* Chapter 6

ASCERTAINING AND
CONTROLLING
RISKS
 Devices developed to
ascertain and control risks:

* Concealment
*Representation
* Warranty
*Condition
* Exceptions
Sec. 26
A neglect to communicate that which a
party knows and ought to communicate, is
called a concealment.

WHAT IS CONCEALMENT?
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 as to which he makes no warranty,
and which the other has not the means of
ascertaining.

Who bears the obligation not to

conceal?
* Insurance contracts are described as contracts uberrimae
fidae, that is, of “utmost good faith”
* The insurer and the insured has the duty to disclose all
material facts before the policy inception.

 In Argente v. West Coast Life Insurance Company, the

Supreme Court explained that the rule on concealment is a
requirement of honesty, good faith, and fair dealing. “The
assured undertakes to state all the circumstances affecting
the risk, a full and fair statement of all is required.”

Uberrimae fidae
Facts that needs to be disclosed:
MATERIAL FACTS

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.
 Test of Materiality
* 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 Supreme Court explained that “The basis of the rule

vitiating the contact in case of concealment is that itmisleads
or deceives the insurer into accepting the risk, or accepting it
at the rate of premium agreed upon.
* In relation to the insured:
o the matters concealed by the insured are considered material if such
matters will affect the insurer’s action on his application either by
approving it with the corresponding adjustment for a higher premium
or rejecting the same or in fixing the terms and conditions of the
policy.
o if the insurer knows about the circumstances relating to the physical or
moral hazard, it will give a chance to the insurer to make further
inquiries and to decide on the basis of such inquiry.

* In relation to the insurer:

o the matters concealed are considered material if they will affect the
decision of the insured to enter into the insurance contract.
* The material information obtained after the filing of
the application but before the insurance takes effect
should also be disclosed.
* If there is nothing in the policy that makes it an
obligation of the party to make disclosure during the
life of the contract, then there is no duty to make such
disclosure for facts occuring after the insurance takes
effect. Such information could not affect the making
of the contract.
 *Causation not necessary
* The matter concealed need not be the cause of the
loss.
* 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.

In Florendo. Philam Plans, Inc., the matter concealed

was the continuing treatment of the insured for heart
condition and diabetes. The claim was denied on the
ground of material concealment although the insured died
of blood poisoining.
To justify one party to rescind the policy on
the ground of concealment:

1. The party must know the fact concealed or at least

he ought to know the same;
2. The fact concealed must be material;
3. No warranty is extended by the party regarding the
fact concealed; and
4. The other party does not have the means of
ascertaining.

*Requisites:
 Knowledge on the part of the agent of the insured
can be imputed to the insured himself only if the
following circumstance are present:
1. It was the duty of the agent to acquire and
communicate information of the facts in
question; and
2. It was possible for the agent, in the exercise of
reasonable diligence, to have made such
communication before the making of the
insurance contract.

*Knowledge of Agent of Insured

* 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, 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.
*When there is no concealment:
1. When matters are known to the other party;
2. When, in the exercise of ordinary care, one party ought to know, and
of which the other party has no reason to suppose him ignorant;
3. When there is waiver of communication;
4. When matters are those which prove or tend to prove the existence of
a risk excluded by a warranty, and which are not otherwise material;
5. When matters are those which relate to a risk excepted from the
policy and which are not otherwise material;
6. When the matter involves general causes that are open to inquiry of
each party and which may affect the political or material perils
contemplated;
7. When the matter is included in general usages of trade;
8. Information of the nature or amount of the insured property, is not
disclosed unless in answer to an inquiry; and
9. When what is involved is information of the party’s own judgment
upon matters in question.
* The duty of disclosure and the duty not to misrepresent
requires that the statemennt to be made by one party
relates to facts and not to opinion.
* There must be good faith and there must be no intent to
deceive.

 In Philamcare Health Systems, Inc. v. Court of Appeals, the

Supreme Court exolained that the answers of an applicant
(who is not a doctor) regarding the medical history of his wife
largely depends on opinion rather than fact. The SC ruled
that there would be no concealment so long as the answers
are made in good faith and without intent to deceive even if
the answers which are in the nature of opinions are untrue.

*Judgment or Opinion?
 *Knowledge of the Insurer
* Where the insurer, at the time of the issuance of a policy of
insurance, has knowledge of existing facts which, if insisted
on, would invalidate the contract from its very inception, such
knowledge constitutes a waiver of conditions in the contract
inconsistent with the facts, and the insurer is estopped
thereafter from asserting the breach of such conditions.
* When the policy contains a condition which renders it voidable
at its inception, and this result is known to the insurer, it will
be presumed to have intended to waive the conditions and to
execute a binding contract, rather than to have deceived the
insured into thinking he is insured when in facts he is not, and
to have taken his money without consideration.
Section 27
A concealment whether intentional or unintentional
entitles the injured party to rescind a contract of
insurance.

 In Argente v. West Coast Life Insurance, The Supreme Court quoted,

“The basis of the rule vitiating the contract in cases of concealment is
that it misleads or deceives the insurer into accepting the risks, or
accepting it at the rate of premium agreed upon. The insurer, relying
upon the belief that the assured will discose 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.”

*Intentional and Unintentional

Concealment
Is good faith a defense in concealment?

No. Intent of the party is irrelevant in concealment.

The Supreme Court held that materiality of the
information withheld does not depend on the state of
mind of the insured. Neither does it depend on the
actual or physical events which ensue.

*Every concealment, whether arising from accident,

negligence, inadvertence, or mistake, if material, will
be equally fatal to the contract as if it were
intentional or fraudulent.
 Exception to Sec. 27:
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.
*Knowledge on the fact concealed
The Supreme Court observed in Saturnino v. The
Philippine American Life Insurance Company that actual
knowledge ofthe insured is not necessary to give the
insurance company the right to avoid the policy on the
gound of concealment. If it were the law that an
insurance company could not depend a policy on the
ground of concealment or misrepresentation, “unless it
could show actual knowledge on the part of the
applicant that the statements were false, then it would
be impossible forit to protect itself and its honest
policyholders against fraudulent and improper claims.”
* It
has been held that where, upon the face of
the application, a question appears to not be
answered at all or to be imperfectly answered,
and the insurers issue a policy without any
further inquiry, they waive the imperfection of
the answer and render the omission to answer
more fully immaterial.

*Waiver of Insurer
* Presence of concealment entitles the insurer to
rescind the insurance contract.
* However, the right to rescind should be
exercised previous to the commencement of an
action on the contract.

Remedy
 *REPRESENTATIONS
*Statements made to give information to the insurer
to induce him to enter into the insurance contract.

 In Pacific Banking Corporation v. Court of Appeals, et al,

the Supreme Court explained that if the “whole
foundation of the contract fails, the risk does not attach
and the policy never becomes a contract between the
parties. Representations of facts are the foundation of
the contract and if the foundation does not exist, the
superstructure does not arise. Falsehood in such
representation is not shown to vary or add to the
contract, or to terminate a contract which has once been
made, but to show that no contact has ever existed.”
 Time of Representation
Sec. 37
A representation may be made at the time of, or before,
issuance of the policy.
Exception:
Sec. 47
The provisions of this chapter apply as well to a
modification of a contract of insurance as to its original
formation.

* Representationmay also be one that induces the party

to agree to modify the contract.
* Representations may also be made at the of or before
the renewal of the policy.
 * Distinctions and Similarities
CONCEALMENT REPRESENTATIONS
1. Involves an omission – non- 1. Involves a positive
disclosure assertion or affirmation
2. Concealment cannot refer 2. Representation can
to future acts. pertain to the fiture
3. Same tests of materiality because it can be
promissory
4. A party can rescind
3. Same test applies
4. A party can rescind
 *Kinds:
As to form:
* Oral or written
As to nature of the statements:
* Affirmative Representations
-involves statements dealing with facts existing at the time the
contract is made.
* Promissory Representations
-pertains to statements at the time the insurance is already
effective.

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.
* Interpretation:
Representations are construed liberally in favor of the insured
and are required to be only substantially true.
Section 38.
The language of a representation is to be interpreted by
the same rules as the language of contracts in general.

* Time to which it refers:

Section 42
A representation must be presumed to refer to the date
on which the contract goes into effect.
 *Test of Materiality
Section 46.
The materiality of a representation is
determined by the same rules as the materiality of a
concealment.

* There is deemed to be a material misrepresentation if the

knowledge of one party thereof will affect the insurer’s
action on his application, either by approving it with the
corresponding adjustment for a higher premium or
rejecting the same or in fixing the terms and conditions of
the policy.
Examples of material representation:

1. There is material representaton for instance

when the insured in a life insurance policy
falsely representated that she had not smoked
for one year.
2. There is also material misrepresentation if the
applicant in a life insurance policy stated that
she weighed 180 pounds when she in fact
weighed 300 pounds.
* Representation as to Age in Life Insurance:
Section 233(d)
(d) 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 payable under the policy shall be such as the premium
would have purchased at the correct age;

* If at the correct age, the insured is not eligible for any

coverage under the policy or its riders, the company will refund
the corresponding premiums actually received by the company
less any indebtedness under the policy.
* Misstatement as to the age of the insured must be done in good
faith.
 Remedy
Section 44.
A representation is to be deemed false when the facts
fail to correspond with its assertions or stipulations.
Section 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.
 Rescission is Unavailable:
The injured party cannot rescind the policy on the
ground of false representation in the following cases:
1. When there is waiver;
2. When an action has already been commenced on
the contract; and
3. When the incontestable clause applies.

*Estoppel is not applicable. Under RA 10607, the

insurer can still rescind the policy even if it
accepted the premium despite knowledge of the
ground for rescission provided that other defense
are not available line the incontestability clause.