Session 6 Rescission Cancellationof Insurance Contracts

Session 6: Rescission/Cancellation of Insurance Contracts

B. Misrepresentation

Fieldmens’s Insurance v. Vda. De Supra Concealment
Songco (23 SCRA 70)
Yu Pang Cheng v. CA (105 Phil 930) ● Yung Pang Eng was applying for life insurance with defendant
(insurance company was never named in the case).
● Sept 1950 he submitted parts I and II of his application consisting
of:
○ the medical declaration made by him to the medical
examiner of defendant
○ the medical examiner’s report
● Later, the insured was confined in St. Luke’s for medical treatment
● Died of “infiltrating medullary carcinoma, Grade 4, advanced
cardiac and of lesser curvature, stomach metastases spleen”
● Yu Pang Cheng brought action to collect the value of an insurance
policy taken upon the life of one Eng from defendant.
● Defendant, in its answer, set up defense that the insured was guilty
of misrepresentation and concealment of material fact
○ Yu Pang Eng allegedly gave false and untruthful
answers in certain questions asked him in his
application
● Trial Court found for Cheng
● CA reversed decision
○ Held that insured was guilty of concealment of material
facts which relieves defendant from liability

Was the insured guilty of concealment of some facts material to the risk
insured against? YES. Insurance policy ineffective.

● In the application for insurance, Eng answered the following:
○ Have you ever had any of the following diseases or
symptoms? Each question must be read and answered
"Yes" or "No".
■ Gastritis, Ulcer of the Stomach or any disease
of that organ? No.
■ Vertigo, Dizziness, Faintingspells or
Unconscious? No.
■ Cancer, Tumors or Ulcers of any kind? No.
○ Have you ever consulted any physician not included in
any of the above answers? Give names and address or
physicians list ailments or accidents and date. No.
● Jan 1950 he was admitted to the Chinese General Hospital for
medical treatment
○ Complained of dizziness, anemia, abdominal pains and
tarry stools, and in the evening of his admission he had
several abdominal pains and his discharges were with
black tarry stools and felt dizzy and weak
○ History of his illness shows that the same "started a
year ago as frequent dizziness."
Session 6: Recission/Cancellation of Insurance Contracts
3A Insurance (J. Hofilena)
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○ An XRay picture of his stomach was taken and the
diagnosis made of him by his doctors showed that his
illness was "peptic ulcer, bleeding."
● Remember that the insured’s confinement in the Chinese General
Hospital took place from Jan 29, 1950 to Feb 11, 1950
○ Application for insurance was submitted on Sept 5,
1950
● Ppparent that when the insured gave his answers regarding his
previous ailment, particularly with regard to "Gastritis, Ulcer of the
Stomach or any disease of that organ" and "Vertigo, Dizziness,
Faintingspells or Unconsciousness", he concealed the ailment of
which he was treated in the Chinese General, Hospital which
precisely has direct connection with the subject of the questions
propounded
● Negative answers given by the insured regarding his previous
ailment, or his concealment of the fact that he was hospitalized and
treated deprived defendant of the opportunity to make the necessary
inquiry as to the nature of his past illness so that as it may form its
estimate relative to the approval of his application
● Our Insurance law provides that " A neglect to communicate that
which a party knows and ought to communicate, is called
concealment"
○ Whether intentional or unintentional, the concealment
entitles the insurer to rescind the contract of insurance
○ Our law even requires the insured to communicate to
the insurer all facts within his knowledge which are
material to the contract and which the other party has
not the means of ascertaining (Section 27), and the
materiality is to be 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
(Section 30).
● Argentine v. West Coast Life Insurance:
○ One ground for the rescission of a contract of insurance
under the insurance Act is "a concealment"
○ In an action on a life insurance policy where the
evidence conclusively shows that the answers to
questions concerning diseases were untrue, the truth or
falsity of the answers become the determining factor.
○ If the policy was procured by fraudulent
representations, the contract of insurance apparently set
forth therein was never legally existent.
○ It can fairly be assumed that had the true facts been
disclosed by the assured, the insurance would never
have been granted.
Eguaras v. Great Eastern (33 Phil ● In 1912, Dominador Albay, with the help of the insurance agent,
263) Ponciano Remigio, applied for a life insurance policy worth P5k
with defendant Great Eastern Insurance. Petitioner Francisca
Eguaras, his motherinlaw, was named the beneficiary
● The policy was issued, after compliance with the requisites and the
investigation done by the physician of Great Eastern, Dr. Vidal, who
gave a favorable medical examination.
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● Later the same year, Albay died. Eguaras presented proof of Albay’s
death to Great Eastern to claim the P5k.
● Great Eastern refused to pay alleging that the insurance policy is
void because it was obtained through fraud and deceit.
● It found that their agent Ponciano Remigio who sold the policy to
Albay knew that the latter had a serious medical condition before
application. In the application, Dominador had answered that he had
a “good constitution” health wise. Remigio then engaged the
services of one Dr. Jose Vidal supposedly to examine Dominador but
because of his knowledge of the latter’s less than normal medical
standing, he presented a different person for physical examination.
This person, Castor Garcia was examined in his place and was found
to be in good health. On this basis, the doctor recommended that the
“Dominador Albay” that he had examined was an insurable risk and
it was because of this that the company had issued the policy
● It was admitted in trial that Albay knew of the false replies and
conspired with Remigio in obtaining the life insurance

Was the life insurance policy valid, entitling Eguaras to the benefits,
despite? — NO. Policy is null and void.

● SC found that the Policy was obtained through fraud and deceit.
○ Art 1269: There is deceit when by words or insidious
machinations on the part of one of the contracting
parties the other is induced to execute a contract which
without them he would not have made.
● It is essential to the nature of deceit that said deceit be prior to or
contemporaneous with the consent that is a necessary requisite for
perfecting the contract.
● The fraud and deceit in this case was the substitution at the
examination of Castor Garcia in place of the insured Albay, which
Albay knew of.
● Garcia was also the one who signed the name of Albay as the insured
in all the documents connected with his application, and also in the
letter and docus relating to the insurance.
● The deceit practiced by the insured is of a serious nature, and
therefore it made the contract void and ineffective.
○ Had the company not been deceived, it would not have
granted the insurance applied for by Albay.
Soliman v. U.S. Life (104 Phil 1046) ● US Life issued a 20 yr endowment life policy on the joint lives of
Patricio Soliman and his wife Rosario, each of them being the
beneficiary of the other.
● In Mar. 1949, the spouses were informed that the premium for Jan
1949 was still unpaid notwithstanding that the 31day grace period
has already expired, and they were furnished at the same time
longform health certificates for the reinstatement of the policies.
● In Apr 1949, they submitted the certificates and paid the premiums.
● In Jan. 1950, Rosario died of acute dilation of the heart, and
thereafter, Patricio filed a claim for the proceeds of the insurance.
● US life denied the claim and filed for the rescission of the contract
on the ground that the certificates failed to disclose that Rosario had
been suffering from bronchial asthma for 3 years prior to their
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submission.

Can the contract still be rescinded? Yes

● The insurer is once again given two years from the date of
reinstatement to investigate into the veracity of the facts represented
by the insured in the application for reinstatement. When US life
sought to rescind the contract on the ground of
concealment/misrepresentation, two years had not yet elapsed.
Hence, the contract can still be rescinded.

Pacific Banking Corp. v. CA (168 ● Oriental Assurance issued an open fire policy to Paramount Shirt
SCRA 1) Manufacturing, wherein the former bound itself to indemnify the
insured for any loss or damage not exceeding P61,000 caused by fire
to its property consisting of stocks, materials and supplies usual to a
shirt factory.
○ This included the furniture, fixtures, machinery and equipment
while contained in the ground, 2nd and 3rd floors of the
building.
● At the time of the subsistence of the policy, Paramount was a debtor
of Pacific Banking Corp. for not less than P800k and the goods in the
policy were held in trust by Paramount for Pacific under trust
receipts.
● The policy was endorsed to Pacific as mortgagee/trustor of the
properties insured, with te knowledge and consent of Oriental.
○ This was to the effect that “loss, if any, under this policy is
payable to the Pacific Banking Corp.”
● A fire broke out on the subject premises destroying the goods
contained in its ground and second floors.
● Pacific sent a demand letter to Oriental for indemnity due to the loss
of property by fire under the endorsement of the policy.
● Oriental informed Pacific that it was not yet ready to accede to the
demand as it was awaiting the final report of the insurance adjuster,
HH Bayne.
● 2 months later, HH Bayne notified Pacific that Paramount has not
filed any claim with it, nor submitted proof of loss, for which reason,
determination of the liability of Oriental could not be had.
● Pacific asked HH Bayne to verify from the records of the Bureau of
Customs the entries of merchandise taken into the customs bonded
warehouse razed by fire as a reliable proof of loss.
● For failure of Oriental to pay the loss as demanded, Pacific filed an
action for a sum of money.
● At the trial, Pacific presented in evidence a communication between
HH Bayne to Asian Surety Insurance Co, revealing undeclared
coinsurances with the following: P30k with Wellington Insurance,
P25k with Empire Surety and P250k with Asian Surety; undertaken
by Paramount on the questioned property.
● Pacific claims that in the subject policy, the coinsurances declared
are those of P30k with Malayan, P50k with South Sea and P25k with
Victory.
● Basta basically Oriental’s argument: the insured committed a
violation of condition No. 3 of the policy in the form of
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nondeclaration of coinsurances.
● Trial Court adjudged Oriental liable to Pacific under the said contract
of insurance.
● CA reversed.

Was the insured guilty of fraud or misrepresentation? Yes

● It is not disputed that the insured failed to reveal before the loss three
other insurances.
● By reason of said unrevealed insurances, the insured (Paramount)
had been guilty of false declaration; a clear misrepresentation and a
vital one because where the insured had been asked to reveal but did
not, that was deception.
● Had the insurer (Oriental_ known that there were many
coinsurances, it could have hesitated or plainly desisted from
entering into such contract.
● Hence, the insured was guilty of clear fraud.

Did such concealment make the policy void? Yes

● As the insurance policy against fire expressly required that notice
should be given by the insured of other insurance upon the same
property, the total absence of such notice nullifies the policy.
● The mortgage clause specifically provides exceptions to the general
rule that insurance as to the interest of the mortgagee cannot be
invalidated:
○ Fraud
○ Misrepresentation
○ Arson

C. Breach of Warranty

Qua Chee Gan vs. Law Union, 98 Supra Concealment
Phil. 85 (1955)
Filipinos Compania de Seguros v. ● Petitioner is a domestic insurance corporation licensed to engage in

Tan (85 Phil 379) the insurance business in the PH.
● Tan Chuaco is the owner of a building located in Lucena, Tayabas.
It was insured in two policies issued by the petitioner for 20K and
10K.
● On January 5, 1942, the building insured was burned and destroyed.
● However, when Chuaco claimed the benefits of the policy, the
petitioner refused to pay.
● An action was brought against the company for recovery on the
policies.
● The trial court ruled against the petitioner and this was affirmed by
the CA.
● The petitioner went to the SC on three grounds. They contend that
under Article 8 of the code, the ff. are the instances where the
insurance ceases to attach unless the insured, before the occurrence
of any loss or damage, obtains the sanction of the company:
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○ Risk of fire or loss was increased In this case risk
was increased when the Japanese forces sealed the
building when they took over Lucena. All the stores
closed at that time were sealed. The sealing converted
the building into an arsenal of war material.
○ Conditions at the time of the loss were abnormal
Given that Lucena was invaded by the Japanese and
that the area was under constant warfare and rioting.
○ Chuaco made a fraudulent declaration in his claim
when he denied that there had been a previous fire in
the premises. The record shows that there was a
previous building on the land on which the insured
building was built. However, the same was destroyed
by a fire from the neighboring buildings.

NOTE: Most of the discussion is that of the CA. The SC believes that
the ruling was not arbitrary or whimsical, so as to warrant the SC to
exercise its supervisory power.

Was the risk of fire or loss increased by the sealing of the building?
(For Chuaco)

● NO. There were only three possible sources of danger to which the
building could be exposed: (1) By action of USAFFE (US Army
Forces in the Far East), (2) Guerrilla, or (3) Civilian saboteurs.
○ It could not be under the USAFFE since they already
withdrew from Manila and its surrounding provinces
to Bataan.
○ It could not be the guerrilla forces since they only
began to organize after the fall of Bataan.
○ It could not be saboteurs. Since the Japanese occupied
Lucena, except for looting, there was peace and quiet
in Lucena under the Japanese forces.
● Furthermore, sealing alone cannot increase the risk or hazard to the
building. The sealing was an act of the Japanese over which Chuaco
had no influence or control. If the contents are indeed war
materials, of value or use to the enemy forces, then it would be
subject to confiscation only.

Was the conditions at the time of the fire abnormal?

● YES. “Abnormal” does not mean that there is actual warfare or
rioting. There is no need for actual fighting. It should be a
situation, a condition of things deviating from the normal.
(anomalous/irregular).
● In this case, when the Japanese forces entered Lucena: (1) most of
the people evacuated already to the barrios, (2) looting was so
rampant that the Japanese had to seal the establishments and
patrol the streets day and night, (3) Passes were issued to residents,
(4) A commission of citizen was created as a form of government in
Lucena at that time (Note: Japanese forces enjoined all public
official from continuing with office work), (5) There was no police
department and the enemy forces were the ones keeping peace and
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order, (6) Curfew was maintained, and (7) electrical services were
suspended.
● These conditions show that conditions in Lucena at the time of the
fire was abnormal. The existence of a regularly organized
government with its police, health, and fire department is usually a
sign of normalcy. Its absence thereof is a sign of abnormal
conditions.

Did the abnormal conditions have the effect of cancelling the policy?
(For Chuaco)

● NO. The fire occurred independently of the abnormal conditions. It
had no relation to the conditions alleged.
● It was shown that the fire originated from the Kitchen of Perrera’s
panciteria which was located beside the insured building. In fact,
the buildings were so close that the presence of a fire department
would not have helped them.
● If the fire started from the kitchen, the assumption is that it had
been purely an ordinary and accidental fire. The risk was caused by
the proximity of the building to the contiguous building, and this
must have already been considered when the policy was issued.

By making a fraudulent declaration, did Chuaco forfeit his benefits
under the policies? (For Chuaco)

● NO. The said allegation (1) was not raised in the answer, (2) was
waived and Chuaco is not estopped from asserting it, and (3) is
immaterial and not fraudulent.
○ The first is procedural but valid since Chuaco would
not be aware of his defense and would not be able to
introduce evidence to counteract.
○ The second is also wellfounded since the company
rejected the claim only under Section 6 making
Chuaco believe that the defense was only for such
article.
○ The third is also sustained since the questions as to the
previous fire, in so far as the fire in question is
concerned, is immaterial and irrelevant.

Is the clause in the policy, that the company will not be liable for loss
or damage by fire happening during an existence of any invasion,
foreign enemy etc. binding?

● NO. Since the words of the policy are those of the company, they
should be taken most strongly against it.
● The interpretation of this policy must be the one that is most
favorable to the insured.
● The words should mean that the policy covered loss by fire
occurring or existing with (if not occasioned by nor connected
with) any invasion, foreign enemy, rebellion etc. Basically, the
fire is still covered under the policy even if there was war at
that time, as long as the cause was not related to or connected
with the war.
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FINAL DECISION/TAKE AWAY The loss was by a cause
independent of, and “unrelated to war, invasion, civil commotion, or to
the abnormal conditions arising therefrom”, or the existence of abnormal
conditions prevailing at that time.
Young v. Midland Textile Co. (30 ● Young owned a residential house and bodega in Escolta, Manila.

Phil 617) ● Young entered into an insurance contract with Midland for the said
properties for Php 60.00.
● One condition of the insurance contract is found in Warranty B,
which said: Waranty B. — It is hereby declared and agreed that
during the pendency of this policy no hazardous goods stored or
kept for sale, and no hazardous trade or process be carried on, in
the building to which this insurance applies, or in any building
connected therewith.
● About a year later, Young stored fireworks (for the celebration of
Chinese New Year) inside the residential house and bodega.
● A month later, the residential house and bodega were partially
destroyed by fire.
● Both parties agreed that the fireworks come within the phrase
“hazardous goods” mentioned in Warranty B.
● However, it was found out that the fireworks:
○ Were found in a part of the buildings not destroyed by fire.
○ Did not contribute to the fire, or to the loss.

Is the storing of fireworks in the insured buildings, being "hazardous
goods," a violation of the terms of the insurance policy—YES,
Midland is not obliged to pay.

● SC held that insurance policies are contracts of indemnity based
solely upon the terms and conditions stipulated in the policy.
● The parties have a right to impose reasonable conditions, as they
may deem wise and necessary. This is because the premium is
measured by the character of the risk assumed.
● If the insured violated any of the conditions of the policy, he is not
entitled to recover for the loss. The compliance of the insured with
the terms of the contract is a condition precedent to the right of
recovery.
● SC held that as a general rule, insurance contracts are construed most
favorably to the insured, however, they are to be construed according
to the sense and meaning of the terms the parties intended.
● In this case, the plain conditions of the insurance contract are
binding upon the parties and should be enforced by the courts.
● Young stored “hazardous goods” inside the buildings insured. Such
act is already a breach of the insurance policy, hence, eliminating
Young’s right get payment from the insurance policy.
● Also, Young contended that the stored fireworks, even though are
“hazardous goods,” didn’t contribute to the loss/fire.
● SC held that this is untenable. Mere storing of the fireworks already
by itself a violation of the terms of the insurance contract.
● Young cannot recover under the insurance contract. Midland is not
obliged to pay.

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Session 6 Rescission Cancellationof Insurance Contracts

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Session 6: Rescission/Cancellation of Insurance Contracts

Filipinos Compania de Seguros v. ● Petitioner is a domestic insurance corporation licensed to engage in

Young v. Midland Textile Co. (30 ● Young owned a residential house and bodega in Escolta, Manila.

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