EN BANC

[G.R. No. 137172. April 4, 2001]

UCPB GENERAL INSURANCE CO. INC., petitioner, vs. MASAGANA
TELAMART, INC., respondent.
R E S O L U T I O N
DAVIDE, JR., C.J .:
In our decision of 15 June 1999 in this case, we reversed and set aside the assailed
decision
[1]
of the Court of Appeals, which affirmed with modification the judgment of the trial
court (a) allowing Respondent to consign the sum of P225,753.95 as full payment of the
premiums for the renewal of the five insurance policies on Respondents properties; (b) declaring
the replacement-renewal policies effective and binding from 22 May 1992 until 22 May 1993;
and (c) ordering Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned
properties covered by the renewal-replacement policies. The modification consisted in the (1)
deletion of the trial courts declaration that three of the policies were in force from August 1991
to August 1992; and (2) reduction of the award of the attorneys fees from 25% to 10% of the
total amount due the Respondent.
The material operative facts upon which the appealed judgment was based are summarized
by the Court of Appeals in its assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5)
insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in
Pasay City and Manila].
All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22
May 1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiff's properties
located at 2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On
July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank
Manager's Checks in the total amount of P225,753.45 as renewal premium payments
for which Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191)
was issued by defendant. On July 14, 1992, Masagana made its formal demand for
indemnification for the burned insured properties. On the same day, defendant
returned the five (5) manager's checks stating in its letter (Exhibit "R"/"8", Record, p.
192) that it was rejecting Masagana's claim on the following grounds:
"a) Said policies expired last May 22, 1992 and were not renewed for another term;
b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and
c) The properties covered by the said policies were burned in a fire that took place last June 13,
1992, or before tender of premium payment."

(Record, p. 5)
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioners stand that Respondents tender of payment
of the premiums on 13 July 1992 did not result in the renewal of the policies, having been made
beyond the effective date of renewal as provided under Policy Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five days in advance of the
end of the policy period mails or delivers to the assured at the address shown in the
policy notice of its intention not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the assured shall be entitled to renew
the policy upon payment of the premium due on the effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent,
which had procured insurance coverage from Petitioner for a number of years, had been granted
a 60 to 90-day credit term for the renewal of the policies. Such a practice had existed up to the
time the claims were filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued
on May 7, 1990 but premium was paid more than 90 days later on August 31, 1990
under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for
Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB
on May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more
than 60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as
other policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to
May 22, 1991 was issued on May 7, 1990 but premium therefor was paid only on July
19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No.
34661 covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990
but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and
"X-1"). Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990
to May 22, 1991 was issued on May 7, 1990 but premium was paid only on July 19,
1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126
to cover insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22,
1989 but premium therefor was collected only on July 25, 1990[sic] under O.R. No.
40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering
risks from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils.
(Masagana's sister company) dated December 10, 1988 but premium therefor was
paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire
Insurance Policy No. 29128 was issued on May 22, 1989 but premium was paid only
on July 25, 1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to
May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued
on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682
for insurance risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and
"DD-1"). Fire Insurance Policy No. HO/F-29362 was issued on June 15, 1989 but
premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance
coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire
Insurance Policy No. 26303 was issued on November 22, 1988 but premium therefor
was collected only on March 15, 1989 under O.R. NO. 38573 for insurance risks
coverage from December 15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the following circumstances constitute
preponderant proof that no timely notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit 11, Record, p. 350)
from Ultramar Reinsurance Brokers that plaintiffs reinsurance facility had been
confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit
11. Apparently, the notice of non-renewal (Exhibit 7, Record, p. 320) was
sent not earlier than said date, or within 45 days from the expiry dates of the
policies as provided under Policy Condition No. 26; (2) Defendant insurer
unconditionally accepted, and issued an official receipt for, the premium payment
on July 1[3], 1992 which indicates defendant's willingness to assume the risk
despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed
Esteban Adjusters and Valuers to investigate plaintiffs claim as shown by the
letter dated July 17, 1992 (Exhibit 11, Record, p. 254).
In our decision of 15 June 1999, we defined the main issue to be whether the fire insurance
policies issued by petitioner to the respondent covering the period from May 22, 1991 to May
22, 1992 had been extended or renewed by an implied credit arrangement though actual
payment of premium was tendered on a later date and after the occurrence of the (fire) risk
insured against. We resolved this issue in the negative in view of Section 77 of the Insurance
Code and our decisions in Valenzuela v. Court of Appeals
[2]
; South Sea Surety and Insurance Co.,
Inc. v. Court of Appeals
[3]
; and Tibay v. Court of Appeals.
[4]
Accordingly, we reversed and set
aside the decision of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It
alleges in the motion that we had made in the decision our own findings of facts, which are not in
accord with those of the trial court and the Court of Appeals. The courts below correctly found
that no notice of non-renewal was made within 45 days before 22 May 1992, or before the
expiration date of the fire insurance policies. Thus, the policies in question were renewed by
operation of law and were effective and valid on 30 June 1992 when the fire occurred, since the
premiums were paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may neither agree expressly or
impliedly on the extension of credit or time to pay the premium nor consider a policy binding
before actual payment. It urges the Court to take judicial notice of the fact that despite the
express provision of Section 77 of the Insurance Code, extension of credit terms in premium
payment has been the prevalent practice in the insurance industry. Most insurance companies,
including Petitioner, extend credit terms because Section 77 of the Insurance Code is not a
prohibitive injunction but is merely designed for the protection of the parties to an insurance
contract. The Code itself, in Section 78, authorizes the validity of a policy notwithstanding non-
payment of premiums.
Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its
awareness of Section 77 Petitioner persuaded and induced Respondent to believe that payment of
premium on the 60- to 90-day credit term was perfectly alright; in fact it accepted payments
within 60 to 90 days after the due dates. By extending credit and habitually accepting payments
60 to 90 days from the effective dates of the policies, it has implicitly agreed to modify the tenor
of the insurance policy and in effect waived the provision therein that it would pay only for the
loss or damage in case the same occurred after payment of the premium.
Petitioner filed an opposition to the Respondents motion for reconsideration. It argues that
both the trial court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner
sent by ordinary mail to Respondent a notice of non-renewal and sent by personal delivery a
copy thereof to Respondents broker, Zuellig. Both courts likewise ignored the fact that
Respondent was fully aware of the notice of non-renewal. A reading of Section 66 of the
Insurance Code readily shows that in order for an insured to be entitled to a renewal of a non-life
policy, payment of the premium due on the effective date of renewal should first be
made. Respondents argument that Section 77 is not a prohibitive provision finds no
authoritative support.
Upon a meticulous review of the records and reevaluation of the issues raised in the motion
for reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the
motion for reconsideration. The following facts, as found by the trial court and the Court of
Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were
annually renewed.
2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the
premiums on the renewed policies.
3. There was no valid notice of non-renewal of the policies in question, as there is no proof at
all that the notice sent by ordinary mail was received by Respondent, and the copy thereof
allegedly sent to Zuellig was ever transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid
by Respondent within the 60- to 90-day credit term and were duly accepted and received by
Petitioners cashier.
The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance
Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioners advantage despite its
practice of granting a 60- to 90-day credit term for the payment of premiums.
Section 77 of the Insurance Code of 1978 provides:
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period provision applies.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code)
promulgated on 18 December 1974. In turn, this Section has its source in Section 72 of Act No.
2427 otherwise known as the Insurance Act as amended by R.A. No. 3540, approved on 21 June
1963, which read:
SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is
exposed to the peril insured against, unless there is clear agreement to grant the
insured credit extension of the premium due. No policy issued by an insurance
company is valid and binding unless and until the premium thereof has been paid.
(Underscoring supplied)
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly
permitting an agreement to extend the period to pay the premium. But are there exceptions to
Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or industrial
life policy whenever the grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides:
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of
premium is conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until premium is
actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of
Appeals,
[5]
wherein we ruled that Section 77 may not apply if the parties have agreed to the
payment in installments of the premium and partial payment has been made at the time of
loss. We said therein, thus:
We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that the petitioners and private respondent
intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in
1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all
the installment payments. Such acceptance of payments speaks loudly of the insurers
intention to honor the policies it issued to petitioner. Certainly, basic principles of
equity and fairness would not allow the insurer to continue collecting and accepting
the premiums, although paid on installments, and later deny liability on the lame
excuse that the premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of
the Court of Appeals in its Resolution denying the motion for reconsideration of its decision:
While the import of Section 77 is that prepayment of premiums is strictly required as
a condition to the validity of the contract, We are not prepared to rule that the request
to make installment payments duly approved by the insurer would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the
initial premium or first installment. Section 78 of the Insurance Code in effect allows
waiver by the insurer of the condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that premium is actually
unpaid. Section 77 merely precludes the parties from stipulating that the policy is
valid even if premiums are not paid, but does not expressly prohibit an agreement
granting credit extension, and such an agreement is not contrary to morals, good
customs, public order or public policy (De Leon, The Insurance Code, p. 175). So is
an understanding to allow insured to pay premiums in installments not so
prescribed. At the very least, both parties should be deemed in estoppel to question
the arrangement they have voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of
Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the insurer may
grant credit extension for the payment of the premium. This simply means that if the insurer has
granted the insured a credit term for the payment of the premium and loss occurs before the
expiration of the term, recovery on the policy should be allowed even though the premium is
paid after the loss but within the credit term.
Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract
to provide a credit term within which to pay the premiums. That agreement is not against the
law, morals, good customs, public order or public policy. The agreement binds the
parties. Article 1306 of the Civil Code provides:
ART. 1306. The contracting parties may establish such stipulations clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
Finally in the instant case, it would be unjust and inequitable if recovery on the policy would
not be permitted against Petitioner, which had consistently granted a 60- to 90-day credit term
for the payment of premiums despite its full awareness of Section 77. Estoppel bars it from
taking refuge under said Section, since Respondent relied in good faith on such
practice. Estoppel then is the fifth exception to Section 77.
WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET
ASIDE, and a new one is hereby entered DENYING the instant petition for failure of Petitioner
to sufficiently show that a reversible error was committed by the Court of Appeals in its
challenged decision, which is hereby AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.
Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-Santiago, De
Leon, Jr., and Sandoval-Gutierrez, JJ., concur.
Vitug, J., Please see separate opinion.
Melo, J., I join the dissents of Justices Vitug and Pardo.
Pardo, J., I dissent. See attached.
Puno and Quisumbing, JJ., I join the dissent of J. Pardo.



[1]
Rollo, 38.
[2]
191 SCRA 1 [1990].
[3]
244 SCRA 744 [1995].
[4]
257 SCRA 126 [1996] (erroneously stated in the decision as 275 SCRA, 126).
[5]
215 SCRA 463 [1992].




FIRST DIVISION
[G.R. No. 138941. October 8, 2001]
AMERICAN HOME ASSURANCE COMPANY, petitioner, vs. TANTUCO
ENTERPRISES, INC., respondent.
D E C I S I O N
PUNO, J .:
Before us is a Petition for Review on Certiorari assailing the Decision of the Court of
Appeals in CA-G.R. CV No. 52221 promulgated on January 14, 1999, which affirmed in toto the
Decision of the Regional Trial Court, Branch 53, Lucena City in Civil Case No. 92-51 dated
October 16, 1995.
Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining
industry. It owns two oil mills. Both are located at its factory compound at Iyam, Lucena
City. It appears that respondent commenced its business operations with only one oil mill. In
1988, it started operating its second oil mill. The latter came to be commonly referred to as the
new oil mill.
The two oil mills were separately covered by fire insurance policies issued by petitioner
American Home Assurance Co., Philippine Branch.
[1]
The first oil mill was insured for three
million pesos (P3,000,000.00) under Policy No. 306-7432324-3 for the period March 1, 1991 to
1992.
[2]
The new oil mill was insured for six million pesos (P6,000,000.00) under Policy No.
306-7432321-9 for the same term.
[3]
Official receipts indicating payment for the full amount of
the premium were issued by the petitioner's agent.
[4]

A fire that broke out in the early morning of September 30,1991 gutted and consumed the
new oil mill. Respondent immediately notified the petitioner of the incident. The latter then sent
its appraisers who inspected the burned premises and the properties destroyed. Thereafter, in a
letter dated October 15, 1991, petitioner rejected respondents claim for the insurance proceeds
on the ground that no policy was issued by it covering the burned oil mill. It stated that the
description of the insured establishment referred to another building thus: Our policy nos. 306-
7432321-9 (Ps 6M) and 306-7432324-4 (Ps 3M) extend insurance coverage to your oil mill
under Building No. 5, whilst the affected oil mill was under Building No. 14.
[5]

A complaint for specific performance and damages was consequently instituted by the
respondent with the RTC, Branch 53 of Lucena City. On October 16, 1995, after trial, the lower
court rendered a Decision finding the petitioner liable on the insurance policy thus:
WHEREFORE, judgment is rendered in favor of the plaintiff ordering defendant to
pay plaintiff:
(a) P4,406,536.40 representing damages for loss by fire of its insured property with
interest at the legal rate;
(b) P80,000.00 for litigation expenses;
(c) P300,000.00 for and as attorneys fees; and
(d) Pay the costs.
SO ORDERED.
[6]

Petitioner assailed this judgment before the Court of Appeals. The appellate court upheld
the same in a Decision promulgated on January 14, 1999, the pertinent portion of which states:
WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit and the
trial courts Decision dated October 16, 1995 is hereby AFFIRMED in toto.
SO ORDERED.
[7]

Petitioner moved for reconsideration. The motion, however, was denied for lack of merit in a
Resolution promulgated on June 10, 1999.
Hence, the present course of action, where petitioner ascribes to the appellate court the
following errors:
(1) The Court of Appeals erred in its conclusion that the issue of non-payment of
the premium was beyond its jurisdiction because it was raised for the first time on
appeal.
[8]

(2) The Court of Appeals erred in its legal interpretation of 'Fire Extinguishing
Appliances Warranty' of the policy.
[9]

(3) With due respect, the conclusion of the Court of Appeals giving no regard to
the parole evidence rule and the principle of estoppel is erroneous.
[10]

The petition is devoid of merit.
The primary reason advanced by the petitioner in resisting the claim of the respondent is that
the burned oil mill is not covered by any insurance policy. According to it, the oil mill insured is
specifically described in the policy by its boundaries in the following manner:
Front: by a driveway thence at 18 meters distance by Bldg. No. 2.
Right: by an open space thence by Bldg. No. 4.
Left: Adjoining thence an imperfect wall by Bldg. No. 4.
Rear: by an open space thence at 8 meters distance.
However, it argues that this specific boundary description clearly pertains, not to the burned oil
mill, but to the other mill. In other words, the oil mill gutted by fire was not the one described by
the specific boundaries in the contested policy.
What exacerbates respondents predicament, petitioner posits, is that it did not have the
supposed wrong description or mistake corrected. Despite the fact that the policy in question
was issued way back in 1988, or about three years before the fire, and despite the Important
Notice in the policy that Please read and examine the policy and if incorrect, return it
immediately for alteration, respondent apparently did not call petitioners attention with respect
to the misdescription.
By way of conclusion, petitioner argues that respondent is barred by the parole evidence
rule from presenting evidence (other than the policy in question) of its self-serving intention (sic)
that it intended really to insure the burned oil mill, just as it is barred by estoppel from
claiming that the description of the insured oil mill in the policy was wrong, because it retained
the policy without having the same corrected before the fire by an endorsement in accordance
with its Condition No. 28.
These contentions can not pass judicial muster.
In construing the words used descriptive of a building insured, the greatest liberality is
shown by the courts in giving effect to the insurance.
[11]
In view of the custom of insurance
agents to examine buildings before writing policies upon them, and since a mistake as to the
identity and character of the building is extremely unlikely, the courts are inclined to consider
that the policy of insurance covers any building which the parties manifestly intended to insure,
however inaccurate the description may be.
[12]

Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our
mind, that what the parties manifestly intended to insure was the new oil mill. This is obvious
from the categorical statement embodied in the policy, extending its protection:
On machineries and equipment with complete accessories usual to a coconut oil mill
including stocks of copra, copra cake and copra mills whilst contained in the new oil
mill building, situate (sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM,
LUCENA CITY UNBLOCKED.
[13]
(emphasis supplied.)
If the parties really intended to protect the first oil mill, then there is no need to specify it as
new.
Indeed, it would be absurd to assume that respondent would protect its first oil mill for
different amounts and leave uncovered its second one. As mentioned earlier, the first oil mill is
already covered under Policy No. 306-7432324-4 issued by the petitioner. It is unthinkable for
respondent to obtain the other policy from the very same company. The latter ought to know that
a second agreement over that same realty results in its overinsurance.
The imperfection in the description of the insured oil mills boundaries can be attributed to a
misunderstanding between the petitioners general agent, Mr. Alfredo Borja, and its policy
issuing clerk, who made the error of copying the boundaries of the first oil mill when typing the
policy to be issued for the new one. As testified to by Mr.Borja:
Atty. G. Camaligan:
Q: What did you do when you received the report?
A: I told them as will be shown by the map the intention really of Mr. Edison Tantuco is to cover
the new oil mill that is why when I presented the existing policy of the old policy, the policy
issuing clerk just merely (sic) copied the wording from the old policy and what she typed is
that the description of the boundaries from the old policy was copied but she inserted
covering the new oil mill and to me at that time the important thing is that it covered the new
oil mill because it is just within one compound and there are only two oil mill[s] and so just
enough, I had the policy prepared. In fact, two policies were prepared having the same date one
for the old one and the other for the new oil mill and exactly the same policy period,
sir.
[14]
(emphasis supplied)
It is thus clear that the source of the discrepancy happened during the preparation of the written
contract.
These facts lead us to hold that the present case falls within one of the recognized exceptions
to the parole evidence rule. Under the Rules of Court, a party may present evidence to modify,
explain or add to the terms of the written agreement if he puts in issue in his pleading, among
others, its failure to express the true intent and agreement of the parties thereto.
[15]
Here, the
contractual intention of the parties cannot be understood from a mere reading of the
instrument. Thus, while the contract explicitly stipulated that it was for the insurance of the new
oil mill, the boundary description written on the policy concededly pertains to the first oil
mill. This irreconcilable difference can only be clarified by admitting evidence aliunde, which
will explain the imperfection and clarify the intent of the parties.
Anent petitioners argument that the respondent is barred by estoppel from claiming that the
description of the insured oil mill in the policy was wrong, we find that the same proceeds from a
wrong assumption. Evidence on record reveals that respondents operating manager, Mr. Edison
Tantuco, notified Mr. Borja (the petitioners agent with whom respondent negotiated for the
contract) about the inaccurate description in the policy. However, Mr. Borja assured Mr.
Tantuco that the use of the adjective new will distinguish the insured property. The assurance
convinced respondent that, despite the impreciseness in the specification of the boundaries, the
insurance will cover the new oil mill. This can be seen from the testimony on cross of Mr.
Tantuco:
"ATTY. SALONGA:
Q: You mentioned, sir, that at least in so far as Exhibit A is concern you have read what the policy
contents.(sic)
Kindly take a look in the page of Exhibit A which was marked as Exhibit A-2 particularly the
boundaries of the property insured by the insurance policy Exhibit A, will you tell us as the
manager of the company whether the boundaries stated in Exhibit A-2 are the boundaries of the
old (sic) mill that was burned or not.
A: It was not, I called up Mr. Borja regarding this matter and he told me that what is
important is the word new oil mill. Mr. Borja said, as a matter of fact, you can never insured
(sic) one property with two (2) policies, you will only do that if you will make to increase the
amount and it is by indorsement not by another policy, sir."
[16]

We again stress that the object of the court in construing a contract is to ascertain the intent
of the parties to the contract and to enforce the agreement which the parties have entered into. In
determining what the parties intended, the courts will read and construe the policy as a whole
and if possible, give effect to all the parts of the contract, keeping in mind always, however, the
prime rule that in the event of doubt, this doubt is to be resolved against the insurer. In
determining the intent of the parties to the contract, the courts will consider the purpose and
object of the contract.
[17]

In a further attempt to avoid liability, petitioner claims that respondent forfeited the renewal
policy for its failure to pay the full amount of the premium and breach of the Fire Extinguishing
Appliances Warranty.
The amount of the premium stated on the face of the policy was P89,770.20. From the
admission of respondents own witness, Mr. Borja, which the petitioner cited, the former only
paid it P75,147.00, leaving a difference of P14,623.20. The deficiency, petitioner argues,
suffices to invalidate the policy, in accordance with Section 77 of the Insurance Code.
[18]

The Court of Appeals refused to consider this contention of the petitioner. It held that this
issue was raised for the first time on appeal, hence, beyond its jurisdiction to resolve, pursuant to
Rule 46, Section 18 of the Rules of Court.
[19]

Petitioner, however, contests this finding of the appellate court. It insists that the issue was
raised in paragraph 24 of its Answer, viz.:
24. Plaintiff has not complied with the condition of the policy and renewal
certificate that the renewal premium should be paid on or before renewal date.
Petitioner adds that the issue was the subject of the cross-examination of Mr. Borja, who
acknowledged that the paid amount was lacking by P14,623.20 by reason of a discount or rebate,
which rebate under Sec. 361 of the Insurance Code is illegal.
The argument fails to impress. It is true that the asseverations petitioner made in paragraph
24 of its Answer ostensibly spoke of the policys condition for payment of the renewal premium
on time and respondents non-compliance with it. Yet, it did not contain any specific and
definite allegation that respondent did not pay the premium, or that it did not pay the full amount,
or that it did not pay the amount on time.
Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial
proceedings, the question of the supposed inadequate payment was never raised. Most
significant to point, petitioner fatally neglected to present, during the whole course of the trial,
any witness to testify that respondent indeed failed to pay the full amount of the premium. The
thrust of the cross-examination of Mr. Borja, on the other hand, was not for the purpose of
proving this fact. Though it briefly touched on the alleged deficiency, such was made in the
course of discussing a discount or rebate, which the agent apparently gave the
respondent. Certainly, the whole tenor of Mr. Borjas testimony, both during direct and cross
examinations, implicitly assumed a valid and subsisting insurance policy. It must be
remembered that he was called to the stand basically to demonstrate that an existing policy
issued by the petitioner covers the burned building.
Finally, petitioner contends that respondent violated the express terms of the Fire
Extinguishing Appliances Warranty. The said warranty provides:
WARRANTED that during the currency of this Policy, Fire Extinguishing
Appliances as mentioned below shall be maintained in efficient working order on
the premises to which insurance applies:
- PORTABLE EXTINGUISHERS
- INTERNAL HYDRANTS
- EXTERNAL HYDRANTS
- FIRE PUMP
- 24-HOUR SECURITY SERVICES
BREACH of this warranty shall render this policy null and void and the Company
shall no longer be liable for any loss which may occur.
[20]

Petitioner argues that the warranty clearly obligates the insured to maintain all the
appliances specified therein. The breach occurred when the respondent failed to install internal
fire hydrants inside the burned building as warranted. This fact was admitted by the oil mills
expeller operator, Gerardo Zarsuela.
Again, the argument lacks merit. We agree with the appellate courts conclusion that the
aforementioned warranty did not require respondent to provide for all the fire extinguishing
appliances enumerated therein. Additionally, we find that neither did it require that the
appliances are restricted to those mentioned in the warranty. In other words, what the warranty
mandates is that respondent should maintain in efficient working condition within the premises
of the insured property, fire fighting equipments such as, but not limited to, those identified in
the list, which will serve as the oil mills first line of defense in case any part of it bursts into
flame.
To be sure, respondent was able to comply with the warranty. Within the vicinity of the new
oil mill can be found the following devices: numerous portable fire extinguishers, two fire
hoses,
[21]
fire hydrant,
[22]
and an emergency fire engine.
[23]
All of these equipments were in
efficient working order when the fire occurred.
It ought to be remembered that not only are warranties strictly construed against the insurer,
but they should, likewise, by themselves be reasonably interpreted.
[24]
That reasonableness is to
be ascertained in light of the factual conditions prevailing in each case. Here, we find that there
is no more need for an internal hydrant considering that inside the burned building were: (1)
numerous portable fire extinguishers, (2) an emergency fire engine, and (3) a fire hose which has
a connection to one of the external hydrants.
IN VIEW WHEREOF, finding no reversible error in the impugned Decision, the instant
petition is hereby DISMISSED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Pardo, and Ynares-Santiago, JJ., concur.
Kapunan, J., on official leave.



[1]
Decision, CA-G.R. CV No. 52221, p. 1; Rollo, p. 27.
[2]
Exhibit K, Folder of Exhibits, p. 54.
[3]
Exhibit C, Folder of Exhibits, p. 22.
[4]
O.R. No. 1043, Exhibit E, Folder of Exhibits, p. 32; O.R. No. 1044, Exhibit Q, Folder of Exhibits, p. 70.
[5]
Exhibit H, Folder of Exhibit, p. 35.
[6]
Decision, Civil Case No. 92-15, RTC, Branch 53, Lucena City, p.14; Original Record, p. 168.
[7]
Decision, CA-G.R. CV No. 52221, p. 6; Rollo, p. 32.
[8]
Verified Petition for Review, p. 99; Rollo, p. 17.
[9]
Petition, p.11; Rollo, p.19.
[10]
Petition, p.14; Rollo, p. 23.
[11]
See Martinez, Philippine Insurance Code Annotated, p. 324, citing Richard vs. Ins. Co., 27 N.W. 586 (1886),
which gives the following illustration: A policy upon a school house was held sufficient to identify the building
insured in which a school was kept, although it was not an ordinary school house; the term store was held to be a
sufficient description of a building used as a restaurant and bakery.
[12]
Vance on Insurance, p. 816-817.
[13]
Exhibit C-2, Folder of Exhibits, p. 24.
[14]
TSN, March 31, 1993, pp. 31-32.
[15]
Rule 130, Section 9, Rules of Court.
[16]
TSN, April 20, 1993, pp. 25-26.
[17]
Vance on Insurance 809 (3
rd
ed., 1951).
[18]
The provision states:
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by
an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period provision applies.
[19]
Now Rule 44, Section 15 of the 1997 Rules of Civil Procedure:
Sec. 15. Questions that may be raised on appeal. - Whether or not the appellant has filed a motion for
new trial in the court below, he may include in his assignment of errors any question of law or fact that has been
raised in the court below and which is within the issues framed by the parties.
[20]
Exhibit C-4-C, Folder of Exhibits, p. 29.
[21]
Exhibits T, T-1 and T-13, Folder of Exhibits, pp. 73 and 77.
[22]
Exhibit T-12, Folder of Exhibits, p. 77.
[23]
Exhibit T-14, Folder of Exhibits, p. 77.
[24]
See Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., 98 Phil. 85 (1955).
FIRST DIVISION

[G.R. No. L-31150. July 22, 1915.]

KONINKLIJKE LUCHTVAART MAATSHAPPIJ N.V., otherwise known as KLM ROYAL DUTCH
AIRLINES, Petitioner, v. THE HONORABLE COURT OF APPEALS, CONSUELO T. MENDOZA and
RUFINO T. MENDOZA, Respondents.

Picazo, Agcaoili, Santayana, Reyes & Tayao for Petitioner.

Bengzon, Villegas, Zarraga, Narciso & Cudala for Respondents.

SYNOPSIS
The KLM Dutch Airlines secured seat reservation for respondents and their two companions from carriers
that would ferry them through their world tour. Their itinerary included the Barcelona-Lourdes route,
serviced by only one airline, the Aer Lingus. They were issued KLM tickets for their entire trip, but their
coupon for the Aer Lingus portion (Flight 861, June 22, 1965) was marked "RQ" which means "on request."
At the KLM office in Frankfurt, Germany, respondents obtained a confirmation from Aer Lingus of seat
reservations on flight 861. In the afternoon of June 22, 1965, the Aer Lingus manager at Barcelona Airport
directed respondents to check in. They did as instructed and were accepted for passage. However, although
their companions were allowed to take the plane, respondents were brusquely off-loaded and shoved aside
on orders of the Aer Lingus manager with the aid of policeman who shouted at them "Coos! Ignorantes
Filipinos." As a result they had to take a train to Lourdes.

Respondents sued petitioner for damages arising from breach of carriage and for humiliating treatment
received by them in the hands of Aer Lingus. After the hearing, the trial court awarded damages to
respondents. On appeal, the KLM sought exoneration, but the Court of Appeals sustained the trial court and
increased the award of damages.

Petitioner assailed the decision of the Court of Appeals, and prayed for exculpation. It argued that its liability
for damages is limited only to occurrence on its own lines citing. Art. 30 of the Warsaw Convention which
provides that in the case of transportation to be performed by various successive carriers the passenger can
take action only against the carrier who performed the transportation during which the accident or delay
occurred.

The Supreme Court affirmed the judgment of the Court of Appeals.

SYLLABUS

1. AIR CARRIER; DAMAGES; ARTICLE 30 OF WARSAW CONVENTION DOES NOT APPLY TO DAMAGE
RESULTING FROM WILLFUL MISCONDUCT. Article 30 of the Warsaw providing that in case of
transportation to be performed by various successive carriers, the passenger can take action only against
the carrier who performed the transportation during which the accident or the delay occurred presupposes
the occurrence of either an accident or delay in the course of the air strip, and does not apply if the damage
is caused by the willful misconduct on the part of the carriers employee or agent acting within the scope of
his employment.

2. ID.; DUTY OF CARRIER TO INFORM PASSENGER OF TERMS AND CONDITIONS OF A CONTRACT. It
would be unfair and inequitable to charge a passenger with automatic knowledge or notice of a condition
which purportedly would excuse the carrier from liability, where the notice is written at the back of the ticket
in letters so small that one has to use a magnifying glass to read the words. To preclude any doubt that the
contract was fairly and freely agreed upon when the passenger accepted the passage ticket, the carrier who
issued the ticket must inform the passenger of the conditions prescribed in the ticket or, in the very least,
ascertain that the passenger read them before he accepted the passage ticket. Absent any showing that the
carriers officials or employees discharged this responsibility to the passenger, the latter cannot be bound by
the conditions by which the carrier assumed the role of a mere ticket-issuing agent for other airlines and
limited its liability only to untoward occurrences in its own lines.

3. ID.; LIABILITY OF TICKET ISSUING CARRIER IN CONTRACT OF CARRIAGE TO BE PERFORMED BY
SUCCESSIVE CARRIERS. Where the passage tickets provide that the carriage to be performed thereunder
by several successive carriers "is to be regarded as a single operation," the carrier which issued the tickets
for the entire trip in effect guaranteed to the passenger that the latter shall have sure space in the various
carriers which would ferry him through the various segments of the trip, and the ticket-issuing carrier
assumes full responsibility for the entire trip and shall be held accountable for the breach of that guaranty
whether the breach occurred in its own lines or in those of the other carriers.

4. COURTS; DUTY OF COURTS TO ASSIST THE AGGRIEVED PARTY. It is but and in full accord with the
policy expressly embodied in our civil law which enjoins courts to be more vigilant for the protection of a
contracting party who occupies an inferior position with respect to the other contracting party.


D E C I S I O N


CASTRO, J.:


In this appeal by way of certiorari the Koninklijke Luchtvaart Maatschappij N.V., otherwise known as the
KLM Royal Dutch Airlines (hereinafter referred to as the KLM) assails the award of damages made by the
Court of Appeals in CA-G.R. 40620 in favor of the spouses Rufino T. Mendoza and Consuelo T. Mendoza
(hereinafter referred to as the respondents).

Sometime in March 1965 the respondents approached Tirso Reyes, manager of a branch of the Philippine
Travel Bureau, a travel agency, for consultations about a world tour which they were intending to make with
their daughter and a niece. Reyes submitted to them, after preliminary discussions, a tentative itinerary
which prescribed a trip of thirty-five legs; the respondents would fly on different airlines. Three segments of
the trip, the longest, would be via KLM. The respondents expressed a desire to visit Lourdes, France, and
discussed with Reyes two alternate routes, namely, Paris to Lourdes and Barcelona to Lourdes. The
respondents decided on the Barcelona-Lourdes route with knowledge that only one airline, Aer Lingus,
serviced it.

The Philippine Travel Bureau to which Reyes was accredited was an agent for international air carriers which
are members of the International Air Transport Association, popularly known as the "IATA," of which both
the KLM and the Aer Lingus are members.

After about two weeks, the respondents approved the itinerary prepared for them, and asked Reyes to make
the necessary plane reservations. Reyes went to the KLM, for which the respondents had expressed
preference. The KLM thereafter secured seat reservations for the respondents and their two companions
from the carriers which would ferry them throughout their trip, with the exception of Aer Lingus. When the
respondents left the Philippines (without their young wards who had enplaned much earlier), they were
issued KLM tickets for their entire trip. However, their coupon for the Aer Lingus portion (Flight 861 for June
22, 1965) was marked "RQ" which meant "on request."

After sightseeing in American and European cities (they were in the meantime joined by their two young
companions), the respondents arrived in Frankfurt, Germany. They went to a KLM office there and obtained
a confirmation from Aer Lingus of seat reservations on flight 861. After meandering in London, Paris and
Lisbon, the foursome finally took wing to Barcelona for their trip to Lourdes, France.

In the afternoon of June 22, 1965 the respondents with their wards went to the Barcelona airport to take
their plane which arrived at 4:00 oclock. At the airport, the manager of Aer Lingus directed the respondents
to check in. They did so as instructed and were accepted for passage. However, although their daughter and
niece were allowed to take the plane, the respondents were off-loaded on orders of the Aer Lingus manager
who brusquely shoved them aside with the aid of a policeman and who shouted at them, "Conos! Ignorantes
Filipinos!"

Mrs. Mendoza later called up the manager of Aer Lingus and requested that they provide her and her
husband means to get to Lourdes, but the request was denied. A stranger, however, advised them to take a
train, which the two did; despite the third class accommodations and lack of food service, they reached
Lourdes the following morning. During the train trip the respondents had to suffer draft winds as they wore
only minimum clothing, their luggage having gone ahead with the Aer Lingus plane. They spent $50 for that
train trip; their plane passage was worth $43.35.

On March 17, 1966 the respondents, referring to KLM as the principal of Aer Lingus, filed a complaint for
damages with the Court of First Instance of Manila arising from breach of contract of carriage and for the
humiliating treatment received by them at the hands of the Aer Lingus manager in Barcelona. After due
hearing, the trial court awarded damages to the respondents as follows: $43.35 or its peso equivalent as
actual damages, P10,000 as moral damages, P5,000 as exemplary damages, and P5,000 as attorneys fees,
and expenses of litigation.

Both parties appealed to the Court of Appeals. The KLM sought complete exoneration; the respondents
prayed for an increase in the award of damages. In its decision of August 14, 1969 the Court of Appeals
decreed as follows: "Appellant KLM is condemned to pay unto the plaintiffs the sum of $43.35 as actual
damages; P50,000 as moral damages; and P6,000 as attorneys fees and costs."cralaw virtua1aw library

Hence, the present recourse by the KLM.

The KLM prays for exculpation from damages on the strength of the following particulars which were
advanced to but rejected by the Court of Appeals:chanrob1es vi rtual 1aw library

(a) The air tickets issued to the respondents stipulate that carriage thereunder is subject to the "Convention
for the Unification of Certain Rules Relating to International Transportation by Air," otherwise known as the
"Warsaw Convention," to which the Philippine Government is a party by adherence, and which pertinently
provides. 1

"ART. 30. (1) In the case of transportation to be performed by various successive carriers and falling within
the definition set out in the third paragraph of Article I, each carrier who accepts passengers, baggage, or
goods shall be subject to the rules set out in the convention, and shall be deemed to be one of the
contracting parties to the contract of transportation insofar as the contract deals with that part of the
transportation which is performed under his supervision. 2

"(2) In the case of transportation of this nature, the passenger or his representative can take action only
against the carrier who performed the transportation during which the accident or the delay occurred, save
in the case where, by express agreement, the first carrier has assumed liability for the whole journey."
(Emphasis supplied)

(b) On the inside front cover of each ticket the following appears under the heading "Conditions of Contract"
:jgc:chanrobles.com.ph

"1. . . . (a) Liability of carrier for damages shall be limited to occurrences on its own line, except in the case
of checked baggage as to which the passenger also has a right of action against the first or last carrier. A
carrier issuing a ticket or checking baggage for carriage over the lines of others does so only as agent."cralaw virtua1aw library

(c) All that the KLM did after the respondents completed their arrangements with the travel agency was to
request for seat reservations among the airlines called for by the itinerary submitted to the KLM and to issue
tickets for the entire flight as a ticket-issuing agent.

The respondents rebut the foregoing arguments, thus:chanrob1es vi rtual 1aw library

(a) Article 30 of the Warsaw Convention has no application in the case at bar which involves, not an accident
or delay, but a willful misconduct on the part of the KLMs agent, the Aer Lingus. Under article 25 of the
same Convention the following is prescribed:jgc:chanrobles. com.ph

"ART. 25. (1) The carrier shall not be entitled to avail himself of the provisions of this convention which
exclude or limit his liability, if the damage is caused by his willful misconduct or by such default on his part
as, in accordance with the law of the court to which the case is submitted, is considered to be equivalent to
willful misconduct. 3

"(2) Similarly, the carrier shall not be entitled to avail himself of the said provisions, if the damage is caused
under the same circumstances by any agent of the carrier acting within the scope of his employment."
(emphasis by respondents).

(b) The condition in their tickets which purportedly excuse the KLM from liability appears in very small print,
to read which, as found by the Court of Appeals, one has practically to use a magnifying glass.

(c) The first paragraph of the "Conditions of Contract" appearing identically on the KLM tickets issued to
them idubitably shows that their contract was one of continuous air transportation around the world:jgc:chanrobles.com.ph

"1. . . .carriage includes the air carrier issuing this ticket and all carriers that carry or undertake to carry
the passenger or his baggage hereunder or perform any other service incidental to such air carriage .. to be
performed hereunder by several successive carrier is regarded as a single operation."cralaw virtua1aw li brary

(d) The contract of air transportation was exclusively between the respondents and the KLM, the latter
merely endorsing its performance to other carriers, like Aer Lingus, as its subcontractors or agents, as
evidenced by the passage tickets themselves which on their face disclose that they are KLM tickets.
Moreover, the respondents dealt only with KLM through the travel agency.

1. The applicability insisted upon by the KLM of article 30 of the Warsaw Convention cannot be sustained.
That article presupposes the occurrence of either an accident or a delay, neither of which took place at the
Barcelona airport; what is here manifest, instead, is that the Aer Lingus, through its manager there, refused
to transport the respondents to their planned and contracted destination.

2. The argument that the KLM should not be held accountable for the tortious conduct of Aer Lingus because
of the provision printed on the respondents tickets expressly limiting the KLMs liability for damages only to
occurrences on its own lines is unacceptable. As noted by the Court of Appeals that condition was printed in
letters so small that one would have to use a magnifying glass to read the words. Under the circumstances,
it would be unfair and inequitable to charge the respondents with automatic knowledge or notice of the said
condition so as to preclude any doubt that it was fairly and freely agreed upon by the respondents when
they accepted the passage tickets issued to them by the KLM. As the airline which issued those tickets with
the knowledge that the respondents would be flown on the various legs of their journey by different air
carriers, the KLM was chargeable with the duty and responsibility of specifically informing the respondents of
conditions prescribed in their tickets or, in the very least, to ascertain that the respondents read them
before they accepted their passage tickets. A thorough search of the record, however, inexplicably fails to
show that any effort was exerted by the KLM officials or employees to discharge in a proper manner this
responsibility to the respondents. Consequently, we hold that the respondents cannot be bound by the
provision in question by which KLM unilaterally assumed the role of a mere ticket-issuing agent for other
airlines and limited its liability only to untoward occurrences on its own lines.

3. Moreover, as maintained by the respondents and the Court of Appeals, the passage tickets of the
respondents provide that the carriage to be performed thereunder by several successive carriers "is to be
regarded as a single operation," which is diametrically incompatible with the theory of the KLM that the
respondents entered into a series of independent contracts with the carriers which took them on the various
segments of their trip. This position of KLM we reject. The respondents dealt exclusively with the KLM which
issued them tickets for their entire trip and which in effect guaranteed to them that they would have sure
space in Aer Lingus flight 861. The respondents, under that assurance of the internationally prestigious KLM,
naturally had the right to expect that their tickets would be honored by Aer Lingus to which, in the legal
sense, the KLM had indorsed and in effect guaranteed the performance of its principal engagement to carry
out the respondents scheduled itinerary previously and mutually agreed upon between the parties.

4. The breach of that guarantee was aggravated by the discourteous and highly arbitrary conduct of an
official of the Aer Lingus which the KLM had engaged to transport the respondents on the Barcelona-Lourdes
segment of their itinerary. It is but just and in full accord with the policy expressly embodied in our civil law
which enjoins courts to be more vigilant for the protection of a contracting party who occupies an inferior
position with respect to the other contracting party, that the KLM should be held responsible for the abuse,
injury and embarrassment suffered by the respondents at the hands of a supercilious boor of the Aer Lingus.

ACCORDINGLY, the judgment of the Court of Appeals dated August 14, 1969 is affirmed, at KLMs cost.

Makalintal, C.J., Makasiar, Esguerra and Muoz Palma, JJ., concur.
Endnotes:


1. See 51 O.G. 4933 et seq. for text of Presidential Proclamation of adherence dated September 23, 1955.
See 51 O.G. 5084 et seq. for full text of the Convention.

2. Article I (3) provides: Transportation to be performed by several successive air carriers shall be deemed,
for the purposes of this Convention, to be one undivided transportation, if it has been regarded by the
parties as a single operation, whether it has been agreed upon under the form of a single contract or of a
series of contracts, and it shall not lose its international character merely because one contract or a series of
contracts is to be performed entirely within the territory subject to the sovereignty, suzerainty, mandate, or
authority of the same High Contracting Party."cralaw virtua1aw l ibrary

3. Article 22 of the Convention limits the liability of an air carrier in the transportation of passengers to
125,000 francs except where both carrier and passenger "agree to a higher limit of liability."