Summary: Tan vs. Court of Appeals (GR 48049, 29 June 1989)

Tan vs. Court of Appeals
[GR 48049, 29 June 1989]
Third Division, Gutierrez Jr. (J): 3 concur, 1 took no part

Facts: On 23 September 1973, Tan Lee Siong, father of Emilio, Juanito, Alberto, and Arturo Tan, applied for life insurance in the amount of P80,000.00 with the Philippine American Life Insurance Company (Philamlife). Said application was approved and Policy 1082467 was issued effective 6 November 1973, with Emilio Tan, et al. as beneficiaries. On 26 April 1975, Tan Lee Siong died of hepatoma. Emilio Tan, et al. then filed with Philamlife their claim for the proceeds of the life insurance policy. However, in a letter dated 11 September 1975, Philamlife denied Emilio Tan et al.'s claim and rescinded the policy by reason of the alleged misrepresentation and concealment of material facts made by the deceased Tan Lee Siong in his application for insurance. The premiums paid on the policy were thereupon refunded. Alleging that Philamlife's refusal to pay them the proceeds of the policy was unjustified and unreasonable, Emilio Tan et al. filed on 27 November 1975, a complaint against the former with the Office of the Insurance Commissioner (I.C. Case 218). After hearing the evidence of both parties, the Insurance Commissioner rendered judgment on 3 August 3, 1977, dismissing the complaint. The Court of Appeals dismissed their appeal from the Insurance Commissioner's decision for lack of merit. Emilio Tan et al. filed the petition for review on certiorari.

Issue: Whether Philamlife no longer had 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. Section 48 of the Insurance Code provides that "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 rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent." Herein, the policy was issued on 6 November 1973 and the insured died on 26 April 1975. The policy was thus in force for a period of only one year and five months. Considering that the insured died before the two-year period had lapsed, Philamlife is not, therefore, barred from proving that the policy is void ab initio by reason of the insured's fraudulent concealment or misrepresentation. Moreover, Philamlife rescinded the contract of insurance and refunded the premiums paid on 11 September 1975, previous to the commencement of this action on 27 November 1975. Under the "incontestability clause," 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 this was a sufficient answer to the various tactics employed by insurance companies to avoid liability. The interpretation of Emilio Tan et al. to said provision -- that the Insurance Law was amended and the second paragraph of Section 48 added to prevent the insurance company from exercising a right to rescind after the death of the insured; that 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; and that 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" -- 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 if the insured fraudulently concealed material facts.

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