RepresentationsUnder the Insurance Code of the Philippines

Group 3Nicolette BambaoRonald MadrigalGerard Dimalaluan

Report Outline

• Representation Defined• Concealment vs Representation / Misrepresentation• Requisites of Misrepresentation (False Representation)• Test of Materiality• When is Representation Made (Sec 37 / 41)• Construction (Sec 38)• Affirmative vs. Promissory Representation• Representation as Implied Warranty (Sec 40)• Alteration and Withdrawal of Representation (Sec 41)• Time of Representation (Sec 42)• Information from Third Persons (Sec 43)• Falsity of Representation (Sec 45)• Materiality (Sec 46)• Applicability of Sec 36 to 48 (Sec 47)• Right to Rescind (Sec 48)

What is Representation?

• Section 36. A representation may be oral or written.

• Factual statements made by the insured at the time of, or prior to, the issuance of the policy to give information to the insurer and induce him to enter into the insurance contract.

How Is Representation Different from Concealment and Misrepresentation?

• A concealment is a negative act, meaning it is the failure to do something which is required while representation is positive act as the insuredvolunteers such facts. Concealment usually occurs prior to making of the insurance contract, while a representation may be made at the time of the issuance of the contract.

• Misrepresentation is a statement of something as a fact which is untrue and material to the risk either:– Knowing it to be true in an attempt to deceive– Positively knowing as true with a tendency to deceive

They are considered an active form of concealment (Book of De Leon).

While representation is a collateral statement which must be true for the contract of insurance requires the most fairness

Concealment vs. Misrepresentation

CONCEALMENT MISREPRESENTATION

Insured withholds information of material facts from the insurer

Insured makes erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract.

Materiality is determined by the same rules applied in cases of misrepresentation.

Concealment on the part of the insured has the same effect as a misrepresentation and gives the insurer the right to rescind the contract.

Whether intentional or not intentional, the injured party is entitled to rescind the contract of insurance on ground of concealment or false representation.

Rules on concealment and representation apply likewise to the insurer since the contracts of insurance is said to be one of utmost good faith on part of both parties to the agreement.

Requisites of False Representation (Misrepresentation)

a. The insured stated a fact which is untrue.b. Such fact was stated with knowledge that it is untrue and with intent to deceive

or which he states positively as true without knowing it to be true and which has a tendency to mislead.

c. Such fact in either case is material to the risk.

A misrepresentation by the insured renders the insurance contract voidable at theoption of the insurer, although the policy is not thereby rendered void ab initio.

Example:

If the insurer was made to believe that he was insuring a brick house when in truth and in fact, the house was made of nipa, or when the insurer insured a man of thirty and it turns out that the man who dies was a 130.

Characteristics of Misrepresentation

a. It is not a part of the contract but merely a collateral inducement to it.b. It may be oral or written.c. It is made at the same time of issuing the policy or before but not after.d. It may be altered or withdrawn before the insurance is effected but not

afterwards.e. It always refers to the date the contract goes into effect.

When Representation is Made

Section 37. A representation may be made at the time of, or before,issuance of the policy.

Section 41. A representation may be altered or withdrawn before the insurance is effected, but not afterwards.

Representation only applies to statements “made” by the insured or by his authority as an inducement of the making of the insurance contract

This also includes modification of contract as to its original form (Section 47). Ex. Change of the purpose of the insured building from commercial to residential after incurring losses

Construction

Section 38. The language of a representation is to be interpreted by the same rules as the language of contracts in general.

It is construed according to the fair and obvious import of the words and considered equivalent to an express statement of all the inferences naturally and necessarily arising from it.

How are misrepresentations construed?They are construed liberally in favor of the insured.Arts. 1370-1376 of the New Civil Code and Rule 130 Secs. 10-19 of the Rules of Court are used to interpret representations

Construction

Must the representations be literally true?No. It is sufficient that they be substantially true.

How can a representation be substantially true and not literally true?

De Leon cites two examples:• If one is asked if he drinks, the question will be construed as referring to habitual use. So

if you drink only when there is an occasion, they you can say NO.• If you are asked if you had any illnesses, local disease or injury in any organ, you can still

say NO even if three weeks before you were suffering from LBM because you ate one kaing of avocados.

Kinds of Representation

Section 39. A representation as to the future is to be deemed a promise, unless it appears that it was merely a statement of belief or expectation.

What are the different kinds of representations?

They may either be:Oral or written;Made at the time of the issuance of the policy or before;Affirmative or promissory

Affirmative vs. Promissory Representation

What is an affirmative representation?It is any allegation as to the existence or non-existence of a fact when the contract begins. An example would be when the insured states that the house subject of the insurance is used only for residential purposes.

What is a promissory representation?A promissory representation is 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.

Statement of Belief vs. Promissory Representation

• Statement of Belief – contingent and not intended as a known fact but merely an intention

• Promissory Representation – promise to be performed after the effectivity of the contract

Problems

Mary applied for insurance. When asked if she was HIV-positive, she said that herbody was wholly free from the HIV virus. If it turns out that Mary is wrong, is the insurer free fromliability because of the misrepresentation?

No. The insurer knows that the insured’s opinion may be mistaken after all, no one can be certain about anything. The insurer should have subjected Mary to a battery of tests before entering into a contract.

John applied for a motor vehicle insurance. When asked if he knew how to drive, he said “I’m a very gooddriver.” It turned out, he doesn’t know how to drive and after a few minutes he crashed into the car ofArvin. Is the insurer liable despite John’s misrepresentation?

NO. Allan is guilty of fraudulent misrepresentation of a material fact. He should have disclosed that he doesn’t know how to drive.

Representation as Implied Warranty

Section 40. A representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty.

Representation vs. WarrantyA warranty, being a condition upon which a contract is to take effect is always part of the written policy

and must appear on its face. A representation is only a matter of collateral information or intelligence on the subject of the voyage insured and makes no part of the policy.

Why is it that a representation cannot qualify an express provision in a contract of insurance?

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

Express Warranty Supersedes RepresentationAn express warranty or stipulation, including a fact represented, or inconsistent with it, will control and

supersede the representation since the written agreement, as far as the epxress provisions extend, is conclusive proof of the conditions on which the contract is made.

Representation as Implied Warranty

Example:

If the policy expressly provides that the house insured is used as a warehouse, any representation made by the insured prior to the issuance of the policy to the effect that the house was used only as a residence is NOT a defense in the action for the recovery of the amount of the insurance.

The representation of the insured to the effect that the last time the vessel was drydocked was six months ago would NOT qualify the implied warranty that the vessel is seaworthy.

Alteration and Withdrawal of Representation

Section 41. A representation may be altered or withdrawn before the insurance is effected, but not afterwards.

What is the reason for this provision?

As representations induce the insurer in assuming the risk insured against and in issuing the insurance policy, it is but logical that representations may not be altered or withdrawn after the insurance is affected.

Time Representation Refers To

Section 42. A representation must be presumed to refer to the date on which the contract goes into effect.

To what time does representation refer?

Representations refer only to the time of making the contract. We earlier said that promissory statements of conditions that exist subsequent to the completion of the contract are conditions or warranties and not representations (See annotations under Sec. 39). But now, we refer ONLY to conditions represented as ALREADY EXISTING. These conditions must exist during the making of the contract.

When is there false representation?

There is NO false representation if the representation was true at the time the contract takes effect, although it became false at the time it was made.

There is false representation if although the representation was true at the time it was made, it subsequently became false at the time the contract took effect.

Problems

A represented that his yacht was in Taiwan when in fact it was in HK. But at the taking effect of thecontract, the yacht had already reached the port in Taiwan. Was there false representation?

NO. Although the representation was false at the time it was made, it was already true at the time when the contract took effect.

A represented that his yacht was in Taiwan and in fact it was in Taiwan. But at the taking effect of thecontract the yacht had already sailed to HK and then it was shipwrecked. Is Insurer liable?

NO. Here there is false representation. This time, the representation although true when made, subsequently became false at the time the contract took effect.

At the time he applied for a life insurance policy on Aug 10, 2004, A had never suffered from any of thediseases enumerated in the policy by the insurer. ON Aug. 17, 2004, A became afflicted with anenumerated disease in the policy. Fortunately, he completely recovered. When the policy was deliveredand the first premium paid on Aug. 30, 2004, A did not disclose his having been sick. Is there falserepresentation?

YES.

Information from Third Persons

Section 43. When a person insured has no personal knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes to be true, withthe explanation that he does so on the information of others; or he may submit the information, in itswhole extent, to the insurer; and in neither case is he responsible for its truth, unless it proceeds from anagent of the insured, whose duty it is to give the information. What is the effect where information is obtained from third persons?

Under Sec. 43, the insured is given discretion to communicate to the insurer what he knows of a matter of which he has no personal knowledge. If the representation turns out to be false, he is NOT responsible therefor, provided he gives the explanation that he represents so on the information of others.

Problem

A is the captain of Titanic. James is the shipowner. On Sept. 19, 2004, James apples for an insurance upon Titanic “Lost or Not Lost” with Jack and Rose Insurance Co. However as of Sept.16, 2004, A already knew that the ship was lost at sea but did not tell James. Can James still recover on

the policy?

NO. a captain of the ship is bound to communicates its loss to the owner, and if the latter effects an insurance on the ship “lost or not lost” in ignorance of the antecedent loss due to the fraud or negligence of the captain, the insured cannot recover on the policy.

Misrepresentation Defined

Section 44. A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations.

What is the importance of Sec. 44?

This defines misrepresentation. When will a representation relied upon avoid a policy?

In order that a representation shall avoid a policy, it must be relied upon and be falise in a substantial and material respect.

Mistake of Forgetfulness:Though the material facts are suppressed and misrepresented through mistake or forgetfulness, and

without any fraudulent purpose, it has the effect to defeat the contract.

Must representation be literally true?No. See Section 38. Representations are not required to be literally true unlike warranties which must be literally true. It is sufficient that representations are substantially true.

Misrepresentation Defined

Is the same true in cases of marine insurance?NO. In marine insurance, the substantial truth of a representation is NOT sufficient. Accdg. to Sec. 107, the insured is required to state the exact and whole truth in relation to all matters that he represents, or upon inquiry, discloses or assumes to disclose.

Illustration:An insurance was made in England on a vessel from New York to Philadelphia, and from the

miscontruction of the Captain’s letter, as was contended on behalf of the assured, it was represented that the vessel “was seen in Delaware on the 11th of December” when she had been lost on the 9th . A representation must be true, and if the assured represents the facts without knowing the truth, he takes the risk upon himself.

Misstatement of Age:Innocent misstatement of age is governed by Sec 27 (d) of the Insurance Code.

A provision that if the age of the insured is considered in determining the premium and the benefits accruing under the policy, and the age of the insured has been misstated, the amount of payable under the policy shall be as such as the premium would have purchased at the correct age.

Falsity of Representation

Section 45. If a representation is false in a material point, whether affirmative orpromissory, the injured party is entitled to rescind the contract from the time when the representation becomes false. The right to rescind granted by this Code to the insurer is waived by the acceptance of premium payments despite knowledge of the ground for rescission. (As amended by Batasang Pambansa Blg. 874)

What does this section provide?

It provides that the falsity of a representation entitles the injured party to rescind the contract from the time when the representation becomes false. And ordinarily, under this section, fraudulent intent is IMMATERIAL. In other words, the injured party can rescind the contract of insurance where there is a misrepresentation even without fraud. And not that the false representation MUST be material.

Illustration:

An applicant for life insurance denied his application that any member of his family had been

sick or that he himself had the disease, although he knew that a brother and sister of his had died of pulmonary tuberculosis and he himself was already spitting blood at the time he filed his application. The misrepresentation is material and sufficient to avoid the contract of insurance even if not intentional. (Sison vs. Manufacturer’s Life Insurance Co, 37 OG 1563)

But it is not misrepresentation foe the insured to state that he did not drink beer or other intoxicants if he drank but very seldom. Here, the representation is false but not a material point.(Insular Life Insurance co. vs Pineda, 40 OG 285)

Effect of Collusion or Fraud of Agent of Insurer

Collusion with the insured• Collusion between the agent and the insured in misrepresenting the facts will vitiate the policy even

though the agent is acting within the apparent scope of his authority( Mutual Aid Union vs. Blackwall, 196 SW 792)

• When there is collusion, the agent thereby ceases to represent his principal , and represents himself; so the insurer is not estopped from avoiding the policy(Sision vs. Sun Life Insurance Co. of Canada, 47 OG 1954)

Principal of Agent• Where the insured merely signed the application form and made the agent of insurer fill the same

for him, it was held that by doing so, the insured made the agent of the insurer his own agent. (Insular Life Assur. Co. vs Feliciano, 74 Phil 469)

• Where the insurer required its medical examiner to put the questions and fill out the answers in his own handwriting, the writer of the application is not the agent of the insured (Wilson vs. Conway Ins. Co, 4 RI 141)

• The insurer is liable when its agent writes a false answer into the application without the knowledge of the insured. (45 CJS 179)

Section 46. The materiality of a representation is determined by the same rules as the materiality of a concealment.

What is the test of materiality?

The materiality of the representation 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 representation is made, in forming his estimates of the disadvantages of the proposed contract or in making his inquiries.

Who determines materiality?

It is a judicial question. It is NOT left to the insurance company to say after the loss has occurred that it would or would not have issued the policy had an answer been truly given. The matter misrepresented must be of that character which the court can say would reasonably affect the insurer’s judgment.

Materiality

Illustration:

If a person seeking auto insurance states that she has no major chronic illnesses, the insurer’s subsequent discovery that the applicant had an incurable disease at the time he competed the insurance form probably will not give the insurer the right to cancel the auto policy. However, if the person was seeking health insurance, such a misrepresentation may justify cancellation of the policy or denial of coverage.

Falsity of Answers

In the insurance application process, mere falsity of answers to questions propounded is insufficient to defeat coverage if not knowingly made with intent to deceive or defraud. A misrepresentation made on an application affect the insurer’s obligation if: 1. The insurer relies on it and it is either material or is made with intent to deceive or;2. The fact misrepresented or falsely warranted contributes to the loss An incorrect or inaccurate statement on the application “does not give rise to the defense of fraud where the true facts, if known, would not have made the contract less desirable to the insurer”.

Applicability of sections 26 to 48

Section 47. The provisions of this chapter apply as well to a modification by the same rules as the materiality of concealment

The provisions of sections 26 to 48 governing concealment and representation apply not only to the original formation of the contract but also to the modification of the same during the time it is in force. Thus, where the insurer is induced to modify the insurance policy as to the rate of premium by a misrepresentation on the part of the insured in a material point, the insurer is entitled to rescind such modification.

Illustration

Alfonso applied for an increase in the coverage of his life insurance. He

failed to disclose that he suffered tuberculosis after the issuance of the policy but was cured before his application for the increase in coverage. There is concealment because rules on concealment and misrepresentation applies as well to the modification of the policy

However, reinstatement of life insurance policy constitutes continuation of original policy and insurer cannot add conditions or restrictions beyond conditions or restriction of original policy.

Concealment and Misrepresentation Compared

Right to Rescind

Section 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or if 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.

When an insurer must exercise his right to rescind

1. In General • A contract of insurance may be rescinded on the ground of concealment or false

representation or breach of warranty. As contemplated in the first paragraph of Section 48, an action to rescind a contract is founded and presupposes the existence of a contract, which is rescinded. Hence, a defense to an action to recover insurance that the policy was obtained through false representations, fraud and deceit is not in the nature of an action to rescind and is, therefore, not barred by the provision. There is no time limit imposed for interposing this defense.

When an insurer must exercise his right to rescind

2. In Non-Life Policy• In order that the insurer may rescind the contract of insurance, such right must

be exercised prior to the commencement of an action on the contract. In other words, the insurer is no longer entitled to rescind a contract of insurance after the insured has filed an action to collect the amount of the insurance. It has been held, however, that where any of the material representations is false, the insurer’s tender of the premiums and notice that the policy is cancelled before commencement of the suit thereon, operates to rescind the contract of insurance.

3. In Life Policy• The defenses are available only during the first two years of a life insurance

policy.

Incontestability Clause

Incontestabilty• After the requisites are shown to exist, the insurer shall be estopped from contesting the policy or

setting up any defense, except as is allowed, on the ground of public policy.

Incontestability Clause

• It prevents an insurer from denying benefits on the ground of misrepresentation in the application. The clause applies only when the policy has been in effect for a specified period of time. This contestability period is usually two or three years. Most states maintain statutes that require an incontestability clause in life and health insurance contracts. The incontestability clause strikes a balance between providing predictable coverage and protecting the right of the insurers to select the precise risks they seek to insure. Most incontestability clauses are limited by a provision stating that the contestability period must be completed within the lifetime of the insured. With this nuance the insurer is able to contest a claim for benefits after the contestability period has lapsed if the insured dies before the end of the period. This protects insurers from providing benefits to someone who was already ill at the inception of the policy that he or she died less than two years later. It means that the insurer may contest the flow of insurance benefits to the insured’s heir.

Requisites of Incontestability

• The policy is a life insurance• It is payable on the death of the insured• It has been in force during the lifetime of the insured for at least two years from

its date of issue or of its last reinstatement

Effect when policy becomes incontestable

When the policy of life insurance becomes incontestable, the insurer may not refuse to pay

the same by claiming that; • The policy is void ab initio• It is rescissible by reason of the fraudulent concealment of the insured or his agent, no matter how

patent or well-founded• It is rescissible by reason of the fraudulent misrepresentation of the insured or his agent

Illustration

X procured insurance on his life through fraudulent concealment or misrepresentations.

If X dies within two years from the issuance of the policy, the rule on incontestability does not apply because the law says that the policy must have been in force during the lifetime of the insured for a period of two years. Hence, his beneficiary cannot recover from the policy.

Whether or not X is dead or alive, the insurer cannot exercise the right after two years from the time the policy is issued. The fraud committed by X is cured by the lapse of the said two-year period.

But if the policy is payable not upon the death of the insured but upon the maturity by lapse of a certain period of time, the insurer can still ask for its annulment or rescission.

Defense not Barred by Incontestability Clause

• The incontestability of the policy under the law is not absolute; otherwise a

beneficiary of any person who had procured a life policy more than two years before his death would automatically be entitled to the proceeds upon that person’s death. Incontestability only deprives the insurer of those defences which arise in connection with the formation and operation of the policy prior to loss.

Exceptions to the Incontestability Clause

• That the person taking the insurance lacked insurable interest• That the cause of death of the insured is an excepted risk• That the premiums have not been paid• That the conditions of the policy relating to military or naval service have been

violated• That the fraud is of particularly vicious type i.e. where the policy was taken out

in furtherance of a scheme to murder the insured or where the beneficiary feloniously killed the insured

• An imposter was used to deceive the insurance company in issuing the policy