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LAW ON INSURANCE

Enverga Law School


First Semester, SY 2016-2017
Saturday, 1 P.M. to 3 P.M.
Atty. Christian Arvin S. Barlan

GUIDE QUESTIONS NO. 4

G. Rescission of Insurance Contracts

1. Concealment

1.1 Defined (Sec. 26, ICP)


Q: Define concealment in insurance contracts. (BAR)

A: A neglect to communicate that which a party knows and ought to


communicate.

1.2 Requisites
Q: For concealment to vitiate a contract of insurance, what requisites
must be present?
1. A: A party knows a fact which he neglects to communicate or
disclose to the other.
2. Such party concealing is duty bound to disclose such fact to the
other.
3. Such party concealing makes no warranty of the fact concealed.
4. The other party does not have the means of ascertaining the fact
concealed.
5. The fact concealed is material.

1.3 Test of Materiality (Sec. 31, ICP)

Q: In June 2011, Juan applied for a life insurance policy with a double
indemnity provision in case of death by accident. Despite an express
inquiry in the application form for insurance, he did not mention the fact
that he had suffered from viral hepatitis the previous year. As Juan had
fully recovered from the disease, the medical examination performed by
the insurance companys physician did not reveal such previous illness,
and showed that Juan was healthy and was an insurable risk. The policy
was issued forthwith.

In March 2013, Juan died in an automobile accident. Subsequent


investigation revealed that Juan was negligent in not having his brakes
checked.

The insurance company refused to pay Juans wife, the designated


beneficiary, on two grounds: that Juan was guilty of fraudulent

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concealment of his liver ailment, and that Juans death was caused by
his own negligence.

The policy is silent as to the effect of the insureds negligence on


the right to recover thereunder. Juans wife insists that she has a right to
recover because Juans death was caused by an accident which had
nothing to do whatsoever with his ailment. She therefor insists on double
indemnity.

a. Is she entitled to any indemnity. Explain.

Juans wife is not entitled to any indemnity under the policy.


The fraudulent concealment of his having suffered from viral
hepatitis, which is a material matter give the insurer the right
to rescind the contract, even if the insured did not die from the
concealed matter.
Negligence by the insured resulting in his death, by itself would
not avoid the policy. But in the case at bar, the policy is avoided
because of the fraudulent concealment of a material matter.

b. If Juans accident occurred in July 2013, would your answer be


the same? Explain. (BAR)

If Juans accident occurred in July 2013, the insurer under the


incontestability clause, is barred from resisting the policy,
because of the lapse of more than two years from the issue
(June 2011) of the policy. My answer therefore, will be different
from the above.

1.4 Consequences of Concealment (Sec. 27, ICP)


Q: What are the consequences or effects of concealment?
A: It vitiates the contract and entitles the insurer to rescind, even if
the death or loss is due to a cause not related to the concealed matter.

Q: X applied for life insurance with Metropolitan Life Insurance


Company. The application contained this question: Have you ever had
any ailment or disease of xxx (b) the stomach or intestines, liver, kidney
or genitourinary organ? X, a laundry woman who has no medical
knowledge answered No. The application was approved, premium was
paid and six months later, X died from cancer of the stomach. The post
medical examination of X shows that she had a cancer at the time she
applied for a policy. Can the beneficiary of X collect on the policy?
Reasons. (BAR)

A: No, the beneficiary cannot collect. The policy can be rescinded by


the insurer on the ground of concealment. Under an amendment of the
Code, the concealment on a material matter, whether done intentionally
or unintentionally, entitles the insurer to rescind, without prejudice

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however to the application of the incontestability clause in the proper
cases.
Good faith is no defense in concealment.

Q: Juan procured a non-medical life insurance from Good Life


Insurance. He designated his wife, Petra, as the beneficiary. Earlier, in
his application in response to the question as to whether or not he had
ever been hospitalized, he answered in the negative. He forgot to mention
his confinement at the Kidney Hospital.

After Juan died in a plane crash, Petra filed a claim with Good Life.
Discovering Juans previous hospitalization, Good Life rejected Petras
claim on the ground of concealment and misrepresentation. Petra sued
Good Life, invoking good faith on the part of Juan.

Will Petras suit prosper? Explain. (BAR)

A: No, Petras suit will not prosper. Juan was guilty of concealment.
Good faith is not a defense in concealment. This assumes that the policy
has been in effect for less than two years from date of issue.
The failure of the insured to reveal other insurances where required by
the policy is a material concealment and can prevent recovery. The
contract is void ab initio.

1.4.1 The matter concealed need not be the cause of the loss.
a. Exceptions
a.1 Incontestability Clause (Sec. 48, ICP)
a.1.a Requisites

Q: Renato was issued a life insurance policy on


January 2, 2010. He concealed the fact that three
years prior to the issuance of his life insurance policy,
he had been seeing a doctor about his heart ailment.

On March 1, 2012, Renato died of heart failure.


May the heirs file a claim on the proceeds of the life
insurance policy of Renato? (BAR)

A: Yes, the heirs of Renato may file a claim on the


proceeds of the life insurance policy. The insured died
more than two years after the effectivity of the policy,
hence the insurer cannot rescind the policy even if
there was concealment. The incontestability clause in
life insurance contracts applies.

1.4.2 Good faith is no defense in concealment (Sec. 27, ICP)

2. Misrepresentations/Omissions
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2.1 Representation defined (Sec. 36, ICP)
2.2 Classes (Sec. 39, ICP)

2.3 Differentiated from Warranty


Q: Distinguish a warranty from a representation. (BAR)
A: A warranty is part of the contract, while representation is a
collateral inducement.
A warranty is written in the policy or in a valid rider or attachment, while
a representation need not to be written.
A warranty is generally conclusively presumed to be material, while
representation should be established to be material.
The fact warranted must be strictly complied with, while representation
requires only to be substantially true.

2.4 Test of Materiality (Sec. 31, ICP)

Q: On May 15, 2014, Juan applied for a life insurance policy with Acme
Life Insurance Company. The policy was issued to Juan on June 30,
2014 but the date of issue, as appearing in the policy, was May 15, 2014,
the date of his application. Juan subsequently realized that some of his
answers in the insurance application were erroneous. Accordingly, he
supplied the insurance company with the correct replies. However, his
letter to the insurance company giving the correct answers was lost in
the mails. Juan died on June 1, 2014.
The insurance company now refuses to pay Juans beneficiary
contending that he (Juan) misrepresented the state of his health at the
time of his application. Is the insurance company liable? State your
reasons. (BAR)

A: The insurance company, Acme Life, can refuse to pay Juans


beneficiary because of his misrepresentations or errors made in his
application.
The bases for Acme in accepting Juans application, and issuing a policy
at the rate stated in the policy, are the representations and statements
made by Juan in his application filed and received by Acme on May 15,
2014.
The correction of errors by Juan did not reach Acme, and Acme had no
opportunity of reevaluating its decision to insure Juan, and to fix the rate
of premiums, in accordance with the correct application.
Acme therefore entered into the contract under the false belief that
Juans application dated May 15, 2014 contained information on the basis of
which it (Acme) could decide on whether or not it should enter into the
contract, and prescribe the rate of premiums.
The good faith or bad faith of Juan is immaterial.
Hence, Acme, the insurer can validly refuse to pay the beneficiary of Juan.

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Q: Pabaya paid for a fire insurance on his multi-storey building. At the
time he applied for the insurance, he told the representative of the
insurance company that he planned to assign a security guard on every
floor of the building right away. Except for the ground floor, no security
guards were assigned. Eleven months after the policy was issued, the
building was gutted by fire which started on the third floor. Unknown to
Pabaya, the insurance company had incorporated his planned
undertaking in the policy.

Can Pabaya recover on the fire insurance policy. Explain. (BAR)

A: Pabaya can recover on the fire insurance policy. The plan to assign
a security guard on every floor of the building, by the fact that it is a mere
plan, cannot amount to a promissory representation or warranty.
The inclusion in the policy of the said plan, if worded as a mere plain in the
policy, does not amount to a promissory representation or a warranty, and the
failure of Pabaya to push through with the plan, is not violative of the
insurance contract.
Therefore, Pabaya is entitled to recover under the policy inspite of his failure to
comply with his plan to assign a security guard on every floor of the insured
building

2.5 Consequences of Misrepresentation

2.5.1 Incontestability Clause

Q: Atty. Roberto took out a life insurance policy from the Dana
Insurance Corp. (DIC) on September 1, 2009. On August 31, 2010,
Roberto died. DIC refused to pay his beneficiaries because it
discovered that Roberto had misrepresented certain material facts
in his application. The beneficiaries sued on the basis that DIC can
contest the validity of the insurance policy only within two (2) years
from date of issued and during the lifetime of the insured. Decide
the case. (BAR)

Q: Manpower Company obtained a group life insurance policy for


its employees from Phoenix Insurance Company. The master policy
issued by Phoenix on June 1, 2006 contained a provision that
eligible employees for insurance coverage were all full-time
employees of Manpower regularly working at least 30 hours per
week. The policy had also an incontestability clause. Beforehand,
Phoenix sent enrollment cards to Manpower for distribution to its
eligible employees. X filled out the card which contained a printed
clause: I request the insurance for which I may become eligible
under said Group Policy. The cards were then sent to Phoenix and
X was among the employees of Manpower who was issued a
certificate of coverage by Phoenix.

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On July 3, 2008, X was killed on the occasion of a robbery in
their house. While processing the claim of Xs beneficiary, Phoenix
found out that X was not an eligible employee as defined in the
group policy since he has not been employed 30 hours a week by
Manpower. Phoenix refused to pay. May Xs beneficiary invoke the
incontestability clause against Phoenix? Reasons. (BAR)

A: Yes, the beneficiary of X may invoke the incontestability


clause. While it is true that the master policy contained an exclusionary clause
(excluding from coverage employees working less than 30 hours), X filled up an
enrollment card where his personal circumstances and working schedule were
obviously contained. The failure by Phoenix to exclude X, who instead was
issued a certificate of coverage, is deemed as a waiver by Phoenix of said
exclusionary clause.
Hence, the beneficiary of X can recover under the policy.

2.5.2 Misrepresentation by Collusion with Insurers Agent

Q: A, agent of life insurance B induced C who had been


suffering from advanced tuberculosis to apply for P10,000- life
insurance which C did and he (C) requested A to fill up the
application form. Thru the connivance of the physician, it was
made to appear in the application that C is in good health and
the P10,000- life insurance policy was issued by B to C.

a. Is the policy issued to C valid?

The policy issued to C is void, because it was issued on a


misrepresentation through his connivance with two
agents of the insurer- the insurance agent and the
insurance physician. It is the participation of C in the
misrepresentation which avoids the policy. C, by
conniving with two agents of the insurer. A, the agent,
and the physician of the insurer, made the two his own
agents, and the misrepresentation of the two is equivalent
to his own misrepresentation, material enough to avoid
the policy.

b. Is B bound by the acts of his agent A? Give reasons for


your answer. (BAR)

B, the insurer, is normally bound by the acts of his


agents, but in the problem above, the participation of the
insured in the commission of the misrepresentation
avoids the policy and will not bind the insurer.

3. Breach of Warranties
3.1 Defined

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3.2 Classes (Sec. 67, ICP)
3.2.1 Express Warranty
3.2.2 Implied Warranty

3.3 Effect of Breach of Warranty (Secs. 74-76, ICP)


3.3.1 Exceptions (Sec. 73, ICP)

Q: Plaintiff had insured his residential building with defendant


company. A warranty clause in the policy reads as follows. It is
hereby declared and agreed that during the pendency of this policy
no hazardous goods shall be stored in the premises covered by this
policy. Late one evening a friend of plaintiff engaged in the
business of selling petroleum in the province, arrived in plaintiffs
house with a truckload of 5-gallon drums filled with kerosene. He
obtained plaintiffs permission to leave the truck in plaintiffs
garage for two days. The garage was located under plaintiffs house.
During the second night, fire broke out in plaintiffs kitchen. Before
the fire reached the garage, however, plaintiff was able to remove
his friends truck with its contents to a place of safety. Owing to the
delay in the arrival of fire engines, however, the fire finally
consumed the entire building. Is plaintiff entitled to recover under
the terms of the policy? (BAR)

A: No, the plaintiff is not entitled to recover under the policy


because of a breach by him of an express warranty that during the
effectivity of the policy, no hazardous goods will be stored in the
insured premises.
That the truckload of kerosene drums was in the insureds house
for two days only to accommodate a friend, that the fire did not
come from the kerosene truck, are of no moment.
A warranty has to be strictly complied with, and a breach thereof,
even if not grave, will entitle the insurer to rescind.

Q: Julie and Alma formed a business partnership. Under the


business name Pino Shop, the partnership engaged in a sale of
construction materials. Julie insured the stocks in trade of Pino
Shop with WGC Insurance Company for P350,000-. Subsequently,
she again got an insurance contract with RSI for P1,000,000- and
then from EIC for P200,000-. A fire of unknown origin gutted the
store of the partnership. Julie filed her claims with the three
insurance companies. However, her claims were denied separately
for breach of policy condition which required the insured to give
notice of any insurance effected covering the stocks in trade. Julie
went to court and contended that she should not be blamed for the
omission, alleging that the insurance agents for WGC, RSI and EIC
knew of the existence of the additional insurance coverages and
that she was not informed about the requirement that such other
or additional insurance should be stated in the policy.
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a. Is the contention of Julie tenable? Explain.

No. an insured is required to disclose the other insurances


covering the subject matter of the insurance being applied
for.

b. May she recover on her fire insurance policies? Explain.


(BAR)
No, because she is guilty of violation of a warranty/condition

3.4 Construction of Warranties

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