G.R. No.

L-15895 November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Jose A. Espiritu for appellant.
Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:
This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to recover from the
defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life annuity. The trial court gave
judgment for the defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life Assurance
Company of Canada through its office in Manila for a life annuity. Two days later he paid the sum of P6,000 to the
manager of the company's Manila office and was given a receipt reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia solicitada por dicho
Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina Central de la Compaia.
The application was immediately forwarded to the head office of the company at Montreal, Canada. On November 26,
1917, the head office gave notice of acceptance by cable to Manila. (Whether on the same day the cable was received
notice was sent by the Manila office of Herrer that the application had been accepted, is a disputed point, which will be
discussed later.) On December 4, 1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A.
Torres wrote to the Manila office of the company stating that Herrer desired to withdraw his application. The following day
the local office replied to Mr. Torres, stating that the policy had been issued, and called attention to the notification of
November 26, 1917. This letter was received by Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on
December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of acceptance of his
application. To resolve this question, we propose to go directly to the evidence of record.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial testified that he
prepared the letter introduced in evidence as Exhibit 3, of date November 26, 1917, and handed it to the local manager,
Mr. E. E. White, for signature. The witness admitted on cross-examination that after preparing the letter and giving it to he
manager, he new nothing of what became of it. The local manager, Mr. White, testified to having received the cablegram
accepting the application of Mr. Herrer from the home office on November 26, 1917. He said that on the same day he
signed a letter notifying Mr. Herrer of this acceptance. The witness further said that letters, after being signed, were sent
to the chief clerk and placed on the mailing desk for transmission. The witness could not tell if the letter had every actually
been placed in the mails. Mr. Tuason, who was the chief clerk, on November 26, 1917, was not called as a witness. For
the defense, attorney Manuel Torres testified to having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr.
Herrer mentioned his application for a life annuity, and that he said that the only document relating to the transaction in his
possession was the provisional receipt. Rafael Enriquez, the administrator of the estate, testified that he had gone through
the effects of the deceased and had found no letter of notification from the insurance company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr. Herrer that his
application had been accepted, was prepared and signed in the local office of the insurance company, was placed in the
ordinary channels for transmission, but as far as we know, was never actually mailed and thus was never received by the
applicant.
Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should be applied to the facts.
In order to reach our legal goal, the obvious signposts along the way must be noticed.
Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code of Commerce
and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of Book III and Section III of Title III of
Book III, which dealt with insurance contracts. In the Civil Code there formerly existed and presumably still exist, Chapters
II and IV, entitled insurance contracts and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915,
there was, however, in force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and health insurance. The
Act expressly repealed Title VIII of Book II and Section III of Title III of Book III of the code of Commerce. The law of
insurance is consequently now found in the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be followed in order that
there may be a contract of insurance. On the other hand, the Civil Code, in article 1802, not only describes a contact of
life annuity markedly similar to the one we are considering, but in two other articles, gives strong clues as to the proper
disposition of the case. For instance, article 16 of the Civil Code provides that "In matters which are governed by special
laws, any deficiency of the latter shall be supplied by the provisions of this Code." On the supposition, therefore, which is
incontestable, that the special law on the subject of insurance is deficient in enunciating the principles governing
acceptance, the subject-matter of the Civil code, if there be any, would be controlling. In the Civil Code is found article
1262 providing that "Consent is shown by the concurrence of offer and acceptance with respect to the thing and the
consideration which are to constitute the contract. An acceptance made by letter shall not bind the person making the
offer except from the time it came to his knowledge. The contract, in such case, is presumed to have been entered into at
the place where the offer was made." This latter article is in opposition to the provisions of article 54 of the Code of
Commerce.
If no mistake has been made in announcing the successive steps by which we reach a conclusion, then the only duty
remaining is for the court to apply the law as it is found. The legislature in its wisdom having enacted a new law on
insurance, and expressly repealed the provisions in the Code of Commerce on the same subject, and having thus left a
void in the commercial law, it would seem logical to make use of the only pertinent provision of law found in the Civil code,
closely related to the chapter concerning life annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from the date it came to
his knowledge, may not be the best expression of modern commercial usage. Still it must be admitted that its enforcement
avoids uncertainty and tends to security. Not only this, but in order that the principle may not be taken too lightly, let it be
noticed that it is identical with the principles announced by a considerable number of respectable courts in the United
States. The courts who take this view have expressly held that an acceptance of an offer of insurance not actually or
constructively communicated to the proposer does not make a contract. Only the mailing of acceptance, it has been said,
completes the contract of insurance, as the locus poenitentiae is ended when the acceptance has passed beyond the
control of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262 of the Civil Code
providing that an acceptance made by letter shall not bind the person making the offer except from the time it came to his
knowledge. The pertinent fact is, that according to the provisional receipt, three things had to be accomplished by the
insurance company before there was a contract: (1) There had to be a medical examination of the applicant; (2) there had
to be approval of the application by the head office of the company; and (3) this approval had in some way to be
communicated by the company to the applicant. The further admitted facts are that the head office in Montreal did accept
the application, did cable the Manila office to that effect, did actually issue the policy and did, through its agent in Manila,
actually write the letter of notification and place it in the usual channels for transmission to the addressee. The fact as to
the letter of notification thus fails to concur with the essential elements of the general rule pertaining to the mailing and
delivery of mail matter as announced by the American courts, namely, when a letter or other mail matter is addressed and
mailed with postage prepaid there is a rebuttable presumption of fact that it was received by the addressee as soon as it
could have been transmitted to him in the ordinary course of the mails. But if any one of these elemental facts fails to
appear, it is fatal to the presumption. For instance, a letter will not be presumed to have been received by the addressee
unless it is shown that it was deposited in the post-office, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R.
A. [N. S.], pp. 458, et seq., notes.)
We hold that the contract for a life annuity in the case at bar was not perfected because it has not been proved
satisfactorily that the acceptance of the application ever came to the knowledge of the applicant.lawph!l.net
Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000 with legal interest
from November 20, 1918, until paid, without special finding as to costs in either instance. So ordered.

[G.R. No. 112329. January 28, 2000]

VIRGINIA A. PEREZ, petitioner, vs. COURT OF APPEALS and BF LIFEMAN INSURANCE
CORPORATION, respondents.

YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts, must be assented to by both parties, either in person or through their agents and so
long as an application for insurance has not been either accepted or rejected, it is merely a proposal or an offer to make a contract.
Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9, 1993 in CA-G.R. CV 35529 entitled,
"BF Lifeman Insurance Corporations, Plaintiff-Appellant versus Virginia A. Perez, Defendant-Appellee," which declared Insurance
Policy 056300 for P50,000.00 issued by private respondent corporation in favor of the deceased Primitivo B. Perez, null and void and
rescinded, thereby reversing the decision rendered by the Regional Trial Court of Manila, Branch XVI.
The facts of the case as summarized by respondent Court of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980 for P20,000.00. Sometime in October
1987, an agent of the insurance corporation, Rodolfo Lalog, visited Perez in Guinayangan, Quezon and convinced him to apply for
additional insurance coverage of P50,000.00, to avail of the ongoing promotional discount of P400.00 if the premium were paid
annually.
On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional insurance coverage of P50,000.00. On
the same day, petitioner Virginia A. Perez, Primitivos wife, paid P2,075.00 to Lalog. The receipt issued by Lalog indicated the amount
received was a "deposit."[1] Unfortunately, Lalog lost the application form accomplished by Perez and so on October 28, 1987, he
asked the latter to fill up another application form.[2] On November 1, 1987, Perez was made to undergo the required medical
examination, which he passed.[3]
Pursuant to the established procedure of the company, Lalog forwarded the application for additional insurance of Perez, together with
all its supporting papers, to the office of BF Lifeman Insurance Corporation at Gumaca, Quezon which office was supposed to forward
the papers to the Manila office.
On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during a storm. At the time of his death,
his application papers for the additional insurance of P50,000.00 were still with the Gumaca office. Lalog testified that when he went
to follow up the papers, he found them still in the Gumaca office and so he personally brought the papers to the Manila office of BF
Lifeman Insurance Corporation. It was only on November 27, 1987 that said papers were received in Manila.
Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation approved the application and issued the
corresponding policy for the P50,000.00 on December 2, 1987.[4]
Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the deceased. She was paid P40,000.00
under the first insurance policy for P20,000.00 (double indemnity in case of accident) but the insurance company refused to pay the
claim under the additional policy coverage of P50,000.00, the proceeds of which amount to P150,000.00 in view of a triple indemnity
rider on the insurance policy. In its letter of January 29, 1988 to Virginia A. Perez, the insurance company maintained that the
insurance for P50,000.00 had not been perfected at the time of the death of Primitivo Perez. Consequently, the insurance company
refunded the amount of P2,075.00 which Virginia Perez had paid.
On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint against Virginia A. Perez seeking the
rescission and declaration of nullity of the insurance contract in question.
Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his prestations under the contract and all the
elements of a valid contract are present. She then filed a counterclaim against private respondent for the collection of P150,000.00 as
actual damages, P100,000.00 as exemplary damages, P30,000.00 as attorneys fees and P10,000.00 as expenses for litigation.
On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads as follows:
WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of defendant Virginia A. Perez,
ordering the plaintiff BF Lifeman Insurance Corporation to pay to her the face value of BF Lifeman Insurance
Policy No. 056300, plus double indemnity under the SARDI or in the total amount of P150,000.00 (any refund made
and/or premium deficiency to be deducted therefrom).
SO ORDERED.[5]
The trial court, in ruling for petitioner, held that the premium for the additional insurance of P50,000.00 had been fully paid and even
if the sum of P2,075.00 were to be considered merely as partial payment, the same does not affect the validity of the policy. The trial
court further stated that the deceased had fully complied with the requirements of the insurance company. He paid, signed the
application form and passed the medical examination. He should not be made to suffer the subsequent delay in the transmittal of his
application form to private respondents head office since these were no longer within his control.
The Court of Appeals, however, reversed the decision of the trial court saying that the insurance contract for P50,000.00 could not
have been perfected since at the time that the policy was issued, Primitivo was already dead. [6] Citing the provision in the application
form signed by Primitivo which states that:
"x x x there shall be no contract of insurance unless and until a policy is issued on this application and that the
policy shall not take effect until the first premium has been paid and the policy has been delivered to and accepted
by me/us in person while I/we, am/are in good health"
the Court of Appeals held that the contract of insurance had to be assented to by both parties and so long as the application for
insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract.
Petitioners motion for reconsideration having been denied by respondent court, the instant petition for certiorari was filed on the
ground that there was a consummated contract of insurance between the deceased and BF Lifeman Insurance Corporation and that the
condition that the policy issued by the corporation be delivered and received by the applicant in good health, is potestative, being
dependent upon the will of the insurance company, and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specified
subject by specified perils.[7] A contract, on the other hand, is a meeting of the minds between two persons whereby one binds himself,
with respect to the other to give something or to render some service.[8] Under Article 1318 of the Civil Code, there is no contract
unless the following requisites concur:
(1).......Consent of the contracting parties;
(2).......Object certain which is the subject matter of the contract;
(3).......Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical examination, his
application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The perfection of the contract of
insurance between the deceased and respondent corporation was further conditioned upon compliance with the following requisites
stated in the application form:
"there shall be no contract of insurance unless and until a policy is issued on this application and that the said
policy shall not take effect until the premium has been paid and the policy delivered to and accepted by me/us in
person while I/We, am/are in good health." [9]
The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely received the application
form and all the requisite supporting papers of the applicant. Its assent was given when it issues a corresponding policy to the
applicant. Under the abovementioned provision, it is only when the applicant pays the premium and receives and accepts the policy
while he is in good health that the contract of insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers for additional insurance coverage
were still with the branch office of respondent corporation in Gumaca and it was only two days later, or on November 27, 1987, when
Lalog personally delivered the application papers to the head office in Manila. Consequently, there was absolutely no way the
acceptance of the application could have been communicated to the applicant for the latter to accept inasmuch as the applicant at the
time was already dead. In the case of Enriquez vs. Sun Life Assurance Co. of Canada, [10]recovery on the life insurance of the deceased
was disallowed on the ground that the contract for annuity was not perfected since it had not been proved satisfactorily that the
acceptance of the application ever reached the knowledge of the applicant.
Petitioner insists that the condition imposed by respondent corporation that a policy must have been delivered to and accepted by the
proposed insured in good health is potestative being dependent upon the will of the corporation and is therefore null and void.
We do not agree.
A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is considered void. Article 1182 of the
New Civil Code states: When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall
be void.
In the case at bar, the following conditions were imposed by the respondent company for the perfection of the contract of insurance:
(a).......a policy must have been issued;
(b).......the premiums paid; and
(c).......the policy must have been delivered to and accepted by the applicant while he is in good health.
The condition imposed by the corporation that the policy must have been delivered to and accepted by the applicant while he is in
good health can hardly be considered as a potestative or facultative condition. On the contrary, the health of the applicant at the time
of the delivery of the policy is beyond the control or will of the insurance company. Rather, the condition is a suspensive one whereby
the acquisition of rights depends upon the happening of an event which constitutes the condition. In this case, the suspensive condition
was the policy must have been delivered and accepted by the applicant while he is in good health. There was non-fulfillment of the
condition, however, inasmuch as the applicant was already dead at the time the policy was issued. Hence, the non-fulfillment of the
condition resulted in the non-perfection of the contract.
As stated above, a contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So
long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. The
contract, to be binding from the date of application, must have been a completed contract, one that leaves nothing to be done, nothing
to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the
minds of the parties have met in agreement.[11]
Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It should be noted that an
application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on the application
does not constitute acceptance even though the insured has forwarded his first premium with his application. The corporation may not
be penalized for the delay in the processing of the application papers. Moreover, while it may have taken some time for the application
papers to reach the main office, in the case at bar, the same was acted upon less than a week after it was received. The processing of
applications by respondent corporation normally takes two to three weeks, the longest being a month. [12] In this case, however, the
requisite medical examination was undergone by the deceased on November 1, 1987; the application papers were forwarded to the
head office on November 27, 1987; and the policy was issued on December 2, 1987. Under these circumstances, we hold that the
delay could not be deemed unreasonable so as to constitute gross negligence.
A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy 056300 for P50,000.00 null and void
and rescinded. The Court of Appeals corrected this in its Resolution of the motion for reconsideration filed by petitioner, thus:
"Anent the appearance of the word rescinded in the dispositive portion of the decision, to which defendant-appellee
attaches undue significance and makes capital of, it is clear that the use of the words and rescinded is, as it is
hereby declared, a superfluity. It is apparent from the context of the decision that the insurance policy in question
was found null and void, and did not have to be rescinded."[13]
True, rescission presupposes the existence of a valid contract. A contract which is null and void is no contract at all and hence could
not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is AFFIRMED insofar as it declared
Insurance Policy No. 056300 for P50,000.00 issued by BF Lifeman Insurance Corporation of no force and effect and hence null and
void. No costs.
SO ORDERED.

G.R. No. L-15774 November 29, 1920

PILAR C. DE LIM, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Sanz and Luzuriaga for appellant.
Cohn and Fisher for appellee.

MALCOLM, J.:
This is an appeal by plaintiff from an order of the Court of First Instance of Zamboanga sustaining a demurrer to plaintiff's
complaint upon the ground that it fails to state a cause of action.
As the demurrer had the effect of admitting the material facts set forth in the complaint, the facts are those alleged by the
plaintiff. On July 6, 1917, Luis Lim y Garcia of Zamboanga made application to the Sun Life Assurance Company of
Canada for a policy of insurance on his life in the sum of P5,000. In his application Lim designated his wife, Pilar C. de
Lim, the plaintiff herein, as the beneficiary. The first premium of P433 was paid by Lim, and upon such payment the
company issued what was called a "provisional policy." Luis Lim y Garcia died on August 23, 1917, after the issuance of
the provisional policy but before approval of the application by the home office of the insurance company. The instant
action is brought by the beneficiary, Pilar C. de Lim, to recover from the Sun Life Assurance Company of Canada the sum
of P5,000, the amount named in the provisional policy.
The "provisional policy" upon which this action rests reads as follows:
Received (subject to the following stipulations and agreements) the sum of four hundred and thirty-three pesos,
being the amount of the first year's premium for a Life Assurance Policy on the life of Mr. Luis D. Lim y Garcia of
Zamboanga for P5,000, for which an application dated the 6th day of July, 1917, has been made to the Sun Life
Assurance Company of Canada.
The above-mentioned life is to be assured in accordance with the terms and conditions contained or inserted by
the Company in the policy which may be granted by it in this particular case for four months only from the date of
the application, provided that the Company shall confirm this agreement by issuing a policy on said application
when the same shall be submitted to the Head Office in Montreal. Should the Company not issue such a policy,
then this agreement shall be null and void ab initio, and the Company shall be held not to have been on the risk at
all, but in such case the amount herein acknowledged shall be returned.
[SEAL.] (Sgd.) T. B. MACAULAY, President.
(Sgd.) A. F. Peters, Agent.
Our duty in this case is to ascertain the correct meaning of the document above quoted. A perusal of the same many
times by the writer and by other members of the court leaves a decided impression of vagueness in the mind. Apparently
it is to be a provisional policy "for four months only from the date of this application." We use the term "apparently"
advisedly, because immediately following the words fixing the four months period comes the word "provided" which has
the meaning of "if." Otherwise stated, the policy for four months is expressly made subjected to the affirmative condition
that "the company shall confirm this agreement by issuing a policy on said application when the same shall be submitted
to the head office in Montreal." To reenforce the same there follows the negative condition
Should the company not issue such a policy, then this agreement shall be null and void ab initio, and the company shall
be held not to have been on the risk." Certainly, language could hardly be used which would more clearly stipulate that the
agreement should not go into effect until the home office of the company should confirm it by issuing a policy. As we read
and understand the so-called provisional policy it amounts to nothing but an acknowledgment on behalf of the company,
that it has received from the person named therein the sum of money agreed upon as the first year's premium upon a
policy to be issued upon the application, if the application is accepted by the company.
It is of course a primary rule that a contract of insurance, like other contracts, must be assented to by both parties either in
person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an
offer or proposal to make a contract. The contract, to be binding from the date of the application, must have been a
completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or
determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in
agreement. Our view is, that a contract of insurance was not here consummated by the parties.lawph!l.net
Appellant relies on Joyce on Insurance. Beginning at page 253, of Volume I, Joyce states the general rule concerning the
agent's receipt pending approval or issuance of policy. The first rule which Joyce lays down is this: If the act of
acceptance of the risk by the agent and the giving by him of a receipt, is within the scope of the agent's authority, and
nothing remains but to issue a policy, then the receipt will bind the company. This rule does not apply, for while here
nothing remained but to issue the policy, this was made an express condition to the contract. The second rule laid down
by Joyce is this: Where an agreement is made between the applicant and the agent whether by signing an application
containing such condition, or otherwise, that no liability shall attach until the principal approves the risk and a receipt is
given buy the agent, such acceptance is merely conditional, and it subordinated to the act of the company in approving or
rejecting; so in life insurance a "binding slip" or "binding receipt" does not insure of itself. This is the rule which we believe
applies to the instant case. The third rule announced by Joyce is this: Where the acceptance by the agent is within the
scope of his authority a receipt containing a contract for insurance for a specific time which is not absolute but conditional,
upon acceptance or rejection by the principal, covers the specified period unless the risk is declined within that period.
The case cited by Joyce to substantiate the last principle is that a Goodfellow vs. Times & Beacon Assurance Com. (17 U.
C. Q. B., 411), not available.
The two cases most nearly in point come from the federal courts and the Supreme Court of Arkansas.
In the case of Steinle vs. New York Life Insurance Co. ([1897], 81 Fed., 489} the facts were that the amount of the first
premium had been paid to an insurance agent and a receipt given therefor. The receipt, however, expressly declared that
if the application was accepted by the company, the insurance shall take effect from the date of the application but that if
the application was not accepted, the money shall be returned. The trite decision of the circuit court of appeal was, "On
the conceded facts of this case, there was no contract to life insurance perfected and the judgment of the circuit court
must be affirmed."
In the case of Cooksey vs. Mutual Life Insurance Co. ([1904], 73 Ark., 117) the person applying for the life insurance paid
and amount equal to the first premium, but the application and the receipt for the money paid, stipulated that the
insurance was to become effective only when the application was approved and the policy issued. The court held that the
transaction did not amount to an agreement for preliminary or temporary insurance. It was said:
It is not an unfamiliar custom among life insurance companies in the operation of the business, upon receipt of an
application for insurance, to enter into a contract with the applicant in the shape of a so-called "binding receipt" for
temporary insurance pending the consideration of the application, to last until the policy be issued or the application
rejected, and such contracts are upheld and enforced when the applicant dies before the issuance of a policy or final
rejection of the application. It is held, too, that such contracts may rest in parol. Counsel for appellant insists that such a
preliminary contract for temporary insurance was entered into in this instance, but we do not think so. On the contrary, the
clause in the application and the receipt given by the solicitor, which are to be read together, stipulate expressly that the
insurance shall become effective only when the "application shall be approved and the policy duly signed by the secretary
at the head office of the company and issued." It constituted no agreement at all for preliminary or temporary insurance;
Mohrstadt vs. Mutual Life Ins. Co., 115 Fed., 81, 52 C. C. A., 675; Steinle vs. New York Life Ins. Co., 81 Fed., 489, 26 C.
C. A., 491." (See further Weinfeld vs. Mutual Reserve Fund Life Ass'n. [1892], 53 Fed, 208' Mohrstadt vs. Mutual Life
Insurance Co. [1902], 115 Fed., 81; Insurance co. vs. Young's Administrator [1875], 90 U. S., 85; Chamberlain vs.
Prudential Insurance Company of America [1901], 109 Wis., 4; Shawnee Mut. Fire Ins. Co. vs. McClure [1913], 39 Okla.,
509; Dorman vs. Connecticut Fire Ins. Co. [1914], 51 contra, Starr vs. Mutual Life Ins. Co. [1905], 41 Wash., 228.)
We are of the opinion that the trial court committed no error in sustaining the demurrer and dismissing the case. It is to be
noted, however, that counsel for appellee admits the liability of the company for the return of the first premium to the
estate of the deceased. It is not to be doubted but that the Sun Life Assurance Company of Canada will immediately, on
the promulgation of this decision, pay to the estate of the late Luis Lim y Garcia the of P433.
The order appealed from, in the nature of a final judgment is affirmed, without special finding as to costs in this instance.
So ordered.

G.R. No. L-41794 August 30, 1935

SEGUNDINA MUSGI, ET AL., plaintiffs-appellees,
vs.
WEST COAST LIFE INSURANCE CO., defendant-appellant.
Courtney Whitney for appellants.
Laurel, Del Rosario and Sabido for appellees.

IMPERIAL, J.:
The plaintiffs, as beneficiaries, brought suit against the defendant to recover the value of two life insurance policies. The
defendant appealed from a judgment sentencing it to pay the plaintiffs the amount of said policies, and the costs.
The principal facts of the case are embodied in the following written stipulation entered into by the parties:
1. That Arsenio T. Garcia was insured by the defendant company in the sum of P5,000 as evidenced by Policy
No. 129454 effective as of July 25, 1931, hereby attached and marked as Exhibit A;
2. That the said Arsenio T. Garcia was again insured by the defendant company in the sum of P10,000 effective
as of October 20, 1931, as evidenced by Policy No. 130381 hereby attached and marked as Exhibit B;
3. That the two policies aforementioned were valid and subsisting at the time of the death of the insured on
December 30, 1932; the fact of said death is evidenced by the accompanying death certificate issued by the Civil
Register of Pasay, Rizal, which is marked as Exhibit C;
4. That the plaintiffs herein are the beneficiaries in said policies, Segundina Musgi of Policy No. 129454, and
Buenaventura Garcia of Policy No. 130381;
5. That demand was made upon the defendant company for the payment of the two policies above referred to, but
the defendant company refused to pay on the grounds stated in the answer.
The two policies were issued upon applications filed by the insured on July 20, 1931 and October 15, of the same year,
respectively. In both applications, the insured had to answer inquiries as to his state of health and that of his family, which
he did voluntarily. In each of the said applications the following question was asked: "1. What physician or practitioner or
any other person not named above have you consulted or been treated by, and for what illness, or ailment? (If none, so
state.)" In the first application, the insured answered "None", and in the second, "No". These answers of the insured as
well as his other statements contained in his applications were one of the causes or considerations for the issuance of the
policies, and they so positively appear therein. After the death of the insured and as a result of the demand made by the
beneficiaries upon the defendant to pay the value of the policies, the latter discovered that the aforementioned answers
were false and fraudulent, because the truth was that the insured, before answering and signing the applications and
before the issuance of the policies, had been treated in the General Hospital by a lady physician for different ailments. It
indisputably appears that between May 13 and 19, 1929, the insured had entered the General Hospital in Manila, and was
treated by Doctor Pilar V. Cruz for peptic ulcer and chronic catarrhal nasopharyngitis; on August 5, 1930, he entered the
same hospital and was treated by the same physician for chronic pyelocystitis and for incipient pulmonary tuberculosis; on
the 13th of the same month he returned to the hospital and was treated by the same physician for chronic suppurative
pyelocystitis and for chronic bronchitis; on the 20th of the same month he again entered the hospital and was treated by
the same doctor for acute tracheo-bronchitis and chronic suppurative pyelocystitis; on the 27th of the same month he
again entered the same hospital and was treated for the same ailments; on December 11, 1930, he again entered the
hospital and was treated for the same ailments; on the 18th of the same month, he again entered the hospital and was
treated for the same ailments; on the 28th of the same month he again entered the hospital and was treated for the same
ailments, and, finally, on January 11, 1931, he again entered the hospital and was treated by the same doctor for the
same ailments.
The defendant contended at the outset that the two policies did not create any valid obligation because they were
fraudulently obtained by the insured. The appealed decision holds that the health of the insured before the acceptance of
his applications and the issuance of the policies could neither be discussed nor questioned by the defendant, because the
insured was examined by three physicians of the company and all of them unanimously certified that he was in good
health and that he could be properly insured. The question here is not whether the physicians' reports or the answers
which the insured gave to them relative to his health were correct or not. It is admitted that such information was
substantially correct, in the sense that the physicians of the defendant who examined the insured, for failure to make a
detailed examination, did not discover the ailments suffered by the insured. However, the question raised for our
determination is whether the two answers given by the insured in his applications are false, and if they were the cause, or
one of the causes, which induced the defendant to issue the policies. On the first point, the facts above set out leave no
room for doubt. The insured knew that he had suffered from a number of ailments, including incipient pulmonary
tuberculosis, before subscribing the applications, yet he concealed them and omitted the hospital where he was confined
as well as the name of the lady physician who treated him. That this concealment and the false statements constituted
fraud, is likewise clear, because the defendant by reason thereof accepted the risk which it would otherwise have flatly
refused. When not otherwise specially provided for by the Insurance Law, the contract of life insurance is governed by the
general rules of the civil law regarding contracts. Article 1261 of the Civil Code provides that there is no contract unless
there should be, in addition to consent and a definite object, a consideration for the obligation established. And article
1276 provides that the statement of a false consideration shall render the contract void. The two answers being one of the
considerations of the policies, and it appearing that they are false and fraudulent, it is evident that the insurance contracts
were null and void and did not give rise to any right to recover their value or amount. A similar case was already decided
by this court in Argente vs. West Coast Life Insurance Co. (51 Phil., 725). In that case the insured concealed from the
physician who examined her that she had consulted and had been treated by another physician for cerebral congestion
and Bell's Palsy, and that she was addicted to alcohol, so much so that on one occasion she was confined in the San
Lazaro Hospital suffering from "alcoholism"; this court held that such concealments and false and fraudulent statements
rendered the policy null and void. In discussing the legal phase of the case, this court said:
One ground for the rescission of a contract of insurance under the Insurance Act is a "concealment", which in
section 25 is defined as "A neglect to communicate that which a party knows and ought to communicate".
Appellant argues that the alleged concealment was immaterial and insufficient to avoid the policy. We cannot
agree. In an action on a life insurance policy where the evidence conclusively shows that the answers to
questions concerning diseases were untrue, the truth or falsity of the answers become the determining factor. If
the policy was procured by fraudulent representations, the contract of insurance apparently set forth therein was
never legally existent. It can fairly be assumed that had the true facts been disclosed by the assured, the
insurance would never have been granted.
In Joyce, The Law of Insurance, second edition, volume 3, Chapter LV, is found the following:
"Concealment exists where the assured has knowledge of a fact material to the risk, and honesty, good faith and
fair dealing requires that he should communicate it to the assured, but he designedly and intentionally withholds
the same.
"Another rule is that if the assured undertakes to state all the circumstances affecting the risk, a full and fair
statement of all is required.
"It is also held that the concealment must, in the absence of inquiries, be not only material, but fraudulent, or the
fact must have been intentionally withheld; so it is held under English law that if no inquiries are made and no
fraud or design to conceal enters into the concealment the contract is not avoided. And it is determined that even
though silence may constitute misrepresentation or concealment it is not of itself necessarily so as it is a question
of fact. Nor is there a concealment justifying a forfeiture where the fact of insanity is not disclosed no questions
being asked concerning the same. . . .
"But it would seem that if a material fact is actually known to the assured, its concealment must of itself
necessarily be a fraud, and if the fact is one which the assured ought to know, or is presumed to know, the
presumption of knowledge ought to place the assured in the same position as in the former case with relation to
material facts; and if the jury in such cases find the fact material, and one tending to increase the risk, it is difficult
to see how the inference of a fraudulent intent or intentional concealment can be avoided. And it is declared that if
a material fact is concealed by assured it is equivalent to a false representation that it does not exist and that the
essentials are the truth of the representations whether they were intended to mislead and did insurer accept them
as true and act upon them to his prejudice. So it is decided that under a stipulation voiding the policy for
concealment or misrepresentation of any material fact or if his interest is not truly stated or is other than the sole
and unconditional ownership the facts are unimportant that insured did not intend to deceive or withhold
information as to encumbrances even though no questions were asked. And if insured while being examined for
life insurance, and knowing that she had heart disease, falsely stated that she was in good health, and though
she could not read the application, it was explained to her and the questions asked through an interpreter, and the
application like the policy contained a provision that no liability should be incurred unless the policy was delivered
while the insured was in good health, the court properly directed a verdict for the insurer, though a witness who
was present at the examination testified that the insured was not asked whether she had heart disease.
xxx xxx xxx
"The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer into
accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the
assured will disclose every material fact within his actual or presumed knowledge, is misled into a belief that the
circumstance withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it
 does not exist. The principal question, therefore, must be, Was the assurer misled or deceived into entering a
contract obligation or in fixing the premium of insurance by a withholding of material information or facts within the
assured's knowledge or presumed knowledge?
"It therefore follows that the assurer in assuming a risk is entitled to know every material fact of which the assured
has exclusive or peculiar knowledge, as well as all material facts which directly tend to increase the hazard or risk
which are known by the assured, or which ought to be or are presumed to be known by him. And a concealment
of such facts vitiates the policy. "It does not seem to be necessary ... that the ... suppression of the truth should
have been willful." If it were but an inadvertent omission, yet if it were material to the risk and such as the plaintiff
should have known to be so, it would render the policy void. But it is held that if untrue or false answers are given
in response to inquiries and they relate to material facts the policy is avoided without regard to the knowledge or
fraud of assured, although under the statute statements are representations which must be fraudulent to avoid the
policy. So under certain codes the important inquiries are whether the concealment was willful and related to a
matter material to the risk.
xxx xxx xxx
"If the assured has exclusive knowledge of material facts, he should fully and fairly disclose the same, whether he
believes them material or not. But notwithstanding this general rule it will not infrequently happen, especially in life
risks, that the assured may have a knowledge actual or presumed of material facts, and yet entertain an honest
belief that they are not material. ... The determination of the point whether there has or has not been a material
concealment must rest largely in all cases upon the form of the questions propounded and the exact terms of the
contract. Thus, where in addition to specifically named diseases the insured was asked whether he had had any
sickness within ten years, to which he answered "No", and it was proven that within that period he had had a
slight attack of pharyngitis, it was held a question properly for the jury whether such an inflammation of the throat
was a "sickness" within the intent of the inquiry, and the court remarked on the appealed decision that if it could
be held as a matter of law that the policy was thereby avoided, then it was a mere devise on the part of insurance
companies to obtain money without rendering themselves liable under the policy. . . .
". . . The question should be left to the jury whether the assured truly represented the state of his health so as not
to mislead or deceive the insurer; and if he did not deal in good faith with the insurer in that matter, then the
inquiry should be made, Did he know the state of his health so as to be able to furnish a proper answer to such
questions as are propounded. A Massachusetts case, if construed as it is frequently cited, would be opposed to
the above conclusion; but, on the contrary, it sustains it, for the reason that symptoms of consumption had so far
developed themselves within a few months prior to effecting the insurance as to induce a reasonable belief that
the applicant had that fatal disease, and we should further construe this case as establishing the rule that such a
matter cannot rest alone upon the assured's belief irrespective of what is a reasonable belief, but that it ought to
be judged by the criterion whether the belief is one fairly warranted by the circumstances. A case in Indiana,
however, holds that if the assured has some affection or ailment of one or more of the organs inquired about so
well-defined and marked as to materially derange for a time the functions of such organ, as in the case of Bright's
disease, the policy will be avoided by a nondisclosure, irrespective of the fact whether the assured knew of such
ailment or not. . . ."
In view of the foregoing, we are of the opinion that the appellant's first two assignments of error are well founded,
wherefore, the appealed judgment is reversed and the defendant absolved from the complaint, with the costs of both
instances to the plaintiffs. So ordered.

[G.R. No. 156167. May 16, 2005]

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.

PUNO, J.:
 Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner GULF
RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner assails the
appellate court decision[1] which dismissed its two appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the insurance companys
liability for earthquake damage to petitioners properties. Petitioner avers that, pursuant to its earthquake shock
endorsement rider, Insurance Policy No. 31944 covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort insured originally with the
American Home Assurance Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from 1984-85; 1985-
86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs. 1, 2, 3 and 4 respectively), the risk of loss from earthquake shock was
extended only to plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and two (2)
swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies referred to the two (2) swimming pools only (Exhs. 1-B, 2-
B, 3-B and F-2); that subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-4182383-0 covering the period March 14,
1988 to March 14, 1989 (Exhs. G also G-1) and in said policy the earthquake endorsement clause as indicated in Exhibits C-1, D-1,
Exhibits E and F-1 was deleted and the entry under Endorsements/Warranties at the time of issue read that plaintiff renewed its policy
with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which carried the
entry under Endorsement/Warranties at Time of Issue, which read Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the
amount of P10,700.00 and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:
Item -P7,691,000.00 - on the Clubhouse only
@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:
a) Tilter House- P19,800.00- 0.551%
b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 206-4568061-9 (Exh. H) provided
that the policy wording and rates in said policy be copied in the policy to be issued by defendant; that defendant issued Policy No.
31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92
(Exh. I); that in the computation of the premium, defendants Policy No. 31944 (Exh. I), which is the policy in question, contained on
the right-hand upper portion of page 7 thereof, the following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against earthquake shock (ES); that in all
the six insurance policies (Exhs. C, D, E, F, G and H), the premium against the peril of earthquake shock is the same, that is P393.00
(Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and
in Policy No. 31944 issued by defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the sum included additional premium the Company agrees,
notwithstanding what is stated in the printed conditions of this policy due to the contrary, that this insurance covers loss or damage to
shock to any of the property insured by this Policy occasioned by or through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-
B, 5-A, 6-D and 7-C);
that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16, 1990 an earthquake struck Central
Luzon and Northern Luzon and plaintiffs properties covered by Policy No. 31944 issued by defendant, including the two swimming
pools in its Agoo Playa Resort were damaged.[2]
After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance Policy No.
31944 for damages on its properties. Respondent instructed petitioner to file a formal claim, then assigned the
investigation of the claim to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc. [3] On July 30, 1990,
respondent, through its adjuster, requested petitioner to submit various documents in support of its claim. On August 7,
1990, Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon,[4]rendered a preliminary
report[5] finding extensive damage caused by the earthquake to the clubhouse and to the two swimming pools. Mr. de
Leon stated that except for the swimming pools, all affected items have no coverage for earthquake shocks. [6] On August
11, 1990, petitioner filed its formal demand[7] for settlement of the damage to all its properties in the Agoo Playa Resort.
On August 23, 1990, respondent denied petitioners claim on the ground that its insurance policy only afforded earthquake
shock coverage to the two swimming pools of the resort. [8] Petitioner and respondent failed to arrive at a
settlement.[9] Thus, on January 24, 1991, petitioner filed a complaint [10] with the regional trial court of Pasig praying for the
payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with interest thereon, as computed
under par. 29 of the policy (Annex B) until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on account of defendants
refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.[11]
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims. [12]
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of earthquake shock, the same
premium it paid against earthquake shock only on the two swimming pools in all the policies issued by AHAC(AIU) (Exhibits C, D,
E, F and G). From this fact the Court must consequently agree with the position of defendant that the endorsement rider (Exhibit 7-C)
means that only the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the language used in an insurance
contract or application is such as to create ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the language used in the policy in litigation is clear and
unambiguous hence there is no need for interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had earthquake shock coverage and were heavily
damaged by the earthquake which struck on July 16, 1990. Defendant having admitted that the damage to the swimming pools was
appraised by defendants adjuster at P386,000.00, defendant must, by virtue of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is liable only for the damage
caused to the two (2) swimming pools and that defendant has made known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed for by plaintiff. As to the counterclaims of defendant, the Court
does not agree that the action filed by plaintiff is baseless and highly speculative since such action is a lawful exercise of the plaintiffs
right to come to Court in the honest belief that their Complaint is meritorious. The prayer, therefore, of defendant for damages is
likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE HUNDRED EIGHTY SIX
THOUSAND PESOS (P386,000.00) representing damage to the two (2) swimming pools, with interest at 6% per annum from the date
of the filing of the Complaint until defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.[13]
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of Appeals based
on the following assigned errors:[14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY RECOVER FOR THE DAMAGE
TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE
CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES
SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO RECOVER UNDER DEFENDANT-
APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID
POLICY ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED TO THE DAMAGES
CLAIMED, WITH INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it attorneys fees and
damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not convinced that the last two (2) insurance
contracts (Exhs. G and H), which the plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance contract with
Philippine Charter Insurance Corporation is said to have been based and copied (Exh. I), covered an extended earthquake shock
insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the imposition of interest 24% on the
insurance claim and 6% on loss of income allegedly amounting to P4,280,000.00. Since the defendant-appellant has expressed its
willingness to pay the damage caused on the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable
only, it then cannot be said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that the award thereof is subject to the sound
discretion of the court. Thus, if such discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et al., G.R. No.
115838, July 18, 2002). Moreover, being the award thereof an exception rather than a rule, it is necessary for the court to make
findings of facts and law that would bring the case within the exception and justify the grant of such award (Country Bankers
Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding
that the plaintiff-appellants action is not baseless and highly speculative, We find that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the Trial Court hereby
AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues: [16]
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS INSURANCE POLICY
NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED
THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR DAMAGES WITH
INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties insured and not only the
swimming pools. It used the words any property insured by this policy, and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the body of
the insurance policy itself, which states that it is [s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake
Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On Long Term Policies. [17]
Third, that the qualification referring to the two swimming pools had already been deleted in the earthquake shock
endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it deleted the said
qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the insurance
policy, because the rider is the more deliberate expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties enumerated at the
time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner and against
respondent. It was respondent which caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be interpreted as a
caveat on the standard fire insurance policy, such as to remove the two swimming pools from the coverage for the risk of
fire. It should not be used to limit the respondents liability for earthquake shock to the two swimming pools only.
 Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under the extended
coverage. The premium for the earthquake shock coverage was already included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend earthquake shock
coverage to all insured properties. When it secured an insurance policy from respondent, petitioner told respondent that it
wanted an exact replica of its latest insurance policy from American Home Assurance Company (AHAC-AIU), which
covered all the resorts properties for earthquake shock damage and respondent agreed. After the July 16, 1990
earthquake, respondent assured petitioner that it was covered for earthquake shock. Respondents insurance adjuster,
Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the necessary documents for its building
claims and other repair costs. Thus, under the doctrine of equitable estoppel, it cannot deny that the insurance policy it
issued to petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the Revised Rules of
Court as its remedy, and there is no need for calibration of the evidence in order to establish the facts upon which this
petition is based.
On the other hand, respondent made the following counter arguments: [18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended coverage against
earthquake shock to petitioners insured properties other than on the two swimming pools. Petitioner admitted that from
1984 to 1988, only the two swimming pools were insured against earthquake shock. From 1988 until 1990, the provisions
in its policy were practically identical to its earlier policies, and there was no increase in the premium paid. AHAC-AIU, in a
letter[19] by its representative Manuel C. Quijano, categorically stated that its previous policy, from which respondents
policy was copied, covered only earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy only covered
earthquake shock damage on the two swimming pools. The amount was the same amount paid by petitioner for
earthquake shock coverage on the two swimming pools from 1990-1991. No additional premium was paid to warrant
coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the two
swimming pools in the policy schedule did not expand the earthquake shock coverage to all of petitioners properties. As
per its agreement with petitioner, respondent copied its policy from the AHAC-AIU policy provided by petitioner. Although
the first five policies contained the said qualification in their riders title, in the last two policies, this qualification in the title
was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This inadvertence
did not make the policy incomplete, nor did it broaden the scope of the endorsement whose descriptive title was merely
enumerated. Any ambiguity in the policy can be easily resolved by looking at the other provisions, specially the
enumeration of the items insured, where only the two swimming pools were noted as covered for earthquake shock
damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase Item
5 P393,000.00 on the two swimming pools only (against the peril of earthquake shock only) meant that only the swimming
pools were insured for earthquake damage. The same phrase is used in toto in the policies from 1989 to 1990, the only
difference being the designation of the two swimming pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the properties
covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium for coverage of the swimming
pools against earthquake shock. No other premium was paid for earthquake shock coverage on the other properties. In
addition, the use of the qualifier ANY instead of ALL to describe the property covered was done deliberately to enable the
parties to specify the properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included in the
earthquake shock coverage. Petitioners own evidence shows that it only required respondent to follow the exact
provisions of its previous policy from AHAC-AIU. Respondent complied with this requirement. Respondents only deviation
from the agreement was when it modified the provisions regarding the replacement cost endorsement. With regard to the
issue under litigation, the riders of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from maintaining that
only the two swimming pools were covered for earthquake shock. The adjusters letter notifying petitioner to present
certain documents for its building claims and repair costs was given to petitioner before the adjuster knew the full
coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after the descriptive name
or title of the Earthquake Shock Endorsement. However, the words of the policy reflect the parties clear intention to limit
earthquake shock coverage to the two swimming pools.
 Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any deficiency
nor did it institute any action to reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since respondent
was willing and able to pay for the damage caused on the two swimming pools, it cannot be considered to be in default,
and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock only) [20]
Second, under the breakdown for premium payments,[21] it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.00[22]
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or indirectly of any of the
following occurrences, namely:--
(a) Earthquake, volcanic eruption or other convulsion of nature. [23]
Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the Perils of Explosion,
Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN EXCESS OF FIVE
MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY HEREBY
UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . . additional premium the Company
agrees, notwithstanding what is stated in the printed conditions of this Policy to the contrary, that this insurance covers loss or damage
(including loss or damage by fire) to any of the property insured by this Policy occasioned by or through or in consequence of
Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby expressly varied) and that any
reference therein to loss or damage by fire should be deemed to apply also to loss or damage occasioned by or through or in
consequence of Earthquake.[24]
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the earthquake shock
coverage. Thus, the policy extended earthquake shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance with each
other.[25] All its parts are reflective of the true intent of the parties. The policy cannot be construed piecemeal. Certain
stipulations cannot be segregated and then made to control; neither do particular words or phrases necessarily determine
its character. Petitioner cannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All
the provisions and riders, taken and interpreted together, indubitably show the intention of the parties to extend
earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the parties to extend
earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. Thus, an insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
 3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and
5. In consideration of the insurer's promise, the insured pays a premium.[26] (Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured against a
specified peril.[27] In fire, casualty, and marine insurance, the premium payable becomes a debt as soon as the risk
attaches.[28] In the subject policy, no premium payments were made with regard to earthquake shock coverage, except on
the two swimming pools. There is no mention of any premium payable for the other resort properties with regard to
earthquake shock. This is consistent with the history of petitioners previous insurance policies from AHAC-AIU. As borne
out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the period from
March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the two swimming pools
only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a provision here
that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the procurement of
this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to your
instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give written
instruction to Forte Insurance Agency advising it that the earthquake shock coverage must extend to all
properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect of
extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there was an earthquake
tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to your
instructions that all properties must be covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance Company marked Exhibit G?
 Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no more
limitation referring to the two swimming pools only, I was contented already that the previous limitation
pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA Warranty & Annual
Payment Agreement on Long Term Policies[29] to the insurance policy as proof of the intent of the parties to extend the
coverage for earthquake shock. However, this phrase is merely an enumeration of the descriptive titles of the riders,
clauses, warranties or endorsements to which the policy is subject, as required under Section 50, paragraph 2 of the
Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the coverage to the two
swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the testimony of Juan Baranda
III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously marked by counsel for
defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these six (6) policies issued
by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries an
earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated in
Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake shock as
provided for in each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as provided for in each of the six
(6) policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in the Clauses
and Warranties: Item 5 only (Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools we do
cover earthquake shock. For building we covered it for full earthquake coverage which includes earthquake
shock
COURT:
 As far as earthquake shock endorsement you do not have a specific coverage for other things other than
swimming pool? You are covering building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or another we can issue
earthquake shock solely but that the moment I see this, the thing that comes to my mind is either insuring a
swimming pool, foundations, they are normally affected by earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive [remained]
its coverage against earthquake shock to two (2) swimming pools only but that Exhibits G and H
respectively entend the coverage against earthquake shock to all the properties indicated in the respective
schedules attached to said policies, what can you say about that testimony of plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure you
that this one covers the two swimming pools with respect to earthquake shock endorsement. Based on it, if
we are going to look at the premium there has been no change with respect to the rates. Everytime (sic)
there is a renewal if the intention of the insurer was to include the earthquake shock, I think there is a
substantial increase in the premium. We are not only going to consider the two (2) swimming pools of the
other as stated in the policy. As I see, there is no increase in the amount of the premium. I must say that
the coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are going to do some
computation based on the rates you will arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to during your
direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2) swimming pools was deleted
from the policies issued by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of the qualifying phrase for
the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company
underwriter, we do not cover. . it was inadvertent because of the previous policies that we have issued with
no specific attachments, premium rates and so on. It was inadvertent, sir.
 The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts to the
issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the earthquake shock
endorsement included all its properties in the resort. Respondent only insured the properties as intended by the petitioner.
Petitioners own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty. Omlas (sic)
to copy from Exhibit H for purposes of procuring the policy from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as this American Home
Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging will be
limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of coverage
of Exhibits I and H sometime in the third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as scope
of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy wordings and
rates were copied from the insurance policy I sent them but it was only when this case erupted that we
discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time
between those indicated in Exhibit I and those indicated in Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the same P393,000.00 on
the two (2) swimming pools only against the peril of earthquake shock which I understood before that this
provision will have to be placed here because this particular provision under the peril of earthquake shock
only is requested because this is an insurance policy and therefore cannot be insured against fire, so this
has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved. Atty. Umlas
categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne Adjusters and
Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors, Inc., respondent never meant
to lead petitioner to believe that the endorsement for earthquake shock covered properties other than the two swimming
pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the policy
issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance
coverage policy and it was indicated under Item 3 specifically that the coverage is only for earthquake
shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had found out in the
 policy and he confirmed to me indeed only Item 3 which were the two swimming pools have coverage for
earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the swimming pools
all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I found out that under Item
3 it was specific on the wordings that on the two swimming pools only, then enclosed in parenthesis
(against the peril[s] of earthquake shock only), and secondly, when I examined the summary of premium
payment only Item 3 which refers to the swimming pools have a computation for premium payment for
earthquake shock and all the other items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the general rule that
insurance contracts are contracts of adhesion which should be liberally construed in favor of the insured and strictly
against the insurer company which usually prepares it.[31] A contract of adhesion is one wherein a party, usually a
corporation, prepares the stipulations in the contract, while the other party merely affixes his signature or his "adhesion"
thereto. Through the years, the courts have held that in these type of contracts, the parties do not bargain on equal
footing, the weaker party's participation being reduced to the alternative to take it or leave it. Thus, these contracts are
viewed as traps for the weaker party whom the courts of justice must protect. [32] Consequently, any ambiguity therein is
resolved against the insurer, or construed liberally in favor of the insured. [33]
The case law will show that this Court will only rule out blind adherence to terms where facts and circumstances will
show that they are basically one-sided.[34] Thus, we have called on lower courts to remain careful in scrutinizing the
factual circumstances behind each case to determine the efficacy of the claims of contending parties. In Development
Bank of the Philippines v. National Merchandising Corporation, et al.,[35] the parties, who were acute businessmen of
experience, were presumed to have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it did not know
the provisions of the policy. From the inception of the policy, petitioner had required the respondent to copy verbatim the
provisions and terms of its latest insurance policy from AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct
participant in securing the insurance policy of petitioner, is reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or exact provisions of the previous insurance policy we had
with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American Home
Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him that the
policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-9 in drafting
its Insurance Policy No. 31944. It is true that there was variance in some terms, specifically in the replacement cost
endorsement, but the principal provisions of the policy remained essentially similar to AHAC-AIUs policy. Consequently,
we cannot apply the "fine print" or "contract of adhesion" rule in this case as the parties intent to limit the coverage of the
policy to the two swimming pools only is not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is dismissed. No
costs. SO ORDERED.

G.R. No. 125678 March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner
Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble,
diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details). 1
The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued
Health Care Agreement No. P010194. Under the agreement, 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 Code6 does not apply.1wphi1.nt
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.17In 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
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated
December 14, 1995 is AFFIRMED.
SO ORDERED.