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

FACTS:

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).

The application was approved for a period of one year and 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 and the amount of coverage was increased
to a maximum sum of P75,000.00 per disability. During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the
hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner denied her claim
saying that the Health Care Agreement was void. According to petitioner, there was a concealment regarding Ernanis medical
history. Doctors at the MMC allegedly discovered at the time of Ernanis confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization expenses herself,
amounting to about P76,000.00.

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

Respondent instituted an action for damages against petitioner and its president, Dr. Benito Reverent. She asked for
reimbursement of her expenses plus moral damages and attorney’s fees. After trial, the lower court ruled against petitioners.
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved
petitioner Reverente.

ISSUE:
Whether or not a health care agreement is not an insurance contract; hence the incontestability clause under the Insurance
Code does not apply.

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

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

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

5. In consideration of the insurers promise, the insured pays a premium.

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

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

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

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

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

In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own health.
The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. 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.

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract.
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. 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.

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. 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.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.

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.

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