1
G.R. No. L-1600 June 1, 1906
THE PHILIPPINE SHIPPING COMPANY, ET AL., plaintiffs-appellants,
vs.
FRANCISCO GARCIA VERGARA, defendant-appellee.
Del-Pan, Ortigas and Fisher, for appellants.
Ledesma, Sumulong and Quintos, for appellee.
ARELLANO, C.J.:
The Philippine Shipping Company, the owner of the steamship Nuestra Sra. de
Lourdes, claims an indemnification of 44,000 pesos for the loss of the said ship as
a result of a collision. Ynchusti & Co. also claimed 24,705.64 pesos as an
indemnification for the loss of the cargo of hemp and coprax carried by the said
ship on her last trip. The defendant, Francisco Garcia Vergara, was the owner of
the steamship Navarra, which collided with the Lourdes.
From the judgment of the trial court the Philippine Shipping Company and the
defendant Vergara appealed, but the latter has failed to prosecute his appeal by a
bill of exceptions or otherwise. The only appellant who has prosecuted this appeal
now reduced its claim to 18,000 pesos, the value of the colliding vessel.
The court below found as a matter of fact that the steamship Lourdes was sailing
in accordance with law, but that the Navarra was not, and was therefore
responsible for the collision. (Bill of exceptions, p. 7.) The court also found as a
fact that "both ships with their respective cargoes were entirely lost." Construing
article 837 of the Code Commerce, the court below held "that the defendant was
not responsible to the plaintiff for the value of the steamship Lourdes, with the
costs against the latter." (Bill of exceptions, p. 8.)
But the appellant, the Philippine Shipping Company, contends that the defendant
should pay to 18,000 pesos, the value of the Navarra at the time of its loss; that
this is the sense in which the provisions of article 837 of the Code of Commerce
should be understood; that said code has followed the principles of the English
law and not those of the American law, and that it was immaterial whether
the Navarra had been entirely lost, provided her value at the time she was lost
could be ascertained, since the extent of the liability of the owner of the colliding
vessel for the damages resulting from the collision is to be determined in
accordance with such value.
Article 837 of the Code Commerce provides: "The civil liability contracted by the
shipowners in the cases prescribed in this section shall be understood as limited
to the value of the vessel with all her equipment and all the freight money earned
during the voyage."
This section is a necessary consequence of the right to abandon the
vessel given to the shipowner in article 587 of the code, and it is one of
the many superfluities contained in the code. (Lorenzo Benito,
"Lecciones," 352.)
Art. 587. The agent shall also the civilly liable for the indemnities in favor
of third persons which arise from the conduct of the captain in the care
of the goods which the vessel carried, but he may exempt himself
therefrom by abandoning the vessel with all her equipments and the
freight he may have earned during the trip.
ART. 590. The part owners of a vessel shall be civilly liable, in the
proportion of their contribution to the common fund, for the results of
the acts of the captain referred to in article 587. Each part owner may
exempt himself from this liability by the abandonment, before a notary,
of the part of the vessel belonging to him.
The "Exposicion de motivos" of the Code of Commerce contains the following: "The
present code (1829) does not determine the juridical status of the agent where
such agent is not himself the owner of the vessel. This omission is supplied by the
proposed code, which provides in accordance with the principles of maritime law
that by agent it is to be understood the person intrusted with the provisioning of
the vessel, or the one who represents her in the port in which she happens to be.
This person is the only who represents the interest of the owner of the vessel. This
provision has therefore cleared the doubt which existed as to the extent of the
liability, both of the agent and for the owner of the vessel. Such liability is limited
by the proposed code to the value of the vessel and other things appertaining
thereto."
There is no doubt that if the Navarra had not been entirely lost, the agent, having
held liable for the negligence of the captain of the vessel, could have abandoned
her with all her equipment and the freight money earned during the voyage, thus
bringing himself within the provisions of the article 837 in so far as the subsidiary
civil liability is concerned. This abandonment which would have amounted to an
offer of the value of the vessel, of her equipment, and freight money earned could
not have been refused, and the agent could not have been personally compelled,
under such circumstances, to pay the 18,000 pesos, the estimated value of the
vessel at the time of the collision.
This is the difference which exist between the lawful acts and lawful obligation of
the captain and the liability which he incurs on account of any unlawful act
committed by him. In the first case, the lawful acts and obligations of the captain
beneficial to the vessel may be enforced as against the agent for the reason that
such obligations arise from the contract of agency (provided, however, that the
captain does not exceed his authority), while as to any liability incurred by the
captain through his unlawful acts, the ship agent is simply subsidiarily civilly
liable. This liability of the agent is limited to the vessel and it does not extend
further. For this reason the Code of Commerce makes agent liable to the extent of

the value of the vessel, as to the codes of the principal maritime nations
provided, with the vessel, and not individually. Such is also the spirit of our code.
The spirit of our code is accurately set forth in a treatise on maritime law, from
which we deem proper to quote the following as the basis of this decision:
That which distinguishes the maritime from the civil law and even from
the mercantile law in general is the real and hypothecary nature of the
former, and the many securities of a real nature that maritime customs
from time immemorial, the laws, the codes, and the later jurisprudence,
have provided for the protection of the various and conflicting interest
which are ventured and risked in maritime expeditions, such as the
interests of the vessel and of the agent, those of the owners of the cargo
and consignees, those who salvage the ship, those who make loans upon
the cargo, those of the sailors and members of the crew as to their wages,
and those of a constructor as to repairs made to the vessel.
As evidence of this "real" nature of the maritime law we have (1) the
limitation of the liability of the agents to the actual value of the vessel
and the freight money, and (2) the right to retain the cargo and the
embargo and detention of the vessel even cases where the ordinary civil
law would not allow more than a personal action against the debtor or
person liable. It will be observed that these rights are correlative, and
naturally so, because if the agent can exempt himself from liability by
abandoning the vessel and freight money, thus avoiding the possibility of
risking his whole fortune in the business, it is also just that his maritime
creditor may for any reason attach the vessel itself to secure his claim
without waiting for a settlement of his rights by a final judgment, even to
the prejudice of a third person.
This repeals the civil law to such an extent that, in certain cases, where
the mortgaged property is lost no personal action lies against the owner
or agent of the vessel. For instance, where the vessel is lost the sailors
and members of the crew can not recover their wages; in case of collision,
the liability of the agent is limited as aforesaid, and in case of
shipwrecks, those who loan their money on the vessel and cargo lose all
their rights and can not claim reimbursement under the law.
There are two reasons why it is impossible to do away with these
privileges, to wit: (1) The risk to which the thing is exposed, and ( 2 ) the
"real" nature of maritime law, exclusively "real," according to which the
liability of the parties is limited to a thing to which is at mercy of the
waves. If the agent is only liable with the vessel and freight money and
both may be lost through the accidents of navigation it is only just that
the maritime creditor have some means of obviating this precarious
nature of his rights by detaining the ship, his only security, before it is
lost.
2
The liens, tacit or legal, which may exist upon the vessel and which a
purchaser of the same would be obliged to respect and recognize — in
addition to those existing in favor of the State by virtue of the privileges
which are granted to it by all the laws — pilot, tonnage, and port dues
and other similar charges, the wages of the crew earned during the last
voyage as provided in article 646, of the Code of Commerce, salvage dues
under article 842, the indemnification due to the captain of the vessel in
case his contract is terminated on account of the voluntary sale of the
ship and the insolvency of the owner as provided in article 608, and
other liabilities arising from collisions under article 837 and 838.
(Madariaga, pp. 60-62, 63, 85.)
We accordingly hold that the defendant is liable for the indemnification to which
the plaintiff is entitled by reason of the collision, but he is not required to pay
such indemnification of the reason that the obligation thus incurred has been
extinguished on account of the loss of the thing bound for the payment thereof,
and in this respect the judgment of the court below is affirmed except in so far as
it requires the plaintiff to pay the costs of this action, which is not exactly proper.
After the expiration of twenty days let judgment be entered in accordance
herewith and ten days thereafter the record be remanded to the Court of First
Instance for execution. So ordered.
G.R. No. L-1600 June 1, 1906
THE PHILIPPINE SHIPPING COMPANY, ET AL., plaintiffs-appellants,
vs.
FRANCISCO GARCIA VERGARA, defendant-appellee.
Del-Pan, Ortigas and Fisher, for appellants.
Ledesma, Sumulong and Quintos, for appellee.
ARELLANO, C.J.:
The Philippine Shipping Company, the owner of the steamship Nuestra Sra. de
Lourdes, claims an indemnification of 44,000 pesos for the loss of the said ship as
a result of a collision. Ynchusti & Co. also claimed 24,705.64 pesos as an
indemnification for the loss of the cargo of hemp and coprax carried by the said
ship on her last trip. The defendant, Francisco Garcia Vergara, was the owner of
the steamship Navarra, which collided with the Lourdes.
From the judgment of the trial court the Philippine Shipping Company and the
defendant Vergara appealed, but the latter has failed to prosecute his appeal by a
bill of exceptions or otherwise. The only appellant who has prosecuted this appeal
now reduced its claim to 18,000 pesos, the value of the colliding vessel.
The court below found as a matter of fact that the steamship Lourdes was sailing
in accordance with law, but that the Navarra was not, and was therefore
responsible for the collision. (Bill of exceptions, p. 7.) The court also found as a

fact that "both ships with their respective cargoes were entirely lost." Construing
article 837 of the Code Commerce, the court below held "that the defendant was
not responsible to the plaintiff for the value of the steamship Lourdes, with the
costs against the latter." (Bill of exceptions, p. 8.)
But the appellant, the Philippine Shipping Company, contends that the defendant
should pay to 18,000 pesos, the value of the Navarra at the time of its loss; that
this is the sense in which the provisions of article 837 of the Code of Commerce
should be understood; that said code has followed the principles of the English
law and not those of the American law, and that it was immaterial whether
the Navarra had been entirely lost, provided her value at the time she was lost
could be ascertained, since the extent of the liability of the owner of the colliding
vessel for the damages resulting from the collision is to be determined in
accordance with such value.
Article 837 of the Code Commerce provides: "The civil liability contracted by the
shipowners in the cases prescribed in this section shall be understood as limited
to the value of the vessel with all her equipment and all the freight money earned
during the voyage."
This section is a necessary consequence of the right to abandon the
vessel given to the shipowner in article 587 of the code, and it is one of
the many superfluities contained in the code. (Lorenzo Benito,
"Lecciones," 352.)
Art. 587. The agent shall also the civilly liable for the indemnities in favor
of third persons which arise from the conduct of the captain in the care
of the goods which the vessel carried, but he may exempt himself
therefrom by abandoning the vessel with all her equipments and the
freight he may have earned during the trip.
ART. 590. The part owners of a vessel shall be civilly liable, in the
proportion of their contribution to the common fund, for the results of
the acts of the captain referred to in article 587. Each part owner may
exempt himself from this liability by the abandonment, before a notary,
of the part of the vessel belonging to him.
The "Exposicion de motivos" of the Code of Commerce contains the following: "The
present code (1829) does not determine the juridical status of the agent where
such agent is not himself the owner of the vessel. This omission is supplied by the
proposed code, which provides in accordance with the principles of maritime law
that by agent it is to be understood the person intrusted with the provisioning of
the vessel, or the one who represents her in the port in which she happens to be.
This person is the only who represents the interest of the owner of the vessel. This
provision has therefore cleared the doubt which existed as to the extent of the
liability, both of the agent and for the owner of the vessel. Such liability is limited
by the proposed code to the value of the vessel and other things appertaining
thereto."
3
There is no doubt that if the Navarra had not been entirely lost, the agent, having
held liable for the negligence of the captain of the vessel, could have abandoned
her with all her equipment and the freight money earned during the voyage, thus
bringing himself within the provisions of the article 837 in so far as the subsidiary
civil liability is concerned. This abandonment which would have amounted to an
offer of the value of the vessel, of her equipment, and freight money earned could
not have been refused, and the agent could not have been personally compelled,
under such circumstances, to pay the 18,000 pesos, the estimated value of the
vessel at the time of the collision.
This is the difference which exist between the lawful acts and lawful obligation of
the captain and the liability which he incurs on account of any unlawful act
committed by him. In the first case, the lawful acts and obligations of the captain
beneficial to the vessel may be enforced as against the agent for the reason that
such obligations arise from the contract of agency (provided, however, that the
captain does not exceed his authority), while as to any liability incurred by the
captain through his unlawful acts, the ship agent is simply subsidiarily civilly
liable. This liability of the agent is limited to the vessel and it does not extend
further. For this reason the Code of Commerce makes agent liable to the extent of
the value of the vessel, as to the codes of the principal maritime nations
provided, with the vessel, and not individually. Such is also the spirit of our code.
The spirit of our code is accurately set forth in a treatise on maritime law, from
which we deem proper to quote the following as the basis of this decision:
That which distinguishes the maritime from the civil law and even from
the mercantile law in general is the real and hypothecary nature of the
former, and the many securities of a real nature that maritime customs
from time immemorial, the laws, the codes, and the later jurisprudence,
have provided for the protection of the various and conflicting interest
which are ventured and risked in maritime expeditions, such as the
interests of the vessel and of the agent, those of the owners of the cargo
and consignees, those who salvage the ship, those who make loans upon
the cargo, those of the sailors and members of the crew as to their wages,
and those of a constructor as to repairs made to the vessel.
As evidence of this "real" nature of the maritime law we have (1) the
limitation of the liability of the agents to the actual value of the vessel
and the freight money, and (2) the right to retain the cargo and the
embargo and detention of the vessel even cases where the ordinary civil
law would not allow more than a personal action against the debtor or
person liable. It will be observed that these rights are correlative, and
naturally so, because if the agent can exempt himself from liability by
abandoning the vessel and freight money, thus avoiding the possibility of
risking his whole fortune in the business, it is also just that his maritime
creditor may for any reason attach the vessel itself to secure his claim
without waiting for a settlement of his rights by a final judgment, even to
the prejudice of a third person.
 4

This repeals the civil law to such an extent that, in certain cases, where ----------------------------
the mortgaged property is lost no personal action lies against the owner
or agent of the vessel. For instance, where the vessel is lost the sailors CA-No. L-774 December 17, 1946
and members of the crew can not recover their wages; in case of collision,
the liability of the agent is limited as aforesaid, and in case of
shipwrecks, those who loan their money on the vessel and cargo lose all MARCIANA DE SALVACION, ET AL., plaintiffs-appellees,
their rights and can not claim reimbursement under the law. vs.
BARTOLOME SAN DIEGO, defendant-appellant.
There are two reasons why it is impossible to do away with these
privileges, to wit: (1) The risk to which the thing is exposed, and ( 2 ) the ----------------------------
"real" nature of maritime law, exclusively "real," according to which the
liability of the parties is limited to a thing to which is at mercy of the CA-No. L-775 December 17, 1946
waves. If the agent is only liable with the vessel and freight money and
both may be lost through the accidents of navigation it is only just that
the maritime creditor have some means of obviating this precarious ROSARIO OCHING, ET AL., plaintiffs-appellees,
nature of his rights by detaining the ship, his only security, before it is vs.
lost. BARTOLOME SAN DIEGO, defendant-appellant.

The liens, tacit or legal, which may exist upon the vessel and which a
purchaser of the same would be obliged to respect and recognize — in
addition to those existing in favor of the State by virtue of the privileges
which are granted to it by all the laws — pilot, tonnage, and port dues
and other similar charges, the wages of the crew earned during the last
voyage as provided in article 646, of the Code of Commerce, salvage dues
under article 842, the indemnification due to the captain of the vessel in
case his contract is terminated on account of the voluntary sale of the
ship and the insolvency of the owner as provided in article 608, and
other liabilities arising from collisions under article 837 and 838.
(Madariaga, pp. 60-62, 63, 85.)
We accordingly hold that the defendant is liable for the indemnification to which
the plaintiff is entitled by reason of the collision, but he is not required to pay
such indemnification of the reason that the obligation thus incurred has been
extinguished on account of the loss of the thing bound for the payment thereof,
and in this respect the judgment of the court below is affirmed except in so far as
it requires the plaintiff to pay the costs of this action, which is not exactly proper.
After the expiration of twenty days let judgment be entered in accordance
herewith and ten days thereafter the record be remanded to the Court of First
Instance for execution. So ordered.
Lichauco, Picazo and Mejia for appellant.
Cecilio I. Lim and Roberto P. Ancog for appellees.
PADILLA, J.:
This is appeal from a judgment rendered by the Court of First Instance of Manila
in the above-entitled cases awarding plaintiffs the compensation provided for in
the Workmen's Compensation Act.
The record of the cases was forwarded to the Court of Appeals for review, but as
there was no question of fact involved in the appeal, said court forwarded the
record to this Court. The appeal was pending when the Pacific War broke up, and
continued pending until after liberation, because the record of the cases was
destroyed as a result of the battle waged by the forces of liberation against the
enemy. As provided by law, the record was reconstituted and we now proceed to
dispose of the appeal.
Appellant, who was the owner of the motor ships San Diego II and Bartolome S,
states in his brief the following:

There is no dispute as to the facts involved in these cases and they may
G.R. No. L-773 December 17, 1946 be gathered from the pleadings and the decision of the trial Court. In
case CA-G.R. No. 773, Dionisia Abueg is the widow of the deceased,
DIONISIA ABUEG, ET AL., plaintiffs-appellees, Amado Nuñez, who was a machinist on board the M/S San Diego II
vs. belonging to the defendant-appellant. In case CA-G.R. No. 774, plaintiff-
BARTOLOME SAN DIEGO, defendant-appellant. appellee, Marciana S. de Salvacion, is the widow of the deceased,
Victoriano Salvacion, who was a machinist on board the M/S Bartolome

S also belonging to the defendant-appellant. In case CA-G.R. No. 775, the
plaintiff-appellee, Rosario R. Oching is the widow of Francisco Oching
who was a captain or patron of the defendant-appellant's M/S Bartolome
S.
The M/S San Diego II and the M/S Bartolome, while engaged in fishing
operations around Mindoro Island on Oct. 1, 1941 were caught by a
typhoon as a consequence of which they were sunk and totally lost.
Amado Nuñez, Victoriano Salvacion and Francisco Oching while acting in
their capacities perished in the shipwreck (Appendix A, p. IV).
It is also undisputed that the above-named vessels were not covered by
any insurance. (Appendix A, p. IV.).
Counsel for the appellant cite article 587 of the Code of Commerce which provides
that if the vessel together with all her tackle and freight money earned during the
voyage are abandoned, the agent's liability to third persons for tortious acts of the
captain in the care of the goods which the ship carried is extinguished
(Yangco vs. Laserna, 73 Phil., 330); article 837 of the same code which provides
that in cases of collision, the ship owners' liability is limited to the value of the
vessel with all her equipment and freight earned during the voyage (Philippine
Shipping company vs. Garcia, 6 Phil., 281), and article 643 of the same Code
which provides that if the vessel and freight are totally lost, the agent's liability for
wages of the crew is extinguished. From these premises counsel draw the
conclusion that appellant's liability, as owner of the two motor ships lost or sunk
as a result of the typhoon that lashed the island of Mindoro on October 1, 1941,
was extinguished.
The real and hypothecary nature of the liability of the shipowner or agent
embodied in the provisions of the Maritime Law, Book III, Code of Commerce, had
its origin in the prevailing continues of the maritime trade and sea voyages during
the medieval ages, attended by innumerable hazards and perils. To offset against
these adverse conditions and encourage shipbuilding and maritime commerce, it
was deemed necessary to confine the liability of the owner or agent arising from
the operation of a ship to the vessel, equipment, and freight, or insurance, if any,
so that if the shipowner or agent abandoned the ship, equipment, and freight, his
liability was extinguished.
But the provisions of the Code of Commerce invoked by appellant have no room in
the application of the Workmen's Compensation Act which seeks to improve, and
aims at the amelioration of, the condition of laborers and employees. It is not the
liability for the damage or loss of the cargo or injury to, or death of, a passenger
by or through the misconduct of the captain or master of the ship; nor the
liability for the loss of the ship as result of collision; nor the responsibility for
wages of the crew, but a liability created by a statute to compensate employees
and laborers in cases of injury received by or inflicted upon them, while engaged
in the performance of their work or employment, or the heirs and dependents and
laborers and employees in the event of death caused by their employment. Such
compensation has nothing to do with the provisions of the Code of Commerce
5
regarding maritime commerce. It is an item in the cost of production which must
be included in the budget of any well-managed industry.lawphil.net
Appellant's assertion that in the case of Enciso vs. Dy-Liaco (57 Phil., 446),
and Murillo vs. Mendoza (66 Phil., 689), the question of the extinction of the
shipowner's liability due to abandonment of the ship by him was not fully
discussed, as in the case of Yangco vs. Laserma, supra, is not entirely correct. In
the last mentioned case, the limitation of the shipowner's liability to the value of
the ship, equipment, freight, and insurance, if any, was the lis mota. In the case
of Enciso vs. Dy-Liacco, supra, the application of the Workmen's Compensation
Act to a master or patron who perished as a result of the sinking of the motorboat
of which he was the master, was the controversy submitted to the court for
decision. This Court held in that case that "It has been repeatedly stated that the
Workmen's Compensation Act was enacted to abrogate the common law and our
Civil Code upon culpable acts and omissions, and that the employer need not be
guilty of neglect or fault, in order that responsibility may attach to him" (pp. 449-
450); and that shipowner was liable to pay compensation provided for in the
Workmen's Compensation Act, notwithstanding the fact that the motorboat was
totally lost. In the case of Murillo vs. Mendoza, supra, this Court held that "The
rights and responsibilities defined in said Act must be governed by its own
peculiar provisions in complete disregard of other similar mercantile law. If an
accident is compensable under the Workmen's Compensation Act, it must be
compensated even when the workman's right is not recognized by or is in conflict
with other provisions of the Civil Code or the Code of Commerce. The reason
behind this principle is that the Workmen's Compensation Act was enacted by the
Legislature in abrogation of the other existing laws." This quoted part of the
decision is in answer to the contention that it was not the intention of the
Legislature to repeal articles 643 and 837 of the Code of Commerce with the
enactment of the Workmen's Compensation Act.
In the memorandum filed by counsel for the appellant, a new point not relied
upon in the court below is raised. They contend that the motorboats engaged in
fishing could not be deemed to be in the coastwise and interisland trade, as
contemplated in section 38 of the Workmen's Compensation Act (No. 3428), as
amended by Act no. 3812, inasmuch as, according to counsel, a craft engaged in
the coastwise and interisland trade is one that carries passengers and/or
merchandise for hire between ports and places in the Philippine
Islands.lawphil.net
This new point raised by counsel for the appellant is inconsistent with the first,
for, if the motor ships in question, while engaged in fishing, were to be considered
as not engaged in interisland and coastwise trade, the provisions of the Code of
Commerce invoked by them regarding limitation of the shipowner's liability or
extinction thereof when the shipowner abandons the ship, cannot be applied
(Lopez vs. Duruelo, 52 Phil., 229). Granting however, that the motor ships run
and operated by the appellant were not engaged in the coastwise and interisland
trade, as contemplated in section 38 of the Workmen's Compensation Act, as
amended, still the deceased officers of the motor ships in question were industrial
employees within the purview of section 39, paragraph (d), as amended, for
industrial employment "includes all employment or work at a trade, occupation or

profession exercised by an employer for the purpose of gain." The only exceptions
recognized by the Act are agriculture, charitable institutions and domestic
service. Even employees engaged in agriculture for the operation of mechanical
implements, are entitled to the benefits of the Workmen's Compensation Act
(Francisco vs. Consing, 63 Phil., 354). In Murillo vs. Mendoza, supra, this Court
held that "our Legislature has deemed it admissible to include in the Workmen's
Compensation Act all incidents that may occur to workmen or employees in
factories, shops and other industrial and agricultural workplaces as well as in the
interisland seas of the Archipelago." But we do not believe that the term
"coastwise and interisland trade" has such a narrow meaning as to confine it to
the carriage for hire of passengers and/or merchandise on vessels between ports
and places in the Philippines, because while fishing is an industry, if the catch is
brought to a port for sale, it is at the same time a trade.
Finding no merit in the appeal filed in these cases, we affirm the judgment of the
lower court, with costs against the appellant.
G.R. No. L-47447-47449 October 29, 1941
TEODORO R. YANGCO, ETC., petitioner,
vs.
MANUEL LASERNA, ET AL., respondents.
Claro M. Recto for petitioner.
Powell & Vega for respondents.
MORAN, J.:
At about one o'clock in the afternoon of May 26, 1927, the steamer S.S. Negros,
belonging to petitioner here, Teodoro R. Yangco, left the port of Romblon on its
retun trip to Manila. Typhoon signal No. 2 was then up, of which fact the captain
was duly advised and his attention thereto called by the passengers themselves
before the vessel set sail. The boat was overloaded as indicated by the loadline
which was 6 to 7 inches below the surface of the water. Baggage, trunks and
other equipments were heaped on the upper deck, the hold being packed to
capacity. In addition, the vessel carried thirty sacks of crushed marble and about
one hundred sacks of copra and some lumber. The passengers, numbering about
180, were overcrowded, the vessel's capacity being limited to only 123 passengers.
After two hours of sailing, the boat encountered strong winds and rough seas
between the islands of Banton and Simara, and as the waves splashed the ladies'
dresses, the awnings were lowered. As the sea became increasingly violent, the
captain ordered the vessel to turn left, evidently to return to port, but in the
manuever, the vessel was caught sidewise by a big wave which caused it to
capsize and sink. Many of the passengers died in the mishap, among them being
Antolin Aldaña and his son Victorioso, husband and son, respectively, of Emilia
6
Bienvenida who, together with her other children and a brother-in-law, are
respondents in G.R. No. 47447; Casiana Laserna, the daughter of respondents
Manuel Laserna and P.A. de Laserna in G.R. 47448; and Genaro Basaña, son of
Filomeno Basaña, respondent in G.R. No. 47449. These respondents instituted in
the Court of First Instance of Capiz separate civil actions against petitioner here
to recover damages for the death of the passengers aforementioned. The court
awarded the heirs of Antolin and Victorioso Aldana the sum of P2,000; the heirs
of Casiana Laserna, P590; and those of Genaro Basana, also P590. After the
rendition of the judgment to this effcet, petitioner, by a verified pleading, sought
to abandon th evessel to the plainitffs in the three cases, together with all its
equipments, without prejudice to his right to appeal. The abandonment having
been denied, an appeal was taken to the Court of Appeals, wherein all the
judgmnets were affirmed except that which sums was increased to P4,000.
Petitioner, now deceased, appealed and is here represented by his legal
representative.
Brushing aside the incidental issues, the fundamental question here raised is:
May the shipowner or agent, notwithstanding the total loss of the vessel as a
result of the negligence of its captain, be properly held liable in damages for the
consequent death of its passengers? We are of the opinion and so hold that this
question is controlled by the provisions of article 587 of the Code of Commerce.
Said article reads:
The agent shall also be civilly liable for the indemnities in favor of third
persons which arise from the conduct of the captain in the care of the
goods which the vessel carried; but he may exempt himself therefrom by
abandoning the vessel with all her equipments and the freight he may
have earned during the voyage.
The provisions accords a shipowner or agent the right of abandonment; and by
necessary implication, his liability is confined to that which he is entitled as of
right to abandon — "the vessel with all her equipments and the freight it may
have earned during the voyage." It is true that the article appears to deal only
with the limited liability of shipowners or agents for damages arising from the
misconduct of the captain in the care of the goods which the vessel carries, but
this is a mere deficiency of language and in no way indicates the true extent of
such liability. The consensus of authorities is to the effect that notwithstanding
the language of the aforequoted provision, the benefit of limited liability therein
provided for, applies in all cases wherein the shipowner or agent may properly be
held liable for the negligent or illicit acts of the captain. Dr. Jose Ma. Gonzalez de
Echavarri y Vivanco, commenting on said article, said:
La letra del Codigo, en el articulo 587, presenta una gravisima cuestion.
El derecho de abandono, si se atiende a lo escrito, solo se refiere a las
indemnizaciones a que dierQe lugar la conducta del Capitan en la
custodia de los efectos que cargo en el buque.
¿Es ese el espiritu del legislador? No; ¿habra derecho de abandono en las
responsabilidades nacidas de obligaciones contraidas por el Capitan y de

otros actos de este? Lo reputamos evidente y, para fortalecer nuestra
opinion, basta copiar el siguiente parrafo de la Exposicion de motivos:
"El proyecto, al aplicar estos principios, se inspira tambien en
los intereses del comercio maritimo, que quedaran mas
asegurados ofreciendo a todo el que contrata con el naviero o
Capitan del buque, la garantia real del mismo, cualesquiera que
sean las facultades o atribuciones de que se hallen investidos."
(Echavarri, Codigo de Comercio, Tomo 4, 2. a ed., pags. 483-
484.)
A cursory examination will disclose that the principle of liomited liability of a
shipowner or agent is provided for in but three articles of the Code of Commerce
— article 587 aforequoted and article 590 and 837. Article 590 merely reiterates
the principle embodied in article 587, applies the same principle in cases of
collision, and it has been observed that said article is but "a necessary
consequences of the right to abandon the vessel given to the shipowner in article
587 of the Code, and it is one of the many superfluities contained in the Code."
(Lorenzo Benito, Lecciones 352, quoted in Philippine Shipping Co. vs. Garcia, 6
Phil. 281, 282.) In effect, therefore, only articles 587 and 590 are the provisions
conatined in our Code of Commerce on the matter, and the framers of said code
had intended those provisions to embody the universal principle of limited liability
in all cases. Thus, in the "Exposicon de Motivos" of the Code of Commerce, we
read:
The present code (1829) does not determine the juridical status of the
agent where such agent is not himself the owner of the vessel. This
omission is supplied by the proposed code, which provides in accordance
with the principles of maritime law that by agent it is to be understood
the person intrusted with the provisioning of the vessel, or the one who
represents her in the port in which she happens to be. This person is the
only one who represents the vessel — that is to say, the only one who
represents the interests of the owner of the vessel. This provision has
therefore cleared the doubt which existed as to the extent of the liability,
both of the agent and of the owner of the vessel. Such liability is limited
by the proposed code to the value of the vesseland other things
appertaining thereto.
In Philippine Shipping Co. vs. Garcia (6 Phil., 281, 284-286), we have expressed
ourselves in such a comprehensive manner as to leave no room for doubt on the
applicability of our ratio decidendi not only to cases of collision but also to those
of shipwrecks, etc. We said:
This is the difference which exists between the lawful acts and lawful
obligations of the captain and the liability which he incurs on account of
any unlawful act committed by him. In the first case, the lawful acts and
obligations of the captain beneficial to the vessel may be enforced as
against the agent for the reason that such obligations arise from te the
contract of agency (provided, however, that the captain does not exceed
7
his authority), while as to any liability incurred by the captain through
his unlawful acts, the ship agent is simply subsidiarily civilly liable. This
liability of the agent is limited to the vessel and it does not extend
further. For this reason the Code of Commerce makes the agent liable to
the extent of the value of the vessel, as the codes of the principal
maritime nations provide with the vessel, and not individually. Such is
also the spirit of our Code.
The spirit of our code s accurately set forth in a treatise on maritime law,
from which we deem proper to quote the following as the basis of this
decision:lawphil.net
"That which distinguishes the maritime from the civil law and
even from the mercantile law in general is the real and
hypothecary nature of the former, and the many securities of
a real nature that maritime customs from time immemorial, the
laws, the codes, and the later jurisprudence, have provided for
the protection of the various and conflicting interests which are
ventured and risked in maritime expeditions, such as the
interests of the vessel and of the agent, those of the owners of
the cargo and consignees, those who salvage the ship, those who
make loans upon the cargo, those of the sailors and members of
the crew as to their wages, and those of a constructor as to
repairs made to the vessel.
"As evidence of this real nature of the maritime law we have (1)
the limitation of the liability of the agents to the actual value of
the vessel and the freight money, and (2) the right to retain the
cargo and the embargo and detention of the vessel even in cases
where the ordinary civil law would not allow more than a
personal action against the debtor or person liable. It will be
observed that these rights are correlative, and naturally so,
because if the agent can exempt himself from liability by
abandoning the vessel and freight money, thus avoiding the
possibility of risking his whole fortune in the business, it is also
just that his maritime creditor may for any reason attach the
vessel itself to secure his claim without waiting for a settlement
of his rights by a final judgment, even to the prejudice of a third
person.
"This repeals the civil law to such an extent that, in certain
cases, where the mortgaged property is lostno personal action
lies against the owner or agent of the vessel. For instance, where
the vessel is lost the sailors and members of the crew cannot
recover their wages; in case of collision, the liability of the agent
is limited as aforesaid, and in case of shipwreck, those who loan
their money on the vessel and cargo lose all their rights and
cannot claim reimbursement under the law.

"There are two reasons why it is impossible to do away with
these privileges, to wit: (1) The risk to which the thing is
exposed, and (2) the real nature of the maritime law,
exclusively real, according to which the liability of the parties is
limited to a thing which is at the mercy of the waves. If the agent
is only liable with the vessel and freight money and both may be
lost through the accidents of navigation it is only just that the
maritime creditor have some means to obviating this precarious
nature of his rights by detaining the ship, his only security,
before it is lost.
"The liens, tacit or legal, which may exist upon the vessel and
which a purchaser of the same would be obliged to respect and
recognize are — in addition to those existing in favor of the State
by virtue of the privileges which are granted to it by all the laws
— pilot, tonnate, and port dues and other similar charges, the
wages of the crew earned during the last voyage as provided in
article 646 of the Code of Commerce, salvage dues under article
842, the indemnification due to the captain of the vessel in case
his contract is terminated on account of the voluntary sale of the
ship and the insolvency of the owner as provided in article 608,
and all other liabilities arising from collisions under articles 837
and 838."
We are shared in this conclusion by the eminent commentators on the subject.
Agustin Vicente y Gella, asserting, in his "Introduccion al Derecho Mercantil
Comparado" 1929 (pages 374-375), the like principle of limited liability of
shipowners or agent in cases of accidents, collisions, shipwrecks, etc., said:
De las responsabilities que pueden resultar como consequencia del
comercio maritimo, y no solo por hechos propios sino tambien por las
que se ocasionen por los del capitan y la tripulacion, responde frente a
tercero el naviero que representa el buque; pero el derecho maritimo es
sobre todo tradicional y siguiendo un viejo principio de la Edad Media la
responsabilidad del naviero se organiza de un modo especifico y
particularisimo que no encuentra similar en el derecho general de las
obligaciones.
Una forma corrientisima de verificarse el comercio maritimo durante la
epoca medieval, era prestar un propietario su navio para que cargase en
el mercancias determinada persona, y se hiciese a la mar, yendo al frente
de la expedicion un patron del buque, que llegado al puerto de destino se
encargaba de venderlas y retornaba al de salida despues de adquirir en
aquel otros efectos que igualmente revendia a su regreso, verificado lo
cual los beneficios de la expedicion se repartian entre el dueño del
buque, el cargador y el capitan y tripulantes en la proporcion estipulada.
El derecho maritimo empezo a considerar la asociacion asi formada como
una verdadera sociedad mercantil, de responsabilidad limitada, y de
acuerdo con los principios que gobiernan aquella en los casos de
8
accidentes, abordajes, naufragios, etc., se resolvia que el dueño del
buque perdia la nave, el cargador las mercancias embarcadas y el
capitan y la tripulacion su trabajo, sin que en ningun caso el tercer
acreedor pudiese reclamar mayor cantidad de ninguno de ellos, porque
su responsabilidad quedaba limitada a lo que cada uno aporto a la
sociedad. Recogidas estas ideas en el derecho comercial de tiempos
posteriores, la responsabilidad del naviero se edifico sobre aquellos
principios, y derogando la norma general civil de que del cumplimiento
de sus obligaciones responde el deudor con todos sus bienes presentes y
futuros, la responsabilidad maritima se considero siempre limitada ipso
jure al patrimonio de mar. Y este es el origen de la regla trascendental de
derecho maritimo segun la cual el naviero se libera de toda
responsabilidad abandonando el buque y el flete a favor de los
acreedores.
From the Enciclopedia Juridica Española, Vol. 23, p. 347, we read:
Ahora bien: ¿hasta donde se extiende esta responsabilidad del naviero?
¿sobre que bienes pueden los acreedores resarcirse? Esta es otra
especialidad del Derecho maritimo; en el Derecho comun la
responsabilidad es limitada; tambien lo era en el antiguo Derecho
maritimo romano; es daba la actio exercitoria contra el exercitor navis sin
ninguna restriccion, pero en la Edad Media una idea nueva se introdujo
en los usos maritimos. Las cargas resultantes de las expediciones
maritimas se consideraron limitadas por los propietarios de las naves a
los valores comprometidos por ellos en cada expedicion; se separo
ficticiamente el patrimonio de los navieros en dos partes que todavia se
designan de una manera bastante exacta; fortuna de tierra y fortuna de
mar o flotante; y se admitio la teoria de que esta era la que respondia
solo de las deudas provinientes de los actos del capitan o de la
tripulacion, es decir, que el conjunto del patrimonio del naviero escaparia
a estas cargas desde el momento en que abandonara la nave y los fletes a
los acreedores. . . .
Escriche in his Diccionario de la Legislacion y Jurisprudencia, Vol. 1, p. 38,
observes:
La responsabilidad del naviero, en el caso expuesto, se funda en el
principio de derecho comun de ser responsable todo el que pone al frente
de un establecimiento a una persona, de los daños o perjuicios que
ocasionare esta desempeñando su cometido, y en que estando facultado
el naviero para la eleccion de capitan de la nave, viene a tener
indirectamente culpa en la negligencia o actos de este que o casionaron
daños o perjuicios, puesto que no se aseguro de su pericia o buena fe.
Limitase, sin embargo, la responsabilidad del naviero a la perdida de la
nave, sus aparejos, y fletes devengados durante el viaje; porque no
pudiendo vigilar de un modo directo e inmediato la conducta del capitan,
hubiera sido duro hacerla extensiva a todos sus bienes que podria
comprometer el capitan con sus faltas o delitos.

The views of these learned commentators, including those of Estasen (Derecho
Mercantil, Vol. 4, 259) and Supino (Derecho Mercantil, pp. 463-464), leave
nothing to be desired and nothing to be doubted on the principle. It only remains
to be noted that the rule of limited liability provided for in our Code of Commerce
reflects merely, or is but a restatement, imperfect though it is, of the almost
universal principle on the subject. While previously under the civil or common
law, the owner of a vessel was liable to the full amount for damages caused by the
misconduct of the master, by the general maritime law of modern Europe, the
liability of the shipowner was subsequently limited to his interest in the vessel.
(Norwich & N. Y. Trans. Co. v. Wright, 80 U. S. 104, 20 Law. ed. 585.) A similar
limitation was placed by the British Parliament upon the liability of Englosh
shipowners through a series of statutes beginning in 1734 with the Act of 7
George II, chapter 15. The legislatures of Massachusetts and Maine followed suit
in 1818 and 1821, and finally, Congress enacted the Limited Liability Act of
March 3, 1851, embodying most of the provisions contained in the British
Statutes (see 24 R. C. L. pp. 1387-1389). Section 4283 of the Revised Statutes
(sec. 183, Tit. 46, Code of Laws of U. S. A.) reads:
LIABILITY OF OWNER NOT TO EXCEED INTEREST. — The liability of
the owner of any vessel, for any embezzlement, loss, or destruction, by
any person, of any property, goods, or merchandise, shipped or put on
board of such vessel, or for any loss, damage, or injury by collision, or for
any act, matter or thing, loss, damage, or forfeiture, done, occasioned, or
incurred without the privity, or knowledge of such owner or owners, shall
in no case exceed the amount or value of the interest of such owner in
such vessel, and her freight then pending.
The policy which the rule is designed to promote is the encouragement of
shipbuilding and investment in maritime commerce. (Vide: Norwich & N. Y. Trans.
Co. v. Wright, supra; The Main v. Williams, 152 U. S. 122; 58 C. J. 634.) And it is
in that spirit that the American courts construed the Limited Liability Act of
Congress whereby the immunities of the Act were applied to claims not only for
lost goods but also for injuries and "loss of life of passengers, whether arising
under the general law of admiralty, or under Federal or State statutes." (The City
of Columbus, 22 Fed. 460; The Longfellow, 104 Fed. 360; Butler v. Boston &
Savannah Steamship Co., 32 Law. ed. 1017; Craig v. Continental Insurance Co.,
35 Law. ed. 836.) The Supreme Court of the United States in Norwich & N. Y.
Trans. Co. v. Wright, 80 U. S. 104, 20 Law. ed. 585, 589-590, accounting for the
history of the principle, clinches our exposition of the supporting authorities:
The history of the limitation of liability of shipowners is matter of
common knowledge. The learned opinion of Judge Ware in the case
of The Rebecca, 1 Ware, 187-194, leaves little to be desired on the
subject. He shows that it originated in the maritime law of modern
Europe; that whilst the civil, as well as the common law, made the owner
responsible to the whole extent of damage caused by the wrongful act or
negligence of the matter or crew, the maritime law only made then liable
(if personally free from blame) to the amount of their interest in the ship.
So that, if they surrendered the ship, they were discharged.
9
Grotius, in his law of War and Peace, says that men would be deterred
from investing in ships if they thereby incurred the apprehension of
being rendered liable to an indefinite amount by the acts of the master
and, therefore, in Holland, they had never observed the Roman Law on
that subject, but had a regulation that the ship owners should be bound
no farther than the value of their ship and freight. His words are: Navis
et eorum quae in navi sunt," "the ship and goods therein." But he is
speaking of the owner's interest; and this, as to the cargo, is the freight
thereon, and in that sense he is understood by the commentators.
Boulay Paty, Droit Maritime, tit. 3, sec. 1, p. 276; Book II, c. XI, sec. XIII.
The maritime law, as codified in the celebrated French Ordonance de la
Marine, in 1681, expressed the rule thus: 'The proprietors of vessels shall
be responsible for the acts of the master, but they shall be discharged by
abandoning the ship and freight.' Valin, in his commentary on this
passage, lib. 2, tit. 8, art. 2, after specifying certain engagements of the
master which are binding on the owners, without any limit of
responsibility, such as contracts for the benefit of the vessel, made
during the voyage (except contracts of bottomry) says: "With these
exceptions it is just that the owner should not be bound for the acts of
the master, except to the amount of the ship and freight. Otherwise he
would run the risk of being ruined by the bad faith or negligence of his
captain, and the apprehension of this would be fatal to the interests of
navigation. It is quite sufficient that he be exposed to the loss of his ship
and of the freight, to make it his interest, independently of any goods he
may have on board to select a reliable captain." Pardessus says: 'The
owner is bound civilly for all delinquencies committed by the captain
within the scope of his authority, but he may discharge himself
therefrom by abandoning the ship and freight; and, if they are lost, it
suffices for his discharge, to surrender all claims in respect of the ship
and its freight," such as insurance, etc. Droit Commercial, part 3, tit. 2,
c. 3, sec. 2.
The same general doctrine is laid down by many other writers on
maritime law. So that it is evident that, by this law, the owner's liability
was coextensive with his interest in the vessel and its freight, and ceased
by his abandonment and surrender of these to the parties sustaining
loss.
In the light of all the foregoing, we therefore hold that if the shipowner or agent
may in any way be held civilly liable at all for injury to or death of passengers
arising from the negligence of the captain in cases of collisions or shipwrecks, his
liability is merely co-extensive with his interest in the vessel such that a total loss
thereof results in its extinction. In arriving at this conclusion, we have not been
unmindful of the fact that the ill-fated steamship Negros, as a vessel engaged in
interisland trade, is a common carrier (De Villata v. Stanely, 32 Phil., 541), and
that the as a vessel engaged in interisland trade, is a common carrier (De
Villata v. Stanely, 32 Phil., 541), and that the relationship between the petitioner
and the passengers who died in the mishap rests on a contract of carriage. But
assuming that petitioner is liable for a breach of contract of carriage, the
exclusively "real and hypothecary nature" of maritime law operates to limit such

liability to the value of the vessel, or to the insurance thereon, if any. In the
instant case it does not appear that the vessel was insured.
Whether the abandonment of the vessel sought by the petitioner in the instant
case was in accordance with law of not, is immaterial. The vessel having totally
perished, any act of abandonment would be an idle ceremony.
Judgement is reversed and petitioner is hereby absolved of all the complaints,
without costs.
MANILA STEAMSHIP CO., INC., Petitioner, vs. INSA ABDULHAMAN (MORO)
and LIM HONG TO, Respondents.
DECISION
REYES, J. B. L., J.:
This case was begun in the Court of First Instance of Zamboanga (Civil Case No.
170) by Insa Abdulhaman against the Manila Steamship Co., owner of the M/S
“Bowline Knot”, and Lim Hong To, owner of the M/L “Consuelo V”, to recover
damages for the death of his (Plaintiff’s) five children and loss of personal
properties on board the M/L “Consuelo V” as a result of a maritime collision
between said vessel and the M/S “Bowline Knot” on May 4, 1948, a few
kilometers distant from San Ramon Beach, Zamboanga City.
On appeal, the Court of Appeals found the following facts to have been
established:chanroblesvirtuallawlibrary
“From 7:chanroblesvirtuallawlibrary00 to 8:chanroblesvirtuallawlibrary00 o’clock
in the evening of May 4, 1948, the M/L “Consuelo V”, laden with cargoes and
passengers left the port of Zamboanga City bound for Siokon under the command
of Faustino Macrohon. She was then towing a kumpit, named “Sta. Maria Bay”.
The weather was good and fair. Among her passengers were the Plaintiff Insa
Abdulhaman, his wife Carimla Mora and their five children already mentioned.
The Plaintiff and his wife paid their fare before the voyage started.
On that same night the M/S “Bowline Knot” was navigating from Maribojoc
towards Zamboanga.
Between 9:chanroblesvirtuallawlibrary30 to 10:chanroblesvirtuallawlibrary00 in
the evening the dark clouds bloated with rain began to fall and the gushing strong
wind began to blow steadily harder, lashing the waves into a choppy and roaring
sea. Such weather lasted for about an hour and then it became fair although it
was showering and the visibility was good enough.
When some of the passengers of the M/L “Consuelo V” were then sleeping and
some were lying down awake, all of a sudden they felt the shocking collision of the
M/L “Consuelo V” and a big motorship, which later on was identified as the M/V
“Bowline Knot”.
10
Because the M/L “Consuelo V” capsized, her crew and passengers, before
realizing what had happened, found themselves swimming and floating on the
crest of the waves and as a result of which nine (9) passengers were dead and
missing and all the cargoes carried on said boat, including those of the Plaintiff as
appear in the list, Exhibit “A”, were also lost.
Among the dead passengers found were Maria, Amlasa, Bidoaya and Bidalla, all
surnamed Inasa, while the body of the child Abdula Inasa of 6 years of age was
never recovered. Before the collision, none of the passengers were warned or
informed of the impending danger as the collision was so sudden and unexpected.
All those rescued at sea were brought by the M/V “Bowline Knot” to Zamboanga
City.” (Decision of C. A., pp. 5-6).
As the cause of the collision, the Court of Appeals affirmed the findings of the
Board of Marine Inquiry, that the commanding officer of the colliding vessels had
both been negligent in operating their respective vessels. Wherefore, the Court
held the owners of both vessels solidarily liable to Plaintiff for the damages caused
to him by the collision, under Article 827 of the Code of Commerce; chan
roblesvirtualawlibrarybut exempted Defendant Lim Hong To from liability by
reason of the sinking and total loss of his vessel, the M/L “Consuelo V”, while the
other Defendant, the Manila Steamship Co., owner of the M/S “Bowline Knot”,
was ordered to pay all of Plaintiff’s damages in the amount of P20,784.00 plus
one-half of the costs. It is from this judgment that Defendant Manila Steamship
Co. had appealed to this Court.
Petitioner Manila Steamship Co. pleads that it is exempt from any liability
to Plaintiff under Article 1903 of the Civil Code because it had exercised the
diligence of a good father of a family in the selection of its employees, particularly
Third Mate Simplicio Ilagan, the officer in command of its vessels, the M/S
“Bowline Knot”, at the time of the collision. This defense is untenable. While it is
true that Plaintiff’s action against Petitioner is based on a tort or quasi-delict, the
tort in question is not a civil tort under the Civil Code but a maritime tort
resulting in a collision at sea, governed by Articles 826-939 of the Code of
Commerce. Under Article 827 of the Code of Commerce, in case of collision
between two vessels imputable to both of them, each vessel shall suffer her own
damage and both shall be solidarily liable for the damages occasioned to their
cargoes. The characteristic language of the law in making the “vessels” solidarily
liable for the damages due to the maritime collision emphasizes the direct nature
of the responsibilities on account of the collision incurred by the shipowner under
maritime law, as distinguished from the civil law and mercantile law in general.
This direct responsibility is recognized in Article 618 of the Code of Commerce
under which the captain shall be civilly liable to the ship agent, and the latter is
the one liable to third persons, as pointed out in the collision case of Yueng Sheng
Exchange & Trading Co. vs. Urrutia & Co., 12 Phil. 747,
753:chanroblesvirtuallawlibrary
“The responsibility involved in the present action is that derived from the
management of the vessel, which was defective on account of lack of skill,
negligence, or fault, either of the captain or of the crew, for which the captain is
responsible to the agent, who in his turn is responsible to the third party
prejudiced or damaged. (Article 618, Code of Commerce).”

In fact, it is a general principle, well established maritime law and custom, that
shipowners and ship agents are civilly liable for the acts of the captain (Code of
Commerce, Article 586) and for the indemnities due the third persons (Article
587); chan roblesvirtualawlibraryso that injured parties may immediately look for
reimbursement to the owner of the ship, it being universally recognized that the
ship master or captain is primarily the representative of the owner (Standard Oil
Co. vs. Lopez Castelo, 42 Phil. 256, 260). This direct liability, moderated and
limited by the owner’s right of abandonment of the vessel and earned freight
(Article 587), has been declared to exist, not only in case of breached contracts,
but also in cases of tortious negligence (Yu Biao Sontua vs. Osorio, 43 Phil. 511,
515):chanroblesvirtuallawlibrary
“In the second assignment of error, the Appellant contends that
the Defendant ought not to be held liable for the negligence of his agents and
employees.
It is proven that the agents and employees, through whose negligence the
explosion and fire in question occurred, were agents, employees and mandatories
of the Defendant. Where the vessel is one of freight, a public concern or public
utility, its owner or agents is liable for the tortious acts of his agents (Articles 587,
613, and 618 Code of Commerce; chan roblesvirtualawlibraryand Article 1902,
1903, 1908, Civil Code). This principle has been repeatedly upheld in various
decisions of this court.
The doctrines cited by the Appellant in support of his theory have reference to the
relations between principal and agent in general, but not to the relations between
ship agent and his agents and employees; chan roblesvirtualawlibraryfor this
reason they cannot be applied in the present case.”
It is easy to see that to admit the defense of due diligence of a bonus paterfamilias
(in the selection and vigilance of the officers and crew) as exempting the
shipowner from any liability for their faults, would render nugatory the solidary
liability established by Article 827 of the Code of Commerce for the greater
protection of injured parties. Shipowners would be able to escape liability in
practically every case, considering that the qualifications and licensing of ship
masters and officers are determined by the State, and that vigilance is practically
impossible to exercise over officers and crew of vessels at sea. To compel the
parties prejudiced to look to the crew for indemnity and redress would be an
illusory remedy for almost always its members are, from captains down, mere
wage earners.
We, therefore, find no reversible error in the refusal of the Court of Appeals to
consider the defense of the Manila Steamship Co., that it is exempt from liability
for the collision with the M/L “Consuelo V” due to absence of negligence on its
parts in the selection and supervision of the officers and crew of the M/S “Bowline
Knot”.
The case of Walter S. Smith & Co. vs. Cadwallader Gibson Lumber Co., 55 Phil.
517, invoked by Petitioner, is not the point. Said case treated of a civil tort, in that
the vessel of the Defendant, allegedly negligently managed by its captain in the
course of its maneuvers to moor at Plaintiff’s wharf, struck the same and partially
demolished it, causing damage to Plaintiff. Because the tort allegedly committed
was civil, the provisions of Article 1903 of the Civil Code were correctly applied.
11
The present case, on the other hand, involves tortious conduct resulting in a
maritime collision; chan roblesvirtualawlibrarywherefore, the liability of the
shipowner is, as already stated, governed by the provisions of the Code of
Commerce and not by the Civil Code.
We agree, however, with Petitioner-Appellant, that the Court of Appeals was in
error in declaring the Respondent Lim Hong To, owner of the M/L “Consuelo V”,
exempt from liability to the original Plaintiff, Abdulhaman, in view of the total loss
of his own vessel, that sank as a result of the collision. It is to be noted that both
the master and the engineer of the motor launch “Consuelo V” were not duly
licensed as such (Exh. 2). In applying for permission to operate, despite the lack
of properly trained and experienced, crew, Respondent Lim Hong To gave as a
reason —
“that the income derived from the vessel is insufficient to pay licensed officers
who demand high salaries”,
and expressly declared:chanroblesvirtuallawlibrary
“That in case of any accident, damage or loss, I shall assume full risk and
responsibility for all the consequences thereof.” (Exhibit 2).
His permit to operate, in fact, stipulated —
“that in case of any accident, damage or loss, the registered owner thereof shall
assume full risk and responsibility for all the consequences thereof, and that said
vessel shall be held answerable for any negligence, disregard or violation of any of
the conditions herein imposed and for any consequence arising from such
negligence, disregard or violations.” (Exhibit 3.)
The Court of Appeals held that neither the letter (Exhibit 2) nor the permit
(Exhibit 3) contained any waiver of the right of Respondent Lim Hong To to limit
his liability to the value of his motor launch and that he did not lose the statutory
right to limit his liability by abandonment of the vessel, as conferred by Article
587 of the Code of Commerce.
We find the ruling untenable. Disregarding the question whether mere inability to
meet the salary demands of duly licensed masters and engineers constitutes non-
availability thereof that would excuse noncompliance with the law and authorize
operation without licensed officers under Act 3553, the fact remains that by
operating with an unlicensed master, Lim Hong To deliberately increased the risk
to which the passengers and shippers of cargo aboard the “Consuelo V” would be
subjected. In his desire to reap greater benefits in the maritime trade, Lim Hong
To willfully augmented the dangers and hazards to his vessel’s unwarry
passengers, who would normally assume that the launch officers possessed the
necessary skill and experience to evade the perils of the sea. Hence, the liability of
said Respondent cannot be the identical to that of a shipowner who bears in mind
the safety of the passengers and cargo by employing duly licensed officers. To
hold, as the Court of Appeals has done, that Lim Hong To may limit his liability to
the value of his vessels, is to erase all difference between compliance with law and
the deliberate disregard thereof. To such proposition we cannot assent.
The international rule is to the effect that the right of abandonment of vessels, as
a legal limitation of a shipowner’s liability, does not apply to cases where the
injury or the average is due to shipowner’s own fault. Fariña (Derecho Comercial

Maritimo, Vol. I, pp. 122-123), on the authority of judicial precedents from
various nations, sets the rule to be as follows:chanroblesvirtuallawlibrary
“Esta generalmente admitido que el propietario del buque no tiene derecho a la
limitacion legal de responsibilidad si los daños o averias que dan origen a la
limitacion provienen de sus propias culpas. El Convenio de Bruselas de 25 de
agosto de 1924 tambien invalida la limitacion en el caso de culpa personal en los
accidentes o averías sobrevenidos (Art. 2°).”
To the same effect, a noted French author states:chanroblesvirtuallawlibrary
“La limitacion de la responsabilidad maritima ha sido admitida para proteger a los
armadores contra los actos abusivos de sus encargados y no dejar su patrimonio
entero a la discrecion del personal de sus buques, porque este personal cumple
sus obligaciones en condiciones especiales; chan roblesvirtualawlibrarypero los
armadores no tienen por sobre los demas derecho a ser amparados contra ellos
mismos ni a ser protegidos contra sus propios actos.”
(Danjon, Derecho Maritimo, Vol. 2, p. 332). (Emphasis supplied.)
That Lim Hong To understood that he would incur greater liability than that
normally borne by shipowners, is clear from his assumption of “ full” risk and
responsibility for all the consequences” of the operation of the M/L “Consuelo
V”; chan roblesvirtualawlibrarya responsibility expressly assumed in his letter
Exhibit 2, and imposed in his special permit, in addition to the vessel itself being
held answerable. This express assumption of “full risk and responsibility” would
be meaningless unless intended to broaden the liability of Respondent Lim Hong
To beyond the value of his vessel.
In resume, we hold:chanroblesvirtuallawlibrary
(1) That the Manila Steamship Co., owner of the M/S “Bowline Knot”, is directly
and primarily responsible in tort for the injuries caused to the Plaintiff by the
collision of said vessel with the launch “Consuelo V”, through the negligence of
the crews of both vessels, and it may not escape liability on the ground that it
exercised due diligence in the selection and supervision of the officers and crew of
the “Bowline Knot”;
(2) That Lim Hong To, as owner of the motor launch “Consuelo V”, having caused
the same to sail without licensed officers, is liable for the injuries caused by the
collision over and beyond the value of said launch;
(3) That both vessels being at fault, the liability of Lim Hong To and Manila
Steamship Co. to the Plaintiff herein is in solidum, as prescribed by Article 827 of
the Code of Commerce.
In view of the foregoing, the decision of the Court of Appeals is modified, and that
of the Court of First Instance affirmed, in the sense of declaring both
original Defendants solidarily liable to Plaintiff Insa Abdulhaman in the sum of
P20,784.00 and the cost of the litigation, without prejudice to the right of the one
who should pay the judgment in full to demand contribution from his co-
Defendant.
12
G.R. No. 70909 January 5, 1994
CONCHITA T. VDA. DE CHUA, THELMA CHUA, assisted by her husband,
CHARLIE DY, CHARLITO CHUA, REYNALDO CHUA, SUSAN CHUA, ALEX
CHUA, EDDIE CHUA, SIMON CHUA, AND ERNESTO CHUA, petitioners,
vs.
THE INTERMEDIATE APPELLATE COURT, VICENTE GO, VICTORIA T. GO,
AND HERMINIGILDA HERRERA, respondents.
Alberto R. de Joya for petitioners.
Zosa & Quijano Law Offices and Expedito P. Bugarin for private respondents.
QUIASON, J.:
This is an appeal by certiorari under Rule 45 of the Revised Rules of Court from
the decision of the Court of Appeals in AC-G.R. CV No. 67692 entitled "Conchita
Vda. de Chua, et al. v. Herminigilda Herrera, et al.," affirming with modification
the decision of the Court of First Instance of Cebu in Civil Case No. R-16589.
The facts as found by the Court of Appeals, are summarized as follows:
Sometime in 1950, defendant Herminigilda Herrera executed a
Contract of Lease (Exh. "A") in favor of Tian On (sic) (or Sy Tian
On) whereby the former leased to the latter Lots. Nos. 620 and
7549 containing an area of 151 square meters, located at
Manalili Street (now V. Gullas Street) Cebu City, for a term of
ten (10) years, renewable for another five (5) years. The contract
of lease (Exh. "A") contains a stipulation giving the lessee an
option to buy the leased property (Exh. A-2) and that the lessor
guarantees to leave the possession of said property to the lessee
for a period of ten (10) years or as long as the lessee faithfully
fulfills the terms and conditions of their contract (Exh. A-5).
In accordance with the said contract of lease, the lessee, Tian
On, erected a residential house on the leased premises.
On February 2, 1954, or within four (4) years from the execution
of the said contract of lease (Exh. "A"), the lessee, Sy Tian On,
executed a Deed of Absolute Sale of Building (Exh. "B") in favor
of Chua Bok, the predecessor-in-interest of the plaintiffs herein,
whereby the former sold to the latter the aforesaid residential
house for and in consideration of the sum of P8,000.00.
Pertinent provisions of this deed of sale (Exh. "B") read as
follows:
 13

. . . That with the sale of the said house and as

a legal consequence, I hereby assign all my
rights and privileges as a lessee of the lot on
which the said building is constructed together
with its corresponding obligations as contained
and expressly stipulated in the Contract of
Lease executed in 1950 between myself and the
lot owner, Herminigilda Herrera, to the said
vendee, Chua Bok who hereby accepts the said
assignment of the said lease and hereby
promises and bind himself to abide by all the
terms and conditions thereof, a copy of the
Lease Contract is hereby attached as
Appendix "A" and made a part hereof.

That the present sale is made with the

knowledge and express consent of the lot-
owner and lessor, Herminigilda Herrera who is
represented herein by her attorney-in-fact,
Vicenta R. de Reynes who hereby also honors
the annulment of the lease made by Sy Tian
On in favor of Chua Bok, and hereby promises
and binds herself to respect and abide by all
the terms and conditions of the lease contract
which is now assigned to the said Chua Bok.

IN WITNESS WHEREOF, the parties have HERMINIGILDA HERRERA

hereunto affixed their signatures on this 2nd
day of February 1954, in the City of Cebu, By:
Philippines.
(Sgd.)
(Sgd.) CHUA BOK VICENTA R.
Vendee-Lessee-Assignee DE REYNES
Attorney-in-
( fact
S Lot-owner-
g Lessor
d
. SIGNED IN THE PRESENCE OF:
)
(Sgd.) ILLEGIBLE
S
Y

T
I
A
N
 14

g That the Party of the First Part who is the

d owner of a parcel of land located at Manalili
. Street, Cebu City containing of an area of
) about 151 (One Hundred Fifty-One) square
meters, more or less, known as Lot. No.
I ________ of the Cadastral Survey of Cebu,
L hereby lets and leases unto the Party of the
L Second Part who hereby accepts in lease the
E abovementioned lot under the following terms
G and conditions:
I
B 1. That the term of this contract shall be for a
L period of FIVE (5) years from August 1, 1960 to
E August 1, 1965, at a monthly rental of SIXTY
PESOS (P60.00) Philippine Currency;
After the said sale transaction, Chua Bok and his family
(plaintiffs herein) resided in the said residential building and 2. That the rental of P60.00 will be paid within
they faithfully and religiously paid the rentals thereof. the first 10 days of every month, to the Party of
the First Part without express demand and in
When the Original Contract of Lease expired in 1960, Chua Bok advance;
and defendant Herminigilda Herrera, through her alleged
attorney-in-fact executed the following — xxx xxx xxx

CONTRACT OF LEASE. 4. That the Party of the Second Part is given an

THIS CONTRACT OF LEASE made and entered
into
this ___ day of August, 1960, in the City of
Cebu, Philippines, by and between:
HERMINIGILDA HERRERA, of
legal age, single, Filipino and
a resident of Cebu City,
Philippines, hereinafter
known as Party of the First
Part;
and
CHUA BOK of legal age,
married and a resident of
Cebu City, Philippines,
hereinafter known as the
Party of the Second Part.
WITNESSETH:
option to buy the said leased premises if he is
qualified and when the Party of the First Part
decides to sell the same and that the Party of
the second Part is also given the option to
renew the Contract of Lease upon terms and
conditions to be agreed by both parties;
xxx xxx xxx
6. That it is hereby expressly reserved that
should the property leased be sold by the Party
of the First part to any other party, the terms
and conditions of this Contract shall be valid
and will continue for the duration of this
contract. The Third party shall be expressed
(sic) bound to respect the terms of this
Contract of Lease;
xxx xxx xxx
That the parties herein, do hereby mutually
and reciprocally stipulate that they will comply
with the terms and conditions herein before set
forth. That the Party of the First Part hereby

(sic) these presents guarantees that she will
leave the property in the possession of the
Party of the Second Part for five (5) years or as
long as the Party of the second Part faithfully
fulfills with the terms and conditions herein set
forth.
IN WITNESS WHEREOF, we have hereunto
affixed our signatures on this 9th day of
September, 1960, in the City of Cebu,
Philippines.
(Sgd.) CHUA BOK
Party of the Second Part
HERMINIGILDA HERRERA
By: Party of the First Part
(Sgd.) VICENTA R. DE REYNES
Attorney-in-Fact
SIGNED IN THE PRESENCE OF:
(Sgd.) ILLEGIBLE
(Sgd.) B.E. SUN
After the expiration of the contract of lease in question (Exh. "C")
the plaintiffs herein, who are the successors-in-interest of Chua
Bok (who had meanwhile died) continued possession of the
premises up to
April 1978, with adjusted rental rate of P1,000.00 (Exh. "D");
later readjusted to P2,000.00.
On July 26, 1977, defendant Herrera through her attorney-in-
fact, Mrs. Luz Tormis, who was authorized with a special power
of attorney, sold the lots in question to defendants-spouses,
Vicente and Victoria Go. The defendants-spouses were able to
have aforesaid sale registered with the Register of Deeds of the
City of Cebu and the titles of the two parcels of land were
transferred in their names (Exhs. "5-Herrera", or "5-Go" and
"6-Herrera" or "6-Go").
Thereafter, or on November 18, 1977, plaintiffs filed the instant
case seeking the annulment of the said sale between
Herminigilda Herrera and spouses Vicente and Victoria Go,
alleging that the conveyance was in violation of the plaintiffs'
15
right of option to buy the leased premises as provided in the
Contract of Lease (Exh. "C") and that the defendants-spouses
acted in bad faith in purchasing the said lots knowing fully well
that the said plaintiffs have the option to buy those lots.
After due trial, the lower court rendered judgment, the
dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing, this
Court ORDERS:
1) The DISMISSAL of plaintiffs' complaint, as
against defendant spouses GO;
2) The plaintiffs to VACATE Lot No. 620 and
Lot No. 7549, ownership over by which
defendants Vicente and Victoria Go being
found valid and legitimate, and to peacefully
turn over the same to said spouses, and to
REMOVE the building thereon at plaintiffs' own
expense, or such removal may be done by the
declared land-owners, likewise at plaintiffs'
expense.
3) Defendant Herrera to pay the spouses Go,
the sum of P15,000.00 as reimbursement to
them for what they already paid to their lawyer;
4) Defendant Herrera to pay plaintiffs the sum
of P50,000.00 (later reduced to P20,000.00, on
motion of defendant Herrera, which the court a
quo granted) in concept of moral damages
suffered by the latter; and
5) Defendant Herrera to pay the costs of the
proceedings (Record on Appeal, pp. 229-230)
(Rollo, pp. 63-68).
Plaintiffs and defendant Herrera appealed from the decision of the trial court to
the Court of Appeals.
In said court, plaintiffs-appellants claimed that the trial court erred: (a) in
dismissing their complaint as against defendants-spouses Go, (b) in ordering
them to vacate the lots in question and to remove the improvements they had
introduced in the premises, and (c) in ordering the execution of the judgment
pending appeal. Defendant-appellant Herrera, on her part, claimed that the trial

court erred in ordering her to pay P15,000.00 as attorney's fees to defendants-
spouses Go and P50,000.00 as moral damages to plaintiffs-appellants.
The Court of Appeals affirmed with modification the decision of the trial court,
thus:
WHEREFORE, premises considered the appealed decision is
hereby MODIFIED by eliminating the award of P20,000.00 moral
damages in favor of the plaintiffs-appellants, the award of
P15,000.00 attorney's fees in favor of defendants-appellees (Go
spouses) and the costs of the proceedings. In all other respects
the appealed decision is hereby AFFIRMED (Rollo, p. 78).
In their petition filed with us, petitioners (plaintiffs-appellants in AC-G.R. No.
67692) gave up their demand for the nullification of the sale of the lots in
question to respondent-spouses Go and limited their appeal to questioning the
affirmance by the Court of Appeals of the decision of the trial court, ordering their
ejectment from the premises in question and the demolition of the improvements
introduced thereon.
In support of their right to possess the premises in question, petitioners rely on
the contract of lease (Exh. "C") entered into by and between Chua Bok and
Vicenta R. de Reynes, as attorney-in-fact of respondent Herrera, as well as on the
tacit renewal thereof by respondent Herrera (Rollo, pp. 35-48).
In declaring the contract of lease (Exh. "C") void, the Court of Appeals noted that
Vicenta R. de Reynes was not armed with a special power of attorney to enter into
a lease contract for a period of more than one year.
We agree with the Court of Appeals.
The lease contract (Exh. "C"), the linchpin of petitioners' cause of action, involves
the lease of real property for a period of more than one year. The contract was
entered into by the agent of the lessor and not the lessor herself. In such a case,
the law requires that the agent be armed with a special power of attorney to lease
the premises.
Article 1878 of the New Civil Code, in pertinent part, provides:
Special Power of Attorney are necessary in the following cases:
xxx xxx xxx
(8) To lease any real property to another person for more than
one year.
16
It is true that respondent Herrera allowed petitioners to occupy the leased
premises after the expiration of the lease contract (Exh. "C") and under
Article 1670 of the Civil Code of the Philippines, a tacit renewal of the lease (tacita
reconduccion) is deemed to have taken place. However, as held in Bernardo
M. Dizon v. Ambrosio Magsaysay, 57 SCRA 250 (1974), a tacit renewal is limited
only to the terms of the contract which are germane to the lessee's right of
continued enjoyment of the property and does not extend to alien matters, like
the option to buy the leased premises.
In said case, Magsaysay leased to Dizon a parcel of land for a term of two years,
expiring on April 1, 1951. Under the lease contract, Dizon was given the
preferential right to purchase the land under the same conditions as those offered
to other buyers. After the lease contract expired, Dizon continued to occupy the
leased premises and to pay the monthly rentals, which Magsaysay accepted. On
March 24, 1954, Dizon learned that Magsaysay had sold the property to a third
party without giving him the opportunity to exercise the preferential right to
purchase given him under the lease contract. Dizon then filed an action against
Magsaysay and the buyer to annul the sale of the property or in the alternative, to
recover damages from Magsaysay. The trial court dismissed the action and the
Court of Appeals affirmed the dismissal. In the Supreme Court, Dizon claimed
that a new lease contract was impliedly created when Magsaysay allowed him to
continue to occupy the premises after the expiration of the original lease contract
and that the other terms of the said contract, including the lessee's preferential
right to purchase, were deemed revived. Dizon invoked Article 1670 of the Civil
Code of the Philippines, which provides:
Art. 1670. If at the end of the contract the lessee should
continue enjoying the thing leased for fifteen days with the
acquiescence of the lessor, and unless a notice to the contrary
by either party has previously been given, it is understood that
there is an implied new lease, not for the period of the original
contract, but for the time established in Articles 1682 and
1687. The other terms of the original contract shall be
revived (Emphasis supplied).
We dismissed Dizon's appeal and sustained the interpretation of the Court of
Appeals that "the other terms of the original contract" mentioned in Article 1670,
are only those terms which are germane to the lessee's right of continued
enjoyment of the property leased. We held:
This is a reasonable construction of the provision, which is
based on the presumption that when the lessor allows the lessee
to continue enjoying possession of the property for fifteen days
after the expiration of the contract he is willing that such
enjoyment shall be for the entire period corresponding to the
rent which is customarily paid — in this case up to the end of
the month because the rent was paid monthly. Necessarily, if
the presumed will of the parties refers to the enjoyment of
possession, the presumption covers the other terms of the
 17

contract related to such possession, such as the amount of the G.R. No. L-47593 December 29, 1943
rental, the date when it must be paid, the care of the property,
the responsibility of repairs, etc. But no such presumption may THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,
be indulged in with respect to special agreements which by vs.
nature are foreign to the right of occupancy or enjoyment SERAFIN D. FELICIANO ET AL., respondents.
inherent in a contract of lease.

Petitioners also question the jurisdiction of the trial court in Civil Case No. R-
16589 in ordering their ejectment from the leased premises and the removal of
the improvements introduced thereon by them. They claim that the action in Civil
Case No. R-16589 was for the annulment of the sale of the property by defendant
Herrera to defendants-spouses Go, and not an appropriate case for an ejectment.
The right of possession of petitioners of the leased premises was squarely put in
issue by defendants-spouse Go in their counterclaim to petitioner's complaint,
where they asked that ". . . the plaintiff should vacate their premises as soon as
feasible or as the Honorable Court may direct" (Record on Appeal, CA-G.R. No.
67692-R; p. 45).
The said counterclaim in effect was an accion publiciana for the recovery of the
possession of the leased premises.
Clearly the Court of First Instance had jurisdiction over actions which involve the
possession of real property or any interest therein, except forcible entry and
detainer actions (Section 44[b], Judiciary Act of 1948; Concepcion v. Presiding
Judge, Br. V, CFI Bulacan, 119 SCRA 222 [1982]).
A counterclaim is considered a complaint, only this time, it is the original
defendant who becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 [1986]). It
stands on the same footing and is to be tested by the same rules as if it were an
independent action. Hence, the same rules on jurisdiction in an independent
action apply to a counterclaim (Vivar v. Vivar, 8 SCRA 847 [1963]; Calo v. Ajax
International, Inc. v. 22 SCRA 996 [1968]; Javier v. Intermediate Appellate Court,
171 SCRA 605 [1989]; Quiason, Philippine Courts and Their Jurisdictions, 1993
ed., p. 203).
Finally, petitioners claim that the Court of Appeals erred in eliminating the award
of moral damages in the amount of P20,000.00 given to them by the trial court
(Rollo, pp. 48-52). The elimination of said award is a logical consequence of the
finding that petitioners had no right of option to purchase the leased premises
that can be enforced against respondent Herrera.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Manuel Roxas and Araneta, Zaragoza, Araneta and Bautista for petitioner.
Deflfin Joven and Pablo Lorenzo for respondents.
Ramirez and Ortigas as amici curiae.
OZAETA, J.:
In a four-to-three decision promulgated on September 13, 1941, 1 this Court
affirmed the judgment of the Court of Appeals in favor of the respondents and
against the petitioner for the sum of P25,000, representing the value of two
insurance policies issued by the petitioner on the life of Evaristo Feliciano. A
motion to reconsider and set aside said decision has been filed by the petitioner,
and both parties have submitted exhaustive and luminous written arguments in
support of their respective contentions.
The facts of the case are set forth in the majority and dissenting opinions
heretofore handed down by this Court, the salient points of which may be briefly
restated as follows:
Evaristo Feliciano, who died on September 29, 1935, was suffering with advanced
pulmonary tuberculosis when he signed his applications for insurance with the
petitioner on October 12, 1934. On that same date Doctor Trepp, who had taken
X-ray pictures of his lungs, informed the respondent Dr. Serafin D. Feliciano,
brother of Evaristo, that the latter "was already in a very serious ad practically
hopeless condition." Nevertheless the question contained in the application —
"Have you ever suffered from any ailment or disease of the lungs, pleurisy,
pneumonia or asthma?" — appears to have been answered , "No" And above the
signature of the applicant, following the answers to the various questions
propounded to him, is the following printed statement:1awphil.net
I declare on behalf of myself and of any person who shall have or claim
any interest in any policy issued hereunder, that each of the above
answers is full, complete and true, and that to the best of my knowledge
and belief I am a proper subject for life insurance. (Exhibit K.)
The false answer above referred to, as well as the others, was written by the
Company's soliciting agent Romulo M. David, in collusion with the medical
examiner Dr. Gregorio Valdez, for the purpose of securing the Company's
approval of the application so that the policy to be issued thereon might be

credited to said agent in connection with the inter-provincial contest which the
Company was then holding among its soliciting agents to boost the sales of its
policies. Agent David bribed Medical Examiner Valdez with money which the
former borrowed from the applicant's mother by way of advanced payment on the
premium, according to the finding of the Court of Appeals. Said court also found
that before the insured signed the application he, as well as the members of his
family, told the agent and the medical examiner that he had been sick and
coughing for some time and that he had gone three times to the Santol
Sanatorium and had X-ray pictures of his lungs taken; but that in spite of such
information the agent and the medical examiner told them that the applicant was
a fit subject for insurance.
Each of the policies sued upon contains the following stipulations:
This policy and the application herefor constitute the entire contract
between the parties hereto. . . . Only the President, or the Manager,
acting jointly with the Secretary or Assistant Secretary (and then only in
writing signed by them) have power in behalf of the Company to issue
permits, or to modify this or any contract, or to extend the same time for
making any premium payment, and the Company shall not be bound by
any promise or representation heretofore or hereafter given by any person
other than the above-named officials, and by them only in writing and
signed conjointly as stated.
The application contains, among others, the following statements:
18. — I [the applicant] hereby declare that all the above statements and
answers as well as all those that I may make to the Company's Medical
Examiner in continuation of this application, to be complete, true and
correct to the best of my knowledge and belief, and I hereby agree as
follows:
1. That his declaration, with the answers to be given by me to the
Medical Examiner, shall be the basis of the policy and form part of same.
xxx xxx xxx
3. That the said policy shall not take effect until the first premium has
been paid and the policy has been delivered to and accepted by me, while
I am in good health.
4. That the agent taking this application has no authority to make, modify
or discharge contracts, or to waive any of the Company's rights or
requirements.
5. My acceptance of any policy issued on this application will constitute a
ratification by me of any corrections in or additions to this application
18
made by the Company in the space provided "For Home Office
Corrections or Additions Only." I agree that photographic copy of this
applications as corrected or added to shall constitute sufficient notice to
me of the changes made. (Emphasis added.)
The petitioner insists that upon the facts of the case the policies in question are
null and void ab initio and that all that the respondents are entitled to is the
refund of the premiums paid thereon. After a careful re-examination of the facts
and the law, we are persuaded that petitioner's contention is correct. To the
reasons adduced in the dissenting opinion heretofore published, we only desire to
add the following considerations:
When Evaristo Feliciano, the applicant for insurance, signed the application in
blank and authorized the soliciting agent and/or medical examiner of the
Company to write the answers for him, he made them his own agents for that
purpose, and he was responsible for their acts in that connection. If they falsified
the answers for him, he could not evade the responsibility for he falsification. He
was not supposed to sign the application in blank. He knew that the answers to
the questions therein contained would be "the basis of the policy," and for that
every reason he was required with his signature to vouch for truth thereof.
Moreover, from the facts of the case we cannot escape the conclusion that the
insured acted in connivance with the soliciting agent and the medical examiner of
the Company in accepting the policies in question. Above the signature of the
applicant is the printed statement or representation: " . . . I am a proper subject
for life insurance." In another sheet of the same application and above another
signature of the applicant was also printed this statement: "That the said policy
shall not take effect until he first premium has been paid and the policy as been
delivered to and accepted by me, while I am in good health." When the applicant
signed the application he was "having difficulty in breathing, . . . with a very high
fever." He had gone three times to the Santol Sanatorium and had X-ray pictures
taken of his lungs. He therefore knew that he was not "a proper subject for life
insurance." When he accepted the policy, he knew that he was not in good health.
Nevertheless, he not only accepted the first policy of P20,000 but then and there
applied for and later accepted another policy of P5,000.
We cannot bring ourselves to believe that the insured did not take the trouble to
read the answers contained in the photostatic copy of the application attached to
and made a part of the policy before he accepted it and paid the premium
thereon. He must have notice that the answers to the questions therein asked
concerning his clinical history were false, and yet he accepted the first policy and
applied for another. In any event, he obligated himself to read the policy when he
subscribed to this statement: "My acceptance of any policy issued on this
application will constitute a ratification by me of any corrections in or additions to
this application made by the Company . . ." By accepting the policy he became
charged with knowledge of its contents, whether he actually read it or not. He
could not ostrich-like hide his head from it in order to avoid his part of the
bargain and at the same time claim the benefit thereof. He knew, or was
chargeable with knowledge, from the very terms of the two policies sued upon

(one of which is printed in English and the other in Spanish) that the soliciting
agent and the medical examiner had no power to bind the Company by any verbal
promise or oral representation. The insured, therefore, had no right to rely — and
we cannot believe he relied in good faith — upon the oral representation. The
insured, therefore, had no right to rely — and we cannot believe he relied in good
faith — upon the oral representation of said agent and medical examiner that he
(the applicant) was a fit subject for insurance notwithstanding that he had been
and was still suffering with advanced pulmonary tuberculosis.
From all the facts and circumstances of this case, we are constrained to conclude
that the insured was a coparticipant, and coresponsible with Agent David and
Medical Examiner Valdez, in the fraudulent procurement of the policies in
question and that by reason thereof said policies are void ab initio.
Wheretofore, the motion for reconsideration is sustained and the judgment of the
Court of Appeals is hereby reversed. Let another judgment be entered in favor of
the respondents and against the petitioner for the refund of the premiums
amounting to P1,389, with legal interest thereon from the date of the complaint,
and without any finding as to costs.
Moran, Paras and Bocobo, JJ., concur.
Separate Opinions
YULO, C.J., concurring:
I can find no quarrel with the legal considerations and conclusions set forth in the
original decision promulgated by this Court. As general rules of law they find full
support not only in reason and in logic, but also in simple human sense of
justice. More so, modern and complicated practices attendant to the ever growing
trade in life insurance demand the strictest accountability by insurance
companies for acts of their authorized agents. In this way only may the State
afford reasonable protection to the unwary public from abuse by such
organizations as may be found to be of questionable moral standards.
But a careful consideration of the evidentiary facts as set forth in the decision of
the Court of Appeals leads me to conclude that the ends of justice would not be
serve by the application to the present case of the rules so enunciated. Rather, to
19
serve the ends of justice the case of the respondents should be removed from the
protection of such rules.
The subject of the insurance policies under consideration is the life of the
assured. It is contended by his beneficiaries that they took these policies on the
basis of a life expectancy of a person gravely stricken with tuberculosis. They
have consistently made protestations that they had so informed the agents of the
insurance company. But the policies were issued upon the life of the assured, as
a perfectly normal and healthy person. The error is vital and goes to the very
existence of the contract itself. Who is responsible for the error?
The direct cause, of course, is the false recitals in the application for insurance.
While it is true that it was the agents of the insurance company who filled out
such application, yet it was the assured who, by signing the application in blank,
made it possible for the said agents to procure the issuance of the policies on the
basis of false information, in order to suit their own purposes. Upon the admitted
facts, I am of the opinion that in justice and in equity, the responsibility for the
falsifications made by the insurance agents in the preparation of the insurance
application should be laid at the door of the assured and his beneficiaries.
I vote with the majority in granting the motion for reconsideration and in
reversing the decision under review.
HONTIVEROS, J., dissenting:
The reasons given in the dissenting opinion in this case, as published in the
Official Gazette of October 4, 1941 (pp. 2847 to 2855), supplemented by those in
the resolution of the majority on the motion for reconsideration, do not seem to
me sufficient to overthrow the decision rendered by the Court of First Instance,
confirmed by the Court of Appeals, and sustained by this Supreme court in its
decision of September 18, 1941. The alleged connivance between the insured
Evaristo Feliciano, the agent Romulo M. David, and the medical examiner Dr.
Gregorio Valdez not only does not clearly appear of record, but on the contrary is
denied in the finding of facts of the court a quo and of the Court of Appeals which
cannot be reviewed or altered by this Court.
The mere fact that the insured signed at the bottom of the application for
insurance when some of its lines intended for answers to certain questions were
still in blank, answers which according to the evidence and to the findings of the
two inferior courts he had grounds to believe will be made in accordance with the
information which he and his family had given to agent David and to Dr. Valdez,
does not convert these two persons into agents of the insured in a way as to make
the latter responsible for the acts of the former. That the photostatic copies of
said forms which are attached to the policies object of this case are almost
illegible, is a fact which should be taken into account, together with the other fact
that Evaristo Feliciano does not know English, the language in which those
documents are written. In support of this dissenting opinion, the following
authorities may be cited:

The mere failure of the insured to inform himself of the insertion of false
answers in the application which has been filled out by the agent of the
insurer does not convict him of lack of good faith. (Vol. 5, Cooley's Briefs
on Insurance, 2nd Ed., p. 4136, and many cases cited.)
The insured is not chargeable with such negligence as will render him
liable for false answers inserted by the agent merely because he signed
the application in blank and trusted the agent to fill out by the agent,
without reading it. (Id., p. 4136, and many cases cited.)
An illiterate person or one who does not understand the English
language (as is the case with Evaristo Feliciano) is not guilty of
inexcusable negligence in failing to read the application or having it read
to him, nor can it be said that such person deliberately made a false
statement because he did not read over the application. (81 ALR 865,
866, W. 117 ALR 796.)
Nor can it be said that the assured, who has fully, frankly, truthfully,
and in good faith answered all the required questions, is guilty of
negligence in signing, without reading, the application which is
thereupon prepared by the agent. He is justified in assuming that the
agent, has, with equal good faith, truthfully recorded the answers give.
He may well say to the Company: 'You accredited this man to me as your
representative, and I signed the application thus prepared by him,
relying upon the character which you gave him, when you commissioned
him to come to me as your agent. If he acted dishonestly in the matter,
you, and not I, must suffer the consequences . . .! (Germania Life Ins.
Co. vs. Lunkeheimer [1931] Ind., 538; 26 N. E., 1052)
In such case the acceptance of the policy, with this application attached,
does not require the insured to institute an investigation into its
provisions, or the conditions upon which is was issued, to ascertain
whether the agent has acted in good faith, since, under such
circumstances, the insured may rely upon the presumption that he has
been honestly dealt with the insurer. (Otto vs. Hartford Ins. Co., 38
Minn., 423).
Besides, the principles that the insured is not bound to know the
contents of the application, and may rely on the agent's assurances that
his answers have been correctly written will, of course, apply with special
force where the insured is illiterate and unable to read, or is ignorant of
the language. (Vol. 5, Cooley's Briefs on Insurance, 2nd Ed. p. 4138,
cases cited.)
And also where the photostatic copies of the application embodied in the
policy are practically illegible, the insured is not bound to know the
contents of the application. (New York Ins. Co. vs. Holpem D.C. 57 Fed.
2nd, 200).
20
According to the great weight of authority, if an agent of the insurer, after
obtaining from an applicant for insurance a correct and truthful answer
to interrogations contained in the application for insurance, without
knowledge of the applicant fills in false answers, either fraudulently or
otherwise, the insurer cannot assert the falsity of such answers as a
defense to the liability on the policy and this is generally without regard
to the subject matter of the answers or the nature of the agent's duties or
limitations on his authority, at least if not brought to the attention of the
applicant. It is equally well settled that if a correct representation is
made in a written application, or the insurance agent issuing the policy
is appraised of the true facts concerning the matter in question, as for
instance the title to the insured premises, but the agent inserts an
incorrect statement in the policy, the insurer cannot rely upon the error
in avoidance of its liability". Home Ins. Co. vs. Mendenhall, 154 Ill., 452,
45 NE., 1078, 36 LRA., 374; Phoenix Ins. Co. vs. Tucker, 92 Ill., 64, 34
Am Rep., 106; Commercial Ins. Co. vs. Spanknoble, 52 Ill., 53, 4 Am.
Report, 582; Young vs. Hartford F. Ins. Co. 45 Iowa, 377, 24 Am. Rep.,
754; Welsh vs. London Assur. 151 Pa., 607, 25 A, 142, 21 Am St. Rep.,
726 — (Taken from Am Juris. on Insurance Vol. 29, par. 843).
An insured may be justified in signing an application in blank at the
request of the insurer's agent, who agrees to fill it in from data furnished
by the insured or from an old application. In fact, an insurer cannot urge
the falsity of representations contained in the policy issued, or in the
application, where such representations were inserted therein, either by
the company or its agent, after the application was signed, without the
knowledge or consent of the insured, who has made no such
representations. (Couch on Insurance, Vol. 4, par. 842 b.)
I believe that the motion for reconsideration presented in this case should be
denied, not only because of the weighty reasons relied upon in the decision which
it attacks, but also because a dangerous precedent would otherwise be
established, for, with the destruction of the confidence which the public has
hitherto reposed in the duly accredited agents of insurance companies and in
their examining physicians, this branch of the economic life of the people will
have to be unfavorably affected.
G.R. No. L-33637 December 31, 1931
ANG GIOK CHIP, doing business under the name and style of Hua Bee Kong
Si, plaintiff-appellee,
vs.
SPRINGFIELD FIRE & MARINE INSURANCE COMPANY, defendant-appellant.

C.A. Sobral for appellant.
Paredes and Buencamino for appellee.
Gibbs and McDonough and Ramon Ozaeta as amici curiae.
MALCOLM, J.:
An important question in the law of insurance, not heretofore considered in this
jurisdiction and, according to our information, not directly resolved in California
from which State the Philippine Insurance Act was taken, must be decided on this
appeal for the future guidance of trial courts and of insurance companies doing
business in the Philippine Islands. This question, flatly stated, is whether a
warranty referred to in the policy as forming part of the contract of insurance and
in the form of a rider to the insurance policy, is null and void because not
complying with the Philippine Insurance Act. The court has had the benefit of
instructive briefs and memoranda from the parties and has also been assisted by
a well prepared brief submitted on behalf of amici curiae.
The admitted facts are these: Ang Giok Chip doing business under the name and
style of Hua Bee Kong Si was formerly the owner of a warehouse situated at No.
643 Calle Reina Regente, City of Manila. The contents of the warehouse were
insured with the three insurance companies for the total sum of P60,000. One
insurance policy, in the amount of P10,000, was taken out with the Springfield
Fire & Marine Insurance Company. The warehouse was destroyed by fire on
January 11, 1928, while the policy issued by the latter company was in force.
Predicated on this policy the plaintiff instituted action in the Court of First
Instance of Manila against the defendant to recover a proportional part of the loss
coming to P8,170.59. Four special defenses were interposed on behalf of the
insurance company, one being planted on a violation of warranty F fixing the
amount of hazardous goods which might be stored in the insured building. The
trial judge in his decision found against the insurance company on all points, and
gave judgment in favor of the plaintiff for the sum of P8,188.74. From this
judgment the insurance company has appealed, and it is to the first and fourth
errors assigned that we would address particular attention.
Considering the result at which we arrive, it is unnecessary for us to discuss
three of the four special defenses which were made by the insurance company.
We think, however, that it would be a reasonable deduction to conclude that more
than 3 per cent of the total value of the merchandise contained in the warehouse
constituted hazardous goods, and that this per cent reached as high as 39. We
place reliance on the consular invoices and on the testimony of the adjuster,
Herridge. Having thus swept to one side all intervening obstacle, the legal
question recurs, as stated in the beginning of this decision, of whether or not
warranty F was null and void.
21
To place this question in its proper light, we turn to the policy issued by the
Springfield Fire & Marine Insurance Company in favor of the plaintiff. The
description of the risk in this policy is as follows:lawphil.net
Ten thousand pesos Philippine Currency. — On general non-
hazardous merchandise, chiefly consisting of chucherias, also
produce, Cacao, Flour, all the property of the Insured, or held by
them in trust, on commission or on joint account with others, or
for which he is responsible, while contained during the currency
of this policy in the godown, situate No. 643 Calle Reina Regent. .
..
This policy is subject to the hereon attached "Ordinary Short Period
Rate Scale" Warranties A & F, Co-insurances Clause "and Three
Fourths Loss Clause," which are forming part of same. Co-
insurance declared:
"P20,000. — Sun Insurance Office Ltd. (K & S)." (Emphasis
inserted.) Securely pasted on the left hand margin of the face of
the policy are five warranties and special clauses. One of them is
warranty F, specially referred to on the face of the policy, reading
in part as follows:
WARRANTY F
It is hereby declared and agreed that during the currency of this
policy no hazardous goods be stored in the Building to which this
insurance applies or in any building communicating therewith,
provided, always, however, that the Insured be permitted to
stored a small quantity of the hazardous goods specified below,
but not exceeding in all 3 per cent of the total value of the whole
of the goods or merchandise contained in said warehouse, viz; . .
..
The applicable law is found in the Instance Act, Act No. 2427, as
amended, section 65 reading:
"Every express warranty, made at or before the execution of a policy, must be
contained in the policy itself, or in another instrument signed by the insured and
referred to in the policy, as making a part of it." As the Philippine law was taken
verbatim from the law of California, in accordance with well settled canons of
statutory construction, the court should follow in fundamental points, at least,
the construction placed by California courts on a California law. Unfortunately
the researches of counsel reveal no authority coming from the courts of California
which is exactly on all fours with the case before us. However, there are certain
consideration lying at the basis of California law and certain indications in the
California decisions which point the way for the decision in this case

Section 65 of the Philippine Insurance Act corresponds to section 2605 of the
Civil Cod of California. The comments of the Code Examiners of California
disclose that the language of section 2605 was quite different from that under the
Code as adopted in 1872. That language was found too harsh as to insurance
companies. The Code Examiners' notes state: "The amendment restores the law
as it existed previous to the Code: See Parsons on Maritime Law, 106, and Phillips
on Insurance, sec. 756." The passage referred to in Philips on Insurance, was
worded by the author as follows:
"Any express warranty or condition is always a part of the policy, but, like any
other part of an express contract, may be written in the margin, or contained in
proposals or documents expressly referred to in the policy, and so made a part of
it." The annotator of the Civil Code of California, after setting forth these facts,
adds:
. . . The section as it now reads is in harmony with the rule that a
warranty may be contained in another instrument than the policy when
expressly referred to in the policy as forming a part thereof: . . . .
What we have above stated has been paraphrased from the decision of the
California Court of Appeals in the case of Isaac Upham Co. vs. United States
Fidelity & Guaranty Co. ( [1922], 211 Pac., 809), and thus discloses the attitude
of the California courts. Likewise in the Federal courts, in the case of Conner vs.
Manchester Assur. Co. ([1904], 130 Fed., 743), section 2605 of the Civil Code of
California came under observation, and it was said that it "is in effect an
affirmance of the generally accepted doctrine applicable to such contracts."
We, therefore, think it wrong to hold that the California law represents a radical
departure from the basic principles governing the law of insurance. We are more
inclined to believe that the codification of the law of California had exactly the
opposite purpose, and that in the language of the Federal court it was but an
affirmance of the generally accepted doctrine applicable to such contracts. This
being true, we turn to two of such well recognized doctrines. In the first place, it is
well settled that a rider attached to a policy is a part of the contract, to the same
extent and with like effect as it actually embodied therein. (I Couch, Cyclopedia of
Insurance Law, sec. 159.) In the second place, it is equally well settled that an
express warranty must appear upon the face of the policy, or be clearly
incorporated therein and made a part thereof by explicit reference, or by words
clearly evidencing such intention. (4 Couch, Cyclopedia of Insurance Law, sec.
862.)
Section 65 of the Insurance Act and its counterpart, section 265 of the Civil Code
of California, will bear analysis as tested by reason and authority. The law says
that every express warranty must be "contained in the policy itself." The word
"contained," according to the dictionaries, means "included," inclosed,"
"embraced," "comprehended," etc. When, therefore, the courts speak of a rider
attached to the policy, and thus "embodied" therein, or of a warranty
"incorporated" in the policy, it is believed that the phrase "contained in the policy
itself" must necessarily include such rider and warranty. As to the alternative
22
relating to "another instrument," "instrument" as here used could not mean a
mere slip of paper like a rider, but something akin to the policy itself, which in
section 48 of the Insurance Act is defined as "The written instrument, in which a
contract of insurance is set forth." In California, every paper writing is not
necessarily an "instrument" within the statutory meaning of the term. The word
"instrument has a well defined definition in California, and as used in the Codes
invariably means some written paper or instrument signed and delivered by one
person to another, transferring the title to, or giving a lien, on property, or giving
a right to debt or duty. (Hoag vs. Howard [1880], 55 Cal., 564; People vs.
Fraser[1913], 137 Pac., 276.) In other words, the rider, warranty F, is contained
in the policy itself, because by the contract of insurance agreed to by the parties it
is made to form a part of the same, but is not another instrument signed by the
insured and referred to in the policy as forming a part of it.
Again, referring to the jurisprudence of California, another rule of insurance
adopted in that State is in point. It is admitted that the policy before us was
accepted by the plaintiff. The receipt of this policy by the insured without
objection binds both the acceptor and the insured to the terms thereof. The
insured may not thereafter be heard to say that he did not read the policy or
know its terms, since it is his duty to read his policy and it will be assumed that
he did so. In California Jurisprudence, vol. 14, p. 427, from which these
statements are taken with citations to California decisions, it is added that it has
been held that where the holder of a policy discovers a mistake made by himself
and the local agent in attaching the wrong rider to his application, elects to retain
the policy issued to him, and neither requests the issuance of a different one nor
offers to pay the premium requisite to insure against the risk which he believe the
rider to cover, he thereby accepts the policy.
We are given to understand, and there is no indication to the contrary, that we
have here a standard insurance policy. We are further given to understand, and
there is no indication to the contrary, that the issuance of the policy in this case
with its attached rider conforms to well established practice in the Philippines
and elsewhere. We are further given to understand, and there is no indication to
the contrary, that there are no less than sixty-nine insurance companies doing
business in the Philippine Islands with outstanding policies more or less similar
to the one involved in this case, and that to nullify such policies would place an
unnecessary hindrance in the transaction of insurance business in the
Philippines. These are matters of public policy. We cannot believe that it was ever
the legislative intention to insert in the Philippine Law on Insurance an oddity, an
incongruity, entirely out of harmony with the law as found in other jurisdiction,
and destructive of good business practice.
We have studied this case carefully and having done so have reached the definite
conclusion that warranty F, a rider attached to the face of the insurance policy,
and referred to in contract of insurance, is valid and sufficient under section 65 of
the Insurance Act. Accordingly, sustaining the first and fourth errors assigned,
and it being unnecessary to discuss the remaining errors, the result will be to
reverse the judgment appealed from and to order the dismissal of the complaint,
without special pronouncement as to costs in either instance.

Street, Villamor, Ostrand, and Romualdez, JJ., concur.
Separate Opinions
VILLA-REAL, J., dissenting:
I fully concur in the dissenting opinion penned by Justice Imperial, and further
say that a rider or slip attached to an insurance policy, though referred to therein
as making a part of it, is not one of the forms prescribed by section 65 of the
Insurance Law in which an express warranty may be made to appear validly so as
to be binding between the insurer and the insured. There are two, and only two
forms provided in said section by which an express warranty may be made to
appear validly, to wit: by embodiment either in the insurance policy itself or in
another instrument signed by the insured and referred to in the policy as making
a part of it.
Now the question arises as to whether the rider or slip containing said warranty F
attached to the policy in question and referred to therein as making a part thereof
is one of the two forms provided in said section 65 of the Insurance Law.
It is admitted that it is not the second form, because not being signed by the
insured it does not constitute an instrument. (Hoag vs. Howard [1880], 55 Cal.,
564; People vs. Fraser [1913], 137 Pac., 276.)
Is it the first form required by law, that is, is it contained in the policy itself? It is
so contended in the majority opinion and authorities are cited in support of such
contention.
In 1 Couch, Cyclopedia of Insurance Law, par. 159, it is said that "as a general
rule, a rider or slip attached to a policy or certificate of insurance is, prima facie at
least, a part of the contract to the same extent, and with like effect, as if actually
embodied therein, provided, of course, that it does not violate any statutory
inhibition, and has been lawfully, and sufficiently attached, ..." (See also 32
Corpus Juris, 1159, par. 270).
Does the attachment of a rider or slip containing an express warranty contravene
the provisions of section 65 of the Insurance Law? When the law, in order to
23
protect the insured, requires that an express warranty be contained in the policy
or in another instrument referred to therein as making a part thereof, it could not
have been its intention to permit that such express warranty be contained in a
piece of paper not signed by the insured although it is attached to the policy and
referred to therein as making a part thereof, because it would be contrary to the
requirement that such express warranty be contained in an instrument signed by
the insured. It is a general rule of statutory construction that a law should not be
so construed as to produced an absurd result. It would certainly be an absurdity
if section 65 of the Insurance Law were construed as requiring that an express
warranty be contained only in the policy or in another instrument signed by the
insured and referred to therein as making a part thereof for the protection of such
insured, and at the same time pertaining that such, express warranty be
contained in a piece of paper not signed by the insured but simply attached to the
policy and referred to therein as making a part thereof, thus opening the door to
fraud, — it being easy to detach such rider or slip and change it with another, —
which is precisely what the law is trying to prevent. It will thus be seen that the
attachment of a rider or slip containing an express warranty to a policy, although
referred to therein as making a part thereof, is contrary to the evident intent and
purpose of section 65 of the Insurance Law.
In the case of Isaac Upham Co. vs. United States Fidelity & Guaranty Co. (211
Pac., 809), cited in the majority opinion, the question was whether a warranty
contained in an application for insurance, which was not referred to in the policy
as making a part thereof, incorporated said warranty in the said policy and was
valid. The Supreme Court of California held that it was not, for lack of such
reference. Of course an application for insurance is a document signed by the
insured, and an express warranty contained therein if referred to in the policy as
making a part thereof, will be considered as contained therein in accordance with
law.
In the case of Conner vs. Manchester Assur. Co. (130 Feb., 743), also cited in the
majority opinion, the question was whether an open policy was a warranty and
the Circuit Court of Appeals for the Northern District of California held that it was
not, and further said that "section 2605 of the Civil Code of California (from which
section 65 of the Insurance Law was taken) was evidently intended to express in
statutory form the rule that no express warranty made by the insured shall affect
the contract of insurance, unless it be contained in the policy or in the
application, or some other instrument signed by the insured and made a part of
the contract, and is in effect an affirmance of the generally accepted doctrine
applicable to such contracts." It will be seen from this statement that the court in
enumerating the forms in which an express warranty may be express or made to
appear does not mention any paper which is not signed by the insured.
The fact that for many years it has been the practice of the insurance companies
to use riders or slips of paper containing express warranties without the signature
of the insured in violation of the law is no reason why such practice should be
permitted to continue when its legality is questioned.

In view of the foregoing consideration, I am constrained to dissent from the
opinion of the majority.
IMPERIAL, J., dissenting:
The decision of this case depended principally, but wholly, on the validity of the
warranty F, Exhibit A-2. This instrument consist of a slip of paper pasted on the
margin of a page of the fire insurance policy. It contains the stipulation that the
insured is permitted to store in the building concerned the hazardous goods
specified, to an amount not exceeding three per cent of the total value of the
merchandise stored. The policy makes reference to this rider as follows: "This
policy is subject to the hereon attached `Ordinary Short Period Rate Scale,'
Warranties A and F, Co-insurance clause and `Three Fourths Loss Clause' which
are forming part of the same"; but the rider is not signed by the insured.
Section 65 of Act No. 2427 (Insurance Law) reads as follows:
Every express warranty, made at or before the execution of a policy, must
be contained in the policy itself, or in another instrument signed by the
insured and referred to in the policy, as making a part of it.
An express warranty, then, made at or before the execution of the policy, like
warranty F, is valid only if it is contained in the policy itself, or in another
instrument signed by the insured and referred to in the policy as forming a part
thereof. Examining warranty F, it may be seen that it does not form an integral
part of the policy but appeals on another slip of paper pasted on the policy; it is
therefore an instrument other than the policy and comes under the second
paragraph provided for in section 65. And, according to this provision, warranty F
cannot be valid or binding, for the simple reason that it is not signed by the
insured, and has no weight, notwithstanding the fact that reference is made to it
in a general way in the body of the policy. This reference is not equivalent to
including it in the policy, for the simple reason, as we have said, that it was made
in a general way. It is mentioned simply as warranty F, without giving any idea of
its contents. The term of the rider might be changed and the heading "Warranty
F" retained, and, following the appellant's line of reasoning, it might, with equal
plausibility, be defended as the express warranty agreed upon, because it was
headed "Warranty F." It is just such alterations as this that the law seeks to
prevent in requiring that all warranties of the kind are to be signed by the insured
and referred to in the policy.
Setting aside for the moment the legal question of the validity of the warranty,
and assuming warranty F to be valid, we have to consider another circumstance
which indicates that the insured did not violate it. The trial court found that at
the time of the fire, the inflammable goods in the warehouse or building of the
insured did not exceed the amount permitted by the insurance company, that is,
three per cent of the total value of the merchandise stored. This finding is borne
out by the evidence, and there is no reason for changing it and making another.
24
For these reasons, I believe the judgment appealed from should be affirmed in its
entirely.
G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people
and instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to
health development which shall endeavor to make essential goods, health and
other social services available to all the people at affordable cost. There shall be
priority for the needs of the underprivileged sick, elderly, disabled, women, and
children. The State shall endeavor to provide free medical care to paupers.1
For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish,
maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and disabled
persons enrolled in the health care plan and to provide for the administrative,
legal, and financial responsibilities of the organization." Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by its duly licensed
physicians, specialists and other professional technical staff participating in the
group practice health delivery system at a hospital or clinic owned, operated or
accredited by it.

xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent
petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest, for
the taxable years 1996 and 1997 in the total amount of ₱224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on
petitioner’s health care agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter dated February 23, 2000. As
respondent did not act on the protest, petitioner filed a petition for review in the
Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and
DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which
read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is
PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT
amounting to ₱22,054,831.75 inclusive of 25% surcharge plus 20% interest from
January 20, 1997 until fully paid for the 1996 VAT deficiency and
₱31,094,163.87 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 petitioner’s 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 petitioner’s 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.
25
Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73
as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25%
surcharge for late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same shall have
been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed
this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the
CA’s decision. We held that petitioner’s 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 petitioner’s contention that it is a health
maintenance organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the beneficiaries under
their plans are treated as insurance contracts. Moreover, DST is not a tax on the
business transacted but an excise on the privilege, opportunity or facility offered
at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for
reconsideration and supplemental motion for reconsideration, asserting the
following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997
is imposed only on a company engaged in the business of fidelity bonds
and other insurance policies. Petitioner, as an HMO, is a service
provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank,
affirmed in effect the CA’s disposition that health care services are not in
the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items
subject to DST is clear, especially in the light of the amendments made
in the DST law in 2002.
(e) Assuming arguendo that petitioner’s agreements are contracts of
indemnity, they are not those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health
insurance, health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of
insurance" mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under 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 ₱5,127,149.08 representing 5% of its net worth as
of the year ending December 31, 2005.8
We find merit in petitioner’s motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987.9 It is engaged in the dispensation of the
following medical services to individuals who enter into health care agreements
with it:
Preventive medical services such as periodic monitoring of health problems,
family planning counseling, consultation and advices on diet, exercise and other
healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays,
urinalysis, fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and
therapeutic processes in the event of an injury or sickness on the part of the
enrolled member.10
Individuals enrolled in its health care program pay an annual membership fee.
Membership is on a year-to-year basis. The medical services are dispensed to
enrolled members in a hospital or clinic owned, operated or accredited by
petitioner, through physicians, medical and dental practitioners under contract
with it. It negotiates with such health care practitioners regarding payment
schemes, financing and other procedures for the delivery of health services.
Except in cases of emergency, the professional services are to be provided only by
petitioner's physicians, i.e. those directly employed by it11 or whose services are
contracted by it.12 Petitioner also provides hospital services such as room and
26
board accommodation, laboratory services, operating rooms, x-ray facilities and
general nursing care.13 If and when a member avails of the benefits under the
agreement, petitioner pays the participating physicians and other health care
providers for the services rendered, at pre-agreed rates.14
To avail of petitioner’s health care programs, the individual members are required
to sign and execute a standard health care agreement embodying the terms and
conditions for the provision of the health care services. The same agreement
contains the various health care services that can be engaged by the enrolled
member, i.e., preventive, diagnostic and curative medical services. Except for the
curative aspect of the medical service offered, the enrolled member may actually
make use of the health care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance
Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an
HMO and not an insurer because its agreements are treated as insurance
contracts and the DST is not a tax on the business but an excise on the privilege,
opportunity or facility used in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to characterize the
business it is engaged in, that is, to determine whether it is an HMO or an
insurance company, as this distinction is indispensable in turn to the issue of
whether or not it is liable for DST on its health care agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court
that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997)
provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all
policies of insurance or bonds or obligations of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity,
employer’s 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 (₱0.50) on each
four pesos (₱4.00), or fractional part thereof, of the premium charged. (Emphasis
supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and
nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the
statute – its every word.18
From the language of Section 185, it is evident that two requisites must concur
before the DST can apply, namely: (1) the document must be a policy of
insurance or an obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity, employer’s liability,
plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health
Insurance Act of 1995"), an HMO is "an entity that provides, offers or arranges for
coverage of designated health services needed by plan members for a fixed
prepaid premium."19 The payments do not vary with the extent, frequency or type
of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance
during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates
what constitutes "doing an insurance business" or "transacting an insurance
business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as
a vocation and not as merely incidental to any other legitimate business
or activity of the surety;
c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance business
within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any
of the foregoing in a manner designed to evade the provisions of this
Code.
In the application of the provisions of this Code, the fact that no profit is derived
from the making of insurance contracts, agreements or transactions or that no
separate or direct consideration is received therefore, shall not be deemed
conclusive to show that the making thereof does not constitute the doing or
transacting of an insurance business.
27
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 Health’s 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
28
basis. Hence, if there are no physicians participating in the medical service
corporation’s 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 petitioner’s 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 petitioner’s 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 thepossibility 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
petitioner’s 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 petitioner’s operations are
identical in every respect to those of the HMOs or health providers which were

parties to those cases. What we are stating is that, for the purpose of determining
what "doing an insurance business" means, we have to scrutinize the operations
of the business as a whole and not its mere components. This is of course only
prudent and appropriate, taking into account the burdensome and strict laws,
rules and regulations applicable to insurers and other entities engaged in the
insurance business. Moreover, we are also not unmindful that there are other
American authorities who have found particular HMOs to be actually engaged in
insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance
industry. This is evident from the fact that it is not supervised by the Insurance
Commission but by the Department of Health.33 In fact, in a letter dated
September 3, 2000, the Insurance Commissioner confirmed that petitioner is not
engaged in the insurance business. This determination of the commissioner must
be accorded great weight. It is well-settled that the interpretation of an
administrative agency which is tasked to implement a statute is accorded great
respect and ordinarily controls the interpretation of laws by the courts. The
reason behind this rule was explained in Nestle Philippines, Inc. v. Court of
Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious
needs of a modern or modernizing society and the establishment of diverse
administrative agencies for addressing and satisfying those needs; it also relates
to the accumulation of experience and growth of specialized capabilities by the
administrative agency charged with implementing a particular statute. In Asturias
Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that
executive officials are presumed to have familiarized themselves with all the
considerations pertinent to the meaning and purpose of the law, and to have
formed an independent, conscientious and competent expert opinion thereon. The
courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and
informed judgment, and the fact that they frequently are the drafters of the law
they interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under
Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance… or
obligations of the nature of indemnity for loss, damage, or liability…." In our
decision dated June 12, 2008, we ruled that petitioner’s 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.
29
Under the health care agreement, the rendition of hospital, medical and
professional services to the member in case of sickness, injury or emergency or
his availment of so-called "out-patient services" (including physical examination,
x-ray and laboratory tests, medical consultations, vaccine administration and
family planning counseling) is the contingent event which gives rise to liability on
the part of the member. In case of exposure of the member to liability, he would
be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by
paying for expenses arising from the stipulated contingencies belies its claim that
its services are prepaid. The expenses to be incurred by each member cannot be
predicted beforehand, if they can be predicted at all. Petitioner assumes the risk
of paying for the costs of the services even if they are significantly and
substantially more than what the member has "prepaid." Petitioner does not bear
the costs alone but distributes or spreads them out among a large group of
persons bearing a similar risk, that is, among all the other members of the health
care program. This is insurance.37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all
policies of insurance or bonds or obligations of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity, employer’s
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire insurance), xxxx
(Emphasis supplied)
In construing this provision, we should be guided by the principle that tax
statutes are strictly construed against the taxing authority.38 This is because
taxation is a destructive power which interferes with the personal and property
rights of the people and takes from them a portion of their property for the
support of the government.39 Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a
health care agreement is in the nature of non-life insurance, which is primarily a
contract of indemnity. However, those cases did not involve the interpretation of a
tax provision. Instead, they dealt with the liability of a health service provider to a
member under the terms of their health care agreement. Such contracts, as
contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:

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 insurer’s promise, the insured pays a
premium.41
Do the agreements between petitioner and its members possess all these
elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out
that, even if a contract contains all the elements of an insurance contract, if its
primary purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four
elements mentioned above would be an insurance contract. The primary
purpose of the parties in making the contract may negate the existence of
an insurance contract. For example, a law firm which enters into contracts with
clients whereby in consideration of periodical payments, it promises to represent
such clients in all suits for or against them, is not engaged in the insurance
business. Its contracts are simply for the purpose of rendering personal services.
On the other hand, a contract by which a corporation, in consideration of a
stipulated amount, agrees at its own expense to defend a physician against all
suits for damages for malpractice is one of insurance, and the corporation will be
deemed as engaged in the business of insurance. Unlike the lawyer’s 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
petitioner’s 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
petitioner’s 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.
30
In other words, there is nothing in petitioner's agreements that gives rise to a
monetary liability on the part of the member to any third party-provider of
medical services which might in turn necessitate indemnification from petitioner.
The terms "indemnify" or "indemnity" presuppose that a liability or claim has
already been incurred. There is no indemnity precisely because the member
merely avails of medical services to be paid or already paid in advance at a pre-
agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of
the benefits anytime, e.g. laboratory services, x-ray, routine annual physical
examination and consultations, vaccine administration as well as family planning
counseling, even in the absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who
receives care from a non-participating physician or hospital. However, this is only
a very minor part of the list of services available. The assumption of the expense
by petitioner is not confined to the happening of a contingency but includes
incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program,
Inc.,43 although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from a non-designated doctor, this
did not make defendant an insurer. Citing Jordan, the Court determined that "the
primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services."44 Since indemnity
of the insured was not the focal point of the agreement but the extension of
medical services to the member at an affordable cost, it did not partake of the
nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not
necessarily true that risk alone is sufficient to establish it. Almost anyone who
undertakes a contractual obligation always bears a certain degree of financial
risk. Consequently, there is a need to distinguish prepaid service contracts (like
those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to
provide health services: the risk that it might fail to earn a reasonable return on
its investment. But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is the risk that the cost
of insurance claims might be higher than the premiums paid. The amount of
premium is calculated on the basis of assumptions made relative to the insured.45
However, assuming that petitioner’s 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
petitioner’s objective is to provide medical services at reduced cost, not to
distribute risk like an insurer.

In sum, an examination of petitioner’s 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
petitioner’s health care agreements under Section 185 of the NIRC of 1997 is the
provision’s 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")46enacted 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, employer’s liability, plate glass, steam boiler, burglar, elevator,
automatic sprinkle, or other branch of insurance (except life, marine, inland,
and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was
enacted revising and consolidating the laws relating to internal revenue. The
aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was
completely reproduced as Section 30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again
reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code).
Upon its amendment on March 10, 1917, the pertinent DST provision became
Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of
1917.
31
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the
NIRC of 1939), which codified all the internal revenue laws of the Philippines. In
an amendment introduced by RA 40 on October 1, 1946, the DST rate was
increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and
1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate
was again increased.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
We can clearly see from these two histories (of the DST on the one hand and
HMOs on the other) that when the law imposing the DST was first passed, HMOs
were yet unknown in the Philippines. However, when the various amendments to
the DST law were enacted, they were already in existence in the Philippines and
the term had in fact already been defined by RA 7875. If it had been the intent of
the legislature to impose DST on health care agreements, it could have done so in
clear and categorical terms. It had many opportunities to do so. But it did not.
The fact that the NIRC contained no specific provision on the DST liability of
health care agreements of HMOs at a time they were already known as such,
belies any legislative intent to impose it on them. As a matter of fact, petitioner
was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of
tax), it would be safe to say that health care agreements were never, at any time,
recognized as insurance contracts or deemed engaged in the business of
insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited
in its range, acknowledging in its very nature no limits, so that security against
its abuse is to be found only in the responsibility of the legislature which imposes
the tax on the constituency who is to pay it.51 So potent indeed is the power that
it was once opined that "the power to tax involves the power to destroy."52
Petitioner claims that the assessed DST to date which amounts to ₱376
million53 is way beyond its net worth of ₱259 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 nation’s
thrust towards a better economy which will ultimately benefit the majority of our
people.59
Petitioner’s 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 paid ₱5,127,149.08
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.
32
In view of petitioner’s 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 petitioner’s 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.73Indeed, 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
petitioner’s 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 petitioner’s health care agreements are not subject to
DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit
of Section 185 of the NIRC and there was never any legislative intent to impose
the same on HMOs like petitioner, the same should not be arbitrarily and
unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate
medical services at a cost which the average wage earner can afford. HMOs
arrange, organize and manage health care treatment in the furtherance of the
goal of providing a more efficient and inexpensive health care system made
possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee
each time they receive medical services), including the ability to control costs.
They protect their members from exposure to the high cost of hospitalization and
other medical expenses brought about by a fluctuating economy. Accordingly,
they play an important role in society as partners of the State in achieving its
constitutional mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.74 Its imposition will elevate the cost of health care services. This will in
turn necessitate an increase in the membership fees, resulting in either placing
health services beyond the reach of the ordinary wage earner or driving the
industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004
decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from
collecting the said tax.
33
No costs.
SO ORDERED.
G.R. No. 195872 March 12, 2014
FORTUNE MEDICARE, INC., Petitioner,
vs.
DAVID ROBERT U. AMORIN, Respondent.
DECISION
REYES, J.:
This is a petition for review on certiorari1 under Rule 45 of the Rules of Court,
which challenges the Decision2 dated 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 ₱12,151.36, 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 in-
patient 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 Amorin’s 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
contract’s operation was confined to Philippine territory.8 Further, it argued that
its liability to Amorin was extinguished upon the latter’s acceptance from the
company of the amount of ₱12,151.36.
The RTC Ruling
On May 8, 2006, the RTC of Makati, Branch 66 rendered its Decision9 dismissing
Amorin’s 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
34
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 ₱12,151.36 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.
The CA 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.14 Second, 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 Care’s motion for reconsideration was denied in a Resolution16 dated
February 24, 2011. Hence, the filing of the present petition for review on
certiorari.
The Present Petition
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 Care’s 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 Court’s Ruling
The petition is bereft of merit.
The Court finds no cogent reason to disturb the CA’s finding that Fortune Care’s
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 non-life insurance, which is primarily a contract of indemnity. Once
the member incurs hospital, medical or any other expense arising from sickness,
injury or other stipulated contingent, the health care provider must pay for the
same to the extent agreed upon under the contract.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
35
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:
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.
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 Care’s 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):
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 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 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.
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 Care’s 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.
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 Care’s 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.1âwphi1 The
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.
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 Amorin’s case fell under the second case, i.e., emergency care in
a non-accredited hospital. Rather than a determination of Philippine or American
standards, the first part of the provision speaks of the full reimbursement of "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" 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
36
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
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.
SO ORDERED.
G.R. No.72878 April 15, 1988
ALMENDRAS MINING CORPORATION, petitioner,
vs.
OFFICE OF THE INSURANCE COMMISSION and COUNTRY BANKERS
INSURANCE CORPORATION, respondents.
Augusto G. Gatmaytan for petitioner.
Romeo G. Velasquez for respondents.
RESOLUTION
FELICIANO, J.:

At about two-thirty in the morning of 3 September 1984, the marine cargo vessel
LCT "Don Paulo," while on a voyage from Davao to Mariveles, Bataan, was forced
ground somewhere in the vicinity of Sogod, Tablas Island, Romblon after having
been hit by strong winds and tidal waves brought about by tropical typhoon
"Nitang." Later that same day, petitioner Almendras Mining Corporation
("Almendras"), owner of the vessel, executed and filed the corresponding Marine
Protest. 1Subsequently, in a letter dated 6 September 1984, 2 petitioner
Almendras formally notified the vessel's insurer, private respondent Country
Bankers Insurance Corporation ("Bankers"), of its intention to file a provisional
claim for indemnity for damages sustained by the vessel. 3
Immediately following the marine casualty, private respondent Bankers
commissioned the services of Audemus Adjustment Corporation, which estimated
the insurer's liability at P2,187,983.00, or the equivalent of seventy percent (70%)
of all expenses necessary for the repair of the vessel. Private respondent accepted
and approved this estimate.
Salvage operations on the LCT "Don Paulo" were commenced on 5 September
1984. By 24 September 1984, the vessel had been towed to and docked at the
Philippine National Oil Corporation (PNOC) marine facility in Bauan, Batangas
where repair work on the same was subsequently performed by the PNOC Marine
Corporation.
Delay, however, overtook the repair work on the LCT 'Don Paulo.' Private
respondent Bankers explained that the delay was due to the unavailability of
spare parts needed in the repair of the vessel's four (4) damaged engines.
Notwithstanding this explanation, petitioner Almendras, on 18 April 1985, filed
with the public respondent office of the Insurance Commission an administrative
complaint 4 (docketed as Administrative Case No. 006) against private respondent
Bankers. In its complaint, petitioner Almendras sought (1) revocation or
suspension of private respondent Bankers' Certificate of Authority to engage in
the insurance business; (2) an administrative directive ordering immediate
completion of all repair work on and delivery to petitioner of the LCT "Don Paulo;"
and (3) damages.
At the initial hearings on Administrative Case No. 006 held before public
respondent Commission, private respondent Bankers agreed to replace the four
(4) damaged engines of the LCT "Don Paulo" with one (1) brand new engine and
three (3) reconditioned engines. This entailed a total additional cost of
P3,000,000.00, seventy percent (70%) of which private respondent Bankers had
previously obligated itself, as insurer, to shoulder. For its part, petitioner
Almendras agreed to pay a thirty percent (30%) share in the cost, but only after it
had inspected one of the proposed replacement engines a brand new Caterpillar
D-3408 marine engine which petitioner had claimed was not a suitable
replacement for the vessel's damaged main engine.
Inspection of the Caterpillar D-3408 engine took place at the premises of the
Actrade Machinery Corporation (supplier of the engine) on 16 July 1985 in the
presence of representatives of both petitioner and private respondent. Engineers
37
of the PNOC Marine Corporation who conducted the inspection found said engine
to have met the engineering requirements of the LCT "Don Paulo;" private
respondent Bankers thus anticipated a favorable response in this regard from
petitioner Almendras.
The following day, however, petitioner Almendras, reiterating its claim that the
proposed Caterpillar D-3408 engine was not at par with the vessel's original but
damaged main engine, demanded instead cash settlement of its insurance claim.
This unexpected turn of events moved the Insurance Commissioner to terminate
the hearing then in progress and to require private respondent Bankers to submit
its Answer to the complaint of petitioner Almendras.
Meanwhile, on 13 August 1985, petitioner Almendras filed a separate civil action
for damages (docketed as Civil Case No. 3120-P) with the Regional Trial Court of
Pasay City. 5
At the 23 August 1985 Commission hearing both parties agreed to submit
Administrative Case No. 006 for resolution on a single issue—i.e,whether or not
revocation or suspension of private respondent Bankers' Certificate of Authority
to engage in the insurance business was justified and proper under the
circumstances of this case.
On 23 October 1985, public respondent Commission, through the Insurance
Commissioner, issued a Resolution 6ordering the dismissal of petitioner
Almendras' complaint. It was found by the Insurance Commissioner that failure
by private respondent Bankers to settle promptly and expeditiously the insurance
claim of petitioner Almendras was attributable to the latter's own act of insisting
on cash settlement thereof, even after the parties had already agreed upon
outright replacement of the vessel's damaged engines. The Insurance
Commissioner also stated in his resolution that, assuming that private
respondent Bankers had incurred in delay in the repair of the LCT "Don Paulo,"
nevertheless, there was nothing in the record of the case to show that such delay
was unreasonable or was the result of any unfair claim settlement practice — as
defined under the Insurance Code, as amended — as would warrant revocation or
suspension of private respondent's Certificate of Authority.
Petitioner Almendras' Motion for Reconsideration was denied for lack of merit by
public respondent Commission on 11 November 1985. 7
In the present Petition for certiorari filed with this Court on 28 November 1985,
petitioner Almendras presents only one issue for determination-i.e., whether or
not there the valid and substantial grounds to revoke or suspend private
respondent Bankers' Certificate of Authority to engage in the insurance business.
Public respondent Commission would, however, raise as an additional issue the
argument that the present Petition for certiorari is improperly filed, that appeal to
the Secretary of Finance from public respondent Commission's disputed
Resolution and Order is the proper recourse for petitioner under the facts and
circumstances of this case. 8

Viewed in the light of the facts obtaining in Administrative Case No. 006 and the
pertinent legal provisions on the matter, we hold that the Court has no
jurisdiction to try and decide the instant Petition.
The provisions of the Insurance Code (Presidential Decree No. 1460), as amended,
clearly indicate that the Office of the Insurance Commission is an administrative
agency vested with regulatory power as well as with adjudicatoryauthority. Among
the several regulatory or non-quasi-judicial duties of the Insurance Commissioner
under the Insurance Code is the authority to issue, or refuse issuance of, a
Certificate of Authority to a person or entity desirous of engaging in insurance
business in the Philippines, 9 and to revoke or suspend such Certificate of
Authority upon a finding of the existence of statutory grounds for such revocation
or suspension. The grounds for revocation or suspension of an insurer's
Certificate of Authority are set out in Section 241 10 and in Section 247 11 of the
Insurance Code as amended. The general regulatory authority of the Insurance
Commissioneris described in Section 414 of the Insurance Code, as amended, in
the following terms:
Section 414. The Insurance Commissioner shall have the duty to
see that all laws relating to insurance, insurance companies and
other insurance matters, mutual benefit associations, and trusts
for charitable uses are faithfully executed and to perform the
duties imposed upon him by this Code, and shall, not
withstanding any existing laws to contrary, have sole and
exclusive authority to regulate the issuance and sale of variable
contracts as defined in section two hundred thirty-two and to
provide for the licensing of persons selling such contracts, and
to issue such reasonable rules and regulations governing the
same.
The Commissioner may issue such rulings, instructions,
circulars, orders and decisions as he may deem necessary to
secure the enforcement of the provisions of this Code, subject to
the approval of the Secretary of Finance. Except as otherwise
specified decisions made by the Commissioner shall be
appealable to the Secretary of Finance. (Emphasis supplied)
which Section also specifies the authority to which a decision of the Insurance
Commissioner rendered in the exercise of its regulatory function may be
appealed.
The adjudicatory authority of the Insurance Commissioner is generally described
in Section 416 of the Insurance Code, as amended, which reads as follows:
Sec. 416. The Commissioner shall have the power to adjudicate
claims and complaints involving any loss, damage or liability for
which an insurer may be answerable under any kind of policy or
contract of insurance, or for which such insurer may be liable
under a contract of membership, or for which a reinsurer may
38
be sued under any contract or reinsurance it may have entered
into, or for which a mutual benefit association may be held
liable under the membership certificates it has issued to its
members, where the amount of any such loss, damage or
liability, excluding interests, cost and attorney's fees, being
claimed or sued upon any kind of insurance, bond, reinsurance
contract, or membership certificate does not exceed in any single
claim one hundred thousand pesos.
xxx xxx xxx
The authority to adjudicate granted to the Commissioner under
this section shall be concurrent with that of the civil courts, but
the filing of a complaint with the Commissioner shall preclude
the civil courts from taking cognizance of a suit involving the
same subject matter. (Emphasis supplied)
Continuing, Section 416 (as amended by B.P. Blg. 874) also specifies the
authority to which appeal may be taken from a final order or decision of the
Commissioner given in the exercise of his adjuclicatory or quasi-judicial power:
Any decision, order or ruling rendered by the Commissioner
after a hearing shall have the force and effect of a judgment. Any
party may appeal from a final order, ruling or decision of the
Commissioner by filing with the Commissioner within thirty days
from receipt of copy of such order, ruling or decision a notice of
appeal to the Intermediate Appellate Court (now the Court of
appeals) in the manner provided for in the Rules of Court for
appeals from the Regional Trial Court to the Intermediate
Appellate Court (now the Court of Appeals).
xxx xxx xxx (Emphasis supplied)
It may be noted that under Section 9 (3) of B.P. Blg. 129, appeals from a final
decision of the Insurance Commissioner rendered in the exercise of his
adjudicatory authority now fall within the exclusive appellate jurisdiction of the
Court of Appeals.
Petitioner Almendras in his Complaint filed with the Insurance Commission,
originally sought remedies which would have required the Insurance
Commissioner to adjudicate on matters pertaining to performance and
satisfaction by private respondent Bankers of its legal obligations under its
Contract of Insurance (policy No. MH-HO/84-305) with petitioner Almendras. The
Court observes, however, that both parties had agreed at the 23 August 1985
hearing before the Insurance Commissioner to submit the case for resolution on the
sole issue of whether or not revocation or suspension of private respondent
Bankers' Certificate of Authority to engage in insurance business was justified. The
scope of the issues involved having been so limited the Insurance Commissioner
 39

was left with the task of determining whether or not private respondent Bankers 5 Complaint; Rollo, pp. 112-115.
was guilty of an act or acts constituting a statutory ground for revocation or
suspension of its Certificate of Authority. Clearly, therefore, the Insurance 6 Rollo, pp. 66-69.
Commissioner's disputed Resolution and Order was issued in the performance of
administrative and regulatory duties and fucntion and should have been appealed
by petitioner to the Office of the Secretary of Finance. 7 Order; Rollo, p. 70.

Petitioner Almendras in effect invoked only the Commissioner's regulatory
authority to determine whether or not private respondent Bankers had violated
provisions of the Insurance Code, as amended. Petitioner had chosen to litigate
the substantive aspects of its insurance claim against Bankers in a different
forum — a judicial one — for it instituted a separate civil action for damages
before the Regional Trial Court of Pasay City, on 13 August 1985, that is, after
efforts at amicable settlement of Administrative Case No. 006 had failed.
Petitioner Almendras had in fact to go before a judicial forum and to limit the
proceedings before the Insurance Commissioner to regulatory, non-judicial,
matters; the claim of petitioner Almendras was in excess of P100,000.00 and,
therefore, fen outside the quasi-judicial jurisdiction of the Insurance
Commissioner under Section 416 of the Insurance Code, as amended.
We conclude that petitioner Almendras remedy after its Motion for
Reconsideration in Administrative Case No. 006 had been denied by public
respondent Commission was to interpose an appeal to the Secretary of Finance.
The present Petition for certiorari is neither proper nor an appropriate substitute
for such an appeal.
WHEREFORE, the Petition for certiorari is DISMISSED. Costs against petitioner.
SO ORDERED.
8 Comment; Rollo, pp. 100-106.
9 Insurance Code, as amended, Sec 186 and 187.
10 Section 241 provides in part:
Section 241. (1) No insurance company doing business in the
Philippines shall refuse, without RTD cause, to pay or settle
claims arising under coverages provided by its policies nor shall
any such company engage in unfair claim settlement practices.
Any of the following acts by an insurance company, if committed
without just cause and performed with such frequency as to
indicate a general business practice, shall constitute unfair
claim settlement practices-,
(a) knowingly misrepresenting to claimants
pertinent facts or policy provisions relating to
coverages at issue;
(b) failing to acknowledge with reasonable
promptness pertinent communications with
respect to arising under its policies;

Fernan (Chairman), Gutierrez, Jr., Bidin and Cortes, JJ., concur.

(c) failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;

Footnotes (d) not attempting in good faith to effectuate

1 Rollo, p. 20, Annex "H" of Petition.
2 Id., p. 21, Annex "I" of Petition.
3 The LCT "Don Paulo" was then insured under Policy No. MH-
HO/84-305, issued by private respondent, in the amount of
P7,000,000.00 and for the period cove 25 June 1984 to 25 June
1985.
prompt, fair and equitable settlement of claims
submitted in which liability has become
reasonably clear; or
(e) compelling policy holders to institute suits
to recover in amounts due under its policies by
offering without justifiable reason substantially
less than the amounts ultimately recovered in
suits brought by them.

xxx xxx xxx

4 Rollo, pp. 96-98, Annex "9" of Comment of private respondent.

(3) If it is found, after notice and an
opportunity to be heard, that an insurance
company has violated this section, each
instance of non- compliance with paragraph (1)
may be treated as a separate violation of this
section and shall be considered sufficient
cause for the suspension or revocation of the
company's certificate of authority.' Section 247
provides:
Sec. 247. If the Commissioner is of the opinion upon
examination or other evidence that any domestic or foreign
insurance company is in an unsound condition, or that it has
faued to comply with the provisions of law or regulations
bulgroupon it, or that its condition or methods of business is
such as to render its proceedings hazardous to the public or to
its policyholders or that its paid-up capital stock, in the case of
a domestic stock company, or its available cash assets, in the
case of a domestic mutual company, or its security deposits, in
the case of a foreign company is impaired or deficient, or that
the margin of solvency required of such company is deficient,
the Commissioner is authorized to suspend or revoke all
certificates of authority granted to such insurance company, its
officers and agents, and no new business shall thereafter be
done by such company or for such company by its agent in the
Philippines while such suspension, revocation or disability
continues or until its authority to do is restored by the
Commissioner. Before restoring such authority, the
Commissioner shall require the company concerned to submit to
Mm a business plan showing the company's estimated receipts
and disbursements, as well as the basis therefor, for the next
succeeding three years."
G.R. No. 76452 July 26, 1994
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS
REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and
RAMON MONTILLA PATERNO, JR., respondents.
Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.
Oscar Z. Benares for private respondent.
40
QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules
of Court, with preliminary injunction or temporary restraining order, to annul and
set aside the Order dated November 6, 1986 of the Insurance Commissioner and
the entire proceedings taken in I.C. Special Case No. 1-86.
We grant the petition.
The instant case arose from a letter-complaint of private respondent Ramon M.
Paterno, Jr. dated April 17, 1986, to respondent Commissioner, alleging certain
problems encountered by agents, supervisors, managers and public consumers of
the Philippine American Life Insurance Company (Philamlife) as a result of certain
practices by said company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner
Rodrigo de los Reyes, in his capacity as Philamlife's president, to comment on
respondent Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los
Reyes suggested that private respondent "submit some sort of a 'bill of
particulars' listing and citing actual cases, facts, dates, figures, provisions of law,
rules and regulations, and all other pertinent data which are necessary to enable
him to prepare an intelligent reply" (Rollo, p. 37). A copy of this letter was sent by
the Insurance Commissioner to private respondent for his comments thereon.
On May 16, 1986, respondent Commissioner received a letter from private
respondent maintaining that his letter-complaint of April 17, 1986 was sufficient
in form and substance, and requested that a hearing thereon be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6,
1986, reiterated his claim that private respondent's letter of May 16, 1986 did not
supply the information he needed to enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent
Commissioner on the validity of the Contract of Agency complained of by private
respondent.
In said hearing, private respondent was required by respondent Commissioner to
specify the provisions of the agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent
Commissioner dated July 31, 1986, reiterating his letter of April 17, 1986 and
praying that the provisions on charges and fees stated in the Contract of Agency
executed between Philamlife and its agents, as well as the implementing
provisions as published in the agents' handbook, agency bulletins and circulars,
be declared as null and void. He also asked that the amounts of such charges and
 41

fees already deducted and collected by Philamlife in connection therewith be received by

reimbursed to the agents, with interest at the prevailing rate reckoned from the the
date when they were deducted. respondent
De los
Respondent Commissioner furnished petitioner De los Reyes with a copy of Reyes, and
private respondent's letter of July 31, 1986, and requested his answer thereto. hence, no
jurisdiction
has been
Petitioner De los Reyes submitted an Answer dated September 8, 1986, acquired
stating inter alia that: over his
person;
(1) Private respondent's letter of August 11, 1986 does not
contain any of the particular information which Philamlife was (3) No
seeking from him and which he promised to submit. answer has
been filed,
(2) That since the Commission's quasi-judicial power was being and hence,
invoked with regard to the complaint, private respondent must the hearing
file a verified formal complaint before any further proceedings. scheduled
on
November 5,
In his letter dated September 9, 1986, private respondent asked for the 1986 in the
resumption of the hearings on his complaint. Subpoena/N
otice, and
On October 1, private respondent executed an affidavit, verifying his letters of wherein the
April 17, 1986, and July 31, 1986. respondent
is required
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant to appear, is
Vice-President and Executive Assistant to the President, asked that respondent premature
Commission first rule on the questions of the jurisdiction of the Insurance and lacks
Commissioner over the subject matter of the letters-complaint and the legal legal basis.
standing of private respondent.
II. The Insurance Commission has no jurisdiction over;
On October 27, respondent Commissioner notified both parties of the hearing of
the case on November 5, 1986. (1) the subject matter or nature of the action;
and
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the
following grounds; (2) over the parties involved (Rollo, p. 102).

1. The Subpoena/Notice has no legal basis and is premature In the Order dated November 6, 1986, respondent Commissioner denied the
because: Motion to Quash. The dispositive portion of said Order reads:

(1) No complaint sufficient in form and NOW, THEREFORE, finding the position of complainant thru
contents has been filed; counsel tenable and considering the fact that the instant case is
an informal administrative litigation falling outside the operation
(2) No of the aforecited memorandum circular but cognizable by this
summons Commission, the hearing officer, in open session ruled as it is
has been hereby ruled to deny the Motion to Quash Subpoena/Notice for
lack of merit (Rollo, p. 109).
issued nor

Hence, this petition.
II
The main issue to be resolved is whether or not the resolution of the legality of the
Contract of Agency falls within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to
take cognizance of the complaint in the exercise of its quasi-judicial powers. The
Solicitor General, upholding the jurisdiction of the Insurance Commissioner,
claims that under Sections 414 and 415 of the Insurance Code, the
Commissioner has authority to nullify the alleged illegal provisions of the
Contract of Agency.
III
The general regulatory authority of the Insurance Commissioner is described in
Section 414 of the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all
laws relating to insurance, insurance companies and other
insurance matters, mutual benefit associations and trusts for
charitable uses are faithfully executed and to perform the duties
imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in
this Code, the Insurance Commissioner is hereby authorized, at
his discretion, to impose upon insurance companies, their
directors and/or officers and/or agents, for any willful failure or
refusal to comply with, or violation of any provision of this Code,
or any order, instruction, regulation or ruling of the Insurance
Commissioner, or any commission of irregularities, and/or
conducting business in an unsafe and unsound manner as may
be determined by the the Insurance Commissioner, the
following:
(a) fines not in excess of five hundred pesos a
day; and
(b)
suspension,
or after due
hearing,
removal of
directors
42
and/or
officers
and/or
agents.
A plain reading of the above-quoted provisions show that the Insurance
Commissioner has the authority to regulate the business of insurance, which is
defined as follows:
(2) The term "doing an insurance business" or "transacting an
insurance business," within the meaning of this Code, shall
include
(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. (Insurance
Code, Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not
included within the meaning of an insurance business, Section 2 of the Insurance
Code cannot be invoked to give jurisdiction over the same to the Insurance
Commissioner. Expressio unius est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of
the Insurance Commissioner under Section 416 of the Insurance Code applies in
his case, we likewise rule in the negative. Section 416 of the Code in pertinent
part, provides:
The Commissioner shall have the power to adjudicate claims
and complaints involving any loss, damage or liability for which
an insurer may be answerable under any kind of policy or
contract of insurance, or for which such insurer may be liable
under a contract of suretyship, or for which a reinsurer may be
used under any contract or reinsurance it may have entered
into, or for which a mutual benefit association may be held
liable under the membership certificates it has issued to its
members, where the amount of any such loss, damage or
liability, excluding interest, costs and attorney's fees, being
claimed or sued upon any kind of insurance, bond, reinsurance
contract, or membership certificate does not exceed in any single
claim one hundred thousand pesos.
 43

A reading of the said section shows that the quasi-judicial power of the Insurance - versus - CHICO-NAZARIO, JJ
Commissioner is limited by law "to claims and complaints involving any loss, DEL MONTE MOTORS, INC., Promulgated:
damage or liability for which an insurer may be answerable under any kind of Respondent. October 9, 2006
policy or contract of insurance, . . ." Hence, this power does not cover the x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- x
relationship affecting the insurance company and its agents but is limited to
adjudicating claims and complaints filed by the insured against the insurance DECISION
company.
PANGANIBAN, CJ:
While the subject of Insurance Agents and Brokers is discussed under Chapter
IV, Title I of the Insurance Code, the provisions of said Chapter speak only of the
licensing requirements and limitations imposed on insurance agents and brokers.
The securities required by the Insurance Code to be deposited with the Insurance
The Insurance Code does not have provisions governing the relations between
insurance companies and their agents. It follows that the Insurance
Commissioner cannot, in the exercise of its quasi-judicial powers, assume Commissioner are intended to answer for the claims of all policy holders in the
jurisdiction over controversies between the insurance companies and their
agents.
event that the depositing insurance company becomes insolvent or otherwise
We have held in the cases of Great Pacific Life Assurance Corporation v.
Judico, 180 SCRA 445 (1989), and Investment Planning Corporation of the unable to satisfy their claims. The security deposit must be ratably distributed
Philippines v. Social Security Commission, 21 SCRA 904 (1962), that an insurance
company may have two classes of agents who sell its insurance policies: (1)
salaried employees who keep definite hours and work under the control and among all the insured who are entitled to their respective shares; it cannot be
supervision of the company; and (2) registered representatives, who work on
commission basis.
garnished or levied upon by a single claimant, to the detriment of the others.
Under the first category, the relationship between the insurance company and its
agents is governed by the Contract of Employment and the provisions of the Labor
Code, while under the second category, the same is governed by the Contract of
Agency and the provisions of the Civil Code on the Agency. Disputes involving the
latter are cognizable by the regular courts. The Case

WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of

the Insurance Commission is SET ASIDE.

SO ORDERED. Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to

reverse the January 16, 2003 Order[2] of the Regional Court (RTC) of Quezon City

REPUBLIC OF THE G.R. No. 156956 (Branch 221) in Civil Case No. Q-97-30412. The RTC found Insurance
PHILIPPINES, Represented
by EDUARDO T. MALINIS, Present:
in His Capacity as Insurance Commissioner Eduardo T. Malinis guilty of indirect contempt for refusing to
Commissioner, PANGANIBAN, CJ, Chairperson,
Petitioner, YNARES-SANTIAGO,
AUSTRIA-MARTINEZ,
CALLEJO, SR., and
 44

comply with the December 18, 2002 Resolution[3] of the lower court. The January representing the balance of Vilfran Liners service contracts with respondent. The

16, 2003 Order states in full: trial court further ordered the execution of the Decision against

On January 8, 2003, [respondent] filed a Motion to Cite

Commissioner Eduardo T. Malinis of the Office of the Insurance the counterbond posted by Vilfran Liner on June 10, 1997, and issued by Capital
Commission in Contempt of Court because of his failure and
refusal to obey the lawful order of this court embodied in a
Resolution dated December 18, 2002 directing him to allow the Insurance and Surety Co., Inc. (CISCO).
withdrawal of the security deposit of Capital Insurance and
Surety Co. (CISCO) in the amount of P11,835,375.50 to be paid
to Sheriff Manuel Paguyo in the satisfaction of the Notice of
Garnishment pursuant to a Decision of this Court which has
become final and executory. On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent,

During the hearing of the Motion set last January 10,

2003, Commissioner Malinis or his counsel or his duly claiming that the latter had no record or document regarding the alleged issuance
authorized representative failed to appear despite notice in utter
disregard of the order of this Court. However,
Commissioner Malinis filed on January 15, 2003 a written of the counterbond; thus, the bond was not valid and enforceable.
Comment reiterating the same grounds already passed upon
and rejected by this Court. This Court finds no lawful
justification or excuse for Commissioner Malinis refusal to
implement the lawful orders of this Court.
On June 13, 2002, the RTC granted the Motion for Execution and issued the
Wherefore, premises considered and after due hearing,
Commissioner Eduardo T. Malinis is hereby declared guilty of
Indirect Contempt of Court pursuant to Section 3 [of] Rule 71 of corresponding Writ. Armed with this Writ, Sheriff Manuel S. Paguyoproceeded to
the 1997 Rules of Civil Procedure for willfully disobeying and
refusing to implement and obey a lawful order of this Court.[4]
levy on the properties of CISCO. He also issued a Notice of Garnishment on

several depository banks of the insurance company. Moreover, he served a similar

The Facts
notice on the Insurance Commission, so as to enforce the Writ on the security

deposit filed by CISCO with the Commission in accordance with Section 203 of

On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412,
the Insurance Code.

finding the defendants (Vilfran Liner, Inc., Hilaria Villegas and Maura Villegas)

jointly and severally liable to pay Del Monte Motors, Inc., P11,835,375.50
 45

On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled The RTC held Insurance Commissioner Malinis in contempt for his refusal to

that the Notice of Garnishment served by Sheriff Paguyo on the insurance implement its Order. It explained that the commissioner had no legal justification

commission was valid. The trial court added that the letter and spirit of the law for his refusal to allow the withdrawal of CISCOs security deposit.

made the security deposit answerable for contractual obligations incurred by

Hence, this Petition.[6]

CISCO under the insurance contracts the latter had entered into. The RTC

resolved thus:

Furthermore, the Commissioner of the Office of the Insurance Issues

Commission is hereby ordered to comply with its obligations
under the Insurance Code by upholding the integrity and
efficacy of bonds validly issued by duly accredited Bonding and
Insurance Companies; and to safeguard the public interest by
insuring the faithful performance to enforce contractual
obligations under existing bonds. Accordingly said office is Petitioner raises this sole issue for the Courts consideration:
ordered to withdraw from the security deposit of Capital
Insurance & Surety Company, Inc. the amount of P11,835.50 to Whether or not the security deposit held by the Insurance
be paid to Sheriff Manuel S. Paguyo in satisfaction of the Notice Commissioner pursuant to Section 203 of the Insurance Code
of Garnishment served on August 16, 2002.[5] may be levied or garnished in favor of only one insured.[7]

On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo

The Courts Ruling

T. Malinis in contempt of court for his refusal to obey the December 18, 2002

Resolution of the trial court.

The Petition is meritorious.

Ruling of the Trial Court

Preliminary Issue:

Propriety of Review
 46

Before discussing the principal issue, the Court will first dispose of the question The issue is not totally moot. To stress, only a portion of respondents claim was

of mootness. satisfied, and the Insurance Commission has required CISCO to replenish the

Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the latters security deposit. Respondent, therefore, may one day decide to further

treasurer of the Philippines a letter dated March 26, 2003, stating that the former garnish the security deposit, once replenished. Moreover, after the questioned

had no objection to the release of the security deposit to Del Monte Order of the lower court was issued, similar claims on the security deposits of

Motors. Portions of the fund were consequently released to respondent in July, various insurance companies have been made before the Insurance

October, and December 2003. Thus, the issue arises: whether these Commission. To set aside the resolution of the issue will only postpone a task

circumstances render the case moot. that is certain to crop up in the future.

Petitioner, however, contends that the partial releases should not be Besides, the business of insurance is imbued with public interest. It is subject to

construed as an abandonment of its stand that security deposits under Section regulation by the State, with respect not only to the relations between the insurer

203 of the Insurance Code are exempt from levy and garnishment. The Republic and the insured, but also to the internal affairs of insurance companies. [8] As this

claims that the releases were made pursuant to the commissioners power of case is undeniably endowed with public interest and involves a matter of public

control over the fund, not to the lower courts Order of garnishment. Petitioner policy, this Court shall not shirk from its duty to educate the bench and the bar

further invokes the jurisdiction of this Court to put to rest the principal issue of by formulating guiding and controlling principles, precepts, doctrines and rules.[9]

whether security deposits made with the Insurance Commission may be levied

and garnished. Principal Issue:

 47

Exemption of Security Deposit

from Levy or Garnishment

The Court is not convinced. As worded, the law expressly and clearly

Section 203 of the Insurance Code provides as follows:

states that the security deposit shall be (1) answerable for all the obligations of
Sec. 203. Every domestic insurance company shall, to the extent
of an amount equal in value to twenty-five per centum of the the depositing insurer under its insurance contracts; (2) at all times free from any
minimum paid-up capital required under section one hundred
eighty-eight, invest its funds only in securities, satisfactory to
the Commissioner, consisting of bonds or other evidences of liens or encumbrance; and (3) exempt from levy by any claimant.
debt of the Government of the Philippines or its political
subdivisions or instrumentalities, or of government-owned or
controlled corporations and entities, including the Central Bank
of the Philippines: Provided, That such investments shall at all
times be maintained free from any lien or encumbrance;
and Provided, further, That such securities shall be deposited To be sure, CISCO, though presently under conservatorship, has valid
with and held by the Commissioner for the faithful performance
by the depositing insurer of all its obligations under its
insurance contracts. The provisions of section one hundred outstanding policies. Its policy holders have a right under the law to be equally
ninety-two shall, so far as practicable, apply to the securities
deposited under this section.
protected by its security deposit. To allow the garnishment of that deposit would
Except as otherwise provided in this Code, no judgment
creditor or other claimant shall have the right to levy upon impair the fund by decreasing it to less than the percentage of paid-up capital
any of the securities of the insurer held on deposit pursuant
to the requirement of the Commissioner. (Emphasis supplied)
that the law requires to be maintained. Further, this move would create, in favor

of respondent, a preference of credit over the other policy holders and

Respondent notes that Section 203 does not provide for an absolute beneficiaries.

prohibition on the levy and garnishment of the security deposit. It contends that

the law requires the deposit, precisely to ensure faithful performance of all the Our Insurance Code is patterned after that of California.[10] Thus, the

obligations of the depositing insurer under the latters various insurance ruling of the states Supreme Court on a similar concept as that of the security

contracts. Hence, respondent claims that the security deposit should be deposit is instructive. Engwicht v. Pacific States Life Assurance Co.[11] held that the

answerable for the counterbond issued by CISCO. money required to be deposited by a mutual assessment insurance company with
 48

the state treasurer was a trust fund to be ratably distributed amongst all the The right to lay claim on the fund is dependent on the solvency of the

claimants entitled to share in it. Such a distribution cannot be had except in an insurer and is subject to all other obligations of the company arising from its

action in the nature of a creditors bill, upon the hearing of which, and with all the insurance contracts. Thus, respondents interest is merely inchoate. Being a mere

parties interested in the fund before it, the court may make equitable distribution expectancy, it has no attribute of property. At this time, it is nonexistent and may

of the fund, and appoint a receiver to carry that distribution into effect.[12] never exist.[14] Hence, it would be premature to make the security deposit

answerable for CISCOs present obligation to Del Monte Motors.

Basic is the statutory construction rule that provisions of a statute

should be construed in accordance with the purpose for which it was Moreover, since insolvency proceedings against CISCO have yet to be

enacted.[13]That is, the securities are held as a contingency fund to answer for the conducted, it would be impossible to establish at this time which claimants are

claims against the insurance company by all its policy holders and their entitled to the security deposit and in what pro-rated amounts. Only after all

beneficiaries.This step is taken in the event that the company becomes insolvent other claimants under subsisting policies issued by CISCO have been heard can

or otherwise unable to satisfy the claims against it. Thus, a single claimant may respondents share be determined.

not lay stake on the securities to the exclusion of all others. The other parties

may have their own claims against the insurance company under other insurance Powers of the Commissioner

contracts it has entered into.

The Insurance Code has vested the Office of the Insurance Commission

with both regulatory and adjudicatory authority over insurance matters.[15]

Respondents Inchoate Right

The general regulatory authority of the insurance commissioner is
described in Section 414 of the Code as follows:
Sec. 414. The Insurance Commissioner shall have the
duty to see that all laws relating to insurance, insurance
companies and other insurance matters, mutual benefit
associations, and trusts for charitable uses are faithfully
executed and to perform the duties imposed upon him by this
Code, and shall, notwithstanding any existing laws to the
contrary, have sole and exclusive authority to regulate the
issuance and sale of variable contracts as defined in section two
hundred thirty-two and to provide for the licensing of persons
selling such contracts, and to issue such reasonable rules and
regulations governing the same.
The Commissioner may issue such rulings, instructions,
circulars, orders and decisions as he may deem necessary to
secure the enforcement of the provisions of this Code, subject to
the approval of the Secretary of Finance. Except as otherwise
specified, decisions made by the Commissioner shall
be appealable to the Secretary of Finance. (Emphasis supplied)
Pursuant to these regulatory powers, the commissioner is authorized to
(1) issue (or to refuse to issue) certificates of authority to persons or entities
desiring to engage in insurance business in the Philippines;[16] (2) revoke or
suspend these certificates of authority upon finding grounds for the revocation or
suspension;[17] (3) impose upon insurance companies, their directors and/or
officers and/or agents appropriate penalties -- fines, suspension or removal from
office -- for failing to comply with the Code or with any of the commissioners
49
orders, instructions, regulations or rulings, or for otherwise conducting business
in an unsafe or unsound manner.[18]
Included in the above regulatory responsibilities is the duty to hold the security
deposits under Sections 191[19] and 203 of the Code, for the benefit and security
of all policy holders. In relation to these provisions, Section 192 of the Insurance
Code states:
Sec. 192. The Commissioner shall hold the securities, deposited
as aforesaid, for the benefit and security of all the policyholders
of the company depositing the same, but shall as long as the
company is solvent, permit the company to collect the interest or
dividends on the securities so deposited, and, from time to
time, with his assent, to withdraw any of such securities, upon
depositing with said Commissioner other like securities, the
market value of which shall be equal to the market value of such
as may be withdrawn. In the event of any company ceasing to do
business in the Philippines the securities deposited as aforesaid
shall be returned upon the companys making
application therefor and proving to the satisfaction of the
Commissioner that it has no further liability under any of its
policies in the Philippines. (Emphasis supplied)
Undeniably, the insurance commissioner has been given a wide latitude
of discretion to regulate the insurance industry so as to protect the insuring
public. The law specifically confers custody over the securities upon the
commissioner, with whom these investments are required to be deposited. An
 50

implied trust[20] is created by the law for the benefit of all claimants under The emergence of the multifarious needs of modern society necessitates

subsisting insurance contracts issued by the insurance company.[21] the establishment of diverse administrative agencies. In addressing these needs,

As the officer vested with custody of the security deposit, the insurance the administrative agencies charged with applying and implementing particular

commissioner is in the best position to determine if and when it may be released statutes have accumulated experience and specialized capabilities.Thus, in a long

without prejudicing the rights of other policy holders. Before allowing the line of cases, this Court has recognized that their construction of a statute is

withdrawal or the release of the deposit, the commissioner must be satisfied that entitled to great respect and should ordinarily be controlling, unless clearly

the conditions contemplated by the law are met and all policy holders protected. shown to be in sharp conflict with the governing statute or the Constitution and

other laws.[23]
Commissioners Actions
Entitled to Great Respect

Clearly, then, the trial court erred in issuing the Writ of Garnishment
In this case, Commissioner Malinis refused to release the security
against the security deposit of CISCO. It follows that without the issuance of a
deposit of CISCO. Believing that the funds were exempt from execution as
valid order, the insurance commissioner could not have been in contempt of
provided by law, he sought to protect other policy holders. His interpretation of
court.[24]
the provisions of the law carries great weight and consideration,[22] as he is the

head of a specialized body tasked with the regulation of insurance matters and
WHEREFORE, the Petition is GRANTED and the assailed Order SET

primarily charged with the implementation of the Insurance Code. ASIDE. No costs.

SO ORDERED.

G.R. No. 207277
MALAYAN INSURANCE CO., INC., YVONNE S. YUCHENGCO, ATTY.
EMMANUEL G. VILLANUEVA, SONNY RUBIN,1 ENGR. FRANCISCO MONDELO,
and MICHAEL REQUIJO,2 Petitioners.
vs.
EMMA CONCEPCION L. LIN,3 Respondent.
DECISION
DEL CASTILLO, J.:
Assailed in this Petition for Review on Certiorari4 are the December 21, 2012
Decision5 of the Court of Appeals (CA) and its May 22, 2013 Resolution6 in CA-
GR. SP No. 118894, both of which found no grave abuse of discretion in the twin
Orders issued by the Regional Trial Court (RTC) of Manila, Branch 52, on
September 29, 20107 and on January 25, 20118 in Civil Case No. 10-122738.
Factual Antecedents
On January 4, 2010, Emma Concepcion L. Lin (Lin) filed a Complaint9 for
Collection of Sum of Money with Damages against Malayan Insurance Co., Inc.
(Malayan), Yvonne Yuchengco (Yvonne), Atty. Emmanuel Villanueva, Sonny
Rubin, Engr. Francisco Mondelo, Michael Angelo Requijo (collectively, the
petitioners), and the Rizal Commercial and Banking Corporation (RCBC). This
was docketed as Civil Case No. 10-122738 of Branch 52 of the Manila RTC.
Lin alleged that she obtained various loans from RCBC secured by six clustered
warehouses located at Plaridel, Bulacan; that the five warehouses were insured
with Malayan against fire for ₱56 million while the remaining warehouse was
insured for ₱2 million; that on February 24, 2008, the five warehouses were
gutted by fire; that on April 8, 2008 the Bureau of Fire Protection (BFP) issued a
Fire Clearance Certification to her (April 8, 2008 FCC) after having determined
that the cause of fire was accidental; that despite the foregoing, her demand for
payment of her insurance claim was denied since the forensic investigators hired
by Malayan claimed that the cause of the fire was arson and not accidental; that
she sought assistance from the Insurance Commission (IC) which, after a meeting
among the parties and a conduct of reinvestigation into the cause/s of the fire,
recommended that Malayan pay Lin's insurance claim and/or accord great weight
to the BFP's findings; that in defiance thereof, Malayan still denied or refused to
pay her insurance claim; and that for these reasons, Malayan's corporate officers
should also be held liable for acquiescing to Malayan's unjustified refusal to pay
her insurance claim.
As against RCBC, Lin averred that notwithstanding the loss of the mortgaged
properties, the bank refused to go after Malayan and instead insisted that she
herself must pay the loans to RCBC, otherwise, foreclosure proceedings would
51
ensue; and that to add insult to injury, RCBC has been compounding the interest
on her loans, despite RCBC's failure or refusal to go after Malayan.
Lin thus prayed in Civil Case No. 10-122738 that judgment be rendered ordering
petitioners to pay her insurance claim plus interest on the amounts due or owing
her; that her loans and mortgage to RCBC be deemed extinguished as of February
2008; that RCBC be enjoined from foreclosing the mortgage on the properties put
up as collaterals; and that petitioners he ordered to pay her ₱l,217,928.88 in the
concept of filing foes, costs of suit,₱l million as exemplary damages, and
₱500,000.00 as attorney’s fees.
Some five months later, or on June 17, 2010, Lin filed before the IC an
administrative case 10 against Malayan, represented this time by Yvonne. This
was docketed as Administrative Case No. 431.
In this administrative case, Lin claimed that since it had been conclusively found
that the cause of the fire was "accidental," the only issue left to be resolved is
whether Malayan should be held liable for unfair claim settlement practice under
Section 241 in relation to Section 247 of the Insurance Code due to its unjustified
refusal to settle her claim; and that in consequence of the foregoing failings,
Malayan's license to operate as a non-life insurance company should be revoked
or suspended, until such time that it fully complies with the IC Resolution
ordering it to accord more weight to the BFP's findings.
On August 17, 2010, Malayan filed a motion to dismiss Civil Case No. 10-122738
based on forum shopping. It argued that the administrative case was instituted to
prompt or incite IC into ordering Malayan to pay her insurance claim; that the
elements of forum shopping are present in these two cases because there exists
identity of parties since Malayan's individual officers who were impleaded in the
civil case are also involved in the administrative case; that the same interests are
shared and represented in both the civil and administrative cases; that there is
identity of causes of action and reliefs sought in the two cases since the
administrative case is merely disguised as an unfair claim settlement charge,
although its real purpose is to allow Lin to recover her insurance claim from
Malayan; that Lin sought to obtain the same reliefs in the administrative case as
in the civil case; that Lin did not comply with her sworn undertaking in the
Certification on Non-Forum Shopping which she attached to the civil case,
because she deliberately failed to notify the RTC about the pending administrative
case within five days from the filing thereof.
This motion to dismiss drew a Comment/Opposition, 11 which Lin filed on August
31, 2010.
Ruling of the Regional Trial Court
In its Order of September 29, 2010,12 the RTC denied the Motion to Dismiss,
thus:

WHEREFORE, the MOTION TO DISMISS filed by [petitioners] is hereby DENIED for
lack of merit.
Furnish the parties through their respective [counsels] with a copy each [of] the
Order.
SO ORDERED.13
The RTC held that in the administrative case, Lin was seeking a relief clearly
distinct from that sought in the civil case; that while in the administrative case
Lin prayed for the suspension or revocation of Malayan's license to operate as a
non-life insurance company, in the civil case Lin prayed for the collection of a
sum of money with damages; that it is abundantly clear that any judgment that
would be obtained in either case would not be res judicata to the other, hence,
there is no forum shopping to speak of.
In its Order of January 25, 2011, 14 the RTC likewise denied, for lack of merit,
petitioners' Motion for Reconsideration.
Ruling of the Court of Appeals
Petitioners thereafter sued out a Petition for Certiorari and Prohibition15 before the
CA. However, in a Decision 16dated December 21, 2012, the CA upheld the RTC,
and disposed as follows:
WHEREFORE absent grave abuse of discretion on the part of respondent Judge,
the Petition for Certiorari and Prohibition (with Temporary Restraining Order and
Preliminary Injunction) is DISMISSED.
SO ORDERED.17
The CA, as did the RTC, found that Lin did not commit forum shopping chiefly for
the reason that the issues raised and the reliefs prayed for in the civil case were
essentially different from those in the administrative case, hence Lin had no duty
at all to inform the RTC about the institution or pendency of the administrative
case.
The CA ruled that forum shopping exists where the elements of litis
pendentia concurred, and where a final judgment in one case will amount to res
judicata in the other. The CA held that of the three elements of forum
shopping viz., (l) identity of parties, or at least such parties as would represent the
same interest in both actions, (2) identity of rights asserted and reliefs prayed for,
the relief being founded on the same facts, and (3) identity of the two proceedings
such that any judgment rendered in one action will, regardless of which party is
successful, amount to res judicata in the other action under consideration, only
the first element may be deemed present in the instant case. The CA held that
there is here identity of parties in the civil and administrative cases because Lin is
52
the complainant in both the civil and administrative cases, and these actions
were filed against the same petitioners, the same RCBC and the same Malayan,
represented by Yvonne, respectively. It held that there is however no identity of
rights asserted and reliefs prayed for because in the civil case, it was Lin's
assertion that petitioners had violated her rights to recover the full amount of her
insurance claim, which is why she prayed/demanded that petitioners pay her
insurance claim plus damages; whereas in the administrative case, Lin's
assertion was that petitioners were guilty of unfair claim settlement practice, for
which reason she prayed that Malayan's license to operate as an insurance
company be revoked or suspended; that the judgment in the civil case, regardless
of which party is successful, would not amount to res judicata in the
administrative case in view of the different issues involved, the dissimilarity in the
quantum of evidence required, and the distinct mode or procedure to be observed
in each case.
Petitioners moved for reconsideration 18 of the CA's Decision, but this motion was
denied by the CA in its Resolution of May 22, 2013.19
Issues
Before this Court, petitioners instituted the present Petition, 20 which raises the
following issues:
The [CA] not only decided questions of substance contrary to law and the
applicable decisions of this Honorable Court, it also sanctioned a flagrant
departure from the accepted and usual course of judicial proceedings.
A.
The [CA] erred in not dismissing the Civil Case on the ground of willful and
deliberate [forum shopping] despite the fact that the civil case and the
administrative case both seek the payment of the same fire insurance claim.
B.
The [CA] erred in not dismissing the civil case for failure on the part of [Lin] to
comply with her undertaking in her verification and certification of non-forum
shopping appended to the civil complaint.21
Petitioners' Arguments
In praying for the reversal of the CA Decision, petitioners argue that regardless of
nomenclature, it is Lin and no one else who filed the administrative case, and
that she is not a mere complaining witness therein; that it is settled that only
substantial identity of parties is required for res judicata to apply; that the
sharing of the same interest is sufficient to constitute identity of parties; that Lin
has not denied that the subject of both the administrative case and the civil case

involved the same fire insurance claim; that there is here identity of causes of
action, too, because the ultimate objective of both the civil case and the
administrative case is to compel Malayan to pay Lin's fire insurance claim; that
although the reliefs sought in the civil case and those in the administrative case
are worded differently, Lin was actually asking for the payment of her insurance
claim in both cases; that it is well-entrenched that a party cannot escape the
operation of the principle in res judicata that a cause of action cannot be litigated
twice just by varying the form of action or the method of presenting the case;
that Go v. Office of the Ombudsman22is inapplicable because the issue in that case
was whether there was unreasonable delay in withholding the insured's claims,
which would warrant the revocation or suspension of the insurers' licenses, and
not whether the insurers should pay the insured's insurance claim;
that Almendras Mining Corporation v. Office of the Insurance Commission23does not
apply to this case either, because the parties in said case agreed to submit the
case for resolution on the sole issue of whether the revocation or suspension of
the insurer's license was justified; and that petitioners will suffer irreparable
injury as a consequence of having to defend themselves in a cfase which should
have been dismissed on the ground of forum shopping.
Respondents Arguments
Lin counters that as stressed in Go v. Office of the Ombudsman, 24 an
administrative case for unfair claim settlement practice may proceed
simultaneously with, or independently of, the civil case for collection of the
insurance proceeds filed by the same claimant since a judgment in one will not
amount to res judicata to the other, and vice versa, due to the variance or
differences in the issues, in the quantum of evidence, and in the procedure to be
followed in prosecuting the cases; that in this case the CA cited the teaching in Go
v. Office of the Ombudsman that there was no grave abuse of discretion in the
RTC's dismissal of petitioners' motion to dismiss; that the CA correctly held that
the RTC did not commit grave abuse of discretion in denying petitioners' motion
to dismiss because the elements of forum shopping were absent; that there is
here no identity of parties because while she (respondent) is the plaintiff in the
civil case, she is only a complaining witness in the administrative case since it is
the IC that is the real party in interest in the administrative case; that the cause
of action in the civil case consists of Malayan's failure or refusal to pay her
insurance claim, whereas in the administrative case, it consists of Malayan's
unfair claim settlement practice; that the issue in the civil case is whether
Malayan is liable to pay Lin's insurance claim, while the issue in the
administrative case is whether Malayan's license to operate should be revoked or
suspended for engaging in unfair claim settlement practice; and that the relief
sought in the civil case consists in the payment of a sum of money plus damages,
while the relief in the administrative case consists of the revocation or suspension
of Malayan's license to operate as an insurance company. According to Lin,
although in the administrative case she prayed that the IC Resolution ordering
Malayan to accord weight to the BFP's findings be declared final, this did not
mean that she was therein seeking payment of her insurance claim, but rather
that the IC can now impose the appropriate administrative sanctions upon
Malayan; that if Malayan felt compelled to pay Lin's insurance claim for fear that
its license to operate as an insurance firm might be suspended or revoked, then
53
this is just a logical result of its failure or refusal to pay the insurance claim; that
the judgment in the civil case will not amount to res judicata in the administrative
case, and vice versa, pursuant to the case law ruling in Go v. Office of the
Ombudsman25and in Almendras v. Office of the Insurance Commission, 26 both of
which categorically allowed the insurance clain1ants therein to file both a civil
and an administrative case against insurers; that the rule against forum shopping
was designed to serve a noble purpose, viz., to be an instrument of justice, hence,
it can in no way be interpreted to subvert such a noble purpose.
Our Ruling
We deny this Petition. We hold that the case law rulings in
the Go and Almendras cases27 control and govern the case at bench.
First off, it is elementary that "an order denying a motion to dismiss is merely
interlocutory and, therefore, not appealable, x x x to x x x avoid undue
inconvenience to the appealing party by having to assail orders as they are
promulgated by the court, when all such orders may be contested in a single
appeal."28
Secondly, petitioners herein utterly failed to prove that the RTC, in issuing the
assailed Orders, acted with grave abuse of discretion amounting to lack or excess
of jurisdiction. "It is well-settled that an act of a court or tribunal may only be
considered to have been done in grave abuse of discretion when the same was
performed in a capricious or whimsical exercise of judgment which is equivalent
to lack or excess of jurisdiction."29 "[F]or grave abuse of discretion to exist, the
abuse of discretion must be patent and gross so as to amount to an evasion of a
positive duty or a virtual refusal to perform a duty enjoined by law, or to act at all
in contemplation of law."30
In the present case, petitioners basically insist that Lin committed willful and
deliberate forum shopping which warrants the dismissal of her civil case because
it is not much different from the administrative case in terms of the parties
involved, the causes of action pleaded, and the reliefs prayed for. Petitioners also
posit that another ground warranting the dismissal of the civil case was Lin's
failure to notify the RTC about the pendency of the administrative case within five
days from the filing thereof.
These arguments will not avail. The proscription against forum shopping is found
in Section 5, Rule 7 of the Rules of Court, which provides:
SEC. 5. Certification against forum shopping. --The plaintiff or principal party shall
certify under oath in the complaint or other initiatory pleading asserting a claim
for relief, or in a sworn certification annexed thereto and simultaneously filed
therewith; (a) that he has not theretofore commenced any action or filed any claim
involving the same issues in any court, tribunal or quasi-judicial agency and, to
the best of his knowledge, no such other action or claim is pending therein; (b) if
there is such other pending action or claim, a complete statement of the present

status thereof; and (c) if he should thereafter learn that the same or similar action
or claim has been filed or is pending, he shall report that fact within five (5) days
therefrom to the court wherein his aforesaid complaint or initiatory pleading has
been filed.
Failure to comply with the foregoing requirements shall not be curable by mere
amendment of the complaint or other initiatory pleading but shall be cause for
the dismissal of the case without prejudice, unless otherwise provided, upon
motion and after hearing. The submission of a false certification or non-
compliance with any of the undertakings therein shall constitute indirect
contempt of court, without prejudice to the corresponding administrative and
criminal actions. If the acts of the party or his counsel clearly constitute willful
and deliberate forum shopping, the same shall be ground for summary dismissal
with prejudice and shall constitute direct contempt, as well as a cause for
administrative sanctions. (n)
The above-stated rule covers the very essence of forum shopping itself, and the
constitutive elements thereof viz., the cognate concepts of litis pendentia and res
judicata -
x x x [T]he essence of forum shopping is the filing of multiple suits involving the
same parties for the same cause of action, either simultaneously or successively,
for the purpose of obtaining a favorable judgment. It exists where the elements
of litis pendentia are present or where a final judgment in one case will amount
to res judicata in another. On the other hand, for litis pendentia to be a ground for
the dismissal of an action, the following requisites must concur: (a) identity of
parties, or at least such parties who represent the same interests in both actions;
(b) identity of rights asserted and relief prayed for, the relief being founded on the
same facts; and (c) the identity with respect to the two preceding particulars in
the two cases is such that any judgment that may be rendered in the pending
case, regardless of which party is successful, would amount to res judicata in the
other case.31
Res judicata, in turn, has the following requisites: "(1) the former judgment must
be final; (2) it must have been rendered by a court having jurisdiction over the
subject matter and over the parties; (3) it must be a judgment on the merits; and
(4) there must be, between the first and second actions, (a) identity of parties, (b)
identity of subject matter, and (c) identity of cause of action."32
"The settled rule is that criminal and civil cases are altogether different from
administrative matters, such that the disposition in the first two will not
inevitably govern the third and vice versa."33In the context of the case at bar,
matters handled by the IC are delineated as either regulatory or adjudicatory,
both of which have distinct characteristics, as postulated in Almendras Mining
Corporation v. Office of the Insurance Commission:34
The provisions of the Insurance Code (Presidential Decree [P.D.] No. 1460), as
amended, clearly indicate that the Office of the [IC] is an administrative agency
vested with regulatory power as well as with adjudicatory authority. Among the
54
several regulatory or non-quasi-judicial duties of the Insurance Commissioner
under the Insurance Code is the authority to issue, or refuse issuance of, a
Certificate of Authority to a person or entity desirous of engaging in insurance
business in the Philippines, and to revoke or suspend such Certificate of
Authority upon a finding of the existence of statutory grounds for such revocation
or suspension. The grounds for revocation or suspension of an insurer's
Certificate of Authority are set out in Section 241 and in Section 247 of the
Insurance Code as amended. The general regulatory authority of the Insurance
Commissioner is described in Section 414 of the Insurance Code, as amended, in
the following terms:
'Section 414. The Insurance Commissioner shall have the duty to see that all laws
relating to insurance, insurance companies and other insurance matters, mutual
benefit associations, and trusts for charitable uses are faithfully executed and to
perform the duties imposed upon him by this Code, and shall, notwithstanding any
existing laws to the contrary, have sole and exclusive authority to regulate the
issuance and sale of variable contracts as defined in section two hundred thirty-
two and to provide for the licensing of persons selling such contracts, and to issue
such reasonable rules and regulations governing the same.
The Commissioner may issue such rulings, instructions, circulars, orders[,] and
decisions as he may deem necessary to secure the enforcement of the provisions of
this Code, subject to the approval of the Secretary of Finance [DOF Secretary].
Except as otherwise specified, decisions made by the Commissioner shall be
appealable to the [DOF Secretary].' (Italics supplied)
which Section also specifies the authority to which a decision of the Insurance
Commissioner rendered in the exercise of its regulatory function may be
appealed.
The adjudicatory authority of the Insurance Commissioner is generally described
in Section 416 of the Insurance Code, as amended, which reads as follows:
'Sec. 416. The Commissioner shall have the power to adjudicate claims and
complaints involving any loss, damage or liability for which an insurer may be
answerable under any kind of policy or contract of insurance, or for which such
insurer may be liable under a contract of suretyship, or for which a reinsurer may
be sued under any contract or reinsurance it may have entered into, or for which
a mutual benefit association may be held liable under the membership certificates
it has issued to its members, where the amount of any such loss, damage or
liability, excluding interests, cost and attorney’s fees, being claimed or sued upon
any kind of insurance, bond, reinsurance contract, or membership certificate does
not exceed in any single claim one hundred thousand pesos.
xxxx
The authority to adjudicate granted to the Commissioner under this section shall be
concurrent with that of the civil courts, but the filing of a complaint with the

Commissioner shall preclude the civil courts from taking cognizance of a suit
involving the same subject matter.' (Italics supplied)
Continuing, Section 416 (as amended by Batas Pambansa (B.P.) Blg. 874) also
specifies the authority to which appeal may be taken from a final order or
decision of the Commissioner given in the exercise of his adjudicatory or quasi-
judicial power:
'Any decision, order or ruling rendered by the Commissioner after a hearing shall
have the force and effect of a judgment. Any party may appeal from a final order,
ruling or decision of the Commissioner by filing with the Commissioner within thirty
days from receipt of copy of such order, ruling or decision a notice of appeal to the
Intermediate Appellate Court (now the Court of Appeals) in the manner provided for
in the Rules of Court for appeals from the Regional Trial Court to the Intermediate
Appellate Court (now the Court of Appeals)
x x x x'
It may be noted that under Section 9 (3) of B.P. Big. 129, appeals from a final
decision of the Insurance Commissioner rendered in the exercise of his
adjudicatory authority now fall within the exclusive appellate jurisdiction of
the Court of Appeals.35
Go v. Office of the Ombudsman36reiterated the above-stated distinctions vis-a-
vis the principles enunciating that a civil case before the trial court involving
recovery of payment of the insured's insurance claim plus damages, can proceed
simultaneously with an administrative case before the IC.37 Expounding on the
foregoing points, this Court said -
**The findings of the trial court will not necessarily foreclose the administrative
case before the [IC], or [vice versa]. True, the parties are the same, and both
actions are predicated on the same set of facts, and will require identical
evidence. But the issues to be resolved, the quantum of evidence, the procedure
to be followed[,] and the reliefs to be adjudged by these two bodies are different.
Petitioner's causes of action in Civil Case No. Q-95-23135 are predicated on the
insurers' refusal to pay her fire insurance claims despite notice, proofs of losses
and other supporting documents. Thus, petitioner prays in her complaint that the
insurers be ordered to pay the full-insured value of the losses, as embodied in
their respective policies. Petitioner also sought payment of interests and damages
in her favor caused by the alleged delay and refusal of the insurers to pay her
claims. The principal issue then that must be resolved by the trial court is
whether or not petitioner is entitled to the payment of her insurance claims and
damages. The matter of whether or not there is unreasonable delay or denial of
the claims is merely an incident to be resolved by the trial court, necessary to
ascertain petitioner's right to claim damages, as prescribed by Section 244 of the
Insurance Code.
55
On the other hand, the core, if not the sole bone of contention in Adm. Case No.
RD-156, is the issue of whether or not there was unreasonable delay or denial of
the claims of petitioner, and if in the affirmative, whether or not that would justify
the suspension or revocation of the insurers' licenses.
Moreover, in Civil Case No. Q-95-23135, petitioner must establish her case by
a preponderance of evidence, or simply put, such evidence that is of greater
weight, or more convincing than that which is offered in opposition to it. In Adm.
Case No. RD-156, the degree of proof required of petitioner to establish her claim
is substantial evidence, which has been defined as that amount of relevant
evidence that a reasonable mind might accept as adequate to justify the
conclusion.
In addition, the procedure to be followed by the trial court is governed by the
Rules of Court, while the [IC] has its own set of rules and it is not bound by the
rigidities of technical rules of procedure. These two bodies conduct independent
means of ascertaining the ultimate facts of their respective cases that will serve as
basis for their respective decisions.1âwphi1
If, for example, the trial court finds that there was no unreasonable delay or
denial of her claims, it does not automatically mean that there was in fact no
such unreasonable delay or denial that would justify the revocation or suspension
of the licenses of the concerned insurance companies. It only means that
petitioner failed to prove by preponderance of evidence that she is entitled to
damages. Such finding would not restrain the [IC], in the exercise of its regulatory
power, from making its own finding of unreasonable delay or denial as long as it
is supported by substantial evidence.
While the possibility that these two bodies will come up with conflicting
resolutions on the same issue is not far-fetched, the finding or conclusion of one
would not necessarily be binding on the other given the difference in the issues
involved, the quantum of evidence required and the procedure to be followed.
Moreover, public interest and public policy demand the speedy and inexpensive
disposition of administrative cases.
Hence, Adm. Case No. RD-156 may proceed alongside Civil Case No. Q-95-
23135.38
As the aforecited cases are analogous in many aspects to the present case, both
in respect to their factual backdrop and in their jurisprudential teachings, the
case law ruling in the Almendras and in the Go cases must apply with implacable
force to the present case. Consistency alone demands - because justice cannot be
inconsistent - that the final authoritative mandate in the cited cases must
produce an end result not much different from the present case.
All told, we find that the CA did not err in holding that the petitioners utterly
failed to prove that the RTC exhibited grave abuse of discretion, amounting to
 56

lack or excess of jurisdiction, which would justify the issuance of the Acting on the complaints, the POEA Administrator motu proprio impleaded
extraordinary writ of certiorari.39 petitioner Finman as party respondent in its capacity as surety for Pan Pacific.
Separate summonses were served upon Finman and Pan Pacific. The return of the
WHEREFORE, the Petition is DENIED. The December 21, 2012 Decision and the summons served on Pan Pacific at its official address registered in the POEA
May 22, 2013 Resolution of the Court of Appeals in CA-GR. SP No. 118894 are records, showed that Pan Pacific had moved out therefrom; no prior notice of
hereby AFFIRMED. transfer or change of address was furnished by Pan Pacific to the POEA as
required under POEA rules. The POEA considered that constructive service of the
complaints had been effected upon Pan Pacific and proceeded accordingly.
Costs against petitioners.
For its part, petitioner Finman filed an answer denying liability and pleading, by
SO ORDERED. way of special and affirmative defenses, that: (1) the POEA had no "jurisdiction
over surety bonds," that jurisdiction being vested in the Insurance Commission or
the regular courts; (2) it (Finman) had not violated Articles 32 and 34 (a) of the
Labor Code and complainants' claims had accrued during the suspension of the
principal obligor, Pan Pacific; (3) complainants had no cause of action against
G.R. No. 90273-75 November 15, 1989 Finman, since it was not privy to the transactions between them and Pan Pacific
and had not received any moneys from them; and (4) the amounts claimed by
FINMAN GENERAL ASSURANCE CORP., petitioner, complainants had been paid by them as deposits and not as placement fees.
vs.
WILLIAM INOCENCIO, ET AL. AND EDWIN CARDONES, THE A hearing was held by the POEA on 14 April 1988, at which time complainants
ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT presented their evidence. Petitioner Finman, though notified of this hearing, did
ADMINISTRATION, THE SECRETARY OF LABOR AND not appear.
EMPLOYMENT, respondents.
On 30 May 1989, the POEA Administrator issued an Order which, in its
David I. Unay, Jr. for petitioner. dispositive portion, said:

RESOLUTION WHEREFORE, premises considered, respondents are hereby

ordered to pay jointly and severally complainants' claims as
follows:

FELICIANO, J.: 1. William Inocencio P6,000 .00

Pan Pacific Overseas Recruiting Services, Inc. ("Pan Pacific") is a private, fee- 2. Perfecto Palero, Sr. P5,500 .00
charging, recruitment and employment agency. T in accordance with the
requirements of Section 4, Rule II, Book II of the Rules and Regulations of the 3. Edwin Cardones P2,000 .00
Philippine Overseas Employment Administration (POEA), Pan Pacific posted a
surety bond issued by petitioner Finman General Assurance Corporation
Respondent agency is ordered to release Cardones' passport, the
("Finman") and was granted a license to operate by the POEA.
expenses or obtaining the same of which (sic) shall be deducted
from the amount of P2,000.00 as it appears that it was
Private respondents William Inocencio, Perfecto Palero, Jr., Edwin Cardones and respondent agency who applied for the processing thereof. The
one Edwin Hernandez filed with the POEA separate complaints against Pan claim of Edwin Hernandez is dismissed without prejudice.
Pacific for violation of Articles 32 and 34 (a) of the Labor Code, as amended and
for refund of placement fees paid to Pan Pacific. The complainants alleged that
For the established violations respondent agency is hereby
Pan Pacific charged and collected such fees from them but did not secure
imposed a penalty fine in the amount of P60,000.00. Further,
employment for them.
the ban earlier imposed upon it is herein reiterated.

SO ORDERED.

Petitioner Finman went on appeal to the Secretary of Labor insisting that: (1) the
POEA had no authority to implead petitioner as party respondent in the
proceedings before the POEA; and that (2) the POEA had no authority to enforce
directly the surety bond against petitioner. In an Order dated 3 August 1989, the
Secretary of Labor upheld the POEA Order appealed from and denied the appeal
for lack of merit.
Petitioner Finman now comes before this Court on a Petition for certiorari with
prayer for preliminary injunction or temporary restraining order, raising much
the same issues it had already ventilated before the POEA and the Secretary of
Labor. It is contended once again by petitioner Finman that the POEA had no
authority to implead petitioner in the proceedings commenced by private
respondents: and that the POEA was not authorized to require, in those same
proceedings, petitioner to pay private respondents' claims for refund against Pan
Pacific on the basis of the surety bond issued by petitioner.
Petitioner's contentions are interrelated and will be dealt with together. They are,
however, quite bereft of merit and must be rejected.
Petitioner cannot seriously dispute the direct and solidary nature of its
obligations under its own surety bond. Under Section 176 of the Insurance Code,
as amended, the liability of a surety in a surety bond is joint and several with the
principal obligor. Petitioner's bond was posted by Pan Pacific in compliance with
the requirements of Article 31 of the Labor Code, which states that —
Art. 31. Bonds. — All applicants for license or authority shall
post such cash and surety bonds as determined by the
Secretary of Labor to guarantee compliance with prescribed
recruitment procedures, rules and regulations, and terms and,
conditions of employment as appropriate.
The Secretary of Labor shall have the exclusive power to
determine, decide, order or direct payment from, or application
of, the cash and surety bond for any claim or injury covered and
guaranteed by the bonds. (Emphasis supplied).
The tenor and scope of petitioner Finman's obligations under the bond it issued
are set out in broad ranging terms by Section 4, Rule II, Book I of the POEA Rules
and Regulations:
Section 4. Payment of Fees and Posting of Bonds. — Upon
approval of the application by the Minister, the applicant shall
pay an annual license fee of P6,000.00. It shall also post a cash
bond of P100,000.00 and a surety bond of P150,000.00 from a
bonding company acceptable to the Administration duly
accredited by the Office of the Insurance Commission. The
bonds shall answer for all valid and legal claims arising from
violations of the conditions for the grant and use of the license or
57
authority and contracts of employment. The bonds shall likewise
guarantee compliance with the provisions of the Labor Code and
its implementing rules and regulations relating to recruitment and
placement, the rules of the Administration and relevant issuances
of the Ministry and all liabilities which the Administration may
impose. The surety bonds shall include the condition that notice
of garnishment to the principal is notice to the
surety. 1 (Emphasis supplied).
While petitioner Finman has refrained from attaching a copy of the bond it had
issued to its Petition for Certiorari, there can be no question that the conditions of
the Finman surety bond Pan Pacific had posted with the POEA include the
italicized portions of Section 4, Rule 11, Book I quoted above. It is settled doctrine
that the conditions of a bond specified and required in the provisions of the
statute or regulation providing for the submission of the bond, are incorporated or
built into all bonds tendered under that statute or regulation, even though not
there set out in printer's ink. 2
In the case at bar, the POEA held, and the Secretary of Labor affirmed, that Pan
Pacific had violated Article 32 of the Labor Code, as amended
Article 32. Fees to be paid by workers. — Any person applying
with a private fee charging employment agency for employment
assistance shall not be charged any fee until he has obtained
employment through its efforts or has actually commenced
employment. Such fee shall be always covered with the approved
receipt clearly showing the amount paid. The Secretary of Labor
shall promulgate a schedule of allowable fees. (Emphasis
supplied).
as well as Article 34 (a) of the same Code:
Article 34. Prohibited practices. — It shall be unlawful for any
individual, entity, licensee, or holder of authority:
(a) To charge or accept, directly or indirectly, any amount than
that specified in the schedule of allowable fees prescribed by the
Secretary of Labor, or to make a worker pay any amount greater
than actually received by him as a loan or advance. (Emphasis
supplied)
There is, hence, no question that, both under the Labor Code 3 and the POEA
Rules and Regulations, 4 Pan Pacific had violated at least one of the conditions for
the grant and continued use of the recruitment license granted to it. There can,
similarly, be no question that the POEA Administrator and the Secretary of Labor
are authorized to require Pan Pacific to refund the placement fees it had charged
private respondents without securing employment for them and to impose the fine
of P60,000.00 upon Pan Pacific. Article 36 of the Labor Code authorizes the

Secretary of Labor "to restrict and regulate" the recruitment and placement
activities of agencies like Pan Pacific and "to issue orders and promulgate rules
and regulations to carry out the objectives and implement the provisions of [Title I
on "Recruitment and Placement of Workers]," including of course, Article 32 on
"Fees to be paid by workers," quoted earlier. Upon the other hand, Section 13 of
Rule VI, Book I of the POEA Rules and Regulations expressly authorize the POEA
Administrator or the Secretary of Labor to impose fines "in addition to or in lieu of
the penalties of suspension or cancellation" of the violator recruitment agency's
license.
If Pan Pacific is liable to private respondents for the refunds claimed by them and
to the POEA for the fine of P60,000.00, and if petitioner Finman is solidarily liable
with Pan Pacific under the operative terms of the bond, it must follow that
Finman is liable both to the private respondents and to the POEA. Petitioner
Finman asserts, however, that the POEA had no authority to implead it in the
proceedings against Pan Pacific.
We are not persuaded by this assertion. Clearly, petitioner Finman is a party-in-
interest in, certainly a proper party to, the proceedings private respondents had
initiated against Pan Pacific the principal obligor. Since Pan Pacific had
thoughtfully refrained from notifying the POEA of its new address and from
responding to the complaints, petitioner Finman may well I be regarded as an
indispensable party to the proceedings before the POEA. Whether Finman was an
indepensable or merely a proper party to the proceedings, we believe and so hold
that the POEA could properly implead it as party respondent either upon the
request of the private respondents or, as it happened, motu propio. Such is the
situation under the Revised Rules of Court 5 and the application thereof, directly
or by analogy, by the POEA can certainly not be regarded as arbitrary, oppressive
or capricious.
The fundamental argument of Finman is that its liability under its own bond
must be determined and enforced, not by the POEA or the Secretary of Labor, but
rather by the Insurance Commission or by the regular courts. Once more, we are
not moved by petitioner's argument.
There appears nothing so special or unique about the determination of a surety's
liability under its bond as to restrict that determination to the Office of the
Insurance Commissioner and to the regular courts of justice exclusively. The
exact opposite is strongly stressed by the second paragraph of Article 31 of the
Labor Code:
Art. 31. Bonds. — ... ...
The secretary of Labor shall have the exclusive power to
determine, decide, order or direct payment from, or application of,
the cash or surety bond for any claim or injury covered and
guaranteed by the bonds. (Emphasis supplied)
58
We believe and so hold that to compel the POEA and private respondents the
beneficiaries of Finman's bond-to go to the Insurance Commissioner or to a
regular court of law to enforce that bond, would be to collide with the public
policy which requires prompt resolution of claims against private recruitment and
placement agencies. The Court will take judicial notice of the appealing frequency
with which some, perhaps many, of such agencies have cheated workers avid for
overseas employment by, e.g., collecting placement fees without securing
employment for them at all, extracting exorbitant fees or "kickbacks" from those
for whom employment is actually obtained, abandoning hapless and unlettered
workers to exploitative foreign principals, and so on. Cash and surety bonds are
required by the POEA and its predecessor agencies from recruitment and
employment companies precisely as a means of ensuring prompt and effective
recourse against such companies when held liable for applicants or workers'
claims. Clearly that public policy will be effectively negated if POEA and the
Department of Labor and Employment were held powerless to compel a surety
company to make good on its solidary undertaking in the same quasi-judicial
proceeding where the liability of the principal obligor, the recruitment or
employment agency, is determined and fixed and where the surety is given
reasonable opportunity to present any defenses it or the principal obligor may be
entitled to set up. Petitioner surety whose liability to private respondents and the
POEA is neither more nor less than that of Pan Pacific, is not entitled to another
or different procedure for determination or fixing of that liability than that which
Pan Pacific is entitled and subject to.
WHEREFORE, the Petition for certiorari with prayer for preliminary injunction or
temporary restraining order is hereby DISMISSED for lack of merit. Costs against
petitioner. This Resolution is immediately executory.