PHILIPPINE HEALTH CARE PROVIDERS, INC.

, Petitioner,  organization to take care of the sick and disabled persons

vs. enrolled in the health care plan and to provide for the
COMMISSIONER OF INTERNAL REVENUE, Respondent. administrative, legal, and financial responsibilities of the
organization." Individuals enrolled in its health care programs
RESOLUTION pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided
CORONA, J.: by its duly licensed physicians, specialists and other
professional technical staff participating in the group practice
ARTICLE II health delivery system at a hospital or clinic owned, operated
Declaration of Principles and State Policies or accredited by it.

Section 15. The State shall protect and promote the right to x x x           x x x          x x x
health of the people and instill health consciousness among
them. On January 27, 2000, respondent Commissioner of Internal
Revenue [CIR] sent petitioner a formal demand letter and the
ARTICLE XIII corresponding assessment notices demanding the payment of
Social Justice and Human Rights deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of
Section 11. The State shall adopt an integrated and ₱224,702,641.18. xxxx
comprehensive approach to health development which shall
endeavor to make essential goods, health and other social The deficiency [documentary stamp tax (DST)] assessment
services available to all the people at affordable cost. There was imposed on petitioner’s health care agreement with the
shall be priority for the needs of the underprivileged sick, members of its health care program pursuant to Section 185 of
elderly, disabled, women, and children. The State shall the 1997 Tax Code xxxx
endeavor to provide free medical care to paupers.1
x x x           x x x          x x x
For resolution are a motion for reconsideration and
supplemental motion for reconsideration dated July 10, 2008 Petitioner protested the assessment in a letter dated February
and July 14, 2008, respectively, filed by petitioner Philippine 23, 2000. As respondent did not act on the protest, petitioner
Health Care Providers, Inc.2 filed a petition for review in the Court of Tax Appeals (CTA)
seeking the cancellation of the deficiency VAT and DST
We recall the facts of this case, as follows: assessments.

Petitioner is a domestic corporation whose primary purpose is On April 5, 2002, the CTA rendered a decision, the dispositive
"[t]o establish, maintain, conduct and operate a prepaid group portion of which read:
practice health care delivery system or a health maintenance
WHEREFORE, in view of the foregoing, the instant Petition for pursuant to Sections 248 and 249 of the Tax Code, until the
Review is PARTIALLY GRANTED. Petitioner is hereby same shall have been fully paid.
ORDERED to PAY the deficiency VAT amounting to
₱22,054,831.75 inclusive of 25% surcharge plus 20% interest SO ORDERED.
from January 20, 1997 until fully paid for the 1996 VAT
deficiency and ₱31,094,163.87 inclusive of 25% surcharge Petitioner moved for reconsideration but the CA denied it.
plus 20% interest from January 20, 1998 until fully paid for the Hence, petitioner filed this case.
1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is
declared void and without force and effect. The 1996 and 1997 x x x           x x x          x x x
deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to In a decision dated June 12, 2008, the Court denied the
DESIST from collecting the said DST deficiency tax. petition and affirmed the CA’s decision. We held that
petitioner’s health care agreement during the pertinent period
SO ORDERED. was in the nature of non-life insurance which is a contract of
indemnity, citing Blue Cross Healthcare, Inc. v.
Respondent appealed the CTA decision to the [Court of Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also
Appeals (CA)] insofar as it cancelled the DST assessment. He ruled that petitioner’s contention that it is a health maintenance
claimed that petitioner’s health care agreement was a contract organization (HMO) and not an insurance company is
of insurance subject to DST under Section 185 of the 1997 irrelevant because contracts between companies like
Tax Code. petitioner and the beneficiaries under their plans are treated as
insurance contracts. Moreover, DST is not a tax on the
On August 16, 2004, the CA rendered its decision. It held that business transacted but an excise on the privilege, opportunity
petitioner’s health care agreement was in the nature of a non- or facility offered at exchanges for the transaction of the
life insurance contract subject to DST. business.

WHEREFORE, the petition for review is GRANTED. The Unable to accept our verdict, petitioner filed the present motion
Decision of the Court of Tax Appeals, insofar as it cancelled for reconsideration and supplemental motion for
and set aside the 1996 and 1997 deficiency documentary reconsideration, asserting the following arguments:
stamp tax assessment and ordered petitioner to desist from
collecting the same is REVERSED and SET ASIDE. (a) The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a company
Respondent is ordered to pay the amounts of ₱55,746,352.19 engaged in the business of fidelity bonds and other
and ₱68,450,258.73 as deficiency Documentary Stamp Tax insurance policies. Petitioner, as an HMO, is a service
for 1996 and 1997, respectively, plus 25% surcharge for late provider, not an insurance company.
payment and 20% interest per annum from January 27, 2000,
 (b) The Court, in dismissing the appeal in CIR v. known as the "Tax Amnesty Act of 2007") by fully paying the
Philippine National Bank, affirmed in effect the CA’s amount of ₱5,127,149.08 representing 5% of its net worth as
disposition that health care services are not in the of the year ending December 31, 2005.8
nature of an insurance business.
We find merit in petitioner’s motion for reconsideration.
(c) Section 185 should be strictly construed.
Petitioner was formally registered and incorporated with the
(d) Legislative intent to exclude health care Securities and Exchange Commission on June 30, 1987.9 It is
agreements from items subject to DST is clear, engaged in the dispensation of the following medical services
especially in the light of the amendments made in the to individuals who enter into health care agreements with it:
DST law in 2002.
Preventive medical services such as periodic monitoring of
(e) Assuming arguendo that petitioner’s agreements health problems, family planning counseling, consultation and
are contracts of indemnity, they are not those advices on diet, exercise and other healthy habits, and
contemplated under Section 185. immunization;

(f) Assuming arguendo that petitioner’s agreements Diagnostic medical services such as routine physical

are akin to health insurance, health insurance is not examinations, x-rays, urinalysis, fecalysis, complete blood
covered by Section 185. count, and the like and

(g) The agreements do not fall under the phrase "other Curative medical services which pertain to the performing of
branch of insurance" mentioned in Section 185. other remedial and therapeutic processes in the event of an
injury or sickness on the part of the enrolled member.10
(h) The June 12, 2008 decision should only apply
prospectively. Individuals enrolled in its health care program pay an annual
membership fee. Membership is on a year-to-year basis. The
(i) Petitioner availed of the tax amnesty benefits under medical services are dispensed to enrolled members in a
RA5 9480 for the taxable year 2005 and all prior years. hospital or clinic owned, operated or accredited by petitioner,
Therefore, the questioned assessments on the DST through physicians, medical and dental practitioners under
are now rendered moot and academic.6 contract with it. It negotiates with such health care practitioners
regarding payment schemes, financing and other procedures
Oral arguments were held in Baguio City on April 22, 2009. for the delivery of health services. Except in cases of
The parties submitted their memoranda on June 8, 2009. emergency, the professional services are to be provided only
by petitioner's physicians, i.e. those directly employed by it11 or
In its motion for reconsideration, petitioner reveals for the first whose services are contracted by it.12 Petitioner also provides
time that it availed of a tax amnesty under RA 9480 7(also hospital services such as room and board accommodation,
laboratory services, operating rooms, x-ray facilities and Section 185 of the National Internal Revenue Code of 1997
general nursing care.13 If and when a member avails of the (NIRC of 1997) provides:
benefits under the agreement, petitioner pays the participating
physicians and other health care providers for the services Section 185. Stamp tax on fidelity bonds and other insurance
rendered, at pre-agreed rates.14 policies. – On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
To avail of petitioner’s health care programs, the individual liability made or renewed by any person, association or
members are required to sign and execute a standard health company or corporation transacting the business
care agreement embodying the terms and conditions for the of accident, fidelity, employer’s liability, plate, glass, steam
provision of the health care services. The same agreement boiler, burglar, elevator, automatic sprinkler, or other branch
contains the various health care services that can be engaged of insurance (except life, marine, inland, and fire
by the enrolled member, i.e., preventive, diagnostic and insurance), and all bonds, undertakings, or recognizances,
curative medical services. Except for the curative aspect of the conditioned for the performance of the duties of any office or
medical service offered, the enrolled member may actually position, for the doing or not doing of anything therein
make use of the health care services being offered by specified, and on all obligations guaranteeing the validity or
petitioner at any time. legality of any bond or other obligations issued by any
province, city, municipality, or other public body or
Health Maintenance Organizations Are Not Engaged In organization, and on all obligations guaranteeing the title to
The Insurance Business any real estate, or guaranteeing any mercantile credits, which
may be made or renewed by any such person, company or
We said in our June 12, 2008 decision that it is irrelevant that corporation, there shall be collected a documentary stamp tax
petitioner is an HMO and not an insurer because its of fifty centavos (₱0.50) on each four pesos (₱4.00), or
agreements are treated as insurance contracts and the DST is fractional part thereof, of the premium charged. (Emphasis
not a tax on the business but an excise on the privilege, supplied)
opportunity or facility used in the transaction of the business.15
It is a cardinal rule in statutory construction that no word,
Petitioner, however, submits that it is of critical importance to clause, sentence, provision or part of a statute shall be
characterize the business it is engaged in, that is, to determine considered surplusage or superfluous, meaningless, void and
whether it is an HMO or an insurance company, as this insignificant. To this end, a construction which renders every
distinction is indispensable in turn to the issue of whether or word operative is preferred over that which makes some words
not it is liable for DST on its health care agreements.16 idle and nugatory.17 This principle is expressed in the
maxim Ut magis valeat quam pereat, that is, we choose the
A second hard look at the relevant law and jurisprudence interpretation which gives effect to the whole of the statute –
convinces the Court that the arguments of petitioner are its every word.18
meritorious.
From the language of Section 185, it is evident that two d) doing or proposing to do any business in substance
requisites must concur before the DST can apply, namely: (1) equivalent to any of the foregoing in a manner
the document must be a policy of insurance or an designed to evade the provisions of this Code.
obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity, In the application of the provisions of this Code, the fact that
employer’s liability, plate, glass, steam boiler, burglar, elevator, no profit is derived from the making of insurance contracts,
automatic sprinkler, or other branch of insurance (except life, agreements or transactions or that no separate or direct
marine, inland, and fire insurance). consideration is received therefore, shall not be deemed
conclusive to show that the making thereof does not constitute
Petitioner is admittedly an HMO. Under RA 7875 (or "The the doing or transacting of an insurance business.
National Health Insurance Act of 1995"), an HMO is "an entity
that provides, offers or arranges for coverage of designated Various courts in the United States, whose jurisprudence has
health services needed by plan members for a fixed prepaid a persuasive effect on our decisions, 21 have determined that
premium."19 The payments do not vary with the extent, HMOs are not in the insurance business. One test that they
frequency or type of services provided. have applied is whether the assumption of risk and
indemnification of loss (which are elements of an insurance
The question is: was petitioner, as an HMO, engaged in the business) are the principal object and purpose of the
business of insurance during the pertinent taxable years? We organization or whether they are merely incidental to its
rule that it was not. business. If these are the principal objectives, the business is
that of insurance. But if they are merely incidental and service
Section 2 (2) of PD20 1460 (otherwise known as the Insurance is the principal purpose, then the business is not insurance.
Code) enumerates what constitutes "doing an insurance
business" or "transacting an insurance business:" Applying the "principal object and purpose test,"22 there is
significant American case law supporting the argument that a
a) making or proposing to make, as insurer, any corporation (such as an HMO, whether or not organized for
insurance contract; profit), whose main object is to provide the members of a
group with health services, is not engaged in the insurance
b) making or proposing to make, as surety, any business.
contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of The rule was enunciated in Jordan v. Group Health
the surety; Association23 wherein the Court of Appeals of the District of
Columbia Circuit held that Group Health Association should
c) doing any kind of business, including a reinsurance not be considered as engaged in insurance activities since it
business, specifically recognized as constituting the was created primarily for the distribution of health care
doing of an insurance business within the meaning of services rather than the assumption of insurance risk.
this Code;
xxx Although Group Health’s activities may be considered in contracting merely to stand its cost when or after it is
one aspect as creating security against loss from illness or rendered.
accident more truly they constitute the quantity purchase of
well-rounded, continuous medical service by its members. That an incidental element of risk distribution or assumption
xxx The functions of such an organization are not identical may be present should not outweigh all other factors. If
with those of insurance or indemnity companies. The latter attention is focused only on that feature, the line between
are concerned primarily, if not exclusively, with risk and the insurance or indemnity and other types of legal arrangement
consequences of its descent, not with service, or its extension and economic function becomes faint, if not extinct. This is
in kind, quantity or distribution; with the unusual occurrence, especially true when the contract is for the sale of goods or
not the daily routine of living. Hazard is predominant. On the services on contingency. But obviously it was not the purpose
other hand, the cooperative is concerned principally with of the insurance statutes to regulate all arrangements for
getting service rendered to its members and doing so at assumption or distribution of risk. That view would cause them
lower prices made possible by quantity purchasing and to engulf practically all contracts, particularly conditional sales
economies in operation. Its primary purpose is to reduce and contingent service agreements. The fallacy is in looking
the cost rather than the risk of medical care; to broaden only at the risk element, to the exclusion of all others
the service to the individual in kind and quantity; to present or their subordination to it. The question turns,
enlarge the number receiving it; to regularize it as an not on whether risk is involved or assumed, but on
everyday incident of living, like purchasing food and whether that or something else to which it is related in the
clothing or oil and gas, rather than merely protecting particular plan is its principal object purpose. 24 (Emphasis
against the financial loss caused by extraordinary and supplied)
unusual occurrences, such as death, disaster at sea, fire
and tornado. It is, in this instance, to take care of colds, In California Physicians’ Service v. Garrison,25 the California
ordinary aches and pains, minor ills and all the temporary court felt that, after scrutinizing the plan of operation as a
bodily discomforts as well as the more serious and unusual whole of the corporation, it was service rather than indemnity
illness. To summarize, the distinctive features of the which stood as its principal purpose.
cooperative are the rendering of service, its extension, the
bringing of physician and patient together, the preventive There is another and more compelling reason for holding that
features, the regularization of service as well as payment, the service is not engaged in the insurance
the substantial reduction in cost by quantity purchasing business. Absence or presence of assumption of risk or
in short, getting the medical job done and paid for; not, peril is not the sole test to be applied in determining its
except incidentally to these features, the indemnification status. The question, more broadly, is whether, looking at
for cost after the services is rendered. Except the last, the plan of operation as a whole, ‘service’ rather than
these are not distinctive or generally characteristic of the ‘indemnity’ is its principal object and purpose. Certainly
insurance arrangement. There is, therefore, a substantial the objects and purposes of the corporation organized and
difference between contracting in this way for the rendering of maintained by the California physicians have a wide scope in
service, even on the contingency that it be needed, and the field of social service. Probably there is no more
impelling need than that of adequate medical care on a A participating provider of health care services is one who
voluntary, low-cost basis for persons of small income. agrees in writing to render health care services to or for
The medical profession unitedly is endeavoring to meet persons covered by a contract issued by health service
that need. Unquestionably this is ‘service’ of a high order corporation in return for which the health service
and not ‘indemnity.’26 (Emphasis supplied) corporation agrees to make payment directly to the
participating provider.28 (Emphasis supplied)
American courts have pointed out that the main difference
between an HMO and an insurance company is that HMOs Consequently, the mere presence of risk would be insufficient
undertake to provide or arrange for the provision of medical to override the primary purpose of the business to provide
services through participating physicians while insurance medical services as needed, with payment made directly to the
companies simply undertake to indemnify the insured for provider of these services.29 In short, even if petitioner
medical expenses incurred up to a pre-agreed assumes the risk of paying the cost of these services even if
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue significantly more than what the member has prepaid, it
Cross and Blue Shield of New Jersey27 is clear on this point: nevertheless cannot be considered as being engaged in the
insurance business.
The basic distinction between medical service corporations
and ordinary health and accident insurers is that the former By the same token, any indemnification resulting from the
undertake to provide prepaid medical services through payment for services rendered in case of emergency by non-
participating physicians, thus relieving subscribers of any participating health providers would still be incidental to
further financial burden, while the latter only undertake to petitioner’s purpose of providing and arranging for health care
indemnify an insured for medical expenses up to, but not services and does not transform it into an insurer. To fulfill its
beyond, the schedule of rates contained in the policy. obligations to its members under the agreements, petitioner is
required to set up a system and the facilities for the delivery of
x x x           x x x          x x x such medical services. This indubitably shows that
indemnification is not its sole object.
The primary purpose of a medical service corporation,
however, is an undertaking to provide physicians who will In fact, a substantial portion of petitioner’s services covers
render services to subscribers on a prepaid basis. Hence, if preventive and diagnostic medical services intended to keep
there are no physicians participating in the medical members from developing medical conditions or diseases.30 As
service corporation’s plan, not only will the subscribers an HMO, it is its obligation to maintain the good health of its
be deprived of the protection which they might reasonably members. Accordingly, its health care programs are
have expected would be provided, but the corporation designed to prevent or to minimize thepossibility of any
will, in effect, be doing business solely as a health and assumption of risk on its part. Thus, its undertaking under
accident indemnity insurer without having qualified as such its agreements is not to indemnify its members against any
and rendering itself subject to the more stringent financial loss or damage arising from a medical condition but, on the
requirements of the General Insurance Laws….
contrary, to provide the health and medical services needed to respect and ordinarily controls the interpretation of laws by the
prevent such loss or damage.31 courts. The reason behind this rule was explained in Nestle
Philippines, Inc. v. Court of Appeals:34
Overall, petitioner appears to provide insurance-type benefits
to its members (with respect to its curative medical services), The rationale for this rule relates not only to the emergence of
but these are incidental to the principal activity of providing the multifarious needs of a modern or modernizing society and
them medical care. The "insurance-like" aspect of petitioner’s the establishment of diverse administrative agencies for
business is miniscule compared to its noninsurance activities. addressing and satisfying those needs; it also relates to the
Therefore, since it substantially provides health care services accumulation of experience and growth of specialized
rather than insurance services, it cannot be considered as capabilities by the administrative agency charged with
being in the insurance business. implementing a particular statute. In Asturias Sugar Central,
Inc. vs. Commissioner of Customs,35 the Court stressed that
It is important to emphasize that, in adopting the "principal executive officials are presumed to have familiarized
purpose test" used in the above-quoted U.S. cases, we are not themselves with all the considerations pertinent to the
saying that petitioner’s operations are identical in every meaning and purpose of the law, and to have formed an
respect to those of the HMOs or health providers which were independent, conscientious and competent expert opinion
parties to those cases. What we are stating is that, for the thereon. The courts give much weight to the government
purpose of determining what "doing an insurance business" agency officials charged with the implementation of the law,
means, we have to scrutinize the operations of the business their competence, expertness, experience and informed
as a whole and not its mere components. This is of course judgment, and the fact that they frequently are the drafters of
only prudent and appropriate, taking into account the the law they interpret.36
burdensome and strict laws, rules and regulations applicable
to insurers and other entities engaged in the insurance A Health Care Agreement Is Not An Insurance Contract
business. Moreover, we are also not unmindful that there are Contemplated Under Section 185 Of The NIRC of 1997
other American authorities who have found particular HMOs to
be actually engaged in insurance activities.32 Section 185 states that DST is imposed on "all policies of
insurance… or obligations of the nature of indemnity for loss,
Lastly, it is significant that petitioner, as an HMO, is not part of damage, or liability…." In our decision dated June 12, 2008,
the insurance industry. This is evident from the fact that it is we ruled that petitioner’s health care agreements are contracts
not supervised by the Insurance Commission but by the of indemnity and are therefore insurance contracts:
Department of Health.33 In fact, in a letter dated September 3,
2000, the Insurance Commissioner confirmed that petitioner is It is … incorrect to say that the health care agreement is not
not engaged in the insurance business. This determination of based on loss or damage because, under the said agreement,
the commissioner must be accorded great weight. It is well- petitioner assumes the liability and indemnifies its member for
settled that the interpretation of an administrative agency hospital, medical and related expenses (such as professional
which is tasked to implement a statute is accorded great fees of physicians). The term "loss or damage" is broad
enough to cover the monetary expense or liability a member (except life, marine, inland, and fire insurance), xxxx
will incur in case of illness or injury. (Emphasis supplied)

Under the health care agreement, the rendition of hospital, In construing this provision, we should be guided by the
medical and professional services to the member in case of principle that tax statutes are strictly construed against the
sickness, injury or emergency or his availment of so-called taxing authority.38 This is because taxation is a destructive
"out-patient services" (including physical examination, x-ray power which interferes with the personal and property rights of
and laboratory tests, medical consultations, vaccine the people and takes from them a portion of their property for
administration and family planning counseling) is the the support of the government.39 Hence, tax laws may not be
contingent event which gives rise to liability on the part of the extended by implication beyond the clear import of their
member. In case of exposure of the member to liability, he language, nor their operation enlarged so as to embrace
would be entitled to indemnification by petitioner. matters not specifically provided.40

Furthermore, the fact that petitioner must relieve its member We are aware that, in Blue Cross and Philamcare, the Court
from liability by paying for expenses arising from the stipulated pronounced that a health care agreement is in the nature of
contingencies belies its claim that its services are prepaid. The non-life insurance, which is primarily a contract of indemnity.
expenses to be incurred by each member cannot be predicted However, those cases did not involve the interpretation of a
beforehand, if they can be predicted at all. Petitioner assumes tax provision. Instead, they dealt with the liability of a health
the risk of paying for the costs of the services even if they are service provider to a member under the terms of their health
significantly and substantially more than what the member has care agreement. Such contracts, as contracts of adhesion, are
"prepaid." Petitioner does not bear the costs alone but liberally interpreted in favor of the member and strictly against
distributes or spreads them out among a large group of the HMO. For this reason, we reconsider our ruling that Blue
persons bearing a similar risk, that is, among all the other Cross and Philamcare are applicable here.
members of the health care program. This is insurance.37
Section 2 (1) of the Insurance Code defines a contract of
We reconsider. We shall quote once again the pertinent insurance as an agreement whereby one undertakes for a
portion of Section 185: consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An
Section 185. Stamp tax on fidelity bonds and other insurance insurance contract exists where the following elements concur:
policies. – On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or 1. The insured has an insurable interest;
liability made or renewed by any person, association or
company or corporation transacting the business of accident, 2. The insured is subject to a risk of loss by the
fidelity, employer’s liability, plate, glass, steam boiler, burglar, happening of the designed peril;
elevator, automatic sprinkler, or other branch of insurance
3. The insurer assumes the risk;
 4. Such assumption of risk is part of a general scheme with, there is no loss, damage or liability on the part of the
to distribute actual losses among a large group of member that should be indemnified by petitioner as an HMO.
persons bearing a similar risk and Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital,
5. In consideration of the insurer’s promise, the insured medical and professional services rendered by the petitioner’s
pays a premium.41 physician or affiliated physician to him. In case of availment by
a member of the benefits under the agreement, petitioner does
Do the agreements between petitioner and its members not reimburse or indemnify the member as the latter does not
possess all these elements? They do not. pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the
First. In our jurisdiction, a commentator of our insurance laws services rendered at pre-agreed rates. The member does not
has pointed out that, even if a contract contains all the make any such payment.
elements of an insurance contract, if its primary purpose is the
rendering of service, it is not a contract of insurance: In other words, there is nothing in petitioner's agreements that
gives rise to a monetary liability on the part of the member to
It does not necessarily follow however, that a contract any third party-provider of medical services which might in turn
containing all the four elements mentioned above would be an necessitate indemnification from petitioner. The terms
insurance contract. The primary purpose of the parties in "indemnify" or "indemnity" presuppose that a liability or claim
making the contract may negate the existence of an has already been incurred. There is no indemnity precisely
insurance contract. For example, a law firm which enters into because the member merely avails of medical services to be
contracts with clients whereby in consideration of periodical paid or already paid in advance at a pre-agreed price under
payments, it promises to represent such clients in all suits for the agreements.
or against them, is not engaged in the insurance business. Its
contracts are simply for the purpose of rendering personal Third. According to the agreement, a member can take
services. On the other hand, a contract by which a corporation, advantage of the bulk of the benefits anytime, e.g. laboratory
in consideration of a stipulated amount, agrees at its own services, x-ray, routine annual physical examination and
expense to defend a physician against all suits for damages consultations, vaccine administration as well as family
for malpractice is one of insurance, and the corporation will be planning counseling, even in the absence of any peril, loss or
deemed as engaged in the business of insurance. Unlike the damage on his or her part.
lawyer’s retainer contract, the essential purpose of such a
contract is not to render personal services, but to indemnify Fourth. In case of emergency, petitioner is obliged to
against loss and damage resulting from the defense of actions reimburse the member who receives care from a non-
for malpractice.42 (Emphasis supplied) participating physician or hospital. However, this is only a very
minor part of the list of services available. The assumption of
Second. Not all the necessary elements of a contract of the expense by petitioner is not confined to the happening of a
insurance are present in petitioner’s agreements. To begin
contingency but includes incidents even in the absence of because petitioner’s objective is to provide medical services at
illness or injury. reduced cost, not to distribute risk like an insurer.

In Michigan Podiatric Medical Association v. National Foot In sum, an examination of petitioner’s agreements with its
Care Program, Inc.,43 although the health care contracts called members leads us to conclude that it is not an insurance
for the defendant to partially reimburse a subscriber for contract within the context of our Insurance Code.
treatment received from a non-designated doctor, this did not
make defendant an insurer. Citing Jordan, the Court There Was No Legislative Intent To Impose DST On Health
determined that "the primary activity of the defendant (was) the Care Agreements Of HMOs
provision of podiatric services to subscribers in consideration
of prepayment for such services."44 Since indemnity of the Furthermore, militating in convincing fashion against the
insured was not the focal point of the agreement but the imposition of DST on petitioner’s health care agreements
extension of medical services to the member at an affordable under Section 185 of the NIRC of 1997 is the provision’s
cost, it did not partake of the nature of a contract of insurance. legislative history. The text of Section 185 came into U.S. law
as early as 1904 when HMOs and health care agreements
Fifth. Although risk is a primary element of an insurance were not even in existence in this jurisdiction. It was imposed
contract, it is not necessarily true that risk alone is sufficient to under Section 116, Article XI of Act No. 1189 (otherwise
establish it. Almost anyone who undertakes a contractual known as the "Internal Revenue Law of 1904")46enacted on
obligation always bears a certain degree of financial risk. July 2, 1904 and became effective on August 1, 1904. Except
Consequently, there is a need to distinguish prepaid service for the rate of tax, Section 185 of the NIRC of 1997 is a
contracts (like those of petitioner) from the usual insurance verbatim reproduction of the pertinent portion of Section 116,
contracts. to wit:

Indeed, petitioner, as an HMO, undertakes a business risk ARTICLE XI

when it offers to provide health services: the risk that it might Stamp Taxes on Specified Objects
fail to earn a reasonable return on its investment. But it is not
the risk of the type peculiar only to insurance companies. Section 116. There shall be levied, collected, and paid for and
Insurance risk, also known as actuarial risk, is the risk that the in respect to the several bonds, debentures, or certificates of
cost of insurance claims might be higher than the premiums stock and indebtedness, and other documents, instruments,
paid. The amount of premium is calculated on the basis of matters, and things mentioned and described in this section, or
assumptions made relative to the insured.45 for or in respect to the vellum, parchment, or paper upon which
such instrument, matters, or things or any of them shall be
However, assuming that petitioner’s commitment to provide written or printed by any person or persons who shall make,
medical services to its members can be construed as an sign, or issue the same, on and after January first, nineteen
acceptance of the risk that it will shell out more than the hundred and five, the several taxes following:
prepaid fees, it still will not qualify as an insurance contract
x x x           x x x          x x x 1978 and October 10, 1984 respectively, the DST rate was
again increased.1avvphi1

Third xxx (c) on all policies of insurance or bond or

obligation of the nature of indemnity for loss, damage, or Effective January 1, 1986, pursuant to Section 45 of PD 1994,
liability made or renewed by any person, association, Section 234 of the NIRC of 1977 was renumbered as Section
company, or corporation transacting the business of 198. And under Section 23 of EO47 273 dated July 25, 1987, it
accident, fidelity, employer’s liability, plate glass, steam was again renumbered and became Section 185.
boiler, burglar, elevator, automatic sprinkle, or other
branch of insurance (except life, marine, inland, and fire On December 23, 1993, under RA 7660, Section 185 was
insurance) xxxx (Emphasis supplied) amended but, again, only with respect to the rate of tax.

On February 27, 1914, Act No. 2339 (the Internal Revenue Notwithstanding the comprehensive amendment of the NIRC
Law of 1914) was enacted revising and consolidating the laws of 1977 by RA 8424 (or the NIRC of 1997), the subject legal
relating to internal revenue. The aforecited pertinent portion of provision was retained as the present Section 185. In 2004,
Section 116, Article XI of Act No. 1189 was completely amendments to the DST provisions were introduced by RA
reproduced as Section 30 (l), Article III of Act No. 2339. The 924348 but Section 185 was untouched.
very detailed and exclusive enumeration of items subject to
DST was thus retained. On the other hand, the concept of an HMO was introduced in
the Philippines with the formation of Bancom Health Care
On December 31, 1916, Section 30 (l), Article III of Act No. Corporation in 1974. The same pioneer HMO was later
2339 was again reproduced as Section 1604 (l), Article IV of reorganized and renamed Integrated Health Care Services,
Act No. 2657 (Administrative Code). Upon its amendment on Inc. (or Intercare). However, there are those who claim that
March 10, 1917, the pertinent DST provision became Section Health Maintenance, Inc. is the HMO industry pioneer, having
1449 (l) of Act No. 2711, otherwise known as the set foot in the Philippines as early as 1965 and having been
Administrative Code of 1917. formally incorporated in 1991. Afterwards, HMOs proliferated
quickly and currently, there are 36 registered HMOs with a
Section 1449 (1) eventually became Sec. 222 of total enrollment of more than 2 million.49
Commonwealth Act No. 466 (the NIRC of 1939), which
codified all the internal revenue laws of the Philippines. In an We can clearly see from these two histories (of the DST on the
amendment introduced by RA 40 on October 1, 1946, the DST one hand and HMOs on the other) that when the law imposing
rate was increased but the provision remained substantially the DST was first passed, HMOs were yet unknown in the
the same. Philippines. However, when the various amendments to the
DST law were enacted, they were already in existence in the
Thereafter, on June 3, 1977, the same provision with the same Philippines and the term had in fact already been defined by
DST rate was reproduced in PD 1158 (NIRC of 1977) as RA 7875. If it had been the intent of the legislature to impose
Section 234. Under PDs 1457 and 1959, enacted on June 11, DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But The power of taxation is sometimes called also the power to
it did not. The fact that the NIRC contained no specific destroy. Therefore it should be exercised with caution to
provision on the DST liability of health care agreements of minimize injury to the proprietary rights of a taxpayer. It must
HMOs at a time they were already known as such, belies any be exercised fairly, equally and uniformly, lest the tax collector
legislative intent to impose it on them. As a matter of fact, kill the "hen that lays the golden egg."58
petitioner was assessed its DST liability only on January
27, 2000, after more than a decade in the business as an Legitimate enterprises enjoy the constitutional protection not to
HMO.50 be taxed out of existence. Incurring losses because of a tax
imposition may be an acceptable consequence but killing the
Considering that Section 185 did not change since 1904 business of an entity is another matter and should not be
(except for the rate of tax), it would be safe to say that health allowed. It is counter-productive and ultimately subversive of
care agreements were never, at any time, recognized as the nation’s thrust towards a better economy which will
insurance contracts or deemed engaged in the business of ultimately benefit the majority of our people.59
insurance within the context of the provision.
Petitioner’s Tax Liability Was Extinguished Under The
The Power To Tax Is Not The Power To Destroy Provisions Of RA 9840

As a general rule, the power to tax is an incident of Petitioner asserts that, regardless of the arguments, the DST
sovereignty and is unlimited in its range, acknowledging in its assessment for taxable years 1996 and 1997 became moot
very nature no limits, so that security against its abuse is to be and academic60 when it availed of the tax amnesty under RA
found only in the responsibility of the legislature which 9480 on December 10, 2007. It paid ₱5,127,149.08
imposes the tax on the constituency who is to pay it.51 So representing 5% of its net worth as of the year ended
potent indeed is the power that it was once opined that "the December 31, 2005 and complied with all requirements of the
power to tax involves the power to destroy."52 tax amnesty. Under Section 6(a) of RA 9480, it is entitled to
immunity from payment of taxes as well as additions thereto,
Petitioner claims that the assessed DST to date which and the appurtenant civil, criminal or administrative penalties
amounts to ₱376 million53 is way beyond its net worth of ₱259 under the 1997 NIRC, as amended, arising from the failure to
million.54 Respondent never disputed these assertions. Given pay any and all internal revenue taxes for taxable year 2005
the realities on the ground, imposing the DST on petitioner and prior years.61
would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the Far from disagreeing with petitioner, respondent manifested in
government ought to encourage private enterprise.55 Petitioner, its memorandum:
just like any concern organized for a lawful economic activity,
has a right to maintain a legitimate business.56 As aptly held Section 6 of [RA 9840] provides that availment of tax amnesty
in Roxas, et al. v. CTA, et al.:57 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 It is true that, although contained in a minute resolution, our
arising in 2005 and the preceding years. dismissal of the petition was a disposition of the merits of the
case. When we dismissed the petition, we effectively affirmed
In view of petitioner’s availment of the benefits of [RA 9840], the CA ruling being questioned. As a result, our ruling in that
and without conceding the merits of this case as discussed case has already become final.67 When a minute resolution
above, respondent concedes that such tax amnesty denies or dismisses a petition for failure to comply with formal
extinguishes the tax liabilities of petitioner. This admission, and substantive requirements, the challenged decision,
however, is not meant to preclude a revocation of the amnesty together with its findings of fact and legal conclusions, are
granted in case it is found to have been granted under deemed sustained.68 But what is its effect on other cases?
circumstances amounting to tax fraud under Section 10 of said
amnesty law.62 (Emphasis supplied) With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res
Furthermore, we held in a recent case that DST is one of the judicata.69 However, if other parties or another subject matter
taxes covered by the tax amnesty program under RA (even with the same parties and issues) is involved, the minute
9480.63 There is no other conclusion to draw than that resolution is not binding precedent. Thus, in CIR v. Baier-
petitioner’s liability for DST for the taxable years 1996 and Nickel,70 the Court noted that a previous case, CIR v. Baier-
1997 was totally extinguished by its availment of the tax Nickel71 involving the same parties and the same issues,
amnesty under RA 9480. was previously disposed of by the Court thru a minute
resolution dated February 17, 2003 sustaining the ruling of the
Is The Court Bound By A Minute Resolution In Another CA. Nonetheless, the Court ruled that the previous case
Case? "ha(d) no bearing" on the latter case because the two cases
involved different subject matters as they were concerned with
Petitioner raises another interesting issue in its motion for the taxable income of different taxable years.72
reconsideration: whether this Court is bound by the ruling of
the CA64 in CIR v. Philippine National Bank65 that a health care Besides, there are substantial, not simply formal, distinctions
agreement of Philamcare Health Systems is not an insurance between a minute resolution and a decision. The constitutional
contract for purposes of the DST. requirement under the first paragraph of Section 14, Article VIII
of the Constitution that the facts and the law on which the
In support of its argument, petitioner cites the August 29, 2001 judgment is based must be expressed clearly and distinctly
minute resolution of this Court dismissing the appeal applies only to decisions, not to minute resolutions. A minute
in Philippine National Bank (G.R. No. 148680).66 Petitioner resolution is signed only by the clerk of court by authority of
argues that the dismissal of G.R. No. 148680 by minute the justices, unlike a decision. It does not require the
resolution was a judgment on the merits; hence, the Court certification of the Chief Justice. Moreover, unlike decisions,
should apply the CA ruling there that a health care agreement minute resolutions are not published in the Philippine Reports.
is not an insurance contract. 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 The rate of DST under Section 185 is equivalent to 12.5% of
decision duly signed by the members of the Court and certified the premium charged.74 Its imposition will elevate the cost of
by the Chief Justice. health care services. This will in turn necessitate an increase
in the membership fees, resulting in either placing health
Accordingly, since petitioner was not a party in G.R. No. services beyond the reach of the ordinary wage earner or
148680 and since petitioner’s liability for DST on its health driving the industry to the ground. At the end of the day,
care agreement was not the subject matter of G.R. No. neither side wins, considering the indispensability of the
148680, petitioner cannot successfully invoke the minute services offered by HMOs.
resolution in that case (which is not even binding precedent) in
its favor. Nonetheless, in view of the reasons already WHEREFORE, the motion for reconsideration
discussed, this does not detract in any way from the fact that is GRANTED. The August 16, 2004 decision of the Court of
petitioner’s health care agreements are not subject to DST. Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment
A Final Note against petitioner is hereby CANCELLED and SET
ASIDE. Respondent is ordered to desist from collecting the
Taking into account that health care agreements are clearly said tax.
not within the ambit of Section 185 of the NIRC and there was
never any legislative intent to impose the same on HMOs like No costs.
petitioner, the same should not be arbitrarily and unjustly
included in its coverage. SO ORDERED.

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 RAFAEL ENRIQUEZ, as administrator of the estate of the
manage health care treatment in the furtherance of the goal of late Joaquin Ma. Herrer, plaintiff-appellant, 
providing a more efficient and inexpensive health care system vs.
made possible by quantity purchasing of services and SUN LIFE ASSURANCE COMPANY OF
economies of scale. They offer advantages over the pay-for- CANADA, defendant-appellee.
service system (wherein individuals are charged a fee each
time they receive medical services), including the ability to Jose A. Espiritu for appellant.
control costs. They protect their members from exposure to Cohn, Fisher and DeWitt for appellee.
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.
MALCOLM, J.: 1917. This letter was received by Mr. Torres on the morning of
December 21, 1917. Mr. Herrer died on December 20, 1917.
This is an action brought by the plaintiff ad administrator of the
estate of the late Joaquin Ma. Herrer to recover from the As above suggested, the issue of fact raised by the evidence
defendant life insurance company the sum of pesos 6,000 paid is whether Herrer received notice of acceptance of his
by the deceased for a life annuity. The trial court gave application. To resolve this question, we propose to go directly
judgment for the defendant. Plaintiff appeals. to the evidence of record.

The undisputed facts are these: On September 24, 1917, The chief clerk of the Manila office of the Sun Life Assurance
Joaquin Herrer made application to the Sun Life Assurance Company of Canada at the time of the trial testified that he
Company of Canada through its office in Manila for a life prepared the letter introduced in evidence as Exhibit 3, of date
annuity. Two days later he paid the sum of P6,000 to the November 26, 1917, and handed it to the local manager, Mr.
manager of the company's Manila office and was given a E. E. White, for signature. The witness admitted on cross-
receipt reading as follows: examination that after preparing the letter and giving it to he
manager, he new nothing of what became of it. The local
MANILA, I. F., 26 de septiembre, 1917. manager, Mr. White, testified to having received the cablegram
accepting the application of Mr. Herrer from the home office on
PROVISIONAL RECEIPT Pesos 6,000 November 26, 1917. He said that on the same day he signed a
letter notifying Mr. Herrer of this acceptance. The witness
Recibi la suma de seis mil pesos de Don Joaquin Herrer de further said that letters, after being signed, were sent to the
Manila como prima dela Renta Vitalicia solicitada por dicho chief clerk and placed on the mailing desk for transmission.
Don Joaquin Herrer hoy, sujeta al examen medico y The witness could not tell if the letter had every actually been
aprobacion de la Oficina Central de la Compañia. placed in the mails. Mr. Tuason, who was the chief clerk, on
November 26, 1917, was not called as a witness. For the
The application was immediately forwarded to the head office defense, attorney Manuel Torres testified to having prepared
of the company at Montreal, Canada. On November 26, 1917, the will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer
the head office gave notice of acceptance by cable to Manila. mentioned his application for a life annuity, and that he said
(Whether on the same day the cable was received notice was that the only document relating to the transaction in his
sent by the Manila office of Herrer that the application had possession was the provisional receipt. Rafael Enriquez, the
been accepted, is a disputed point, which will be discussed administrator of the estate, testified that he had gone through
later.) On December 4, 1917, the policy was issued at the effects of the deceased and had found no letter of
Montreal. On December 18, 1917, attorney Aurelio A. Torres notification from the insurance company to Mr. Herrer.
wrote to the Manila office of the company stating that Herrer
desired to withdraw his application. The following day the local Our deduction from the evidence on this issue must be that the
office replied to Mr. Torres, stating that the policy had been letter of November 26, 1917, notifying Mr. Herrer that his
issued, and called attention to the notification of November 26, application had been accepted, was prepared and signed in
the local office of the insurance company, was placed in the insurance is deficient in enunciating the principles governing
ordinary channels for transmission, but as far as we know, was acceptance, the subject-matter of the Civil code, if there be
never actually mailed and thus was never received by the any, would be controlling. In the Civil Code is found article
applicant. 1262 providing that "Consent is shown by the concurrence of
offer and acceptance with respect to the thing and the
Not forgetting our conclusion of fact, it next becomes consideration which are to constitute the contract. An
necessary to determine the law which should be applied to the acceptance made by letter shall not bind the person making
facts. In order to reach our legal goal, the obvious signposts the offer except from the time it came to his knowledge. The
along the way must be noticed. contract, in such case, is presumed to have been entered into
at the place where the offer was made." This latter article is in
Until quite recently, all of the provisions concerning life opposition to the provisions of article 54 of the Code of
insurance in the Philippines were found in the Code of Commerce.
Commerce and the Civil Code. In the Code of the Commerce,
there formerly existed Title VIII of Book III and Section III of If no mistake has been made in announcing the successive
Title III of Book III, which dealt with insurance contracts. In the steps by which we reach a conclusion, then the only duty
Civil Code there formerly existed and presumably still exist, remaining is for the court to apply the law as it is found. The
Chapters II and IV, entitled insurance contracts and life legislature in its wisdom having enacted a new law on
annuities, respectively, of Title XII of Book IV. On the after July insurance, and expressly repealed the provisions in the Code
1, 1915, there was, however, in force the Insurance Act. No. of Commerce on the same subject, and having thus left a void
2427. Chapter IV of this Act concerns life and health in the commercial law, it would seem logical to make use of
insurance. The Act expressly repealed Title VIII of Book II and the only pertinent provision of law found in the Civil code,
Section III of Title III of Book III of the code of Commerce. The closely related to the chapter concerning life annuities.
law of insurance is consequently now found in the Insurance
Act and the Civil Code. The Civil Code rule, that an acceptance made by letter shall
bind the person making the offer only from the date it came to
While, as just noticed, the Insurance Act deals with life his knowledge, may not be the best expression of modern
insurance, it is silent as to the methods to be followed in order commercial usage. Still it must be admitted that its
that there may be a contract of insurance. On the other hand, enforcement avoids uncertainty and tends to security. Not only
the Civil Code, in article 1802, not only describes a contact of this, but in order that the principle may not be taken too lightly,
life annuity markedly similar to the one we are considering, but let it be noticed that it is identical with the principles
in two other articles, gives strong clues as to the proper announced by a considerable number of respectable courts in
disposition of the case. For instance, article 16 of the Civil the United States. The courts who take this view have
Code provides that "In matters which are governed by special expressly held that an acceptance of an offer of insurance not
laws, any deficiency of the latter shall be supplied by the actually or constructively communicated to the proposer does
provisions of this Code." On the supposition, therefore, which not make a contract. Only the mailing of acceptance, it has
is incontestable, that the special law on the subject of been said, completes the contract of insurance, as the locus
poenitentiae is ended when the acceptance has passed satisfactorily that the acceptance of the application ever came
beyond the control of the party. (I Joyce, The Law of to the knowledge of the applicant.lawph!l.net

Insurance, pp. 235, 244.)

Judgment is reversed, and the plaintiff shall have and recover
In resume, therefore, the law applicable to the case is found to from the defendant the sum of P6,000 with legal interest from
be the second paragraph of article 1262 of the Civil Code November 20, 1918, until paid, without special finding as to
providing that an acceptance made by letter shall not bind the costs in either instance. So ordered.
person making the offer except from the time it came to his
knowledge. The pertinent fact is, that according to the
provisional receipt, three things had to be accomplished by the
insurance company before there was a contract: (1) There had FIELDMEN'S INSURANCE CO., INC., petitioner, 
to be a medical examination of the applicant; (2) there had to vs.
be approval of the application by the head office of the MERCEDES VARGAS VDA. DE SONGCO, ET AL. and
company; and (3) this approval had in some way to be COURT OF APPEALS, respondents.
communicated by the company to the applicant. The further
admitted facts are that the head office in Montreal did accept
Jose S. Suarez for petitioner.
the application, did cable the Manila office to that effect, did
Eligio G. Lagman for respondents.
actually issue the policy and did, through its agent in Manila,
actually write the letter of notification and place it in the usual
channels for transmission to the addressee. The fact as to the
letter of notification thus fails to concur with the essential FERNANDO, J.:
elements of the general rule pertaining to the mailing and
delivery of mail matter as announced by the American courts, An insurance firm, petitioner Fieldmen's Insurance Co., Inc.,
namely, when a letter or other mail matter is addressed and was not allowed to escape liability under a common carrier
mailed with postage prepaid there is a rebuttable presumption insurance policy on the pretext that what was insured, not
of fact that it was received by the addressee as soon as it once but twice, was a private vehicle and not a common
could have been transmitted to him in the ordinary course of carrier, the policy being issued upon the insistence of its agent
the mails. But if any one of these elemental facts fails to who discounted fears of the insured that his privately owned
appear, it is fatal to the presumption. For instance, a letter will vehicle might not fall within its terms, the insured moreover
not be presumed to have been received by the addressee being "a man of scant education," finishing only the first grade.
unless it is shown that it was deposited in the post-office, So it was held in a decision of the lower court thereafter
properly addressed and stamped. (See 22 C.J., 96, and 49 L. affirmed by respondent Court of Appeals. Petitioner in seeking
R. A. [N. S.], pp. 458, et seq., notes.) the review of the above decision of respondent Court of
Appeals cannot be so sanguine as to entertain the belief that a
We hold that the contract for a life annuity in the case at bar different outcome could be expected. To be more explicit, we
was not perfected because it has not been proved sustain the Court of Appeals.
The facts as found by respondent Court of Appeals, binding insured because their company is not owned by the
upon us, follow: "This is a peculiar case. Federico Songco of Government and the Government has nothing to do with their
Floridablanca, Pampanga, a man of scant education being company. So they could do what they please whenever they
only a first grader ..., owned a private jeepney with Plate No. believe a vehicle is insurable' ... In spite of the fact that the
41-289 for the year 1960. On September 15, 1960, as such present case was filed and tried in the CFI of Pampanga, the
private vehicle owner, he was induced by Fieldmen's defendant company did not even care to rebut Amor Songco's
Insurance Company Pampanga agent Benjamin Sambat to testimony by calling on the witness-stand agent Benjamin
apply for a Common Carrier's Liability Insurance Policy Sambat, its Pampanga Field Representative." 2
covering his motor vehicle ... Upon paying an annual premium
of P16.50, defendant Fieldmen's Insurance Company, Inc. The plaintiffs in the lower court, likewise respondents here,
issued on September 19, 1960, Common Carriers Accident were the surviving widow and children of the deceased
Insurance Policy No. 45-HO- 4254 ... the duration of which will Federico Songco as well as the injured passenger Jose
be for one (1) year, effective September 15, 1960 to Manuel. On the above facts they prevailed, as had been
September 15, 1961. On September 22, 1961, the defendant mentioned, in the lower court and in the respondent Court of
company, upon payment of the corresponding premium, Appeals. 1awphîl.nèt

renewed the policy by extending the coverage from October

15, 1961 to October 15, 1962. This time Federico Songco's The basis for the favorable judgment is the doctrine
private jeepney carried Plate No. J-68136-Pampanga-1961. ... announced in Qua Chee Gan v. Law Union and Rock
On October 29, 1961, during the effectivity of the renewed Insurance Co., Ltd., 3 with Justice J. B. L. Reyes speaking for
policy, the insured vehicle while being driven by Rodolfo the Court. It is now beyond question that where inequitable
Songco, a duly licensed driver and son of Federico (the conduct is shown by an insurance firm, it is "estopped from
vehicle owner) collided with a car in the municipality of enforcing forfeitures in its favor, in order to forestall fraud or
Calumpit, province of Bulacan, as a result of which mishap imposition on the insured." 4
Federico Songco (father) and Rodolfo Songco (son) died,
Carlos Songco (another son), the latter's wife, Angelita As much, if not much more so than the Qua Chee
Songco, and a family friend by the name of Jose Manuel Gan decision, this is a case where the doctrine of estoppel
sustained physical injuries of varying degree." 1 undeniably calls for application. After petitioner Fieldmen's
Insurance Co., Inc. had led the insured Federico Songco to
It was further shown according to the decision of respondent believe that he could qualify under the common carrier liability
Court of Appeals: "Amor Songco, 42-year-old son of deceased insurance policy, and to enter into contract of insurance paying
Federico Songco, testifying as witness, declared that when the premiums due, it could not, thereafter, in any litigation
insurance agent Benjamin Sambat was inducing his father to arising out of such representation, be permitted to change its
insure his vehicle, he butted in saying: 'That cannot be, Mr. stand to the detriment of the heirs of the insured. As estoppel
Sambat, because our vehicle is an "owner" private vehicle and is primarily based on the doctrine of good faith and the
not for passengers,' to which agent Sambat replied: 'whether avoidance of harm that will befall the innocent party due to its
our vehicle was an "owner" type or for passengers it could be
injurious reliance, the failure to apply it in this case would Even if it be assumed that there was an ambiguity, an excerpt
result in a gross travesty of justice. from the Qua Chee Gan decision would reveal anew the
weakness of petitioner's contention. Thus: "Moreover, taking
That is all that needs be said insofar as the first alleged error into account the well known rule that ambiguities or obscurities
of respondent Court of Appeals is concerned, petitioner being must be strictly interpreted against the party that caused them,
adamant in its far-from-reasonable plea that estoppel could not the 'memo of warranty' invoked by appellant bars the latter
be invoked by the heirs of the insured as a bar to the alleged from questioning the existence of the appliances called for in
breach of warranty and condition in the policy. lt would now the insured premises, since its initial expression, 'the
rely on the fact that the insured owned a private vehicle, not a undernoted appliances for the extinction of fire being kept on
common carrier, something which it knew all along when not the premises insured hereby, ... it is hereby warranted ...,'
once but twice its agent, no doubt without any objection in its admits of interpretation as an admission of the existence of
part, exerted the utmost pressure on the insured, a man of such appliances which appellant cannot now contradict,
scant education, to enter into such a contract. should the parol evidence rule apply." 7

Nor is there any merit to the second alleged error of To the same effect is the following citation from the same
respondent Court that no legal liability was incurred under the leading case: "This rigid application of the rule on ambiguities
policy by petitioner. Why liability under the terms of the has become necessary in view of current business practices.
policy 5 was inescapable was set forth in the decision of The courts cannot ignore that nowadays monopolies, cartels
respondent Court of Appeals. Thus: "Since some of the and concentration of capital, endowed with overwhelming
conditions contained in the policy issued by the defendant- economic power, manage to impose upon parties dealing with
appellant were impossible to comply with under the existing them cunningly prepared 'agreements' that the weaker party
conditions at the time and 'inconsistent with the known facts,' may not change one whit, his participation in the 'agreement'
the insurer 'is estopped from asserting breach of such being reduced to the alternative to 'take it or leave it' labelled
conditions.' From this jurisprudence, we find no valid reason to since Raymond Saleilles 'contracts by adherence' (contrats
deviate and consequently hold that the decision appealed from d'adhesion), in contrast to those entered into by parties
should be affirmed. The injured parties, to wit, Carlos Songco, bargaining on an equal footing, such contracts (of which
Angelito Songco and Jose Manuel, for whose hospital and policies of insurance and international bills of lading are prime
medical expenses the defendant company was being made examples) obviously call for greater strictness and vigilance on
liable, were passengers of the jeepney at the time of the the part of courts of justice with a view to protecting the
occurrence, and Rodolfo Songco, for whose burial expenses weaker party from abuses and imposition, and prevent their
the defendant company was also being made liable was the becoming traps for the unwary (New Civil Code. Article 24;
driver of the vehicle in question. Except for the fact, that they Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February
were not fare paying passengers, their status as beneficiaries 1942)." 8
under the policy is recognized therein." 6
The last error assigned which would find fault with the decision
of respondent Court of Appeals insofar as it affirmed the lower
court award for exemplary damages as well as attorney's fees Commissioner, and RAMON MONTILLA PATERNO,
is, on its face, of no persuasive force at all. JR., respondents.

The conclusion that inescapably emerges from the above is Ponce Enrile, Cayetano, Reyes and Manalastas for
the correctness of the decision of respondent Court of Appeals petitioners.
sought to be reviewed. For, to borrow once again from the
language of the Qua Chee Gan opinion: "The contract of Oscar Z. Benares for private respondent.
insurance is one of perfect good faith (uberima fides) not for
the insured alone,but equally so for the insurer; in fact, it is
more so for the latter, since its dominant bargaining position
carries with it stricter responsibility."9
QUIASON, J.:
This is merely to stress that while the morality of the business
world is not the morality of institutions of rectitude like the This is a petition for certiorari and prohibition under Rule 65 of
pulpit and the academe, it cannot descend so low as to be the Revised Rules of Court, with preliminary injunction or
another name for guile or deception. Moreover, should it temporary restraining order, to annul and set aside the Order
happen thus, no court of justice should allow itself to lend its dated November 6, 1986 of the Insurance Commissioner and
approval and support. 1awphîl.nèt
the entire proceedings taken in I.C. Special Case No. 1-86.

We have no choice but to recognize the monetary We grant the petition.

responsibility of petitioner Fieldmen's Insurance Co., Inc. It did
not succeed in its persistent effort to avoid complying with its The instant case arose from a letter-complaint of private
obligation in the lower court and the Court of Appeals. Much respondent Ramon M. Paterno, Jr. dated April 17, 1986, to
less should it find any receptivity from us for its unwarranted respondent Commissioner, alleging certain problems
and unjustified plea to escape from its liability. encountered by agents, supervisors, managers and public
consumers of the Philippine American Life Insurance
WHEREFORE, the decision of respondent Court of Appeals of Company (Philamlife) as a result of certain practices by said
July 20, 1965, is affirmed in its entirety. Costs against company.
petitioner Fieldmen's Insurance Co., Inc.
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
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and letter.
RODRIGO DE LOS REYES, petitioners, 
vs. In a letter dated April 29, 1986 to respondent Commissioner,
HON. ARMANDO ANSALDO, in his capacity as Insurance petitioner De los Reyes suggested that private respondent
"submit some sort of a 'bill of particulars' listing and citing at the prevailing rate reckoned from the date when they were
actual cases, facts, dates, figures, provisions of law, rules and deducted.
regulations, and all other pertinent data which are necessary
to enable him to prepare an intelligent reply" (Rollo, p. 37). A Respondent Commissioner furnished petitioner De los Reyes
copy of this letter was sent by the Insurance Commissioner to with a copy of private respondent's letter of July 31, 1986, and
private respondent for his comments thereon. requested his answer thereto.

On May 16, 1986, respondent Commissioner received a letter Petitioner De los Reyes submitted an Answer dated
from private respondent maintaining that his letter-complaint of September 8, 1986, stating inter alia that:
April 17, 1986 was sufficient in form and substance, and
requested that a hearing thereon be conducted. (1) Private respondent's letter of August 11,
1986 does not contain any of the particular
Petitioner De los Reyes, in his letter to respondent information which Philamlife was seeking from
Commissioner dated June 6, 1986, reiterated his claim that him and which he promised to submit.
private respondent's letter of May 16, 1986 did not supply the
information he needed to enable him to answer the letter- (2) That since the Commission's quasi-judicial
complaint. power was being invoked with regard to the
complaint, private respondent must file a
On July 14, a hearing on the letter-complaint was held by verified formal complaint before any further
respondent Commissioner on the validity of the Contract of proceedings.
Agency complained of by private respondent.
In his letter dated September 9, 1986, private respondent
In said hearing, private respondent was required by asked for the resumption of the hearings on his complaint.
respondent Commissioner to specify the provisions of the
agency contract which he claimed to be illegal. On October 1, private respondent executed an affidavit,
verifying his letters of April 17, 1986, and July 31, 1986.
On August 4, private respondent submitted a letter of
specification to respondent Commissioner dated July 31, In a letter dated October 14, 1986, Manuel Ortega, Philamlife's
1986, reiterating his letter of April 17, 1986 and praying that Senior Assistant Vice-President and Executive Assistant to the
the provisions on charges and fees stated in the Contract of President, asked that respondent Commission first rule on the
Agency executed between Philamlife and its agents, as well as questions of the jurisdiction of the Insurance Commissioner
the implementing provisions as published in the agents' over the subject matter of the letters-complaint and the legal
handbook, agency bulletins and circulars, be declared as null standing of private respondent.
and void. He also asked that the amounts of such charges and
fees already deducted and collected by Philamlife in On October 27, respondent Commissioner notified both parties
connection therewith be reimbursed to the agents, with interest of the hearing of the case on November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash hearing officer, in open session ruled as it is
Subpoena/Notice on the following grounds; hereby ruled to deny the Motion to Quash
Subpoena/Notice for lack of merit (Rollo, p.
1. The Subpoena/Notice has no legal basis and 109).
is premature because:
Hence, this petition.
(1) No complaint sufficient in form and contents has been filed;
II
(2) No summons has been issued nor received by the
respondent De los Reyes, and hence, no jurisdiction has been The main issue to be resolved is whether or not the resolution
acquired over his person; of the legality of the Contract of Agency falls within the
jurisdiction of the Insurance Commissioner.
(3) No answer has been filed, and hence, the hearing
scheduled on November 5, 1986 in the Subpoena/Notice, and Private respondent contends that the Insurance Commissioner
wherein the respondent is required to appear, is premature has jurisdiction to take cognizance of the complaint in the
and lacks legal basis. exercise of its quasi-judicial powers. The Solicitor General,
upholding the jurisdiction of the Insurance Commissioner,
II. The Insurance Commission has no claims that under Sections 414 and 415 of the Insurance
jurisdiction over; Code, the Commissioner has authority to nullify the alleged
illegal provisions of the Contract of Agency.
(1) the subject matter or nature
of the action; and III

(2) over the parties involved The general regulatory authority of the Insurance
(Rollo, p. 102). Commissioner is described in Section 414 of the Insurance
Code, to wit:
In the Order dated November 6, 1986, respondent
Commissioner denied the Motion to Quash. The dispositive The Insurance Commissioner shall have the
portion of said Order reads: duty to see that all laws relating to insurance,
insurance companies and other insurance
NOW, THEREFORE, finding the position of matters, mutual benefit associations and trusts
complainant thru counsel tenable and for charitable uses are faithfully executed and to
considering the fact that the instant case is an perform the duties imposed upon him by this
informal administrative litigation falling outside Code, . . .
the operation of the aforecited memorandum
circular but cognizable by this Commission, the On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere the provisions of this Code. (Insurance Code,
in this Code, the Insurance Commissioner is hereby Sec. 2[2]; Emphasis supplied).
authorized, at his discretion, to impose upon insurance
companies, their directors and/or officers and/or agents, for Since the contract of agency entered into between Philamlife
any willful failure or refusal to comply with, or violation of any and its agents is not included within the meaning of an
provision of this Code, or any order, instruction, regulation or insurance business, Section 2 of the Insurance Code cannot
ruling of the Insurance Commissioner, or any commission of be invoked to give jurisdiction over the same to the Insurance
irregularities, and/or conducting business in an unsafe and Commissioner. Expressio unius est exclusio alterius.
unsound manner as may be determined by the the Insurance
Commissioner, the following: With regard to private respondent's contention that the quasi-
judicial power of the Insurance Commissioner under Section
(a) fines not in excess of five hundred pesos a day; and 416 of the Insurance Code applies in his case, we likewise rule
in the negative. Section 416 of the Code in pertinent part,
(b) suspension, or after due hearing, removal of directors provides:
and/or officers and/or agents.
The Commissioner shall have the power to
A plain reading of the above-quoted provisions show that the adjudicate claims and complaints involving any
Insurance Commissioner has the authority to regulate the loss, damage or liability for which an insurer
business of insurance, which is defined as follows: may be answerable under any kind of policy or
contract of insurance, or for which such insurer
(2) The term "doing an insurance business" or may be liable under a contract of suretyship, or
"transacting an insurance business," within the for which a reinsurer may be used under any
meaning of this Code, shall include contract or reinsurance it may have entered
(a) making or proposing to make, as insurer, into, or for which a mutual benefit association
any insurance contract; may be held liable under the membership
(b) making, or proposing to make, as surety, certificates it has issued to its members, where
any contract of suretyship as a vocation and the amount of any such loss, damage or
not as merely incidental to any other legitimate liability, excluding interest, costs and attorney's
business or activity of the surety; (c) doing any fees, being claimed or sued upon any kind of
kind of business, including a reinsurance insurance, bond, reinsurance contract, or
business, specifically recognized as constituting membership certificate does not exceed in any
the doing of an insurance business within the single claim one hundred thousand pesos.
meaning of this Code; (d) doing or proposing to
do any business in substance equivalent to any A reading of the said section shows that the quasi-judicial
of the foregoing in a manner designed to evade power of the Insurance Commissioner is limited by law "to
claims and complaints involving any loss, damage or liability
for which an insurer may be answerable under any kind of WHEREFORE, the petition is GRANTED. The Order dated
policy or contract of insurance, . . ." Hence, this power does November 6, 1986 of the Insurance Commission is SET
not cover the relationship affecting the insurance company and ASIDE.
its agents but is limited to adjudicating claims and complaints
filed by the insured against the insurance company. SO ORDERED.

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 AMERICAN HOME ASSURANCE
requirements and limitations imposed on insurance agents and
brokers. COMPANY, petitioner, vs. TANTUCO
ENTERPRISES, INC., respondent.
The Insurance Code does not have provisions governing the
relations between insurance companies and their agents. It DECISION
follows that the Insurance Commissioner cannot, in the
exercise of its quasi-judicial powers, assume jurisdiction over PUNO, J.:
controversies between the insurance companies and their
agents. Before us is a Petition for Review on Certiorari assailing
the Decision of the Court of Appeals in CA-G.R. CV No.
We have held in the cases of Great Pacific Life Assurance 52221 promulgated on January 14, 1999, which affirmed in
Corporation v. Judico, 180 SCRA 445 (1989), and Investment toto the Decision of the Regional Trial Court, Branch 53,
Planning Corporation of the Philippines v. Social Security Lucena City in Civil Case No. 92-51 dated October 16, 1995.
Commission, 21 SCRA 904 (1962), that an insurance
company may have two classes of agents who sell its Respondent Tantuco Enterprises, Inc. is engaged in the
insurance policies: (1) salaried employees who keep definite coconut oil milling and refining industry. It owns two oil
hours and work under the control and supervision of the mills. Both are located at its factory compound at Iyam, Lucena
company; and (2) registered representatives, who work on City. It appears that respondent commenced its business
commission basis. operations with only one oil mill. In 1988, it started operating
its second oil mill. The latter came to be commonly referred to
Under the first category, the relationship between the as the new oil mill.
insurance company and its agents is governed by the Contract
of Employment and the provisions of the Labor Code, while The two oil mills were separately covered by fire
under the second category, the same is governed by the insurance policies issued by petitioner American Home
Contract of Agency and the provisions of the Civil Code on the Assurance Co., Philippine Branch.[1] The first oil mill was
Agency. Disputes involving the latter are cognizable by the insured for three million pesos (P3,000,000.00) under Policy
regular courts. No. 306-7432324-3 for the period March 1, 1991 to 1992.
  The new oil mill was insured for six million pesos
[2]
(c) P300,000.00 for and as attorneys fees; and
(P6,000,000.00) under Policy No. 306-7432321-9 for the same
term.[3] Official receipts indicating payment for the full amount (d) Pay the costs.
of the premium were issued by the petitioner's agent.[4]
A fire that broke out in the early morning of September SO ORDERED.[6]
30,1991 gutted and consumed the new oil mill. Respondent
immediately notified the petitioner of the incident. The latter Petitioner assailed this judgment before the Court of
then sent its appraisers who inspected the burned premises and Appeals. The appellate court upheld the same in a Decision
the properties destroyed. Thereafter, in a letter dated October promulgated on January 14, 1999, the pertinent portion of
15, 1991, petitioner rejected respondents claim for the which states:
insurance proceeds on the ground that no policy was issued by
it covering the burned oil mill. It stated that the description of WHEREFORE, the instant appeal is hereby
the insured establishment referred to another building thus: Our DISMISSED for lack of merit and the trial courts
policy nos. 306-7432321-9 (Ps 6M) and 306-7432324-4 (Ps
3M) extend insurance coverage to your oil mill under Building
Decision dated October 16, 1995 is hereby
No. 5, whilst the affected oil mill was under Building No. 14.[5] AFFIRMED in toto.
A complaint for specific performance and damages was SO ORDERED.[7]
consequently instituted by the respondent with the RTC,
Branch 53 of Lucena City. On October 16, 1995, after trial, the Petitioner moved for reconsideration. The motion, however,
lower court rendered a Decision finding the petitioner liable on was denied for lack of merit in a Resolution promulgated on
the insurance policy thus: June 10, 1999.

WHEREFORE, judgment is rendered in favor of the Hence, the present course of action, where petitioner
plaintiff ordering defendant to pay plaintiff: ascribes to the appellate court the following errors:

(a) P4,406,536.40 representing damages for loss (1) The Court of Appeals erred in its conclusion
by fire of its insured property with interest at the legal that the issue of non-payment of the premium was
rate; beyond its jurisdiction because it was raised for
the first time on appeal.[8]
(b) P80,000.00 for litigation expenses;
 (2) The Court of Appeals erred in its legal What exacerbates respondents predicament, petitioner
interpretation of 'Fire Extinguishing Appliances posits, is that it did not have the supposed wrong description or
mistake corrected. Despite the fact that the policy in question
Warranty' of the policy.[9]
was issued way back in 1988, or about three years before the
fire, and despite the Important Notice in the policy that Please
(3) With due respect, the conclusion of the Court read and examine the policy and if incorrect, return it
of Appeals giving no regard to the parole immediately for alteration, respondent apparently did not call
evidence rule and the principle of estoppel is petitioners attention with respect to the misdescription.
erroneous.[10] By way of conclusion, petitioner argues that respondent is
barred by the parole evidence rule from presenting evidence
The petition is devoid of merit. (other than the policy in question) of its self-serving intention
The primary reason advanced by the petitioner in resisting (sic) that it intended really to insure the burned oil mill, just as
the claim of the respondent is that the burned oil mill is not it is barred by estoppel  from claiming that the description of
covered by any insurance policy. According to it, the oil mill the insured oil mill in the policy was wrong, because it retained
insured is specifically described in the policy by its boundaries the policy without having the same corrected before the fire by
in the following manner: an endorsement in accordance with its Condition No. 28.
These contentions can not pass judicial muster.
Front: by a driveway thence at 18 meters distance by
In construing the words used descriptive of a building
Bldg. No. 2.
insured, the greatest liberality is shown by the courts in giving
effect to the insurance.[11] In view of the custom of insurance
Right: by an open space thence by Bldg. No. 4. agents to examine buildings before writing policies upon them,
and since a mistake as to the identity and character of the
Left: Adjoining thence an imperfect wall by Bldg. No. building is extremely unlikely, the courts are inclined to
4. consider that the policy of insurance covers any building which
the parties manifestly intended to insure, however inaccurate
Rear: by an open space thence at 8 meters distance. the description may be.[12]
Notwithstanding, therefore, the misdescription in the
However, it argues that this specific boundary description policy, it is beyond dispute, to our mind, that what the parties
clearly pertains, not to the burned oil mill, but to the other manifestly intended to insure was the new oil mill. This is
mill. In other words, the oil mill gutted by fire was not the one obvious from the categorical statement embodied in the policy,
described by the specific boundaries in the contested policy. extending its protection:
On machineries and equipment with complete from the old policy and what she typed is that the
description of the boundaries from the old policy was
accessories usual to a coconut oil mill including copied but she inserted covering the new oil mill and to
stocks of copra, copra cake and copra mills whilst me at that time the important thing is that it covered the
contained in the new oil mill building, situate (sic) at new oil mill because it is just within one compound and
UNNO. ALONG NATIONAL HIGH WAY, BO. there are only two oil mill[s] and so just enough, I had the
policy prepared. In fact, two policies were prepared having
IYAM, LUCENA CITY UNBLOCKED.[13] (emphasis the same date one for the old one and the other for the new
supplied.) oil mill and exactly the same policy period, sir. [14] (emphasis
supplied)
If the parties really intended to protect the first oil mill, then
It is thus clear that the source of the discrepancy happened
there is no need to specify it as new.
during the preparation of the written contract.
Indeed, it would be absurd to assume that respondent
These facts lead us to hold that the present case falls
would protect its first oil mill for different amounts and leave
within one of the recognized exceptions to the parole evidence
uncovered its second one. As mentioned earlier, the first oil
rule. Under the Rules of Court, a party may present evidence to
mill is already covered under Policy No. 306-7432324-4 issued
modify, explain or add to the terms of the written agreement if
by the petitioner. It is unthinkable for respondent to obtain the
he puts in issue in his pleading, among others, its failure to
other policy from the very same company. The latter ought to
express the true intent and agreement of the parties thereto.
know that a second agreement over that same realty results in [15]
 Here, the contractual intention of the parties cannot be
its overinsurance.
understood from a mere reading of the instrument. Thus, while
The imperfection in the description of the insured oil mills the contract explicitly stipulated that it was for the insurance of
boundaries can be attributed to a misunderstanding between the the new oil mill, the boundary description written on the policy
petitioners general agent, Mr. Alfredo Borja, and its policy concededly pertains to the first oil mill. This irreconcilable
issuing clerk, who made the error of copying the boundaries of difference can only be clarified by admitting
the first oil mill when typing the policy to be issued for the new evidence aliunde, which will explain the imperfection and
one. As testified to by Mr.Borja: clarify the intent of the parties.
Atty. G. Camaligan: Anent petitioners argument that the respondent is barred
Q: What did you do when you received the report? by estoppel from claiming that the description of the insured oil
mill in the policy was wrong, we find that the same proceeds
A: I told them as will be shown by the map the intention really of from a wrong assumption. Evidence on record reveals that
Mr. Edison Tantuco is to cover the new oil mill that is why respondents operating manager, Mr. Edison Tantuco, notified
when I presented the existing policy of the old policy, the Mr. Borja (the petitioners agent with whom respondent
policy issuing clerk just merely (sic) copied the wording
negotiated for the contract) about the inaccurate description in
the policy. However, Mr. Borja assured Mr. Tantuco that the In a further attempt to avoid liability, petitioner claims that
use of the adjective new will distinguish the insured respondent forfeited the renewal policy for its failure to pay the
property. The assurance convinced respondent that, despite the full amount of the premium and breach of the Fire
impreciseness in the specification of the boundaries, the Extinguishing Appliances Warranty.
insurance will cover the new oil mill. This can be seen from the
The amount of the premium stated on the face of the
testimony on cross of Mr. Tantuco:
policy was P89,770.20. From the admission of respondents
"ATTY. SALONGA: own witness, Mr. Borja, which the petitioner cited, the former
Q: You mentioned, sir, that at least in so far as Exhibit A is only paid it P75,147.00, leaving a difference
concern you have read what the policy contents.(sic) of P14,623.20. The deficiency, petitioner argues, suffices to
invalidate the policy, in accordance with Section 77 of the
Kindly take a look in the page of Exhibit A which was marked as Insurance Code.[18]
Exhibit A-2 particularly the boundaries of the property
insured by the insurance policy Exhibit A, will you tell us as The Court of Appeals refused to consider this contention
the manager of the company whether the boundaries stated of the petitioner. It held that this issue was raised for the first
in Exhibit A-2 are the boundaries of the old (sic) mill that time on appeal, hence, beyond its jurisdiction to resolve,
was burned or not. pursuant to Rule 46, Section 18 of the Rules of Court.[19]
A: It was not, I called up Mr. Borja regarding this matter and Petitioner, however, contests this finding of the appellate
he told me that what is important is the word new oil court. It insists that the issue was raised in paragraph 24 of its
mill. Mr. Borja said, as a matter of fact, you can never
Answer, viz.:
insured (sic) one property with two (2) policies, you will
only do that if you will make to increase the amount and it is
by indorsement not by another policy, sir."[16] 24. Plaintiff has not complied with the condition
We again stress that the object of the court in construing a
of the policy and renewal certificate that the
contract is to ascertain the intent of the parties to the contract renewal premium should be paid on or before
and to enforce the agreement which the parties have entered renewal date.
into. In determining what the parties intended, the courts will
read and construe the policy as a whole and if possible, give Petitioner adds that the issue was the subject of the cross-
effect to all the parts of the contract, keeping in mind always, examination of Mr. Borja, who acknowledged that the paid
however, the prime rule that in the event of doubt, this doubt is amount was lacking by P14,623.20 by reason of a discount or
to be resolved against the insurer. In determining the intent of rebate, which rebate under Sec. 361 of the Insurance Code is
the parties to the contract, the courts will consider the purpose illegal.
and object of the contract.[17] The argument fails to impress. It is true that the
asseverations petitioner made in paragraph 24 of its Answer
ostensibly spoke of the policys condition for payment of the - PORTABLE EXTINGUISHERS
renewal premium on time and respondents non-compliance
with it. Yet, it did not contain any specific and definite - INTERNAL HYDRANTS
allegation that respondent did not pay the premium, or that it
did not pay the full amount, or that it did not pay the amount on
time.
- EXTERNAL HYDRANTS
Likewise, when the issues to be resolved in the trial court - FIRE PUMP
were formulated at the pre-trial proceedings, the question of the
supposed inadequate payment was never raised. Most - 24-HOUR SECURITY SERVICES
significant to point, petitioner fatally neglected to present,
during the whole course of the trial, any witness to testify that
respondent indeed failed to pay the full amount of the
BREACH of this warranty shall render this policy
premium. The thrust of the cross-examination of Mr. Borja, on null and void and the Company shall no longer be
the other hand, was not for the purpose of proving this liable for any loss which may occur.[20]
fact. Though it briefly touched on the alleged deficiency, such
was made in the course of discussing a discount or rebate, Petitioner argues that the warranty clearly obligates the
which the agent apparently gave the respondent. Certainly, the insured to maintain all the appliances specified therein. The
whole tenor of Mr. Borjas testimony, both during direct and breach occurred when the respondent failed to install internal
cross examinations, implicitly assumed a valid and subsisting fire hydrants inside the burned building as warranted. This fact
insurance policy. It must be remembered that he was called to was admitted by the oil mills expeller operator, Gerardo
the stand basically to demonstrate that an existing policy issued Zarsuela.
by the petitioner covers the burned building. Again, the argument lacks merit. We agree with the
Finally, petitioner contends that respondent violated the appellate courts conclusion that the aforementioned warranty
express terms of the Fire Extinguishing Appliances did not require respondent to provide for all the fire
Warranty. The said warranty provides: extinguishing appliances enumerated therein. Additionally, we
find that neither did it require that the appliances are restricted
WARRANTED that during the currency of this to those mentioned in the warranty. In other words, what the
Policy, Fire Extinguishing Appliances as warranty mandates is that respondent should maintain in
efficient working condition within the premises of the insured
mentioned below shall be maintained in efficient property, fire fighting equipments such as, but not limited to,
working order on the premises to which insurance those identified in the list, which will serve as the oil mills first
applies: line of defense in case any part of it bursts into flame.
 To be sure, respondent was able to comply with the through their agents and so long as an application for
warranty. Within the vicinity of the new oil mill can be found insurance has not been either accepted or rejected, it is
the following devices: numerous portable fire extinguishers,
merely a proposal or an offer to make a contract.
two fire hoses,[21] fire hydrant,[22] and an emergency fire engine.
[23]
 All of these equipments were in efficient working order
when the fire occurred. Petitioner Virginia A. Perez assails the decision of
respondent Court of Appeals dated July 9, 1993 in
It ought to be remembered that not only are warranties
CA-G.R. CV 35529 entitled, "BF Lifeman Insurance
strictly construed against the insurer, but they should, likewise,
by themselves be reasonably interpreted.[24] That reasonableness Corporations, Plaintiff-Appellant versus Virginia A.
is to be ascertained in light of the factual conditions prevailing Perez, Defendant-Appellee," which declared
in each case. Here, we find that there is no more need for an Insurance Policy 056300 for P50,000.00 issued by
internal hydrant considering that inside the burned building private respondent corporation in favor of the
were: (1) numerous portable fire extinguishers, (2) an deceased Primitivo B. Perez, null and void and
emergency fire engine, and (3) a fire hose which has a
rescinded, thereby reversing the decision rendered by
connection to one of the external hydrants.
the Regional Trial Court of Manila, Branch XVI.
IN VIEW WHEREOF, finding no reversible error in the
impugned Decision, the instant petition is hereby DISMISSED. The facts of the case as summarized by respondent
SO ORDERED. Court of Appeals are not in dispute.

Primitivo B. Perez had been insured with the BF

Lifeman Insurance Corporation since 1980
VIRGINIA A. PEREZ, petitioner, vs. COURT OF
for P20,000.00. Sometime in October 1987, an agent
APPEALS and BF LIFEMAN INSURANCE
of the insurance corporation, Rodolfo Lalog, visited
CORPORATION, respondents.
Perez in Guinayangan, Quezon and convinced him to
DECISION apply for additional insurance coverage
of P50,000.00, to avail of the ongoing promotional
YNARES-SANTIAGO, J.: discount of P400.00 if the premium were paid
annually.
A contract of insurance, like all other contracts, must
be assented to by both parties, either in person or
On October 20, 1987, Primitivo B. Perez Corporation. It was only on November 27, 1987 that
accomplished an application form for the additional said papers were received in Manila.
insurance coverage of P50,000.00. On the same day,
petitioner Virginia A. Perez, Primitivos wife, Without knowing that Perez died on November 25,
paid P2,075.00 to Lalog. The receipt issued by Lalog 1987, BF Lifeman Insurance Corporation approved
indicated the amount received was a the application and issued the corresponding policy
"deposit."  Unfortunately, Lalog lost the application
[1] for the P50,000.00 on December 2, 1987. 
[4]

form accomplished by Perez and so on October 28,

1987, he asked the latter to fill up another application Petitioner Virginia Perez went to Manila to claim the
form.  On November 1, 1987, Perez was made to
[2] benefits under the insurance policies of the deceased.
undergo the required medical examination, which he She was paid P40,000.00 under the first insurance
passed. [3] policy for P20,000.00 (double indemnity in case of
accident) but the insurance company refused to pay
Pursuant to the established procedure of the company, the claim under the additional policy coverage
Lalog forwarded the application for additional of P50,000.00, the proceeds of which amount
insurance of Perez, together with all its supporting to P150,000.00 in view of a triple indemnity rider on
papers, to the office of BF Lifeman Insurance the insurance policy. In its letter of January 29, 1988
Corporation at Gumaca, Quezon which office was to Virginia A. Perez, the insurance company
supposed to forward the papers to the Manila office. maintained that the insurance for P50,000.00 had not
been perfected at the time of the death of Primitivo
On November 25, 1987, Perez died in an accident. He Perez. Consequently, the insurance company refunded
was riding in a banca which capsized during a storm. the amount of P2,075.00 which Virginia Perez had
At the time of his death, his application papers for the paid.
additional insurance of P50,000.00 were still with the
Gumaca office. Lalog testified that when he went to On September 21, 1990, private respondent BF
follow up the papers, he found them still in the Lifeman Insurance Corporation filed a complaint
Gumaca office and so he personally brought the against Virginia A. Perez seeking the rescission and
papers to the Manila office of BF Lifeman Insurance declaration of nullity of the insurance contract in
question.
Petitioner Virginia A. Perez, on the other hand, The trial court, in ruling for petitioner, held that the
averred that the deceased had fulfilled all his premium for the additional insurance of P50,000.00
prestations under the contract and all the elements of a had been fully paid and even if the sum of P2,075.00
valid contract are present. She then filed a were to be considered merely as partial payment, the
counterclaim against private respondent for the same does not affect the validity of the policy. The
collection of P150,000.00 as actual trial court further stated that the deceased had fully
damages, P100,000.00 as exemplary complied with the requirements of the insurance
damages, P30,000.00 as attorneys fees company. He paid, signed the application form and
and P10,000.00 as expenses for litigation. passed the medical examination. He should not be
made to suffer the subsequent delay in the transmittal
On October 25, 1991, the trial court rendered a of his application form to private respondents head
decision in favor of petitioner, the dispositive portion office since these were no longer within his control.
of which reads as follows:
The Court of Appeals, however, reversed the decision
WHEREFORE PREMISES of the trial court saying that the insurance contract
CONSIDERED, judgment is hereby for P50,000.00 could not have been perfected since at
rendered in favor of defendant Virginia the time that the policy was issued, Primitivo was
A. Perez, ordering the plaintiff BF already dead.  Citing the provision in the application
[6]

Lifeman Insurance Corporation to pay to form signed by Primitivo which states that:
her the face value of BF Lifeman
Insurance Policy No. 056300, plus "x x x there shall be no contract of
double indemnity under the SARDI or in insurance unless and until a policy is
the total amount of P150,000.00 (any issued on this application and that the
refund made and/or premium deficiency policy shall not take effect until the first
to be deducted therefrom). premium has been paid and the policy
has been delivered to and accepted by
SO ORDERED. [5]
me/us in person while I/we, am/are in
good health"
the Court of Appeals held that the contract of (1).......Consent of the contracting parties;
insurance had to be assented to by both parties and so
long as the application for insurance has not been (2).......Object certain which is the
either accepted or rejected, it is merely an offer or subject matter of the contract;
proposal to make a contract.
(3).......Cause of the obligation which is
Petitioners motion for reconsideration having been established.
denied by respondent court, the instant petition for
certiorari was filed on the ground that there was a Consent must be manifested by the meeting of the
consummated contract of insurance between the offer and the acceptance upon the thing and the cause
deceased and BF Lifeman Insurance Corporation and which are to constitute the contract. The offer must be
that the condition that the policy issued by the certain and the acceptance absolute.
corporation be delivered and received by the applicant
in good health, is potestative, being dependent upon When Primitivo filed an application for insurance,
the will of the insurance company, and is therefore paid P2,075.00 and submitted the results of his
null and void. medical examination, his application was subject to
the acceptance of private respondent BF Lifeman
The petition is bereft of merit. Insurance Corporation. The perfection of the contract
of insurance between the deceased and respondent
Insurance is a contract whereby, for a stipulated corporation was further conditioned upon compliance
consideration, one party undertakes to compensate the with the following requisites stated in the application
other for loss on a specified subject by specified form:
perils.  A contract, on the other hand, is a meeting of
[7]

the minds between two persons whereby one binds "there shall be no contract of insurance
himself, with respect to the other to give something or unless and until a policy is issued on this
to render some service.  Under Article 1318 of the
[8] application and that the said policy shall
Civil Code, there is no contract unless the following not take effect until the premium has
requisites concur: been paid and the policy delivered to and
 accepted by me/us in person while I/We, satisfactorily that the acceptance of the application
am/are in good health." 
[9]
ever reached the knowledge of the applicant.

The assent of private respondent BF Lifeman Petitioner insists that the condition imposed by
Insurance Corporation therefore was not given when it respondent corporation that a policy must have been
merely received the application form and all the delivered to and accepted by the proposed insured in
requisite supporting papers of the applicant. Its assent good health is potestative being dependent upon the
was given when it issues a corresponding policy to the will of the corporation and is therefore null and void.
applicant. Under the abovementioned provision, it is
only when the applicant pays the premium and We do not agree.
receives and accepts the policy while he is in good
health that the contract of insurance is deemed to have A potestative condition depends upon the exclusive
been perfected. will of one of the parties. For this reason, it is
considered void. Article 1182 of the New Civil Code
It is not disputed, however, that when Primitivo died states: When the fulfillment of the condition depends
on November 25, 1987, his application papers for upon the sole will of the debtor, the conditional
additional insurance coverage were still with the obligation shall be void.
branch office of respondent corporation in Gumaca
and it was only two days later, or on November 27, In the case at bar, the following conditions were
1987, when Lalog personally delivered the application imposed by the respondent company for the perfection
papers to the head office in Manila. Consequently, of the contract of insurance:
there was absolutely no way the acceptance of the
application could have been communicated to the (a).......a policy must have been issued;
applicant for the latter to accept inasmuch as the
(b).......the premiums paid; and
applicant at the time was already dead. In the case
of Enriquez vs. Sun Life Assurance Co. of Canada, (c).......the policy must have been
recovery on the life insurance of the deceased was
[10]
delivered to and accepted by the
disallowed on the ground that the contract for annuity applicant while he is in good health.
was not perfected since it had not been proved
The condition imposed by the corporation that the insurance unless the minds of the parties have met in
policy must have been delivered to and accepted by agreement. [11]

the applicant while he is in good health can hardly be

considered as a potestative or facultative condition. Prescinding from the foregoing, respondent
On the contrary, the health of the applicant at the time corporation cannot be held liable for gross negligence.
of the delivery of the policy is beyond the control or It should be noted that an application is a mere offer
will of the insurance company. Rather, the condition which requires the overt act of the insurer for it to
is a suspensive one whereby the acquisition of rights ripen into a contract. Delay in acting on the
depends upon the happening of an event which application does not constitute acceptance even
constitutes the condition. In this case, the suspensive though the insured has forwarded his first premium
condition was the policy must have been delivered with his application. The corporation may not be
and accepted by the applicant while he is in good penalized for the delay in the processing of the
health. There was non-fulfillment of the condition, application papers. Moreover, while it may have taken
however, inasmuch as the applicant was already dead some time for the application papers to reach the main
at the time the policy was issued. Hence, the non- office, in the case at bar, the same was acted upon less
fulfillment of the condition resulted in the non- than a week after it was received. The processing of
perfection of the contract. applications by respondent corporation normally takes
two to three weeks, the longest being a month.  In [12]

As stated above, a contract of insurance, like other this case, however, the requisite medical examination
contracts, must be assented to by both parties either in was undergone by the deceased on November 1, 1987;
person or by their agents. So long as an application the application papers were forwarded to the head
for insurance has not been either accepted or rejected, office on November 27, 1987; and the policy was
it is merely an offer or proposal to make a contract. issued on December 2, 1987. Under these
The contract, to be binding from the date of circumstances, we hold that the delay could not be
application, must have been a completed contract, one deemed unreasonable so as to constitute gross
that leaves nothing to be done, nothing to be negligence.
completed, nothing to be passed upon, or determined,
before it shall take effect. There can be no contract of A final note. It has not escaped our notice that the
Court of Appeals declared Insurance Policy 056300
for P50,000.00 null and void and rescinded. The SO ORDERED.
Court of Appeals corrected this in its Resolution of
the motion for reconsideration filed by petitioner, MITSUBISHI MOTORS PHILIPPINES SALARIED
EMPLOYEES UNION (MMPSEU), Petitioner, 
thus: vs.
MITSUBISHI MOTORS PHILIPPINES
"Anent the appearance of the word CORPORATION, Respondent.
rescinded in the dispositive portion of the
DECISION
decision, to which defendant-appellee
attaches undue significance and makes DEL CASTILLO, J.:
capital of, it is clear that the use of the
words and rescinded is, as it is hereby The Collective Bargaining Agreement (CBA) of the parties in
declared, a superfluity. It is apparent this case provides that the company shoulder the
hospitalization expenses of the dependents of covered
from the context of the decision that the employees subject to certain limitations and restrictions.
insurance policy in question was found Accordingly, covered employees pay part of the hospitalization
null and void, and did not have to be insurance premium through monthly salary deduction while the
company, upon hospitalization of the covered employees'
rescinded."[13]

dependents, shall pay the hospitalization expenses incurred

for the same. The conflict arose when a portion of the
True, rescission presupposes the existence of a valid hospitalization expenses of the covered employees'
contract. A contract which is null and void is no dependents were paid/shouldered by the dependent's own
contract at all and hence could not be the subject of health insurance. While the company refused to pay the
portion of the hospital expenses already shouldered by the
rescission. dependents' own health insurance, the union insists that the
covered employees are entitled to the whole and undiminished
WHEREFORE, the decision rendered by the Court amount of said hospital expenses.
of Appeals in CA-G.R. CV No. 35529 is AFFIRMED
By this Petition for Review on Certiorari,1 petitioner Mitsubishi
insofar as it declared Insurance Policy No. 056300 Motors Philippines Salaried Employees Union (MMPSEU)
for P50,000.00 issued by BF Lifeman Insurance assails the March 31, 2006 Decision2 and December 5, 2006
Corporation of no force and effect and hence null and Resolution3 of the Court of Appeals (CA) in CA-G.R. SP No.
void. No costs. 75630, which reversed and set aside the Voluntary Arbitrator’s
December 3, 2002 Decision4 and declared respondent
Mitsubishi Motors Philippines Corporation (MMPC) to be under
no legal obligation to pay its covered employees’ dependents’ c. The limitations and restrictions listed in Annex "B"
hospitalization expenses which were already shouldered by must be observed.
other health insurance companies.
d. Payment shall be direct to the hospital and doctor
Factual Antecedents and must be covered by actual billings.

The parties’ CBA5 covering the period August 1, 1996 to July Each employee shall pay one hundred pesos (₱100.00) per
31, 1999 provides for the hospitalization insurance benefits for month through salary deduction as his share in the payment of
the covered dependents, thus: the insurance premium for the above coverage with the
balance of the premium to be paid by the COMPANY. If the
SECTION 4. DEPENDENTS’ GROUP HOSPITALIZATION COMPANY is self-insured the one hundred pesos (₱100.00)
INSURANCE – The COMPANY shall obtain group per employee monthly contribution shall be given to the
hospitalization insurance coverage or assume under a self- COMPANY which shall shoulder the expenses subject to the
insurance basis hospitalization for the dependents of regular above level of benefits and subject to the same limitations and
employees up to a maximum amount of forty thousand pesos restrictions provided for in Annex "B" hereof.
(₱40,000.00) per confinement subject to the following:
The hospitalization expenses must be covered by actual
a. The room and board must not exceed three hundred hospital and doctor’s bills and any amount in excess of the
pesos (₱300.00) per day up to a maximum of thirty-one above mentioned level of benefits will be for the account of the
(31) days. Similarly, Doctor’s Call fees must not exceed employee.
three hundred pesos (₱300.00) per day for a maximum
of thirty-one (31) days. Any excess of this amount shall For purposes of this provision, eligible dependents are the
be borne by the employee. covered employees’ natural parents, legal spouse and
legitimate or legally adopted or step children who are
b. Confinement must be in a hospital designated by the unmarried, unemployed who have not attained twenty-one (21)
COMPANY. For this purpose, the COMPANY shall years of age and wholly dependent upon the employee for
designate hospitals in different convenient places to be support.
availed of by the dependents of employees. In cases of
emergency where the dependent is confined without This provision applies only in cases of actual confinement in
the recommendation of the company doctor or in a the hospital for at least six (6) hours.
hospital not designated by the COMPANY, the
COMPANY shall look into the circumstances of such Maternity cases are not covered by this section but will be
confinement and arrange for the payment of the under the next succeeding section on maternity benefits.6
amount to the extent of the hospitalization benefit.
When the CBA expired on July 31, 1999, the parties executed
another CBA7 effective August 1, 1999 to July 31, 2002
incorporating the same provisions on dependents’ paid by MEDICard and by Prosper, Calida, Oabel and Martin
hospitalization insurance benefits but in the increased amount asked for reimbursement from MMPC. However, MMPC
of ₱50,000.00. The room and board expenses, as well as the denied the claims contending that double insurance would
doctor’s call fees, were also increased to ₱375.00. result if the said employees would receive from the company
the full amount of hospitalization expenses despite having
On separate occasions, three members of MMPSEU, namely, already received payment of portions thereof from other health
Ernesto Calida (Calida), Hermie Juan Oabel (Oabel) and insurance providers.
Jocelyn Martin (Martin), filed claims for reimbursement of
hospitalization expenses of their dependents. This prompted the MMPSEU President to write the MMPC
President17 demanding full payment of the hospitalization
MMPC paid only a portion of their hospitalization insurance benefits. Alleging discrimination against MMPSEU union
claims, not the full amount. In the case of Calida, his wife, members, she pointed out that full reimbursement was given in
Lanie, was confined at Sto. Tomas University Hospital from a similar claim filed by Luisito Cruz (Cruz), a member of the
September 4 to 9, 1998 due to Thyroidectomy. The medical Hourly Union. In a letter-reply,18 MMPC, through its Vice-
expenses incurred totalled ₱29,967.10. Of this amount, President for Industrial Relations Division, clarified that the
₱9,000.00 representing professional fees was paid by claims of the said MMPSEU members have already been paid
MEDICard Philippines, Inc. (MEDICard) which provides health on the basis of official receipts submitted. It also denied the
maintenance to Lanie.8 MMPC only paid ₱12,148.63.9 It did not charge of discrimination and explained that the case of Cruz
pay the ₱9,000.00 already paid by MEDICard and the involved an entirely different matter since it concerned the
₱6,278.47 not covered by official receipts. It refused to give to admissibility of certified true copies of documents for
Calida the difference between the amount of medical reimbursement purposes, which case had been settled
expenses of ₱27,427.1010 which he claimed to be entitled to through voluntary arbitration.
under the CBA and the ₱12,148.63 which MMPC directly paid
to the hospital. On August 28, 2000, MMPSEU referred the dispute to the
National Conciliation and Mediation Board and requested for
In the case of Martin, his father, Jose, was admitted at The preventive mediation.19
Medical City from March 26 to 27, 2000 due to Acid Peptic
Disease and incurred medical expenses amounting to Proceedings before the Voluntary Arbitrator
₱9,101.30.14 MEDICard paid ₱8,496.00.15Consequently,
MMPC only paid ₱288.40,  after deducting from the total
16
On October 3, 2000, the case was referred to Voluntary
medical expenses the amount paid by MEDICard and the Arbitrator Rolando Capocyan for resolution of the issue
₱316.90 discount given by the hospital. involving the interpretation of the subject CBA provision.20

Claiming that under the CBA, they are entitled to hospital MMPSEU alleged that there is nothing in the CBA which
benefits amounting to ₱27,427.10, ₱6,769.35 and ₱8,123.80, prohibits an employee from obtaining other insurance or
respectively, which should not be reduced by the amounts declares that medical expenses can be reimbursed only upon
presentation of original official receipts. It stressed that the [Salaried] Employees Union
hospitalization benefits should be computed based on the Ortigas Avenue Extension,
formula indicated in the CBA without deducting the benefits Cainta, Rizal
derived from other insurance providers. Besides, if reduction is
permitted, MMPC would be unjustly benefited from the Madam:
monthly premium contributed by the employees through salary
deduction. MMPSEU added that its members had legitimate We acknowledge receipt of your letter which, to our
claims under the CBA and that any doubt as to any of its impression, basically poses the question of whether or not
provisions should be resolved in favor of its members. recovery of medical expenses from a Health Maintenance
Moreover, any ambiguity should be resolved in favor of labor.21 Organization bars recovery of the same reimbursable amount
of medical expenses under a contract of health or medical
On the other hand, MMPC argued that the reimbursement of insurance.
the entire amounts being claimed by the covered employees,
including those already paid by other insurance companies, We wish to opine that in cases of claims for reimbursement of
would constitute double indemnity or double insurance, which medical expenses where there are two contracts providing
is circumscribed under the Insurance Code. Moreover, a benefits to that effect, recovery may be had on both
contract of insurance is a contract of indemnity and the simultaneously. In the absence of an Other Insurance
employees cannot be allowed to profit from their dependents’ provision in these coverages, the courts have uniformly held
loss.22 that an insured is entitled to receive the insurance benefits
without regard to the amount of total benefits provided by other
Meanwhile, the parties separately sought for a legal opinion insurance. (INSURANCE LAW, A Guide to Fundamental
from the Insurance Commission relative to the issue at hand. Principles, Legal Doctrines, and Commercial Practices; Robert
In its letter23 to the Insurance Commission, MMPC requested E. Keeton, Alau I. Widiss, p. 261). The result is consistent with
for confirmation of its position that the covered employees the public policy underlying the collateral source rule – that is,
cannot claim insurance benefits for a loss that had already x x x the courts have usually concluded that the liability of a
been covered or paid by another insurance company. health or accident insurer is not reduced by other possible
However, the Office of the Insurance Commission opted not to sources of indemnification or compensation. (ibid).
render an opinion on the matter as the same may become the
subject of a formal complaint before it.24 On the other hand, Very truly yours,
when queried by MMPSEU,25the Insurance Commission,
through Atty. Richard David C. Funk II (Atty. Funk) of the RICHARD DAVID C. FUNK II
Claims Adjudication Division, rendered an opinion contained in Officer-in-Charge
a letter,26 viz: Claims Adjudication Division

Ms. Cecilia L. ParasPresident (SGD.)

Mitsubishi Motors Phils. Attorney IV
On December 3, 2002, the Voluntary Arbitrator rendered a contracts. Besides, a contrary interpretation would "allow
Decision27 finding MMPC liable to pay or reimburse the amount unscrupulous employees to unduly profit from the x x x
of hospitalization expenses already paid by other health benefits" and shall "open the floodgates to questionable claims
insurance companies. The Voluntary Arbitrator held that the x x x."30
employees may demand simultaneous payment from both the
CBA and their dependents’ separate health insurance without The dispositive portion of the CA Decision31 reads:
resulting to double insurance, since separate premiums were
paid for each contract. He also noted that the CBA does not WHEREFORE, the instant petition is GRANTED. The decision
prohibit reimbursement in case there are other health insurers. of the voluntary arbitrator dated December 3, 2002 is
REVERSED and SET ASIDE and judgment is rendered
Proceedings before the Court of Appeals declaring that under Art. XI, Sec. 4 of the Collective Bargaining
Agreement between petitioner and respondent effective
MMPC filed a Petition for Review with Prayer for the Issuance August 1, 1999 to July 31, 2002, the former’s obligation to
of a Temporary Restraining Order and/or Writ of Preliminary reimburse the Union members for the hospitalization expenses
Injunction28 before the CA. It claimed that the Voluntary incurred by their dependents is exclusive of those paid by the
Arbitrator committed grave abuse of discretion in not finding Union members to the hospital.
that recovery under both insurance policies constitutes double
insurance as both had the same subject matter, interest SO ORDERED.32
insured and risk or peril insured against; in relying solely on
the unauthorized legal opinion of Atty. Funk; and in not finding In its Motion for Reconsideration,33 MMPSEU pointed out that
that the employees will be benefited twice for the same loss. In the alleged oppression that may be committed by abusive
its Comment,29 MMPSEU countered that MMPC will unjustly employees is a mere possibility whereas the resulting losses
enrich itself and profit from the monthly premiums paid if full to the employees are real. MMPSEU cited Samsel v. Allstate
reimbursement is not made. Insurance Co.,34 wherein the Arizona Supreme Court explicitly
ruled that an insured may recover from separate health
On March 31, 2006, the CA found merit in MMPC’s Petition. It insurance providers, regardless of whether one of them has
ruled that despite the lack of a provision which bars recovery already paid the medical expenses incurred. On the other
in case of payment by other insurers, the wordings of the hand, MMPC argued in its Comment35 that the cited foreign
subject provision of the CBA showed that the parties intended case involves a different set of facts.
to make MMPC liable only for expenses actually incurred by
an employee’s qualified dependent. In particular, the provision The CA, in its Resolution36 dated December 5, 2006, denied
stipulates that payment should be made directly to the hospital MMPSEU’s motion.
and that the claim should be supported by actual hospital and
doctor’s bills. These mean that the employees shall only be Hence, this Petition.
paid amounts not covered by other health insurance and is
more in keeping with the principle of indemnity in insurance Issues
MMPSEU presented the following grounds in support of its BENEFITS IF DOUBLE RECOVERY WERE ALLOWED
Petition: INSTEAD OF THE REAL INJURY TO THE EMPLOYEES
WHO ARE PAYING FOR THE CBA HOSPITALIZATION
A. BENEFITS THROUGH MONTHLY SALARY DEDUCTIONS
BUT WHO MAY NOT BE ABLE TO AVAIL OF THE SAME IF
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT THEY OR THEIR DEPENDENTS HAVE OTHER HEALTH
REVERSED THE DECISION DATED 03 [DECEMBER] 2002 INSURANCE.37
OF THE VOLUNTARY ARBITRATOR BELOW WHEN THE
SAME WAS SUPPORTED BY SUBSTANTIAL EVIDENCE, MMPSEU avers that the Decision of the Voluntary Arbitrator
INCLUDING THE OPINION OF THE INSURANCE deserves utmost respect and finality because it is supported
COMMISSION THAT RECOVERY FROM BOTH THE CBA by substantial evidence and is in accordance with the opinion
AND SEPARATE HEALTH CARDS IS NOT PROHIBITED IN rendered by the Insurance Commission, an agency equipped
THE ABSENCE OF ANY SPECIFIC PROVISION IN THE with vast knowledge concerning insurance contracts. It
CBA. maintains that under the CBA, member-employees are entitled
to full reimbursement of medical expenses incurred by their
B. dependents regardless of any amounts paid by the latter’s
health insurance provider. Otherwise, non-recovery will
THE COURT OF APPEALS COMMITTED REVERSIBLE constitute unjust enrichment on the part of MMPC. It avers that
ERROR IN OVERTURNING THE DECISION OF THE recovery from both the CBA and other insurance companies is
VOLUNTARY ARBITRATOR WITHOUT EVEN GIVING ANY allowed under their CBA and not prohibited by law nor by
LEGAL OR JUSTIFIABLE BASIS FOR SUCH REVERSAL. jurisprudence.

C. Our Ruling

THE COURT OF APPEALS COMMITTED GRAVE ERROR IN The Petition has no merit.
REFUSING TO CONSIDER OR EVEN MENTION ANYTHING
ABOUT THE AMERICAN AUTHORITIES CITED IN THE Atty. Funk erred in applying the
RECORDS THAT DO NOT PROHIBIT, BUT IN FACT collateral source rule.
ALLOW, RECOVERY FROM TWO SEPARATE HEALTH
PLANS. The Voluntary Arbitrator based his ruling on the opinion of
Atty. Funk that the employees may recover benefits from
D. different insurance providers without regard to the amount of
benefits paid by each. According to him, this view is consistent
THE COURT OF APPEALS GRAVELY ERRED IN GIVING with the theory of the collateral source rule.
MORE IMPORTANCE TO A POSSIBLE, HENCE MERELY
SPECULATIVE, ABUSE BY EMPLOYEES OF THE
As part of American personal injury law, the collateral source deny the other, it favors the victim of the wrong rather than the
rule was originally applied to tort cases wherein the defendant wrongdoer.
is prevented from benefiting from the plaintiff’s receipt of
money from other sources.38 Under this rule, if an injured Thus, the tortfeasor is required to bear the cost for the full
person receives compensation for his injuries from a source value of his or her negligent conduct even if it results in a
wholly independent of the tortfeasor, the payment should not windfall for the innocent plaintiff. (Citations omitted)
be deducted from the damages which he would otherwise
collect from the tortfeasor.39 In a recent Decision40 by the Illinois As seen, the collateral source rule applies in order to place the
Supreme Court, the rule has been described as "an responsibility for losses on the party causing them.43Its
established exception to the general rule that damages in application is justified so that "'the wrongdoer should not
negligence actions must be compensatory." The Court went on benefit from the expenditures made by the injured party or
to explain that although the rule appears to allow a double take advantage of contracts or other relations that may exist
recovery, the collateral source will have a lien or subrogation between the injured party and third persons."44Thus, it finds no
right to prevent such a double recovery.41 In Mitchell v. application to cases involving no-fault insurances under which
Haldar,42 the collateral source rule was rationalized by the the insured is indemnified for losses by insurance companies,
Supreme Court of Delaware: regardless of who was at fault in the incident generating the
losses.45 Here, it is clear that MMPC is a no-fault insurer.
The collateral source rule is ‘predicated on the theory that a Hence, it cannot be obliged to pay the hospitalization
tortfeasor has no interest in, and therefore no right to benefit expenses of the dependents of its employees which had
from monies received by the injured person from sources already been paid by separate health insurance providers of
unconnected with the defendant’. According to the collateral said dependents.
source rule, ‘a tortfeasor has no right to any mitigation of
damages because of payments or compensation received by The Voluntary Arbitrator therefore erred in adopting Atty.
the injured person from an independent source.’ The rationale Funk’s view that the covered employees are entitled to full
for the collateral source rule is based upon the quasi-punitive payment of the hospital expenses incurred by their
nature of tort law liability. It has been explained as follows: dependents, including the amounts already paid by other
health insurance companies based on the theory of collateral
The collateral source rule is designed to strike a balance source rule.
between two competing principles of tort law: (1) a plaintiff is
entitled to compensation sufficient to make him whole, but no The conditions set forth in the CBA provision indicate an
more; and (2) a defendant is liable for all damages that intention to limit MMPC’s liability only to actual expenses
proximately result from his wrong. A plaintiff who receives a incurred by the employees’ dependents, that is, excluding the
double recovery for a single tort enjoys a windfall; a defendant amounts paid by dependents’ other health insurance
who escapes, in whole or in part, liability for his wrong enjoys providers.
a windfall. Because the law must sanction one windfall and
The Voluntary Arbitrator ruled that the CBA has no express enjoy medical benefits under an automobile policy insurance
provision barring claims for hospitalization expenses already despite being able to also recover from a separate health
paid by other insurers. Hence, the covered employees can insurer. In that case, the Allstate automobile policy does not
recover from both. The CA did not agree, saying that the contain any clause restricting medical payment coverage to
conditions set forth in the CBA implied an intention of the expenses actually paid by the insured nor does it specifically
parties to limit MMPC’s liability only to the extent of the provide for reduction of medical payments benefits by a
expenses actually incurred by their dependents which coordination of benefits.48 However, in the case before us, the
excludes the amounts shouldered by other health insurance dependents’ group hospitalization insurance provision in the
companies. CBA specifically contains a condition which limits MMPC’s
liability only up to the extent of the expenses that should be
We agree with the CA. The condition that payment should be paid by the covered employee’s dependent to the hospital and
direct to the hospital and doctor implies that MMPC is only doctor. This is evident from the portion which states that
liable to pay medical expenses actually shouldered by the "payment by MMPC shall be direct to the hospital and
employees’ dependents. It follows that MMPC’s liability is doctor."49 In contrast, the Allstate automobile policy expressly
limited, that is, it does not include the amounts paid by other gives Allstate the authority to pay directly to the insured person
health insurance providers. This condition is obviously or on the latter’s behalf all reasonable expenses actually
intended to thwart not only fraudulent claims but also double incurred. Therefore, reliance on Samsel is unavailing because
claims for the same loss of the dependents of covered the facts therein are different and not decisive of the issues in
employees. the present case.

It is well to note at this point that the CBA constitutes a To allow reimbursement of amounts paid
contract between the parties and as such, it should be strictly under other insurance policies shall
construed for the purpose of limiting the amount of the constitute double recovery which is not
employer’s liability.46 The terms of the subject provision are sanctioned by law.
clear and provide no room for any other interpretation. As
there is no ambiguity, the terms must be taken in their plain, MMPSEU insists that MMPC is also liable for the amounts
ordinary and popular sense.47 Consequently, MMPSEU cannot covered under other insurance policies; otherwise, MMPC will
rely on the rule that a contract of insurance is to be liberally unjustly profit from the premiums the employees contribute
construed in favor of the insured. Neither can it rely on the through monthly salary deductions.
theory that any doubt must be resolved in favor of labor.
This contention is unmeritorious.
Samsel v. Allstate Insurance Co. is not
on all fours with the case at bar. To constitute unjust enrichment, it must be shown that a party
was unjustly enriched in the sense that the term unjustly could
MMPSEU cannot rely on Samsel v. Allstate Insurance Co. mean illegally or unlawfully.50 A claim for unjust enrichment
where the Supreme Court of Arizona allowed the insured to
fails when the person who will benefit has a valid claim to such HON. BERNARDO TEVES, Presiding Judge, CFI of
benefit.51 Misamis Oriental Branch VII, LEOVIGILDO TANDOG, JR.,
and ROGELIO TIRO, respondents.
The CBA has provided for MMPC’s limited liability which
extends only up to the amount to be paid to the hospital and Filiberto Leonardo, Abelardo C. Almario & Samuel B.
doctor by the employees’ dependents, excluding those paid by Abadiano for petitioner.
other insurers. Consequently, the covered employees will not
receive more than what is due them; neither is MMPC under Leovigildo Vallar for private respondents.
any obligation to give more than what is due under the CBA.

Moreover, since the subject CBA provision is an insurance

contract, the rights and obligations of the parties must be SANTOS, J.:
determined in accordance with the general principles of
insurance law.52 Being in the nature of a non-life insurance This is an original action for Prohibition with Pre Injunction filed
contract and essentially a contract of indemnity, the CBA October 3, 1973 to restrain respondent Judge from proceeding
provision obligates MMPC to indemnify the covered further with Civil Case No. 4091, entitled Leovigildo D.
employees’ medical expenses incurred by their dependents Tandog, Jr. and Rogelio Tiro v. Sweet Lines, Inc." after he
but only up to the extent of the expenses actually denied petitioner's Motion to Dismiss the complaint, and the
incurred.53 This is consistent with the principle of indemnity Motion for Reconsideration of said order.  1

which proscribes the insured from recovering greater than the

loss.54 Indeed, to profit from a loss will lead to unjust Briefly, the facts of record follow. Private respondents Atty.
enrichment and therefore should not be countenanced. As Leovigildo Tandog and Rogelio Tiro, a contractor by
aptly ruled by the CA, to grant the claims of MMPSEU will professions, bought tickets Nos. 0011736 and 011737 for
permit possible abuse by employees. Voyage 90 on December 31, 1971 at the branch office of
petitioner, a shipping company transporting inter-island
WHEREFORE, the Petition is DENIED. The Decision dated passengers and cargoes, at Cagayan de Oro City.
March 31, 2006 and Resolution dated December 5, 2006 of Respondents were to board petitioner's vessel, M/S "Sweet
the Court of Appeals in CA-G.R. SP No. 75630, are Hope" bound for Tagbilaran City via the port of Cebu. Upon
AFFIRMED. learning that the vessel was not proceeding to Bohol, since
many passengers were bound for Surigao, private
SO ORDERED. respondents per advice, went to the branch office for proper
relocation to M/S "Sweet Town". Because the said vessel was
already filled to capacity, they were forced to agree "to hide at
the cargo section to avoid inspection of the officers of the
SWEET LINES, INC., petitioner,  Philippine Coastguard." Private respondents alleged that they
vs. were, during the trip," "exposed to the scorching heat of the
sun and the dust coming from the ship's cargo of corn grits," Is Condition No. 14 printed at the back of the petitioner's
and that the tickets they bought at Cagayan de Oro City for passage tickets purchased by private respondents, which
Tagbilaran were not honored and they were constrained to pay limits the venue of actions arising from the contract of carriage
for other tickets. In view thereof, private respondents sued to theCourt of First Instance of Cebu, valid and enforceable?
petitioner for damages and for breach of contract of carriage in Otherwise stated, may a common carrier engaged in inter-
the alleged sum of P10,000.00 before respondents Court of island shipping stipulate thru condition printed at the back of
First Instance of Misamis Oriental. 2
passage tickets to its vessels that any and all actions arising
out of the ocntract of carriage should be filed only in a
Petitioner moved to dismiss the complaint on the ground of particular province or city, in this case the City of Cebu, to the
improper venue. This motion was premised on the condition exclusion of all others?
printed at the back of the tickets, i.e., Condition No. 14, which
reads: Petitioner contends thaty Condition No. 14 is valid and
enforceable, since private respndents acceded to tit when they
14. It is hereby agreed and understood that any purchased passage tickets at its Cagayan de Oro branch
and all actions arising out of the conditions and office and took its vessel M/S "Sweet Town" for passage to
provisions of this ticket, irrespective of where it Tagbilaran, Bohol — that the condition of the venue of actions
is issued, shall be filed in the competent courts in the City of Cebu is proper since venue may be validly
in the City of Cebu. 3 waived, citing cases;   that is an effective waiver of venue,
10

valid and binding as such, since it is printed in bold and capital

The motion was denied by the trial court.   Petitioner moved to
4 letters and not in fine print and merely assigns the place where
reconnsider the order of denial, but no avail.   Hence, this
5 the action sing from the contract is institution likewise citing
instant petition for prohibition for preliminary injunction, cases;   and that condition No. 14 is unequivocal and
11

'alleging that the respondent judge has departed from the mandatory, the words and phrases "any and all", "irrespective
accepted and usual course of judicial preoceeding" and "had of where it is issued," and "shag" leave no doubt that the
acted without or in excess or in error of his jurisdicton or in intention of Condition No. 14 is to fix the venue in the City of
gross abuse of discretion. 6 Cebu, to the exclusion of other places; that the orders of the
respondent Judge are an unwarranted departure from
In Our resolution of November 20, 1973, We restrained established jurisprudence governing the case; and that he
respondent Judge from proceeding further with the case and acted without or in excess of his jurisdiction in is the orders
required respondent to comment.   On January 18, 1974, We
7 complained of.  12

gave due course to the petition and required respondent to

answer.   Thereafter, the parties submitted their respesctive
8 On the other hand, private respondents claim that Condition
memoranda in support of their respective contentions.  9 No. 14 is not valid, that the same is not an essential element of
the contract of carriage, being in itself a different agreement
Presented thus for Our resolution is a question is aquestion which requires the mutual consent of the parties to it; that they
which, to all appearances, is one of first impression, to wit — had no say in its preparation, the existence of which they could
not refuse, hence, they had no choice but to pay for the tickets It should be borne in mind, however, that with respect to the
and to avail of petitioner's shipping facilities out of necessity; fourteen (14) conditions — one of which is "Condition No. 14"
that the carrier "has been exacting too much from the public by which is in issue in this case — printed at the back of the
inserting impositions in the passage tickets too burdensome to passage tickets, these are commonly known as "contracts of
bear," that the condition which was printed in fine letters is an adhesion," the validity and/or enforceability of which will have
imposition on the riding public and does not bind respondents, to be determined by the peculiar circumstances obtaining in
citing cases;   that while venue 6f actions may be transferred
13
each case and the nature of the conditions or terms sought to
from one province to another, such arrangement requires the be enforced. For, "(W)hile generally, stipulations in a contract
"written agreement of the parties", not to be imposed come about after deliberate drafting by the parties thereto, ...
unilaterally; and that assuming that the condition is valid, it is there are certain contracts almost all the provisions of which
not exclusive and does not, therefore, exclude the filing of the have been drafted only by one party, usually a corporation.
action in Misamis Oriental,  14
Such contracts are called contracts of adhesion, because the
only participation of the party is the signing of his signature or
There is no question that there was a valid contract of carriage his 'adhesion' thereto. Insurance contracts, bills of lading,
entered into by petitioner and private respondents and that the contracts of make of lots on the installment plan fall into this
passage tickets, upon which the latter based their complaint, category" 16

are the best evidence thereof. All the essential elements of a

valid contract, i.e., consent, cause or consideration and object, By the peculiar circumstances under which contracts of
are present. As held in Peralta de Guerrero, et al. v. Madrigal adhesion are entered into — namely, that it is drafted only by
Shipping Co., Inc.,  15
one party, usually the corporation, and is sought to be
accepted or adhered to by the other party, in this instance the
It is a matter of common knowledge that passengers, private respondents, who cannot change the
whenever a passenger boards a ship for same and who are thus made to adhere thereto on the "take it
transportation from one place to another he is or leave it" basis — certain guidelines in the determination of
issued a ticket by the shipper which has all the their validity and/or enforceability have been formulated in
elements of a written contract, Namely: (1) the order to that justice and fan play characterize the relationship
consent of the contracting parties manifested by of the contracting parties. Thus, this Court speaking through
the fact that the passenger boards the ship and Justice J.B.L. Reyes in Qua Chee Gan v. Law Union and Rock
the shipper consents or accepts him in the ship Insurance Co.,   and later through Justice Fernando
17

for transportation; (2) cause or consideration in Fieldman Insurance v. Vargas,   held —

18

which is the fare paid by the passenger as

stated in the ticket; (3) object, which is the The courts cannot ignore that nowadays,
transportation of the passenger from the place monopolies, cartels and concentration of capital
of departure to the place of destination which endowed with overwhelm economic power,
are stated in the ticket. manage to impose upon parties d with them y
prepared 'agreements' that the weaker party
 may not change one whit his participation in the of venue of proceedings of this nature, since the same will
'agreement' being reduced to the alternative 'to prejudice rights and interests of innumerable passengers in
take it or leave it,' labelled since Raymond different s of the country who, under Condition No. 14, will
Saleilles 'contracts by adherence' (contracts d' have to file suits against petitioner only in the City of Cebu.
adhesion) in contrast to those entered into by
parties bargaining on an equal footing. Such 1. It is a matter of public knowledge, of which We can take
contracts (of which policies of insurance and judicial notice, that there is a dearth of and acute shortage in
international bill of lading are prime examples) inter- island vessels plying between the country's several
obviously cap for greater strictness and islands, and the facilities they offer leave much to be desired.
vigilance on the part of the courts of justice with Thus, even under ordinary circumstances, the piers are
a view to protecting the weaker party from congested with passengers and their cargo waiting to be
abuses and imposition, and prevent their transported. The conditions are even worse at peak and/or the
becoming traps for the unwary. rainy seasons, when Passengers literally scramble to
whatever accommodations may be availed of, even through
To the same effect and import, and, in recognition of the circuitous routes, and/or at the risk of their safety — their
character of contracts of this kind, the protection of the immediate concern, for the moment, being to be able to board
disadvantaged is expressly enjoined by the New Civil Code — vessels with the hope of reaching their destinations. The
schedules are — as often as not if not more so — delayed or
In all contractual property or other relations, altered. This was precisely the experience of private
when one of the parties is at a disadvantage on respondents when they were relocated to M/S "Sweet Town"
account of his moral dependence, ignorance from M/S "Sweet Hope" and then any to the scorching heat of
indigence, mental weakness, tender age and the sun and the dust coming from the ship's cargo of corn
other handicap, the courts must be vigilant for grits, " because even the latter was filed to capacity.
his 
protection. 19
Under these circumstances, it is hardly just and proper to
expect the passengers to examine their tickets received from
Considered in the light Of the foregoing norms and in the crowded/congested counters, more often than not during rush
context Of circumstances Prevailing in the inter-island ship. hours, for conditions that may be printed much charge them
ping industry in the country today, We find and hold that with having consented to the conditions, so printed, especially
Condition No. 14 printed at the back of the passage tickets if there are a number of such conditions m fine print, as in this
should be held as void and unenforceable for the following case. 20

reasons first, under circumstances obligation in the inter-island

ship. ping industry, it is not just and fair to bind passengers to Again, it should be noted that Condition No. 14 was prepared
the terms of the conditions printed at the back of the passage solely at the ms of the petitioner, respondents had no say in its
tickets, on which Condition No. 14 is Printed in fine letters, and preparation. Neither did the latter have the opportunity to take
second, Condition No. 14 subverts the public policy on transfer the into account prior to the purpose chase of their tickets. For,
unlike the small print provisions of contracts — the common has branches or offices in the respective ports of call of its
example of contracts of adherence — which are entered into vessels and can afford to litigate in any of these places.
by the insured in his awareness of said conditions, since the Hence, the filing of the suit in the CFI of Misamis Oriental, as
insured is afforded the op to and co the same, passengers of was done in the instant case, will not cause inconvenience to,
inter-island v do not have the same chance, since their alleged much less prejudice, petitioner.
adhesion is presumed only from the fact that they purpose
chased the tickets. Public policy is ". . . that principle of the law which holds that
no subject or citizen can lawfully do that which has a tendency
It should also be stressed that slapping companies are to be injurious to the public or against the public
franchise holders of certificates of public convenience and good ...   Under this principle" ... freedom of contract or private
22

therefore, posses a virtual monopoly over the business of dealing is restricted by law for the good of the public.   Clearly,
23

transporting passengers between the ports covered by their Condition No. 14, if enforced, will be subversive of the public
franchise. This being so, shipping companies, like petitioner, good or interest, since it will frustrate in meritorious cases,
engaged in inter-island shipping, have a virtual monopoly of actions of passenger cants outside of Cebu City, thus placing
the business of transporting passengers and may thus dictate petitioner company at a decided advantage over said persons,
their terms of passage, leaving passengers with no choice but who may have perfectly legitimate claims against it. The said
to buy their tickets and avail of their vessels and facilities. condition should, therefore, be declared void and
Finally, judicial notice may be taken of the fact that the bulk of unenforceable, as contrary to public policy — to make the
those who board these inter-island vested come from the low- courts accessible to all who may have need of their services.
income groups and are less literate, and who have little or no
choice but to avail of petitioner's vessels. WHEREFORE, the petition for prohibition is DISMISS. ED.
The restraining order issued on November 20, 1973, is hereby
2. Condition No. 14 is subversive of public policy on transfers LIFTED and SET ASIDE. Costs against petitioner.
of venue of actions. For, although venue may be changed or
transferred from one province to another by agreement of the
parties in writing t to Rule 4, Section 3, of the Rules of Court,
such an agreement will not be held valid where it practically SUN INSURANCE OFFICE, LTD., petitioner, 
negates the action of the claimants, such as the private vs.
respondents herein. The philosophy underlying the provisions THE HON. COURT OF APPEALS and NERISSA
on transfer of venue of actions is the convenience of the LIM, respondents.
plaintiffs as well as his witnesses and to promote   the ends of
21

justice. Considering the expense and trouble a passenger

 
residing outside of Cebu City would incur to prosecute a claim
in the City of Cebu, he would most probably decide not to file
the action at all. The condition will thus defeat, instead of CRUZ, J.:
enhance, the ends of justice. Upon the other hand, petitioner
The petitioner issued Personal Accident Policy No. 05687 to insurance contract are to be construed and considered
Felix Lim, Jr. with a face value of P200,000.00. Two months according to the ordinary understanding and common usage
later, he was dead with a bullet wound in his head. As and speech of people generally. In-substance, the courts are
beneficiary, his wife Nerissa Lim sought payment on the policy practically agreed that the words "accident" and "accidental"
but her claim was rejected. The petitioner agreed that there mean that which happens by chance or fortuitously, without
was no suicide. It argued, however that there was no accident intention or design, and which is unexpected, unusual, and
either. unforeseen. The definition that has usually been adopted by
the courts is that an accident is an event that takes place
Pilar Nalagon, Lim's secretary, was the only eyewitness to his without one's foresight or expectation — an event that
death. It happened on October 6, 1982, at about 10 o'clock in proceeds from an unknown cause, or is an unusual effect of a
the evening, after his mother's birthday party. According to known case, and therefore not expected.  4

Nalagon, Lim was in a happy mood (but not drunk) and was
playing with his handgun, from which he had previously An accident is an event which happens without any human
removed the magazine. As she watched television, he stood in agency or, if happening through human agency, an event
front of her and pointed the gun at her. She pushed it aside which, under the circumstances, is unusual to and not
and said it might he loaded. He assured her it was not and expected by the person to whom it happens. It has also been
then pointed it to his temple. The next moment there was an defined as an injury which happens by reason of some
explosion and Lim slumped to the floor. He was dead before violence or casualty to the injured without his design, consent,
he fell. 
1
or voluntary co-operation. 5

The widow sued the petitioner in the Regional Trial Court of In light of these definitions, the Court is convinced that the
Zamboanga City and was sustained.   The petitioner was
2
incident that resulted in Lim's death was indeed an accident.
sentenced to pay her P200,000.00, representing the face The petitioner, invoking the case of De la Cruz v. Capital
value of the policy, with interest at the legal rate; P10,000.00 Insurance,   says that "there is no accident when a deliberate
6

as moral damages; P5,000.00 as exemplary damages; act is performed unless some additional, unexpected,
P5,000.00 as actual and compensatory damages; and independent and unforeseen happening occurs which
P5,000.00 as attorney's fees, plus the costs of the suit. This produces or brings about their injury or death." There was
decision was affirmed on appeal, and the motion for such a happening. This was the firing of the gun, which was
reconsideration was denied.   The petitioner then came to this
3
the additional unexpected and independent and unforeseen
Court to fault the Court of Appeals for approving the payment occurrence that led to the insured person's death.
of the claim and the award of damages.
The petitioner also cites one of the four exceptions provided
The term "accident" has been defined as follows: for in the insurance contract and contends that the private
petitioner's claim is barred by such provision. It is there stated:
The words "accident" and "accidental" have never acquired
any technical signification in law, and when used in an Exceptions —
The company shall not be liable in respect of That posture is arguable. But what is not is that, as the
secretary testified, Lim had removed the magazine from the
1. Bodily injury gun and believed it was no longer dangerous. He expressly
assured her that the gun was not loaded. It is submitted that
xxx xxx xxx Lim did not willfully expose himself to needless peril when he
pointed the gun to his temple because the fact is that he
b. consequent upon thought it was not unsafe to do so. The act was precisely
intended to assure Nalagon that the gun was indeed harmless.
i) The insured person attempting to commit
suicide or willfully exposing himself to needless The contrary view is expressed by the petitioner thus:
peril except in an attempt to save human life.
Accident insurance policies were never
To repeat, the parties agree that Lim did not commit suicide. intended to reward the insured for his tendency
Nevertheless, the petitioner contends that the insured willfully to show off or for his miscalculations. They
exposed himself to needless peril and thus removed himself were intended to provide for contingencies.
from the coverage of the insurance policy. Hence, when I miscalculate and jump from the
Quezon Bridge into the Pasig River in the belief
It should be noted at the outset that suicide and willful that I can overcome the current, I have wilfully
exposure to needless peril are in pari materia because they exposed myself to peril and must accept the
both signify a disregard for one's life. The only difference is in consequences of my act. If I drown I cannot go
degree, as suicide imports a positive act of ending such life to the insurance company to ask them to
whereas the second act indicates a reckless risking of it that is compensate me for my failure to swim as well
almost suicidal in intent. To illustrate, a person who walks a as I thought I could. The insured in the case at
tightrope one thousand meters above the ground and without bar deliberately put the gun to his head and
any safety device may not actually be intending to commit pulled the trigger. He wilfully exposed himself to
suicide, but his act is nonetheless suicidal. He would thus be peril.
considered as "willfully exposing himself to needless peril"
within the meaning of the exception in question. The Court certainly agrees that a drowned man cannot go to
the insurance company to ask for compensation. That might
The petitioner maintains that by the mere act of pointing the frighten the insurance people to death. We also agree that
gun to hip temple, Lim had willfully exposed himself to under the circumstances narrated, his beneficiary would not be
needless peril and so came under the exception. The theory is able to collect on the insurance policy for it is clear that when
that a gun is per se dangerous and should therefore be he braved the currents below, he deliberately exposed himself
handled cautiously in every case. to a known peril.
The private respondent maintains that Lim did not. That is result of an action does not per se make the act
where she says the analogy fails. The petitioner's hypothetical wrongful and subject the act or to the payment
swimmer knew when he dived off the Quezon Bridge that the of moral damages. The law could not have
currents below were dangerous. By contrast, Lim did not know meant to impose a penalty on the right to
that the gun he put to his head was loaded. litigate; such right is so precious that moral
damages may not be charged on those who
Lim was unquestionably negligent and that negligence cost may exercise it erroneously. For these the law
him his own life. But it should not prevent his widow from taxes costs.  7

recovering from the insurance policy he obtained precisely

against accident. There is nothing in the policy that relieves The fact that the results of the trial were
the insurer of the responsibility to pay the indemnity agreed adverse to Barreto did not alone make his act in
upon if the insured is shown to have contributed to his own bringing the action wrongful because in most
accident. Indeed, most accidents are caused by negligence. cases one party will lose; we would be imposing
There are only four exceptions expressly made in the contract an unjust condition or limitation on the right to
to relieve the insurer from liability, and none of these litigate. We hold that the award of moral
exceptions is applicable in the case at bar. ** damages in the case at bar is not justified by
the facts had circumstances as well as the law.
It bears noting that insurance contracts are as a rule supposed
to be interpreted liberally in favor of the assured. There is no If a party wins, he cannot, as a rule, recover
reason to deviate from this rule, especially in view of the attorney's fees and litigation expenses, since it
circumstances of this case as above analyzed. is not the fact of winning alone that entitles him
to recover such damages of the exceptional
On the second assigned error, however, the Court must rule in circumstances enumerated in Art. 2208.
favor of the petitioner. The basic issue raised in this case is, as Otherwise, every time a defendant wins,
the petitioner correctly observed, one of first impression. It is automatically the plaintiff must pay attorney's
evident that the petitioner was acting in good faith then it fees thereby putting a premium on the right to
resisted the private respondent's claim on the ground that the litigate which should not be so. For those
death of the insured was covered by the exception. The issue expenses, the law deems the award of costs as
was indeed debatable and was clearly not raised only for the sufficient. 8
purpose of evading a legitimate obligation. We hold therefore
that the award of moral and exemplary damages and of WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it
holds the petitioner liable to the private respondent in the sum of P200,000.00 representing
attorney's fees is unjust and so must be disapproved. the face value of the insurance contract, with interest at the legal rate from the date of the
filing of the complaint until the full amount is paid, but MODIFIED with the deletion of all
awards for damages, including attorney's fees, except the costs of the suit.
In order that a person may be made liable to
the payment of moral damages, the law SO ORDERED.
requires that his act be wrongful. The adverse
 A contract of group life insurance was executed between
petitioner Great Pacific Life Assurance Corporation
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner, (hereinafter Grepalife) and Development Bank of the
vs. Philippines (hereinafter DBP). Grepalife agreed to insure the
COURT OF APPEALS AND MEDARDA V. lives of eligible housing loan mortgagors of DBP.
LEUTERIO, respondents.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and
QUISUMBING, J.: a housing debtor of DBP applied for membership in the group
life insurance plan. In an application form, Dr. Leuterio
answered questions concerning his health condition as
This petition for review, under Rule 45 of the Rules of Court,
follows:
assails the Decision   dated May 17, 1993, of the Court of
1

Appeals and its Resolution   dated January 4, 1994 in CA-G.R.

2

CV No. 18341. The appellate court affirmed in toto the 7. Have you ever had, or
judgment of the Misamis Oriental Regional Trial Court, Branch consulted, a physician for a heart
18, in an insurance claim filed by private respondent against condition, high blood pressure,
Great Pacific Life Assurance Co. The dispositive portion of the cancer, diabetes, lung; kidney or
trial court's decision reads: stomach disorder or any other
physical impairment?
WHEREFORE, judgment is rendered adjudging
the defendant GREAT PACIFIC LIFE Answer: No. If so give details
ASSURANCE CORPORATION as insurer _____________.
under its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay 8. Are you now, to the best of
to the DEVELOPMENT BANK OF THE your knowledge, in good health?
PHILIPPINES as creditor of the insured Dr.
Wilfredo Leuterio, the amount of EIGHTY SIX Answer: [x] Yes [ ] NO.  4

THOUSAND TWO HUNDRED PESOS

(P86,200.00); dismissing the claims for On November 15, 1983, Grepalife issued Certificate No. B-
damages, attorney's fees and litigation 18558, as insurance coverage of Dr. Leuterio, to the extent of
expenses in the complaint and counterclaim, his DBP mortgage indebtedness amounting to eighty-six
with costs against the defendant and dismissing thousand, two hundred (P86,200.00) pesos. 1âwphi1.nêt

the complaint in respect to the plaintiffs, other

than the widow-beneficiary, for lack of cause of On August 6, 1984, Dr. Leuterio died due to "massive cerebral
action. 
3
hemorrhage." Consequently, DBP submitted a death claim to
Grepalife. Grepalife denied the claim alleging that Dr. Leuterio
The facts, as found by the Court of Appeals, are as follows: was not physically healthy when he applied for an insurance
coverage on November 15, 1983. Grepalife insisted that Dr. BORROWERS, INSTEAD OF
Leuterio did not disclose he had been suffering from DISMISSING THE CASE
hypertension, which caused his death. Allegedly, such non- AGAINST DEFENDANT-
disclosure constituted concealment that justified the denial of APPELLANT [Petitioner
the claim. Grepalife] FOR LACK OF
CAUSE OF ACTION.
On October 20, 1986, the widow of the late Dr. Leuterio,
respondent Medarda V. Leuterio, filed a complaint with the 2. THE LOWER COURT ERRED
Regional Trial Court of Misamis Oriental, Branch 18, against IN NOT DISMISSING THE
Grepalife for "Specific Performance with Damages."  During5
CASE FOR WANT OF
the trial, Dr. Hernando Mejia, who issued the death certificate, JURISDICTION OVER THE
was called to testify. Dr. Mejia's findings, based partly from the SUBJECT OR NATURE OF THE
information given by the respondent widow, stated that Dr. ACTION AND OVER THE
Leuterio complained of headaches presumably due to high PERSON OF THE
blood pressure. The inference was not conclusive because Dr. DEFENDANT.
Leuterio was not autopsied, hence, other causes were not
ruled out. 3. THE LOWER COURT ERRED
IN ORDERING DEFENDANT-
On February 22, 1988, the trial court rendered a decision in APPELLANT TO PAY TO DBP
favor of respondent widow and against Grepalife. On May 17, THE AMOUNT OF P86,200.00
1993, the Court of Appeals sustained the trial court's decision. IN THE ABSENCE OF ANY
Hence, the present petition. Petitioners interposed the EVIDENCE TO SHOW HOW
following assigned errors: MUCH WAS THE ACTUAL
AMOUNT PAYABLE TO DBP IN
1. THE LOWER COURT ERRED ACCORDANCE WITH ITS
IN HOLDING DEFENDANT- GROUP INSURANCE
APPELLANT LIABLE TO THE CONTRACT WITH
DEVELOPMENT BANK OF THE DEFENDANT-APPELLANT.
PHILIPPINES (DBP) WHICH IS
NOT A PARTY TO THE CASE 4. THE LOWER COURT ERRED
FOR PAYMENT OF THE IN HOLDING THAT THERE
PROCEEDS OF A MORTGAGE WAS NO CONCEALMENT OF
REDEMPTION INSURANCE ON MATERIAL INFORMATION ON
THE LIFE OF PLAINTIFF'S THE PART OF WILFREDO
HUSBAND WILFREDO LEUTERIO IN HIS
LEUTERIO ONE OF ITS LOAN APPLICATION FOR
 MEMBERSHIP IN THE GROUP Grepalife was held liable to pay the proceeds of insurance
LIFE INSURANCE PLAN contract in favor of DBP, the indispensable party who was not
BETWEEN DEFENDANT- joined in the suit.
APPELLANT OF THE
INSURANCE CLAIM ARISING To resolve the issue, we must consider the insurable interest
FROM THE DEATH OF in mortgaged properties and the parties to this type of contract.
WILFREDO LEUTERIO.  6
The rationale of a group insurance policy of mortgagors,
otherwise known as the "mortgage redemption insurance," is a
Synthesized below are the assigned errors for our resolution: device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it has to enter into
1. Whether the Court of Appeals such form of contract so that in the event of the unexpected
erred in holding petitioner liable demise of the mortgagor during the subsistence of the
to DBP as beneficiary in a group mortgage contract, the proceeds from such insurance will be
life insurance contract from a applied to the payment of the mortgage debt, thereby relieving
complaint filed by the widow of the heirs of the mortgagor from paying the obligation.   In a
7

the decedent/mortgagor? similar vein, ample protection is given to the mortgagor under
such a concept so that in the event of death; the mortgage
2. Whether the Court of Appeals obligation will be extinguished by the application of the
erred in not finding that Dr. insurance proceeds to the mortgage
Leuterio concealed that he had indebtedness.   Consequently, where the mortgagor pays the
8

hypertension, which would vitiate insurance premium under the group insurance policy, making
the insurance contract? the loss payable to the mortgagee, the insurance is on the
mortgagor's interest, and the mortgagor continues to be a
3. Whether the Court of Appeals party to the contract. In this type of policy insurance, the
erred in holding Grepalife liable mortgagee is simply an appointee of the insurance fund, such
in the amount of eighty six loss-payable clause does not make the mortgagee a party to
thousand, two hundred the contract. 
9

(P86,200.00) pesos without

proof of the actual outstanding Sec. 8 of the Insurance Code provides:
mortgage payable by the
mortgagor to DBP. Unless the policy provides, where a mortgagor
of property effects insurance in his own name
Petitioner alleges that the complaint was instituted by the providing that the loss shall be payable to the
widow of Dr. Leuterio, not the real party in interest, hence the mortgagee, or assigns a policy of insurance to a
trial court acquired no jurisdiction over the case. It argues that mortgagee, the insurance is deemed to be upon
when the Court of Appeals affirmed the trial court's judgment, the interest of the mortgagor, who does not
 cease to be a party to the original contract, and mortgagee and is made payable to him, yet the
any act of his, prior to the loss, which would mortgagor may sue thereon in his own name,
otherwise avoid the insurance, will have the especially where the mortgagee's interest is
same effect, although the property is in the less than the full amount recoverable under the
hands of the mortgagee, but any act which, policy, * * *.
under the contract of insurance, is to be
performed by the mortgagor, may be performed And in volume 33, page 82, of the same work,
by the mortgagee therein named, with the same we read the following:
effect as if it had been performed by the
mortgagor. Insured may be regarded as the real party in
interest, although he has assigned the policy for
The insured private respondent did not cede to the mortgagee the purpose of collection, or has assigned as
all his rights or interests in the insurance, the policy stating collateral security any judgment he may
that: "In the event of the debtor's death before his obtain. 
13

indebtedness with the Creditor [DBP] shall have been fully

paid, an amount to pay the outstanding indebtedness shall first And since a policy of insurance upon life or health may pass
be paid to the creditor and the balance of sum assured, if there by transfer, will or succession to any person, whether he has
is any, shall then be paid to the beneficiary/ies designated by an insurable interest or not, and such person may recover it
the debtor."   When DBP submitted the insurance claim
10
whatever the insured might have recovered,  the widow of the
14

against petitioner, the latter denied payment thereof, decedent Dr. Leuterio may file the suit against the insurer,
interposing the defense of concealment committed by the Grepalife.
insured. Thereafter, DBP collected the debt from the
mortgagor and took the necessary action of foreclosure on the The second assigned error refers to an alleged concealment
residential lot of private respondent.   In Gonzales La O vs.
11
that the petitioner interposed as its defense to annul the
Yek Tong Lin Fire & Marine Ins. Co.   we held:
12
insurance contract. Petitioner contends that Dr. Leuterio failed
to disclose that he had hypertension, which might have caused
Insured, being the person with whom the his death. Concealment exists where the assured had
contract was made, is primarily the proper knowledge of a fact material to the risk, and honesty, good
person to bring suit thereon. * * * Subject to faith, and fair dealing requires that he should communicate it
some exceptions, insured may thus sue, to the assured, but he designedly and intentionally withholds
although the policy is taken wholly or in part for the same. 15

the benefit of another person named or

unnamed, and although it is expressly made Petitioner merely relied on the testimony of the attending
payable to another as his interest may appear physician, Dr. Hernando Mejia, as supported by the
or otherwise. * * * Although a policy issued to a information given by the widow of the decedent. Grepalife
mortgagor is taken out for the benefit of the asserts that Dr. Mejia's technical diagnosis of the cause of
death of Dr. Leuterio was a duly documented hospital record, the medicines taken by Dr. Leuterio were for
and that the widow's declaration that her husband had hypertension, the appellant had not proven nor
"possible hypertension several years ago" should not be produced any witness who could attest to Dr.
considered as hearsay, but as part of res gestae. Leuterio's medical history . . .

On the contrary the medical findings were not conclusive xxx xxx xxx
because Dr. Mejia did not conduct an autopsy on the body of
the decedent. As the attending physician, Dr. Mejia stated that Appellant insurance company had failed to
he had no knowledge of Dr. Leuterio's any previous hospital establish that there was concealment made by
confinement.   Dr. Leuterio's death certificate stated that
16
the insured, hence, it cannot refuse payment of
hypertension was only "the possible cause of death." The the claim. 
17

private respondent's statement, as to the medical history of

her husband, was due to her unreliable recollection of events. The fraudulent intent on the part of the insured must be
Hence, the statement of the physician was properly established to entitle the insurer to rescind the
considered by the trial court as hearsay. contract. Misrepresentation as a defense of the insurer to
18

avoid liability is an affirmative defense and the duty to

The question of whether there was concealment was aptly establish such defense by satisfactory and convincing
answered by the appellate court, thus: evidence rests upon the insurer.   In the case at bar, the
19

petitioner failed to clearly and satisfactorily establish its

The insured, Dr. Leuterio, had answered in his defense, and is therefore liable to pay the proceeds of the
insurance application that he was in good insurance. 1âwphi1.nêt

health and that he had not consulted a doctor or

any of the enumerated ailments, including And that brings us to the last point in the review of the case at
hypertension; when he died the attending bar. Petitioner claims that there was no evidence as to the
physician had certified in the death certificate amount of Dr. Leuterio's outstanding indebtedness to DBP at
that the former died of cerebral hemorrhage, the time of the mortgagor's death. Hence, for private
probably secondary to hypertension. From this respondent's failure to establish the same, the action for
report, the appellant insurance company specific performance should be dismissed. Petitioner's claim is
refused to pay the insurance claim. Appellant without merit. A life insurance policy is a valued
alleged that the insured had concealed the fact policy.   Unless the interest of a person insured is susceptible
20

that he had hypertension. of exact pecuniary measurement, the measure of indemnity

under a policy of insurance upon life or health is the sum fixed
Contrary to appellant's allegations, there was in the policy.   The mortgagor paid the premium according to
21

no sufficient proof that the insured had suffered the coverage of his insurance, which states that:
from hypertension. Aside from the statement of
the insured's widow who was not even sure if
 The policy states that upon receipt of due proof SO ORDERED.
of the Debtor's death during the terms of this
insurance, a death benefit in the amount of
P86,200.00 shall be paid.
THE INSULAR LIFE ASSURANCE COMPANY,
In the event of the debtor's death before his LTD., plaintiff-appellee, 
indebtedness with the creditor shall have been vs.
fully paid, an amount to pay the outstanding CARPONIA T. EBRADO and PASCUALA VDA. DE
indebtedness shall first be paid to the Creditor EBRADO, defendants-appellants.
and the balance of the Sum Assured, if there is
any shall then be paid to the beneficiary/ies
designated by the debtor."  (Emphasis omitted)
22

However, we noted that the Court of Appeals' decision was

MARTIN, J.:
promulgated on May 17, 1993. In private respondent's
memorandum, she states that DBP foreclosed in 1995 their
residential lot, in satisfaction of mortgagor's outstanding loan. This is a novel question in insurance law: Can a common-law
Considering this supervening event, the insurance proceeds wife named as beneficiary in the life insurance policy of a
shall inure to the benefit of the heirs of the deceased person or legally married man claim the proceeds thereof in case of
his beneficiaries. Equity dictates that DBP should not unjustly death of the latter?
enrich itself at the expense of another (Nemo cum alterius
detrimenio protest). Hence, it cannot collect the insurance On September 1, 1968, Buenaventura Cristor Ebrado was
proceeds, after it already foreclosed on the mortgage. The issued by The Life Assurance Co., Ltd., Policy No. 009929 on
proceeds now rightly belong to Dr. Leuterio's heirs represented a whole-life for P5,882.00 with a, rider for Accidental Death for
by his widow, herein private respondent Medarda Leuterio. the same amount Buenaventura C. Ebrado designated T.
Ebrado as the revocable beneficiary in his policy. He to her as
WHEREFORE, the petition is hereby DENIED. The Decision his wife.
and Resolution of the Court of Appeals in CA-G.R. CV 18341
is AFFIRMED with MODIFICATION that the petitioner is On October 21, 1969, Buenaventura C. Ebrado died as a
ORDERED to pay the insurance proceeds amounting to result of an t when he was hit by a failing branch of a tree. As
Eighty-six thousand, two hundred (P86,200.00) pesos to the the policy was in force, The Insular Life Assurance Co., Ltd.
heirs of the insured, Dr. Wilfredo Leuterio (deceased), upon liable to pay the coverage in the total amount of P11,745.73,
presentation of proof of prior settlement of mortgagor's representing the face value of the policy in the amount of
indebtedness to Development Bank of the Philippines. Costs P5,882.00 plus the additional benefits for accidental death also
against petitioner.
1âwphi1.nêt
in the amount of P5,882.00 and the refund of P18.00 paid for
the premium due November, 1969, minus the unpaid
premiums and interest thereon due for January and February, that during the lifetime of the deceased, he was
1969, in the sum of P36.27. insured with Insular Life Assurance Co. Under
Policy No. 009929 whole life plan, dated
Carponia T. Ebrado filed with the insurer a claim for the September 1, 1968 for the sum of P5,882.00
proceeds of the Policy as the designated beneficiary therein, with the rider for accidental death benefit as
although she admits that she and the insured Buenaventura C. evidenced by Exhibits A for plaintiffs and Exhibit
Ebrado were merely living as husband and wife without the 1 for the defendant Pascuala and Exhibit 7 for
benefit of marriage. Carponia Ebrado; 3) that during the lifetime of
Buenaventura Ebrado, he was living with his
Pascuala Vda. de Ebrado also filed her claim as the widow of common-wife, Carponia Ebrado, with whom
the deceased insured. She asserts that she is the one entitled she had 2 children although he was not legally
to the insurance proceeds, not the common-law wife, Carponia separated from his legal wife; 4) that
T. Ebrado. Buenaventura in accident on October 21, 1969
as evidenced by the death Exhibit 3 and
In doubt as to whom the insurance proceeds shall be paid, the affidavit of the police report of his death Exhibit
insurer, The Insular Life Assurance Co., Ltd. commenced an 5; 5) that complainant Carponia Ebrado filed
action for Interpleader before the Court of First Instance of claim with the Insular Life Assurance Co. which
Rizal on April 29, 1970. was contested by Pascuala Ebrado who also
filed claim for the proceeds of said policy 6) that
After the issues have been joined, a pre-trial conference was in view ofthe adverse claims the insurance
held on July 8, 1972, after which, a pre-trial order was entered company filed this action against the two herein
reading as follows:  claimants Carponia and Pascuala Ebrado; 7)
that there is now due from the Insular Life
ñé+.£ªwph!1

Assurance Co. as proceeds of the policy

During the pre-trial conference, the parties
P11,745.73; 8) that the beneficiary designated
manifested to the court. that there is no
by the insured in the policy is Carponia Ebrado
possibility of amicable settlement. Hence, the
and the insured made reservation to change the
Court proceeded to have the parties submit
beneficiary but although the insured made the
their evidence for the purpose of the pre-trial
option to change the beneficiary, same was
and make admissions for the purpose of
never changed up to the time of his death and
pretrial. During this conference, parties
the wife did not have any opportunity to write
Carponia T. Ebrado and Pascuala Ebrado
the company that there was reservation to
agreed and stipulated: 1) that the deceased
change the designation of the parties agreed
Buenaventura Ebrado was married to Pascuala
that a decision be rendered based on and
Ebrado with whom she has six — (legitimate)
stipulation of facts as to who among the two
namely; Hernando, Cresencio, Elsa, Erlinda,
claimants is entitled to the policy.
Felizardo and Helen, all surnamed Ebrado; 2)
 Upon motion of the parties, they are given ten defendant Pascuala Vda. de Ebrado was valid
(10) days to file their simultaneous memoranda and still existing at the time the insurance in
from the receipt of this order. question was purchased there is no question
that defendant Carponia T. Ebrado is
SO ORDERED. disqualified from becoming the beneficiary of
the policy in question and as such she is not
On September 25, 1972, the trial court rendered judgment entitled to the proceeds of the insurance upon
declaring among others, Carponia T. Ebrado disqualified from the death of the insured.
becoming beneficiary of the insured Buenaventura Cristor
Ebrado and directing the payment of the insurance proceeds From this judgment, Carponia T. Ebrado appealed to the Court
to the estate of the deceased insured. The trial court held:  ñé+.£ªwph!1
of Appeals, but on July 11, 1976, the Appellate Court certified
the case to Us as involving only questions of law.
It is patent from the last paragraph of Art. 739 of
the Civil Code that a criminal conviction for We affirm the judgment of the lower court.
adultery or concubinage is not essential in order
to establish the disqualification mentioned 1. It is quite unfortunate that the Insurance Act (RA 2327, as
therein. Neither is it also necessary that a amended) or even the new Insurance Code (PD No. 612, as
finding of such guilt or commission of those acts amended) does not contain any specific provision grossly
be made in a separate independent action resolutory of the prime question at hand. Section 50 of the
brought for the purpose. The guilt of the donee Insurance Act which provides that "(t)he insurance shag be
(beneficiary) may be proved by preponderance applied exclusively to the proper interest of the person in
of evidence in the same proceeding (the action whose name it is made" 1 cannot be validly seized upon to hold
brought to declare the nullity of the donation). that the mm includes the beneficiary. The word "interest" highly
suggests that the provision refers only to the "insured" and not to the
It is, however, essential that such adultery or beneficiary, since a contract of insurance is personal in
character. 2 Otherwise, the prohibitory laws against illicit relationships
concubinage exists at the time defendant
especially on property and descent will be rendered nugatory, as the
Carponia T. Ebrado was made beneficiary in same could easily be circumvented by modes of insurance. Rather,
the policy in question for the disqualification and the general rules of civil law should be applied to resolve this void in
incapacity to exist and that it is only necessary the Insurance Law. Article 2011 of the New Civil Code states: "The
that such fact be established by preponderance contract of insurance is governed by special laws. Matters not
of evidence in the trial. Since it is agreed in their expressly provided for in such special laws shall be regulated by this
stipulation above-quoted that the deceased Code." When not otherwise specifically provided for by the Insurance
insured and defendant Carponia T. Ebrado Law, the contract of life insurance is governed by the general rules of
were living together as husband and wife the civil law regulating contracts. 3 And under Article 2012 of the
without being legally married and that the same Code, "any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a fife
marriage of the insured with the other
insurance policy by the person who cannot make a donation to
him. 4 Common-law spouses are, definitely, barred from receiving considered as a testament and in construing it, the courts will, so far
donations from each other. Article 739 of the new Civil Code as possible treat it as a will and determine the effect of a clause
provides: 
ñé+.£ªwph!1 designating the beneficiary by rules under which wins are
interpreted. 6
The following donations shall be void:
3. Policy considerations and dictates of morality rightly justify
1. Those made between persons who were the institution of a barrier between common law spouses in
guilty of adultery or concubinage at the time of record to Property relations since such hip ultimately
donation; encroaches upon the nuptial and filial rights of the legitimate
family There is every reason to hold that the bar in donations
Those made between persons found guilty of between legitimate spouses and those between illegitimate
the same criminal offense, in consideration ones should be enforced in life insurance policies since the
thereof; same are based on similar consideration As above pointed
out, a beneficiary in a fife insurance policy is no different from
3. Those made to a public officer or his wife, a donee. Both are recipients of pure beneficence. So long as
descendants or ascendants by reason of his manage remains the threshold of family laws, reason and
office. morality dictate that the impediments imposed upon married
couple should likewise be imposed upon extra-marital
relationship. If legitimate relationship is circumscribed by these
In the case referred to in No. 1, the action for
legal disabilities, with more reason should an illicit relationship
declaration of nullity may be brought by the
be restricted by these disabilities. Thus, in Matabuena v.
spouse of the donor or donee; and the guilt of
Cervantes, 7 this Court, through Justice Fernando, said: 
the donee may be proved by preponderance of
ñé+.£ªwph!1

evidence in the same action.

If the policy of the law is, in the language of the
opinion of the then Justice J.B.L. Reyes of that
2. In essence, a life insurance policy is no different from a civil
court (Court of Appeals), 'to prohibit donations
donation insofar as the beneficiary is concerned. Both are
in favor of the other consort and his
founded upon the same consideration: liberality. A beneficiary
descendants because of and undue and
is like a donee, because from the premiums of the policy which
improper pressure and influence upon the
the insured pays out of liberality, the beneficiary will receive
donor, a prejudice deeply rooted in our ancient
the proceeds or profits of said insurance. As a consequence,
law;" por-que no se enganen desponjandose el
the proscription in Article 739 of the new Civil Code should
uno al otro por amor que han de consuno'
equally operate in life insurance contracts. The mandate of
(According to) the Partidas (Part IV, Tit. XI,
Article 2012 cannot be laid aside: any person who cannot
LAW IV), reiterating the rationale 'No Mutuato
receive a donation cannot be named as beneficiary in the life
amore invicem spoliarentur' the Pandects (Bk,
insurance policy of the person who cannot make the
24, Titl. 1, De donat, inter virum et uxorem);
donation. 5 Under American law, a policy of life insurance is
then there is very reason to apply the same
prohibitive policy to persons living together as attained. Whatever omission may be apparent
husband and wife without the benefit of in an interpretation purely literal of the language
nuptials. For it is not to be doubted that assent used must be remedied by an adherence to its
to such irregular connection for thirty years avowed objective.
bespeaks greater influence of one party over
the other, so that the danger that the law seeks 4. We do not think that a conviction for adultery or
to avoid is correspondingly increased. concubinage is exacted before the disabilities mentioned in
Moreover, as already pointed out by Ulpian (in Article 739 may effectuate. More specifically, with record to the
his lib. 32 ad Sabinum, fr. 1), 'it would not be disability on "persons who were guilty of adultery or
just that such donations should subsist, lest the concubinage at the time of the donation," Article 739 itself
condition 6f those who incurred guilt should turn provides: ñé+.£ªwph!1

out to be better.' So long as marriage remains

the cornerstone of our family law, reason and In the case referred to in No. 1, the action for
morality alike demand that the disabilities declaration of nullity may be brought by the
attached to marriage should likewise attach to spouse of the donor or donee; and the guilty of
concubinage. the donee may be proved by preponderance of
evidence in the same action.
It is hardly necessary to add that even in the
absence of the above pronouncement, any The underscored clause neatly conveys that no criminal
other conclusion cannot stand the test of conviction for the offense is a condition precedent. In fact, it
scrutiny. It would be to indict the frame of the cannot even be from the aforequoted provision that a
Civil Code for a failure to apply a laudable rule prosecution is needed. On the contrary, the law plainly states
to a situation which in its essentials cannot be that the guilt of the party may be proved "in the same acting for
distinguished. Moreover, if it is at all to be declaration of nullity of donation. And, it would be sufficient if
differentiated the policy of the law which evidence preponderates upon the guilt of the consort for the
embodies a deeply rooted notion of what is just offense indicated. The quantum of proof in criminal cases is
and what is right would be nullified if such not demanded.
irregular relationship instead of being visited
with disabilities would be attended with benefits. In the caw before Us, the requisite proof of common-law
Certainly a legal norm should not be relationship between the insured and the beneficiary has been
susceptible to such a reproach. If there is every conveniently supplied by the stipulations between the parties
any occasion where the principle of statutory in the pre-trial conference of the case. It case agreed upon
construction that what is within the spirit of the and stipulated therein that the deceased insured
law is as much a part of it as what is written, Buenaventura C. Ebrado was married to Pascuala Ebrado with
this is it. Otherwise the basic purpose whom she has six legitimate children; that during his lifetime,
discernible in such codal provision would not be the deceased insured was living with his common-law wife,
Carponia Ebrado, with whom he has two children. These This is a petition1 for review on certiorari under Rule 45 of the
stipulations are nothing less than judicial admissions which, as Rules, seeking to reverse and set aside the Resolution2 dated
a consequence, no longer require proof and cannot be January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV
contradicted. 8 A fortiori, on the basis of these admissions, a No. 85948, dismissing petitioners’ appeal for lack of
judgment may be validly rendered without going through the rigors of jurisdiction.
a trial for the sole purpose of proving the illicit liaison between the
insured and the beneficiary. In fact, in that pretrial, the parties even The case stems from a petition3 filed against respondents with
agreed "that a decision be rendered based on this agreement and
the Regional Trial Court, Branch 29, for revocation and/or
stipulation of facts as to who among the two claimants is entitled to
the policy." reduction of insurance proceeds for being void and/or
inofficious, with prayer for a temporary restraining order (TRO)
and a writ of preliminary injunction.
ACCORDINGLY, the appealed judgment of the lower court is
hereby affirmed. Carponia T. Ebrado is hereby declared
disqualified to be the beneficiary of the late Buenaventura C. The petition alleged that: (1) petitioners were the legitimate
Ebrado in his life insurance policy. As a consequence, the wife and children of Loreto Maramag (Loreto), while
proceeds of the policy are hereby held payable to the estate of respondents were Loreto’s illegitimate family; (2) Eva de
the deceased insured. Costs against Carponia T. Ebrado. Guzman Maramag (Eva) was a concubine of Loreto and a
suspect in the killing of the latter, thus, she is disqualified to
receive any proceeds from his insurance policies from Insular
SO ORDERED.
Life Assurance Company, Ltd. (Insular)4 and Great Pacific Life
Assurance Corporation (Grepalife);5 (3) the illegitimate children
of Loreto—Odessa, Karl Brian, and Trisha Angelie—were
entitled only to one-half of the legitime of the legitimate
HEIRS OF LORETO C. MARAMAG, represented by children, thus, the proceeds released to Odessa and those to
surviving spouse VICENTA PANGILINAN be released to Karl Brian and Trisha Angelie were inofficious
MARAMAG,Petitioners,  and should be reduced; and (4) petitioners could not be
vs. deprived of their legitimes, which should be satisfied first.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE
GUZMAN MARAMAG, KARL BRIAN DE GUZMAN In support of the prayer for TRO and writ of preliminary
MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR injunction, petitioners alleged, among others, that part of the
LIFE ASSURANCE COMPANY, LTD., and GREAT PACIFIC insurance proceeds had already been released in favor of
LIFE ASSURANCE CORPORATION, Respondents. Odessa, while the rest of the proceeds are to be released in
favor of Karl Brian and Trisha Angelie, both minors, upon the
DECISION appointment of their legal guardian. Petitioners also prayed for
the total amount of ₱320,000.00 as actual litigation expenses
NACHURA, J.: and attorney’s fees.
In answer,6 Insular admitted that Loreto misrepresented Eva As the whereabouts of Eva, Odessa, Karl Brian, and Trisha
as his legitimate wife and Odessa, Karl Brian, and Trisha Angelie were not known to petitioners, summons by
Angelie as his legitimate children, and that they filed their publication was resorted to. Still, the illegitimate family of
claims for the insurance proceeds of the insurance policies; Loreto failed to file their answer. Hence, the trial court, upon
that when it ascertained that Eva was not the legal wife of motion of petitioners, declared them in default in its Order
Loreto, it disqualified her as a beneficiary and divided the dated May 7, 2004.
proceeds among Odessa, Karl Brian, and Trisha Angelie, as
the remaining designated beneficiaries; and that it released During the pre-trial on July 28, 2004, both Insular and
Odessa’s share as she was of age, but withheld the release of Grepalife moved that the issues raised in their respective
the shares of minors Karl Brian and Trisha Angelie pending answers be resolved first. The trial court ordered petitioners to
submission of letters of guardianship. Insular alleged that the comment within 15 days.
complaint or petition failed to state a cause of action insofar as
it sought to declare as void the designation of Eva as In their comment, petitioners alleged that the issue raised by
beneficiary, because Loreto revoked her designation as such Insular and Grepalife was purely legal – whether the complaint
in Policy No. A001544070 and it disqualified her in Policy No. itself was proper or not – and that the designation of a
A001693029; and insofar as it sought to declare as inofficious beneficiary is an act of liberality or a donation and, therefore,
the shares of Odessa, Karl Brian, and Trisha Angelie, subject to the provisions of Articles 7528 and 7729 of the Civil
considering that no settlement of Loreto’s estate had been Code.
filed nor had the respective shares of the heirs been
determined. Insular further claimed that it was bound to honor In reply, both Insular and Grepalife countered that the
the insurance policies designating the children of Loreto with insurance proceeds belong exclusively to the designated
Eva as beneficiaries pursuant to Section 53 of the Insurance beneficiaries in the policies, not to the estate or to the heirs of
Code. the insured. Grepalife also reiterated that it had disqualified
Eva as a beneficiary when it ascertained that Loreto was
In its own answer7 with compulsory counterclaim, Grepalife legally married to Vicenta Pangilinan Maramag.
alleged that Eva was not designated as an insurance policy
beneficiary; that the claims filed by Odessa, Karl Brian, and On September 21, 2004, the trial court issued a Resolution,
Trisha Angelie were denied because Loreto was ineligible for the dispositive portion of which reads –
insurance due to a misrepresentation in his application form
that he was born on December 10, 1936 and, thus, not more WHEREFORE, the motion to dismiss incorporated in the
than 65 years old when he signed it in September 2001; that answer of defendants Insular Life and Grepalife is granted with
the case was premature, there being no claim filed by the respect to defendants Odessa, Karl Brian and Trisha
legitimate family of Loreto; and that the law on succession Maramag. The action shall proceed with respect to the other
does not apply where the designation of insurance defendants Eva Verna de Guzman, Insular Life and Grepalife.
beneficiaries is clear.
SO ORDERED.10
In so ruling, the trial court ratiocinated thus – Association v. Juanita Golpeo, et al., the Honorable Supreme
Court made the following pronouncements[:]
Art. 2011 of the Civil Code provides that the contract of
insurance is governed by the (sic) special laws. Matters not "With the finding of the trial court that the proceeds to the Life
expressly provided for in such special laws shall be regulated Insurance Policy belongs exclusively to the defendant as his
by this Code. The principal law on insurance is the Insurance individual and separate property, we agree that the proceeds
Code, as amended. Only in case of deficiency in the Insurance of an insurance policy belong exclusively to the beneficiary
Code that the Civil Code may be resorted to. (Enriquez v. Sun and not to the estate of the person whose life was insured, and
Life Assurance Co., 41 Phil. 269.) that such proceeds are the separate and individual property of
the beneficiary and not of the heirs of the person whose life
The Insurance Code, as amended, contains a provision was insured, is the doctrine in America. We believe that the
regarding to whom the insurance proceeds shall be paid. It is same doctrine obtains in these Islands by virtue of Section 428
very clear under Sec. 53 thereof that the insurance proceeds of the Code of Commerce x x x."
shall be applied exclusively to the proper interest of the person
in whose name or for whose benefit it is made, unless In [the] light of the above pronouncements, it is very clear that
otherwise specified in the policy. Since the defendants are the the plaintiffs has (sic) no sufficient cause of action against
ones named as the primary beneficiary (sic) in the insurances defendants Odessa, Karl Brian and Trisha Angelie Maramag
(sic) taken by the deceased Loreto C. Maramag and there is for the reduction and/or declaration of inofficiousness of
no showing that herein plaintiffs were also included as donation as primary beneficiary (sic) in the insurances (sic) of
beneficiary (sic) therein the insurance proceeds shall the late Loreto C. Maramag.
exclusively be paid to them. This is because the beneficiary
has a vested right to the indemnity, unless the insured However, herein plaintiffs are not totally bereft of any cause of
reserves the right to change the beneficiary. (Grecio v. Sunlife action. One of the named beneficiary (sic) in the insurances
Assurance Co. of Canada, 48 Phil. [sic] 63). (sic) taken by the late Loreto C. Maramag is his concubine Eva
Verna De Guzman. Any person who is forbidden from
Neither could the plaintiffs invoked (sic) the law on donations receiving any donation under Article 739 cannot be named
or the rules on testamentary succession in order to defeat the beneficiary of a life insurance policy of the person who cannot
right of herein defendants to collect the insurance indemnity. make any donation to him, according to said article (Art. 2012,
The beneficiary in a contract of insurance is not the donee Civil Code). If a concubine is made the beneficiary, it is
spoken in the law of donation. The rules on testamentary believed that the insurance contract will still remain valid, but
succession cannot apply here, for the insurance indemnity the indemnity must go to the legal heirs and not to the
does not partake of a donation. As such, the insurance concubine, for evidently, what is prohibited under Art. 2012 is
indemnity cannot be considered as an advance of the the naming of the improper beneficiary. In such case, the
inheritance which can be subject to collation (Del Val v. Del action for the declaration of nullity may be brought by the
Val, 29 Phil. 534). In the case of Southern Luzon Employees’ spouse of the donor or donee, and the guilt of the donor and
donee may be proved by preponderance of evidence in the
same action (Comment of Edgardo L. Paras, Civil Code of the SO ORDERED.14
Philippines, page 897). Since the designation of defendant
Eva Verna de Guzman as one of the primary beneficiary (sic) In granting the motions for reconsideration of Insular and
in the insurances (sic) taken by the late Loreto C. Maramag is Grepalife, the trial court considered the allegations of Insular
void under Art. 739 of the Civil Code, the insurance indemnity that Loreto revoked the designation of Eva in one policy and
that should be paid to her must go to the legal heirs of the that Insular disqualified her as a beneficiary in the other policy
deceased which this court may properly take cognizance as such that the entire proceeds would be paid to the illegitimate
the action for the declaration for the nullity of a void donation children of Loreto with Eva pursuant to Section 53 of the
falls within the general jurisdiction of this Court.11 Insurance Code. It ruled that it is only in cases where there are
no beneficiaries designated, or when the only designated
Insular12 and Grepalife13 filed their respective motions for beneficiary is disqualified, that the proceeds should be paid to
reconsideration, arguing, in the main, that the petition failed to the estate of the insured. As to the claim that the proceeds to
state a cause of action. Insular further averred that the be paid to Loreto’s illegitimate children should be reduced
proceeds were divided among the three children as the based on the rules on legitime, the trial court held that the
remaining named beneficiaries. Grepalife, for its part, also distribution of the insurance proceeds is governed primarily by
alleged that the premiums paid had already been refunded. the Insurance Code, and the provisions of the Civil Code are
irrelevant and inapplicable. With respect to the Grepalife
Petitioners, in their comment, reiterated their earlier arguments policy, the trial court noted that Eva was never designated as a
and posited that whether the complaint may be dismissed for beneficiary, but only Odessa, Karl Brian, and Trisha Angelie;
failure to state a cause of action must be determined solely on thus, it upheld the dismissal of the case as to the illegitimate
the basis of the allegations in the complaint, such that the children. It further held that the matter of Loreto’s
defenses of Insular and Grepalife would be better threshed out misrepresentation was premature; the appropriate action may
during trial.
1avvphi1
be filed only upon denial of the claim of the named
beneficiaries for the insurance proceeds by Grepalife.
On June 16, 2005, the trial court issued a Resolution,
disposing, as follows: Petitioners appealed the June 16, 2005 Resolution to the CA,
but it dismissed the appeal for lack of jurisdiction, holding that
WHEREFORE, in view of the foregoing disquisitions, the the decision of the trial court dismissing the complaint for
Motions for Reconsideration filed by defendants Grepalife and failure to state a cause of action involved a pure question of
Insular Life are hereby GRANTED. Accordingly, the portion of law. The appellate court also noted that petitioners did not file
the Resolution of this Court dated 21 September 2004 which within the reglementary period a motion for reconsideration of
ordered the prosecution of the case against defendant Eva the trial court’s Resolution, dated September 21, 2004,
Verna De Guzman, Grepalife and Insular Life is hereby SET dismissing the complaint as against Odessa, Karl Brian, and
ASIDE, and the case against them is hereby ordered Trisha Angelie; thus, the said Resolution had already attained
DISMISSED. finality.
Hence, this petition raising the following issues: The grant of the motion to dismiss was based on the trial
court’s finding that the petition failed to state a cause of action,
a. In determining the merits of a motion to dismiss for as provided in Rule 16, Section 1(g), of the Rules of Court,
failure to state a cause of action, may the Court which reads –
consider matters which were not alleged in the
Complaint, particularly the defenses put up by the SECTION 1. Grounds. – Within the time for but before filing
defendants in their Answer? the answer to the complaint or pleading asserting a claim, a
motion to dismiss may be made on any of the following
b. In granting a motion for reconsideration of a motion grounds:
to dismiss for failure to state a cause of action, did not
the Regional Trial Court engage in the examination and xxxx
determination of what were the facts and their
probative value, or the truth thereof, when it premised (g) That the pleading asserting the claim states no cause of
the dismissal on allegations of the defendants in their action.
answer – which had not been proven?
A cause of action is the act or omission by which a party
c. x x x (A)re the members of the legitimate family violates a right of another.16 A complaint states a cause of
entitled to the proceeds of the insurance for the action when it contains the three (3) elements of a cause of
concubine?15 action—(1) the legal right of the plaintiff; (2) the correlative
obligation of the defendant; and (3) the act or omission of the
In essence, petitioners posit that their petition before the trial defendant in violation of the legal right. If any of these
court should not have been dismissed for failure to state a elements is absent, the complaint becomes vulnerable to a
cause of action because the finding that Eva was either motion to dismiss on the ground of failure to state a cause of
disqualified as a beneficiary by the insurance companies or action.17
that her designation was revoked by Loreto, hypothetically
admitted as true, was raised only in the answers and motions When a motion to dismiss is premised on this ground, the
for reconsideration of both Insular and Grepalife. They argue ruling thereon should be based only on the facts alleged in the
that for a motion to dismiss to prosper on that ground, only the complaint. The court must resolve the issue on the strength of
allegations in the complaint should be considered. They further such allegations, assuming them to be true. The test of
contend that, even assuming Insular disqualified Eva as a sufficiency of a cause of action rests on whether,
beneficiary, her share should not have been distributed to her hypothetically admitting the facts alleged in the complaint to be
children with Loreto but, instead, awarded to them, being the true, the court can render a valid judgment upon the same, in
legitimate heirs of the insured deceased, in accordance with accordance with the prayer in the complaint. This is the
law and jurisprudence. general rule.

The petition should be denied.

However, this rule is subject to well-recognized exceptions, It is evident from the face of the complaint that petitioners are
such that there is no hypothetical admission of the veracity of not entitled to a favorable judgment in light of Article 2011 of
the allegations if: the Civil Code which expressly provides that insurance
contracts shall be governed by special laws, i.e., the Insurance
1. the falsity of the allegations is subject to judicial Code. Section 53 of the Insurance Code states—
notice;
SECTION 53. The insurance proceeds shall be applied
2. such allegations are legally impossible; exclusively to the proper interest of the person in whose name
or for whose benefit it is made unless otherwise specified in
3. the allegations refer to facts which are inadmissible the policy.
in evidence;
Pursuant thereto, it is obvious that the only persons entitled to
4. by the record or document in the pleading, the claim the insurance proceeds are either the insured, if still
allegations appear unfounded; or alive; or the beneficiary, if the insured is already deceased,
upon the maturation of the policy.20 The exception to this rule is
5. there is evidence which has been presented to the a situation where the insurance contract was intended to
court by stipulation of the parties or in the course of the benefit third persons who are not parties to the same in the
hearings related to the case.18 form of favorable stipulations or indemnity. In such a case,
third parties may directly sue and claim from the insurer.21
In this case, it is clear from the petition filed before the trial
court that, although petitioners are the legitimate heirs of Petitioners are third parties to the insurance contracts with
Loreto, they were not named as beneficiaries in the insurance Insular and Grepalife and, thus, are not entitled to the
policies issued by Insular and Grepalife. The basis of proceeds thereof. Accordingly, respondents Insular and
petitioners’ claim is that Eva, being a concubine of Loreto and Grepalife have no legal obligation to turn over the insurance
a suspect in his murder, is disqualified from being designated proceeds to petitioners. The revocation of Eva as a beneficiary
as beneficiary of the insurance policies, and that Eva’s in one policy and her disqualification as such in another are of
children with Loreto, being illegitimate children, are entitled to no moment considering that the designation of the illegitimate
a lesser share of the proceeds of the policies. They also children as beneficiaries in Loreto’s insurance policies remains
argued that pursuant to Section 12 of the Insurance valid. Because no legal proscription exists in naming as
Code,19 Eva’s share in the proceeds should be forfeited in their beneficiaries the children of illicit relationships by the
favor, the former having brought about the death of Loreto. insured,22 the shares of Eva in the insurance proceeds,
Thus, they prayed that the share of Eva and portions of the whether forfeited by the court in view of the prohibition on
shares of Loreto’s illegitimate children should be awarded to donations under Article 739 of the Civil Code or by the insurers
them, being the legitimate heirs of Loreto entitled to their themselves for reasons based on the insurance contracts,
respective legitimes. must be awarded to the said illegitimate children, the
designated beneficiaries, to the exclusion of petitioners. It is
only in cases where the insured has not designated any the power to change the beneficiary — the former wife — and
beneficiary,23 or when the designated beneficiary is disqualified to name instead his actual wife, where the insured and the
by law to receive the proceeds,24 that the insurance policy beneficiary have been divorced and where the policy of
proceeds shall redound to the benefit of the estate of the insurance does not expressly reserve to the insured the right
insured. to change the beneficiary. Although the authorities have been
exhausted, no legal situation exactly like the one before us has
In this regard, the assailed June 16, 2005 Resolution of the been encountered.
trial court should be upheld. In the same light, the Decision of
the CA dated January 8, 2008 should be sustained. Indeed, Hilario Gercio, the insured, is the plaintiff. The Sun Life
the appellate court had no jurisdiction to take cognizance of Assurance Co. of Canada, the insurer, and Andrea Zialcita,
the appeal; the issue of failure to state a cause of action is a the beneficiary, are the defendants. The complaint is in the
question of law and not of fact, there being no findings of fact nature of mandamus. Its purpose is to compel the defendant
in the first place.25 Sun Life Assurance Co. of Canada to change the beneficiary
in the policy issued by the defendant company on the life of
WHEREFORE, the petition is DENIED for lack of merit. Costs the plaintiff Hilario Gercio, with one Andrea Zialcita as
against petitioners. beneficiary.

SO ORDERED. A default judgment was taken in the lower court against the
defendant Andrea Zialcita. The other defendant, the Sun Life
Assurance Co. of Canada, first demurred to the complaint and
when the demurrer was overruled, filed an answer in the
nature of a general denial. The case was then submitted for
HILARIO GERCIO, plaintiff-appellee, 
decision on an agreed statement of facts. The judgment of the
vs.
trial court was in favor of the plaintiff without costs, and
SUN LIFE ASSURANCE OF CANADA, ET AL., defendants. 
ordered the defendant company to eliminate from the
SUN LIFE ASSURANCE OF CANADA, appellant.
insurance policy the name of Andrea Zialcita as beneficiary
and to substitute therefor such name as the plaintiff might
Fisher, DeWitt, Perkins and Brady and Jesus Trinidad for furnish to the defendant for that purpose.
appellant.
Vicente Romualdez, Feria and La O and P. J. Sevilla for
The Sun Life Assurance Co. of Canada has appealed and has
appellee.
assigned three errors alleged to have been committed by the
lower court. The appellee has countered with a motion which
MALCOLM, J.: asks the court to dismiss the appeal of the defendant Sun Life
Assurance Co. of Canada, with costs.
The question of first impression in the law of life insurance to
be here decided is whether the insured — the husband — has
As the motion presented by the appellee and the first two On the date the policy was issued, Andrea Zialcita was the
errors assigned by the appellant are preliminary in nature, we lawful wife of Hilario Gercio. Towards the end of the year
will pass upon the first. Appellee argues that the "substantial 1919, she was convicted of the crime of adultery. On
defendant" was Andrea Zialcita, and that since she was September 4, 1920, a decree of divorce was issued in civil
adjudged in default, the Sun Life Assurance Co. of Canada case no. 17955, which had the effect of completely dissolving
has no interest in the appeal. It will be noticed, however, that the bonds of matrimony contracted by Hilario Gercio and
the complaint prays for affirmative relief against the insurance Andrea Zialcita.
company. It will be noticed further that it is stipulated that the
insurance company has persistently refused to change the On March 4, 1922, Hilario Gercio formally notified the Sun Life
beneficiary as desired by the plaintiff. As the rights of Andrea Assurance Co. of Canada that he had revoked his donation in
Zialcita in the policy are rights which are enforceable by her favor of Andrea Zialcita, and that he had designated in her
only against the insurance company, the defendant insurance stead his present wife, Adela Garcia de Gercio, as the
company will only be fully protected if the question at issue is beneficiary of the policy. Gercio requested the insurance
conclusively determined. Accordingly, we have decided not to company to eliminate Andrea Zialcita as beneficiary. This, the
accede to the motion of the appellee and not to order the insurance company has refused and still refuses to do.
dismissal of the appeal of the appellant.
With all of these introductory matters disposed of and with the
This brings us to the main issue. Before, however, discussing legal question to the forefront, it becomes our first duty to
its legal aspects, it is advisable to have before us the essential determine what law should be applied to the facts. In this
facts. As they are stipulated, this part of the decision can connection, it should be remembered that the insurance policy
easily be accomplished. was taken out in 1910, that the Insurance Act. No. 2427,
became effective in 1914, and that the effort to change the
On January 29, 1910, the Sun Life Assurance Co. of Canada beneficiary was made in 1922. Should the provisions of the
issued insurance policy No. 161481 on the life of Hilario Code of Commerce and the Civil Code in force in 1910, or the
Gercio. The policy was what is known as a twenty-year provisions of the Insurance Act now in force, or the general
endowment policy. By its terms, the insurance company principles of law, guide the court in its decision?
agreed to insure the life of Hilario Gercio for the sum of
P/2,000, to be paid him on February 1, 1930, or if the insured On the supposition, first, that the Code of Commerce is
should die before said date, then to his wife, Mrs. Andrea applicable, yet there can be found in it no provision either
Zialcita, should she survive him; otherwise to the executors, permitting or prohibiting the insured to change the beneficiary.
administrators, or assigns of the insured. The policy also
contained a schedule of reserves, amounts in cash, paid-up On the supposition, next, that the Civil Code regulates
policies, and renewed insurance, guaranteed. The policy did insurance contracts, it would be most difficult, if indeed it is
not include any provision reserving to the insured the right to practicable, to test a life insurance policy by its provisions.
change the beneficiary. Should the insurance contract, whereby the husband names
the wife as the beneficiary, be denominated a donation inter
vivos, a donation causa mortis, a contract in favor of a third the modern Law of Insurance as found in the United States
person, or an aleatory contract? The subject is further proper.
complicated by the fact that if an insurance contract should be
considered a donation, a husband may then never insure his The wife has an insurable interest in the life of her husband.
life in favor of his wife and vice versa, inasmuch as article The beneficiary has an absolute vested interest in the policy
1334 prohibits all donations between spouses during marriage. from the date of its issuance and delivery. So when a policy of
It would seem, therefore, that this court was right when in the life insurance is taken out by the husband in which the wife is
case of Del Val vs. Del Val ([1915]), 29 Phil., 534), it declined named as beneficiary, she has a subsisting interest in the
to consider the proceeds of the insurance policy as a donation policy. And this applies to a policy to which there are attached
or gift, saying "the contract of life insurance is a special the incidents of a loan value, cash surrender value, an
contract and the destination of the proceeds thereof is automatic extension by premiums paid, and to an endowment
determined by special laws which deal exclusively with that policy, as well as to an ordinary life insurance policy. If the
subject. The Civil Code has no provisions which relate directly husband wishes to retain to himself the control and ownership
and specifically to life-insurance contracts or to the destination of the policy he may so provide in the policy. But if the policy
of life-insurance proceeds. . . ." Some satisfaction is gathered contains no provision authorizing a change of beneficiary
from the perplexities of the Louisiana Supreme Court, a civil without the beneficiary's consent, the insured cannot make
law jurisdiction, where the jurists have disagreed as to the such change. Accordingly, it is held that a life insurance policy
classification of the insurance contract, but have agreed in of a husband made payable to the wife as beneficiary, is the
their conclusions as will hereafter see. (Re Succession of separate property of the beneficiary and beyond the control of
Leone Desforges [1914], 52 L.R.A. [N.S.], 689; Lambert vs the husband.
Penn Mutual Life Insurance Company of Philadelphia and
L'Hote & Co. [1898], 50 La. Ann., 1027.) As to the effect produced by the divorce, the Philippine
Divorce Law, Act No. 2710, merely provides in section 9 that
On the further supposition that the Insurance Act applies, it will the decree of divorce shall dissolve the community property as
be found that in this Law, there is likewise no provision either soon as such decree becomes final. Unlike the statutes of a
permitting or prohibiting the insured to change the beneficiary. few jurisdictions, there is no provision in the Philippine Law
permitting the beneficiary in a policy for the benefit of the wife
We must perforce conclude that whether the case be of the husband to be changed after a divorce. It must follow,
considered as of 1910, or 1914, or 1922, and whether the therefore, in the absence of a statute to the contrary, that if a
case be considered in the light of the Code of Commerce, the policy is taken out upon a husband's life the wife is named as
Civil Code, or the Insurance Act, the deficiencies in the law will beneficiary therein, a subsequent divorce does not destroy her
have to be supplemented by the general principles prevailing rights under the policy.
on the subject. To that end, we have gathered the rules which
follow from the best considered American authorities. In These are some of the pertinent principles of the Law of
adopting these rules, we do so with the purpose of having the Insurance. To reinforce them, we would, even at the expense
Philippine Law of Insurance conform as nearly as possible to of clogging the decision with unnecessary citation of authority,
bring to notice certain decisions which seem to us to have they were divorced, and alimony was decreed and paid
controlling influence. to the wife, and there was never any issue of the
marriage. They both subsequently married again, after
To begin with, it is said that our Insurance Act is mostly taken which, in February, 1871, George F. Schaefer died.
from the statute of California. It should prove of interest, This action was brought by Francisca, the survivor.
therefore, to know the stand taken by the Supreme Court of
that State. A California decision oft cited in the Cyclopedias xxx           xxx           xxx
is Yore vs. Booth ([1895]), 110 Cal., 238; 52 Am. St. Rep., 81),
in which we find the following: The other point, relating to the alleged cessation of
insurable interest by reason of the divorce of the
. . . It seems to be the settled doctrine, with but slight parties, is entitled to more serious consideration,
dissent in the courts of this country, that a person who although we have very little difficulty in disposing of it.
procures a policy upon his own life, payable to a
designated beneficiary, although he pays the premiums It will be proper, in the first place, to ascertain what is
himself, and keeps the policy in his exclusive an insurable interest. It is generally agreed that mere
possession, has no power to change the beneficiary, wager policies, that is, policies in which the insured
unless the policy itself, or the charter of the insurance party has no interest in its loss or destruction, are void,
company, so provides. In policy, although he has as against public policy. . . . But precisely what interest
parted with nothing, and is simply the object of is necessary, in order to take a policy out of the
another's bounty, has acquired a vested and category of mere wager, has been the subject of much
irrevocable interest in the policy, which he may keep discussion. In marine and fire insurance the difficulty is
alive for his own benefit by paying the premiums or not so great, because there insurance is considered as
assessments if the person who effected the insurance strictly an indemnity. But in life insurance the loss can
fails or refuses to do so. seldom be measured by pecuniary values. Still, an
interest of some sort in the insured life must exist. A
As carrying great weight, there should also be taken into man cannot take out insurance on the life of a total
account two decisions coming from the Supreme Court of the stranger, nor on that of one who is not so connected
United States. The first of these decisions, in point of time, with him as to make the continuance of the life a matter
is Connecticut Mutual Life Insurance Company vs of some real interest to him.
Schaefer ([1877]), 94 U.S., 457). There, Mr. Justice Bradley,
delivering the opinion of the court, in part said: It is well settled that a man has an insurable interest in
his own life and in that of his wife and children; a
This was an action on a policy of the court, in part said: woman in the life of her husband; and the creditor in
July 25, 1868, on the joint lives of George F. and the life of his debtor. Indeed it may be said generally
Francisca Schaefer, then husband and wife, payable to that any reasonable expectation of pecuniary benefit or
the survivor on the death of either. In January, 1870, advantage from the continued life of another creates an
 insurable interest in such life. And there is no doubt can avail himself; nor upon his death have his personal
that a man may effect an insurance on his own life for representatives or his creditors any interest in the
the benefit of a relative or fried; or two or more proceeds of such contracts, which belong to the
persons, on their joint lives, for the benefit of the beneficiaries to whom they are payable.
survivor or survivors. The old tontines were based
substantially on this principle, and their validity has It is indeed the general rule that a policy, and the
never been called in question. money to become due under it, belong, the moment it
is issued, to the person or persons named in it as the
xxx           xxx           xxx beneficiary or beneficiaries, and that there is no power
in the person procuring the insurance, by any act of
The policy in question might, in our opinion, be his, by deed or by will, to transfer to any other person
sustained as a joint insurance, without reference to any the interest of the person named.
other interest, or to the question whether the cessation
of interest avoids a policy good at its inception. We do A jurisdiction which found itself in somewhat the same
not hesitate to say, however, that a policy taken out in situation as the Philippines, because of having to reconcile the
good faith and valid at its inception, is not avoided by civil law with the more modern principles of insurance, is
the cessation of the insurable interest, unless such be Louisiana. In a case coming before the Federal Courts, In re
the necessary effect of the provisions of the policy Dreuil & Co. ([1915]), 221 Fed., 796), the facts were that an
itself. . . . endowment insurance policy provided for payment of the
amount thereof at the expiration of twenty years to the insured,
. . . .In our judgment of life policy, originally valid, does or his executors, administrators, or assigns, with the proviso
not cease to be so by the cessation of the assured that, if the insured die within such period, payment was to be
party's interest in the life insured. made to his wife if she survive him. It was held that the wife
has a vested interest in the policy, of which she cannot be
Another controlling decision of the United States Supreme deprived without her consent. Foster, District Judge,
Court is that of the Central National Bank of Washington City announced:
vs. Hume ([1888], 128 U.S., 134). Therein, Mr. Chief Justice
Fuller, as the organ of the court, announced the following In so far as the law of Louisiana is concerned, it may
doctrines: also be considered settled that where a policy is of the
semitontine variety, as in this case, the beneficiary has
We think it cannot be doubted that in the instance of a vested right in the policy, of which she cannot be
contracts of insurance with a wife or children, or both, deprived without her consent. (Lambert vs Penn Mutual
upon their insurable interest in the life of the husband Life Ins. Co., 50 La. Ann., 1027; 24 South., 16.) (See in
or father, the latter, while they are living, can exercise same connection a leading decision of the Louisiana
no power of disposition over the same without their Supreme Court, Re Succession of Leonce Desforges,
consent, nor has he any interest therein of which he [1914], 52 L.R.A. [N.S.], 689.)
Some question has arisen as to the power of the insured to interest of his wards. But however that may be, it is
destroy the vested interest of the beneficiary in the policy. That manifest that the option can only be exercised by those
point is well covered in the case of Entwistle vs. Travelers having the full legal interest in the policy, or by their
Insurance Company ([1902], 202 Pa. St., 141). To quote: assignee. Neither the husband, nor the wife, nor both
together had power to destroy the vested interest of the
. . . The interest of the wife was wholly contingent upon children in the policy.
her surviving her husband, and she could convey no
greater interest in the policy than she herself had. The The case most nearly on all fours with the one at bar is that
interest of the children of the insured, which was of Wallace vs Mutual Benefit Life Insurance Co. ([1906], 97
created for them by the contract when the policy was Minn., 27; 3 L.R.A. [N.S.], 478). The opinion there delivered
issued; vested in them at the same time that the also invokes added interest when it is noted that it was written
interest of the wife became vested in her. Both by Mr. Justice Elliott, the author of a text on insurance, later a
interests were contingent. If the wife die before the member of this court. In the Minnesota case cited, one
insured, she will take nothing under the policy. If the Wallace effected a "twenty-year endowment" policy of
insured should die before the wife, then the children insurance on his life, payable in the event of his death within
take nothing under the policy. We see no reason to twenty years to Emma G. Wallace, his wife, but, if he lived, to
discriminate between the wife and the children. They himself at the end of twenty years. If Wallace died before the
are all payees, under the policy, and together death of his wife, within the twenty years, the policy was
constitute the assured. payable to the personal representatives of the insured. During
the pendency of divorce proceedings, the parties signed a
The contingency which will determine whether the wife, contract by which Wallace agreed that, if a divorce was
or the children as a class will take the proceeds, has granted to Mrs. Wallace, the court might award her certain
not as yet happened; all the beneficiaries are living, specified property as alimony, and Mrs. Wallace agreed to
and nothing has occurred by which the rights of the relinquish all claim to any property arising out of the relation of
parties are in any way changed. The provision that the husband and wife. The divorce was granted. An action was
policy may be converted into cash at the option of the brought by Wallace to compel Mrs. Wallace to relinquish her
holder does not change the relative rights of the interest in the insurance policy. Mr. Justice Elliott said:
parties. We agree entirely with the suggestion that
"holder" or "holders", as used in this connection, As soon as the policy was issued Mrs. Wallace
means those who in law are the owners of the policy, acquired a vested interest therein, of which she could
and are entitled to the rights and benefits which may not be deprived without her consent, except under the
accrue under it; in other words, all the beneficiaries; in terms of the contract with the insurance company. No
the present case, not only the wife, by the children of right to change the beneficiary was reserved. Her
the insured. If for any reason, prudence required the interest in the policy was her individual property,
conversion of the policy into cash, a guardian would subject to be divested only by her death, the lapse of
have no special difficulty in reasonable protecting the time, or by the failure of the insured to pay the
 premiums. She could keep the policy alive by paying was thereafter again married to one who sustained the
the premiums, if the insured did not do so. It was relation of wife to him at the time of his death.
contingent upon these events, but it was free from the
control of her husband. He had no interest in her The rights of a beneficiary in an ordinary life insurance
property in this policy, contingent or otherwise. Her policy become vested upon the issuance of the policy,
interest was free from any claim on the part of the and can thereafter, during the life of the beneficiary, be
insured or his creditors. He could deprive her of her defeated only as provided by the terms of the policy.
interest absolutely in but one way, by living more than
twenty years. We are unable to see how the plaintiff's If space permitted, the following corroborative authority could
interest in the policy was primary or superior to that of also be taken into account: Joyce, The Law of Insurance,
the husband. Both interests were contingent, but they second edition, vol. 2, pp. 1649 et seq.; 37 Corpus Juris, pp.
were entirely separate and distinct, the one from the 394 et seq.; 14 R.C.L., pp. 1376 et seq.; Green vs.
other. The wife's interest was not affected by the Green ([1912], 147 Ky., 608; 39 L.R.A. [N.S.],
decree of court which dissolved the marriage contract 370); Washington Life Insurance Co. vs. Berwald ([1903], 97
between the parties. It remains her separate property, Tex., 111); Begley vs. Miller ([1907]), 137 Ill., App., 278); Blum
after the divorce as before. . . vs. New York L. Ins. Co. ([1906], 197 Mo., 513; 8 L.R.A. [N.S.],
923; Union Central Life Ins. Co. vs. Buxer ([1900], 62 Ohio St.,
. . . . The fact that she was his wife at the time the 385; 49 L.R.A., 737); Griffith vs. New York Life Ins. Co.
policy was issued may have been, and undoubtedly ([1894], 101 Cal., 627; 40 Am. St. Rep., 96); Preston vs.
was, the reason why she was named as beneficiary in Conn. Mut. L. Ins. Co. of Hartford([1902]); 95 Md.,
the event of his death. But her property interest in the 101); Snyder vs. Supreme Ruler of Fraternal Mystic
policy after it was issued did not in any reasonable Circle ([1909], 122 Tenn. 248; 45 L.R.A. [N.S.], 209); Lloyd vs.
sense arise out of the marriage relation. Royal Union Mut. L. Ins. Co. ([1917], 245 Fed., 162); Phoenix
Mut. L. Ins. Co. vs. Dunham ([1878], 46 Conn., 79; 33 Am.
Somewhat the same question came before the Supreme Court Rep., 14); McKee vs. Phoenix Ins. Co. ([1859], 28 Mo., 383;
of Kansas in the leading case of Filley vs. Illinois Life 75 Am. Rep., 129); Supreme Council American Legion of
Insurance Company ([1914]), 91 Kansas, 220; L.R.A. [1915 Honor vs. Smith and Smith ([1889], 45 N.J. Eq.,
D], 130). It was held, following consideration extending to two 466); Overhiser vs. Overhiser ([1900], 63 Ohio St., 77; 81 Am.
motions for rehearing, as follows: St. Rep., 612; 50 L.R.A., 552); Condon vs. New York Life
Insurance Co. ([1918], 183 Iowa, 658); with which
The benefit accruing from a policy of life insurance compare Foster vs. Gile ([1880], 50 Wis., 603) and Hatch vs.
upon the life of a married man, payable upon his death Hatch ([1904], 35 Tex. Civ. App., 373).
to his wife, naming her, is payable to the surviving
beneficiary named, although she may have years On the admitted facts and the authorities supporting the nearly
thereafter secured a divorce from her husband, and he universally accepted principles of insurance, we are irresistibly
led to the conclusion that the question at issue must be local distributor of products bearing trademarks owned by Levi
answered in the negative. Strauss & Co.. IMC and LSPI separately obtained from
respondent fire insurance policies with book debt
The judgment appealed from will be reversed and the endorsements. The insurance policies provide for coverage on
complaint ordered dismissed as to the appellant, without "book debts in connection with ready-made clothing materials
special pronouncement as to the costs in either instance. So which have been sold or delivered to various customers and
ordered. dealers of the Insured anywhere in the Philippines."2 The
policies defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after
the time of the loss covered under this Policy." 3 The policies
also provide for the following conditions:
G.R. No. 147839             June 8, 2006
1. Warranted that the Company shall not be liable for
GAISANO CAGAYAN, INC. Petitioner, 
any unpaid account in respect of the merchandise sold
vs.
and delivered by the Insured which are outstanding at
INSURANCE COMPANY OF NORTH
the date of loss for a period in excess of six (6) months
AMERICA, Respondent.
from the date of the covering invoice or actual delivery
of the merchandise whichever shall first occur.
DECISION
2. Warranted that the Insured shall submit to the
AUSTRIA-MARTINEZ, J.: Company within twelve (12) days after the close of
every calendar month all amount shown in their books
Before the Court is a petition for review on certiorari of the of accounts as unpaid and thus become receivable
Decision1 dated October 11, 2000 of the Court of Appeals (CA) item from their customers and dealers. x x x4
in CA-G.R. CV No. 61848 which set aside the Decision dated
August 31, 1998 of the Regional Trial Court, Branch 138, xxxx
Makati (RTC) in Civil Case No. 92-322 and upheld the causes
of action for damages of Insurance Company of North America
Petitioner is a customer and dealer of the products of IMC and
(respondent) against Gaisano Cagayan, Inc. (petitioner); and
LSPI. On February 25, 1991, the Gaisano Superstore
the CA Resolution dated April 11, 2001 which denied
Complex in Cagayan de Oro City, owned by petitioner, was
petitioner's motion for reconsideration.
consumed by fire. Included in the items lost or destroyed in the
fire were stocks of ready-made clothing materials sold and
The factual background of the case is as follows: delivered by IMC and LSPI.

Intercapitol Marketing Corporation (IMC) is the maker of On February 4, 1992, respondent filed a complaint for
Wrangler Blue Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the damages against petitioner. It alleges that IMC and LSPI filed
with respondent their claims under their respective fire Dissatisfied, petitioner appealed to the CA.9 On October 11,
insurance policies with book debt endorsements; that as of 2000, the CA rendered its decision setting aside the decision
February 25, 1991, the unpaid accounts of petitioner on the of the RTC. The dispositive portion of the decision reads:
sale and delivery of ready-made clothing materials with IMC
was P2,119,205.00 while with LSPI it was P535,613.00; that WHEREFORE, in view of the foregoing, the appealed decision
respondent paid the claims of IMC and LSPI and, by virtue is REVERSED and SET ASIDE and a new one is entered
thereof, respondent was subrogated to their rights against ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
petitioner; that respondent made several demands for
payment upon petitioner but these went unheeded.5 1. the amount of P2,119,205.60 representing the
amount paid by the plaintiff-appellant to the insured
In its Answer with Counter Claim dated July 4, 1995, petitioner Inter Capitol Marketing Corporation, plus legal interest
contends that it could not be held liable because the property from the time of demand until fully paid;
covered by the insurance policies were destroyed due to
fortuities event or force majeure; that respondent's right of 2. the amount of P535,613.00 representing the amount
subrogation has no basis inasmuch as there was no breach of paid by the plaintiff-appellant to the insured Levi
contract committed by it since the loss was due to fire which it Strauss Phil., Inc., plus legal interest from the time of
could not prevent or foresee; that IMC and LSPI never demand until fully paid.
communicated to it that they insured their properties; that it
never consented to paying the claim of the insured.6 With costs against the defendant-appellee.

At the pre-trial conference the parties failed to arrive at an SO ORDERED.10

amicable settlement.7 Thus, trial on the merits ensued.
The CA held that the sales invoices are proofs of sale, being
On August 31, 1998, the RTC rendered its decision dismissing detailed statements of the nature, quantity and cost of the
respondent's complaint.8 It held that the fire was purely thing sold; that loss of the goods in the fire must be borne by
accidental; that the cause of the fire was not attributable to the petitioner since the proviso contained in the sales invoices is
negligence of the petitioner; that it has not been established an exception under Article 1504 (1) of the Civil Code, to the
that petitioner is the debtor of IMC and LSPI; that since the general rule that if the thing is lost by a fortuitous event, the
sales invoices state that "it is further agreed that merely for risk is borne by the owner of the thing at the time the loss
purpose of securing the payment of purchase price, the above- under the principle of res perit domino; that petitioner's
described merchandise remains the property of the vendor obligation to IMC and LSPI is not the delivery of the lost goods
until the purchase price is fully paid", IMC and LSPI retained but the payment of its unpaid account and as such the
ownership of the delivered goods and must bear the loss. obligation to pay is not extinguished, even if the fire is
considered a fortuitous event; that by subrogation, the insurer
has the right to go against petitioner; that, being a fire
insurance with book debt endorsements, what was insured As to the second error, petitioner avers that despite delivery of
was the vendor's interest as a creditor.11 the goods, petitioner-buyer IMC and LSPI assumed the risk of
loss when they secured fire insurance policies over the goods.
Petitioner filed a motion for reconsideration12 but it was denied
by the CA in its Resolution dated April 11, 2001.13 Concerning the third ground, petitioner submits that there is no
subrogation in favor of respondent as no valid insurance could
Hence, the present petition for review on certiorari anchored be maintained thereon by IMC and LSPI since all risk had
on the following Assignment of Errors: transferred to petitioner upon delivery of the goods; that
petitioner was not privy to the insurance contract or the
THE COURT OF APPEALS ERRED IN HOLDING THAT THE payment between respondent and its insured nor was its
INSURANCE IN THE INSTANT CASE WAS ONE OVER consent or approval ever secured; that this lack of privity
CREDIT. forecloses any real interest on the part of respondent in the
obligation to pay, limiting its interest to keeping the insured
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL goods safe from fire.
RISK OVER THE SUBJECT GOODS IN THE INSTANT CASE
HAD TRANSFERRED TO PETITIONER UPON DELIVERY For its part, respondent counters that while ownership over the
THEREOF. ready- made clothing materials was transferred upon delivery
to petitioner, IMC and LSPI have insurable interest over said
THE COURT OF APPEALS ERRED IN HOLDING THAT goods as creditors who stand to suffer direct pecuniary loss
THERE WAS AUTOMATIC SUBROGATION UNDER ART. from its destruction by fire; that petitioner is liable for loss of
2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14 the ready-made clothing materials since it failed to overcome
the presumption of liability under Article 126516 of the Civil
Anent the first error, petitioner contends that the insurance in Code; that the fire was caused through petitioner's negligence
the present case cannot be deemed to be over credit since an in failing to provide stringent measures of caution, care and
insurance "on credit" belies not only the nature of fire maintenance on its property because electric wires do not
insurance but the express terms of the policies; that it was not usually short circuit unless there are defects in their installation
credit that was insured since respondent paid on the occasion or when there is lack of proper maintenance and supervision
of the loss of the insured goods to fire and not because of the of the property; that petitioner is guilty of gross and evident
non-payment by petitioner of any obligation; that, even if the bad faith in refusing to pay respondent's valid claim and
insurance is deemed as one over credit, there was no loss as should be liable to respondent for contracted lawyer's fees,
the accounts were not yet due since no prior demands were litigation expenses and cost of suit.17
made by IMC and LSPI against petitioner for payment of the
debt and such demands came from respondent only after it As a general rule, in petitions for review, the jurisdiction of this
had already paid IMC and LSPI under the fire insurance Court in cases brought before it from the CA is limited to
policies.15 reviewing questions of law which involves no examination of
the probative value of the evidence presented by the litigants
or any of them.18 The Supreme Court is not a trier of facts; it is It is well-settled that when the words of a contract are plain
not its function to analyze or weigh evidence all over and readily understood, there is no room for construction. 22 In
again.19 Accordingly, findings of fact of the appellate court are this case, the questioned insurance policies provide coverage
generally conclusive on the Supreme Court.20 for "book debts in connection with ready-made clothing
materials which have been sold or delivered to various
Nevertheless, jurisprudence has recognized several customers and dealers of the Insured anywhere in the
exceptions in which factual issues may be resolved by this Philippines."23 ; and defined book debts as the "unpaid account
Court, such as: (1) when the findings are grounded entirely on still appearing in the Book of Account of the Insured 45 days
speculation, surmises or conjectures; (2) when the inference after the time of the loss covered under this Policy."24 Nowhere
made is manifestly mistaken, absurd or impossible; (3) when is it provided in the questioned insurance policies that the
there is grave abuse of discretion; (4) when the judgment is subject of the insurance is the goods sold and delivered to the
based on a misapprehension of facts; (5) when the findings of customers and dealers of the insured.
facts are conflicting; (6) when in making its findings the CA
went beyond the issues of the case, or its findings are contrary Indeed, when the terms of the agreement are clear and explicit
to the admissions of both the appellant and the appellee; (7) that they do not justify an attempt to read into it any alleged
when the findings are contrary to the trial court; (8) when the intention of the parties, the terms are to be understood literally
findings are conclusions without citation of specific evidence just as they appear on the face of the contract.25 Thus, what
on which they are based; (9) when the facts set forth in the were insured against were the accounts of IMC and LSPI with
petition as well as in the petitioner's main and reply briefs are petitioner which remained unpaid 45 days after the loss
not disputed by the respondent; (10) when the findings of fact through fire, and not the loss or destruction of the goods
are premised on the supposed absence of evidence and delivered.
contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by Petitioner argues that IMC bears the risk of loss because it
the parties, which, if properly considered, would justify a expressly reserved ownership of the goods by stipulating in
different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the sales invoices that "[i]t is further agreed that merely for
the present petition. purpose of securing the payment of the purchase price the
above described merchandise remains the property of the
At issue is the proper interpretation of the questioned vendor until the purchase price thereof is fully paid."26
insurance policy. Petitioner claims that the CA erred in
construing a fire insurance policy on book debts as one The Court is not persuaded.
covering the unpaid accounts of IMC and LSPI since such
insurance applies to loss of the ready-made clothing materials The present case clearly falls under paragraph (1), Article
sold and delivered to petitioner. 1504 of the Civil Code:

The Court disagrees with petitioner's stand. ART. 1504. Unless otherwise agreed, the goods remain at the
seller's risk until the ownership therein is transferred to the
buyer, but when the ownership therein is transferred to the Therefore, an insurable interest in property does not
buyer the goods are at the buyer's risk whether actual delivery necessarily imply a property interest in, or a lien upon, or
has been made or not, except that: possession of, the subject matter of the insurance, and neither
the title nor a beneficial interest is requisite to the existence of
(1) Where delivery of the goods has been made to the buyer such an interest, it is sufficient that the insured is so situated
or to a bailee for the buyer, in pursuance of the contract and with reference to the property that he would be liable to loss
the ownership in the goods has been retained by the seller should it be injured or destroyed by the peril against which it is
merely to secure performance by the buyer of his obligations insured.29 Anyone has an insurable interest in property who
under the contract, the goods are at the buyer's risk from the derives a benefit from its existence or would suffer loss from
time of such delivery; (Emphasis supplied) its destruction.30Indeed, a vendor or seller retains an insurable
interest in the property sold so long as he has any interest
xxxx therein, in other words, so long as he would suffer by its
destruction, as where he has a vendor's lien. 31 In this case, the
Thus, when the seller retains ownership only to insure that the insurable interest of IMC and LSPI pertain to the unpaid
buyer will pay its debt, the risk of loss is borne by the accounts appearing in their Books of Account 45 days after the
buyer.27 Accordingly, petitioner bears the risk of loss of the time of the loss covered by the policies.
goods delivered.
The next question is: Is petitioner liable for the unpaid
IMC and LSPI did not lose complete interest over the goods. accounts?
They have an insurable interest until full payment of the value
of the delivered goods. Unlike the civil law concept of res perit Petitioner's argument that it is not liable because the fire is a
domino, where ownership is the basis for consideration of who fortuitous event under Article 117432 of the Civil Code is
bears the risk of loss, in property insurance, one's interest is misplaced. As held earlier, petitioner bears the loss under
not determined by concept of title, but whether insured has Article 1504 (1) of the Civil Code.
substantial economic interest in the property.28
Moreover, it must be stressed that the insurance in this case is
Section 13 of our Insurance Code defines insurable interest as not for loss of goods by fire but for petitioner's accounts with
"every interest in property, whether real or personal, or any IMC and LSPI that remained unpaid 45 days after the fire.
relation thereto, or liability in respect thereof, of such nature Accordingly, petitioner's obligation is for the payment of
that a contemplated peril might directly damnify the insured." money. As correctly stated by the CA, where the obligation
Parenthetically, under Section 14 of the same Code, an consists in the payment of money, the failure of the debtor to
insurable interest in property may consist in: (a) an existing make the payment even by reason of a fortuitous event shall
interest; (b) an inchoate interest founded on existing interest; not relieve him of his liability.33 The rationale for this is that the
or (c) an expectancy, coupled with an existing interest in that rule that an obligor should be held exempt from liability when
out of which the expectancy arises. the loss occurs thru a fortuitous event only holds true when the
obligation consists in the delivery of a determinate thing and
there is no stipulation holding him liable even in case of action against petitioner is squarely sanctioned by Article 2207
fortuitous event. It does not apply when the obligation is of the Civil Code which provides:
pecuniary in nature.34
Art. 2207. If the plaintiff's property has been insured, and he
Under Article 1263 of the Civil Code, "[i]n an obligation to has received indemnity from the insurance company for the
deliver a generic thing, the loss or destruction of anything of injury or loss arising out of the wrong or breach of contract
the same kind does not extinguish the obligation." If the complained of, the insurance company shall be subrogated to
obligation is generic in the sense that the object thereof is the rights of the insured against the wrongdoer or the person
designated merely by its class or genus without any particular who has violated the contract. x x x
designation or physical segregation from all others of the same
class, the loss or destruction of anything of the same kind Petitioner failed to refute respondent's evidence.
even without the debtor's fault and before he has incurred in
delay will not have the effect of extinguishing the As to LSPI, respondent failed to present sufficient evidence to
obligation.35 This rule is based on the principle that the genus prove its cause of action. No evidentiary weight can be given
of a thing can never perish. Genus nunquan perit.36 An to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from
obligation to pay money is generic; therefore, it is not excused petitioner's General Manager, Stephen S. Gaisano, Jr., since it
by fortuitous loss of any specific property of the debtor.37 is not an admission of petitioner's unpaid account with LSPI. It
only confirms the loss of Levi's products in the amount
Thus, whether fire is a fortuitous event or petitioner was of P535,613.00 in the fire that razed petitioner's building on
negligent are matters immaterial to this case. What is relevant February 25, 1991.
here is whether it has been established that petitioner has
outstanding accounts with IMC and LSPI. Moreover, there is no proof of full settlement of the insurance
claim of LSPI; no subrogation receipt was offered in evidence.
With respect to IMC, the respondent has adequately Thus, there is no evidence that respondent has been
established its claim. Exhibits "C" to "C-22"38 show that subrogated to any right which LSPI may have against
petitioner has an outstanding account with IMC in the amount petitioner. Failure to substantiate the claim of subrogation is
of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing fatal to petitioner's case for recovery of the amount
payment to IMC. Exhibit "F"40 is the subrogation receipt of P535,613.00.
executed by IMC in favor of respondent upon receipt of the
insurance proceeds. All these documents have been properly WHEREFORE, the petition is partly GRANTED. The assailed
identified, presented and marked as exhibits in court. The Decision dated October 11, 2000 and Resolution dated April
subrogation receipt, by itself, is sufficient to establish not only 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
the relationship of respondent as insurer and IMC as the are AFFIRMED with the MODIFICATION that the order to pay
insured, but also the amount paid to settle the insurance claim. the amount of P535,613.00 to respondent is DELETED for
The right of subrogation accrues simply upon payment by the lack of factual basis. No pronouncement as to costs. SO
insurance company of the insurance claim.41 Respondent's ORDERED.