Lawyereering

Facts:

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

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of ₱224,702,641.18. xxxx

The deficiency [documentary stamp tax (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 xxxx

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.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] 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. It held that petitioner’s health care agreement was in the nature of a non-life insurance contract subject to DST.

Issue:

            Whether or not, a Health Maintenance Organizations’ contracts are contract of insurance.

Ruling:

            No. An examination of petitioner’s agreements with its members lead the Court to conclude that it is not an insurance contract within the context of our Insurance Code.

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

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

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

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

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:.

Second. Not all the necessary elements of a contract of insurance are present in petitioner’s agreements. To begin with, there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioner’s physician or affiliated physician to him. In case of an ailment by a member of the benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment.

Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured.

However, assuming that petitioner’s commitment to provide medical services to its members can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioner’s objective is to provide medical services at reduced cost, not to distribute risk like an insurer.

Facts:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld), initially for One Million (₱1,000,000.00) Pesos and eventually increased to One Million Five Hundred Thousand (₱1,500,000.00) Pesos, covering the period from August 14, 1980 to March 13, 1981.

Pertinent portions of subject policy on the buildings insured, and location thereof, read:

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

x x x           x x x          x x x

‘Said building of four-span lofty one storey in height with mezzanine portions is constructed of reinforced concrete and hollow blocks and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly plant, offices, warehouse and caretaker’s quarters.

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

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

On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion of its four-span building and partly gutting the left and right sections thereof. A two-storey building (behind said four-span building) where fun and amusement machines and spare parts were stored, was also destroyed by the fire.

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

It is petitioner’s submission that the fire insurance policy litigated upon protected only the contents of the main building (four-span), and did not include those stored in the two-storey annex building. On the other hand, the private respondent theorized that the so called “annex” was not an annex but was actually an integral part of the four-span building and therefore, the goods and items stored therein were covered by the same fire insurance policy.

Issue:

            Whether or not the ‘Annex” building was covered by insurance policy.

Ruling:

So also, considering that the two-storey building aforementioned was already existing when subject fire insurance policy contract was entered into on January 12, 1981, having been constructed sometime in 1978, petitioner should have specifically excluded the said two-storey building from the coverage of the fire insurance if minded to exclude the same but if did not, and instead, went on to provide that such fire insurance policy covers the products, raw materials and supplies stored within the premises of respondent Transworld which was an integral part of the four-span building occupied by Transworld, knowing fully well the existence of such building adjoining and intercommunicating with the right section of the four-span building.

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

Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has created a doubt regarding the portions of the building insured thereby. Article 1377 of the New Civil Code provides:

“Art.1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity”

Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal Surety Insurance Company, whose lawyer or managers drafted the fire insurance policy contract under scrutiny. Citing the aforecited provision of law in point, the Court in Landicho vs. Government Service Insurance System, ruled:

“This is particularly true as regards insurance policies, in respect of which it is settled that the ‘terms in an insurance policy, which are ambiguous, equivocal, or uncertain x x x are to be construed strictly and most strongly against the insurer, and liberally in favor of the insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where forfeiture is involved’ (29 Am. Jur., 181), and the reason for this is that the ‘insured usually has no voice in the selection or arrangement of the words employed and that the language of the contract is selected with great care and deliberation by experts and legal advisers employed by, and acting exclusively in the interest of, the insurance company.’ (44 C.J.S., p. 1174).””

Facts:

            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.  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 186  and 187  of the Insurance Code, while Pioneer violated Sections 299,  300  and 301  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.

Steamship Mutual 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.

Issue:

            Whether or not Steamship Mutual, a P & I Club, engaged in the insurance business in the Philippines

Ruling:

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

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

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

In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses incident to a marine adventure.  Section 99  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.  Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs.

Facts:

On October 20, 1997, Sun Life filed filed with the CIR its insurance premium tax return and documentary stamp tax declaration returns and paid the total amount.

“On December 29, 1997, the CTA rendered its decision in Insular Life Assurance Co. Ltd. v. [CIR], which held that mutual life insurance companies are purely cooperative companies and are exempt from the payment of premium tax and DST. This pronouncement was later affirmed by SC in [CIR] v. Insular Life Assurance Company, Ltd. Sun Life surmised that[,] Hence, on August 20, 1999, Sun Life filed with the CIR an administrative claim for tax credit of its alleged erroneously paid premium tax and DST for the aforestated tax periods.

Both CTA and CA ruled that Sun Life was a cooperative.

Issue:

Whether or not Sun Life is a purely cooperative and was organized and conducted solely by the members thereof for the exclusive benefit of each member and not for profit under Section 199 of the National Internal Revenue Code.

Ruling:

Yes. Sun Life is a cooperative.

It is operated with money collected from its members. Since respondent is composed entirely of members who are also its policyholders, all premiums collected obviously come only from them.

The member-policyholders constitute “both insurer and insured”  who “contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid.”  The premiums  pooled into this fund are earmarked for the payment of their indemnity and benefit claims.

It is licensed for the mutual protection of its members, not for the profit of anyone.

A mutual life insurance company is conducted for the benefit of its member-policyholders,  who pay into its capital by way of premiums. To that extent, they are responsible for the payment of all its losses.  “The cash paid in for premiums and the premium notes constitute their assets x x x.”  In the event that the company itself fails before the terms of the policies expire, the member-policyholders do not acquire the status of creditors.  Rather, they simply become debtors for whatever premiums that they have originally agreed to pay the company, if they have not yet paid those amounts in full, for “[m]utual companies x x x depend solely upon x x x premiums.”  Only when the premiums will have accumulated to a sum larger than that required to pay for company losses will the member-policyholders be entitled to a “pro rata division thereof as profits.”