Rescission of Insurance Contracts and Refund of Premiums

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The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of a lawyer or you may directly contact and consult Alburo Alburo and Associates Law Offices to address your specific legal concerns, if there is any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

 

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AT A GLANCE:

A concealment, whether intentional or unintentional, entitled the injured party to rescind a contract of insurance. (Section 27, Insurance Code)

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, entitled the insurer to rescind. (Section 29, Insurance Code)

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. (Section 45, Insurance Code)

A person insured is entitled to a return of the premium when the insurance contract voidable, and subsequently annulled under the provisions of the Civil Code; or on account of the fraud or misrepresentation of the insurer, or of his agent, or on account of fact, or the existence of which the insured was ignorant of without his fault, or when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy. (Section 82, Insurance Code)

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Republic Act No. 10607 or the Insurance Code of the Philippines, defines a contract on insurance as an agreement whereby one undertakes for a consideration to indemnify another for consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. (Section 2, par. a, Insurance Code)

 

Rescission of Insurance Contract

An insurer can exercise its right to rescind an insurance contract when the following conditions are present:

1. The policy limits the use or condition of the thing insured;
2. There is an alteration in said use or condition;
3. The alteration is without the consent of the insurer;
4. The alteration is made by means within the insured’s control; and
5. The alteration increases the risk of loss. (Malayan Insurance Company v. PAP Co., Ltd., G.R. No. 200784, August 07, 2013)

 

The insurer has the right to rescind the policy under the following grounds:

1. Concealment, whether intentional or unintentional

 

The Insurance Code provides that:

 

“A concealment, whether intentional or unintentional, entitled the injured party to rescind a contract of insurance.” (Section 27, Insurance Code)

 

“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 28, Insurance Code)

 

As held in the case of The Insular Assurance Co., Ltd. v. Heirs of Alvarez (G.R. No. 207526, October 03, 2018):

 

“Concealment exists where the assured has knowledge of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should communicate it to the assured, but he designedly and intentionally withholds the same.”  

 

2. Intentional or fraudulent omission

 

The law says:

 

“An intentional or 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 29, Insurance Code)

 

3. Misrepresentation

 

The case of Manulife Philippines, Inc. v. Hermenegilda Ybañez (G.R. No. 204736, November 28, 2016) is instructive:

 

“The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer.”

 

The law says:

 

“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.” (Section 45, Insurance Code)

 

 

4. Violation of material warranty or other material provisions of the policy

 

The case of Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines (G.R. No. 151890, June 20, 2006) defines warranty in the following manner:

 

“A warranty is a statement of or promise set forth in the policy, or by reference incorporated therein, the untruthfulness or non-fulfillment of which in any respect, and without reference to whether the insurer was in fact prejudiced by such untruth or nonfulfillment, renders the policy voidable by the insurer.” 

 

5. Violation of a provision wherein a policy declares that the violation of which would avoid the policy

 

Section 75 of the Insurance Code provides that:

 

“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.”

 

Further, Section 48 of the Insurance Code states:

 

“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 (2) years from the date of its issue or of its 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.”

 

Refund of Insurance Premiums

An insurance premium is the agreed price for assuming and carrying the risk, which is the consideration paid to an insurer for undertaking to indemnify the insured against a specified peril. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. (Section 77, Insurance Code)

 

Section 82 of the Insurance Code provides that “a person insured is entitled to a return of the premium when the insurance contract voidable, and subsequently annulled under the provisions of the Civil Code; or on account of the fraud or misrepresentation of the insurer, or of his agent, or on account of fact, or the existence of which the insured was ignorant of without his fault, or when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy.”

 

Return of premiums can be made in the following cases:

1. If the thing insured was never exposed to the risks insured against, the whole premium should be refunded (Section 80, par. a, Insurance Code)

 

2. When the contract is voidable due to the fraud or misrepresentation of the insurer or his agent, the whole premium should be refunded (Section 82, Insurance Code)

 

3. When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy and the whole premium should be refunded (Section 82, Insurance Code)

 

4. When the contract is voidable because of the existence of facts of which the insured was ignorant without his fault, the whole premium should be refunded (Section 82, Insurance Code)

 

5. Where the insurance is for a definite period and the insured surrenders his policy, to such portion of the premium as corresponds with the unexpired time at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy, the premium should be returned (Section 80, par. b, Insurance Code)

 

6. When there is over-insurance by several insurers, the return premiums should be proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk (Section 83, Insurance Code)

 

7. When rescission is granted due to the insurer’s breach of contract.

 

 

Related Article/s:

Basics of an Insurance Contract

What are the grounds for the rescission of an insurance contract?

What is the effect of non-payment of premiums?

 

 

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