Commercial Law

Emilio Tan vs Court of Appeals

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G.R. No. 48049 – 174 SCRA 403 – Mercantile Law – Insurance Law – Representation – Concealment – Rescission of an Insurance Contract – Incontestability Clause

In September 1973, Tan Lee Siong applied for a life insurance under the Philippine American Life Insurance Company (PHILAMLIFE). He stated in the application form that he has no health issues whatsoever and so in November 1973 he was issued a life insurance policy in the amount of P80,000.00. He listed his sons as beneficiaries (Emilio Tan et al). In April 1975, Tan Lee Siong died due to hepatoma. His sons filed an insurance claim but PHILAMLIFE denied the same as it alleged that Tan Lee Siong concealed the fact that he was hypertensive, diabetic, and was suffering from hepatoma at the time of his application for the insurance.

The beneficiaries averred that PHILAMLIFE can no longer rescind the insurance contract because the insured is already dead. They invoke Section 48 of the Insurance Code which they interpreted to mean that an insurer can only rescind an insurance contract during the lifetime of the insured; and that such rescission should be done within two years prior to the filing of a suit involving the insurance.

ISSUE: Whether or not the interpretation of the Tan brothers is correct.

HELD: No. The pertinent section in the Insurance Code provides:

Section 48. 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 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.

The so-called “incontestability clause” precludes the insurer from raising the defenses of false representations 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. The phrase “during the lifetime” found in Section 48 simply means that the policy is no longer considered in force after the insured has died. The key phrase in the second paragraph of Section 48 is “for a period of two years.”

Note that the policy was in force for only one year and 5 months when Tan Lee Siong died (November 1973 – April 1975). This means that PHILAMLIFE can still contest and rescind the policy issued by reason of the misrepresentation made by Tan Lee Siong.

Further, because of Tan Lee Siong’s statement that he does not have any health issues, the insurance company was misled into believing that he was healthy and so it did not deem a medical checkup to be necessary and that ultimately led to the issuance of the life insurance policy.

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