INSURANCE

Atty. Mary Anne B. Jamisola – Adriano, CPA

Section 25. Every stipulation in a policy of insurance for the payment of loss whether the
person insured has or has not any interest in the property insured, or that the policy shall be received
as proof of such interest, and every policy executed by way of gaming or wagering, is VOID.

STIPULATIONS PROHIBITED IN AN INSURANCE POLICY

• Wager Policy - a pretended insurance where the insured has no interest in the thing insured
and can sustain no loss by the happening of the misfortunes insured against him. The law,
however, makes an exception in the cases mentioned in Section 181 regarding life insurance.

STIPULATION THAT THE POLICY SHALL BE RECEIVED AS A PROOF OF INSURABLE

INTEREST
• Whether or not insurable interest exists does not depend upon the contract of insurance or the
stipulations therein. The insurer can always show lack of insurable interest after the issuance
of a policy of insurance. Such defense of absence of insurable interest is available only to the
insurer.
WAGERING OR GAMING POLICIES VOID
A contract of insurance is void for illegality unless the insured has an insurable interest in the
subject matter insured.

A MERE BET UPON A FUTURE EVENT

• Wager or gaming policies are disapproved and condemned not only under statutes declaring
them void, but also on the ground of public policy. They are regarded as detrimental to society.
Such policies have a tendency to create a desire for the event.

NON-EXISTENCE OF LOSS FROM THE OCCURRENCE OF EVENT

• Wagers suffer no loss from the occurrence of the contingent event. They actually profit from it.
The insurable interest requirement intends to deter the insured from the temptation to bring
about by unnatural means the results of the contingent event.
 TITLE 4. CONCEALMENT
Section 26. A neglect to communicate that which a party knows and ought to communicate, is
called a concealment.

PRIMARY CONCERNS OF THE PARTIES TO AN INSURANCE CONTRACT

1. The correct estimation of the risk which enables the insurer to decide whether he is willing to
assume it, and if so, at what rate of premium.
2. The precise delimitation of the risk which determines the extent of the contingent duty to pay
by the insurer
3. Control of the risk after it is assumed as will enable the insurer to guard against the increase
of risk due to change in conditions
4. Determining whether a loss occurred and if so, the amount of such loss
DEVICES FOR ASCERTAINING & CONTROLLING RISK & LOSS
1. Concealment
2. Representations
3. Warranties
4. Conditions
5. Exceptions

CONCEALMENT AND REPRESENTATION

To enable the insurer to secure the same information with respect to the risk that was
possessed by the applicant for insurance, so that he might be equally capable of forming a just estimate
or its quality.

WARRANTIES AND CONDITIONS

Deals with conditions existing at the inception of the contract. They involve facts the existence
of which shows the risk to be greater than that intended to be assumed and operates to create in the
insurer the power to extinguish if he so desires, the legal relations already created.
Example: The insured is required to warrant that he had not been subject to a major operation or a
stipulation in the policy may be inserted that the policy shall be void should the insured be guilty of
concealment or representations.
EXCEPTIONS
Used for the purpose of making more definite the coverage indicated by the general
description of the risk by excluding certain specified risks that otherwise would have been included
under the general language describing the risks assumed.

The general description of the risk concerned has two parts:

1. Designation of the specific property interest to be covered
2. Specification of such of the perils to which that property interest would be exposed

Example: “This policy shall not cover accounts, bills, currency, deeds, evidences of debt, money or
securities; nor bullion or manuscripts, unless specifically named hereon in writing.”
CONCEALMENT
A neglect to communicate that which a party knows and ought to communicate. It is the
intentional withholding by the insured of any fact material to the risk.

REQUISITES
1. A party knows the fact which he neglects to communicate or disclose to the other
2. Such party concealing is duty bound to disclose such fact
3. Such party concealing makes no warranty of the fact concealed
4. The other party has no means of ascertaining the fact concealed

TAKE NOTE: Where a warranty is made of the fact concealed, the non-disclosure of such fact is
not concealment but constitutes a violation of warranty.
Section 27. A concealment whether intentional or unintentional entitles the injured party to
rescind a contract of insurance. (ORDINARY CONCEALMENT)

EFFECT OF CONCEALMENT
A. CONCEALMENT BY THE INSURED - failure on the part of the insured to disclose
conditions affecting the risk, of which he is aware, makes the contract voidable at the
insurer’s option.

RATIONALE: Insurance policies are traditionally contracts uberrimae fidae – that is

contracts of utmost good faith

TAKE NOTE: It is not limited to material facts which the applicant knows. It extends to
those which he ought to know, they being necessary for the insurer to evaluate the risk.
Therefore, it is no defense to plead mistake or forgetfulness.

B. CONCEALMENT BY THE INSURER – injured party is entitled to rescind the contract.

RATIONALE: The contractual duty of disclosure is not required of the insured alone, but is
imposed with equal stringency upon the insurer, since his dominant bargaining position
carries with it stricter responsibility.
PROOF OF FRAUD IN CONCEALMENT NOT REQUIRED
Fraud is not essential in order that the insured may be guilty of concealment. The duty to
communicate is independent of the intention. Thus, the absence of an intent to deceive is
immaterial.

RATIONALE: It would be impossible for the insurer to protect itself and its honest policyholders
against fraudulent and improper claims. It would be wholly at the mercy of any one who wished
to apply for insurance, as it would be impossible to show actual fraud except in the extremest
cases.

BASIS OF THIS PROVISION

Because it misleads or deceives the insurer into accepting the risk, or accepting it at the rate of
premium agreed upon.
Section 28. Each party to a contract of insurance must communicate to the other, in good faith,
all facts within his knowledge which are material to the contract and as to which he makes
no warranty, and which the other has not the means of ascertaining.

MATTERS THAT MUST BE COMMUNICATED EVEN IN THE ABSENCE OF INQUIRY

1. They are material to the contract.
2. The other has no means of ascertaining the said facts.
3. The party with the duty to communicate makes no warranty.

TAKE NOTE: The test is, if the applicant is aware of the existence of some circumstances which
he knows would influence the insurer in acting upon his application, good faith requires him to
disclose that circumstance, though unasked.
Section 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 , entitles the insurer to
rescind.

WHEN FRAUDULENT INTENT IS NECESSARY

Unlike in ordinary concealment (Sec 27), the non-disclosure under this Section must be
intentional and fraudulent in order that the contract may be rescinded.

A. Insured – the one guilty of the omission

B. Insurer – the one entitled to rescission of contract

SECTION 29 RELATES TO “FALSITY OF WARRANTY”

In every contract of marine insurance, there is an implied warranty that the ship is
seaworthy. Thus, the intentional and fraudulent omission on the part of the insured when
applying for a policy to communicate information that his ship is in distress or in peril – would
entitle the insurer to rescind because said concealment tends proves or tends to prove the falsity
of the warranty that the ship is seaworthy.
Section 30. Neither party to a contract of insurance is bound to communicate information of
the matters following, EXCEPT in answer to the inquiries of the other:

1. Those which the other knows

2. Those which, in the exercise of ordinary care, the other ought to know, and of which the
former has no reason to suppose him ignorant
3. Those of which the other waives communication
4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which
are not otherwise material; and
5. Those which relate to a risk excepted from the policy and which are not otherwise material.

GENERAL RULE: NO DUTY TO MAKE DISCLOSURE

6. Matters known to, or right to be known by insurer, or of which he waives disclosure
7. Risks excepted from the policy
8. Nature or amount of insured’s interest

EXCEPTION: In answer to the inquiries of the insurer.

Section 31. Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.

TEST OF MATERIALITY
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 contract.

TAKE NOTE: No information possessed by one party can be material, in the sense of requiring
disclosure, unless it is possible that it may influence the other in the making of the contract.

WHEN CONCEALMENT REGARDED AS INTENTIONAL

Intention being a state of mind, can be determined only by the external acts or failure to act
from which inferences as to subjective belief may be reasonably drawn.
The insured cannot be guilty of concealment where the fact concealed is not material.

TIME WHEN INFORMATION ACQUIRED

The concealment must take place at the time the contract is entered into in order that the policy
may be avoided. The duty of disclosure ends with the completion and effectivity of the contract.

A. AFTER CONTRACT HAS BEEN EFFECTIVE - If the contract is already complete and
binding before the information is acquired – there is no duty on the insured to disclose the
same, even though the policy is yet to issue.
B. AFTER CONTRACT BECOMES EFFECTIVE - If the contract is to be effective only upon the
issuance of the policy – an applicant is under the duty to disclose material facts occurring or
coming to his knowledge between the date of submitting his application and the date the
policy is delivered.
Section 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.

MATTERS EACH PARTY BOUND TO KNOW

1. General causes open to inquiry equally with that of the other (i.e. that a nation is at war, or
the laws and political conditions in other countries)
2. Those which affect the political or material perils contemplated
3. All general usages of trade (i.e. rules of navigation, kinds of seasons, and all risks connected
with navigation)
Section 33. The right to information of material facts may be waived, either by the terms of
insurance or by neglect to make inquiry as to such facts, where they are distinctly implied in other
facts of which information is communicated.

Right to information may be waived

A. Express – by the terms of the insurance contract
B. Implied – by neglect to make inquiry as to such facts

TAKE NOTE: If the applicant has answered the questions asked in the application, he is justified in
assuming that no further information is desired. A waiver is a type of estoppel.

Example: In an answer to a question, the insured communicated to the insurer that he had once
stayed in a hospital. The insurer did not inquire as to the cause of the confinement. Here, there is
implied waiver on the part of the insurer of its rights to be informed of the kind of sickness which
caused insured’s confinement in the hospital.
INSURANCE LAW CASES
1. A.G. Factor v. Phil. American Life Insurance
Facts: Insured died of stage 3 cancer of the cervix. Insurer denied the claim of death benefits on the ground that
insured concealed the fact that he had cancer in her application. However, it appears that the insured faithfully
answered the questions in the application, even indicating the addresses and names of the persons, laboratories and
hospitals when and where she had consultations.

Issue: Was the insured guilty of concealment of fact material to the insurance contract?

Ruling: No. The insurer had every means to ascertain the truth of the matter alleged in the application. Insurer’s
failure to make inquiry constituted a waiver of its right to information of the facts.

2. Ng Zee v. Asian Crusader Life Assurance Corp

Facts: Insured stated that he was operated on for a tumor of the stomach associated with ulcer. It turned out
however that his aliment was diagnosed as peptic ulcer where a portion of his stomach was removed.

Issue: Was the insurer deceived into entering the contract or accepting the risk at the rate of premium agreed
upon?

Ruling: No. In the absence of evidence that the insured had sufficient medical knowledge as to enable him to
distinguish between peptic ulcer and a tumor, his statement that said tumor was associated with peptic ulcer of
the stomach should be construed as an expression in good faith of his belief as to the nature of his ailment and
operation.
While the information was imperfect, the same was nevertheless sufficient to have induced the insurer to make
further inquiries about the ailment and operation of the insured. Insurer’s failure to make further inquiry
therefore waives the imperfection of the answer.
Section 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 51.

DISCLOSURE OF NATURE & EXTENT OF INTEREST OF INSURED

General Rule: There is no need to disclose the interest in the property insured.
Exceptions:
1. In answer to an inquiry
2. If the person applying for the policy is not the absolute owner thereof (Section 51)

Example:
A fire insurance policy was issued to Feds. He was described as the owner of the property, but in
fact, he was only given the privilege of occupying the property, rent-free for life by the terms of
his father’s will.

Is the policy valid? No. Feds is guilty of misrepresentation. He should have disclosed the nature
of his interest in the property inasmuch as he is not the absolute owner thereof.
Section 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.

Disclosure of judgment upon the matters in questions

The duty to disclose is confined to facts. Hence, there is no duty to disclose mere opinion,
speculation, intention or expectation.

TAKE NOTE: This is true even if the insured is asked.

Example:
If the insurer asks “how long do you think you will live?”, the insured need not answer the question.
The fact that he committed error in answering such a question calling for an expression of opinion
does not constitute fraud in law.
Section 36. A representation may be oral or written.

Representation
Statement made by the insured at the time of, or prior to the issuance of the policy relative to
the risk to be insured, as to an existing or past fact or state of facts, or concerning a future
happening – to give information to the insurer and otherwise induce him to enter into the
insurance contract.

Misrepresentation
A statement:
1. As a fact of something which is untrue
2. Which the insured stated with knowledge that it is untrue and with an intent to deceive or
which he states positively as true without knowing it to be true and which he has tendency
to mislead
3. Where such fact in either case is material to the risk

TAKE NOTE: Misrepresentation may be viewed as the active form of concealment. The
misrepresentation has the effect of rendering the contract voidable at the option of the insurer, even
though innocently made and without wrongful intent.
FORMS AND NATURE OF REPRESENTATION

Information given concerning risk

The person applying for insurance must give the insurer all information concerning the risk as will be
of use to the latter in estimating the character and in determining whether or not to assume it.
The information may be given:
1. Orally
2. Written in papers not connected with the contract (i.e. circulars, prospectuses, examiner’s
report)
3. In the policy itself

Forms the basis of contract

The information, however given, forms the basis of the contract. It describes, marks out and defines
the risk assumed. Here arises the reasonable rule that the untruth of any material representation
relied on by the insurer will avoid the contract, wholly irrespective of the intent, whether innocent or
fraudulent.

Intended as collateral inducements

Representations are made to influence the insurer to accept the risk. Thus, it may be communicated
in any manner whatsoever that is intelligible.
Section 38. The language of a representation is to be interpreted by the same rules as the language
of contracts in general.

Construction of representations
Representations are construed liberally in favor of the insured, and are required to be only
substantially true.

TAKE NOTE: Warranties, in contrast, must be literally true, otherwise the contract will fail.

Examples:
1. Questions as to the use of liquor – will be construed as referring to habitual use and not
occasional use.
2. Questions as to illness or disease – refer to serious ailments and not to minor indispositions
Section 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.

KINDS OF REPRESENTATION
A representation must be made at the time of issuing the policy or before and may be:
1. Oral or written
2. Affirmative or promissory

Affirmative representation – Any allegation as to the existence or non-existence of a fact when

the contract begins.
Example: A statement of the insured that the house to be insured is used only for residential
purposes.

Promissory representation – Any promise to be fulfilled after the contract has come into existence
or any statement concerning what is to happen during the existence of the insurance.
NATURE OF PROMISSORY REPRESENTATION
The term “promissory representation” is used in two senses:
1. It is used to indicate a parol or oral promise made in connection with the insurance but not
incorporated in the policy.
2. An undertaking by the insured, indicated in the policy, but not specifically made a warranty. It is
however in such a case, merely an executory term of the contract and not properly a
representation.

Important: A promissory representation is substantially a condition or a warranty.

EFFECT ON POLICY OF EXPRESSIONS OF OPINION OR EXPECTATION

Good faith or bad faith of the insured
A representation of the expectation, intention, belief, or opinion of the insured, although false, will
not avoid a policy of insurance if there is no actual fraud in inducing the acceptance of the risk.
Liability of the insurer
The good faith of the insured furnishes the criterion of truth. Thus, to avoid liability, the insurer
must prove both (1) materiality of the insured’s opinion and (3) the latter’s intent to deceive.

Important: If the representation is one of fact, all the insurer need to prove is its falsity and
materiality as defined in Sections 44, 45, 46. The intent to deceive is presumed.
When representation deemed a mere expression of opinion
An oral representation as to a future event or condition, over which the insured has no control,
with reference to property or life insured, will be deemed a mere expression of opinion which will
avoid a contract only when made in bad faith.

Example: Insured made an oral promise that the building shall be occupied. The failure to fulfill the
promise if made in good faith, will not avoid the policy.
Section 40. A representation cannot qualify an express provision in a contract of insurance , but it
may qualify an implied warranty.

Effect of representation on express provisions of policy

A representation cannot qualify an express provision or an express warranty in a contract of
insurance. This is because a representation is not part of the contract but only a collateral
inducement to it.

Important: A representation however, may qualify an implied warranty.

Examples:
1. If the policy expressly provides that the house insured is used as a warehouse, any
representation made by the insured prior to the issuance of the policy that the house was used
only as a resident – is not a defense in the action for recovery of the amount of insurance.

2. If the insured makes a representation that the vessel insured was deficient for the voyage
because it was not duly manned, such representation may qualify the implied warranty that the
vessel is seaworthy.
Section 41. A representation may be altered or withdrawn before the insurance is
effected, but not afterwards.
Time to which representation refers
Representations refer only to the time of making the contract. Representations found to be
untrue may be withdrawn prior to the completion of the contract but not afterwards.
Rules:
A. There is no false representation, if it is true at the time the contract takes effect although false
at the time it was made and vice versa.

Example: If the insured represented that his vessel was in Tokyo when it fact it was in
Hongkong, but at the taking into effect of the contract, it was already in Tokyo – there is no
misrepresentation.

B. There is false representation if it is true at the time it was made but false at the time the
contract takes effect.

Example: Assuming the representation that the vessel was in Tokyo to be true but on the
date of the execution of the contract the vessel was no longer in Tokyo but in Hongkong and
is shipwrecked there, the insurer is not liable under the policy on the ground of false
representation.
TAKE NOTE: In other words, a representation is a continuing representation until the contract takes
effect.
Section 43. When a person insured has no personal knowledge of a fact, he may nevertheless
repeat information which he has upon the subject, and which he believes to be true, with the
explanation that he does so on the information of others; or he may submit the information, in its
whole extent, to the insurer; and in neither case is he responsible for its truth, unless it proceeds
from an agent of the insured, whose duty it is to give the information.
Effect where information obtained from third persons
The insured is given discretion to communicate to the insurer what he knows of a matter of
which he has no personal knowledge. If the representation turns out to be false, he is not
responsible therefore, provided he gives explanation that he does so on the information of
others.

Example: If the insured has no personal knowledge of the cause of the death of his parents
because they died when the insured was still an infant, he may report information obtained from
friends and relatives, expressly stating that he does not possess knowledge personally but
through others. In this case, the insured is not responsible for the truth of the information.

Effect where information obtained from agent of insured or insurer

A. Agent of the insured – if it was possible for the agent under such circumstances in the exercise
of due diligence to have made such communication before the making of the contract, the
insured will be liable for the truth.

B. Agent of the insurer – the same principle applies to the insurer though in the nature of things,
the question does not occur so frequently.
Section 44. A representation is to be deemed false when the facts fail to correspond with its
assertions or stipulations.

When representation deemed false

In order that a policy shall be avoided, a representation relied upon must be false in a substantial
and material respect.

Important: Unlike warranties, representations are not required to be literally true. They need only
be substantially true.

The rule does not apply in marine insurance

In marine insurance, substantial truth of a representation is not sufficient. The insured is required
to state the exact and whole truth in relation to all matters that he represents, or upon inquiry
discloses or assumes to disclose.

TAKE NOTE: A statement that the applicant is in good health is held not to mean that he is in perfect
health, but that he is not aware of any disease of such a serious nature as to impair his health
permanently. That he is temporarily ill because of some passing malady does not render his
representation substantially untrue
Construction of representation as affirmative.
A representation written in the policy even in such form as to admit of its being construed as an
executory agreement or promissory representation will rather be construed, when possible, as an
affirmative representation of a present fact in order to save the policy from avoidance.

Example: The insured states that no smoking is allowed on the premises. The truth of the
representation at the time the contract takes effect is sufficient to validate the insurance which
will not be affected by a subsequent change in the practice as to smoking in the premises.