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INSULAR LIFE ASSURANCE COMPANY v. PAZ Y. KHU

FACTS:

Felipe N. Khu, Sr. applied for a life insurance policy with Insular Life Assurance Company Ltd. under the Diamond Jubilee Insurance Plan. The policy took effect on June 22, 1997. However, due to non-payment of the premium, the policy lapsed on June 23, 1999. Felipe applied for the reinstatement of his policy on September 7, 1999, and paid the necessary premium. Insular Life informed Felipe that his reinstatement application would only be considered if he agreed to certain conditions and paid an additional premium. On December 27, 1999, Felipe paid the additional premium, and Insular Life issued an endorsement on January 7, 2000, certifying the reinstatement of the policy with certain changes. Felipe continued to pay the annual premium for the next two years. However, on September 22, 2001, Felipe passed away, and Insular Life denied his beneficiaries' claim for the reinstated policy. Insular Life cited concealment and misrepresentation by Felipe as the reasons for the denial. Felipe's beneficiaries filed a complaint for specific performance with damages, seeking the validity and enforceability of the reinstated policy. The RTC ruled in favor of the beneficiaries, asserting that the policy was valid and incontestable at the time of Felipe's death. The CA affirmed the RTC's decision. Insular Life then filed a petition for review on certiorari before the Supreme Court. The main issue to be resolved is whether Felipe's reinstated life insurance policy is already incontestable at the time of his death.

ISSUES:

  1. When should the reinstatement of the insurance policy be considered effective?

  2. What is the significance of the date of reinstatement?

  3. Whether there is ambiguity or obscurity in the language of the insurance contract.

  4. Whether the construction favorable to the insured should be adopted.

RULING:

  1. The reinstatement of the insurance policy should be considered effective on June 22, 1999, as indicated in the Letter of Acceptance and the Endorsement.

  2. The date of reinstatement is significant because it determines the start of the two-year period under the Insurance Code, after which the insurer cannot prove that the policy is void ab initio or rescindible due to fraudulent concealment or misrepresentation.

  3. Yes, there is ambiguity or obscurity in the language of the insurance contract.

  4. Yes, the construction favorable to the insured should be adopted.

PRINCIPLES:

  • Section 48 of the Insurance Code regulates the actions of both insurers and prospective takers of life insurance. It gives insurers enough time to uncover any fraud, concealment, or misrepresentation, and protects legitimate policyholders from unwarranted denial of claims or delays in collecting insurance proceeds.

  • The reinstatement of an insurance policy should be reckoned from the date of approval by the insurer, as it signifies the restoration of the policy to premium-paying status.

  • The two-year period under the Insurance Code begins from the date of issuance or the last reinstatement of the policy, after which the insurer cannot prove that the policy is void ab initio or rescindible due to fraudulent concealment or misrepresentation.

  • An insurance contract is a contract of adhesion, which must be construed liberally in favor of the insured and strictly against the insurer to safeguard the latter's interest.

  • Ambiguities in insurance contracts should be resolved against the insurer and in favor of the insured.

  • Limitations of liability in insurance policies should be construed in such a way as to preclude the insurer from noncompliance with its obligations.

  • Insurance contracts are imbued with public interest and must be considered whenever the rights and obligations of the insurer and the insured are to be delineated.

  • Insurance companies must act with haste upon insurance applications, either denying or approving them, in order to protect the interest of insurance applicants.