102 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10807 with Notet on Pre-Need Act) agent or broker and the imposition of a fine not exceeding Twenty- five Thousand Pesos (P25,000). b. The purpose of these statutes is the prevention of unfair discriminatory practices by insurance companies, agents and brokers in order to ensure that equal terms are fixed for policyholders of the same insurable class and equal expectation of life. In aid and furtherance of this desirable policy, the statutes prohibit such practices involving rebates or preferential treatment with respect to the cost of the policy or the benefits allowed for the premium. It follows that to enforce contracts or agreements directly forbidden under these statutes, thereby allowing recovery thereunder, would be subversive of the very public policy which the law was designed and intended to uphold. While the statutes are addressed to the insursnee companies, agents and brokers, and are enacted for the protection of policyholders, the provisions are for the general body of policyholders who would suffer by the enforcement of the prohibited agreements, and not for those who have entered into Such agreements and are seeking to profit by its terms.» Always beliew in gouotelf : Good lack vith your omy, & fi alle ‘Ins. Co, of Californie, 111 NW 660 (1907); Bernbhum v. Travelers Ins, Co. of Hartford, Connecticut, 108 SW 2d 941 (1987); Chats v. Bloom, 54 NE 24 #89 (1944); Mahone ¥, Hartford Life and Arcident Insurance Company, 561 P 2d 142 (1976). ‘Nora Lumibao v. The Hon. Intermediate Appellate Court and Eugenio ‘Trinidad, ibid, citing Smathers v, Bankers’ Life Ins. Co, 65 SH 746 11909); Riehmond \. Conservative Life Ins. Co, 165 NW 286 (19117), Sovereign Camp v, Wagapmer, 173 So. 424 11937), CHAPTER FIVE , THE POLICY ‘A .cléarly> readable and_understandable insurance policy is important for the protection of the general public. In the early days of fire insurance business, certain insurance companies were notorious for cluttering their pelicias with restrictive pravisiona that. resulted in voluminous contracts that were largely unreadable. A decision in one case contains this Dickensian description of such nefarious practice: “orms of applications and poligies x x x of a most complicated and elaborate structure were prepared, and filled ‘with covenants, exceptions stipulations, provisions, @rules, regulations and conditions rendering the policy void in a great number of sontingencios. Those provision were of such balk and character that they would not be understood by men in general, even if subjected to a careful and laborious study; by men in general, they were sure not to be studied at all. ‘The study of thom was rendered particularly unattractive by a profuse intermixture of discourses on subjects in which @ premium payer would have no interest. This compound, if read by him, ‘would, unless he were an extraordinary man, be en inexplicable riddle, a mare flood of darknase and confusion, some of the most material stipulations were concealed in a mass of rubbish on the back side of the policy and the following page, where few would expect to find anything more than a dull appendix and where seareely any one would think of looking for information x x x. As if it were feared that, notwithstanding these discouraging circumstances, some extremely eccentric person might attempt to examine and understand the meaning of the involved and intricate nat in which he was to be entangled, it was printed in such small type and in lines so long and so crowded that the perusel of it was made physically difficult, painful and injurious. "Delaney v, Rockingham Farmers Mutual Insurance Company, 52 NH. 681, 587 [1873], cited in Huchner, Black & Webb, p. 17. 103104 ESSENTIALS OF INSURANCE LAW (Republic Aet No, 10607 with Notes on Pre-Need Act) a CONSENSUAL. An insurance contract is a consensual ict. It is perfected by mere consent of the parties and no ality is required for its perfection. Hence, the absence of a policy does not bar the contract from coming into existence. . STATUTE OF FRAUDS INAPPLICABLE, A contract ‘g_unenforceable ifthe same does not comply with the Statute of 1uds, Article 1403 of the New Civil Code requires a contract to be in a note or memorandum if it is one of the cases covered by the Statute of Frauds.' These include contracts that eannot be performed within one (1) year after the contract is made. One argument is that insurance contracts (with a term of more than one [1] year) cannot. be performed within one (1) year because the loss may occur after one year. However, insurance contracts can be performed within one (D year although it is contingent upon the happening of an event. For instance, while life insurance contracts may remain in force for decades, the obligation of the insurance company to pay the proceeds may likewise be performed within one (1) year because the future event (death of the insured) may occur within one (1) year. Hence, insuraniee contracts are not covered by the Statute of Frauds. 43. POLICY, Although formalities are not required for the perfection of the contract, it is still mandated by law that written, Policies should be issued by the insurer. A policy of insurance is defined in Section 49 of the Insurance Code as “the written instrument in which a contract of insurance is set forth.” a,,/ Printed Form. Section 50 of the Insurance Code provides that the policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance shall be written on the blank spaces provided therein. (2) Before RA No. 10607, Group Insurance and Group Annuity Policies which may be typewritten and need not be in printed form. However, RA No. 10607 removed this exception in Section 50, b. Electronic Document. Section 50 now provides that “the policy may be in electronic form subject to the pertinent provisions of RA No. 8792, otherwise known as the ‘Electronic Commerce ‘Act’ and to such rules and regulations as may be prescribed hy the Commissionor.”* *S0o Article 1408, New Civil Code. Section 50, 1.C., as amended by RA No. 10607. (CHAPTER FIVE 105 "THE POLICY proval of Insurance Commission. All policies isu eve companies are approved by the Insurance Co mn accordance with the first paragraph of Section 252 which provides: SEC. 232. No policy, certificate or contract of insurance shall be issued or delivered within the in the form previously approved by ‘and no application form shall be ith, and no rider, clause, warranty or endorsement shal be attached te, printed or siamped upon such 4. Basie Provisions. The provisions of an insurance con- tract can be classified as follows: (1) declarations, (2) insuring agree- ments, (3) exclusions, and (4) conditions. The policy of Insurance ‘must contain the provisions enumerated in Section 51 which pro- vides: SEC. 51. A policy of insurance must specify: (a) The parties between whom the contract is mad (b) The amount to be insured except in the cases ‘of open or running policies; {c) The premium, or if the insurance Is of a character where the exact premium Is only determinable upon the termination of the contract, a statoment of the basis and rates upon which the final premium is to be determined; (@) The property or life insured; {e) Theinterest of the insured in property insured, ifhe is not the absolute owner thereof, (f) The risks insured against; and (9) The period during which the insurance is to continue.108 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) @, Declarations. Most of the provisions of Section 51 are part of the declaration. “Declarations identify the insured; describe the property, activity or life insured; state the types of coverage purchased, the applicable policy limits and the term of the. coverage; and indicate the premium paid for each soparate coverage purchases, The purpose of the declarations made by the insured is to give the insurer sufficient information to enable it, with information from othersgources, to issue the desired contract at a proper price” () Insuring Agreements. These provisions: 5 what the insurer promises to do. mS insuring oan praete the characteristics of the events covered under the captract.”: * (2) Exclusions, These provisions limit the covera, s, The age provided under the intsuring agreements. These provisions exchude specified perils, property, sources of liability, persons, losses, locations and time periods.* (3) Conditions. Those provisions define terms used in the other parts of the contract, prescribe conditions that. must be complied before the insurer can be made liable and may describe the basis for computing the premium.’ f. Distinguished from Notes. In marine insurance, the policy should be distinguished from “Marine Risk Notes.” A Marine Risk Note is an acknowledgment or declaration confirming the specific shipment covered by its Marine Open Policy, the evaluation of the cargo, and the chargeable premium. Such nete is not the policy itself. §4. DESIGNATION OF BENEFICIARY. The designation of the beneficiary should be made in unequivocal terms. ‘The Insurance Code provides for rules on designation of beneficiaries as SEC. 53. The insurance proceeds shall be applied exclusively to the proper interest of the person in whose “G. Anbar Willams, J. and Richard M. Hens, ick Management and Ina anc, 1969 th Bp 358 hereinaer referred tons Willams dr and Helm ‘Williams, Jr, and Heins, bic. " - ‘Wiliams, Jr. and Heine, 340, iam tnd Het ‘Abit Siping. Campeny’s. Philippine Amoriean General Insurance Company. GR. No. 7752, Ocuiber 6, 1888, 178 SCRA 357, Main Inara Company, Ine v. Rey Brokerage Corporation, GI No- 112106, Noveter oi Door CHAPTER FIVE 107 ‘THE POLICY name or for whose benefit it is made unless otherwise specified in the policy. §5. IDENTIFICATION OF THE INSURED. Sections 54 and 55 provides for rules on the determination of the real owner of the policy. SEC. 54. When an insurance contract is executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the Insured as agent or trustee, or by other gonoral words in the policy. SEC. 55. To render an insurance effected by one partner or part-owner, applicable to the interest of his co-partners or other part-owners, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest. a. Agent or Trustee. ‘The principal may be damnified by the loss of the property that he owns that is under the care of trustee or agent. On the other hand, the agent or trustee that takes care of the property may also be damnified by the property’s loss. Hence, both the principal and his agent or trustee can insure the property under the latter's care. There may be instances, however, that the principal takes an insurance on the property through the agent or trustee. The policy may not expressly provide that it was the principal who really took the policy but the policy may contain words that will indicate that the principal is the real party in interest. ‘This is an example of the situations that are covered by Section 54 of the Insurance Code. b. Partner or Co-owners. Partners and co-owners may have insurable interest on the property owned by the partnership or owned in common, ‘The insurance can be taken by the managing partner or co-owner on the property for the partnership or the co- ownership. In such easo, the terms of the policy should expressly provided that the insurance are applicable to the joint or common interest. An express provision is necessary because a co-owner and partner also has insurable interest on the property and they may take an insurance for their own benefit. c. Insured Indentified in General Terms. Section 56 of the Insurance Code applies when the insured is not specifically108 ESSENTIALS OF INSURANCE LAW. (Republic Act No. 10607 with Notes on Pre-Neod Act) identified. When the description of the insured in a policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim ‘the benefit of the policy. Hence, it is a question of proof if the person. claims that he is one of those described as insured in general terms. SEC. 56. When the description of the insured in a policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim the benefit of the policy. ‘Thus, an insurance over a car may designate the “registered owner” as the insured. In such case, there it can easily be established by presenting the Certificate of Registration of the car. 46. POLICY FORM, The insurer is generally free to provide for the terms and conditions of the policies that it will issue so long as the same provisions are not contrary to law, moral, customs, and public policy. In addition, the forms are subject to the approval of the Insurance Commission. Pursuant to Section 226 of the Insurance Code, the Insurance Commission likewise imposed the minimum requirements for the approval of insuranee plans/forms for policy, certificate or contract of insurance, application, rider, clause, warranty or indorsements for all life insurance companies.* a. In some cases, the Insurance Commission approved standard policies that should be used by insurers. For example, the Insurance Commission approved a Standard Fire Policy in September 1980 and the same was made eflective in January 1981, Similarly, the Insurance Commission likewise approved a Standard Life Insurance Policy dated June 25, 1993," b. However, in certain cases, the law itself provides for man- datory provisions. Thus, the law prescribes minimum mandatory provisions for the following policies: (1) Individual life," (2) Endow- ment Insurance," (3) Group Life, and (4) Industrial Life. lar Letior No, 11-90, July 10, 1990, Circular Lettar No. 14.63, “Section 283, LC. "8a, "Section 224, 1.0, ‘Section 236, 1.C. (CHAPTER FIVE, 109 "THE POLICY Be RIDERS. The cocond and third paragraphs of Section 50 of the Insurance Code provide for the rules regarding riders, clauses, warranties or endorsements that are not part of the original printed form but are merely attached to the policies, viz. “Any rider, clause, warranty or endorsement Purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding ‘on the insured, unless the descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and written on the blank spaces provided in the policy. Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be countersigned by the insured or owner, which countersignature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement.” a, _Requisites. Based on Section 50 of the Insurance Code, a rider, clause warranty or endorsement that are not part of the original printed form are binding provided that: () The rider, clause, warranty or endorsement is attached to the policy; (2) The deseriptive title or name of the rider, clause, warranty or endorsement: is mentioned and written on the blank spaces provided in the original printed policy form; and (3) If not applied for by the insured or owner, the rider, clause, warranty or endorsement shall be countersigned by the insured b. An endorsement is a written agreement attached to a policy to add or subtract insurance coverages. A rider is an endorsement to an insurance policy that modifies clauses and provisions of the policy, including or excluding coverage.” If the requirements of Section 50 of the Insurance Code are complied with, “Rubin, p. 168. ‘Rubin, p. 440,0 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) they take precedence over the original policy provisions. They are deemed integral parts of the original policy.” c. It is a well-settled rule that in case repugnance exists between written and printed portions of a policy, the written portion prevails. There can be no question that as far as any inconsistency exists, a “rider” prevails over the printed clause it covers. When an. instrument consists partly of written words and partly of a printed form and the two are inconsistent, the former controls the latter." 48. CONTRACT OF ADHESION. Insurance policies are contracts of adhesion because only one party (insurer) prepares the written contract while the other party (insured) merely adheres to the contract. Usually, the insured cannot change the written policy imposed by the insurer. It is likewise called contract by adhoren 2, Nevertheless, it does not follow that the insured has not given his consent to the terms and conditions of the insurance contract simply because it is 2 contract of adhesion. A contract of adhesion is as equally binding as any other contract. Evary insured should be aware of the fact that a party is not relieved of the duty to exercise the ordinary care and prudence that would be exacted just because what is involved is a contract by adherence. The conformity of the insured to the terms of the policy is implied trom his failure to express any disagreement with what is provided for therein. b. Tt may be true that the majority rule is that injured persons may acept policies without reading them, and that this is not negligence per se. However, the rule is not without any exception, Thus, it is incumbent upon ‘the insured to read the insurance contract if this can be reasonably expected of him considering that he has been a businessman for a long period of timeand the contract. concems indemnity in case of loss in his money-meking trade of “Commicsioner of Internal Revenue v. Linceln Philippine Life Insurance Co, Ime., G.R. No. 119176, March 19, 2002, This case invelver un “Automatic Inerease Clouse” where the date when the aulomaife increase of the value of the policy is Provided for in the attachment, The Supreme Court ruled that there was no need to ontar into a soparats agreement, ‘’Rrancisco Jarque v. Smith Bell & Co, Ltd, etal, G.R, No, L-32986, November 11, 1980, citing Joyce on Insurance, 24 Ed., See. 224, p, 600; Amould on Marine Insurance, Sth Rd., Sec. 79; Marine Byuipment Corporation v. Automobile Insurance o,24 Ped. 2d), 607; and Marine Insurance Company v. MeLahanan, 290 Fed. 685, CHAPTER FIVE an ‘THE POLICY which important consideration he could not have been unaware as it was precisely the reason for his procuring the same.” §9. INTERPRETATION AND PROOF. Since an insurance contract is a contract of adhesion, any doubt should be resolved against the insurer. Conformably, it stands to reason that the doubt should be resolved against the insurer whose lawyer or managers drafted the insurance policy contract” This is consistent with Article 187 of the New Civil Code which provides: Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. a. The Supreme Court ruled in Landicho v. Government Service Insurance System: “This is particularly truo as regards insurance policies, in respact of whieh it is settled that the ‘terms in an insurance policy, which are ambiguous, equivocal, or uncertain xxxare tobe construedstrictly and most strongly against the insurer, and liberally in favor of the insured so as to effect the dominant, purpose of indemnity or payment to the insured, especially where forfeiture is involved,’ and the reason for thie is that tho ‘insured ‘usually has no voice in the selection or arrangement of the words employed and that the language of the contract is selecied with great care and deliberation by experts and legal advisers employed by, and acting exclusively in the interest of, the insurance company.” b. In Fieldmen's Insurance Company, Inc.v.Vda. De Songco,* the Supreme Court likewise ruled: “This rigid application of the rule on ambiguities has become necessary in view of current business practices. The courts cannot ignore that nowadays monopclics, cartels and concentration of capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared ‘agreements’ that the weaker party may not change one whit, his participation in the ‘agreement’ being reduced to the alternative to ‘take it or leave it’ labeled since Raymond Saleilles “New Life Enterprises and Julian Sy v. Hon. Court of Appeals, etal, G.R, No. 071, March 31, 1992. ‘Rizal Surety and Insurance Compeny ¢. Court of Appeals and ‘Transworld Knitting Mills, Inc., G-R. No. 112360, July 18, 2000. "GR. No, 1-28866, March 17, 197%, citing 28 An, Jur. 181 & 44 CJS 1174, G.R. No, 24883, Sep:omber 23, 1968, citing New Civil Code, Article 24; Sent, of Supreme Court of Spain, 13 December 1984, 27 February 1942,az ESSENTIALS OP INSURANCE LAW (Republic Act No, 10607 with Notes an Pre-Neod Act) ‘contracts by adherence’ (contrats /sic! dadhesion), in contrast to these entered into by parties bargaining on an equal footing, such contracts (of which policies of insurance and international bills of Jading are prime example) obviously call for greater strictness and vigilance on the part of courts of justice with a view to protecting the weaker party from abuses and imposition, and prevont their becoming traps for the unwary.” c. For example, if the stipulation as to the coverage of the fire insurance policy under controversy has created a doubt regarding the portions of the building insured thereby, the doubt should be resolved in favor of the insured and against the insurance company.” An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contract, which is, to insure against risks of loss or damage to the goods. Such interpretation should result from the natural and reasonable meaning of the language in the policy. d. While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the insurer company, yet, contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense.* $9.01. PROOF, If the terms and conditions of the policy is in question in a case, the party who seeks to prove such terms and conditions must present the policy during trial and formally offer it as evidence. Any person who relies on the policy as the basis of his cause of action must also attach the same to the complaint as an actionable document. The Court observed: “The Court further recognizes the danger as precedent should we sustain Malayan’s position, and not only because such @ ruling would formally violate the rule on actionable ®Rizal Surety and Insurance Company v. Court of Appesla and Transworld Knitting Mills, Ine., GR. No. 112960, July 18, 2000. “Malayan Insurance Corporation V. The Honorable Court of Appeals and TKC ‘Marketing Corporation, CLR. No, 119599, March 20, 1997, *Sun Insurance Office, Ltd. v, Court of Appeals and Emilio Taa, C.R. No, 89741, March 13, 1991; Pacific Banking Corp. v. Courtof Appeals, 168SCRA 1 (1988), Malayan Insurance Company. Ine. v. Regis Brokerage Corporaticn, G.R. No. 172156, November 23, 2007. CHAPTERFIVE, 13 "THE POLICY documents. Malayan would have us effectuate an insurance contract without having to consider its partiealar terms and conditions, and on a blind leap of faith that such contract is indeed valid and subsisting. The conclusion further works the utter prejudice of defendants such as Regis or Pairearco since they would be deprived the opportunity to examine the document that gives rise to the plaintiff's right torecover against ‘them, or to raise arguments or objections against the validity or admissibility of such document. If a legal claim is irrefragably sourced from an actionable document, the defendants cannot bbe deprived of the right to examine or utilize such document in order to intelligently raise a defense. The inability or refusal of ‘the plaintiff to submit such document into evidence constitutes an effective denial of that right of the defendant which is ultimately rooted in due process of law, to say nothing on how such failure fatally diminishes the plaintiff's substantiation of its own cause of action.” a, The obligation to attach the policy to the Complaint as an actionable document and to present, and offer the same applies even if the plaintiff is an insurance company that is trying to recover based on its right of subrogation.” b. Note that the Insurance Commission issued I.C. Circular No. 11-2000 which prevents insurers and insurance agents from divulging information in insurance policies. However, the Supreme Court ruled that the Circular is not intended to prevent. compliance with lawful orders of the Court. Hence, there is no legal impediment to the production of the insurance application and the insurance policy pursuant to subpoena issued by the trial court." PROBLEMS: 1. GRI is the owner of a resort and had its properties in said resort insured originally with the AHAC. In the firet, four insurence policies issued by AHAC the risk of loss from earthquake shock was extended only to plaintiffs ‘two swimming pools. Subsequently, petitioner agreed to insure with respondent the properties covered by the policy isoued by AHAC-AIU, provided that Ue policy ‘wording and rates in said policy be enpied in the policy "Malayan Insurance Company, Ins. v. Regis Brokerage Corporation, ibid. Philip S. Yu y. Court of Appealo, G.2 No. 154116, Nevember 20, 2008, 476 SCRA 443.14 ESSENTIALS OF INSURANCE LAW (Republic Act. No, 10607 with Notes on Pre-Naed Act) tobe issued by respondent, An earthquake struck central Luzon and northern Luzon end petitioner's properties, including the two swimming, pools, were damages. GH then filed a claim with the reapondent for the waid damage including other properties destroyed by the earthquaice. Respondent denied dlaim and suid that they are only inble ‘to the two swimming pools covered by the policy and not ‘the other properties. Whether or not AHAC ie aleo liable for the damages caused by the earthquake on the other properties of petitioner! ‘A: No. AHAC is only liable for the two swimming pools. It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance with ‘each other. All its parts are reflective of the true intent of the parties. The poliey cannot be construed piecemeal. GEL eannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and riders, taken and interpreted together, indubitably show the intention of the parties to extend the earthquake shock coverage to the swimming pools orly. An insurance premium is the consideration paid by the insured to the insurer for undertaking to indemnify the former against a specified peril. In the subject policy, no premium Payments were paid with regard to earthquake shock coverage except on the two pools. There is no mention of any premium payable for the other resort properties. (Gulf Resorts, Ine. v. Philippine Charter Insurance Corporation, G.R. No. 156167, May 16, 2005) $10, COVER NOTES. Cover notes are interim or preparatory contracts of insurance. An interim coverage may be necessary because the insurer may need more time to process the insurance application. The applicable provision states: SEC. 52. Cover notes may be issued to bind insurance temporarily pending the Issuance of the policy. Within sixty (60) days after the issue of the cover note, a policy shall be issued in lieu thereof, including within its terms the identical insurance bound under the cover note and the premium therefor. Cover notes may be extended or renewed beyond such sixty (60) days with the written approval of the ‘Commissioner if he determines that such extension is ot contrary to and Is not for the purpose of violating CHAPTER FIVE 15 "THE POLICY any provisions of this Code. The Commissioner may promulgate rules and regulations governing such extensions for the purpose of preventing such violations ‘and may by such rules and regulations dispense with the requirement of written approval by him in the case of extension in compliance with suchrules and regulations. a, Requisites. The issuance of Cover Notes under Section ‘52s subject to the following rules: (1). The Cover Note shall be issued or renewed only upon prior approval of the Insurance Commission; (2) ‘The Cover Note shall be valid and binding not more than sixty (60) days from the date of its issuance; (8) The cover note may be cancelled hy either party ‘upon prior notice to the other of at least seven (7) days; ) The policy should be issuod within sixty (60) days after the issuance of the cover note; and (5) The sixty (60) day period may be extended upon written approval of the Insurance Commission. b, When approval is dispensed with, The written approval of the Insurance Commission is dispensed with upon the certification of the president, vice-president or general manager of the insurer that the risk involved, the values of such risks and premium therefor have not as yet been determined or established and the extension or renewal is not contrary to or is not for the purpose of violating the Insurance Code or any rule.” c. Premium, No separate premium (separate from the policy or main contract) is required for the cover note.” §11. KINDS OF PROPERTY INSURANCE POLICY. A property insurance policy is either open, valued or running.” These types of policies are defined in Sections 60 to 62, viz. SEC. 60. An open policy is one in which the value of the thing insured is not agreed upon, and the amount of "ns, Meme. Cire. No. 8-76 Pacific'Timbor Export Comp. v. Court of Appeals, 112 SCRA 199, ‘nection 69, 1.C.16 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) the insurance merely represents the insurer's maximum liability. The value of such thing shall be ascertained in case of loss.” SEC. 61. A valued policy is one which expresses ‘on its face an agreement that the thing insured shall be valued at a specific sum. ‘SEC. 62. A running policy is one which contem- plates successive insurance ind which provides that the object of the policy may be from time to time de- fined, especially as to the subjects of insurance, by ad- ditional statements or indorsements. 2. Valued Poliey. A valued policy expresses the agreed valuation ofthe thing insured on the face of the policy.’This valuation is binding on the parties; no party can establish a different valuation in case of loss. The amount to be paid by the insurer as indemnity may not necessarily be related to the actual loss. ‘The measure of indemnity is the agreed valuation and not the actual loss. That is precisely the reason why a valued policy is considered an exception to the principle of indemnity. (1) ‘Tho rule that the valuation in « valued policy is binding on the insurer may be justified if the situation of the insurer is considered vis-a-vis that of the insured. Unlike its most prospective customers, the insurer has the necessary resources to determine the correct valuation of the property. After profiting from premium payment at the rate that was ‘computed on the basis of the agreed valuation (and which rate will then be high if there is over-insurance), the insurer should not be allowed to question the valuation on whieh it profited. (2) A life insurance policy is always a valued policy because the amount fixed in the policy is always not related to the actual loss. The parties will always agree on a valuation which is always not equivalent to the value of the life that: will be lost, b. Open Policy. No valuetion of the property is stipulated in an open policy. Consistent with the rule that contract of insurance is a contract of indemnity, the insurer is only entitled to recover the TAs amended by RANo. 10607. CHAPTER FIVE ut ‘THE POLICY amount of the actual loss sustained by him as he may be able to cstablish (there heing no express valuation in the policy). Judgment may be properly entered against the insurer for lack of satisfactory proof of the amount of his loss. An open policy is sometimes called an “anvalued policy” because it is “one in which the value is not fixed, but is left to be definitely determined in case of loss.” The actual loss as determined will represent the total indemnity due the insured from the insurer except only that the total indemnity shall not exceed the face value of the poliey.* (1)_ There is still a face value appearing in an Open Policy. However, the amount fixed merely represent’s the insurers liability." c. Running Policy. A fire insurance policy may be entered into that covers “stock of rice and palay (loose and/or in sacks), the yperty of the assured or held by him in trust, on commission or on Joint account with others and/or for which he is responsible in case of loss, while contained during the currency of the policies in the building of the assured in Binalonan, Pangasinan,”* This policy is 2 typical running policy where the extent of the property insured shall be defined from time to time because of the nature of the business thatis being insured. PROBLEMS: 1. Suppose that Fortune owns a house valued at P600,000 and insured the same against fire with three insurance companies as follows: X— P400,000 ‘YY — P200,000 Z — P600,000 Tan Chuce v. Vorkshive Fire and Life Ineurance Company, @.R. No. 1-606, October 15, 1909, citing Franklin F. Ins, Co. v. Hamil, 6 Gill (Mi.) 87;Marchesseau v Merchants Ins.,Co., 1Rob. (La.), 438; Eagle Ins. Co. v, Lafayette Ins. Co,,9 Tad., 443, ‘Couch on Insurance, 2nd Bd, Ve. 1, pp. 90.91, hereinafter callod “Couch 90, 91" ‘Development Insurance Corporation v. Intermediate Appellate Court, et a, GR, No, 1-71360, July 16, 1986. Section 60, 1.C., as amended by RA No. 10607. Lee Bog & Compeny r. Hanover Fire Insurance Company of the City of New epee ag ee aa tae eee goaus 3. SSENTIALS OF INSURANCE LAW (Repablic Aet No, 10807 with Netas on Pre-Nead Act) In the absence of any stipulation in the policies, from which insurance company or companies may Fortune recover in case of fire should destroy his house completely? Fortune may recover fom any, any two or all of the insurers provided that the total amount that he will recover doos not oxcood his lose (See. 94, ICP). Fortune may demand indemnity from Z alone for P600,000. In the alternative, Fortune may recover from all insurers 200,000 each. Fortune may also opt to recover P400,000 from X and recover the balanee from any or both Y or Z. If each of the policies obtained by Fortune in problem (1) is an open policy and it was immediately determined after the fire that the value of the house was P2.4 Million, how much may he collect from X, Y, and Z? Fortune may recover the full amount of the coverage from ‘each insurer if all policies are open policies. The value of tho property to be considered i the actual value of P24 Million. Since the total amcunt of the insurance coverage is less than the actual loss, Fortune may recover P400,000 from X, P200,000 from ¥ and P600,000 from Z or a total ‘amount of P12 Million, If each of the fire insurance policies obtained by Fortune in problem (2) is a valued peliey and the value of his house was fixed in each policies at PIM, how much would Fortune recover from X if he has already obteined full payment from the insurance policies issued by Y and Z? Fortune can only recover P200,000 from X. The valuation of the property (inithis ease P1 Million) is binding on the partios and it is no longer necessary to detormine the actual value thereof. The valuation in the policy is deemed the actual value of the property. (Par. [bJ, Section 94, ICP) ‘Supposing in problem (1), Fortune was able to collect from both Y and Z, may he keep the entire amount he was able to collect from the said two insurance companies? Explain ‘your answers, No. Fortune may not keep the amount that he collected, from Vand Z. In problem (1), the total value ofthe property was P600,000, hence, if he collected P200,000 from Y and 600,000 from Z, there is an excess of P200,000. Fortune can only be indemnified for his loss. Fortune must hold the excess amount of hie insurable interest in the houta, 200,000, in trust for the insurers Y and Z. (Par, (d), Section 94, ICP) (CHAPTER FIVE ‘THE POLICY 5. In problem (1) what is the extent of the liability of the insurance companies among themselves? Rach insurer is bound to contributa ratably 10 the lose in proportion to the amount for which he is liable under his contract (Par. fe), Section 94, ICP). The ratable contribution of each insurer will be determined based on the following formula: Amount of policy x Jess = liability of insurer ‘Total insurance taken ‘Using the foregoing formula, the extent of liability of cach insurer out of the total loss of P600,000 are as follows: X = P200,000 (400,000/1.200,000 x 600,000), Y 100,000 (200,000/1,200,000 x 600,000) and Z, = P300,000 (600,000/1,200,000 x 600,000). no §12. CANCELLATION. Cancellation of property insurance SEG: 64/N6 policy ot insurance other than life shall led by the insurer except upon prior notice ‘of to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the followit (2) Non-payment of premium; (b) Conviction of a crime an increasing the hazard insured ag: {c) Discovery of fraud or material misrepresenta- tion; (@) Discovery of willful or reckless acts or ‘omissions increasing the hazard insured against; (e) Physical changes in the property insured which result in the property becoming uninsurable; or () Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; or ‘Section B4lf] was added by RA No. 10607. policies should be made in accordance with Sections 64 and 85 of the Insurance Code which provide:130 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pro:Nocd Act) (g) Adetermination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code. SEC. 65. All notices of cancellation mentioned in the preceding section shall be in writing, mailed or delivered to the named insured at the address shown in the policy, of to his broker provided the broker is authorized in writing by the policy owner to receive the notice of cancellation on his behalf, and shall state: (a) Which of the grounds set forth in Section 64 is relied upon; and (b) That, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based. a, Requisites of Cancellation. Cancellation of insurance policies requires the concurrence of the following conditions: (1) Prior notice of cancellation to insured; (2) The notice of cancellation must be based on the oceurrence after effective date of the policy of one or more of the grounds mentioned in Section 64; (8) The notice must be in writing, mailed or delivered to the named insured at the addross shown in the policy or ta his broker is euthorized in writing in the policy owner to receive the notice of cancellation on his behalf, (4) The notice must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on which cancellation is based.” b. Property Insurance. The law provides that Section 64 applies to insurance ‘other than life insurance.” In other words, Section 64 applies only to property insurance. (2) _ Nevertheless, itis believed that some of the grounds in Section 64 may apply to life insurance. For example, 2 life “=Philameare Health Systems, Ine v. Court of Appeals and Julita Trinos, G.R. No. 125678, March 18, 2002 Malayan Ineurance Ce, Ine. v. Grogoria Crus Arnaldo, G.R.No. L-67835, October 12, 1987; Section 65 as amended by RA No. 10607. CHAPTER FIVE 121 ‘THE POLICY inuranee policy may also be cancelled for non-payment of premium, fraud or material misrepresentation. «. Reason for Notice Requirement. The purpose of provisions or stipulations for notice to the insured is to prevent the cancellation of the policy without allowing the insured ample opportunity to negotiate for other insurance in its stead. The form and sufficiency of a notice of cancellation is determined by policy provisions and Sections 64 and 65 of the Insurance Code.” 4. Contents of Notice. Section 65 requires a statement of the grounds relied upon. Nevertheless, so long as the ground is stated, written notice to the insured need not be in any particular form in ordor to form the basis for the cancellation of a policy. In the absence of a statute or policy provision prescribing such form, the notice is sufficient so long as it positively and unequivocally indicates to the insured, that it is the intention of the company that the policy shall cease to be binding. Where the policy contains no provision that a certain number of days notice shall be given, a reasonable notice and opportunity to obtain other insurance must be given" ©. Actual Receipt Necessary. Actual personel notice to the insured is essential to a cancellation under a provision for cancellation by notice. The actual receipt by the insured of a notice of cancellation is universally recognized as a condition precedent to a cancellation of the policy by the insurer. Consequently, a letter containing notice of cancellation which is mailed by the insurer but not recoived by tho insurod, is ineffective as cancellation. {Receipt of Notice by Broker. Generally, the receipt of notice of cancellation by the broker is not binding on the insured. Ordinarily, “the suthority of the broker to represent the insured ends with the completion of the contract, and any notice thereafter given to the broker will not affect the rights of the insured.” By way of exception, Section 85 as amended by RA No. 10607 now provides Gaara lmport and Export, Co, Ine. v. Philippine International Surety Co., Ine, and Philippine National Bank, G.R. No. 15164, May 31, 1963, citing 29 Am. Jur. p. 782-741. “Gaara Import and Export, Co, Ine, v. Philippine International Surety Co., Inc. and Philippine National Bank, ibid. “Sanra Import and Export, Co, Ine, v. Philippine International Surety Co., Inc. and Philippine Notional Bank, 21d “Vance, pp. 444-445.aa ESSENTIALS OF INSURANCE LAW (Republic Act No, 106017 with Notes cn Pro-Neod Act) that notice of cancellation can he given to the broker provided that the broker is authorized in writing by the policy owner to receive the notice of cancellation on his behalf. g. Cancellation by the Insured, While Section 64 deals only with the right of the insurer to cancel the policy, it does not follow that the insured cannot cancel the policy. This right to surrender the policy is implicit in Section 80 of the Insurance Code which provides that the insured is entitled to the return of the premium “where the insurance is made for a dofinite period of time and the insured surrenders his policy, to such portion of the premium as corresponds with the unexpired time, at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy, after deducting from the whole premium any claim for loss or damage under the policy which has previously accrued.” Section 80 is subject to the caveat that ‘no holder of a life insurance policy may avail himself of the privileges of this paragraph without. sufficient cause as otherwise provided by law.” (1) It should likewise be noted in this connection that in a case decided under the old Insurance Law, the Supreme Court ruled that “neither the return of the policy, nor a demand for the return of a proportion of the premium corresponding to the unexpired term, nor the actual return of said portion of the premium is essential to the effectivity of the request of the insured for the cancellation of the insurance poliey. Upon receipt thereof by the insurer, the contract becomes ipso facto terminated, without any further act of any party." $13, RENEWAL OF POLICY. The insured has the right to renew a non-life insurance policy. He can do so by simply paying the premium due on the effective date of the renewal. However, the insured will not have any right to renew if notice of the intention not to renew is given by the insurer at least forty-five (45) days prior expiration of the policy. SEC. 66. In case of insurance other than life, unless the insurer at least forty-five (45) days in advance of the end of the policy period mails or delivers to the named insured at the address shown in the policy notice of its intention not to renew the policy or to condition “Lecna Patino. Tho Capital Inuranee& Surety Co, tne, OR No: Let ‘May 15, 1959, mi ae, (CHAPTER FIVE, 13 ‘THE POLICY its renewal upon reduction of limits or elimination of coverages, the named insured shall be entitled to renew the policy upon payment of the premium due on the effective date of the renewal. Any policy written for a term of less than one (1) year shall be considered as if written for a term of one (1) year. Any policy written for a term longer than one (1) year or any policy with no fixed expiration date shall be considered as if written for successive policy periods or terms of one (1) year. $14. REFORMATION OF THE POLICY, It may happen that what was agreed upon is different from what is written in the policy. For example, during the negotiations which resulted in the writing of an insurance policy, the parties agreed to certain terms and conditions but the resulting policy does not reflect their true agreement, because of inadvertence, ignorance, or mistake. In such case, the Court would have the pawer to reform the contracts and give effect to them in the sense in which the parties intended to be bound. But in order to justify this, it must be made clearly to appear that the minds of the contracting parties did actually meet in agreement and that they labored under some mutual error or mistake in respect to the expression of their purpose.* a. Thus, in one case," it appeared that a mortgagee desiring to insure his own insurable interest only, correctly stated his interest, and asked that the same be insured. The insurance company agreed to aecepi the risk, but the policy was issued in the namo of the mortgagor-owner, bocauso of the mistaken belief of the company’s agent that the law required it to be so drawn. It was held that a court of equity had the power, at the suit of the mortgagee, to reform the instrument and give judgment in his favor for the loss thereunder, although it had been exactly as it was. Said the court: “If the applicant correctly states his interest and distincily asks for an insurance thereon, and the agent of the insurer agrees to comply with his request, and assumes to decide upon the form of the policy to be written for that purpose, and by mistake of law adopts the “San Miguel Brewery, etal. v, Law Union and Rock Insurance Company (Ltd, tal, CR. No. 1-14300, January 10, 1020. See aloo Fink v. Queons Inouranco Co, 24 Fed, 318; Bsch v. Home Insurance Co., 78 Towa, 394; 16 Am. St. Rep., 43; Woodbury Savings etc, Co. v. Charter Oak Insurance Co.,31 Conn., 517; Balen v. Hanover Fire Insurance Co., 67 Mich. 170 “ibid, citing in Bailey v. American Central Insurance Co. (13 Fed., 250).14 ESSENTIALS OP INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Need Act) wrong form, a court of equity will reform the instrument so as to make it insurance upon the interest named.”* b, In another case the Court said: “The Court] hals] before us a contract from which by mistake, material stipulations have been omitted, whereby the true intent and meaning of the parties are not fully or accurately expressed. There was @ definite concluded agreement as to insurance, which, in point of time, preceded the preparation and delivery of the poliey, and this is demonstrated by legal and exact evidence, which removes all doubt as to the sense and undertaking of the parties. In the agreement, there has been a mutual mistake, caused chiefly by that contracting party who now seeks to limit the insurance to an interest in the property less than that agreed to be insured. The written egreement did not effect that which the parties intended. That a court of equity can afford relief in such a case, is, We think, well settled by the authorities.”* fc. Butto justify the reformation of a contract, the proof must be of the most satisfactory character, and it must clearly appear that the contract failed to express the real agreement between the parties, $14.01. MISTAKE. It should be noted that it is also possible for the insured to recover even if there was a mistake. It is not necessary that there be reformation of the policy. In an early case, it was apparent that a mistake was made in the issuance of the policy. The insured wanted insurance upon a stock of goods, which ‘he owned, and he received and paid for a policy on a building, which he did not own, and while the policy was in force and effect, both the building, which he did not own, and the stock of merchandise, which he did own, were completely destroyed by fire. The insured was a well known merchant, and his merchandise was in the building described in the policy. The insured was allowed to recover for the Joss of his merchandise under the circumstances." "iba. “Afbid. citing Smell v. Atlantic, ete. Ins Co., 98 U.S, 85, 885 25 L, ed, 2 ““Domningo Garcia and Philippine National Bank v. The Hong Kong Fire and Insurance Co,, Lid, GR. No. 20841, September 1, 1923, CHAPTER SIX x ASCERTAINING AND ‘ CONTROLLING RISKS Professor Vance said thet “in making a contract so highly aleatory as that of insurance the parties have four primary eoncerns: (1) the correct estimation of the risk which enables the insurer to decide whether he is willing to assume it, and if so et what rate of premium; (2) the precise delimitation of the risk which determines the extent of the contingent duty to pay undertaken by the insurer; (8) such control of the risk after it is assumed as will enable the underwriter to guard against the increase of the risk because of change in conditions; and (4) determining whether the loss has occurred, and if so, the amount of the loss.”" It is precisely because of such concerns that different devices were developed to ascertain and control risks. These devices include concealment, representation, warranty, condition and exceptions. Thus, the correct estimation of the risk may be made if all material information are disclosed and ifthe parties are certain that disclosed information can be relied upon. On the other hand, delimitation of the risk may be made by specific description of the risk consisting of the designation of the specific person or property interest to he covered and the specification of the perils. Delimitation is further accomplished by using exceptions that are inserted in the policy or stated in the rider. Control of the risk can be done by resorting to promissory warranties and conditions that will prevent the occurrence of risks or hazards that may happen after the policy has beendssued. . CONCEALMENT. Concealment is defined in Sections and 28 of the Insurance Code as follows: "William R. Vanco, Handbook of the Law of Insurance, 2nd Bd, pp. 384-386, hereinalter referred to as “Vance,” 125126 ESSENTIALS OF INSURANCE LAW (epablic Act No. 10607 with Notes on Pre-Noed Act) SEC. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment. ‘SEC. 28. Each party to a contract of insurance must eipiatsatis of, in good faith, all facts within k r ri ial mers not the means of ascertaining. a The obligation of each party not to conceal material facts, is expressed in Section 28 of the Insurance Code which states that each party toa contract of insurance must communicate to the other, {in good faith, all facts within his knowledge which are material to the contract end as to which he makes no warranty, and which the other has not the meana of ascertaining. The obligation to communicate is the obligation of each party, both the insurer and the insured. Even the insurer is bound to observe utmost good faith in dealing with the insured. b. The duty to disclose is required because insurance contracts are described as contracts uberrimae fidae, that is, of utmost good faith. Lord Mansfield explained in a leading case’ in England: “Inouranco is a contract upon speculation, The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured’ only: the underwriters trust his representation, and proceeds upon the confidence that he does not keep back circumstances in his Knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risqué as ifit did not exists.” $1.01, MATERIALITY. Only material facts are required to be disclosed. It: would be too much to puton an insured the duty todisclose everything that might influence the mind of the insurer. “Busi could hardly be carried on if this were required.”* In relation to the insured, the matters he concealed are considered material if such matters will affect the insurer's action on his application, either ®Warier v, Boshm, 3 Burr. 1905 (1766) Victor Dover, A’ Hendbook to Marine Insurance, 1975 Ba., p. &46, citing Tonides v. Pender, 1874, hereinafter referred to as “Dover. CHAPTER SIX wat ASCERTAINING AND CONTROLLING RISKS by approving it with the corresponding adjustment for a higher premium or rejecting the same or in fixing the terms and conditions of the policy. In relation to the insurer, the matters conosaled are considered material if they will affect the decision of the insured to enter into the insurance contract. Section 31 provides: ‘SEC. 31. Matefiality is to be detormined not by the event, but solely by the ‘probable and | influence of the facts upon the party to whom the ‘communication is due, in forming his estimate of the advantages of the proposed contract, or in making his inquiries. a. Generally, the matter concealed by the insured is considered material if it relates to physical hazard or moral hazard. Hazards affect the estimate of the disadvantages of the proposed contract. If the insurer knows about the circumstances relating to physical or moral hazard, it will give a chance to the insurer to make further inquiries and to decide on the basis of such inquiry. b. _ Thus, according to Professor Vance, “the test of materiality is the effect which the knowledge of the fact in question would have on the making of the contract. To be material, a fact need not ‘increase the risk or contribute to any loss or damage suffered. It is sufficient if the knowledge of it would influence the parties in making the eantract.” c. If there isnothing in the policy that makes itan obligation of the party to make disclosure during the life of the contract, then there is no duty to make such disclosure for facts occurring after the insurance takes effect. Such information could not affect the making of the contract, d. The Supreme Court explained in one case: “The basis of the rule vitiating the contract in case of concealment is that it misleads or deceives the insurer into accepting the risk, or accepting itat the rate of premium agreed upon. The insurer, relying upon the belief that the assured will disclose every material within his actual or presumed knowledge, is misled into a belief that the circumstance ‘Wane, p. 847. sBornardo Argento v. West Const Life Insurance, Ine, G.R. No. L-24898, ‘March 19, 1928.128 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Need Act) withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it does not exist. The principal question, therefore, must be: Was the assurer misled or deceived into entering a contract obligation or in fixing the premium of insurance by a withholding of material information of facts within the assured’s knowledge or presumed knowledge?” e. In Malayan Insurance . PAP Co. Ltd, the transfer of the Tocation of the insured machineries was considered material conceelment that should have been disclosed when the fire insurance policy was renewed. The unconsented removal of the machineries to another location made the said machineries at the insured company's own risk. The Court ruled that there was concealment that entitles the insurer to rescind under Sections 25 and 27 of the Insurance Code. f In Florendo v. Philam Plons, Inc.," the insured signed the insurance application without filling in the details regarding his continuing treatments for heart condition and diebetes. The Suprome Court ruled that there was concealment of « material fact. In this same case, the beneficiary also argued that the application required the disclosure of treatment: for heart condition in the last five years. The beneficiary pointed out that the pacemaker implant, was made ebout 20 years before he signed the application. The Supreme Court rejected the argument expleining that: “Lourdes next points out thet it made no difference if ‘Manuel failed to revea! the fact thathe had a pacemaker implant in the early 70s since this djd not fall within the five-year ‘timeframe that the disclosure contemplated. But a pacemaker is an electronic device implanted into the body and connected to ‘the wall of the heart, designed to provide regular, mild, electric shock that stimulates the contraction of the heart muscles and roatores normaley to the heartbeat. That Maauel still had hia pacemaker when he applied for a pension plan in October 1997 is an admission that he remained under treatment for irregular heartbeat within five years preceding that application. Besides, as already stated, Manuel had been taking medicine for his heart condition and diabetes when hesubmitted hhis pension plan application. These clearly full within the *GRNo, 200784, August 7, 2018: Neto that the Supreme Court considered the nondisclosure as concealment, misreprosentation end a breach of material warranty. 4G.R. No. 186988, February 22, 2012. CHAPTER SIX 129 ASCERTAINING AND CONTROLLING RISKS five-year period. More, oven if Perlals knowlodge of Manuel's pacomaker may be epplied to Philam Plans under the theory of ‘imputed knowledge, itis not cleimed that Perla was aware of his ‘two other afflictions that needed medical treatments, Pursuant to Soction 27 of tho Insurance Code, Manue?’s concealment entitles Philem Plans to rescind ita contract of insurance with $1.02, CAUSATION NOT NECESSARY. The matter con- cealed need not be the cause of theloss. For example, in life insurance, tthe facts concoaled nood not have a bearing on the cause of death of the insured. It is well-settled that the insured need not die of the disease if he had failed to disclose to the insurer the existence of such disease. It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in meking inquiries." a, In Florendo v. Philam Plans, Inc.,' the matter concealed was the continuing treatment of the insured for heart condition and diahetes. The claim was denied on the ground of material concealment although the insured died of blood poisoning. §1.08. REQUISITES. The requisites that can be derived from the provisions of the Insurance Code that. justify one party to rescind the policy on the ground of concealment are as follows: (1) ‘The party involved must know the fact concealed or at least he ought to know the same;"" (2) The fact. concealed must be material; (8) No warranty is extended by the party regarding the fact concealed; and (4) The other party does not have the means of ascertaining." $1.04. KNOWLEDGE OF AGENT OF INSURED. Professor Vance believes that knowledge on the par? of the agent of the inoured can be imputed to the insured himself only if the following of Canada v. The Hoa. Court of Appeals and Spousee Rolando and Bemarda Baceni, @.R. No, 105135, June 22, 1895; Henson v. The Philippine American Life Insurance Co., 56 0.G. No. 48 [1960, "Supra “Seetien 21, LC. Section 28, 1.0. hea, “Section 28 LC.; Florendo v. Fhiliam Plans, Inc., supra.180 ESSENTIALS OF INSURANCE LAW (Ropablic Act No. 10607 with Notes on Pro-Nood Act) circumstances are present: (1) It was the duty of the agent to acquire and communicate information of the facts in question, and (2) It was possible for the agent, in the exercise of reasonable diligence, to have made such communication before the making of the insurance contract.” Tt is believed that the requirements suggested by Prof. Vanco are consistent with Section 43 of the Insurance Code which provides that the principal-insured is bound with the knowledge of his agent “whose duty it is to give information.” a. In Florendo v. Philam Plans, Inc. the beneficiary insisted that there was no concealment because the soliciting agent knew that the insured had a pacemaker implanted 20 years before he signed the application. In addition, the beneficiary contended that the mere fact that the insured signed the application in blank and let the soliciting agent fill in the required details did not make her his agent and bind him for hor concealment. The Supreme Court: rejected the arguments stating that the responsibility of preparing the application belonged to the insured and the insured cannot sign the application and disown the responsibility for having it filled up. If the insured furnished the soliciting agent the needed information and delegated to her the filling up of the application, then she acted on his instruction, not on the insurer's instructions. ‘The Supreme Court likewise observed that, even assuming that it was the soliciting agent who filled up the application, the insured is still bound by what it contains because he expressly certified that he authorized the actions of the agent. The Supreme Court also noted that the insured was a civil engineer and manager of a construction company and he could be e1 d to know that one must read every document, especially if it creates rights and obligations affecting him before signing the same. “It could reasonably be expected that he would not trifle with something that would provide additional financial security to him and his wife in his twilight years,"" $1.05. WHEN THERE IS NO CONCEALMENT. ‘SEC. 30. Neither party to a contract of insurance is bound to communicate information of the matters following, except in answer to tho inquiries of the other: (a) Those which the other knows; vane p SBA. MSupre ‘Florendo v. Philam Plans, Inc., supro. CHAPTER SIX ast ASCERTAINING AND CONTROLLING RISKS. (b) Those which, in the exercise of ordinary care, the other ought to knovr, and of which the former has no reason to suppose him ignorant, (c) Those of which the other waives communica- tion; (4) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material; and (e) Those which relate to a risk excepted from the policy and which are not otherwise material. SEC. 32. Each party to a contract of insurance is bound to know 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; and all general usages of trade. SEC. 33. The right to Information of material facts, may be waived, either by the terms of the insurance or by neglect to make inquiry as to such facts, whore thoy are distinctly implied in other facts of which information is communicated. SEC. 34. Information of the nature or amount of the interest of one insured need not be communicated unless in answer to an inquiry, except as prescribed by section fifty-one. ‘SEC. 35, Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question. a. When there is no material concealment. From tho above-quoted provisions, there is no material concealment that justifies the insurer to rescind the policy in the following casos (1) When matters are known to the other party; (2) When, in the exercise of ordinary care, one party ought to now, and of which the other party has no reason to suppose him ignorant; (8) When there is waiver of communication; (4) When matters are those which prove or tend to prove132 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Noten on Pre-Naed Act) the existence of a risk excluded by a warranty, and which are not otherwise material; (5) When matters are those which relate to a risk excepted from the policy and which are not otherwise material; (6) When the matter involves general causes that are open to inquiry of each party and which may affect the political or material perils contemplated; (7) When the matter is included in general usages of trade; (8) Information of the nature or amount of the insured property, is not disclosed unless in answer to an inquiry: and (9) When what is involved is information of the party’s ‘own judgment upon the matters in question. b, Facts that need not be disclosed. Indeed, not all facts are to be disclosed to the other party. As oxplained by Lord Mansfield: “The underwriter need not be told what lessens the risk agreed and understood to be run by the express terms of the policy. Ho need not be told general topies of apeculation; as for instance: The underwriter is bound to know every cause which may occasion natural perils; as the difficulty of the voyage, the kind of seasons, the probability of lightning, hurricanes, earthquakes, ofc. He is bound to know every cause which may occasion political perils; from the rupture of States from war, and the various opérations of it. He is bound to know the probabilily of safety from the continuance or return of peace; from the imbecility of the enemy, through the weakness of their counsels or their want of strength, ete. ‘The reason of the rule which obliges parties to disclose is to prevent fraud and to encourage good faith. It is adapted to such facts as vary the nature of the contract which one privately knows and the other is ignorant and has reeson to suspect. ‘The question, therefore, must always be whether there ‘was under all tho cireumstancos at tho time the policy was underwritten, a fair representation; or a concealment x x x varying materially the object of the policy and changing the risks understood to be run.” "Carter v. Boehm, supra. CHAPTER six 133 ASCERTAINING AND CONTROLLING RISKS $1.08, JUDGMENT OR OPINION. Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question. Thus, opinions of the insured need not be disclosed. In other words, the duty of disclosure ~ and the duly not to misrepresent — requires that the statement to be made by one party relatos to facts and not to opinion.” However, there must be good faith and there must be no intent to deceive.” Thus, the Supreme Court relied on the following disquisition in one case: “although false, a representation of the expectation, intention, belief, opinion, or judgment of tha insured will not avoid the policy if there is no actual fraud in indueing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although the statement is maverial to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a dear distinction between such « case und one in which the insured is fraudulently and intentionally statos to bo true, as 1a matter of expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, sinee In such ease the intent to deceive the insurer is obvious and amounts to actual fraud.” a, In the above-cited Philamcare Health Systems, Inc. v. Court of Appeals and Julita Trinos,* the Supreme Court explained that the answers of an applicant (who is not a doctor) regarding the medical history of his wife largely depends on opinion rather than fact. The Supreme Court ruled that there would be no cancoalment so long as the answers are made in good faith and without intent to deceive even if the answers which are in the nature of opinions are untrue. In the said case, Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. It appears that in the application for health coverage, petitioner required respandent’s ‘Sohn Birds, Modern Insurance Law, sth Ed. (1997), p. 102, hereinafter referred to a8 "Birds" “sPhilameare Health Systems, Ine. v. Court of Appeals and Julita Trinos, GR. No. 125678, March 18, 2002, ibid, citing Herrick ¥. Union Mut. Fire Tas, Co., #8 Me 998; Brysnt ¥. Modern ‘Woodmen of America, "bid.134 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10807 with Notes on Pro-Nood Act) husband ta sign an expressauthorization for any person, organization or entity that has any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination. In the standard application form, he gave the answer “NO” to the following uostion: “Have you or any of your family mombors over ecnsulted or heen treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer?” The petitioner insurer denied the claim saying that there was a concealment regarding Emnani’s medical history. Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that he was hypertensive, diabetic end asthmatie, contrary to his enswer in the application form. The retitioner was not sustained by the Supreme Cour: explaining that the statement was a matter of opinion. b. The conclusion would be different, however, if the insured knows relevant facts that indicate the nature or gravity of his illness. Thus, if the insured had consulted a doctor for something other than common colds and he had full knowledge of the nature of the illness, the non-disclosure thereof cannot be considered just @ matter of opinion. It is one involving non-disclosure of material fact, For example, in Sun Life Insurance Company of Canada ». Court of Appeals and Rolanda and Bernarda Bacani,” the deceased insured was asked whether he consulted a doctor or submitted to ECG, X-rays, blood test, and other test, or have been attended or admitted to & hospital or have sought adviee for urine, kidney or bladder disorder. Tho decoased answered questions in the affirmative with respect to the first (whether he consulted a doctor) but limited his answer to a consultation with a certain doctor of the Chinese General Hospital on February 1986, for cough and flu complications. The other questions were answered in the negative. However, the insurer later discovered that that two weeks prior to his application for insurance, the insured was examined and emnfined at the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased was subjected to urinalysis, ultra-sonography and hematology tests. The Supreme Court ruled that the information which the insured failed to disclose were material end relevant to the approval and the issuance of the insurance policy. The matters concesled would have definitely effected petitioner's action on his application, either by approving %G.R. No, 105135, June 22, 1995. See case digest below, CHAPTER SIX 185 ASCERTAINING AND CONTROLLING RISKS, it with the corresponding adjustment for a higher promium or rejecting the same. Moreover, a disclosure may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the application. The ‘Supreme Court ruled that there could not have been good faith on. the part of the insured because he was surely aware of the previous confinement. $1.07. KNOWLEDGE OF THE INSURER. It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent with the facts, and the insurer is estopped thereafter from asserting the breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary, that an insurance company intends to execute a valid contract in return for the premium received; and when the policy contains a condition whieh renders it voideble 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, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken his money without consideration.* a, Reason for the Rule. The plain, human justice of this doctrine is perfeetly apparent. To allow a company to secept one’s money for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing, and s0 closely related to positive fraud, as to the abhorent to fair minded mon, It would be to allow the company to treat the policy as valid long enough to get the premium on it, and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy expressed the true intention of the company would be to indict it, for fraudulent purposes and designs which We cannot beliove it to be guilty of. "Qua Choo Gan v. Law Union ard Rock Insurance Co, Itd., LR, No. LAGI, December 17, 1955,98 Phil. 85, 90-91, citing 29 Am. Jur., Insurance, Section 607, at pp. 611-812, Qua Choo Can v, Law Union and Rock Insurance Cow, Ltdy ibid. citing Wileon v. Commercial Union Assurance Co,, 96 Atl. 640, 643-544.136 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10007 with Notes on Pre-Need Act) b. The Supreme Court explained in one case the effect of Knowledge on the part of the insurer of facts that are enough to invalidate the policy: “It is usually held that where the insurer, atthe time ofthe issuance of a policy of insurance, has knowledge of existing facts which, ifinsiated on, would invalidate the contract from ite very inception, such knowledge constitutes a waiver of conditions in ‘the contract inconsistent with the known facts, and the insurer is stopped thereafter from asserting the breach of such conditions, ‘The law is charitable enough to easumo, in the absence of any showing to the contrary, that an insurance company intends to ‘execute a valid contract in return for the premium received; and when the policy contains a condition which renders it voidable at its inception, and this result is known to the insurer, it will bbe presumed to have intended to waive the conditions and to execute 2 binding contract, rather than to have deceived the insured iato thinking be is insured when in fact he is not, and to have takon his money without consideration.” (29 Am. Jur, Insurance, Section 807, at pp. 611-612.) The reason for the rule is not difficalt to find. “Tho plain, human justice of this doctrine is perfectly, apparent. To allow ¢ company to accept one’s money for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, thet the assured believes it to valid and binding, is so contrary to the dictates of honosty and fair dealing, and so closely related to positive fraud, as to be abhorren: to fair-minded men. It would be to allow the company to treat the policy as valid long enough to get the premium on it, and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy expressed the true intention of the company would be to indict it, for fraudulent pores and designs which we cannot beliave it to be guilty of” (Siac Caine alan Aamirance Cas 66 AM 840 66% A similar view was upheld in the case of Copital Insurance & Surety Co,, Inc. v. Plastic Era Co., Inc, 65 SCRA 134, which involved « violation of the provision of the policy requiring the payment: of premiums hefore the insurance shall become effective. The company issued the policy upon the execution of a "Regina Billlon ¥. Manila Bankers Life Insurance Corp, G.R. No. L-84200, September 30. 1982. CHAPTER six 397 ASCERTAINING AND CONTROLLING RISKS promissory note for the payment of the premium. A check given subsequent by the insured as partial payment of the premium ‘was dishonored for lack of fands. Despite such deviation from tho terms of the policy, the insurer was held liable. $1.08, INTENTIONAL AND UNINTENTIONAL CON- CEALMENT. Section 27 of the Insurance Code is unequivocal that intent of the party is irrelevant in concealment: SEC. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. a. In this jurisdiction, concealment, whether intentional or unintentional, entitles the insurer to rescind the contract of insurance. This rule is consistent with the definition of concealment as “negligence to communicate that which a party knows and ought to communicate.” In the case of Argente v. West Coast Life Insurance Co.," the Supreme Court quoted Joyce as follows.” “The basis of the rule vitiating the contract in cases of concealmentis that it misleads or deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the assured will disclose every material fact within his actual or presumed knowledge, is misled into a belief that the circumstance withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it does not exist.” Prof Dover explained that concealment, or suppressio veri, is nearly allied to allegatio falsi, and avoids a contract upon principles of natural justice. Every concealment, whether arising from accident, negligence, ‘inadvertence, or mistake, if material, will be equally fatal to the contract as if it were intentional or fraudulent. b, The Supreme Court held that materiality of the information withheld does not depend on the state of mind of the insured, Neither docs it dopond on the actual or physical events which ensue. Thus, “good faith” is no defense in concealment. c. In one case, the insured’s failure to disclose the fact that he was hospitalized for two (2) weeks prior to filing his application Wigaaci» Saturninov. The Philippine American Life Insurance Company, G.R. ‘No, L-16163, February 28, 1963. 61 Phil. 725, 792. Joyce, Lana of Insurance, 2nd Fa. Vol. 3, ™Dover, p. $44.198 ESSENTIALS OF INSURANCE LAW (Republic Act: No. 10807 with Notes on Pre-Neod Act) for insurance, raises grave doubts about his bona fides. It can be inferred that such concealment was deliberate on his part.” d. Section 27 of the Insurance Code adopts the rule under the old Insurance Law. However, the original Section 27 does not contain the phrase “intentional or unintentional.” This phrase was however returned by B.P. Blg. 874. Nevertheless, the absence of the phrase “intentional or unintentional” in the original Insurance Code of 1078 (prior to its amendment by B.P. Blg. 874) did not change the rule. As a simple matter of grammar, it may be noted that “intentional” and “unintentional” cancel each other out. The net result therefore of the phrase “whether intentional or unintentional” is precisely to leave unqualified the term “concealment.” Thus, Section 27 of the Insurance Code of 1978 is properly read as referring to “any concealment” without regard to whether such concealment, is intentional or unintentional. The phrase “whether intentional or unintentional” was in fact superfluous. The deletion of the phrase “whether intentional or unintentional” could not have had the effect of imposing an affirmative requirement that a concealment must be intentional if it is wo entitle the injured party to rescind a contract of insurance. The restoration in 1986 by B.P. Blg. 874 of the phrase “whether intentional or unintentional” merely underscored the fact that all throughout (from 1914 to 1986), the statute did not require proof that concealment must be “intentional” in order to authorize rescission by the injured party." e. An exception to the rule that concealment may be intentional or unintentional is provided for in Section 29 of the Insurance Code because the requirement thereinis that the omission is intentional or fraudulent. Section 29 states: SEC. 29. An intentional and fraudulent omission, ‘on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty, entities the insurer to rescind, {There would still be material concealment even if the insured has no knowledge of the existonce of a duty to disclose, "Vida. de Canilang v. Court of Appeals, G.R, No. 92492, June 17, 1999, 223 SCRA 443, Ng Gan Ze v. Asian Cruvader Life A ‘May 90, 1983, wanee Corporation, CLR. No, 1-908865, CHAPTER six 189 ASCERTAINING AND CONTROLLING RISKS Similarly, concealment is present if the insured has no knowledge of the materiality of the fact which he already knows. A man may act, in perfect good faith within the meaning of the ordinary term of the phrase, yet still be held not to have acted in the utmost good faith in the legal sense.” $1.09, KNOWLEDGE OF THE FACT CONCEALED. With respect to knowledge of the material fect concealed, the Supreme Court observed in Ignacio Saturnino v. The Philippine American Life Insurance Company® that actual knowledge of the insured is not nevessaty to give the insurance company the right to avoid the policy on the ground of concealment. If it were the law that an insurance company could not depend a policy on the ground of concealment or misrepresentation, “unless it could show actual knowledge on the part of the applicant that the statements were false, then it would be impossible for it to protect itself and its honest. policyholders against fraudulent and improper claims." It would be wholly at the merey of anyone who wishes to apply for insurance, as it would be impossible to show actusl fraud except in extreme cases. It could not: rely on an application as containing information on which it could act. There would be no incentive to an applicant to tell the truth." In other words, under the majority view, absence of knowledge of the fect concealed will not deprive the insurer of the right to invoke concealment. because unintentional concealment is still concealment that is contemplated under Section 26 of the Insurance Code. a. ‘The majority view is to the effect that the insured need not know the fact concealed is consistent with what Prof. Vance referred toa the English Doctrine. Prof. Vanco cited the celebrated case of Carter v. Boehm® where Justice Mansfield observed that. although the suppression should happen through mistake, without any fraudulent intention, yet the underwriter is deceived because the risk run is really different from the risk understood and intended to be run at the time of the agreement. Birds, p. 108. Supra, citing Kasprask v. Metropolitan Insurance Co,, 40 N-Y.S, 211, 214, “bid. bid. "Vance, p. 899. This is in contrast tothe American Doctrine where the presence of fraud ia necessary before tho concealment ean be involod 3 Borrows, 1905, 1909.149 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Need Act) (1) One example that is often cited is a situation where the insured was already sick at the time he took the policy but he was not aware of such fact. It is often suggested that there is concealment of material fact because concealment need not be intentional.» (2) Similarly, there is still concealment even if the party does not know but he ought to know the matter concealed. ‘The law makes this an exception. Although objectively speaking, the party is not actually avare of the matter concealed, the law ascribes to him presumed knowledge of the matter or fact concealed beeause he ought to know the same matter or fact in view of the surrounding cireumstances. Thus, if a party was not aware of the nature of his illness by reason of negligence or indifference, then this may amount to bad faith in some cases and therefore material concealment results. For example, if the insured was hospitalized for several months, he cannot claim that there was no material conceelment because he ought to know the nature of his illness. b. Minority View. The minority view is to the effect that the contract cannot be rescinded on the ground of concealment if the non-disclosing party does not know the fact involved. Thie view is supported by the definition in Section 26 of the Insurance Code which states that concealment is neglect to communicate that which a party “knows and ought to communicate.” Thus, it is required under Section 26 that the fact allegedly concealed is known to the party or at the very least, the fact is something that the party who allegedly concealed ought to know. According to this view, when the law states that the concealment is intentional or unintentional, the intent refers to the intent to deceive or “corrupt intent.” The view is that Section 26 of the Insurance Code which refers to matiers that “a party knows” can be reconciled with Section 27 which refers to intentional and unintentional concealment. The view is that one can conceal only iffhe knows what to conceal. It is true that concealment, can still avoid the policy even if tho concealment is unintentional, “Suggested answers to the Bar Examinations in Commercial Law of the UP Law Conter ‘This wos in fact the issue that was resolved by the alternative rules cited in the trestise of Prof. Vance when he referred to the English Rale and the American Rae. The English doctrine ie to the elfect that the presence or absence of corrupt ‘iokanit fs Snicirtoriel (Vanos: 0.2001 CHAPTER SIX M1 ASCERTAINING AND CONTROLLING RISKS But this only means that thero is still concealment whether or not there was fraudulent intent. Thus, mistake, good faith and negligence will not excuse the insured from material concealment because unintentional non-disclosure still avoids the policy. ©. Exceptions. Nevertheless, even under the majority view where knowledge on the part of the insured/applicant is immate- rial, there were cases when the Supreme Court did not sustain the insurer's position that the insurance policies in question can be avoided on the ground of concealment or misrepresentation. ‘These include cases when (1) the matter allegedly concealed is a matter of opinion, and (2) when the insurer waived his right to the informa- tion as in the ease where the insured gave an imperfect answer. For example, the insurer cannot avoid the policy on the ground of con- cealment if the matter concealed involves an opinion on the medical condition of the insured. In the above-cited UCPB General Insur- ance case," the insurer was not informed of the medical condition of the insured. However, the Court ruled that the medical condition of the insured isa matter of opinion which cannot be invoked so long as there was no intont to deceive. Hence, if the insured stated that he is in good health, such statement is a matter of opinion and should not be construed as material concealment. $1.10. WAIVER OF INSURER. It has been held that where, upon the face of the application, a question eppears to be not answered at all or to be imperfectly answered, and the insurers issue a policy without any further inquiry, they waive the imperfection of the answer and render the omission to answer more fully immaterial. For example, in life insurance, even if from the viewpoint of a medical expert, the information communicated about tho ailment of the insured was imperfect, thero would be no ground to avoid the policy on the ground of concealment. if the imperfect answer or information is nevertheless sufficient to have induced insurer to make further inquiries about the ailment and operation of the insured. “See £1.10 below. “Supra. “Ng Gain Zee. Asian Crusader Life Aneurance Corporation, G.R. No.L-30685, ‘May 30, 1983,waz ESSENTIALS OF INSURANCE LAW (Republic Act No. 10807 with Notoa on Pro-Nood Act) a. In Ng Gan Zee v. Asian Crusader Life Assurance Cor- poration,* the alleged false statements given by Kwong Nam are as follows: Operated on for a Tumor {mayoma] of the stomach. Claims that Tumor has been associated with ulcer of stomach, Tumor taken out was hard and of a hen’s erg size. Operation was two [2} years ago in Chinese General Hospital by Dr. Yap. Now, claims he is completely recovered. ‘The insurer claims that there was material misrepresentation because the doctor who treated the insured reported that about two (2) years before he (the insured) applied for a life insurance policy, the insured was diagnosed as having “peptic ulcer” for which, an operation, known as a sub-total gastrie resection was performed on the insured and that the Surgical Pathology Report of Dr. Elias Pantangeo showing that the specimen removed from the patient's body was a portion of the stomach measuring 12cm. and 19 em. along the lesser curvature with a diameter of 15 em. along the greatest dimension. The Supreme Court considered this as an imperfect answer that does not avoid the policy. The Supreme Court adopted the observation of the trial court that “if the ailment and operation of [the insured] had such an important bearing on the question of whether the [insurer] would undertake the insurance or not, the court cannot understand why the [insured] or its medical examiner did not make any further inquiries on such matters from the xx x {hJospital or require copies of the hospital records from the appellant before acting on the application for insurance, The fact of the matter is that the [insurer] was too cager to accept the application and receive the insured’s premium, It would be inequitable now to allow the [insurer] (o avoid liability under the circumstances.”# $1.11, REMEDY. Section 27 provides that the prosence of concealment entitles the insurer to rescind the insurance contract. However, it is important to note that the right to rescind should be exercised previous to the commencement of an action on the “Mbid. We should be ncted that the Supreme Court observed in Ng Gan Zee v. Asian Crusader Life Assurance Corporation that the concealment must. be intentionally made. This obsorvation ie spperently inconsistent with the provisions of the old Insurance Law (the law then in force) which expressly provides that the concealment may be intentional or unintentional. Hence, such eheervation must be considered asa mere biter “Ibid. CHAPTER six ASCERTAINING AND CONTROLLING RISKS as contract. It is also subject to the incontestable clause discussed hereunder. PROBLEMS: L In a non-medical insurance contract (one where the company waives medical examination) the insured failed to disclose that she had once been operated on, although ‘he information on this matter wes supposed to have been supplied the company. Within the proper period, may the insurance company have the contract rescinded? ‘Yes, the insurance company ean have the contract rescinded. The fact that the insured was operated on is a material factthat should have been disclosed to the insurer. ‘The fact concealed may have affected the decision of the insurer ta approve the application or to fix the premium rate. Section 27 of the Insurance Code provides that “a concealment whother intentional or unintentional entitles the injured party to rescind a contract of insurance.” X applied for Life Insurance with Metropolitan Life Insurance Company. The application conteined this question: “Have you ever had sny ailment. or disease of xox (b) the stomach or intestines, liver, kidney or genitourinary organ?” X, a leundry 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 ofX shows that she had the cancer at the time she applied for a policy. Can the beneficiary of X collect on the policy? No, the beneficiary of X cannot collect on the policy. ‘The matier concealed was material hence the insurer has a valid defense against the beneficiary. The defense is available even if X was not aware of her fatal illness ‘because Section 27 of the Insurance Code gives the right to the insurer to avoid the policy whether the concealment is intentional or unintentional Juan procured a “non-medical” life insurance from Good Life Insurance. He designated his wife, Petra, 2s the hen- eficiary. Eariier in his application in response to the ques- tion as to whether or not he had ever been hospitalized, he answered in the negative. He forgot to mention his “ection 48, 1.C.as ESSENTIALS OP INSURANCE LAW (Republic Act No, 10607 with Noves on Pre-Need Act) confinement at the Kidney Hospital. After Juan died in 1 plane crash, Petra filed a claim with Geod Life, Diseov- ering Juan's previous hospitalization, Good Life rejected Petra’s claim on the ground of concealment: and misrepro- sentation. Petra sued Good Life, invoking faith on the part of Juan. Will Petra’s suit prosper? Explain. No, Petra’s suit will not prosper. There was material concealment in the present case because the illness of Juan, could certainly affect the decision of the ineurer to enter into the insurance contract. The fact that the insured died. of a cause that is alien to the illness that wes concealed will prevent the insurer from invoking the concealment, as a defense. In addition, the faet that the insured merely forgot to disclose his confinement at the Kidney Hospital does not excuse him from the non-disclosure because Scction 27 of the Insurance Code mukes concealment, available as a defense whether the samo is intentional or ‘unintentional. A, an agent of life insurance company X, induced B who has been suffering from advanced tuberculosis to epply for 10,000 life insurancs which B did and he (B) requested to fill the application form. ‘Through the connivance of the Physician, it was made to appear in the appleation that B is in good health and the P10,000 life insurance policy was issued by X to B, If B dies of tuberculosis, may his, beneficiaries recover? Why? No, the beneficiaries may not recover. There was collusion on the part of the insured, the insurance agent and the physician which vitiates the policy. This is not a simple case of concealmenttbut a deliberate attempt to defraud the insurer, There was a deliberate attempt to hide the fact that the insured was suffering from tuberculosis. ‘On October 18, 1980, P took out a life insurance policy and named his only son Q as beneficiary. P thereafter learned that Q was hooked on drugs and immediately notified the insurance company in writing that he is substituting his sister R as the beneficiary in place of Q. P later died of advanced tuberculosis, In the application filled up by the ‘agent of the insurance company, the agent, without the knowledge of P, filled in a false answer and made itappear that P was in good health, Upon P's death, Q claimed the proceeds of the insurance policy contending that as designated beneficiary, he having acquired a vested right ‘to the pelicy. Can the insurance company refuse liability fon the policy? CHAPTER SIX ASCERTAINING AND CONTROLLING RISKS, No. The false statement was made by the insurer's agent hence it should be the insurer who should bear the effects of its agents misconduct. It would have been different if thero was collusion botween tho agent and the insured, However, there is no such collusion in the present case because the problem states that the false answer was made without the knowledge of the insured. (See Malayan Insurance Corp. v. Pinca, G-R. No. 67835, October 12, 1987 & Great Pacific Life v. CA, 89 SCRA 543) ‘The policy sued upon is one for 20-year endowment non- medical insurance. This kind of policy dispenses with the medical examination of the applicant usually required in ordinary life policies, However, detailed information is called for in the application concerning the applicant's, health and medical history. The written application in this case was submitted by Saturnino to appellee on November 16, 1957, witnessed by appellee's agont Edward A. Santos. ‘The policy was issued on the same day, upon payment. of the first year’s premium of P339.25. On September 19, 1968 Saturnine died of pneumonia, secondary to influenza, Appellants horo, who are her surviving husband and miner child, respectively, demanded payment of the face value of the policy. The claim was rejected and this suit was subsequently instituted. It appears that two (2) months prior to the issuance of the pelicy or on September 9, 1957, ‘Saturnino was operated on for cancer, involving complete removal of the right breast, including the pectoral muscles and the glands found in the right armpit. She stayed in ‘the hospital for a period of eight days, after which she vas discharged, although according to the surgeon who operated onhershe could notbeconsidered definitely cured, her ailment being of the malignant type. Notwithstanding the fact of her operation, Estefania A. Saturnino did not make a disclosure thereof in her application for insurance. On the contrary, she stated therein that she did not have, nor had she ever had, among other ailments listed in the application, eancer or other tumors; that she had not consulted any physician, undergone any operation or suffered any injury within the preceding five (6) years; and tat she had never been treated for nor did she ever have any illness or disease peculiar to her sex, particularly of the breast, ovaries, uterus, and menstrual disorders. The application also recites that the foregoing declarations constituted “a further basis for the issuance of the policy. Did the insured make such false representations of material facts as to avoid the policy? What is the effect of waiver of the medical examination? 146M6 ESSENTIALS OP INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Noed Act) A: There can be no dispute that the information given by her in her application for insurance was false, namely, that she had never had cancer or tumors, or consulted any physician or undergone any operation within the receding period of five years. Are the facts then falsely represented material? The Insurance Law (Section 30) provides that ‘materiality ic to be determined not by the event, but solély by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the proposed contract, or in making his inquirics.” It seems to be the contention of appellants that the facts subject of the representation ‘were not material in view of the “non-medical” nature of ‘the insurance epplied for, which does away with the usual requirement of medical examination before the policy is issued. The contention is without merit, If anything, the ‘waiver of medical examination renders even more material the information required of the applicant concerning Previous condition of health and diseases suffered, for such in‘ormation necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. It is logical to assume that if appelloo had been properly apprised of the insured’s medical history she would at least. have been made to undergo medical examination in order to determine her insurability, Appellants argue that due information concerning the insured’s previous illness and operation had been given to appellees agent Edward A. Santos, who filled the application form after it was signed in blank by Estefania A Saturnino. This wks denied by Santos in his testimony and the trial court found such testimony to be true. ‘This is a finding of fact which is binding upon us, this appeal having been taken upon questions of law alone. We do not deem it necessary, therefore, to consider appellee's additional argument, which was upheld by the trial court, that in signing the application form in blank and leaving it to Edvard A. Santos to fill (assuming that to be the truth) the insured in effect made Santos her agent for that Purpose and consequently was responsible for the errors in the entries made by him in that eapacity, In the application for insurance signed by the insured in this case, she agreed to mbmit to a medical examination by a duly appointed examiner of appellee if in the latter's opinion such examination was necessary as farther evidence ofinsurability. In notaskingherto submit CHAPTER SIX ASCERTAINING AND CONTROLLING RISKS to modical examination, appellants maintain, appellee ‘was guilty of negligence, which precluded it from finding about her actual state ofhealth, No such negligence ean be ‘Amputed to appellee. It was precisely because the insured hhad given hereelf a clean bill of health that appellee no Jonger considered an actual medical check-up necessary. Appellants also contend there was no fraudulent concealment of the truth inasmuch as the insured herself did not know, since her doctor never told her, that the disease for which she had been operated on was cancer. In the first place the concealment of the fact of the operation, itself was fraudulent, as there could not have been any mistake about it, no matter what the ailment. Secondly, in order to avoid a policy it is not necessary to show actual fraud on the partof the insured. (gnacio Saturnino ». The Philippine American Life Insurance Company, G.R. No. 1616163, February 28, 1963) On April 15, 1986, Robert Jchn B, Bacani procured a life insurance contract for himself from petitioner. He was isoued Policy No. 3:903-763-X vahied P100,000, with double indemnity in ease of accidental death. The designated beneficiary was his mother, respondent, Bernarda Bacani, On June 26, 1987, the insured died in a plane crash, Respondent Beraarda Bacani fled a claim with petitioner, seeking the benefits ofthe insarance policy taken by her son. Petitioner conducted an investigation and its findings prompted it to reject the claim, In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclosed material facts relevant. to the issuance of the policy, thus rendering the contrect of insurance voidable. A check representing the total promiums paid in tho amount of P10,172 was attached to said letter. Petitioner claimed that the insured gave false statements in his application when he answered the following questions: “5. Within the past 5 years have you: @ consulted any doctor or other health practitioner? 5) submitted to: ECG? Xrays? blood tests? other tests? ua148 A ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notas on Pre-Need Act) ©) attended or been admitted to any hospital or other medical facility? “6. Have you ever had or sought advice for: a xe 4) urine, kidney or bladder disorder?” Polto, p. 53). The deveased answered questions No. Bia) in the affirmative but limited his answer to a consultation ‘with 2 certain Dr. Reinaldo D, Raymundo of the Chinese General Hospital on February 1986, for cough and flu complications. The other questions were answered in the negative (Rollo, p. 53). Petitioner discovered that two weeks prior to his application for insurance, the insured was examined and confined at the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased was subjected to urinalysis, ultre-souography and hematology tests. (a.) ‘Was rescission of the contract justified on the ground of concealment? (b.) Will the waiver of medical exemination be deemed a waiver of concealment «s a ground for rescission? (c.) Assuming that there was concealment, can the same be invoked even if it was not the cause of the loss? a. Yes. The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to his health. ‘The information which the insured failed to disclose were material and relevant to the approval and the issuance of the insutance policy. The matters concealed would have definitely affected petitioner's action ‘on his spplication, oither by approving it with the ‘correspending adjustment for a higher premium or rejecting the seme. Moreover, a disclosure may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the application. Tt should be noted that materiality of the information withheld does not depend on the state of mind of the insured. Neither docs it depend on the actual or physical events which ensue. Thus, “good faith” is no defense in concealment, The insured’s failure to disclose the fact that he was hospitalized for two wooks prior to filing hie application for insurance, raises grave doubts about his bonafides. It appears that such concealment wes deliberate on his part. CHAPTER SIX ASCERTAINING AND CONTROLLING RISKS b. No. The argument that the insurer's waiver of the ‘modical examination of the insured debunks the materiality of the facts concesled, is untenable, The waiver of a medical examination [in 2 non-medical insurance contract] renders even more material the information required of the applicant conceming previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the palicy ornot, Such argument of private respondents would make Section 27 ofthe Insurance Code, which allows tho injured party to reseind a contract of insurance where there is concealment, ineffective. ¢ Yes, concealment ean still be invoked. The fact thet the facts concealed had no bearing to the cause of deathof the insured, itis well-settled thattheimsured need not die of the disease he had failed to disclose tothe insurer. It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries. (Sun Assurance Company of Canada v. The Hon. Court of Appeals and Spouses Rolando and Bernarda Bacani, G.R. No. 105135, June 22, 1995; Henson v. The Philippine American Life Insurance Co,, 58 O.G. No. 48 (1980) NOTE; The rescission in this case was exercised within the two-year contestability period as recognized in Section 48 of ‘The Insurance Code. On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as suffering from “sinus tachycardia.” The docior prescribed the following for him: ‘Trazopam, a tranquilizer; and Aptin, a beta-blocker drug. Mr. Canilang consulted the same doctor again on 3 August, 1982 and this time was found to have “acute bronchitis.” On the next day, 4 August 1982, Jaime Canilang applied for 2 “non-medical” insurance policy with respondent Great Pacific Life Assurance Company (“Great Pacific”) naming his wife, petitioner Thelma Canilang, a3 his beneficiary. Jaime Canilang was issued ordinary life insurance Policy No, 345163, with the face valueof P19,700, effective as of 9 August 1982, On 6 August 1983, Jaime Canilang died of “congestive heart failure,” “anemia,” and “chronic anemia.” Petitioner, widow and beneficiary of the insured, filed a claim with Great Pacific which the insurer ee ee arg eC ee Seer area aaa) 491650 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Neod Act) insured had concealed material information from it. The medical declaration which was set out: in the application for insurance executed by Jaime Canilang read as follows: “MEDICAL DECLARATION ‘Thereby declare that: GQ) Thave not been confined in any hospital, sanitarium or infirmary, nor received any medical or surgical advice /attention within the last five (5) years. (2) I have never been treated nor consulted «@ physician for a heart condition, high blood pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other physical impairment. (8) Iam, tothe best of my knowledge, in gocd health. EXCEPTIONS: GENERAL DECLARATION I hereby declare that ail the foregoing ‘answers and statements are complete, true and correct, [hereby agree that if there be any fraud or misrepresentation in the above statements material to the risk, the INSURANCE COMPANY upon discovery within two(2) years from the effective date of insurance shall have the right to declare such insurance nut and void. That the liabilities of the Company under the said Policy/TA/Certifcate shall accrue ‘and begin only from the date of commencement of risk stated in the Policy/TA/Certificate, provided that the first premium is paid and the Policy! TA/ Certificate is delivered to, and accepted by me in person, when Tom in actual g00d heath, Signed at Manila this 4th day of August, 1992. Mlegible Signature of Applicant.” (CHAPTER SIX ASCERTAINING AND CONTROLLING RISKS ‘We note that in addition to the nogative statementa made by Mr. Canilang in paragraphs 1 and 2 of the medical declaration, he failed to disclose in the appropriate space, under the caption “Exceptions,” that he had twice consulted Dr. Wilfredo B. Cleudio who had found him to be suffering from “sinus tachycardia” and “acute bronchitis.” Was there material concealment? Yes, there was material concealment. The information which Jaime Canilang failed to discloses was material to the ability of Great Pacific to estimate the probable risk he presented as a subject of life insurance. Had Canilang. disclosed his visits to his doctor, the diagnosis made and the medicines prescribed by such doctor, in the insurance application, it may be reasonebly assumed that Great Pacific would have made further inquiries and would have probably refused to issue a non-medicel insurance policy or, at the very least, required a higher premium, for the same coverage. The materiality of the infurmation withheld by Great Pacific did not depend upon the state of mind of Jaime Canilang. A man’s state of mind or subjective belief is not capable of proof in our judicial process, except through proof of external acts or failure to ‘ct from which inferences as to his subjective belief may be reasonably drawn, Neither does materiality depend upon ‘the actual or physical events which ensue. Materiality relates rather to the “probable and reasonable influence of the facts” upon the party to whom the communication should have been made, in assessing the risk involved in making or omitting to make further inquiries and in accepting the application for insurance; that “probable end reasonable influence of the facts” concealed must, of course, be determined objectively, by the judge ultimately. In any ease, in the case at bar, the nature of the facts not conveyed to the insurer was such that the failure ‘to communicate must have been intentional rather than merely inadvertent. For Jaime Conilang could not have been unaware that this heart beat would at times rise to high and alarming levels and that he had consulted a doctor twice in the two (2) months before applying fornon- medical insurance. Indoed, the last modical concultation took place just the day before the insurance application was filed. In all probability, Jaime Canilang went to visit, his doctor preeisely because of the discomfort-and concera brought about by his osperionsing “sinus tachycardia.” (Thelme Véa. de Canilang v. Hon. Court of Appeals, et al, G.R. No, 92492, June 17, 1993) 151wz ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Nood Act) 9. The insured, in his application for insurance, particularly in his declarations to the examining physician, stated the following in answering the questions propounded to him: 44. Have you ever had any of the following diseases or symptoms? Each question ‘must be read and answered *Yes" or ‘No” Gastritis, Uleer of the Stomach or any divoase of that organ? No. Vertizo, Dizziness, Fointing-spelts or Unconscious? No. Cancer, Tumors or Uleores of any hind? No. 15. Have you ever consulted any physician not included in any of the above answers? Give names and address or physicians lst citments or accidents and date. No. It appears that the insured entered the Chinese General Hospital for medical treatment on January 29, 1960 having stayed there up to February 11, 1950. ‘Upon entering the hospital, he 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. The history of his illness shows that the same “started a year ago as frequent dizziness.” An X-rey picture of his stomath was taken and the diagnosis made of him by his doctors showed that his illness was “peptic ulcer, bleeding,” Was there material concealment? ‘Yes, there was material concealment. It should be noted that the insured's confinement in the Chinese General Hospital took place from January 29, 1950 to February ‘UL, 1950, whereas his application for insurance wherein, he stated his answer to the questions propounded to him. by the examining physician of defendant was submitted to defendant on Sepiember 5, 1950. It is apparent that, when the insured gave his answers regarding his previous ailment, particularly with regard to “Gastritis, Uleer of the Stomach or any disease of that organ” and “Vance, p. 359. CHAPTER SIX 163 ASCERTAINING AND CONTROLLING RISKS “Vertigo, Dizziness, Fainting-epella or Unconsciousnese,” 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. The negative answers given by the insured regarding his previous ailment, or his concealment of the fact that he ‘was hospitalized and treated for sometime of peptic ulcer and hed suffered from “dizziness, anemia, abdominal pains and tarry stools,” 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, Had defendant. been given such oppertunity, considering the previous illness of the insured as disclosed by the record of the Chinese General ‘Hospital, defendant would probably had never consented ‘to the issuance of the policy in question. In fact, according, to the death cortificato, tho insured died of “infiltrating medullary carcinoma, Grade 4, advanced cardiac and of lesser curvature, stomach metastases spleen,” which may have direct connection with his previous iliness. (Yu Pang Cheng v. The Court of Appeals, of al, GR. No. L-12485, May 29, 1959) §2, REPRESENTATION, Representations are statements made to give information to the insurer to induce him to enterinto the insurance contract.’ A representation is @ collateral communication made to the other party in writing or by word of mouth. §2.01, TIME OF REPRESENTATION. Since representations are supposed to induce the other party to enter into the policy, they. are made at the time or before the issuance of the policy. Obviously, information statements made after the policy takes effect will no longer have any bearing on the decision of the insurer to issue the policy or the decision of the insured to enter into the contract. SEC. 37.A representation may be made at the time of, or beforo, issuance of the policy. a, Modification. An exception to the rule embodied in Section 37 is that which is contemplated in Section 47 of the Insurance Code which provides: Vance, F889. “Dover. p. 352.164 ESSENTIALS OF INSURANCE LAW (Republic Act No, 106)7 with Notes on Pre-Noed Act) SEC. 47. The provisions of this chapter apply as well to a modification of a contract of insurance as to its original formation. In other words, the representation may also be one that induces the party to agree to modify the contract. This may therefore cover representations that induce the other party to agree to novate the agreement. It follows from the provision that representations may also be made at the time of or before the renewal of the policy. $2.02. DISTINCTIONS AND SIMILARITIES. CONCEALMENT REPRESENTATION 1, It involves an omission —| 1. It involves a positive asser- nondisclosure. tion or affirmation, 2, Concealment cannot refer | 2. Representation can pertain to future acts. to the future because it ean be promissory. 3. Same test of materiality | 3, Same test applies. applies. 4. _Aparty can rescind, 4. A party can rescind. 42.08. KINDS, As to form, a representation may be oral or written. As to the nature of the statements, representation may be either affirmative or promissbry. a. Affirmative representations involve statements dealing with facts existing at the time the contract is made while promissory representations pertain to statements made by the insured concerning what is to happen at the time the insurance is already effective. Section 39 provides that: ‘SEG, 39. A representation as to the future is to be deemed a promise, unless it appears that it was merely a statement of belief or expectation. Bedtion 36, .C. (CHAPTER Six 155 ASCERTAINING AND CONTROLLING RISKS. §2.04. INTERPRETATION. The basic rule is that represen- tations are construed liberally in favor of the insured and are re- quired to be only substantially true. a. Rules. Section 38 of the Insurance Code provides that the language of a representation is to be interpreted by the same rules as the language of contracts in general. In this connection, Articles 1370 to 1379 of the New Civil Code may be applied. For instance, the rule in the New Civil Code is that if the terms are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. b. Time to Which it Refers. Section 42 of the Insurance Code provides that a representation must be presumed to refer to the date on which the contract goes into effect. For example, the representation that the house is not occupied relates to the time the contract takes effect. It may be possible that the house had been occupied before but there is no misrepresentetion so long as the same is not occupied when the contract takes effec:. Obviously, this applies only to affirmative representations and not to promissory representations. ¢. Can qualify an implied warrant, Section 40 provides that a representation cannot qualify an express provision in a contract of insurance but it may qualify an implied warranty. For instance, the implied warrant of scaworthinoss may be qualified by a representation which was made earlier by the insured that the ship does not have a particular equipment on board. §2.05. TEST OF MATERIALITY. Section 46 of the Insuranco Code provides that the materiality of a representation is determined by the same rules as the materiality of a concealment. Thus, there is deemed to be material misrepresentation if the knowledge of one party thereof will affect the insurer's action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same or in fixing the terms and conditions of the policy. a. Examples. Thus, the representation is material if it relates to health, freedom from disease, habits and medical atten- "Vane. p 873. “Article 1370, New Civil Code.156 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) dance. There are instances when family relationship and family his- tory may also be important.” b, Representation as to Age in Life Insurance. Section 233(d) provides that the following provision must be stated in an Individual Life or Endowment Policy: ()_A provision that if the age of the person in- sured, or the age of any person, considered in deter- mining the premium, or the benefits accruing under the policy, has been misstated, any amount payable or benefit accruing under the policy shall be such as the premium paid would have purchased at the correct agi (1) With the above-quoted provision, a misstatement of the age of the insured does not: avoid the policy. The only rosult is that any amount payable or benefit accraing under the policy shall be such as the premium paid would have purchased at the correct age. In other words, the benefits that will be paid will be equal to what the premium paid hy the insured would have purchased if the age had been correctly stated. This rule takes into consideration the view that no person ean testify cn his own age except from hearsay. (2) In this connection, the Standard Life Insurance Policy Provisions issued by the Insurance Commission under Circular Letter No. 14-93, dated June 25, 1993 include the following: N “Ifthe age of the Insured has been misstated, the amount of insurance will be adjnsted to the amount which the premium would have purchased at the correct age, applicable risk class and applicable premium rates as of the policy date. If at the correct age, the Insured is not eligible for any coverage under this Policy or its riders, the Company will refund the corresponding premiums actually received by the Company less any indebtedness ander this Policy.” (3) No doubt, persons do not have accurate informetion as to their correct ages. Yet the correct age of the insured is the SS. Huebner and Kenneth Black, Jr, Life Insurance, 10th Rd., pp. 178-174, Dereinafter called “Huebner and Black.” (CHAPTER Six ast ASCERTAINING AND CONTROLLING RISKS chief corner-stone of the life insurance structure.** The prudent thing for the insurer to do then is to require the submission of the Certificate of Live Birth of the insured. If the Certificate of Live Birth will not be required and the insurer merely relied on the representation of the insured, then the insurer's only rocourseis to make tho adjustment regarding premium if there was mistatement. (4) Nevertheless, it is believed that the misstatement as to the age of the insured must be done in good faith. There is a ground to rescind for misrepresentation if there is fraud or intent to deceive consistent with the feature of insurance as, contracts ubberimae fidce. ¢. _ Erroneous description of building in fire insurance. Misdeseription of the building without the fault of the insured cannot be considered materiel representation.** The mistake of the ‘employees or agents of the insurance company cannot prejudice the insured. (1) With respect to statements regarding the value ofthe property, it has been observed that all statements of value are, of necessity, to a large extent matters of opinion and it would be outrageous to hold the that the validity of all valued policies must depend upon the absolute correctness of the estimated amount. The ordinary test of value of property is the price it will commond in the market if offered for sale, Howover, men may honestly differ about the value of the market or as to what it will bring in the market. $2.08. REMEDY. There is misrepresentation or false representation under Section 44 of the Insurance Code if the facts fail to correspond with assertions or stipulations, Misrepresentation entitles the aggrieved party to the right to reseind the contract. Section 45 provides: ‘SEC. 45. If a representation is false in a material point, whether affirmative or promissory, the injured “Langan ¥. United States Life Insurance Co,, 844 Mo, $89, 180 So, W. (2d) 479.0939). “Domingo Garcia v. Hong Koug Fire & Marine Insurance, Ca, Lid., CR. No. 20841, September 1, 1928, 45 Phil. 122, ‘1 Goueh 215, Mrs. Henry E. Harding v. Commercisl Union Assurance Co, @R. No 112707, August 10, 1918.188 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10607 with Notes on Pre-Need Act) party is entitled to rescind the contract from the time when the representation becomes false. a. When Rescission is Unavailable. Based on Section 48 and the second sentence of Section 45, the injured party cannot rescind the policy on the ground of false representation in the following cases: (L) When there is waiver; (2) When an action has already been commenced on the contract; and (8) When the incontestable clause applies. b. __Estoppel No longer Applicable. Before RA No. 10607, the insurer can no longer rescind the policy “when there is estoppel asin thecase where the insurer accepted premium payments despite knowledge of the ground for rescission.”» However, RA No. 10607 deleted this provision thereby indicating that acceptance of the premium will not estop the insurer from rescinding the policy on the ground of misrepresentation. In other words, the insurer can still rescind the policy even ifit accepted the premium despite knowledge of the ground for rescission provided that other defenses are not available like the ineontestability clause discussed herounder. PROBLEM: 1, On May 12, 1962, Kwong Nam applied for « 20-yoar endowment insurance on his life for the sum of P20,000, with his wife, appellee Ng Gan Zee as beneficiary. On the ‘samedate, appellant, upon receip} ofthe required premium from the insured, approved the application and issued the corresponding policy. On Decomber 8, 1963, Kwong Nam died of cancer of the liver with metestasis, All premiums hhad boon religiously paid at the time of his death. On ‘January 10,1964, his widow Ng Gan Zeepresented a claim in due form to appellant for payment of the face value of the policy. On the same date, she submitted the required "Section 48, 1.0. Pb, "Before RA No. 10607, there is a secand sentence in Seetion 45, 1.0. that states that ‘the right to rescind granted by this Cede to tho inaurer ia waived by the acceptance of premium payments despite knowledge of the ground for rescission. (As amended by Baas Pambansa Big. 874" CHAPTER SIX ASCERTAINING AND CONTROLLING RISKS: proof of death of the insured. Appellant denied the claim ‘onthe groané that the answers given by the insured to the ‘questions appealing in his application for life insurance were untrue. The insured allegedly made the following misrepresentation: ‘Operated on for a Tumor [mayomal of the stomach. Claims that Tumor has been associated with ulcer of stomach, Tumor taken out was hard and of a hhea's egg size. Operation was two (2) years ago in Chinese General Hospital by Dr. Yap. Now, elaims he is completely recovered” The insurer relied on the following to prove the alleged misrepresentation: [1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the Chinese General Hospital on May 22, 1960, i.e, about 2 years before he applied for an insurance policy on May 12, 1962. According to said report, Dr. Fu Sim Yuan had diagnosed the patients ailment as peptic ulcer’ for which, an operation, known as a sub-total gastric resection was performed on the patient by Dr. Pacifico Yap; and [2] The Surgical Pathology Report of Dr. Elias Pantangeo showing that the epecimen removed from the patient's body was a portion of the stomach measuring 12 em. and 19cm. along the lesser curvature with a diameter of 15 em, along the greatest cimension. On the bases of the ebove undisputed ‘medical data showing that tho insured was operated on for “peptic ulcer,” involving the excision of a portion of the stomach, appellant argues that the insured’s statement in his application that a tumor, “hard and of a hen’s egg sizo,” was removed during said operation, constituted material concealment. Was there material representation that avoids the policy? No. It bears emphesis that Kwong Nam had informed the appellant's medical examiner that the tumor for which he was operated on was “asscciated with ulcer of the stomach.” In the absence of evidence that the insured had sufficient medical knowledge as to enable him to distinguish between “peptic leer” and "a tumor,” nis stetemont that said tumor was ‘ascociated with ulcer of the stomach,” should be construed as an expression made in good faith of his belief as to the nature of his ailment and operation. Indeed, such statement, must. be presumed to have boon mede by him without knowlodgo of its incorrectness and without any deliberate intent on his part to mislead the appellant. While it may be conceded that, from the viewpoint of a medical expert, the information communicated was imperfect, the same ‘was nevertheless sufficient to have induced appellant to make further inquiries about the ailment and operation 159160 ESSENTIALS OF INSURANCH LAW (Republic Act No. 10607 with Noten on Pro-Neod Act) of the insured. It has been held that where, upon the face of the application, a question appears to be not answered at all or to be imperfectly answored, and the insurers issue a policy without any further inquiry, they waive the imperfection of the answer and render the omission to answer mere fully immaterial. As aptly noted by the lower court, “if the allment and operation of Kwong Nam hhad such an impartant bearing on the questicn of whether the defendant would undertake the insurance or not, the court cannot understand why the defendant or its medical examiner did nol make any further inquiries on such matters from the Chinese Genoral Hospital or require copies of the hospital records from the appellant before ‘acting on the application for insurance.” Tha fact of the matter is that tho defendant was too eager to accept the application and receive the insured’s premium. It: world be inequitable now toallow the defendant to avoid lisbility oer the crs aioe (Ng Gan Zee v. Asian Cruzader bife Assurance Corporation, GR. No, L-30685, May PG rp 1-30685, May 30, $3. WARRANTIES. A warranty is an affirmation of fact or promise that farms part of the terms and concitions of the policy. Otherwise stated, a warranty is a statement or promise set forth in the policy, or by reference incorporated therein, the untruth or non- fulfillment, renders the policy voidable hy the insurer. SEC. 68. A warranty may relate to the past, the Present, the future, or to any or all of these. ‘ a. A warranty provides a safety-valve by which underwriters a ensure that an insurance is actually of the character attributed it n S801. EINDS, A warranty is either expross or implied. warranty may also be an affirmati y or promisso: ja irmative warranty or promissory a. An express warranty is one that is stated in the polic : nt is 1 poliey or any of its attachments. An implied warranty is a natural element of the contract imposed by law and are part of the policy without __Pradeatal Guarantee and. Assurance, Tne. Tran GR. No. 151600, une 20,2000, 491 SCRA a1, 435, ANS Shipping Lines, "Dover p68 "section 67, LC: CHAPTER six 161 ASCERTAINING AND CONTROLLING RISKS the need that it be stated in the policy. For example, there may be implied warranty of seaworthiness in marine insurance. b. Anaifirmative warranty is an affirmation of fact that exist at the time they are made. It is an undertaking that some positive allegation of fact is true, For example, the insured may warrant that the insured building is not being for commercial purposes. Promissory warranty stipulates that certain things shall be done or a specified condition shall exist during the currency of life of the insurance contract. In promissory warranty, one party is bound by an executory stipulation. $8.02, RULES ON PROMISSORY WARRANTIES. Promis- sory warranties are subject to Sections 72 and 73 of the Insurance Code which provide: SEC. 72. Astatement in a policy which imparts that itis intended to do or not to do a thing which materially affects the risk, is a warranty that such act or omission shall take place. SEC. 73. When, before the time arrives for the performance of a warranty relating to the future, a loss insured against happens, or performance becomes unlawful at the place of the contract, or impossible, the ‘omission to fulfill the warranty does not avoid the policy. a. Promissory warranty may either be a positive act or an omission. Thus, the insured in a fire insurance may warrant that the firewall of the building will be modified to the height and specifications stated in the policy. On the other hand, there may also be a promissory warranty Uhat is in the form of omission as in the case where the insured warrants that he will not store gasoline or kerosene in the insured building. $8.03, FORMALITIES OF EXPRESS WARRANTY. Section 69 of the Insurance Code provides that no particular form of words is necessary to create a warranty. However, Section 70 imposes the following requirements: SEC. 70. Without prejudice to Section 51, every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy as making a part of it.162 ESSENTIALS OF INSURANCE LAW (Ropublic Act No, 10607 with Notos on Pre-Need Act) a, ‘Thus, there are only two (2) ways of making an express warranty part of the insurance contract: (2) It must be contained in the policy itself; or (2) Itmay be expressed in another instrument provided that the separate instrument is signed by the insured and referred to in the policy. $8.04, EXAMPLES OF EXPRESS WARRANTY. Section 71 of the Insurance Code provides thet a statement in a policy of a matter relating ta the person or thing insured, or to the risk, as a fact, is an express warranty thereof. For example, a statement in the life insurance policy that the insured has not been involved in any vehicular accident for the past ten years or has never heen charged with any crime involving moral turpitude is an express warranty. Similarly, a statement that there are no gasoline in the insured building is a warranty because it relates to the risk insured against. a. A warranty may likewise be in the form of an “other insurance” clause whereby the insured warrants that there is no existing insurance over the same property when the insurance pilicy takes effect. $3.05. BREACH OF WARRANTY BY THE INSURED. Breach of warranty by the insured renders the contract defeasible. However, in order to avoid the policy, the insurer must prove such breach consistent with the rule that any violation must be established by the person who is making such allegation.» a. ‘The insurer may'elect to waive his right to avoid the policy in case of breach by the insured. This waiver by the insurer may be express or implied. For example, there is implied waiver when the insurer renewed the policy knowing that there was breach of warranty.© PROBLEM: 1. Julie and Alma formed a businose partnership, Under the business name Pino Shop, the partnership is engaged in ‘Soe Chaptar 9, Section 3 discussing the “Other Insurance Classe.” “Prudential Guarantee and Assurance, Inc. v. ‘Trans-Asia Shipping, Lines, Inc, GR. No. 161690, June 20, 2006, Ine, ae rndential Conrantes and Atsurance, Ie. v, ane-Asa Skipping, Lines, CHAPTER SIX 163 ASCERTAINING AND CONTROLLING RISKS the 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 million and then from RIC for 'P200,000. A fire of unknown origin gutted the store of the partnership. Julie filed her claim with the three insurance companies. However, her claim was denied separately for broach of poliey 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 ‘ot be blamed for the omission, alleging that the insurance agents for WGC, RSI and RIC knew of the exisioneo 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. May she recover on her fire insurance policy? A: No, she can no longer recover from said inaurance policy because she is guilty of violation of a warranty condition. $3.06. REMEDY. A party may rescind the policy if there is breach of warranty on the part of the other party. SEC. 74. The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the othor to rescind. SEG. 75. A policy may declare that a violation of ‘specified provisions thereof shall avoidit, otherwise the breach of an immaterial provision does not avoid the policy. a, It should be noted that Sections 74 and 75 allow the party to rescind or to avoid the policy only in case of a material breach, Breach of an immaterial provision does not zvoid the policy. Sections 74 to 75 of the Insurance Code indicate that it is no longer the rule that all warranties are considered material the moment that they are expressed to be so in the policy. It should be recalled that the rule in the United States is that materiality of warranties are already removed from the consideration of the court or jury. This is not the rule under the Insurance Code. b. However, if the policy itself provides that breach of a warranty or a provision avoids the policy, the warranty is deemed to be material. The policy may make what would normally be164 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10807 with Notes on Pre-Need Act) considered an immaterial warrenty into one that is material. This may be done if the parties agree that the statements are absolutely true and if untrue in any respect, the policy is avoided, c. There is authority for the view, however, that non- compliance with a warranty is excused when by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendored unlawful by any subsequent law. Breach may likewise be waived by the other party $8.07, BREACH WITHOUT FRAUD. SEC. 76.A breach of warranty without fraud merely ‘xonerates an insurer from the time that it occurs, or where it is broken in its inception, prevents tha policy from attaching to the risk. $8.08. DISTINCTIONS. WARRANTY REPRESENTATION 1. It is part of the | 1, It isnot part of the contract but contract. collateral inducement. 2. Itis written ona policy | 2. It can be oral or in writing. orits rider. 3. It is presumed to bé| 3. It must be established to be ‘material. material. 4. There must be strict | 4. It must be substantially true. compliance. $4. OTHER DEVICES. Risks can also be limited or controlled using “exceptions,” “exclusions,” and ‘conditions.” $4.01. CONDITIONS. Conditions are in the nature of calla- teral terms. They do not relate to the risk covered or statement of "Dover, p- 870. (CHAPTER Six 165 ASCERTAINING AND CONTROLLING RISKS facts but are in the nature of collateral promises or stipulations.” ‘These include the following: (1) Promises or obligations regarding claims procedure: that are not fundamental to the validity of the contract, and (2) Conditions conferring more rights to the insurer enlarging or repeating the minimum rights provided by law." a. An insurance contract with stipulated conditions is the law between the parties. Its terms and conditions constitute the measure of the insurer's liability and compliance therewith is a condition precedent to the insured’s right to recovery from the insurer." b. For example, a policy may provide that all benefits under the policy shall be forfeited “if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent mezns or devises are used by the Insured or anyone acting in his behalf to obtain any benefit under the policy.” Thus, if for example an insured presented » false declaration to support his claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue of the same stipulation of the policy in the absence of proof that the insurer waived such provision. Worse yet, by presenting a false lease contract, the insured, reprehensibly disregarded the principle that insurance contracts are uberrimae fidae and demand the most abundant good faith." ¢. The burden is on the insurer to prove that the insured broached the condition that is imposed. Since breach of condition ia 2 defense that will relieve him of his liability under the policy the ‘onus of proof'is on the insurer who will invoke such defense. $4.02, EXCEPTION, EXCLUSION OR EXEMPTION. Tho insurer may provide for exemptions or exceptions in the policy. ‘However, the rule is that if the insurer desires to limit or restrict the “Birds, 151 ‘Rafael (ex) Verundia v. Court of Appeals, etal, G.R. No. 76605, January 22, 1999, Pacific Basking Corporation v. Court of Appeal 168 SCRA 1 [1988]; Oriental Assurance Corporation v. Court of Appeals, 200 SCRA 459 [1991], citing Peria Compania de Seguros, In. v. Court of Appeols, 185 SCRA 741 (1991). Rafael Rex) Veranda v. Court of Appeals, et al, G.R. No. 7505, January 22, 1993, “bid,166 ESSENTIALS OF ‘Republic Act No. 10607 wi ‘SURANCE LAW "Notes on Pre-Need Act) operation of the general provisions of its contract by special proviso, exception, or exemption, the policy should express such limitation in cleer and unmistakable language. For example, ifthe insurer wants 1w include the risk of arrest occasioned by ordinary judicial process as an exception in the marine insurance policy, it must expressly so provide in the policy without ambiguity.” @, _Ivis to be desired that the terms and phraseology of the exception clause be clearly expressed so as to be within the easy grasp and understanding of the insured, for if the terms are doubtful or obscure the same must be of necessity be interpreted or resolved against the insured who cause the ambiguity. b, Exceptions to the general coverage are construed most strongly against the company. Even an express exception in a policy is to be construed against the underwriters by whom the policy is framed, and for whose benefit the exception is introduced. Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is adopted. c. The cbligation to prove that the loss is covered by the exception rests with the insurer. For example, a fire insurance policy in one case excludes from the coverage of the policy damages resulting from explosion. The Supreme Court still sustained the claim because the insurer failed to prove that the cause of the loss was explosion.” 4, In another case,* the personal accident insuranee policy involved specifically enumerated only ten (10) circumstances wherein no liability attaches\to the insurance company for any injury, disability or loss suffered by the insured as a result of any of the stipulated causes. The High Court observed that the principle of “expressio unius est exelusio alteriue” — the mention of one thing implies the exclusion of another thing — is applicable. Since murder. and assault was not expressly included in the enumeration of the "faleyan Insurance Corporation v. The Honorable Cours of Appeals and TRC Marketing Corporation, G.R, No. 119598, March 20, 1997, "Virginia Calanoe v. Court of Appeals, GR. No, L-8151, December 16, 1956, “aie Paris-Manile Perfume Co. v. Phoonix Assurance Company, Lid, G.R. No, 1.25845, December 17, 1926, ™Pinman General Assuraace Corporstion v, Hon, Court of Appeals and Julia ‘Surposa, G.R. No, 100970, September 2, 1992. See Chapter 14 for the digest of this CHAPTER SIX 167 ASCERTAINING AND CONTROLLING RISKS circumstances that would negate liability in said insurance policy, murdor and assault cannot be considerod by implication to discharge the insurance company from liability for any injury, disability or loss suffered by the insured. Thus, the failure of the insurance company to include death resulting from murder or assault among the prohibited risks leads inevitably to the conclusion that it did not intend to limit or exempt itself from liability for such death. The Court likewise cited Article 1377 of the Civil Codo of ‘the Philippines which provides that the interpretation of obscure words or stipulations in a contractshall not favor the party who caused the obscurity. Moreover, it is well-sottled that contracts of insurance are to be construed liberally in favor of the insured and strictly against the insurer. Ambiguity in the words of an insurance contract should he interpreted in favor of its beneficiary. §5. INCONTESTABLE CLAUSE. Section 48 of the Insur- ance Code provides that: SEC. 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two (2) years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is tescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent. $5.01. MANDATORY INCONTESTABLE CLAUSES. Section 233 requires the following incontestable clause in an Individual Lifo or Endowment Policy: (b) A provision that the policy shall be incon- testable after it shall have been in force during the lifetime of the insured for a period of two (2) years from its date of issue as shown in the policy, or date of approval of last reinstatement, except for non-payment ‘of premium and except for violation of the conditions of the policy relating to military or naval service in time of war;168 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10807 with Notes on Pre-Neod Act) a. For group life insurance policies, the mandatory incon- testable clause required under Section 234 is as follows: (b)_Aprovision that the validity of the policy shall not be contested, except for non-payment of premiums after it has been in force for two (2) years from its date of Issue; and that no statement made by any insured under the policy relat to his insurability shall be used in contesting the validity of the insurance with respect to which such statement was made after such insurance has been in force prior to the contest for a period of two (2) years during such person's lifetime nor unless contained in written instrument signed by him; b. The mandated incontestable clause for industrial life insurance policies under Section 236 of the Insurance Code states: (b) A provision that the policy shall be incontest- able after it has been in force during the lifetime of the Insured for a specified period, not more than two (2) years from its date of issue, except for non-payment of premiums and except for violation of the conditions of the policy relating to naval or military service, or servic- 8 auxiliary thereto, and exceptas to provisions relating to benefits in the event of disability as defined in the policy, and those granting additional insurance specifi- cally against death by accident or by accidental mean: or to additional insurance against loss of, or loss of use of, specific members of the body; $5.02. RATIONALE. The incontestable clause is upheld in law not for the purpose of upholding fraud but for the parpose of shutting offharassing defenses.” The clause is designed to induce the insurer to investigate and act with reasonable promptness if it wishes to avoid the policy. The facts can be best ascertained and established if investigated within the soonest possible time. Investigation becomes harder through the passage of time. It is unfair for the insurer to wait for the death of the insured who obviously can no longer defend his claim.” The rationale wes explained as follows: "Muiual Life Insurance Company v. Whitehead, 123 Ky, 21, 26 (1906), "Amon Life Assurance Co. ¥,lome Canital Corn. 60 Cal Rrtr. Sad #0811977). CHAPTER Six 189 ASCERTAINING AND CONTROLLING RISKS “Barly Use of the Clause. The incontestable clause was first introduced by life insurance companies on a voluntary basis in the latter hall of the 1800's in an effort to counteract a growing attitude toward the life insurance business. This feeling, was due largely to the practices of some insurers of taking full ‘advantage of their right to disaffirm a contract if any statement, even a relatively unimportant one, in the application were not Ktorally true, Often premiums hed been paid for « long period of time, and the misstatements concerned were relatively trivial, yet the company would disaffirm the contract at the death of the insured, leaving the beneficiary in the difficult position of either having no insurance or explaining and alleged misstatement made many years earlier in the application and aout which she knew little or nothing. Asa matter of fac, the early life insurers had a considerable amount of success’ in cisalfirming their policies in circumstances of this kind, but thia ouceces, ao one commentator has put it. rapidly gained for them a reputation as the ‘great repudiators.” In an effort to counteract this growing reputation and to assure the insureds and beneficiaries that such purely technical grounds would not be used to disaffirm their contracts, the incontestable clause was introduced in the latter half of the 19th century by the companies themselves.” a. The insurer has two (2) years from the date of issuance of the insurance contract or of its last reinstatement within which to contest the policy, whether or not, the insured still lives within such period. After two (2) years, the defenses of concealment or misrepresentation, no matter how patent or well founded, no longer lie. Congress felt this was a sufficient answer to the various tactics employed by insurance companies to avoid liability." b. _ Inone case where the insured died before the expiration of the two-year period, the beneficiaries contended that the insurance company no longer had the right to rescind the contract of insurance as rescission must allegedly be done during the lifetime of the insured within two years and prior to the commencement of action. ‘The Supreme Court rejected this contention because the petitioners’ interpretation would give rise to the incongruous situation where the beneficiaries of an insured who dies right after taking out and “Greider and Beadles, p. 181. "Emilio Tan, et al. v. ‘The Court of Appoals and Philippine American Life Insurance Company, G.R. No. 48049, June 29, 1989.170 ESSENTIALS OF INSURANCE LAW (Republic Act No. 10807 with Notes on Pre-Need Act) CHAPTER SIX 7 ASCERTAINING AND CONTROLLING RISKS, paying for a life insurance policy, would he allowed to collect on the policy even if the insured fraudulently concealed material facts"! ¢. The incontestable clause was not: applied in Florendo ». b, If Juar’s accident oceurred in July 1988, would your ‘answer be the same? Explain. A: a, No. Juan’s wife is not entitled to any indemnity. Philam Plans* becuse the two-year period has not yet lapsed, $6.08. WHEN INAPPLICABLE. The incontestable clause cannot be invoked in the following eases: (2) Nonpayment of premium (2) Violation of the conditions of the policy relating to military or naval service in times of war; (3) Property Insurance" Juan concealed a material fact and the fact that the cause of his death is not the liver ailment coes not relieve him and his heirs of the effect of such concealment. No, my anower would not be tho same if Juan's accident occurred in July 1983. The incontestable or incontestability clause is already applicable. The policy has become incontestable considering that the policy was issued in June 1981 and two (2) yoars had lapsed from the data of the issuance of the policy. Section 43 of the Insurance Code provides that 3: “after a policy of life insurance made payable on the EROHLEME: death of the insured shall have been in force during 1, In June 1981, Juan applied for a life insurance policy with the lifetime of the insured for a period of two years a double indemnity provision in case of death by accident. Describe an express injury in the application form of insnranco, he did not mentien 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 company’s physician did from the date of its issue or of its last reinstatement, ‘the insurer cannot prove that the policy is votd ab initio or in rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent.” not reveal such previous illness, and showed that Juan 2. On September 28, 1990, Tan took a life insurance policy was healthy and was an insurable risk. The policy from Philam. The policy was issued on November 6, 1990. was issued forthwith. In March 1983, Juan died in an He died on April 26, 1992 of Hepatoma, The insurance automobile accident, Subsequent investigation revealed company denied the beneficiariss’ claim and roscindod that Juan is nogligont ia not having his broaks checked. the policy by reason of alleged misrepresentation ‘The insurance company refused to pay Juan's wife, the and concealment of material facts made by Tan in designated beneficiaryton two grounds: that Juan is guilty his application It retumed the premiums paid. The of fraudulent concealment of his ailment, and that Juan's beneficiaries contended that the company had no right to death was cansed by his own negligence. The poli rescind the contract as rescission must be done “during silent as to the effect of the insured’s negligence on the the lifetime” of the insured within two (2) years and prior right to recover therein. Juan’s wife insists that she has to the commencement of the action, Is the contention of the right to recover because Juan's death was caused by the beneficiaries tenable? i Ss ee oebing fo do shagonyet wt ba ‘A. No, the contention of the beneficiaries is untenable. Mr. liver ailment, She therefore insists on double indemnity, Is she entitled to any indemnity? Explain. ‘Tan died on April 26, 1992 or less than two 2) years from the insurance of the policy on September 23, 1990. There isno requirement under Section 227 that the rescission is done during the lifetime of the insured, ‘Bmili Tas, et al. v. ‘The Court of Appeals and Philippine American Life Insurance Company, ibid. 46. WAR LIMITATION RIDER OR WAR CLAUSE. Section pore ato, 227 requires a provision in the policy that the incontestable clause “hid. does not apply if there is a violation of the conditions of the policy “Section 48, LC. relating to military or naval service in times of war. The war clause172 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Neod Act) iteelf is not required by the Insurance Code. However, the moment the parties include a war clause in the policy, the beneficiaries can no longer invoke the incontestable clause if the war clause is violated. The war limitation clause or rider limits the liability of the insurer in the event the insured looses his life as a result of war. It was explained that the purpose of this clause is not so negative as it might seem. Insurers might not be willing to issue life insurance Policies in times of war. Hence, a war clause does nol represent so much a limitation on the coverage in the broad sense as a practical way of issuing coverage that would not otherwise be made available to a large number of young men in times of war or when war is imminent. It permits the issuance of life insurance policies that, ‘would not otherwise be issued.” §7. DEFENSES OF INSURED AGAINST REVOCATION. Aside from the incontestable clause, other grounds may be invoked by the insured or his beneficiaries to prevent the insurer from invoking the devices for limiting or controlling the risk. These include: (1) Guaranteed Insurability Clause, (2) Failure to invoke before commencement of the action, (3) Waiver, and (4) Estoppel. $7.01. GUARANTEED INSURABILITY CLAUSE. For group life insurance policies, Section 228 provides that no statement made by any insured under the policy relating to his insurability shall be used in contesting the validity of the insurance with respect to which such statement was made after such insurance has been in force prior to the contest for a period of two (2) years during such person’s lifetime nor unless captained in written instrument signed by him. Thus, under this provision, statements that lend to show that the insured is uninsurable cannot be used against him in the following cases: (2) Ifthe insurance has been in force prior to the contest for a period of two (2) years during the person’s lifetime; or (2) If the statement is not in writing and/or not signed by the insured, a. The term “insurability” meludes all matters which would have been considered by the company on the application except the age of the insured. It includes such oloments as habits, occupation, “Greidar and Beadles, p. 219. (CHAPTER Six 178 ASCERTAIVING AND CONTROLLING RISKS finances and good health.” It is often confused with good health but it has long boon settled that good health is not the same as insurability. The classic example of the distinction between the two is the statement in one case that a criminal that is condemned to death may be in perfect health but hardly insurable. >. For instanee, insurance company may consider a person uninsurable because of the insured’s pecuniary circumstances coupled with heavy over-insurance that is entirely out of line with In another case, the insurability was ing that the insured is known to be financially insolvent and the circumstances show probability of suicide. ¢. The insurability clause may likewise be stipulated upon by the parties for individual lif and endowment policies. ‘This clause becomes more important when the insured is entitled to reinstatement or renewal of the policy. Proof of insurability at the time of the application for reinstatement is a proper risk for insurance upon the basis of the original contract.” §7.02. TIMELINESS OF RESCISSION. The first paragraph of Section 48 of the Insurance Code provides thet “whenever a ight to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract.” The chapter referred to is Chapter I which includes provisions on concealment, representations, and warranties. Thus, in one case where the insurer alleged that there was concealment, the Supreme Court explained that while under Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a contract of insurance,” the rright to rescind should be exercised previous to the commencement of an action on the contract a,‘ Theprovision requiring the right to rescind tobe exercised previous to the commencement of an action is a copy of Section 47 of the old law. In a decision of the Supreme Court under the old law, “ibid, p. a1; Kallman v. Kquitable Live Assurance Society, 248 A.D. 140, 288 NYS. 1082 (1936) ‘Kallman v. Equitable Life Assurance Society, ibi. “Ibid. [bid citing Ginshorg v. Eastern Life Tneurance Co, of New York, 18 Nu oq. 223, 178 A. 318. Banas, Oriental Life Insurance Co., (CA) B2 0.G, 9898 (No. 19) ey a a ar ce a aa14 ESSENTIALS OF INSURANCE LAW (Ropablie Act No. 10607 with Notes on Pre-Neod Act) ‘it was explained that: “As stated, an action to rescind a contract is founded upon and presupposes the existence of the eotract which is sought to ke rescinded. [fall of the material matters set forth and alleged in the defendant's special plea are true, there was no valid contract of insurance, for the simple reason that the minds of the parties never met and never agreed upon the terms and conditions of the contract. (The Court] [is] clearly of the opinion that, if such matters are known to exist by a preponderance of the evidence, they would constitute a valid defense to plaintiff's cause of action,”* b. If-an insurer cannot rescind the contract because of the ‘commencement of an action, the insurer ean still set up the ground for restission as a defense. In another case," the Supreme Court explained the origin and the interpretation of the rule in the first paragraph of Section 48 in the State where the same rule originated: “Lastly, appellant contends that even if the insurance company had a right to rescind the contract, such right cannot now be enforced in view of the provisions of Section 47 of the Insurance Act providing “Whenever a right to rescind a contract of insurance is given to their insurer by provision ofthis chapter, such right must be exercised previous to the commencement of anactionon the contract.” This section was derived from Section 2583 of the California Civil Cede, but in contrast thereto, makes use of the imperative “must” instead of tho permissive “may.” Nevertheless, there are two answers to the problem as propounded, The first is that the California law as construed by the code examiners, at whose recommendation it was adopted, conceded that “A failure to exercise the right (of rescission), cannot, of course, prejudite any defense to the ection which the concealment may furnish.” (Codes of California annotated; Tan Chay Heng °, West Coast Life Inaurance Company [1927], p. 80, ante, The second answer is that the insurance company mere than one month previous to the commencement of the present action wrote the plaintiff and informed him that the insurance contract was void because it had been procured through fraudulent representations, and offered to refund to the plaintiff the premium which the latier had paid upon the return of the policy for cancellation, As held in California as toa fire insuranes poliey, where any of the material representations “Tan Chay Heng v. The West Coast Life Insurance Company, G.R. No. Laz7o41, November 21, 1927. Bernardo Angonte v. Wost Coast Life Insurance Company, G.R. No, 24399, ‘March 19, 1998, ‘CHAPTER s1x a5 ASCERTAINING AND CONTROLLING RISKS are false, the insurer’s tender of the premium and notice that tthe policy is canceled, before the commencement of suit thereon, ‘operate to rescind the contract of insurance. (Rankin v. Amazon Insurance Co. [1891], 89 Cal, 208.)" c. ‘The abovequoted Decision states that the interpretation under the California Civil Code as to a fire insurance policy is that where any of the material representations is false, the insurer's tender of the premium and notice that the poliey is cancelled, before the commencement of suit thereon, operate to rescind the contract, of insurance. Thus, the exercise of the right to rescind does not require the filing of a case in court. §7.03. WAIVER. Waivor is the intentional relinquishment of a known right. It may also be narrowly defined as the intended giving up of a known privilege or power. It always involves consent but it does not rise to the level of contract." Waiver may be express or implied. a. ‘The right to information of material facts may be waived, either by the terms of the insurance or by neglect to make inquiry as to such facts, where they are distincUly implied in other facts of which information is communicated. For example, if the insured already disclosed that he had undergone surgery without stating all the details, the insurer can no longer rescind the contract on the ground thet the specific illness involved in the surgery was not disclosed. ‘The insurer is deemed to have made a waiver for its failure to make further inquiries. b. It has been held that where, upon the face of the appli- cation, a question appears to be not answered at all or 10 be imperfectly answered, and the insurers issue a policy without any farther inquiry, the insurers thereby waive the imperfection of the answer and render the omission to answer more fully immaterial” ¢. _ Waiver is also illustrated in Section 33 of the Insurance Code which provides that the right to information of material facts may be waived, either by the terms of the insurance ar by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated. "bid. Vance, p, 451. "Ng Gan Zee v. Asian Cruzader Life Assurance Corporation, supra.176 ESSENTIALS OF INSURANCE LAW (Republic Act No, 10607 with Notes on Pre-Need Act) §7.04. ESTOPPEL. Article 1431 of the New Civil Code provides that through estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. Estoppel may be fn pais or by deed. Unlike a waiver, there is no element of consent in estoppel. As already discussed earlier, Section 45 of the Insurance Code (hofore it was amended by RA No. 10607) used to provide for an example of estoppel. However, RA No. 10607 already removed this previous exception in Section 45 of the Insurance Code, 2 Forsxample, an insurance firm was not allowed to escape Uability under a common carrior insurance policy on the pretest that what was insured, not once but twice, was a Private vehicle and Rot @ common carrier. The policy was issued upon the insistonea of the insurer's agent. who discounted fears of the insured that hie privately owned vehicle might not fall within the terms of the policy, Moreover, the insured was “a man of scant education,” finishing only the first grade. ‘The Supreme Court cbserved that it is now beyond question that where inequitable conduct is shown by an insurance firm, it is “estopped from enforcing forfeitures in its favor, in ordex to forestall fraud or imposition on the insured." The doctrine of estoppel undeniably calls for application, Since the insurer had led theinsured to believe that he could qualify under the common carrier ability insurance policy, and to enter into contract of insurenes Paying the premiums due, it could not, thereafter, in any litigation arising out of such representation, be permitted to change its stand fo.he detriment ofthe heirs of the insured. As estoppel is primarily based on the doctrine of | ‘good faith and the avoidance of harm that will befall the innocont party due to its injurious: reliance, the failure to apply it in this case would résult in a gross travesty of justice.» pAagldmenk Insurance Company v. Mercedes Vargas Vea. De Songeo, GR. No. 124835, September 23, 1968; Qua Choe Gan v. Law Union and Nose Peers Go, Lid, supra. ibid. CHAPTER SEVEN LOSS AND NOTICE OF LOSS stion of causation is a focal question in insurance sasor beatae th abies of iurere "est on proof of eausaton. Tre determinatien of whether oF not the risk insured against or excepted peril oa isk ao insured gaint is the proximate cau ofthe las i rucal in fving the insurers ibility. In many eases, insurance claims involve simple cause and effect analysis, In sme case, the tae is complicated because of the number of vandicate causes thet may have preceded the loss. As John Stuart explained in his A Syste of Logic: ith only, 4 that one effect must be connected wit ons cate orsouage of enon at eat pean cay ore only in obey There te en never inepndnt ein his he a Petes ae ‘iginated. One fact may be the consequent ‘i sonieiceei it may follow, with equal uniformity, any one of severe antcdents, or ecto antecedent, Hay cue tay fee neharal ttn. iy prods some kinds of sensation: many causes may produce ne given effect may really be produced hy a certain costes Sopexeclycapebtoot beng produced without i injury or damage . LOSS, Loss in insurance means the injury sath, aan pine ere ee or more of the accidents or misfortune against which the cae in consideration of the premium, has undertaken to indemn: insured i iarydetriment .._Inproperty insurance, loss means the pecuniary. consisting ofthe total cash value ofthe property in case of total loss “Bon Boy Lyf Basque Mar al, OR. No, 085, May 2, 1967. at