When the insurer is no contest to the insured

“The interesting question now is, can the insurer ever rescind a life insurance policy on grounds of concealment and/or misrepresentation.”

What is the effect of the insured’s failure to disclose material facts in his insurance application? When the insured dies within two years from issuance of the insurance policy, can the insurer still rescind the policy despite the insured’s concealment or misrepresentation as to his medical condition? Let us take the case of Jimmy. He applied for life insurance with SL Insurance. In his application, he indicated that he had sought advice for kidney problems. On February 5, 2001, SL approved Jimmy’s application and issued the insurance policy. On May 11, 2001, Jimmy died as a result of a gunshot wound.

As such, his spouse-beneficiary filed a claimant’s statement to seek the death benefits indicated in his insurance policy. SL denied the claim on the ground that the details on Jimmy’s medical history were not disclosed in his application.

SL filed a complaint for rescission before the court, alleging that Jimmy did not disclose in his insurance application, his previous medical treatment at the National Kidney Transplant Institute in May and August of 1994. According to SL, the undisclosed fact suggested that the insured was in “renal failure” and at a high-risk medical condition.

For her defense, the beneficiary claimed that Jimmy did not commit a misrepresentation, acted in good faith when he signed the insurance application and even authorized SL to inquire further into his medical history for verification purposes.

Should SL make good on the policy and pay the beneficiary ? The Supreme Court ruled in the affirmative, citing Section 48 of the Insurance Code, which provides that after a policy of life insurance payable upon the death of the insured shall have been in force during the lifetime of the insured for a period of two years from date of its issue or its last reinstatement, the insurer can not 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.

The Court concluded that, under the provision, after the two-year period lapses, 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. (Sun Life of Canada Philippines vs Sibya, G.R. No. 211212, June 08, 2016)

In the present case, SL issued Jimmy’s policy on February 5, 2001. Upon his death, however, on May 11, 2001, or a mere three months from the issuance of the policy, SL had lost its right of rescission. The death of the insured within the two-year period renders the right of the insurer to rescind the policy nugatory. As such, the incontestability period has set in. The Court further held that assuming, for the sake of argument, that the incontestability period had not yet set in, there was no concealment and misrepresentation because Jimmy admitted in his application his medical treatment for kidney ailment.

Moreover, he executed an authorization in favor of SL to conduct investigation in reference to his medical history.

Section 48 is commonly known in Insurance Law as the so-called “incontestability clause “ in life insurance. It precludes the insurer from raising the defense of false representation or concealment of material facts insofar as health and previous diseases are concerned if the insurance has been in force for at least two years during the insured’s lifetime. In short, after two years, the defense of concealment or misrepresentation, no matter how patent or well-founded, no longer applies. (Tan vs Court of Appeals, 174 SCRA 403, June 29, 1989).

It has a two-fold purpose. It forewarns prospective takers of life insurance that their attempts at insurance fraud would be timely uncovered. 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 by law (Manila Bankers Life Insurance vs Aban, 702 SCRA 417, July 29, 2013).

It is interesting to note that in Tan vs Court of Appeals, the Supreme Court ruled that the insurer is precluded from rescinding the policy after two years from issue or last reinstatement, regardless of the death of the insured during the two-year period.

The phrase “during the lifetime” simply means that the policy is no longer considered in force after the insured has died.

In Manila Bankers case, the Supreme Court, however, expanded the coverage of the clause to include the death of the insured during the two-year period. Was it just an obiter dictum considering that incontestability clause had really set in because the insured died anyway after two years and seven months from issuance of the policy? In Sibya, the insured died after three months from issuance of the policy and the Court, reiterating the Manila Bankers ruling, affirmed that the incontestability clause had set in.

The interesting question now is, can the insurer ever rescind a life insurance policy on grounds of concealment and/or misrepresentation? The insurer is barred from doing so if the insured dies before the two-year period, and similarly precluded after the lapse of the same period. So, when may the insurer discover and raise the concealment and misrepresentation? The death of the insured, no matter how proximate to the date of policy issuance, effectively forecloses investigation on possible fraudulent claims and misrepresentation as to his health and medical conditions.

Has the incontestability clause become a no-contest clause? The Sibya ruling, indeed, is a reason to rejoice for the insured and cause of disappointment for the insurer. Whether or not the Supreme Court will affirm or rethink its position if the issue is again properly elevated to it remains to be seen. For now, the applicant for life insurance must act in good faith and authorize the insurer to conduct investigation as to his medical history in order to minimize, if not negate the allegation of fraud and the contentious application of the incontestability clause.

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