LECTURE NOTES ON INSURANCE2004

WHAT LAWS GOVERN INSURANCE

The laws governing insurance in the order of priority are (1) The Insurance Code [PD 1460-whose effectivity date is June 11, 1978] (2) In the absence of applicable provisions, the Civil Code (2) In the absence of applicable provisions in the Insurance Code and Civil Code, the general principles on the subject in the United States (Constantino vs. Asia Life Insurance, 87 Phil 248)

Example: H applied for insurance with S Company with offices in Montreal, Canada. The application was mailed to S and on November 26, the insurer gave notice of acceptance by cable. H never received the cable and he died on December 20. The Insurance Code is silent as to acceptance by cable. The Civil Code shall apply and under Article 1319, an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge. There was no valid contract as H died without knowing the acceptance of his application. (Enriquez vs. Sun Life Assurance of Canada, 41 Phil 269)

WHAT IS A CONTRACT OF INSURANCE

A Contract of Insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.

A Contract of Suretyship shall also be deemed an insurance contract if made by a surety who or which is doing an insurance business.

Doing an insurance business or transacting an insurance business is:

a) making or proposing to make as insurer, any insurance contract;b) making or proposing to make, as surety, any contract of suretyship as a

vocation and not as merely incidental to any other legitimate business or activity of the surety;

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

d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of the Code. (Section 2)

NOTE – the fact that no profit is derived from making of insurance contracts, agreements or transactions or that no separate or direct consideration is received

shall not be deemed CONCLUSIVE to show that the making thereof does not constitute the doing or transacting of an insurance business.

NATURE AND CHARACTERISTICS OF A CONTRACT OF INSURANCE

1. IT IS AN ALEATORY CONTRACT - the liability of the Insurer depends upon the happening of a contingent event. It is not a wagering contract.

2. IT IS A CONTRACT OF INDEMNITY FOR NON-LIFE – recovery is commensurate to the loss. IT IS AN INVESTMENT IN LIFE INSURANCE – secured by the insured as a measure of economic security for him during his lifetime and for his beneficiary upon his death EXCEPT one secured by the creditor on the life of the debtor.

3. IT IS A PERSONAL CONTRACT - an insurer contracts with reference to the character of the insured and vice versa.

4. IT IS EXECUTORY AND CONDITIONAL ON THE PART OF THE INSURER - because upon happening of the event or peril insured against, the conditions having been met, it has the obligation to execute the contract by paying the insured. IT IS EXECUTED ON THE PART OF THE INSURED after the payment of the premium

5. IT IS ONE OF PERFECT GOOD FAITH for both Insurer and Insured, but more so for the INSURER, since its dominant bargaining position imposes a stricter liability/responsibility.

6. IT IS A CONTRACT OF ADHESION – Insurance companies manage to impose upon the insured prepared contracts which the insured cannot change. Consequently, they are construed as follows:

a. In case there is no doubt as to the terms of the insurance contract, it is to be construed in its PLAIN, ORDINARY, AND POPULAR SENSE.

b. If DOUBTFUL, AMBIGUOUS, UNCERTAIN it is to be construed strictly against the insurer and liberally in favor of the insured because the latter has no voice in the selection of the words used, and the language used is selected by the lawyers of the Insurer. (QUA CHEE GAN v. LAW UNION ROCK INS. CO. LTD 98 Phil. 85)

ILLUSTRATIONS:

a. P Bank obtained insurance against robbery which excluded loss by any criminal act of the insured or any authorized representative. While transferring funds from one branch to another, the insured’s armored truck was robbed. The driver was assigned by a labor contractor with the insured, while the security guard was

assigned by an agency contracted by the insured. Both driver and guard were found to be involved. Can the loss be excluded? HELD: THE LOSS IS EXCLUDED, the DRIVER/GUARD ALTHOUGH ASSIGNED BY LABOR CONTRACTORS – ARE AUTHORIZED REPRESENTATIVES. THE TERMS ARE CLEAR AND UNAMBIGUOUS (Fortune Insurance v. CA, 244 SCRA 308).

b. Personal Accident policies providing payment for “loss of hand”. The Insurance policy defines it as amputation. Insured has an accident resulting in a temporary total disability but hand is not amputated. HELD: Insurer is not liable (TY v. First National Surety and Assurance Company – 17 SCRA 364) BUT – in a case where the policy provided for loss of both legs by amputation, a claim against the policy was allowed for a total paralysis to exclude total paralysis is contrary to public policy, public good and sound morality, as it would force the insured to have his legs amputated to be able to claim on the policy (Panaton v. Malayan – 2 Court of Appeals 783).

c. Warranty in a fire insurance policy prohibited storage of oils having a flash point of below 300 Fahrenheit. Gasoline is stored. Is there a policy violation? HELD: The clause is ambiguous. In ordinary parlance oil means lubricants – not gasoline. There is no reason why gasoline could not be expressed clearly in the language the public can readily understand. (QUA CHEE GAN 98 Phil. 85)

d. An action to recover the amount of PHP 2,000.00 due to death by drowning where the policy provided for indemnity in the amount of PHP 1,000.00 to PHP 3,000.00. HELD: the interpretation of the obscure stipulation in contract must not favor the one who caused the obscurity. Hence, judgment for an additional PHP 2,000.00 was affirmed (Del Rosario vs. Equitable Insurance and Casualty Company, 8 SCRA 343).

e. Denial of a claim on the ground that the insured vehicle was a private “owner” type vehicle on the ground that the policy issued to the insured was a Common Carrier’s Liability Insurance Policy which covers a public vehicle for hire. HELD: Insurer is liable as it was aware all along that the vehicle of the insured was a private vehicle. (Fieldmans Insurance v. Mercedes Vargas vda De Songco, 25 SCRA 70)

f. Denial of claim for benefit due to the death of Flaviano Landicho in a plane crash under a GSIS Policy on the ground of non payment of the premium. HELD: The policy contained a provision that the application for insurance is authority for GSIS to cause the deduction of premium from the insured’s salary (Landicho v. GSIS, 44 SCRA 7)

OTHER CASE REFERENCES: New Life Enterprises v. CA, 207 SCRA 669

WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT

1. The insured should possess an interest of some kind, susceptible of pecuniary estimation – known as “insurable interest”. GENERALLY – a person has insurable interest in the subject matter insured when:

HE HAS SUCH A RELATION OR CONNECTION WITH, OR CONCERN IN, SUCH SUBJECT MATTER THAT HE WILL DERIVE PECUNIARY BENEFIT OR ADVANTAGE FROM ITS PRESERVATION OR WILL SUFFER PECUNIARY LOSS OR DAMAGE FROM ITS DESTRUCTION, TERMINATION OR INJURY BY THE HAPPENING OF THE EVENT INSURED AGAINST.

It is necessary because its absence renders the contract VOID. This is based on the principle that insurance is a contract of indemnity. If the insured has no interest, he will not stand to suffer loss or injury by the happening of the event insured against.

IN WHAT DOES A PERSON HAVE INSURABLE INTEREST IN

a. Every person has an insurable interest in the LIFE and HEALTH of (1) himself, his spouse and of his children (2) any person on whom he depends wholly or in fact for education or support, or in whom he has a pecuniary interest (Note Article 195 of the Family Code specifying the persons obligated to support each other. Example-pecuniary interest-partners, employees) (3) any person under a legal obligation to him for the payment of money, respecting property or services, of which death or illness might delay or prevent performance (Examples: Mortgagors. Debtors) (4) any person upon whose life, any estate or interest vested in him depends (Example: Usufructuary X allows Y to receive fruits of the land of the former as long as he is alive. Y has insurable interest in the life of X, because the death of X will terminate his right and cause him damage). (Section 10)

WHAT IS THE BASIS OF INSURABLE INTEREST IN LIFE

It exists when there is reasonable ground founded on the relation of the parties, either pecuniary or contractual or by blood, or by affinity to expect some benefit from the continuance of life of the insured.

WHEN MUST INSURABLE INTEREST IN LIFE EXIST

Insurable interest in life must exist at the time of the effectivity of the policy and need not exist at the time of the death of the insured as life insurance is not a contract of indemnity.IT IS MEANT TO GIVE FINANCIAL SECURITY EITHER TO THE INSURED OR HIS BENEFICIARIES (Section 19).However, insurable interest of a creditor on the life of a debtor must exist not only at the time of effectivity but also at the time of the death of the debtor– as in this instance it is a contract of indemnity.HIS INTEREST IS CAPABLE OF EXACT PECUNIARY MEASUREMENT

WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONE’S LIFE

He has unlimited interest in his own life or that of another person regardless of whether or not the latter has insurable interest. Provided, that if the beneficiary has no insurable interest, there is no force or bad faith. BUT, if he takes out a policy on the life of another and names himself as the beneficiary, he must have an insurable interest in the life of the insured.

IS THE CONSENT OF THE INSURED REQUIRED WHEN INSURANCE IS TAKEN

The law does not require the consent of the person insured and such has been considered as not essential to the validity of the contract as long as there is insurable interest at the beginning.

b. A person also has insurable interest in property as EVERY INTEREST IN PROPERTY, WHETHER REAL OR PERSONAL, OR ANY RELATION THERETO, OR LIABILITY IN RESPECT THEREOF, OF SUCH NATURE THAT A CONTEMPLATED PERIL MIGHT DIRECTLY DAMNIFY THE INSURED IS AN INSURABLE INTEREST (Section 13). It may consist of (1) An existing interest ( Example: By means of a conditional deed of sale, A sold his house to B for PHP 2,000,000.00. B pays a down payment of PHP 500,000.00. Prior to full payment and execution of an absolute sale, A has insurable interest in the house equivalent to the balance due him, while B has insurable interest to the extent of the down payment because loss of the house will mean that he suffers a loss of PHP 500,000.00 (2) An inchoate interest founded on an existing interest (Defined: interest in real estate which is not a present interest but which may ripen into a vested interest if not barred, extinguished, or divested. Example: Interest in Corporate property arising from stockholdings but limited to its value (3) An expectancy, coupled with an existing interest in that out of which the expectancy arises.(Example: A ship owner has insurable interest in expected freight charges. Future crops that a farmer will grow on land belonging to him at the time of the issuance of the policy) Note that the expectancy must be founded on an actual right to the thing or a valid contract for it. Note also that a carrier or depository of any kind has insurable interest in the thing held by him as such to the extent of his liability but not to exceed the value thereof (Sections 13, 14, 15).

But, a mere contingent or expectant interest in anything, not founded on contract or actual right to the thing is not INSURABLE – as there is no insurable interest (Section 16).

Examples: (1) a son has no insurable interest on a building owned by father despite being designated as an heir in the will as the will does not produce any effect before the testator’s death (2) the owner of land on expected crops has insurable interest as he owns the land

WHAT IS THE TEST OR MEASURE OF INSURABLE INTEREST IN PROPERTY

Whether one will derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its destruction. (Section 17)

MUST THE BENEFICIARY IN PROPERTY INSURANCE HAVE INSURABLE INTEREST ON THE PROPERTY INSURED

YES, as no contract or policy of insurance on property shall be enforceable EXCEPT for the benefit of some person having insurable interest in the property insured.

EXAMPLE: The owner insures his building against fire naming his nephew as beneficiary. In case of loss – only the owner can recover – what is not enforceable is the designation of beneficiary – not the entire policy itself.

WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST

Must exist at the time the insurance takes effect and when the loss occurs but need not exist in the meantime (Section 19)

EXAMPLES:

1. If A insures his house on May 2002 for 1 yr – and without assigning the policy, he sold it to B – if a fire occurs after it is sold to B – A cannot recover. B cannot recover also as he has no insurable interest at the time the insurance was procured.

2. An unsecured creditor secures insurance over the house of his debtor, A. The house is burned. The creditor cannot recover as he has no insurable interest at the time the insurance was obtained.

What if A sold the house to the creditor before the loss? Still no recovery as there was no insurable interest at the time it took effect.

3. If A re-acquires the property from B before the fire – A can recover on the policy.

COMPARE WITH INSURABLE INTEREST IN LIFE

LIFE PROPERTY

1. not necessary – can be based based on pecuniary intereston consanguinity or affinity

2. only at effectivity except that exist at the time of effectivity and losstaken by a creditor in the life

of the debtor

3. no limit exist if based on debtor limited to actual volume insuredcreditor

IN RELATION TO THE NEED FOR THE EXISTENCE OF INSURABLE INTEREST, PLS. NOTE:

That a change of interest in any port of a thing insured in accompanied by a corresponding change of interest in the insurance suspends the insurance to an equivalent extent until interest in the thing and interest in the insurance is vested in the same person.

EG.

A buyer of a property insured by the previous owner who has not obtained a transfer of the insurance policy in his name – cannot recover.

RELATED QUERY – How about the seller – NO – no insurable interest at the time of loss – (Sec 19)

WHAT CHANGE IS CONTEMPLATED

An absolute transfer of the property NOT LIFE A LEASE / MORTGAGE

EXCEPTIONS –

1. Life, Health or accident insurance because they are not contracts of indemnity and insurable interest is not required at the time of loss.

2. A change of interest after occurrence of an injury and results in loss – does not affect the right of the insured to indemnity – (Sec 21)

- after loss – the liability of the insurer is fixed

3. a change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the others. (Sec 22)

4. a change of interest by will or succession on the death of the insured does not avoid the insurance – his interest passes on the thing insured (Sec 23)

5. a transfer of interest by one or several partners, joint owners, or owners in common, who are jointly insured – to the others, does not avoid insurance even though it has been agreed that insurance shall lease upon an allocation of the thing insured.

NOTE –

- there must be not stipulation against it – otherwise it is avoided.

- transfer to strangers avoid the policy

6. when notwithstanding a prohibition, the consent of the insurer is obtained

7. when the policy is so fraud that it will insure to the benefit of whomsoever may become the owner during the continuance of the risk.

LASTLY –

The following are void stipulations in property insurance –

A. a stipulation for the payment of the loss whether the person insured has or has not interest in the property insured – because it is a contract of indemnity.

B. Stipulation that the policy shall be received as proof of such interest – existence of insurable interest does not depend on the policy –

C. every policy issued by way of gaining or wagering shall be void.

Those insured without insurable interest – as they do not suffer a damage from the occurrence of the event insured against – they vested profit.

CONTINUATION OF ELEMENTS –

2. The insured is subject to risk of loss through the destruction or impairment of that interest by the happening of the designated risks.

3. The Insurer assumes the risk of loss

4. Such assertion is part of a general scheme to distributed actual loss among a large group of persons bearing somewhat similar risks

5. As a consideration for the insurer’s promise, the insured makes a ratable contribution called a premium to the general insurance fund.

WHAT MAY BE INSURED AGAINST

ANY UNKNOWN OR CONTINGENT EVENT, WHETHER PAST OR FUTURE, WHICH MAY DAMNIFY A PERSON HAVING INSURABLE INTEREST OR CREATE A LIABILITY AGAINST HIM, MAY BE INSURED AGAINST (Section 3)

Example: Insurance against damage, liability,unknown past event ( in marine insurance – insurance over the vessel against perils of the sea, lost or not lost), or future event like loss or theft of the object

In relation to the insurance so secured, NOTE (1) The consent of the husband is not necessary for the validity of an insurance policy taken by a MARRIED woman on her life and that of her children. Under Article 145 of the Family Code, she can also insure her separate property without the consent of the husband. (2) A minor may take out a contract for life, health and accident insurance with any company authorized to do business in the Philippines, provided it be taken out on his own life and the beneficiary named is his estate, father, mother, husband, wife, child, brother or sister. In so doing, the married woman / minor may exercise all the rights or privileges under the policy.

NOTE: RA 6809 lowering the age of minority from 21-18.

BUT – WHAT IS THE EFFECT OF THE DEATH OF THE ORIGINAL OWNER OF A POLICY WHICH COVERS THE LIFE OF A MINOR, AHEAD OF THE MINOR- all rights, title and interest in the policy shall automatically vest in the minor unless otherwise provided in the policy.

WHAT CANNOT BE INSURED

An insurance for or against the drawing of any lottery or for or against any chance or ticket in a lottery drawing a prize. BECAUSE GAMBLING RESULTS IN PROFIT AND INSURANCE ONLY SEEKS TO INDEMNIFY THE INSURED AGAINST LOSS (Section 4).

WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE

1. INSURER - Every person, partnership, association or corporation duly authorized to transact insurance business as provided in the Code may be an insurer. It is the party who agrees to indemnify another upon the happening of specified contingency (Section 6).

2. INSURED – Party to be indemnified in case of a loss (Section 7). Anyone except a public enemy (is a nation at war with the Philippines and every citizen or subject of such nation. WHY – the purpose of war is to cripple the power and exhaust the resources of the enemy, and it is inconsistent to destroy it’s resources then pay it the value of what has been destroyed) may be insured.

WHO MAY INSURE A MORTGAGED PROPERTY

Both the Mortgagor and Mortgagee may take out separate policies with the same or different companies. The mortgagor – to the extent of the value of his property, the mortgagee – to the extent of his credit (Section 8).

WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES THE PROPERTY MORTGAGED IN HIS OWN NAME BUT MAKES THE LOSS PAYABLE TO THE MORTGAGEE OR ASSIGNS THE POLICY TO HIM.

UNLESS THE POLICY PROVIDES OTHERWISE

a. The insurance is still deemed to be upon the interest of the mortgagor who does not cease to be a party to the original contract. HENCE, if the policy is cancelled, notice must be given to the mortgagor.

b. Any act of the mortgagor, prior to loss, which would otherwise avoid the policy or insurance, will have the same effect, although the property is in the hands of the mortgagee. HENCE, if there is a violation of the policy by the mortgagor , the mortgagee cannot recover.

c. Any act required to be done by the mortgagor may be performed by the mortgagee with the same effect as if it has been performed by the mortgagor. Example: if notice of loss is required, the mortgagee may give it.

d. Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit, and the balance, if any, is to be paid to the mortgagor, since such is for both their benefits.

e. Upon recovery by the mortgagee, his credit is extinguished.

IF ON THE OTHER HAND, (Section 9), the Insurer assents to the transfer of the insurance from the mortgagor to the mortgagee, and at the time of his assent, imposes further qualifications on the assignee, making a new contract with him, the acts of the MORTGAGOR cannot affect the rights of the assignee – NOTE UNION MORTGAGE CLAUSE – Creates the relation of insured and insurer between the mortgagee and the insurer independent of the contract of the mortgagor. In such case, any act of the mortgagor can no longer affect the rights of the mortgagee – the insurance contract is now independent of that with the mortgagor.

WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE WITHOUT REFERENCE TO THE RIGHT OF THE MORTGAGOR.

a. The mortgagee may collect from the insurer upon occurrence of the loss to the extent of his credit.

b. Unless, otherwise stated, the mortgagor cannot collect the balance of the proceeds, after the mortgagee is paid.

c. The insurer, after payment to the mortgagee, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect the debt to the extent paid to the mortgagee.

d. The mortgagee after payment cannot collect anymore from the mortgagor BUT if he is unable to collect in full from the insurer, he can recover from the mortgagor.

e. The mortgagor is not released from the debt because the insurer is subrogated in place of the mortgagee.

3. BENEFICIARY – the person who receives the benefits of an insurance policy upon its maturity.

WHO MAY BE A BENEFICIARIES IN LIFE INSURANCE

Anyone, except those who are prohibited by law to receive donations from the insured. Note Article 739 of the Civil Code, hence the following cannot be designated as beneficiaries (1)Those made between persons guilty of adultery or concubinage at the time of the designation (2)Those found guilty of the same criminal offense in consideration thereof (3) Those made to a public officer or his wife, descendants / ascendants by reason of his office.

A PRIOR CONVICTION FOR ADULTERY / CONCUBINAGE IS NOT REQUIRED, it can be proven by a preponderance of evidence in the same action nullifying the designation. Note the cases of Insular Life vs. Ebrado, 80 SCRA 181, where a common law wife of the insured who is married could not be named as a beneficiary and SSS vs. Davac, 17 SCRA 863, where the insured designated his second wife as a beneficiary was upheld as the latter was not aware of the first marriage.

The disqualification does not extend to the children of the adultery or concubinage in view of the express recognition of the successional rights of illegitimate children (Article 287,NCC and Article 176, Family Code).

MUST THE BENEFICIARY HAVE INSURABLE INTEREST ON THE LIFE OF THE INSURED

It is recognized that the insured may name anyone he chooses, except those disqualified to receive donations, as a beneficiary in his life insurance, even if he is a stranger and has no insurable interest in the life of the insured. The designation, however, must be in GOOD FAITH AND WITHOUT FRAUD OR INTENT TO ENTER

INTO A WAGERING CONTRACT. (Example: Jose obtains several life insurance policies that he cannot afford. Named as beneficiary is Juan, the spouse or children of Jose are not named as beneficiaries. The premiums are paid by Juan, who did not have insurable interest in the life of Jose. In this case the policies are void because they were entered into as wagering contracts)

CAN THE BENEFICIARY BE CHANGED

The insured shall have the right to change the beneficiary he designated – unless he has expressly waived the right in the policy (Section 11)

If he has waived the right, the effect is to make the designation as irrevocable. Note though that the designation of the guilty spouse as irrevocable beneficiary is revocable at the instance of the innocent spouse in cases of termination of (1) a subsequent marriage (2) nullification of marriage (3) annulment of marriage, and (4) legal separation (Article 43 (4) Family Code)

WHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE BENEFICIARY IN A LIFE INSURANCE CONTRACT

The beneficiary has a vested right that cannot be taken away without his consent. In fact should the insured discontinue payment of the premium, the beneficiary may continue paying. Neither can the insured get a loan or obtain the cash surrender value of the policy without his consent (Nario vs. Philamlife, 20 SCRA 434). Note where the wife and minor children were named irrevocable beneficiaries, wife dies, the husband seeks to change the beneficiaries with the consent of the children. The consent is not valid due to minority (Philamlife vs. Pineda, 170 SCRA 416).

WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN ENDOWMENT POLICY

His interest is contingent as benefits are to be paid him only if the assured dies before the specified period. If the insured outlives the period, the benefits are paid to the insured.

WHAT IS THE EFFECT OF THE FAILURE TO DESIGNATE OR BENEFICIARY IS DISQUALIFIED

The benefits of the policy shall accrue to the estate of the insured.

WHO RECOVERS IF BENEFICIARY PREDECEASES THE INSURED

IF DESIGNATION IS IRREVOCABLE, the legal representatives of the beneficiary may recover unless it was stipulated that the benefits are payable only “IF LIVING”.

IF DESIGNATION IS REVOCABLE, and no change is made, the benefits passes to the estate of the insured. The rule holds also if benefits were payable “ only if living” or “if surviving” and the beneficiary dies before the insured.

WHAT HAPPENS TO INTEREST OF THE BENEFICIARY IN LIFE INSURANCE WHERE HE WILLFULLY KILLS THE INSURED

If the killing is WILLFUL, the interest is forfeited if he is the principal, an accomplice, or an accessory. The NEAREST RELATIVE OF INSURED GETS THE PROCEEDS IF NOT OTHERWISE DISQUALIFIED (Section 12). If not willful or felonious, the provision does not apply.

OUTLINE OF GENERAL PROVISIONS

I. INSURANCE AND WHAT IS DOING AN INSURANCE BUSINESS [2]

II. CHARACTERISTICS AND ELEMENTS: Insurable Interest- (a) Why it is necessary (b) What it consists of (b.1) In Life [10] (b.2) In Property [13,14,15, 16] (c) When it must exist [17,18,19] (d) Effect of a change [20,21,22,23,24]

III. CONTRACT OF INSURANCE: (a) What may be insured against [3] (b) What cannot be insured against [4]. (c) Void stipulations [25]- Applicability [5]

IV. PARTIES: (a) Insurer [6] (b) Insured [7, 8,9] (c) Beneficiary [11,12]

CONCEALMENT

WHAT IS CONCEALMENT

Concealment is a neglect to communicate that which a party knows and ought to communicate (Section 26)

WHAT IS THE EFFECT OF CONCEALMENT

Whether intentional or not, it entitles the injured party to rescind the contract of insurance (Section 27). Note though that the right to rescind is optional on the part of the injured party. Rescission is an option because it misleads or deceives the insurer into accepting the risk or accepting it at the rate of premium agreed upon.

Examples: (1) The insured does not disclose sickness but dies of another cause. There is concealment because it is material to a determination of the assumption of risk by the insurer. (2) The father of the insured obtained an insurance policy over his daughter, but did not disclose that she was a mongoloid child, the child dies of influenza, the concealment relieves the insurer of liability (Grepalife vs. CA 89 S 543)

BASIS OF PROVISIONS ON CONCEALMENT / REPRESENTATION

Fundamental characteristic of a contract of insurance that it is one of PERFECT /UTMOST GOOD FAITH.

WHO MUST PROVE KNOWLEDGE OF THE FACT CONCEALED

The party claiming the existence of concealment must prove that there was knowledge on the part of the party charged with concealment. Example: If the Insured stated that there was no hereditary taint (illness that has affected members of the family) on either side of the family to my knowledge – IN ORDER TO PROVE / SHOW CONCEALMENT – the insurer must prove that the hereditary taint alleged to exist was known to the insured.

AS OF WHAT TIME MUST THE PARTY CHARGED WITH CONCEALMENT HAVE KNOWLEDGE OF THE FACT CONCEALED

Generally, a party must have knowledge of the fact concealed at the time of the effectivity of the policy. Note that even if a party did not know of the existence at the time of application but before its effectivity, there is concealment.

Information acquired after effectivity is not concealment and does not constitute ground to rescind the policy, as after the policy is issued, information subsequently acquired is no longer material as it will not affect or influence the party to enter into contract. However, in case of the reinstatement of a lapsed policy, facts known after effectivity but before reinstatement must be disclosed.

HOW IS THE MATERIALITY OF CONCEALMENT OR REPRESENTATION DETERMINED

Materiality is determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries (Section 31).

WHAT IS THE TEST OF MATERIALITY

The test of materiality is whether knowledge of the true facts could have influenced a prudent insurer in determining whether to accept the risk or in fixing the premiums

MUST THERE BE A CAUSAL CONNECTION BETWEEN THE FACT CONCERNED AND THE CAUSE OF LOSS

Concealment need not, in order to be material, be of facts which bring about or contribute to, or are connected of the insured’s loss. It is IMMATERIAL that there is no causal relationship between the fact concealed and the loss sustained. IT IS SUFFICIENT THAT THE NON-REVELATION HAS MISLED THE INSURER IN FORMING ITS ESTIMATE OF DISADVANTAGE OR FIXING THE PREMIUM. Examples: Insured concealed kidney disease and enlarged liver – Later he died of thrombosis, is the insurer liable? NO, since the fact concealed was material though the insured did not die therefrom. Henson v. Philam – 50 OG 73428. Insured had concealed that he had kidney disease. He dies in plane crash. The INSURER not liable (Sunlife vs. CA – 245 SCRA 269)

WHAT FACTS THEN MUST BE COMMUNICATED

Each party to an insurance contract is bound to communicate to the other all facts that meet the following requisites:

(1) Such facts that must be within his knowledge – as concealment requires knowledge of the fact concealed by the party charged with concealment.

(2) Fact/s must be material to the contract – it must be of such nature that had the insurer known of it, it would not have accepted the risk or demanded a higher premium

(3) That the other party had no means of ascertaining such fact/s

(4) That the party with a duty to communicate makes no warranty (Section 28) as the existence of a warranty makes the requirement to disclose superfluous BUT – an intentional and fraudulent omission on the part of the one insured to communicate information on a matter PROVING OR TENDING TO PROVE THE FALSITY OF A WARRANTY entitles the insurer to rescind (Section 29). Example: Warranty that the ship is seaworthy – THE INTENTIONAL AND FRAUDULENT OMISSION OF THE INSURED TO state that the ship’s communications equipment is out of order will entitle the insurer to rescind.

WHAT MATTERS NEED NOT BE COMMUNICATED

Except in answer to the inquiries of the other:

(1) Those which the other knows – as the insurer cannot say that it has been deceived or misled. Example: Insured discloses that he has tuberculosis to the agent of the insurer, who in turn omits to state the same in the application of the insured was deemed knowledge of the insurer (Insular Life Assurance Co vs. Feliciano, 74 Phil 468). Insurer had surveyed the location and surrounding area of a building that is to be insured against fire, an omission to state that there are neighboring buildings will not avoid policy.

(b) Those, which, in the exercise of ordinary care, the other ought to know, and of which, the former has no reason to suppose him to be ignorant. The facts that the other ought to know as per Section 32 are: (1) all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated. Example: public events like the fact that a nation at war, or laws or political conditions in other countries. Here, the source of information is equally open to the insurer, who is therefore presumed to know them, and (b) all the general uses of trade. Examples: Rules of navigation, kinds of seasons, all the risks of navigation.

c) Those of which the other waives communication. A waiver takes place either, by the terms of the insurance or by the neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated (Section 33). Example: where an application for insurance is made in writing and the questions therein are unanswered or incompletely answered – and the insurer without further inquiries, issues the policy. It thereby waives all right to a disclosure or to a more complete answer. If question asks whether the insured has submitted himself to any infirmary, sanitarium or hospital for consultation or treatment. Insured replies that he was confined at the Quezon Memorial Hospital for five days due to influenza. There is no waiver and shall constitute concealment as the answer was complete and could be relied upon by the insurer. If the insured answered “yes”, the answer would have been incomplete and ambiguous. This would constitute a waiver as the insured did not make any further inquiry. (Note Ng Gan Zee vs. Asian Crusader Life Assurance, 122 SCRA 461)

ISSUE: Is the waiver of a medical examination tantamount to a waiver of material information. NO, because waiver of medical examination is made when the insured represents himself to be in good health. It is reasonable to assume that had the insured revealed material information – the insurer would not have waived the examination. Example: A obtained a non-medical insurance. In the policy, it was stated that A never had cancer – but 2 months prior she was operated on for cancer – the beneficiaries claimed payment stating that there was no material misrepresentation in view of the waiver of the medical examination. The misrepresentation was to be taken into consideration before issuing the policy, it was A’s representation that she had a clean bill of health that led the insurer not to require a medical examination (Saturnino v. Phil-Am – 7 SCRA 316)

d) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material. Example: The insurance only covers loss due to hijacking or terrorism. A warranty has been made by the insured that loss due to perils of the sea is excluded. Consequently, the fact that the vessel’s engines have been fitted with used parts need not be disclosed as the seaworthiness of the vessel is not material.

e) Those which relate to a risk exempted from the policy, and which are not otherwise material (Section 30). Example: Policy covers against loss by theft. There

is no need to disclose that the area where the object is located is earthquake prone area if loss due to earthquakes is not covered by the policy.

OTHER MATTERS THAT DO NOT NEED TO BE COMMUNICATED –

a. Information of the nature or amount of the interest of one insured need not be communicated unless in answer to inquiry, except as prescribed by Section 51 as the extent of the interest of the insured in property insured must be specified if he is not the absolute owner. Also – a trustee, mortgagee or building contractor must communicate his particular insurable interest in the property even if no inquiry is made. (Section 34)

b. Neither party to a contract is bound to communicate even upon inquiry any information of his own opinion or judgment upon the matters question (Section 35).Only material facts are required – not opinions, speculations or expectations, EXCEPT in marine insurance – where the belief or the expectation of a 3 rd person in reference to a material fact is material and must be communicated. Example: The insured is required to disclose an opinion of marine experts as to seaworthiness of a vessel (See Section 108)

REPRESENTATIONSWHAT IS A REPRESENTATION

Oral or written statement of a fact or a condition affecting the risk made by the INSURED to the insurance company, tending to induce the insurer to take the risk (Section 36)

WHEN MAY A REPRESENTATION BE MADE

Since it is an inducement to entering a contract – IT MUST ORDINARILY BE MADE AT THE SAME TIME AS OR BEFORE – the issuance of the policy (Section 37). Note that it can also be made after the issuance of the policy when the purpose thereof is to induce the insurer to modify an existing insurance contract – as the provisions also apply to a MODIFICATION (same with CONCEALMENT)

HOW SHOULD A REPRESENTATION BE CONSTRUED

The language of a representation is to be interpreted by the same rules as the language of contracts in general (Section 38). HENCE , it need not be literally true and correct / accurate in every respect, RATHER, it is sufficient if it is substantially or materially true. In case of a promissory representation, it is sufficient if it is substantially complied with. Examples: (1) H bought a car for PHP 2,800.00 and spent PHP 900.00 for repairs – H gave it to W as a gift. W secures insurance and says the price is around PHP 4,000.00, though the present actual value is about PHP 3,000.00. Is W guilty of misrepresentation because she did not pay for the car?

NO, because the literal truth is not necessary. The insurer can value the car independently.

WHAT ARE THE FORMS AND KINDS OF REPRESENTATION

Representations may be ORAL or WRITTEN and can either be:

AFFIRMATIVE- which is an affirmation of a fact existing when the contract begins. Example: That the insured is of good health at the time of the contract.

PROMISSORY – which is a statement by the insured concerning what is to happen during the term of the insurance. Example: That the insured will install additional fire extinguishers at a stipulated future date. A representation as to the future is to be deemed a promise, unless it was merely a statement of belief or expectation.

IS A REPRESENTATION PART OF THE CONTRACT

No, it cannot qualify as an express provision in a contract ( it is a collateral inducement to the contract) BUT it may qualify an implied warranty( Section 40). Example: Under Section 113 – it is implied that a ship is seaworthy. A representation by the insured that its communication system is defective will QUALIFY the warranty. Hence, insured can still recover in case of loss.

CAN A REPRESENTATION BE WITHDRAWN OR ALTERED

Yes, as long as the insurance has not yet been effected and the insured has not yet been induced to issue the policy. If withdrawn or altered afterwards, the contract can be rescinded as the insurer has already been led to issue the policy (Section 41).

TO WHAT DATE DOES A REPRESENTATION REFER

It must be presumed to refer to the date on which the contract goes into effect (Section 42). NOTE: there is no false representation if it is TRUE at the time the contract takes effect although false at the time it is made. Example: Insured states at application that vessel is in TOKYO but is really in HONGKONG, there is no false representation if at issuance vessel is already in TOKYO. CONVERSELY, there is a false representation, if it is true at the time it is made but false at the time the contract takes effect. Example: Insured states that he has never been affected with pneumonia at application, but if in the meantime, he is afflicted with pneumonia before the policy takes effect, and he does not disclose , there is a false representation.

WHEN IS A REPRESENTATION SAID TO BE FALSE

When the facts fail to correspond with its assertions or stipulations (Section 44)

MUST THE INSURED COMMUNICATE INFORMATION OF WHICH HAS NO PERSONAL KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM OTHERS

When a person has no PERSONAL KNOWLEDGE OF A FACTS – HE MAY OR MAY NOT communicate such information to the insurer. If he does communicate, he is not responsible for its truth (Section 43). Hence, there can be no misrepresentation

WHEN IS THE INSURED REQUIRED TO DISCLOSE INFORMATION FROM A 3RD

PERSON

When the information material to the transaction was acquired by an agent of the insured, as knowledge of the agent is also knowledge of the principal. Example: If a ship captain is aware of a defect that affects the seaworthiness, that defect must be communicated as the ship captain is under obligation to disclose it to the owner.

WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT

If it is false on a material point, whether affirmative or promissory – the injured party is entitled to rescind the contract from the time the representation becomes false. HOWEVER, the right to rescind is considered waived by the acceptance of premium payments despite knowledge of the ground to rescind (Section 45) Example: Insurer was aware of the lack of extinguishers required by the policy. BUT there is no waiver – if the insurer had no knowledge of the ground at the time of the acceptance of the premium. Example: Unauthorized driver. (Stokes vs. Malayan 127 SCRA 766)

HOW IS MATERIALITY DETERMINED

The same as concealment (Section 46) probable and reasonable influence of the facts upon the party to whom the representation is made in forming his estimate of the advantage/disadvantages of the contract or in making inquiries.

WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED – (Sec 48)

The right to rescind must be exercised PREVIOUS to the commencement of an action on the contract (Section 48). Note the case of TAN CHAY HING vs. WEST COAST LIFE INSURANCE CO, 51 PHIL 80, where an insurer interposed the defense in an action to claim the proceeds that the contract is null and void. Section 48 was held to apply only when THERE IS A CONTRACT TO RESCIND.

IT IS ALSO QUALIFIED BY 2ND PAR OF SECTION 48 WHICH PROVIDES that after a policy of life insurance payable on the death of the insured shall have been in force during the lifetime of the insured for a period of 2 years from the date of issue or its last reinstatement, the insurer cannot prove that the policy is VOID AB INITIO or is

subject to rescission by reason of a fraudulent concealment or misrepresentation of the insured or his agent ( KNOWN AS THE INCONTESTABILITY CLAUSE)

WHAT IS THE THEORY AND OBJECT BEHIND THE INCONTESTABILITY CLAUSE

On the part of the INSURER – an insurer has/should have a reasonable opportunity to investigate the statements which are made by the applicant and that after a definite period, it should no longer be permitted to question its validity.

On the part of the INSURED – its object is to give the greatest possible assurance that the beneficiaries would receive payment of the proceeds without question as to validity of the policy.

WHAT ARE THE REQUISITES

The requisites are (1)It is a life insurance policy (2)It is a payable on the death of the insured (3) It has been in force during the lifetime of the insured for AT LEAST TWO YEARS from date of issue / or last reinstatement. NOTE: TAN vs. CA – 174 SCRA 403- DURING THE LIFETIME OF THE INSURED MEANS THAT THE POLICY IS NO LONGER IN FORCE IF THE INSURED DIES. Facts: Philam issued policy on November 6, 1973. On April 26, 1975 the insured died. The beneficiaries claimed but the insurer denied the claim on September 11, 1975 and rescinded the policy on the ground of misrepresentation and concealment. HELD – Insurer has two years from date of issue / reinstatement within which to contest the policy whether or not the insured still lives within the period.

WHAT DEFENSES ARE NOT BARRED BY INCONTESTABILITY EVEN AFTER THE LAPSE OF 2 YEARS

The defenses that are not barred are (1) non-payment of premiums (2) lack of insurable interest (3) that the cause of death was excepted or not covered by the terms of the policy (4) that the fraud was of a particular vicious type such as (a) policy was taken in furtherance of a scheme to murder the insured (b) where the insured substituted another for the medical examination (c) where the beneficiary feloniously killed the insured (5) violation of a condition in the policy relating to military or naval service in time of war (6) the necessary notice or proof of death was not given (7) action is not brought within time specified in the policy, which in no case should be less than 1 year as per Section 63.

WHAT ARE THE EFFECTS OF INCONTESTABILITYThe insurer can no longer escape liability tender the policy or be allowed to prove that the policy is void ab initio or may be rescinded by reason of concealment or misrepresentation by the agent of the insured or the insured.

DISTINGUISH CONCEALMENT FROM REPRESENTATION

Concealment is the neglect of one party to communicate to the other material facts. The information he gives in compliance with his duty to reveal information is representation. Representation therefore, is the communication required to comply with the prohibition against concealment.

Concealment is the passive and misrepresentation is the active form of the same bad faith.

CONCEALMENT AND REPRESENTATION COMPARED

1. In concealment – the insured withholds information of material facts, while in representation – the insured makes erroneous statements

2. In concealment and misrepresentation both give the insurer the right to rescind the contract of insurance

3. The materiality of concealment and representation are determined by the same rules

4. Whether the concealment or representation is intentional or not, the injured party can rescind

5. Since insurance contracts are of utmost good faith – the insurer is also covered by the rules