Keppel Cebu Shipyard, Inc vs Pioneer Insurance and Surety Corporation

Nachura, J. | G.R. Nos. 180880-81 September 25, 2009

Topic: Effect of payment
Nature: Petition for review on certiorari

PARTIES:

G.R. Nos. 180880-81 September 25, 2009

KEPPEL CEBU SHIPYARD, INC., Petitioner, vs. PIONEER INSURANCE AND SURETY
CORPORATION, Respondent.

G.R. Nos. 180896-97

PIONEER INSURANCE AND SURETY CORPORATION, Petitioner, vs. KEPPEL CEBU SHIPYARD,
INC., Respondent.

Angelino Sevillejo – welder

DOCTRINE:

On subrogation:
Payment by the insurer to the insured operates as an equitable assignment to the insurer of all the
remedies that the insured may have against the third party whose negligence or wrongful act caused
the loss.

FACTS:

 26 January 2000: Keppel Cebu Shipyard Inc (KCSI) and WG&A Jebsens Shipmanagement, Inc.
(WG&A) executed a Shiprepair Agreement wherein KCSI would renovate and reconstruct
WG&A’s M/V "Superferry 3" using its dry docking facilities pursuant to its restrictive safety and
security rules and regulations.

 Prior to the execution of the Shiprepair Agreement, "Superferry 3" was already insured by WG&A
with Pioneer Insurance and Surety Corporation (Pioneer) for US$8,472,581.78.

 8 February 2000: in the course of its repair, M/V "Superferry 3" was gutted by fire. Claiming that
the extent of the damage was pervasive, WG&A declared the vessel’s damage as a "total
constructive loss" and, hence, filed an insurance claim with Pioneer.

 16 June 2000: Pioneer paid the insurance claim of WG&A in the amount of US$8,472,581.78.
WG&A, in turn, executed a Loss and Subrogation Receipt in favor of Pioneer

 Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter denied any
responsibility for the loss of the subject vessel.
  7 August 2000: As KCSI continuously refused to pay despite repeated demands, Pioneer filed a
Request for Arbitration before the Construction Industry Arbitration Commission (CIAC) seeking
payment for itself and on behalf of WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A
Jebsens Shipmanagement, Inc.

 KCSI and WG&A reached an amicable settlement, leading the latter to file a Notice of Withdrawal
of Claim on April 17, 2001 with the CIAC. The CIAC granted the withdrawal thereby dismissing
the claim of WG&A against KCSI. Hence, the arbitration proceeded with Pioneer as the remaining
claimant.

DISPUTED MATTERS (Relevant to the topic only kasi ang haba)

Pioneer KCSI
As to  argues that it has been Pioneer is not a real party in interest and has no
subrogation subrogated to the claims standing because it has not been subrogated to the
of its assured Vessel Owner. The insurance policies on which Pioneer
bases its right of subrogation were not validly obtained:
 Right of subrogation:
 There is no valid arbitration agreement between the
o is by Operation of KCSI and the Vessel Owner. When the ship repair
Law agreement (which includes the arbitration
agreement) was signed by WG&A Jebsens on behalf
o exists in Property of the Vessel, the same was still owned by Aboitiz
Insurance Shipping.

o is not Dependent  Consequently, when another firm, WG&A INC,

Upon Privity of authorized WG&A Jebsens to manage the MV
Contract. Superferry 3, it had no authority to do so

Moreover:
 Payment operates as
equitable assignment of
rights to insurer  Pioneer has not proved payment of the proceeds of
the policies to any specific party including the Vessel
owner
 right of subrogation
entitles insurer to recover
from the liable party.  Pioneer had no legally demandable obligation to pay
under the policies and did so only voluntarily:

 Pioneer and WG&A agreed that there is no

Constructive Total Loss "unless the expense of
recovering and repairing the vessel would exceed
the Agreed Value" of ₱360 million assigned by the
parties to the Vessel, a threshold which the actual
repair cost for the Vessel did not reach. Since
Pioneer opted to pay contrary to the provisions of the
policies, its payment was voluntary, and there was
no resulting subrogation to the Vessel.
  Since KCSI is not liable for the fire and the resulting
damage to the Vessel, then it derived no benefit from
Pioneer’s payment to WG&A.

 CIAC ruled both WG&A and KCSI are guilty of negligence, with the following findings and
conclusions:

o Liability of KCSI: By the requirement that all hotworks are to be done by the Yard (KCSI),
Sevillejo remains a yard employee. Hence, they are liable as an Sevillejo’s employer.

o Liability of WG&A: the fact that what was ask of Sevillejo was outside the work order, the
Vessel is considered equally negligent.

 Both appealed to the CA. CA granted KCSI’s petition but dismissed Pioneer’s. Pioneer filed an
MR which was partially granted. Hence, these petitions.

RELEVANT ISSUES:

Is subrogation1 proper? If proper, to what extent can subrogation be made? – YES,

SUBROGATION IS PROPER TO THE EXTENT OF M/V SUPERFERRY 3’S SALVAGE VALUE

 Payment by the insurer to the insured operates as an equitable assignment to the insurer of all
the remedies that the insured may have against the third party whose negligence or wrongful act
caused the loss.

 The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract. It
accrues simply upon payment by the insurance company of the insurance claim. The doctrine of
subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the
mode that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity,
and good conscience, ought to pay.

 APPLICATION: Pioneer paid WG&A, as proven by the Loss and Subrogation receipt, and thus
should be subrogated. However, Salvage value of the damaged M/V "Superferry 3" should be
taken into account in the grant of any award. Not considering this salvage value in the award
would amount to unjust enrichment on the part of Pioneer.

OTHER INSURANCE CODE-RELATED ISSUES:

W/N THERE WAS TOTAL LOSS – YES

1
Art. 2207. If the plaintiff’s property has been insured and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.
  Under Sec 139, IC, a constructive total loss occurs if the value of loss or injury exceeds 3/4 of
total value of the thing insured.2

 However, the insurance policy of M/V Superferry 3 stipulates that:

o Agreed Value = cost of repaired value ONLY, damage/break up value shall not be taken
into account

o There shall be no recovery for a constructive Total Loss hereunder unless the expense of
recovering and repairing the Vessel would exceed the Agreed Value in policies on Hull
and Machinery

 SEC 139, IC governs because (1) Philippine law is deemed incorporated in every locally
executed contract; and (2) the marine insurance policies in question expressly provided the that
the “insurance is subject to English jurisdiction, except in the event that loss or losses are payable
in the Philippines, in which case if the said laws and customs of England shall be in conflict with
the laws of the Republic of the Philippines, then the laws of the Republic of the Philippines shall
govern.”

 The word "may" in the Sec 139 is intended to grant the insured (WG&A) the option or discretion
to choose the abandonment of the thing insured (M/V "Superferry 3"), or any particular portion
thereof separately valued by the policy, or otherwise separately insured, and recover for a total
loss when the cause of the loss is a peril insured against. This option or discretion is expressed
as a right in Section 1313, IC.

 APPLICATION: The estimates given by the three disinterested and qualified shipyards show that
the damage to the ship would exceed ₱270,000,000.00, or ¾ of the total value of the policies –
₱360,000,000.00. These estimates constituted credible and acceptable proof of the extent of the
damage sustained by the vessel.

o These estimates were confirmed by the Adjustment Report submitted by Richards Hogg
Lindley (Phils.), Inc., the average adjuster that Pioneer had enlisted

o KCSI did not cross-examine Henson Lim, Director of Richards Hogg, whose affidavit-
direct testimony submitted to the CIAC confirmed that the vessel was a constructive total
loss.

 The Loss and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of payment
of the insurance proceeds to the former, and no controverting evidence was presented by KCSI
to rebut the presumed authority of the signatory to receive such payment.

2
Sec. 139. A person insured by a contract of marine insurance may abandon the thing insured, or any particular
portion hereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof,
when the cause of the loss is a peril insured against:
(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the
peril;
(b) If it is injured to such an extent as to reduce its value more than three-fourths; x x x
3
Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon under Section one
hundred thirty-nine.
 W/N CLAUSES 20 AND 22(a) OF THE INSURANCE POLICY ARE VALID – NO

 CLAUSES 20 and 22(a) were printed in fine-print at the back of the Shiprepair Agreement

o Clause 20: KCSI’s liability is only up to ₱50,000,000.00;

o Clause 22(a): KCSI stands as a co-assured in the insurance policies, as found in the
Shiprepair Agreement.

o These clauses are not valid: WG&A did not voluntarily and expressly agree to these
provisions.

 Engr. Elvin F. Bello, WG&A’s fleet manager, testified that he did not sign the fine-
print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were
found, because he did not want WG&A to be bound by them.

 However, considering that it was only KCSI that had shipyard facilities
large enough to accommodate the dry docking and repair of big vessels
owned by WG&A, such as M/V "Superferry 3," in Cebu, he had to sign
the front portion of the Shiprepair Agreement; otherwise, the vessel
would not be accepted for dry docking.

 The assailed clauses amount to a contract of adhesion imposed on WG&A on a

"take-it-or-leave-it" basis. Although not invalid, per se, a contract of adhesion is
void when the weaker party is imposed upon in dealing with the dominant
bargaining party, and its option is reduced to the alternative of "taking it or
leaving it," completely depriving such party of the opportunity to bargain on equal
footing.

 Clause 20 is also a void and ineffectual waiver of the right of WG&A to be

compensated for the full insured value of the vessel or, at the very least, for its
actual market value. A waiver must be positively proved, since a waiver by
implication is not normally countenanced.

 Clause 20 is a stipulation that may be considered contrary to public policy. To

allow KCSI to limit its liability to only ₱50,000,000.00, notwithstanding the fact
that there was a constructive total loss in the amount of ₱360,000,000.00, would
sanction the exercise of a degree of diligence short of what is ordinarily required.

 Clause 22(a) cannot be upheld. To have deemed KCSI as a co-assured under

the policies would have had the effect of nullifying any claim of WG&A from
Pioneer for any loss or damage caused by the negligence of KCSI.

DISPOSITIVE:

WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. No. 180896-97 and the
Petition of Keppel Cebu Shipyard, Inc. in G.R. No. 180880-81 are PARTIALLY GRANTED and the
Amended Decision dated December 20, 2007 of the Court of Appeals is MODIFIED. Accordingly, KCSI is
ordered to pay Pioneer the amount of ₱360,000,000.00 less ₱30,252,648.09, equivalent to the salvage
value recovered by Pioneer from M/V "Superferry 3," or the net total amount of ₱329,747,351.91, with six
percent (6%) interest per annum reckoned from the time the Request for Arbitration was filed until this
Decision becomes final and executory, plus twelve percent (12%) interest per annum on the said amount
or any balance thereof from the finality of the Decision until the same will have been fully paid. The
arbitration costs shall be borne by both parties on a pro rata basis. Costs against KCSI.

NO SEPARATE OPINIONS