insurance missing cases- sept 24

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SECOND DIVISION

[G.R. No. 137775. March 31, 2005]

FGU INSURANCE CORPORATION, petitioner, vs. THE COURT OF APPEALS, SAN MIGUELCORPORATION, and ESTATE OF ANG GUI, represented by LUCIO, JULIAN, and JAIME, allsurnamed ANG, and CO TO, respondents.

[G.R. No. 140704. March 31, 2005]

ESTATE OF ANG GUI, Represented by LUCIO, JULIAN and JAIME, all surnamed ANG, and CO TO,petitioners, vs. THE HONORABLE COURT OF APPEALS, SAN MIGUEL CORP., and FGUINSURANCE CORP., respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

Before Us are two separate Petitions for review assailing the Decision[1] of the Court of Appeals inCA-G.R. CV No. 49624 entitled, San Miguel Corporation, Plaintiff-Appellee versus Estate of Ang Gui,represented by Lucio, Julian and Jaime, all surnamed Ang, and Co To, Defendants-Appellants, ThirdPartyPlaintiffs versus FGU Insurance Corporation, Third-Party Defendant-Appellant, which affirmed in toto thedecision[2] of the Regional Trial Court of Cebu City, Branch 22. The dispositive portion of the Court ofAppeals decision reads:

WHEREFORE, for all the foregoing, judgment is hereby rendered as follows:

1) Ordering defendants to pay plaintiff the sum ofP1,346,197.00 and an interest of 6% per annum to be reckoned from the filing of thiscase on October 2, 1990;

2) Ordering defendants to pay plaintiff the sum ofP25,000.00 for attorneys fees and an additional sum of P10,000.00 as litigationexpenses;

3) With cost against defendants.For the Third-Party Complaint:

1) Ordering third-party defendant FGU Insurance Company to pay and reimburse defendants the amount ofP632,700.00.[3]

The Facts

Evidence shows that Anco Enterprises Company (ANCO), a partnership between Ang Gui and Co To,was engaged in the shipping business. It owned the M/T ANCO tugboat and the D/B Lucio barge whichwere operated as common carriers. Since the D/B Lucio had no engine of its own, it could not maneuver byitself and had to be towed by a tugboat for it to move from one place to another.

On 23 September 1979, San Miguel Corporation (SMC) shipped from Mandaue City, Cebu, on boardthe D/B Lucio, for towage by M/T ANCO, the following cargoes:

Bill of Lading No. Shipment Destination1 25,000 cases Pale Pilsen Estancia, Iloilo

350 cases Cerveza Negra Estancia, Iloilo
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2 15,000 cases Pale Pilsen San Jose, Antique200 cases Cerveza Negra San Jose, Antique

The consignee for the cargoes covered by Bill of Lading No. 1 was SMCs Beer Marketing Division(BMD)-Estancia Beer Sales Office, Estancia, Iloilo, while the consignee for the cargoes covered by Bill ofLading No. 2 was SMCs BMD-San Jose Beer Sales Office, San Jose, Antique.

The D/B Lucio was towed by the M/T ANCO all the way from Mandaue City to San Jose, Antique. The

vessels arrived at San Jose, Antique, at about one oclock in the afternoon of 30 September 1979. Thetugboat M/T ANCO left the barge immediately after reaching San Jose, Antique.

When the barge and tugboat arrived at San Jose, Antique, in the afternoon of 30 September 1979, theclouds over the area were dark and the waves were already big. The arrastre workers unloading thecargoes of SMC on board the D/B Lucio began to complain about their difficulty in unloading the cargoes.SMCs District Sales Supervisor, Fernando Macabuag, requested ANCOs representative to transfer thebarge to a safer place because the vessel might not be able to withstand the big waves.

ANCOs representative did not heed the request because he was confident that the barge couldwithstand the waves. This, notwithstanding the fact that at that time, only the M/T ANCO was left at thewharf of San Jose, Antique, as all other vessels already left the wharf to seek shelter. With the wavesgrowing bigger and bigger, only Ten Thousand Seven Hundred Ninety (10,790) cases of beer weredischarged into the custody of the arrastre operator.

At about ten to eleven oclock in the evening of 01 October 1979, the crew of D/B Lucio abandonedthe vessel because the barges rope attached to the wharf was cut off by the big waves. At around midnight,the barge run aground and was broken and the cargoes of beer in the barge were swept away.

As a result, ANCO failed to deliver to SMCs consignee Twenty-Nine Thousand Two Hundred Ten(29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra. The value per case ofPale Pilsen was Forty-Five Pesos and Twenty Centavos (P45.20). The value of a case of Cerveza Negrawas Forty-Seven Pesos and Ten Centavos (P47.10), hence, SMCs claim against ANCO amounted to OneMillion Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00).

As a consequence of the incident, SMC filed a complaint for Breach of Contract of Carriage andDamages against ANCO for the amount of One Million Three Hundred Forty-Six Thousand One HundredNinety-Seven Pesos (P1,346,197.00) plus interest, litigation expenses and Twenty-Five Percent (25%) of the

total claim as attorneys fees.

Upon Ang Guis death, ANCO, as a partnership, was dissolved hence, on 26 January 1993, SMC fileda second amended complaint which was admitted by the Court impleading the surviving partner, Co To andthe Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed Ang. The substituteddefendants adopted the original answer with counterclaim of ANCO since the substantial allegations of theoriginal complaint and the amended complaint are practically the same.

ANCO admitted that the cases of beer Pale Pilsen and Cerveza Negra mentioned in the complaintwere indeed loaded on the vessel belonging to ANCO. It claimed however that it had an agreement withSMC that ANCO would not be liable for any losses or damages resulting to the cargoes by reason offortuitous event. Since the cases of beer Pale Pilsen and Cerveza Negra were lost by reason of a storm, afortuitous event which battered and sunk the vessel in which they were loaded, they should not be heldliable. ANCO further asserted that there was an agreement between them and SMC to insure the cargoes inorder to recover indemnity in case of loss. Pursuant to that agreement, the cargoes to the extent of TwentyThousand (20,000) cases was insured with FGU Insurance Corporation (FGU) for the total amount of EightHundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) per Marine Insurance Policy No. 29591.

Subsequently, ANCO, with leave of court, filed a Third-Party Complaint against FGU, alleging thatbefore the vessel of ANCO left for San Jose, Antique with the cargoes owned by SMC, the cargoes, to theextent of Twenty Thousand (20,000) cases, were insured with FGU for a total amount of Eight Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) under Marine Insurance Policy No. 29591. ANCOfurther alleged that on or about 02 October 1979, by reason of very strong winds and heavy waves broughtabout by a passing typhoon, the vessel run aground near the vicinity of San Jose, Antique, as a result ofwhich, the vessel was totally wrecked and its cargoes owned by SMC were lost and/or destroyed. Accordingto ANCO, the loss of said cargoes occurred as a result of risks insured against in the insurance policy andduring the existence and lifetime of said insurance policy. ANCO went on to assert that in the remote

possibility that the court will order ANCO to pay SMCs claim, the third-party defendant corporation should beheld liable to indemnify or reimburse ANCO whatever amounts, or damages, it may be required to pay toSMC.


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In its answer to the Third-Party complaint, third-party defendant FGU admitted the existence of theInsurance Policy under Marine Cover Note No. 29591 but maintained that the alleged loss of the cargoescovered by the said insurance policy cannot be attributed directly or indirectly to any of the risks insuredagainst in the said insurance policy. According to FGU, it is only liable under the policy to Third-party PlaintiffANCO and/or Plaintiff SMC in case of any of the following:

a) total loss of the entire shipment;

b) loss of any case as a result of the sinking of the vessel; orc) loss as a result of the vessel being on fire.

Furthermore, FGU alleged that the Third-Party Plaintiff ANCO and Plaintiff SMC failed to exerciseordinary diligence or the diligence of a good father of the family in the care and supervision of the cargoesinsured to prevent its loss and/or destruction.

Third-Party defendant FGU prayed for the dismissal of the Third-Party Complaint and asked for actual,moral, and exemplary damages and attorneys fees.[1]

The trial court found that while the cargoes were indeed lost due to fortuitous event, there was failureon ANCOs part, through their representatives, to observe the degree of diligence required that wouldexonerate them from liability. The trial court thus held the Estate of Ang Gui and Co To liable to SMC for theamount of the lost shipment. With respect to the Third-Party complaint, the court a quo found FGU liable to

bear Fifty-Three Percent (53%) of the amount of the lost cargoes. According to the trial court:

. . . Evidence is to the effect that the D/B Lucio, on which the cargo insured, run-aground and was broken and the beer

cargoes on the said barge were swept away.It is the sense of this Court that the risk insured against was the cause ofthe loss.

. . .Since the total cargo was 40,550 cases which had a total amount ofP1,833,905.00 and the amount of the policy was

only for P858,500.00, defendants as assured, therefore, were considered co-insurers of third-party defendant FGU

Insurance Corporation to the extent of 975,405.00 value of the cargo. Consequently, inasmuch as there was partial lossof only P1,346,197.00, the assured shall bear 53% of the loss[4] [Emphasis ours]

The appellate court affirmed in toto the decision of the lower court and denied the motion forreconsideration and the supplemental motion for reconsideration.

Hence, the petitions.

The Issues

In G.R. No. 137775, the grounds for review raised by petitioner FGU can be summarized into two: 1)Whether or not respondent Court of Appeals committed grave abuse of discretion in holding FGU liableunder the insurance contract considering the circumstances surrounding the loss of the cargoes; and 2)Whether or not the Court of Appeals committed an error of law in holding that the doctrine ofres judicata

applies in the instant case.

In G.R. No. 140704, petitioner Estate of Ang Gui and Co To assail the decision of the appellate courtbased on the following assignments of error: 1) The Court of Appeals committed grave abuse of discretion inaffirming the findings of the lower court that the negligence of the crewmembers of the D/B Lucio was theproximate cause of the loss of the cargoes; and 2) The respondent court acted with grave abuse ofdiscretion when it ruled that the appeal was without merit despite the fact that said court had accepted thedecision in Civil Case No. R-19341, as affirmed by the Court of Appeals and the Supreme Court, as resjudicata.

Ruling of the Court

First, we shall endeavor to dispose of the common issue raised by both petitioners in their respective

petitions for review, that is, whether or not the doctrine ofres judicata applies in the instant case.

It is ANCOs contention that the decision in Civil Case No. R-19341,[5] which was decided in its favor,constitutes res judicata with respect to the issues raised in the case at bar.
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The contention is without merit. There can be no res judicata as between Civil Case No. R-19341 andthe case at bar. In order forres judicata to be made applicable in a case, the following essential requisitesmust be present: 1) the former judgment must be final; 2) the former judgment must have been rendered bya court having jurisdiction over the subject matter and the parties; 3) the former judgment must be ajudgment or order on the merits; and 4) there must be between the first andsecond action identity of parties,identity of subject matter, and identity of causes of action.[6]

There is no question that the first three elements of res judicata as enumerated above are indeed

satisfied by the decision in Civil Case No. R-19341. However, the doctrine is still inapplicable due to theabsence of the last essential requisite of identity of parties, subject matter and causes of action.

The parties in Civil Case No. R-19341 were ANCO as plaintiff and FGU as defendant while in theinstant case, SMC is the plaintiff and the Estate of Ang Gui represented by Lucio, Julian and Jaime, allsurnamed Ang and Co To as defendants, with the latter merely impleading FGU as third-party defendant.

The subject matter of Civil Case No. R-19341 was the insurance contract entered into by ANCO, theowner of the vessel, with FGU covering the vessel D/B Lucio, while in the instant case, the subject matter oflitigation is the loss of the cargoes of SMC, as shipper, loaded in the D/B Lucio and the resulting failure ofANCO to deliver to SMCs consignees the lost cargo. Otherwise stated, the controversy in the first caseinvolved the rights and liabilities of the shipownervis--vis that of the insurer, while the present case involvesthe rights and liabilities of the shipper vis--vis that of the shipowner. Specifically, Civil Case No. R-19341was an action for Specific Performance and Damages based on FGU Marine Hull Insurance Policy No. VMF-

MH-13519 covering the vessel D/B Lucio, while the instant case is an action for Breach of Contract ofCarriage and Damages filed by SMC against ANCO based on Bill of Lading No. 1 and No. 2, with defendantANCO seeking reimbursement from FGU under Insurance Policy No. MA-58486, should the former be heldliable to pay SMC.

Moreover, the subject matter of the third-party complaint against FGU in this case is different from thatin Civil Case No. R-19341. In the latter, ANCO was suing FGU for the insurance contract over the vesselwhile in the former, the third-party complaint arose from the insurance contract covering the cargoes onboard the D/B Lucio.

The doctrine ofres judicata precludes the re-litigation of a particular fact or issue already passed uponby a court of competent jurisdiction in a former judgment, in another action between the same parties basedon a different claim or cause of action. The judgment in the prior action operates as estoppel only as tothose matters in issue or points controverted, upon the determination of which the finding or judgment was

rendered.[7] If a particular point or question is in issue in the second action, and the judgment will depend onthe determination of that particular point or question, a former judgment between the same parties or theirprivies will be final and conclusive in the second if that same point or question was in issue and adjudicatedin the first suit.[8]

Since the case at bar arose from the same incident as that involved in Civil Case No. R-19341, onlyfindings with respect to matters passed upon by the court in the former judgment are conclusive in thedisposition of the instant case. A careful perusal of the decision in Civil Case No. R-19341 will reveal that thepivotal issues resolved by the lower court, as affirmed by both the Court of Appeals and the Supreme Court,can be summarized into three legal conclusions: 1) that the D/B Lucio before and during the voyage wasseaworthy; 2) that there was proper notice of loss made by ANCO within the reglementary period; and 3) thatthe vessel D/B Lucio was a constructive total loss.

Said decision, however, did not pass upon the issues raised in the instant case. Absent therein wasany discussion regarding the liability of ANCO for the loss of the cargoes. Neither did the lower court passupon the issue of the alleged negligence of the crewmembers of the D/B Lucio being the cause of the loss ofthe cargoes owned by SMC.

Therefore, based on the foregoing discussion, we are reversing the findings of the Court of Appealsthat there is res judicata.

Anent ANCOs first assignment of error, i.e., the appellate court committed error in concluding that thenegligence of ANCOs representatives was the proximate cause of the loss, said issue is a question of factassailing the lower courts appreciation of evidence on the negligence or lack thereof of the crewmembers ofthe D/B Lucio. As a rule, findings of fact of lower courts, particularly when affirmed by the appellate court, aredeemed final and conclusive. The Supreme Court cannot review such findings on appeal, especially whenthey are borne out by the records or are based on substantial evidence.[9] As held in the case ofDonato v.

Court of Appeals,[10] in this jurisdiction, it is a fundamental and settled rule that findings of fact by the trialcourt are entitled to great weight on appeal and should not be disturbed unless for strong and cogentreasons because the trial court is in a better position to examine real evidence, as well as to observe thedemeanor of the witnesses while testifying in the case.[11]
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It is not the function of this Court to analyze or weigh evidence all over again, unless there is ashowing that the findings of the lower court are totally devoid of support or are glaringly erroneous as toconstitute palpable error or grave abuse of discretion.[12]

A careful study of the records shows no cogent reason to fault the findings of the lower court, assustained by the appellate court, that ANCOs representatives failed to exercise the extraordinary degree ofdiligence required by the law to exculpate them from liability for the loss of the cargoes.

First, ANCO admitted that they failed to deliver to the designated consignee the Twenty NineThousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of CervezaNegra.

Second, it is borne out in the testimony of the witnesses on record that the barge D/B Lucio had noengine of its own and could not maneuver by itself. Yet, the patron of ANCOs tugboat M/T ANCO left it tofend for itself notwithstanding the fact that as the two vessels arrived at the port of San Jose, Antique, signsof the impending storm were already manifest. As stated by the lower court, witness Mr. Anastacio Manilagtestified that the captain or patron of the tugboat M/T ANCO left the barge D/B Lucio immediately after itreached San Jose, Antique, despite the fact that there were already big waves and the area was alreadydark. This is corroborated by defendants own witness, Mr. Fernando Macabueg.[13]

The trial court continued:

At that precise moment, since it is the duty of the defendant to exercise and observe extraordinary diligence in thevigilance over the cargo of the plaintiff, the patron or captain of M/T ANCO, representing the defendant could have

placed D/B Lucio in a very safe location before they left knowing or sensing at that time the coming of a typhoon. Thepresence of big waves and dark clouds could have warned the patron or captain of M/T ANCO to insure the safety of D/

B Lucio including its cargo. D/B Lucio being a barge, without its engine, as the patron or captain of M/T ANCO knew,could not possibly maneuver by itself. Had the patron or captain of M/T ANCO, the representative of the defendantsobserved extraordinary diligence in placing the D/B Lucio in a safe place, the loss to the cargo of the plaintiff could not

have occurred. In short, therefore, defendants through their representatives, failed to observe the degree of diligencerequired of them under the provision of Art. 1733 of the Civil Code of the Philippines.[14]

Petitioners Estate of Ang Gui and Co To, in their Memorandum, asserted that the contention ofrespondents SMC and FGU that the crewmembers of D/B Lucio should have left port at the onset of thetyphoon is like advising the fish to jump from the frying pan into the fire and an advice that borders onmadness.[15]

The argument does not persuade. The records show that the D/B Lucio was the only vessel left atSan Jose, Antique, during the time in question. The other vessels were transferred and temporarily movedto Malandong, 5 kilometers from wharf where the barge remained.[16] Clearly, the transferred vessels weredefinitely safer in Malandong than at the port of San Jose, Antique, at that particular time, a fact whichpetitioners failed to dispute

ANCOs arguments boil down to the claim that the loss of the cargoes was caused by the typhoonSisang, a fortuitous event (caso fortuito), and there was no fault or negligence on their part. In fact, ANCOclaims that their crewmembers exercised due diligence to prevent or minimize the loss of the cargoes buttheir efforts proved no match to the forces unleashed by the typhoon which, in petitioners own words was,by any yardstick, a natural calamity, a fortuitous event, an act of God, the consequences of which petitionerscould not be held liable for.[17]

The Civil Code provides:

Art. 1733. Common carriers, from the nature of their business and for reasons of public policy are bound to observeextraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them,

according to all the circumstances of each case.

Such extraordinary diligence in vigilance over the goods is further expressed in Articles 1734, 1735, and 1745 Nos. 5, 6,

and 7 . . .

Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same isdue to any of the following causes only:
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(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;. . .

Art. 1739.In order that the common carrier may be exempted from responsibility,the natural disaster must have

been the proximate and only cause of the loss. However, the common carrier must exercise due diligence to prevent orminimize loss before, during and after the occurrence of flood, storm, or other natural disaster in order that the commoncarrier may be exempted from liability for the loss, destruction, or deterioration of the goods . . . (Emphasis supplied)

Caso fortuito or force majeure (which in law are identical insofar as they exempt an obligor fromliability)[18] by definition, are extraordinary events not foreseeable or avoidable, events that could not beforeseen, or which though foreseen, were inevitable. It is therefore not enough that the event should nothave been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or toavoid.[19]

In this case, the calamity which caused the loss of the cargoes was not unforeseen nor was itunavoidable. In fact, the other vessels in the port of San Jose, Antique, managed to transfer to anotherplace, a circumstance which prompted SMCs District Sales Supervisor to request that the D/B Lucio belikewise transferred, but to no avail. The D/B Lucio had no engine and could not maneuver by itself. Even if

ANCOs representatives wanted to transfer it, they no longer had any means to do so as the tugboat M/TANCO had already departed, leaving the barge to its own devices. The captain of the tugboat should havehad the foresight not to leave the barge alone considering the pending storm.

While the loss of the cargoes was admittedly caused by the typhoon Sisang, a natural disaster, ANCOcould not escape liability to respondent SMC. The records clearly show the failure of petitionersrepresentatives to exercise the extraordinary degree of diligence mandated by law. To be exempted fromresponsibility, the natural disaster should have been the proximate and only cause of the loss.[20] Theremust have been no contributory negligence on the part of the common carrier. As held in the case ofLimpangco Sons v. Yangco Steamship Co.:[21]

. . . To be exempt from liability because of an act of God, the tug must be free from any previous negligence or

misconduct by which that loss or damage may have been occasioned. For, although the immediate or proximate causeof the loss in any given instance may have been what is termed an act of God, yet, if the tug unnecessarily exposed thetwo to such accident by any culpable act or omission of its own, it is not excused.[22]

Therefore, as correctly pointed out by the appellate court, there was blatant negligence on the part ofM/T ANCOs crewmembers, first in leaving the engine-less barge D/B Lucio at the mercy of the storm withoutthe assistance of the tugboat, and again in failing to heed the request of SMCs representatives to have thebarge transferred to a safer place, as was done by the other vessels in the port; thus, making said blatantnegligence the proximate cause of the loss of the cargoes.

We now come to the issue of whether or not FGU can be held liable under the insurance policy toreimburse ANCO for the loss of the cargoes despite the findings of the respondent court that such loss wasoccasioned by the blatant negligence of the latters employees.

One of the purposes for taking out insurance is to protect the insured against the consequences of hisown negligence and that of his agents. Thus, it is a basic rule in insurance that the carelessness andnegligence of the insured or his agents constitute no defense on the part of the insurer. [23] This rulehowever presupposes that the loss has occurred due to causes which could not have been prevented by theinsured, despite the exercise of due diligence.

The question now is whether there is a certain degree of negligence on the part of the insured or hisagents that will deprive him the right to recover under the insurance contract. We say there is. However, towhat extent such negligence must go in order to exonerate the insurer from liability must be evaluated in lightof the circumstances surrounding each case. When evidence show that the insureds negligence orrecklessness is so gross as to be sufficient to constitute a willful act, the insurer must be exonerated.

In the case ofStandard Marine Ins. Co. v. Nome Beach L. & T. Co.,[24] the United States SupremeCourt held that:

The ordinary negligence of the insured and his agents has long been held as a part of the risk which the insurer takes

upon himself, and the existence of which, where it is the proximate cause of the loss, does not absolve the insurer from
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liability.But willful exposure, gross negligence, negligence amounting to misconduct, etc., have often been held torelease the insurer from such liability.[25] [Emphasis ours]

. . .

In the case of Williams v. New England Insurance Co., 3 Cliff. 244, Fed. Cas. No. 17,731, the owners of an insured

vessel attempted to put her across the bar at Hatteras Inlet. She struck on the bar and was wrecked. The master knewthat the depth of water on the bar was such as to make the attempted passage dangerous. Judge Clifford held that, underthe circumstances, the loss was not within the protection of the policy, saying:

Authorities to prove that persons insured cannot recover for a loss occasioned by their own wrongful acts are hardly

necessary, as the proposition involves an elementary principle of universal application. Losses may be recovered by theinsured, though remotely occasioned by the negligence or misconduct of the master or crew, if proximately caused by

the perils insured against, because such mistakes and negligence are incident to navigation and constitute a part of the

perils which those who engage in such adventures are obliged to incur; but it was never supposed that the insured could

recover indemnity for a loss occasioned by his own wrongful act or by that of any agent for whose conduct he was

responsible.[26] [Emphasis ours]

From the above-mentioned decision, the United States Supreme Court has made a distinctionbetween ordinary negligence and gross negligence or negligence amounting to misconduct and its effect onthe insureds right to recover under the insurance contract. According to the Court, while mistake andnegligence of the master or crew are incident to navigation and constitute a part of the perils that the insureris obliged to incur, such negligence or recklessness must not be of such gross character as to amount tomisconduct or wrongful acts; otherwise, such negligence shall release the insurer from liability under theinsurance contract.

In the case at bar, both the trial court and the appellate court had concluded from the evidence that thecrewmembers of both the D/B Lucio and the M/T ANCO were blatantly negligent. To wit:

There was blatant negligence on the part of the employees of defendants-appellants when the patron (operator) of the

tug boat immediately left the barge at the San Jose, Antique wharf despite the looming bad weather.Negligence waslikewise exhibited by the defendants-appellants representative who did not heed Macabuags request that the barge be

moved to a more secure place. The prudent thing to do, as was done by the other sea vessels at San Jose, Antiqueduring the time in question, was to transfer the vessel to a safer wharf. The negligence of the defendants-appellants is

proved by the fact that on 01 October 1979, the only simple vessel left at the wharf in San Jose was the D/B Lucio .[27]

[Emphasis ours]

As stated earlier, this Court does not find any reason to deviate from the conclusion drawn by thelower court, as sustained by the Court of Appeals, that ANCOs representatives had failed to exerciseextraordinary diligence required of common carriers in the shipment of SMCs cargoes. Such blatantnegligence being the proximate cause of the loss of the cargoes amounting to One Million Three HundredForty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00)

This Court, taking into account the circumstances present in the instant case, concludes that theblatant negligence of ANCOs employees is of such gross character that it amounts to a wrongful act whichmust exonerate FGU from liability under the insurance contract.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 24 February 1999 ishereby AFFIRMED with MODIFICATION dismissing the third-party complaint.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Baguio City

SECOND DIVISION
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G.R. No. 166245 April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,vs.THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.

D E C I S I O N

VELASCO, JR., J.:

The Case

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

The Facts

On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered into

an agreement denominated as Creditor Group Life Policy No. P-19202

with petitioner Eternal GardensMemorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased burial lots from iton installment basis would be insured by Philamlife. The amount of insurance coverage depended upon theexisting balance of the purchased burial lots. The policy was to be effective for a period of one year,renewable on a yearly basis.

The relevant provisions of the policy are:

ELIGIBILITY.

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

EVIDENCE OF INSURABILITY.

No medical examination shall be required for amounts of insurance up to P50,000.00. However, adeclaration of good health shall be required for all Lot Purchasers as part of the application. The Companyreserves the right to require further evidence of insurability satisfactory to the Company in respect of thefollowing:

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

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

LIFE INSURANCE BENEFIT.

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

EFFECTIVE DATE OF BENEFIT.

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

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

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

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

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

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

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

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

In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of Insurability provision, "adeclaration of good health shall be required for all Lot Purchasers as party of the application." We cite furtherthe provision on Effective Date of Coverage under the policy which states that "there shall be no insurance ifthe application is not approved by the Company." Since no application had been submitted by the Insured/Assured, prior to his death, for our approval but was submitted instead on November 15, 1984, after his

death, Mr. John Uy Chuang was not covered under the Policy. We wish to point out that Eternal Gardensbeing the Assured was a party to the Contract and was therefore aware of these pertinent provisions.

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

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

WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL, againstDefendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the sum of P100,000.00, representingthe proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until fully paid; and, to pay the sumof P10,000.00 as attorneys fees.

SO ORDERED.

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

Philamlife appealed to the CA, which ruled, thus:
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WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810 is REVERSEDand SET ASIDE, and the complaint is DISMISSED. No costs.

SO ORDERED.11

The CA based its Decision on the factual finding that Chuangs application was not enclosed in Eternalsletter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted application

form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no application form,Chuang was not covered by Philamlifes insurance.

Hence, we have this petition with the following grounds:

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

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

II. There was no valid insurance coverage; and

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

The Courts Ruling

As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the CAand first level courts, considering their findings of facts are conclusive and binding on this Court. However,such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:

(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inferencemade is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when thejudgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in

making its findings the [CA] went beyond the issues of the case, or its findings are contrary to the admissionsof both the appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial court;(8) when the findings are conclusions without citation of specific evidence on which they are based; (9) whenthe facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by therespondent; (10) when the findings of fact are premised on the supposed absence of evidence andcontradicted by the evidence on record; and (11) when the Court of Appeals manifestly overlooked certainrelevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion.12(Emphasis supplied.)

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

Eternal claims that the evidence that it presented before the trial court supports its contention that it

submitted a copy of the insurance application of Chuang before his death. In Eternals letter dated December29, 1982, a list of insurable interests of buyers for October 1982 was attached, including Chuang in the list ofnew businesses. Eternal added it was noted at the bottom of said letter that the corresponding "Phil-Am LifeInsurance Application Forms & Cert." were enclosed in the letter that was apparently received by Philamlifeon January 15, 1983. Finally, Eternal alleged that it provided a copy of the insurance application which wassigned by Chuang himself and executed before his death.

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

The evidence on record supports Eternals position.

The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received, states

that the insurance forms for the attached list of burial lot buyers were attached to the letter. Such stamp ofreceipt has the effect of acknowledging receipt of the letter together with the attachments. Such receipt is anadmission by Philamlife against its own interest.13 The burden of evidence has shifted to Philamlife, which
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must prove that the letter did not contain Chuangs insurance application. However, Philamlife failed to do so;thus, Philamlife is deemed to have received Chuangs insurance application.

To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is stamped asreceived, the contents of the letter are correct and accounted for.

Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to inconsistencies is

groundless. The trial court is in the best position to determine the reliability and credibility of the witnesses,because it has the opportunity to observe firsthand the witnesses demeanor, conduct, and attitude. Findingsof the trial court on such matters are binding and conclusive on the appellate court, unless some facts orcircumstances of weight and substance have been overlooked, misapprehended, or misinterpreted,14 that, ifconsidered, might affect the result of the case.15

An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no overlookedfacts of substance and value.

Philamlife primarily claims that Eternal did not even know where the original insurance application of Chuangwas, as shown by the testimony of Edilberto Mendoza:

Atty. Arevalo:

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

[Mendoza:]

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

Atty. Miranda:

We move to strike out the answer as it is not responsive as counsel is merely asking for the location and

does not [ask] for the number of copy.

Atty. Arevalo:

Q Where is the original?

[Mendoza:]

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

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

As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two insuranceapplication forms were accomplished and the testimony of Mendoza on who actually filled out the applicationform, these are minor inconsistencies that donot affect the credibility of the witnesses. Thus, we ruled inPeople v. Paredes that minor inconsistencies are too trivial to affect the credibility of witnesses, and thesemay even serve to strengthen their credibility as these negate any suspicion that the testimonies have beenrehearsed.17

We reiterated the above ruling in Merencillo v. People:

Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecutions evidence as

a whole or reflect on the witnesses honesty. The test is whether the testimonies agree on essential facts andwhether the respective versions corroborate and substantially coincide with each other so as to make aconsistent and coherent whole.18
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In the present case, the number of copies of the insurance application that Chuang executed is not at issue,neither is whether the insurance application presented by Eternal has been falsified. Thus, theinconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternals witnesses.

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

This question must be answered in the affirmative.

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

EFFECTIVE DATE OF BENEFIT.

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

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

It must be remembered that an insurance contract is a contract of adhesion which must be construedliberally in favor of the insured and strictly against the insurer in order to safeguard the latters 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 anyambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contractof insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolvedagainst the insurer; in other words, it should be construed liberally in favor of the insured and strictlyagainst the insurer. Limitations of liability should be regarded with extreme jealousy and must be construedin such a way as to preclude the insurer from noncompliance with its obligations.19 (Emphasis supplied.)

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

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

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10, 1980,

must be construed in favor of the insured and in favor of the effectivity of the insurance contract.

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

As a final note, to characterize the insurer and the insured as contracting parties on equal footing isinaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of experience

in the industry purposefully used to its advantage. More often than not, insurance contracts are contracts ofadhesion containing technical terms and conditions of the industry, confusing if at all understandable tolaypersons, that are imposed on those who wish to avail of insurance. As such, insurance contracts areimbued with public interest that must be considered whenever the rights and obligations of the insurer and
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the insured are to be delineated. Hence, in order to protect the interest of insurance applicants, insurancecompanies must be obligated to act with haste upon insurance applications, to either deny or approve thesame, or otherwise be bound to honor the application as a valid, binding, and effective insurance contract. 21

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

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

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

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

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

No costs.

SO ORDERED.

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

THIRD DIVISIONREPUBLIC OF THE PHILIPPINES, G.R. No. 158085Represented by the COMMISSIONER

OF INTERNAL REVENUE, Present: Petitioner, Panganiban,J., Chairman, Sandoval-Gutierrez - versus - Corona, Carpio Morales, and Garcia,JJSUNLIFE ASSURANCE Promulgated:COMPANY OF CANADA,

Respondent. October 14, 2005x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISIONPANGANIBAN,J.:Having satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this Court that it is a bona fidecooperative, respondent is entitled to exemption from the payment of taxes on life insurance premiums and

documentary stamps. Not being governed by the Cooperative Code of the Philippines, it is not required to be registered
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with the Cooperative Development Authority in order to avail itself of the tax exemptions. Significantly, neither the TaxCode nor the Insurance Code mandates this administrative registration.

The CaseBefore us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the January 23,

2003 Decision[2] and the April 21, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 69125. The

dispositive portion of the Decision reads as follows:WHEREFORE, the petition for review is hereby DENIED.[4]

The Facts The antecedents, as narrated by the CA, are as follows:

Sun Life is a mutual life insurance company organized and existingunder the laws of Canada. It is registered and authorized by the Securities andExchange Commission and the Insurance Commission to engage in business in

the Philippines as a mutual life insurance company with principal office at Paseode Roxas, Legaspi Village, Makati City.

On October 20, 1997, Sun Life filed with the [Commissioner ofInternal Revenue] (CIR) its insurance premium tax return for the third quarter of1997 and paid the premium tax in the amount of P31,485,834.51. For theperiod covering August 21 to December 18, 1997, petitioner filed with the CIR its[documentary stamp tax (DST)] declaration returns and paid the total amount ofP30,000,000.00.

On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered

its decision in Insular Life Assurance Co. Ltd. v. [CIR], which held that mutual lifeinsurance companies are purely cooperative companies and are exempt fromthe payment of premium tax and DST. This pronouncement was later affirmed

by this court in [CIR] v. Insular Life Assurance Company, Ltd. Sun Life surmisedthat[,] being a mutual life insurance company, it was likewise exempt from thepayment of premium tax and DST. Hence, on August 20, 1999, Sun Life filedwith the CIR an administrative claim for tax credit of its alleged erroneously paidpremium tax and DST for the aforestated tax periods.

For failure of the CIR to act upon the administrative claim for tax

credit and with the 2-year period to file a claim for tax credit or refund dwindlingaway and about to expire, Sun Life filed with the CTA a petition for review onAugust 23, 1999. In its petition, it prayed for the issuance of a tax creditcertificate in the amount of P61,485,834.51 representing P31,485,834.51 oferroneously paid premium tax for the third quarter of 1997 and P30,000[,000].00of DST on policies of insurance from August 21 to December 18, 1997. Sun Life

stood firm on its contention that it is a mutual life insurance company vestedwith all the characteristic features and elements of a cooperative company orassociation as defined in [S]ection 121 of the Tax Code. Primarily, themanagement and affairs of Sun Life were conducted by its members; secondly,it is operated with money collected from its members; and, lastly, it has for itspurpose the mutual protection of its members and not for profit or gain.

In its answer, the CIR, then respondent, raised as special and

affirmative defenses the following:7. Petitioners (Sun Lifes) alleged claim for

refund is subject to administrative routinary investigation/examination by respondents (CIRs) Bureau.

8. Petitioner must prove that it falls under theexception provided for under Section 121 (now 123) ofthe Tax Code to be exempted from premium tax and beentitled to the refund sought.
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9. Claims for tax refund/credit are construed

strictly against the claimants thereof as they are in thenature of exemption from payment of tax.

10. In an action for tax credit/refund, the

burden is upon the taxpayer to establish its right thereto,and failure to sustain this burden is fatal to said claim x x

x.

11. It is incumbent upon petitioner to showthat it has complied with the provisions of Section 204[,]in relation to Section 229, both in the 1997 Tax Code.

On November 12, 2002, the CTA found in favor of Sun Life.

Quoting largely from its earlier findings in Insular Life Assurance Company,Ltd. v. [CIR], which it found to be on all fours with the present action, the CTAruled:

The [CA] has already spoken. It ruled that a

mutual life insurance company is a purely cooperative

company[;] thus, exempted from the payment of premiumand documentary stamp taxes. Petitioner Sun Life iswithout doubt a mutual life insurance company. x x x.

x x x x x x x

x xBeing similarly situated with Insular, Petitioner

at bar is entitled to the same interpretation given by thisCourt in the earlier cases of The Insular Life AssuranceCompany, Ltd. vs. [CIR] (CTA Case Nos. 5336 and 5601)and by the [CA] in the case entitled [CIR] vs. The InsularLife Assurance Company, Ltd., C.A. G.R. SP No. 46516,September 29, 1998. Petitioner Sun Life as a mutual life

insurance company is[,] therefore[,] a cooperativecompany or association and is exempted from thepayment of premium tax and [DST] on policies ofinsurance pursuant to Section 121 (now Section 123)and Section 199[1]) (now Section 199[a]) of the TaxCode.

Seeking reconsideration of the decision of the CTA, the CIR

argued that Sun Life ought to have registered, foremost, with the CooperativeDevelopment Authority before it could enjoy the exemptions from premium taxand DST extended to purely cooperative companies or associations under[S]ections 121 and 199 of the Tax Code. For its failure to register, it could notavail of the exemptions prayed for. Moreover, the CIR alleged that Sun Life

failed to prove that ownership of the company was vested in its members whoare entitled to vote and elect the Board of Trustees among [them]. The CIRfurther claimed that change in the 1997 Tax Code subjecting mutual lifeinsurance companies to the regular corporate income tax rate reflected thelegislatures recognition that these companies must be earning profits.

Notwithstanding these arguments, the CTA denied the CIRs

motion for reconsideration.Thwarted anew but nonetheless undaunted, the CIR comes to this

court via this petition on the sole ground that:The Tax Court erred in granting the refund[,] becauserespondent does not fall under the exception provided for

under Section 121 (now 123) of the Tax Code to beexempted from premium tax and DST and be entitled tothe refund.


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The CIR repleads the arguments it raised with the CTA and proposesfurther that the [CA] decision in [CIR] v. Insular Life Assurance Company, Ltd. is notcontrolling and cannot constitute res judicata in the present action. At best, thepronouncements are merely persuasive as the decisions of the Supreme Court

alone have a universal and mandatory effect.[5]

Ruling of the Court of AppealsIn upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation duly licensed to

engage in mutual life insurance business in the Philippines. Thus, respondent was deemed exempt from premium anddocumentary stamp taxes, because its affairs are managed and conducted by its members with money collected from

among themselves, solely for their own protection, and not for profit. Its members or policyholders constituted bothinsurer and insured who contribute, by a system of premiums or assessments, to the creation of a fund from which all

losses and liabilities were paid. The dividends it distributed to them were not profits, but returns of amounts that hadbeen overcharged them for insurance.

For having satisfactorily shown with substantial evidence that it had erroneously paid and seasonably filed its

claim for premium and documentary stamp taxes, respondent was entitled to a refund, the CA ruled.Hence, this Petition.[6]

The IssuesPetitioner raises the following issues for our consideration:

I.

Whether or not respondent is a purely cooperative company or associationunder Section 121 of the National Internal Revenue Code and a fraternal orbeneficiary society, order or cooperative company on the lodge system or localcooperation plan and organized and conducted solely by the members thereoffor the exclusive benefit of each member and not for profit under Section 199of the National Internal Revenue Code.

II.Whether or not registration with the Cooperative Development Authority is asine qua non requirement to be entitled to tax exemption.

III.Whether or not respondent is exempted from payment of tax on life insurancepremiums and documentary stamp tax.[7]

We shall tackle the issues seriatim.The Courts Ruling

The Petition has no merit.First Issue:

Whether Respondent Is a Cooperative
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The Tax Code defines a cooperative as an association conducted by the members thereof with the money

collected from among themselves and solely for their own protection and not for profit.[8] Without a doubt,respondent is a cooperative engaged in a mutual life insurance business.

First, it is managed by its members. Both the CA and the CTA found that the management and affairs ofrespondent were conducted by its member-policyholders.[9]

A stock insurance company doing business in the Philippines may alter its organization and transform itself into

a mutual insurance company.[10] Respondent has been mutualized or converted from a stock life insurance companyto a nonstock mutual life insurance corporation[11] pursuant to Section 266 of the Insurance Code of 1978.[12] On thebasis of its bylaws, its ownership has been vested in its member-policyholders who are each entitled to one vote; [13]

and who, in turn, elect from among themselves the members of its board of trustees.[14] Being the governing body of anonstock corporation, the board exercises corporate powers, lays down all corporate business policies, and assumes

responsibility for the efficiency of management.[15]Second, 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.[16]

The member-policyholders constitute both insurer and insured[17] who contribute, by a system of premiums

or assessments, to the creation of a fund from which all losses and liabilities are paid.[18] The premiums[19] pooledinto this fund are earmarked for the payment of their indemnity and benefit claims.

Third, it is licensed for the mutual protection of its members, not for the profit of anyone.As early as October 30, 1947, the director of commerce had already issued a license to respondent -- a

corporation organized and existing under the laws of Canada -- to engage in business in the Philippines.[20] Pursuantto Section 225 of Canadas Insurance Companies Act, the Canadian minister of state (for finance and privati zation) also

declared in its Amending Letters Patent that respondent would be a mutual company effective June 1, 1992.[21] In thePhilippines, the insurance commissioner also granted it annual Certificates of Authority to transact life insurancebusiness, the most relevant of which were dated July 1, 1997 and July 1, 1998.[22]

A mutual life insurance company is conducted for the benefit of its member-policyholders,[23] who pay into its

capital by way of premiums. To that extent, they are responsible for the payment of all its losses.[24] The cash paid infor premiums and the premium notes constitute their assets x x x.[25] In the event that the company itself fails beforethe terms of the policies expire, the member-policyholders do not acquire the status of creditors.[26] Rather, theysimply 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.[27] Only when thepremiums 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.[28]Contributing to its capital, the member-policyholders of a mutual company are obviously also its owners.[29]

Sustaining a dual relationship inter se, they not only contribute to the payment of its losses, but are also entitled to a

proportionate share[30] and participate alike[31] in its profits and surplus.Where the insurance is taken at cost, it is important that the rates of premium charged by a mutual company be

larger than might reasonably be expected to carry the insurance, in order to constitute a margin of safety. The table ofmortality used will show an admittedly higher death rate than will probably prevail; the assumed interest rate on the

investments of the company is made lower than is expected to be realized; and the provision for contingencies and

expenses, made greater than would ordinarily be necessary.[32] This course of action is taken, because a mutualcompany has no capital stock and relies solely upon its premiums to meet unexpected losses, contingencies and

expenses.

Certainly, many factors are considered in calculating the insurance premium. Since they vary with the kind ofinsurance taken and with the group of policyholders insured, any excess in the amount anticipated by a mutual company
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to cover the cost of providing for the insurance over its actual realized cost will also vary. If a member-policyholderreceives an excess payment, then the apportionment must have been based upon a calculation of the actual cost of

insurance that the company has provided for that particular member-policyholder. Accordingly, in apportioningdivisible surpluses, any mutual company uses a contribution method that aims to distribute those surpluses among its

member-policyholders, in the same proportion as they have contributed to the surpluses by their payments.[33]Sharing in the common fund, any member-policyholder may choose to withdraw dividends in cash or to apply

them in order to reduce a subsequent premium, purchase additional insurance, or accelerate the payment period. Although the premium made at the beginning of a year is more than necessary to provide for the cost of carrying the

insurance, the member-policyholder will nevertheless receive the benefit of the overcharge by way of dividends, at the

end of the year when the cost is actually ascertained. The declaration of a dividend upon a policy reducespro tanto thecost of insurance to the holder of the policy. That is its purpose and effect.[34]

A stipulated insurance premium cannot be increased, but may be lessened annually by so much as the experience

of the preceding year has determined it to have been greater than the cost of carrying the insurance x x x. [35] Thedifference between that premium and the cost of carrying the risk of loss constitutes the so-called dividend which,

however, is not in any real sense a dividend.[36] It is a technical term that is well understood in the insurancebusiness to be widely different from that to which it is ordinarily attached.

The so-called dividend that is received by member-policyholders is not a portion of profits set aside for

distribution to the stockholders in proportion to their subscription to the capital stock of a corporation.[37] One, amutual company has no capital stock

to which subscription is necessary; there are no stockholders to speak of, but only members. And, two, the amount theyreceive does not partake of the nature of a profit or income. The quasi-appearance of profit will not change its character.It remains an overpayment, a benefit to which the member-policyholder is equitably entitled.[38]

Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its own members. It doesnot operate for profit, but for the mutual benefit of its member-policyholders. They receive their insurance at cost,while reasonably and properly guarding and maintaining the stability and solvency of the company.[39] The economicbenefits filter to the cooperative members. Either equally or proportionally, they are distributed among members incorrelation with the resources of the association utilized.[40]

It does not follow that because respondent is registered as a nonstock corporation and thus exists for a purpose

other than profit, the company can no longer make any profits.[41] Earning profits is merely its secondary, not primary,purpose. In fact, it may not lawfully engage in any business activity for profit, for to do so would change or contradictits nature[42] as a non-profit entity.[43] It may, however, invest its corporate funds in order to earn additional incomefor paying its operating expenses and meeting benefit claims. Any excess profit it obtains as an incident to itsoperations can only be used, whenever necessary or proper, for the furtherance of the purpose for which it was

organized.[44]Second Issue:

Whether CDA Registration Is NecessaryUnder the Tax Code although respondent is a cooperative, registration with the Cooperative Development

Authority (CDA)[45] is not necessary in order for it to be exempt from the payment of both percentage taxes on

insurance premiums, under Section 121; and documentary stamp taxes on policies of insurance or annuities it grants,

under Section 199.

First, the Tax Code does not require registration with the CDA. No tax provision requires a mutual life insurancecompany to register with that agency in order to enjoy exemption from both percentage and documentary stamp taxes.

A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the submission of theCertificate of Registration with the CDA,[46] before the issuance of a tax exemption certificate. That provision cannot

prevail over the clear absence of an equivalent requirement under the Tax Code. One, as we will explain below, the
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