VI. RESCISSION OF INSURANCE CONTRACTS

Question 1

What is “ubberimae fides”?

Answer 1

Perfect good faith.

Question 2

How does the Code define concealment?

Answer 2

IC. Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.

Question 3

What is the effect of a concealment?

Answer 3

IC. Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.

Question 4

Is the insured obliged to disclose everything?

Answer 4

No. Sec. 30 of the Code provides exceptions. According to the Code, “Neither party to a contract of insurance is bound to communicate information of the matters following, except in answers to the inquiries of another:

(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.”

Question 5

What must each party to an insurance contract communicate to the other?

Answer 5

Each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract, and as to which he makes no warranty, and which the other has not the means of ascertaining. (Sec. 28. IC)

Question 6

May there be a waiver of the right to information?

Answer 6

Yes. According to Sec. 33 of the Code, “The right to information of material facts may be waived, either by the terms of the insurance or by the neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated.”

Question 7

How is materiality determined?

Answer 7

As provided in Sec. 31 of the Code: “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.”

Question 8

What is the test of materiality?

Answer 8

The test of materiality is whether the insurer would have agreed to issue the policy had it known of the facts concealed or, perhaps, impose additional terms or require higher premium.

Question 9

What is the difference between concealment and misrepresentation?

Answer 9

Misrepresentation may be distinguished from concealment inn the sense that the former is an active form of deception whereas concealment is the passive form thereof. In misrepresentation, an oral or written assertion is made, whereas in concealment, there is a failure to disclose a material fact.

Question 10

What is the a “representation”?

Answer 10

A representation is an oral or written statement of a material fact, made by the insured to the insurer tending to induce the latter to assume the risk. It may be either affirmative or promissory.

Question 11

What is misrepresentation?

Answer 11

Misrepresentation is a false representation which the insured states with the knowledge that it is untrue, intended to deceive the insurer into accepting the risk.

Question 12

Must a representation be literally true and accurate?

Answer 12

No. A representation need not be literally true and accurate. It is sufficient that it is substantially or materially true, and in case of promissory representation, it is sufficient that it is substantially complied with.

Question 13

Does misrepresentation as to age entitle the insurer to rescind the contract?

Answer 13

No. A misrepresentation as to the age of the insured does not constitute a ground for rescission. Under Sec. 233(d) of the Code, if the age of the insured was considered in determining the premium and the benefits under the policy, and the age of insured has been misstated, the amount payable under the policy shall be such as the premium would have purchased at the correct age.

Question 14

What are the two kinds of representation?

Answer 14

Sec. 36. A representation may be oral or written.

Question 15

When may a representation be made?

Answer 15

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

Question 16

How should representations be interpreted?

Answer 16

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

Question 17

What is the effect of a representation as to the future?

Answer 17

Sec. 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.

Question 18

Can a representation qualify an express provision in a contract of insurance?

Answer 18

No. Sec. 40 of the Code provides “A representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty.”

Question 19

May a representation be withdrawn after the insurance contract is effected?

Answer 19

No. Under Sec. 41 of the Code: “A representation may be altered or withdrawn before the insurance is effected, but not afterwards.”

Question 20

To what date does a representation refer to?

Answer 20

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

Question 21

What is the effect on a representation when a person insured has no personal knowledge of a fact?

Answer 21

Sec. 43. When a person insured has no personal knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes to be true, with the explanation that he does so on the information of others; or he may submit the information, in its whole extent, to the insurer; and in neither case is he responsible for its truth, unless it proceeds from an agent of the insured, whose duty it is to give the information.

Question 22

When is a representation deemed false?

Answer 22

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

Question 23

What is the remedy when a representation is false?

Answer 23

Sec. 45. 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.

Question 24

How do we determine the materiality of a representation?

Answer 24

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

***

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.

Note from Carale: The test of materiality is whether the insurer would have agreed to issue the policy had it known of the facts concealed or, perhaps, impose additional terms or require higher premium.

Question 25

What is the “incontestable clause"?

Answer 25

The incontestable clause has been defined as a clause in life or health insurance policy providing that after the policy has been in force for a given length of time (e.g. two or three years) **the insurer shall not be able to contest it as to statements contained in the application**.

Question 26

What provision of law provides that the incontestable clause is required to be included in an individual life or endowment policy?

Answer 26

Sec. 233(b). In case of individual life or endowment insurance, the policy shall contain in substance the following conditions: xxx (b) A provision that the policy shall be incontestable after it shall have been in force during the lifetime of the insured for a period of two years from its date of issue as shown in the policy, or date of approval of last reinstatement, **except for non-payment of premium and except for violation of the conditions of the policy relating to military or naval service in time of war**.

Question 27

What is the effect of an incontestable period?

Answer 27

Sec. 48. x x 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 rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent.**

Question 28

What are the defenses still available to the insurer after the two-year period?

Answer 28

1. Non-payment of premium to make the policy effective or remain in force; 2. Lack of insurable interest; 3. Coverage such that the loss/damage did not arise from the risks covered; 4. Violation of military or naval service provisions of the policy (also an issue of coverage); 5. Failure to commence action within reglementary period; 6. Failure to comply with conditions (proof of loss, etc.) subsequent to the loss; or 7. The particular viciousness of the fraud employed by t he insured to procure the contract, such as (1) where the policy was taken pursuant to a scheme to murder the insured, or (2) the insured substitutes himself with another during the medical examination.

Question 29

What is the definition of a warranty?

Answer 29

Warranty has been defined as a “statement or promise set forth in the policy, or y reference incorporate therein, the untruth or non-fulfillment of which in any respect, and without reference to whether the insurer was in fact prejudiced by such untruth or non fulfillment, renders the policy voidable by the insurer, wholly irrespective of the materiality of such statement or promise.” [Vance; however according to Carale, this definition is lacking because it only defines from the perspective of the insurer.]

Question 30

What are the kinds of warranties?

Answer 30

The kinds of warranties are: * Express (Sec. 67 and 71); * Implied (Marine only); * Affirmative (Sec. 68); * Promissory (Sec. 72 & 73).

Question 31

Sec. 67. A warranty is either […].

Answer 31

Sec. 67. A warranty is either **express or implied.**

Question 32

Sec. 68. A warranty may relate to the […].

Answer 32

Sec. 68. A warranty may relate to the past, the present, the future, or to any or all of these.

Question 33

Is there a particular form necessary for a valid warranty?

Answer 33

No. Sec. 69 provides, “No particular form of words is necessary to create a warranty.”

Question 34

What is the requirement regarding express warranties?

Answer 34

Sec. 70. Without prejudice to Section 51, every express warranty, made at or before the execution of a policy, **must be contained in the policy itself**, or in another instrument signed by the insured and referred to in the policy as making a part of it.

Question 35

What constitutes an express warranty?

Answer 35

Sec. 71. A statement in a policy, of a matter relating to the person or thing insured, or to the risk, as a fact, is an express warranty thereof.

Question 36

Sec. 72. A statement in a policy, which imparts that it is intended […] which materially affects the risk, is a warranty that […].

Answer 36

Sec. 72. A statement in a policy, which imparts that it is intended **to do or not to do a thing** which materially affects the risk, is a warranty that **such act or omission shall take place**.

Question 37

When will the non-fulfillment of the warranty not avoid the policy?

Answer 37

Sec. 73. When, **before the time arrives for the performance of a warranty relating to the future**, a loss insured against happens, or **performance becomes unlawful at the place of the contract, or impossible**, the omission to fulfill the warranty does not avoid the policy.

Question 38

What is the remedy of the parties when there is a breach of warranty?

Answer 38

Sec. 74. The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to **rescind**.

Question 39

May parties provide that a violation of immaterial provisions will render a policy void?

Answer 39

Yes. Sec. 75 provides, “A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy.”

Question 40

What is the effect of a breach of a warranty without fraud?

Answer 40

Sec. 76. A breach of warranty without fraud **merely exonerates an insurer from the time that it occurs,** or where it is broken in its inception, **prevents the policy from attaching to the risk**.

Question 41

What are the other grounds of cancellation of a policy?

Answer 41

Sec. 64. No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, _after the effective date of the policy_, of one or more of the following: (a) **non-payment** of premium; (b) **conviction of a crime** arising out of acts **increasing the hazard insured against**; (c) **discovery of fraud** or material misrepresentation; (d) discovery of **willful or reckless acts or omission** increasing the hazard insured against; (e) **physical changes** in the property insured which result in the property becoming uninsurable; or (f) a **determination by the Commissioner** that the continuation of the policy would violate or would place the insurer in violation of this Code.