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1.

Qua Chee Gan vs Law Union and Rock Insurance Co., Ltd.

Facts: Qua Chee Gan owns four warehouses in Albay. He was using these warehouses to

house crops like copra and hemp. All warehouses were insured by Law Union and Rock

Insurance for the amount of P370,000.00. The insurance states that Qua Chee Gan should

install 11 hydrants in the warehouses premises. Qua Chee Gan installed only two, but Law

Union nevertheless went on with the insurance policy and collected premiums from Qua

Chee Gan. The insurance contract also provides that oil should not be stored within the

premises of the warehouses.

In 1940, three of the warehouses were destroyed by fire. The damage caused amounted to

P398k. Qua Chee Gan demanded insurance pay from Law Union but the latter refused as italleged that after investigation from their part, they found out that Qua Chee Gan caused the

fire. Law Union in fact sued Qua Chee Gan for Arson.

Qua Chee Gan was acquitted in the arson case. He then demanded that Law Union pay up.

This time, Law Union averred that the insurance contract is void because Qua Chee Gan

failed to install 11 hydrants; and that gasoline was found in one of the warehouses.

ISSUE:Whether or not the insurance contract is void.

HELD:No. Law Union cannot exempt itself from paying Qua Chee Gan because it is estopped

from invoking the same. It is a well settled rule of law that an insurer which with knowledge

of facts entitling it to treat a policy as no longer in force, receives and accepts a premium on

the policy, estopped to take advantage of the forfeiture.

Also, gasoline is not one of those items specifically prohibited from the premises of

the warehouses. What was mentioned was the word oil which could mean

anything (from palm oil to lubricant and not gasoline or kerosene). This ambiguity is

to be interpreted against Law Union because a contract of insurance is a contract of

adhesion. Further, oil is incidental to Qua Chee Gans business, it being used for

motor fuel.

2. Ty v. Filipinas Compaia de Seguros

Facts:

> Ty was employed as a mechanic operator by Braodway Cotton Factory at Grace Park,

Caloocan.

> In 1953, he took personal accident policies from 7 insurance companies (6 defendants), on

different dates, effective for 12 mos.

> On Dec. 24. 1953, a fire broke out in the factory were Ty was working. A hevy object fellon his hand when he was trying to put out the fire.

> From Dec. 1953 to Feb. 6, 1954 Ty received treatment at the Natl Orthopedic Hospital for

six listed injuries. The attending surgeon certified that these injuries would cause the

temporary total disability of Tys left hand.

> Insurance companies refused to pay Tys claim for compensation under the policies by

reason of said disability of his left hand. Ty filed a complaint in the municipal court who

decided in his favor.

> CFI reversed on the ground that under the uniform terms of the policies, partial disability

due to loss of either hand of the insured, to be compensable must be the result of

amputation.

Issue:

Whether or not Ty should b e indemnified under his accident policies.

Held.

NO.

SC already ruled in the case of Ty v. FNSI that were the insurance policies define partial

disability as loss of either hand by amputation through the bones of the wrist, the insured

cannot recover under said policies for temporary disability of his left hand caused by the

fractures of some fingers. The provision is clear enough to inform the party entering into

that contract that the loss to be considered a disability entitled to indemnity, must be

severance or amputation of the affected member of the body of the insured.

3. Del Rosario v Equitable G.R. No. L-16215 June 29, 1963

Facts:

Equitables insurance policy covered indemnities for bodily injuries and deaths, however, it

never specificed an amount to be given in case of a persons death by drowning. It specified

amounts from 1,000 to 3,000 for other causes of death, however.

Francisico del Rosario died from drowning after jumping from a sinking ship. The insurer,

Equitable, agreed to pay Php 1,000 as the claim for an accident. His attorney, howvever,

contended that he amount should be greater under section 2, Php 1500. The issue was

resolved in theInsurance Commison, where it was held that Section 1, under the provisions

applied. (Php 1,000 as indemnity) Thelawyer still didint agree and instituted a suit. The trail

court held that the company had the discretion to pay from Php 1,000 to 3,000 for death by

drowning since there was no fixed amount for this type of death. The amended decision

ordered the company to pay Php 2,000

Issue:What should the amount be?

Held:Judgment affirmed. Still 2,000.

Ratio:

The interpretation of obscure stipulations in a contract should not favor the party who cause

the obscurity.

Ambigious terms in a policy are to be construed strictly against, the insurer, and liberally in

favor of the insured for the payment of indemnity where forfeiture is involved. The company

takes great care in the wording and has legal advisers who create the contracts to the benefit

of the company.Trial court ruling are well considered because they are supported by doctrines oninsurance

resolving cases against the party who caused the ambiguity in the wording of the contracts

terms. This was also due to t he fact that the insured didnt have much of a say in formulating

the contract.

4. Misamis v Capital Insurance

Facts:

Misamis Lumber Company insured its Ford Falcon to Capital Insurance for P 14,000. One day,

the cars crank and flywheel broke when it passed over a water hole in Aurora

Boulevard. Misamis sent it to be repaired at the cost of 302 pesos. However, Capital did not

want to pay the entire amount because the repair limit in the contract stipulated up to 150

pesos only. Misamis filed suit.

The lower court ruled against the insurance corporation because the company did not showthat the cost was excessive. Also , the court ruled that absolving the company of the excess

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amount would make the contract one sided.

Issue:Is the insurance company liable for more t han the amount in the repair limit?

Held:No. Insurance company only ordered to pay 150 pesos.

Ratio:

Paragraph 4, subpar a. of the insurance contract is clear and specific. It authorizes up to 150

pesos only as a repair limit.

The lower court did not heed the express stipulation in the agreement. The policy specificallynoted the mechanics for repair in par. 2 and the limits of the liability in par 4. The company

didnt notify the insurance provider before it did the repairs. Also, even if the contract is

onerous, this doesnt justify its abrogation.

5. Verendia v. CA

Facts:

> Fidelity and Surety Insurance Company (Fidelity) issued Fire Insurance Policy No. F-18876

effective between June 23, 1980 and June 23, 1981 covering Rafael (Rex) Verendia's

residential in the amount of P385,000.00. Designated as beneficiary was the Monte de

Piedad & Savings Bank.

> Verendia also insured the same building with two other companies, namely, The Country

Bankers Insurance for P56,000.00 and The Development Insurance for P400,000.00.

> While the three fire insurance policies were in force, the insured property was completely

destroyed by fire.

> Fidelity appraised the damage amounting to 385,000 when it was accordingly informed of

the loss. Despite demands, Fidelity refused payment under its policy, thus prompting

Verendia to file a complaint for the recovery of 385,000

> Fidelity, averred that the policy was avoided by reason of over-insurance, that Verendia

maliciously represented that the building at the time of the fire was leased under a contract

executed on June 25, 1980 to a certain Roberto Garcia, when actually it was a Marcelo Garcia

who was the lessee.

Issue:

Whether or not Verendia can claim on the insurance despite the misrepresentation as to thelessee and the overinsurance.

Held:

NOPE.

The contract of lease upon which Verendia relies to support his claim for insurance benefits,

was entered into between him and one Robert Garcia, a couple of days after the effectivity of

the insurance policy. When the rented residential building was razed to the ground, it

appears that Robert Garcia was still within the premises. However, according to the

investigation by the police, the building appeared to have "no occupants" and that Mr.

Roberto Garcia was "renting on the otherside of said compound" These pieces of evidence

belie Verendia's uncorroborated testimony that Marcelo Garcia whom he considered as the

real lessee, was occupying the building when it was burned.

Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed the

lease contract but it was Marcelo Garcia cousin of Robert, who had also been paying the

rentals all the while. Verendia, however, failed to explain why Marcelo had to sign his

cousin's name when he in fact he was paying for the rent and why he (Verendia) himself, the

lessor, allowed such a ruse. Fidelity's conclusions on these proven facts appear, therefore, to

have sufficient bases: Verendia concocted the lease contract to deflect responsibility for the

fire towards an alleged "lessee", inflated the value of the property by the alleged monthly

rental of P6,500) when in fact, the Provincial Assessor of Rizal had assessed the property's

fair market value to be only P40,300.00, insured the same property with two o ther insurance

companies for a total coverage of around P900,000, and created a dead-end for the adjuster

by the disappearance of Robert Garcia.

Basically a contract of indemnity, an insurance contract is the law between the parties. Its

terms and conditions constitute the measure of the insurer's liability and compliance

therewith is a condition precedent to the insured's right to recovery from the. As it is also a

contract of adhesion, an insurance contract should be liberally construed in favor of the

insured and strictly against the insurer company which usually prepares it

.

Considering, however, the foregoing discussion pointing to the fact that Verendia used a false

lease contract to support his claim under Fire Insurance Policy, the terms of the policy should

be strictly construed against the insured. Verendia failed to live by the terms of the policy,

specifically Section 13 thereof which is expressed in terms that are clear and unambiguous,

that all benefits under the policy shall be forfeited "if the claim be in any respect fraudulent,

or if any false declaration be made or used in support thereof, or if any fraudulent means or

devises are used by the Insured or anyone acting in his behalf to obtain any benefit under the

policy". Verendia, having presented a false declaration to support his claim for benefits in the

form of a fraudulent lease contract, he forfeited all benefits therein by virtue of Section 13 of

the policy in the absence of proof that Fidelity waived such provision

There is also no reason to conclude t hat by submitting the subrogation receipt as evidence in

court, Fidelity bound itself to a "mutual agreement" to settle Verendia's claims in

consideration of the amount of P142,685.77. While the said receipt appears to have been a

filled-up form of Fidelity, no representative of Fidelity had signed it. It is even incomplete as

the blank spaces for a witness and his address are not filled up. More significantly, the same

receipt states that Verendia had received the aforesaid amount. However, that Verendia had

not received the amount stated therein, is proven by the fact that Verendia himself filed thecomplaint for the full amount of P385,000.00 stated in the policy. It might be that there had

been efforts to settle Verendia's claims, but surely, the subrogation receipt by itself does not

prove that a settlement had been arrived at and enforced. Thus, to interpret Fidelity's

presentation of the subrogation receipt in evidence as indicative of its accession to its

"terms" is not only wanting in rational basis but would be substituting the will of the Court

for that of the parties

6. GULF RESORTS, INC. VS. PHILIPPINE CHARTER INSURANCE CORPORATION

FACTS:

Plaintiff Gulf Resorts is the owner of the Plaza Resort situated at Agoo, La Union and had its

properties in said resort insured originally with the American Home Assurance Company or

AHAC-AIU. In the first four insurance policies issued by AHAC- AIU the risk of loss from

earthquake shock was extended to only the plaintiffs t wo swimming pools, thus,earthquake shock endt. Subsequently, AHAC-AIU issued in the plaintiffs favor Policy

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number 206-4182383-0 covering the period March 14, 1988 to March 14, 1989 and in the

said policy, the earthquake endorsement clause was deleted and the entry under

Endorsements/Warranties at the time of issue read that plaintiff renewed its policy with

AHAC-AIU for the period of March 14, 1989 to March 14, 1990 under policy number 206-

4568061-9 which carried the entry under Endorsement/Warrantiesat Time of Issue which

read Endorsement to Include Earthquake Shock in the amount of P10,700 and paid

P42,658.14 as premium thereof.

The plaintiff agreed to insure with defendant the properties covered by AHAC- AIU Policy

number 206-4568061-9 provided that the policy wording and rates in the said policy be

copied in the policy to be issued by defendant. The defendant then issued Policy number31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991 for P10,700,600

for a total premium of P45,159.92. In Policy number 31944 issued by defendant, the shock

endorsement provide:

In consideration of the payment by the insured to the company of the sum included

additional premium the Company agrees, notwithstanding what is stated in the printed

conditions of this policy due to the contrary, that this insurance covers loss or damage to

shock to any of the property insured by this Policy occasioned by or through or in

consequence of earthquake.

That in the said policy, the word included was del eted. On July 16, 1990 an earthquake

struck Central Luzon and Northern Luzon and the plaintiffs properties covered by Policy No.

31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were

damaged.

After the earthquake, petitioner advised respondent that it would be making a claim under

its Insurance Policy No. 31944 for damages on its properties. Respondent instructed

petitioner to file a formal claim, then assigned the investigation of the claim to an

independent claims adjuster. On July 30, 1990, respondent through its adjuster, requested

petitioner to submit various documents in support of its claim. Subsequently, the adjuster

rendered a decision saying except for the swimming pools, all affected items have no

coverage for earthquake shocks. Petitioner then filed its formal demand for settlement for

the damage to all its properties in t he Agoo Playa Resort.

The regional trial court ruled in favor of respondent stating that only the 2 swimming pools

had earthquake shock coverage. Upon appeal, the appellate court affirmed the decision of

the trial court.

ISSUE: Whether or not the other properties in the Agoo Playa Resort are included in the

earthquake shock coverage of the said insurance policy

HELD:

It is basic that all the provisions of the insurance policy should be examined and

interpreted in consonance with each other. All its parts are reflective of the true intent of the

parties. The policy cannot be construed piecemeal.

Petitioner cannot focus on the earthquake shock endorsement to the exclusion of the other

provisions. All the provisions and riders, taken and interpreted together, indubitably show

the intention of the parties to extend earthquake shock coverage to the two swimming pools

only.

A careful examination of the premium recapitulation will show that it is the clear intent of

the parties to extend earthquake coverage shock only to the 2 swimming pools. Section 2(1)of the Insurance Code defines a contract of insurance as an agreement whereby one

undertakes for a consideration to indemnify another against loss, damage or liability arising

from an unknown or contingent event. Thus, an insurance contract exists where the

following elements concur:

1.

the insured has an insurable interest

2.

the insured is subject to a risk of loss by the happening of the designated peril

3.

the insurer assumes the risk

4.

such assumption of risk is part of a general scheme to distribute actual losses

among a large group of persons bearing similar risk

5. in consideration of the insurers promise, the insured pays a premiuman insurance

premium is the consideration paid an insurer for undertaking to indemnify theinsured against a specified peril.

In the subject policy, no premium payments were made with regard to earthquake

shock coverage, except on the 2 swimming pools. There is no mention of any premium

payable for the other resort properties with regard to earthquake shock. This is

consistent with the history of petitioners previous insurance policies from AHAC-AIU.

Hence, the judgment of the Court of Appeals is affirmed.

7. WHITE GOLD MARINE SERVICES, INC., petitioner vs. PIONEER INSURANCE AND SURETY

CORPORATION and THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA)

LTD., respondents

FACTS: White Gold procured a protection and indemnity coverage for its vessels from The

Steamship Mutual through Pioneer. It was issued a Certificate of Entry and Acceptance.

Pioneer also issued receipts evidencing payments. When White Gold failed to fully pay its

accounts, Steamship Mutual refused to renew the coverage.

Steamship Mutual filed a case against White Gold for collection of sum of money. White Gold

filed a complaint before the Insurance Commission claiming that Steamship Mutual violated

Sections 186 and 187 of the Insurance Code, while Pioneer violated Sections 299-301 in

relation to Sections 302-303. It was dismissed, ruling that there was no need for Steamship

Mutual to secure a license because it was not engaged in the insurance business, as a

Protection and Indemnity Club (P & I Club). Pioneer also need not obtain another license as

insurance agent and/or a broker for Steamship Mutual. Moreover, Pioneer was already

licensed. CA affirmed. Hence, the petition.

A P & I Club is an association composed of ship owners in general who band together for thespecific purpose of providing insurance cover on a mutual basis against liabilities incidental to

ship owning that the members incur in favor of third parties. As a P & I Club, Steamship

Mutuals primary purpose is to solicit and provide protection and indemnity coverage and for

this purpose, it has engaged the s ervices of Pioneer to act as its agent.

ISSUE:

Whether Steamship Mutual, a P & I Club, is engaged in the insurance business in the

Philippines. YES

Whether Pioneer needs a license as an insurance agent/broker for

Steamship Mutual. YES

HELD:

Section 2 (2) of the Insurance Code enumerates what constitutes doing an insurance

business or transacting an insurance business. The test to determine if a contract is an

insurance contract or not, depends on the nature of the promise, the act required to be

performed, and the exact nature of the agreement in the light of the occurrence,contingency, or circumstances under which the performance becomes requisite. It is not by

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what it is called. Basically, an insurance contract is a contract of indemnity. In it, one

undertakes for a consideration to indemnify another against loss, damage or liability arising

from an unknown or contingent event.

In particular, a marine insurance undertakes to indemnify the assured against marine losses,

such as the losses incident to a marine adventure. A mutual insurance company is a

cooperative enterprise where the members are both the insurer and insured. Additionally,

mutual insurance associations, or clubs, provide three types of coverage, namely, protection

and indemnity, war risks, and defense costs.

A P & I Club is a form of insurance against third party liability, where the third party is

anyone other than the P & I Club and the members. By definition then, Steamship Mutual asa P & I Club is a mutual insurance association engaged in the marine insurance business.

Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer, must

secure a license from the Insurance Commission. Since a contract of insurance involves public

interest, regulation by the State is necessary. Thus, no insurer or insurance company is

allowed to engage in the insurance business without a license or a certificate of authority

from the Insurance Commission.

Although Pioneer is already licensed as an insurance company, it needs a separate license to

act as insurance agent for Steamship Mutual. CA decision REVERSED AND SET ASIDE.

Steamship Mutual and Pioneer are ORDERED to obtain licenses.

8. ETERNAL VS. PHILAMLIFE

FACTS: Respondent Philamlife entered into an agreement denominated as Creditor Group

Life Policy with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under the

policy, the clients of Eternal who purchased burial lots from it on installment basis would be

insured by Philamlife. The amount of insurance coverage depended upon the existing

balance of the purchased burial lots.

The relevant provisions of the policy are:ELIGIBILITY.xxE VIDENCE OF

INSURABILITY.

xx

LIFE INSURANCE BENEFIT.x

x EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan

with the Assured. However, there shall be no insurance if the application of the Lot Purchaser

is not approved by the Company.

xx

Eternal was required under the policy to submit to Philamlife a list of all new lot

purchasers, together with a copy of the application of each purchaser, and the amounts of

the respective unpaid balances of all insured lot purchasers. Eternal complied by submitting aletter dated December 29, 1982, containing a list of insurable balances of its lot buyers for

October 1982. One of those included in the list as new business was a certain John Chuang.

His balance of payments was 100K. on August 2, 1984, Chuang died.

Eternal sent a letter dated to Philamlife, which served as an insurance claim for Chuangs

death. Attached to the claim were certain documents. In reply, Philamlife wrote Eternal a

letter requiring Eternal to submit the additional documents relative to its insurance claim for

Chuangs death. Eternal transmitted the required documents through a letter which was

received by Philamlife.

After more than a year, Philamlife had not furnished Eternal with any reply to the latters

insurance claim. This prompted Eternal to demand from Philamlife the payment of the claim

for PhP 100,000.In response to Eternals demand, Philamlife denied Eternals insurance

claim in a letter a portion of which reads:

The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal

Gardens Memorial Park in October 1982 for the total maximum insurable amount of

P100,000.00 each. No application for Group Insurance was submitted in our office prior to his

death on August 2, 1984

Eternal filed a case with the RTC for a sum of money against Philamlife, which decided in

favor of Eternal, ordering Philamlife to pay the former 100K representing the proceeds of the

policy. CA reversed. Hence this petition.

ISSUE:WON Philamlife should pay the 100K insurance proceeds

HELD:Petition granted.YES. An examination of the provision of the POLICY under effective date of benefit, would

show ambiguity between its two sentences. The first sentence appears to state that the

insurance coverage of the clients o f Eternal already became effective upon contracting a loan

with Eternal while the second sentence appears to require Philamlife to approve the

insurance contract before the same can become effective.

It must be remembered that an insurance contract is a contract of adhesion which must be

construed liberally in favor of the insured and strictly against the insurer in order to

safeguard the latters interest.

On the other hand, the seemingly conflicting provisions must be harmonized to mean that

upon a partys purchase of a memorial lot on installment from Eternal, an insurance contract

covering the lot purchaser is created and the same is effective, valid, and binding until

terminated by Philamlife by disapproving the insurance application. The second sentence of

the Creditor Group Life Policy on the Effective Date of Benefit is in the nature of a resolutory

condition which would lead to the cessation of the insurance contract. Moreover, the mere

inaction of the insurer on the insurance application must not work to prejudice the insured; it

cannot be interpreted as a termination of the insurance contract. The termination of the

insurance contract by the insurer must be explicit and unambiguous.

9. Philamcare v CA, G.R. No. 125678. March 18, 2002

Facts: Ernani Trinos applied for a health care coverage with Philam. He answered no to a

question asking if he or his family members were treated to heart trouble, asthma, diabetes,

etc.The application was approved for 1 year. He was also given hospitalization benefits and

out-patient benefits. After the period expired, he was given an expanded coverage for Php

75,000. During the period, he suffered from heart attack and was confined at MMC. The wife

tried to claim the benefits but the petitioner denied it saying that he concealed his medicalhistory by answering no to the aforementioned question. She had to pay for the hospital bills

amounting to 76,000. Her husband subsequently passed away. She filed a case in the trial

court for the collection of the amount plus damages. She was awarded 76,000 for the bills

and 40,000 for damages. The CA affirmed but deleted awards for damages. Hence, this

appeal.

Issue:WON a health care agreement is not an insurance contract; hence the incontestability

clause under the Insurance Code does not apply.

H e l d :No. Petition dismissed.

Ratio: Petitioner claimed that it granted benefits only when the insured is alive during the

one-year duration. It contended that there was no indemnification unlike in insurance

contracts. It supported this claim by saying that it is a health maintenance organizationcovered by the DOH and not the Insurance Commission. Lastly, it claimed that the

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Incontestability clause didnt apply because two -year and not one-year effectivity periods

were required.

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.

Section 3 states: every person has an

insurable interest in the life and health:

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

In this case, the husbands health was the

insurable interest. The health care agreement was in the nature of non-life insurance, which

is primarily a contract of indemnity. The provider must pay for the medical expenses resulting

from sickness or injury.

While petitioner contended that the husband concealed materialfact of his sickness, the contract stated that: 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.

This meant that the petitioners required him to sign authorization to furnish reports about

his medical condition. The contract also authorized Philam to inquire directly to his medical

history.

Hence, the contention of concealment isnt valid.

They cant also invoke the Invalidation of agreement clause where failure of the insured to

disclose information was a grounds for revocation simply because the answer assailed by the

company was the heart condition question based on the insureds opinion. He wasnt a

medical doctor, so he cant accurately gauge his condition.

Henrick v Fire - in such case the insurer is not justified in relying upon such statement, but is

obligated to make further inquiry.Fraudulent intent must be proven to rescind the

contract. This was incumbent upon the provider.

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. Section 27 of the

Insurance Code- a concealment entitles the injured party to rescind a contract of insurance.

As to cancellation procedure- Cancellation requires certain 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 thepolicy;

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

None were fulfilled by the provider.

As to incontestability- The trial court said that under 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.

10. PHILHEALTH CARE PROVIDERS vs. CIR

G.R. No. 167330 September 18, 2009FACTS: On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent

Philhealth a formal demand letter and the corresponding assessment notices demanding the

payment of deficiency taxes for the taxable years 1996 and 1997 in the total amount of

P224,702,641.18. Philhealth protested the assessment and, as CIR did not act on the protest,

Philhealth filed a petition for review in the Court of Tax Appeals (CTA) seeking the

cancellation of the deficiency VAT and DST (documentary stamp tax) assessments. CTA

rendered a decision ordering the Philhealth to pay the deficiency VAT for 1996 and 1997 and

canceling the 1996 and 1997 deficiency DST assessment against it.

CIR appealed the CTA decision to CA insofar as it cancelled the DST assessment claiming that

petitioners health care agreement was a contract of insurance subject to DST under Secti on

185 of the 1997 Tax Code.CA reversed the decision of CTA and upheld that the petitioners health care agreement was

in the nature of non-life insurance contract subject to DST.

ISSUES:

1. WON the respondent is a Health Maintenance Organization (HMO)

2. WON petitioner, as an HMO, engaged in the business of insurance during the pertinent

taxable years

3. WON a health care agreement is an insurance contract.

HELD:

1. Philhealth 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.

2. NO, Philhealth is not engaged in the business of insurance. Pursuant to the principal

object and purpose test adopted by the Supreme Court, the primary purpose of a medical

service corporation, such as Philhealth, is NOT the assumption of risk and indemnification,

but rather to provide physicians who will render services to subscribers on a prepaid basis. In

fact, a substantial portion of petitioners services covers preventive and diagnostic medical

services intended to keep members from developing medical conditions or diseases. As an

HMO, it is its obligation to maintain the good health of its members. Accordingly, its health

care programs are designed to prevent or to minimize the possibility of any assumption of

risk on its part. Thus, its undertaking under its agreements is not to indemnify its members

against any loss or damage arising from a medical condition but, on the contrary, to provide

the health and medical services needed to prevent such loss or damage. 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.3. NO, a healthcare agreement is not an insurance contract. The agreements between the

petitioner and its members do not possess all the elements of an insurance contract provided

in Sec. 2(1) of the Insurance Code because the healthcare's primary purpose is to render

service and not to assume risk and indemnify another. Also, 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.

NOTE: Principal object and purpose test of United State jurisprudence, to wit: whether the assumption of risk andindemnification 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 isthat of insurance. But if they are merely incidental and service is the principal purpose, then the business is not

insurance.