I. Rescission of Insurance Contract: Concealment, Misrepresentation and Breach of Warranties

A. Basis/Rationale 1. Insurance is of utmost good faith(uberrimae fidae)2. As risk management devices3. As grounds for rescission

B. Concealment 1. Definition- Sections 26, 27, 28 and 29

SEC. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.

SEC. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.

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.

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.

Matters which need not be disclosed-Sections 30, 32, 33 and 34SEC. 30. Neither party to a contract of insurance is bound to communicate information of the matters following, except in answer to the inquiries of the other:“(a) Those which the other knows;“(b) Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to suppose him ignorant;“(c) Those of which the other waives communication;“(d) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material; and“(e) Those which relate to a risk excepted from the policy and which are not otherwise material.

SEC. 32. Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade.

SEC. 33. The right to information of material facts may be waived, either by the terms of insurance or by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated.

SEC. 34. Information of the nature or amount of the interest of one insured need not be communicated unless in answer to an inquiry, except as prescribed by Section 51.

2. Test of Materiality-Section 31SEC. 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.

Vda. De Canilang vs. CA, G.R. No. 92492

Facts: 1. Canilang was found to have suffered from sinus tachycardia then bronchitis after a check-up from his doctor. 2. He applied for a "non-medical" insurance policy with respondent Grepalife naming his wife, Thelma Canilang, as his beneficiary.

3. He died of "congestive heart failure," "anemia," and "chronic anemia." The widow filed a claim with Great Pacific which the insurer denied on the ground that the insured had concealed material information from it.

4. Petitioner then filed a complaint against Great Pacific for recovery of the insurance proceeds. Petitioner testified that she was not aware of any serious illness suffered by her late husband and her husband had died because of a kidney disorder. The doctor who gave the checkup stated that he treated the deceased for “sinus tachycardia” and "acute bronchitis."

5. Great Pacific presented a physician who testified that the deceased's insurance application had been approved on the basis of his medical declaration. She explained that as a rule, medical examinations are required only in cases where the applicant has indicated in his application for insurance coverage that he has previously undergone medical consultation and hospitalization.

6. The Insurance Commissioner ordered Great Pacific to pay P19,700 plus legal interest and P2,000.00 as attorney's fees.

7. On appeal by Great Pacific, the Court of Appeals reversed. It found that the failure of Jaime Canilang to disclose previous medical consultation and treatment constituted material information which should have been communicated to Great Pacific to enable the latter to make proper inquiries.

8.Hence this petition by the widow.

Issue: Won Canilang was guilty of misrepresentation

Held: Yes. There was a right of the insurance company to rescind the contract if it was proven that the insured committed fraud in not affirming that he was treated for heart condition and other ailments stipulated.

Apart from certifying that he didn’t suffer from such a condition, Canilang also failed to disclose in the that he had twice consulted a doctor who had found him to be suffering from "sinus tachycardia" and "acute bronchitis."

Under the Insurance Code:Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.Sec. 28. Each party to a contract of insurance must communicate to the other, in good faith, all factors 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.The information concealed must be information which the concealing party knew and should have communicated. The test of materiality of such information is contained in Section 31: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.

The information which Jaime Canilang failed to disclose was material to the ability of Great Pacific to estimate the probable risk he presented as a subject of life insurance. Had he disclosed his visits to his doctor, the diagnosis made and medicines prescribed by such doctor, in the insurance application, it may be reasonably assumed that Great Pacific would have made further inquiries and would have probably refused to issue a non-medical insurance policy.Materiality relates rather to the "probable and reasonable influence of the facts" upon the party to whom the communication should have been made, in assessing the risk involved in making or omitting to make further inquiries and in accepting the application for insurance; that "probable and reasonable influence of the facts" concealed must, of course, be determined objectively, by the judge ultimately.The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain information to the insurer was not "intentional" in nature, for the reason that Canilang believed that he was suffering from minor ailment like a common cold. Section 27 stated that:

Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.The failure to communicate must have been intentional rather than inadvertent. Canilang could not have been unaware that his heart beat would at times rise to high and alarming levels and that he had consulted a doctor twice in the two (2) months before applying for non-medical insurance.

Indeed, the last medical consultation took place just the day before the insurance application was filed. In all probability, Jaime Canilang went to visit his doctor precisely because of the ailment.

Canilang's failure to set out answers to some of the questions in the insurance application constituted concealment.

Sun Life American Co., vs. CA, G.R. No. 105135

Facts: 1. Robert John B. Bacani procured a life insurance contract for himself from Sunlife. He was issued a policy for P100,000.00, with double indemnity in case of accidental death. The designated beneficiary was his mother, Bernarda Bacani.

2. The insured died in a plane crash. Respondent Bernarda Bacani filed a claim with petitioner, seeking the benefits of the insurance policy taken by her son. Petitioner conducted an investigation and its findings prompted it to reject the claim.

3. Sunlife informed Bacani that the insured did not disclose material facts relevant to the issuance of the policy, thus rendering the contract of insurance voidable. A check representing the total premiums paid in the amount of P10,172.00 was attached to said letter.

4. Petitioner claimed that the insured gave false statements in his application. The deceased answered claimed that he consulted a Dr. Raymundo of the Chinese General Hospital for cough and flu complications. The other questions were answered in the negative.

5. Petitioner discovered that two weeks prior to his application for insurance, the insured was examined and confined at the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased was subjected to urinalysis tests.

6. Bernarda Bacani and her husband filed an action for specific performance against petitioner with the RTC. The court ruled in favor of the spouses and ordered Sunlife to pay P100,000.00.

7. In ruling for private respondents, the trial court concluded that the facts concealed by the insured were made in good faith and under a belief that they need not be disclosed. The court also held that the medial history was irrelevant because it wasn’t medical insurance.

8. The Court of Appeals affirmed the decision of the trial court. The appellate court ruled that petitioner cannot avoid its obligation by claiming concealment because the cause of death was unrelated to the facts concealed by the insured. Petitioner's motion for reconsideration was denied. Hence, this petition.

Issue: WON the insured was guilty of misrepresentation which made the contract void.

Held: Yes. Section 26 of The Insurance Code required a party to a contract of insurance to 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 no means of ascertaining.“A neglect to communicate that which a party knows and ought to communicate, is called concealment.”

“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 communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries.”

The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to his health.

The information which the insured failed to disclose were material and relevant to the approval and issuance of the insurance policy. The matters concealed would have definitely affected petitioner's action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the application.

Vda. de Canilang v. Court of Appeals- 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.“Good faith" is no defense in concealment. The insured's failure to disclose the fact that he was hospitalized raises grave doubts about his eligibility. Such concealment was deliberate on his part.The argument, that petitioner's waiver of the medical examination of the insured debunks the materiality of the facts concealed, is untenable.

Saturnino v. Philippine American Life Insurance " . . . the waiver of a medical examination [in a non-medical insurance contract] renders even more material the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not . . . "

The finding that the facts concealed had no bearing to the cause of death of the insured, it is well settled that the insured need not die of the disease he had failed to disclose to the insurer. 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 as held in Henson.

C. Misrepresentation, the active form of concealment- Sections 36 to 48

SEC. 36. A representation may be oral or written.

SEC. 37. A representation may be made at the time of, or before, issuance of the policy.

SEC. 38. The language of a representation is to be interpreted by the same rules as the language of contracts in general.

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.

SEC. 40. A representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty.

SEC. 41. A representation may be altered or withdrawn before the insurance is effected, but not afterwards.

SEC. 42. A representation must be presumed to refer to the date on which the contract goes into effect.

SEC. 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.

SEC. 44. A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations.

SEC. 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.

SEC. 46. The materiality of a representation is determined by the same rules as the materiality of a concealment.

SEC. 47. The provisions of this chapter apply as well to a modification of a contract of insurance as to its original formation.

SEC. 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.

Insular Life vs. Feliciano, G.R. No. 47593

Facts: 1. Evaristo Feliciano was issued an insurance policy by Insular Life. In September 1935, he died.

2. His heirs filed an insurance claim but Insular Life denied the application as it averred that Feliciano’s application was attended by fraud. It was later found in court that the insurance agent and the medical examiner of Insular Life who assisted Feliciano in signing the application knew that Feliciano was already suffering from tuberculosis; that they were aware of the true medical condition of Feliciano yet they still made it appear that he was healthy in the insurance application form; that Feliciano signed the application in blank and the agent filled the information for him.

Issue: Whether or not Insular Life can avoid the insurance policy by reason of the fact that its agent knowingly and intentionally wrote down the answers in the application differing from those made by Feliciano.

Held: Yes. When Evaristo Feliciano, the applicant for insurance, signed the application in blank and authorized the soliciting agent and/or medical examiner of the Company to write the answers for him, he made them his own agents for that purpose, and he was responsible for their acts in that connection. If they falsified the answers for him, he could not evade the responsibility for their falsification. He was not supposed to sign the application in blank. He knew that the answers to the questions therein contained would be "the basis of the policy," and for that every reason he was required with his signature to vouch for truth thereof. Moreover, from the facts of the case we cannot escape the conclusion that the insured acted in connivance with the soliciting agent and the medical examiner of the Company in accepting the policies in question.

Above the signature of the applicant is the printed statement or representation: " . . . I am a proper subject for life insurance." In another sheet of the same application and above another signature of the applicant was also printed this statement: "That the said policy shall not take effect until he first premium has been paid and the policy as been delivered to and accepted by me, while I am in good health."

When the applicant signed the application he was "having difficulty in breathing, . . . with a very high fever." He had gone three times to the Santol Sanatorium and had X-ray pictures taken of his lungs. He therefore knew that he was not "a proper subject for life insurance." When he accepted the policy, he knew that he was not in good health.

Nevertheless, he not only accepted the first policy of P20,000 but then and there applied for and later accepted another policy of P5,000. From all the facts and circumstances of this case, we are constrained to conclude that the insured was a coparticipant, and coresponsible with Agent David and Medical Examiner Valdez, in the fraudulent procurement of the policies in question and that by reason thereof said policies are void ab initio.

Yu Pang Cheng vs. CA, G.R. No. L-12465

Facts: 1. Yu Pang Eng submitted application for insurance consisting of the medical declaration made by him to the medical examiner and the report. Yu then paid the premium in the sum of P591.70.

2. The insured, in his application for insurance, said “no” to ever having stomach disease, cancer, and fainting-spells. He also claimed to not have consulted a physician regarding such diseases.After submitting the form, he entered the hospital where he complained of dizziness, anemia, abdominal pains and tarry stools. He was found to have peptic ulcer.

3. The insured entered another hospital for medical treatment but he died of "infiltrating medullary carcinoma, Grade 4, advanced cardiac and of lesser curvature, stomach metastases spleen."

4. Yu Pang Cheng aimed to collect P10,000.00 on life of one Yu Pang Eng from an insurance company.The company set up the defense that the insured was guilty of misrepresentation and concealment of material facts. They subsequently refused to give the indemnity.

5. The trial court rendered judgment ordering defendant to pay plaintiff the sum of P10,000.00, plus P2,000.00 as attorney's fees.6. The Court of Appeals reversed the decision of the trial court, holding that the insured was guilty of concealment of material facts. Hence the present petition.

Issue: Whether or not the insured is guilty of concealment of some facts material to the risk insured that consequently avoids the policy.

Held: Yes. The first confinement took place from January 29, 1950 to February 11, while his application was submitted on September 5, 1950. When he gave his answers to the policy, he concealed the ailment of which he was treated in the hospital.

The negative answers given by the insured regarding his previous ailment deprived defendant of the opportunity to make the necessary inquiry as to the nature of his past illness so that as it may form its estimate relative to the approval of his application. Had defendant been given such opportunity, the company would probably had never consented to the issuance of the policy in question. In fact, according to the death certificate, the insured’s death may have direct connection with his previous illness.

Under the law, a neglect to communicate that which a party knows and ought to communicate, is called concealment. This entitles the insurer to rescind the contract. The insured is required to communicate to the insurer all facts within his knowledge which are material to the contract and which the other party has not the means of ascertaining. The 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.

Argente vs. West Coast- “One ground for the rescission of a contract of insurance under the insurance Act is "a concealment", which in section 25 is defined "A neglect to communicate that which a party knows and ought to communicate."

“In an action on a life insurance policy where the evidence conclusively shows that the answers to questions concerning diseases were untrue, the truth or falsity of the answers become the determining factor. If the policy was procured by fraudulent representations, the contract of insurance was never legally existent. It can fairly be assumed that had the true facts been disclosed by the assured, the insurance would never have been granted.”

D. The Incontestability clause- Section 48, par. 2

“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.

Tan vs. CA, G.R. No. 48049

Facts: 1. Tan Lee Siong, father of the petitioners, applied for life insurance in the amount of P 80,000.00 with Philamlife. It was approved. Tan Lee Siong died of hepatoma (liver cancer).

2. Petitioners then filed a claim for the proceeds. The company denied petitioners' claim and rescinded the policy by reason of the alleged misrepresentation and concealment of material facts. The premiums paid on the policy were refunded.

3. The petitioners filed a complaint in the Insurance Commission. The latter dismissed the complaint.The Court of Appeals dismissed ' the petitioners' appeal from the Insurance Commissioner's decision for lack of merit. Hence, this petition.

Issue: WON Philam didn’t have the right to rescind the contract of insurance as rescission must allegedly be done during the lifetime of the insured within two years and prior to the commencement of action.

Held: No. The Insurance Code states in 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" in the second paragraph prevents the insurer from raising the defenses of false representations 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 policy was in force for a period of only one year and five months. Considering that the insured died before the two-year period had lapsed, respondent company is not, therefore, barred from proving that the policy is void ab initio by reason of the insured's fraudulent concealment or misrepresentation.

The "incontestability clause" added by the second paragraph of Section 48 is in force for two years. After this, the defenses of concealment or misrepresentation no longer lie.

The petitioners argue that no evidence was presented to show that the medical terms were explained in a layman's language to the insured. They also argue that no evidence was presented by respondent company to show that the questions appearing in Part II of the application for insurance were asked, explained to and understood by the deceased so as to prove concealment on his part. This couldn’t be accepted because the insured signed the form. He affirmed the correctness of all the entries.

The company records show that the deceased was examined by Dr. Victoriano Lim and was found to be diabetic and hypertensive. He was also found to have suffered from hepatoma. Because of the concealment made by the deceased, the company was thus misled into accepting the risk and approving his application as medically fit.

Manila Bankers Life Insurance vs. Aban, G.R. No. 175666

Facts: 1. Delia Sotero took out a life insurance policy from Manila Bankers Life Insurance Corporation (Bankers Life), designating respondent Cresencia P. Aban, her niece, as her beneficiary.

2. Petitioner issued Insurance Policy No. 747411, with a face value of P100,000.00, in Sotero's favor on August 30, 1993, after the requisite medical examination and payment of the insurance premium.

3. When the insurance policy had been in force for more than two years and seven months, Sotero died. Respondent filed a claim for the insurance proceeds on July 9, 1996. Petitioner conducted an investigation into the claim, and came out with the following findings:

1. Sotero did not personally apply for insurance coverage, as she was illiterate;chanr0blesvirtualawlibrary2. Sotero was sickly since 1990;3. Sotero did not have the financial capability to pay the insurance premiums on Insurance Policy No. 747411;4. Sotero did not sign the July 3, 1993 application for insurance; [and] 5. Respondent was the one .who filed the insurance application, and x x x designated herself as the beneficiary.

For the above reasons, petitioner denied respondent's claim on April 16, 1997 and refunded the premiums paid on the policy.

4. Petitioner filed a civil case for rescission and/or annulment of the policy, which was docketed as Civil Case No. 97-867 and assigned to Branch 134 of the Makati Regional Trial Court. The main thesis of the Complaint was that the policy was obtained by fraud, concealment and/or misrepresentation under the Insurance Code, which thus renders it voidable under Article 1390 of the Civil Code.

5. Respondent filed a Motion to Dismiss claiming that petitioner's cause of action was barred by prescription pursuant to Section 48 of the Insurance Code, which provides as follows:

6. 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.

7. 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.

8. During the proceedings on the Motion to Dismiss, petitioner's investigator testified in court, stating among others that the insurance underwriter who solicited the insurance is a cousin of respondent's husband, Dindo Aban, and that it was the respondent who paid the annual premiums on the policy.

RTC dismissed the case granting the motion.

CA thus sustained the trial court. Applying Section 48 to petitioner's case, the CA held that petitioner may no longer prove that the subject policy was void ab initio or rescindable by reason of fraudulent concealment or misrepresentation after the lapse of more than two years from its issuance. It ratiocinated that petitioner was equipped with ample means to determine, within the first two years of the policy, whether fraud, concealment or misrepresentation was present when the insurance coverage was obtained. If it failed to do so within the statutory two-year period, then the insured must be protected and allowed to claim upon the policy.

Issue: the court of appeals erred in sustaining the application of the incontestability provision in the insurance code by the trial court.

Held:

No. The ultimate aim of Section 48 of the Insurance Code 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.

E. Warranties- Sections 67 to 76SEC. 67. A warranty is either expressed or implied.

SEC. 68. A warranty may relate to the past, the present, the future, or to any or all of these.

SEC. 69. No particular form of words is necessary to create a warranty.

SEC. 70. Without prejudice to Section 51, every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy as making a part of it.

SEC. 71. A statement in a policy, of a matter relating to the person or thing insured, or to the risk, as fact, is an express warranty thereof.

SEC. 72. A statement in a policy, which imparts that it is intended to do or not to do a thing which materially affects the risk, is a warranty that such act or omission shall take place.

SEC. 73. When, before the time arrives for the performance of a warranty relating to the future, a loss insured against happens, or performance becomes unlawful at the place of the contract, or impossible, the omission to fulfill the warranty does not avoid the policy.

SEC. 74. The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to rescind.

SEC. 75. 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.

SEC. 76. A breach of warranty without fraud merely exonerates an insurer from the time that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk.

Qua Chee Gan vs. Law Union, G.R. No. L-4611

Facts: 1. The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas (designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of stocks of copra and of hemp, baled and loose, in which the appellee dealt extensively. They had been, with their contents, insured with the defendant Company since 1937, and the lose made payable to the Philippine National Bank as mortgage of the hemp and crops, to the extent of its interest.

2. Fire broke out in the early morning of July 21, 1940, and lasted almost one week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored theren.

3. Plaintiff-appellee informed the insurer by telegram on the same date; and on the next day, the fire adjusters engaged by appellant insurance company arrived and proceeded to examine and photograph the premises, pored over the books of the insured and conducted an extensive investigation.

4. The plaintiff having submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of the insurance, P370,000), the Insurance Company resisted payment, claiming violation of warranties and conditions, filing of fraudulent claims, and that the fire had been deliberately caused by the insured or by other persons in connivance with him.

5. With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his brother, Qua Chee Pao, and some employees of his, were indicted and tried in 1940 for the crime of arson, it being claimed that they had set fire

to the destroyed warehouses to collect the insurance. They were, however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit WW).

6. Thereafter, the civil suit to collect the insurance money proceeded to its trial and termination in the Court below, with the result noted at the start of this opinion. The Philippine National Bank's complaint in intervention was dismissed because the appellee had managed to pay his indebtedness to the Bank during the pendecy of the suit, and despite the fire losses.

Qua Chee Gan, instituted this action in the Court of First Instance, seeking to recover the proceeds of certain fire insurance policies totalling P370,000, issued by the Law Union & Rock Insurance Co., Ltd., upon certain bodegas and merchandise of the insured that were burned on June 21, 1940. The records of the original case were destroyed during the liberation of the region, and were reconstituted in 1946.

RTC render a decision in favor of the plaintiff

From the decision, the defendant Insurance Company appealed directly to this Court.

In its first assignment of error, the insurance company alleges that the trial Court should have held that the policies were avoided for breach of warranty, specifically the one appearing on a rider pasted (with other similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders were attached for the first time in 1939, and the pertinent portions read as follows:

Memo. of Warranty. — The undernoted Appliances for the extinction of fire being kept on the premises insured hereby, and it being declared and understood that there is an ample and constant water supply with sufficient pressure available at all seasons for the same, it is hereby warranted that the said appliances shall be maintained in efficient working order during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed on the premium chargeable under this policy.

Hydrants in the compound, not less in number than one for each 150 feet of external wall measurement of building, protected, with not less than 100 feet of hose piping and nozzles for every two hydrants kept under cover in convenient places, the hydrants being supplied with water pressure by a pumping engine, or from some other source, capable of discharging at the rate of not less than 200 gallons of water per minute into the upper story of the highest building protected, and a trained brigade of not less than 20 men to work the same.'

It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the appellee should have eleven (11) fire hydrants in the compound, and that he actually had only two (2), with a further pair nearby, belonging to the municipality of Tabaco.

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so-called fire hydrants warranty, for the reason that knowing fully all that the number of hydrants demanded therein never existed from the very beginning, the appellant neverthless issued the policies in question subject to such warranty, and received the corresponding premiums. It would be perilously close to conniving at fraud upon the insured to allow appellant to claims now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire hydrants installed by Qua Chee Gan and two others nearby, owned by the municipality of TAbaco, contrary to the requirements of the warranty in question. Such fact appears from positive testimony for the insured that appellant's agents inspected the premises; and the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made is moreover rendered probable by its being a prerequisite for the fixing of the discount on the premium to which the insured was entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available (See "Scale of Allowances" to which the policies were expressly made subject).

F. Grounds and exercise of right of Rescission- Sections 48, 64, 65 and 170

SEC. 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.

SEC. 64. No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the following:

“(a) Nonpayment of premium;“(b) Conviction of a crime arising out of acts increasing the hazard insured against;“(c) Discovery of fraud or material misrepresentation;“(d) Discovery of willful or reckless acts or omissions increasing the hazard insured against;“(e) Physical changes in the property insured which result in the property becoming uninsurable;“(f) Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; “(g) A determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code.

SEC. 65. All notices of cancellation mentioned in the preceding section shall be in writing, mailed or delivered to the named insured at the address shown in the policy, or to his broker provided the broker is authorized in writing by the policy owner to receive the notice of cancellation on his behalf, and shall state:

“(a) Which of the grounds set forth in Section 64 is relied upon; and“(b) That, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based.

SEC. 170. An alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance.

Areola vs. CA ( supra)

FACTS:

December 17, 1984: Prudential Guarantee And Assurance, Inc. issued collector's provisional receipt amounting to P1,609.65 June 29, 1985: 7 months after the issuance of petitioner Santos Areola's Personal Accident Insurance Policy, Prudential Guarantee And Assurance, Inc. unilaterally cancelled it for failing to pay his premiums through its manager Teofilo M. MalapitShocked by the cancellation of the policy, Santos approached Carlito Ang, agent of Prudential and demanded the issuance of an official receipt. Ang told Santos that it was a mistake and assured its rectification.July 15, 1985: Santos demanded the same terms and same rate increase as when he paid the provincial receipt but Malapit insisted that the partial payment he made was exhausted and that he should pay the balance or his policy will cease to operateJuly 25, 1985 : Assistant Vice-President Mariano M. Ampil III apologized August 6, 1985 had filed a complaint for breach of contract with damages before the lower courtAugust 13, 1985: Santos received through Carlito Ang the leeter of Assistant Vice-President Mariano M. Ampil III finding error on their part since premiums were not remitted Malapit, proposed to extend its lifetime to December 17, 1985RTC: favored Santos - Prudential in Bad FaithCA: Reversed - not motivated by negligence, malice or bad faith in cancelling subject policyISSUE: W/N the Areolas can file against damages despite the effort to rectify the cancellation

HELD: YES. RTC reinstated

Malapit's fraudulent act of misappropriating the premiums paid is beyond doubt directly imputable to PrudentialArt. 1910. The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly.Subsequent reinstatement could not possibly absolve Prudential there being an obvious breach of contracta contract of insurance creates reciprocal obligations for both insurer and insuredArticle 1191choice between fulfillment or rescission of the obligation in case one of the obligors fails to comply with what is incumbent upon himentitles the injured party to payment of damages, regardless of whether he demands fulfillment or rescission of the obligationNominal damages are "recoverable where a legal right is technically violated and must be vindicated against an invasion that has produced no actual present loss of any kind, or where there has been a breach of contract and no substantial injury or actual damages whatsoever have been or can be shown.