FIRST DIVISION [G.R. No. 125678. March 18, 2002] PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents. D E C I S I O N 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, respondents 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 Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis 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 attorneys fees. After trial, the lower court ruled against petitioners, viz:
Transcript
FIRST DIVISION
[G.R. No. 125678. March 18, 2002]
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents.
D E C I S I O N
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, respondents 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 Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis 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 attorneys 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 attorneys 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] Petitioners 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 Code[6]does not apply.
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 insurers 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 respondents 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 respondents husband concealed a material fact in his application. It appears that in the application for health coverage, petitioners required respondents 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 respondents 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 applicants 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 respondents 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 respondents 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 deceaseds hospitalization, medication and the professional fees of the attending physicians.[24]
ARTICLE IIDeclaration 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 XIIISocial Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide free medical care to paupers.[1]
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July
14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.[2]
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is [t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx
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 P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST
assessment. He claimed that petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in
the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.
SO ORDERED. Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners
health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity,
citing Blue Cross Healthcare, Inc. v. Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4] We also ruled that petitioners
contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because contracts
between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not
a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of
the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration,
asserting the following arguments:
(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 CAs
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 petitioners agreements are contracts of indemnity, they are not those contemplated
under Section 185. (f) Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered
by Section 185. (g) The agreements do not fall under the phrase other branch of insurance mentioned in Section 185. (h) The June 12, 2008 decision should only apply prospectively. (i) Petitioner availed of the tax amnesty benefits under RA [5] 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
9480[7] (also known as the Tax Amnesty Act of 2007) by fully paying the amount of P5,127,149.08 representing 5% of its net
worth as of the year ending December 31, 2005.[8]
We find merit in petitioners motion for reconsideration.
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 it[11] 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 petitioners health care programs, the individual members are required to sign and execute a standard health
care agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the
various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical
services. Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health
care services being offered by petitioner at any time.
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, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), 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, employers 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 PD[20] 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 Healths activities may be considered in one aspect as creating security against loss from illness or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. xxx The functions of such an organization are not identical with those of insurance or indemnity companies. The latter are concerned primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object purpose.[24] (Emphasis supplied)
In California Physicians Service v. Garrison,[25] the California court felt that, after scrutinizing the plan of operation as a
whole of the corporation, it was service rather than indemnity which stood as its principal purpose. There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly, is whether, looking at the plan of operation as a whole, service rather than indemnity is its principal object and purpose. Certainly the objects and purposes of the corporation organized and maintained by the California physicians have a wide scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on a voluntary, low-cost basis for persons of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably this is service of a high order and not indemnity.[26] (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs
undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies
simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit.Somerset Orthopedic Associates,
P.A. v. Horizon Blue Cross and Blue Shield of New Jersey[27] 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 xxxThe primary purpose of a medical service corporation, however, is an undertaking to provide
physicians who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corporations plan, not only will the subscribers be deprived of the protection which they might reasonably have expected would be provided, but the corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the health service corporation agrees to make payment directly to the participating provider.[28] (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide
medical services as needed, with payment made directly to the provider of these services. [29] In short, even if petitioner assumes
the risk of paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be
considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-
participating health providers would still be incidental to petitioners purpose of providing and arranging for health care services
and does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set
up a system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole
object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services intended to keep
members from developing medical conditions or diseases.[30] As an HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are designed to prevent or to minimize thepossibility of any assumption of
risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising
from a medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage.
[31]
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical
services), but these are incidental to the principal activity of providing them medical care. The insurance-like aspect of petitioners
business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather
than insurance services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the principal purpose test used in the above-quoted U.S. cases, we are not
saying that petitioners operations are identical in every respect to those of the HMOs or health providers which were parties to
those cases. What we are stating is that, for the purpose of determining what doing an insurance business means, we have to
scrutinize the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate,
taking into account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the
insurance business. Moreover, we are also not unmindful that there are other American authorities who have found particular
HMOs to be actually engaged in insurance activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that
it is not supervised by the Insurance Commission but by the Department of Health. [33] In fact, in a letter dated September 3, 2000,
the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business.This determination of the
commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked
to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind
this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:[34]
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,[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 petitioners health care agreements are contracts of
indemnity and are therefore insurance contracts: It is incorrect to say that the health care agreement is not based on loss or damage because, under the
said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large
group of persons bearing a similar risk, that is, among all the other members of the health care program. This is insurance.[37]
We reconsider. We shall quote once again the pertinent portion of Section 185: Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or
bonds or obligations of the nature of indemnity for loss, damage, or liabilitymade or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing
authority.[38] This is because taxation is a destructive power which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the government. [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 insurers 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 lawyers retainer contract, the essential purpose of such a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of actions for malpractice.[42] (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with,
there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional
services rendered by the petitioners physician or affiliated physician to him. In case of availment by a member of the benefits
under the agreement,petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is
the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates.
The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member
to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms
indemnify or indemnity presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the
member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory
services, x-ray, routine annual physical examination 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 petitioners commitment to provide medical services to its members can be construed as an
acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because
petitioners objective is to provide medical services at reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.
THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE AGREEMENTS OF HMOS
Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements under Section
185 of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S. law as early as 1904 when
HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of
Act No. 1189 (otherwise known as the Internal Revenue Law of 1904) [46] enacted on July 2, 1904 and became effective on August
1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section
116, to wit:
ARTICLE XIStamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability made or renewed by any person, association, company, or corporation transacting the business of accident, fidelity, employers liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
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.
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 EO[47] 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 NOTTHE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.[51] So potent indeed is the power that it was once opined that the power to tax involves the power to
destroy.[52]
Petitioner claims that the assessed DST to date which amounts to P376 million[53] is way beyond its net worth of P259 million.
[54] Respondent never disputed these assertions.Given the realities on the ground, imposing the DST on petitioner would be highly
oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to
encourage private enterprise.[55] Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a
legitimate business.[56] As aptly held in Roxas, et al. v. CTA, et al.:[57]
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax
imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It
is counter-productive and ultimately subversive of the nations thrust towards a better economy which will ultimately benefit the
majority of our people.[59]
PETITIONERS TAX LIABILITYWAS EXTINGUISHED UNDERTHE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot
and academic[60] when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5%
of its net worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section
6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal
or administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.[61]
Far from disagreeing with petitioner, respondent manifested in its memorandum: Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this
case as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances amounting to tax fraud under Section 10 of said amnesty law.[62] (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA 9480.
[63] There is no other conclusion to draw than that petitioners liability for DST for the taxable years 1996 and 1997 was totally
extinguished by its availment of the tax amnesty under RA 9480.
IS THE COURT BOUND BY A MINUTE RESOLUTION IN ANOTHER CASE?
Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the
CA[64] in CIR v. Philippine National Bank[65] 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-Nickel[71] involving the
same parties and the same issues, was previously disposed of by the Court thru a minute resolution dated February 17,
2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case ha(d) no bearing on the latter
case because the two cases involved different subject matters as they were concerned with the taxable income of different taxable
years.[72]
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of
the Chief Justice.Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso
of Section 4(3) of Article VIII speaks of a decision.[73] Indeed, as a rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on its health care
agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case
(which is not even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in
any way from the fact that petitioners health care agreements are not subject to DST.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.SPECIAL FIRST DIVISION
PHILIPPINE HEALTH CARE G.R. No. 167330PROVIDERS, INC.,Petitioner, Present: PUNO, C.J., Chairperson,CORONA,- v e r s u s - CHICO-NAZARIO,*
ARTICLE IIDeclaration 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 XIIISocial Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide free medical care to paupers.[1]
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July
14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.[2]
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is [t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care
agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx
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 P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST
assessment. He claimed that petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in
the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.
SO ORDERED. Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners
health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity,
citing Blue Cross Healthcare, Inc. v. Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4] We also ruled that petitioners
contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because contracts
between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not
a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of
the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration,
asserting the following arguments:
(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 CAs
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 petitioners agreements are contracts of indemnity, they are not those contemplated
under Section 185. (f) Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered
by Section 185. (g) The agreements do not fall under the phrase other branch of insurance mentioned in Section 185. (h) The June 12, 2008 decision should only apply prospectively. (i) Petitioner availed of the tax amnesty benefits under RA [5] 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
9480[7] (also known as the Tax Amnesty Act of 2007) by fully paying the amount of P5,127,149.08 representing 5% of its net
worth as of the year ending December 31, 2005.[8]
We find merit in petitioners motion for reconsideration.
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 it[11] 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 petitioners health care programs, the individual members are required to sign and execute a standard health
care agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the
various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical
services. Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health
care services being offered by petitioner at any time.
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, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing the title to any real
estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), 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, employers 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 PD[20] 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 Healths activities may be considered in one aspect as creating security against loss from illness or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. xxx The functions of such an organization are not identical with those of insurance or indemnity companies. The latter are concerned primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object purpose.[24] (Emphasis supplied)
In California Physicians Service v. Garrison,[25] the California court felt that, after scrutinizing the plan of operation as a
whole of the corporation, it was service rather than indemnity which stood as its principal purpose. There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly, is whether, looking at the plan of operation as a whole, service rather than indemnity is its principal object and purpose. Certainly the objects and purposes of the corporation organized and maintained by the California physicians have a wide scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on a voluntary, low-cost basis for persons of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably this is service of a high order and not indemnity.[26] (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs
undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies
simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit.Somerset Orthopedic Associates,
P.A. v. Horizon Blue Cross and Blue Shield of New Jersey[27] 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 xxxThe primary purpose of a medical service corporation, however, is an undertaking to provide
physicians who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corporations plan, not only will the subscribers be deprived of the protection which they might reasonably have expected would be provided, but the corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the health service corporation agrees to make payment directly to the participating provider.[28] (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide
medical services as needed, with payment made directly to the provider of these services. [29] In short, even if petitioner assumes
the risk of paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be
considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-
participating health providers would still be incidental to petitioners purpose of providing and arranging for health care services
and does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set
up a system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole
object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services intended to keep
members from developing medical conditions or diseases.[30] As an HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are designed to prevent or to minimize thepossibility of any assumption of
risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising
from a medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage.
[31]
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical
services), but these are incidental to the principal activity of providing them medical care. The insurance-like aspect of petitioners
business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather
than insurance services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the principal purpose test used in the above-quoted U.S. cases, we are not
saying that petitioners operations are identical in every respect to those of the HMOs or health providers which were parties to
those cases. What we are stating is that, for the purpose of determining what doing an insurance business means, we have to
scrutinize the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate,
taking into account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the
insurance business. Moreover, we are also not unmindful that there are other American authorities who have found particular
HMOs to be actually engaged in insurance activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that
it is not supervised by the Insurance Commission but by the Department of Health. [33] In fact, in a letter dated September 3, 2000,
the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business.This determination of the
commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked
to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind
this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:[34]
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,[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 petitioners health care agreements are contracts of
indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care program. This is insurance.[37]
We reconsider. We shall quote once again the pertinent portion of Section 185: Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or
bonds or obligations of the nature of indemnity for loss, damage, or liabilitymade or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing
authority.[38] This is because taxation is a destructive power which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the government. [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 insurers 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 lawyers retainer contract, the essential purpose of such a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of actions for malpractice.[42] (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with,
there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional
services rendered by the petitioners physician or affiliated physician to him. In case of availment by a member of the benefits
under the agreement,petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is
the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates.
The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member
to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms
indemnify or indemnity presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the
member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory
services, x-ray, routine annual physical examination 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 petitioners commitment to provide medical services to its members can be construed as an
acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because
petitioners objective is to provide medical services at reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.
THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE AGREEMENTS OF HMOS
Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements under Section
185 of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S. law as early as 1904 when
HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of
Act No. 1189 (otherwise known as the Internal Revenue Law of 1904) [46] enacted on July 2, 1904 and became effective on August
1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section
116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability made or renewed by any person, association, company, or corporation transacting the business of accident, fidelity, employers liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
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.
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 EO[47] 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 NOTTHE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.[51] So potent indeed is the power that it was once opined that the power to tax involves the power to
destroy.[52]
Petitioner claims that the assessed DST to date which amounts to P376 million[53] is way beyond its net worth of P259 million.
[54] Respondent never disputed these assertions.Given the realities on the ground, imposing the DST on petitioner would be highly
oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to
encourage private enterprise.[55] Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a
legitimate business.[56] As aptly held in Roxas, et al. v. CTA, et al.:[57]
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax
imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It
is counter-productive and ultimately subversive of the nations thrust towards a better economy which will ultimately benefit the
majority of our people.[59]
PETITIONERS TAX LIABILITYWAS EXTINGUISHED UNDERTHE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot
and academic[60] when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5%
of its net worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section
6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal
or administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.[61]
Far from disagreeing with petitioner, respondent manifested in its memorandum: Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this
case as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances amounting to tax fraud under Section 10 of said amnesty law.[62] (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA 9480.
[63] There is no other conclusion to draw than that petitioners liability for DST for the taxable years 1996 and 1997 was totally
extinguished by its availment of the tax amnesty under RA 9480.
IS THE COURT BOUND BY A MINUTE RESOLUTION IN ANOTHER CASE?
Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the
CA[64] in CIR v. Philippine National Bank[65] 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-Nickel[71] involving the
same parties and the same issues, was previously disposed of by the Court thru a minute resolution dated February 17,
2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case ha(d) no bearing on the latter
case because the two cases involved different subject matters as they were concerned with the taxable income of different taxable
years.[72]
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of
the Chief Justice.Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso
of Section 4(3) of Article VIII speaks of a decision.[73] Indeed, as a rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on its health care
agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case
(which is not even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in
any way from the fact that petitioners health care agreements are not subject to DST.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.
SECOND DIVISION
[G.R. No. 119599. March 20, 1997]
MALAYAN INSURANCE CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS and TKC MARKETING CORPORATION, respondents.
D E C I S I O N
ROMERO, J.:
Assailed in this petition for review on certiorari is the decision of the Court of Appeals in CA-G.R. No. 43023[1] which affirmed, with slight modification, the decision of the Regional Trial Court of Cebu, Branch 15.
Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric tons of soya bean meal which was loaded on board the ship MV Al Kaziemah on or about September 8, 1989 for carriage from the port of Rio del Grande, Brazil, to the port of Manila. Said cargo was insured against the risk of loss by petitioner Malayan Insurance Corporation for
which it issued two (2) Marine Cargo Policy Nos. M/LP 97800305 amounting to P18,986,902.45 and M/LP 97800306 amounting to P1,195,005.45, both dated September 1989.
While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to Manila, the civil authorities arrested and detained it because of a lawsuit on a question of ownership and possession. As a result, private respondent notified petitioner on October 4, 1989 of the arrest of the vessel and made a formal claim for the amount of US$916,886.66, representing the dollar equivalent on the policies, for non-delivery of the cargo. Private respondent likewise sought the assistance of petitioner on what to do with the cargo.
Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the policies. Private respondent, accordingly, advised petitioner that it might tranship the cargo and requested an extension of the insurance coverage until actual transhipment, which extension was approved upon payment of additional premium. The insurance coverage was extended under the same terms and conditions embodied in the original policies while in the process of making arrangements for the transhipment of the cargo from Durban to Manila, covering the period October 4-December 19, 1989.
However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40 per metric ton or a total of P10,304,231.75 due to its perishable nature which could no longer stand a voyage of twenty days to Manila and another twenty days for the discharge thereof. On January 5, 1990, private respondent forthwith reduced its claim to US$448,806.09 (or its peso equivalent of P9,879,928.89 at the exchange rate of P22.0138 per $1.00) representing private respondent's loss after the proceeds of the sale were deducted from the original claim of $916,886.66 or P20,184,159.55.
Petitioner maintained its position that the arrest of the vessel by civil authorities on a question of ownership was an excepted risk under the marine insurance policies. This prompted private respondent to file a complaint for damages praying that aside from its claim, it be reimbursed the amount of P128,770.88 as legal expenses and the interest it paid for the loan it obtained to finance the shipment totalling P942,269.30. In addition, private respondent asked for moral damages amounting to P200,000.00, exemplary damages amounting to P200,000.00 and attorney's fees equivalent to 30% of what will be awarded by the court.
The lower court decided in favor of private respondent and required petitioner to pay, aside from the insurance claim, consequential and liquidated damages amounting toP1,024,233.88, exemplary damages amounting to P100,000.00, reimbursement in the amount equivalent to 10% of whatever is recovered as attorney's fees as well as the costs of the suit. On private respondent's motion for reconsideration, petitioner was also required to further pay interest at the rate of 12% per annum on all amounts due and owing to the private respondent by virtue of the lower court decision counted from the inception of this case until the same is paid.
On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the deletion of Clause 12 of the policies issued to private respondent, the same became automatically covered under subsection 1.1 of Section 1 of the Institute War Clauses. The arrests, restraints or detainments contemplated in the former clause were those effected by political or executive acts. Losses occasioned by riot or ordinary judicial processes were not covered therein. In other words, arrest, restraint or detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules out detention by ordinary legal processes. Hence, arrests by civil authorities, such as what happened in the instant case, is an excepted risk under Clause 12 of the Institute Cargo Clause or the F.C. & S. Clause. However, with the deletion of Clause 12 of the Institute Cargo Clause and the consequent adoption or institution of the Institute War Clauses (Cargo), the arrest and seizure by judicial processes which were excluded under the former policy became one of the covered risks.
The appellate court added that the failure to deliver the consigned goods in the port of destination is a loss compensable, not only under the Institute War Clause but also under the Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies, as read in relation to Section 130 of the Insurance Code and as held in Williams v. Cole.[2]
Furthermore, the appellate court contended that since the vessel was prevented at an intermediate port from completing the voyage due to its seizure by civil authorities, a peril insured against, the liability of petitioner continued until the goods could have been transhipped. But due to the perishable nature of the goods, it had to be promptly sold to minimize loss. Accordingly, the sale of the goods being reasonable and justified, it should not operate to discharge petitioner from its contractual liability.
Hence this petition, claiming that the Court of Appeals erred:
1. In ruling that the arrest of the vessel was a risk covered under the subject insurance policies.
2. In ruling that there was constructive total loss over the cargo.
3. In ruling that petitioner was in bad faith in declining private respondent's claim.
4. In giving undue reliance to the doctrine that insurance policies are strictly construed against the insurer.
In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is not compensable since the term "arrest" refers to "political or executive acts" and does not include a loss caused by riot or by ordinary judicial process as in this case; (b) the deletion of the Free from Capture or Seizure Clause would leave the assured covered solely for the perils specified by the wording of the policy itself; (c) the rationale for the exclusion of an arrest pursuant to judicial authorities is to eliminate collusion between unscrupulous assured and civil authorities.
As to the second assigned error, petitioner submits that any loss which private respondent may have incurred was in the nature and form of unrecovered acquisition value brought about by a voluntary sacrifice sale and not by arrest, detention or seizure of the ship.
As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its honest belief that the arrest of the vessel was not a compensable risk under the policies issued. In fact, petitioner supported private respondent by accommodating the latter's request for an extension of the insurance coverage, notwithstanding that it was then under no legal obligation to do so.
Private respondent, on the other hand, argued that when it appealed its case to the Court of Appeals, petitioner did not raise as an issue the award of exemplary damages. It cannot now, for the first time, raise the same before this Court. Likewise, petitioner cannot submit for the first time on appeal its argument that it was wrong for the Court of Appeals to have ruled the way it did based on facts that would need inquiry into the evidence. Even if inquiry into the facts were possible, such was not necessary because the coverage as ruled upon by the Court of Appeals is evident from the very terms of the policies.
It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly interpreted against it because the rule is that any ambiguity is to be taken contra proferentum. Risk policies should be construed reasonably and in a manner as to make effective the intentions and expectations of the parties. It added that the policies clearly stipulate that they cover the risks of non-delivery of an entire package and that it was petitioner itself that invited and granted the extensions and collected premiums thereon.
The resolution of this controversy hinges on the interpretation of the "Perils" clause of the subject policies in relation to the excluded risks or warranty specifically stated therein.
By way of a historical background, marine insurance developed as an all-risk coverage, using the phrase "perils of the sea" to encompass the wide and varied range of risks that were covered. [3] The subject policies contain the "Perils" clause which is a standard form in any marine insurance policy. Said clause reads:
"Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and to take upon them in this voyage; they are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea, Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation, condition, or quality soever, Barratry of the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt, detriment, or damage of the said goods and merchandise or any part thereof . AND in case of any loss or misfortune it shall be lawful to the ASSURED, their factors, servants and assigns, to sue, labour, and travel for, in and about the defence, safeguards, and recovery of the said goods and merchandises, and ship, & c., or any part thereof, without prejudice to this INSURANCE; to the charges whereof the said COMPANY, will contribute according to the rate and quantity of the sum herein INSURED. AND it is expressly declared and agreed that no acts of the Insurer or Insured in recovering, saving, or preserving the Property insured shall be considered as a Waiver, or Acceptance of Abandonment. And it is agreed by the said COMPANY, that this writing or Policy of INSURANCE shall be of as much Force and Effect as the surest Writing or Policy of INSURANCE made in LONDON. And so the said MALAYAN INSURANCE COMPANY, INC., are contented, and do hereby promise and bind themselves, their Heirs, Executors, Goods and Chattel, to the ASSURED, his or their Executors, Administrators, or Assigns, for the true Performance of the Premises; confessing themselves paid the Consideration due unto them for this INSURANCE at and after the rate arranged." (Underscoring supplied)
The exception or limitation to the "Perils" clause and the "All other perils" clause in the subject policies is specifically referred to as Clause 12 called the "Free from Capture & Seizure Clause" or the F.C. & S. Clause which reads, thus:
"Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any attempt thereat; also from the consequences of hostilities and warlike operations, whether there be a declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of a collision, any other vessel involved therein is performing) by a hostile act by or against a belligerent power and for the purpose of this warranty 'power' includes any authorities maintaining naval, military or air forces in association with power.
Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike arising therefrom or piracy.
Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form part of this insurance." (Underscoring supplied)
However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute War Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of Section 1, provides:
"1. This insurance covers:
1.1 The risks excluded from the standard form of English Marine Policy by the clause warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof of hostilities or warlike operations, whether there be a declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo),
stranding, heavy weather or fire unless caused directly (and independently of the nature on voyage or service which the vessel concerned or, in the case of a collision any other vessel involved therein is performing) by a hostile act by or against a belligerent power; and for the purpose of this warranty 'power' includes any authority maintaining naval, military or air forces in association with a power. Further warranted free from the consequences of civil war, revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy."
According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the Institute War Clauses (Cargo), among others, means that any "capture, arrest, detention, etc." pertained exclusively to warlike operations if this Court strictly construes the heading of the said Clauses. However, it also claims that the parties intended to include arrests, etc. even if it were not the result of hostilities or warlike operations. It further claims that on the strength of jurisprudence on the matter, the term "arrests" would only cover those arising from political or executive acts, concluding that whether private respondent's claim is anchored on subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the vessel by judicial authorities is an excluded risk.[4]
This Court cannot agree with petitioner's assertions, particularly when it alleges that in the "Perils" Clause, it assumed the risk of arrest caused solely by executive or political acts of the government of the seizing state and thereby excludes "arrests" caused by ordinary legal processes, such as in the instant case.
With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this Court agrees with the Court of Appeals and the private respondent that "arrest" caused by ordinary judicial process is deemed included among the covered risks. This interpretation becomes inevitable when subsection 1.1 of Section 1 of the Institute War Clauses provided that "this insurance covers the risks excluded from the Standard Form of English Marine Policy by the clause 'Warranted free of capture, seizure, arrest, etc. x x x'" or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by ordinary judicial process is also a risk excluded from the Standard Form of English Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is not included in the covered risk simply because the F.C. & S. Clause under the Institute War Clauses can only be operative in case of hostilities or warlike operations on account of its heading "Institute War Clauses." This Court agrees with the Court of Appeals when it held that ". . . Although the F.C. & S. Clause may have originally been inserted in marine policies to protect against risks of war, (see generally G. Gilmore & C. Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation in recent years to include seizure or detention by civil authorities seems consistent with the general purposes of the clause, x x x"[5] In fact, petitioner itself averred that subsection 1.1 of Section 1 of the Institute War Clauses included "arrest" even if it were not a result of hostilities or warlike operations.[6] In this regard, since what was also excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary judicial process, logically, such "arrest" would now become a covered risk under subsection 1.1 of Section 1 of the Institute War Clauses, regardless of whether or not said "arrest" by civil authorities occurred in a state of war.
Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It stated that "the F.C. & S. Clause was "originally incorporated in insurance policies to eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause applies even if there be no war or warlike operations x x x"[7] In the same vein, it contended that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result of hostilities or warlike operations."[8]
This Court cannot help the impression that petitioner is overly straining its interpretation of the provisions of the policy in order to avoid being liable for private respondent's claim.
This Court finds it pointless for petitioner to maintain its position that it only insures risks of "arrest" occasioned by executive or political acts of government which is interpreted as not referring to those caused by ordinary legal processes as contained in the "Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest occasioned by executive or political acts of the government and naturally, also those caused by ordinary legal processes; and, thereafter incorporates subsection 1.1 of Section 1 of the Institute War Clauses which now includes in the coverage risks of arrest due to executive or political acts of a government but then still excludes "arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of said Clauses should also have included "arrests" previously excluded from the coverage of the F.C. & S. Clause.
It has been held that a strained interpretation which is unnatural and forced, as to lead to an absurd conclusion or to render the policy nonsensical, should, by all means, be avoided. [9]Likewise, it must be borne in mind that such contracts are invariably prepared by the companies and must be accepted by the insured in the form in which they are written. [10] Any construction of a marine policy rendering it void should be avoided. [11] Such policies will, therefore, be construed strictly against the company in order to avoid a forfeiture, unless no other result is possible from the language used.[12]
If a marine insurance company desires to limit or restrict the operation of the general provisions of its contract by special proviso, exception, or exemption, it should express such limitation in clear and unmistakable language. [13] Obviously, the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial process was expressly indicated as an exception in the subject policies, there would have been no controversy with respect to the interpretation of the subject clauses.
Be that as it may, exceptions to the general coverage are construed most strongly against the company. [14] Even an express exception in a policy is to be construed against the underwriters by whom the policy is framed, and for whose benefit the exception is introduced.[15]
An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contract which is, to insure against risks of loss or damage to the goods. Such interpretation should result from the natural and reasonable meaning of language in the policy.[16] Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is adopted.[17]
Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. [18] A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations.[19]
In view of the foregoing, this Court sees no need to discuss the other issues presented.
WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Republic of the PhilippinesSUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-38613 February 25, 1982
PACIFIC TIMBER EXPORT CORPORATION, petitioner, vs.THE HONORABLE COURT OF APPEALS and WORKMEN'S INSURANCE COMPANY, INC., respondents.
DE CASTRO, ** J.:
This petition seeks the review of the decision of the Court of Appeals reversing the decision of the Court of First Instance of Manila in favor of petitioner and against private respondent which ordered the latter to pay the sum of Pll,042.04 with interest at the rate of 12% interest from receipt of notice of loss on April 15, 1963 up to the complete payment, the sum of P3,000.00 as attorney's fees and the costs 1 thereby dismissing petitioner s complaint with costs. 2
The findings of the of fact of the Court of Appeals, which are generally binding upon this Court, Except as shall be indicated in the discussion of the opinion of this Court the substantial correctness of still particular finding having been disputed, thereby raising a question of law reviewable by this Court 3 are as follows:
March 19, l963, the plaintiff secured temporary insurance from the defendant for its exportation of 1,250,000 board feet of Philippine Lauan and Apitong logs to be shipped from the Diapitan. Bay, Quezon Province to Okinawa and Tokyo, Japan. The defendant issued on said date Cover Note No. 1010, insuring the said cargo of the plaintiff "Subject to the Terms and Conditions of the WORKMEN'S INSURANCE COMPANY, INC. printed Marine Policy form as filed with and approved by the Office of the Insurance Commissioner (Exhibit A).
The regular marine cargo policies were issued by the defendant in favor of the plaintiff on April 2, 1963. The two marine policies bore the numbers 53 HO 1032 and 53 HO 1033 (Exhibits B and C, respectively). Policy No. 53 H0 1033 (Exhibit B) was for 542 pieces of logs equivalent to 499,950 board feet. Policy No. 53 H0 1033 was for 853 pieces of logs equivalent to 695,548 board feet (Exhibit C). The total cargo insured under the two marine policies accordingly consisted of 1,395 logs, or the equivalent of 1,195.498 bd. ft.
After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the two marine policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs intended to be exported were lost during loading operations in the Diapitan Bay. The logs were to be loaded on the 'SS Woodlock' which docked about 500 meters from the shoreline of the Diapitan Bay. The logs were taken from the log pond of the plaintiff and from which they were towed in rafts to the vessel. At about 10:00 o'clock a. m. on March 29, 1963, while the logs were alongside the vessel, bad weather developed resulting in 75 pieces of logs which were rafted together co break loose from
each other. 45 pieces of logs were salvaged, but 30 pieces were verified to have been lost or washed away as a result of the accident.
In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of 'appropriately 32 pieces of log's during loading of the 'SS Woodlock'. The said letter (Exhibit F) reads as follows:
April 4, 1963
Workmen's Insurance Company, Inc. Manila, Philippines
Gentlemen:
This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd. ft. Philippine Lauan and Apitong Logs. We would like to inform you that we have received advance preliminary report from our Office in Diapitan, Quezon that we have lost approximately 32 pieces of logs during loading of the SS Woodlock.
We will send you an accurate report all the details including values as soon as same will be reported to us.
Thank you for your attention, we wish to remain.
Very respectfully yours,
PACIFIC TIMBER EXPORT CORPORATION
(Sgd.) EMMANUEL S. ATILANO Asst. General Manager.
Although dated April 4, 1963, the letter was received in the office of the defendant only on April 15, 1963, as shown by the stamp impression appearing on the left bottom corner of said letter. The plaintiff subsequently submitted a 'Claim Statement demanding payment of the loss under Policies Nos. 53 HO 1032 and 53 HO 1033, in the total amount of P19,286.79 (Exhibit G).
On July 17, 1963, the defendant requested the First Philippine Adjustment Corporation to inspect the loss and assess the damage. The adjustment company submitted its 'Report on August 23, 1963 (Exhibit H). In said report, the adjuster found that 'the loss of 30 pieces of logs is not covered by Policies Nos. 53 HO 1032 and 1033 inasmuch as said policies covered the actual number of logs loaded on board the 'SS Woodlock' However, the loss of 30 pieces of logs is within the 1,250,000 bd. ft. covered by Cover Note 1010 insured for $70,000.00.
On September 14, 1963, the adjustment company submitted a computation of the defendant's probable liability on the loss sustained by the shipment, in the total amount of Pl1,042.04 (Exhibit 4).
On January 13, 1964, the defendant wrote the plaintiff denying the latter's claim, on the ground they defendant's investigation revealed that the entire shipment of logs covered by the two marines policies No. 53 110 1032 and 713 HO 1033 were received in good order at their point of destination. It was further stated that the said loss may be considered as covered under Cover Note No. 1010 because the said Note had become 'null and void by virtue of the issuance of Marine Policy Nos. 53 HO 1032 and 1033'(Exhibit J-1). The denial of the claim by the defendant was brought by the plaintiff to the attention of the Insurance Commissioner by means of a letter dated March 21, 1964 (Exhibit K). In a reply letter dated March 30, 1964, Insurance Commissioner Francisco Y. Mandanas observed that 'it is only fair and equitable to indemnify the insured under Cover Note No. 1010', and advised early settlement of the said marine loss and salvage claim (Exhibit L).
On June 26, 1964, the defendant informed the Insurance Commissioner that, on advice of their attorneys, the claim of the plaintiff is being denied on the ground that the cover note is null and void for lack of valuable consideration (Exhibit M). 4
Petitioner assigned as errors of the Court of Appeals, the following:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS NULL AND VOID FOR LACK OF VALUABLE CONSIDERATION BECAUSE THE COURT DISREGARDED THE PROVEN FACTS THAT PREMIUMS FOR THE COMPREHENSIVE INSURANCE COVERAGE THAT INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT INCLUDED THE COVER NOTE WAS
PAID BY PETITIONER AND THAT NO SEPARATE PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON ALL ITS COVER NOTES.
II
THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS RELEASED FROM LIABILITY UNDER THE COVER NOTE DUE TO UNREASONABLE DELAY IN GIVING NOTICE OF LOSS BECAUSE THE COURT DISREGARDED THE PROVEN FACT THAT PRIVATE RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY OBJECT TO THE CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE OF LOSS AND, CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE WAIVED UNDER SECTION 84 OF THE INSURANCE ACT. 5
1. Petitioner contends that the Cover Note was issued with a consideration when, by express stipulation, the cover note is made subject to the terms and conditions of the marine policies, and the payment of premiums is one of the terms of the policies. From this undisputed fact, We uphold petitioner's submission that the Cover Note was not without consideration for which the respondent court held the Cover Note as null and void, and denied recovery therefrom. The fact that no separate premium was paid on the Cover Note before the loss insured against occurred, does not militate against the validity of petitioner's contention, for no such premium could have been paid, since by the nature of the Cover Note, it did not contain, as all Cover Notes do not contain particulars of the shipment that would serve as basis for the computation of the premiums. As a logical consequence, no separate premiums are intended or required to be paid on a Cover Note. This is a fact admitted by an official of respondent company, Juan Jose Camacho, in charge of issuing cover notes of the respondent company (p. 33, tsn, September 24, 1965).
At any rate, it is not disputed that petitioner paid in full all the premiums as called for by the statement issued by private respondent after the issuance of the two regular marine insurance policies, thereby leaving no account unpaid by petitioner due on the insurance coverage, which must be deemed to include the Cover Note. If the Note is to be treated as a separate policy instead of integrating it to the regular policies subsequently issued, the purpose and function of the Cover Note would be set at naught or rendered meaningless, for it is in a real sense a contract, not a mere application for insurance which is a mere offer. 6
It may be true that the marine insurance policies issued were for logs no longer including those which had been lost during loading operations. This had to be so because the risk insured against is not for loss during operations anymore, but for loss during transit, the logs having already been safely placed aboard. This would make no difference, however, insofar as the liability on the cover note is concerned, for the number or volume of logs lost can be determined independently as in fact it had been so ascertained at the instance of private respondent itself when it sent its own adjuster to investigate and assess the loss, after the issuance of the marine insurance policies.
The adjuster went as far as submitting his report to respondent, as well as its computation of respondent's liability on the insurance coverage. This coverage could not have been no other than what was stipulated in the Cover Note, for no loss or damage had to be assessed on the coverage arising from the marine insurance policies. For obvious reasons, it was not necessary to ask petitioner to pay premium on the Cover Note, for the loss insured against having already occurred, the more practical procedure is simply to deduct the premium from the amount due the petitioner on the Cover Note. The non-payment of premium on the Cover Note is, therefore, no cause for the petitioner to lose what is due it as if there had been payment of premium, for non-payment by it was not chargeable against its fault. Had all the logs been lost during the loading operations, but after the issuance of the Cover Note, liability on the note would have already arisen even before payment of premium. This is how the cover note as a "binder" should legally operate otherwise, it would serve no practical purpose in the realm of commerce, and is supported by the doctrine that where a policy is delivered without requiring payment of the premium, the presumption is that a credit was intended and policy is valid. 7
2. The defense of delay as raised by private respondent in resisting the claim cannot be sustained. The law requires this ground of delay to be promptly and specifically asserted when a claim on the insurance agreement is made. The undisputed facts show that instead of invoking the ground of delay in objecting to petitioner's claim of recovery on the cover note, it took steps clearly indicative that this particular ground for objection to the claim was never in its mind. The nature of this specific ground for resisting a claim places the insurer on duty to inquire when the loss took place, so that it could determine whether delay would be a valid ground upon which to object to a claim against it.
As already stated earlier, private respondent's reaction upon receipt of the notice of loss, which was on April 15, 1963, was to set in motion from July 1963 what would be necessary to determine the cause and extent of the loss, with a view to the payment thereof on the insurance agreement. Thus it sent its adjuster to investigate and assess the loss in July, 1963. The adjuster submitted his report on August 23, 1963 and its computation of respondent's liability on September 14, 1963. From April 1963 to July, 1963, enough time was available for private respondent to determine if petitioner was guilty of delay in communicating the loss to respondent company. In the proceedings that took place later in the Office of the Insurance Commissioner, private respondent should then have raised this ground of delay to avoid liability. It did not do so. It must be because it did not find any delay, as this Court fails to find a real and substantial sign thereof. But even on the assumption that there was delay, this Court is satisfied and convinced that as expressly provided by law, waiver can successfully be raised against private respondent. Thus Section 84 of the Insurance Act provides:
Section 84.—Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of his or if he omits to take objection promptly and specifically upon that ground.
From what has been said, We find duly substantiated petitioner's assignments of error.
ACCORDINGLY, the appealed decision is set aside and the decision of the Court of First Instance is reinstated in toto with the affirmance of this Court. No special pronouncement as to costs.
SO ORDERED.
Republic of the PhilippinesSupreme Court
Manila
THIRD DIVISION
EASTERN SHIPPING LINES, INC.,Petitioner,
- versus -
PRUDENTIAL GUARANTEE AND ASSURANCE, INC.,Respondent.
On November 24 to 28, 1995, the shipment was withdrawn by Seafront Customs and Brokerage from the pier and
delivered to the warehouse of Nissan in Quezon City.[6]
A survey of the shipment was then conducted by Tan-Gaute Adjustment Company, Inc. (surveyor) at Nissans warehouse.
On January 16, 1996, the surveyor submitted its report[7] with a finding that there were short (missing) items in Cases Nos.
10/A26/T3K and 10/A26/7K and broken/scratched and broken items in Case No. 10/A26/70K; and that (i)n (its) opinion, the
shortage and damage sustained by the shipment were due to pilferage and improper handling, respectively while in the custody of
the vessel and/or Arrastre Contractors.[8]
As a result, Nissan demanded the sum of P1,047,298.34[9] representing the cost of the damages sustained by the shipment
from petitioner, the owner of the vessel, and ATI, the arrastre operator. However, the demands were not heeded.[10]
On August 21, 1996, as insurer of the shipment against all risks per Marine Open Policy No. 86-168 and Marine Cargo
Risk Note No. 3921/95, respondent Prudential Guarantee and Assurance Inc. paid Nissan the sum of P1,047,298.34.
On October 1, 1996, respondent sued petitioner and ATI for reimbursement of the amount it paid to Nissan before the
Regional Trial Court (RTC) of Makati City, Branch 148, docketed as Civil Case No. 96-1665, entitled Prudential Guarantee and
Assurance, Inc. v. Eastern Shipping Lines, Inc. Respondent claimed that it was subrogated to the rights of Nissan by virtue of said
payment.[11]
On June 21, 1999, the RTC rendered a Decision,[12] the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendants Eastern Shipping Lines, Inc. and ATI, and said defendants are hereby ordered to pay jointly and solidarily plaintiff the following:
1) The claim of P1,047,298.34 with legal interest thereon of 6% per annum from the date of the
filing of this complaint until the same is fully paid;2) [Twenty-five (25%)] percent of the principal claim, as and for attorneys fees;3) Plus costs of suit.
Both the counterclaims and crossclaims are without legal basis. The counterclaims and crossclaims are
based on the assumption that the other defendant is the one solely liable. However, inasmuch as the solidary liability of the defendants have been established, the counterclaims and crossclaims must be denied.
Equal costs against Eastern Shipping Lines, Inc. and Asian Terminals, Inc.
SO ORDERED.[13]
Both petitioner and ATI appealed to the CA.
On April 26, 2006, the CA rendered a Decision the dispositive portion of which reads: WHEREFORE, the appealed decision is AFFIRMED with MODIFICATIONS, in that (i) defendant-
appellant Eastern Shipping Lines, Inc. is ordered to pay appellee (a) the amount ofP904,293.75 plus interest thereon at the rate of 6% per annum from the filing of the complaint up to the finality of this judgment, when the interest shall become 12% per annum until fully paid, and (b) the costs of suit; (ii) the award of attorneys fees is DELETED; and (iii) the complaint against defendant-appellant Asian Terminals, Inc. is DISMISSED.
The CA exonerated ATI and ruled that petitioner was solely responsible for the damages caused to the cargoes.
Moreover, the CA relying on Delsan Transport Lines, Inc. vs. Court of Appeals,[15] ruled that the right of subrogation accrues upon
payment by the insurance company of the insurance claim and that the presentation of the insurance policy is not indispensable
before the appellee may recover in the exercise of its subrogatory right.[16]
Petitioner then filed a motion for reconsideration, which was, however, denied by the CA in a Resolution dated August
15, 2006.
Hence, herein petition, with petitioner raising the following assignment of errors to wit: I.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT FINDING HEREIN PETITIONER LIABLE DESPITE THE FACT THAT RESPONDENT FAILED TO SUBMIT ANY INSURANCE POLICY.
II.WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT APPLYING THE
US$500.00/PACKAGE/CASE PACKAGE LIMITATION OF LIABILITY IN ACCORDANCE WITH THE CARRIAGE OF GOODS BY SEA ACT.[17]
The petition is meritorious.
The rule in our jurisdiction is that only questions of law may be entertained by this Court in a petition for review on certiorari.
This rule, however, is not iron-clad and admits of certain exceptions, one of which is when the CA manifestly overlooked certain
relevant and undisputed facts that, if properly considered, would justify a different conclusion. [18]In the case at bar, the records of
the case contain evidence which justify the application of the exception.
Anent the first error, petitioner argues that respondent was not properly subrogated because of the non-presentation of the
marine insurance policy. In the case at bar, in order to prove its claim, respondent presented a marine cargo risk note and a
subrogation receipt. Thus, the question to be resolved is whether the two documents, without the Marine Insurance Policy, are
sufficient to prove respondents right of subrogation.
Before anything else, it must be emphasized that a marine risk note is not an insurance policy. It is only an acknowledgment or
declaration of the insurer confirming the specific shipment covered by its marine open policy, the evaluation of the cargo and the
chargeable premium.[19] In International Container Terminal Services, Inc. v. FGU Insurance Corporation (International),[20] the
nature of a marine cargo risk note was explained, thus:x x x It is the marine open policy which is the main insurance contract. In other words, the marine open policy is the blanket insurance to be undertaken by FGU on all goods to be shipped by RAGC during the existence of the contract, while the marine risk note specifies the particular goods/shipment insured by FGU on that specific transaction, including the sum insured, the shipment particulars as well as the premium paid for such shipment. x x x.[21]
For clarity, the pertinent portions of the Marine Cargo Risk Note, [22] relied upon by respondent, are hereunder reproduced, to wit: RN NO 39821/95Date: Nov. 16, 1995 NISSAN MOTOR PHILS., INC.x x x Gentlemen: We have this day noted a Risk in your favor subject to all clauses and condition of the Companys printed form of Marine Open Policy No. 86-168 For PHILIPINE PESOS FOURTEEN MILLION ONE HUNDRED SEVENTY-THREE THOUSAND FORTY-TWO & 91/100 ONLY (P14, 173,042.91) xxx CARGO: 56 CASES NISSAN MOTOR VEHICLE CKD (GC22) CONDITIONS: INSTITUTE CARGO CLAUSES AOTHER TERMS AND CONDITIONS PERMOP-86-168 From: NAGOYATo: MANILA, PHILS.ETD: NOV. 8, 1995 ETA: NOV. 17, 1995CARRIER: APOLLO TUJUHB/L NO: NMA-1BANK: BANK OF THE PHILLIPINE ISLANDSL/C NO: 026010051971Shipper/ Consignee: MARUBENI CORPORATION
It is undisputed that the cargoes were already on board the carrier as early as November 8, 1995 and that the same arrived
at the port of Manila on November 16, 1995. It is, however, very apparent that the Marine Cargo Risk Note was issued only
on November 16, 1995. The same, therefore, should have raised a red flag, as it would be impossible to know whether said goods
were actually insured while the same were in transit from Japan to Manila. On this score, this Court is guided by Malayan
Insurance Co., Inc. v. Regis Brokerage Corp.,[23] where this Court ruled:
Thus, we can only consider the Marine Risk Note in determining whether there existed a contract of insurance between ABB Koppel and Malayan at the time of the loss of the motors.However, the very terms of the Marine Risk Note itself are quite damning. It is dated 21 March 1995, or after the occurrence of the loss, and specifically states that Malayan ha[d] this day noted the above-mentioned risk in your favor and hereby guarantee[s] that this document has all the force and effect of the terms and conditions in the Corporations printed form of the standard Marine Cargo Policy and the Companys Marine Open Policy.[24]
Likewise, the date of the issuance of the Marine Risk Note also caught the attention of petitioner. In petitioners
Comment/Opposition[25] to the formal offer of evidence before the RTC, petitioner made the following manifestations, to wit:
Exhibit B, Marine Cargo Risk Note No. 39821 dated November 16, 1995 is being objected to for being irrelevant and immaterial as it was executed on November 16, 1995. The cargoes arrived in Manila on November 16, 1995. This means that the cargoes are not specifically covered by any particular insurance at the time of transit. The alleged Marine Open Policy was not presented. Marine Open Policy may be subject to Institute Cargo Clauses which may require arbitration prior to the filing of an action in court.[26]
In addition, petitioner also contended that the Marine Cargo Risk Note referred to Institute Cargo Clauses A and other
terms and conditions per Marine Open Policy-86-168.
Based on the forgoing, it is already evident why herein petition is meritorious. The Marine Risk Note relied upon by
respondent as the basis for its claim for subrogation is insufficient to prove said claim.
As previously stated, the Marine Risk Note was issued only on November 16, 1995; hence, without a copy of the marine
insurance policy, it would be impossible and simply guesswork to know whether the cargo was insured during the voyage which
started on November 8, 1995. Again, without the marine insurance policy, it would be impossible for this Court to know the
following: first, the specifics of the Institute Cargo Clauses A and other terms and conditions per Marine Open Policy-86-168 as
alluded to in the Marine Risk Note; second, if the said terms and conditions were actually complied with before respondent paid
Nissans claim.
Furthermore, a reading of the transcript of the records clearly show that, at the RTC, petitioner had already objected to
the non-presentation of the marine insurance policy, to wit:
Q. Are you also the one preparing the Marine Insurance Contract?A. No, sir. Q. Who is the one?A. Our Marine Cargo Underwriting Department. Q. And do you know anybody in that department?A. Yes, sir. Q. And you were aware that this particular cargo of the shipment was insured?A. Yes, sir, per policy issued. Q. And that you are referring to Exhibit?A. The Marine Cargo Risk.
Q. Is this the only contract of Insurance between Prudential Guarantee and Nissan?A. Sir, there is a Marine Open Policy. Q. Do you have any copy of that?A. It is in the office. Atty. Alojado Can you produce that copy?Atty. Zapa May we know the request of counsel for producing this Marine Open Policy?
Atty. Alojado The basis of the question is the answer of the witness which says that there is another contract of
insurance. COURT Yes, that is a Marine Open Policy.
Are you familiar with Marine Open Policy?
Atty. Alojado Yes, Your Honor.But we would also like to be familiarize withthat contract.
COURT But you know already a Marine Open Policy
Atty. Alojado Yes, Your Honor.
COURT I do not know if you work as a lawyer for several Insurance Company? Atty. Alojado No, Your Honor. Honestly, Your Honor I worked asa Maritime lawyer. COURT Then you should know what is Marine Open Policy.Atty. Alojado I would like to know the specification of theMarine Open Policy in this regard. Atty. Zapa I think your Honor, between the plaintiff and the defendant there is no issue against the insurance. COURT Yes because this witness it not testifying on the Marine Open Policy. Atty. Alojado We submit. COURT Proceed. Atty. AlojadoQ. But there is a Marine Open PolicyA. Yes, sir.[27]
x x x x
COURTQ. Is the policy a standing policy, a continuing policy or is it going only for only a year or for a particular
shipment or what?A. For this particular consignee, they have Marine Open Policy. Atty. Alojado That was not presented. COURT Thats why Im asking. So the policy is not only for a particular shipment, but all other shipments that
may come?A. Yes, Your Honor. Q. Are covered?A. Yes, Your Honor.
Q. Without any specifications?A. Yes, Your Honor.[28]
Clearly, petitioner was not remiss when it openly objected to the non-presentation of the Marine Insurance Policy. As
testified to by respondents witness, they had a copy of the marine insurance policy in their office. Thus, respondent was already
apprised of the possible importance of the said document to their cause.
In addition, this Court takes notice that notwithstanding that the RTC may have denied the repeated manifestation of
petitioner of the non-presentation of the marine insurance policy, the same by itself does not exonerate respondent. As plaintiff, it
was respondents burden to present the evidence necessary to substantiate its claim.
In its Complaint,[29] respondent alleged: That the above-described shipment was insured for P14,173,042.91 against all
risks under plaintiffs Marine Cargo Risk Note No. 39821/Marine Open Policy No. 86-168.[30] Therefore, other than the marine
cargo risk note, respondent should have also presented the marine insurance policy, as the same also served as the basis for its
complaint. Section 7, Rule 9 of the 1997 Rules of Civil Procedure, provide:
SECTION 7. Action or defense based on document.Whenever an action or defense is based upon a written instrument or document, the substance of such instrument or document shall be set forth in the pleading, and the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to be a part of the pleading, or said copy may, with like effect, be set forth in the pleading.
On this score, Malayan is instructive: Malayans right of recovery as a subrogee of ABB Koppel cannot be predicated alone on the liability of
the respondent to ABB Koppel, even though such liability will necessarily have to be established at the trial for Malayan to recover. Because Malayans right to recovery derives from contractual subrogation as an incident to an insurance relationship, and not from any proximate injury to it inflicted by the respondents, it is critical that Malayan establish the legal basis of such right to subrogation by presenting the contract constitutive of the insurance relationship between it and ABB Koppel. Without such legal basis, its cause of action cannot survive.
Our procedural rules make plain how easily Malayan could have adduced the Marine Insurance Policy. Ideally, this should have been accomplished from the moment it filed the complaint. Since the Marine Insurance Policy was constitutive of the insurer-insured relationship from which Malayan draws its right to subrogation, such document should have been attached to the complaint itself, as provided for in Section 7, Rule 9 of the 1997 Rules of Civil Procedure: x x x[31]
Therefore, since respondent alluded to an actionable document in its complaint, the contract of insurance between it and Nissan, as
integral to its cause of action against petitioner, the Marine Insurance Policy should have been attached to the Complaint. Even in
its formal offer of evidence, respondent alluded to the marine insurance policy which can stand independent of the Marine Cargo
Risk Note, to wit:
EXH B = Marine Cargo Risk Note No. 39821/95 Dated November 16, 1995. Purpose: As proof that the subject shipment was covered by insurance for P14,173, 042.91 under Marine Open Policy No. 86-168.[32]
It is significant that the date when the alleged insurance contract was constituted cannot be established with certainty
without the contract itself. Said point is crucial because there can be no insurance on a risk that had already occurred by the time
the contract was executed.[33] Surely, the Marine Risk Note on its face does not specify when the insurance was constituted.
The importance of the presentation of the Marine Insurance Policy was also emphasized in Wallem Philippines Shipping,
Inc. v. Prudential Guarantee & Assurance, Inc.,[34] where this Court ruled:
x x x Wallem still cannot be held liable because of the failure of Prudential to present the contract of insurance or a copy thereof. Prudential claims that it is subrogated to the rights of GMC pursuant to their insurance contract. For this purpose, it submitted a subrogation receipt (Exh. J) and a marine cargo risk note (Exh. D). However, as the trial court pointed out, this is not sufficient. As GMCs subrogee, Prudential can exercise only those rights granted to GMC under the insurance contract. The contract of insurance must be presented in evidence to indicate the extent of its coverage. As there was no determination of rights under the insurance contract, this Courts ruling in Home Insurance Corporation v. Court of Appeals is applicable:
The insurance contract has not been presented. It may be assumed for the sake of argument that the subrogation receipt may nevertheless be used to establish the relationship between the petitioner [Home Insurance Corporation] and the consignee [Nestl Phil.] and the amount paid to settle the claim. But that is all the document can do. By itself alone, the subrogation receipt is not sufficient to prove the petitioners claim holding the respondent [Mabuhay Brokerage Co., Inc.] liable for the damage to the engine.
. . . .
It is curious that the petitioner disregarded this rule, knowing that the best evidence of the insurance contract was its original copy, which was presumably in the possession of Home itself.Failure to present this original (or even a copy of it), for reasons the Court cannot comprehend, must prove fatal to this petition.[35]
Finally, there have been cases where this Court ruled that the non-presentation of the marine insurance policy is not fatal,
as can be gleaned in
International, where this Court held:Indeed, jurisprudence has it that the marine insurance policy needs to be presented in evidence before the trial court or even belatedly before the appellate court. In Malayan Insurance Co., Inc. v. Regis Brokerage Corp., the Court stated that the presentation of the marine insurance policy was necessary, as the issues raised therein arose from the very existence of an insurance contract between Malayan Insurance and its consignee, ABB Koppel, even prior to the loss of the shipment. In Wallem Philippines Shipping, Inc. v. Prudential Guarantee and Assurance, Inc., the Court ruled that the insurance contract must be presented in evidence in order to determine the extent of the coverage. This was also the ruling of the Court in Home Insurance Corporation v. Court of Appeals.
However, as in every general rule, there are admitted exceptions. In Delsan Transport Lines, Inc. v. Court of Appeals, the Court stated that the presentation of the insurance policy was not fatal because the loss of the cargo undoubtedly occurred while on board the petitioner's vessel, unlike in Home Insurance in which the cargo passed through several stages with different parties and it could not be determined when the damage to the cargo occurred, such that the insurer should be liable for it. As in Delsan, there is no doubt that the loss of the cargo in the present case occurred while in petitioner's custody. Moreover, there is no issue as regards the provisions of Marine Open Policy No. MOP-12763, such that the presentation of the contract itself is necessary for perusal, not to mention that its existence was already admitted by petitioner in open court. And even though it was not offered in evidence, it still can be considered by the court as long as they have been properly identified by testimony duly recorded and they have themselves been incorporated in the records of the case.[36]
Although the CA may have ruled that the damage to the cargo occurred while the same was in petitioners custody, this Court
cannot apply the ruling in International to the case at bar. In contrast, unlike in International where there was no issue as regards
the provisions of the marine insurance policy, such that the presentation of the contract itself is necessary for perusal, herein
petitioner had repeatedly objected to the non-presentation of the marine insurance policy and had manifested its desire to know the
specific provisions thereof. Moreover, and the same is critical, the marine risk note in the case at bar is questionable because: first,
it is dated on the same day the cargoes arrived at the port of Manila and not during the duration of the voyage; second, without the
Marine Insurance Policy to elucidate on the specifics of the terms and conditions alluded to in the marine risk note, it would be
simply guesswork to know if the same were complied with.
Lastly, to cast all doubt on the merits of herein petition, this Court is guided by the ruling in Malayan, to wit:
It cannot be denied from the only established facts that Malayan and ABB Koppel comported as if there was an insurance relationship between them and documents exist that evince the presence of such legal relationship. But, under these premises, the very insurance contract emerges as the white elephant in the room an obdurate presence which everybody reacts to, yet, legally invisible as a matter of evidence since no attempt had been made to prove its corporeal existence in the court of law. It may seem commonsensical to conclude anyway that there was a contract of insurance between Malayan and ABB Koppel since they obviously behaved in a manner that indicates such relationship, yet the same conclusion could be had even if, for example, those parties staged an elaborate charade to impress on the world the existence of an insurance contract when there actually was none. While there is absolutely no indication of any bad faith of such import by Malayan or ABB Koppel, the fact that the commonsensical conclusion can be drawn even if there was bad faith that convinces us to reject such line of thinking.
The Court further recognizes the danger as precedent should we sustain Malayans position, and
not only because such a ruling would formally violate the rule on actionable documents. Malayan would have us effectuate an insurance contract without having to consider its particular terms and conditions, and on a blind leap of faith that such contract is indeed valid and subsisting. The conclusion further works to the utter prejudice of defendants such as Regis or Paircargo since they would be deprived the opportunity to examine the document that gives rise to the plaintiffs right to recover against them, or to raise arguments or objections against the validity or admissibility of such document. If a legal claim is irrefragably sourced from an actionable document, the defendants cannot be deprived of the right to examine or utilize such document in order to intelligently raise a defense. The inability or refusal of the plaintiff to submit such document into evidence constitutes an effective denial of that right of the defendant which is ultimately rooted in due process of law, to say nothing on how such failure fatally diminishes the plaintiffs substantiation of its own cause of action.[37]
In conclusion, this Court rules that based on the applicable jurisprudence, because of the inadequacy of the Marine Cargo
Risk Note for the reasons already stated, it was incumbent on respondent to present in evidence the Marine Insurance Policy, and
having failed in doing so, its claim of subrogation must necessarily fail.
Because of the foregoing, it would be unnecessary to discuss the second error raised by petitioner.
WHEREFORE, premises considered, the petition is GRANTED. The April 26, 2006 Decision and August 15,
2006 Resolution of the Court of Appeals in CA-G.R. CV No. 68165 are hereby REVERSED and SET ASIDE. The Complaint in
Civil Case No. 96-1665 is DISMISSED.
SO ORDERED.
FIRST DIVISION
[G.R. No. 116940. June 11, 1997]
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., petitioner, vs. COURT OF APPEALS and FELMAN SHIPPING LINES,respondents.
D E C I S I O N
BELLOSILLO, J.:
This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to observe the extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of the insurer to be subrogated to the rights of the insured upon payment of the insurance claim.
On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board MV Asilda, a vessel owned and operated by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-liter Coca-Cola softdrink bottles to be transported from Zamboanga City to Cebu City for consignee Coca-Cola Bottlers Philippines, Inc., Cebu.[1] The shipment was insured with petitioner Philippine American General Insurance Co., Inc. (PHILAMGEN for brevity), under Marine Open Policy No. 100367-PAG.
MV Asilda left the port of Zamboanga in fine weather at eight oclock in the evening of the same day. At around eight forty-five the following morning, 7 July 1983, the vessel sank in the waters of Zamboanga del Norte bringing down her entire cargo with her including the subject 7,500 cases of 1-liter Coca-Cola softdrink bottles.
On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim with respondent FELMAN for recovery of damages it sustained as a result of the loss of its softdrink bottles that sank with MV Asilda. Respondent denied the claim thus prompting the consignee to file an insurance claim with PHILAMGEN which paid its claim of P755,250.00.
Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN which disclaimed any liability for the loss. Consequently, on 29 November 1983 PHILAMGEN sued the shipowner for sum of money and damages.
In its complaint PHILAMGEN alleged that the sinking and total loss of MV Asilda and its cargo were due to the vessels unseaworthiness as she was put to sea in an unstable condition.It further alleged that the vessel was improperly manned and that its officers were grossly negligent in failing to take appropriate measures to proceed to a nearby port or beach after the vessel started to list.
On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that no right of subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any event, FELMAN had abandoned all its rights, interests and ownership over MV Asilda together with her freight and appurtenances for the purpose of limiting and extinguishing its liability under Art. 587 of the Code of Commerce.[2]
On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the Court of Appeals set aside the dismissal and remanded the case to the lower court for trial on the merits. FELMAN filed a petition for certiorari with this Court but it was subsequently denied on 13 February 1989.
On 28 February 1992 the trial court rendered judgment in favor of FELMAN. [3] It ruled that MV Asilda was seaworthy when it left the port of Zamboanga as confirmed by certificates issued by the Philippine Coast Guard and the shipowners surveyor attesting to its seaworthiness. Thus the loss of the vessel and its entire shipment could only be attributed to either a fortuitous event, in which case, no liability should attach unless there was a stipulation to the contrary, or to the negligence of the captain and his crew, in which case, Art. 587 of the Code of Commerce should apply.
The lower court further ruled that assuming MV Asilda was unseaworthy, still PHILAMGEN could not recover from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had breached its implied warranty on the vessels seaworthiness. Resultantly, the payment made by PHILAMGEN to the assured was an undue, wrong and mistaken payment. Since it was not legally owing, it did not give PHILAMGEN the right of subrogation so as to permit it to bring an action in court as a subrogee.
On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August 1994 respondent appellate court rendered judgment finding MV Asilda unseaworthy for being top- heavy as 2,500 cases of Coca-Cola softdrink bottles were improperly stowed on deck. In other words, while the vessel possessed the necessary Coast Guard certification indicating its seaworthiness with respect to the structure of the ship itself, it was not seaworthy with respect to the cargo. Nonetheless, the appellate court denied the claim of PHILAMGEN on the ground that the assureds implied warranty of seaworthiness was not complied with. Perfunctorily, PHILAMGEN was not properly subrogated to the rights and interests of the shipper.Furthermore, respondent court held that the filing of notice of abandonment had absolved the shipowner/agent from liability under the limited liability rule.
The issues for resolution in this petition are: (a) whether MV Asilda was seaworthy when it left the port of Zamboanga; (b) whether the limited liability under Art. 587 of the Code ofCommerce should apply; and, (c) whether PHILAMGEN was properly subrogated to the rights and legal actions which the shipper had against FELMAN, the shipowner.
MV Asilda was unseaworthy when it left the port of Zamboanga. In a joint statement, the captain as well as the chief mate of the vessel confirmed that the weather was fine when they left the port of Zamboanga. According to them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an undetermined quantity of empty boxes for fresh eggs. They loaded the empty boxes for eggs and about 500 cases of Coca-Cola bottles on deck. [4] The ship captain stated that around four oclock in the morning of 7 July 1983 he was awakened by the officer on duty to inform him that the vessel had hit a floating log. At that time he noticed that the weather had deteriorated with strong southeast winds inducing big waves. After thirty minutes he observed that the vessel was listing slightly to starboard and would not correct itself despite the heavy rolling and pitching. He then ordered his crew to shift the cargo from starboard to portside until the vessel was balanced. At about seven oclock in the morning, the master of the vessel stopped the engine because the vessel was listing dangerously to portside. He ordered his crew to shift the cargo back to starboard. The shifting of cargo took about an hour afterwhich he rang the engine room to resume full speed.
At around eight forty-five, the vessel suddenly listed to portside and before the captain could decide on his next move, some of the cargo on deck were thrown overboard and seawaterentered the engine room and cargo holds of the vessel. At that instance, the master of the vessel ordered his crew to abandon ship. Shortly thereafter, MV Asilda capsized and sank. He ascribed the sinking to the entry of seawater through a hole in the hull caused by the vessels collision with a partially submerged log.[5]
The Elite Adjusters, Inc., submitted a report regarding the sinking of MV Asilda. The report, which was adopted by the Court of Appeals, reads -
We found in the course of our investigation that a reasonable explanation for the series of lists experienced by the vessel that eventually led to her capsizing and sinking, was that the vessel was top-heavywhich is to say that while the vessel may not have been overloaded, yet the distribution or stowage of the cargo on board was done in such a manner that the vessel was in top-heavy condition at the time of her departure and which condition rendered her unstable and unseaworthy for that particular voyage.
In this connection, we wish to call attention to the fact that this vessel was designed as a fishing vessel x x x x and it was not designed to carry a substantial amount or quantity of cargo on deck. Therefore, we believe strongly that had her cargo been confined to those that could have been accommodated under deck, her stability would not have been affected and the vessel would not have been in any danger of capsizing, even given the prevailing weather conditions at that time of sinking.
But from the moment that the vessel was utilized to load heavy cargo on its deck, the vessel was rendered unseaworthy for the purpose of carrying the type of cargo because the weight of the deck cargo so decreased the vessels metacentric height as to cause it to become unstable.
Finally, with regard to the allegation that the vessel encountered big waves, it must be pointed out that ships are precisely designed to be able to navigate safely even during heavy weather and frequently we hear of ships safely and successfully weathering encounters with typhoons and although they may sustain some amount of damage, the sinking of ship during heavy weather is not a frequent occurrence and is not likely to occur unless they are inherently unstable and unseaworthy x x x x
We believe, therefore, and so hold that the proximate cause of the sinking of the M/V Asilda was her condition of unseaworthiness arising from her having been top-heavy when she departed from the Port of Zamboanga. Her having capsized and eventually sunk was bound to happen and was therefore in the category of an inevitable occurrence (underscoring supplied).[6]
We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the proximate cause of the sinking of MV Asilda was its being top-heavy. Contrary to the ship captains allegations, evidence shows that approximately 2,500 cases of softdrink bottles were stowed on deck. Several days after MV Asilda sank, an estimated 2,500 empty Coca-Cola plastic cases were recovered near the vicinity of the sinking. Considering that the ships hatches were properly secured, the empty Coca-Cola cases recovered could have come only from the vessels deck cargo. It is settled that carrying a deck cargo raises the presumption of unseaworthiness unless it can be shown that the deck cargo will not interfere with the proper management of the ship. However, in this case it was established that MV Asilda was not designed to carry substantial amount of cargo on deck. The inordinate loading of cargo deck resulted in the decrease of the vessels metacentric height [7] thus making it unstable. The strong winds and waves encountered by the vessel are but the ordinary vicissitudes of a sea voyage and as such merely contributed to its already unstable and unseaworthy condition.
On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at bar. [8] Simply put, the ship agent is liable for the negligent acts of the captain in the care of goods loaded on the vessel. This liability however can be limited through abandonment of the vessel, its equipment and freightage as provided in Art. 587. Nonetheless, there are exceptional circumstances wherein the ship agent could still be held answerable despite the abandonment, as where the loss or injury was due to the fault of the shipowner and the captain.[9] The international rule is to the effect that the right of abandonment of vessels, as a legal limitation of a shipowners liability, does not apply to cases where the injury or average was occasioned by the shipowners own fault. [10] It must be stressed at this point that Art. 587 speaks only of situations where the fault or negligence is committed solely by the captain. Where the shipowner is likewise to be blamed, Art. 587 will not apply, and such situation will be covered by the provisions of the Civil Code on common carrier.[11]
It was already established at the outset that the sinking of MV Asilda was due to its unseaworthiness even at the time of its departure from the port of Zamboanga. It was top-heavy as an excessive amount of cargo was loaded on deck. Closer supervision on the part of the shipowner could have prevented this fatal miscalculation. As such, FELMAN was equally negligent.It cannot therefore escape liability through the expedient of filing a notice of abandonment of the vessel by virtue of Art. 587 of the Code of Commerce.
Under Art 1733 of the Civil Code, (c)ommon carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case x x x x" In the event of loss of goods, common carriers are presumed to have acted negligently. FELMAN, the shipowner, was not able to rebut this presumption.
In relation to the question of subrogation, respondent appellate court found MV Asilda unseaworthy with reference to the cargo and therefore ruled that there was breach of warranty of seaworthiness that rendered the assured not entitled to the payment of is claim under the policy. Hence, when PHILAMGEN paid the claim of the bottling firm there was in effect a voluntary payment and no right of subrogation accrued in its favor. In other words, when PHILAMGEN paid it did so at its own risk.
It is generally held that in every marine insurance policy the assured impliedly warrants to the assurer that the vessel is seaworthy and such warranty is as much a term of the contract as if expressly written on the face of the policy. [12] Thus Sec. 113 of the Insurance Code provides that (i)n every marine insurance upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is seaworthy. Under Sec. 114, a ship is seaworthy when reasonably fit to perform the service, and to encounterthe ordinary perils of the voyage, contemplated by the parties to the policy. Thus it becomes the obligation of the cargo owner to look for a reliable common carrier which keeps its vesselsin seaworthy
condition. He may have no control over the vessel but he has full control in the selection of the common carrier that will transport his goods. He also has full discretion in the choice of assurer that will underwrite a particular venture.
We need not belabor the alleged breach of warranty of seaworthiness by the assured as painstakingly pointed out by FELMAN to stress that subrogation will not work in this case. In policies where the law will generally imply a warranty of seaworthiness, it can only be excluded by terms in writing in the policy in the clearest language.[13] And where the policy stipulates that the seaworthiness of the vessel as between the assured and the assurer is admitted, the question of seaworthiness cannot be raised by the assurer without showing concealment or misrepresentation by the assured.[14]
The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least two (2) instances has dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine Open Policy No. 100367-PAG reads (t)he liberties as per Contract of Affreightment the presence of the Negligence Clause and/or Latent Defect Clause in the Bill of Lading and/or Charter Party and/or Contract of Affreightment as between the Assured and the Company shall not prejudice the insurance. The seaworthiness of the vessel as between the Assured and the Assurers is hereby admitted.[15]
The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which states (t)he seaworthiness of the vessel as between the Assured and Underwriters in hereby admitted x x x x"[16]
The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two things: (a) that the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of unseaworthiness is assumed by the insurance company.[17] The insertion of such waiver clauses in cargo policies is in recognition of the realistic fact that cargo owners cannot control the state of the vessel. Thus it can be said that with such categorical waiver, PHILAMGEN has accepted the risk of unseaworthiness so that if the ship should sink by unseaworthiness, as what occurred in this case, PHILAMGEN is liable.
Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGENs action against FELMAN is squarely sanctioned by Art. 2207 of the Civil Code which provides:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.
In Pan Malayan Insurance Corporation v. Court of Appeals,[18] we said that payment by the assurer to the assured operates as an equitable assignment to the assurer of all the remedies which the assured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of any privity of contract or upon payment by the insurance company of the insurance claim. It accrues simply upon payment by the insurance company of the insurance claim.
The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity and good conscience ought to pay.[19] Therefore, the payment made by PHILAMGEN to Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an action as subrogee against FELMAN. Having failed to rebut the presumption of fault, the liability of FELMAN for the loss of the 7,500 cases of 1-liter Coca-Cola softdrink bottles is inevitable.
WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to pay petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred Fifty-five Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon counted from 29 November 1983, the date of judicial demand, pursuant to Arts. 2212 and 2213 of the Civil Code.[20]
SO ORDERED.
SECOND DIVISION
[G.R. No. 124050. June 19, 1997]
MAYER STEEL PIPE CORPORATION and HONGKONG GOVERNMENT SUPPLIES DEPARTMENT, petitioners, vs. COURT OF APPEALS, SOUTH SEA SURETY AND INSURANCE CO., INC. and the CHARTER INSURANCE CORPORATION, respondents.
This is a petition for review on certiorari to annul and set aside the Decision of respondent Court of Appeals dated December 14, 1995[1] and its Resolution dated February 22, 1996[2] in CA-G.R. CV No. 45805 entitled Mayer Steel Pipe Corporation and Hongkong Government Supplies Department v. South Sea Surety Insurance Co., Inc. and The Charter Insurance Corporation.[3]
In 1983, petitioner Hongkong Government Supplies Department (Hongkong) contracted petitioner Mayer Steel Pipe Corporation (Mayer) to manufacture and supply various steel pipes and fittings. From August to October, 1983, Mayer shipped the pipes and fittings to Hongkong as evidenced by Invoice Nos. MSPC-1014, MSPC-1015, MSPC-1025, MSPC-1020, MSPC-1017 and MSPC-1022.[4]
Prior to the shipping, petitioner Mayer insured the pipes and fittings against all risks with private respondents South Sea Surety and Insurance Co., Inc. (South Sea) and Charter Insurance Corp. (Charter). The pipes and fittings covered by Invoice Nos. MSPC-1014, 1015 and 1025 with a total amount of US$212,772.09 were insured with respondent South Sea, while those covered by Invoice Nos. 1020, 1017 and 1022 with a total amount of US$149,470.00 were insured with respondent Charter.
Petitioners Mayer and Hongkong jointly appointed Industrial Inspection (International) Inc. as third-party inspector to examine whether the pipes and fittings are manufactured in accordance with the specifications in the contract. Industrial Inspection certified all the pipes and fittings to be in good order condition before they were loaded in the vessel. Nonetheless, when the goods reached Hongkong, it was discovered that a substantial portion thereof was damaged.
Petitioners filed a claim against private respondents for indemnity under the insurance contract. Respondent Charter paid petitioner Hongkong the amount of HK$64,904.75. Petitioners demanded payment of the balance of HK$299,345.30 representing the cost of repair of the damaged pipes. Private respondents refused to pay because the insurance surveyor's report allegedly showed that the damage is a factory defect.
On April 17, 1986, petitioners filed an action against private respondents to recover the sum of HK$299,345.30. For their defense, private respondents averred that they have no obligation to pay the amount claimed by petitioners because the damage to the goods is due to factory defects which are not covered by the insurance policies.
The trial court ruled in favor of petitioners. It found that the damage to the goods is not due to manufacturing defects. It also noted that the insurance contracts executed by petitioner Mayer and private respondents are "all risks" policies which insure against all causes of conceivable loss or damage. The only exceptions are those excluded in the policy, or those sustained due to fraud or intentional misconduct on the part of the insured. The dispositive portion of the decision states:
WHEREFORE, judgment is hereby rendered ordering the defendants jointly and severally, to pay the plaintiffs the following:
1. the sum equivalent in Philippine currency of HK$299,345.30 with legal rate of interest as of the filing of the complaint;
2. P100,000.00 as and for attorney's fees; and
3. costs of suit.
SO ORDERED.[5]
Private respondents elevated the case to respondent Court of Appeals.
Respondent court affirmed the finding of the trial court that the damage is not due to factory defect and that it was covered by the "all risks" insurance policies issued by private respondents to petitioner Mayer. However, it set aside the decision of the trial court and dismissed the complaint on the ground of prescription. It held that the action is barred under Section 3(6) of the Carriage of Goods by Sea Act since it was filed only on April 17, 1986, more than two years from the time the goods were unloaded from the vessel. Section 3(6) of the Carriage of Goods by Sea Act provides that "the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered." Respondent court ruled that this provision applies not only to the carrier but also to the insurer, citing Filipino Merchants Insurance Co., Inc. vs. Alejandro.[6]
Hence this petition with the following assignments of error:
1. The respondent Court of Appeals erred in holding that petitioners' cause of action had already prescribed on the mistaken application of the Carriage of Goods by Sea Act and the doctrine of Filipino Merchants Co., Inc. v. Alejandro (145 SCRA 42); and
2. The respondent Court of Appeals committed an error in dismissing the complaint.[7]
The petition is impressed with merit. Respondent court erred in applying Section 3(6) of the Carriage of Goods by Sea Act.
Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall be discharged from all liability for loss or damage to the goods if no suit is filed within one year after delivery of the goods or the date when they should have been delivered. Under this provision, only the carrier's liability is extinguished if no suit is brought within one year. But the liability of the insurer is not extinguished because the insurer's liability is based not on the contract of carriage but on the contract of insurance. A close reading of the law reveals that the Carriage of Goods by Sea Act governs the relationship between the carrier on the one hand and the shipper, the consignee and/or the insurer on the other hand. It defines the obligations of the carrier under
the contract of carriage. It does not, however, affect the relationship between the shipper and the insurer. The latter case is governed by the Insurance Code.
Our ruling in Filipino Merchants Insurance Co., Inc. v. Alejandro[8] and the other cases[9] cited therein does not support respondent court's view that the insurer's liability prescribes after one year if no action for indemnity is filed against the carrier or the insurer. In that case, the shipper filed a complaint against the insurer for recovery of a sum of money as indemnity for the loss and damage sustained by the insured goods. The insurer, in turn, filed a third-party complaint against the carrier for reimbursement of the amount it paid to the shipper. The insurer filed the third-party complaint on January 9, 1978, more than one year after delivery of the goods on December 17, 1977. The court held that the Insurer was already barred from filing a claim against the carrier because under the Carriage of Goods by Sea Act, the suit against the carrier must be filed within one year after delivery of the goods or the date when the goods should have been delivered. The court said that "the coverage of the Act includes the insurer of the goods."[10]
The Filipino Merchants case is different from the case at bar. In Filipino Merchants, it was the insurer which filed a claim against the carrier for reimbursement of the amount it paid to the shipper. In the case at bar, it was the shipper which filed a claim against the insurer. The basis of the shipper's claim is the "all risks" insurance policies issued by private respondents to petitioner Mayer.
The ruling in Filipino Merchants should apply only to suits against the carrier filed either by the shipper, the consignee or the insurer. When the court said in Filipino Merchants that Section 3(6) of the Carriage of Goods by Sea Act applies to the insurer, it meant that the insurer, like the shipper, may no longer file a claim against the carrier beyond the one-year period provided in the law. But it does not mean that the shipper may no longer file a claim against the insurer because the basis of the insurer's liability is the insurance contract. An insurance contract is a contract whereby one party, for a consideration known as the premium, agrees to indemnify another for loss or damage which he may suffer from a specified peril. [11] An "all risks" insurance policy covers all kinds of loss other than those due to willful and fraudulent act of the insured.[12] Thus, when private respondents issued the "all risks" policies to petitioner Mayer, they bound themselves to indemnify the latter in case of loss or damage to the goods insured. Such obligation prescribes in ten years, in accordance with Article 1144 of the New Civil Code.[13]
IN VIEW WHEREOF, the petition is GRANTED. The Decision of respondent Court of Appeals dated December 14, 1995 and its Resolution dated February 22, 1996 are hereby SET ASIDE and the Decision of the Regional Trial Court is hereby REINSTATED. No costs.
SO ORDERED.
Republic of the PhilippinesSUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-67835 October 12, 1987
MALAYAN INSURANCE CO., INC. (MICO), petitioner, vs.GREGORIA CRUZ ARNALDO, in her capacity as the INSURANCE COMMISSIONER, and CORONACION PINCA, respondents.
CRUZ, J.:
When a person's house is razed, the fire usually burns down the efforts of a lifetime and forecloses hope for the suddenly somber future. The vanished abode becomes a charred and painful memory. Where once stood a home, there is now, in the sighing wisps of smoke, only a gray desolation. The dying embers leave ashes in the heart.
For peace of mind and as a hedge against possible loss, many people now secure fire insurance. This is an aleatory contract. By such insurance, the insured in effect wagers that his house will be burned, with the insurer assuring him against the loss, for a fee. If the house does burn, the insured, while losing his house, wins the wagers. The prize is the recompense to be given by the insurer to make good the loss the insured has sustained.
It would be a pity then if, having lost his house, the insured were also to lose the payment he expects to recover for such loss. Sometimes it is his fault that he cannot collect, as where there is a defect imputable to him in the insurance contract. Conversely, the reason may be an unjust refusal of the insurer to acknowledge a just obligation, as has happened many times.
In the instant case the private respondent has been sustained by the Insurance Commission in her claim for compensation for her burned property. The petitioner is now before us to dispute the decision, 1 on the ground that there was no valid insurance contract at the time of the loss.
The chronology of the relevant antecedent facts is as follows:
On June 7, 1981, the petitioner (hereinafter called (MICO) issued to the private respondent, Coronacion Pinca, Fire Insurance Policy No. F-001-17212 on her property for the amount of P14,000.00 effective July 22, 1981, until July 22, 1982. 2
On October 15,1981, MICO allegedly cancelled the policy for non-payment, of the premium and sent the corresponding notice to Pinca. 3
On December 24, 1981, payment of the premium for Pinca was received by DomingoAdora, agent of MICO. 4
On January 15, 1982, Adora remitted this payment to MICO,together with other payments. 5
On January 18, 1982, Pinca's property was completely burned. 6
On February 5, 1982, Pinca's payment was returned by MICO to Adora on the ground that her policy had been cancelled earlier. But Adora refused to accept it. 7
In due time, Pinca made the requisite demands for payment, which MICO rejected. She then went to the Insurance Commission. It is because she was ultimately sustained by the public respondent that the petitioner has come to us for relief.
From the procedural viewpoint alone, the petition must be rejected. It is stillborn.
The records show that notice of the decision of the public respondent dated April 5, 1982, was received by MICO on April 10, 1982. 8 On April 25, 1982, it filed a motion for reconsideration, which was denied on June 4, 1982. 9 Notice of this denial was received by MICO on June 13, 1982, as evidenced by Annex "1" duly authenticated by the Insurance Commission. 10 The instant petition was filed with this Court on July 2, 1982. 11
The position of the petition is that the petition is governed by Section 416 0f the Insurance Code giving it thirty days wthin which to appeal by certiorari to this Court. Alternatively, it also invokes Rule 45 of the Rules of Court. For their part, the public and private respondents insist that the applicable law is B.P. 129, which they say governs not only courts of justice but also quasi-judicial bodies like the Insurance Commission. The period for appeal under this law is also fifteen days, as under Rule 45.
The pivotal date is the date the notice of the denial of the motion for reconsideration was received by MICO.
MICO avers this was June 18, 1982, and offers in evidence its Annex "B," 12 which is a copy of the Order of June 14, 1982, with a signed rubber-stamped notation on the upper left-hand corner that it was received on June 18, 1982, by its legal department. It does not indicate from whom. At the bottom, significantly, there is another signature under which are the ciphers "6-13-82," for which no explanation has been given.
Against this document, the private respodent points in her Annex "1," 13 the authenticated copy of the same Order with a rubber-stamped notation at the bottom thereof indicating that it was received for the Malayan Insurance Co., Inc. by J. Gotladera on "6-13-82." The signature may or may not habe been written by the same person who signed at the bottom of the petitioner's Annex "B."
Between the two dates, the court chooses to believe June 13, 1982, not only because the numbers "6-13-82" appear on both annexes but also because it is the date authenticated by the administrative division of the Insurance Commission. Annex "B" is at worst self-serving; at best, it might only indicate that it was received on June 18, 1982, by the legal department of MICO, after it had been received earlier by some other of its personnel on June 13, 1982. Whatever the reason for the delay in transmitting it to the legal department need not detain us here.
Under Section 416 of the Insurance Code, the period for appeal is thirty days from notice of the decision of the Insurance Commission. The petitioner filed its motion for reconsideration on April 25, 1981, or fifteen days such notice, and the reglementary period began to run again after June 13, 1981, date of its receipt of notice of the denial of the said motion for reconsideration. As the herein petition was filed on July 2, 1981, or nineteen days later, there is no question that it is tardy by four days.
Counted from June 13, the fifteen-day period prescribed under Rule 45, assuming it is applicable, would end on June 28, 1982, or also four days from July 2, when the petition was filed.
If it was filed under B.P. 129, then, considering that the motion for reconsideration was filed on the fifteenth day after MICO received notice of the decision, only one more day would have remained for it to appeal, to wit, June 14, 1982. That would make the petition eighteen days late by July 2.
Indeed, even if the applicable law were still R.A. 5434, governing appeals from administrative bodies, the petition would still be tardy. The law provides for a fixed period of ten days from notice of the denial of a seasonable motion for reconsideration within which to appeal from the decision. Accordingly, that ten-day period, counted from June 13, 1982, would have ended on June 23, 1982, making the petition filed on July 2, 1982, nine dayslate.
Whichever law is applicable, therefore, the petition can and should be dismissed for late filing.
On the merits, it must also fail. MICO's arguments that there was no payment of premium and that the policy had been cancelled before the occurence of the loss are not acceptable. Its contention that the claim was allowed without proof of loss is also untenable.
The petitioner relies heavily on Section 77 of the Insurance Code providing that:
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.
The above provision is not applicable because payment of the premium was in fact eventually made in this case. Notably, the premium invoice issued to Pinca at the time of the delivery of the policy on June 7, 1981 was stamped "Payment Received" of the amoung of P930.60 on "12-24-81" by Domingo Adora. 14 This is important because it suggests an understanding between MICO and the insured that such payment could be made later, as agent Adora had assured Pinca. In any event, it is not denied that this payment was actually made by Pinca to Adora, who remitted the same to MICO.
The payment was made on December 24, 1981, and the fire occured on January 18, 1982. One wonders: suppose the payment had been made and accepted in, say, August 1981, would the commencement date of the policy have been changed to the date of the payment, or would the payment have retroacted to July 22, 1981? If MICO accepted the payment in December 1981 and the insured property had not been burned, would that policy not have expired just the same on July 22, 1982, pursuant to its original terms, and not on December 24, 1982?
It would seem from MICO's own theory, that the policy would have become effective only upon payment, if accepted and so would have been valid only from December 24, 1981m but only up to July 22, 1981, according to the original terms. In others words, the policy would have run for only eight months although the premium paid was for one whole year.
It is not disputed that the preium was actually paid by Pinca to Adora on December 24, 1981, who received it on behalf of MICO, to which it was remitted on January 15, 1982. What is questioned is the validity of Pinca's payment and of Adora's authority to receive it.
MICO's acknowledgment of Adora as its agent defeats its contention that he was not authorized to receive the premium payment on its behalf. It is clearly provided in Section 306 of the Insurance Code that:
SEC. 306. xxx xxx xxx
Any insurance company which delivers to an insurance agant or insurance broker a policy or contract of insurance shall be demmed to have authorized such agent or broker to receive on its behalf payment of any premium which is due on such policy or contract of insurance at the time of its issuance or delivery or which becomes due thereon.
And it is a well-known principle under the law of agency that:
Payment to an agent having authority to receive or collect payment is equivalent to payment to the principal himself; such payment is complete when the money delivered is into the agent's hands and is a discharge of the indebtedness owing to the principal. 15
There is the petitioner's argument, however, that Adora was not authorized to accept the premium payment because six months had elapsed since the issuance by the policy itself. It is argued that this prohibition was binding upon Pinca, who made the payment to Adora at her own riskl as she was bound to first check his authority to receive it. 16
MICO is taking an inconsistent stand. While contending that acceptance of the premium payment was prohibited by the policy, it at the same time insists that the policy never came into force because the premium had not been paid. One surely, cannot have his cake and eat it too.
We do not share MICO's view that there was no existing insurance at the time of the loss sustained by Pinca because her policy never became effective for non-payment of premium. Payment was in fact made, rendering the policy operative as of June 22, 1981, and removing it from the provisions of Article 77, Thereafter, the policy could be cancelled on any of the supervening grounds enumerated in Article 64 (except "nonpayment of premium") provided the cancellation was made in accordance therewith and with Article 65.
Section 64 reads as follows:
SEC. 64. No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the hazard insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful, or reckless acts or commissions increasing the hazard insured against;
(e) physical changes in the property insured which result in the property becoming uninsurable;or
(f) a determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code.
As for the method of cancellation, Section 65 provides as follows:
SEC. 65. All notices of cancellation mentioned in the preceding section shall be in writing, mailed or delivered to the named insured at the address shown in the policy, and shall state (a) which of the grounds set forth in section sixty-four is relied upon and (b) that, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based.
A valid cancellation must, therefore, require concurrence of the following conditions:
(1) There must be prior notice of cancellation to the insured; 17
(2) The notice must be based on the occurrence, after the effective date of the policy, of one or more of the grounds mentioned;18
(3) The notice must be (a) in writing, (b) mailed, or delivered to the named insured, (c) at the address shown in the policy; 19
(4) It must state (a) which of the grounds mentioned in Section 64 is relied upon and (b) that upon written request of the insured, the insurer will furnish the facts on which the cancellation is based. 20
MICO's claims it cancelled the policy in question on October 15, 1981, for non-payment of premium. To support this assertion, it presented one of its employees, who testified that "the original of the endorsement and credit memo" — presumably meaning the alleged cancellation — "were sent the assured by mail through our mailing section" 21 However, there is no proof that the notice, assuming it complied with the other requisites mentioned above, was actually mailed to and received by Pinca. All MICO's offers to show that the cancellation was communicated to the insured is its employee's testimony that the said cancellation was sent "by mail through our mailing section." without more. The petitioner then says that its "stand is enervated (sic) by the legal presumption of regularity and due performance of duty." 22(not realizing perhaps that "enervated" means "debilitated" not "strengthened").
On the other hand, there is the flat denial of Pinca, who says she never received the claimed cancellation and who, of course, did not have to prove such denial Considering the strict language of Section 64 that no insurance policy shall be cancelled except upon prior notice, it behooved MICO's to make sure that the cancellation was actually sent to and received by the insured. The presumption cited is unavailing against the positive duty enjoined by Section 64 upon MICO and the flat denial made by the private respondent that she had received notice of the claimed cancellation.
It stands to reason that if Pinca had really received the said notice, she would not have made payment on the original policy on December 24, 1981. Instead, she would have asked for a new insurance, effective on that date and until one year later, and so taken advantage of the extended period. The Court finds that if she did pay on that date, it was because she honestly believed that the policy issued on June 7, 1981, was still in effect and she was willing to make her payment retroact to July 22, 1981, its stipulated commencement date. After all, agent Adora was very accomodating and had earlier told her "to call him up any time" she was ready with her payment on the policy earlier issued. She was obviously only reciprocating in kind when she paid her premium for the period beginning July 22, 1981, and not December 24, 1981.
MICO's suggests that Pinca knew the policy had already been cancelled and that when she paid the premium on December 24, 1981, her purpose was "to renew it." As this could not be done by the agent alone under the terms of the original policy, the renewal thereof did not legally bind MICO. which had not ratified it. To support this argument, MICO's cites the following exchange:
Q: Now, Madam Witness, on December 25th you made the alleged payment. Now, my question is that, did it not come to your mind that after the lapse of six (6) months, your policy was cancelled?
A: I have thought of that but the agent told me to call him up at anytime.
Q: So if you thought that your policy was already intended to revive cancelled policy?
A: Misleading, Your Honor.
Hearing Officer: The testimony of witness is that, she thought of that.
Q: I will revise the question. Now, Mrs. Witness, you stated that you thought the policy was cancelled. Now, when you made the payment of December 24, 1981, your intention was to revive the policy if it was already cancelled?
A: Yes, to renew it. 23
A close study of the above transcript will show that Pinca meant to renew the policy if it had really been already cancelled but not if it was stffl effective. It was all conditional. As it has not been shown that there was a valid cancellation of the policy, there was consequently no need to renew it but to pay the premium thereon. Payment was thus legally made on the original transaction and it could be, and was, validly received on behalf of the insurer by its agent Adora. Adora. incidentally, had not been informed of the cancellation either and saw no reason not to accept the said payment.
The last point raised by the petitioner should not pose much difficulty. The valuation fixed in fire insurance policy is conclusive in case of total loss in the absence of fraud, 24 which is not shown here. Loss and its amount may be determined on the basis of such proof as may be offered by the insured, which need not be of such persuasiveness as is required in judicial proceedings. 25 If, as in this case, the insured files notice and preliminary proof of loss and the insurer fails to specify to the former all the defects thereof and without unnecessary delay, all objections to notice and proof of loss are deemed waived under Section 90 of the Insurance Code.
The certification 26 issued by the Integrated National Police, Lao-ang, Samar, as to the extent of Pinca's loss should be considered sufficient. Notably,MICO submitted no evidence to the contrary nor did it even question the extent of the loss in its answer before the Insurance Commission. It is also worth observing that Pinca's property was not the only building bumed in the fire that razed the commercial district of Lao-ang, Samar, on January 18, 1982. 27
There is nothing in the Insurance Code that makes the participation of an adjuster in the assessment of the loss imperative or indespensable, as MICO suggests. Section 325, which it cites, simply speaks of the licensing and duties of adjusters.
We see in this cases an obvious design to evade or at least delay the discharge of a just obligation through efforts bordering on bad faith if not plain duplicity, We note that the motion for reconsideration was filed on the fifteenth day from notice of the decision of the Insurance Commission and that there was a feeble attempt to show that the notice of denial of the said motion was not received on June 13, 1982, to further hinder the proceedings and justify the filing of the petition with this Court fourteen days after June 18, 1982. We also look askance at the alleged cancellation, of which the insured and MICO's agent himself had no knowledge, and the curious fact that although Pinca's payment was remitted to MICO's by its agent on January 15, 1982, MICO sought to return it to Adora only on February 5, 1982, after it presumably had learned of the occurrence of the loss insured against on January 18, 1982. These circumstances make the motives of the petitioner highly suspect, to say the least, and cast serious doubts upon its candor and bona fides.
WHEREFORE, the petition is DENIED. The decision of the Insurance Commission dated April 10, 1981, and its Order of June 4, 1981, are AFFIRMED in full, with costs against the petitioner. This decision is immediately executory.
SO ORDERED.
Republic of the PhilippinesSUPREME COURT
Manila
FIRST DIVISION
G.R. No. 115278 May 23, 1995
FORTUNE INSURANCE AND SURETY CO., INC., petitioner, vs.COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.
DAVIDE, JR., J.:
The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is liable under the Money, Security, and Payroll Robbery policy it issued to the private respondent or whether recovery thereunder is precluded under the general exceptions clause thereof. Both the trial court and the Court of Appeals held that there should be recovery. The petitioner contends otherwise.
This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by private respondent Producers Bank of the Philippines (hereinafter Producers) against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter Fortune) of a complaint for recovery of the sum of P725,000.00 under the policy issued by Fortune. The sum was allegedly lost during a robbery of Producer's armored vehicle while it was in transit to transfer the money from its Pasay City Branch to its head office in Makati. The case was docketed as Civil Case No. 1817 and assigned to Branch 146 thereof.
After joinder of issues, the parties asked the trial court to render judgment based on the following stipulation of facts:
1. The plaintiff was insured by the defendants and an insurance policy was issued, the duplicate original of which is hereto attached as Exhibit "A";
2. An armored car of the plaintiff, while in the process of transferring cash in the sum of P725,000.00 under the custody of its teller, Maribeth Alampay, from its Pasay Branch to its Head Office at 8737 Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was robbed of the said cash. The robbery took place while the armored car was traveling along Taft Avenue in Pasay City;
3. The said armored car was driven by Benjamin Magalong Y de Vera, escorted by Security Guard Saturnino Atiga Y Rosete. Driver Magalong was assigned by PRC Management Systems with the plaintiff by virtue of an Agreement executed on August 7, 1983, a duplicate original copy of which is hereto attached as Exhibit "B";
4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the plaintiff by virtue of a contract of Security Service executed on October 25, 1982, a duplicate original copy of which is hereto attached as Exhibit "C";
5. After an investigation conducted by the Pasay police authorities, the driver Magalong and guard Atiga were charged, together with Edelmer Bantigue Y Eulalio, Reynaldo Aquino and John Doe, with violation of P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of Pasay City. A copy of the complaint is hereto attached as Exhibit "D";
6. The Fiscal of Pasay City then filed an information charging the aforesaid persons with the said crime before Branch 112 of the Regional Trial Court of Pasay City. A copy of the said information is hereto attached as Exhibit "E." The case is still being tried as of this date;
7. Demands were made by the plaintiff upon the defendant to pay the amount of the loss of P725,000.00, but the latter refused to pay as the loss is excluded from the coverage of the insurance policy, attached hereto as Exhibit "A," specifically under page 1 thereof, "General Exceptions" Section (b), which is marked as Exhibit "A-1," and which reads as follows:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in report of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent or criminal act of the insured or any officer, employee, partner, director, trustee or authorized representative of the Insured whether acting alone or in conjunction with others. . . .
8. The plaintiff opposes the contention of the defendant and contends that Atiga and Magalong are not its "officer, employee, . . . trustee or authorized representative . . . at the time of the robbery. 1
On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion thereof reads as follows:
WHEREFORE, premises considered, the Court finds for plaintiff and against defendant, and
(a) orders defendant to pay plaintiff the net amount of P540,000.00 as liability under Policy No. 0207 (as mitigated by the P40,000.00 special clause deduction and by the recovered sum of P145,000.00), with interest thereon at the legal rate, until fully paid;
(b) orders defendant to pay plaintiff the sum of P30,000.00 as and for attorney's fees; and
(c) orders defendant to pay costs of suit.
All other claims and counterclaims are accordingly dismissed forthwith.
SO ORDERED. 2
The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It Said:
The Court is satisfied that plaintiff may not be said to have selected and engaged Magalong and Atiga, their services as armored car driver and as security guard having been merely offered by PRC Management and by Unicorn Security and which latter firms assigned them to plaintiff. The wages and salaries of both Magalong and Atiga are presumably paid by their respective firms, which alone wields the power to dismiss them. Magalong and Atiga are assigned to plaintiff in fulfillment of agreements to provide driving services and property protection as such — in a context which does not impress the Court as translating into plaintiff's power to control the conduct of any assigned driver or security guard, beyond perhaps entitling plaintiff to request are replacement for such driver guard. The finding is accordingly compelled that neither Magalong nor Atiga were plaintiff's "employees" in avoidance of defendant's liability under the policy, particularly the general exceptions therein embodied.
Neither is the Court prepared to accept the proposition that driver Magalong and guard Atiga were the "authorized representatives" of plaintiff. They were merely an assigned armored car driver and security guard, respectively, for the June 29, 1987 money transfer from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly — it was teller Maribeth Alampay who had "custody" of the P725,000.00 cash being transferred along a specified money route, and hence plaintiff's then designated "messenger" adverted to in the policy. 3
Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No. 32946. In its decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.
The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were neither employees nor authorized representatives of Producers and ratiocinated as follows:
A policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the insurance company (New Life Enterprises vs. Court of Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA 554). 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 (New Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193).
The language used by defendant-appellant in the above quoted stipulation is plain, ordinary and simple. No other interpretation is necessary. The word "employee" must be taken to mean in the ordinary sense.
The Labor Code is a special law specifically dealing with/and specifically designed to protect labor and therefore its definition as to employer-employee relationships insofar as the application/enforcement of said Code is concerned must necessarily be inapplicable to an insurance contract which defendant-appellant itself had formulated. Had it intended to apply the Labor Code in defining what the word "employee" refers to, it must/should have so stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees of plaintiff-appellee bank because it has no power to hire or to dismiss said driver and security guard under the contracts (Exhs. 8 and C) except only to ask for their replacements from the contractors. 5
On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and the Court of Appeals erred in holding it liable under the insurance policy because the loss falls within the general exceptions clause considering that driver Magalong and security guard Atiga were Producers' authorized representatives or employees in the transfer of the money and payroll from its branch office in Pasay City to its head office in Makati.
According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from one branch to another, they effectively and necessarily became its authorized representatives in the care and custody of the money. Assuming that they could not be considered authorized representatives, they were, nevertheless, employees of Producers. It asserts that the existence of an employer-employee relationship "is determined by law and being such, it cannot be the subject of agreement." Thus, if there was in reality an employer-employee relationship between Producers, on the one hand, and Magalong and Atiga, on the other, the provisions in the contracts of Producers with PRC Management System for Magalong and with Unicorn Security Services for Atiga which state that Producers is not their employer and that it is absolved from any liability as an employer, would not obliterate the relationship.
Fortune points out that an employer-employee relationship depends upon four standards: (1) the manner of selection and engagement of the putative employee; (2) the mode of payment of wages; (3) the presence or absence of a power to dismiss; and (4) the presence and absence of a power to control the putative employee's conduct. Of the four, the right-of-control test has been held to be the decisive factor. 6 It asserts that the power of control over Magalong and Atiga was vested in and exercised by Producers. Fortune further insists that PRC Management System and Unicorn Security Services are but "labor-only" contractors under Article 106 of the Labor Code which provides:
Art. 106. Contractor or subcontractor. — There is "labor-only" contracting where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such persons are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.
Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling in International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is equivalent to a finding that there is an employer-employee relationship between the owner of the project and the employees of the "labor-only" contractor.
On the other hand, Producers contends that Magalong and Atiga were not its employees since it had nothing to do with their selection and engagement, the payment of their wages, their dismissal, and the control of their conduct. Producers argued that the rule in International Timber Corp. is not applicable to all cases but only when it becomes necessary to prevent any violation or circumvention of the Labor Code, a social legislation whose provisions may set aside contracts entered into by parties in order to give protection to the working man.
Producers further asseverates that what should be applied is the rule in American President Lines vs. Clave, 8 to wit:
In determining the existence of employer-employee relationship, the following elements are generally considered, namely: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the power of dismissal; and (4) the power to control the employee's conduct.
Since under Producers' contract with PRC Management Systems it is the latter which assigned Magalong as the driver of Producers' armored car and was responsible for his faithful discharge of his duties and responsibilities, and since Producers paid the monthly compensation of P1,400.00 per driver to PRC Management Systems and not to Magalong, it is clear that Magalong was not Producers' employee. As to Atiga, Producers relies on the provision of its contract with Unicorn Security Services which provides that the guards of the latter "are in no sense employees of the CLIENT."
There is merit in this petition.
It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance policy which is a form of casualty insurance. Section 174 of the Insurance Code provides:
Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of insurance such as fire or marine. It includes, but is not limited to, employer's liability insurance, public liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance. (emphases supplied)
Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other provisions applicable to casualty insurance or to robbery insurance in particular. These contracts are, therefore, governed by the general provisions applicable to all types of insurance. Outside of these, the rights and obligations of the parties must be determined by the terms of their contract, taking into consideration its purpose and always in accordance with the general principles of insurance law. 9
It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud the insurer — the moral hazard — is so great that insurers have found it necessary to fill up their policies with countless restrictions, many designed to reduce this hazard. Seldom does the insurer assume the risk of all losses due to the hazards insured against." 10 Persons frequently excluded under such provisions are those in the insured's service and employment. 11 The purpose of the exception is to guard against liability should the theft be committed by one having unrestricted access to the property. 12 In such cases, the terms specifying the excluded classes are to be given their meaning as understood in common speech. 13 The terms "service" and "employment" are generally associated with the idea of selection, control, and compensation. 14
A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against the insurer, 15 or it should be construed liberally in favor of the insured and strictly against the insurer. 16 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 obligation. 17 It goes without saying then that if the terms of the contract are clear and unambiguous, there is no room for construction and such terms cannot be enlarged or diminished by judicial construction. 18
An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It is settled that the terms of the policy constitute the measure of the insurer's liability. 20 In the absence of statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and to impose whatever conditions they deem best upon their obligations not inconsistent with public policy.
With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as employees or authorized representatives of Producers under paragraph (b) of the general exceptions clause of the policy which, for easy reference, is again quoted:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent or criminal act of the insured or any officer, employee, partner, director, trustee or authorized representative of the Insured whether acting alone or in conjunction with others. . . . (emphases supplied)
There is marked disagreement between the parties on the correct meaning of the terms "employee" and "authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from protection and coverage losses arising from dishonest, fraudulent, or criminal acts of persons granted or having unrestricted access to Producers' money or payroll. When it used then the term "employee," it must have had in mind any person who qualifies as such as generally and
universally understood, or jurisprudentially established in the light of the four standards in the determination of the employer-employee relationship, 21 or as statutorily declared even in a limited sense as in the case of Article 106 of the Labor Code which considers the employees under a "labor-only" contract as employees of the party employing them and not of the party who supplied them to the employer. 22
Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security Services are "labor-only" contracts.
Producers, however, insists that by the express terms thereof, it is not the employer of Magalong. Notwithstanding such express assumption of PRC Management Systems and Unicorn Security Services that the drivers and the security guards each shall supply to Producers are not the latter's employees, it may, in fact, be that it is because the contracts are, indeed, "labor-only" contracts. Whether they are is, in the light of the criteria provided for in Article 106 of the Labor Code, a question of fact. Since the parties opted to submit the case for judgment on the basis of their stipulation of facts which are strictly limited to the insurance policy, the contracts with PRC Management Systems and Unicorn Security Services, the complaint for violation of P.D. No. 532, and the information therefor filed by the City Fiscal of Pasay City, there is a paucity of evidence as to whether the contracts between Producers and PRC Management Systems and Unicorn Security Services are "labor-only" contracts.
But even granting for the sake of argument that these contracts were not "labor-only" contracts, and PRC Management Systems and Unicorn Security Services were truly independent contractors, we are satisfied that Magalong and Atiga were, in respect of the transfer of Producer's money from its Pasay City branch to its head office in Makati, its "authorized representatives" who served as such with its teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to safely transfer the money to its head office, with Alampay to be responsible for its custody in transit; Magalong to drive the armored vehicle which would carry the money; and Atiga to provide the needed security for the money, the vehicle, and his two other companions. In short, for these particular tasks, the three acted as agents of Producers. A "representative" is defined as one who represents or stands in the place of another; one who represents others or another in a special capacity, as an agent, and is interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the insurance policy.
WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No. 1817 is DISMISSED.
The instant Petition for Review under Rule 45[1]of the Rules of Court assails the Decision[2] dated 26 June 2002 of the Court of
Appeals in CA-G.R. SP No. 67297, which granted the Petition for Certiorari of respondent Malayan Insurance Company, Inc.
(MICI) and recalled and set aside the Order[3] dated 6 September 2001 of the Regional Trial Court (RTC), Branch 73, of Antipolo
City, in Civil Case No. 93-2705. The RTC, in its recalled Order, denied the Notice of Appeal of MICI and granted the Motion for
the Issuance of a Writ of Execution filed by petitioners Heirs of George Y. Poe. The present Petition also challenges the
Resolution[4] dated 29 November 2002 of the appellate court denying petitioners Motion for Reconsideration.
Records show that on 26 January 1996 at about 4:45 a.m., George Y. Poe (George) while waiting for a ride to work in front of
Capital Garments Corporation, Ortigas Avenue Extension, Barangay Dolores, Taytay, Rizal, was run over by a ten-wheeler Isuzu
hauler truck with Plate No. PMH-858 owned by Rhoda Santos (Rhoda), and then being driven by Willie Labrador (Willie). [5] The
said truck was insured with respondent MICI under Policy No. CV-293-007446-8.
To seek redress for Georges untimely death, his heirs and herein petitioners, namely, his widow Emercelinda, and their children
Flerida and Fernando, filed with the RTC a Complaint for damages against Rhoda and respondent MICI, docketed as Civil Case
No. 93-2705.[6] Petitioners identified Rhoda and respondent MICI, as follows:
Defendant RHODA SANTOS is likewise of legal age, Filipino and a resident of Real Street, Pamplona, Las Pias, Metro Manila where she may be served with summons and other court processes. [Herein respondent] MALAYAN INSURANCE COMPANY, INC. (hereinafter [MICI] for brevity) is a corporation duly organized and existing under Philippine law with address at Yuchengco Bldg., 484 Q. Paredes Street, Binondo, Manila where it may be served with summons and other processes of this Honorable Court; Defendant Rhoda Santos, who is engaged in the business, among others, of selling gravel and sand is the registered owner of one Isuzu Truck, with Plate No. PMH-858 and is the employer of Willie Labrador the authorized driver of the aforesaid truck. [Respondent MICI] on the other hand is the insurer of Rhoda Santos under a valid and existing insurance policy duly issued by said [MICI], Policy No. CV-293-007446-8 over the subject vehicle owned by Rhoda Santos, Truck-Hauler Isuzu 10 wheeler with plate no. PMH-858, serial no. SRZ451-1928340 and motor no. 10PA1-403803. Under said insurance policy, [MICI] binds itself, among others, to be liable for damages as well as any bodily injury to third persons which may be caused by the operation of the insured vehicle.[7]
And prayed that:
[J]udgment issue in favor of [herein petitioners] ordering [Rhoda and herein respondent MICI] jointly and solidarily to pay the [petitioners] the following: 1. Actual damages in the total amount of THIRTY SIX THOUSAND (P36,000.00) PESOS for funeral and burial expenses; 2. Actual damages in the amount of EIGHT HUNDRED FIVE THOUSAND NINE HUNDRED EIGHTY FOUR (P805,984.00) PESOS as loss of earnings and financial support given by the deceased by reason of his income and employment; 3. Moral damages in the amount of FIFTY THOUSAND (P50,000.00) PESOS; 4. Exemplary damages in the amount of FIFTY THOUSAND (P50,000.00) PESOS; 5. Attorneys fees in the amount of FIFTY THOUSAND (P50,000.00) PESOS and litigation expense in the amount of ONE THOUSAND FIVE HUNDRED (P1,500.00) PESOS for each court appearance; 6. The costs of suit. Other reliefs just and equitable in the premises are likewise prayed for.[8]
Rhoda and respondent MICI made the following admissions in their Joint Answer[9]:
That [Rhoda and herein respondent MICI] admit the allegations in paragraphs 2, 3 and 4 of the complaint; That [Rhoda and respondent MICI] admit the allegations in paragraph 5 of the complaint that the cargo truck is insured with [respondent] Malayan Insurance Company, Inc. [(MICI)] however, the liability of the insured company attached only if there is a judicial pronouncement that the insured and her driver are liable and moreover, the liability of the insurance company is subject to the limitations set forth in the insurance policy.[10]
Rhoda and respondent MICI denied liability for Georges death averring, among other defenses, that: a) the accident was caused by
the negligent act of the victim George, who surreptitiously and unexpectedly crossed the road, catching the driver Willie by
surprise, and despite the latters effort to swerve the truck to the right, the said vehicle still came into contact with the victim; b) the
liability of respondent MICI, if any, would attach only upon a judicial pronouncement that the insured Rhoda and her driver Willie
are liable; c) the liability of MICI should be based on the extent of the insurance coverage as embodied in Rhodas policy; and d)
Rhoda had always exercised the diligence of a good father of a family in the selection and supervision of her driver Willie.
After the termination of the pre-trial proceedings, trial on the merits ensued.
Petitioners introduced and offered evidence in support of their claims for damages against MICI, and then rested their
case. Thereafter, the hearings for the reception of the evidence of Rhoda and respondent MICI were scheduled, but they failed to
adduce their evidence despite several postponements granted by the trial court. Thus, during the hearing on 9 June 1995, the RTC,
upon motion of petitioners counsel, issued an Order[11] declaring that Rhoda and respondent MICI had waived their right to present
evidence, and ordering the parties to already submit their respective Memorandum within 15 days, after which, the case would be
deemed submitted for decision.
Rhoda and respondent MICI filed a Motion for Reconsideration[12] of the Order dated 9 June 1995, but it was denied by the RTC
in another Order dated 11 August 1995.[13]
Consequently, Rhoda and respondent MICI filed a Petition for Certiorari, Mandamus,[14] Prohibition and Injunction with Prayer
for a Temporary Restraining Order and Writ of Preliminary Injunction, assailing the Orders dated 9 June 1995 and 11 August
1995 of the RTC foreclosing their right to adduce evidence in support of their defense. The Petition was docketed as CA-G.R. SP
No. 38948.
The Court of Appeals, through its Third Division, promulgated a Decision [15] on 29 April 1996, denying due course to the Petition
in CA-G.R. SP No. 38948. Rhoda and respondent MICI elevated the matter to the Supreme Court via a Petition for Certiorari,[16] docketed as G.R. No. 126244. This Court likewise dismissed the Petition in G.R. No. 126244 in a Resolution dated 30
September 1996.[17] Entry of Judgment was made in G.R. No. 126244 on 8 November 1996.[18]
On 28 February 2000, the RTC rendered a Decision in Civil Case No. 93-2705, the dispositive portion of which reads:
Wherefore, [Rhoda and herein respondent MICI] are hereby ordered to pay jointly and solidarily to the [herein petitioners] the following: 1. Moral damages amounting to P100,000.00; 2. Actual damages for loss of earning capacity amounting to P805,984.00; 3. P36,000.00 for funeral expenses; 4. P50,000.00 as exemplary damages; 5. P50,000.00 for attorneys fees plus P1,500 per court appearance; and 6. Cost of suit.[19]
Rhoda and respondent MICI received their copy of the foregoing RTC Decision on 14 March 2000.[20] On 22 March 2000,
respondent MICI and Rhoda filed a Motion for Reconsideration[21] of said Decision, averring therein that the RTC erred in ruling
that the obligation of Rhoda and respondent MICI to petitioners was solidary or joint and several; in computing Georges loss of
earning capacity not in accord with established jurisprudence; and in awarding moral damages although it was not buttressed by
evidence.
Resolving the Motion of respondent MICI and Rhoda, the RTC issued an Order[22] on 24 January 2001 modifying and amending
its Decision dated 28 February 2000, and dismissing the case against respondent MICI.
The RTC held that: After a careful evaluation of the issues at hand, the contention of the [herein respondent MICI] as far as the solidary liability of the insurance company with the other defendant [Rhoda] is meritorious. However, the assailed Decision can be modified or amended to correct the same honest inadvertence without necessarily reversing it and set aside to conform with the evidence on hand.
The RTC also re-computed Georges loss of earning capacity, as follows:
The computation of actual damages for loss of earning capacity was determined by applying the formula adopted in the American Expectancy Table of Mortality or the actuarial of Combined Experience Table of Mortality applied in x x x Villa Rey Transit, Inc. v. Court of Appeals (31 SCRA 521). Moral damages is awarded in accordance with Article 2206 of the New Civil Code of the Philippines. While death indemnity in the amount of P50,000.00 is automatically awarded in cases where the victim had died (People v. Sison, September 14, 1990 [189 SCRA 643]).[23]
In the end, the RTC decreed:
WHEREFORE, in view of the foregoing consideration, the Decision of this Court dated 28 February 2000 is hereby amended or modified. Said Decision should read as follows:
Wherefore, defendant Rhoda Santos is hereby ordered to pay to the [herein petitioners] the following: 1. Moral damages amounting to P100,000.00; 2. Actual damages for loss of earning capacity amounting to P102,106.00; 3. P36,000.00 for funeral expenses; 4. P50,000.00 as death indemnity; 5. P50,000.00 for attorneys fees plus P1,500.00 per court appearance; 6. Costs of the suit. The case against Malayan Insurance Company, Inc. is hereby dismissed.[24]
It was petitioners turn to file a Motion for Reconsideration[25] of the 24 January 2001 Order, to which respondent MICI filed a
Vigorous Opposition to the Plaintiffs Motion for Reconsideration.[26]
On 15 June 2001, the RTC issued an Order reinstating its Decision dated 28 February 2000, relevant portions of which state:
Finding the arguments raised by the [herein petitioners] in their Motion for Reconsideration of the Order of this Court dated January 24, 2001 to be more meritorious to [herein respondents] Malayan Insurance Co., Inc. (sic) arguments in its vigorous opposition thereto, said motion is hereby granted.
Accordingly, the Order under consideration is hereby reconsidered and set aside. The decision of this Court dated February 28, 2000 is hereby reinstated. Notify parties herein.[27]
Respondent MICI received a copy of the 15 June 2001 Order of the RTC on 27 June 2001.
Aggrieved by the latest turn of events, respondent MICI filed on 9 July 2001 a Notice of Appeal[28] of the 28 February
2000 Decision of the RTC, reinstated by the 15 June 2001 Resolution of the same court. Rhoda did not join respondent MICI in its
Notice of Appeal.[29]
Petitioners filed their Opposition[30] to the Notice of Appeal of respondent MICI, with a Motion for the Issuance of Writ of
Execution.
After considering the recent pleadings of the parties, the RTC, in its Order dated 6 September 2001, denied the Notice of Appeal
of respondent MICI and granted petitioners Motion for the Issuance of Writ of Execution. The RTC reasoned in its Order:
The records disclosed that on February 28, 2000 this Court rendered a Decision in favor of the [herein petitioners] and against [Rhoda and herein respondent MICI]. The Decision was said to have been received by MICI on March 14, 2000. Eight days after or on March 22, 2000, MICI mailed its Motion for Reconsideration to this Court and granted the same in the Order datedJanuary 24, 2001. From this Order, [petitioners] filed a Motion for Reconsideration on February 21, 2001 to which MICI filed a vigorous opposition. On June 15, 2001 this Court granted [petitioners] motion reinstating the Decision dated February 28, 2000. According to MICI, the June 15, 2001 order was received by it on June 27, 2001. MICI filed a Notice of Appeal on July 9, 2001 or twelve (12) days from receipt of said Order. [Petitioners] contend that the Notice of Appeal was filed out of time while [respondent] MICI opposes, arguing otherwise. The latter interposed that the Order dated June 15, 2001 is in reality a new Decision thereby giving it a fresh fifteen (15) days within which to file notice of appeal. [Respondent] MICIs contention is not meritorious. The fifteen (15) day period within which to file a notice of appeal should be reckoned from the date it received the Decision on March 14, 2000. So that when MICI mailed its Motion for Reconsideration on March 22, 2000, eight (8) days had already lapsed, MICI has remaining seven (7) days to file a notice of appeal. However, when it received the last Order of this Court it took [respondent] MICI twelve (12) days to file the same. Needless to say, MICIs Notice of Appeal was filed out of time. The Court cannot countenance the argument of MICI that a resolution to a motion for a final order or judgment will have the effect of giving a fresh reglementary period. This would be contrary to what was provided in the rules of procedure.[31]
Accordingly, the RTC adjudged:
WHEREFORE, premises considered, [herein respondent] MICIs Notice of Appeal is hereby Denied for having filed out of time making the Decision of this Court dated February 28, 2000 as final and executory. Accordingly, the Motion for Issuance of Writ of Execution filed by [herein petitioners] is hereby Granted. Notify parties herein.[32]
Respondent MICI filed a Petition for Certiorari[33] under Rule 65 of the Rules of Court before the Court of Appeals, which was
docketed as CA-G.R. SP No. 67297. The Petition assailed, for having been rendered by the RTC with grave abuse of discretion
amounting to lack or excess of jurisdiction, the following: (1) the Order dated 6 September 2001, denying the Notice of Appeal of
respondent MICI and granting petitioners Motion for the Issuance of Writ of Execution; (2) the Decision dated 28 February 2000,
holding Rhoda and respondent MICI jointly and severally liable for Georges death; and (3) the Order dated 15 June 2001,
reinstating the Decision dated 28 February 2000.
The Court of Appeals granted the Petition for Certiorari of respondent MICI in a Decision dated 26 June 2000, ratiocinating thus:
Prescinding therefrom, we hold that the fifteen (15) day period to appeal must be reckoned from the time the [herein respondent] Malayan received the order dated 15 June 2001 reversing in toto the order of 24 January 2000 and reinstating in full the Decision dated 28 February 2000. Thus, [respondent] Malayan had until 12 July 2001 within which to file its notice of appeal. Therefore, when [respondent] Malayan filed its notice of appeal on 09 July 2001, it was well within the reglementary period and should have been given due course by the public respondent court. It was therefore, an excess of jurisdiction on the part of the public respondent court when it reckoned the [respondent] Malayans period to appeal on the date it received on 14 March 2000 the formers decision dated 28 February 2000. As earlier expostulated, the said decision was completely vacated insofar as the [respondent] Malayan is concerned when the public respondent court in its order dated 24 January 2001 dismissed the case against the former. Thus, to reckon the fifteen (15) days to appeal from the day the [respondent] Malayan received the said decision on 14 March 2000, is the height of absurdity because there was nothing for the [respondent] Malayan to appeal inasmuch as the public respondent court vacated the said decision in favor of the former. The aforesaid conclusion finds support in Sta. Romana vs. Lacson (104 SCRA 93), where the court, relying on the case of Magdalena Estate, Inc. vs. Caluag, 11 SCRA 334, held that where the court of origin made a thoroughly (sic) restudy of the original judgment and rendered the amended and clarified judgment only after considering all the factual and legal issues, the amended and clarified decision was an entirely new decision which superseded (sic). For all intents and purposes, the court concluded the trial court rendered a new judgment from which the time to appeal must be reckoned. In the instant case, what is involved is not merely a substantial amendment or modification of the original decision, but the total reversal thereof in the order dated 24 January 2000. Given the rationale in the aforecited cases, it is only logical that the period of appeal be counted from 27 June 2001, the date that [respondent] Malayan received the order dated 15 June 2001 reversing in toto the order of 24 January 2000 and reinstating the Decision dated 28 February 2000.[34] (Emphasis supplied.)
The fallo of the Decision of the Court of Appeals reads:
WHEREFORE, in consideration of the foregoing premises, the petition for certiorari is partially GRANTED. Accordingly, the public respondent courts order dated 06 September 2001 is hereby RECALLED and SET ASIDE. Public respondent court is hereby directed to approve the petitioner Malayans notice of appeal and to refrain from executing the writ of execution granted on 06 September 2001.[35]
The Court of Appeals denied petitioners Motion for Reconsideration in a Resolution dated 29 November 2002.
Understandably distraught, petitioners come before this Court in this Petition for Review, which raise the following issues:
I.
Whether or not the respondent Court of Appeals committed grave abuse of discretion when it ruled that private respondent could file a Petition for Certiorari even though its Motion for Reconsideration was still pending resolution with the lower court.
II.
Whether or not the respondent Court of Appeals committed grave abuse of discretion when it ruled that the private respondent had filed its Notice of Appeal with the trial court within the reglementary period.[36]
The Court first turns its attention to the primary issue for its resolution: whether the Notice of Appeal filed by respondent
MICI before the RTC was filed out of time.
The period for filing a Notice of Appeal is set by Rule 41, Section 3 of the 1997 Rules of Court:SEC. 3. Period of ordinary appeal. The appeal shall be taken within fifteen (15) days from notice of
the judgment or final order appealed from. Where a record on appeal is required, the appellants shall file a notice of appeal and a record on appeal within thirty (30) days from notice of the judgment or final order. x x x.
The period of appeal shall be interrupted by a timely motion for new trial or reconsideration. No
motion for extension of time to file a motion for new trial or reconsideration shall be allowed.
It is clear under the Rules that an appeal should be taken within 15 days from the notice of judgment or final order
appealed from.[37] A final judgment or order is one that finally disposes of a case, leaving nothing more for the court to do with
respect to it. It is an adjudication on the merits which, considering the evidence presented at the trial, declares categorically what
the rights and obligations of the parties are; or it may be an order or judgment that dismisses an action.[38]
Propitious to petitioners is Neypes v. Court of Appeals,[39] which the Court promulgated on 14 September 2005, and
wherein it laid down the fresh period rule:
To standardize the appeal periods provided in the Rules and to afford litigants fair opportunity to
appeal their cases, the Court deems it practical to allow a fresh period of 15 days within which to file the notice of appeal in the Regional Trial Court, counted from receipt of the order dismissing a motion for a new trial or motion for reconsideration.
Henceforth, this fresh period rule shall also apply to Rule 40 governing appeals from the Municipal
Trial Courts to the Regional Trial Courts; Rule 42 on petitions for review from the Regional Trial Courts to the Court of Appeals; Rule 43 on appeals from quasi-judicial agencies to the Court of Appeals and Rule 45 governing appeals by certiorari to the Supreme Court. The new rule aims to regiment or make the appeal period uniform, to be counted from receipt of the order denying the motion for new trial, motion for reconsideration (whether full or partial) or any final order or resolution. (Emphases ours.)
The fresh period of 15 days becomes significant when a party opts to file a motion for new trial or motion for
reconsideration. In this manner, the trial court which rendered the assailed decision is given another opportunity to review the case
and, in the process, minimize and/or rectify any error of judgment.[40] With the advent of the fresh period rule, parties who availed
themselves of the remedy of motion for reconsideration are now allowed to file a notice of appeal within fifteen days from the
denial of that motion.[41]
The Court has accentuated that the fresh period rule is not inconsistent with Rule 41, Section 3 of the Rules of Court
which states that the appeal shall be taken within fifteen (15) days from notice of judgment or final order appealed from. The use
of the disjunctive word or signifies disassociation and independence of one thing from another. It should, as a rule, be construed
in the sense which it ordinarily implies.[42] Hence, the use of or in the above provision supposes that the notice of appeal may be
filed within 15 days from the notice of judgment or within 15 days from notice of the final order in the case.
Applying the fresh period rule, the Court agrees with the Court of Appeals and holds that respondent MICI seasonably
filed its Notice of Appeal with the RTC on 9 July 2001, just 12 days from 27 June 2001, when it received the denial of its Motion
for Reconsideration of the 15 June 2001 Resolution reinstating the 28 February 2000 Decision of the RTC.
The fresh period rule may be applied to the case of respondent MICI, although the events which transpired concerning its
Notice of Appeal took place in June and July 2001, inasmuch as rules of procedure may be given retroactive effect on actions
pending and undetermined at the time of their passage. The Court notes that Neypes was promulgated on 14 September 2005,
while the instant Petition was still pending before this Court.
Reference may be made to Republic v. Court of Appeals,[43] involving the retroactive application of A.M. No. 00-2-03-SC
which provided that the 60-day period within which to file a petition for certiorari shall be reckoned from receipt of the order
denying the motion for reconsideration. In said case, the Court declared that rules of procedure may be given retroactive effect to
actions pending and undetermined at the time of their passage and this will not violate any right of a person who may feel that he
is adversely affected, inasmuch as there is no vested rights in rules of procedure.
The presumption that a man will do that which tends to his obvious advantage, if he possesses the means, supplies a most important test for judging of the comparative weight of evidence x x x If, on the supposition that a charge or claim is unfounded, the party against whom it is made has evidence within his reach by which he may repel that which is offered to his prejudice, his omission to do so supplies a strong presumption that the charge or claim is well founded; it would be contrary to every principle of reason, and to all experience of human conduct, to form any other conclusion. (Starkie on Evidence, p. 846, Moore on Facts, Vol. I, p. 544) x x x x The ordinary rule is that one who has knowledge peculiarly within his own control, and refuses to divulge it, cannot complain if the court puts the most unfavorable construction upon his silence, and infers that a disclosure would have shown the fact to be as claimed by the opposing party." (Societe, etc., v. Allen, 90 Fed. Rep. 815, 817, 33 C.C.A. 282, per Taft, C.J., Moore on Facts, Vol. I, p. 561).[63]
The inference still holds even if it be assumed, for argument's sake, that the solidary liability of respondent MICI with Rhoda is
improbable, for it has likewise been said that:
Weak evidence becomes strong by the neglect of the party against whom it is put in, in not showing by means within the easy control of that party that the conclusion drawn from such evidence is untrue. (Pittsburgh, etc., R. Co. v. Callaghan, 50 III. App. 676, 681, Moore on Facts, Vol. I, p. 572).[64]
Given the admission of respondent MICI that it is the insurer of the truck involved in the accident that killed George, and
in the utter absence of proof to establish both the existence and the extent/amount of the alleged limited liability of respondent
MICI as insurer, the Court could only conclude that respondent MICI had agreed to fully indemnify third-party
liabilities. Consequently, there is no more difference in the amounts of damages which petitioners can recover from Rhoda or
respondent MICI; petitioners can recover the said amounts in full from either of them, thus, making their liabilities solidary or
joint and several.
The Court now comes to the issue of the amounts of the damages awarded.
In its Decision dated 22 February 2000, the RTC awarded petitioners moral and actual damages, as well as funeral expenses and
attorneys fees. Subsequently, in its Order dated24 January 2001, the RTC reduced the amount of actual damages
from P805,984.00 to P102,106.00, but additionally awarded death indemnity in the amount of P50,000.00. Its award of moral
damages and funeral expenses as well as attorneys fees remained constant in its 28 February 2000 decision and was carried over
to its 24 January 2001 Order.
The Court shall now proceed to scrutinize said award of damages.
As regards the award of actual damages, Article 2199 of the Civil Code provides that [e]xcept as provided by law or by stipulation
one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved x x x.
The RTC awarded P36,000.00 for burial expenses. The award of P36,000.00 for burial expenses is duly supported by receipts
evidencing that petitioners did incur this expense.The petitioners held a wake for two days at their residence and another two days
at the Loyola Memorial Park.[65] The amount covered the expenses by petitioners for the wake, funeral and burial of George.[66]
As to compensation for loss of earning capacity, the RTC initially awarded P805,984.00 in its 28 February 2000 Decision, which
it later reduced to P102,106.00 on 24 January 2001.
Article 2206 of the Civil Code provides that in addition to the indemnity for death caused by a crime or quasi-delict, the defendant
shall be liable for the loss of the earning capacity of the deceased, and the indemnity shall be paid to the heirs of the latter, x x
x. Compensation of this nature is awarded not for loss of earnings but for loss of capacity to earn money. Hence, it is proper that
compensation for loss of earning capacity should be awarded to the petitioners in accordance with the formula established in
decided cases for computing net earning capacity, to wit:
The formula for the computation of unearned income is:
Net Earning Capacity = life expectancy x (gross annual income -reasonable and necessary living expenses). Life expectancy is determined in accordance with the formula: 2 / 3 x [80 - age of deceased at the time of death][67]
Jurisprudence provides that the first factor, i.e., life expectancy, shall be computed by applying the formula (2/3 x [80 - age at
death]) adopted in the American Expectancy Table of Mortality or the Actuarial of Combined Experience Table of Mortality.
The second factor is computed by multiplying the life expectancy by the net earnings of the deceased, i.e., the total earnings less
expenses necessary in the creation of such earnings or income and less living and other incidental expenses. The loss is not
equivalent to the entire earnings of the deceased, but only such portion that he would have used to support his dependents or heirs.
Hence, the Court deducts from his gross earnings the necessary expenses supposed to be used by the deceased for his own
needs. The Court explained in Villa Rey Transit v. Court of Appeals[68]:
[The award of damages for loss of earning capacity is] concerned with the determination of the losses or damages sustained by the private respondents, as dependents and intestate heirs of the deceased, and that said damages consist, not of the full amount of his earnings, but of the support they received or would have received from him had he not died in consequence of the negligence of petitioner's agent. In fixing the amount of that support, we must reckon with the necessary expenses of his own living, which should be deducted from his earnings. Thus, it has been consistently held that earning capacity, as an element of damages to one's estate for his death by wrongful act is necessarily his net earning capacity or his capacity to acquire money, less necessary expense for his own living. Stated otherwise, the amount recoverable is not the loss of the entire earning, but rather the loss of that portion of the earnings which the beneficiary would have received. In other words, only net earnings, and not gross earnings are to be considered that is, the total of the earnings less expenses necessary in the creation of such earnings or income and less living and other incidental expenses.
Applying the aforestated jurisprudential guidelines in the computation of the amount of award for damages set out in Villa Rey,
the Court computes the award for the loss of Georges earning capacity as follows:
Life expectancy = 2/3 x [80 - age of deceased at the time of death]2/3 x [80 56]2/3 x [24]
FORMULA NET EARNING CAPACITY (NEC)
If: Age at time of death of George Poe = 58[69]
Monthly Income at time of death = P6,946[70]
Gross Annual Income (GAI) = [(6,946) (12)] = P83,352Reasonable/Necessary Living Expenses (R/NLE) = 50%[71] of GAI = P41,676 NEC = [2/3 (80-58)] [83,352-41,676]= [2/3 (22)] [41,676]= [14.67] [41,676]= P611,386.92
Therefore, Georges lost net earning capacity is equivalent to P611,386.92
The RTC awarded moral damages[72] in the amount of P100,000.00. With respect to moral damages, the same are awarded under
The award of moral damages is aimed at a restoration, within the limits of the possible, of the spiritual status quo ante. Moral damages are designed to compensate and alleviate in some way the physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury unjustly caused a person. Although incapable of pecuniary computation, they must be proportionate to the suffering inflicted. The amount of the award bears no relation whatsoever with the wealth or means of the offender.
In the instant case, petitioners testimonies reveal the intense suffering which they continue to experience as a result of
Georges death.[73] It is not difficult to comprehend that the sudden and unexpected loss of a husband and father would cause
mental anguish and serious anxiety in the wife and children he left behind. Moral damages in the amount of P100,000.00 are
proper for Georges death.[74]
The RTC also awarded P50,000.00 as death indemnity which the Court shall not disturb. The award of P50,000.00 as death
indemnity is in accordance with current rulings of the Court.[75]
Finally, the RTC awarded attorneys fees to petitioners. Petitioners are entitled to attorneys fees. Under Article 2008 of the Civil
Code, attorneys fees may be granted when a party is compelled to litigate or incur expenses to protect his interest by reason of an
unjustified act of the other party.[76] In Metro Manila Transit Corporation v. Court of Appeals,[77] the Court held that an award
of P50,000.00 as attorneys fees was reasonable. Hence, petitioners are entitled to attorneys fees in that amount.[78]
WHEREFORE, premises considered, the instant Petition is PARTIALLY GRANTED. While the Court AFFIRMS the
Decision, dated 26 June 2002, and Resolution, dated 29 November 2002, of the Court of Appeals in CA-G.R. SP No. 67297,
granting the Petition for Certiorari of respondent Malayan Insurance Company, Inc., the Court, nonetheless,RESOLVES, in
consideration of the speedy administration of justice, and the peculiar circumstances of the case, to give DUE COURSE to the
present Petition and decide the same on its merits.
Rhoda Santos and respondent Malayan Insurance Company, Inc. are hereby ordered to pay jointly and severally the petitioners
Heirs of George Y. Poe the following:
(1) Funeral expenses P36,000.00;
(2) Actual damages for loss of earning capacity P611,386.92;
(3) Moral damages amounting to P100,000.00;
(4) Death indemnity P50,000.00; and
(5) Attorneys fees P50,000.00 plus P1,500.00 per court appearance.
No costs.
SO ORDERED.
SECOND DIVISION
INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME ASSURANCE CORPORATION,Petitioners,
x -----------------------------------------------------------------------------------------xD E C I S I O NBRION, J.:
Before this Court is the Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by Intra-Strata Assurance
Corporation (Intra-Strata) and Philippine Home Assurance Corporation (PhilHome), collectively referred to as petitioners.
The petition seeks to set aside the decision dated November 26, 2002
of the Court of Appeals[1] (CA) that in turn affirmed the ruling of the Regional Trial Court (RTC), Branch 20, Manila in Civil Case
No. 83-15071.[2] In its ruling, the RTC found the petitioners liable as sureties for the customs duties, internal revenue taxes, and
other charges due on the importations made by the importer, Grand Textile Manufacturing Corporation (Grand Textile).[3]
BACKGROUND FACTS
Grand Textile is a local manufacturing corporation. In 1974, it imported from different countries various articles such as dyestuffs,
spare parts for textile machinery, polyester filament yarn, textile auxiliary chemicals, trans open type reciprocating compressor,
and trevira filament. Subsequent to the importation, these articles were transferred to Customs Bonded Warehouse No. 462. As
computed by the Bureau of Customs, the customs duties, internal revenue taxes, and other charges due on the importations
amounted toP2,363,147.00. To secure the payment of these obligations pursuant to Section 1904 of the Tariff and Customs Code
(Code),[4] Intra-Strata and PhilHome each issued general warehousing bonds in favor of the Bureau of Customs. These bonds, the
terms of which are fully quoted below, commonly provide that the goods shall be withdrawn from the bonded warehouse on
payment of the legal customs duties, internal revenue, and other charges to which they shall then be subject.[5]
Without payment of the taxes, customs duties, and charges due and for purposes of domestic consumption, Grand Textile
withdrew the imported goods from storage.[6] The Bureau of Customs demanded payment of the amounts due from Grand Textile
as importer, and from Intra-Strata and PhilHome as sureties. All three failed to pay. The government responded on January 14,
1983 by filing a collection suit against the parties with the RTC of Manila.
LOWER COURT DECISIONS
After hearing, the RTC rendered its January 4, 1995 decision finding Grand Textile (as importer) and the petitioners (as sureties)
liable for the taxes, duties, and charges due on the imported articles. The dispositive portion of this decision states: [7]
WHEREFORE, premises considered, the Court RESOLVES directing:
(1) the defendant Grand Textile Manufacturing Corporation to pay plaintiff, the sum of P2,363,174.00, plus interests at the legal rate from the filing of the Complaint until fully paid;
(2) the defendant Intra-Strata Assurance Corporation to pay plaintiff, jointly and severally, with defendant Grand, the sum of P2,319,211.00 plus interest from the filing of the Complaint until fully paid; and the defendant Philippine Home Assurance Corporation to pay plaintiff the sum of P43,936.00 plus interests to be computed from the filing of the Complaint until fully paid;
(3) the forfeiture of all the General Warehousing Bonds executed by Intra-Strata and PhilHome; and
of suretyship. Under the accessory contract, the surety becomes directly, primarily, and equally bound with the principal as the
original promissor although he possesses no direct or personal interest over the latters obligations and does not receive any benefit
therefrom.[12]
The Bonds Under Consideration
That the bonds under consideration are surety bonds (and hence are governed by the above laws and rules) is not disputed; the
petitioners merely assert that they should not be liable for the reasons summarized above. Two elements, both affecting the
suretyship agreement, are material in the issues the petitioners pose. The first is the effect of the law on the suretyship agreement;
the terms of the suretyship agreement constitute the second.
A feature of the petitioners bonds, not stated expressly in the bonds themselves but one that is true in every contract, is that
applicable laws form part of and are read into the contract without need for any express reference. This feature proceeds from
Article 1306 of the Civil Code pursuant to which we had occasion to rule: It is to be recognized that a large degree of autonomy is accorded the contracting parties. Not that it is unfettered. They may, according to Article 1306 of the Civil Code establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public policy. The law thus sets limits. It is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute. Its terms are embodied therein. The contracting parties need not repeat them. They do not even have to be referred to. Every contract thus contains not only what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter.[13]
Two of the applicable laws, principally pertaining to the importer, are Sections 101 and 1204 of the Tariff and
Customs Code which provide that: Sec 101. Imported Items Subject to Duty All articles when imported from any foreign country into the Philippines shall be subject to duty upon such importation even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in clear laws.
x x x x
Sec. 1204. Liability of Importer for Duties Unless relieved by laws or regulations, the liability for duties, taxes, fees, and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees, and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced which such articles are in custody or subject to the control of the government.
The obligation to pay, principally by the importer, is shared by the latter with a willing third party under a suretyship agreement
under Section 1904 of the Code which itself provides:Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehousing Bond After
articles declared in the entry of warehousing shall have been examined and the duties, taxes, and other charges shall have been determined, the Collector shall require from the importer, an irrevocable domestic letter of credit, bank guarantee, or bond equivalent to the amount of such duties, taxes, and other charges conditioned upon the withdrawal of the articles within the period prescribed by Section 1908 of this Code and for payment of any duties, taxes, and other charges to which the articles shall then be subject and upon compliance with all legal requirements regarding their importation.
We point these out to stress the legal basis for the submission of the petitioners bonds and the conditions attaching to
these bonds. As heretofore mentioned, there is, firstly, a principal obligation belonging to the importer-obligor as provided under
Section 101; secondly, there is an accessory obligation, assumed by the sureties pursuant to Section 1904 which, by the nature of a
surety agreement, directly, primarily, and equally bind them to the obligee to pay the obligors obligation.
The second element to consider in a suretyship agreement relates to the terms of the bonds themselves, under the rule that the
terms of the suretyship are determined by the suretyship contract itself. [14] The General Warehousing Bond[15] that is at the core of
the present dispute provides:
KNOW ALL MEN BY THESE PRESENTS:That I/we GRAND TEXTILE MANUFACTURING CORPORATION Km. 21, Marilao, Bulacan, as Principal, and PHILIPPINE HOME ASSURANCE as the latter being a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, as Surety, are held and firmly bound unto the Republic of the Philippines, in the sum of PESOS TWO MILLION ONLY (P2,000,000.00), Philippine Currency, to be paid to the Republic of the Philippines, for the payment whereof, we bind ourselves, our heirs, executors, administrators and assigns, jointly and severally, firmly by these presents: WHEREAS, the above-bounden Principal will from time to time make application to make entry for storing in customs-internal revenue bonded warehouse certain goods, wares, and merchandise, subject to customs duties and special import tax or internal revenue taxes or both; WHEREAS, the above principal in making application for storing merchandise in customs-internal revenue bonded warehouse as above stated, will file this in his name as principal, which bond shall be approved by the Collector of Customs or his Deputy; and WHEREAS, the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond. NOW THEREFORE, the condition of this obligation is such that if within six (6) months from the date of arrival of the importing vessel in any case, the goods, wares, and merchandise shall beregularly and lawfully withdrawn from public stores or bonded warehouse on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall then be subject; or if at any time within six (6) months from the said date of arrival, or within nine (9) months if the time is extended for a period of three (3) months, as provided in Section 1903 of the Tariff and Customs Code of the Philippines, said importation shall be so withdrawn for consumption, then the above obligation shall be void, otherwise, to remain in full force and effect. Obligations hereunder may only be accepted during the calendar year 1974 and the right to reserve by the corresponding Collector of Customs to refuse to accept further liabilities under this general bond, whenever, in his opinion, conditions warrant doing so. IN WITNESS WHEREOF, we have signed our names and affixed our seals on this 20 th day of September, 1974 at Makati, Rizal, Philippines.
Considered in relation with the underlying laws that are deemed read into these bonds, it is at once clear that the bonds shall
subsist that is, shall remain in full force and effectunless the imported articles are regularly and lawfully withdrawn. . .on payment
of the legal customs duties, internal revenue taxes, and other charges to which they shall be subject. Fully fleshed out, the
obligation to pay the duties, taxes, and other charges primarily rested on the principal Grand Textile; it was allowed to warehouse
the imported articles without need for prior payment of the amounts due, conditioned on the filing of a bond that shall remain in
full force and effect until the payment of the duties, taxes, and charges due. Under these terms, the fact that a withdrawal has been
made and its circumstances are not material to the sureties liability, except to signal both the principals default and the elevation
to a due and demandable status of the sureties solidary obligation to pay. Under the bonds plain terms, this solidary obligation
subsists for as long as the amounts due on the importations have not been paid. Thus, it is completely erroneous for the petitioners
to say that they were released from their obligations under their bond when Grand Textile withdrew the imported goods without
payment of taxes, duties, and charges. From a commonsensical perspective, it may well be asked: why else would the law require
a surety when such surety would be bound only if the withdrawal would be regular due to the payment of the required duties,
taxes, and other charges?
We note in this regard the rule that a surety is released from its obligation when there is a material alteration of the contract in
connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes
away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. A
surety, however, is not released by a change in the contract which does not have the effect of making its obligation more onerous.
[16]
We find under the facts of this case no significant or material alteration in the principal contract between the government and the
importer, nor in the obligation that the petitioners assumed as sureties. Specifically, the petitioners never assumed, nor were any
additional obligation imposed, due to any modification of the terms of importation and the obligations thereunder. The obligation,
and one that never varied, is on the part of the importer, to pay the customs duties, taxes, and charges due on the importation,
and on the part of the sureties, to be solidarily bound to the payment of the amounts due on the imported goods upon their
withdrawal or upon expiration of the given terms. The petitioners lack of consent to the withdrawal of the goods, if this is their
complaint, is a matter between them and the principal Grand Textile; it is a matter outside the concern of government whose
interest as creditor-obligee in the importation transaction is the payment by the importer-obligor of the duties, taxes, and charges
due before the importation process is concluded. With respect to the sureties who are there as third parties to ensure that the
amounts due are paid, the creditor-obligee's active concern is to enforce the sureties solidary obligation that has become due and
demandable. This matter is further and more fully explored below.
The Need for Notice to Bondsmen
To support the conclusion that they should be released from the bonds they issued, the petitioners argue that upon the
issuance and acceptance of the bonds, they became direct parties to the bonded transaction entitled to participate and actively
intervene, as sureties, in the handling of the imported articles; that, as sureties, they are entitled to notice of any act of the bond
obligee and of the bond principal that would affect the risks secured by the bond; and that otherwise, the door becomes wide open
for possible fraudulent conspiracy between the bond obligee and principal to defraud the surety.[17]
In taking these positions, the petitioners appear to misconstrue the nature of a surety relationship, particularly the fact that
two types of relationships are involved, that is, the underlying principal relationship between the creditor (government) and the
debtor (importer), and the accessory surety relationship whereby the surety binds itself, for a consideration paid by the debtor, to
be jointly and solidarily liable to the creditor for the debtors default. The creditor in this latter relationship accepts the suretys
solidary undertaking to pay if the debtor does not pay.[18] Such acceptance, however, does not change in any material way the
creditors relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor
relationship. The contract of surety simply gives rise to an obligation on the part of the surety in relation with the creditor and is a
one-way relationship for the benefit of the latter.[19]
In other words, the surety does not, by reason of the surety agreement, earn the right to intervene in the principal creditor-
debtor relationship; its role becomes alive only upon the debtors default, at which time it can be directly held liable by the creditor
for payment as a solidary obligor. A surety contract is made principally for the benefit of the creditor-obligee and this is ensured
by the solidary nature of the sureties undertaking.[20] Under these terms, the surety is not entitled as a rule to a separate notice of
default,[21]nor to the benefit of excussion,[22] and may be sued separately or together with the principal debtor. [23] The words of this
Court in Palmares v. CA[24] are worth noting:Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principals default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principals default and to perform the obligation.
He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship.
Significantly, nowhere in the petitioners bonds does it state that prior notice is required to fix the sureties
liabilities. Without such express requirement, the creditors right to enforce payment cannot be denied as the petitioners
became bound as soon as Grand Textile, the principal debtor, defaulted. Thus, the filing of the collection suit was sufficient notice
to the sureties of their principals default.
The petitioners reliance on Visayan Surety and Insurance Corporation v. Pascual[25] and Aguasin v. Velasquez[26] does not appear
to us to be well taken as these cases do not squarely apply to the present case. These cases relate to bonds issued as a requirement
for the issuance of writs of replevin. The Rules of Court expressly require that before damages can be claimed against such bonds,
notice must be given to the sureties to bind them to the award of damages. No such requirement is evident in this case as neither
the Tariff and Customs Code nor the issued bonds require prior notice to sureties.
The petitioners argument focusing on the additional risks they incur if they cannot intervene in the handling of the warehoused
articles must perforce fail in light of what we have said above regarding the nature of their obligation as sureties and the
relationships among the parties where a surety agreement exists. We add that the petitioners have effectively waived as against the
creditor (the government) any such claim in light of the provision of the bond that the surety hereon agrees to accept all
responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond. [27] Any such claim
including those arising from the withdrawal of the warehoused articles without the payment of the requisite duties, taxes and
charges is for the principal and the sureties to thresh out between or among themselves.
Government is Not Bound by Estoppel
As its final point, the petitioners argue that they cannot be held liable for the unpaid customs duties, taxes, and other charges
because it is the Bureau of Customs duty to ensure that the duties and taxes are paid before the imported goods are released from
its custody and they cannot be made to pay for the error or negligence of the Bureaus employees in authorizing the unlawful and
irregular withdrawal of the goods.
It has long been a settled rule that the government is not bound by the errors committed by its agents. Estoppel does not also lie
against the government or any of its agencies arising from unauthorized or illegal acts of public officers.[28] This is particularly true
in the collection of legitimate taxes due where the collection has to be made whether or not there is error, complicity, or plain
neglect on the part of the collecting agents.[29] In CIR v. CTA,[30] we pointedly said: It is axiomatic that the government cannot and must not be estopped particularly in matters involving
taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. Thus, it should be collected without unnecessary hindrance or delay.
We see no reason to deviate from this rule and we shall not do so now.
WHEREFORE, premises considered, we hereby DENY the petition and AFFIRM the Decision of the Court of Appeals. Costs
