C. Concealment

C. Concealment

R.A. No. 10607, Sections 26-35, 51

"CONCEALMENT

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

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

"Section 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 as to which he makes no warranty, and which the other has not the means of ascertaining.

"Section 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.

"Section 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.

"Section 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.

"Section 32. Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade.

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

"Section 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 51.

"Section 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.

"Section 51. A policy of insurance must specify:

"(a) The parties between whom the contract is made; "(b) The amount to be insured except in the cases of open or running policies; "(c) The premium, or if the insurance is of a character where the exact premium is only determinable upon the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined; "(d) The property or life insured; "(e) The interest of the insured in property insured, if he is not the absolute owner thereof; "(f) The risks insured against; and "(g) The period during which the insurance is to continue.

Concealment is a neglect to communicate that which a party knows and ought to communicate. (Sec. 26, IC¹)

Concealment may be committed by either party to the insurance contract and need not be intentional. It is a party’s neglect to communicate a fact that the party knows and ought to communicate; whether intentional or unintentional, it entitles the injured party to rescind the insurance contract.

Under Sec. 27 of the IC², "A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.” Moreover, under Sec. 168 of the IC³, the insurer is entitled to rescind a contract of fire insurance if, without its consent, the use or condition of the thing insured is altered from that to which it is limited by the policy, by means within the insured’s control, and the alteration increases the risk. (Malayan Insurance Company, Inc. v. Pap Co., Ltd., G.R. No. 200784, 7 August 2013)⁴

Requisites (Ne-D-NoW-NoM-Ma)

• A party knows a fact which he Neglects to communicate or disclose to the other party;
• Such party concealing is Duty bound to disclose such fact to the other;
• Such party concealing makes No Warranty as to the fact concealed;
• The other party has No Means of ascertaining the fact concealed; and
• The fact must be Material.

Omission

The failure to communicate information on matters proving or tending to prove the falsity of warranty. An intentional and fraudulent omission by the insured to communicate information proving or tending to prove the falsity of a warranty entitles the insurer to rescind the contract of insurance under Section 29 of the Insurance Code (RA 10607).

Test of Materiality (2000 BAR)

It is 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. (Sec. 31, IC)⁶

NOTE: As long as the facts concealed are material, concealment, whether intentional or not, entitles the injured party to rescind. (Sec. 27, IC)⁷

Facts not conveyed to the insurer raises presumption that the failure of the insured to communicate must have been intentional rather than inadvertent. Good faith is not a defense because of the Uberrimae Fidei Doctrine.

Rules on Concealment

• If there is concealment under Section 27 of the Insurance Code⁸, the remedy of the insurer is rescission since concealment vitiates the contract of insurance; (1996 BAR)
• The party claiming the existence of concealment must prove that there was knowledge of the fact concealed on the part of the party charged with concealment.;
• Good faith is NOT a defense in concealment. Concealment, whether intentional or unintentional entitles the injured party to rescind the contract of insurance; (Sec. 27, IC)⁹
• The matter concealed need not be the cause of loss; (Sec. 31, IC)¹⁰ and
• To be guilty of concealment, a party must have knowledge of the fact concealed at the time of the effectivity of the policy.

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

A: 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 probably and reasonably have influenced the insurer’s assessment of the proposed contract or its inquiries. (Sunlife Assurance Company of Canada v. COURT OF APPEALS and Spouses ROLANDO and BERNARDA BACANI, G.R. No. 105135, 22 June 1995¹¹; Divina, 2021)

When Concealment Produces the Effect of Avoiding the Policy

Concealment should take place at the time the contract is entered into and not afterwards in order that the policy may be avoided. The duty of disclosure ends with the completion of the contract. Waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. Failure to communicate information acquired after the effectivity of the policy will not be a ground to rescind the contract.

NOTE: The reason for this rule is that if concealment should take place after the contract is entered into, the information concealed is no longer material as it will no longer influence the other party to enter into such contract.

Q: On June 21, 2008, Yate took out a life insurance policy on her life in the amount of P10 million and named her husband Vandy and daughter as joint irrevocable beneficiaries. Before the policy was issued and the premiums were paid, Yate underwent a medical checkup with a physician accredited by the insurer, and the only result found was that she was suffering from high blood pressure.

Yate was previously diagnosed by a private physician of having breast cancer which she did not disclose to the insurer in her application, nor to the insurer's accredited physician because by then, she was told that she was already cancer-free after undergoing surgery which removed both her breasts. She was later diagnosed with psychotic tendency that graduated into extreme despondency.

She was found dead hanging in her closet 36 months after the issuance of the policy. The police authorities declared it to be a case of suicide. The policy did not include suicide as an excepted risk.

a. Can the insurer raise the issue of failure to disclose that she had cancer as a cause for denying the claim of the beneficiaries?

A: NO, assuming the policy remained in force during Yate’s lifetime for two years. Although her prior breast-cancer diagnosis and surgery could have been material, the insurer can no longer contest the policy on the ground of concealment in her application after that period. (Secs. 31 and 48, IC)¹²

The prior diagnosis and surgery may therefore be material despite the later statement that she was cancer-free.

b. Are the beneficiaries entitled to receive the proceeds of the life insurance notwithstanding the fact that the cause of death was suicide? (2018 BAR)

A: YES. The beneficiaries are entitled to receive the proceeds. The rule is that the insurer in life insurance is liable in case of suicide only when it is committed after the policy has been in force for a period of two years from the date of issue or last reinstatement. The rule, however, admits of an exception so that when suicide is committed in the state of insanity, it shall be compensable regardless of the date of commission. (Sec. 180, IC)¹³

In the facts given, Yate was diagnosed with psychotic tendency that graduated into extreme despondency; thus, even though Yate committed suicide 36 months from issuance of the policy, the insurer is liable.

Concealment in Marine Insurance

Rules on concealment are stricter in marine insurance since the insurer would have to depend almost entirely on the matters communicated by the insured. Thus, in addition to material facts, each party must disclose all the information he possesses which are material or the information of the belief or expectation of a third person, in reference to a material fact. But concealment in a marine insurance in any of the following matters enumerated under Sec. 112 of the IC¹⁴ does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed.

Test in Ascertaining the Existence of Concealment

If the applicant is aware of the existence of some circumstances which he knows would probably influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked.

Matters that Need NOT be Disclosed

General Rule: Neither party to an insurance contract is required to disclose information concerning the following matters:

• Those already known to the other party;
• Those that the other party, exercising ordinary diligence, ought to know, and about which the first party has no cause to believe the other is unaware;
• Those whose communication the other party waives;
• Those demonstrating or tending to demonstrate a risk excluded by a warranty, provided they are not otherwise material;
• Those pertaining to a risk excepted from the coverage of the policy, provided they are not otherwise material; and
• The nature or amount of the insured's interest, except as prescribed by Sec. 51 (Sec. 34, IC)¹⁵.

Exception: These matters must be communicated when in answer to the inquiries of the other party (Sec. 30, IC)¹⁶.

Note: Neither party is bound to disclose, even upon inquiry, information consisting of their own judgment, as it adds nothing to the evaluation of the application (Sec. 35, IC)¹⁷.

Right to Information of Material Facts May be Waived

• Expressly by the terms of the contract; or
• Impliedly by the failure to make an inquiry as to such facts, where they are distinctly implied in other facts from which information is communicated. (Sec. 33, IC)²⁴

Q: 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?

A: NO, concealment is the neglect to communicate a fact that a party knows and ought to communicate (Sec. 26, IC); intent to deceive is not required. 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. (Zee v. Asian Crusader Life Assurance Corporation, G.R. No. L-30685, 30 May 1983)²⁵

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 Asian Crusader. While it may be conceded that, from the viewpoint of a medical expert, the information communicated was imperfect, the same was nevertheless sufficient to have induced Asian Crusader to make further inquiries about the ailment and operation of the insured.

Instances whereby Concealment Made by an Agent Procuring the Insurance Binds the Principal

• Where it was the duty of the agent to acquire and communicate information of the facts in question; or
• Where it was possible for the agent, in the exercise of reasonable diligence to have made such communication before the making of the insurance contract.

NOTE: Failure on the part of the insured to disclose such facts known to his agent, or wholly due to the fault of the agent, will avoid the policy, despite the good faith of the insured.