FIRST DIVISION

G.R. No. 125678 March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage
with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to
the following question:

Have you or any of your family members ever consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give
details).1

The application was approved for a period of one year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement,
respondent’s husband was entitled to avail of hospitalization benefits, whether ordinary or
emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual
physical examinations, preventive health care and other out-patient services.

Upon the termination of the agreement, the same was extended for another year from March 1, 1989
to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased
to a maximum sum of P75,000.00 per disability. 2

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila
Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the
hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner
denied her claim saying that the Health Care Agreement was void. According to petitioner, there was
a concealment regarding Ernani’s medical history. Doctors at the MMC allegedly discovered at the
time of Ernani’s confinement that he was hypertensive, diabetic and asthmatic, contrary to his
answer in the application form. Thus, respondent paid the hospitalization expenses herself,
amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home.
Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however,
respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and
was feeling very weak. Respondent was constrained to bring him back to the Chinese General
Hospital where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action
for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil
Case No. 90-53795. She asked for reimbursement of her expenses plus moral damages and
attorney’s fees. After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff
Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani
Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who
paid the same;

2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;

4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.

SO ORDERED.3

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for
damages and absolved petitioner Reverente. 4 Petitioner’s motion for reconsideration was
denied.5 Hence, petitioner brought the instant petition for review, raising the primary argument that a
health care agreement is not an insurance contract; hence the "incontestability clause" under the
Insurance Code6 does not apply. 1âwphi1.nêt

Petitioner argues that the agreement grants "living benefits," such as medical check-ups and
hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the
agreement until its expiration one-year thereafter. Petitioner also points out that only medical and
hospitalization benefits are given under the agreement without any indemnification, unlike in an
insurance contract where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts which last
longer,7 petitioner argues that the incontestability clause does not apply, as the same requires an
effectivity period of at least two years. Petitioner further argues that it is not an insurance company,
which is governed by the Insurance Commission, but a Health Maintenance Organization under the
authority of the Department of Health.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:

1. 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. 8

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or
future, which may damnify a person having an insurable interest against him, may be insured
against. Every person has an insurable interest in the life and health of himself. Section 10 provides:

Every person has an insurable interest in the life and health:

(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in whom
he has a pecuniary interest;

(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondent’s husband in obtaining the health care
agreement was his own health. The health care agreement was in the nature of non-life insurance,
which is primarily a contract of indemnity.9 Once the member incurs hospital, medical or any other
expense arising from sickness, injury or other stipulated contingent, the health care provider must
pay for the same to the extent agreed upon under the contract.

Petitioner argues that respondent’s husband concealed a material fact in his application. It appears
that in the application for health coverage, petitioners required respondent’s husband to sign an
express authorization for any person, organization or entity that has any record or knowledge of his
health to furnish any and all information relative to any hospitalization, consultation, treatment or any
other medical advice or examination. 10 Specifically, the Health Care Agreement signed by
respondent’s husband states:

We hereby declare and agree that all statement and answers contained herein and in any
addendum annexed to this application are full, complete and true and bind all parties in
interest under the Agreement herein applied for, that there shall be no contract of health care
coverage unless and until an Agreement is issued on this application and the full
Membership Fee according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in
the application; that any physician is, by these presents, expressly authorized to disclose or
give testimony at anytime relative to any information acquired by him in his professional
capacity upon any question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this application shall be a
ratification of any correction in or addition to this application as stated in the space for Home
Office Endorsement.11 (Underscoring ours)

In addition to the above condition, petitioner additionally required the applicant for authorization to
inquire about the applicant’s medical history, thus:
 I hereby authorize any person, organization, or entity that has any record or knowledge of
my health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any and
all information relative to any hospitalization, consultation, treatment or any other medical
advice or examination. This authorization is in connection with the application for health care
coverage only. A photographic copy of this authorization shall be as valid as the
original.12 (Underscoring ours)

Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:

Failure to disclose or misrepresentation of any material information by the member in the

application or medical examination, whether intentional or unintentional, shall automatically
invalidate the Agreement from the very beginning and liability of Philamcare shall be limited
to return of all Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the applicant by
Philamcare or the assessment of a higher Membership Fee for the benefit or benefits applied
for.13

The answer assailed by petitioner was in response to the question relating to the medical history of
the applicant. This largely depends on opinion rather than fact, especially coming from respondent’s
husband who was not a medical doctor. Where matters of opinion or judgment are called for,
answers made in good faith and without intent to deceive will not avoid a policy even though they are
untrue.14 Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of

the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of
the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although
the statement is material to the risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon such statement, but is obligated
to make further inquiry. There is a clear distinction between such a case and one in which
the insured is fraudulently and intentionally states to be true, as a matter of expectation or
belief, that which he then knows, to be actually untrue, or the impossibility of which is shown
by the facts within his knowledge, since in such case the intent to deceive the insurer is
obvious and amounts to actual fraud. 15 (Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract.16 Concealment as a defense for the health care provider or insurer to avoid
liability is an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer. In any case, with or without the authority to
investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility
under the agreement, petitioner is bound to answer the same to the extent agreed upon. In the end,
the liability of the health care provider attaches once the member is hospitalized for the disease or
injury covered by the agreement or whenever he avails of the covered benefits which he has
prepaid.

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a
contract of insurance." The right to rescind should be exercised previous to the commencement of
an action on the contract.17 In this case, no rescission was made. Besides, the cancellation of health
care agreements as in insurance policies require the concurrence of the following conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the
grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon
request of insured, to furnish facts on which cancellation is based. 18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the insurer
from non-compliance with his obligation.19 Being a contract of adhesion, the terms of an insurance
contract are to be construed strictly against the party which prepared the contract – the insurer. 20 By
reason of the exclusive control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of
the insured, especially to avoid forfeiture.21 This is equally applicable to Health Care Agreements.
The phraseology used in medical or hospital service contracts, such as the one at bar, must be
liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two
interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of
doubtful import should be strictly construed against the provider. 22

Anent the incontestability of the membership of respondent’s husband, we quote with approval the
following findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems
Inc. had twelve months from the date of issuance of the Agreement within which to contest
the membership of the patient if he had previous ailment of asthma, and six months from the
issuance of the agreement if the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or misrepresentation no longer lie. 23

Finally, petitioner alleges that respondent was not the legal wife of the deceased member
considering that at the time of their marriage, the deceased was previously married to another
woman who was still alive. The health care agreement is in the nature of a contract of indemnity.
Hence, payment should be made to the party who incurred the expenses. It is not controverted that
respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement.
The records adequately prove the expenses incurred by respondent for the deceased’s
hospitalization, medication and the professional fees of the attending physicians. 24

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court
of Appeals dated December 14, 1995 is AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., Puno, and Kapunan, JJ., concur.

Footnote

1
Record, p. 28.
2
Exhibit "4", Record, p. 156.

3
Dated November 16, 1993; penned by Judge Lolita Gal-lang; Rollo, pp. 134-135.

4
Dated December 14, 1995, penned by Associate Justice Fidel P. Purisima, concurred in by
Associate Justices Fermin A. Martin, Jr. and Conchita Carpio Morales; Rollo, p. 45.

5
Resolution dated July 23, 1996; Rollo, p. 48.

6
Section 48 of P.D. No. 1460 otherwise known as the Insurance Code.

7
Petition, pp. 13-14; Rollo, pp. 22-23.

8
See Vance pp. 1-2 cited in Agbayani, Commercial Laws of the Philippines, vol. 2, 1986 ed.
p. 6.

9
Cha v. Court of Appeals, 270 SCRA 690, 694 (1997).

10
Record, p. 28.

11
Ibid.

12
Ibid.

13
Ibid., p. 13.

14
Bryant v. Modern Woodmen of America, 86 Neb 372, 125 NW 621.

Herrick v. Union Mut. Fire Ins. Co., 48 Me 558; Bryant v. Modern Woodmen of
15

America, supra; Boutelle v. Westchester Fire Ins. Co., 51 Vt 4 cited in 43 Am Jur 2d § 1016.

Great Pacific Life v. Court of Appeals, 316 SCRA 677 [1999], citing Ng Gan Zee v. Asian
16

Crusader Life Assurance Corp., 122 SCRA 461 [1983]. 1âwphi1.nêt

17
Section 48, Insurance Code.

18
Malayan Insurance v. Cruz Arnaldo, 154 SCRA 672 [1987].

19
Heirs of Ildefonso Cosculluela, Sr. v. Rico General Insurance Corporation, 179 SCRA 511
[1989].

20
Landicho v. GSIS, 44 SCRA 7 [1972]; Western Guaranty Company v. Court of Appeals,
187 SCRA 652 [1990].

21
44 C.J.S. pp. 1166-1175; 29 Am. Jur. 180. See also Aetna Insurance Co. v. Rhodes, 170
F2d 111; Insurance Co. v. Norton, 96 U.S. 234, 24 L ed 689; Pfeiffer v. Missouri State Life
Ins. Co., 174 Ark 783, 297 SW 847.

See Myers v. Kitsap Physicians Service, 78 Wash 2d 286, 474 P2d 109, 66 ALR3d 1196;
22

Hunt v. Hospital Service Plan, 81 ALR 2d 919 cited in 43 Am Jur 2d § 289.

 23
Record, p. 257.

24
Exhibit "B", Exhibits "D" to "D-7"; Record, pp. 88-97.

Republic of the Philippines

SUPREME COURT
Manila

SPECIAL FIRST DIVISION

G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.

ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the
people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women, and children. The State shall endeavor to provide free medical care to paupers. 1

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated
July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers,
Inc.2

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance organization
to take care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of
₱224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax
Code xxxx

xxx xxx xxx

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

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of
25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and ₱31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully
paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioner’s health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement
was in the nature of a non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.

Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as deficiency

Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and
20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code,
until the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We
held that petitioner’s health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also ruled that petitioner’s contention that
it is a health maintenance organization (HMO) and not an insurance company is irrelevant because
contracts between companies like petitioner and the beneficiaries under their plans are treated as
insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental
motion for reconsideration, asserting the following arguments:

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

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect
the CA’s disposition that health care services are not in the nature of an insurance business.

(c) Section 185 should be strictly construed.

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

(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not
those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health
insurance is not covered by Section 185.

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

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered
moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda
on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of
₱5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005. 8

We find merit in petitioner’s motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission
on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals
who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member. 10

Individuals enrolled in its health care program pay an annual membership fee. Membership is on a
year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those directly employed
by it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as
room and board accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the
participating physicians and other health care providers for the services rendered, at pre-agreed
rates.14

To avail of petitioner’s health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision of
the health care services. The same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except
for the curative aspect of the medical service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15

Petitioner, however, submits that it is of critical importance to characterize the business it is engaged
in, that is, to determine whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for DST on its health care
agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of
petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business
of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing
the validity or legality of any bond or other obligations issued by any province, city, municipality, or
other public body or organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such person, company
or corporation, there shall be collected a documentary stamp tax of fifty centavos (₱0.50) on each
four pesos (₱4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its every
word.18

From the language of Section 185, it is evident that two requisites must concur before the DST can
apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of
indemnity and (2) the maker should be transacting the business of accident, fidelity, employer’s
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"),
an HMO is "an entity that provides, offers or arranges for coverage of designated health services
needed by plan members for a fixed prepaid premium." 19 The payments do not vary with the extent,
frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"

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

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

c) doing any kind of business, including a reinsurance business, specifically recognized as

constituting the doing of an insurance business within the meaning of this Code;
 d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they have
applied is whether the assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization or whether they are
merely incidental to its business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal purpose, then the business is
not insurance.

Applying the "principal object and purpose test,"22 there is significant American case law supporting
the argument that a corporation (such as an HMO, whether or not organized for profit), whose main
object is to provide the members of a group with health services, is not engaged in the insurance
business.

The rule was enunciated in Jordan v. Group Health Association 23 wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health Association should not be considered as engaged
in insurance activities since it was created primarily for the distribution of health care services rather
than the assumption of insurance risk.

xxx Although Group Health’s activities may be considered in one aspect as creating security against
loss from illness or accident more truly they constitute the quantity purchase of well-rounded,
continuous medical service by its members. xxx The functions of such an organization are not
identical with those of insurance or indemnity companies. The latter are concerned primarily, if
not exclusively, with risk and the consequences of its descent, not with service, or its extension in
kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made possible by quantity purchasing
and economies in operation. Its primary purpose is to reduce the cost rather than the risk of
medical care; to broaden the service to the individual in kind and quantity; to enlarge the
number receiving it; to regularize it as an everyday incident of living, like purchasing food
and clothing or oil and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is,
in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the regularization of service as well
as payment, the substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the indemnification
for cost after the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial difference between
contracting in this way for the rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and
other types of legal arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or services on contingency. But obviously it
was not the purpose of the insurance statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf practically all contracts, particularly
conditional sales and contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it. The question turns,
not on whether risk is involved or assumed, but on whether that or something else to which it
is related in the particular plan is its principal object purpose.24 (Emphasis supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan
of operation as a whole of the corporation, it was service rather than indemnity which stood as its
principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to
be applied in determining its status. The question, more broadly, is whether, looking at the
plan of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’ 26 (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only undertake
to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained
in the policy.

xxx xxx xxx

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

physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporation’s plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected would
be provided, but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering itself subject to the
more stringent financial requirements of the General Insurance Laws….

A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in return for
which the health service corporation agrees to make payment directly to the participating
provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made directly to the provider of these
services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of
emergency by non-participating health providers would still be incidental to petitioner’s purpose of
providing and arranging for health care services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is required to set up a system and the
facilities for the delivery of such medical services. This indubitably shows that indemnification is not
its sole object.

In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases. 30 As an HMO, it
is its obligation to maintain the good health of its members. Accordingly, its health care programs
are designed to prevent or to minimize the possibility of any assumption of risk on its
part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to provide the health and medical
services needed to prevent such loss or damage. 31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted
U.S. cases, we are not saying that petitioner’s operations are identical in every respect to those of
the HMOs or health providers which were parties to those cases. What we are stating is that, for the
purpose of determining what "doing an insurance business" means, we have to scrutinize the
operations of the business as a whole and not its mere components. This is of course only prudent
and appropriate, taking into account the burdensome and strict laws, rules and regulations
applicable to insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular HMOs to be
actually engaged in insurance activities.32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident
from the fact that it is not supervised by the Insurance Commission but by the Department of
Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of the commissioner must be
accorded great weight. It is well-settled that the interpretation of an administrative agency which is
tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of
Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and
satisfying those needs; it also relates to the accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a particular statute. In Asturias
Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that executive officials are
presumed to have familiarized themselves with all the considerations pertinent to the meaning and
purpose of the law, and to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed judgment, and
the fact that they frequently are the drafters of the law they interpret. 36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of
indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that
petitioner’s health care agreements are contracts of indemnity and are therefore insurance contracts:

It is … incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of physicians). The term "loss or damage"
is broad enough to cover the monetary expense or liability a member will incur in case of illness or
injury.

Under the health care agreement, the rendition of hospital, medical and professional services to the
member in case of sickness, injury or emergency or his availment of so-called "out-patient services"
(including physical examination, x-ray and laboratory tests, medical consultations, vaccine
administration and family planning counseling) is the contingent event which gives rise to liability on
the part of the member. In case of exposure of the member to liability, he would be entitled to
indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses
to be incurred by each member cannot be predicted beforehand, if they can be predicted at all.
Petitioner assumes the risk of paying for the costs of the services even if they are significantly and
substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of persons bearing a similar risk, that is, among
all the other members of the health care program. This is insurance. 37

We reconsider. We shall quote once again the pertinent portion of Section 185:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of their
property for the support of the government. 39 Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However,
those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of
a health service provider to a member under the terms of their health care agreement. Such
contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are
applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and

5. In consideration of the insurer’s promise, the insured pays a premium. 41

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its primary purpose is the rendering of service,
it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements mentioned
above would be an insurance contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the insurance business. Its
contracts are simply for the purpose of rendering personal services. On the other hand, a contract by
which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance. Unlike the lawyer’s retainer contract, the
essential purpose of such a contract is not to render personal services, but to indemnify against loss
and damage resulting from the defense of actions for malpractice. 42 (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioner’s physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the member merely avails
of medical services to be paid or already paid in advance at a pre-agreed price under the
agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril, loss
or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from
a non-participating physician or hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health
care contracts called for the defendant to partially reimburse a subscriber for treatment received
from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court
determined that "the primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services."44 Since indemnity of the insured was
not the focal point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always
bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services:
the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured. 45

However, assuming that petitioner’s commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not
qualify as an insurance contract because petitioner’s objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is
not an insurance contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health
care agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act
No. 1189 (otherwise known as the "Internal Revenue Law of 1904") 46 enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a
verbatim reproduction of the pertinent portion of Section 116, to wit:
 ARTICLE XI
Stamp Taxes on Specified Objects

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

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employer’s liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116,
Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917,
the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939),
which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40
on October 1, 1946, the DST rate was increased but the provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD
1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and
October 10, 1984 respectively, the DST rate was again increased. 1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was
renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to
the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of
1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to
the DST provisions were introduced by RA 9243 48 but Section 185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early
as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2 million. 49

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been
the intent of the legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe
to say that health care agreements were never, at any time, recognized as insurance contracts or
deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is to pay it. 51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52

Petitioner claims that the assessed DST to date which amounts to ₱376 million 53 is way beyond its
net worth of ₱259 million.54 Respondent never disputed these assertions. Given the realities on the
ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government ought to encourage private
enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." 58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable consequence but killing the business of an
entity is another matter and should not be allowed. It is counter-productive and ultimately subversive
of the nation’s thrust towards a better economy which will ultimately benefit the majority of our
people.59

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of
RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. 61
Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under
the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this
case as discussed above, respondent concedes that such tax amnesty extinguishes the tax
liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62 (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for DST
for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty
under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is
bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of
Philamcare Health Systems is not an insurance contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has already become final. 67 When a
minute resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.68 But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-
Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and
the same issues, was previously disposed of by the Court thru a minute resolution dated February
17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case
"ha(d) no bearing" on the latter case because the two cases involved different subject matters as
they were concerned with the taxable income of different taxable years. 72

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed clearly
and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices, unlike a decision. It does not require the certification
of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. 73 Indeed,
as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for
DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot
successfully invoke the minute resolution in that case (which is not even binding precedent) in its
favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from
the fact that petitioner’s health care agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within the ambit of Section 185 of
the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the
same should not be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services
at a cost which the average wage earner can afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. 74 Its imposition
will elevate the cost of health care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent
is ordered to desist from collecting the said tax.

No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-44059 October 28, 1977

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:

This is a novel question in insurance law: Can a common-law wife named as beneficiary in the life
insurance policy of a legally married man claim the proceeds thereof in case of death of the latter?

On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd.,
Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the same
amount Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in his policy. He
to her as his wife.

On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a failing
branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to pay the
coverage in the total amount of P11,745.73, representing the face value of the policy in the amount
of P5,882.00 plus the additional benefits for accidental death also in the amount of P5,882.00 and
the refund of P18.00 paid for the premium due November, 1969, minus the unpaid premiums and
interest thereon due for January and February, 1969, in the sum of P36.27.

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated
beneficiary therein, although she admits that she and the insured Buenaventura C. Ebrado were
merely living as husband and wife without the benefit of marriage.

Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts
that she is the one entitled to the insurance proceeds, not the common-law wife, Carponia T.
Ebrado.

In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance
Co., Ltd. commenced an action for Interpleader before the Court of First Instance of Rizal on April
29, 1970.

After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a
pre-trial order was entered reading as follows:ñé+.£ªwph!1

During the pre-trial conference, the parties manifested to the court. that there is no
possibility of amicable settlement. Hence, the Court proceeded to have the parties
submit their evidence for the purpose of the pre-trial and make admissions for the
purpose of pretrial. During this conference, parties Carponia T. Ebrado and Pascuala
Ebrado agreed and stipulated: 1) that the deceased Buenaventura Ebrado was
married to Pascuala Ebrado with whom she has six — (legitimate) namely;
Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2)
that during the lifetime of the deceased, he was insured with Insular Life Assurance
Co. Under Policy No. 009929 whole life plan, dated September 1, 1968 for the sum
of P5,882.00 with the rider for accidental death benefit as evidenced by Exhibits A for
plaintiffs and Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia Ebrado;
3) that during the lifetime of Buenaventura Ebrado, he was living with his common-
wife, Carponia Ebrado, with whom she had 2 children although he was not legally
 separated from his legal wife; 4) that Buenaventura in accident on October 21, 1969
as evidenced by the death Exhibit 3 and affidavit of the police report of his death
Exhibit 5; 5) that complainant Carponia Ebrado filed claim with the Insular Life
Assurance Co. which was contested by Pascuala Ebrado who also filed claim for the
proceeds of said policy 6) that in view ofthe adverse claims the insurance company
filed this action against the two herein claimants Carponia and Pascuala Ebrado; 7)
that there is now due from the Insular Life Assurance Co. as proceeds of the policy
P11,745.73; 8) that the beneficiary designated by the insured in the policy is
Carponia Ebrado and the insured made reservation to change the beneficiary but
although the insured made the option to change the beneficiary, same was never
changed up to the time of his death and the wife did not have any opportunity to write
the company that there was reservation to change the designation of the parties
agreed that a decision be rendered based on and stipulation of facts as to who
among the two claimants is entitled to the policy.

Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.

SO ORDERED.

On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T.
Ebrado disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and
directing the payment of the insurance proceeds to the estate of the deceased insured. The trial
court held:ñé+.£ªwph!1

It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of such
guilt or commission of those acts be made in a separate independent action brought
for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare
the nullity of the donation).

It is, however, essential that such adultery or concubinage exists at the time
defendant Carponia T. Ebrado was made beneficiary in the policy in question for the
disqualification and incapacity to exist and that it is only necessary that such fact be
established by preponderance of evidence in the trial. Since it is agreed in their
stipulation above-quoted that the deceased insured and defendant Carponia T.
Ebrado were living together as husband and wife without being legally married and
that the marriage of the insured with the other defendant Pascuala Vda. de Ebrado
was valid and still existing at the time the insurance in question was purchased there
is no question that defendant Carponia T. Ebrado is disqualified from becoming the
beneficiary of the policy in question and as such she is not entitled to the proceeds of
the insurance upon the death of the insured.

From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976, the
Appellate Court certified the case to Us as involving only questions of law.

We affirm the judgment of the lower court.

1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new Insurance
Code (PD No. 612, as amended) does not contain any specific provision grossly resolutory of the
prime question at hand. Section 50 of the Insurance Act which provides that "(t)he insurance shag
be applied exclusively to the proper interest of the person in whose name it is made" 1 cannot be
validly seized upon to hold that the mm includes the beneficiary. The word "interest" highly suggests that
the provision refers only to the "insured" and not to the beneficiary, since a contract of insurance is
personal in character. 2 Otherwise, the prohibitory laws against illicit relationships especially on property
and descent will be rendered nugatory, as the same could easily be circumvented by modes of insurance.
Rather, the general rules of civil law should be applied to resolve this void in the Insurance Law. Article
2011 of the New Civil Code states: "The contract of insurance is governed by special laws. Matters not
expressly provided for in such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is governed by the general
rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code, "any person who is
forbidden from receiving any donation under Article 739 cannot be named beneficiary of a fife insurance
policy by the person who cannot make a donation to him. 4 Common-law spouses are, definitely, barred
from receiving donations from each other. Article 739 of the new Civil Code provides: ñé+.£ªwph!1

The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at the
time of donation;

Those made between persons found guilty of the same criminal offense, in
consideration thereof;

3. Those made to a public officer or his wife, descendants or ascendants by reason

of his office.

In the case referred to in No. 1, the action for declaration of nullity may be brought by
the spouse of the donor or donee; and the guilt of the donee may be proved by
preponderance of evidence in the same action.

2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is
concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee,
because from the premiums of the policy which the insured pays out of liberality, the beneficiary will
receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739
of the new Civil Code should equally operate in life insurance contracts. The mandate of Article 2012
cannot be laid aside: any person who cannot receive a donation cannot be named as beneficiary in
the life insurance policy of the person who cannot make the donation. 5 Under American law, a policy
of life insurance is considered as a testament and in construing it, the courts will, so far as possible treat it
as a will and determine the effect of a clause designating the beneficiary by rules under which wins are
interpreted. 6

3. Policy considerations and dictates of morality rightly justify the institution of a barrier between
common law spouses in record to Property relations since such hip ultimately encroaches upon the
nuptial and filial rights of the legitimate family There is every reason to hold that the bar in donations
between legitimate spouses and those between illegitimate ones should be enforced in life insurance
policies since the same are based on similar consideration As above pointed out, a beneficiary in a
fife insurance policy is no different from a donee. Both are recipients of pure beneficence. So long as
manage remains the threshold of family laws, reason and morality dictate that the impediments
imposed upon married couple should likewise be imposed upon extra-marital relationship. If
legitimate relationship is circumscribed by these legal disabilities, with more reason should an illicit
relationship be restricted by these disabilities. Thus, in Matabuena v. Cervantes, 7 this Court, through
Justice Fernando, said: ñé+.£ªwph!1
 If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que no
se enganen desponjandose el uno al otro por amor que han de consuno' (According
to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore
invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem);
then there is very reason to apply the same prohibitive policy to persons living
together as husband and wife without the benefit of nuptials. For it is not to be
doubted that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32
ad Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest the
condition 6f those who incurred guilt should turn out to be better.' So long as
marriage remains the cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should likewise attach to
concubinage.

It is hardly necessary to add that even in the absence of the above pronouncement,
any other conclusion cannot stand the test of scrutiny. It would be to indict the frame
of the Civil Code for a failure to apply a laudable rule to a situation which in its
essentials cannot be distinguished. Moreover, if it is at all to be differentiated the
policy of the law which embodies a deeply rooted notion of what is just and what is
right would be nullified if such irregular relationship instead of being visited with
disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of
statutory construction that what is within the spirit of the law is as much a part of it as
what is written, this is it. Otherwise the basic purpose discernible in such codal
provision would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied by an adherence
to its avowed objective.

4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More specifically, with record to the disability on "persons
who were guilty of adultery or concubinage at the time of the donation," Article 739 itself provides: ñé+.£ªwph!1

In the case referred to in No. 1, the action for declaration of nullity may be brought by
the spouse of the donor or donee; and the guilty of the donee may be proved by
preponderance of evidence in the same action.

The underscored clause neatly conveys that no criminal conviction for the offense is a condition
precedent. In fact, it cannot even be from the aforequoted provision that a prosecution is needed. On
the contrary, the law plainly states that the guilt of the party may be proved "in the same acting for
declaration of nullity of donation. And, it would be sufficient if evidence preponderates upon the guilt
of the consort for the offense indicated. The quantum of proof in criminal cases is not demanded.

In the caw before Us, the requisite proof of common-law relationship between the insured and the
beneficiary has been conveniently supplied by the stipulations between the parties in the pre-trial
conference of the case. It case agreed upon and stipulated therein that the deceased insured
Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate
children; that during his lifetime, the deceased insured was living with his common-law wife,
Carponia Ebrado, with whom he has two children. These stipulations are nothing less than judicial
admissions which, as a consequence, no longer require proof and cannot be contradicted. 8 A fortiori,
on the basis of these admissions, a judgment may be validly rendered without going through the rigors of
a trial for the sole purpose of proving the illicit liaison between the insured and the beneficiary. In fact, in
that pretrial, the parties even agreed "that a decision be rendered based on this agreement and
stipulation of facts as to who among the two claimants is entitled to the policy."

ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T. Ebrado is
hereby declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado in his life
insurance policy. As a consequence, the proceeds of the policy are hereby held payable to the
estate of the deceased insured. Costs against Carponia T. Ebrado.

SO ORDERED.

Teehankee (Chairman), Makasiar, Muñ;oz Palma, Fernandez and Guerrero, JJ., concur. 1äwphï1.ñët

FIRST DIVISION

G.R. No. 210302, August 27, 2020

INTEGRATED MICRO ELECTRONICS, INC., PETITIONER, V. STANDARD

INSURANCE CO., INC., RESPONDENT.

DECISION

LOPEZ, J.:

The proper interpretation of the terms of a contract and the validity of service of
summons are the main issues in this Petition for Review on Certiorari under Rule 45 of
the Rules of Court assailing the Court of Appeals' (CA) Decision 1 dated March 26, 2013
in CA-G.R. SP No. 124433, which reversed the findings of the Regional Trial Court
(RTC).

ANTECEDENTS

Sometime in March 2009, a panel of insurers composed of Standard Insurance Co., Inc.
(Standard Insurance), together with United Coconut Planters Bank (UCPB) General
Insurance, Co. Inc., Pioneer Insurance and Surety Corporation, Bank of Philippine
Islands (BPI) M/S Insurance Corporation, and Malayan Insurance Co., Inc., issued
Policy No. HOF09FD-FAR0860362 in favor of Integrated Micro Electronics, Inc.
(Integrated Micro), insuring all of its properties against "all risks of physical loss,
destruction of, or damage, including fire" for the period March 31, 2009 to March 31,
2010.3

On May 24, 2009, a fire broke out at Integrated Micro's building causing damage to its
production equipment and machineries.4 Thus, on May 25, 2009, Integrated Micro filed
a claim for indemnity from Standard Insurance5 but was rejected on February 24,
20106 on the ground that the cause of the loss was an excluded peril. Aggrieved,
Integrated Micro sought reconsideration.7 In a letter dated April 12, 2010,8 Standard
Insurance denied the reconsideration which Integrated Micro received on April 15,
2010. Almost a year thereafter, on April 11, 2011, Integrated Micro filed a
complaint9 for specific performance and damages against Standard Insurance before
the RTC asking actual damages of US$1,117,056.84, or its peso equivalent at the time
of loss, or the amount of P52,892,641.35.

Standard Insurance moved to dismiss10 the complaint for invalid service of summons,
lack of cause of action, and prescription. Allegedly, the summons was served upon the
legal assistant or the secretary of Standard Insurance's in-house counsel, who was not
authorized to receive summons under Section 11, Rule 14 of the 1997 Rules of Court.
Also, mere allegation of occurrence of fire is insufficient to establish a cause of action.
The policy requires that the fire must be unforeseen, sudden, and accidental. At any
rate, Integrated Micro's cause of action had prescribed because it filed the complaint
beyond the 12-month period from the rejection of the claim. Standard Insurance
notified Integrated Micro about the denial of its claim on February 24, 2010. However,
Integrated Micro commenced the complaint on April 11, 2011, about two months after
the cause of action has prescribed.

On November 9, 2011,11 the RTC denied the motion to dismiss and directed Standard
Insurance to file a responsive pleading. Dissatisfied, Standard Insurance sought
reconsideration but was denied. Hence, Standard Insurance filed a petition
for certiorari with the CA docketed as CA-G.R. SP No. 124433. On March 26,
2013,12 the CA granted the petition and ruled that Integrated Micro's cause of action
had prescribed and that the summons was improperly served, viz.: ChanRoblesVirtualawlibrary

Under the insurance policy x x x, "if a claim be made and rejected and an action or suit
be not commenced either in the Insurance Commission[,] or any Court of competent
jurisdiction within twelve (12) months from receipt of notice of such rejection, or in
case of arbitration taking place as provided herein within twelve (12) months after due
notice of the award made by the arbitrator or arbitrators or umpire, then the claim shall
for all purposes be deemed to have been abandoned and shall not be thereafter be
recoverable x x x."

Undoubtedly, the complaint was filed out of time.

Jurisprudence dictates that the aforementioned period must be reckoned from the date
the claim was rejected or denied.� This doctrine was highlighted by the Supreme
Court in Summit Guarantee, et al. VS, Hon. De Guzman, viz:.

"The one-year period should instead be counted from the date of rejection by
the insurer as this is the time when the cause of action accrues."

In the instant case, the respondent had until 24 February fill to file a complaint against
the petitioner. However, the records reveal that the case was filed on 11 April 2011 or a
period of one and a half (1 �) months after the cause of action has prescribed. Thus,
it is evident that the respondent had lost its right to file its claim from the petitioner.
 xxxx

Further, We find that the instant complaint is likewise dismissible on the ground that
the service of summons was invalid as it was served on the legal assistant of the in-
house counsel.

xxxx

WHEREFORE, premises considered,: the instant Petition is GRANTED. Accordingly, the

Orders dated 9 November 2011 and 13 February of the court a quo are
hereby NULLIFIED and SET ASIDE.13 (Emphases-supplied.)
Integrated Micro's motion for reconsideration was denied. 14 Hence, this petition for
review on certiorari arguing that the CA gravely erred in finding that:

A. THE CLAIM OF PETITIONER x x x HAS PRESCRIBED;

B. THE SERVICE OF SUMMONS RESPONDENT x x x WAS INVALID. 15

Integrated Micro cites Eagle Star., Co., Ltd, et al. V. Chia Yu16 and insists that its arose
of action has not prescribed. The cause of action only accrues when the insurer finally
rejects the claim.17 Accordingly, Standard Insurance's Letter dated February 24, 2010
denying Integrated Micro's claim is only initial and did not prejudice any request for
reconsideration. The 12-month-prescriptive period should be reckoned from April 15,
2010 when Integrated Micro received the final rejection of its for reconsideration.�
Also, the service of summons upon the legal assistant or secretary of insurer's in-house
counsel is considered substantial compliance since Standard Insurance actually received
the summons.

RULING

The petition is unmeritorious.

Contracts of insurance must be construed according to the sense and meaning of the
terms which the parties themselves have used. If the provisions are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular
sense.18 This is consistent with the cardinal rule of interpretation that "[i]f the terms of
a contract are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control 19 . Here, the insurance policy
provides the manner and period of filing of a claim, thus:

GENERAL CONDITIONS APPLICABLE UNDER ALL SECTIONS

xxxx

Claim
 xxxx

If a claim be made and rejected and an action or suit be not commenced either in the
Insurance Commission or any Court of competent jurisdiction within twelve (12)
months from receipt of notice of such rejection, or in case of arbitration taking
place as provided herein within twelve (12) months after due notice of the award made
by the arbitrator or arbitrators or umpire, then the claim shall for all purposes be
deemed to have been abandoned and shall not thereafter be recoverable
hereunder.20 (Emphasis supplied.)
It is explicit that if a claim is made and rejected, an action or suit should be
commenced within a period of 12 months. There is no qualification nor distinction
whether it is the insurer's initial or final rejection. The parties did not agree that the
insurer should first deny any request for reconsideration before a suit for indemnity
may be filed. Thus, based on the plain and ordinary context of the agreement, the
parties contemplated that the cause of action for loss or damages arising from the
insurance contract shall accrue from rejection of the claim at the first instance.

True, in the Eagle Star case that Integrated Micro cited, we ruled that the accrual of the
cause of action for filing an insurance claim shall commence when there is a final
rejection by the insurance company to avoid unnecessary suit. As to when such final
rejection occurs, however, we did not go beyond the terms of the insurance contract
to simplify the prompt settlement of insurance claims. In that case, the insurance policy
provided that the insured should file his claim, first, with the carrier, and then with the
insurer. The "final rejection" refers to the rejection by the insurance company.
Although the Eagle Star case used the phrase "final rejection," the same cannot be
taken to mean the rejection of a petition for reconsideration. Thus, in the subsequent
case of Sun Insurance Office, Ltd. v. Court of Appeals, et al.,21 we clarified that once
there is a refusal conveyed by the insurer to the claimant, expressly or impliedly, the
12-month prescriptive period should commence to run,22 without awaiting any
reconsideration, lest new body of rules be promulgated to resolve the conflict, thus: ChanRoblesVirtualawlibrary

x x x the rejection referred to should be construed as the rejection, in the first

instance, for if what is being referred to is a reiterated rejection conveyed in a
resolution of a petition for reconsideration, such should have been expressly
stipulated.

Thus, to allow the filing of a motion for reconsideration to suspend the running
of the prescriptive period of twelve months, a whole new body of rules on the
matter should be promulgated so as to avoid any conflict that may be brought
by it, such as:

a)� whether the mere filing of a plea for reconsideration of a denial is sufficient or
must it be supported by arguments/affidavits/material evidence;

b) how many petitions for reconsideration should be permitted? 23 (Emphases supplied.)

We echoed the same reasons in H.H. Hollero Construction, Inc. v. GSIS, et al., 24 and
maintained that "x x x 'final rejection' simply means denial by the insurer of the claims
of the insured and not the rejection or denial by the insurer of the insured's motion or
request for reconsideration. The rejection referred to should be construed as the
rejection in the first instance x x x." 25 Accordingly, the CA did not err in ruling that
Integrated Micro's cause of action had prescribed. To be sure, Integrated Micro received
the notice rejecting its claim on February 24, 2010, but the complaint was filed only on
April 11, 2011, which is beyond the 12-month prescriptive period.

Likewise, the CA is correct in finding that the service of summons upon the legal
assistant of Standard Insurance's in-house counsel is improper. Rule 14, Section 11 of
the 1997 Rules of Court provides the manner of serving summons to a corporation,
thus �

Sec. 11. Service upon domestic private juridical entity. � When the defendant is a
corporation, partnership or association organized under the laws of the Philippines with
a juridical personality, service may be made on the president, managing partner,
general manager, corporate secretary, treasurer, or in-house counsel.
(Emphasis supplied.)
Notably, this provision amended Rule 14, Section 13 26 of the 1964 Rules of Court that
allowed service to an agent of a corporation. The new rule, however, has specifically
identified and limited the persons to whom service of summons must be
made.27 Contrary to Integrated Micro's assertion, the amendment effectively abandoned
the substantial compliance doctrine and restricted the persons authorized to receive
summons for juridical entities. As aptly discussed in Sps. Mason v. Court of
Appeals,28viz.:ChanRoblesVirtualawlibrary

The question of whether the substantial compliance rule is still applicable under Section
11, Rule 14 of the 1997 Rules of Civil Procedure has been settled in Villarosa which
applies squarely to the instant case, x x x We held that there was no valid service of
summons on Villarosa as service was made through a person not included in
the enumeration in Section 11, Rule 14 of the 1997 Rules of Civil Procedure,
which revised the Section 13, Rule 14 of the 1964 Rules of Court. We
discarded the trial court's basis for denying the motion to dismiss, namely,
private respondent's substantial compliance with the rule on service of
summons, and fully agreed with petitioner's assertions that the enumeration
under the new rule is restricted, limited and exclusive following the rule in
statutory construction that expressio imios est exclusio cilterius. Had the Rules of Court
Revision Committee intended to liberalize the rule on service of summons, we said, it
could have easily done so by clear and concise language. Absent a manifest intent to
liberalize the rule, we stressed strict compliance with Section 11, Rule 14 of
the 1997 Rules of Civil Procedure.29 (Emphasis supplied.)
FOR THESE REASONS, the petition is DENIED. The Court of Appeals' Decision dated
March 26, 2013 in CA-G.R. SP No. 124433 is AFFIRMED.

SO ORDERED.

Caguioa, (Acting Chairperson), Reyes, J., Jr., Hernando, * and Lazaro-Javier, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 198174 September 2, 2013

ALPHA INSURANCE AND SURETY CO., PETITIONER,

vs.
ARSENIA SONIA CASTOR, RESPONDENT.

DECISION

PERALTA, J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision1 dated May 31, 2011 and Resolution2 dated August 10, 2011 of the Court of Appeals (CA)
in CA-G.R. CV No. 93027.

The facts follow.

On February 21, 2007, respondent entered into a contract of insurance, Motor Car Policy No.
MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota Revo DLX DSL. The contract
of insurance obligates the petitioner to pay the respondent the amount of Six Hundred Thirty
Thousand Pesos (₱630,000.00) in case of loss or damage to said vehicle during the period covered,
which is from February 26, 2007 to February 26, 2008.

On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel Salazar Lanuza
(Lanuza), to bring the above-described vehicle to a nearby auto-shop for a tune-up. However,
Lanuza no longer returned the motor vehicle to respondent and despite diligent efforts to locate the
same, said efforts proved futile. Resultantly, respondent promptly reported the incident to the police
and concomitantly notified petitioner of the said loss and demanded payment of the insurance
proceeds in the total sum of ₱630,000.00.

In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent, stating among
others, thus:

Upon verification of the documents submitted, particularly the Police Report and your Affidavit, which
states that the culprit, who stole the Insure[d] unit, is employed with you. We would like to invite you
on the provision of the Policy under Exceptions to Section-III, which we quote:

1.) The Company shall not be liable for:

xxxx
(4) Any malicious damage caused by the Insured, any member of his family or by "A PERSON IN
THE INSURED’S SERVICE."

In view [of] the foregoing, we regret that we cannot act favorably on your claim.

In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim and argued that
the exception refers to damage of the motor vehicle and not to its loss. However, petitioner’s denial
of respondent’s insured claim remains firm.

Accordingly, respondent filed a Complaint for Sum of Money with Damages against petitioner before
the Regional Trial Court (RTC) of Quezon City on September 10, 2007.

In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of respondent in this
wise:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant ordering the latter as follows:

To pay plaintiff the amount of ₱466,000.00 plus legal interest of 6% per annum from the time of
demand up to the time the amount is fully settled;

To pay attorney’s fees in the sum of ₱65,000.00; and

To pay the costs of suit.

All other claims not granted are hereby denied for lack of legal and factual basis. 3

Aggrieved, petitioner filed an appeal with the CA.

On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon City’s decision.
The fallo reads:

WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the Decision, dated
December 19, 2008, of Branch 215 of the Regional Trial Court of Quezon City, in Civil Case No. Q-
07-61099, is hereby AFFIRMED in toto.

SO ORDERED.4

Petitioner filed a Motion for Reconsideration against said decision, but the same was denied in a
Resolution dated August 10, 2011.

Hence, the present petition wherein petitioner raises the following grounds for the allowance of its
petition:

WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND GROSSLY
OR GRAVELY ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF THE PRIVATE
RESPONDENT AND AGAINST THE PETITIONER AND RULED THAT EXCEPTION DOES NOT
COVER LOSS BUT ONLY DAMAGE BECAUSE THE TERMS OF THE INSURANCE POLICY ARE
[AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH THAT THE PARTIES THEMSELVES
DISAGREE ABOUT THE MEANING OF PARTICULAR PROVISIONS, THE POLICY WILL BE
CONSTRUED BY THE COURTS LIBERALLY IN FAVOR OF THE ASSURED AND STRICTLY
AGAINST THE INSURER.

WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND

COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN TOTO THE JUDGMENT
OF THE TRIAL COURT.5

Simply, the core issue boils down to whether or not the loss of respondent’s vehicle is excluded
under the insurance policy.

We rule in the negative.

Significant portions of Section III of the Insurance Policy states:

SECTION III – LOSS OR DAMAGE

The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage
to the Schedule Vehicle and its accessories and spare parts whilst thereon:

(a)

by accidental collision or overturning, or collision or overturning consequent upon mechanical

breakdown or consequent upon wear and tear;

(b)

by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;

(c)

by malicious act;

(d)

whilst in transit (including the processes of loading and unloading) incidental to such transit by road,
rail, inland waterway, lift or elevator.

xxxx

EXCEPTIONS TO SECTION III

The Company shall not be liable to pay for:

Loss or Damage in respect of any claim or series of claims arising out of one event, the first amount
of each and every loss for each and every vehicle insured by this Policy, such amount being equal to
one percent (1.00%) of the Insured’s estimate of Fair Market Value as shown in the Policy Schedule
with a minimum deductible amount of Php3,000.00;

Consequential loss, depreciation, wear and tear, mechanical or electrical breakdowns, failures or
breakages;
Damage to tires, unless the Schedule Vehicle is damaged at the same time;

Any malicious damage caused by the Insured, any member of his family or by a person in the
Insured’s service.6

In denying respondent’s claim, petitioner takes exception by arguing that the word "damage," under
paragraph 4 of "Exceptions to Section III," means loss due to injury or harm to person, property or
reputation, and should be construed to cover malicious "loss" as in "theft." Thus, it asserts that the
loss of respondent’s vehicle as a result of it being stolen by the latter’s driver is excluded from the
policy.

We do not agree.

Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that theft perpetrated
by the driver of the insured is not an exception to the coverage from the insurance policy, since
Section III thereof did not qualify as to who would commit the theft. Thus:

Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance
policy subject of this case. This is evident from the very provision of Section III – "Loss or Damage."
The insurance company, subject to the limits of liability, is obligated to indemnify the insured against
theft. Said provision does not qualify as to who would commit the theft. Thus, even if the same is
committed by the driver of the insured, there being no categorical declaration of exception, the same
must be covered. As correctly pointed out by the plaintiff, "(A)n insurance contract should be
interpreted as to carry out the purpose for which the parties entered into the contract which is to
insure against risks of loss or damage to the goods. Such interpretation should result from the
natural and reasonable meaning of language in the policy. Where restrictive provisions are open to
two interpretations, that which is most favorable to the insured is adopted." The defendant would
argue that if the person employed by the insured would commit the theft and the insurer would be
held liable, then this would result to an absurd situation where the insurer would also be held liable if
the insured would commit the theft. This argument is certainly flawed. Of course, if the theft would be
committed by the insured himself, the same would be an exception to the coverage since in that
case there would be fraud on the part of the insured or breach of material warranty under Section 69
of the Insurance Code.7

Moreover, contracts of insurance, like other contracts, are to be construed according to the sense
and meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular
sense.8 Accordingly, in interpreting the exclusions in an insurance contract, the terms used
specifying the excluded classes therein are to be given their meaning as understood in common
speech.9

Adverse to petitioner’s claim, the words "loss" and "damage" mean different things in common
ordinary usage. The word "loss" refers to the act or fact of losing, or failure to keep possession, while
the word "damage" means deterioration or injury to property. 1âwphi1

Therefore, petitioner cannot exclude the loss of respondent’s vehicle under the insurance policy
under paragraph 4 of "Exceptions to Section III," since the same refers only to "malicious damage,"
or more specifically, "injury" to the motor vehicle caused by a person under the insured’s service.
Paragraph 4 clearly does not contemplate "loss of property," as what happened in the instant case.

Further, the CA aptly ruled that "malicious damage," as provided for in the subject policy as one of
the exceptions from coverage, is the damage that is the direct result from the deliberate or willful act
of the insured, members of his family, and any person in the insured’s service, whose clear plan or
purpose was to cause damage to the insured vehicle for purposes of defrauding the insurer, viz.:

This interpretation by the Court is bolstered by the observation that the subject policy appears to
clearly delineate between the terms "loss" and "damage" by using both terms throughout the said
policy. x x x

xxxx

If the intention of the defendant-appellant was to include the term "loss" within the term "damage"
then logic dictates that it should have used the term "damage" alone in the entire policy or otherwise
included a clear definition of the said term as part of the provisions of the said insurance contract.
Which is why the Court finds it puzzling that in the said policy’s provision detailing the exceptions to
the policy’s coverage in Section III thereof, which is one of the crucial parts in the insurance contract,
the insurer, after liberally using the words "loss" and "damage" in the entire policy, suddenly went
specific by using the word "damage" only in the policy’s exception regarding "malicious damage."
Now, the defendant-appellant would like this Court to believe that it really intended the word
"damage" in the term "malicious damage" to include the theft of the insured vehicle.

The Court does not find the particular contention to be well taken.

True, it is a basic rule in the interpretation of contracts that the terms of a contract are to be
construed according to the sense and meaning of the terms which the parties thereto have used. In
the case of property insurance policies, the evident intention of the contracting parties, i.e., the
insurer and the assured, determine the import of the various terms and provisions embodied in the
policy. However, when the terms of the insurance policy are ambiguous, equivocal or uncertain,
such that the parties themselves disagree about the meaning of particular provisions, the policy will
be construed by the courts liberally in favor of the assured and strictly against the insurer. 10

Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the 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. Thus, in Eternal Gardens Memorial Park
Corporation v. Philippine American Life Insurance Company, 11 this Court ruled –

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
latter’s 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 non-
compliance with its obligations.

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. 12

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is DENIED.
Accordingly, the Decision dated May 31, 2011 and Resolution dated August 10, 2011 of the Court of
Appeals are hereby AFFIRMED.

SO ORDERED.