G.R. No.

198174 September 2, 2013

ALPHA INSURANCE AND SURETY CO., PETITIONER,

vs.

ARSENIA SONIA CASTOR, RESPONDENT.

DECISION

PERALTA, J.:

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

The facts follow.

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

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

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

Upon verification of the documents submitted, particularly the Police Report and your Affidavit, which states that the
culprit, who stole the Insure[d] unit, is employed with you. We would like to invite you on the provision of the Policy under
Exceptions to Section-III, which we quote:
1.) The Company shall not be liable for:

xxxx

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

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

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

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

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

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

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

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

To pay the costs of suit.

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

Aggrieved, petitioner filed an appeal with the CA.

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

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

SO ORDERED.4

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

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

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

WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION
WHEN IT [AFFIRMED] IN TOTO THE JUDGMENT OF THE TRIAL COURT.5

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

We rule in the negative.

Significant portions of Section III of the Insurance Policy states:

SECTION III – LOSS OR DAMAGE

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

(a)

by accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or consequent
upon wear and tear;

(b)

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

(c)

by malicious act;

(d)

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

xxxx

EXCEPTIONS TO SECTION III

The Company shall not be liable to pay for:

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

Consequential loss, depreciation, wear and tear, mechanical or electrical breakdowns, failures or breakages;

Damage to tires, unless the Schedule Vehicle is damaged at the same time;

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

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

We do not agree.

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

Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance policy subject of this
case. This is evident from the very provision of Section III – "Loss or Damage." The insurance company, subject to the limits
of liability, is obligated to indemnify the insured against theft. Said provision does not qualify as to who would commit the
theft. Thus, even if the same is committed by the driver of the insured, there being no categorical declaration of
exception, the same must be covered. As correctly pointed out by the plaintiff, "(A)n insurance contract should be
interpreted as to carry out the purpose for which the parties entered into the contract which is to insure against risks of
loss or damage to the goods. Such interpretation should result from the natural and reasonable meaning of language in
the policy. Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is
adopted." The defendant would argue that if the person employed by the insured would commit the theft and the insurer
would be held liable, then this would result to an absurd situation where the insurer would also be held liable if the
insured would commit the theft. This argument is certainly flawed. Of course, if the theft would be committed by the
insured himself, the same would be an exception to the coverage since in that case there would be fraud on the part of
the insured or breach of material warranty under Section 69 of the Insurance Code.7
Moreover, contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the
terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular sense.8 Accordingly, in interpreting the exclusions in an insurance
contract, the terms used specifying the excluded classes therein are to be given their meaning as understood in common
speech.9

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

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

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

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

xxxx

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

The Court does not find the particular contention to be well taken.
True, it is a basic rule in the interpretation of contracts that the terms of a contract are to be construed according to the
sense and meaning of the terms which the parties thereto have used. In the case of property insurance policies, the
evident intention of the contracting parties, i.e., the insurer and the assured, determine the import of the various terms
and provisions embodied in the policy. However, when the terms of the insurance policy are ambiguous, equivocal or
uncertain, such that the parties themselves disagree about the meaning of particular provisions, the policy will be
construed by the courts liberally in favor of the assured and strictly against the insurer.10

Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the insurance contract contain limitations
on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation.
Thus, in Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance Company,11 this Court ruled –

It must be remembered that an insurance contract is a contract of adhesion which must be construed liberally in favor of
the insured and strictly against the insurer in order to safeguard the latter’s interest. Thus, in Malayan Insurance
Corporation v. Court of Appeals, this Court held that:

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

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

When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to
preclude the insurer from non-compliance with his obligation. Being a contract of adhesion, the terms of an insurance
contract are to be construed strictly against the party which prepared the contract, the insurer. By reason of the exclusive
control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly
interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture.12

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

SO ORDERED.
G.R. No. 156167 May 16, 2005

GULF RESORTS, INC., petitioner,

vs.

PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.

DECISION

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 decision1
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 company’s liability
for earthquake damage to petitioner’s 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 plaintiff’s 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 plaintiff’s 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, defendant’s 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 plaintiff’s 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 report5 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 demand7 for settlement of the damage to all its properties in the Agoo Playa Resort. On August 23, 1990,
respondent denied petitioner’s 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 complaint10 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 defendant’s
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 attorney’s 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 defendant’s 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 plaintiff’s 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 defendant’s obligation to plaintiff is fully paid.

No pronouncement as to costs.13

Petitioner’s 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-APPELLANT’S RIGHT TO RECOVER UNDER DEFENDANT-APPELLEE’S
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 court’s failure to award it attorney’s 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-appellant’s 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-appellant’s prayer for an attorney’s 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-appellant’s 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 RESPONDENT’S 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 PETITIONER’S PRAYER FOR DAMAGES WITH INTEREST THEREON
AT THE RATE CLAIMED, ATTORNEY’S FEES AND EXPENSES OF LITIGATION.
Petitioner contends:

First, that the policy’s 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 respondent’s 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
resort’s properties for earthquake shock damage and respondent agreed. After the July 16, 1990 earthquake, respondent
assured petitioner that it was covered for earthquake shock. Respondent’s 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 petitioner’s 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
letter19 by its representative Manuel C. Quijano, categorically stated that its previous policy, from which respondent’s
policy was copied, covered only earthquake shock for the two swimming pools.

Second, petitioner’s 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 petitioner’s 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 rider’s 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. Petitioner’s 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. Respondent’s 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 adjuster’s 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-AIU’s 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, attorney’s 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

393,000.00

0.100%-E/S

393.0022]

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 ½ % 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 petitioner’s previous insurance policies from AHAC-AIU. As borne out by petitioner’s
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 III30

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. Plaintiff’s 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 plaintiff’s 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 don’t, 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 petitioner’s contention that respondent’s 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. Petitioner’s
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 respondent’s representative Atty. Umlas were not proved. Atty. Umlas
categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondent’s 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 petitioner’s knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36

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-AIU’s 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, respondent’s husband was entitled to avail of hospitalization
benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as
annual physical examinations, preventive health care and other out-patient services.

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

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

After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was
admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home
again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring
him back to the Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against
petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and attorney’s fees. After trial, the lower court ruled against
petitioners, viz:

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

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

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

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

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

SO ORDERED.3

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

Petitioner argues that the agreement grants "living benefits," such as medical check-ups and hospitalization which a
member may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year
thereafter. Petitioner also points out that only medical and hospitalization benefits are given under the agreement
without any indemnification, unlike in an insurance contract where the insured is indemnified for his loss. Moreover, since
Health Care Agreements are only for a period of one year, as compared to insurance contracts which last longer,7
petitioner argues that the incontestability clause does not apply, as the same requires an effectivity period of at least two
years. Petitioner further argues that it is not an insurance company, which is governed by the Insurance Commission, but a
Health Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

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

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

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

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

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

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

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

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

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

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

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

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

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

Failure to disclose or misrepresentation of any material information by the member in the application or medical
examination, whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning
and liability of Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented
information is deemed material if its revelation would have resulted in the declination of the applicant by Philamcare or
the assessment of a higher Membership Fee for the benefit or benefits applied for.13
The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This
largely depends on opinion rather than fact, especially coming from respondent’s husband who was not a medical doctor.
Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not
avoid a policy even though they are untrue.14 Thus,

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

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

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

1. Prior notice of cancellation to insured;

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

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

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to
furnish facts on which cancellation is based.18
None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations on
liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation.19
Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which
prepared the contract – the insurer.20 By reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of
the insured, especially to avoid forfeiture.21 This is equally applicable to Health Care Agreements. The phraseology used in
medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if
doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to be adopted, and
exclusionary clauses of doubtful import should be strictly construed against the provider.22

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

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

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

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

SO ORDERED.
G.R. No. 167330 June 12, 2008

PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CORONA, J.:

Is a health care agreement in the nature of an insurance contract and therefore subject to the documentary stamp tax
(DST) imposed under Section 185 of Republic Act 8424 (Tax Code of 1997)?

This is an issue of first impression. The Court of Appeals (CA) answered it affirmatively in its August 16, 2004 decision1 in
CA-G.R. SP No. 70479. Petitioner Philippine Health Care Providers, Inc. believes otherwise and assails the CA decision in
this petition for review under Rule 45 of the Rules of Court.

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid
group practice health care delivery system or a health maintenance organization to take care of the sick and disabled
persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the
organization."2 Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other
professional technical staff participating in the group practice health delivery system at a hospital or clinic owned,
operated or accredited by it.3

The pertinent part of petitioner's membership or health care agreement4 provides:

VII BENEFITS

Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims for reimbursement] of this Agreement,
Members shall have the following Benefits under this Agreement:
In-Patient Services. In the event that a Member contract[s] sickness or suffers injury which requires confinement in a
participating Hospital[,] the services or benefits stated below shall be provided to the Member free of charge, but in no
case shall [petitioner] be liable to pay more than P75,000.00 in benefits with respect to anyone sickness, injury or related
causes. If a member has exhausted such maximum benefits with respect to a particular sickness, injury or related causes,
all accounts in excess of P75,000.00 shall be borne by the enrollee. It is[,] however, understood that the payment by
[petitioner] of the said maximum in In-Patient Benefits to any one member shall preclude a subsequent payment of
benefits to such member in respect of an unrelated sickness, injury or related causes happening during the remainder of
his membership term.

(a) Room and Board

(b) Services of physician and/or surgeon or specialist

(c) Use of operating room and recovery room

(d) Standard Nursing Services

(e) Drugs and Medication for use in the hospital except those which are used to dissolve blood clots in the vascular
systems (i.e., trombolytic agents)

(f) Anesthesia and its administration

(g) Dressings, plaster casts and other miscellaneous supplies

(h) Laboratory tests, x-rays and other necessary diagnostic services

(i) Transfusion of blood and other blood elements

Condition for in-Patient Care. The provision of the services or benefits mentioned in the immediately preceding paragraph
shall be subject to the following conditions:
(a) The Hospital Confinement must be approved by [petitioner's] Physician, Participating Physician or [petitioner's]
Medical Coordinator in that Hospital prior to confinement.

(b) The confinement shall be in a Participating Hospital and the accommodation shall be in accordance with the
Member[']s benefit classification.

(c) Professional services shall be provided only by the [petitioner's] Physicians or Participating Physicians.

(d) If discharge from the Hospital has been authorized by [petitioner's] attending Physician or Participating Physician and
the Member shall fail or refuse to do so, [petitioner] shall not be responsible for any charges incurred after discharge has
been authorized.

Out-Patient Services. A Member is entitled free of charge to the following services or benefits which shall be rendered or
administered either in [petitioner's] Clinic or in a Participating Hospital under the direction or supervision of [petitioner's]
Physician, Participating Physician or [petitioner's] Medical Coordinator.

(a) Gold Plan Standard Annual Physical Examination on the anniversary date of membership, to be done at [petitioner's]
designated hospital/clinic, to wit:

(i) Taking a medical history

(ii) Physical examination

(iii) Chest x-ray

(iv) Stool examination

(v) Complete Blood Count

(vi) Urinalysis
(vii) Fasting Blood Sugar (FBS)

(viii) SGPT

(ix) Creatinine

(x) Uric Acid

(xi) Resting Electrocardiogram

(xii) Pap Smear (Optional for women 40 years and above)

(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical Examination.

The following tests are to be done as part of the Member[']s Annual check-up program at [petitioner's] designated clinic,
to wit:

1) Routine Physical Examination

2) CBC (Complete Blood Count)

* Hemoglobin * Hematocrit

* Differential * RBC/WBC

3) Chest X-ray

4) Urinalysis
5) Fecalysis

(c) Preventive Health Care, which shall include:

(i) Periodic Monitoring of Health Problems

(ii) Family planning counseling

(iii) Consultation and advices on diet, exercise and other healthy habits

(iv) Immunization but excluding drugs for vaccines used

(d) Out-Patient Care, which shall include:

(i) Consultation, including specialist evaluation

(ii) Treatment of injury or illness

(iii) Necessary x-ray and laboratory examination

(iv) Emergency medicines needed for the immediate

relief of symptoms

(v) Minor surgery not requiring confinement

Emergency Care. Subject to the conditions and limitations in this Agreement and those specified below, a Member is
entitled to receive emergency care [in case of emergency. For this purpose, all hospitals and all attending physician(s) in
the Emergency Room automatically become accredited. In participating hospitals, the member shall be entitled to the
following services free of charge: (a) doctor's fees, (b) emergency room fees, (c) medicines used for immediate relief and
during treatment, (d) oxygen, intravenous fluids and whole blood and human blood products, (e) dressings, casts and
sutures and (f) x-rays, laboratory and diagnostic examinations and other medical services related to the emergency
treatment of the patient.]5 Provided, however, that in no case shall the total amount payable by [petitioner] for said
Emergency, inclusive of hospital bill and professional fees, exceed P75,000.00.

If the Member received care in a non-participating hospital, [petitioner] shall reimburse [him]6 80% of the hospital bill or
the amount of P5,000.00[,] whichever is lesser, and 50% of the professional fees of non-participating physicians based on
[petitioner's] schedule of fees provided that the total amount[,] inclusive of hospital bills and professional fee shall not
exceed P5,000.00.

On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of P224,702,641.18. The assessment represented the following:

Value Added Tax (VAT)

DST

1996

P 45,767,596.23

P 55,746,352.19

1997

54,738,434.03

68,450,258.73
P 100,506,030.26

P 124,196,610.92

The deficiency DST assessment was imposed on petitioner's health care agreement with the members of its health care
program pursuant to Section 185 of the 1997 Tax Code which provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. - On all policies of insurance or bonds or obligations
of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employer's liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or
not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other
obligations issued by any province, city, municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any
such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each
four pesos (P4.00), or fractional part thereof, of the premium charged. (emphasis supplied)

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

On April 5, 2002, the CTA rendered a decision,7 the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from
January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20%
interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is
declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.8
Respondent appealed the CTA decision to the CA9 insofar as it cancelled the DST assessment. He claimed that petitioner's
health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision.10 It held that petitioner's health care agreement was in the nature of a
non-life insurance contract subject to DST:

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

Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary Stamp Tax
for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.

SO ORDERED.11

Petitioner moved for reconsideration but the CA denied it. Hence, this petition.

Petitioner essentially argues that its health care agreement is not a contract of insurance but a contract for the provision
on a prepaid basis of medical services, including medical check-up, that are not based on loss or damage. Petitioner also
insists that it is not engaged in the insurance business. It is a health maintenance organization regulated by the
Department of Health, not an insurance company under the jurisdiction of the Insurance Commission. For these reasons,
petitioner asserts that the health care agreement is not subject to DST.

We do not agree.

The DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination
of specific legal relationships through the execution of specific instruments.12 It is an excise upon the privilege,
opportunity, or facility offered at exchanges for the transaction of the business.13 In particular, the DST under Section 185
of the 1997 Tax Code is imposed on the privilege of making or renewing any policy of insurance (except life, marine, inland
and fire insurance), bond or obligation in the nature of indemnity for loss, damage, or liability.
Under the law, a contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.14 The event insured against must be
designated in the contract and must either be unknown or contingent.15

Petitioner's health care agreement is primarily a contract of indemnity. And in the recent case of Blue Cross Healthcare,
Inc. v. Olivares,16 this Court ruled that a health care agreement is in the nature of a non-life insurance policy.

Contrary to petitioner's claim, its health care agreement is not a contract for the provision of medical services. Petitioner
does not actually provide medical or hospital services but merely arranges for the same17 and pays for them up to the
stipulated maximum amount of coverage. It is also incorrect to say that the health care agreement is not based on loss or
damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to
cover the monetary expense or liability a member will incur in case of illness or injury.

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

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

Petitioner's health care agreement is substantially similar to that involved in Philamcare Health Systems, Inc. v. CA.18 The
health care agreement in that case entitled the subscriber to avail of the hospitalization benefits, whether ordinary or
emergency, listed therein. It also provided for "out-patient benefits" such as annual physical examinations, preventive
health care and other out-patient services. This Court ruled in Philamcare Health Systems, Inc.:

[T]he insurable interest of [the subscriber] 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. Once the member incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated contingency, the health care
provider must pay for the same to the extent agreed upon under the contract.19 (emphasis supplied)
Similarly, the insurable interest of every member of petitioner's health care program in obtaining the health care
agreement is his own health. Under the agreement, petitioner is bound to indemnify any member who incurs hospital,
medical or any other expense arising from sickness, injury or other stipulated contingency to the extent agreed upon
under the contract.

Petitioner's contention that it is a health maintenance organization and not an insurance company is irrelevant. Contracts
between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts.20

Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity, or facility offered at
exchanges for the transaction of the business.21 It is an excise on the facilities used in the transaction of the business,
separate and apart from the business itself.22

WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP No. 70479
is AFFIRMED.

Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency documentary stamp tax for
1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000 until
full payment thereof.

Costs against petitioner.

SO ORDERED.
G.R. No. 154514. July 28, 2005

WHITE GOLD MARINE SERVICES, INC., Petitioners,

vs.

PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION
(BERMUDA) LTD., Respondents.

DECISION

QUISUMBING, J.:

This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No. 60144, affirming
the Decision2 dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that
there was no violation of the Insurance Code and the respondents do not need license as insurer and insurance
agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The
Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety
Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and Acceptance.3 Pioneer also issued
receipts evidencing payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual
refused to renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latter’s unpaid
balance. White Gold on the other hand, filed a complaint before the Insurance Commission claiming that Steamship
Mutual violated Sections 1864 and 1875 of the Insurance Code, while Pioneer violated Sections 299,6 3007 and 3018 in
relation to Sections 302 and 303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to secure a
license because it was not engaged in the insurance business. It explained that Steamship Mutual was a Protection and
Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a broker for
Steamship Mutual because Steamship Mutual was not engaged in the insurance business. Moreover, Pioneer was already
licensed, hence, a separate license solely as agent/broker of Steamship Mutual was already superfluous.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court
distinguished between P & I Clubs vis-à-vis conventional insurance. The appellate court also held that Pioneer merely
acted as a collection agent of Steamship Mutual.

In this petition, petitioner assigns the following errors allegedly committed by the appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES
ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER
IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT
STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN
CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT REMOVING] THE
OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.9
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in the
Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to do business
in the Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications issued by the
Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its assertion, it
cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals10 as "an association composed of
shipowners in general who band together for the specific purpose of providing insurance cover on a mutual basis against
liabilities incidental to shipowning that the members incur in favor of third parties." It stresses that as a P & I Club,
Steamship Mutual’s primary purpose is to solicit and provide protection and indemnity coverage and for this purpose, it
has engaged the services of Pioneer to act as its agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in the
Philippines. It is merely an association of vessel owners who have come together to provide mutual protection against
liabilities incidental to shipowning.11 Respondents aver Hyopsung is inapplicable in this case because the issue in
Hyopsung was the jurisdiction of the court over Hyopsung.

Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or "transacting an
insurance business". These are:

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

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

(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an
insurance business within the meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade
the provisions of this Code.
...

The same provision also provides, the fact that no profit is derived from the making of insurance contracts, agreements or
transactions, or that no separate or direct consideration is received therefor, shall not preclude the existence of an
insurance business.12

The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required
to be performed, and the exact nature of the agreement in the light of the occurrence, contingency, or circumstances
under which the performance becomes requisite. It is not by what it is called.13

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.14

In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses incident to
a marine adventure.15 Section 9916 of the Insurance Code enumerates the coverage of marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and insured.
In it, the members all contribute, by a system of premiums or assessments, to the creation of a fund from which all losses
and liabilities are paid, and where the profits are divided among themselves, in proportion to their interest.17
Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity,
war risks, and defense costs.18

A P & I Club is "a form of insurance against third party liability, where the third party is anyone other than the P & I Club
and the members."19 By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in
the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of authority
mandated by Section 18720 of the Insurance Code. It maintains a resident agent in the Philippines to solicit insurance and
to collect payments in its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it was cancelled
due to non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer,
must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance
company is allowed to engage in the insurance business without a license or a certificate of authority from the Insurance
Commission.21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration22 issued by the Insurance
Commission. It has been licensed to do or transact insurance business by virtue of the certificate of authority23 issued by
the same agency. However, a Certification from the Commission states that Pioneer does not have a separate license to be
an agent/broker of Steamship Mutual.24

Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance agent for
Steamship Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for
insurance, or receive for services in obtaining insurance, any commission or other compensation from any insurance
company doing business in the Philippines or any agent thereof, without first procuring a license so to act from the
Commissioner, which must be renewed annually on the first day of January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneer’s certificate of authority and removal of its directors and officers.
Regrettably, we are not the forum for these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals affirming the
Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual
Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses
and to secure proper authorizations to do business as insurer and insurance agent, respectively. The petitioner’s prayer for
the revocation of Pioneer’s Certificate of Authority and removal of its directors and officers, is DENIED. Costs against
respondents.

SO ORDERED.
G.R. No. L-22042 August 17, 1967

DIONISIA, EULOGIO, MARINA, GUILLERMO and NORBERTO all surnamed GUINGON, plaintiffs-appellees,

vs.

ILUMINADO DEL MONTE, JULIO AGUILAR and CAPITAL INSURANCE and SURETY CO., INC., defendants.

CAPITAL INSURANCE and SURETY CO., INC., defendant-appellant.

Generoso Almario and Associates for plaintiffs-appellees.

Achacoso and Associates for defendant-appellant.

BENGZON, J.P., J.:

Julio Aguilar owned and operated several jeepneys in the City of Manila among which was one with plate number PUJ-
206-Manila, 1961. He entered into a contract with the Capital Insurance & Surety Co., Inc. insuring the operation of his
jeepneys against accidents with third-party liability. As a consequence thereof an insurance policy was executed by the
Capital Insurance & Surety Co., Inc., the pertinent provisions of which in so far as this case is concerned contains the
following:

Section II —LIABILITY TO THE PUBLIC

1. The Company, will, subject to the limits of liability, indemnify the Insured in the event of accident caused by or arising
out of the use of the Motor Vehicle/s or in connection with the loading or unloading of the Motor Vehicle/s, against all
sums including claimant's costs and expenses which the Insured shall become legally liable to pay in respect of:

a. death of or bodily injury to any person

b. damage to property

During the effectivity of such insurance policy on February 20, 1961 Iluminado del Monte, one of the drivers of the
jeepneys operated by Aguilar, while driving along the intersection of Juan Luna and Moro streets, City of Manila, bumped
with the jeepney abovementioned one Gervacio Guingon who had just alighted from another jeepney and as a
consequence the latter died some days thereafter.

A corresponding information for homicide thru reckless imprudence was filed against Iluminado del Monte, who pleaded
guilty. A penalty of four months imprisonment was imposed on him.

As a corollary to such action, the heirs of Gervacio Guingon filed an action for damages praying that the sum of P82,771.80
be paid to them jointly and severally by the defendants, driver Iluminado del Monte, owner and operator Julio Aguilar, and
the Capital Insurance & Surety Co., Inc. For failure to answer the complaint, Del Monte and Aguilar were declared in
default. Capital Insurance & Surety Co., Inc. answered, alleging that the plaintiff has no cause of action against it. During
the trial the following facts were stipulated:

COURT: The Court wants to find if there is a stipulation in the policy whereby the insured is insured against liability to third
persons who are not passengers of jeeps.

ALMARIO: As far as I know, in my honest belief, there is no particularization as to the passengers, whether the passengers
of the jeep insured or a passenger of another jeep or whether it is a pedestrian. With those, we can submit the stipulation.

SIMBULAN: I admit that. (T.s.n., p. 21, Jan. 23, 1962; p. 65 Rec. on Appeal)

On August 27, 1962, the Court of First Instance of Manila rendered its judgment with the following dispositive portion:

WHEREFORE, judgment is rendered sentencing Iluminado del Monte and Julio Aguilar jointly and severally to pay plaintiffs
the sum of P8,572.95 as damages for the death of their father, plus P1,000.00 for attorney's fees plus costs.

The defendant Capital Insurance and Surety Co., Inc. is hereby sentenced to pay the plaintiffs the sum of Five Thousand
(P5,000.00) Pesos plus Five Hundred (P500.00) Pesos as attorney's fees and costs. These sums of P5,000.00 and P500.00
adjudged against Capital Insurance and Surety Co., Inc. shall be applied in partial satisfaction of the judgment rendered
against Iluminado del Monte and Julio Aguilar in this case.

SO ORDERED.
The case was appealed to the Court of Appeals which appellate court on September 30, 1963 certified the case to Us
because the appeal raises purely questions of law.

The issues raised before Us in this appeal are (1) As the company agreed to indemnify the insured Julio Aguilar, is it only
the insured to whom it is liable? (2) Must Julio Aguilar first show himself to be entitled to indemnity before the insurance
company may be held liable for the same? (3) Plaintiffs not being parties to the insurance contract, do they have a cause
of action against the company; and (4) Does the fact that the insured is liable to the plaintiffs necessarily mean that the
insurer is liable to the insured?

In the discussion of the points thus raised, what is paramount is the interpretation of the insurance contract with the aim
in view of attaining the objectives for which the insurance was taken. The Rules of Court provide that parties may be
joined either as plaintiffs or defendants, as the right to relief in respect to or arising out of the same transactions is alleged
to exist (Sec. 6, Rule 3). The policy, on the other hand, contains a clause stating:

E. Action Against Company

No action shall lie against the Company unless, as a condition precedent thereto, the Insured shall have fully complied
with all of the terms of this Policy, nor until the amount of the Insured's obligation to pay shall have been finally
determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant,
and the Company.

Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall
thereafter be entitled to recover under this policy to the extent of the insurance afforded by the Policy. Nothing contained
in this policy shall give any person or organization any right to join the Company as a co-defendant in any action against
the Insured to determine the Insured's liability.

Bankruptcy or insolvency of the Insured or of the Insured's estate shall not relieve the Company of any of its obligations
hereunder.

Appellant contends that the "no action" clause in the policy closes the avenue to any third party which may be injured in
an accident wherein the jeepney of the insured might have been the cause of the injury of third persons, alleging the
freedom of contracts. Will the mere fact that such clause was agreed upon by the parties in an insurance policy prevail
over the Rules of Court which authorizes the joining of parties plaintiffs or defendants?

The foregoing issues raise two principal: questions: (1) Can plaintiffs sue the insurer at all? (2) If so, can plaintiffs sue the
insurer jointly with the insured?
The policy in the present case, as aforequoted, is one whereby the insurer agreed to indemnify the insured "against all
sums . . . which the Insured shall become legally liable to pay in respect of: a. death of or bodily injury to any person . . . ."
Clearly, therefore, it is one for indemnity against liability;1 from the fact then that the insured is liable to the third person,
such third person is entitled to sue the insurer.1äwphï1.ñët

The right of the person injured to sue the insurer of the party at fault (insured), depends on whether the contract of
insurance is intended to benefit third persons also or only the insured. And the test applied has been this: Where the
contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable, can sue
the insurer. Where the contract is for indemnity against actual loss or payment, then third persons cannot proceed against
the insurer, the contract being solely to reimburse the insured for liability actually discharged by him thru payment to
third persons, said third persons' recourse being thus limited to the insured alone.2

The next question is on the right of the third person to sue the insurer jointly with the insured. The policy requires, as
afore-stated, that suit and final judgment be first obtained against the insured; that only "thereafter" can the person
injured recover on the policy; it expressly disallows suing the insurer as a co-defendant of the insured in a suit to
determine the latter's liability. As adverted to before, the query is which procedure to follow — that of the insurance
policy or the Rules of Court.

The "no action" clause in the policy of insurance cannot prevail over the Rules of Court provision aimed at avoiding
multiplicity of suits. In a case squarely on the point, American Automobile Ins. Co. vs. Struwe, 218 SW 534 (Texas CCA), it
was held that a "no action" clause in a policy of insurance cannot override procedural rules aimed at avoidance of
multiplicity of suits. We quote:

Appellants filed a plea in abatement on the grounds that the suit had been prematurely brought against the insurance
company, and that it had been improperly joined with Zunker, as said insurance company, under the terms of the policy,
was only liable after judgment had been awarded against Zunker. . . .

* * * That plea was properly overruled, because under the laws of Texas a dual suit will always be avoided whenever all
parties can have a fair trial when joined in one suit. Appellee, had he so desired, could have prosecuted his claim to
judgment as against Zunker and then have sued on that judgment against the insurance company, but the law does not
make it imperative that he should do so, but would permit him to dispose of the whole matter in one suit.

The rule has often been announced in Texas that when two causes of action are connected with each other, or grow out of
the same transaction, they may be properly joined, and in such suit all parties against whom the plaintiff asserts a
common or an alternative liability may be joined as defendants. . . . Even if appellants had presented any plea in
abatement as to joinder of damages arising from a tort with those arising from a contract, it could not, under the facts of
this case, be sustained, for the rule is that a suit may include an action for breach of contract and one for tort, provided
they are connected with each other or grew out of the same transaction.

Similarly, in the instant suit, Sec. 5 of Rule 2 on "Joinder of causes of action" and Sec. 6 of Rule 3 on "Permissive joinder of
parties" cannot be superseded, at least with respect to third persons not a party to the contract, as herein, by a "no
action" clause in the contract of insurance.

Wherefore, the judgment appealed from is affirmed in toto. Costs against appellant. So ordered.
G.R. No. L-20853 May 29, 1967

BONIFACIO BROS., INC., ET AL., plaintiffs-appellants,

vs.

ENRIQUE MORA, ET AL., defendants-appellees.

G. Magsaysay for plaintiffs-appellants.

Abad Santos and Pablo for defendant-appellee H. E. Reyes, Inc.

J. P. Santilla and A. D. Hidalgo, Jr. for other defendant-appellee.

CASTRO, J.:

This is an appeal from the decision of the Court of First Instance of Manila, Branch XV, in civil case 48823, affirming the
decision of the Municipal Court of Manila, declaring the H.S. Reyes, Inc. as having a better right than the Bonifacio Bros.,
Inc. and the Ayala Auto Parts Company, appellants herein, to the proceeds of motor insurance policy A-0615, in the sum of
P2,002.73, issued by the State Bonding & Insurance Co. Inc., and directing payment of the said amount to the H. Reyes,
Inc.

Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC- mortgaged the same to the H.S. Reyes, Inc.,
with the condition that the former would insure the automobile with the latter as beneficiary. The automobile was
thereafter insured on June 23, 1959 with the State Bonding & Insurance Co., Inc., and motor car insurance policy A-0615
was issued to Enrique Mora, the pertinent provisions of which read:

1. The Company (referring to the State Bonding & Insurance Co., Inc.) will, subject to the Limits of Liability, indemnify the
Insured against loss of or damages to the Motor Vehicle and its accessories and spare parts whilst thereon; (a) by
accidental collision or overturning or collision or overturning consequent upon mechanical breakdown or consequent
upon wear and tear,

xxx xxx xxx

2. At its own option the Company may pay in cash the amount of the loss or damage or may repair, reinstate, or replace
the Motor Vehicle or any part thereof or its accessories or spare parts. The liability of the Company shall not exceed the
value of the parts whichever is the less. The Insured's estimate of value stated in the schedule will be the maximum
amount payable by the Company in respect of any claim for loss or damage.1äwphï1.ñët

xxx xxx xxx

4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for which the Company may be
liable under this Policy provided that: — (a) The estimated cost of such repair does not exceed the Authorized Repair Limit,
(b) A detailed estimate of the cost is forwarded to the Company without delay, subject to the condition that "Loss, if any is
payable to H.S. Reyes, Inc.," by virtue of the fact that said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes,
Inc. and that under a clause in said insurance policy, any loss was made payable to the H.S. Reyes, Inc. as Mortgagee;

xxx xxx xxx

During the effectivity of the insurance contract, the car met with an accident. The insurance company then assigned the
accident to the Bayne Adjustment Co. for investigation and appraisal of the damage. Enrique Mora, without the
knowledge and consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish the labor and materials, some
of which were supplied by the Ayala Auto Parts Co. For the cost of labor and materials, Enrique Mora was billed at
P2,102.73 through the H.H. Bayne Adjustment Co. The insurance company after claiming a franchise in the amount of
P100, drew a check in the amount of P2,002.73, as proceeds of the insurance policy, payable to the order of Enrique Mora
or H.S. Reyes,. Inc., and entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to the proper
party. In the meantime, the car was delivered to Enrique Mora without the consent of the H.S. Reyes, Inc., and without
payment to the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. of the cost of repairs and materials.

Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio Bros. Inc. and the Ayala Auto
Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of Manila against Enrique Mora and the State Bonding
& Insurance Co., Inc. for the collection of the sum of P2,002.73 The insurance company filed its answer with a
counterclaim for interpleader, requiring the Bonifacio Bros. Inc. and the H.S. Reyes, Inc. to interplead in order to
determine who has better right to the insurance proceeds in question. Enrique Mora was declared in default for failure to
appear at the hearing, and evidence against him was received ex parte. However, the counsel for the Bonifacio Bros. Inc.,
Ayala Auto Parts Co. and State Bonding & Insurance Co. Inc. submitted a stipulation of facts, on the basis of which are
Municipal Court rendered a decision declaring the H.S. Reyes, Inc. as having a better right to the disputed amount and
ordering State Bonding & Insurance Co. Inc. to pay to the H. S. Reyes, Inc. the said sum of P2,002.73. From this decision,
the appellants elevated the case to the Court of First Instance of Manila which the stipulation of facts was reproduced. On
October 19, 1962 the latter court rendered a decision, affirming the decision of the Municipal Court. The Bonifacio Bros.
Inc. and the Ayala Auto Parts Co. moved for reconsideration of the decision, but the trial court denied the motion. Hence,
this appeal.

The main issue raised is whether there is privity of contract between the Bonifacio Bros. Inc. and the Ayala Auto Parts Co.
on the one hand and the insurance company on the other. The appellants argue that the insurance company and Enrique
Mora are parties to the repair of the car as well as the towage thereof performed. The authority for this assertion is to be
found, it is alleged, in paragraph 4 of the insurance contract which provides that "the insured may authorize the repair of
the Motor Vehicle necessitated by damage for which the company may be liable under the policy provided that (a) the
estimated cost of such repair does not exceed the Authorized Repair Limit, and (b) a detailed estimate of the cost is
forwarded to the company without delay." It is stressed that the H.H. Bayne Adjustment Company's recommendation of
payment of the appellants' bill for materials and repairs for which the latter drew a check for P2,002.73 indicates that
Mora and the H.H. Bayne Adjustment Co. acted for and in representation of the insurance company.

This argument is, in our view, beside the point, because from the undisputed facts and from the pleadings it will be seen
that the appellants' alleged cause of action rests exclusively upon the terms of the insurance contract. The appellants seek
to recover the insurance proceeds, and for this purpose, they rely upon paragraph 4 of the insurance contract document
executed by and between the State Bonding & Insurance Company, Inc. and Enrique Mora. The appellants are not
mentioned in the contract as parties thereto nor is there any clause or provision thereof from which we can infer that
there is an obligation on the part of the insurance company to pay the cost of repairs directly to them. It is fundamental
that contracts take effect only between the parties thereto, except in some specific instances provided by law where the
contract contains some stipulation in favor of a third person.1 Such stipulation is known as stipulation pour autrui or a
provision in favor of a third person not a pay to the contract. Under this doctrine, a third person is allowed to avail himself
of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and
deliberately conferred a favor upon such person.2 Consequently, a third person not a party to the contract has no action
against the parties thereto, and cannot generally demand the enforcement of the same.3 The question of whether a third
person has an enforcible interest in a contract, must be settled by determining whether the contracting parties intended
to tender him such an interest by deliberately inserting terms in their agreement with the avowed purpose of conferring a
favor upon such third person. In this connection, this Court has laid down the rule that the fairest test to determine
whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely
upon the intention of the parties as disclosed by their contract.4 In the instant case the insurance contract does not
contain any words or clauses to disclose an intent to give any benefit to any repairmen or materialmen in case of repair of
the car in question. The parties to the insurance contract omitted such stipulation, which is a circumstance that supports
the said conclusion. On the other hand, the "loss payable" clause of the insurance policy stipulates that "Loss, if any, is
payable to H.S. Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they intended to benefit.

We likewise observe from the brief of the State Bonding & Insurance Company that it has vehemently opposed the
assertion or pretension of the appellants that they are privy to the contract. If it were the intention of the insurance
company to make itself liable to the repair shop or materialmen, it could have easily inserted in the contract a stipulation
to that effect. To hold now that the original parties to the insurance contract intended to confer upon the appellants the
benefit claimed by them would require us to ignore the indespensable requisite that a stipulation pour autrui must be
clearly expressed by the parties, which we cannot do.

As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead of establishing privity
between the appellants and the insurance company, such stipulation merely establishes the procedure that the insured
has to follow in order to be entitled to indemnity for repair. This paragraph therefore should not be construed as bringing
into existence in favor of the appellants a right of action against the insurance company as such intention can never be
inferred therefrom.
Another cogent reason for not recognizing a right of action by the appellants against the insurance company is that "a
policy of insurance is a distinct and independent contract between the insured and insurer, and third persons have no
right either in a court of equity, or in a court of law, to the proceeds of it, unless there be some contract of trust,
expressed or implied between the insured and third person."5 In this case, no contract of trust, expressed or implied
exists. We, therefore, agree with the trial court that no cause of action exists in favor of the appellants in so far as the
proceeds of insurance are concerned. The appellants' claim, if at all, is merely equitable in nature and must be made
effective through Enrique Mora who entered into a contract with the Bonifacio Bros. Inc. This conclusion is deducible not
only from the principle governing the operation and effect of insurance contracts in general, but is clearly covered by the
express provisions of section 50 of the Insurance Act which read:

The insurance shall be applied exclusively to the proper interests of the person in whose name it is made unless otherwise
specified in the policy.

The policy in question has been so framed that "Loss, if any, is payable to H.S. Reyes, Inc.," which unmistakably shows the
intention of the parties.

The final contention of the appellants is that the right of the H.S. Reyes, Inc. to the insurance proceeds arises only if there
was loss and not where there is mere damage as in the instant case. Suffice it to say that any attempt to draw a distinction
between "loss" and "damage" is uncalled for, because the word "loss" in insurance law embraces injury or damage.

Loss in insurance, defined. — The injury or damage sustained by the insured in consequence of the happening of one or
more of the accidents or misfortune against which the insurer, in consideration of the premium, has undertaken to
indemnify the insured. (1 Bouv. Ins. No. 1215; Black's Law Dictionary; Cyclopedic Law Dictionary, cited in Martin's Phil.
Commercial Laws, Vol. 1, 1961 ed. p. 608).

Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or partial.

Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost.

G.R. No. L-23248 February 28, 1969

MANUEL UY, plaintiff-appellee,

vs.

ENRICO PALOMAR, in his capacity as Postmaster General, defendant-appellant.

Jalandoni and Jamir for plaintiff-appellee.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de Castro, Solicitor Augusto M.
Amores and Special Attorney M. N. Maningat for defendant-appellant.

ZALDIVAR, J.:

Manuel Uy filed a complaint with the Court of First Instance of Manila (Civil Case No. 55678) against the Postmaster
General, praying for an injunction to restrain said Postmaster General and his subordinates, agents or representatives
from enforcing Fraud Order No. 3, dated November 22, 1963, declaring Manuel Uy Sweepstakes Agency as conducting a
lottery or gift enterprise and directing all postmasters and other employees of the Bureau of Posts concerned to return to
the sender any mail matter addressed to Manuel Uy Sweepstakes Agency or to any of its agents or representatives with
the notation "Fraudulent" stamped upon the cover of such mail matter, and prohibiting the issuance or payment of any
money order or telegraphic transfer to the said agency or to any of its agents and representatives.

As prayed for in the complaint, a writ of preliminary injunction was issued ex parte by the lower court. The Postmaster
General moved for the dissolution of the writ of preliminary injunction, but the motion was denied.

The Postmaster General filed an answer to the complaint, setting up the defense that Manuel Uy was conducting a lottery
or gift enterprise that is prohibited by law; that as Postmaster General he has the authority to issue the fraud order in
question and he did not abuse his discretion in doing so; and that Manuel Uy had not exhausted all the administrative
remedies before invoking judicial intervention.

The lower court, on the basis of the stipulation of facts submitted by the parties declared Fraud Order No. 3 contrary to
law and violative of the rights of the plaintiff and made permanent the preliminary injunction previously issued.

The Postmaster General appealed to this Court.

The salient facts gathered from the stipulation of facts and culled from the briefs of the parties are as follows:

Manuel Uy (appellee, for short) is a duly authorized agent of the Philippine Charity Sweepstakes Office (PCSO for short), a
government entity created and empowered by law to hold sweepstakes draws and lotteries for charitable and public
purposes. As such agent of the PCSO appellee is engaged in the sale and distribution of sweepstakes and lottery tickets
which the PCSO prints and issues for each and every one of the not less than twenty draws that said office annually holds.
To carry out its business of selling sweepstakes and lottery tickets issued by the PCSO appellee, upon authority of the said
office, employs sub-agents throughout the Philippines, through which sub-agents not less than 70% of appellee's total
sales for each draw are made; and, with the consent of the PCSO appellee agrees to give 50% of the agent's prize to the
sub-agent selling the prize-winning ticket. The agent's prize is 10% of the prize won by the ticket sold.

For the Grand Christmas Sweepstakes Draw which would be held on December 15, 1963, the PCSO fixed the first, second
and third prizes at P700,000.00, P350,000.00, and P175,000.00, respectively, and set a sale goal, of P6,000,000.00 worth of
tickets. The PCSO directed its duly authorized agents to undertake every means possible to help achieve the six-million-
peso sales goal. In compliance with said directive, appellee devised and, through his representatives, offered to the public,
the "Grand Christmas Bonus Award" plan. The plan was designed to boost the sales of tickets for the PCSO Grand
Christmas Sweepstakes Draw. According to said plan, the appellee's sub-agents and purchasers of whole sweepstakes
tickets sold by appellee and his sub-agents may, in addition to the regular prize money of the December 15, 1963 draw,
win bonuses and awards as follows: for the sub-agent and buyer of the ticket winning the first prize, one 1963 Volkswagen
sedan each; for the sub-agent and buyer of the ticket winning the second prize, one Radiowealth 23-inch television set
each; for the sub-agent and buyer of the ticket winning the third prize, one Radiowealth refrigerator each; for the sub-
agents and buyers of the tickets winning any of the six fourth prizes, one Radiowealth sewing machine each; and for the
sub-agent and buyer of the ticket winning the charity prize, one Radiowealth Fiesta "hi-fi" radio set each. Except for the
amount paid for the authorized prize of the sweepstakes tickets, those entitled to benefit from the plan did not have to
pay any other amount in consideration of the right to benefit from the plan. The awards may be claimed by presenting to
the appellee the sales invoice of the winning tickets, in the case of the sellers, and the eight shares of the winning tickets,
in the case of the buyers.

The aforementioned plan is a modification (or alternative plan, as the appellee calls it) of the original scheme presented by
the appellee, thru counsel, to the Assistant Postmaster General in a letter dated October 15, 1963, and which the latter, in
his answer dated October 18, 1963, considered as violative of the Postal Law.

The appellee advertised his "Grand Christmas Bonus Award" plan, as described above, in the metropolitan newspapers of
nationwide circulation, the first of such advertisements appearing in seven such newspapers in their issues of November
18, 1963. The newspaper advertisements were repeated almost every week after November 18, 1963, with the last of
them published in the issue of the "Daily Mirror" of December 7, 1963.

As already stated, the fraud order in question was issued by the Postmaster-General (appellant, for short) under date of
November 22, 1963. However, it was only on December 10, 1963 that the appellee came to know of the issuance and
context thereof when he sought clarification from the Manila Post Office why his parcels containing sweepstakes tickets
for his sub-agents, as well as his other mail matters of purely personal nature, were refused acceptance for mailing the day
previous.

In the afternoon of December 10, 1963, appellee filed the complaint, mentioned at the beginning of this opinion, alleging
among others, that in issuing Fraud Order No. 3 the appellant "has acted arbitrarily or gravely exceeded his authority,
and/or committed an error of law". 1

Disclaiming that in issuing the fraud order he acted arbitrarily, or gravely exceeded his authority and/or committed an
error of law, appellant, in his answer to the complaint, cites as basis of his action, the provisions of Sections 1954(a), 1982,
and 1983 of the Postal Law (Chapter 52 of the Revised Administrative Code), pertinent portions of which read:

SEC. 1954. Absolutely nonmailable matter. — No matter belonging to any of the following classes, whether sealed as first
class matter or not, shall be imported into the Philippines through the mails, or be deposited in or carried by the mails of
the Philippines, or be delivered to its addressee by any officer or employee of the Bureau of Posts:

(a) Written or printed matter in any form, advertising, describing, or in any manner pertaining to, or conveying or
purporting to convey any information concerning any lottery, gift enterprise, or similar scheme depending in whole or in
part upon lot or chance, or any scheme, device, or enterprise for obtaining money or property of any kind by means of
false or fraudulent pretenses, representations, or promises.

xxx xxx xxx

SEC. 1982. Fraud orders. — Upon satisfactory evidence that any person or company is engaged in conducting any lottery,
gift enterprise, or scheme or the distribution of money, or of any real or personal property by lot, chance, or drawing of
any kind, or that any person or company is conducting any scheme, device, or enterprise for obtaining money or property
of any kind through the mails by means of false or fraudulent pretenses, representations, or promises, the Director of
Posts may instruct any postmaster or other officer or employee of the Bureau of Posts to return to the person depositing
same in the mails, with the word "fraudulent" plainly written or stamped upon the outside cover thereof, any mail matter
of whatever class mailed by or addressed to such person or company or the representative or agent of such person or
company....

SEC. 1983. Deprivation of use of money order system and telegraphic transfer service. — Director of Posts may, upon
evidence satisfactory to him that any person or company is engaged in conducting any lottery, gift enterprise, or scheme
for the distribution of money or of any real or personal property by lot, chance, or drawing of any kind, or that any person
or company is conducting any scheme, device, or enterprise for obtaining money or property of any kind through the mails
by means of false or fraudulent pretenses, representations, or promise, forbid the issue or payment by any postmaster of
any postal money order or telegraphic transfer to said person or company, or to the agent of any such person or company,
whether such agent is acting as an individual or as a firm, bank, corporation, or association of any kind, and may provide
by regulation for the return to the remitters of the sums named in money orders or telegraphic transfers drawn in favor of
such person or company or its agent.... (Emphasis supplied).

Invoking the phrase "upon evidence satisfactory to him the appellant contends that the fraud order in question was legally
issued because he had been satisfied with the evidence presented to him that appellee was conducting a lottery or gift
enterprise. 2 We note that the appellee does not question the authority of the appellant, under Sections 1954(a), 1982
and 1983 aforequoted, to prohibit the use of the mails, the money order system and the telegraphic transfer service for
the promotion of lotteries, gift enterprises or fraudulent schemes. 3 Indeed, appellant would be remiss in the performance
of his duties should he fail to exercise his authority under the Postal Law if and when the mails, the money order system,
and the telegraphic transfer service are utilized for the promotion of lotteries, gift enterprises and similar schemes
prohibited by law. Appellant's authority, however, is not absolute. Neither does the law give him unlimited discretion. The
appellant may only exercise his authority if there is a clear showing that the mails, the money order system and the
telegraphic transfer service are used to promote a scheme or enterprise prohibited by law.

In the present case, therefore, the question that must be resolved is whether appellee's "Grand Christmas Bonus Award"
plan constitutes a lottery, gift enterprise, or similar scheme proscribed by the Postal Law, aforequoted, as would authorize
the appellant to issue the fraud order in question.

Before we resolve the question, however, we wish to advert to the claim of the appellant that he had made his decision
based upon satisfactory evidence that the "Grand Christmas Bonus Award" plan of appellee is a lottery or gift enterprise
for the distribution of gifts by chance, and his decision in this regard cannot be reviewed by the court. 4 Thus, the
appellant, in his brief, 5 says:

It is respectfully submitted that corollary to the rule that courts cannot interfere in the performance of ordinary duties of
the executive department is the equally compelling rule that decisions of the defendant on questions of fact are final and
conclusive and generally cannot be reviewed by the courts. For it cannot be denied that the Postmaster General is charged
with quasi-judicial functions and vested with discretion in determining what is mailable matter and in withholding from
the plaintiff the privilege of using the mail, the money order system and the telegraphic transfer service... As the disputed,
Fraud Order No. 3 was issued pursuant to the powers vested in the defendant by the Postal Law and in accordance with
satisfactory evidence presented to him, it cannot be said that the defendant was palpably wrong or that his decision had
no reasonable basis whatever. Neither can it be said that he exceeded his authority nor that he abused his discretion.

In this connection it may be stated that the Postal Law contains no provision for judicial review of the decision of the
Postmaster General. This Court, however, in Reyes vs. Topacio 6 had stated that the action of the Director of Posts (now
Postmaster General) is subject to revision by the courts in case he exceeded his authority or his act is palpably wrong. And
in "El Debate" Inc. vs. Topacio 7 this Court said that the courts will not interfere with the decision of the Director of Post
(Postmaster General) as to what is, and what is not, mailable matter unless clearly of opinion that it was wrong. In other
words, the courts will interfere with the decision of the Postmaster General if it clearly appears that the decision is wrong.
This Court, by said rulings, recognizes the availability of judicial review over the action of the Postmaster General,
notwithstanding the absence of statutory provision for judicial review of his action. It may not be amiss to state that said
rulings are in consonance with American jurisprudence to the effect that the absence of statutory provisions for judicial
review does not necessarily mean that access to the courts is barred. The silence of the Congress is not to be construed as
indicating a legislative intent to preclude judicial review. 8 In American School of Magnetic Healing vs. McAnnulty, 9 the
U.S. Supreme Court, speaking on the power of the courts to review the action of the Postmaster General under a statute
similar to our Postal Law, 10 said:

That the conduct of the post office is a part of the administrative department of the government is entirely true, but that
does not necessarily and always oust the courts of jurisdiction to grant relief to a party aggrieved by any action by the
head, or one of the subordinate officials, of that Department, which is unauthorized by the statute under which he
assumes to act. The acts of all its officers must be justified by some law, and in case an official violates the law to the injury
of an individual the courts generally have jurisdiction to grant relief.

Appellant also invokes the doctrine of exhaustion of administrative remedies, and asserts that the action of the appellee in
the present case was premature because he had not first appealed the fraud order to higher administrative authorities.
This assertion of appellant has no merit. The rule on exhaustion of administrative remedies is not a hard and fast one. It
admits of exceptions, amongst which are: (1) where the question involved is purely a legal one, 11 and (2) where there are
circumstances indicating the urgency of judicial intervention. 12 The question involved in the present case is legal —
whether or not the "Grand Christmas Bonus Award" plan of appellee, based upon the facts as stipulated, is a lottery or gift
enterprise. We take note that the Grand Christmas Sweepstakes draw in conjunction with which appellee's plan was
offered, was scheduled for December 15, 1963, or barely five days from December 10, 1963, the date when appellee
learned of the issuance of the fraud order. Time was of the essence to the appellee.

We now resolve the main question in this case, namely, whether or not appellee's "Grand Christmas Bonus Award" plan
constitutes a lottery or a gift enterprise. There is no statutory definition of the terms "lottery" and "gift enterprise". This
Court, in the case of "El Debate" Inc. vs. Topacio, supra, referring to lottery, said:

... while countless definitions of lottery have been attempted, the authoritative one for this jurisdiction is that of the
United States Supreme Court, in analogous cases having to do with the power of the United States Postmaster General,
viz: The term "lottery" extends to all schemes for the distribution of prizes by chance, such as policy playing, gift
exhibitions, prize concerts, raffles at fairs, etc., and various forms of gambling. The three essential elements of a lottery
are: First, consideration; second, prize; and third. chance (Horner vs. United States [1902] 147 U.S. 449; Public Clearing
House vs. Coyne [1903] 194 U.S., 497; U.S. vs. Filart and Singson [1915] 30 Phil. 80; U.S. vs. Olsen and Marker [1917] 36
Phil. 395; U.S. Vs. Baguio [1919] 39 Phil. 962: Valhalla Hotel Construction Company vs. Carmona, p. 233, ante.)

Thus, for lottery to exist, three elements must concur, namely: consideration, prize, and chance.
Appellant maintains that all the elements are present in the "Grand Christmas Bonus Award" plan of the appellee, to wit:
"(1) consideration, because to participate and win in the contest one must buy and resell (in case of sub-agents) or buy (in
case of ticket buyers) only 'Manuel Uy' tickets; (2) prize, because of the goods to be awarded to the winners; and (3)
chance, because the determination of the winners depends upon the results of the sweepstakes draw which is decidedly a
game of chance." 13 With particular emphasis on the element of consideration, appellant likens this case to the "El
Debate" case, supra, and paraphrasing the ruling therein says that "By analogy there is consideration with respect to
persons who will buy 'Manuel Uy' tickets (in preference to tickets sold by other authorized agents, like Tagumpay, Pelagia
Viray, Marcela Meer Millar, etc.) merely to win prizes in addition to the regular sweepstakes prizes (and it is to such
persons that the scheme is directed); moreover, the persons patronizing the Manuel Uy Sweepstakes Agency do not all
receive same amount and some may receive more than the value paid for their tickets through chance and the prizes
awarded by the Philippine Charity Sweepstakes Office." 14

As against this contention, appellee maintains that there is absence of the element of consideration because except for
paying the authorized purchase price of the corresponding sweepstakes tickets, those entitled to participate in and to
benefit from appellee's "Grand Christmas Bonus Award" plan do not part with any other consideration for the right to take
part and benefit therefrom, which fact is admitted by the appellant. 15 Further, appellee contends that even under the
test laid down in the "El Debate" case, the element of consideration is lacking because appellee's sub-agents would have
continued to sell and the general public would have continued to buy 'Manuel Uy' tickets regardless of appellee's "Grand
Christmas Bonus Award" plan. 16 Moreover, appellee advances the view that under another test adopted by American
courts as shown by a review of comparative case law in the United States, there can be no consideration under the plan in
question because the participants pay no money or its equivalent into a fund which pays for the prize. 17

Speaking of the element of consideration, this Court in the aforementioned "El Debate" case, and quoted in Caltex (Phil.)
Inc. vs. Postmaster General, 18 said:

In respect to the last element of consideration, the law does not condemn the gratuitous distribution of property by
chance, if no consideration is derived directly or indirectly from the party receiving the chance, but does condemn as
criminal, schemes in which a valuable consideration of some kind is paid directly or indirectly for the chance to draw a
prize.

In the "Grand Christmas Bonus Award" plan of the appellee We do not see the presence of the element of consideration,
that is, payment of something of value, or agreement to pay, for the chance to win the bonus or award offered. True, that
to be a participant in said plan, one must have to buy a whole sweepstakes ticket (8 shares) sold by the Manuel Uy
Sweepstakes Agency or by its sub-agents. But the payment for the price of the sweepstakes ticket is the consideration for
the chance to win any of the prizes offered by the PCSO in the sweepstakes draw of December 15, 1963. Wholly or partly,
said payment cannot be deemed as a consideration also for the chance to win the prizes offered by the appellee. For
nothing is asked of, or received from, the buyer of the ticket more than the authorized price thereof, and which price
appears on the face of the ticket. In fact, appellant admits that except for the price of the ticket, those entitled to
participate and benefit from the plan do not part with any other consideration for the right to take part and benefit
therefrom. 19 Indeed, as correctly observed by the lower court, "there is absolutely no separate consideration for the
right to win any of the offered bonuses or awards."
The analogy drawn by the appellant from the "El Debate" case is not persuasive. On the contrary, the "reason" or
"inducement" test laid down in said case in determining the presence of the element of consideration seems to favor the
appellee. Paraphrased, the test as expressed in the "El Debate" case is: if the reason for the subscription of the "El Debate"
was the desire to subscribe regardless of any prize offered, then there was no consideration insofar as the prize plan is
concerned; upon the other hand, if the reason for the subscription was to win the prize offered, then the payment of the
subscription fee constituted a consideration for the chance to win the prize. In the instant case, there are two groups of
participants, in appellee's plan, namely: the sub-agents and the ticket buyers. It cannot be denied that the sub-agents
who, as stated in the stipulation of facts, are responsible for not less than 70% of appellee's total sales for every draw,
would have continued to be appellee's sub-agents and would have sold "Manuel Uy" tickets regardless of the plan in
question. Anyway, they stood to receive 50% of the agent's prize for any of the prize-winning ticket they could sell. Upon
the other hand, the probability is that the general public would have purchased "Manuel Uy" tickets in their desire to win
any of the prizes offered by the PCSO regardless of the inducement offered by the appellee to win additional prizes. This
conclusion finds support from the admitted fact that the appellee has consistently sold the greatest number of tickets
among the PCSO'S authorized agents. 20 And undoubtedly, every person who purchased sweepstakes tickets from the
Manuel Uy Sweepstakes Agency for the December 15, 1963 draw must have been induced, not by the prizes offered by
the appellee but by the substantial prizes offered by the PCSO to wit: First prize, P700,000.00; Second prize P350,000.00;
and Third prize, P175,000.00.

It may not be amiss to state at this juncture that the comparative case law in the United States indicates that there is
another test for determining whether or not the element of consideration exists in a given scheme or plan so as to
constitute the same a lottery under parallel antilottery legislation. In Post Publishing Co. vs. Murray, 21 it was held:

The advertisement or scheme in question does not seem to be like any of the kinds or types of wrong against which the
Act of Congress was directed. It did not present a lottery scheme because a lottery involves a scheme for raising money by
selling chances to share in the distribution of prizes — a scheme for the distribution of prizes by chance among persons
purchasing tickets. It was not a gift enterprise because a gift enterprise contemplates a scheme in which publishers or
sellers give presents as inducements to members of the public to part with their money. (Emphasis supplied.)

The more recent case of Garden City Chamber of Commerce vs. Wagnet 22 laid down the test in more definitive terms, as
follows:

The examination of authorities made in the present case induces the belief that the consideration requisite to a lottery is a
contribution in kind to the fund or property to be distributed. (Emphasis supplied)

The test indicated in the foregoing rulings simply means that unless the participants pay money or its equivalent into a
fund which pays for the prizes, there is no lottery. Stated differently, there is consideration or price paid if it appears that
the prizes offered, by whatever name they may be called, came out of the fund raised by the sale of chances among the
participants in order to win the prizes. Conversely, if the prizes do not come out of the fund or contributions by the
participants, no consideration has been paid, and consequently there is no lottery.
In the instant case, as stated by the lower court, the prizes offered by the appellee were to be taken from his share in the
agent's prize 23 , which was 10% of the amount of the prize won by each ticket sold. 24 Therefore, since none of the prizes
(awards and bonuses) offered in appellee's plan were to come directly from the aggregate price of the sweepstakes tickets
sold by appellee, as a part thereof, no consideration exists for the chance to win said prizes, there being no "contribution
in kind to the fund or property to be distributed."

Appellant, however, urges that the patronage of "Manuel Uy" tickets constitutes a consideration because from the
increased sales, appellee would derive benefits in the form of "returns on his quite substantial investment." This
suggestion is without merit. The question of consideration is not to be determined from the standpoint of the appellee, or
the proponent of the scheme, but rather from that of the sub-agents and the ticket buyers. Said this Court in Caltex (Phil.)
case, supra, on this point:

Off-tangent, too, is the suggestion that the scheme, being admittedly for sales promotion, would naturally benefit the
sponsor in the way of increased patronage by those who will be encouraged to prefer Caltex products "if only to get the
chance to draw a prize by securing entry blanks". The required element of consideration does not consist of the benefit
derived by the proponent of the contest. The true test, as laid down in People vs. Cardas 28 P. 2d. 99, 137 Cal. App. (Supp.)
788, is whether the participant pays a valuable consideration for the chance, and not whether those conducting the
enterprise received something of value in return for the distribution of the prize. Perspective properly oriented, the
standpoint of the contestant is all that matters, not that of the sponsor. The following, culled from Corpus Juris Secundum,
should set the matter at rest:

The fact that the holder of the drawing expects thereby to receive, some benefit in the way of patronage or otherwise, as
a result of the drawing, does not supply the element of consideration. — Griffith Amusement Co. v. Morgan, Tex. Civ App.,
98 S.W. 2d., 844. (54 C.J.S., p. 849).

Equally enlightening in this connection is the following dissertation of the court in the case of State vs. Hundling: 25

The question is not whether the donor of the prize makes a profit in some remote and indirect way, but, rather, whether
those who have a chance at the prize pay anything of value for that chance. Every scheme of advertising, including the
giving away of premiums and prizes, naturally has for its objects, not purely a philanthropic purpose, but increased
business. Even the corner grocer who gives candy to the children of the neighborhood may be prompted by that motive,
but that does not make the gift unlawful. And if the grocery instead of giving candy to all the children, gives it only to some
as determined by lot, that circumstance does not make the gift made unlawful by the further circumstance that the
business of the grocer in the neighborhood may be thereby increased. Profit accruing remotely and indirectly to the
person who gives the prize is not a substitute for the requirement that he who has the chance to win the prize must pay a
valuable consideration therefor, in order to make the scheme a lottery. (Emphasis supplied.)
Based on the foregoing rulings, therefore, it is clear that there is no consideration or price for the chance to win any of the
prizes offered by the appellee in his "Grand Christmas Bonus Award" plan. There being no consideration, there is no
lottery. 26

Even in the light of the mischief or evil sought to be redressed by the Postal Law, or the ratio legis, the appellee's scheme
cannot be condemned as a lottery. It is merely a scheme set up to promote the sale of tickets for the Grand Christmas
Sweepstakes Draw held on December 15, 1963. Should any question be raised it would be: whether or not sweepstakes
draws cultivate or stimulate the gambling spirit among the people. It should be so, because it cannot be doubted that
sweepstakes tickets purchasers are induced to buy said tickets because of the desire to win any of the substantial prizes
offered by the PCSO. This question, however, is at once rendered moot and academic because sweepstakes draws are
authorized by law.

But appellant presents as an alternative argument the contention that even if assuming that "the element of consideration
is lacking the scheme is still a gift enterprise which is also prohibited by the Postal Law." And in support of this contention
or proposition, appellant relies solely on Opinion No. 217, series of 1953 of the Secretary of Justice, which, according to
the appellant, "ruled that the elements of gift enterprise, as distinguished from the lottery, are only chance and prize."

In the Caltex (Phil.) case, supra, this Court, rejecting a similar contention of the appellant, emphatically held:

[W]e note that in the Postal Law the term in question (gift enterprise) is used in association with the word "lottery". With
the meaning of lottery settled, and consonant to the well-known principle of legal hermeneutics noscitu a sociis — which
Opinion 217 aforesaid also relied upon although only in so far as the clement of chance is concerned — it is only logical
that the term under construction should be accorded no other meaning than that which is consistent with the nature of
the word associated therewith. Hence, if lottery is prohibited only if it involves a consideration, so also must the term "gift
enterprise" be so construed. Significantly, there is not in the law the slightest indicium of any intent to eliminate that
element of consideration from the "gift enterprise" therein included.

This conclusion firms up in the light of the mischief sought to be remedied by the law, resort to the determination thereof
being an accepted extrinsic aid in statutory construction. Mail fraud orders, it is axiomatic, are designed to prevent the use
of the mails as a medium for disseminating printed matters which on grounds of public policy are declared non-mailable.
As applied to lotteries, gift enterprises and similar schemes, justification lies in the recognized necessity to suppress their
tendency to inflame the gambling spirit and to corrupt public morals (Com. vs. Lund 15 A. 2d., 839, 143 Pa. Super. 208).
Since in gambling it is inherent that something of value be hazarded for a chance to gain a larger amount, it follows
ineluctably that where no consideration is paid by the contestant to participate, the reason behind the law can hardly be
said to obtain. If, as it has been held —

Gratuitous distribution of property by lot or chance does not constitute "lottery", if it is not resorted to as a device to
evade the law and no consideration is derived, directly or indirectly, from the party receiving the chance, gambling spirit
not being cultivated or stimulated thereby. (City of Roswell vs. Jones, 67 P. 2d., 286, 41 N.M., 258.') (25 Words and
Phrases, perm. ed., p. 695, emphasis)

We find no obstacle in saying the same respecting a gift enterprise. In the end, we are persuaded to hold that, under the
prohibitive provisions of the Postal Law which we have heretofore examined, gift enterprise and similar schemps therein
contemplated are condemnable only if, like lotteries, they involve the element of consideration....

Considered in the light of the foregoing elucidations the conclusion is irresistible that since in the instant case the element
of consideration is lacking, the plan or scheme in question is also not a "gift enterprise" or a "similar scheme" proscribed
by the Postal Law.

Not being a lottery, gift enterprise or similar scheme, appellee's "Grand Christmas Bonus Award" plan can be considered a
scheme for the gratuitous distribution of personal property by chance which the Postal Law does not condemn. Thus, in
labelling said scheme as a lottery or gift enterprise when it is not, appellant not only committed a palpable error of law but
also exceeded his statutory authority in issuing the fraud order in question. The power of the appellant to issue a fraud
order under the Postal Law is dependent upon the existence of a lottery, gift enterprise or similar scheme.

Accordingly, the lower court did not err in declaring the fraud order in question contrary to law and in substituting its
judgement for that of the appellant. The lower court did not also err in issuing the writ of injunction, the remedy
adequate, speedy and appropriate under the circumstances.lawphi1.nêt

... The Postmaster General's order being the result of a mistaken view of the law, could not operate as a defense to his
action on the part of the defendant, though it might justify his obedience thereto until some action of the court. In such a
case as the one before us there is no adequate remedy at law, the injunction to prohibit the further withholding of the
mail from complaint being the only remedy at all adequate to the full relief to which the complainants are entitled.... 27

WHEREFORE, the decision appealed from should be, as it is hereby, affirmed. No pronouncement as to costs. It is so
ordered.