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INSURANCE DELEON SUMMARY
CONCEALMENT
Section 26
Four primary concerns of the parties to an insurance
contract
In making a contract, so highly aleatory as that of insurance,
the parties have four primary concerns, to wit:
(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 undertaken by the insurer;
(3) Such control of the risk after it is assumed as will enable
the insurer to guard against the increase of the risk because of
change in conditions; and
(4) Determining whether a loss occurred and if so, the amount
of such loss. (Vance, op. ext., pp. 364-365.)
Devices for ascertaining and controlling risk and loss
In order to effect the above ends which at times may prove to
be very difficult, several devices, technically known as
concealment, representations, warranties, conditions, and
exceptions, have been developed by persons engaged in the
insurance business.
(1) The devices of concealment (see Sec. 26.) and
representations
(see Sec. 36.) were originally developed for the purpose of
enabling 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 of its quality.
(2) Warranties (see Sees. 67, 68.) and conditions so far as
they are affirmative, that is, dealing with conditions existing
at the inception of the contract, and exceptions are used for
the purpose of making more definite and certain the general
words used to describe the risk the insurer undertook to bear.
The general description of the risk concerned has two
parts:
First, the designation of the specific property interest to be
covered; and
Secondly, the specification of such of the perils to which that
property interest would be exposed.
For example: The insured may be required to warrant that he
had not been subject to the peril of a major operation, or a
condition in the form of a stipulation may be inserted in the
policy that the policy shall be void should the insured be
guilty of concealment or misrepresentation. Warranties and
conditions involve facts the existence of which shows the risk
to be greater than that intended to be assumed and operates to
1
create in the insurer the power to extinguish, if he so desires,
the legal relations already created.
(3) Exceptions perform a similar function in 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 exception may be of certain
property or of
certain peril within the general coverage. For example: 'This
policy shall not cover accounts, bills, currency, deeds,
evidences of debt, money or securities; nor unless specifically
named hereon in writing, bullion or manuscripts/'
In a fire insurance policy, burning caused by lightning may
be excepted from the risks assumed.
(4) Executory warranties (Sec. 68.) and conditions, that is,
undertakings that certain conditions should or should not exist
in the future, are used to enable the insurer to rescind the
contract in case subsequent events increased the risk to such
an extent that he is no longer willing to bear.
For example: The insured may warrant that a watchman will
be kept upon the premises during the currency of the policy,
or conditions may be inserted to the effect that the policy shall
become void if any repairs are made upon the building, or the
hazard otherwise increased without the written consent of the
insurer.
In a somewhat different way, exceptions are also used for the
purpose of controlling risks. For example: If in any particular
instance the insurer fears the consequences of the vacancy of
the property insured, he may, instead of inserting the
condition that the entire policy shall be void if the property
becomes and
remains vacant or unoccupied for a period of 30 days without
the consent of the insurer, provide that he assumes no liability
for loss while such vacancy or unoccupancy remains.
In this case, the occurrence of the excepted vacancy does not
give the insurer
any power to rescind the contract which remains in full force
and
effect.
(5) The insurer must also protect himself against fraudulent
claims of loss; and this he attempts to do by inserting in the
policy various conditions which take the form of conditions
precedent.
For instance, there are conditions requiring immediate notice
of loss or injury and detailed proofs of loss within a limited
period (see Sees. 88, 89.); and in a great many policies, there
is found a condition requiring that any action thereon shall be
brought within a limited time, (see Sec. 63.)
It is necessary for the insurer to ascertain not only the fact of
loss, but also the amount of any loss that may in fact have
occurred. To secure such protection, the insurer inserts the
various conditions providing for the appointment of
appraisers,
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and for arbitration in case no agreement can be reached as to
the amount of loss,
Concealment defined
Concealment is defined by Section 26 as a neglect to
communicate that which a party knows and ought to
communicate.
Requisites of concealment
Read together with Section 28, there can be no
concealment
unless:
(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 to the other;
(3) such party concealing makes no warranty of the fact
concealed; and
(4) the other party has not the means of ascertaining the
fact concealed.
Where a warranty is made of the fact concealed, the non-
disclosure of such fact is not concealment but constitutes a
violation of warranty. (Title 7.)
Sec. 27. A concealment whether intentional or unintentional
entitles the injured party to rescind a contract of insurance,
(as amended by B.P. Big. 874.)
Effect of concealment
(1) By the insured. — As a rule, failure on the party of the
insured to disclose conditions affecting the risk, of which he
is aware, makes the contract voidable at the insurer's option.
- The reason is that insurance policies are traditionally
contracts uberrimae fidae, that is, contracts of the utmost
good faith.
This doctrine is essential on account of the fact that the full
circumstances of the subject matter of insurance are, as a rule,
known to the insured only, and the insurer, in deciding
whether or not to accept a risk, must rely primarily upon the
information supplied to him by the applicant. It is strictly
interpreted by the courts and is not limited to material facts
which the applicant knows, but extends to those which he
ought to know they being necessary for the insurer to
evaluate the risk, either to charge a higher premium or to
refuse to issue a policy altogether.
Therefore, it is no defense to plead mistake or forgetfulness.
(2) By the insurer. — The contractual duty of disclosure
imposed by utmost good faith is not required of the insured
alone, but is imposed with equal stringency upon the insurer;
in fact, it is more upon the latter, since his dominant
bargaining
position carries with it stricter responsibility.
2
The duty of utmost good faith is breached by concealment or
misrepresentation. (Sees. 44, 45.) Section 27 "entitles" the
injured party to rescind a contract of insurance by reason of
concealment, implying that it is optional on his part whether
or not to exercise his right of rescission.
Proof of fraud in concealment
Under Section 27, the insurer need not prove fraud in order
to rescind a contract on the ground of concealment
(1) Existence of fraud not required. — The duty of
communication is independent of the intention and is violated
by the fact of concealment, even when there is no design to
deceive
In this jurisdiction, the legal effect of a concealment,
whether intentional or unintentional,1 is the same, i.e., it
entitles the insurer to rescind the contract of insurance,
- concealment being defined as "negligence to
communicate that which a party knows and ought to
communicate."
(2) Reason for the rule. — Moreover, if it were necessary
for the insurance company to show actual fraud on the part of
the insured, "then it is plain that it would be impossible for
it 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. 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
But Section 27 must be read in relation to Section 29.
(3) Basis and criterion for provision. —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 insured 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.2 (see Sec. 31.)
The principal question, therefore, must be: "Was the insurer
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?"
EXAMPLE:
In his application for life insurance, D did not reveal the fact
that he was suffering from an ailment.
(1) Whether or not D was aware of the ailment, there is no
concealment (Sec. 26.) where the ailment was not material to
the contract. (Sec. 31.)
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(2) Whether or not D was aware of the ailment, there is
concealment where the ailment was material to the contract:
(a) If D was aware of the ailment but honestly believed that it
was not material, the concealment is not fraudulent or
intentional.
(b) If D was aware of the ailment, there is fraudulent
concealment where the ailment was material to the contract
and D knew or believed that it was material.
Rules as to marine insurance
(1) In the United States. — The rule as stated in Section 27
applies only to (ocean) marine insurance.
The reason for the contrary rule : is that in marine
insurance, "the subject of insurance is generally beyond the
reach, and not open to the inspection of the underwriters,
often in distant ports or upon the high seas x x x and the
underwriter from the very necessities of his undertaking is
obliged to rely upon the assured and has, therefore, the right
to exact a full disclosure of all the facts known to him which
may in any way affect the risk to be assumed."
On the other hand, in fire and other kinds of insurance, the
subject "is, or may be, seen and inspected before the risk is
assumed and its construction, situation and ordinary hazards
as well appreciated by the underwriter as by the other" and,
therefore "no such necessity for reliance exists, and if the
underwriter assumes the risk without taking the trouble to
either examine or inquire, he cannot very well in the absence
of fraud, complain that it turned out greater than he
anticipated."
(2) In the Philippines. — The rule, however, that obtains in
our jurisdiction, applicable to every kind of insurance, is that
fraud is not essential in order that the insured may be
guilty of concealment. Section 26 (now Sec. 27.) of the
former Insurance Act was taken from Section 330 of the
California Insurance Code and it has been held that under this
provision, the presence or absence of an intent to deceive is
immaterial.
Sec. 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 which the
other has not the means of ascertaining, and as to which he
makes no warranty. Matters that must be communicated even
in the absence of inquiry.
This section makes it the duty of each party to a contract of
insurance to communicate in good faith all facts within his
knowledge only when:
(1) they are material to the contract (Sees. 31, 34, 35.);
(2) the other has not the means of ascertaining the said facts
(see Sees. 30, 32, 33.); and
(3) as to which the party with the duty to communicate
makes no warranty, (see Sees. 67-76.)
3
So, an applicant for life insurance suffering from or who had
been treated or hospitalized for some ailment like pneumonia,
diabetes or syphilis or incipient pulmonary tuberculosis or
peptic ulcer or cerebral congestion and Bells Palsy or that his
case had been diagnosed as alcoholism or psychoneurosis
or cardiovascular disease or sinus tachycardia (sinus
initiated; heart rate faster than 100 beats per minute, a
common reaction to heart disease) and acute bronchitis or that
he was hospitalized for two weeks prior to his application for
insurance
- must disclose such facts even if not inquired into
where such facts are material to the risk assumed by
the insurer.
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.
Effect of failure of insurer to verify
The effect of material concealment cannot be avoided by the
allegation that the insurer could have known and discovered
the illness or disease which the insured had concealed.
This argument postulates an obligation of the insurance
company before issuing the policy to verify the statements
made by the insured in his application. But there is no such
obligation.
The insurance company has the right to rely on the
statements of the insured as to material facts such as to his
previous sickness, for he knows the facts, and the matter is
not one of which disclosure is excused by the law.
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, entitles
the insurer to rescind.
When fraudulent intent necessary.
Under this section, the concealment relates to the "falsity of a
warranty." (see Sees. 67-76.) Unlike in ordinary concealment
(Sec. 27.), the non-disclosure under Section 29 must be
intentional and fraudulent in order that the contract may be
rescinded. It is to be noted here that the omission is on the
part of the insured and the party entitled to rescind is the
insurer.
Thus, in every contract of marine insurance, the warranty is
implied that the ship is seaworthy (Sees. 113, 114.), 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 special peril would
entitle the insurer to rescind because the concealment refers
to matters proving or tending to prove the falsity of the
warranty that the ship is seaworthy.
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Sec. 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:
(a) Those which the other knows;
(b) 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;
(c) Those of which the other waives communication;
(d) 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.
Matters made the subject of special inquiries material
As a general proposition: matters made the subject of
inquiry must be deemed material, even though otherwise they
might not be so regarded and the insured is required to make
full and true disclosure to questions asked.
The failure of an apparently complete answer to make full
disclosure will avoid the policy. But an answer incomplete on
its face will not defeat the policy in the absence of bad faith.
EXAMPLE:
If one applying for insurance upon a building against fire is
asked whether the property is encumbered and for what
amount and his answer discloses one mortgage when in fact
there are two, the policy issued thereon is avoided.
But if to the same question he merely answers that the
property is encumbered, without stating the amount of
encumbrances, the issue of the policy without further inquiry,
is a waiver of the omission to state the amount.
When there is no duty to make disclosure
The circumstances of the parties to an insurance contract,
or the conditions under which it is executed may be such as
to render it unnecessary, in the absence of questions requiring
it, for the insured to disclose to the insurer, facts that would
otherwise be material. Thus:
(1) Matters known to, or right to be known by insurer, or of
which he waives disclosure. — The insured cannot be
penalized for failure to disclose matters already known to the
insurer (Sec. 30[a].) for obviously, the insurer cannot say
there is deception; or ought to be known to the insurer or his
agent (ibid., [b]; Sec. 32.) for to hold otherwise would be to
charge the insured with the default of the insurer or his agent;
or of which the insurer waives communication for the insurer
is in estoppel.
(2) Risks excepted from the policy. — The insurer cannot
complain of the insured's failure to disclose facts that concern
only risks excepted from the policy, either expressly or by
warranty, from the liability assumed under the policy.
4
It is important to note, however, that in this case, the
undisclosed fact must not be material for otherwise, the rule
will not apply.
(3) Nature or amount of insured's interest. — Also,
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. (Sec. 34.)
Sec. 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.
Determination of materiality
(1) Test of materiality. — The test is in 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.
- The matter must, of course, be determined
ultimately by the court.
EXAMPLE:
When D insured his house against fire, he did not disclose
the fact that he received two letters threatening to set his
house on fire if he did not pay P50,000.00 to the sender. D's
house was destroyed by an accidental fire. The insurer can
deny liability for the loss.
(2) From the standpoint of the insurer. — A fact is material if
the knowledge of it would have a "probable and reasonable
influence upon the insurer in assessing the risk involved
and in making or omitting further inquiries, and cause
him either to reject the risk or to accept it only at a higher
premium rate or on different terms though that fact may
not even remotely contribute to the contingency upon
which the insurer would become liable, or in any wise
affect the risk
(a) Thus, where the applicant concealed the fact that he
had pneumonia, diabetes or syphillis, the policy is avoided
although the cause of the death (e.g., plane crash) be totally
unconnected with the material fact concealed or
misrepresented.
- 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.
(b) The materiality of the existence of other insurance
contracts against fire upon the same property insured, when
its disclosure is one of the conditions specified in the fire
insurance policy, is not open to doubt.
(c) In non-medical insurance (which does away, with the
usual medical examination before the policy is issued), the
waiver by the insurance company of medical examination
renders more material,
- the information required of the applicant concerning the
previous condition of health and disease suffered,
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INSURANCE DELEON SUMMARY
- for such information necessarily constitutes an important
factor which the insurer takes into consideration in deciding
whether to issue the policy or not.
(d) In a case where the insured, in his application for
insurance, made a negative answer which is false, to the
question of whether he has consulted or been treated for
elevated blood pressure and on the basis of the answer, the
insurer accepted his application as a standard risk where only
the routine medical examination was taken, and subsequently
the insured died of hypertension,
HELD : that the insurer may rescind the contract of insurance
and delay payment on the ground of concealment and/or
misrepresentation.
- The insurer was ordered to refund the premiums
paid by the deceased insured with legal interest from
the time payment was made.
(3) When concealment regarded as intentional — 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 act from which inferences as to his subjective belief
may be reasonably drawn.
The nature of the facts not conveyed to the insurer may be
such that the failure of the insured to communicate must have
been intentional rather than inadvertent.
(a) The concealment by the insured of the fact that he "was
operated on for cancer, involving complete removal of the
right breast and stayed in the hospital for a period of eight
(8) days" is in itself fraudulent, although the insured's doctor
never told her, that the disease for which she was operated on
was cancer, "as there could not have been any mistake about
it, no matter what the ailment."
(b) The withholding by the applicant, father of oneyear- old
insured, of the fact that his daughter was typically a
mongoloid child, of which he was fully aware, as such a
congenital physical defect could never be ensconced nor
disguised, in supplying essential data for the insurance
application form which fact is material to the contract,
constitutes fraudulent concealment.
(c) The concealment was held intentional on the part of the
insured who "could not have been unaware that his heart be
at would at times rise to high and alarming levels and that he
had consulted a doctor twice in the two (2) months before
applying for non-medical insurance. Indeed, the last medical
consultation took place just the day before the insurance
application was filed. In all probability, [the insured] went to
visit his doctor precisely because of the discomfort and
concern brought about by his experiencing sinus
tachycardia."
But in the absence of evidence of the uninsurability of a
person afflicted with chronic cough, concealment thereof is
no ground for annulment of the policy.
5
(4) Where fact concealed not material — The insured cannot
be guilty of concealment where the fact concealed is not
material.
Thus, where the insured underwent an ECG
(electrocardiogram) test and the results showed a normal
condition but he gave a negative answer to the question
whether he had such test, it
PAGE 145
conditions in other countries (Beech vs. Ins. Co., 7 L. ed. 90
[1800].), or the allegiance of particular countries, the sources
of his information being equally open to the insurer who is,
therefore, presumed to know them.
Likewise, the insurer is charged with the knowledge of the
general trade usages and rules of navigation, kind of seasons,
and all the risks connected with navigation.
Sec. 33. The right to information of material facts may be
waived, either by the terms of insurance or by neglect to make
inquiries as to such facts where they are distinctly implied in
other facts of which information is communicated.
Right to information may be waived
The right to information of material facts may be waived
either expressly: by the terms of insurance,
IMPLIEDLY: by neglect to make inquiry as to the facts
already communicated.
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.
In this case, the law presumes that there is implied waiver
on the part of the insurer of its right to be informed of the kind
of sickness which caused insured's confinement in the
hospital.
The Insurer is estopped in the future from using that former
right to its advantage. But there is no waiver where the
failure of the insurer to make further inquiries was due
precisely to concealment on the part of the insured.
ILLUSTRATIVE CASES:
1. Insurer had every means to ascertain truth of matters
alleged in application.
Facts: The cause of death of the insured was certified as
"Cancer of the Cervix, Stage III." The insurer's ground for
denial of claim of death benefits is concealment of the fact
that the insured had knowledge of and been treated for cancer
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INSURANCE DELEON SUMMARY
of the cervix and hypertension, which fact the insured failed
to reveal in her application.
It appears, however, that the insured had faithfully answered
the questions in the application to the best of her knowledge
even indicating the addresses and names of persons,
laboratories and hospitals when and where she had
consultations.
Issue: Was the insured guilty of concealment of fact material
to the insurance contract?
Held: No. The insurer had every means to ascertain the
truth of the matter alleged in the application. The failure of
the insurer to make inquiry constituted a waiver of its right to
information of the facts
2. Insured lacked sufficient medical knowledge as to enable
him to distinguish between "peptic ulcer" and "tumor."
Facts: The alleged false statements given by the insured
are as follows: "Operated on for a Tumor (mayoma) of the
stomach. Claims that tumor has been associated with ulcer of
the stomach. Tumor taken out was hard and of a hen's egg
size.
Operation was two years ago. Now claims he is completely
recovered."
It appears that the insured's ailment was diagnosed as
"peptic ulcer" for which an operation known as "sub-total
gastric resection" was performed; and that the specimen
removed from his body was "a portion of stomach measuring
12 cm. and 19 cm. along the lesser curvature with a diameter
of 15 cm. along the greatest dimension."
Issue: Was the insurer, because of insured's representation,
misled or deceived into entering the contract or in accepting
the risk at the rate of premium agreed upon?
Held: 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 made in good faith of
his belief as to the nature of his ailment and operation.
Indeed, such statement must be presumed to have been
made by him without knowledge of its incorrectness and
without any deliberate intent on his part to mislead the
insurer.
While from the viewpoint of a medical expert, the
information communicated was imperfect, the same was
nevertheless sufficient to have induced the insurer to make
further inquiries about the ailment and operation of the
insured.
Where "upon the face of the application, a question appears
to be not answered at all or to be imperfectly answered and
the insurer issues a policy without any further inquiry, it
waives the imperfection of the answer and renders the
omission to
6
answer more fully immaterial."
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.
Disclosure of nature and extent of interest of insured
Under Section 51(e), it is required that a policy of insurance
must specify "the interest of the insured in property insured,
if he is not the absolute owner thereof/' So, a mortgagee must
disclose his particular interest even if no inquiry is made by
the insurer in relation thereto. Such requirement is made so
that the insurer may determine the extent of the insured's
insurable interest, But there is no need to disclose the interest
in the property insured if it is absolute.
EXAMPLE:
A fire insurance policy was issued to D (insured). He was
described as the owner of the insured residential property. D
was only given the privilege of occupying the house, rent-free
for life, by the terms of his father's will. D represented himself
as the owner.
Is the policy valid?
No. D 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.
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.
Disclosure of judgment upon the matters in question
The duty to disclose is confined to facts.
Hence, there is no duty to disclose mere opinion, speculation,
intention or expectation.
This is true even if the insured is asked.
EXAMPLE:
Suppose the insurer asks the insured the following question:
"How long do you think you will live? "
The insured need not answer the question; and the fact that
he committed error in answering a question calling for an
expression of opinion does not constitute fraud in law.