. 458, MAY 16, 2005

551
Gulf Resorts, Inc. vs. Philippine Charter Insurance Corporation
known or contingent event. Thus, an insurance contract exists where the following
elements concur: 1. The insured has an insurable interest; 2. The insured is subject to
a risk of loss by the happening of the designated peril; 3. The insurer assumes the
risk; 4. Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk; and 5. In consideration of the
insurers promise, the insured pays a premium.
Insurance; It is basic that all the provisions of the insurance policy should be examined
and interpreted in consonance with each other.It is basic that all the provisions of
the insurance policy should be examined and interpreted in consonance with each
Same; Same; Same; Premium; An insurance premium is the consideration paid an

insurer for undertaking to indemnify the insured against a specified peril.An
insurance premium is the consideration paid an insurer for undertaking to indemnify
the insured against a specified peril. In fire, casualty, and marine insurance, the
premium payable becomes a debt as soon as the risk attaches. In the subject policy,
no premium payments were made with regard to earthquake shock coverage, except
on the two swimming pools. There is no mention of any premium payable for the other
resort properties with regard to earthquake shock. This is consistent with the history of
petitioners previous insurance policies from AHAC-AIU.
Same; Contracts of Adhesion; Words and Phrases; A contract of adhesion is one
wherein a party, usually a corporation, prepares the stipulations in the contract, while
the other party merely affixes his signature or his adhesion thereto; The Supreme
Court will only rule out blind adherence to terms where facts and circumstances will
show that they are basically one-sided.In sum, there is no ambiguity in the terms of
the contract and its riders. Petitioner cannot rely on the general rule that insurance
contracts are contracts of adhesion which should be liberally construed in favor of the
insured and strictly against the insurer company which usually prepares it. A contract
of adhesion is one wherein a party, usually a corporation, prepares the stipulations in
the contract, while the other party merely affixes his signature or his adhesion
thereto. Through the years, the courts have held that in these type of contracts, the
parties do not bargain on equal footing, the weaker partys participation being reduced
to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the
weaker party whom the courts of justice must protect. Consequently, any ambiguity
therein is resolved against the insurer, or construed liberally in favor of the
552
SECOND DIVISION
G.R. No. 156167
May 16, 2005
GULF RESORTS, INC., petitioner,

vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of
Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE
CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court
decision1 which dismissed its two appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of
the insurance companys liability for earthquake damage to petitioners properties.
Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance
Policy No. 31944 covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for loss to the two
swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as
follows:
552
Gulf Resorts, Inc. vs. Philippine Charter Insurance Corporation
insured. The case law will show that this Court will only rule out blind adherence to
terms where facts and circumstances will show that they are basically one-sided.
Thus, we have called on lower courts to remain careful in scrutinizing the factual
circumstances behind each case to determine the efficacy of the claims of contending
parties. In Development Bank of the Philippines v. National Merchandising
Corporation, et al., the parties, who were acute businessmen of experience, were
presumed to have assented to the assailed documents with full knowledge. [Gulf
Resorts, Inc. vs. Philippine Charter Insurance Corporation, 458 SCRA 550(2005)]
SUPREME COURT
Manila
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and
had its properties in said resort insured originally with the American Home
Assurance Company (AHAC-AIU). In the first four insurance policies issued
by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C",
"D", "E" and "F"; also Exhs. "1", "2", "3" and "4" respectively), the risk of loss
from earthquake shock was extended only to plaintiffs two swimming pools,
thus, "earthquake shock endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E"
and two (2) swimming pools only (Exhs. "C-1"; D-1", "E" and "F-1"). "Item 5"
in those policies referred to the two (2) swimming pools only (Exhs. "1-B",
"2-B", "3-B" and "F-2"); that subsequently AHAC(AIU) issued in plaintiffs
favor Policy No. 206-4182383-0 covering the period March 14, 1988 to
March 14, 1989 (Exhs. "G" also "G-1") and in said policy the earthquake
endorsement clause as indicated in Exhibits "C-1", "D-1", Exhibits "E" and
"F-1" was deleted and the entry under Endorsements/Warranties at the time
of issue read that plaintiff renewed its policy with AHAC (AIU) for the period
of March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh.
"H") which carried the entry under "Endorsement/Warranties at Time of
Issue", which read "Endorsement to Include Earthquake Shock (Exh. "6-B-
1") in the amount of P10,700.00 and paid P42,658.14 (Exhs. "6-A" and "6B") as premium thereof, computed as follows:
Item
P7,691,000.00 -
premium of P45,159.92 (Exh. "I"); that in the computation of the premium,

defendants Policy No. 31944 (Exh. "I"), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:
on the Clubhouse only

Rate-Various
@ .392%;
Premium
1,500,000.00 -
393,000.00 -
116,600.00
a) Tilter House
b) Power House
c) House Shed
P37,420.60 F/L
2,061.52
Typhoon
1,030.76
EC
393.00
ES
on the furniture, etc. contained in the building above-mentioned@ .

490%;
on the two swimming pools, only (against the peril of earthquake

shock only) @ 0.100%
other buildings include as follows:
P100,000.00 -
P19,800.00 Doc. Stamps
3,068.10
F.S.T.
776.89
Prem. Tax
409.05
P41,000.00 -
P55,000.00 -
for furniture, fixtures, lines air-con and operating equipment

TOTAL
that plaintiff agreed to insure with defendant the properties covered by

AHAC (AIU) Policy No. 206-4568061-9 (Exh. "H") provided that the policy
wording and rates in said policy be copied in the policy to be issued by
defendant; that defendant issued Policy No. 31944 to plaintiff covering the
period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total
45,159.92;
that the above break-down of premiums shows that plaintiff paid

only P393.00 as premium against earthquake shock (ES); that in all the six
insurance policies (Exhs. "C", "D", "E", "F", "G" and "H"), the premium
against the peril of earthquake shock is the same, that is P393.00 (Exhs.
"C" and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and
"5-C-1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G" and "H") and
in Policy No. 31944 issued by defendant, the shock endorsement
provide(sic):
In consideration of the payment by the insured to the company of
the sum included additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this
policy due to the contrary, that this insurance covers loss or
damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs.
"1-D", "2-D", "3-A", "4-B", "5-A", "6-D" and "7-C");
that in Exhibit "7-C" the word "included" above the underlined portion was
deleted; that on July 16, 1990 an earthquake struck Central Luzon and
Northern Luzon and plaintiffs properties covered by Policy No. 31944
issued by defendant, including the two swimming pools in its Agoo Playa
Resort were damaged.2
After the earthquake, petitioner advised respondent that it would be making a claim
under its Insurance Policy No. 31944 for damages on its properties. Respondent
instructed petitioner to file a formal claim, then assigned the investigation of the claim
to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc. 3 On July 30,
1990, respondent, through its adjuster, requested petitioner to submit various
documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors,
Inc., through its Vice-President A.R. de Leon,4 rendered a preliminary report5 finding
extensive damage caused by the earthquake to the clubhouse and to the two
swimming pools. Mr. de Leon stated that "except for the swimming pools, all affected
items have no coverage for earthquake shocks."6 On August 11, 1990, petitioner filed
its formal demand7 for settlement of the damage to all its properties in the Agoo Playa
Resort. On August 23, 1990, respondent denied petitioners claim on the ground that
its insurance policy only afforded earthquake shock coverage to the two swimming
pools of the resort.8Petitioner and respondent failed to arrive at a settlement.9 Thus, on
January 24, 1991, petitioner filed a complaint10 with the regional trial court of Pasig
praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured
properties, with interest thereon, as computed under par. 29 of the policy
(Annex "B") until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses
sustained by plaintiff on account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of
litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium
of P393.00 against the peril of earthquake shock, the same premium it paid
against earthquake shock only on the two swimming pools in all the policies
issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and "G"). From this fact the
Court must consequently agree with the position of defendant that the
endorsement rider (Exhibit "7-C") means that only the two swimming pools
were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of
adhesion hence, where the language used in an insurance contract or
application is such as to create ambiguity the same should be resolved
against the party responsible therefor, i.e., the insurance company which
prepared the contract. To the mind of [the] Court, the language used in the
policy in litigation is clear and unambiguous hence there is no need for
interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming
pools had earthquake shock coverage and were heavily damaged by the
earthquake which struck on July 16, 1990. Defendant having admitted that
the damage to the swimming pools was appraised by defendants adjuster
at P386,000.00, defendant must, by virtue of the contract of insurance, pay
plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding
paragraph that defendant is liable only for the damage caused to the two (2)
swimming pools and that defendant has made known to plaintiff its
willingness and readiness to settle said liability, there is no basis for the
grant of the other damages prayed for by plaintiff. As to the counterclaims of
defendant, the Court does not agree that the action filed by plaintiff is
baseless and highly speculative since such action is a lawful exercise of the
plaintiffs right to come to Court in the honest belief that their Complaint is
meritorious. The prayer, therefore, of defendant for damages is likewise
denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs
the sum of THREE HUNDRED EIGHTY SIX THOUSAND PESOS
(P386,000.00) representing damage to the two (2) swimming pools, with
interest at 6% per annum from the date of the filing of the Complaint until
defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal
with the Court of Appeals based on the following assigned errors:14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT
CAN ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING
POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS
PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE ISSUANCE
OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES
SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFFAPPELLANTS RIGHT TO RECOVER UNDER DEFENDANT-APPELLEES
POLICY (NO. 31944; EXH "I") BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE
ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16,
1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFFAPPELLANT IS ENTITLED TO THE DAMAGES CLAIMED, WITH
INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON
PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure
to award it attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties,
We are not convinced that the last two (2) insurance contracts (Exhs. "G"
and "H"), which the plaintiff-appellant had with AHAC (AIU) and upon which
the subject insurance contract with Philippine Charter Insurance Corporation
is said to have been based and copied (Exh. "I"), covered an extended
earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiffappellants prayer for the imposition of interest 24% on the insurance
claim and 6% on loss of income allegedly amounting toP4,280,000.00.
Since the defendant-appellant has expressed its willingness to pay the
damage caused on the two (2) swimming pools, as the Court a quo and this
Court correctly found it to be liable only, it then cannot be said that it was in
default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, longstanding is the rule that the award thereof is subject to the sound discretion
of the court. Thus, if such discretion is well-exercised, it will not be disturbed
on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002).
Moreover, being the award thereof an exception rather than a rule, it is
necessary for the court to make findings of facts and law that would bring
the case within the exception and justify the grant of such award (Country
Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that
the plaintiff-appellants action is not baseless and highly speculative, We
find that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby
DISMISSED and judgment of the Trial Court hereby AFFIRMED in toto. No
costs.15
Petitioner filed the present petition raising the following issues:16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT
UNDER RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE
TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES
COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF
EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED
PETITIONERS PRAYER FOR DAMAGES WITH INTEREST THEREON AT
THE RATE CLAIMED, ATTORNEYS FEES AND EXPENSES OF
LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words "any property
insured by this policy," and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states that it
is "[s]ubject to: Other Insurance Clause, Typhoon Endorsement,Earthquake Shock
Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On
Long Term Policies."17
Third, that the qualification referring to the two swimming pools had already been
deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent
omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over
the wording of the insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in
favor of petitioner and against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance policy,
such as to remove the two swimming pools from the coverage for the risk of fire. It
should not be used to limit the respondents liability for earthquake shock to the two
swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was
not paid under the extended coverage. The premium for the earthquake shock
coverage was already included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to
extend earthquake shock coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told respondent that it wanted an exact
replica of its latest insurance policy from American Home Assurance Company
(AHAC-AIU), which covered all the resorts properties for earthquake shock damage
and respondent agreed. After the July 16, 1990 earthquake, respondent assured
petitioner that it was covered for earthquake shock. Respondents insurance adjuster,
Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the
necessary documents for its building claims and other repair costs. Thus, under the
doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to
petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule
45 of the Revised Rules of Court as its remedy, and there is no need for calibration of
the evidence in order to establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments: 18
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly
extended coverage against earthquake shock to petitioners insured properties other
than on the two swimming pools. Petitioner admitted that from 1984 to 1988, only the
two swimming pools were insured against earthquake shock. From 1988 until 1990,
the provisions in its policy were practically identical to its earlier policies, and there
was no increase in the premium paid. AHAC-AIU, in a letter19 by its representative
Manuel C. Quijano, categorically stated that its previous policy, from which
respondents policy was copied, covered only earthquake shock for the two swimming
pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows
that the policy only covered earthquake shock damage on the two swimming pools.
The amount was the same amount paid by petitioner for earthquake shock coverage
on the two swimming pools from 1990-1991. No additional premium was paid to
warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the
earthquake shock coverage to all of petitioners properties. As per its agreement with
petitioner, respondent copied its policy from the AHAC-AIU policy provided by
petitioner. Although the first five policies contained the said qualification in their riders
title, in the last two policies, this qualification in the title was deleted. AHAC-AIU,
through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This
inadvertence did not make the policy incomplete, nor did it broaden the scope of the
endorsement whose descriptive title was merely enumerated. Any ambiguity in the
policy can be easily resolved by looking at the other provisions, specially the
enumeration of the items insured, where only the two swimming pools were noted as
covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988,
the phrase "Item 5 P393,000.00 on the two swimming pools only (against the peril
of earthquake shock only)" meant that only the swimming pools were insured for
earthquake damage. The same phrase is used in toto in the policies from 1989 to
1990, the only difference being the designation of the two swimming pools as "Item 3."
Fifth, in order for the earthquake shock endorsement to be effective, premiums must
be paid for all the properties covered. In all of its seven insurance policies, petitioner
only paid P393.00 as premium for coverage of the swimming pools against
earthquake shock. No other premium was paid for earthquake shock coverage on the
other properties. In addition, the use of the qualifier "ANY" instead of "ALL" to describe
the property covered was done deliberately to enable the parties to specify the
properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties
must be included in the earthquake shock coverage. Petitioners own evidence shows
that it only required respondent to follow the exact provisions of its previous policy
from AHAC-AIU. Respondent complied with this requirement. Respondents only
deviation from the agreement was when it modified the provisions regarding the
replacement cost endorsement. With regard to the issue under litigation, the riders of
the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would
estop it from maintaining that only the two swimming pools were covered for
earthquake shock. The adjusters letter notifying petitioner to present certain
documents for its building claims and repair costs was given to petitioner before the
adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase "Item 5
Only" after the descriptive name or title of the Earthquake Shock Endorsement.
However, the words of the policy reflect the parties clear intention to limit earthquake
shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did
not object to any deficiency nor did it institute any action to reform the policy. The
policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation
expenses. Since respondent was willing and able to pay for the damage caused on
the two swimming pools, it cannot be considered to be in default, and therefore, it is
not liable for interest.
We hold that the petition is devoid of merit.
393.0022]
Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or
through or in consequence, directly or indirectly of any of the following
occurrences, namely:-(a) Earthquake, volcanic eruption or other convulsion of nature.
23
Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To
Include the Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED

AGGREGATE SUMS INSURED IN EXCESS OF FIVE MILLION PESOS, IN
CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF THE NET
PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE
INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.
First, in the designation of location of risk, only the two swimming pools were
specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the
peril of earthquake shock only)20
Earthquake Endorsement
Second, under the breakdown for premium payments,21 it was stated that:
In consideration of the payment by the Insured to the Company of the sum

of P. . . . . . . . . . . . . . . . . additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this Policy to the
contrary, that this insurance covers loss or damage (including loss or
damage by fire) to any of the property insured by this Policy occasioned by
or through or in consequence of Earthquake.
PREMIUM RECAPITULATION
xxx
0.100%-E/S
ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES
In Insurance Policy No. 31944, four key items are important in the resolution of the
case at bar.
ITEM NOS.
393,000.00
AMOUNT
RATES
PREMIUM
Provided always that all the conditions of this Policy shall apply (except in
so far as they may be hereby expressly varied) and that any reference
therein to loss or damage by fire should be deemed to apply also to loss or
damage occasioned by or through or in consequence of Earthquake.24
Petitioner contends that pursuant to this rider, no qualifications were placed on the
scope of the earthquake shock coverage. Thus, the policy extended earthquake shock
coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and
interpreted in consonance with each other.25 All its parts are reflective of the true intent
of the parties. The policy cannot be construed piecemeal. Certain stipulations cannot
be segregated and then made to control; neither do particular words or phrases
necessarily determine its character. Petitioner cannot focus on the earthquake shock
endorsement to the exclusion of the other provisions. All the provisions and riders,
taken and interpreted together, indubitably show the intention of the parties to extend
earthquake shock coverage to the two swimming pools only.
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the
warranty, there is a provision here that it was only for item 5.
A careful examination of the premium recapitulation will show that it is the clear intent
of the parties to extend earthquake shock coverage only to the two swimming pools.
Section 2(1) of the Insurance Code defines a contract of insurance as an agreement
damage or liability arising from an unknown or contingent event. Thus, an insurance
contract exists where the following elements concur:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25,

1991
1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated
peril;
Q. More specifically Item 5 states the amount of P393,000.00 corresponding

to the two swimming pools only?
A. Yes, sir.
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you
personally arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
3. The insurer assumes the risk;

A. If you are referring to Forte Insurance Agency, yes.
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a
premium.26 (Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to
indemnify the insured against a specified peril.27 In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk attaches.28 In the
subject policy, no premium payments were made with regard to earthquake shock
coverage, except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is
consistent with the history of petitioners previous insurance policies from AHAC-AIU.
As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25,
1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your
insurance policy during the period from March 4, 1984 to March 4, 1985 the
coverage on earthquake shock was limited to the two swimming pools only?
Q. Is Forte Insurance Agency a department or division of your company?

A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are
concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they
are of course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend
what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to
March 14, 1989, did you give written instruction to Forte Insurance Agency
advising it that the earthquake shock coverage must extend to all properties
of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an
oral instruction to that effect of extending the coverage on (sic) the other
properties of the company.
DIRECT EXAMINATION OF JUAN BARANDA III30

TSN, August 11, 1992
pp. 9-12
Q. And that instruction, according to you, was very important because in

April 1987 there was an earthquake tremor in La Union?
Atty. Mejia:
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in
the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the
provisions with respect to your instructions that all properties must be
covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home
Assurance Company marked Exhibit "G"?
We respectfully manifest that the same exhibits C to H inclusive

have been previously marked by counsel for defendant as
Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic)
these six (6) policies issued by your company [in favor] of Agoo
Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of
time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits
C to H respectively carries an earthquake shock endorsement[?] My
question to you is, on the basis on (sic) the wordings indicated in Exhibits C
to H respectively what was the extent of the coverage [against] the peril of
earthquake shock as provided for in each of the six (6) policies?
Atty. Mejia: Yes.

xxx
Witness:
WITNESS:
A. I examined the policy and seeing that the warranty on the earthquake
shock endorsement has no more limitation referring to the two swimming
pools only, I was contented already that the previous limitation pertaining to
the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement
on Long Term Policies"29 to the insurance policy as proof of the intent of the parties
to extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or endorsements
to which the policy is subject, as required under Section 50, paragraph 2 of the
Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification
limiting the coverage to the two swimming pools. The earthquake shock endorsement
cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter for
AHAC-AIU:
The extent of the coverage is only up to the two (2) swimming

pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and
H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against
earthquake shock as provided for in each of the six (6) policies
extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration

"Earthquake Shock Endorsement, in the Clauses and Warranties:
Item 5 only (Earthquake Shock Endorsement)," sir.
the two swimming pools with respect to earthquake shock

endorsement. Based on it, if we are going to look at the premium
there has been no change with respect to the rates. Everytime
(sic) there is a renewal if the intention of the insurer was to
include the earthquake shock, I think there is a substantial
increase in the premium. We are not only going to consider the
two (2) swimming pools of the other as stated in the policy. As I
see, there is no increase in the amount of the premium. I must
say that the coverage was not broaden (sic) to include the other
items.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on
stand alone basis. For swimming pools we do cover earthquake
shock. For building we covered it for full earthquake coverage
which includes earthquake shock
COURT:
They are the same, the premium rates?
WITNESS:
COURT:
As far as earthquake shock endorsement you do not have a
specific coverage for other things other than swimming pool? You
are covering building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are
covering building or another we can issue earthquake shock
solely but that the moment I see this, the thing that comes to my
mind is either insuring a swimming pool, foundations, they are
normally affected by earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
They are the same in the sence (sic), in the amount of the
coverage. If you are going to do some computation based on the
rates you will arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire
insurance?
WITNESS:
No, we dont, sir.
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only

Exhibits C, D, E and F inclusive [remained] its coverage against earthquake
shock to two (2) swimming pools only but that Exhibits G and H respectively
entend the coverage against earthquake shock to all the properties
indicated in the respective schedules attached to said policies, what can you
say about that testimony of plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand
alone without the other half of it. I assure you that this one covers
Q. That is why the phrase "earthquake shock to the two (2) swimming pools
only" was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and
H which you have pointed to during your direct-examination, the
phrase "Item no. 5 only" meaning to (sic) the two (2) swimming
pools was deleted from the policies issued by AIU, is it not?
A. Yes, sir. He assured me that with regards to the insurance premium rates
that they will be charging will be limited to this one. I (sic) can even be
lesser.
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to
the deletion of the qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase
is inadvertent. Being a company underwriter, we do not cover. . it
was inadvertent because of the previous policies that we have
issued with no specific attachments, premium rates and so on. It
was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous and
subsequent acts to the issuance of the insurance policy falsely gave the petitioner
assurance that the coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as intended by the
petitioner. Petitioners own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what
exactly did you tell Atty. Omlas (sic) to copy from Exhibit "H" for purposes of
procuring the policy from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same
provisions as this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit "H" of course?
CROSS EXAMINATION OF LEOPOLDO MANTOHAC

pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of
the provisions and scope of coverage of Exhibits "I" and "H" sometime in the
third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between
the policy wordings as well as scope of coverage of Exhibits "I" and "H"
respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured
already that the policy wordings and rates were copied from the insurance
policy I sent them but it was only when this case erupted that we discovered
some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice
any discrepancy at any time between those indicated in Exhibit "I" and those
indicated in Exhibit "H" respectively?
A. With regard to the wordings I did not notice any difference because it was
exactly the same P393,000.00 on the two (2) swimming pools only against
the peril of earthquake shock which I understood before that this provision
will have to be placed here because this particular provision under the peril
of earthquake shock only is requested because this is an insurance policy
and therefore cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas
were not proved. Atty. Umlas categorically denied having given such assurances.
A. Yes, sir, to Exhibit "H".

Q. So, all the provisions here will be the same except that of the premium
rates?
Finally, petitioner puts much stress on the letter of respondents independent claims
adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative
of Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to
believe that the endorsement for earthquake shock covered properties other than the
two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and

Surveyors, Inc.)
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the
extent of coverage of the policy issued by Philippine Charter Insurance
Corporation?
A. I remember that when I returned to the office after the inspection, I got a
photocopy of the insurance coverage policy and it was indicated under Item
3 specifically that the coverage is only for earthquake shock. Then, I
remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had
found out in the policy and he confirmed to me indeed only Item 3 which
were the two swimming pools have coverage for earthquake shock.
have called on lower courts to remain careful in scrutinizing the factual circumstances
behind each case to determine the efficacy of the claims of contending parties.
In Development Bank of the Philippines v. National Merchandising Corporation,
et al.,35 the parties, who were acute businessmen of experience, were presumed to
have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar.
Petitioner cannot claim it did not know the provisions of the policy. From the inception
of the policy, petitioner had required the respondent to copyverbatim the provisions
and terms of its latest insurance policy from AHAC-AIU. The testimony of Mr. Leopoldo
Mantohac, a direct participant in securing the insurance policy of petitioner, is
reflective of petitioners knowledge,viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36
TSN, September 23, 1991
pp. 20-21
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating
that except for the swimming pools all affected items have no coverage for
earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of
the policy I found out that under Item 3 it was specific on the wordings that
on the two swimming pools only, then enclosed in parenthesis (against the
peril[s] of earthquake shock only), and secondly, when I examined the
summary of premium payment only Item 3 which refers to the swimming
pools have a computation for premium payment for earthquake shock and
all the other items have no computation for payment of premiums.
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want
for those facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under
Philippine Charter Insurance Corporation as long as it will follow the same
or exact provisions of the previous insurance policy we had with American
Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which
you wanted in the American Home Insurance policy are to be incorporated
in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion
which should be liberally construed in favor of the insured and strictly against the
insurer company which usually prepares it.31 A contract of adhesion is one wherein a
party, usually a corporation, prepares the stipulations in the contract, while the other
party merely affixes his signature or his "adhesion" thereto. Through the years, the
courts have held that in these type of contracts, the parties do not bargain on equal
footing, the weaker party's participation being reduced to the alternative to take it or
leave it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect.32Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the insured.33
The case law will show that this Court will only rule out blind adherence to terms
where facts and circumstances will show that they are basically one-sided.34 Thus, we
A. When I examined the policy of the Philippine Charter Insurance

Corporation I specifically told him that the policy and wordings shall be
copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy
No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was
variance in some terms, specifically in the replacement cost endorsement, but the
principal provisions of the policy remained essentially similar to AHAC-AIUs policy.
Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this
case as the parties intent to limit the coverage of the policy to the two swimming pools
only is not ambiguous.37
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.
Insurance; Premiums; Exceptions to the rule in Section 77 of the Insurance Code of

1978 that there be prepayment of premiums as a condition to the validity of the
insurance contract.It can be seen at once that Section 77 does not restate the
portion of Section 72 expressly permitting an agreement to extend the period to pay
the premium. But are there exceptions to Section 77? The answer is in the affirmative.
The first exception is
______________
* EN BANC.
308
308
conclusion of the Court of Appeals, Tuscany has provided a fourth exception to

Section 77, namely, that the insurer may grant credit extension for the payment of the
premium. This simply means that if the insurer has granted the insured a credit term
for the payment of the premium and loss occurs before the expiration of the term,
recovery on the policy should be allowed even though the premium is paid after the
loss but within the credit term.
Same; Same; There is nothing in Section 77 which prohibits the parties in an
insurance contract to provide a credit term within which to pay the premiums.
Moreover, there is nothing in Section 77 which prohibits the parties in an insurance
contract to provide a credit term within which to pay the premiums. That agreement is
not against the law, morals, good customs, public order or public policy. The
agreement binds the parties.
Same; Same; Estoppel; Where an insurer had consistently granted a 60- to 90-day
credit term for the payment of premiums despite its full awareness of Section 77, and
the assured had relied in good faith on such practice, estoppel bars it from taking
refuge under said Section.Finally in the instant case, it would be unjust and
inequitable if recovery on the policy would not be permitted against Petitioner, which
had consistently panted a 60- to 90-day credit term for the payment of premiums
despite its full awareness of Section 77. Estoppel bars it from taking refuge under said
Section, since Respondent relied in good faith on such practice. Estoppel then is the
fifth exception to Section 77. [UCPB General Insurance Co., Inc. vs. Masagana
Telamart, Inc., 356 SCRA 307(2001)]

SUPREME COURT
Manila
UCPB General Insurance Co., Inc. vs. Masagana Telamart, Inc.

provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies. The second is that covered by Section
78 of the Insurance Code, which provides: SEC. 78. Any acknowledgment in a policy
or contract of insurance of the receipt of premium is conclusive evidence of its
payment, so far as to make the policy binding, notwithstanding any stipulation therein
that it shall not be binding until premium is actually paid. A third exception was laid
down in Makati Tuscany Condominium Corporation vs. Court of Appeals, wherein we
ruled that Section 77 may not apply if the parties have agreed to the payment in
installments of the premium and partial payment has been made at the time of loss, x
x x Not only that. In Tuscany, we also quoted with approval the following
pronouncement of the Court of Appeals in its Resolution denying the motion for
reconsideration of its decision: x x x By the approval of the aforequoted findings and
FIRST DIVISION
G.R. No. 137172 June 15, 1999

UCPB GENERAL INSURANCE CO., INC., petitioner,
vs.
MASAGANA TELAMART, INC., respondent.
PARDO, J.:
The case is an appeal via certiorari seeking to set aside the decision of the Court of
Appeals, 1 affirming with modification that of the Regional Trial Court, Branch 58,
Makati, ordering petitioner to pay respondent the sum of P18,645,000.00, as the
proceeds of the insurance coverage of respondent's property razed by fire; 25% of the
total amount due as attorney's fees and P25,000.00 as litigation expenses, and costs.
On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an
answer to the complaint. It alleged that the complaint "fails to state a cause of action";
that petitioner was not liable to respondent for insurance proceeds under the policies
because at the time of the loss of respondent's property due to fire, the policies had
long expired and were not renewed. 3
After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati,
rendered decision, the dispositive portion of which reads:
The facts are undisputed and may be related as follows:

On April 15, 1991, petitioner issued five (5) insurance policies covering respondent's
various property described therein against fire, for the period from May 22, 1991 to
May 22, 1992.
In March 1992, petitioner evaluated the policies and decided not to renew them upon
expiration of their terms on May 22, 1992. Petitioner advised respondent's broker,
Zuellig Insurance Brokers, Inc. of its intention not to renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of the non-renewal of the
policies at the address stated in the policies.
On June 13, 1992, fire razed respondent's property covered by three of the insurance
policies petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at its head office five
(5) manager's checks in the total amount of P225,753.95, representing premium for
the renewal of the policies from May 22, 1992 to May 22, 1993. No notice of loss was
filed by respondent under the policies prior to July 14, 1992.
On July 14, 1992, respondent filed with petitioner its formal claim for indemnification of
the insured property razed by fire.
On the same day, July 14, 1992, petitioner returned to respondent the five (5)
manager's checks that it tendered, and at the same time rejected respondent's claim
for the reasons (a) that the policies had expired and were not renewed, and (b) that
the fire occurred on June 13, 1992, before respondent's tender of premium payment.
On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati
City, a civil complaint against petitioner for recovery of P18,645,000.00, representing
the face value of the policies covering respondent's insured property razed by fire, and
for attorney's fees. 2
WHEREFORE, premises considered, judgment is hereby

rendered in favor of the plaintiff and against the defendant, as
follows:
(1) Authorizing and allowing the plaintiff to consign/deposit with
this Court the sum of P225,753.95 (refused by the defendant) as
full payment of the corresponding premiums for the replacementrenewal policies for Exhibits A, B, C, D and E;
(2) Declaring plaintiff to have fully complied with its obligation to
pay the premium thereby rendering the replacement-renewal
policy of Exhibits A, B, C, D and E effective and binding for the
duration May 22, 1992 until May 22, 1993; and, ordering
defendant to deliver forthwith to plaintiff the said replacementrenewal policies;
(3) Declaring Exhibits A & B, in force from August 22, 1991 up to
August 23, 1992 and August 9, 1991 to August 9, 1992,
respectively; and
(4) Ordering the defendant to pay plaintiff the sums of: (a)
P18,645,000.00 representing the latter's claim for indemnity under
Exhibits A, B & C and/or its replacement-renewal policies; (b) 25%
of the total amount due as and for attorney's fees; (c) P25,000.00
as necessary litigation expenses; and, (d) the costs of suit.
All other claims and counterclaims asserted by the parties are
denied and/or dismissed, including plaintiff's claim for interests.
SO ORDERED.
Makati, Metro-Manila, March 10, 1993.
ZOSIMO Z. ANGELES.
expressly or impliedly on the extension of creditor time to pay the premium and
consider the policy binding before actual payment.
Judge. 4
In due time, petitioner appealed to the Court of Appeals. 5
On September 7, 1998, the Court of Appeals promulgated its decision 6 affirming that
of the Regional Trial Court with the modification that item No. 3 of the dispositive
portion was deleted, and the award of attorney's fees was reduced to 10% of the total
amount due. 7
The Court of Appeals held that following previous practise, respondent was allowed a
sixty (60) to ninety (90) day credit term for the renewal of its policies, and that the
acceptance of the late premium payment suggested an understanding that payment
could be made later.
Hence, this appeal.
By resolution adopted on March 24, 1999, we required respondent to comment on the
petition, not to file a motion to dismiss within ten (10) days from notice. 8 On April 22,
1999, respondent filed its comment. 9
Respondent submits that the Court of Appeals correctly ruled that no timely notice of
non-renewal was sent. The notice of non-renewal sent to broker Zuellig which claimed
that it verbally notified the insurance agency but not respondent itself did not suffice.
Respondent submits further that the Court of Appeals did not err in finding that there
existed a sixty (60) to ninety (90) days credit agreement between UCPB and
Masagana, and that, finally, the Supreme Court could not review factual findings of the
lower court affirmed by the Court of Appeals. 10
We give due course to the appeal.
The basic issue raised is whether the fire insurance policies issued by petitioner to the
respondent covering the period May 22, 1991 to May 22, 1992, had expired on the
latter date or had been extended or renewed by an implied credit arrangement though
actual payment of premium was tendered on a later date after the occurrence of the
risk (fire) insured against.
The answer is easily found in the Insurance Code. No, an insurance policy, other than
life, issued originally or on renewal, is not valid and binding until actual payment of the
premium. Any agreement to the contrary is void. 11The parties may not agree
The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 12 cited by the Court of
Appeals, is not applicable. In that case, payment of the premium was in fact actually
made on December 24, 1981, and the fire occurred on January 18, 1982. Here, the
payment of the premium for renewal of the policies was tendered on July 13, 1992, a
month after the fire occurred on June 13, 1992. The assured did not even give the
insurer a notice of loss within a reasonable time after occurrence of the fire.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the
Court of Appeals in CA-G.R. CV No. 42321. In lieu thereof the Court renders judgment
dismissing respondent's complaint and petitioner's counterclaims thereto filed with the
Regional Trial Court, Branch 58, Makati City, in Civil Case No. 92-2023. Without
costs.1wphi1.nt
SO ORDERED.
Davide, Jr., C.J., Melo, Kapunan and Ynares-Santiago, JJ., concur.
contain limitations on liability, courts should construe them in such a way as to

preclude the insurer from noncompliance with his obligation. Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the
party which prepared the contract the insurer. By reason of the exclusive control of
the insurance company over the terms and phraseology of the insurance contract,
ambiguity must be strictly interpreted against the insurer and liberally in favor of the
insured, especially to avoid forfeiture. 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.
Same; Same; Same; Interpretation of Contracts; Ambiguities in a contract are
interpreted against the party that caused the ambiguity.Settled is the rule that
ambiguities in a contract are interpreted against the party that caused the ambiguity.
[A]ny ambiguity in a contract whose terms are susceptible of different interpretations
must be read against the party who drafted it. [Fortune Medicare, Inc. vs. Amorin,
719 SCRA 133(2014)]
Civil Law; Contracts; Health Care Providers; For purposes of determining the liability
of a health care provider to its members, jurisprudence holds that a health care
agreement is in the nature of nonlife insurance, which is primarily a contract of
indemnity.We emphasize that for purposes of determining the liability of a health
care provider to its members, jurisprudence holds that a health care agreement is in
the nature of nonlife insurance, which is primarily a contract of indemnity. Once the
member incurs hospital, medical or any other expense arising from sickness, injury or
other stipulated contingent, the health care provider must pay for the same to the
extent agreed upon under the contract.
Same; Same; Same; Contract of Adhesion; 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;

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 195872
FORTUNE MEDICARE, INC., Petitioner,

vs.
DAVID ROBERT U. AMORIN, Respondent.
DECISION
_______________
* FIRST DIVISION.
134
This is equally applicable to Health Care Agreements.To aid in the interpretation of
health care agreements, the Court laid down the following guidelines in Philamcare
Health Systems v. CA, 379 SCRA 356 (2002): When the terms of insurance contract
March 12, 2014
REYES, J.:
This is a petition for review on certiorari1 under Rule 45 of the Rules of Court, which
challenges the Decision2dated September 27, 2010 and Resolution3 dated February
24, 2011 of the Court of Appeals (CA) in CA-G.R. CV No. 87255.
The Facts
David Robert U. Amorin (Amorin) was a cardholder/member of Fortune Medicare, Inc.
(Fortune Care), a corporation engaged in providing health maintenance services to its
members. The terms of Amorin's medical coverage were provided in a Corporate
Health Program Contract4 (Health Care Contract) which was executed on January 6,
2000 by Fortune Care and the House of Representatives, where Amorin was a
permanent employee.
While on vacation in Honolulu, Hawaii, United States of America (U.S.A.) in May 1999,
Amorin underwent an emergency surgery, specifically appendectomy, at the St.
Francis Medical Center, causing him to incur professional and hospitalization
expenses of US$7,242.35 and US$1,777.79, respectively. He attempted to recover
from Fortune Care the full amount thereof upon his return to Manila, but the company
merely approved a reimbursement of P12,151.36, an amount that was based on the
average cost of appendectomy, net of medicare deduction, if the procedure were
performed in an accredited hospital in Metro Manila.5 Amorin received under protest
the approved amount, but asked for its adjustment to cover the total amount of
professional fees which he had paid, and eighty percent (80%) of the approved
standard charges based on "American standard", considering that the emergency
procedure occurred in the U.S.A. To support his claim, Amorin cited Section 3, Article
V on Benefits and Coverages of the Health Care Contract, to wit:
A. EMERGENCY CARE IN ACCREDITED HOSPITAL. Whether as an inpatient or out-patient, the member shall be entitled to full coverage under
the benefits provisions of the Contract at any FortuneCare accredited
hospitals subject only to the pertinent provision of Article VII
(Exclusions/Limitations) hereof. For emergency care attended by non
affiliated physician (MSU), the member shall be reimbursed 80% of the
professional fee which should have been paid, had the member been
treated by an affiliated physician. The availment of emergency care from an
unaffiliated physician shall not invalidate or diminish any claim if it shall be
shown to have been reasonably impossible to obtain such emergency care
from an affiliated physician.
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total

hospitalization cost including the professional fee (based on the total approved
charges) to a member who receives emergency care in a non-accredited hospital. The
above coverage applies only to Emergency confinement within Philippine Territory.
However, if the emergency confinement occurs in a foreign territory, Fortune Care will
be obligated to reimburse or pay eighty (80%) percent of the approved standard
charges which shall cover the hospitalization costs and professional fees. x x x6
Still, Fortune Care denied Amorins request, prompting the latter to file a complaint7 for
breach of contract with damages with the Regional Trial Court (RTC) of Makati City.
For its part, Fortune Care argued that the Health Care Contract did not cover
hospitalization costs and professional fees incurred in foreign countries, as the
contracts operation was confined to Philippine territory.8Further, it argued that its
liability to Amorin was extinguished upon the latters acceptance from the company of
the amount of P12,151.36.
The RTC Ruling
On May 8, 2006, the RTC of Makati, Branch 66 rendered its Decision9 dismissing
Amorins complaint. Citing Section 3, Article V of the Health Care Contract, the RTC
explained:
Taking the contract as a whole, the Court is convinced that the parties intended to use
the Philippine standard as basis. Section 3 of the Corporate Health Care Program
Contract provides that:
xxxx
On the basis of the clause providing for reimbursement equivalent to 80% of the
professional fee which should have been paid, had the member been treated by an
affiliated physician, the Court concludes that the basis for reimbursement shall be
Philippine rates. That provision, taken with Article V of the health program contract,
which identifies affiliated hospitals as only those accredited clinics, hospitals and
medical centers located "nationwide" only point to the Philippine standard as basis for
reimbursement.
The clause providing for reimbursement in case of emergency operation in a foreign
territory equivalent to 80% of the approved standard charges which shall cover
hospitalization costs and professional fees, can only be reasonably construed in
connection with the preceding clause on professional fees to give meaning to a
somewhat vague clause. A particular clause should not be studied as a detached and
isolated expression, but the whole and every part of the contract must be considered
in fixing the meaning of its parts.10
In the absence of evidence to the contrary, the trial court considered the amount
of P12,151.36 already paid by Fortune Care to Amorin as equivalent to 80% of the
hospitalization and professional fees payable to the latter had he been treated in an
affiliated hospital.11
Dissatisfied, Amorin appealed the RTC decision to the CA.
Fortune Care cites the following grounds to support its petition:

I. The CA gravely erred in concluding that the phrase "approved standard
charges" is subject to interpretation, and that it did not automatically mean
"Philippine Standard"; and
II. The CA gravely erred in denying Fortune Cares motion for
reconsideration, which in effect affirmed its decision that the American
Standard Cost shall be applied in the payment of medical and
hospitalization expenses and professional fees incurred by the
respondent.17
The CA Ruling
The Courts Ruling
On September 27, 2010, the CA rendered its Decision12 granting the appeal. Thus, the
dispositive portion of its decision reads:
WHEREFORE, all the foregoing premises considered, the instant appeal is hereby
GRANTED. The May 8, 2006 assailed Decision of the Regional Trial Court (RTC) of
Makati City, Branch 66 is hereby REVERSED and SET ASIDE, and a new one
entered ordering Fortune Medicare, Inc. to reimburse [Amorin] 80% of the total
amount of the actual hospitalization expenses of $7,242.35 and professional fee of
$1,777.79 paid by him to St. Francis Medical Center pursuant to Section 3, Article V of
the Corporate Health Care Program Contract, or their peso equivalent at the time the
amounts became due, less the [P]12,151.36 already paid by Fortunecare.
SO ORDERED.13
In so ruling, the appellate court pointed out that, first, health care agreements such as
the subject Health Care Contract, being like insurance contracts, must be liberally
construed in favor of the subscriber. In case its provisions are 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.14Second, the CA explained that there was nothing under Article V
of the Health Care Contract which provided that the Philippine standard should be
used even in the event of an emergency confinement in a foreign territory.15
Fortune Cares motion for reconsideration was denied in a Resolution 16 dated
February 24, 2011. Hence, the filing of the present petition for review on certiorari.
The Present Petition
The petition is bereft of merit.

The Court finds no cogent reason to disturb the CAs finding that Fortune Cares
liability to Amorin under the subject Health Care Contract should be based on the
expenses for hospital and professional fees which he actually incurred, and should not
be limited by the amount that he would have incurred had his emergency treatment
been performed in an accredited hospital in the Philippines.
We emphasize that for purposes of determining the liability of a health care provider to
its members, jurisprudence holds that a health care agreement is in the nature of nonlife insurance, which is primarily a contract of indemnity. Once the member incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated
contingent, the health care provider must pay for the same to the extent agreed upon
under the contract.18
To aid in the interpretation of health care agreements, the Court laid down the
following guidelines in Philamcare Health Systems v. CA19:
When the terms of insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with his
obligation. Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract the insurer. By
reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured, especially to avoid forfeiture. 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.20 (Citations omitted
and emphasis ours)
Consistent with the foregoing, we reiterated in Blue Cross Health Care, Inc. v.
Spouses Olivares21:
The point of dispute now concerns the proper interpretation of the phrase "approved
standard charges", which shall be the base for the allowable 80% benefit. The trial
court ruled that the phrase should be interpreted in light of the provisions of Section
3(A), i.e., to the extent that may be allowed for treatments performed by accredited
physicians in accredited hospitals. As the appellate court however held, this must be
interpreted in its literal sense, guided by the rule that any ambiguity shall be strictly
construed against Fortune Care, and liberally in favor of Amorin.
In Philamcare Health Systems, Inc. v. CA, we ruled that a health care agreement is in
the nature of a non-life insurance. It is an established rule in insurance contracts that
when their terms contain limitations on liability, they should be construed strictly
against the insurer. These are contracts of adhesion the terms of which must be
interpreted and enforced stringently against the insurer which prepared the contract.
This doctrine is equally applicable to health care agreements.
The Court agrees with the CA. As may be gleaned from the Health Care Contract, the
parties thereto contemplated the possibility of emergency care in a foreign country. As
the contract recognized Fortune Cares liability for emergency treatments even in
foreign territories, it expressly limited its liability only insofar as the percentage of
hospitalization and professional fees that must be paid or reimbursed was concerned,
pegged at a mere 80% of the approved standard charges.
xxxx
x x x [L]imitations of liability on the part of the insurer or health care provider must be
construed in such a way as to preclude it from evading its obligations. Accordingly,
they should be scrutinized by the courts with "extreme jealousy" and "care" and with a
"jaundiced eye." x x x.22 (Citations omitted and emphasis supplied)
In the instant case, the extent of Fortune Cares liability to Amorin under the attendant
circumstances was governed by Section 3(B), Article V of the subject Health Care
Contract, considering that the appendectomy which the member had to undergo
qualified as an emergency care, but the treatment was performed at St. Francis
Medical Center in Honolulu, Hawaii, U.S.A., a non-accredited hospital. We restate the
pertinent portions of Section 3(B):
The word "standard" as used in the cited stipulation was vague and ambiguous, as it
could be susceptible of different meanings. Plainly, the term "standard charges" could
be read as referring to the "hospitalization costs and professional fees" which were
specifically cited as compensable even when incurred in a foreign country. Contrary to
Fortune Cares argument, from nowhere in the Health Care Contract could it be
reasonably deduced that these "standard charges" referred to the "Philippine
standard", or that cost which would have been incurred if the medical services were
performed in an accredited hospital situated in the Philippines. The RTC ruling that the
use of the "Philippine standard" could be inferred from the provisions of Section 3(A),
which covered emergency care in an accredited hospital, was misplaced. Evidently,
the parties to the Health Care Contract made a clear distinction between emergency
care in an accredited hospital, and that obtained from a non-accredited
hospital.1wphi1The limitation on payment based on "Philippine standard" for services
of accredited physicians was expressly made applicable only in the case of an
emergency care in an accredited hospital.
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL

1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total
charges) to a member who receives emergency care in a non-accredited hospital. The
above coverage applies only to Emergency confinement within Philippine Territory.
However, if the emergency confinement occurs in foreign territory, Fortune Care will
be obligated to reimburse or pay eighty (80%) percent of the approved standard
charges which shall cover the hospitalization costs and professional fees. x x
x23 (Emphasis supplied)
The proper interpretation of the phrase "standard charges" could instead be correlated
with and reasonably inferred from the other provisions of Section 3(B), considering
that Amorins case fell under the second case, i.e., emergency care in a nonaccredited hospital. Rather than a determination of Philippine or American standards,
the first part of the provision speaks of the full reimbursement of "the total
charges) to a member who receives emergency care in a non-accredited hospital"
within the Philippines. Thus, for emergency care in non-accredited hospitals, this cited
clause declared the standard in the determination of the amount to be paid, without
any reference to and regardless of the amounts that would have been payable if the
treatment was done by an affiliated physician or in an affiliated hospital. For
treatments in foreign territories, the only qualification was only as to the percentage, or
80% of that payable for treatments performed in non-accredited hospital.
All told, in the absence of any qualifying word that clearly limited Fortune Care's
liability to costs that are applicable in the Philippines, the amount payable by Fortune
Care should not be limited to the cost of treatment in the Philippines, as to do so
would result in the clear disadvantage of its member. If, as Fortune Care argued, the
premium and other charges in the Health Care Contract were merely computed on
assumption and risk under Philippine cost and, that the American cost standard or any
foreign country's cost was never considered, such limitations should have been
distinctly specified and clearly reflected in the extent of coverage which the company
voluntarily assumed. This was what Fortune Care found appropriate when in its new
health care agreement with the House of Representatives, particularly in their 2006
agreement, the provision on emergency care in non-accredited hospitals was modified
to read as follows:
However, if the emergency confinement occurs in a foreign territory, Fortunecare will
be obligated to reimburse or pay one hundred (100%) percent under approved
Philippine Standard covered charges for hospitalization costs and professional fees
but not to exceed maximum allowable coverage, payable in pesos at prevailing
currency exchange rate at the time of availment in said territory where he/she is
confined. x x x24
Settled is the rule that ambiguities in a contract are interpreted against the party that
caused the ambiguity. "Any ambiguity in a contract whose terms are susceptible of
different interpretations must be read against the party who drafted it."25
Civil Law; Contracts; Insurance; Where there was no perfected contract of insurance,
DBP MRI Pool cannot be held liable on the contract that does not exist.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI
Pool. The pool, however, did not approve the application of Dans. There is also no
showing that it accepted the sum of P1,476.00, which DBP credited to its account with
full knowledge that it was payment for Danss premium. There was, as a result, no
perfected contract of insurance; hence, the DBP MRI Pool cannot be held liable on a
contract that does not exist.
WHEREFORE, the petition is DENIED. The Decision dated September 27, 2010 and
Resolution dated February 24, 2011 of the Court of Appeals in CA-G.R. CV No. 87255
are AFFIRMED.
Same; Agency; Obligation of the Agent; Agent acting as such is not personally liable
unless he expressly binds himself or exceeds his authority.Under Article 1897 of the
Civil Code of the Philippines, the agent who acts as such is not personally liable to
the party with whom he contracts, unless he expressly binds himself or exceeds the
limits of
SO ORDERED.
_______________
* FIRST DIVISION.
371
VOL. 231, MARCH 21, 1994
371
Development Bank of the Philippines vs. Court of Appeals
372
his authority without giving such party sufficient notice of his powers.
Same; Same; Same; Liability of the agent who exceeds the scope of his authority
depends upon whether the 3rd person is aware of the limits of agents powers.The
liability of an agent who exceeds the scope of his authority depends upon whether the
third person is aware of the limits of the agents powers. There is no showing that
Dans knew of the limitation on DBPs authority to solicit applications for MRI.
Development Bank of the Philippines vs. Court of Appeals

required in the assessment of said kind of damages (Civil Code of the Philippines, Art.
2216). The same may be recovered in acts referred to in Article 2219 of the Civil
Code. [Development Bank of the Philippines vs. Court of Appeals, 231 SCRA
370(1994)]
Same; Same; Same; If the third person dealing with an agent is unaware of the limits
of the authority conferred by the principal on the agent and the third person has been
deceived by the non-disclosure by the agent, then the latter is liable for damages to
him.If the third person dealing with an agent is unaware of the limits of the authority
conferred by the principal on the agent and he (third person) has been deceived by
the non-disclosure thereof by the agent, then the latter is liable for damages to him (V
Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, p.
422 [1992], citing Sentencia [Cuba] of September 25, 1907). The rule that the agent is
liable when he acts without authority is founded upon the supposition that there has
been some wrong or omission on his part either in misrepresenting, or in affirming, or
concealing the authority under which he assumes to act (Francisco, V., Agency 307
[1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-disclosure of
the limits of the agency carries with it the implication that a deception was perpetrated
on the unsuspecting client, the provisions of Articles 19, 20 and 21 of the Civil Code of
the Philippines come into play.
Same; Damages; One is entitled to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved.One is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved
(Civil Code of the Philippines, Art. 2199). Damages, to be recoverable, must not only
be capable of proof, but must be actually proved with a reasonable degree of certainty
(Refractories Corporation v. Intermediate Appellate Court, 176 SCRA 539 [1989];
Choa Tek Hee v. Philippine Publishing Co., 34 Phil. 447 [1916]). Speculative damages
are too remote to be included in an accurate estimate of damages (Sun Life
Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).
Same; Same; No proof of pecuniary loss is required in the assessment of moral
damages.While Dans is not entitled to compensatory damages, he is entitled to
moral damages. No proof of pecuniary loss is

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-109937 March 21, 1994

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS,
represented by CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION
INSURANCE POOL, respondents.
Office of the Legal Counsel for petitioner.
Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance Pool.
372
QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court
to reverse and set aside the decision of the Court of Appeals in CA-G.R CV No. 26434
and its resolution denying reconsideration thereof.
later collected the insurance premium thereon. Respondent Estate therefore prayed:
(1) that the sum of P139,500.00, which it paid under protest for the loan, be
reimbursed; (2) that the mortgage debt of the deceased be declared fully paid; and (3)
that damages be awarded.
We affirm the decision of the Court of Appeals with modification.

I
In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-inlaw, applied for a loan of P500,000.00 with the Development Bank of the Philippines
(DBP), Basilan Branch. As the principal mortgagor, Dans, then 76 years of age, was
advised by DBP to obtain a mortgage redemption insurance (MRI) with the DBP
Mortgage Redemption Insurance Pool (DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4,
1987 and released on August 11, 1987. From the proceeds of the loan, DBP deducted
the amount of P1,476.00 as payment for the MRI premium. On August 15, 1987, Dans
accomplished and submitted the "MRI Application for Insurance" and the "Health
Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10
percent, was credited by DBP to the savings account of the DBP MRI Pool.
Accordingly, the DBP MRI Pool was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed
this information to the DBP MRI Pool. On September 23, 1987, the DBP MRI Pool
notified DBP that Dans was not eligible for MRI coverage, being over the acceptance
age limit of 60 years at the time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late
husband's MRI application. The DBP offered to refund the premium of P1,476.00
which the deceased had paid, but Candida Dans refused to accept the same,
demanding payment of the face value of the MRI or an amount equivalent to the loan.
She, likewise, refused to accept an ex gratia settlement of P30,000.00, which the DBP
later offered.
The DBP and the DBP MRI Pool separately filed their answers, with the former
asserting a cross-claim against the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits
submitted by respondent Estate. As a result of these admissions, the trial court
narrowed down the issues and, without opposition from the parties, found the case
ripe for summary judgment. Consequently, the trial court ordered the parties to submit
their respective position papers and documentary evidence, which may serve as basis
for the judgment.
On March 10, 1990, the trial court rendered a decision in favor of respondent Estate
and against DBP. The DBP MRI Pool, however, was absolved from liability, after the
trial court found no privity of contract between it and the deceased. The trial court
declared DBP in estoppel for having led Dans into applying for MRI and actually
collecting the premium and the service fee, despite knowledge of his age ineligibility.
The dispositive portion of the decision read as follows:
WHEREFORE, in view of the foregoing consideration and in the
furtherance of justice and equity, the Court finds judgment for the
plaintiff and against Defendant DBP, ordering the latter:
1. To return and reimburse plaintiff the amount of P139,500.00
plus legal rate of interest as amortization payment paid under
protest;
2. To consider the mortgage loan of P300,000.00 including all
interest accumulated or otherwise to have been settled, satisfied
or set-off by virtue of the insurance coverage of the late Juan B.
Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
On February 10, 1989, respondent Estate, through Candida Dans as administratrix,

filed a complaint with the Regional Trial Court, Branch I, Basilan, against DBP and the
insurance pool for "Collection of Sum of Money with Damages." Respondent Estate
alleged that Dans became insured by the DBP MRI Pool when DBP, with full
knowledge of Dans' age at the time of application, required him to apply for MRI, and
4. To pay plaintiff in the amount of P10,000.00 as costs of

litigation and other expenses, and other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are

hereby dismissed. The Cross-claim of Defendant DBP is likewise
dismissed (Rollo, p. 79)
The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992,
the appellate court affirmedin toto the decision of the trial court. The DBP's motion for
reconsideration was denied in a resolution dated April 20, 1993.
already deducted from the proceeds thereof the MRI premium. Four days latter, DBP
made Dans fill up and sign his application for MRI, as well as his health statement.
The DBP later submitted both the application form and health statement to the DBP
MRI Pool at the DBP Main Building, Makati Metro Manila. As service fee, DBP
deducted 10 percent of the premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the
second as an insurance agent.
Hence, this recourse.

II
When Dans applied for MRI, he filled up and personally signed a "Health Statement
for DBP MRI Pool" (Exh. "5-Bank") with the following declaration:
I hereby declare and agree that all the statements and answers
contained herein are true, complete and correct to the best of my
knowledge and belief and form part of my application for
insurance. It is understood and agreed that no insurance
coverage shall be effected unless and until this application is
approved and the full premium is paid during my continued good
health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the
application shall be approved by the insurance pool; and (2) when the full premium is
paid during the continued good health of the applicant. These two conditions, being
joined conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI
Pool. The pool, however, did not approve the application of Dans. There is also no
showing that it accepted the sum of P1,476.00, which DBP credited to its account with
full knowledge that it was payment for Dan's premium. There was, as a result, no
perfected contract of insurance; hence, the DBP MRI Pool cannot be held liable on a
contract that does not exist.
The liability of DBP is another matter.
It was DBP, as a matter of policy and practice, that required Dans, the borrower, to
secure MRI coverage. Instead of allowing Dans to look for his own insurance carrier or
some other form of insurance policy, DBP compelled him to apply with the DBP MRI
Pool for MRI coverage. When Dan's loan was released on August 11, 1987, DBP
As an insurance agent, DBP made Dans go through the motion of applying for said
insurance, thereby leading him and his family to believe that they had already fulfilled
all the requirements for the MRI and that the issuance of their policy was forthcoming.
Apparently, DBP had full knowledge that Dan's application was never going to be
approved. The maximum age for MRI acceptance is 60 years as clearly and
specifically provided in Article 1 of the Group Mortgage Redemption Insurance Policy
signed in 1984 by all the insurance companies concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is
not personally liable to the party with whom he contracts, unless he expressly binds
himself or exceeds the limits of his authority without giving such party sufficient notice
of his powers."
The DBP is not authorized to accept applications for MRI when its clients are more
than 60 years of age (Exh. "1-Pool"). Knowing all the while that Dans was ineligible for
MRI coverage because of his advanced age, DBP exceeded the scope of its authority
when it accepted Dan's application for MRI by collecting the insurance premium, and
deducting its agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority depends upon
whether the third person is aware of the limits of the agent's powers. There is no
showing that Dans knew of the limitation on DBP's authority to solicit applications for
MRI.
If the third person dealing with an agent is unaware of the limits of the authority
conferred by the principal on the agent and he (third person) has been deceived by
the non-disclosure thereof by the agent, then the latter is liable for damages to him (V
Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, p.
422 [1992], citing Sentencia [Cuba] of September 25, 1907). The rule that the agent is
liable when he acts without authority is founded upon the supposition that there has
been some wrong or omission on his part either in misrepresenting, or in affirming, or
concealing the authority under which he assumes to act (Francisco, V., Agency 307
[1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-disclosure of
the limits of the agency carries with it the implication that a deception was perpetrated
on the unsuspecting client, the provisions of Articles 19, 20 and 21 of the Civil Code of
the Philippines come into play.
While Dans is not entitled to compensatory damages, he is entitled to moral damages.

No proof of pecuniary loss is required in the assessment of said kind of damages (Civil
Code of Philippines, Art. 2216). The same may be recovered in acts referred to in
Article 2219 of the Civil Code.
Article 19 provides:
Every person must, in the exercise of his rights and in the
performance of his duties, act with justice give everyone his due
and observe honesty and good faith.
Every person who, contrary to law, willfully or negligently causes
damage to another, shall indemnify the latter for the same.
Any person, who willfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy
shall compensate the latter for the damage.
The DBP's liability, however, cannot be for the entire value of the insurance policy. To
assume that were it not for DBP's concealment of the limits of its authority, Dans
would have secured an MRI from another insurance company, and therefore would
have been fully insured by the time he died, is highly speculative. Considering his
advanced age, there is no absolute certainty that Dans could obtain an insurance
coverage from another company. It must also be noted that Dans died almost
immediately, i.e., on the nineteenth day after applying for the MRI, and on the twentythird day from the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss suffered by
him as he has duly proved (Civil Code of the Philippines, Art. 2199). Damages, to be
recoverable, must not only be capable of proof, but must be actually proved with a
reasonable degree of certainty (Refractories Corporation v. Intermediate Appellate
Court, 176 SCRA 539 [1989]; Choa Tek Hee v. Philippine Publishing Co., 34 Phil. 447
[1916]). Speculative damages are too remote to be included in an accurate estimate
of damages (Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).
The assessment of moral damages is left to the discretion of the court according to
the circumstances of each case (Civil Code of the Philippines, Art. 2216). Considering
that DBP had offered to pay P30,000.00 to respondent Estate in ex gratia settlement
of its claim and that DBP's non-disclosure of the limits of its authority amounted to a
deception to its client, an award of moral damages in the amount of P50,000.00 would
be reasonable.
The award of attorney's fees is also just and equitable under the circumstances (Civil
Code of the Philippines, Article 2208 [11]).
WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE
respondent Estate of Juan B. Dans the amount of P1,476.00 with legal interest from
the date of the filing of the complaint until fully paid; and (2) to PAY said Estate the
amount of Fifty Thousand Pesos (P50,000.00) as moral damages and the amount of
Ten Thousand Pesos (P10,000.00) as attorney's fees. With costs against petitioner.
SO ORDERED.
Insurance; Nature of contract.To borrow once again from the language of the Qua
Chee Gan opinion: "The contract of insurance is one of perfect good faith (uberrima
fides) not for the insured alone, but equally so for the insurer; in fact, it is more so for
the latter, since its dominant bargaining position carries with it stricter responsibility."
Same; Where insurer is estopped from disclaiming responsibility; Case at bar.The
insurer knew all along that the insured owned a private vehicle and not a common
carrier. Its agents even discounted the fears of the latter, not once but twice, that his
privately owned vehicle might not fall within the terms of the common carrier insurance
policy. Held: This is a case where the doctrine of estoppel undeniably calls for
application. It is now beyond question that where inequitable conduct is shown by an
insurance firm, it is "estopped from enforcing forfeitures in its f avor, in order to
forestall fraud or imposition on the insured." After petitioner had led the insured to
believe that he could qualify under the common carrier liability insurance policy, and to
enter into contract of insurance paying the premiums due, it could not, thereafter, in
any litigation arising out of such representation, be permitted to change its stand to the
detriment of the heirs of the insured. As estoppel is primarily based on the doctrine of
good faith and the avoidance of harm that will befall the innocent party due to its
injurious reliance, the failure to apply it in this case would result in a gross travesty of
justice.
Same; Ambiguities in contract; Against whom and how interpreted.It is a well-known
rule that ambiguities or obscurities must be strictly interpreted against the party that
caused them. This rigid application of the rule on ambiguities has become necessary
in view of current business practices. The courts cannot ignore that nowadays
monopolies, cartels and concentration of capital, endowed with overwhelming
economic power, manage to impose upon parties dealing with them cunningly
prepared
71

71
Raymond Saleilees 'contracts by adherence' (contrats d'adhesion), in contrast to

those entered into by parties bargaining on an equal f ooting, such contracts (of which
policies of insurance and international bills of lading are prime example) obviously call
for greater strictness and vigilance on the part of the court of justice with a view to
protecting the weaker party from abuses and imposition, and prevent their becoming
traps for the unwary. (Citing Qua Chee Gan case). [Fieldmen's Insurance Co., Inc. vs.
Vda. de Songco, 25 SCRA 70(1968)]
SUPREME COURT
Manila
EN BANC
G.R. No. L-24833
September 23, 1968
FIELDMEN'S INSURANCE CO., INC., petitioner,

vs.
MERCEDES VARGAS VDA. DE SONGCO, ET AL. and COURT OF
APPEALS, respondents.
Jose S. Suarez for petitioner.
Eligio G. Lagman for respondents.
FERNANDO, J.:
An insurance firm, petitioner Fieldmen's Insurance Co., Inc., was not allowed to
escape liability under a common carrier insurance policy on the pretext that what was
insured, not once but twice, was a private vehicle and not a common carrier, the policy
being issued upon the insistence of its agent who discounted fears of the insured that
his privately owned vehicle might not fall within its terms, the insured moreover being
"a man of scant education," finishing only the first grade. So it was held in a decision
of the lower court thereafter affirmed by respondent Court of Appeals. Petitioner in
seeking the review of the above decision of respondent Court of Appeals cannot be so
sanguine as to entertain the belief that a different outcome could be expected. To be
more explicit, we sustain the Court of Appeals.
Fieldmen's Insurance Co., Inc. vs. Vda. de Songco

'agreements' that the weaker party may not change one whit, his participation in the
'agreement' being reduced to the alternative to 'take it or leave it' labelled since
The facts as found by respondent Court of Appeals, binding upon us, follow: "This is a
peculiar case. Federico Songco of Floridablanca, Pampanga, a man of scant
education being only a first grader ..., owned a private jeepney with Plate No. 41-289
for the year 1960. On September 15, 1960, as such private vehicle owner, he was
induced by Fieldmen's Insurance Company Pampanga agent Benjamin Sambat to
apply for a Common Carrier's Liability Insurance Policy covering his motor vehicle ...
Upon paying an annual premium of P16.50, defendant Fieldmen's Insurance
Company, Inc. issued on September 19, 1960, Common Carriers Accident Insurance
Policy No. 45-HO- 4254 ... the duration of which will be for one (1) year, effective
September 15, 1960 to September 15, 1961. On September 22, 1961, the defendant
company, upon payment of the corresponding premium, renewed the policy by
extending the coverage from October 15, 1961 to October 15, 1962. This time
Federico Songco's private jeepney carried Plate No. J-68136-Pampanga-1961. ... On
October 29, 1961, during the effectivity of the renewed policy, the insured vehicle
while being driven by Rodolfo Songco, a duly licensed driver and son of Federico (the
vehicle owner) collided with a car in the municipality of Calumpit, province of Bulacan,
as a result of which mishap Federico Songco (father) and Rodolfo Songco (son) died,
Carlos Songco (another son), the latter's wife, Angelita Songco, and a family friend by
the name of Jose Manuel sustained physical injuries of varying degree." 1
It was further shown according to the decision of respondent Court of Appeals: "Amor
Songco, 42-year-old son of deceased Federico Songco, testifying as witness,
declared that when insurance agent Benjamin Sambat was inducing his father to
insure his vehicle, he butted in saying: 'That cannot be, Mr. Sambat, because our
vehicle is an "owner" private vehicle and not for passengers,' to which agent Sambat
replied: 'whether our vehicle was an "owner" type or for passengers it could be insured
because their company is not owned by the Government and the Government has
nothing to do with their company. So they could do what they please whenever they
believe a vehicle is insurable' ... In spite of the fact that the present case was filed and
tried in the CFI of Pampanga, the defendant company did not even care to rebut Amor
Songco's testimony by calling on the witness-stand agent Benjamin Sambat, its
Pampanga Field Representative." 2
The plaintiffs in the lower court, likewise respondents here, were the surviving widow
and children of the deceased Federico Songco as well as the injured passenger Jose
Manuel. On the above facts they prevailed, as had been mentioned, in the lower court
and in the respondent Court of Appeals.1awphl.nt
The basis for the favorable judgment is the doctrine announced in Qua Chee Gan v.
Law Union and Rock Insurance Co., Ltd., 3 with Justice J. B. L. Reyes speaking for the
Court. It is now beyond question that where inequitable conduct is shown by an
insurance firm, it is "estopped from enforcing forfeitures in its favor, in order to forestall
fraud or imposition on the insured." 4
As much, if not much more so than the Qua Chee Gan decision, this is a case where
the doctrine of estoppel undeniably calls for application. After petitioner Fieldmen's
Insurance Co., Inc. had led the insured Federico Songco to believe that he could
qualify under the common carrier liability insurance policy, and to enter into contract of
insurance paying the premiums due, it could not, thereafter, in any litigation arising out
of such representation, be permitted to change its stand to the detriment of the heirs
of the insured. As estoppel is primarily based on the doctrine of good faith and the
avoidance of harm that will befall the innocent party due to its injurious reliance, the
failure to apply it in this case would result in a gross travesty of justice.
That is all that needs be said insofar as the first alleged error of respondent Court of
Appeals is concerned, petitioner being adamant in its far-from-reasonable plea that
estoppel could not be invoked by the heirs of the insured as a bar to the alleged
breach of warranty and condition in the policy. lt would now rely on the fact that the
insured owned a private vehicle, not a common carrier, something which it knew all
along when not once but twice its agent, no doubt without any objection in its part,
exerted the utmost pressure on the insured, a man of scant education, to enter into
such a contract.
Nor is there any merit to the second alleged error of respondent Court that no legal
liability was incurred under the policy by petitioner. Why liability under the terms of the
policy 5 was inescapable was set forth in the decision of respondent Court of Appeals.
Thus: "Since some of the conditions contained in the policy issued by the defendantappellant were impossible to comply with under the existing conditions at the time and
'inconsistent with the known facts,' the insurer 'is estopped from asserting breach of
such conditions.' From this jurisprudence, we find no valid reason to deviate and
consequently hold that the decision appealed from should be affirmed. The injured
parties, to wit, Carlos Songco, Angelito Songco and Jose Manuel, for whose hospital
and medical expenses the defendant company was being made liable, were
passengers of the jeepney at the time of the occurrence, and Rodolfo Songco, for
whose burial expenses the defendant company was also being made liable was the
driver of the vehicle in question. Except for the fact, that they were not fare paying
passengers, their status as beneficiaries under the policy is recognized therein." 6
Even if it be assumed that there was an ambiguity, an excerpt from the Qua Chee
Gan decision would reveal anew the weakness of petitioner's contention. Thus:
"Moreover, taking into account the well known rule that ambiguities or obscurities must
be strictly interpreted against the party that caused them, the 'memo of warranty'
invoked by appellant bars the latter from questioning the existence of the appliances
called for in the insured premises, since its initial expression, 'the undernoted
appliances for the extinction of fire being kept on the premises insured hereby, ... it is
hereby warranted ...,' admits of interpretation as an admission of the existence of such
appliances which appellant cannot now contradict, should the parol evidence rule
apply." 7
To the same effect is the following citation from the same leading case: "This rigid
application of the rule on ambiguities has become necessary in view of current
business practices. The courts cannot ignore that nowadays monopolies, cartels and
concentration of capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared 'agreements' that the
weaker party may not change one whit, his participation in the 'agreement' being
reduced to the alternative to 'take it or leave it' labelled since Raymond Saleilles
'contracts by adherence' (contrats d'adhesion), in contrast to those entered into by
parties bargaining on an equal footing, such contracts (of which policies of insurance
and international bills of lading are prime examples) obviously call for greater
strictness and vigilance on the part of courts of justice with a view to protecting the
weaker party from abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code. Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934,
27 February 1942)." 8
The last error assigned which would find fault with the decision of respondent Court of
Appeals insofar as it affirmed the lower court award for exemplary damages as well as
attorney's fees is, on its face, of no persuasive force at all.
The conclusion that inescapably emerges from the above is the correctness of the
decision of respondent Court of Appeals sought to be reviewed. For, to borrow once
again from the language of the Qua Chee Gan opinion: "The contract of insurance is
one of perfect good faith (uberima fides) not for the insured alone,but equally so for
the insurer; in fact, it is more so for the latter, since its dominant bargaining position
carries with it stricter responsibility." 9
This is merely to stress that while the morality of the business world is not the morality
of institutions of rectitude like the pulpit and the academe, it cannot descend so low as
to be another name for guile or deception. Moreover, should it happen thus, no court
of justice should allow itself to lend its approval and support.1awphl.nt
We have no choice but to recognize the monetary responsibility of petitioner
Fieldmen's Insurance Co., Inc. It did not succeed in its persistent effort to avoid
complying with its obligation in the lower court and the Court of Appeals. Much less
should it find any receptivity from us for its unwarranted and unjustified plea to escape
from its liability.
WHEREFORE, the decision of respondent Court of Appeals of July 20, 1965, is
affirmed in its entirety. Costs against petitioner Fieldmen's Insurance Co., Inc.
avoided. Such policies will, therefore, be construed strictly against the company in
order to avoid a forfeiture, unless no other result is possible from the language used.
_______________
* SECOND DIVISION.
243
VOL. 270, MARCH 20, 1997

243
Malayan Insurance Corporation vs. Court of Appeals
Insurance; Marine insurance developed as an all-risk coverage using the phrase

perils of the sea to encompass the wide and varied range of risks that were covered.
By way of a historical background, marine insurance developed as an all-risk
coverage, using the phrase perils of the sea to encompass the wide and varied
range of risks that were covered. The subject policies contain the Perils clause which
is a standard form in any marine insurance policy.
Same; Court agrees with the Court of Appeals and the private respondent that arrest
caused by ordinary judicial process is deemed included among the covered risks.
With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses,
however, this Court agrees with the Court of Appeals and the private respondent that
arrest caused by ordinary judicial process is deemed included among the covered
risks. This interpretation becomes inevitable when subsection 1.1 of Section 1 of the
Institute War Clauses provided that this insurance covers the risks excluded from the
Standard Form of English Marine Policy by the clause Warranted free of capture,
seizure, arrest, etc. x x x or the F.C. & S. Clause. Jurisprudentially, arrests caused
by ordinary judicial process is also a risk excluded from the Standard Form of English
Marine Policy or the F.C. & S. Clause.
Same; Any construction of a marine policy rendering it void should be avoided.It has
been held that a strained interpretation which is unnatural and forced, as to lead to an
absurd conclusion or to render the policy nonsensical, should, by all means, be
avoided. Likewise, it must be borne in mind that such contracts are invariably
prepared by the companies and must be accepted by the insured in the form in which
they are written. Any construction of a marine policy rendering it void should be
Same; To limit or restrict the operation of the general provisions of the contract by
special proviso, exception, or exemption, the insurance company should express such
limitation in clear and unmistakable language.If a marine insurance company
desires to limit or restrict the operation of the general provisions of its contract by
special proviso, exception, or exemption, it should express such limitation in clear and
unmistakable language. Obviously, the deletion of the F.C. & S. Clause and the
consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses
(Cargo) gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial
process was expressly indicated as an exception in the subject policies, there would
have been no controversy with respect to the interpretation of the subject clauses.
Same; Exceptions to the general coverage are construed most strongly against the
company.Be that as it may, exceptions to the general coverage are construed most
strongly against the company. Even an express exception in a policy is to be
construed against the underwriters by whom the policy is framed, and for whose
benefit the exception is introduced.
Same; Where restrictive provisions are open to two interpretations that which is most
favorable to the insured is adopted.An insurance contract should be so interpreted
as to carry out the purpose for which the parties entered into the contract which is, to
insure against risks of loss or damage to the goods. Such interpretation should result
from the natural and reasonable meaning of language in the policy. Where restrictive
provisions are open to two interpretations, that which is most favorable to the insured
is adopted.
Same; A contract of insurance being a contract of adhesion, par excellence, any

ambiguity therein should be resolved against the insurer.Indemnity and liability
insurance policies are construed in accordance with the general rule of resolving any
ambiguity therein in favor of the insured, where the contract or policy is prepared by
the insurer. A contract of insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in other words, it should be
construed liberally in favor of the insured and strictly against the insurer. Limitations of
liability should be regarded with extreme jealousy and must be construed in such a
way as to preclude the insurer from noncompliance with its obligations. [Malayan
Insurance Corporation vs. Court of Appeals, 270 SCRA 242(1997)]

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 119599 March 20, 1997

MALAYAN INSURANCE CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS and TKC MARKETING
CORPORATION, respondents.
ROMERO, J.:
Assailed in this petition for review on certiorari is the decision of the Court of Appeals
in CA-G. R. No. 43023 1which affirmed, with slight modification, the decision of the
Regional Trial Court of Cebu, Branch 15.
Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171
metric tons of soya bean meal which was loaded on board the ship MV Al Kaziemah
on or about September 8, 1989 for carriage from the port of Rio del Grande, Brazil, to
the port of Manila. Said cargo was insured against the risk of loss by petitioner
Malayan Insurance Corporation for which it issued two (2) Marine Cargo policy Nos.
M/LP 97800305 amounting to P18,986,902.45 and M/LP 97800306 amounting to
P1,195,005.45, both dated September 1989.
While the vessel was docked in Durban, South Africa on September 11, 1989 enroute
to Manila, the civil authorities arrested and detained it because of a lawsuit on a
question of ownership and possession. As a result, private respondent notified
petitioner on October 4, 1989 of the arrest of the vessel and made a formal claim for
the amount of US$916,886.66, representing the dollar equivalent on the policies, for
non-delivery of the cargo. Private respondent likewise sought the assistance of
petitioner on what to do with the cargo.
Petitioner replied that the arrest of the vessel by civil authority was not a peril covered
by the policies. Private respondent, accordingly, advised petitioner that it might
tranship the cargo and requested an extension of the insurance coverage until actual
transhipment, which extension was approved upon payment of additional premium.
The insurance coverage was extended under the same terms and conditions
embodied in the original policies while in the process of making arrangements for the
transhipment of the cargo from Durban to Manila, covering the period October 4 December 19, 1989.
However, on December 11, 1989, the cargo was sold in Durban, South Africa, for
US$154.40 per metric ton or a total of P10,304,231.75 due to its perishable nature
which could no longer stand a voyage of twenty days to Manila and another twenty
days for the discharge thereof. On January 5, 1990, private respondent forthwith
reduced its claim to US$448,806.09 (or its peso equivalent of P9,879,928.89 at the
exchange rate of P22.0138 per $1.00) representing private respondent's loss after the
proceeds of the sale were deducted from the original claim of $916,886.66 or
P20,184,159.55.
Petitioner maintained its position that the arrest of the vessel by civil authorities on a
question of ownership was an excepted risk under the marine insurance policies. This
prompted private respondent to file a complaint for damages praying that aside from
its claim, it be reimbursed the amount of P128,770.88 as legal expenses and the
interest it paid for the loan it obtained to finance the shipment totalling P942,269.30. In
addition, private respondent asked for moral damages amounting to P200,000.00,
exemplary damages amounting to P200,000.00 and attorney's fees equivalent to 30%
of what will be awarded by the court.
The lower court decided in favor of private respondent and required petitioner to pay,
aside from the insurance claim, consequential and liquidated damages amounting to
P1,024,233.88, exemplary damages amounting to P100,000.00, reimbursement in the
amount equivalent to 10% of whatever is recovered as attorney's fees as well as the
costs of the suit. On private respondent's motion for reconsideration, petitioner was
also required to further pay interest at the rate of 12% per annum on all amounts due
and owing to the private respondent by virtue of the lower court decision counted from
the inception of this case until the same is paid.
On appeal, the Court of Appeals affirmed the decision of the lower court stating that
with the deletion of Clause 12 of the policies issued to private respondent, the same
became automatically covered under subsection 1.1 of Section 1 of the Institute War
Clauses. The arrests, restraints or detainments contemplated in the former clause
were those effected by political or executive acts. Losses occasioned by riot or
ordinary judicial processes were not covered therein. In other words, arrest, restraint
or detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules out
detention by ordinary legal processes. Hence, arrests by civil authorities, such as what
happened in the instant case, is an excepted risk under Clause 12 of the Institute
Cargo Clause or the F.C. & S. Clause. However, with the deletion of Clause 12 of the
Institute Cargo Clause and the consequent adoption or institution of the Institute War
Clauses (Cargo), the arrest and seizure by judicial processes which were excluded
under the former policy became one of the covered risks.
The appellate court added that the failure to deliver the consigned goods in the port of
destination is a loss compensable, not only under the Institute War Clause but also
under the Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies,
as read in relation to Section 130 of the Insurance Code and as held inWilliams
v. Cole. 2
Furthermore, the appellate court contended that since the vessel was prevented at an
intermediate port from completing the voyage due to its seizure by civil authorities, a
peril insured against, the liability of petitioner continued until the goods could have
been transhipped. But due to the perishable nature of the goods, it had to be promptly
sold to minimize loss. Accordingly, the sale of the goods being reasonable and
justified, it should not operate to discharge petitioner from its contractual liability.
Hence this petition, claiming that the Court of Appeals erred:
1. In ruling that the arrest of the vessel was a risk covered under the subject insurance
policies.
2. In ruling that there was constructive total loss over the cargo.
3. In ruling that petitioner was in bad faith in declining private respondent's claim.
4. In giving undue reliance to the doctrine that insurance policies are strictly construed
against the insurer.
In assigning the first error, petitioner submits the following: (a) an arrest by civil
authority is not compensable since the term "arrest" refers to "political or executive
acts" and does not include a loss caused by riot or by ordinary judicial process as in
this case; (b) the deletion of the Free from capture or Seizure Clause would leave the
assured covered solely for the perils specified by the wording of the policy itself; (c)
the rationale for the exclusion of an arrest pursuant to judicial authorities is to
eliminate collusion between unscrupulous assured and civil authorities.
As to the second assigned error, petitioner submits that any loss which private
respondent may have incurred was in the nature and form of unrecovered acquisition
value brought about by a voluntary sacrifice sale and not by arrest, detention or
seizure of the ship.
As to the third issue, petitioner alleges that its act of rejecting the claim was a result of
its honest belief that the arrest of the vessel was not a compensable risk under the
policies issued. In fact, petitioner supported private respondent by accommodating the
latter's request for an extension of the insurance coverage, notwithstanding that it was
then under no legal obligation to do so.
Private respondent, on the other hand, argued that when it appealed its case to the
Court of Appeals, petitioner did not raise as an issue the award of exemplary
damages. It cannot now, for the first time, raise the same before this Court. Likewise,
petitioner cannot submit for the first time on appeal its argument that it was wrong for
the Court of Appeals to have ruled the way it did based on facts that would need
inquiry into the evidence. Even if inquiry into the facts were possible, such was not
necessary because the coverage as ruled upon by the Court of Appeals is evident
from the very terms of the policies.
It also argued that petitioner, being the sole author of the policies, "arrests" should be
strictly interpreted against it because the rule is that any ambiguity is to be
taken contra proferentum. Risk policies should be construed reasonably and in a
manner as to make effective the intentions and expectations of the parties. It added
that the policies clearly stipulate that they cover the risks of non-delivery of an entire
package and that it was petitioner itself that invited and granted the extensions and
collected premiums thereon.
The resolution of this controversy hinges on the interpretation of the "Perils" clause of
the subject policies in relation to the excluded risks or warranty specifically stated
therein.
By way of a historical background, marine insurance developed as an all-risk
coverage, using the phrase "perils of the sea" to encompass the wide and varied
range of risks that were covered. 3 The subject policies contain the "Perils" clause
which is a standard form in any marine insurance policy. Said clause reads:
Touching the adventures which the said MALAYAN INSURANCE
CO., are content to bear, and to take upon them in this voyage;
they are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers,
Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals,
Takings of the Sea, Arrests, Restraints and Detainments of all
Kings, Princess and Peoples, of what Nation, Condition, or quality
soever, Barratry of the Master and Mariners, and of all other
Perils, Losses, and Misfortunes, that have come to hurt,
detriment, or damage of the said goods and merchandise or any
part thereof . AND in case of any loss or misfortune it shall be
lawful to the ASSURED, their factors, servants and assigns, to
sue, labour, and travel for, in and about the defence, safeguards,
and recovery of the said goods and merchandises, and ship, & c.,
or any part thereof, without prejudice to this INSURANCE; to the
charges whereof the said COMPANY, will contribute according to
the rate and quantity of the sum herein INSURED. AND it is
expressly declared and agreed that no acts of the Insurer or
Insured in recovering, saving, or preserving the Property insured
shall be considered as a Waiver, or Acceptance of Abandonment.
And it is agreed by the said COMPANY, that this writing or Policy
of INSURANCE shall be of as much Force and Effect as the
surest Writing or policy of INSURANCE made in LONDON. And
so the said MALAYAN INSURANCE COMPANY., INC., are
contented, and do hereby promise and bind themselves, their
Heirs, Executors, Goods and Chattel, to the ASSURED, his or
their Executors, Administrators, or Assigns, for the true
Performance of the Premises; confessing themselves paid the
Consideration due unto them for this INSURANCE at and after
the rate arranged. (Emphasis supplied)
The exception or limitation to the "Perils" clause and the "All other perils" clause in the
subject policies is specifically referred to as Clause 12 called the "Free from Capture &
Seizure Clause" or the F.C. & S. Clause which reads, thus:
Warranted free of capture, seizure, arrest, restraint or detainment,

and the consequences thereof or of any attempt thereat; also
from the consequences of hostilities and warlike operations,
whether there be a declaration of war or not; but this warranty
shall not exclude collision, contact with any fixed or floating object
(other than a mine or torpedo), stranding, heavy weather or fire
unless caused directly (and independently of the nature of the
voyage or service which the vessel concerned or, in the case of a
collision, any other vessel involved therein is performing) by a
hostile act by or against a belligerent power and for the purpose
of this warranty "power" includes any authorities maintaining
naval, military or air forces in association with power.
Further warranted free from the consequences of civil war,
revolution, insurrection, or civil strike arising therefrom or piracy.
Should Clause 12 be deleted, the relevant current institute war
clauses shall be deemed to form part of this insurance. (Emphasis
supplied)
However, the F. C. & S. Clause was deleted from the policies. Consequently, the
Institute War Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of
Section 1, provides:
1. This insurance covers:
1.1 The risks excluded from the standard form of English Marine
Policy by the clause warranted free of capture, seizure, arrest,
restraint or detainment, and the consequences thereof of
hostilities or warlike operations, whether there be a declaration of
war or not; but this warranty shall not exclude collision, contact
with any fixed or floating object (other than a mine or torpedo),
stranding, heavy weather or fire unless caused directly (and
independently of the nature on voyage or service which the vessel
concerned or, in the case of a collision any other vessel involved
therein is performing) by a hostile act by or against a belligerent
power; and for the purpose of this warranty "power" includes any
authority maintaining naval, military or air forces in association
with a power. Further warranted free from the consequences of
civil war, revolution, rebellion, insurrection, or civil strike arising
therefrom, or piracy.
According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of

the Institute War Clauses (Cargo), among others, means that any "capture, arrest,
detention, etc." pertained exclusively to warlike operations if this Court strictly
construes the heading of the said clauses. However, it also claims that the parties
intended to include arrests, etc. even if it were not the result of hostilities or warlike
operations. It further claims that on the strength of jurisprudence on the matter, the
term "arrests" would only cover those arising from political or executive acts,
concluding that whether private respondent's claim is anchored on subsection 1.1 of
Section 1 of the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of
the vessel by judicial authorities is an excluded risk. 4
Petitioner itself seems to be confused about the application of the F.C. & S. Clause as
well as that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It
stated that "the F.C. & S. Clause was "originally incorporated in insurance policies to
eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause
applies even if there be no war or warlike operations . . . ." 7 In the same vein, it
contended that subsection 1.1 of Section 1 of the Institute War Clauses
(Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the
deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of
Section 1 of the Institute War Clauses (Cargo) was to include "arrest, etc. even if were
not a result of hostilities or warlike operations. 8
This Court cannot agree with petitioner's assertions, particularly when it alleges that in
the "Perils" Clause, it assumed the risk of arrest caused solely by executive or political
acts of the government of the seizing state and thereby excludes "arrests" caused by
ordinary legal processes, such as in the instant case.
This Court cannot help the impression that petitioner is overly straining its
interpretation of the provisions of the policy in order to avoid being liable for private
respondent's claim.
With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses,
however, this Court agrees with the Court of Appeals and the private respondent that
"arrest" caused by ordinary judicial process is deemed included among the covered
risks. This interpretation becomes inevitable when subsection 1.1 of Section 1 of the
Institute War Clauses provided that "this insurance covers the risks excluded from the
Standard Form of English Marine Policy by the clause "Warranted free of capture,
seizure, arrest, etc. . . ." or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by
ordinary judicial process is also a risk excluded from the Standard Form of English
Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial
process is not included in the covered risk simply because the F.C. & S. Clause under
the Institute War Clauses can only be operative in case of hostilities or warlike
operations on account of its heading "Institute War Clauses." This Court agrees with
the Court of Appeals when it held that ". . . . Although the F.C. & S. Clause may have
originally been inserted in marine policies to protect against risks of war, (see
generally G. Gilmore & C. Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed.
1975]), its interpretation in recent years to include seizure or detention by civil
authorities seems consistent with the general purposes of the clause, . . . ." 5 In fact,
petitioner itself averred that subsection 1.1 of Section 1 of the Institute War Clauses
included "arrest" even if it were not a result of hostilities or warlike operations. 6 In this
regard, since what was also excluded in the deleted F.C. & S. Clause was "arrest"
occasioned by ordinary judicial process, logically, such "arrest" would now become a
covered risk under subsection 1.1 of Section 1 of the Institute War Clauses,
regardless of whether or not said "arrest" by civil authorities occurred in a state of war.
This Court finds it pointless for petitioner to maintain its position that it only insures
risks of "arrest" occasioned by executive or political acts of government which is
interpreted as not referring to those caused by ordinary legal processes as contained
in the "Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest
occasioned by executive or political acts of the government and naturally, also those
caused by ordinary legal processes; and, thereafter incorporates subsection 1.1 of
Section 1 of the Institute War Clauses which now includes in the coverage risks of
arrest due to executive or political acts of a government but then still excludes
"arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of
said Clauses should also have included "arrests" previously excluded from the
coverage of the F.C. & S. Clause.
It has been held that a strained interpretation which is unnatural and forced, as to lead
to an absurd conclusion or to render the policy nonsensical, should, by all means, be
avoided. 9 Likewise, it must be borne in mind that such contracts are invariably
prepared by the companies and must be accepted by the insured in the form in which
they are written. 10 Any construction of a marine policy rendering it void should be
avoided. 11 Such policies will, therefore, be construed strictly against the company in
order to avoid a forfeiture, unless no other result is possible from the language used. 12
If a marine insurance company desires to limit or restrict the operation of the general
provisions of its contract by special proviso, exception, or exemption, it should express
such limitation in clear and unmistakable language. 13Obviously, the deletion of the
F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of arrest
occasioned by ordinary judicial process was expressly indicated as an exception in the
subject policies, there would have been no controversy with respect to the
interpretation of the subject clauses.
Be that as it may, exceptions to the general coverage are construed most strongly
against the company. 14 Even an express exception in a policy is to be construed
against the underwriters by whom the policy is framed, and for whose benefit the
exception is introduced. 15
An insurance contract should be so interpreted as to carry out the purpose for which
the parties entered into the contract which is, to insure against risks of loss or damage
to the goods. Such interpretation should result from the natural and reasonable
meaning of language in the policy. 16 Where restrictive provisions are open to two
interpretations, that which is most favorable to the insured is adopted. 17
Indemnity and liability insurance policies are construed in accordance with the general
rule of resolving any ambiguity therein in favor of the insured, where the contract or
policy is prepared by the insurer. 18 A contract of insurance, being a contract of
adhesion, par excellence, any ambiguity therein should be resolved against the
insurer; in other words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be regarded with extreme
jealousy and must be construed in such a way as to preclude the insurer from
noncompliance with its obligations. 19
Evidence; Witnesses; We ruled in People v. Paredes, 368 SCRA 102 (2001), that
minor inconsistencies are too trivial to affect the credibility of witnesses, and these
may even serve to strengthen their credibility as these negate any suspicion that the
testimonies have been rehearsed.As to the seeming inconsistencies between the
testimony of Manuel Cortez on whether one or two insurance application forms were
accomplished and the testimony of Mendoza on who actually filled out the application
form, these are minor inconsistencies that do not affect the credibility of the witnesses.
Thus, we ruled in People v. Paredes, 368 SCRA 102 (2001), that minor
inconsistencies are too trivial to affect the credibility of witnesses, and
_______________
In view of the foregoing, this Court sees no need to discuss the other issues
presented.
WHEREFORE, the petition for review is DENIED and the decision of the Court of
Appeals is AFFIRMED.
* SECOND DIVISION.
2
SO ORDERED.
2
Eternal Gardens Memorial Park Corporation vs. Philippine American Life Insurance
Company
these may even serve to strengthen their credibility as these negate any suspicion
that the testimonies have been rehearsed.
Contracts; Insurance Law; It must be remembered that an insurance contract is a
contract of adhesion which must be construed liberally in favor of the insured and
strictly against the insurer in order to safeguard the latters interest.It must be
remembered that an insurance contract is a contract of adhesion which must be
construed liberally in favor of the insured and strictly against the insurer in order to
safeguard the latters interest. Thus, in Malayan Insurance Corporation v. Court of

Appeals, 270 SCRA 242 (1997), this Court held that: Indemnity and liability insurance
policies are construed in accordance with the general rule of resolving any ambiguity
therein in favor of the insured, where the contract or policy is prepared by the insurer.
A contract of insurance, being a contract of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in other words, it should be construed
liberally in favor of the insured and strictly against the insurer. Limitations of liability
should be regarded with extreme jealousy and must be construed in such a way as to
preclude the insurer from noncompliance with its obligations. (Emphasis supplied.)
Same; Same; The mere inaction of the insurer on the insurance application must not
work to prejudice the insured; it cannot be interpreted as a termination of the
insurance contract.The seemingly conflicting provisions must be harmonized to
mean that upon a partys purchase of a memorial lot on installment from Eternal, an
insurance contract covering the lot purchaser is created and the same is effective,
valid, and binding until terminated by Philamlife by disapproving the insurance
application. The second sentence of Creditor Group Life Policy No. P-1920 on the
Effective Date of Benefit is in the nature of a resolutory condition which would lead to
the cessation of the insurance contract. Moreover, the mere inaction of the insurer on
the insurance application must not work to prejudice the insured; it cannot be
interpreted as a termination of the insurance contract. The termination of the
insurance contract by the insurer must be explicit and unambiguous.
Same; Same; Insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the
must be considered whenever the rights and obligations of the insurer and the insured
are to be delineated. Hence, in order to protect the interest of insurance applicants,
insurance companies must be obligated to act with haste upon insurance applications,
to either deny or approve the same, or otherwise be bound to honor the application as
a valid, binding, and effective insurance contract. [Eternal Gardens Memorial Park
Corporation vs. Philippine American Life Insurance Company, 551 SCRA 1(2008)]
SUPREME COURT
Baguio City
SECOND DIVISION
G.R. No. 166245
April 9, 2008
ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,

vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case
VOL. 551, APRIL 9, 2008
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse
and set aside the November 26, 2004 Decision1 of the Court of Appeals (CA) in CAG.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance
application be considered as approval of the application?
3
The Facts
Eternal Gardens Memorial Park Corporation vs. Philippine American Life Insurance
Company
insurer and the insured are to be delineated.To characterize the insurer and the
insured as contracting parties on equal footing is inaccurate at best. Insurance
contracts are wholly prepared by the insurer with vast amounts of experience in the
industry purposefully used to its advantage. More often than not, insurance contracts
are contracts of adhesion containing technical terms and conditions of the industry,
confusing if at all understandable to laypersons, that are imposed on those who wish
to avail of insurance. As such, insurance contracts are imbued with public interest that
On December 10, 1980, respondent Philippine American Life Insurance Company

(Philamlife) entered into an agreement denominated as Creditor Group Life Policy No.
P-19202 with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under
the policy, the clients of Eternal who purchased burial lots from it on installment basis
would be insured by Philamlife. The amount of insurance coverage depended upon
the existing balance of the purchased burial lots. The policy was to be effective for a
period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65
years of age, is indebted to the Assured for the unpaid balance of his loan
with the Assured, and is accepted for Life Insurance coverage by the
Company on its effective date is eligible for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to
P50,000.00. However, a declaration of good health shall be required for all
Lot Purchasers as part of the application. The Company reserves the right
to require further evidence of insurability satisfactory to the Company in
respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the
amount of the unpaid balance of his loan (including arrears up to but not
exceeding 2 months) as reported by the Assured to the Company or the
sum of P100,000.00, whichever is smaller. Such benefit shall be paid to the
Assured if the Lot Purchaser dies while insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if
the application of the Lot Purchaser is not approved by the Company.3
Eternal was required under the policy to submit to Philamlife a list of all new lot
purchasers, together with a copy of the application of each purchaser, and the
amounts of the respective unpaid balances of all insured lot purchasers. In relation to
the instant petition, Eternal complied by submitting a letter dated December 29,
1982,4containing a list of insurable balances of its lot buyers for October 1982. One of
those included in the list as "new business" was a certain John Chuang. His balance
of payments was PhP 100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an
insurance claim for Chuangs death. Attached to the claim were the following
documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating that
Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4) Certificate of
Attending Physician; and (5) Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to
submit the following documents relative to its insurance claim for Chuangs death: (1)
Certificate of Claimant (with form attached); (2) Assureds Certificate (with form
attached); (3) Application for Insurance accomplished and signed by the insured,
Chuang, while still living; and (4) Statement of Account showing the unpaid balance of
Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14,
1984,7 which was received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the
latters insurance claim. This prompted Eternal to demand from Philamlife the
payment of the claim for PhP 100,000 on April 25, 1986.8
In response to Eternals demand, Philamlife denied Eternals insurance claim in a
letter dated May 20, 1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and
9529 with Eternal Gardens Memorial Park in October 1982 for the total
maximum insurable amount of P100,000.00 each. No application for Group
Insurance was submitted in our office prior to his death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920, under
Evidence of Insurability provision, "a declaration of good health shall be
required for all Lot Purchasers as party of the application." We cite further
the provision on Effective Date of Coverage under the policy which states
that "there shall be no insurance if the application is not approved by the
Company." Since no application had been submitted by the
Insured/Assured, prior to his death, for our approval but was submitted
instead on November 15, 1984, after his death, Mr. John Uy Chuang was
not covered under the Policy. We wish to point out that Eternal Gardens
being the Assured was a party to the Contract and was therefore aware of
these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our
approval per se of the insurance coverage but are held by us in trust for the
payor until the prerequisites for insurance coverage shall have been met.
We will however, return all the premiums which have been paid in behalf of
John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC)
for a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial
court decided in favor of Eternal, the dispositive portion of which reads:
The Honorable Court of Appeals has decided a question of substance, not

therefore determined by this Honorable Court, or has decided it in a way not
in accord with law or with the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to
respondent PhilamLife before the death of John Chuang;
II. There was no valid insurance coverage; and
WHEREFORE, premises considered, judgment is hereby rendered in favor

of Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering the
Defendant PHILAMLIFE, to pay the sum of P100,000.00, representing the
proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until
fully paid; and, to pay the sum of P10,000.00 as attorneys fees.
SO ORDERED.
The RTC found that Eternal submitted Chuangs application for insurance which he
accomplished before his death, as testified to by Eternals witness and evidenced by
the letter dated December 29, 1982, stating, among others: "Encl: Phil-Am Life
Insurance Application Forms & Cert."10 It further ruled that due to Philamlifes inaction
from the submission of the requirements of the group insurance on December 29,
1982 to Chuangs death on August 2, 1984, as well as Philamlifes acceptance of the
premiums during the same period, Philamlife was deemed to have approved Chuangs
application. The RTC said that since the contract is a group life insurance, once proof
of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil
Case No. 57810 is REVERSED and SET ASIDE, and the complaint
is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not
enclosed in Eternals letter dated December 29, 1982. It further ruled that the nonaccomplishment of the submitted application form violated Section 26 of the Insurance
Code. Thus, the CA concluded, there being no application form, Chuang was not
covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
III. Reversing and setting aside the Decision of the Regional Trial
Court dated May 29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual
issues raised before the CA and first level courts, considering their findings of facts are
conclusive and binding on this Court. However, such rule is subject to exceptions, as
enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of
facts are conflicting; (6) when in making its findings the [CA] went beyond
the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (7) when the findings [of the CA] are
contrary to the trial court; (8) when the findings are conclusions without
citation of specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioners main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on
record; and (11) when the Court of Appeals manifestly overlooked certain
relevant facts not disputed by the parties, which, if properly considered,
would justify a different conclusion.12 (Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this
Court may review them.
Eternal claims that the evidence that it presented before the trial court supports its
contention that it submitted a copy of the insurance application of Chuang before his
death. In Eternals letter dated December 29, 1982, a list of insurable interests of
buyers for October 1982 was attached, including Chuang in the list of new
businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in
the letter that was apparently received by Philamlife on January 15, 1983. Finally,
Eternal alleged that it provided a copy of the insurance application which was signed
by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is
insufficient, arguing that Eternal must present evidence showing that Philamlife
received a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife
stamped as received, states that the insurance forms for the attached list of burial lot
buyers were attached to the letter. Such stamp of receipt has the effect of
acknowledging receipt of the letter together with the attachments. Such receipt is an
admission by Philamlife against its own interest.13 The burden of evidence has shifted
to Philamlife, which must prove that the letter did not contain Chuangs insurance
application. However, Philamlife failed to do so; thus, Philamlife is deemed to have
received Chuangs insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal
letter is stamped as received, the contents of the letter are correct and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due
to inconsistencies is groundless. The trial court is in the best position to determine the
reliability and credibility of the witnesses, because it has the opportunity to observe
firsthand the witnesses demeanor, conduct, and attitude. Findings of the trial court on
such matters are binding and conclusive on the appellate court, unless some facts or
circumstances of weight and substance have been overlooked, misapprehended, or
misinterpreted,14 that, if considered, might affect the result of the case.15
An examination of the testimonies of the witnesses mentioned by Philamlife, however,
reveals no overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance
application of Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of

new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two
copies of this form and the original of this is submitted to Philamlife together
with the monthly remittances and the second copy is remained or retained
with the marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is
merely asking for the location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I
submitted with that payment together with the new clients all the originals I
see to it before I sign the transmittal letter the originals are attached
therein.16
In other words, the witness admitted not knowing where the original insurance
application was, but believed that the application was transmitted to Philamlife as an
attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on
whether one or two insurance application forms were accomplished and the testimony
of Mendoza on who actually filled out the application form, these are minor
inconsistencies that do not affect the credibility of the witnesses. Thus, we ruled in
People v. Paredes that minor inconsistencies are too trivial to affect the credibility of
witnesses, and these may even serve to strengthen their credibility as these negate
any suspicion that the testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity

of the prosecutions evidence as a whole or reflect on the witnesses
honesty. The test is whether the testimonies agree on essential facts and
whether the respective versions corroborate and substantially coincide with
each other so as to make a consistent and coherent whole.18
In the present case, the number of copies of the insurance application that Chuang
executed is not at issue, neither is whether the insurance application presented by
Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without
approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is
provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if
the application of the Lot Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two
sentences. The first sentence appears to state that the insurance coverage of the
clients of Eternal already became effective upon contracting a loan with Eternal while
the second sentence appears to require Philamlife to approve the insurance contract
before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which
must be construed liberally in favor of the insured and strictly against the insurer in
order to safeguard the latters interest. Thus, in Malayan Insurance Corporation v.
Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with
the general rule of resolving any ambiguity therein in favor of the insured,
where the contract or policy is prepared by the insurer. A contract of
insurance, being a contract of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in other words, it should

be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with
its obligations.19 (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts
should construe them in such a way as to preclude the insurer from noncompliance with his obligation. Being a contract of adhesion, the terms of an
insurance contract are to be construed strictly against the party which
prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance
contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. 20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920
dated December 10, 1980, must be construed in favor of the insured and in favor of
the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean
that upon a partys purchase of a memorial lot on installment from Eternal, an
insurance contract covering the lot purchaser is created and the same is effective,
valid, and binding until terminated by Philamlife by disapproving the insurance
application. The second sentence of Creditor Group Life Policy No. P-1920 on the
Effective Date of Benefit is in the nature of a resolutory condition which would lead to
the cessation of the insurance contract. Moreover, the mere inaction of the insurer on
the insurance application must not work to prejudice the insured; it cannot be
interpreted as a termination of the insurance contract. The termination of the
insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on
equal footing is inaccurate at best. Insurance contracts are wholly prepared by the
insurer with vast amounts of experience in the industry purposefully used to its
advantage. More often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the insurer and the insured are to
be delineated. Hence, in order to protect the interest of insurance applicants,
insurance companies must be obligated to act with haste upon insurance applications,
to either deny or approve the same, or otherwise be bound to honor the application as
a valid, binding, and effective insurance contract.21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CAG.R. CV No. 57810 isREVERSED and SET ASIDE. The May 29, 1996 Decision of the
Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of
the Life Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of
PhP 100,000 from the time of extra-judicial demand by Eternal until
Philamlifes receipt of the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per
annum of PhP 100,000 from June 17, 1996 until full payment of this award;
and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.

No costs.
SO ORDERED.

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Cases 1-12

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Actions; Appeals; Pleadings and Practice; In a petition for review, only questions of

Same; Same; Warranties; It is generally accepted that a warranty is a statement or

MAINTAINED, it remains that TRANSASIA must be allowed to recover its rightful

TRANSASIAs claim on the insurance, thus: x x x We agree. Notwithstanding its

VOL. 491, JUNE 20, 2006

SUPREME COURT REPORTS ANNOTATED

G.R. No. 151890

June 20, 2006

SUPREME COURT REPORTS ANNOTATED

June 20, 2006

In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiffs claim

On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan

All costs against appellee.14

THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY

THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT, IN

THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06

In our Resolution of 2 December 2002, we granted TRANS-ASIAs Motion for

The warranty condition CLASSED AND CLASS MAINTAINED was explained by

A A classification society is an organization which sets certain standards for a vessel

A I believe with Bureau Veritas.24

A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a

Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of

3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorneys

4. An interest of 12% per annum is similarly imposed on the TOTAL amount

Statutory Construction; It is a cardinal rule in statutory construction that no word,

be considered as being engaged in the insurance business.The mere presence of

SUPREME COURT REPORTS ANNOTATED

VOL. 600, SEPTEMBER 18, 2009

Health Maintenance Organizations; Various courts in the United States, whose

missioner must be accorded great weight. It is well-settled that the interpretation of an

Same; Same; Although risk is a primary element of an insurance contract, it is not

SUPREME COURT REPORTS ANNOTATED

VOL. 600, SEPTEMBER 18, 2009

G.R. No. 167330

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

SUPREME COURT REPORTS ANNOTATED

September 18, 2009

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent

Petitioner protested the assessment in a letter dated February 23, 2000. As

Preventive medical services such as periodic monitoring of health problems, family

(c) Section 185 should be strictly construed.

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,

It is a cardinal rule in statutory construction that no word, clause, sentence, provision

Health Maintenance Organizations Are Not Engaged In The Insurance Business

Petitioner, however, submits that it is of critical importance to characterize the

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

d) doing or proposing to do any business in substance equivalent to any of

financial loss caused by extraordinary and unusual occurrences, such as death,

The primary purpose of a medical service corporation, however, is an undertaking to

and consultations, vaccine administration as well as family planning counseling, even

Fourth. In case of emergency, petitioner is obliged to reimburse the member who

In Michigan Podiatric Medical Association v. National Foot Care Program,

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

as insurance contracts or deemed engaged in the business of insurance within the

Far from disagreeing with petitioner, respondent manifested in its memorandum:

VOL. 453, MARCH 18, 2005

Commissioner of Internal Revenue vs. Philippine American Accident Insurance

or compliance with contractual obligations or the payment of debts of others shall be

VOL. 453, MARCH 18, 2005

SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine American Accident Insurance

Commissioner of Internal Revenue vs. Philippine American Accident Insurance

Republic of the Philippines

COMMISSIONER OF INTERNAL REVENUE, Petitioner,