Section 26. A neglect to communicate that which a party knows and ought to communicate is called a concealment.
What are the four primary concerns of parties to an insurance contract?
In making a contract so highly aleatory such as that of insurance, the parties have four primary concerns to wit:
1. The correct estimation of the risk which enables the insurer to decide whether he is willing to assume it, and if so, at what rate or premium;
2. The precise delimitation of the risk which determines the extent of the contingent duty to pay undertaken by the insurer;
3. Such control of the risk after it is assumed as will enable the insurer to guard against the increase of the risk because of change in conditions; and
4. Determining whether a loss occurred, and if so, the amount of such loss.
What is concealment?
Concealment is a neglect to communicate that which a party knows and ought to communicate.
What are the requisites of concealment?
There can be no concealment unless:
1) A party knows the fact which he neglects to communicate or disclose to the other;
2) Such party concealing duty bound to disclose such fact to the other
3) Such party concealing makes no warranty of the fact concealed; and
4) The other party has no means of ascertaining the fact concealed
Section 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.
What is the effect of concealment?
As a rule, failure on the part of the insured to disclose conditions affecting the risk of which he is aware, makes the contract voidable at the insured’s option. The reason is that insurance policies are traditionally contracts uberrime fidae, that is, contracts of the outmost good faith. This doctrine is essential on account of the fact that the full circumstances of the subject-matter of insurance are, as a rule, known to the insured only, and the insurer, in deciding whether or not to accept a risk, must rely primarily upon the information supplied to him by the appellant.
In order to rescind a contract on the ground of concealment, must the insurer prove fraud?
NO. Under Sec. 27, the insurer need not prove fraud in order to rescind a contract on the ground of concealment. The duty of communication is independent of the intention and is violated by the fact of concealment, even when there is no intention to deceive. Sec. 27 provides that the effect of concealment is the same regardless of whether the concealment is intentional or unintentional.
Why does the law make no distinction between international and unintentional concealment?
Because you have to prove fraud. And if you have to prove fraud, you have to prove intention to deceive. And it is so hard to prove intention to deceive because we are not mind-readers.
What is the reason behind Sec. 27?
The reason behind the Sec. is that in cases of concealment, the insurer is misled or deceived into accepting the risk , or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the insured will disclose every material fact within his actual or presumed knowledge, is misled into a belief that the circumstance withheld does NOT exist, and he is thereby induced to estimate the risk upon a false basis.
What is the criterion then if we were to apply Sec. 27?
We must ask ourselves the question: Was the insurer misled or deceiving into entering a contract obligation or in fixing the premium of insurance by the withholding of material information or facts within the insured’s knowledge or presumed knowledge? The application of Sec 27, necessarily depends on the answer to this question.