This document discusses the grounds for rescinding insurance contracts due to concealment, misrepresentation, or breach of warranty under Philippine insurance law. It explains that insurance contracts require utmost good faith, and outlines the key elements and tests for determining whether concealment, misrepresentation, or a breach of warranty allows an insurer to rescind a policy. These include whether a concealed or misrepresented fact is material to the insurer's risk assessment and if the insurer would have issued the policy or charged a different premium had the truth been disclosed.
This document discusses the grounds for rescinding insurance contracts due to concealment, misrepresentation, or breach of warranty under Philippine insurance law. It explains that insurance contracts require utmost good faith, and outlines the key elements and tests for determining whether concealment, misrepresentation, or a breach of warranty allows an insurer to rescind a policy. These include whether a concealed or misrepresented fact is material to the insurer's risk assessment and if the insurer would have issued the policy or charged a different premium had the truth been disclosed.
This document discusses the grounds for rescinding insurance contracts due to concealment, misrepresentation, or breach of warranty under Philippine insurance law. It explains that insurance contracts require utmost good faith, and outlines the key elements and tests for determining whether concealment, misrepresentation, or a breach of warranty allows an insurer to rescind a policy. These include whether a concealed or misrepresented fact is material to the insurer's risk assessment and if the insurer would have issued the policy or charged a different premium had the truth been disclosed.
Professor Rescission • Based on the fundamental characteristics of an insurance contract that it be one of perfect good faith (uberrimae fides) for both parties • Grounds for rescission of insurance contracts: – Concealment (Secs. 26-35) – Misrepresentation (Secs. 36-48) – Breach of Warranty (Secs. 67-76) Concern of Parties in an Insurance Contract • Correct estimation of the risk – enables the insurer to decide whether he is willing to assume it & at what rate or premium • Precise delimitation of the risk – extent of the contingent duty to pay by the insurer • Control of the risk – enable insurer to guard against the risk • Determine whether a loss occurred Concealment • The neglect to communicate that which a party knows and ought to communicate (Sec. 26, IC) • Concealment whether intentional or not entitles the injured party to rescind the contract of insurance (Sec. 27, IC) • Saturnino v. Philippine American Life Ins. Co. 7 SCRA 316 – it was ruled that in order to avoid a policy it is not necessary to show actual fraud on the part of the insured Concealment • The reason for Sec. 27 is that concealment misleads or deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed upon. • Good faith is no defense in concealment. (Musngi v. West Coast Life Ins. Co. 61 Phil 864) • The reason for this is that insurance contracts are contracts uberrimae fidae. Facts to be communicated • Sec. 28, IC: Each party to an insurance contract must communicate to the other in good faith, all facts: a. which are within his knowledge b. Which are material to the contract c. Which the other party has not the means of ascertaining; and d. As to which the party with the duty to communicate makes no warranty.
Exceptions: Sec. 30, ICP
Requisites of Concealment • There must be knowledge of the fact concealed to be proven by the party claiming the existence of concealment • Such knowledge must have existed at the time the insurance takes effect for concealment to arise • The fact concealed must be material Non-disclosure of Facts • Matters though material need not be disclosed except in answer to inquiries of the other party: a. Facts already known to the other party b. Facts the other party ought to know c. Facts which the other party waives communication d. Facts relating to risk excluded by a warranty e. Facts relating to a risk excepted from the policy Test of Materiality • Materiality is determined not by the event but by the probable or reasonable influence of the facts on the judgment of the parties in entering into an insurance contract. (Sec. 31, ICP) • The fact concealed is of such nature that had the insurer known of it, it would not have accepted the risk or would have demanded a higher premium, or could have laid down different terms • Test: if the applicant is aware of the existence of some circumstance which he knows would influence the insurer in acting upon his application. Constructive Notice to both Parties • Each party to contract of insurance is bound to know all the general causes which are open to his inquiry (sec. 32, IC) • The insured need not disclose public events such as the nation is at war or the laws or political conditions in other countries • He likewise need not communicate the general usages of trade like customs pertaining to maritime matters, rules of navigation, kinds of seasons and all the risk connected with navigation. Waiver of disclosure of material facts • A party is not bound to disclose material facts the disclosure of which are waived (Sec. 33, IC): a. Expressly by the terms of the policy b. Impliedly, by neglect to make inquiries as to such facts which can be distinctly implied in the other facts communicated. • Ng Gan Zee v. Asian Crusader Life Assn. Corp. 122 SCRA 461 Communication of Insurable Interest • GR: Insured is not bound to communicate the nature and/or amount of his insurable interest in the life or property insured (Sec 34, IC) • Exceptions: – When the insurer makes inquiry from the insured – When the insured is not the absolute owner of the property insured Ex. A trustee, mortgagee or building contractor must communicate his particularly insurable interest in the property insured even if no inquiry is made by the insurer Opinion/Judgment need not be communicated • Even upon inquiry, the parties are not required to communicate information of his own opinion or judgment on the matters in question. (Sec 35, IC) • Only material facts are required to be disclosed and not mere opinion, speculation, intention or expectation. • In marine insurance, information of the belief or expectation of a third person, in reference to a material fact, is material. (Sec. 110, ICP) REPRESENTATION Representation • A representation is an oral or written statement of a material or fact, made by the insured to the insurer at the time of, or before the issuance of the policy induce the latter to issue said policy. (Sec 36, 37 & 45, IC) • A representation may be altered or withdrawn before the insurance is effected but not afterwards. (Sec 41, ICP) Affirmative & Representation • Any allegation as to the existence or non-existence of a fact when the contract begins. • Example: insurer manifests that the house subject of the insurance is used only for residential purposes. Promissory Representation • Any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance. – Undertaking by the insured, inserted in the policy, but NOT specifically made a warranty • Examples: – In fire insurance, oral promised that the building will be occupied – In fire insurance, oral promised to install five fire extinguishers in the building Avoiding Liability • The insurer must prove BOTH the materiality of the insured’s opinion and the latter’s intent to deceive. • If the representation is one of fact, all the insurer needs to prove is its falsity and materiality. Intent to deceive is already presumed. • An oral representation as to future event, or condition over which the insured has no control, with reference to property or life insured will be deemed a mere expression of opinion, which will avoid a contract ONLY when made in bad faith. • A representation shall avoid a policy when such was relied upon and such is substantially and materially false. Misrepresentation • A statement as a fact of something which is untrue which the insured stated with knowledge that it is untrue and with an intent to deceive or which he states as true without knowing it to be true and which has the tendency to mislead; and where such fact in either case is material to the risk. • A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations. (Sec. 44, ICP) Rule: misrepresentations are liberally construed in favor of the insured. Nature of Representation • A representation is a mere collateral inducement to a contract. It is not part of the contract. • A representation cannot qualify an express provision in the contract, however, it may qualify an implied warranty. (Sec 40, IC) – If a policy expressly provides that all floors in the building insured have water sprinkler devices, a representation by the insured before the insurance takes effect that the two floors did not have sprinklers does not qualify the express provision in the contract. The insured cannot recover from the insurer. Duty of the Applicant for an Insurance • It is the duty to give the insurer all such information concerning the risk as will be use in estimating its character and determining whether or not to assume it. • This information may be given orally or written in papers connected with the contract such as the application form/sheet. • Reckoning Date of Representation • A representation must be presumed to refer to the date of on which the contract goes into effect. (Sec 42, ICP) • There is NO misrepresentation if the representation was true at the time the contract takes effect, although it became false at the time it was made. • There is misrepresentation if although the representation was true at the time it was made, if subsequently became false at the time the contract took effect. Representation can modify Implied Warranty • In every marine insurance as warranty is implied that the ship is seaworthy. A representation of the insured that the vessel’s communications facilities were out of order at the time the policy was issued qualifies the implied warranty of seaworthiness. The insured can still recover from the insurer. Effect of Misrepresentation (Sec 45, ICP) • An insurance policy may be rescinded if the insured makes a false representation, whether intentional or unintentional, on a material point which induced the insurer to issue the policy. • The right to rescind is given to the injured party and may be exercised from the time the representation becomes false. • The right to rescind is waived by the acceptance by the insurer of the premium despite knowledge of false representation. Materiality in Representation • The materiality of a representation is determined by the same rules as the materiality of a concealment. (Sec 46, ICP) • Materiality is determined not by the event but by the probable or reasonable influence of the facts on the judgment of the parties in entering into an insurance contract. (Sec. 31, ICP) Concealment v. Misrepresentation Concealment Misrepresentation Passive form of deceit Active form of deceit the insured neglects or The insured makes an oral fails to disclose a material or written false statement fact in securing the to induce the insurer to insurance. issue the policy. Both require that the fact concealed or misrepresented must be a material fact and may be committed intentionally or unintentionally. WARRANTY Warranty • A statement or promise stated in the policy itself or incorporated therein by reference, whereby the insured expressly contracts as to the present or future existence of certain facts, circumstances, or conditions, the literal truth of which is essential to the validity of the contract of insurance. • Express or implied (Sec. 67, ICP) • May relate to the past, the present, the future, or to any or all of these. (Sec. 68, I Kinds of Warranties • Affirmative – The insured asserts the existence of a matter at or before the issuance of the policy • Promissory – A statement in the policy that a thing which is a material to the risk is intended to be done or not to be done after the policy takes effect. (Sec. 72, ICP) – The insured promises that certain matters shall exist or will be done/omitted after the policy takes effect – Non-performance of a promissory warranty entitles the other party to rescind the contract. (Sec. 73, ICP) Kinds of Warranties • Express – The assertion/promise is clearly set forth in the policy or incorporated therein by reference – It must be made at or before the execution of the policy. (Sec. 70, ICP) – includes statement in a policy relating to the person or thing insured, or to the risk as a fact (Sec. 71, ICP) – Statements in the application or medical examination are representations only and not warranties, if the application or medical examination is not incorporated in the policy or made part of it by reference. Kinds of Warranties • Implied – Not set forth in the policy but because of the general tenor of the terms of the policy or from the very nature of the insurance contract, a warranty is necessarily inferred or understood. Warranty v. Representation Warranty Representation Part of the contract Merely a collateral inducement thereto Expressly set forth in the policy May be oral or written in or incorporated therein by another instrument reference Must be strictly and literally be May only be substantially true performed Presumed material Must be shown to be material Breach of warranty is a breach A ground for rescinding the of the contract itself contract Warranty may be waived • Qua Chee Gan v. Law Union Rock Ins. Co., 98 Phil 85 – When the policy contains a condition which renders it voidable at its inception and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract Form of Warranty • No particular form of words is necessary to create a warranty. (Sec. 69, ICP) • It depends upon the intention of the parties, the nature of the contract or the words used thereto • In case of doubt, the statement is presumed to be a mere representation and not a warranty. Violation of a Material Warranty • A violation of the material warranty, or other material provisions of a policy entitles the other party to rescind the contract. (Sec. 74, ICP) – True even if the violation of the material warranty did not contribute to the loss • Immaterial provisions declared to be material avoids the policy if violated (Sec. 75, ICP) – Parties may agree that a violation of any provision of the policy even if not material shall avoid it Falsity of a Warranty • Falsity of a warranty (Sec. 29, ICP) • Non-disclosure under Sec. 29 unlike Sec. 27 must be intentional or fraudulent in order that the contract may be rescinded. • Example: In marine insurance, there is an implied warranty of seaworthiness of the vessel. There is concealment under this section when the insured intentionally or fraudulently failed to communicate the same. Breach of Warranty • GR: fraud is not essential of a breach of warranty – A mere violation of a material warranty even without fraud entitles the other party to rescind – A breach of warranty without fraud exonerates the insurer from the time the breach occurs – If there is fraud, the policy is voided ab initio and the insured is not entitled to the return of premium paid Requisites for Rescission • There must be a basis for rescission. (breach of warranty, concealment or misrepresentation) • The rescission must be coupled with a check for the amount of premiums already paid. • The rescission must be exercised within the two years that the insurance is in force during the lifetime of the insured. Exercising the Right to Rescind (Sec 48, ICP) • In a non-life insurance policy, the insurer may rescind a contract of insurance prior to the commencement of an action on the contract. • In a life insurance policy, the insurer may rescind the contract of insurance during the first two years when the policy was in force during the lifetime of the insured from the date of its issue or of its last reinstatement. The Incontestability Clause • Clauses in the insurance policy stipulating that the policy shall be incontestable after stated period. • In life insurance, it is incontestable after the lapse of 2 years from the date of its effectivity or of its last reinstatement during the lifetime of the insured. (Sec. 48 par 2, ICP) • Said period is given for the insurer to reasonably investigate the statements which the applicant makes in procuring his policy • It also gives assurance to the policy holder that his beneficiaries would receive payment without question as to the validity of the policy Requisites for Incontestability 1. Policy is a life insurance policy 2. Said policy is payable on the death of the insured 3. It has been in force during the lifetime of the insured for at least 2 years from its date of issue or of its last reinstatement
Note: the period of two years may be shortened
but cannot be extended by stipulation Defenses of the Insurer against Incontestability • Insured lacks insurable interest • Cause of death of the insured is an excepted risk • Premiums have not been paid • Beneficiary feloniously killed the insured • Policy is taken out in furtherance of a scheme to murder the insured • Insured substitutes another person for the medical examination • Action was not brought within the time specified • Beneficiary failed to furnish proof of death or failure to comply with any condition imposed by the policy END OF LECTURE