RESCISSION OF INSURANCE CONTRACTS

Topic: Concealment; Material Concealment: Incontestability Clause (1994)

On September 23, 1990, Tan took a life insurance policy from Philam. The policy was issued on
November 6, 1990. He died on April 26, 1992 of hepatoma. The insurance company denied the
beneficiaries‘ claim and rescinded the policy by reason of alleged misrepresentation and
concealment of material facts made by Tan in his application. It returned the premiums paid.
The beneficiaries contend that the company had no right to rescind the contract as rescission
must be done ―during the lifetime‖ of the insured within two years and prior to the
commencement of the action. Is the contention of the beneficiaries tenable?

ANSWER:
No. The incontestability clause does not apply. The insured dies within less than two years from
the issuance of the policy on September 23, 1990. The insured died on April 26, 1992, or less
than 2 years from September 23, 1990.
The right of the insurer to rescind is only lost if the beneficiary has commenced an action on the
policy. There is no such action in this case.
1980
“P” filed an application with an insurance company for a 20-year endowment policy in the
amount of P50,000.00 on the life of his one-year-old daughter, supplying all the essential data in
the application form, but without disclosing that his daughter was a mongoloid child. Upon “P’s”
payment of the annual premium, a binding deposit receipt was issued to “P” by the insurance
agent, subject to processing by the company. The insurance company disapproved the
insurance application stating that the plan applied for was not available for minors below seven
years old, and offered another plan. The insurance agent did not inform “P” of the disapproval
nor of the alternative plan offered, and instead, strongly recommended that the company
reconsider and approve the insurance application.

As fate would have it, “P’s” daughter died. “P” sought payment of the proceeds of the insurance
but the company refused on the grounds that there was concealment of a material fact in the
insurance application form and that it had rejected the application. “P” contended, on the other
hand, that the binding deposit receipt constituted a temporary contract of life insurance.

How would you resolve the issue?

Answer:
The insurance company is not liable.

The binding deposit receipt is merely conditional and does not insure outright. Where an
agreement is made between the applicant and the agent, no liability shall attach until the
principal (insurance company) approves the risk. He binding deposit receipt is subordinated to
the act of the insurance company in approving or rejecting the application; thus, in life
insurance, a “binding slip” or “binding receipt” does not insure by itself;

Thus, when as in this case the application was disapproved, before the death of the insured,
there was no perfected contract of insurance in order to make the company liable. (Great
Pacific Life Ass. Co. v. C.A., April 30, 1979; 89 SCRA 549.)

2010

x.

To secure a loan of P10 million, Mario mortgaged his building to Armando. In accordance with
the loan arrangements, Mano had the building insured with First Insurance Company for P10
million, designating Armando as the beneficiary.

Armando also took an insurance on the building upon his own interest with Second Insurance
Company for P5 million.

The building was totally destroyed by fire, a peril insured against under both insurance policies.
It was subsequently determined that the fire had been intentionally started by Mario and that in
violation of the loan agreement, he had been storing inflammable materials in the building

1. How much, if any, can Armando recover from either or both insurance companies? (2%)

SUGGESTED ANSWER:

Armando can receive P5 million from Second Insurance Company. As mortgagee, he had
an insurable interest in the building Panlileo v. Cosio, 97 Phil 919 11955. Armando cannot
collect anything from First Insurance Company. First Insurance Company is not liable for
the loss of the building. First, it was due to a willful act of Mario, who committed arson
(Section 87 of the Insurance Code; East Furnitures, Inc. v. Globe do Rutgers Fire
Insurance Company, 57 Phil. 576 /1932). Second, fire insurance policies contain a warranty
that the insured will not store hazardous materials within the
averages include all damages and expenses which are deliberately caused to save the vessel,
Its cargo, or both at the same time, from a real and known risk (Article 811 of the Code of
Commerce).

11

Enrique obtained from Seguro Insurance Company a comprehensive motor vehicle insurance to cover
his top of the line Aston Martin. The policy was issued on March 31, 2010 and, on even date, Enrique
paid the premium with a personal check postdated April 6, 2010.
On April 5, 2010, the car was involved in an accident that resulted in its total loss.

On April 10, 2010, the drawee bank returned Enrique’s check with the notation "Insufficient Funds."
Upon notification, Enrique immediately deposited additional funds with the bank and asked the insurer
to redeposit the check.

Enrique thereupon claimed indemnity from the insurer. Is the insurer liable under the insurance
coverage? Why or why not? (3%)