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Wednesday, January 29, 2020
Home Opinion Op-Ed Columns The incontestability clause: Fostering a more prudent insurance policy

The incontestability clause: Fostering a more prudent insurance policy



WHEN applying for insurance, the information given by the potential policyholders, which is generally personal in nature, must be accurate and true.

The insurance company uses this information to estimate the appropriate insurance premium and coverage.

If such information is concealed or misrepresented, it may lead to denial of claims because it is as if the insurance contract never existed.

Because of this, there are cases where the insurance laws give the insurer the right to rescind or withdraw a policy that was based on false information.

However, as human beings, the information entered by the potential insurance policy holders in the application forms may not always be free of errors and inaccuracies.

Also, there are times when the insured does not realize how important it is to provide a piece of information unless told to do so by the insurer.

It would seem unfair if the insurer, who was given the right to cancel the contract does so based on false but relatively unimportant fact despite the policyholder’s continuous payment of the premium.

If the insured died, the beneficiaries would be in a difficult position due to a slight error made in the application form years ago.

Such a mistake could have been corrected right away had the insurer practiced prudence by inquiring further.

It is also possible that the insured did not know that a certain information was considered very important and must be shared, unless notified by the insurer upon further investigation.

To avoid such unfair situations, although Philippine insurance laws allow for the insurer’s right to cancel a contract in some cases, they also require that such right must be done within a specific period.

This is maintained in the “incontestability clause” found in most life insurance policies.

The statements in this clause prevent the insurer from avoiding the policy due to a piece of false or misstated information relayed by the insured, even those fraudulently done, after a specific amount of time has passed.

Note that the law requires specific incontestability clauses to be included in the following types of insurance policies: individual life or endowment policy, group life insurance policies, industrial life policies.

The incontestability clause, in a sense, requires the insurer to double-check the authenticity of the information provided by the insured.

Failure to further investigate such information more carefully and later on voiding the contract upon discovery of a false fact would be unjust as this provides room for the insurer to avoid liability.

A life insurance policy would be incontestable or beyond question and is deemed in force and valid despite the fraudulent or dishonest concealment or misrepresentation of information by the insured after it has been in force during the lifetime of the insured for a period of two years.

To illustrate, suppose a life insurance was obtained on Jan. 1, 2015 and the insured died three years later.

The beneficiaries are claiming from the insurance on Feb. 1, 2018 but got denied on the ground that the deceased insured fraudulently concealed an information about his health in his application, which was linked to his death, thus the policy was invalid from the beginning.

However, such denial of claim by the insurer is wrong because the two-year period within which the insurance company should have contested had already expired.

However, there are conflicting views regarding the denial of claims if the insured died before the expiration of the two-year period.

On one hand, in the decision issued by the Supreme Court in Emilio Tan, et al. v. Court of Appeals, it was held that the policy can still be voided or the claim can be denied if the insured dies within the two-year period as long as there is a concealment or misrepresentation made by the insured in the insurance contract.

In contrast, in Sun Life of Canada (Philippines), Inc. v. Sibya, a more recent case, the Supreme Court decided that the death of the insured within the two-year period will render the right of the insurer to rescind the policy nugatory or without effect.

The observation in Manila Bankers Life Insurance Corporation v. Aban was cited which indicated that after the two-year period ends, or when the insured dies within the two year period, the insurer must make good on the policy, even though the policy was obtained by fraud, concealment, or misrepresentation.

Lastly, it must be noted that there are situations when the incontestable clause is not applicable such as when the premium had not been paid, or when there is a violation of the conditions of the policy related to military or naval service in times of war.

It is also not applicable in property insurance or when there is no insurable interest in the first place.

When vicious or cruel fraud was used in getting the policy (impersonation or a scheme which involved murdering the insured), the incontestable clause will not be applicable.

The clause is likewise ineffective in cases where the cause of the loss is an excepted risk, where the beneficiary feloniously kills the insured, the beneficiary failed to comply with conditions subsequent like failure to submit notice of loss, and if the claim is denied because the given period of time to file a claim has already ended.

The author is the deputy commissioner for legal services of the Insurance Commission. He may be contacted at rb.escolango@yahoo.com.

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