BusinessMirror – Incontestibility clause

Incontestibility clause
Category: Opinion 16 November 2016
Written by Dennis B. Funa

Under the New Civil Code, a contract is voidable if

the consent by one party is vitiated by mistake or
fraud. The incontestability clause in the Insurance
Code is an exception to this Civil Code provision. The
incontestability clause provides that a life insurance
policy shall be incontestable after two years from the
date of issuance, regardless of any mistake, fraud,
concealment or misrepresentation. Under Philippine
laws, it may only be contested on the ground of non-payment of premiums.

The incontestability clause is one of the strongest protections for a policyholder or

beneficiary, this rule is soundly on the side of the consumer

The ultimate aim of the incontestability clause is “to compel insurers to solicit business
from or provide insurance coverage only to legitimate and bona fide clients, by
requiring them to thoroughly investigate those they insure within two years from
effectivity of the policy and while the insured is still alive. If they do not, they will be
obligated to honor claims on the policies they issue, regardless of fraud, concealment
or misrepresentation.” (Manila Bankers Life Insurance Corporation v. Aban, G.R. No.
175666, July 29, 2013).

The object of an incontestability clause is “to restrict the insurer to a definite time within
which to discover any fraud or misrepresentation made by the insured in the
application for insurance and to take appropriate action to cancel the policy.”

In Manila Bankers, Delia Sotero was issued a life insurance policy, with a face value
of Php 100,000.00 on August 30, 1993. On April 10, 1996, when the insurance policy
had been in force for more than two years and seven months, Sotero died. After
receiving the claim, the insurer denied the claim and refunded the premiums on the
ground that the insurance policy was void ab initio for want of insurable interest. The
insurer pointed out that Sotero could not have personally applied for insurance as she
was illiterate and did not have the financial capacity to pay the premiums. The court
upheld the trial court’s findings that it was Sotero herself who obtained the insurance
and not an impostor. More importantly, invoking the incontestability clause, the Court
ruled that the insurer is barred from proving that the policy is void ab initio by reason
of the insured’s fraudulent concealment, or misrepresentation or want of insurable
interest on the part of the beneficiary.

A matter of query is whether or not such fraudulent concealment or misrepresentation

can be contested, and the payment of claims consequently denied, if the insured died

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BusinessMirror – Incontestibility clause

during the contestability period or before the expiration of the two-years within which
the insurer should investigate as provided in the Insurance Code.

In Sun Life of Canada (Phil.), Inc. v. Sibya et al. (G.R. No. 211212, June 8, 2016),
Jesus Sibya, Jr. was issued a life insurance policy on Februaury 5, 2001 by Sun Life
with Daisy Sibya, Jesus III, and Jaime as the beneficiaries. The policy entitled them to
a death benefit of Php 1,000,000 should Jesus die on or before February 5, 2021 or a
sum of money if Jesus is still living on the endowment date. In his application, Sibya
indicated that he had undergone lithotripsy due to kidney stone at the National Kidney
Institute and was discharged after three days with no recurrence. On May 11, 2001,
or less than two years later, Jesus died of a gunshot wound. Sun Life denied the
claim and refunded the premiums paid on the ground that certain details about Jesus’s
medical history were not disclosed in his application. Sun Life alleged that Jesus did
not disclose in his application his previous medical treatment at the National Kidney
Transplant Institute on May and August of 1994 and that the insured was in “renal
failure” making him a high risk individual.

The Supreme Court held, citing Manila Bankers Life Insurance Corp. v. Aban, that if
the insured dies within the two-year contestability period, the insurer is bound
to make good its obligation under the policy regardless of the presence or lack of
concealment or misrepresentation. The Court ruled that “the death of the insured
within the two-year period will render the right of the insurer to rescind the policy
nugatory. As such, the incontestability period will now set in.”

It should be noted that while the Manila Bankers case did state that the insurer must
make good on the policy if the insured dies within the two-year period, such was a
mere obiter dictum.

A review of two previous cases (Tan et al. v. Court of Appeal et al.; Sunlife Assurance
Company of Canada v. Bacani) would show that the incontestability period does not
set in if the insured dies during the contestable period.

In Emilio Tan et al. v. Court of Appeals et al. (G.R. No. 48049, June 29, 1989), Tan
Lee Siong, was issued a life insurance by the Philippine American Life Insurance
Company, effective November 6, 1973. On April 26, 1975, or less than two years
later, Tan Lee Siong died of hepatoma. On September 11, 1975, the insurer denied
the claim and rescinded the policy on the ground of concealment and
misrepresentation.

The Supreme Court ruled that the policy was in force for a period of only one year and
five months, that the insurance company is not barred from proving that the policy is
void ab initio by reason of the insured’s fraudulent concealment or misrepresentation.
It noted also that respondent company rescinded the contract of insurance and
refunded the premiums paid on September 11, 1975, previous to the commencement
of the action on November 27, 1975.

The insurer has two years from the date of issuance of the insurance contract or of its
last reinstatement within which to contest the policy, whether or not, the insured still
lives within such period. After two years, the defenses of concealment or
misrepresentation, no matter how patent or well founded, no longer lie. Congress felt

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this was a sufficient answer to the various tactics employed by insurance companies
to avoid liability. The petitioners’ interpretation would give rise to the incongruous
situation where the beneficiaries of an insured who dies right after taking out and
paying for a life insurance policy, would be allowed to collect on the policy even of the
insured fraudulently concealed material facts.

In Sunlife Assurance Company of Canada v. Bacani (G.R. No. 105135, June 22,
1995), Robert Bacani procured a life insurance for himself from Sunlife on April 15,
1986. He designated his mother as beneficiary. On June 26, 1987, or less than two
years later, Bacani died in a plane crash. Upon filing a claim, Sunlife rejected it on the
ground that Bacani did not disclose material facts thus rendering the insurance
contract voidable. Bacani allegedly gave false statements in his application. He stated
that he only had consultations with a doctor for cough and flu complications. The
insurer had discovered that the insured was confined at the Lung Center of the
Philippines where he was diagnosed for renal failure. The Supreme Court ruled that
the insurer properly exercised its right to rescind the contract of insurance be reason
of the concealment by the insured. The rescission was exercised within the two-year
contestability period under Section 48.

END.

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Dennis B. Funa ([email protected]) is presently the deputy Insurance commissioner of
the Legal Services Group of the Insurance Commission.

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