THIRD DIVISION

[G.R. No. 112360. July 18, 2000]

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT

OF APPEALS and TRANSWORLD KNITTING MILLS,
INC., respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules

of Court seeking to annul and set aside the July 15, 1993 Decision and
[1]

October 22, 1993 Resolution of the Court of Appeals in CA-G.R. CV

[2] [3]

NO. 28779, which modified the Ruling of the Regional Trial Court of
[4]

Pasig, Branch 161, in Civil Case No. 46106.

The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal

Insurance) issued Fire Insurance Policy No. 45727 in favor of
Transworld Knitting Mills, Inc. (Transworld), initially for One Million
(P1,000,000.00) Pesos and eventually increased to One Million Five
Hundred Thousand (P1,500,000.00) Pesos, covering the period from
August 14, 1980 to March 13, 1981.

Pertinent portions of subject policy on the buildings insured, and

location thereof, read:

"On stocks of finished and/or unfinished products, raw materials

and supplies of every kind and description, the properties of the
Insureds and/or held by them in trust, on commission or on joint
account with others and/or for which they (sic) responsible in case
of loss whilst contained and/or stored during the currency of this
Policy in the premises occupied by them forming part of the
buildings situate (sic) within own Compound at MAGDALO
STREET, BARRIO UGONG, PASIG, METRO MANILA,
PHILIPPINES, BLOCK NO. 601.

xxx...............xxx...............xxx

Said building of four-span lofty one storey in height with

mezzanine portions is constructed of reinforced concrete and
hollow blocks and/or concrete under galvanized iron roof and
occupied as hosiery mills, garment and lingerie factory, transistor-
 stereo assembly plant, offices, warehouse and caretaker's
quarters.

'Bounds in front partly by one-storey concrete building under

galvanized iron roof occupied as canteen and guardhouse, partly
by building of two and partly one storey constructed of concrete
below, timber above undergalvanized iron roof occupied as
garage and quarters and partly by open space and/or tracking/
packing, beyond which is the aforementioned Magdalo Street; on
its right and left by driveway, thence open spaces, and at the rear
by open spaces.'" [5]

The same pieces of property insured with the petitioner were also
insured with New India Assurance Company, Ltd., (New India).

On January 12, 1981, fire broke out in the compound of Transworld,

razing the middle portion of its four-span building and partly gutting the
left and right sections thereof. A two-storey building (behind said four-
span building) where fun and amusement machines and spare parts
were stored, was also destroyed by the fire.

Transworld filed its insurance claims with Rizal Surety & Insurance
Company and New India Assurance Company but to no avail.

On May 26, 1982, private respondent brought against the said

insurance companies an action for collection of sum of money and
damages, docketed as Civil Case No. 46106 before Branch 161 of the
then Court of First Instance of Rizal; praying for judgment ordering Rizal
Insurance and New India to pay the amount of P2,747, 867.00 plus
legal interest, P400,000.00 as attorney's fees, exemplary damages,
expenses of litigation of P50,000.00 and costs of suit. [6]

Petitioner Rizal Insurance countered that its fire insurance policy sued
upon covered only the contents of the four-span building, which was
partly burned, and not the damage caused by the fire on the two-storey
annex building.[7]

On January 4, 1990, the trial court rendered its decision; disposing as

follows:

"ACCORDINGLY, judgment is hereby rendered as follows:

(1)Dismissing the case as against The New India Assurance Co.,

Ltd.;
 (2) Ordering defendant Rizal Surety And Insurance Company to
pay Transwrold (sic) Knitting Mills, Inc. the amount of P826,
500.00 representing the actual value of the losses suffered by it;
and

(3) Cost against defendant Rizal Surety and Insurance Company.

SO ORDERED." [8]

Both the petitioner, Rizal Insurance Company, and private respondent,

Transworld Knitting Mills, Inc., went to the Court of Appeals, which
came out with its decision of July 15, 1993 under attack, the decretal
portion of which reads:

"WHEREFORE, and upon all the foregoing, the decision of the

court below is MODIFIED in that defendant New India Assurance
Company has and is hereby required to pay plaintiff-appellant the
amount of P1,818,604.19 while the other Rizal Surety has to pay
the plaintiff-appellant P470,328.67, based on the actual losses
sustained by plaintiff Transworld in the fire, totalling
P2,790,376.00 as against the amounts of fire insurance
coverages respectively extended by New India in the amount of
P5,800,000.00 and Rizal Surety and Insurance Company in the
amount of P1,500,000.00.

No costs.

SO ORDERED." [9]

On August 20, 1993, from the aforesaid judgment of the Court of

Appeals New India appealed to this Court theorizing inter alia that the
private respondent could not be compensated for the loss of the fun and
amusement machines and spare parts stored at the two-storey building
because it (Transworld) had no insurable interest in said goods or items.

On February 2, 1994, the Court denied the appeal with finality in G.R.
No. L-111118 (New India Assurance Company Ltd. vs. Court of
Appeals).

Petitioner Rizal Insurance and private respondent Transworld,

interposed a Motion for Reconsideration before the Court of Appeals,
and on October 22, 1993, the Court of Appeals reconsidered its
decision of July 15, 1993, as regards the imposition of interest, ruling
thus:
 "WHEREFORE, the Decision of July 15, 1993 is amended but
only insofar as the imposition of legal interest is concerned, that,
on the assessment against New India Assurance Company on the
amount of P1,818,604.19 and that against Rizal Surety &
Insurance Company on the amount of P470,328.67, from May 26,
1982 when the complaint was filed until payment is made. The
rest of the said decision is retained in all other respects.

SO ORDERED." [10]

Undaunted, petitioner Rizal Surety & Insurance Company found its way
to this Court via the present Petition, contending that:

I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT

THE ANNEX BUILDING WHERE THE BULK OF THE BURNED
PROPERTIES WERE STORED, WAS INCLUDED IN THE
COVERAGE OF THE INSURANCE POLICY ISSUED BY RIZAL
SURETY TO TRANSWORLD.

II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B)

ERRED IN NOT CONSIDERING THE PICTURES (EXHS. 3 TO
7-C-RIZAL SURETY), TAKEN IMMEDIATELY AFTER THE FIRE,
WHICH CLEARLY SHOW THAT THE PREMISES OCCUPIED
BY TRANSWORLD, WHERE THE INSURED PROPERTIES
WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.

III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING

THAT TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH
AND WITH MALICE IN FILING ITS CLEARLY UNFOUNDED
CIVIL ACTION, AND IN NOT ORDERING TRANSWORLD TO
PAY TO RIZAL SURETY MORAL AND PUNITIVE DAMAGES
(ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND
EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL
CODE). [11]

The Petition is not impressed with merit.

It is petitioner's submission that the fire insurance policy litigated upon

protected only the contents of the main building (four-span), and did
[12]

not include those stored in the two-storey annex building. On the other
hand, the private respondent theorized that the so called "annex" was
not an annex but was actually an integral part of the four-span
building and therefore, the goods and items stored therein were
[13]

covered by the same fire insurance policy.

Resolution of the issues posited here hinges on the proper interpretation
of the stipulation in subject fire insurance policy regarding its coverage,
which reads:

"xxx contained and/or stored during the currency of this Policy in

the premises occupied by them forming part of the buildings
situate (sic) within own Compound xxx"

Therefrom, it can be gleaned unerringly that the fire insurance policy in

question did not limit its coverage to what were stored in the four-span
building. As opined by the trial court of origin, two requirements must
concur in order that the said fun and amusement machines and spare
parts would be deemed protected by the fire insurance policy under
scrutiny, to wit:

"First, said properties must be contained and/or stored in the

areas occupied by Transworld and second, said areas must form
part of the building described in the policy xxx"
[14]

'Said building of four-span lofty one storey in height

with mezzanine portions is constructed of reinforced
concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo
assembly plant, offices, ware house and caretaker's
quarter.'

The Court is mindful of the well-entrenched doctrine that factual findings

by the Court of Appeals are conclusive on the parties and not
reviewable by this Court, and the same carry even more weight when
the Court of Appeals has affirmed the findings of fact arrived at by the
lower court.[15]

In the case under consideration, both the trial court and the Court of
Appeals found that the so called "annex " was not an annex building but
an integral and inseparable part of the four-span building described in
the policy and consequently, the machines and spare parts stored
therein were covered by the fire insurance in dispute. The letter-report
of the Manila Adjusters and Surveyor's Company, which petitioner itself
cited and invoked, describes the "annex" building as follows:

"Two-storey building constructed of partly timber and partly

concrete hollow blocks under g.i. roof which is adjoining and
intercommunicating with the repair of the first right span of the
lofty storey building and thence by property fence wall." [16]
Verily, the two-storey building involved, a permanent structure which
adjoins and intercommunicates with the "first right span of the lofty
storey building", formed part thereof, and meets the requisites for
[17]

compensability under the fire insurance policy sued upon.

So also, considering that the two-storey building aforementioned was

already existing when subject fire insurance policy contract was entered
into on January 12, 1981, having been constructed sometime in
1978, petitioner should have specifically excluded the said two-storey
[18]

building from the coverage of the fire insurance if minded to exclude the
same but if did not, and instead, went on to provide that such fire
insurance policy covers the products, raw materials and supplies stored
within the premises of respondent Transworld which was an integral
part of the four-span building occupied by Transworld, knowing fully well
the existence of such building adjoining and intercommunicating with
the right section of the four-span building.

After a careful study, the Court does not find any basis for disturbing
what the lower courts found and arrived at.

Indeed, the stipulation as to the coverage of the fire insurance policy

under controversy has created a doubt regarding the portions of the
building insured thereby. Article 1377 of the New Civil Code provides:

"Art.1377. The interpretation of obscure words or stipulations in a

contract shall not favor the party who caused the obscurity"

Conformably, it stands to reason that the doubt should be resolved

against the petitioner, Rizal Surety Insurance Company, whose lawyer
or managers drafted the fire insurance policy contract under scrutiny.
Citing the aforecited provision of law in point, the Court in Landicho vs.
Government Service Insurance System, ruled:
[19]

"This is particularly true as regards insurance policies, in respect

of which it is settled that the 'terms in an insurance policy, which
are ambiguous, equivocal, or uncertain x x x are to be construed
strictly and most strongly against the insurer, and liberally in favor
of the insured so as to effect the dominant purpose of indemnity
or payment to the insured, especially where forfeiture is involved'
(29 Am. Jur., 181), and the reason for this is that the 'insured
usually has no voice in the selection or arrangement of the words
employed and that the language of the contract is selected with
great care and deliberation by experts and legal advisers
employed by, and acting exclusively in the interest of, the
insurance company.' (44 C.J.S., p. 1174)."" [20]
Equally relevant is the following disquisition of the Court in Fieldmen's
Insurance Company, Inc. vs. Vda. De Songco, to wit: [21]

"'This rigid application of the rule on ambiguities has become

necessary in view of current business practices. The courts
cannot ignore that nowadays monopolies, cartels and
concentration of capital, endowed with overwhelming economic
power, manage to impose upon parties dealing with them
cunningly prepared 'agreements' that the weaker party may not
change one whit, his participation in the 'agreement' being
reduced to the alternative to 'take it or leave it' labelled since
Raymond Saleilles 'contracts by adherence' (contrats [sic]
d'adhesion), in contrast to these entered into by parties bargaining
on an equal footing, such contracts (of which policies of insurance
and international bills of lading are prime example) obviously call
for greater strictness and vigilance on the part of courts of justice
with a view to protecting the weaker party from abuses and
imposition, and prevent their becoming traps for the unwary (New
Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec.
1934, 27 February 1942.)'" [22]

The issue of whether or not Transworld has an insurable interest in the

fun and amusement machines and spare parts, which entitles it to be
indemnified for the loss thereof, had been settled in G.R. No. L-111118,
entitled New India Assurance Company, Ltd., vs. Court of Appeals,
where the appeal of New India from the decision of the Court of Appeals
under review, was denied with finality by this Court on February 2, 1994.

The rule on conclusiveness of judgment, which obtains under the

premises, precludes the relitigation of a particular fact or issue in
another action between the same parties based on a different claim or
cause of action. "xxx the judgment in the prior action operates as
estoppel only as to those matters in issue or points controverted, upon
the determination of which the finding or judgment was rendered. In
fine, the previous judgment is conclusive in the second case, only as
those matters actually and directly controverted and determined and not
as to matters merely involved therein." [23]

Applying the abovecited pronouncement, the Court, in Smith Bell and

Company (Phils.), Inc. vs. Court of Appeals, held that the issue of
[24]

negligence of the shipping line, which issue had already been passed
upon in a case filed by one of the insurers, is conclusive and can no
longer be relitigated in a similar case filed by another insurer against the
same shipping line on the basis of the same factual circumstances.
Ratiocinating further, the Court opined:
 "In the case at bar, the issue of which vessel ('Don Carlos' or
'Yotai Maru') had been negligent, or so negligent as to have
proximately caused the collision between them, was an issue that
was actually, directly and expressly raised, controverted and
litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that
issue in his Decision and held the 'Don Carlos' to have been
negligent rather than the 'Yotai Maru' and, as already noted, that
Decision was affirmed by this Court in G.R. No. L-48839 in a
Resolution dated 6 December 1987. The Reyes Decision thus
became final and executory approximately two (2) years before
the Sison Decision, which is assailed in the case at bar, was
promulgated. Applying the rule of conclusiveness of judgment, the
question of which vessel had been negligent in the collision
between the two (2) vessels, had long been settled by this Court
and could no longer be relitigated in C.A.-G.R. No. 61206-R.
Private respondent Go Thong was certainly bound by the ruling or
judgment of Reyes, L.B., J. and that of this Court. The Court of
Appeals fell into clear and reversible error when it disregarded the
Decision of this Court affirming the Reyes Decision." [25]

The controversy at bar is on all fours with the aforecited case.

Considering that private respondent's insurable interest in, and
compensability for the loss of subject fun and amusement machines and
spare parts, had been adjudicated, settled and sustained by the Court of
Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R. No. L-
111118, in a Resolution, dated February 2, 1994, the same can no
longer be relitigated and passed upon in the present case. Ineluctably,
the petitioner, Rizal Surety Insurance Company, is bound by the ruling
of the Court of Appeals and of this Court that the private respondent has
an insurable interest in the aforesaid fun and amusement machines and
spare parts; and should be indemnified for the loss of the same.

So also, the Court of Appeals correctly adjudged petitioner liable for the
amount of P470,328.67, it being the total loss and damage suffered by
Transworld for which petitioner Rizal Insurance is liable.
[26]

All things studiedly considered and viewed in proper perspective, the

Court is of the irresistible conclusion, and so finds, that the Court of
Appeals erred not in holding the petitioner, Rizal Surety Insurance
Company, liable for the destruction and loss of the insured buildings and
articles of the private respondent.

WHEREFORE, the Decision, dated July 15, 1993, and the Resolution,
dated October 22, 1993, of the Court of Appeals in CA-G.R. CV NO.
28779 are AFFIRMED in toto. No pronouncement as to costs.
G.R. No. 125678 March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.

YNARES-SANTIAGO, J.:

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

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED.3

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

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

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

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

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

5. In consideration of the insurer’s promise, the insured pays a premium.8

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

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

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

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

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

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

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

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

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

In addition to the above condition, petitioner additionally required the applicant for authorization to
inquire about the applicant’s medical history, thus:

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

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

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

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

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

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

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

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

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a
contract of insurance." The right to rescind should be exercised previous to the commencement of
an action on the contract.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 respondent’s husband, we quote with approval the
following findings of the trial court:

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

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

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

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-31845 April 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,

vs.
HONORABLE COURT OF APPEALS, respondents.

G.R. No. L-31878 April 30, 1979

LAPULAPU D. MONDRAGON, petitioner,

vs.
HON. COURT OF APPEALS and NGO HING, respondents.

Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner Company.

Voltaire Garcia for petitioner Mondragon.

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of this Court dated April
29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both cases seek similar relief,
through these petitions for certiorari by way of appeal, from the amended decision of respondent
Court of Appeals which affirmed in toto the decision of the Court of First Instance of Cebu, ordering
"the defendants (herein petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly
and severally to pay plaintiff (herein private respondent Ngo Hing) the amount of P50,000.00 with
interest at 6% from the date of the filing of the complaint, and the sum of P1,077.75, without interest.

It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the Great
Pacific Life Assurance Company (hereinafter referred to as Pacific Life) for a twenty-year
endownment policy in the amount of P50,000.00 on the life of his one-year old daughter Helen Go.
Said respondent supplied the essential data which petitioner Lapulapu D. Mondragon, Branch
Manager of the Pacific Life in Cebu City wrote on the corresponding form in his own handwriting
(Exhibit I-M). Mondragon finally type-wrote the data on the application form which was signed by
private respondent Ngo Hing. The latter paid the annual premuim the sum of P1,077.75 going over
to the Company, but he reatined the amount of P1,317.00 as his commission for being a duly
authorized agebt of Pacific Life. Upon the payment of the insurance premuim, the binding deposit
receipt (Exhibit E) was issued to private respondent Ngo Hing. Likewise, petitioner Mondragon
handwrote at the bottom of the back page of the application form his strong recommendation for the
approval of the insurance application. Then on April 30, 1957, Mondragon received a letter from
Pacific Life disapproving the insurance application (Exhibit 3-M). The letter stated that the said life
insurance application for 20-year endowment plan is not available for minors below seven years old,
but Pacific Life can consider the same under the Juvenile Triple Action Plan, and advised that if the
offer is acceptable, the Juvenile Non-Medical Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by
petitioner Mondragon to private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote
back Pacific Life again strongly recommending the approval of the 20-year endowment insurance
plan to children, pointing out that since 1954 the customers, especially the Chinese, were asking for
such coverage (Exhibit 4-M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza with
complication of bronchopneumonia. Thereupon, private respondent sought the payment of the
proceeds of the insurance, but having failed in his effort, he filed the action for the recovery of the
same before the Court of First Instance of Cebu, which rendered the adverse decision as earlier
refered to against both petitioners.

The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E)
constituted a temporary contract of the life insurance in question; and (2) whether private respondent
Ngo Hing concealed the state of health and physical condition of Helen Go, which rendered void the
aforesaid Exhibit E.

1. At the back of Exhibit E are condition precedents required before a deposit is considered a
BINDING RECEIPT. These conditions state that:

A. If the Company or its agent, shan have received the premium deposit ... and the
insurance application, ON or PRIOR to the date of medical examination ... said
insurance shan be in force and in effect from the date of such medical examination,
for such period as is covered by the deposit ..., PROVIDED the company shall be
satisfied that on said date the applicant was insurable on standard rates under its
rule for the amount of insurance and the kind of policy requested in the application.

D. If the Company does not accept the application on standard rate for the amount of
insurance and/or the kind of policy requested in the application but issue, or offers to
issue a policy for a different plan and/or amount ..., the insurance shall not be in force
and in effect until the applicant shall have accepted the policy as issued or offered by
the Company and shall have paid the full premium thereof. If the applicant does not
accept the policy, the deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above, and the
Company declines to approve the application the insurance applied for shall not have
been in force at any time and the sum paid be returned to the applicant upon the
surrender of this receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is intended to
be merely a provisional or temporary insurance contract and only upon compliance of the following
conditions: (1) that the company shall be satisfied that the applicant was insurable on standard rates;
(2) that if the company does not accept the application and offers to issue a policy for a different
plan, the insurance contract shall not be binding until the applicant accepts the policy offered;
otherwise, the deposit shall be reftmded; and (3) that if the applicant is not ble according to the
standard rates, and the company disapproves the application, the insurance applied for shall not be
in force at any time, and the premium paid shall be returned to the applicant.

Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is merely
an acknowledgment, on behalf of the company, that the latter's branch office had received from the
applicant the insurance premium and had accepted the application subject for processing by the
insurance company; and that the latter will either approve or reject the same on the basis of whether
or not the applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved the
insurance application of respondent Ngo Hing, the binding deposit receipt in question had never
become in force at any time.

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does
not insure outright. As held by this Court, where an agreement is made between the applicant and
the agent, no liability shall attach until the principal approves the risk and a receipt is given by the
agent. The acceptance is merely conditional and is subordinated to the act of the company in
approving or rejecting the application. Thus, in life insurance, a "binding slip" or "binding receipt"
does not insure by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-M),
Pacific Life disapproved the insurance application in question on the ground that it is not offering the
twenty-year endowment insurance policy to children less than seven years of age. What it offered
instead is another plan known as the Juvenile Triple Action, which private respondent failed to
accept. In the absence of a meeting of the minds between petitioner Pacific Life and private
respondent Ngo Hing over the 20-year endowment life insurance in the amount of P50,000.00 in
favor of the latter's one-year old daughter, and with the non-compliance of the abovequoted
conditions stated in the disputed binding deposit receipt, there could have been no insurance
contract duly perfected between thenl Accordingly, the deposit paid by private respondent shall have
to be refunded by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance, like
other contracts, must be assented to by both parties either in person or by their agents ... The
contract, to be binding from the date of the application, must have been a completed contract, one
that leaves nothing to be dione, 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."

We are not impressed with private respondent's contention that failure of petitioner Mondragon to
communicate to him the rejection of the insurance application would not have any adverse effect on
the allegedly perfected temporary contract (Respondent's Brief, pp. 13-14). In this first place, there
was no contract perfected between the parties who had no meeting of their minds. Private
respondet, being an authorized insurance agent of Pacific Life at Cebu branch office, is indubitably
aware that said company does not offer the life insurance applied for. When he filed the insurance
application in dispute, private respondent was, therefore, only taking the chance that Pacific Life will
approve the recommendation of Mondragon for the acceptance and approval of the application in
question along with his proposal that the insurance company starts to offer the 20-year endowment
insurance plan for children less than seven years. Nonetheless, the record discloses that Pacific Life
had rejected the proposal and recommendation. Secondly, having an insurable interest on the life of
his one-year old daughter, aside from being an insurance agent and an offense associate of
petitioner Mondragon, private respondent Ngo Hing must have known and followed the progress on
the processing of such application and could not pretend ignorance of the Company's rejection of the
20-year endowment life insurance application.

At this juncture, We find it fit to quote with approval, the very apt observation of then Appellate
Associate Justice Ruperto G. Martin who later came up to this Court, from his dissenting opinion to
the amended decision of the respondent court which completely reversed the original decision, the
following:

Of course, there is the insinuation that neither the memorandum of rejection (Exhibit
3-M) nor the reply thereto of appellant Mondragon reiterating the desire for
applicant's father to have the application considered as one for a 20-year endowment
plan was ever duly communicated to Ngo; Hing, father of the minor applicant. I am
not quite conninced that this was so. Ngo Hing, as father of the applicant herself, was
precisely the "underwriter who wrote this case" (Exhibit H-1). The unchallenged
statement of appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M),
specifically admits that said Ngo Hing was "our associate" and that it was the latter
who "insisted that the plan be placed on the 20-year endowment plan." Under these
circumstances, it is inconceivable that the progress in the processing of the
application was not brought home to his knowledge. He must have been duly
apprised of the rejection of the application for a 20-year endowment plan otherwise
Mondragon would not have asserted that it was Ngo Hing himself who insisted on the
application as originally filed, thereby implictly declining the offer to consider the
application under the Juvenile Triple Action Plan. Besides, the associate of
 Mondragon that he was, Ngo Hing should only be presumed to know what kind of
policies are available in the company for minors below 7 years old. What he and
Mondragon were apparently trying to do in the premises was merely to prod the
company into going into the business of issuing endowment policies for minors just
as other insurance companies allegedly do. Until such a definite policy is however,
adopted by the company, it can hardly be said that it could have been bound at all
under the binding slip for a plan of insurance that it could not have, by then issued at
all. (Amended Decision, Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is of the firm belief that private
respondent had deliberately concealed the state of health and piysical condition of his daughter
Helen Go. Wher private regpondeit supplied the required essential data for the insurance application
form, he was fully aware that his one-year old daughter is typically a mongoloid child. Such a
congenital physical defect could never be ensconced nor disguished. Nonetheless, private
respondent, in apparent bad faith, withheld the fact materal to the risk to be assumed by the
insurance compary. As an insurance agent of Pacific Life, he ought to know, as he surely must have
known. his duty and responsibility to such a material fact. Had he diamond said significant fact in the
insurance application fom Pacific Life would have verified the same and would have had no choice
but to disapprove the application outright.

The contract of insurance is one of perfect good faith uberrima fides meaning good faith, absolute
and perfect candor or openness and honesty; the absence of any concealment or demotion,
however slight [Black's Law Dictionary, 2nd Edition], not for the alone but equally so for the insurer
(Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a neglect to
communicate that which a partY knows aDd Ought to communicate (Section 25, Act No. 2427).
Whether intentional or unintentional the concealment entitles the insurer to rescind the contract of
insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino vs.
Philippine American Life Insurance Company, 7 SCRA 316). Private respondent appears guilty
thereof.

We are thus constrained to hold that no insurance contract was perfected between the parties with
the noncompliance of the conditions provided in the binding receipt, and concealment, as legally
defined, having been comraitted by herein private respondent.

WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby
entered absolving petitioners Lapulapu D. Mondragon and Great Pacific Life Assurance Company
from their civil liabilities as found by respondent Court and ordering the aforesaid insurance
company to reimburse the amount of P1,077.75, without interest, to private respondent, Ngo Hing.
Costs against private respondent.

SO ORDERED.

Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera, JJ., concur.

Fernandez, J., took no part.

 Republic of the Philippines
SUPREME COURT
Baguio City

SECOND DIVISION

G.R. No. 166245 April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,

vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.

DECISION

VELASCO, JR., J.:

The Case

Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside
the November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the
query: May the inaction of the insurer on the insurance application be considered as approval of the
application?

The Facts

On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife)
entered into an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner
Eternal Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who
purchased burial lots from it on installment basis would be insured by Philamlife. The amount of
insurance coverage depended upon the existing balance of the purchased burial lots. The policy was
to be effective for a period of one year, renewable on a yearly basis.

The relevant provisions of the policy are:

ELIGIBILITY.

Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is
indebted to the Assured for the unpaid balance of his loan with the Assured, and is accepted
for Life Insurance coverage by the Company on its effective date is eligible for insurance
under the Policy.

EVIDENCE OF INSURABILITY.

No medical examination shall be required for amounts of insurance up to P50,000.00.

However, a declaration of good health shall be required for all Lot Purchasers as part of the
application. The Company reserves the right to require further evidence of insurability
satisfactory to the Company in respect of the following:

1. Any amount of insurance in excess of P50,000.00.

2. Any lot purchaser who is more than 55 years of age.

LIFE INSURANCE BENEFIT.

 The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the
unpaid balance of his loan (including arrears up to but not exceeding 2 months) as reported
by the Assured to the Company or the sum of P100,000.00, whichever is smaller. Such
benefit shall be paid to the Assured if the Lot Purchaser dies while insured under the Policy.

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan
with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.3

Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together
with a copy of the application of each purchaser, and the amounts of the respective unpaid balances
of all insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter
dated December 29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982.
One of those included in the list as "new business" was a certain John Chuang. His balance of
payments was PhP 100,000. On August 2, 1984, Chuang died.

Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for
Chuang’s death. Attached to the claim were the following documents: (1) Chuang’s Certificate of
Death; (2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate
of Claimant; (4) Certificate of Attending Physician; and (5) Assured’s Certificate.

In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit the
following documents relative to its insurance claim for Chuang’s death: (1) Certificate of Claimant
(with form attached); (2) Assured’s Certificate (with form attached); (3) Application for Insurance
accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account
showing the unpaid balance of Chuang before his death.

Eternal transmitted the required documents through a letter dated November 14, 1984,7 which was
received by Philamlife on November 15, 1984.

After more than a year, Philamlife had not furnished Eternal with any reply to the latter’s insurance
claim. This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000
on April 25, 1986.8

In response to Eternal’s demand, Philamlife denied Eternal’s insurance claim in a letter dated May
20, 1986,9 a portion of which reads:

The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal
Gardens Memorial Park in October 1982 for the total maximum insurable amount of
P100,000.00 each. No application for Group Insurance was submitted in our office prior to
his death on August 2, 1984.

In accordance with our Creditor’s Group Life Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of good health shall be required for all Lot Purchasers as
party of the application." We cite further the provision on Effective Date of Coverage under
the policy which states that "there shall be no insurance if the application is not approved by
the Company." Since no application had been submitted by the Insured/Assured, prior to his
death, for our approval but was submitted instead on November 15, 1984, after his death,
Mr. John Uy Chuang was not covered under the Policy. We wish to point out that Eternal
Gardens being the Assured was a party to the Contract and was therefore aware of these
pertinent provisions.

With regard to our acceptance of premiums, these do not connote our approval per se of the
insurance coverage but are held by us in trust for the payor until the prerequisites for
 insurance coverage shall have been met. We will however, return all the premiums which
have been paid in behalf of John Uy Chuang.

Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of
money against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of
Eternal, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff

ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay
the sum of P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus
legal rate of interest, until fully paid; and, to pay the sum of P10,000.00 as attorney’s fees.

SO ORDERED.

The RTC found that Eternal submitted Chuang’s application for insurance which he accomplished
before his death, as testified to by Eternal’s witness and evidenced by the letter dated December 29,
1982, stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert."10 It further
ruled that due to Philamlife’s inaction from the submission of the requirements of the group
insurance on December 29, 1982 to Chuang’s death on August 2, 1984, as well as Philamlife’s
acceptance of the premiums during the same period, Philamlife was deemed to have approved
Chuang’s application. The RTC said that since the contract is a group life insurance, once proof of
death is submitted, payment must follow.

Philamlife appealed to the CA, which ruled, thus:

WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.

SO ORDERED.11

The CA based its Decision on the factual finding that Chuang’s application was not enclosed in
Eternal’s letter dated December 29, 1982. It further ruled that the non-accomplishment of the
submitted application form violated Section 26 of the Insurance Code. Thus, the CA concluded,
there being no application form, Chuang was not covered by Philamlife’s insurance.

Hence, we have this petition with the following grounds:

The Honorable Court of Appeals has decided a question of substance, not therefore
determined by this Honorable Court, or has decided it in a way not in accord with law or with
the applicable jurisprudence, in holding that:

I. The application for insurance was not duly submitted to respondent PhilamLife
before the death of John Chuang;

II. There was no valid insurance coverage; and

III. Reversing and setting aside the Decision of the Regional Trial Court dated May
29, 1996.

The Court’s Ruling

As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before
the CA and first level courts, considering their findings of facts are conclusive and binding on this
Court. However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:
 (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5)
when the findings of facts are conflicting; (6) when in making its findings the [CA] went
beyond the issues of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial
court; (8) when the findings are conclusions without citation of specific evidence on which
they are based; (9) when the facts set forth in the petition as well as in the petitioner’s main
and reply briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record;
and (11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed
by the parties, which, if properly considered, would justify a different conclusion.12(Emphasis
supplied.)

In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may
review them.

Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternal’s letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that
was apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a
copy of the insurance application which was signed by Chuang himself and executed before his
death.

On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing
that Eternal must present evidence showing that Philamlife received a copy of Chuang’s insurance
application.

The evidence on record supports Eternal’s position.

The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received,
states that the insurance forms for the attached list of burial lot buyers were attached to the letter.
Such stamp of receipt has the effect of acknowledging receipt of the letter together with the
attachments. Such receipt is an admission by Philamlife against its own interest.13 The burden of
evidence has shifted to Philamlife, which must prove that the letter did not contain Chuang’s
insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed to have
received Chuang’s insurance application.

To reiterate, it was Philamlife’s bounden duty to make sure that before a transmittal letter is stamped
as received, the contents of the letter are correct and accounted for.

Philamlife’s allegation that Eternal’s witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the reliability and
credibility of the witnesses, because it has the opportunity to observe firsthand the witnesses’
demeanor, conduct, and attitude. Findings of the trial court on such matters are binding and
conclusive on the appellate court, unless some facts or circumstances of weight and substance have
been overlooked, misapprehended, or misinterpreted,14 that, if considered, might affect the result of
the case.15

An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no

overlooked facts of substance and value.

Philamlife primarily claims that Eternal did not even know where the original insurance application of
Chuang was, as shown by the testimony of Edilberto Mendoza:
 Atty. Arevalo:

Q Where is the original of the application form which is required in case of new coverage?

[Mendoza:]

A It is [a] standard operating procedure for the new client to fill up two copies of this form and
the original of this is submitted to Philamlife together with the monthly remittances and the
second copy is remained or retained with the marketing department of Eternal Gardens.

Atty. Miranda:

We move to strike out the answer as it is not responsive as counsel is merely asking for the
location and does not [ask] for the number of copy.

Atty. Arevalo:

Q Where is the original?

[Mendoza:]

A As far as I remember I do not know where the original but when I submitted with that
payment together with the new clients all the originals I see to it before I sign the transmittal
letter the originals are attached therein.16

In other words, the witness admitted not knowing where the original insurance application was, but
believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.

As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two
insurance application forms were accomplished and the testimony of Mendoza on who actually filled
out the application form, these are minor inconsistencies that do not affect the credibility of the
witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility as these negate any
suspicion that the testimonies have been rehearsed.17

We reiterated the above ruling in Merencillo v. People:

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

prosecution’s evidence as a whole or reflect on the witnesses’ honesty. The test is whether
the testimonies agree on essential facts and whether the respective versions corroborate
and substantially coincide with each other so as to make a consistent and coherent whole.18

In the present case, the number of copies of the insurance application that Chuang executed is not
at issue, neither is whether the insurance application presented by Eternal has been falsified. Thus,
the inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternal’s
witnesses.

However, the question arises as to whether Philamlife assumed the risk of loss without approving
the application.

This question must be answered in the affirmative.

As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group
Life Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:
 EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan
with the Assured. However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.

An examination of the above provision would show ambiguity between its two sentences. The first
sentence appears to state that the insurance coverage of the clients of Eternal already became
effective upon contracting a loan with Eternal while the second sentence appears to require
Philamlife to approve the insurance contract before the same can become effective.

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

construed liberally in favor of the insured and strictly against the insurer in order to safeguard the
latter’s interest. Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:

Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is
prepared by the insurer. A contract of insurance, being a contract of adhesion, par
excellence, any ambiguity therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be construed in
such a way as to preclude the insurer from noncompliance with its obligations.19 (Emphasis
supplied.)

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the
above ruling, stating that:

When the terms of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his obligation. Being
a contract of adhesion, the terms of an insurance contract are to be construed strictly against
the party which prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured, especially
to avoid forfeiture.20

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December
10, 1980, must be construed in favor of the insured and in favor of the effectivity of the insurance
contract.

On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a
party’s purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot
purchaser is created and the same is effective, valid, and binding until terminated by Philamlife by
disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P-
1920 on the Effective Date of Benefit is in the nature of a resolutory condition which would lead to
the cessation of the insurance contract. Moreover, the mere inaction of the insurer on the insurance
application must not work to prejudice the insured; it cannot be interpreted as a termination of the
insurance contract. The termination of the insurance contract by the insurer must be explicit and
unambiguous.

As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More often than not, insurance
contracts are contracts of adhesion containing technical terms and conditions of the industry,
confusing if at all understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must be considered
whenever the rights and obligations of the insurer and the insured are to be delineated. Hence, in
order to protect the interest of insurance applicants, insurance companies must be obligated to act
with haste upon insurance applications, to either deny or approve the same, or otherwise be bound
to honor the application as a valid, binding, and effective insurance contract.21

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No.
57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch
138 is MODIFIED. Philamlife is hereby ORDERED:

(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life
Insurance Policy of Chuang;

(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000
from the time of extra-judicial demand by Eternal until Philamlife’s receipt of the May 29,
1996 RTC Decision on June 17, 1996;

(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP
100,000 from June 17, 1996 until full payment of this award; and

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

No costs.

SO ORDERED.

Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario*, JJ.,

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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 Compañia.

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.

Mapa, C.J., Araullo, Avanceña and Villamor, JJ., concur.

Johnson, J., dissents.