G.R. No.

156956

October 9, 2006

REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His Capacity as Insurance

Commissioner,
petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.

DECISION

PANGANIBAN, CJ.:
The securities required by the Insurance Code to be deposited with the Insurance
Commissioner are intended to answer for the claims of all policy holders in the event that the
depositing insurance company becomes insolvent or otherwise unable to satisfy their claims.
The security deposit must be ratably distributed among all the insured who are entitled to their
respective shares; it cannot be garnished or levied upon by a single claimant, to the detriment of
the others.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the
January 16, 2003 Order2 of the Regional Court (RTC) of Quezon City (Branch 221) in Civil Case
No. Q-97-30412. The RTC found Insurance Commissioner Eduardo T. Malinis guilty of indirect
contempt for refusing to comply with the December 18, 2002 Resolution3 of the lower court. The
January 16, 2003 Order states in full:
"On January 8, 2003, [respondent] filed a Motion to Cite Commissioner Eduardo T.
Malinis of the Office of the Insurance Commission in Contempt of Court because of his
failure and refusal to obey the lawful order of this court embodied in a Resolution dated
December 18, 2002 directing him to allow the withdrawal of the security deposit of
Capital Insurance and Surety Co. (CISCO) in the amount of P11,835,375.50 to be paid
to Sheriff Manuel Paguyo in the satisfaction of the Notice of Garnishment pursuant to a
Decision of this Court which has become final and executory.
"During the hearing of the Motion set last January 10, 2003, Commissioner Malinis or his
counsel or his duly authorized representative failed to appear despite notice in utter
disregard of the order of this Court. However, Commissioner Malinis filed on January 15,
2003 a written Comment reiterating the same grounds already passed upon and rejected
by this Court. This Court finds no lawful justification or excuse for Commissioner Malinis'
refusal to implement the lawful orders of this Court.
"Wherefore, premises considered and after due hearing, Commissioner Eduardo T.
Malinis is hereby declared guilty of Indirect Contempt of Court pursuant to Section 3 [of]

Rule 71 of the 1997 Rules of Civil Procedure for willfully disobeying and refusing to
implement and obey a lawful order of this Court."4
The Facts
On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412, finding the
defendants (Vilfran Liner, Inc., Hilaria Villegas and Maura Villegas) jointly and severally liable to
pay Del Monte Motors, Inc., P11,835,375.50 representing the balance of Vilfran Liner's service
contracts with respondent. The trial court further ordered the execution of the Decision against
the counterbond posted by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and
Surety Co., Inc. (CISCO).
On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent, claiming that
the latter had no record or document regarding the alleged issuance of the counterbond; thus,
the bond was not valid and enforceable.
On June 13, 2002, the RTC granted the Motion for Execution and issued the corresponding
Writ. Armed with this Writ, Sheriff Manuel S. Paguyo proceeded to levy on the properties of
CISCO. He also issued a Notice of Garnishment on several depository banks of the insurance
company. Moreover, he served a similar notice on the Insurance Commission, so as to enforce
the Writ on the security deposit filed by CISCO with the Commission in accordance with Section
203 of the Insurance Code.
On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled that the
Notice of Garnishment served by Sheriff Paguyo on the insurance commission was valid. The
trial court added that the letter and spirit of the law made the security deposit answerable for
contractual obligations incurred by CISCO under the insurance contracts the latter had entered
into. The RTC resolved thus:
"Furthermore, the Commissioner of the Office of the Insurance Commission is hereby
ordered to comply with its obligations under the Insurance Code by upholding the
integrity and efficacy of bonds validly issued by duly accredited Bonding and Insurance
Companies; and to safeguard the public interest by insuring the faithful performance to
enforce contractual obligations under existing bonds. Accordingly said office is ordered
to withdraw from the security deposit of Capital Insurance & Surety Company, Inc. the
amount of P11,835.50 to be paid to Sheriff Manuel S. Paguyo in satisfaction of the
Notice of Garnishment served on August 16, 2002."5
On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo T. Malinis in
contempt of court for his refusal to obey the December 18, 2002 Resolution of the trial court.
Ruling of the Trial Court
The RTC held Insurance Commissioner Malinis in contempt for his refusal to implement its
Order. It explained that the commissioner had no legal justification for his refusal to allow the
withdrawal of CISCO's security deposit.
Hence, this Petition.6
Issues

Petitioner raises this sole issue for the Court's consideration:

"Whether or not the security deposit held by the Insurance Commissioner pursuant to
Section 203 of the Insurance Code may be levied or garnished in favor of only one
insured."7
The Court's Ruling
The Petition is meritorious.
Preliminary
Propriety of Review

Issue:

Before discussing the principal issue, the Court will first dispose of the question of mootness.
Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the treasurer of
the Philippines a letter dated March 26, 2003, stating that the former had no objection to the
release of the security deposit to Del Monte Motors. Portions of the fund were consequently
released to respondent in July, October, and December 2003. Thus, the issue arises: whether
these circumstances render the case moot.
Petitioner, however, contends that the partial releases should not be construed as an
abandonment of its stand that security deposits under Section 203 of the Insurance Code are
exempt from levy and garnishment. The Republic claims that the releases were made pursuant
to the commissioner's power of control over the fund, not to the lower court's Order of
garnishment. Petitioner further invokes the jurisdiction of this Court to put to rest the principal
issue of whether security deposits made with the Insurance Commission may be levied and
garnished.
The issue is not totally moot. To stress, only a portion of respondent's claim was satisfied, and
the Insurance Commission has required CISCO to replenish the latter's security deposit.
Respondent, therefore, may one day decide to further garnish the security deposit, once
replenished. Moreover, after the questioned Order of the lower court was issued, similar claims
on the security deposits of various insurance companies have been made before the Insurance
Commission. To set aside the resolution of the issue will only postpone a task that is certain to
crop up in the future.
Besides, the business of insurance is imbued with public interest. It is subject to regulation by
the State, with respect not only to the relations between the insurer and the insured, but also to
the internal affairs of insurance companies.8 As this case is undeniably endowed with public
interest and involves a matter of public policy, this Court shall not shirk from its duty to educate
the bench and the bar by formulating guiding and controlling principles, precepts, doctrines and
rules.9
Principal
Exemption of Security Deposit from Levy or Garnishment
Section 203 of the Insurance Code provides as follows:

Issue:

"Sec. 203. Every domestic insurance company shall, to the extent of an amount equal in
value to twenty-five per centum of the minimum paid-up capital required under section
one hundred eighty-eight, invest its funds only in securities, satisfactory to the
Commissioner, consisting of bonds or other evidences of debt of the Government of the
Philippines or its political subdivisions or instrumentalities, or of government-owned or
controlled corporations and entities, including the Central Bank of the Philippines:
Provided, That such investments shall at all times be maintained free from any lien or
encumbrance; and Provided, further, That such securities shall be deposited with and
held by the Commissioner for the faithful performance by the depositing insurer of all its
obligations under its insurance contracts. The provisions of section one hundred
ninety-two shall, so far as practicable, apply to the securities deposited under this
section.
"Except as otherwise provided in this Code, no judgment creditor or other claimant
shall have the right to levy upon any of the securities of the insurer held on
deposit pursuant to the requirement of the Commissioner." (Emphasis supplied)
Respondent notes that Section 203 does not provide for an absolute prohibition on the levy and
garnishment of the security deposit. It contends that the law requires the deposit, precisely to
ensure faithful performance of all the obligations of the depositing insurer under the latter's
various insurance contracts. Hence, respondent claims that the security deposit should be
answerable for the counterbond issued by CISCO.
The Court is not convinced. As worded, the law expressly and clearly states that the security
deposit shall be (1) answerable for all the obligations of the depositing insurer under its
insurance contracts; (2) at all times free from any liens or encumbrance; and (3) exempt from
levy by any claimant.
To be sure, CISCO, though presently under conservatorship, has valid outstanding policies. Its
policy holders have a right under the law to be equally protected by its security deposit. To allow
the garnishment of that deposit would impair the fund by decreasing it to less than the
percentage of paid-up capital that the law requires to be maintained. Further, this move would
create, in favor of respondent, a preference of credit over the other policy holders and
beneficiaries.
Our Insurance Code is patterned after that of California. 10 Thus, the ruling of the state's
Supreme Court on a similar concept as that of the security deposit is instructive. Engwicht v.
Pacific States Life Assurance Co.11 held that the money required to be deposited by a mutual
assessment insurance company with the state treasurer was "a trust fund to be ratably
distributed amongst all the claimants entitled to share in it. Such a distribution cannot be had
except in an action in the nature of a creditors' bill, upon the hearing of which, and with all the
parties interested in the fund before it, the court may make equitable distribution of the fund, and
appoint a receiver to carry that distribution into effect."12
Basic is the statutory construction rule that provisions of a statute should be construed in
accordance with the purpose for which it was enacted. 13 That is, the securities are held as a
contingency fund to answer for the claims against the insurance company by all its policy
holders and their beneficiaries. This step is taken in the event that the company becomes
insolvent or otherwise unable to satisfy the claims against it. Thus, a single claimant may not lay

stake on the securities to the exclusion of all others. The other parties may have their own
claims against the insurance company under other insurance contracts it has entered into.
Respondent's Inchoate Right
The right to lay claim on the fund is dependent on the solvency of the insurer and is subject to
all other obligations of the company arising from its insurance contracts. Thus, respondent's
interest is merely inchoate. Being a mere expectancy, it has no attribute of property. At this time,
it is nonexistent and may never exist.14 Hence, it would be premature to make the security
deposit answerable for CISCO's present obligation to Del Monte Motors.
Moreover, since insolvency proceedings against CISCO have yet to be conducted, it would be
impossible to establish at this time which claimants are entitled to the security deposit and in
what pro-rated amounts. Only after all other claimants under subsisting policies issued by
CISCO have been heard can respondent's share be determined.
Powers of the Commissioner
The Insurance Code has vested the Office of the Insurance Commission with both regulatory
and adjudicatory authority over insurance matters.15
The general regulatory authority of the insurance commissioner is described in Section 414 of
the Code as follows:
"Sec. 414. The Insurance Commissioner shall have the duty to see that all laws relating
to insurance, insurance companies and other insurance matters, mutual benefit
associations, and trusts for charitable uses are faithfully executed and to perform the
duties imposed upon him by this Code, and shall, notwithstanding any existing laws to
the contrary, have sole and exclusive authority to regulate the issuance and sale of
variable contracts as defined in section two hundred thirty-two and to provide for the
licensing of persons selling such contracts, and to issue such reasonable rules and
regulations governing the same.
"The Commissioner may issue such rulings, instructions, circulars, orders and decisions
as he may deem necessary to secure the enforcement of the provisions of this Code,
subject to the approval of the Secretary of Finance. Except as otherwise specified,
decisions made by the Commissioner shall be appealable to the Secretary of Finance."
(Emphasis supplied)
Pursuant to these regulatory powers, the commissioner is authorized to (1) issue (or to refuse to
issue) certificates of authority to persons or entities desiring to engage in insurance business in
the Philippines;16 (2) revoke or suspend these certificates of authority upon finding grounds for
the revocation or suspension;17 (3) impose upon insurance companies, their directors and/or
officers and/or agents appropriate penalties -- fines, suspension or removal from office -- for
failing to comply with the Code or with any of the commissioner's orders, instructions,
regulations or rulings, or for otherwise conducting business in an unsafe or unsound manner.18
Included in the above regulatory responsibilities is the duty to hold the security deposits under
Sections 19119 and 203 of the Code, for the benefit and security of all policy holders. In relation
to these provisions, Section 192 of the Insurance Code states:

"Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the
benefit and security of all the policyholders of the company depositing the same, but
shall as long as the company is solvent, permit the company to collect the interest or
dividends on the securities so deposited, and, from time to time, with his assent, to
withdraw any of such securities, upon depositing with said Commissioner other like
securities, the market value of which shall be equal to the market value of such as may
be withdrawn. In the event of any company ceasing to do business in the Philippines the
securities deposited as aforesaid shall be returned upon the company's making
application therefor and proving to the satisfaction of the Commissioner that it has no
further liability under any of its policies in the Philippines." (Emphasis supplied)
Undeniably, the insurance commissioner has been given a wide latitude of discretion to regulate
the insurance industry so as to protect the insuring public. The law specifically confers custody
over the securities upon the commissioner, with whom these investments are required to be
deposited. An implied trust20 is created by the law for the benefit of all claimants under
subsisting insurance contracts issued by the insurance company.21
As the officer vested with custody of the security deposit, the insurance commissioner is in the
best position to determine if and when it may be released without prejudicing the rights of other
policy holders. Before allowing the withdrawal or the release of the deposit, the commissioner
must be satisfied that the conditions contemplated by the law are met and all policy holders
protected.
Commissioner's
Entitled to Great Respect

Actions

In this case, Commissioner Malinis refused to release the security deposit of CISCO. Believing
that the funds were exempt from execution as provided by law, he sought to protect other policy
holders. His interpretation of the provisions of the law carries great weight and consideration, 22
as he is the head of a specialized body tasked with the regulation of insurance matters and
primarily charged with the implementation of the Insurance Code.
The emergence of the multifarious needs of modern society necessitates the establishment of
diverse administrative agencies. In addressing these needs, the administrative agencies
charged with applying and implementing particular statutes have accumulated experience and
specialized capabilities. Thus, in a long line of cases, this Court has recognized that their
construction of a statute is entitled to great respect and should ordinarily be controlling, unless
clearly shown to be in sharp conflict with the governing statute or the Constitution and other
laws.23
Clearly, then, the trial court erred in issuing the Writ of Garnishment against the security deposit
of CISCO. It follows that without the issuance of a valid order, the insurance commissioner could
not have been in contempt of court.24
WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No costs.
SO ORDERED.

G.R. No. 76452 July 26, 1994

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES,
petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON
MONTILLA PATERNO, JR., respondents.
Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.
Oscar Z. Benares for private respondent.

QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court, with
preliminary injunction or temporary restraining order, to annul and set aside the Order dated
November 6, 1986 of the Insurance Commissioner and the entire proceedings taken in I.C.
Special Case No. 1-86.
We grant the petition.
The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr.
dated April 17, 1986, to respondent Commissioner, alleging certain problems encountered by
agents, supervisors, managers and public consumers of the Philippine American Life Insurance
Company (Philamlife) as a result of certain practices by said company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo de los
Reyes, in his capacity as Philamlife's president, to comment on respondent Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes suggested
that private respondent "submit some sort of a 'bill of particulars' listing and citing actual cases,
facts, dates, figures, provisions of law, rules and regulations, and all other pertinent data which
are necessary to enable him to prepare an intelligent reply" (Rollo, p. 37). A copy of this letter
was sent by the Insurance Commissioner to private respondent for his comments thereon.
On May 16, 1986, respondent Commissioner received a letter from private respondent
maintaining that his letter-complaint of April 17, 1986 was sufficient in form and substance, and
requested that a hearing thereon be conducted.

Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986, reiterated
his claim that private respondent's letter of May 16, 1986 did not supply the information he
needed to enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent Commissioner on the
validity of the Contract of Agency complained of by private respondent.
In said hearing, private respondent was required by respondent Commissioner to specify the
provisions of the agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent Commissioner
dated July 31, 1986, reiterating his letter of April 17, 1986 and praying that the provisions on
charges and fees stated in the Contract of Agency executed between Philamlife and its agents,
as well as the implementing provisions as published in the agents' handbook, agency bulletins
and circulars, be declared as null and void. He also asked that the amounts of such charges
and fees already deducted and collected by Philamlife in connection therewith be reimbursed to
the agents, with interest at the prevailing rate reckoned from the date when they were deducted.
Respondent Commissioner furnished petitioner De los Reyes with a copy of private
respondent's letter of July 31, 1986, and requested his answer thereto.
Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter alia that:
(1) Private respondent's letter of August 11, 1986 does not contain any of the
particular information which Philamlife was seeking from him and which he
promised to submit.
(2) That since the Commission's quasi-judicial power was being invoked with
regard to the complaint, private respondent must file a verified formal complaint
before any further proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption of the
hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April 17, 1986,
and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant Vice-President
and Executive Assistant to the President, asked that respondent Commission first rule on the
questions of the jurisdiction of the Insurance Commissioner over the subject matter of the
letters-complaint and the legal standing of private respondent.
On October 27, respondent Commissioner notified both parties of the hearing of the case on
November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following
grounds;

1. The Subpoena/Notice has no legal basis and is premature because:

(1) No complaint sufficient in form and contents has been filed;
(2) No summons has been issued
nor received by the respondent De
los Reyes, and hence, no jurisdiction
has been acquired over his person;
(3) No answer has been filed, and
hence, the hearing scheduled on
November
5,
1986
in
the
Subpoena/Notice, and wherein the
respondent is required to appear, is
premature and lacks legal basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action; and
(2) over the parties involved (Rollo, p. 102).
In the Order dated November 6, 1986, respondent Commissioner denied the Motion to Quash.
The dispositive portion of said Order reads:
NOW, THEREFORE, finding the position of complainant thru counsel tenable and
considering the fact that the instant case is an informal administrative litigation
falling outside the operation of the aforecited memorandum circular but
cognizable by this Commission, the hearing officer, in open session ruled as it is
hereby ruled to deny the Motion to Quash Subpoena/Notice for lack of merit
(Rollo, p. 109).
Hence, this petition.
II
The main issue to be resolved is whether or not the resolution of the legality of the Contract of
Agency falls within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to take
cognizance of the complaint in the exercise of its quasi-judicial powers. The Solicitor General,
upholding the jurisdiction of the Insurance Commissioner, claims that under Sections 414 and
415 of the Insurance Code, the Commissioner has authority to nullify the alleged illegal
provisions of the Contract of Agency.
III

The general regulatory authority of the Insurance Commissioner is described in Section 414 of
the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all laws relating to
insurance, insurance companies and other insurance matters, mutual benefit
associations and trusts for charitable uses are faithfully executed and to perform
the duties imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in this Code, the
Insurance Commissioner is hereby authorized, at his discretion, to impose upon
insurance companies, their directors and/or officers and/or agents, for any willful
failure or refusal to comply with, or violation of any provision of this Code, or any
order, instruction, regulation or ruling of the Insurance Commissioner, or any
commission of irregularities, and/or conducting business in an unsafe and
unsound manner as may be determined by the the Insurance Commissioner, the
following:
(a) fines not in excess of five hundred pesos a day; and
(b) suspension, or after due hearing,
removal of directors and/or officers
and/or agents.
A plain reading of the above-quoted provisions show that the Insurance Commissioner has the
authority to regulate the business of insurance, which is defined as follows:
(2) The term "doing an insurance business" or "transacting an insurance
business,"
within
the
meaning
of
this
Code,
shall
include
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or activity
of the surety; (c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance business within
the meaning of this Code; (d) doing or proposing to do any business in
substance equivalent to any of the foregoing in a manner designed to evade the
provisions of this Code. (Insurance Code, Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not included
within the meaning of an insurance business, Section 2 of the Insurance Code cannot be
invoked to give jurisdiction over the same to the Insurance Commissioner. Expressio unius est
exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the Insurance
Commissioner under Section 416 of the Insurance Code applies in his case, we likewise rule in
the negative. Section 416 of the Code in pertinent part, provides:

The Commissioner shall have the power to adjudicate claims and complaints
involving any loss, damage or liability for which an insurer may be answerable
under any kind of policy or contract of insurance, or for which such insurer may
be liable under a contract of suretyship, or for which a reinsurer may be used
under any contract or reinsurance it may have entered into, or for which a mutual
benefit association may be held liable under the membership certificates it has
issued to its members, where the amount of any such loss, damage or liability,
excluding interest, costs and attorney's fees, being claimed or sued upon any
kind of insurance, bond, reinsurance contract, or membership certificate does not
exceed in any single claim one hundred thousand pesos.
A reading of the said section shows that the quasi-judicial 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 policy or contract of insurance, . . ." Hence, this
power does not cover the relationship affecting the insurance company and its agents but is
limited to adjudicating claims and complaints filed by the insured against the insurance
company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the
Insurance Code, the provisions of said Chapter speak only of the licensing requirements and
limitations imposed on insurance agents and brokers.
The Insurance Code does not have provisions governing the relations between insurance
companies and their agents. It follows that the Insurance Commissioner cannot, in the exercise
of its quasi-judicial powers, assume jurisdiction over controversies between the insurance
companies and their agents.
We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445
(1989), and Investment Planning Corporation of the Philippines v. Social Security Commission,
21 SCRA 904 (1962), that an insurance company may have two classes of agents who sell its
insurance policies: (1) salaried employees who keep definite hours and work under the control
and supervision of the company; and (2) registered representatives, who work on commission
basis.
Under the first category, the relationship between the insurance company and its agents is
governed by the Contract of Employment and the provisions of the Labor Code, while under the
second category, the same is governed by the Contract of Agency and the provisions of the Civil
Code on the Agency. Disputes involving the latter are cognizable by the regular courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the Insurance
Commission is SET ASIDE.
SO ORDERED.

PHILIPPINE
HEALTH
CARE
PROVIDERS,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

INC.,

petitioner,

DECISION
CORONA, J.:
Is a health care agreement in the nature of an insurance contract and therefore subject to the
documentary stamp tax (DST) imposed under Section 185 of Republic Act 8424 (Tax Code of
1997)?
This is an issue of first impression. The Court of Appeals (CA) answered it affirmatively in its
August 16, 2004 decision1 in CA-G.R. SP No. 70479. Petitioner Philippine Health Care
Providers, Inc. believes otherwise and assails the CA decision in this petition for review under
Rule 45 of the Rules of Court.
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct
and operate a prepaid group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in the health care plan and to
provide for the administrative, legal, and financial responsibilities of the organization." 2
Individuals enrolled in its health care programs pay an annual membership fee and are entitled
to various preventive, diagnostic and curative medical services provided by its duly licensed
physicians, specialists and other professional technical staff participating in the group practice
health delivery system at a hospital or clinic owned, operated or accredited by it.3
The pertinent part of petitioner's membership or health care agreement4 provides:
VII BENEFITS
Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims for
reimbursement] of this Agreement, Members shall have the following Benefits under this
Agreement:
In-Patient Services. In the event that a Member contract[s] sickness or suffers injury
which requires confinement in a participating Hospital[,] the services or benefits stated
below shall be provided to the Member free of charge, but in no case shall [petitioner] be
liable to pay more than P75,000.00 in benefits with respect to anyone sickness, injury or
related causes. If a member has exhausted such maximum benefits with respect to a

particular sickness, injury or related causes, all accounts in excess of P75,000.00 shall
be borne by the enrollee. It is[,] however, understood that the payment by [petitioner] of
the said maximum in In-Patient Benefits to any one member shall preclude a subsequent
payment of benefits to such member in respect of an unrelated sickness, injury or
related causes happening during the remainder of his membership term.
(a) Room and Board
(b) Services of physician and/or surgeon or specialist
(c) Use of operating room and recovery room
(d) Standard Nursing Services
(e) Drugs and Medication for use in the hospital except those which are used to
dissolve blood clots in the vascular systems (i.e., trombolytic agents)
(f) Anesthesia and its administration
(g) Dressings, plaster casts and other miscellaneous supplies
(h) Laboratory tests, x-rays and other necessary diagnostic services
(i) Transfusion of blood and other blood elements
Condition for in-Patient Care. The provision of the services or benefits mentioned in
the immediately preceding paragraph shall be subject to the following conditions:
(a) The Hospital Confinement must be approved by [petitioner's] Physician,
Participating Physician or [petitioner's] Medical Coordinator in that Hospital prior
to confinement.
(b) The confinement shall be in a Participating Hospital and the accommodation
shall be in accordance with the Member[']s benefit classification.
(c) Professional services shall be provided only by the [petitioner's] Physicians or
Participating Physicians.
(d) If discharge from the Hospital has been authorized by [petitioner's] attending
Physician or Participating Physician and the Member shall fail or refuse to do so,
[petitioner] shall not be responsible for any charges incurred after discharge has
been authorized.
Out-Patient Services. A Member is entitled free of charge to the following services or
benefits which shall be rendered or administered either in [petitioner's] Clinic or in a
Participating Hospital under the direction or supervision of [petitioner's] Physician,
Participating Physician or [petitioner's] Medical Coordinator.

(a) Gold Plan Standard Annual Physical Examination on the anniversary date of
membership, to be done at [petitioner's] designated hospital/clinic, to wit:
(i) Taking a medical history
(ii) Physical examination
(iii) Chest x-ray
(iv) Stool examination
(v) Complete Blood Count
(vi) Urinalysis
(vii) Fasting Blood Sugar (FBS)
(viii) SGPT
(ix) Creatinine
(x) Uric Acid
(xi) Resting Electrocardiogram
(xii) Pap Smear (Optional for women 40 years and above)
(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical
Examination.
The following tests are to be done as part of the Member[']s Annual check-up
program at [petitioner's] designated clinic, to wit:
1) Routine Physical Examination
2) CBC (Complete Blood Count)
* Hemoglobin * Hematocrit
* Differential * RBC/WBC
3) Chest X-ray
4) Urinalysis
5) Fecalysis
(c) Preventive Health Care, which shall include:

(i) Periodic Monitoring of Health Problems

(ii) Family planning counseling
(iii) Consultation and advices on diet, exercise and other healthy habits
(iv) Immunization but excluding drugs for vaccines used
(d) Out-Patient Care, which shall include:
(i) Consultation, including specialist evaluation
(ii) Treatment of injury or illness
(iii) Necessary x-ray and laboratory examination
(iv) Emergency medicines needed for the immediate
relief of symptoms
(v) Minor surgery not requiring confinement
Emergency Care. Subject to the conditions and limitations in this Agreement and those
specified below, a Member is entitled to receive emergency care [in case of emergency.
For this purpose, all hospitals and all attending physician(s) in the Emergency Room
automatically become accredited. In participating hospitals, the member shall be entitled
to the following services free of charge: (a) doctor's fees, (b) emergency room fees, (c)
medicines used for immediate relief and during treatment, (d) oxygen, intravenous fluids
and whole blood and human blood products, (e) dressings, casts and sutures and (f) xrays, laboratory and diagnostic examinations and other medical services related to the
emergency treatment of the patient.]5 Provided, however, that in no case shall the total
amount payable by [petitioner] for said Emergency, inclusive of hospital bill and
professional fees, exceed P75,000.00.
If the Member received care in a non-participating hospital, [petitioner] shall reimburse
[him]6 80% of the hospital bill or the amount of P5,000.00[,] whichever is lesser, and 50%
of the professional fees of non-participating physicians based on [petitioner's] schedule
of fees provided that the total amount[,] inclusive of hospital bills and professional fee
shall not exceed P5,000.00.
On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total
amount of P224,702,641.18. The assessment represented the following:

Value
(VAT)

Added

Tax DST

1996

1997

54,738,434.03

45,767,596.23 P

55,746,352.19

68,450,258.73

100,506,030.26 P

124,196,610.92

The deficiency DST assessment was imposed on petitioner's health care agreement with the
members of its health care program pursuant to Section 185 of the 1997 Tax Code which
provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. - On all policies
of insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employer's liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), and all bonds, undertakings, or recognizances,
conditioned for the performance of the duties of any office or position, for the doing or
not doing of anything therein specified, and on all obligations guaranteeing the validity or
legality of any bond or other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations guaranteeing the title to any real
estate, or guaranteeing any mercantile credits, which may be made or renewed by any
such person, company or corporation, there shall be collected a documentary stamp tax
of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the
premium charged. (emphasis supplied)
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not
act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking
the cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision,7 the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to
P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997
until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting
the said DST deficiency tax.
SO ORDERED.8

Respondent appealed the CTA decision to the CA9 insofar as it cancelled the DST assessment.
He claimed that petitioner's health care agreement was a contract of insurance subject to DST
under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. 10 It held that petitioner's health care
agreement was in the nature of a non-life insurance contract subject to DST:
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered petitioner to desist from collecting the
same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge
for late payment and 20% interest per annum from January 27, 2000, pursuant to
Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.
SO ORDERED.11
Petitioner moved for reconsideration but the CA denied it. Hence, this petition.
Petitioner essentially argues that its health care agreement is not a contract of insurance but a
contract for the provision on a prepaid basis of medical services, including medical check-up,
that are not based on loss or damage. Petitioner also insists that it is not engaged in the
insurance business. It is a health maintenance organization regulated by the Department of
Health, not an insurance company under the jurisdiction of the Insurance Commission. For
these reasons, petitioner asserts that the health care agreement is not subject to DST.
We do not agree.
The DST is levied on the exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships through the execution of specific
instruments.12 It is an excise upon the privilege, opportunity, or facility offered at exchanges for
the transaction of the business.13 In particular, the DST under Section 185 of the 1997 Tax
Code is imposed on the privilege of making or renewing any policy of insurance (except
life, marine, inland and fire insurance), bond or obligation in the nature of indemnity for
loss, damage, or liability.
Under the law, a contract of insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event.14 The event insured against must be designated in the contract and must
either be unknown or contingent.15
Petitioner's health care agreement is primarily a contract of indemnity. And in the recent case of
Blue Cross Healthcare, Inc. v. Olivares,16 this Court ruled that a health care agreement is in the
nature of a non-life insurance policy.
Contrary to petitioner's claim, its health care agreement is not a contract for the provision of
medical services. Petitioner does not actually provide medical or hospital services but merely
arranges for the same17 and pays for them up to the stipulated maximum amount of coverage. It

is also incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for
hospital, medical and related expenses (such as professional fees of physicians). The term "loss
or damage" is broad enough to cover the monetary expense or liability a member will incur in
case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to
the member in case of sickness, injury or emergency or his availment of so-called "out-patient
services" (including physical examination, x-ray and laboratory tests, medical consultations,
vaccine administration and family planning counseling) is the contingent event which gives rise
to liability on the part of the member. In case of exposure of the member to liability, he would be
entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are prepaid.
The expenses to be incurred by each member cannot be predicted beforehand, if they can be
predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they
are significantly and substantially more than what the member has "prepaid." Petitioner does not
bear the costs alone but distributes or spreads them out among a large group of persons
bearing a similar risk, that is, among all the other members of the health care program. This is
insurance.
Petitioner's health care agreement is substantially similar to that involved in Philamcare Health
Systems, Inc. v. CA.18 The health care agreement in that case entitled the subscriber to avail of
the hospitalization benefits, whether ordinary or emergency, listed therein. It also provided for
"out-patient benefits" such as annual physical examinations, preventive health care and other
out-patient services. This Court ruled in Philamcare Health Systems, Inc.:
[T]he insurable interest of [the subscriber] in obtaining the health care agreement was
his own health. The health care agreement was in the nature of non-life insurance,
which is primarily a contract of indemnity. Once the member incurs hospital, medical
or any other expense arising from sickness, injury or other stipulated contingency, the
health care provider must pay for the same to the extent agreed upon under the
contract.19 (emphasis supplied)
Similarly, the insurable interest of every member of petitioner's health care program in obtaining
the health care agreement is his own health. Under the agreement, petitioner is bound to
indemnify any member who incurs hospital, medical or any other expense arising from sickness,
injury or other stipulated contingency to the extent agreed upon under the contract.
Petitioner's contention that it is a health maintenance organization and not an insurance
company is irrelevant. Contracts between companies like petitioner and the beneficiaries under
their plans are treated as insurance contracts.20
Moreover, DST is not a tax on the business transacted but an excise on the privilege,
opportunity, or facility offered at exchanges for the transaction of the business. 21 It is an excise
on the facilities used in the transaction of the business, separate and apart from the
business itself.22

WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the Court of
Appeals in CA-G.R. SP No. 70479 is AFFIRMED.
Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency
documentary stamp tax for 1996 and 1997, respectively, plus 25% surcharge for late payment
and 20% interest per annum from January 27, 2000 until full payment thereof.
Costs against petitioner.
SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE PHILIPPINE AMERICAN

ACCIDENT INSURANCE COMPANY, INC., THE PHILIPPINE AMERICAN ASSURANCE
COMPANY, INC., and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC.,
respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review[1] assailing the Decision[2] of 7 January 2000 of the
Court of Appeals in CA-G.R. SP No. 36816. The Court of Appeals affirmed the Decision[3] of 5
January 1995 of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2514, 2515 and 2516.
The CTA ordered the Commissioner of Internal Revenue (petitioner) to refund a total of
P29,575.02 to respondent companies (respondents).
Antecedent Facts
Respondents are domestic corporations licensed to transact insurance business in the
country. From August 1971 to September 1972, respondents paid the Bureau of Internal
Revenue under protest the 3% tax imposed on lending investors by Section 195-A[4] of
Commonwealth Act No. 466 (CA 466), as amended by Republic Act No. 6110 (RA 6110) and
other laws. CA 466 was the National Internal Revenue Code (NIRC) applicable at the time.

Respondents paid the following amounts: P7,985.25 from Philippine American (PHILAM)
Accident Insurance Company; P7,047.80 from PHILAM Assurance Company; and P14,541.97
from PHILAM General Insurance Company. These amounts represented 3% of each
companys interest income from mortgage and other loans. Respondents also paid the taxes
required of insurance companies under CA 466.
On 31 January 1973, respondents sent a letter-claim to petitioner seeking a refund of the
taxes paid under protest. When respondents did not receive a response, each respondent
filed on 26 April 1973 a petition for review with the CTA. These three petitions, which were
later consolidated, argued that respondents were not lending investors and as such were not
subject to the 3% lending investors tax under Section 195-A.
The CTA archived respondents case for several years while another case with a similar issue
was pending before the higher courts. When respondents case was reinstated, the CTA ruled
that respondents were entitled to their refund.
The Ruling of the Court of Tax Appeals
The CTA held that respondents are not taxable as lending investors because the term lending
investors does not embrace insurance companies. The CTA traced the history of the tax on
lending investors, as follows:
Originally, a person who was engaged in lending money at interest was taxed as a money
lender. [Sec. 1464(x), Rev. Adm. Code] The term money lenders was defined as including all
persons who make a practice of lending money for themselves or others at interest. [Sec.
1465(v), id.] Under this law, an insurance company was not considered a money lender and
was not taxable as such. To quote from an old BIR Ruling:
The lending of money at interest by insurance companies constitutes a necessary incident of
their regular business. For this reason, insurance companies are not liable to tax as money
lenders or real estate brokers for making or negotiating loans secured by real property.
(Ruling, February 28, 1920; BIR 135.2) (The Internal Revenue Law, Annotated, 2 nd ed., 1929,
by B.L. Meer, page 143)
The same rule has been applied to banks.
For making investments on salary loans, banks will not be required to pay the money lenders
tax imposed by this subsection, for the reason that money lending is considered a mere
incident of the banking business. [See Ruling No. 43, (October 8, 1926) 25 Off. Gaz. 1326)
(The Internal Revenue Law, Annotated, id.)
The term money lenders was later changed to lending investors but the definition of the term
remains the same. [Sec. 1464(x), Rev. Adm. Code, as finally amended by Com. Act No. 215,
and Sec. 1465(v) of the same Code, as finally amended by Act No. 3963] The same law is
embodied in the present National Internal Revenue Code (Com. Act No. 466) without change,
except in the amount of the tax. [See Secs. 182(A) (3) (dd) and 194(u), National Internal
Revenue Code.]

It is a well-settled rule that an administrative interpretation of a law which has been followed
and applied for a long time, and thereafter the law is re-enacted without substantial change,
such administrative interpretation is deemed to have received legislative approval. In short,
the administrative interpretation becomes part of the law as it is presumed to carry out the
legislative purpose.[5]
The CTA held that the practice of lending money at interest is part of the insurance business.
CA 466 already taxes the insurance business. The CTA pointed out that the law recognizes
and even regulates this practice of lending money by insurance companies.
The CTA observed that CA 466 also treated differently insurance companies from lending
investors in regard to fixed taxes. Under Section 182(A)(3)(gg), insurance companies were
subject to the same fixed tax as banks and finance companies. The CTA reasoned that
insurance companies were grouped with banks and finance companies because the latters
lending activities were also integral to their business. In contrast, lending investors were taxed
at a different fixed tax under Section 182(A)(3)(dd) of CA 466. The CTA stated that insurance
companies xxx had never been required by respondent [CIR] to pay the fixed tax imposed on
lending investors xxx.[6]
The dispositive portion of the Decision of 5 January 1995 of the Court of Tax Appeals (CTA
Decision) reads:
WHEREFORE, premises considered, petitioners Philippine American Accident Insurance Co.,
Philippine American Assurance Co., and Philippine American General Insurance Co., Inc. are
not taxable on their lending transactions independently of their insurance business.
Accordingly, respondent is hereby ordered to refund to petitioner[s] the sum of P7,985.25,
P7,047.80 and P14,541.97 in CTA Cases No. 2514, 2515 and 2516, respectively representing
the fixed and percentage taxes when (sic) paid by petitioners as lending investor from August
1971 to September 1972.
No pronouncement as to cost.
SO ORDERED.[7]
Dissatisfied, petitioner elevated the matter to the Court of Appeals.[8]
The Ruling of the Court of Appeals
The Court of Appeals ruled that respondents are not taxable as lending investors. In its
Decision of 7 January 2000 (CA Decision), the Court of Appeals affirmed the ruling of the CTA,
thus:
WHEREFORE, premises considered, the petition is DISMISSED, hereby AFFIRMING the
decision, dated January 5, 1995, of the Court of Tax Appeals in CTA Cases Nos. 2514, 2515
and 2516.
SO ORDERED.[9]

Petitioner appealed the CA Decision to this Court.

The Issues
Petitioner raises the sole issue:
WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO THE 3%
PERCENTAGE TAX AS LENDING INVESTORS UNDER SECTIONS 182(A)(3)(DD) AND 195A, RESPECTIVELY IN RELATION TO SECTION 194(U), ALL OF THE NIRC.[10]
The Ruling of the Court
The petition lacks merit.
On the Additional Issue Raised by Petitioner
Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on lending investors, depending
on their location.[11] The sole question before the CTA was whether respondents were subject
to the percentage tax on lending investors under Section 195-A. Petitioner raised for the first
time the issue of the fixed tax in the Petition for Review[12] petitioner filed before the Court of
Appeals.
Ordinarily, a party cannot raise for the first time on appeal an issue not raised in the trial court.
[13] The Court of Appeals should not have taken cognizance of the issue on respondents
supposed liability under Section 182(A)(3)(dd). However, we cannot entirely fault the Court of
Appeals or petitioner. Even if the percentage tax on lending investors was the sole issue
before it, the CTA ordered petitioner to refund to the PHILAM companies the fixed and
percentage taxes [t]hen paid by petitioners as lending investor.[14] Although the amounts for
refund consisted only of what respondents paid as percentage taxes, the CTA Decision also
ordered the refund to respondents of the fixed tax on lending investors. Respondents in their
pleadings deny any liability under Section 182(A)(3)(dd), on the same ground that they are not
lending investors.
The question of whether respondents should pay the fixed tax under Section 182(A)(3)(dd)
revolves around the same issue of whether respondents are taxable as lending investors. In
similar circumstances, the Court has held that an appellate court may consider an unassigned
error if it is closely related to an error that was properly assigned.[15] This rule properly
applies to the present case. Thus, we shall consider and rule on the issue of whether
respondents are subject to the fixed tax under Section 182(A)(3)(dd).
Whether Insurance Companies are
Taxable as Lending Investors
Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section 194(u) of CA 466, petitioner
argues that insurance companies are subject to two fixed taxes and two percentage taxes.
Petitioner alleges that:

As a lending investor, an insurance company is subject to an annual fixed tax of P500.00 and
another P500.00 under Section 182 (A)(3)(dd) and (gg) of the Tax Code. As an underwriter, an
insurance company is subject to the 3% tax of the total premiums collected and another 3%
on the gross receipts as a lending investor under Sections 255 and 195-A, respectively of the
same Code. xxx[16]
Petitioner also contends that the refund granted to respondents is in the nature of a tax
exemption, and cannot be allowed unless granted explicitly and categorically.
The rule that tax exemptions should be construed strictly against the taxpayer presupposes
that the taxpayer is clearly subject to the tax being levied against him. Unless a statute
imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled
rule that the imposition of a tax cannot be presumed.[17] Where there is doubt, tax laws must
be construed strictly against the government and in favor of the taxpayer.[18] This is because
taxes are burdens on the taxpayer, and should not be unduly imposed or presumed beyond
what the statutes expressly and clearly import.[19]
Section 182(A)(3)(dd) of CA 466 also provides:
Sec. 182. Fixed taxes. (A) On business xxx
xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount
stated being for the whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one hundred and
twenty-five pesos; Provided, That lending investors who do business as such
in more than one province shall pay a tax of five hundred pesos.
Section 195-A of CA 466 provides:
Sec. 195-A. Percentage tax on dealers in securities; lending investors. Dealers in securities and
lending investors shall pay a tax equivalent to three per centum on their gross income.
Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies. Section
182(A)(3)(dd) provides for the taxation of lending investors in different localities. Section 195-A
refers to dealers in securities and lending investors. The burden is thus on petitioner to show
that insurance companies are lending investors for purposes of taxation.

In this case, petitioner does not dispute that respondents are in the insurance business.
Petitioner merely alleges that the definition of lending investors under CA 466 is broad enough
to encompass insurance companies. Petitioner insists that because of Section 194(u), the two
principal activities of the insurance business, namely, underwriting and investment, are
separately taxable.[20]
Section 194(u) of CA 466 states:
(u) Lending investor includes all persons who make a practice of lending money for themselves
or others at interest.
xxx
As can be seen, Section 194(u) does not tax the practice of lending per se. It merely defines
what lending investors are. The question is whether the lending activities of insurance
companies make them lending investors for purposes of taxation.
We agree with the CTA and Court of Appeals that it does not. Insurance companies cannot be
considered lending investors under CA 466, as amended.
Definition of Lending
Investors under CA 466 Does
Not Include Insurance
Companies.
The definition in Section 194(u) of CA 466 is not broad enough to include the business of
insurance companies. The Insurance Code of 1978[21] is very clear on what constitutes an
insurance company. It provides that an insurer or insurance company shall include all
individuals, partnerships, associations or corporations xxx engaged as principals in the
insurance business, excepting mutual benefit associations.[22] More specifically, respondents
fall under the category of insurance corporations as defined in Section 185 of the Insurance
Code, thus:
SECTION 185. Corporations formed or organized to save any person or persons or other
corporations harmless from loss, damage, or liability arising from any unknown or future or
contingent event, or to indemnify or to compensate any person or persons or other corporations
for any such loss, damage, or liability, or to guarantee the performance of or compliance with
contractual obligations or the payment of debts of others shall be known as insurance
corporations.
Plainly, insurance companies and lending investors are different enterprises in the eyes of the
law. Lending investors cannot, for a consideration, hold anyone harmless from loss, damage or
liability, nor provide compensation or indemnity for loss. The underwriting of risks is the

prerogative of insurers, the great majority of which are incorporated insurance companies[23]
like respondents.
Granting of Mortgage and
other Loans are Investment
Practices that are Part of the
Insurance Business.
True, respondents granted mortgage and other kinds of loans. However, this was not done
independently of respondents insurance business. The granting of certain loans is one of
several means of investment allowed to insurance companies. No less than the Insurance Code
mandates and regulates this practice.[24]
Unlike the practice of lending investors, the lending activities of insurance companies are
circumscribed and strictly regulated by the State. Insurance companies cannot freely lend to
themselves or others as lending investors can,[25] nor can insurance companies grant simply
any kind of loan. Even prior to 1978, the Insurance Code prescribed strict rules for the granting
of loans by insurance companies.[26] These provisions on mortgage, collateral and policy loans
were reiterated in the Insurance Code of 1978 and are still in force today.
Petitioner concedes that respondents investment practices are as much a part of the insurance
business as the task of underwriting. Nevertheless, petitioner argues that such investment
practices are separately taxable under CA 466.
The CTA and the Court of Appeals found that the investment of premiums and other funds
received by respondents through the granting of mortgage and other loans was necessary to
respondents business and hence, should not be taxed separately.
Insurance companies are required by law to possess and maintain substantial legal reserves to
meet their obligations to policyholders.[27] This obviously cannot be accomplished through the
collection of premiums alone, as the legal reserves and capital and surplus insurance
companies are obligated to maintain run into millions of pesos. As such, the creation of
investment income has long been held to be generally, if not necessarily, essential to the
business of insurance.[28]
The creation of investment income in the manner sanctioned by the laws on insurance is thus
part of the business of insurance, and the fruits of these investments are essentially income
from the insurance business. This is particularly true if the invested assets are held either as
reserved funds to provide for policy obligations or as capital and surplus to provide an extra
margin of safety which will be attractive to insurance buyers.[29]
The Court has also held that when a company is taxed on its main business, it is no longer
taxable further for engaging in an activity or work which is merely a part of, incidental to and is
necessary to its main business.[30] Respondents already paid percentage and fixed taxes on

their insurance business. To require them to pay percentage and fixed taxes again for an activity
which is necessarily a part of the same business, the law must expressly require such additional
payment of tax. There is, however, no provision of law requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to pay double
percentage and fixed taxes. They merely tax lending investors, not lending activities.
Respondents were not transformed into lending investors by the mere fact that they granted
loans, as these investments were part of, incidental and necessary to their insurance business.
Different Tax Treatment of
Insurance Companies and
Lending Investors.
Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors and
insurance companies. The relevant portions of Section 182 state:
Sec. 182. Fixed taxes. (A) On business xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount stated
being for the whole year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2. In second and third class municipalities, two hundred and fifty pesos;
3. In fourth and fifth class municipalities and municipal districts, one
hundred and twenty-five pesos; Provided, That lending investors who
do business as such in more than one province shall pay a tax of five
hundred pesos.
xxx
(gg) Banks, insurance companies, finance and investment companies doing business in the
Philippines and franchise grantees, five hundred pesos.
xxx (Emphasis supplied.)
The separate provisions on lending investors and insurance companies demonstrate an
intention to treat these businesses differently. If Congress intended insurance companies to be
taxed as lending investors, there would be no need for Section 182(A)(3)(gg). Section 182(A)(3)
(dd) would have been sufficient. That insurance companies were included with banks, finance

and investment companies also supports the CTAs conclusion that insurance companies had
more in common with the latter enterprises than with lending investors. As the CTA pointed out,
banks also regularly lend money at interest, but are not taxable as lending investors.
We find no merit in petitioners contention that Congress intended to subject respondents to two
percentage taxes and two fixed taxes. Petitioners argument goes against the doctrine of strict
interpretation of tax impositions.
Petitioners argument is likewise not in accord with existing jurisprudence. In Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,[31] the Court ruled that the different
tax treatment accorded to pawnshops and lending investors in the NIRC of 1977 and the NIRC
of 1986 showed the intent of Congress to deal with both subjects differently. The same
reasoning applies squarely to the present case.
Even the current tax law does not treat insurance companies as lending investors. Under
Section 108(A)[32] of the NIRC of 1997, lending investors and non-life insurance companies,
except for their crop insurances, are subject to value-added tax (VAT). Life insurance companies
are exempt from VAT, but are subject to percentage tax under Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention insurance
companies already implies the latters exclusion from the coverage of these provisions. When a
statute enumerates the things upon which it is to operate, everything else by implication must be
excluded from its operation and effect.[33]
Definition of Lending
Investors in CA 466 is Not
New.
Petitioner does not dispute that it issued a ruling in 1920 to the effect that the lending of money
at interest was a necessary incident of the insurance business, and that insurance companies
were thus not subject to the tax on money lenders. Petitioner argues only that the 1920 ruling
does not apply to the instant case because RA 6110 introduced the definition of lending
investors to CA 466 only in 1969.
The subject definition was actually introduced much earlier, at a time when lending investors
were still referred to as money lenders. Sections 45 and 46 of the Internal Revenue Law of
1914[34] (1914 Tax Code) state:
SECTION 45. Amount of Tax on Business. Fixed taxes on business shall be collected as
follows, the amount stated being for the whole year, when not otherwise specified:
xxx
(x) Money lenders, eighty pesos;

xxx
SECTION 46. Words and Phrases Defined. In applying the provisions of the preceding
section words and phrases shall be taken in the sense and extension indicated below:
xxx
Money lender includes all persons who make a practice of lending money for themselves
or others at interest. (Emphasis supplied)
As can be seen, the definitions of money lender under the 1914 Tax Code and lending investor
under CA 466 are identical. The term money lender was merely changed to lending investor
when Act No. 3963 amended the Revised Administrative Code in 1932.[35] This same definition
of lending investor has since appeared in Section 194(u) of CA 466 and later tax laws.
Note that insurance companies were not included among the businesses subject to an annual
fixed tax under the 1914 Tax Code.[36] That Congress later saw the need to introduce Section
182(A)(3)(gg) in CA 466 bolsters our view that there was no legislative intent to tax insurance
companies as lending investors. If insurance companies were already taxed as lending
investors, there would have been no need for a separate provision specifically requiring
insurance companies to pay fixed taxes.
The Court Accords Great
Weight to the Factual Findings
of the CTA.
Dedicated exclusively to the study and consideration of tax problems, the CTA has necessarily
developed an expertise in the subject of taxation that this Court has recognized time and again.
For this reason, the findings of fact of the CTA, particularly when affirmed by the Court of
Appeals, are generally conclusive on this Court absent grave abuse of discretion or palpable
error,[37] which are not present in this case.
WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7 January 2000 of the
Court of Appeals in CA-G.R. SP No. 36816.

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY
CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION
(BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in
CA-G.R. SP No. 60144, affirming the Decision[2] dated May 3, 2000 of the Insurance
Commission in I.C. Adm. Case No. RD-277. Both decisions held that there was no violation of
the Insurance Code and the respondents do not need license as insurer and insurance
agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for
its vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship
Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold
was issued a Certificate of Entry and Acceptance.[3] Pioneer also issued receipts evidencing
payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual
refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to
recover the latters unpaid balance. White Gold on the other hand, filed a complaint before the
Insurance Commission claiming that Steamship Mutual violated Sections 186[4] and 187[5] of

the Insurance Code, while Pioneer violated Sections 299,[6] 300[7] and 301[8] in relation to
Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for
Steamship Mutual to secure a license because it was not engaged in the insurance business. It
explained that Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise,
Pioneer need not obtain another license as insurance agent and/or a broker for Steamship
Mutual because Steamship Mutual was not engaged in the insurance business. Moreover,
Pioneer was already licensed, hence, a separate license solely as agent/broker of Steamship
Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the
appellate court distinguished between P & I Clubs vis--vis conventional insurance. The appellate
court also held that Pioneer merely acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT
DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT
NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT
PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT
PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the
insurance business in the Philippines? (2) Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not
have a license to do business in the Philippines although Pioneer is its resident agent. This
relationship is reflected in the certifications issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business.
To buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v.
Court of Appeals[10] as an association composed of shipowners in general who band together
for the specific purpose of providing insurance cover on a mutual basis against liabilities
incidental to shipowning that the members incur in favor of third parties. It stresses that as a P &
I Club, Steamship Mutuals primary purpose is to solicit and provide protection and indemnity
coverage and for this purpose, it has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the
insurance business in the Philippines. It is merely an association of vessel owners who have
come together to provide mutual protection against liabilities incidental to shipowning.[11]
Respondents aver Hyopsung is inapplicable in this case because the issue in Hyopsung was
the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an insurance business
or transacting an insurance business. These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and
not as merely incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in
a manner designed to evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is derived from the making of insurance
contracts, agreements or transactions, or that no separate or direct consideration is received
therefor, shall not preclude the existence of an insurance business.[12]
The test to determine if a contract is an insurance contract or not, depends on the nature of the
promise, the act required to be performed, and the exact nature of the agreement in the light of
the occurrence, contingency, or circumstances under which the performance becomes requisite.
It is not by what it is called.[13]

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a

consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event.[14]
In particular, a marine insurance undertakes to indemnify the assured against marine losses,
such as the losses incident to a marine adventure.[15] Section 99[16] of the Insurance Code
enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both
the insurer and insured. In it, the members all contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid, and where
the profits are divided among themselves, in proportion to their interest.[17] Additionally, mutual
insurance associations, or clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the third party is anyone
other than the P & I Club and the members.[19] By definition then, Steamship Mutual as a P & I
Club is a mutual insurance association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without the
requisite certificate of authority mandated by Section 187[20] of the Insurance Code. It
maintains a resident agent in the Philippines to solicit insurance and to collect payments in its
behalf. We note that Steamship Mutual even renewed its P & I Club cover until it was cancelled
due to non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or
through its agent Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary.
Thus, no insurer or insurance company is allowed to engage in the insurance business without
a license or a certificate of authority from the Insurance Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of
registration[22] issued by the Insurance Commission. It has been licensed to do or transact
insurance business by virtue of the certificate of authority[23] issued by the same agency.
However, a Certification from the Commission states that Pioneer does not have a separate
license to be an agent/broker of Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance company, it needs a separate license to
act as insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or
procurement of applications for insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance company doing business in the
Philippines or any agent thereof, without first procuring a license so to act from the

Commissioner, which must be renewed annually on the first day of January, or within six months
thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its
directors and officers. Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the
Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is
hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association
(Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED to obtain
licenses and to secure proper authorizations to do business as insurer and insurance agent,
respectively. The petitioners prayer for the revocation of Pioneers Certificate of Authority and
removal of its directors and officers, is DENIED. Costs against respondents.

DEVELOPMENT
BANK
OF
THE
PHILIPPINES,
petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS, represented by
CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION INSURANCE POOL,
respondents.
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to reverse
and set aside the decision of the Court of Appeals in CA-G.R CV No. 26434 and its resolution
denying reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.

In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-law, applied
for a loan of P500,000.00 with the Development Bank of the Philippines (DBP), Basilan Branch.
As the principal mortgagor, Dans, then 76 years of age, was advised by DBP to obtain a
mortgage redemption insurance (MRI) with the DBP Mortgage Redemption Insurance Pool
(DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4, 1987 and
released on August 11, 1987. From the proceeds of the loan, DBP deducted the amount of
P1,476.00 as payment for the MRI premium. On August 15, 1987, Dans accomplished and
submitted the "MRI Application for Insurance" and the "Health Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was
credited by DBP to the savings account of the DBP MRI Pool. Accordingly, the DBP MRI Pool
was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this
information to the DBP MRI Pool. On September 23, 1987, the DBP MRI Pool notified DBP that
Dans was not eligible for MRI coverage, being over the acceptance age limit of 60 years at the
time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late husband's MRI
application. The DBP offered to refund the premium of P1,476.00 which the deceased had paid,
but Candida Dans refused to accept the same, demanding payment of the face value of the MRI
or an amount equivalent to the loan. She, likewise, refused to accept an ex gratia settlement of
P30,000.00, which the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as administratrix, filed a
complaint with the Regional Trial Court, Branch I, Basilan, against DBP and the insurance pool
for "Collection of Sum of Money with Damages." Respondent Estate alleged that Dans became
insured by the DBP MRI Pool when DBP, with full knowledge of Dans' age at the time of
application, required him to apply for MRI, and later collected the insurance premium thereon.
Respondent Estate therefore prayed: (1) that the sum of P139,500.00, which it paid under
protest for the loan, be reimbursed; (2) that the mortgage debt of the deceased be declared fully
paid; and (3) that damages be awarded.
The DBP and the DBP MRI Pool separately filed their answers, with the former asserting a
cross-claim against the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits submitted
by respondent Estate. As a result of these admissions, the trial court narrowed down the issues
and, without opposition from the parties, found the case ripe for summary judgment.
Consequently, the trial court ordered the parties to submit their respective position papers and
documentary evidence, which may serve as basis for the judgment.
On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and against
DBP. The DBP MRI Pool, however, was absolved from liability, after the trial court found no
privity of contract between it and the deceased. The trial court declared DBP in estoppel for

having led Dans into applying for MRI and actually collecting the premium and the service fee,
despite knowledge of his age ineligibility. The dispositive portion of the decision read as follows:
WHEREFORE, in view of the foregoing consideration and in the furtherance of
justice and equity, the Court finds judgment for the plaintiff and against Defendant
DBP, ordering the latter:
1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of
interest as amortization payment paid under protest;
2. To consider the mortgage loan of P300,000.00 including all interest
accumulated or otherwise to have been settled, satisfied or set-off by virtue of the
insurance coverage of the late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other
expenses, and other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are hereby
dismissed. The Cross-claim of Defendant DBP is likewise dismissed (Rollo, p.
79)
The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the
appellate court affirmed in toto the decision of the trial court. The DBP's motion for
reconsideration was denied in a resolution dated April 20, 1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a "Health Statement for DBP
MRI Pool" (Exh. "5-Bank") with the following declaration:
I hereby declare and agree that all the statements and answers contained herein
are true, complete and correct to the best of my knowledge and belief and form
part of my application for insurance. It is understood and agreed that no
insurance coverage shall be effected unless and until this application is approved
and the full premium is paid during my continued good health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the
application shall be approved by the insurance pool; and (2) when the full premium is paid
during the continued good health of the applicant. These two conditions, being joined
conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool. The
pool, however, did not approve the application of Dans. There is also no showing that it

accepted the sum of P1,476.00, which DBP credited to its account with full knowledge that it
was payment for Dan's premium. There was, as a result, no perfected contract of insurance;
hence, the DBP MRI Pool cannot be held liable on a contract that does not exist.
The liability of DBP is another matter.
It was DBP, as a matter of policy and practice, that required Dans, the borrower, to secure MRI
coverage. Instead of allowing Dans to look for his own insurance carrier or some other form of
insurance policy, DBP compelled him to apply with the DBP MRI Pool for MRI coverage. When
Dan's loan was released on August 11, 1987, DBP already deducted from the proceeds thereof
the MRI premium. Four days latter, DBP made Dans fill up and sign his application for MRI, as
well as his health statement. The DBP later submitted both the application form and health
statement to the DBP MRI Pool at the DBP Main Building, Makati Metro Manila. As service fee,
DBP deducted 10 percent of the premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the second as
an insurance agent.
As an insurance agent, DBP made Dans go through the motion of applying for said insurance,
thereby leading him and his family to believe that they had already fulfilled all the requirements
for the MRI and that the issuance of their policy was forthcoming. Apparently, DBP had full
knowledge that Dan's application was never going to be approved. The maximum age for MRI
acceptance is 60 years as clearly and specifically provided in Article 1 of the Group Mortgage
Redemption Insurance Policy signed in 1984 by all the insurance companies concerned (Exh.
"1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is not
personally liable to the party with whom he contracts, unless he expressly binds himself or
exceeds the limits of his authority without giving such party sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its clients are more than 60
years of age (Exh. "1-Pool"). Knowing all the while that Dans was ineligible for MRI coverage
because of his advanced age, DBP exceeded the scope of its authority when it accepted Dan's
application for MRI by collecting the insurance premium, and deducting its agent's commission
and service fee.
The liability of an agent who exceeds the scope of his authority depends upon whether the third
person is aware of the limits of the agent's powers. There is no showing that Dans knew of the
limitation on DBP's authority to solicit applications for MRI.
If the third person dealing with an agent is unaware of the limits of the authority conferred by the
principal on the agent and he (third person) has been deceived by the non-disclosure thereof by
the agent, then the latter is liable for damages to him (V Tolentino, Commentaries and
Jurisprudence on the Civil Code of the Philippines, p. 422 [1992], citing Sentencia [Cuba] of
September 25, 1907). The rule that the agent is liable when he acts without authority is founded
upon the supposition that there has been some wrong or omission on his part either in
misrepresenting, or in affirming, or concealing the authority under which he assumes to act

(Francisco, V., Agency 307 [1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the
non-disclosure of the limits of the agency carries with it the implication that a deception was
perpetrated on the unsuspecting client, the provisions of Articles 19, 20 and 21 of the Civil Code
of the Philippines come into play.
Article 19 provides:
Every person must, in the exercise of his rights and in the performance of his
duties, act with justice give everyone his due and observe honesty and good
faith.
Article 20 provides:
Every person who, contrary to law, willfully or negligently causes damage to
another, shall indemnify the latter for the same.
Article 21 provides:
Any person, who willfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for
the damage.
The DBP's liability, however, cannot be for the entire value of the insurance policy. To assume
that were it not for DBP's concealment of the limits of its authority, Dans would have secured an
MRI from another insurance company, and therefore would have been fully insured by the time
he died, is highly speculative. Considering his advanced age, there is no absolute certainty that
Dans could obtain an insurance coverage from another company. It must also be noted that
Dans died almost immediately, i.e., on the nineteenth day after applying for the MRI, and on the
twenty-third day from the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss suffered by him as he
has duly proved (Civil Code of the Philippines, Art. 2199). Damages, to be recoverable, must not
only be capable of proof, but must be actually proved with a reasonable degree of certainty
(Refractories Corporation v. Intermediate Appellate Court, 176 SCRA 539 [1989]; Choa Tek Hee
v. Philippine Publishing Co., 34 Phil. 447 [1916]). Speculative damages are too remote to be
included in an accurate estimate of damages (Sun Life Assurance v. Rueda Hermanos, 37 Phil.
844 [1918]).
While Dans is not entitled to compensatory damages, he is entitled to moral damages. No proof
of pecuniary loss is required in the assessment of said kind of damages (Civil Code of
Philippines, Art. 2216). The same may be recovered in acts referred to in Article 2219 of the
Civil Code.
The assessment of moral damages is left to the discretion of the court according to the
circumstances of each case (Civil Code of the Philippines, Art. 2216). Considering that DBP had
offered to pay P30,000.00 to respondent Estate in ex gratia settlement of its claim and that

DBP's non-disclosure of the limits of its authority amounted to a deception to its client, an award
of moral damages in the amount of P50,000.00 would be reasonable.
The award of attorney's fees is also just and equitable under the circumstances (Civil Code of
the Philippines, Article 2208 [11]).
WHEREFORE,
the
decision
of
the
Court
of
Appeals
in
CA
G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE respondent
Estate of Juan B. Dans the amount of P1,476.00 with legal interest from the date of the filing of
the complaint until fully paid; and (2) to PAY said Estate the amount of Fifty Thousand Pesos
(P50,000.00) as moral damages and the amount of Ten Thousand Pesos (P10,000.00) as
attorney's fees. With costs against petitioner.
SO ORDERED.
UCPB GENERAL INSURANCE CO. INC., petitioner, vs. MASAGANA TELAMART, INC.,
respondent.
In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision i[1]
of the Court of Appeals, which affirmed with modification the judgment of the trial court (a)
allowing Respondent to consign the sum of P225,753.95 as full payment of the premiums for
the renewal of the five insurance policies on Respondents properties; (b) declaring the
replacement-renewal policies effective and binding from 22 May 1992 until 22 May 1993; and
(c) ordering Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned
properties covered by the renewal-replacement policies. The modification consisted in the (1)
deletion of the trial courts declaration that three of the policies were in force from August 1991 to
August 1992; and (2) reduction of the award of the attorneys fees from 25% to 10% of the total
amount due the Respondent.
The material operative facts upon which the appealed judgment was based are summarized by
the Court of Appeals in its assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance
policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay City and Manila].
All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to
4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiff's properties located at 2410-2432 and
2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13, 1992, plaintiff tendered, and
defendant accepted, five (5) Equitable Bank Manager's Checks in the total amount of
P225,753.45 as renewal premium payments for which Official Receipt Direct Premium No.
62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July 14, 1992, Masagana
made its formal demand for indemnification for the burned insured properties. On the same day,
defendant returned the five (5) manager's checks stating in its letter (Exhibit "R"/"8", Record, p.
192) that it was rejecting Masagana's claim on the following grounds:
"a)Said policies expired last May 22, 1992 and were not renewed for another term;
b)

Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and

c)
The properties covered by the said policies were burned in a fire that took place last
June 13, 1992, or before tender of premium payment."
(Record, p. 5)
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioners stand that Respondents tender of payment of
the premiums on 13 July 1992 did not result in the renewal of the policies, having been made
beyond the effective date of renewal as provided under Policy Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five days in advance of the end of the
policy period mails or delivers to the assured at the address shown in the policy notice of its
intention not to renew the policy or to condition its renewal upon reduction of limits or elimination
of coverages, the assured shall be entitled to renew the policy upon payment of the premium
due on the effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent,
which had procured insurance coverage from Petitioner for a number of years, had been
granted a 60 to 90-day credit term for the renewal of the policies. Such a practice had existed
up to the time the claims were filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7,
1990 but premium was paid more than 90 days later on August 31, 1990 under O.R. No. 4771
(Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for Insurance Risk Coverage from May
22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but premium was collected by
UCPB only on July 13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs. "V" and
"V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering risks from May
22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium therefor was paid only on
July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661
covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but premium was
paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and "X-1"). Fire Insurance Policy
No. 34688 for insurance coverage from May 22, 1990 to May 22, 1991 was issued on May 7,
1990 but premium was paid only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1").
Fire Insurance Policy No. 29126 to cover insurance risks from May 22, 1989 to May 22, 1990
was issued on May 22, 1989 but premium therefor was collected only on July 25, 1990[sic]
under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering
risks from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's
sister company) dated December 10, 1988 but premium therefor was paid only on February 15,
1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128 was
issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No. 40800 for
insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire
Insurance Policy No. 29127 was issued on May 22, 1989 but premium was paid only on July 17,
1989 under O.R. No. 40682 for insurance risk coverage from May 22, 1989 to May 22, 1990
(Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was issued on June 15, 1989
but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage
from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303
was issued on November 22, 1988 but premium therefor was collected only on March 15, 1989

under O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to December 15,
1989 (Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the following circumstances constitute
preponderant proof that no timely notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit 11, Record, p. 350) from
Ultramar Reinsurance Brokers that plaintiffs reinsurance facility had been confirmed up to
67.5% only on April 15, 1992 as indicated on Exhibit 11. Apparently, the notice of nonrenewal (Exhibit 7, Record, p. 320) was sent not earlier than said date, or within 45 days
from the expiry dates of the policies as provided under Policy Condition No. 26; (2)
Defendant insurer unconditionally accepted, and issued an official receipt for, the premium
payment on July 1[3], 1992 which indicates defendant's willingness to assume the risk
despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban
Adjusters and Valuers to investigate plaintiffs claim as shown by the letter dated July 17,
1992 (Exhibit 11, Record, p. 254).
In our decision of 15 June 1999, we defined the main issue to be whether the fire insurance
policies issued by petitioner to the respondent covering the period from May 22, 1991 to May
22, 1992 had been extended or renewed by an implied credit arrangement though actual
payment of premium was tendered on a later date and after the occurrence of the (fire) risk
insured against. We resolved this issue in the negative in view of Section 77 of the Insurance
Code and our decisions in Valenzuela v. Court of Appealsii[2]; South Sea Surety and Insurance
Co., Inc. v. Court of Appealsiii[3]; and Tibay v. Court of Appeals.iv[4] Accordingly, we reversed
and set aside the decision of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges
in the motion that we had made in the decision our own findings of facts, which are not in accord
with those of the trial court and the Court of Appeals. The courts below correctly found that no
notice of non-renewal was made within 45 days before 22 May 1992, or before the expiration
date of the fire insurance policies. Thus, the policies in question were renewed by operation of
law and were effective and valid on 30 June 1992 when the fire occurred, since the premiums
were paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may neither agree expressly or
impliedly on the extension of credit or time to pay the premium nor consider a policy binding
before actual payment. It urges the Court to take judicial notice of the fact that despite the
express provision of Section 77 of the Insurance Code, extension of credit terms in premium
payment has been the prevalent practice in the insurance industry. Most insurance companies,
including Petitioner, extend credit terms because Section 77 of the Insurance Code is not a
prohibitive injunction but is merely designed for the protection of the parties to an insurance
contract. The Code itself, in Section 78, authorizes the validity of a policy notwithstanding nonpayment of premiums.
Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its
awareness of Section 77 Petitioner persuaded and induced Respondent to believe that payment
of premium on the 60- to 90-day credit term was perfectly alright; in fact it accepted payments
within 60 to 90 days after the due dates. By extending credit and habitually accepting payments
60 to 90 days from the effective dates of the policies, it has implicitly agreed to modify the tenor

of the insurance policy and in effect waived the provision therein that it would pay only for the
loss or damage in case the same occurred after payment of the premium.
Petitioner filed an opposition to the Respondents motion for reconsideration. It argues that both
the trial court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent
by ordinary mail to Respondent a notice of non-renewal and sent by personal delivery a copy
thereof to Respondents broker, Zuellig. Both courts likewise ignored the fact that Respondent
was fully aware of the notice of non-renewal. A reading of Section 66 of the Insurance Code
readily shows that in order for an insured to be entitled to a renewal of a non-life policy, payment
of the premium due on the effective date of renewal should first be made. Respondents
argument that Section 77 is not a prohibitive provision finds no authoritative support.
Upon a meticulous review of the records and reevaluation of the issues raised in the motion for
reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the motion
for reconsideration. The following facts, as found by the trial court and the Court of Appeals, are
indeed duly established:
1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies
were annually renewed.
2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the
premiums on the renewed policies.
3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all
that the notice sent by ordinary mail was received by Respondent, and the copy thereof
allegedly sent to Zuellig was ever transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid
by Respondent within the 60- to 90-day credit term and were duly accepted and received by
Petitioners cashier.
The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance
Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioners advantage despite its
practice of granting a 60- to 90-day credit term for the payment of premiums.
Section 77 of the Insurance Code of 1978 provides:
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of a life or an industrial life policy
whenever the grace period provision applies.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated
on 18 December 1974. In turn, this Section has its source in Section 72 of Act No. 2427
otherwise known as the Insurance Act as amended by R.A. No. 3540, approved on 21 June
1963, which read:
SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed
to the peril insured against, unless there is clear agreement to grant the insured credit extension

of the premium due. No policy issued by an insurance company is valid and binding unless and
until the premium thereof has been paid. (Underscoring supplied)
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly
permitting an agreement to extend the period to pay the premium. But are there exceptions to
Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life
policy whenever the grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides:
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of
Appeals,v[5] wherein we ruled that Section 77 may not apply if the parties have agreed to the
payment in installments of the premium and partial payment has been made at the time of loss.
We said therein, thus:
We hold that the subject policies are valid even if the premiums were paid on installments. The
records clearly show that the petitioners and private respondent intended subject insurance
policies to be binding and effective notwithstanding the staggered payment of the premiums.
The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those
three years, the insurer accepted all the installment payments. Such acceptance of payments
speaks loudly of the insurers intention to honor the policies it issued to petitioner. Certainly,
basic principles of equity and fairness would not allow the insurer to continue collecting and
accepting the premiums, although paid on installments, and later deny liability on the lame
excuse that the premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of the
Court of Appeals in its Resolution denying the motion for reconsideration of its decision:
While the import of Section 77 is that prepayment of premiums is strictly required as a condition
to the validity of the contract, We are not prepared to rule that the request to make installment
payments duly approved by the insurer would prevent the entire contract of insurance from
going into effect despite payment and acceptance of the initial premium or first installment.
Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of
prepayment by making an acknowledgment in the insurance policy of receipt of premium as
conclusive evidence of payment so far as to make the policy binding despite the fact that
premium is actually unpaid. Section 77 merely precludes the parties from stipulating that the
policy is valid even if premiums are not paid, but does not expressly prohibit an agreement
granting credit extension, and such an agreement is not contrary to morals, good customs,
public order or public policy (De Leon, The Insurance Code, p. 175). So is an understanding to
allow insured to pay premiums in installments not so prescribed. At the very least, both parties
should be deemed in estoppel to question the arrangement they have voluntarily accepted.

By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany
has provided a fourth exception to Section 77, namely, that the insurer may grant credit
extension for the payment of the premium. This simply means that if the insurer has granted the
insured a credit term for the payment of the premium and loss occurs before the expiration of
the term, recovery on the policy should be allowed even though the premium is paid after the
loss but within the credit term.
Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to
provide a credit term within which to pay the premiums. That agreement is not against the law,
morals, good customs, public order or public policy. The agreement binds the parties. Article
1306 of the Civil Code provides:
ART. 1306. The contracting parties may establish such stipulations clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not
be permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for
the payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking
refuge under said Section, since Respondent relied in good faith on such practice. Estoppel
then is the fifth exception to Section 77.
WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE,
and a new one is hereby entered DENYING the instant petition for failure of Petitioner to
sufficiently show that a reversible error was committed by the Court of Appeals in its challenged
decision, which is hereby AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.
FIELDMEN'S
INSURANCE
CO.,
INC.,
petitioner,
vs.
MERCEDES VARGAS VDA. DE SONGCO, ET AL. and COURT OF APPEALS, respondents.
An insurance firm, petitioner Fieldmen's Insurance Co., Inc., was not allowed to escape liability
under a common carrier insurance policy on the pretext that what was insured, not once but
twice, was a private vehicle and not a common carrier, the policy being issued upon the
insistence of its agent who discounted fears of the insured that his privately owned vehicle might
not fall within its terms, the insured moreover being "a man of scant education," finishing only
the first grade. So it was held in a decision of the lower court thereafter affirmed by respondent
Court of Appeals. Petitioner in seeking the review of the above decision of respondent Court of
Appeals cannot be so sanguine as to entertain the belief that a different outcome could be
expected. To be more explicit, we sustain the Court of Appeals.
The facts as found by respondent Court of Appeals, binding upon us, follow: "This is a peculiar
case. Federico Songco of Floridablanca, Pampanga, a man of scant education being only a first
grader ..., owned a private jeepney with Plate No. 41-289 for the year 1960. On September 15,
1960, as such private vehicle owner, he was induced by Fieldmen's Insurance Company

Pampanga agent Benjamin Sambat to apply for a Common Carrier's Liability Insurance Policy
covering his motor vehicle ... Upon paying an annual premium of P16.50, defendant Fieldmen's
Insurance Company, Inc. issued on September 19, 1960, Common Carriers Accident Insurance
Policy No. 45-HO- 4254 ... the duration of which will be for one (1) year, effective September 15,
1960 to September 15, 1961. On September 22, 1961, the defendant company, upon payment
of the corresponding premium, renewed the policy by extending the coverage from October 15,
1961 to October 15, 1962. This time Federico Songco's private jeepney carried Plate No. J68136-Pampanga-1961. ... On October 29, 1961, during the effectivity of the renewed policy,
the insured vehicle while being driven by Rodolfo Songco, a duly licensed driver and son of
Federico (the vehicle owner) collided with a car in the municipality of Calumpit, province of
Bulacan, as a result of which mishap Federico Songco (father) and Rodolfo Songco (son) died,
Carlos Songco (another son), the latter's wife, Angelita Songco, and a family friend by the name
of Jose Manuel sustained physical injuries of varying degree." 1
It was further shown according to the decision of respondent Court of Appeals: "Amor Songco,
42-year-old son of deceased Federico Songco, testifying as witness, declared that when
insurance agent Benjamin Sambat was inducing his father to insure his vehicle, he butted in
saying: 'That cannot be, Mr. Sambat, because our vehicle is an "owner" private vehicle and not
for passengers,' to which agent Sambat replied: 'whether our vehicle was an "owner" type or for
passengers it could be insured because their company is not owned by the Government and the
Government has nothing to do with their company. So they could do what they please whenever
they believe a vehicle is insurable' ... In spite of the fact that the present case was filed and tried
in the CFI of Pampanga, the defendant company did not even care to rebut Amor Songco's
testimony by calling on the witness-stand agent Benjamin Sambat, its Pampanga Field
Representative." 2
The plaintiffs in the lower court, likewise respondents here, were the surviving widow and
children of the deceased Federico Songco as well as the injured passenger Jose Manuel. On
the above facts they prevailed, as had been mentioned, in the lower court and in the respondent
Court of Appeals.1awphl.nt
The basis for the favorable judgment is the doctrine announced in Qua Chee Gan v. Law Union
and Rock Insurance Co., Ltd., 3 with Justice J. B. L. Reyes speaking for the Court. It is now
beyond question that where inequitable conduct is shown by an insurance firm, it is "estopped
from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured." 4
As much, if not much more so than the Qua Chee Gan decision, this is a case where the
doctrine of estoppel undeniably calls for application. After petitioner Fieldmen's Insurance Co.,
Inc. had led the insured Federico Songco to believe that he could qualify under the common
carrier liability insurance policy, and to enter into contract of insurance paying the premiums
due, it could not, thereafter, in any litigation arising out of such representation, be permitted to
change its stand to the detriment of the heirs of the insured. As estoppel is primarily based on
the doctrine of good faith and the avoidance of harm that will befall the innocent party due to its
injurious reliance, the failure to apply it in this case would result in a gross travesty of justice.
That is all that needs be said insofar as the first alleged error of respondent Court of Appeals is
concerned, petitioner being adamant in its far-from-reasonable plea that estoppel could not be

invoked by the heirs of the insured as a bar to the alleged breach of warranty and condition in
the policy. lt would now rely on the fact that the insured owned a private vehicle, not a common
carrier, something which it knew all along when not once but twice its agent, no doubt without
any objection in its part, exerted the utmost pressure on the insured, a man of scant education,
to enter into such a contract.
Nor is there any merit to the second alleged error of respondent Court that no legal liability was
incurred under the policy by petitioner. Why liability under the terms of the policy 5 was
inescapable was set forth in the decision of respondent Court of Appeals. Thus: "Since some of
the conditions contained in the policy issued by the defendant-appellant were impossible to
comply with under the existing conditions at the time and 'inconsistent with the known facts,' the
insurer 'is estopped from asserting breach of such conditions.' From this jurisprudence, we find
no valid reason to deviate and consequently hold that the decision appealed from should be
affirmed. The injured parties, to wit, Carlos Songco, Angelito Songco and Jose Manuel, for
whose hospital and medical expenses the defendant company was being made liable, were
passengers of the jeepney at the time of the occurrence, and Rodolfo Songco, for whose burial
expenses the defendant company was also being made liable was the driver of the vehicle in
question. Except for the fact, that they were not fare paying passengers, their status as
beneficiaries under the policy is recognized therein." 6
Even if it be assumed that there was an ambiguity, an excerpt from the Qua Chee Gan decision
would reveal anew the weakness of petitioner's contention. Thus: "Moreover, taking into account
the well known rule that ambiguities or obscurities must be strictly interpreted against the party
that caused them, the 'memo of warranty' invoked by appellant bars the latter from questioning
the existence of the appliances called for in the insured premises, since its initial expression,
'the undernoted appliances for the extinction of fire being kept on the premises insured
hereby, ... it is hereby warranted ...,' admits of interpretation as an admission of the existence of
such appliances which appellant cannot now contradict, should the parol evidence rule apply." 7
To the same effect is the following citation from the same leading case: "This rigid application of
the rule on ambiguities has become necessary in view of current business practices. The courts
cannot ignore that nowadays monopolies, cartels and concentration of capital, endowed with
overwhelming economic power, manage to impose upon parties dealing with them cunningly
prepared 'agreements' that the weaker party may not change one whit, his participation in the
'agreement' being reduced to the alternative to 'take it or leave it' labelled since Raymond
Saleilles 'contracts by adherence' (contrats d'adhesion), in contrast to those entered into by
parties bargaining on an equal footing, such contracts (of which policies of insurance and
international bills of lading are prime examples) obviously call for greater strictness and
vigilance on the part of courts of justice with a view to protecting the weaker party from abuses
and imposition, and prevent their becoming traps for the unwary (New Civil Code. Article 24;
Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942)." 8
The last error assigned which would find fault with the decision of respondent Court of Appeals
insofar as it affirmed the lower court award for exemplary damages as well as attorney's fees is,
on its face, of no persuasive force at all.

The conclusion that inescapably emerges from the above is the correctness of the decision of
respondent Court of Appeals sought to be reviewed. For, to borrow once again from the
language of the Qua Chee Gan opinion: "The contract of insurance is one of perfect good faith
(uberima fides) not for the insured alone,but equally so for the insurer; in fact, it is more so for
the latter, since its dominant bargaining position carries with it stricter responsibility." 9
This is merely to stress that while the morality of the business world is not the morality of
institutions of rectitude like the pulpit and the academe, it cannot descend so low as to be
another name for guile or deception. Moreover, should it happen thus, no court of justice should
allow itself to lend its approval and support.1awphl.nt
We have no choice but to recognize the monetary responsibility of petitioner Fieldmen's
Insurance Co., Inc. It did not succeed in its persistent effort to avoid complying with its obligation
in the lower court and the Court of Appeals. Much less should it find any receptivity from us for
its unwarranted and unjustified plea to escape from its liability.
WHEREFORE, the decision of respondent Court of Appeals of July 20, 1965, is affirmed in its
entirety. Costs against petitioner Fieldmen's Insurance Co., Inc.
SIMEON
DEL
ROSARIO,
plaintiff-appellee,
vs.
THE EQUITABLE INSURANCE AND CASUALTY CO., INC., defendant-appellant.
On February 7, 1957, the defendant Equitable Insurance and Casualty Co., Inc., issued
Personal Accident Policy No. 7136 on the life of Francisco del Rosario, alias Paquito Bolero,
son of herein plaintiff-appellee, binding itself to pay the sum of P1,000.00 to P3,000.00, as
indemnity for the death of the insured. The pertinent provisions of the Policy, recite:
Part I. Indemnity For Death
If the insured sustains any bodily injury which is effected solely through violent, external,
visible and accidental means, and which shall result, independently of all other causes
and within sixty (60) days from the occurrence thereof, in the Death of the Insured, the
Company shall pay the amount set opposite such injury:

Section 1. Injury sustained other than

those specified below unless excepted
hereinafter. . . . . . . .
P1,000.00
Section 2. Injury sustained by the
wrecking or disablement of a railroad
passenger car or street railway car in or
on which the Insured is travelling as a
farepaying passenger. . . . . . . .
P1,500.00

Section 3. Injury sustained by the burning

of a church, theatre, public library or
municipal administration building while the
Insured is therein at the commencement
of the fire. . . . . . . .
P2,000.00
Section 4. Injury sustained by the
wrecking or disablement of a regular
passenger elevator car in which the
Insured is being conveyed as a
passenger (Elevator in mines excluded)
P2,500.00

Section 5. Injury sustained by a stroke of

lightning or by a cyclone. . . . . . . .
P3,000.00
xxx

xxx

xxx

Part VI. Exceptions

This policy shall not cover disappearance of the Insured nor shall it cover Death,
Disability, Hospital fees, or Loss of Time, caused to the insured:
. . . (h) By drowning except as a consequence of the wrecking or disablement in the
Philippine waters of a passenger steam or motor vessel in which the Insured is travelling
as a farepaying passenger; . . . .
A rider to the Policy contained the following:
IV. DROWNING
It is hereby declared and agreed that exemption clause Letter (h) embodied in PART VI of the
policy is hereby waived by the company, and to form a part of the provision covered by the
policy.
On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while on board
the motor launch "ISLAMA" together with 33 others, including his beneficiary in the Policy,
Remedios Jayme, were forced to jump off said launch on account of fire which broke out on said
vessel, resulting in the death of drowning, of the insured and beneficiary in the waters of Jolo.
1wph1.t
On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir, filed a claim
for payment with defendant company, and on September 13, 1957, defendant company paid to

him (plaintiff) the sum of P1,000.00, pursuant to Section 1 of Part I of the policy. The receipt
signed by plaintiff reads
RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC., the sum
of PESOS ONE THOUSAND (P1,000.00) Philippine Currency, being
settlement in full for all claims and demands against said Company as a result of
an accident which occurred on February 26, 1957, insured under out ACCIDENT
Policy No. 7136, causing the death of the Assured.
In view of the foregoing, this policy is hereby surrendered and CANCELLED.
LOSS COMPUTATION
Amount
of
__________
vvvvv

Insurance

P1,000.00

On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant company
acknowledging receipt by his client (plaintiff herein), of the P1,000.00, but informing said
company that said amount was not the correct one. Atty. Francisco claimed
The amount payable under the policy, I believe should be P1,500.00 under the provision
of Section 2, part 1 of the policy, based on the rule of pari materia as the death of the
insured occurred under the circumstances similar to that provided under the aforecited
section.
Defendant company, upon receipt of the letter, referred the matter to the Insurance
Commissioner, who rendered an opinion that the liability of the company was only P1,000.00,
pursuant to Section 1, Part I of the Provisions of the policy (Exh. F, or 3). Because of the above
opinion, defendant insurance company refused to pay more than P1,000.00. In the meantime,
Atty. Vicente Francisco, in a subsequent letter to the insurance company, asked for P3,000.00
which the Company refused, to pay. Hence, a complaint for the recovery of the balance of
P2,000.00 more was instituted with the Court of First Instance of Rizal (Pasay City, Branch VII),
praying for it further sum of P10,000.00 as attorney's fees, expenses of litigation and costs.
Defendant Insurance Company presented a Motion to Dismiss, alleging that the demand or
claim is set forth in the complaint had already been released, plaintiff having received the full
amount due as appearing in policy and as per opinion of the Insurance Commissioner. An
opposition to the motion to dismiss, was presented by plaintiff, and other pleadings were
subsequently file by the parties. On December 28, 1957, the trial court deferred action on the
motion to dismiss until termination of the trial of the case, it appearing that the ground thereof
was not indubitable. In the Answer to the complaint, defendant company practically admitted all
the allegations therein, denying only those which stated that under the policy its liability was
P3,000.00.
On September 1, 1958, the trial court promulgated an Amended Decision, the pertinent portions
of which read
xxx

xxx

xxx

Since the contemporaneous and subsequent acts of the parties show that it was not
their intention that the payment of P1,000.00 to the plaintiff and the signing of the loss
receipt exhibit "1" would be considered as releasing the defendant completely from its
liability on the policy in question, said intention of the parties should prevail over the
contents of the loss receipt "1" (Articles 1370 and 1371, New Civil Code).
". . . . Under the terms of this policy, defendant company agreed to pay P1,000.00 to
P3,000.00 as indemnity for the death of the insured. The insured died of drowning.
Death by drowning is covered by the policy the pertinent provisions of which reads as
follows:
xxx

xxx

xxx

"Part I of the policy fixes specific amounts as indemnities in case of death

resulting from "bodily injury which is effected solely thru violence, external, visible
and accidental means" but, Part I of the Policy is not applicable in case of death
by drowning because death by drowning is not one resulting from "bodily injury
which is affected solely thru violent, external, visible and accidental means" as
"Bodily Injury" means a cut, a bruise, or a wound and drowning is death due to
suffocation and not to any cut, bruise or wound."
xxx

xxx

xxx

Besides, on the face of the policy Exhibit "A" itself, death by drowning is a ground for
recovery apart from the bodily injury because death by bodily injury is covered by Part I
of the policy while death by drowning is covered by Part VI thereof. But while the policy
mentions specific amounts that may be recovered for death for bodily injury, yet, there is
not specific amount mentioned in the policy for death thru drowning although the latter is,
under Part VI of the policy, a ground for recovery thereunder. Since the defendant has
bound itself to pay P1000.00 to P3,000.00 as indemnity for the death of the insured but
the policy does not positively state any definite amount that may be recovered in case of
death by drowning, there is an ambiguity in this respect in the policy, which ambiguity
must be interpreted in favor of the insured and strictly against the insurer so as to allow
greater indemnity.
xxx

xxx

xxx

. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already paid
the amount of P1,000.00 to the plaintiff so that there still remains a balance of P2,000.00
of the amount to which plaintiff is entitled to recover under the policy Exhibit "A".
The plaintiff asks for an award of P10,000.00 as attorney's fees and expenses of
litigation. However, since it is evident that the defendant had not acted in bad faith in
refusing to pay plaintiff's claim, the Court cannot award plaintiff's claim for attorney's fees
and expenses of litigation.
IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside its
decision dated July 21, 1958 and hereby renders judgment, ordering the defendant to
pay plaintiff the sum of Two Thousand (P2,000.00) Pesos and to pay the costs.

The above judgment was appealed to the Court of Appeals on three (3) counts. Said Court, in a
Resolution dated September 29, 1959, elevated the case to this Court, stating that the genuine
issue is purely legal in nature.
All the parties agree that indemnity has to be paid. The conflict centers on how much should the
indemnity be. We believe that under the proven facts and circumstances, the findings and
conclusions of the trial court, are well taken, for they are supported by the generally accepted
principles or rulings on insurance, which enunciate that where there is an ambiguity with respect
to the terms and conditions of the policy, the same will be resolved against the one responsible
thereof. It should be recalled in this connection, that generally, the insured, has little, if any,
participation in the preparation of the policy, together with the drafting of its terms and
Conditions. The interpretation of obscure stipulations in a contract should not favor the party
who cause the obscurity (Art. 1377, N.C.C.), which, in the case at bar, is the insurance
company.
. . . . And so it has been generally held that the "terms in an insurance policy, which are
ambiguous, equivocal or uncertain . . . are to be construed strictly against, the insurer,
and liberally in favor of the insured so as to effect the dominant purpose of indemnity or
payment to the insured, especially where a forfeiture is involved," (29 Am. Jur. 181) and
the reason for this rule is that the "insured usually has no voice in the selection or
arrangement of the words employed and that the language of the contract is selected
with great care and deliberation by expert and legal advisers employed by, and acting
exclusively in the interest of, the insurance company" (44 C.J.S. 1174). Calanoc v. Court
of Appeals, et al., G.R. No. L-8151, Dec. 16, 1955.
. . . . Where two interpretations, equally fair, of languages used in an insurance policy
may be made, that which allows the greater indemnity will prevail. (L'Engel v. Scotish
Union & Nat. F. Ins. Co., 48 Fla. 82, 37 So. 462, 67 LRA 581 111 Am. St. Rep. 70, 5 Ann.
Cas. 749).
At any event, the policy under consideration, covers death or disability by accidental means,
and the appellant insurance company agreed to pay P1,000.00 to P3,000.00. is indemnity for
death of the insured.
In view of the conclusions reached, it would seem unnecessary to discuss the other issues
raised in the appeal.
The judgment appealed from is hereby affirmed. Without costs.
FE DE JOYA LANDICHO, in her own behalf and as judicial guardian of her minor children,
RAFAEL J. LANDICHO and MA. LOURDES EUGENIA LANDICHO,plaintiffs-appellees,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM,defendant-appellant. .
Appeal of the Government Service Insurance System hereinafter referred to as GSIS, for the
sake of brevity from a decision of the Court of First Instance of Manila directing said
defendant to pay to the plaintiffs-appellees, Fe de Joya Landicho and her minor children, Rafael
J. and Maria Lourdes Eugenia, both surnamed Landicho, the sum of P15,800, with interest

thereon, at the legal rate, from September 26, 1967, until fully paid, in addition to the sum of
P1,000, as and for attorney's fees, and the costs.
The facts are not in dispute. On June 1, 1964, the GSIS issued in favor of Flaviano Landicho, a
civil engineer of the Bureau of Public Works, stationed at Mamburao, Mindoro Occidental,
optional additional life insurance policy No. OG-136107 in the sum of P7,900. The policy states
on its face:
This insurance is granted subject to the terms and conditions hereinafter set forth
and in consideration of the "Information" therefor and of the payment on the day
this Policy takes effect of the monthly premiums stated above, due from and
payable by the Insured, and the like payments on the last day of every month
during the lifetime of the Insured until maturity of this Policy or until prior death of
the Insured.
On page 2 of said policy, condition No. 1 provides, in part: .
1. PAYMENT OF PREMIUMS: .
... . Premiums are due and payable at the Office of the System in Manila or at
any of its branches. When any premium or installment thereof remains unpaid
after its due date, such due date is the date of default in payment of premiums.
The mere possession of this Policy does not imply that it is in force unless the
premiums due thereon are paid on time or the policy has sufficient cash value to
keep it in force.
Condition No. 18, on page 8 of the policy, is of the following tenor: .
18. ENTIRE CONTRACT IN THIS POLICY: .
This Policy together with the "Information" sheet signed by the Insured, a copy of
which is attached hereto, is issued under the provisions of Commonwealth Act
No. 186, as amended, and constitutes the entire contract.
All statements made by the Insured shall, in the absence of fraud, be deemed
representations and no warranties, and no statement shall void the Policy or be
used as a defense to claim hereunder unless it be contained in written
information and a copy of such information be endorsed upon or attached to the
Policy when issued.
Before the issuance of said policy, the insured had filed an application, by filing and signing a
printed form of the GSIS on the basis of which the policy was issued. Paragraph 7 of said
application States:
7. I hereby declare that all the above statements and answers as well as those I
may make to the System's Medical Examiner in continuation of this application,

to be true and co direct to the best of my knowledge and belief, and I hereby
agree as follows: .
a. That this declaration, with the answers to be given by me to the Medical
Officer, shall be made the basis the policy and form part of the same; .
b. That acceptance of my policy issued on this application will constitute a
ratification by me of any correction or addition to this application made by the
System; .
c. That this application serves as a letter of authority to the Collecting Officer of
our Office thru the GSIS to deduct from my salary the monthly premium in the
amount of P33.36, beginning the month of May, 1964, and every month
thereafter until notice of its discontinuance shall have beenreceived from the
System; .
d. That the failure to deduct from my salary the month premiums shall not make
the policy lapse, however, the premium account shall be considered as
indebtedness which, I bind myself to pay the System; .
e. That my policy shall be made effective on the first day of the month next
following the month the first premium is paid; provided, that it is not more ninety
(90) days before or after the date of the medical examination,was conducted if
required." .
While still under the employment of the Bureau of Public Works, Mr. Landicho met his death, on
June 29, 1966, in an airplane crash in Mindoro. Thereupon, Mrs. Landicho, in her own behalf
and that of her co-plaintiffs and minor children, Rafael J. and Maria Lourdes Eugenia, filed with
the GSIS a claim for P15,800, as the double indemnity due under policy No. OG-136107,
because of the untimely death of the insured owing to said accident. The GSIS denied the
claim, upon the ground that the policy had never been in force because, pursuant to subdivision
(e) of the above-quoted paragraph 7 of the application, the policy "shall be ... effective on the
first day of the month next following the month the first premium is paid," and no premium had
ever been paid on said policy. Upon refusal of the GSIS to reconsider its stand, this action was
filed, September 22, 1967, in the Court of First Instance of Manila, in which the GSIS reiterated
its aforementioned defense. Thereafter submitted by both parties for judgment on the pleadings,
upon the ground thatthe case involve purely questions of law, said court rendered, in due
course, its abovementioned decision, from which the GSIS has taken the present appeal.
The main issue therein is whether or not the insurance policy in question has ever been in force,
not a single premium having been paid thereon. In support of the affirmative, plaintiffs invoke
the stipulation in the policy to the effect that the information contained in the application filed by
the insured shall form part of the contract between him and the GSIS, and, especially,
subdivisions (c) and (d) of paragraph 7 of said application stating that the same shall serve "as
a letter of authority to the Collecting Officer of our Office" the Bureau of Public Works "thru
the GSIS to deduct from my salary the monthly premium in the amount of P33.36 beginning the
month of May, 1964, and every month thereafter," and that "failure to deduct from my salary the

monthly premiums shall not make the policy lapse, however, the premium account shall be
considered as indebtedness which, I" the insured "bind myself to pay the System." 1 The
GSIS maintains, however, the negative, relying upon subdivision (e) of the same paragraph No.
7, which provides that the "policy shall be made effective on the first day of the month next
following the month the first premium is paid." Under this theory, subdivisions (c) and (d) of said
paragraph 7 would not apply unless and until the first premium shall have been actually paid,
pursuant to subdivision (e) of the same paragraph.
Although it may not be entirely farfetched, this view is not likely to be in accord with the
understanding of many, if not most, government employees who obtain an optional additional
life insurance policy. As a consequence, the actual receipt by them of their full pay without
any deduction for premiums on their optional additional life insurance policies may not impart
to them the warning which, otherwise, it would necessarily convey that said policy is not,
as yet, in force, for they are liable to believe "that failure to deduct" from the salary of the
insured "the monthly premiums shall not" in the language of subdivision (d) "make the
policy lapse" and that "the premiums account shall be considered as indebtedness," to be paid
or deducted later, because, after all, the so called "payment" of premiums is nothing but a
"paper" or "accounting" process, whereby funds are merely transferred, not physically, but
constructively, from one office of the government to another. In other words, the language, of
subdivisions (c), (d) and (e) is such as to create an ambiguity that should be resolved against
the party responsible therefor defendant GSIS, as the party who prepared and furnished the
application form and in favor of the party misled thereby, the insured employee.
Indeed, our Civil Code provides:
The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity. 2
This is particularly true as regards insurance policies, in respect of which it is settled that the "
"terms in an insurance policy, which are ambiguous, equivocal, or uncertain ... are to be
construed strictly and most strongly against the insurer, and liberally in favor of the insured so
as to effect the dominant purpose of indemnity or payment to the insured, especially where a
forfeiture is involved" (29 Am. Jur., 181), and the reason for this rule is the "insured usually has
no voice in the selection or arrangement of the words employed and that the language of the
contract is selected with great care and deliberation by experts and legal advisers employed by,
and acting exclusively in the interest of, the insurance company." (44 C.J.S., p. 1174.) 3.
The equitable and ethical considerations justifying the foregoing view are bolstered up by two
(2) factors, namely:
(a) The aforementioned subdivision (c) states "that this application serves as a letter of authority
to the Collecting Officer of our Office" the Bureau of Public Works "thru the GSIS to deduct
from my salary the monthly premium in the amount of P33.36." No such deduction was made
and, consequently, not even the first premium "paid" because the collecting officer of the
Bureau of Public Works was not advised by the GSIS to make it (the deduction) pursuant to said
authority. Surely, this omission of the GSIS should not inure to its benefit. .

(b) The GSIS had impliedly induced the insured to believe that Policy No. OG-136107 was in
force, he having been paid by the GSIS the dividends corresponding to said policy. Had the
insured had the slightest inkling that the latter was not, as yet, effective for non-payment of the
first premium, he would have, in all probability, caused the same to be forthwith satisfied.
WHEREFORE, the decision appealed from should be, it is hereby affirmed, with costs against
the defendant-appellant, Government Service Insurance System. It is so ordered. .
Reyes, J.B.L., Makalintal, Zaldivar, Castro, Fernando, Teehankee, Villamor, Barredo and
Makasiar, JJ., concur.

ETERNAL
GARDENS
MEMORIAL
PARK
CORPORATION,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.

petitioner,

The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set
aside the November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810
is the query: May the inaction of the insurer on the insurance application be considered as
approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife)
entered into an agreement denominated as Creditor Group Life Policy No. P-1920 2 with
petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of
Eternal who purchased burial lots from it on installment basis would be insured by Philamlife.
The amount of insurance coverage depended upon the existing balance of the purchased burial
lots. The policy was to be effective for a period of one year, renewable on a yearly basis.

The relevant provisions of the policy are:

ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age,
is indebted to the Assured for the unpaid balance of his loan with the Assured, and is
accepted for Life Insurance coverage by the Company on its effective date is eligible for
insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to P50,000.00.
However, a declaration of good health shall be required for all Lot Purchasers as part of
the application. The Company reserves the right to require further evidence of
insurability satisfactory to the Company in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the
unpaid balance of his loan (including arrears up to but not exceeding 2 months) as
reported by the Assured to the Company or the sum of P100,000.00, whichever is
smaller. Such benefit shall be paid to the Assured if the Lot Purchaser dies while insured
under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a
loan with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.3
Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers,
together with a copy of the application of each purchaser, and the amounts of the respective
unpaid balances of all insured lot purchasers. In relation to the instant petition, Eternal complied
by submitting a letter dated December 29, 1982, 4 containing a list of insurable balances of its lot
buyers for October 1982. One of those included in the list as "new business" was a certain John
Chuang. His balance of payments was PhP 100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim
for Chuangs death. Attached to the claim were the following documents: (1) Chuangs
Certificate of Death; (2) Identification Certificate stating that Chuang is a naturalized Filipino
Citizen; (3) Certificate of Claimant; (4) Certificate of Attending Physician; and (5) Assureds
Certificate.

In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit the
following documents relative to its insurance claim for Chuangs death: (1) Certificate of
Claimant (with form attached); (2) Assureds Certificate (with form attached); (3) Application for
Insurance accomplished and signed by the insured, Chuang, while still living; and (4) Statement
of Account showing the unpaid balance of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14, 1984, 7 which
was received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the latters
insurance claim. This prompted Eternal to demand from Philamlife the payment of the claim for
PhP 100,000 on April 25, 1986.8
In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter dated
May 20, 1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and 9529 with
Eternal Gardens Memorial Park in October 1982 for the total maximum insurable amount
of P100,000.00 each. No application for Group Insurance was submitted in our office
prior to his death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of good health shall be required for all Lot
Purchasers as party of the application." We cite further the provision on Effective Date of
Coverage under the policy which states that "there shall be no insurance if the
application is not approved by the Company." Since no application had been submitted
by the Insured/Assured, prior to his death, for our approval but was submitted instead on
November 15, 1984, after his death, Mr. John Uy Chuang was not covered under the
Policy. We wish to point out that Eternal Gardens being the Assured was a party to the
Contract and was therefore aware of these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our approval per se of
the insurance coverage but are held by us in trust for the payor until the prerequisites for
insurance coverage shall have been met. We will however, return all the premiums
which have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum
of money against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor
of Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff
ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to
pay the sum of P100,000.00, representing the proceeds of the Policy of John Uy
Chuang, plus legal rate of interest, until fully paid; and, to pay the sum of P10,000.00 as
attorneys fees.
SO ORDERED.

The RTC found that Eternal submitted Chuangs application for insurance which he
accomplished before his death, as testified to by Eternals witness and evidenced by the letter
dated December 29, 1982, stating, among others: "Encl: Phil-Am Life Insurance Application
Forms & Cert."10 It further ruled that due to Philamlifes inaction from the submission of the
requirements of the group insurance on December 29, 1982 to Chuangs death on August 2,
1984, as well as Philamlifes acceptance of the premiums during the same period, Philamlife
was deemed to have approved Chuangs application. The RTC said that since the contract is a
group life insurance, once proof of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No.
57810 is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not enclosed in
Eternals letter dated December 29, 1982. It further ruled that the non-accomplishment of the
submitted application form violated Section 26 of the Insurance Code. Thus, the CA concluded,
there being no application form, Chuang was not covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore
determined by this Honorable Court, or has decided it in a way not in accord with law or
with the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife
before the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated
May 29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised
before the CA and first level courts, considering their findings of facts are conclusive and binding
on this Court. However, such rule is subject to exceptions, as enunciated in Sampayan v. Court
of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a misapprehension of
facts; (5) when the findings of facts are conflicting; (6) when in making its findings the
[CA] went beyond the issues of the case, or its findings are contrary to the admissions of

both the appellant and the appellee; (7) when the findings [of the CA] are contrary to
the trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as well as
in the petitioners main and reply briefs are not disputed by the respondent; (10) when
the findings of fact are premised on the supposed absence of evidence and contradicted
by the evidence on record; and (11) when the Court of Appeals manifestly overlooked
certain relevant facts not disputed by the parties, which, if properly considered, would
justify a different conclusion.12 (Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court
may review them.
Eternal claims that the evidence that it presented before the trial court supports its contention
that it submitted a copy of the insurance application of Chuang before his death. In Eternals
letter dated December 29, 1982, a list of insurable interests of buyers for October 1982 was
attached, including Chuang in the list of new businesses. Eternal added it was noted at the
bottom of said letter that the corresponding "Phil-Am Life Insurance Application Forms & Cert."
were enclosed in the letter that was apparently received by Philamlife on January 15, 1983.
Finally, Eternal alleged that it provided a copy of the insurance application which was signed by
Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient,
arguing that Eternal must present evidence showing that Philamlife received a copy of Chuangs
insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as
received, states that the insurance forms for the attached list of burial lot buyers were attached
to the letter. Such stamp of receipt has the effect of acknowledging receipt of the letter together
with the attachments. Such receipt is an admission by Philamlife against its own interest. 13 The
burden of evidence has shifted to Philamlife, which must prove that the letter did not contain
Chuangs insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed
to have received Chuangs insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is
stamped as received, the contents of the letter are correct and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the reliability
and credibility of the witnesses, because it has the opportunity to observe firsthand the
witnesses demeanor, conduct, and attitude. Findings of the trial court on such matters are
binding and conclusive on the appellate court, unless some facts or circumstances of weight
and substance have been overlooked, misapprehended, or misinterpreted, 14 that, if considered,
might affect the result of the case.15

An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals

no overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance
application of Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new
coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of this form
and the original of this is submitted to Philamlife together with the monthly remittances
and the second copy is remained or retained with the marketing department of Eternal
Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely asking for
the location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with that
payment together with the new clients all the originals I see to it before I sign the
transmittal letter the originals are attached therein.16
In other words, the witness admitted not knowing where the original insurance application was,
but believed that the application was transmitted to Philamlife as an attachment to a transmittal
letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or
two insurance application forms were accomplished and the testimony of Mendoza on who
actually filled out the application form, these are minor inconsistencies that do not affect the
credibility of the witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are
too trivial to affect the credibility of witnesses, and these may even serve to strengthen their
credibility as these negate any suspicion that the testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:

Minor discrepancies or inconsistencies do not impair the essential integrity of the

prosecutions evidence as a whole or reflect on the witnesses honesty. The test is
whether the testimonies agree on essential facts and whether the respective versions
corroborate and substantially coincide with each other so as to make a consistent and
coherent whole.18
In the present case, the number of copies of the insurance application that Chuang executed is
not at issue, neither is whether the insurance application presented by Eternal has been
falsified. Thus, the inconsistencies pointed out by Philamlife are minor and do not affect the
credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without
approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor
Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a
loan with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two sentences. The
first sentence appears to state that the insurance coverage of the clients of Eternal already
became effective upon contracting a loan with Eternal while the second sentence appears to
require Philamlife to approve the insurance contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which must be
construed liberally in favor of the insured and strictly against the insurer in order to safeguard
the latters interest. Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held
that:
Indemnity and liability insurance policies are construed in accordance with the general
rule of resolving any ambiguity therein in favor of the insured, where the contract or
policy is prepared by the insurer. A contract of insurance, being a contract of
adhesion, par excellence, any ambiguity therein should be resolved against the
insurer; in other words, it should be construed liberally in favor of the insured and strictly
against the insurer. Limitations of liability should be regarded with extreme jealousy and
must be construed in such a way as to preclude the insurer from noncompliance with its
obligations.19 (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated
the above ruling, stating that:

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

(4) To pay Eternal attorneys fees in the amount of PhP 10,000.

No costs.
SO ORDERED.
MALAYAN
INSURANCE
CO.,
INC.,
petitioner,
vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY,
SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.
Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319R, dated 22 February 1973, which affirmed, with some modifications, the decision, ** dated 27
April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan.
The antecedent facts of the case are as follows:
On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private
respondent Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18
April 1967 to 18 April 1968, covering a Willys jeep with Motor No. ET-03023 Serial No. 351672,
and Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not
to exceed P600.00 and "third-party liability" in the amount of P20,000.00.
During the effectivity of said insurance policy, and more particularly on 19 December 1967, at
about 3:30 o'clock in the afternoon, the insured jeep, while being driven by one Juan P.
Campollo an employee of the respondent San Leon Rice Mill, Inc., collided with a passenger
bus belonging to the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short)
at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the
insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C.
Vallejos, who was riding in the ill-fated jeep.
As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance
Co., Inc. and the PANTRANCO before the Court of First Instance of Pangasinan, which was
docketed as Civil Case No. U-2021. He prayed therein that the defendants be ordered to pay
him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and hospital
expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory
damages; and P5,000.00, for attorney's fees.
Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive
speed and bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of
the highway in order to avoid the jeep; and that it had observed the diligence of a good father of
a family to prevent damage, especially in the selection and supervision of its employees and in
the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability.
Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability
to the plaintiff, claiming that the fault in the accident was solely imputable to the PANTRANCO.

Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner
wherein he alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of
P5,000.00 for hospitalization and other expenses, and, in his cross-claim against the herein
petitioner, he alleged that the petitioner had issued in his favor a private car comprehensive
policy wherein the insurance company obligated itself to indemnify Sio Choy, as insured, for the
damage to his motor vehicle, as well as for any liability to third persons arising out of any
accident during the effectivity of such insurance contract, which policy was in full force and
effect when the vehicular accident complained of occurred. He prayed that he be reimbursed by
the insurance company for the amount that he may be ordered to pay.
Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint
against the San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy,
at the time of the accident, was an employee of the San Leon Rice Mill, Inc. performing his
duties within the scope of his assigned task, and not an employee of Sio Choy; and that, as the
San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be
liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner
prayed that judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the
amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and
indemnify the petitioner for any sum that it may be ordered to pay the plaintiff.
After trial, judgment was rendered as follows:
WHEREFORE, in view of the foregoing findings of this Court judgment is hereby
rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance
Co., Inc., and third-party defendant San Leon Rice Mill, Inc., as follows:
(a) P4,103 as actual damages;
(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos
for the period of three (3) years;
(c) P5,000.00 as moral damages;
(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.
The above-named parties against whom this judgment is rendered are hereby
held jointly and severally liable. With respect, however, to Malayan Insurance
Co., Inc., its liability will be up to only P20,000.00.
As no satisfactory proof of cost of damage to its bus was presented by defendant
Pantranco, no award should be made in its favor. Its counter-claim for attorney's
fees is also dismissed for not being proved. 1
On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio
Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally
liable for the damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San
Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance

company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice
Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance
company. 2
Hence, the present recourse by petitioner insurance company.
The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to
order the San Leon Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half
(1/2) of the entire amount of damages, petitioner may be ordered to pay jointly and severally
with Sio Choy.
The Court, acting upon the petition, gave due course to the same, but "only insofar as it
concerns the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it being
understood that no other aspect of the decision of the Court of Appeals shall be reviewed,
hence, execution may already issue in favor of respondent Martin C. Vallejos against the
respondents, without prejudice to the determination of whether or not petitioner shall be entitled
to reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of whatever the
former may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos." 3
However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to
petitioner, it is important to determine first the nature or basis of the liability of petitioner to
respondent Vallejos, as compared to that of respondents Sio Choy and San Leon Rice Mill, Inc.
Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld
by the Court of Appeals, was correct in holding petitioner and respondents Sio Choy and San
Leon Rice Mill, Inc. "solidarily liable" to respondent Vallejos; and (2) whether petitioner is entitled
to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount petitioner has
been adjudged to pay respondent Vallejos on its insurance policy.
As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that
petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable
to respondent Vallejos.
We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy
and San Leon Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to
respondent Vallejos for the damages awarded to Vallejos.
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the illfated Willys jeep, pursuant to Article 2184 of the Civil Code which provides:
Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if
the former, who was in the vehicle, could have, by the use of due diligence,
prevented the misfortune it is disputably presumed that a driver was negligent, if
he had been found guilty of reckless driving or violating traffic regulations at least
twice within the next preceding two months.

If the owner was not in the motor vehicle, the provisions of article 2180 are
applicable.
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to
plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the
motor vehicle mishap, is Article 2180 of the Civil Code which reads:
Art. 2180. The obligation imposed by article 2176 is demandable not only for
one's own acts or omissions, but also for those of persons for whom one is
responsible.
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though
the former are not engaged ill any business or industry.
xxx xxx xxx
The responsibility treated in this article shall cease when the persons herein
mentioned proved that they observed all the diligence of a good father of a family
to prevent damage.
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal
tortfeasors who are primarily liable to respondent Vallejos. The law states that the responsibility
of two or more persons who are liable for a quasi-delict is solidarily. 4
On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio
Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than
P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third
party liability clause included in the private car comprehensive policy existing between petitioner
and respondent Sio Choy at the time of the complained vehicular accident.
In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was
bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by
the heirs of said passenger against the driver and owner of the jeepney at fault as well as
against the insurance company which insured the latter jeepney against third party liability, the
trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault
jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages
and attorney's fees; while the insurance company was sentenced to pay the heirs the amount of
P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said
owner and driver of the jeepney. Thus, in said Guingon case, it was only the owner and the
driver of the jeepney at fault, not including the insurance company, who were held solidarily
liable to the heirs of the victim.
While it is true that where the insurance contract provides for indemnity against liability to third
persons, such third persons can directly sue the insurer, 6 however, the direct liability of the

insurer under indemnity contracts against third party liability does not mean that the insurer can
be held solidarily liable with the insured and/or the other parties found at fault. The liability of the
insurer is based on contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it
cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal
tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer
were solidarily liable with said two (2) respondents by reason of the indemnity contract against
third party liability-under which an insurer can be directly sued by a third party this will result
in a violation of the principles underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary
debtors. 7 On the other hand, insurance is defined as "a contract whereby one undertakes for a
consideration to indemnify another against loss, damage, or liability arising from an unknown or
contingent event." 8
In the case at bar, the trial court held petitioner together with respondents Sio Choy and San
Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with
the qualification that petitioner's liability is only up to P20,000.00. In the context of a solidary
obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of
P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be
obliged to pay the entire obligation when the amount stated in its insurance policy with
respondent Sio Choy for indemnity against third party liability is only P20,000.00? Moreover, the
qualification made in the decision of the trial court to the effect that petitioner is sentenced to
pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident
breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by
the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and
San Leon Rice Mill, Inc. to respondent Vallejos.
As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled
that petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the
ground that said respondent is not privy to the contract of insurance existing between petitioner
and respondent Sio Choy. We disagree.
The appellate court overlooked the principle of subrogation in insurance contracts. Thus
... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs.
Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is
entitled to be subrogated pro tanto to any right of action which the insured may
have against the third person whose negligence or wrongful act caused the loss
(44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan
Assurance Co., 283 U.S. 284, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The loss in the first instance is
that of the insured but after reimbursement or compensation, it becomes the loss
of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins.
Co., 22 Ohio St. 382).

Although many policies including policies in the standard form, now provide for
subrogation, and thus determine the rights of the insurer in this respect, the
equitable right of subrogation as the legal effect of payment inures to the insurer
without any formal assignment or any express stipulation to that effect in the
policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company
pays for the loss, such payment operates as an equitable assignment to the
insurer of the property and all remedies which the insured may have for the
recovery thereof. That right is not dependent upon , nor does it grow out of any
privity of contract (emphasis supplied) or upon written assignment of claim, and
payment to the insured makes the insurer assignee in equity (Shambley v. JobeBlackley Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18). 9
It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot
exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as
such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill,
Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation
the right to be reimbursed by his co-debtors for the share which corresponds to each.
Art. 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may choose
which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period
may be demanded.
xxx xxx xxx
In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby
becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from
respondent San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are
solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may
enforce the entire obligation on only one of said solidary debtors. If Sio Choy as solidary debtor
is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is
compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee
of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of
P14,551.50 (which is 1/2 of P29,103.00 )
WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the
Court of Appeals, is hereby AFFIRMED, with the modification above-mentioned. Without
pronouncement as to costs.
SO ORDERED.

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF APPEALS and
TRANSWORLD KNITTING MILLS, INC., respondents.
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking
to annul and set aside the July 15, 1993 Decision 1[1] and October 22, 1993
Resolution2[2] of the Court of Appeals3[3] in CA-G.R. CV NO. 28779, which modified the
Ruling4[4] of the Regional Trial Court of Pasig, Branch 161, in Civil Case No. 46106.
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire
Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld),
initially for One Million (P1,000,000.00) Pesos and eventually increased to One Million
Five Hundred Thousand (P1,500,000.00) Pesos, covering the period from August 14,
1980 to March 13, 1981.
Pertinent portions of subject policy on the buildings insured, and location thereof, read:
"On stocks of finished and/or unfinished products, raw materials and supplies of
every kind and description, the properties of the Insureds and/or held by them in
trust, on commission or on joint account with others and/or for which they (sic)
responsible in case of loss whilst contained and/or stored during the currency of
this Policy in the premises occupied by them forming part of the buildings situate
1
2
3
4

(sic) within own Compound at MAGDALO STREET, BARRIO UGONG, PASIG,

METRO MANILA, PHILIPPINES, BLOCK NO. 601.
xxx...............xxx...............xxx
Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills, garment and lingerie factory,
transistor-stereo assembly plant, offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete building under galvanized iron roof
occupied as canteen and guardhouse, partly by building of two and partly one
storey constructed of concrete below, timber above undergalvanized iron roof
occupied as garage and quarters and partly by open space and/or tracking/
packing, beyond which is the aforementioned Magdalo Street; on its right and left
by driveway, thence open spaces, and at the rear by open spaces.'"5[5]
The same pieces of property insured with the petitioner were also insured with New India
Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld, razing the middle
portion of its four-span building and partly gutting the left and right sections thereof. A
two-storey building (behind said four-span building) where fun and amusement
machines and spare parts were stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance Company and New
India Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance companies an
action for collection of sum of money and damages, docketed as Civil Case No. 46106
before Branch 161 of the then Court of First Instance of Rizal; praying for judgment
ordering Rizal Insurance and New India to pay the amount of P2,747, 867.00 plus legal
interest, P400,000.00 as attorney's fees, exemplary damages, expenses of litigation of
P50,000.00 and costs of suit.6[6]
Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered
only the contents of the four-span building, which was partly burned, and not the
damage caused by the fire on the two-storey annex building.7[7]
On January 4, 1990, the trial court rendered its decision; disposing as follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
5
6
7

(1)Dismissing the case as against The New India Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold
(sic) Knitting Mills, Inc. the amount of P826, 500.00 representing the actual value
of the losses suffered by it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."8[8]
Both the petitioner, Rizal Insurance Company, and private respondent, Transworld
Knitting Mills, Inc., went to the Court of Appeals, which came out with its decision of July
15, 1993 under attack, the decretal portion of which reads:
"WHEREFORE, and upon all the foregoing, the decision of the court below is
MODIFIED in that defendant New India Assurance Company has and is hereby
required to pay plaintiff-appellant the amount of P1,818,604.19 while the other
Rizal Surety has to pay the plaintiff-appellant P470,328.67, based on the actual
losses sustained by plaintiff Transworld in the fire, totalling P2,790,376.00 as
against the amounts of fire insurance coverages respectively extended by New
India in the amount of P5,800,000.00 and Rizal Surety and Insurance Company
in the amount of P1,500,000.00.
No costs.
SO ORDERED."9[9]
On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India
appealed to this Court theorizing inter alia that the private respondent could not be
compensated for the loss of the fun and amusement machines and spare parts stored at
the two-storey building because it (Transworld) had no insurable interest in said goods or
items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118
(New India Assurance Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for
Reconsideration before the Court of Appeals, and on October 22, 1993, the Court of
Appeals reconsidered its decision of July 15, 1993, as regards the imposition of interest,
ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the
imposition of legal interest is concerned, that, on the assessment against New
India Assurance Company on the amount of P1,818,604.19 and that against
Rizal Surety & Insurance Company on the amount of P470,328.67, from May 26,
8
9

1982 when the complaint was filed until payment is made. The rest of the said
decision is retained in all other respects.
SO ORDERED."10[10]
Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court via
the present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX
BUILDING WHERE THE BULK OF THE BURNED PROPERTIES WERE
STORED, WAS INCLUDED IN THE COVERAGE OF THE INSURANCE POLICY
ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN NOT
CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY), TAKEN
IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT THE
PREMISES OCCUPIED BY TRANSWORLD, WHERE THE INSURED
PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT
TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH MALICE IN
FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN NOT ORDERING
TRANSWORLD TO PAY TO RIZAL SURETY MORAL AND PUNITIVE
DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND
EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL CODE).11[11]
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon protected only the
contents of the main building (four-span),12[12] and did not include those stored in the
two-storey annex building. On the other hand, the private respondent theorized that the
so called "annex" was not an annex but was actually an integral part of the four-span
building13[13] and therefore, the goods and items stored therein were covered by the
same fire insurance policy.
Resolution of the issues posited here hinges on the proper interpretation of the
stipulation in subject fire insurance policy regarding its coverage, which reads:
"xxx contained and/or stored during the currency of this Policy in the premises
occupied by them forming part of the buildings situate (sic) within own Compound
xxx"
10
11
12
13

Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not
limit its coverage to what were stored in the four-span building. As opined by the trial
court of origin, two requirements must concur in order that the said fun and amusement
machines and spare parts would be deemed protected by the fire insurance policy under
scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas occupied by
Transworld and second, said areas must form part of the building described in
the policy xxx"14[14]
'Said building of four-span lofty one storey in height with
mezzanine portions is constructed of reinforced concrete and
hollow blocks and/or concrete under galvanized iron roof and
occupied as hosiery mills, garment and lingerie factory, transistorstereo assembly plant, offices, ware house and caretaker's
quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings by the Court of
Appeals are conclusive on the parties and not reviewable by this Court, and the same
carry even more weight when the Court of Appeals has affirmed the findings of fact
arrived at by the lower court.15[15]
In the case under consideration, both the trial court and the Court of Appeals found that
the so called "annex " was not an annex building but an integral and inseparable part of
the four-span building described in the policy and consequently, the machines and spare
parts stored therein were covered by the fire insurance in dispute. The letter-report of the
Manila Adjusters and Surveyor's Company, which petitioner itself cited and invoked,
describes the "annex" building as follows:
"Two-storey building constructed of partly timber and partly concrete hollow
blocks under g.i. roof which is adjoining and intercommunicating with the repair of
the first right span of the lofty storey building and thence by property fence
wall."16[16]
Verily, the two-storey building involved, a permanent structure which adjoins and
intercommunicates with the "first right span of the lofty storey building", 17[17] formed part
thereof, and meets the requisites for compensability under the fire insurance policy sued
upon.
So also, considering that the two-storey building aforementioned was already existing
when subject fire insurance policy contract was entered into on January 12, 1981,
14
15
16
17

having been constructed sometime in 1978, 18[18] petitioner should have specifically
excluded the said two-storey building from the coverage of the fire insurance if minded to
exclude the same but if did not, and instead, went on to provide that such fire insurance
policy covers the products, raw materials and supplies stored within the premises of
respondent Transworld which was an integral part of the four-span building occupied by
Transworld, knowing fully well the existence of such building adjoining and
intercommunicating with the right section of the four-span building.
After a careful study, the Court does not find any basis for disturbing what the lower
courts found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under controversy
has created a doubt regarding the portions of the building insured thereby. Article 1377
of the New Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against the petitioner,
Rizal Surety Insurance Company, whose lawyer or managers drafted the fire insurance
policy contract under scrutiny. Citing the aforecited provision of law in point, the Court in
Landicho vs. Government Service Insurance System,19[19] ruled:
"This is particularly true as regards insurance policies, in respect of which it is
settled that the 'terms in an insurance policy, which are ambiguous, equivocal, or
uncertain x x x are to be construed strictly and most strongly against the insurer,
and liberally in favor of the insured so as to effect the dominant purpose of
indemnity or payment to the insured, especially where forfeiture is involved' (29
Am. Jur., 181), and the reason for this is that the 'insured usually has no voice in
the selection or arrangement of the words employed and that the language of the
contract is selected with great care and deliberation by experts and legal
advisers employed by, and acting exclusively in the interest of, the insurance
company.' (44 C.J.S., p. 1174).""20[20]
Equally relevant is the following disquisition of the Court in Fieldmen's Insurance
Company, Inc. vs. Vda. De Songco,21[21] to wit:
"'This rigid application of the rule on ambiguities has become necessary in view
of current business practices. The courts cannot ignore that nowadays
monopolies, cartels and concentration of capital, endowed with overwhelming
economic power, manage to impose upon parties dealing with them cunningly
18
19
20
21

prepared 'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to 'take it or
leave it' labelled since Raymond Saleilles 'contracts by adherence' (contrats [sic]
d'adhesion), in contrast to these entered into by parties bargaining on an equal
footing, such contracts (of which policies of insurance and international bills of
lading are prime example) obviously call for greater strictness and vigilance on
the part of courts of justice with a view to protecting the weaker party from
abuses and imposition, and prevent their becoming traps for the unwary (New
Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27
February 1942.)'"22[22]
The issue of whether or not Transworld has an insurable interest in the fun and
amusement machines and spare parts, which entitles it to be indemnified for the loss
thereof, had been settled in G.R. No. L-111118, entitled New India Assurance Company,
Ltd., vs. Court of Appeals, where the appeal of New India from the decision of the Court
of Appeals under review, was denied with finality by this Court on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the premises, precludes
the relitigation of a particular fact or issue in another action between the same parties
based on a different claim or cause of action. "xxx the judgment in the prior action
operates as estoppel only as to those matters in issue or points controverted, upon the
determination of which the finding or judgment was rendered. In fine, the previous
judgment is conclusive in the second case, only as those matters actually and directly
controverted and determined and not as to matters merely involved therein."23[23]
Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.),
Inc. vs. Court of Appeals,24[24] held that the issue of negligence of the shipping line,
which issue had already been passed upon in a case filed by one of the insurers, is
conclusive and can no longer be relitigated in a similar case filed by another insurer
against the same shipping line on the basis of the same factual circumstances.
Ratiocinating further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had
been negligent, or so negligent as to have proximately caused the collision
between them, was an issue that was actually, directly and expressly raised,
controverted and litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved
that issue in his Decision and held the 'Don Carlos' to have been negligent rather
than the 'Yotai Maru' and, as already noted, that Decision was affirmed by this
Court in G.R. No. L-48839 in a Resolution dated 6 December 1987. The Reyes
Decision thus became final and executory approximately two (2) years before the
Sison Decision, which is assailed in the case at bar, was promulgated. Applying
the rule of conclusiveness of judgment, the question of which vessel had been
negligent in the collision between the two (2) vessels, had long been settled by
22
23
24

this Court and could no longer be relitigated in C.A.-G.R. No. 61206-R. Private
respondent Go Thong was certainly bound by the ruling or judgment of Reyes,
L.B., J. and that of this Court. The Court of Appeals fell into clear and reversible
error when it disregarded the Decision of this Court affirming the Reyes
Decision."25[25]
The controversy at bar is on all fours with the aforecited case. Considering that private
respondent's insurable interest in, and compensability for the loss of subject fun and
amusement machines and spare parts, had been adjudicated, settled and sustained by
the Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R. No. L-111118,
in a Resolution, dated February 2, 1994, the same can no longer be relitigated and
passed upon in the present case. Ineluctably, the petitioner, Rizal Surety Insurance
Company, is bound by the ruling of the Court of Appeals and of this Court that the private
respondent has an insurable interest in the aforesaid fun and amusement machines and
spare parts; and should be indemnified for the loss of the same.
So also, the Court of Appeals correctly adjudged petitioner liable for the amount of
P470,328.67, it being the total loss and damage suffered by Transworld for which
petitioner Rizal Insurance is liable.26[26]
All things studiedly considered and viewed in proper perspective, the Court is of the
irresistible conclusion, and so finds, that the Court of Appeals erred not in holding the
petitioner, Rizal Surety Insurance Company, liable for the destruction and loss of the
insured buildings and articles of the private respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October
22, 1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in toto. No
pronouncement as to costs.
SO ORDERED.
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION,
respondent.
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by
petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE
CORPORATION. Petitioner assails the appellate court decision[1] which dismissed its two
appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the
insurance companys liability for earthquake damage to petitioners properties. Petitioner avers
25
26

that, pursuant to its earthquake shock endorsement rider, Insurance Policy No. 31944 covers all
damages to the properties within its resort caused by earthquake. Respondent contends that
the rider limits its liability for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in
said resort insured originally with the American Home Assurance Company (AHAC-AIU). In the
first four insurance policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 198788 (Exhs. C, D, E and F; also Exhs. 1, 2, 3 and 4 respectively), the risk of loss from earthquake
shock was extended only to plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5
only) (Exhs. C-1; D-1, and E and two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item
5 in those policies referred to the two (2) swimming pools only (Exhs. 1-B, 2-B, 3-B and F-2);
that subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-4182383-0 covering the
period March 14, 1988 to March 14, 1989 (Exhs. G also G-1) and in said policy the earthquake
endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E and F-1 was deleted and the
entry under Endorsements/Warranties at the time of issue read that plaintiff renewed its policy
with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under Policy No. 2064568061-9 (Exh. H) which carried the entry under Endorsement/Warranties at Time of Issue,
which read Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount of
P10,700.00 and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:
Item -P7,691,000.00 - on the Clubhouse only
@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:
a) Tilter House- P19,800.00- 0.551%
b) Power House- P41,000.00- 0.551%

c) House Shed- P55,000.00 -0.540%

P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No.
206-4568061-9 (Exh. H) provided that the policy wording and rates in said policy be copied in
the policy to be issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering
the period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium of
P45,159.92 (Exh. I); that in the computation of the premium, defendants Policy No. 31944 (Exh.
I), which is the policy in question, contained on the right-hand upper portion of page 7 thereof,
the following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as premium
against earthquake shock (ES); that in all the six insurance policies (Exhs. C, D, E, F, G and H),
the premium against the peril of earthquake shock is the same, that is P393.00 (Exhs. C and 1B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C,
D, E, F, G and H) and in Policy No. 31944 issued by defendant, the shock endorsement
provide(sic):
In consideration of the payment by the insured to the company of the sum included additional
premium the Company agrees, notwithstanding what is stated in the printed conditions of this
policy due to the contrary, that this insurance covers loss or damage to shock to any of the
property insured by this Policy occasioned by or through or in consequence of earthquake
(Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-C);

that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16,
1990 an earthquake struck Central Luzon and Northern Luzon and plaintiffs properties covered
by Policy No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa
Resort were damaged.[2]
After the earthquake, petitioner advised respondent that it would be making a claim under its
Insurance Policy No. 31944 for damages on its properties. Respondent instructed petitioner to
file a formal claim, then assigned the investigation of the claim to an independent claims
adjuster, Bayne Adjusters and Surveyors, Inc.[3] On July 30, 1990, respondent, through its
adjuster, requested petitioner to submit various documents in support of its claim. On August 7,
1990, Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon,[4]
rendered a preliminary report[5] finding extensive damage caused by the earthquake to the
clubhouse and to the two swimming pools. Mr. de Leon stated that except for the swimming
pools, all affected items have no coverage for earthquake shocks.[6] On August 11, 1990,
petitioner filed its formal demand[7] for settlement of the damage to all its properties in the Agoo
Playa Resort. On August 23, 1990, respondent denied petitioners claim on the ground that its
insurance policy only afforded earthquake shock coverage to the two swimming pools of the
resort.[8] Petitioner and respondent failed to arrive at a settlement.[9] Thus, on January 24,
1991, petitioner filed a complaint[10] with the regional trial court of Pasig praying for the
payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties,
with interest thereon, as computed under par. 29 of the policy (Annex B) until fully
paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by
plaintiff on account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.[11]
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.[12]
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril
of earthquake shock, the same premium it paid against earthquake shock only on the two
swimming pools in all the policies issued by AHAC(AIU) (Exhibits C, D, E, F and G). From this
fact the Court must consequently agree with the position of defendant that the endorsement
rider (Exhibit 7-C) means that only the two swimming pools were insured against earthquake
shock.

Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the
language used in an insurance contract or application is such as to create ambiguity the same
should be resolved against the party responsible therefor, i.e., the insurance company which
prepared the contract. To the mind of [the] Court, the language used in the policy in litigation is
clear and unambiguous hence there is no need for interpretation or construction but only
application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which struck on July
16, 1990. Defendant having admitted that the damage to the swimming pools was appraised by
defendants adjuster at P386,000.00, defendant must, by virtue of the contract of insurance, pay
plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph that
defendant is liable only for the damage caused to the two (2) swimming pools and that
defendant has made known to plaintiff its willingness and readiness to settle said liability, there
is no basis for the grant of the other damages prayed for by plaintiff. As to the counterclaims of
defendant, the Court does not agree that the action filed by plaintiff is baseless and highly
speculative since such action is a lawful exercise of the plaintiffs right to come to Court in the
honest belief that their Complaint is meritorious. The prayer, therefore, of defendant for
damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE
HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two
(2) swimming pools, with interest at 6% per annum from the date of the filing of the Complaint
until defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.[13]
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the
Court of Appeals based on the following assigned errors:[14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY
NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE
ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO
THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING
ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.

On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it
attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not
convinced that the last two (2) insurance contracts (Exhs. G and H), which the plaintiff-appellant
had with AHAC (AIU) and upon which the subject insurance contract with Philippine Charter
Insurance Corporation is said to have been based and copied (Exh. I), covered an extended
earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for
the imposition of interest 24% on the insurance claim and 6% on loss of income allegedly
amounting to P4,280,000.00. Since the defendant-appellant has expressed its willingness to
pay the damage caused on the two (2) swimming pools, as the Court a quo and this Court
correctly found it to be liable only, it then cannot be said that it was in default and therefore liable
for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that
the award thereof is subject to the sound discretion of the court. Thus, if such discretion is wellexercised, it will not be disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18,
2002). Moreover, being the award thereof an exception rather than a rule, it is necessary for the
court to make findings of facts and law that would bring the case within the exception and justify
the grant of such award (Country Bankers Insurance Corp. v. Lianga Bay and Community MultiPurpose Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiffappellants action is not baseless and highly speculative, We find that the Court a quo did not err
in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment
of the Trial Court hereby AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues:[16]
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING
POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE
INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS
PRAYER FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED,
ATTORNEYS FEES AND EXPENSES OF LITIGATION.
Petitioner contends:

First, that the policys earthquake shock endorsement clearly covers all of the properties insured
and not only the swimming pools. It used the words any property insured by this policy, and it
should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is
confirmed in the body of the insurance policy itself, which states that it is [s]ubject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endt., Extended Coverage
Endt., FEA Warranty & Annual Payment Agreement On Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already been deleted in the
earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission
when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the
wording of the insurance policy, because the rider is the more deliberate expression of the
agreement of the contracting parties.
Sixth, that in their previous insurance policies,
endorsements/warranties enumerated at the time of issue.

limits

were

placed

on

the

Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of
petitioner and against respondent. It was respondent which caused the ambiguity when it made
the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should
be interpreted as a caveat on the standard fire insurance policy, such as to remove the two
swimming pools from the coverage for the risk of fire. It should not be used to limit the
respondents liability for earthquake shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was not paid
under the extended coverage. The premium for the earthquake shock coverage was already
included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend
earthquake shock coverage to all insured properties. When it secured an insurance policy from
respondent, petitioner told respondent that it wanted an exact replica of its latest insurance
policy from American Home Assurance Company (AHAC-AIU), which covered all the resorts
properties for earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake shock.
Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc., likewise requested
petitioner to submit the necessary documents for its building claims and other repair costs.
Thus, under the doctrine of equitable estoppel, it cannot deny that the insurance policy it issued
to petitioner covered all of the properties within the resort.

Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the
Revised Rules of Court as its remedy, and there is no need for calibration of the evidence in
order to establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments:[18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended
coverage against earthquake shock to petitioners insured properties other than on the two
swimming pools. Petitioner admitted that from 1984 to 1988, only the two swimming pools were
insured against earthquake shock. From 1988 until 1990, the provisions in its policy were
practically identical to its earlier policies, and there was no increase in the premium paid. AHACAIU, in a letter[19] by its representative Manuel C. Quijano, categorically stated that its previous
policy, from which respondents policy was copied, covered only earthquake shock for the two
swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the
policy only covered earthquake shock damage on the two swimming pools. The amount was the
same amount paid by petitioner for earthquake shock coverage on the two swimming pools from
1990-1991. No additional premium was paid to warrant coverage of the other properties in the
resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the earthquake
shock coverage to all of petitioners properties. As per its agreement with petitioner, respondent
copied its policy from the AHAC-AIU policy provided by petitioner. Although the first five policies
contained the said qualification in their riders title, in the last two policies, this qualification in the
title was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a mere
inadvertence. This inadvertence did not make the policy incomplete, nor did it broaden the
scope of the endorsement whose descriptive title was merely enumerated. Any ambiguity in the
policy can be easily resolved by looking at the other provisions, specially the enumeration of the
items insured, where only the two swimming pools were noted as covered for earthquake shock
damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the
phrase Item 5 P393,000.00 on the two swimming pools only (against the peril of earthquake
shock only) meant that only the swimming pools were insured for earthquake damage. The
same phrase is used in toto in the policies from 1989 to 1990, the only difference being the
designation of the two swimming pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for
all the properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as
premium for coverage of the swimming pools against earthquake shock. No other premium was
paid for earthquake shock coverage on the other properties. In addition, the use of the qualifier
ANY instead of ALL to describe the property covered was done deliberately to enable the parties
to specify the properties included for earthquake coverage.

Sixth, petitioner did not inform respondent of its requirement that all of its properties must be
included in the earthquake shock coverage. Petitioners own evidence shows that it only
required respondent to follow the exact provisions of its previous policy from AHAC-AIU.
Respondent complied with this requirement. Respondents only deviation from the agreement
was when it modified the provisions regarding the replacement cost endorsement. With regard
to the issue under litigation, the riders of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it
from maintaining that only the two swimming pools were covered for earthquake shock. The
adjusters letter notifying petitioner to present certain documents for its building claims and repair
costs was given to petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after
the descriptive name or title of the Earthquake Shock Endorsement. However, the words of the
policy reflect the parties clear intention to limit earthquake shock coverage to the two swimming
pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not
object to any deficiency nor did it institute any action to reform the policy. The policy binds the
petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses.
Since respondent was willing and able to pay for the damage caused on the two swimming
pools, it cannot be considered to be in default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as
included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock
only)[20]
Second, under the breakdown for premium payments,[21] it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.00[22]
Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:-(a) Earthquake, volcanic eruption or other convulsion of nature. [23]
Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the
Perils of Explosion, Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS
INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF
5% OR 7 % OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE
THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . .
. . . additional premium the Company agrees, notwithstanding what is stated in the printed
conditions of this Policy to the contrary, that this insurance covers loss or damage (including
loss or damage by fire) to any of the property insured by this Policy occasioned by or through or
in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they may be
hereby expressly varied) and that any reference therein to loss or damage by fire should be
deemed to apply also to loss or damage occasioned by or through or in consequence of
Earthquake.[24]
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the
insured properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other.[25] All its parts are reflective of the true intent of the parties. The
policy cannot be construed piecemeal. Certain stipulations cannot be segregated and then
made to control; neither do particular words or phrases necessarily determine its character.
Petitioner cannot focus on the earthquake shock endorsement to the exclusion of the other
provisions. All the provisions and riders, taken and interpreted together, indubitably show the
intention of the parties to extend earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the
parties to extend earthquake shock coverage only to the two swimming pools. Section 2(1) of
the Insurance Code defines a contract of insurance as an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or liability arising from an

unknown or contingent event. Thus, an insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a premium.[26]
(Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the
insured against a specified peril.[27] In fire, casualty, and marine insurance, the premium
payable becomes a debt as soon as the risk attaches.[28] In the subject policy, no premium
payments were made with regard to earthquake shock coverage, except on the two swimming
pools. There is no mention of any premium payable for the other resort properties with regard to
earthquake shock. This is consistent with the history of petitioners previous insurance policies
from AHAC-AIU. As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during
the period from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited
to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a
provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two
swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the
procurement of this policy?
A. Yes, sir.

Q. Did you also do this through your insurance agency?

A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course
subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did
you give written instruction to Forte Insurance Agency advising it that the earthquake shock
coverage must extend to all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to that
effect of extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there was an
earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that
correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions with
respect to your instructions that all properties must be covered again by earthquake shock
endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance Company
marked Exhibit G?
Atty. Mejia: Yes.
Witness:

A. I examined the policy and seeing that the warranty on the earthquake shock endorsement
has no more limitation referring to the two swimming pools only, I was contented already that
the previous limitation pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance
Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage
Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies[29] to
the insurance policy as proof of the intent of the parties to extend the coverage for earthquake
shock. However, this phrase is merely an enumeration of the descriptive titles of the riders,
clauses, warranties or endorsements to which the policy is subject, as required under Section
50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the
coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone.
As explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously marked by
counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these
six (6) policies issued by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively
carries an earthquake shock endorsement[?] My question to you is, on the basis on (sic) the
wordings indicated in Exhibits C to H respectively what was the extent of the coverage [against]
the peril of earthquake shock as provided for in each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.

ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as provided for in
each of the six (6) policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in the
Clauses and Warranties: Item 5 only (Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For swimming
pools we do cover earthquake shock. For building we covered it for full earthquake coverage
which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for other things
other than swimming pool? You are covering building? They are covered by a general
insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or another we
can issue earthquake shock solely but that the moment I see this, the thing that comes to my
mind is either insuring a swimming pool, foundations, they are normally affected by earthquake
but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F
inclusive [remained] its coverage against earthquake shock to two (2) swimming pools only but
that Exhibits G and H respectively entend the coverage against earthquake shock to all the
properties indicated in the respective schedules attached to said policies, what can you say
about that testimony of plaintiffs witness?
WITNESS:

As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I
assure you that this one covers the two swimming pools with respect to earthquake shock
endorsement. Based on it, if we are going to look at the premium there has been no change
with respect to the rates. Everytime (sic) there is a renewal if the intention of the insurer was to
include the earthquake shock, I think there is a substantial increase in the premium. We are not
only going to consider the two (2) swimming pools of the other as stated in the policy. As I see,
there is no increase in the amount of the premium. I must say that the coverage was not
broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are going to do
some computation based on the rates you will arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only was placed, is it
not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to
during your direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2)
swimming pools was deleted from the policies issued by AIU, is it not?
xxx
ATTY. ANDRES:

As an insurance executive will you not attach any significance to the deletion of the qualifying
phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a
company underwriter, we do not cover. . it was inadvertent because of the previous policies that
we have issued with no specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous and
subsequent acts to the issuance of the insurance policy falsely gave the petitioner assurance
that the coverage of the earthquake shock endorsement included all its properties in the resort.
Respondent only insured the properties as intended by the petitioner. Petitioners own witness
testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell
Atty. Omlas (sic) to copy from Exhibit H for purposes of procuring the policy from Philippine
Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as this
American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be
charging will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and
scope of coverage of Exhibits I and H sometime in the third week of March, 1990 or thereabout?

A. Yes, sir, about that time.

Q. And at that time did you notice any discrepancy or difference between the policy wordings as
well as scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the
policy wordings and rates were copied from the insurance policy I sent them but it was only
when this case erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any discrepancy at
any time between those indicated in Exhibit I and those indicated in Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the same
P393,000.00 on the two (2) swimming pools only against the peril of earthquake shock which I
understood before that this provision will have to be placed here because this particular
provision under the peril of earthquake shock only is requested because this is an insurance
policy and therefore cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not
proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster,
Bayne Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters
and Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement
for earthquake shock covered properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage
of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of the
insurance coverage policy and it was indicated under Item 3 specifically that the coverage is
only for earthquake shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to
him what I had found out in the policy and he confirmed to me indeed only Item 3 which were
the two swimming pools have coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the
swimming pools all affected items have no coverage for earthquake shock?

xxx
A. I based my statement on my findings, because upon my examination of the policy I found out
that under Item 3 it was specific on the wordings that on the two swimming pools only, then
enclosed in parenthesis (against the peril[s] of earthquake shock only), and secondly, when I
examined the summary of premium payment only Item 3 which refers to the swimming pools
have a computation for premium payment for earthquake shock and all the other items have no
computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on
the general rule that insurance contracts are contracts of adhesion which should be liberally
construed in favor of the insured and strictly against the insurer company which usually
prepares it.[31] A contract of adhesion is one wherein a party, usually a corporation, prepares
the stipulations in the contract, while the other party merely affixes his signature or his
"adhesion" thereto. Through the years, the courts have held that in these type of contracts, the
parties do not bargain on equal footing, the weaker party's participation being reduced to the
alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party
whom the courts of justice must protect.[32] Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the insured.[33]
The case law will show that this Court will only rule out blind adherence to terms where facts
and circumstances will show that they are basically one-sided.[34] Thus, we have called on
lower courts to remain careful in scrutinizing the factual circumstances behind each case to
determine the efficacy of the claims of contending parties. In Development Bank of the
Philippines v. National Merchandising Corporation, et al.,[35] the parties, who were acute
businessmen of experience, were presumed to have assented to the assailed documents with
full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot
claim it did not know the provisions of the policy. From the inception of the policy, petitioner had
required the respondent to copy verbatim the provisions and terms of its latest insurance policy
from AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in securing the
insurance policy of petitioner, is reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in
Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter
Insurance Corporation as long as it will follow the same or exact provisions of the previous
insurance policy we had with American Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the
American Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told
him that the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 2064568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some
terms, specifically in the replacement cost endorsement, but the principal provisions of the
policy remained essentially similar to AHAC-AIUs policy. Consequently, we cannot apply the
"fine print" or "contract of adhesion" rule in this case as the parties intent to limit the coverage of
the policy to the two swimming pools only is not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari
is dismissed. No costs.
SO ORDERED.

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