G.R. No. 195176. April 18, 2016.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., Petitioner, vs. PAZ Y. KHU, FELIPE Y. KHU, JR., and FREDERICK Y. KHU, Respondents.

FACTS

On March 6, 1997, Felipe N. Khu, Sr. applied for a life insurance policy with Insular Life, which issued Policy No. A000015683 effective June 22, 1997. The policy lapsed on June 23, 1999, due to non-payment of premiums. On September 7, 1999, Felipe applied for reinstatement, paying a premium and later agreeing to additional conditions set by Insular Life, including payment of an extra premium and deletion of certain riders. He paid the additional premium on December 27, 1999. On January 7, 2000, Insular Life issued Endorsement No. PNA000015683, stating the reinstatement was approved “on the understanding that the following changes are made on the policy effective June 22, 1999.” Felipe subsequently paid annual premiums covering periods from June 22, 2000, to June 21, 2002. He died on September 22, 2001, from various ailments, including end-stage renal failure and diabetes. His beneficiaries filed a claim, which Insular Life denied, rescinding the policy on grounds of concealment and misrepresentation regarding Felipe’s health conditions. The beneficiaries then filed a complaint for specific performance. The Regional Trial Court ruled in favor of the beneficiaries, declaring the policy reinstated as of June 22, 1999, and thus incontestable at the time of Felipe’s death. The Court of Appeals affirmed the RTC’s decision but deleted the awards for moral damages, attorney’s fees, and litigation expenses.

ISSUE

Whether Felipe’s reinstated life insurance policy was already incontestable at the time of his death.

RULING

The Supreme Court denied the petition, affirming the Court of Appeals’ decision. The Court held that the reinstated policy was incontestable at the time of Felipe’s death. Under Section 48 of the Insurance Code, the two-year contestability period for a reinstated policy is reckoned from the date of approval of the reinstatement. However, in this case, there was ambiguity in the insurance documents—specifically, the Endorsement and the Letter of Acceptance—regarding the effective date of reinstatement. The Endorsement stated that changes were made “effective June 22, 1999,” but it was unclear whether this date referred to the reinstatement itself or only to the changes. Given this ambiguity, and applying the principle that insurance contracts are contracts of adhesion, any obscurity must be interpreted strictly against the insurer and in favor of the insured. Thus, the reinstatement was deemed effective June 22, 1999, making the policy incontestable by September 22, 2001 (over two years later). The Court rejected Insular Life’s argument that the reinstatement was approved only on December 27, 1999 (the date of the additional premium payment), as the ambiguity in the documents prepared by Insular Life warranted an interpretation favorable to the insured. Consequently, the policy was beyond the contestability period, and the beneficiaries were entitled to the proceeds.