RESCISSION OF

INSURANCE CONTRACTS
Law 139 Insurance Law

ATTY. GILBERT R. HUFANA

Professor
 Rescission
• Based on the fundamental characteristics of an
insurance contract that it be one of perfect good
faith (uberrimae fides) for both parties
• Grounds for rescission of insurance contracts:
– Concealment (Secs. 26-35)
– Misrepresentation (Secs. 36-48)
– Breach of Warranty (Secs. 67-76)
 Concern of Parties in an
Insurance Contract
• Correct estimation of the risk – enables
the insurer to decide whether he is willing
to assume it & at what rate or premium
• Precise delimitation of the risk – extent
of the contingent duty to pay by the insurer
• Control of the risk – enable insurer to
guard against the risk
• Determine whether a loss occurred
 Concealment
• The neglect to communicate that which a party
knows and ought to communicate (Sec. 26, IC)
• Concealment whether intentional or not entitles
the injured party to rescind the contract of
insurance (Sec. 27, IC)
• Saturnino v. Philippine American Life Ins. Co. 7
SCRA 316 – it was ruled that in order to avoid a
policy it is not necessary to show actual fraud on
the part of the insured
 Concealment
• The reason for Sec. 27 is that concealment
misleads or deceives the insurer into accepting
the risk, or accepting it at the rate of premium
agreed upon.
• Good faith is no defense in concealment.
(Musngi v. West Coast Life Ins. Co. 61 Phil 864)
• The reason for this is that insurance contracts
are contracts uberrimae fidae.
 Facts to be communicated
• Sec. 28, IC: Each party to an insurance contract
must communicate to the other in good faith, all
facts:
a. which are within his knowledge
b. Which are material to the contract
c. Which the other party has not the means of
ascertaining; and
d. As to which the party with the duty to communicate
makes no warranty.

Exceptions: Sec. 30, ICP

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

Note: the period of two years may be shortened

but cannot be extended by stipulation
 Defenses of the Insurer
against Incontestability
• Insured lacks insurable interest
• Cause of death of the insured is an excepted risk
• Premiums have not been paid
• Beneficiary feloniously killed the insured
• Policy is taken out in furtherance of a scheme to
murder the insured
• Insured substitutes another person for the medical
examination
• Action was not brought within the time specified
• Beneficiary failed to furnish proof of death or failure to
comply with any condition imposed by the policy
END OF LECTURE