-INSURANCE-

What can be insured?

1. Life or health
2. Property
3. Loss or damage in marine insurance
4. Casualty or liability to third party
5. Non-performance by the principal debtor of his obligation to the creditor

What may be insured against?

Any contingent or unknown event, whether past or future, which may damnify a person
having an insurable interest, or create a liability against him, may be insured against,
subject to the relevant provisions of the Insurance Code.

Life

Upon whose life or health does a person have insurable interest in?

Every person has an insurable interest in the life and health:

“(a) Of himself, of his spouse, and of his children;

“(b) Of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
“(c) Of any person under a legal obligation to him for the payment of money, or
respecting property or services, of which death or illness might delay or prevent the
performance; and “(d) Of any person upon whose life any estate or interest vested in him
depends.

If a person procures insurance on his own life, who may be his beneficiary?

A person can take insurance on his own life and designate anyone as beneficiary except
those disqualified to receive donation under Article 739 of the Civil Code. The beneficiary
in this case can be anyone, such as a distant relative or a friend, who need not have any
insurable interest in the life of the insured.

Who are the persons specified in Article 739 and as such, cannot be designated
beneficiary of the insured?

The persons specified in Article 739 of the Civil Code are:

a. persons in illicit relations –– adultery or concubinage (no need for conviction);20 b.
persons found guilty of adultery or concubinage;
c. public officer or his wife, descendants, or ascendants.
If any person, other than those disqualified to receive donation under Article 739
of the Civil Code, is designated beneficiary can the lawful spouse and legitimate
children of the insured complain of denial of their legitime?

The lawful spouse and legitimate children cannot complain of denial of their legitime
because the proceeds of the life insurance policy do not form part of the estate of the
insured. Neither can they claim the insurance proceeds because they are not privy to the
contract.
Moreover, under Section 53 of the Insurance Code, the insurance proceeds shall be
applied exclusively to the proper interest of the person in whose name or for whose
benefit it is made unless otherwise specified in the policy.

Heirs of Loreto Maramag, his legal wife and his legitimate children filed a case for
revocation and/or reduction of insurance proceeds alleging that Eva de Guzman
Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the latter,
thus, she is disqualified to receive any proceeds from his insurance policies and
that illegitimate children of Loreto were entitled only to one-half of the legitime
of the legitimate children.

Who are entitled to the proceeds of the insurance policy?

The illegitimate children, designated as beneficiaries, are entitled to the insurance

proceeds, to the exclusion of the legitimate children. Section 53 of the Insurance Code
states that the insurance proceeds shall be applied exclusively to the proper interest of
the person in whose name or for whose benefit it is made unless otherwise specified in
the policy. Pursuant thereto, it is obvious that the only persons entitled to claim the
insurance proceeds are either the insured, if still alive; or the beneficiary, if the insured is
already deceased, upon the maturation of the policy.

The legitimate heirs of Loreto who were not designated as beneficiaries in the life
insurance policy are considered third parties to the insurance contract, and thus not
entitled to the proceeds thereof. The insurers have no legal obligation to turn over the
proceeds to them. The revocation of the common law spouse of Loreto as beneficiary is of
no moment considering that the designation of the illegitimate children as beneficiaries
remains valid. Because no legal proscription exists in naming as beneficiaries the children
of illicit relationships by the insured, the shares of Eva in the insurance proceeds, whether
forfeited by the court in view of the prohibition on donations under Article 739 of the
Civil Code or by the insurers themselves for reasons based on the insurance contracts,
must be awarded to the said illegitimate children. Heirs of Loreto Maramag v. Eva
Verna De Guzman Maramag, et al., G.R. No. 181132, June 5, 2009; 1998 and 2019 Bar
exams.

The ruling in Insular Life Assn. Co., Ltd. v. Ebrado that the proceeds should be paid to the
legal spouse in case of a common law spouse is designated beneficiary is not entirely
correct. The proceeds should be payable to the estate which includes not only the spouse
but the children as well.

What are the effects of the revocable designation of the beneficiary?

The insured may change the beneficiary during his lifetime, add a beneficiary or exclude a
beneficiary in case of joint designation of beneficiaries.

The same rule applies in case the policy is silent on the nature of the designation, for in
such case, the designation is deemed to be revocable.

To whom will the proceeds of the life insurance policy be payable?

The proceeds of the life insurance policy are payable as follows:

1. In case a beneficiary is unlawfully designated, the proceeds shall payable to the

estate of the insured (not only to the lawful spouse of the insured although she has
a share in the estate of the insured). It is because the policy remains valid. Only
the designation is void.
2. In case of joint designation of beneficiaries, the share of the unlawfully designated
beneficiary shall form additional part of the share of the lawfully designated
beneficiary. Thus, the share of the common law spouse shall be forfeited in favor of
the designated illegitimate children.
3. In case of joint designation of lawfully designated beneficiaries, proceeds shall be
divided based on terms of policy. If the policy is silent, the proceeds shall be
divided equally between or among the beneficiaries.
4. In case a beneficiary is lawfully designated and the insured dies ahead of the
beneficiary, the proceeds are payable to the beneficiary unless he is the principal,
accessory or accomplice in willfully bringing about the death of the insured.
5. In such a case, interest of the beneficiary shall be forfeited and the share forfeited
shall pass on to the other beneficiaries, unless otherwise disqualified. In the
absence of other beneficiaries, the proceeds shall be paid in accordance with the
policy contract. If the policy contract is silent, the proceeds shall be paid to the
estate of the insured.33 Note that the insurer is still liable.
6. In case the beneficiary predeceases the insured, make a distinction between
irrevocable and revocable beneficiary. If irrevocable, the proceeds shall inure to the
benefit of the legal representatives of the beneficiary. If revocable, the proceeds
shall inure to the estate of the insured. If the is silent as to whether designation is
irrevocable or revocable, the proceeds shall inure to the estate of the insured
because the designation is revocable unless otherwise specified in the policy.

Property

What does insurable interest in property consist of?

Every interest in property, whether real or personal, or any relation thereto, or liability in
respect thereof, of such nature that a contemplated peril might directly damnify the
insured, is an insurable interest.

An insurable interest in property may consist in:

“(a) An existing interest;

“(b) An inchoate interest founded on an existing interest; or
“(c) An expectancy, coupled with an existing interest in that out of which the expectancy
arises.

A mere contingent or expectant interest in anything, not founded on an actual right to

the thing, nor upon any valid contract for it, is not insurable.

The measure of an insurable interest in property is the extent to which the insured might
be damnified by loss or injury thereof.

Give examples of existing interest.

1. A carrier or depository of any kind has an insurable interest in a thing held by him
as such, to the extent of his liability but not to exceed the value thereof.
2. Both the mortgagor and mortgagee may insure the mortgaged property against
fire. The mortgagor may insure it up to the extent of the value while the mortgagee
up to the extent of the mortgage debt.
3. A depositor may insure his deposits in excess of the PDIC insurance coverage.

Give examples of inchoate interest founded on existing interest.

1. A stockholder may insure corporate property to the extent of and in proportion to

the value of his shares in the corporation. A stockholder has inchoate right to the
corporate assets which will ripen into full ownership upon dissolution and
liquidation of the corporation.
2. A property under contract to sell. The buyer may insure the property to the extent
of the amount of payment he has made or the entire value of the property
depending on how the stipulation in the agreement will damnify him in case of
loss of such property. The seller may also insure the property to the extent of the
unpaid purchase price or even the full value if there is stipulation that he is liable
to return the payment in case of non-delivery. 2015, 1991 Bar.

c. The judgment creditor, after levy of the judgment debtor’s property, may insure it
because the debtor may not exercise his right of redemption. He has inchoate interest
because he may acquire ownership of the levied property in case of failure of the debtor
to redeem. The judgment creditor and the judgment debtor both have insurable interest
on the property which can be separately covered by fire insurance. In case of loss before
expiration of the redemption period, the owner and the judgment creditor may recover
on their separate insurance. If the loss occurs after expiration of the redemption period,
only the judgment creditor may claim on the insurance.

d. A general creditor, however, has no insurable interest on the debtor’s property. This is
because prior to the levy, the general creditor’s interest on the debtor’s property is a mere
contingent or expectant interest not founded on an actual right to the thing, nor upon
any valid contract for it.

Give examples of expectancy coupled with existing interest out of which the
expectancy arises.

1. Growing crops.
2. Expected freightage of the common carrier.
3. Profits of a partnership for a partner.

When should insurable interest exist in property and in life and health?

An interest in property insured must exist when the insurance takes effect, and when the
loss occurs, but need not exist in the meantime; and interest in the life or health of a
person insured must exist when the insurance takes effect, but need not exist thereafter
or when the loss occurs.

Distinguish insurable interest in property insurance from insurable interest in life

insurance.

1. In property insurance, the actual value of the interest therein is the limit of the
insurance that can validly be placed thereon. In life insurance, there is no limit to
the amount of insurance that may be taken upon life except in case of a creditor
securing the life of the debtor in which case the insurance should be limited to the
amount of the debt.
2. In property insurance, an interest insured must exist when the insurance takes
effect and when the loss occurs but need not exist in the meantime. In life
insurance, it is enough that insurable interest exists at the time when the contract
is made but it need not exist at the time of loss.

c. The beneficiary in property insurance must have insurable interest over the property
insured and such insurable interest must be covered by the insurance policy. In life
insurance, if the insured procured insurance on his own life, he can designate anyone as
beneficiary (except those disqualified to receive donation) even though the latter has no
insurable interest in the life of the insured. Bar 2002
Illustrative bar exam questions

In a civil suit, the Court ordered Benjie to pay Nat P5,000,000.00. To execute the
judgment, the sheriff levied upon Benjie’s registered property (a parcel of land
and the building thereon), and sold the same at public auction to Nat, the highest
bidder. The latter, on April 18, 2019 registered with the Register of Deeds the
certificate of sale issued to him by the sheriff. Meanwhile, on January 27, 2020,
Benjie insured with Garapal Insurance for P5,000,000.00 the same building that
was sold at public auction to Nat. Benjie failed to redeem the property by April 19,
2020.

On May 2, 2020, a fire razed the building to the ground. Garapal Insurance refused
to make good its obligation to Benjie under the insurance contract.

a. Is Garapal Insurance legally justified in refusing payment to Benjie? b. Is Nat

entitled to collect on the insurance policy?

Answer:

a. Yes. At the time of the loss, Benjie was no longer the owner of the property insured as
he failed to redeem the property. The law requires in property insurance that a person
can recover the proceeds of the policy if he has insurable interest at the time of the
issuance of the policy and also at the time when the loss occurs. When the fire occurred,
Benjie no longer had insurable interest in the property insured.

b. No. While at the time of the loss he has insurable interest in the building, as he was the
owner thereof, Nat did not have any interest in the policy. There was no automatic
transfer clause in the policy that would give him such interest in the policy.

On January 4, 2019, Mr. P joined Alpha Corporation (ALPHA) as President of the

company. ALPHA took out a life insurance policy on the life of Mr. P with Mutual
Insurance Company, designating ALPHA as the beneficiary. ALPHA also carried
fire insurance with Beta Insurance Co. on a house owned by it, but temporarily
occupied by Mr. P again with ALPHA as beneficiary.

On September 1, 2019, Mr. P resigned from ALPHA and purchased the company
house he had been occupying. A few days later, a fire occurred resulting in the
death of Mr. P and the destruction of the house.

What are the rights of ALPHA (a) against Mutual Life Insurance Company on the
life insurance policy?

ALPHA can recover against Mutual Life Insurance Co. in the life insurance policy as its
insurable interest in the life of the person insured, Mr. P, existed when the insurance took
effect. In life insurance, insurable interest need not exist thereafter or when the loss
occurred.

Alpha, however, cannot recover on the fire insurance because at the time of the loss, it
had no more insurable interest having sold the property to Mr. P. In property insurance,
it is not enough that the insured must have insurable interest at the time of the issuance
of the policy but also at the time of loss.

“A” owns a house valued at P5,000,000.00 which he had insured against fire for
P7,500,000.00. He obtained a loan from “B” in the amount of P3,500,000.00, and to
secure payment thereof, he executed a deed of mortgage on the house, but
without assigning the insurance policy to the latter. For “A’s” failure to pay the
loan upon maturity, “B” initiated foreclosure proceedings and in the ensuing
public sale, the house was sold by the sheriff to “B” as highest bidder. Immediately
upon issuance of the sheriff’s certificate of sale in his favor, “B” insured the house
against fire for P3,500,000.00 with another insurance company. In order to redeem
the house, “A” borrowed P3,500,000.00 from “C” and, as security device, he
assigned the insurance policy of P7,500,000.00 to “C”. However, before “A” could
pay “B” his obligation, the house was accidentally and totally burned.

Do “A”, “B”, and “C” have any insurance interest in the house? May “A”, “B”, and “C”
recover under the policies? If so, how much?

As to A: He has insurable interest in his house, an existing interest, but only for
P5,000,000.00, the value of the said house. But, when he assigned it to C, said A had no
more interest in his insurance policy, and A cannot anymore recover on said insurance
policy.

As to B: He has insurable interest on A’s house, having an interest founded upon an

existing interest, for P3,500,000.00, the amount of mortgage debt.

As to C: He has no insurable interest on A’s house when the insurance took effect and his
interest is a mere contingent or expectant interest not founded on an actual right or valid
contract to A’s house. Hence, C cannot recover. 1982 modified BAR exam question.

A businessman in the grocery business obtained from First Insurance an

insurance policy for P5M to fully cover his stocks-in-trade from the risk of fire.

Three months later, a fire of accidental origin broke out and completely destroyed
the grocery including his stocks-in-trade. This prompted the businessman to file
with First Insurance a claim for P5M representing the full value of his goods.

First Insurance denied the claim because it discovered that at the time of the loss,
the stock-in-trade were mortgaged to a creditor who likewise obtained from
Second Insurance Company for insurance coverage for the stocks at their full
value of P5M.

a. May the businessman and the creditor obtain separate insurance coverage over
the same stocksin-trade? Explain.

b. Suppose you are the Judge, how much would you allow the businessman and
the creditor to recover from their respective insurers. Explain.

Answer:

a. Yes. The businessman, as owner, and the creditor, as mortgagee, have separate
insurable interests in the same stocks-in-trade. Each may insure such interest to protect
his own separate interest.

b. As judge, I would allow the businessman to recover his total loss of P5M pesos
representing the full value of his goods which were lost through fire. As to the creditor, I
would allow him to recover the amount to the extent of or equivalent to the value of the
credit he extended to the businessman for the stocks-in-trade which were mortgaged by
the businesssman.

In marine insurance, what peril may be insured against?

As a rule, only perils of the sea may be insured against. To recover under a marine
insurance policy, the proximate cause of the loss must be perils of the sea. The insurer is
not liable if the loss is due to ordinary, natural and inevitable action of the sea, ordinary
wear and tear and unseaworthiness. Loss due to unseaworthiness is tantamount to perils
of the ship.

However, if the parties agreed on an all risk policy, all losses connected with the voyage
or transportation may be covered unless expressly excepted.

Enumerate the perils covered under a fire insurance.

Fire insurance is insurance against loss arising from fire, lightning, windstorm, tornados,
earthquakes and other allied risks, when such risks are covered by extension to fire
insurance policies or under separate policies.

While conceptually fire insurance includes allied risks as enumerated above, the insured
may recover only for the risk/s insured against, as specified in the policy.

What are the different kinds of insurance policy?

A policy is either open, valued or running.

An open policy is one in which the value of the thing insured is not agreed upon, and the
amount of the insurance merely represents the insurer’s maximum liability. The value of
such thing insured shall be ascertained at the time of the loss.

A valued policy is one which expresses on its face an agreement that the thing insured
shall be valued at a specific sum.

A running policy is one which contemplates successive insurances, and which provides
that the object of the policy may be from time to time defined, especially as to the
subjects of insurance, by additional statements or indorsements.

1. Suppose that Fortune owns a house valued at P600,000.00 and insured the
same against fire with three (3) insurance companies as follows:
X ------------------- P400,000.00
Y ------------------- P200,000.00

Z ------------------- P600,000.00

In the absence of any stipulation in the policies from which insurance

company or companies may Fortune recover in case fire should destroy his
house completely?

2. If each of the fire insurance policies obtained by Fortune in problem (a) is a

valued policy and the value of his house was fixed in each of the policies at
P1M, how much would Fortune recover from X if he has already obtained
full payment on the insurance policies issued by Y and Z?
3. If each of the policies obtained by Fortune in problem (a) above is an open
policy and it was immediately determined after the fire that the value of
Fortune’s house was P2.4M, how much may he collect from X, Y, and Z?

4. In problem (a), what is the extent of the liability of the insurance

companies among themselves?
5. Supposing in problem (a) above, 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 (2) insurance companies?

Explain your answer.

A. Fortune may recover from the insurers in such order as he may select up to their
concurrent liability.
B. Assuming that the real value of the property is P1M, Fortune may recover only the
balance of P200,000.00 from X Insurance Company since the insured may only recover up
to the extent of his loss. Assuming that the real value is P600,000.00, having obtained full
payment on the insurance policies issued by Y and Z, Fortune may no longer recover from
X Insurance Company.

C. In an open policy, the insured may recover his total loss up to the amount of the
insurance coverage. Thus, the extent of recovery would be P400,000.00 from X;
P200,000.00 from Y; and P600,000.00 from Z.

D. In the problem (a), the insurance companies among themselves would be liable, viz.: X
— 4/12 of P600,000.00 = P200,000.00

Y— 2/12 of P600,000.00 = P100,000.00 Z— 6/12 of P600,000.00 = P300,000.00

E. No, he can only be indemnified for his loss, not profit thereby; hence, he must return
P200,000.00 of the P800,000.00 he was able to collect. Bar 1990

What is casualty insurance?

Casualty insurance is insurance covering loss or liability arising from accident or mishap,
excluding certain types of loss which by law or custom are considered as falling
exclusively within the scope of other types of insurance such as fire or marine. It includes,
but is not limited to, employer’s liability insurance, motor vehicle liability insurance, plate
glass insurance, burglary and theft insurance, personal accident and health insurance as
written by non-life insurance companies, and other substantially similar kinds of
insurance.

Lope Maglana met an accident that resulted in his death while driving his
motorcycle on his way to workstation. He was bumped by a PUJ jeep which was
driven by Pepito Into and was operated and owned by defendant Destrajo, when
he overtook another passenger jeep that was going towards the city. Thereafter,
the heirs of the deceased filed an action against Destrajo and the Afisco Insurance
Corporation (AFISCO) for damages and attorney’s fees.

AFISCO was ordered to reimburse Destrajo whatever amounts the latter shall have
paid onlyup to the extent of its insurance coverage, signifying only secondary
liability. The heirs, however, claimed that AFISCO should not merely be held
secondarily liable because the Insurance Code provides that the insurer’s liability
is “direct and primary and/or jointly and severally with the operator of the
vehicle”, although only up to the extent of the insurance coverage.

Is AFISCO solidarily liable with Destrajo?

No, while it is true that where the insurance contract provides for indemnity against
liability to third persons, such third persons can directly sue the insurer, however, the
direct liability of the insurer under indemnity contracts against third party liability does
not mean that the insurer can be held solidarily liable with the insured and/or the other
parties found at fault. The liability of the insurer is based on contract, specifically, the
terms of the insurance policy; that of the insured is based on tort.

When does the right of the insured to recover under the policy accrue?

AFISCO’s liability under Third Party Liability coverage accrues immediately upon
occurrence of injury or event upon which the liability depends and does not depend on
the recovery of judgment by the injured party against the insured. Therefore, the AFISCO
can be sued and held directly liable by the injured party to the extent of coverage but not
solidary with that of Destrajo. As such, the heirs have the option either to claim from
AFISCO and the balance from Destrajo or enforce the entire judgment from Destrajo
subject to reimbursement from AFISCO to the extent of the insurance coverage.
Figuracion Vda. de Maglana, et al. v. Hon. Francisco Consolacion and Afisco
Insurance Corporation, G.R. No. 60506, August 6, 1992.

What is the “no fault indemnity provision” in the Insurance Code?

It provides that any claim for death or injury to a passenger or to a third party should be
paid without the necessity of proving fault or negligence of any kind, subject to the
following rules:

A) The total indemnity in respect of any person shall not be less than Php 15,000; B) The
following proofs of loss, when submitted under oath shall be sufficient

evidence to substantiate the claim

I. Police report of accident; and

II. Death certificate and evidence of medical or hospital disbursement in

respect of which refund is claimed; or

III. Medical report and evidence or hospital disbursement in respect of which

refund is claimed

C. Claims may be made against one motor vehicle only. In the case of an occupant of a
vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding,
mounting or dismounting from. In any other case, claim shall lie against the insurer of
the directly offending vehicle. In all cases, the right of the party paying the claim to
recover against the owner of the vehicle responsible for the accident shall be maintained.
CLAIMS FOR LIFE INSURANCE

What are the common defenses available to the insurer to deny claims for life
insurance?

1. Lack of insurable interest

2. Concealment
3. Misrepresentation
4. Incontestability clause has not set in
5. Non-payment of premium

What is concealment?

The neglect to communicate that which a party knows and ought to communicate is
called a concealment.

What is the effect of concealment?

A concealment, whether intentional or unintentional, entitles the injured party to rescind

a contract of insurance.

The basis of the rule vitiating the contract in cases of concealment is 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. 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 or facts within the assured’s
knowledge or presumed knowledge? Insular Life Assurance Co., Ltd. v. Heirs of
Alvarez, G.R. Nos. 207526 and 210156.

What is the test of materiality?

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.

Should the fact/s concealed be the proximate cause of the loss in order to
constitute concealment?

No, the facts concealed need not be the proximate cause of the loss in order to constitute
concealment. 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. The test is whether the matters concealed would have definitely affected the
insurer’s action on the application of the insured, either by approving it with the
corresponding adjustment for a higher premium or rejecting the same. Sunlife
Assurance Company of Canada v. Court of Appeals, G.R. No. 105135, June 22, 1995.

Cite cases/instances constituting concealment even though the facts concealed

were not the proximate cause of the loss.

1. “A” applied for a non-medical life insurance. The insured did not inform the
insurer that one week prior to his application for insurance, he was examined and
confined at St. Luke’s Hospital where he was diagnosed for lung cancer. The
insured soon thereafter died in a plane crash. Bar 2001.
2. The insured did not disclose that his daughter was a mongoloid child even though
the cause of her death was influenza. Great Pacific Life Assurance Company v.
Court of Appeals, G.R. No. L-31845, April 30, 1979.
3. When the insured answered that he consulted a doctor for cough and flu
complications but the insurer discovered that two weeks prior to his application
for insurance, he was examined and confined at the Lung Center of the
Philippines, where he was diagnosed for renal failure, even though the insured
died in a plane crash. Sunlife Assurance Company of Canada v. Court of
Appeals, G.R. No. 105135, June 22, 1995; Bar 1996.

4. When the insured consulted a doctor and was diagnosed as suffering from “sinus
tachycardia”; then consulted the same doctor again and this time was found to
have “acute bronchitis”, even though the cause of the death was “congestive heart
failure,” “anemia,” and “chronic anemia.” Thelma Vda. de Canilang v. Court of
Appeals and Great Pacific Life Assurance Corporation, G.R. No. 92492, June
17, 1993.
5. When the insured did not disclose in this fire insurance application that his house
had been insured with another insurance company. The fact of the existence of the
other insurance is material because had he answered truthfully, the insurer would
probably have charged him higher premium, or would have made further
inquiries, or would have imposed some other conditions in the policy to protect its
interest. The existence of a large amount of insurance increases the moral hazard
or the temptation to commit arson. Bar 1976
6. When the insured did not mention in his application for life insurance that he had
suffered from viral hepatitis the previous year even though he had fully recovered
from the disease, the medical examination performed by the insurance company’s
physician did not reveal such previous illness, and showed that he was healthy and
was an insurable risk, even though he died of an automobile accident. Bar 1983
Kwong Nam applied for a 20-year endowment insurance on his life with his wife,
Ng Gan Zee as beneficiary. On the same date, Asian Crusader, upon receipt of the
required premium from the insured, approved the application and issued the
corresponding policy. Kwong Nam died of cancer of the liver with metastasis. All
premiums had been paid at the time of his death.

Ng Gan Zee presented a claim for payment of the face value of the policy. Asian
Crusader Life Assurance denied the claim on the ground that the answers given by
the insured to the questions in his application for life insurance were untrue,
claiming Kwong Nam’s misrepresentation when he answered “No” to the question
appearing in the application for life insurance. Also, it was alleged that Kwong
Nam was examined in connection with his application for life insurance, but he
gave the medical examiner false and misleading information as to his ailment and
previous operation by saying that it was associated with ulcer of the stomach.
Asian Crusader contended that he was operated on for peptic ulcer 2 years before
the policy was applied for and that he never disclosed such an operation.

Was there concealment?

No, concealment exists where the assured has knowledge of fact material to the risk, and
honesty, good faith, and fair dealing require that he should communicate it to the
assurer, but he designedly and intentionally withholds the same. In the absence of
evidence that the insured had sufficient medical knowledge as to enable him to
distinguish peptic ulcer and a tumor, his statement that said tumor was associated 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. Ng Gan Zee v. Asian Crusader Life
Assurance Corporation, G.R. No. L-30685, May 30, 1983.

What is representation in the context of insurance laws?

Representation is a statement of fact or condition relating to the risk which induced the
insurer to enter into a contract. Representation is the statement made in compliance with
the duty to disclose.

When is a representation deemed false?

A representation is to be deemed false when the facts fail to correspond with its
assertions or stipulations.

What is the effect of false representation?

If a representation is false in a material point, whether affirmative or promissory, the
injured party is entitled to rescind the contract from the time when the representation
becomes false.

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.

Jose Alvarez applied for and was granted a housing loan by UnionBank. This loan
was secured by a promissory note, a real estate mortgage over the property of
Alvarez and a mortgage redemption insurance taken on the life of Alvarez with
UnionBank as beneficiary. Alvarez was among the mortgagors included in the list
of qualified debtors covered by the Group Mortgage Redemption Insurance that
UnionBank had with Insular Life.

Alvarez died and subsequently, UnionBank filed with Insular Life a death claim
under Alvarez’s name pursuant to the Group Mortgage Redemption Insurance.
Insular Life denied the claim after determining that Alvarez was not eligible for
coverage of Group Mortgage Redemption Insurance as he was supposedly more
than 60 years old at the time of his loan’s approval. With the claim’s denial, the
monthly amortizations of the loan stood unpaid. Subsequently, the lot was
foreclosed and sold at a public auction with UnionBank as the highest bidder. The
Heirs of Alvarez filed a complaint for specific performance to demand against
Insular Life to fulfill its obligation as an insurer under the Group Mortgage
Redemption Insurance, and for nullification of foreclosure against UnionBank.
Was there concealment?

None. Section 26 defines concealment as a neglect to communicate that which a party

knows and ought to communicate. However, Alvarez did not withhold information on or
neglect to state his age. He made an actual declaration and assertion about it. What this
case involves, instead, is an allegedly false representation. If indeed Alvarez misdeclared
his age such that his assertion fails to correspond with his factual age, he made a false
representation, not a concealment. As such, fraudulent intent on the part of the insured
must be established to entitle the insurer to rescind the contract. The Insurance Code
dispenses with proof of fraudulent intent in cases of rescission due to concealment, but
not in cases of rescission due to false representation. When abundance of documentary
evidence can be referenced to demonstrate a design to defraud, presenting singular
document with erroneous entry does not qualify as clear and convincing proof of
fraudulent intent. Insular Life basically relied on the Health Statement form personally
accomplished by Alvarez wherein he wrote that his birth year was 1942. The Court,
however, posited that Alvarez must have accomplished and submitted many other
documents when he applied for the housing loan and executed supporting instruments
like the promissory note, real estate mortgage, and Group Mortgage Redemption
Insurance. A design to defraud would have demanded his consistency. He needed to
maintain appearances across all documents. However, the best that Insular Life could
come up with before the Regional Trial Court and the Court of Appeals was a single
document. The Court of Appeals was straightforward, i.e., the most basic document that
Alvarez accomplished in relation to Insular Life must have been an insurance application
form. Strangely, Insular Life failed to adduce even this document — a piece of evidence
that was not only commonsensical, but also one which has always been in its possession
and disposal. Insular Life Assurance Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526
and 210156, October 3, 2018.

The Supreme Court also ruled that the foreclosure of the mortgage was void. UnionBank
approved Alvarez’s loan and real estate mortgage, and endorsed the mortgage redemption
insurance to Insular Life. Fully aware of considerations that could have disqualified
Alvarez, it nevertheless acted as though nothing was irregular. It itself acted as if, and
therefore represented that, Alvarez was qualified.

Explain the Incontestability Clause.

The incontestability clause in life insurance policy is based on Section 48 of the Insurance
Code: “Whenever a right to rescind a contract of insurance is given to the
insurerby 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 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 rescindable by reason of the fraudulent concealment
or misrepresentation of the insured or his agent.”

It means that after two years from date of issuance of the policy or its last reinstatement,
the insurer must make good on the policy, even though the policy was obtained by fraud,
concealment, or misrepresentation. It basically precludes the insurer from rescinding the
policy on account of concealment or misrepresentation. Sunlife of Canada
(Philippines), Inc. v. Sibya, et al., G.R. No. 211212, June 8, 2016; BAR 2012.

What are the requisites of the incontestability clause?

The requisites are:

a. The insurance is a life insurance payable on the death of the insured.

The clause is therefore not applicable to annuity because the annuitant pays lump sum to
the insurer and gets a certain amount from the insurer every year until the
annuitant/insured dies.
b. The policy is in force for at least 2 years from its date of issue as appearing in the policy
or of its last reinstatement.

The two-year period is not reckoned from date of receipt but from issuance of the policy
or last reinstatement.

What is the rationale of the incontestability clause?

The incontestability clause regulates both the actions of the insurers and prospective
takers of life insurance. It gives insurers enough time to inquire whether the policy was
obtained by fraud, concealment, or misrepresentation; on the other hand, it forewarns
scheming individuals that their attempts at insurance fraud would be timely uncovered
— thus deterring them from venturing into such nefarious enterprise. At the same time,
legitimate policy holders are absolutely protected from unwarranted denial of their claims
or delay in the collection of insurance proceeds occasioned by allegations of fraud,
concealment, or misrepresentation by insurers, claims which may no longer be set up
after the two-year period expires as ordained under the law. . Insular v. Felipe Khu,
G.R. No. 195176, April 18, 2016, citing manila bankers case

ILLUSTRATIVE BAR EXAM QUESTIONS

In January 2016, Mr. H was issued a life insurance policy by XYZ Insurance Co.,
wherein his wife, Mrs. W, was designated as the sole beneficiary. Unbeknownst to
XYZ Insurance Co., however, Mr. H had been previously diagnosed with colon
cancer, the fact of which Mr. H had concealed during the entire time his insurance
policy was being processed. In January 2019, Mr. H unfortunately committed
suicide. Due to her husband’s death, Mrs. W, as beneficiary, filed a claim with XYZ
Insurance Co. to recover the proceeds of the late Mr. H’s life insurance policy.
However, XYZ Insurance Co. resisted the claim, contending that: (1) The policy is
void ab initio because Mr. H fraudulently concealed or misrepresented his
medical condition, i.e., his colon cancer; and (2) As an insurer in a life insurance
policy, it cannot be held liable in case of suicide. Rule each of XYZ Insurance Co.’s
contentions.

The first contention is not tenable. Under the incontestability clause, after a policy of life
insurance made payable upon 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 issuance of the policy or last
reinstatement, the insurer must make good on the policy even though the policy was
obtained through fraud, concealment, or misrepresentation.150 Even if Mr. H had
concealed or misrepresented that he was previously diagnosed with colon cancer, XYZ
can no longer rescind the policy since it had been in force already for three (3) years.

On the second contention, XYZ Insurance is liable despite the suicide of Mr. H. Under the
Insurance Code, the insurer is liable when suicide is committed after the policy has been
in force for a period of two (2) years from the date of issue or its last reinstatement.151 In
this case, Mr. H committed suicide three (3) years after issuance of the policy. Thus, XYZ
should be liable to the beneficiary of Mr. H. BAR 2019; 2013.

On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Ilocos
Bankers Life Insurance Corporation (Ilocos Life) designating Cresencia Aban
(Aban), her niece, as her beneficiary.

On April 10, 1996, Sotero died. Aban filed a claim for the insurance proceeds on
July 9, 1996.

Ilocos Life conducted an investigation into the claim and came out with the
following findings:

1. Sotero did not personally apply for insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability to pay the premium on the
policy.
4. Sotero did not sign the application for insurance.
5. Aban was the one who filed the insurance application and designated
herself as the beneficiary.

For the above reasons and claiming fraud, Ilocos Life denied Aban’s claim on April
16, 1997, but refunded the premium paid on the policy.

a. May Sotero validly designate her niece as beneficiary?

b. May the incontestability period set even in cases of fraud as alleged in this

case?
c. Is Aban entitled to claim the proceeds under the policy?

a. Yes. Sotero may validly designate her niece, Aban, as beneficiary. When the insured
takes insurance on his own life, he can designate anyone as beneficiary except those
disqualified to receive donation under Article 739 of the Civil Code. Aban does not fall
within the disqualification.

b. Yes. The “incontestability clause” is a provision in Insurance Code which provides that
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 rescindable by reason of fraudulent concealment or misrepresentation of the insured
or his agent.
In this case, the policy was issued on August 30, 1993, and the insured died on April 10,
1996. The insurance policy was thus in force for a period of three (3) years, seven (7)
months and 24 days. Considering that the insured died after the two-year period, Ilocos
is, therefore, barred from proving that the policy is void ab initio by reason of the
insured’s fraudulent concealment or misrepresentation.

c. Yes, Aban is entitled to claim the proceeds. After the two-year period lapsed, or when
the insured dies within the period, the insurer must make good on the policy, even
though the policy was obtained by fraud, concealment, or misrepresentation, as in this
case, when the insured did not personally apply for the policy as she was illiterate and
that it was the beneficiary who filled up the insurance application designating herself as
beneficiary. Manila Bankers Life Insurance Corporation v. Aban, G.R. No. 175666;
BAR 2014.

Note that in Manila Bankers Life Insurance Corporation and Sun Life of Canada v. Sibya
cases, it seems that there are two incontestability clauses :

1. Two years had lapsed from the issuance of the policy or last reinstatement.

2. The insured died within two years from issuance of the policy

The second application, however, goes against the rationale of the incontestability
clause.It precludes the insurer from conducting investigation if the insured committed
concealment and/or misrepresentation, particularly if the insured died shortly after
issuance of the policy

If this will be asked in the bar, the proposed answer is that the ruling in Tan v. Court of
Appeals is more doctrinal. The clause can be invoked even after the death of the insured
and not just during his lifetime. The rescission need not be always done during the
lifetime of the insured. The phrase “ during the lifetime “ found in Section 48 of the
Insurance Code simply means that the policy is no longer considered in force when the
insured died. But, the incontestability clause will only set in after two years from issuance
of the policy or last reinstatement. This ruling is also in keeping with the rationale of the
incontestability clause. You have to add, however, that you are not unaware of the SC
decisions in Manila Bankers v. Aban and Sun Life v. Sibya but the ruling in these cases on
whether the incontestability clause has set in upon death of the insured is only an obiter
dictum. In Manila Bank case, 3 years had lapsed from issuance of the policy. In Sun Life
case, the SC ruled that there was no concealment.

What are the defenses not barred by the incontestability clause?

These defenses are not barred by the incontestability clause:

a. Lack of Insurable interest;
b. Premium was not paid;
c. The death was due to excepted risk, (like suicide);
d. The insured employed vicious fraud (as in another person took the physical exams

for the insured);

e. Failure to comply with conditions imposed by the insurer; and
f. Time specified in the contract to make claims is not complied with.

Is the insurer in a life insurance liable in case of suicide by the insured?

The insurer in a life insurance contract shall be liable in case of suicide only when it is
committed after the policy has been in force for a period of two (2) years from the date of
its issue or of its last reinstatement, unless the policy provides a shorter period: Provided,
however, that suicide committed in the state of insanity shall be compensable regardless
of the date of commission.

The insurer, however, is not liable if suicide in an excepted risk.

May a life insurance policy be assigned?

A policy of insurance upon life or health may pass by transfer, will or succession to any
person, whether he has an insurable interest or not, and such person may recover upon it
whatever the insured might have recovered. The assignee need not have insurable
interest in the life of the insured. This is because in life insurance, insurable interest must
exist only at the time of the issuance of the policy. The only exception is to circumvent
the rule on insurable interest as when assignment is made in favor of a person who
cannot be designated beneficiary of the insured.