46 Keppel Cebu Shipyard, Inc. V. Pioneer Ins..docx

COMMERCIAL LAW REVIEW | G01| INSURANCE LAW DIGEST #46 Keppel Cebu Shipyard, Inc. (KCSI) v. Pioneer Ins. [G.R. Nos. 180880-81, Sept. 25, 2009, 601 SCRA 96] Topic: Subrogation Ponente: Nachura, J. Author: Rufino, Alvin Angelo C. ER: KCSI and WG&A executed a Shiprepair Agreement wherein KCSI would reconstruct WG&A’ s M/V Superferry 3 using its dry docking facilities. Prior to the execution of the Shiprepair Agreement, Superferry 3 was already insured by WG&A with Pioneer. In the course of its repair, M/V Superferry 3 was gutted by fire. WG&A declared the vessels damage as pervasive and as a total constructive loss and, hence, filed an insurance claim with Pioneer. Pioneer paid the insurance claim of WG&A in turn, executed a Loss and Subrogation Receipt in favor of Pioneer. Pioneer claimed for reimbursement but KSCI did not heed to such demand. Pioneer asseverates that it is now entitled to be subrogated to the rights of WG&A to claim the amount of the loss. KCSI counters that a total constructive loss was not adequately proven by Pioneer, and that there is no proof of payment of the insurance proceeds. SC ruled that Pioneer has been subrogated to the claim of its assured, WG&A. Hence, KCSI is ordered to pay Pioneer the amount of ₱360M (vessel’s insured value) less ₱30.2M (salvage value) recovered by Pioneer from M/V "Superferry 3," or the net total amount of ₱329.8M DOCTRINE: Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to enforce payment. 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.

Facts: KCSI and WG&A Jebsens Ship management, Inc. (WG&A) executed a Ship repair Agreement wherein KCSI would renovate and reconstruct WG&A’s M/V "Superferry 3" using its dry docking facilities. Prior to the execution of the Ship repair Agreement, "Superferry 3" was already insured by WG&A with Pioneer for US$8.4M. 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. Pioneer then paid the insurance claim of WG&A in the amount of US$8.4M or P360M. 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. As KCSI continuously refused to pay despite repeated demands, Pioneer filed a Request for Arbitration before the Construction Industry Arbitration Commission (CIAC). Pioneer asseverates that there existed a total constructive loss so that it had to pay WG&A the full amount of the insurance coverage and that it was entitled to be subrogated to the rights of WG&A to claim the amount of the loss. On the other hand, KCSI contends that a total constructive loss was not adequately proven by Pioneer, and that there is no proof of payment of the insurance proceeds. CIAC ordered KCSI to pay Pioneer the amount of 25M (half of the P50M max liability under the contract) as WG&A is partially liable too. Pioneer appealed to the CA. The latter initially dismissed the case but on MR by Pioneer, the award of P25M by CIAC was reinstated. Hence, this petition. Issue: Whether subrogation by Pioneer is proper (if yes, to what extent). Ruling: Yes. 1

COMMERCIAL LAW REVIEW | G01| INSURANCE LAW DIGEST Ratio: 

Payment of the insurance proceeds is proven by the Loss and Subrogation Receipt executed by WG&A in favor of Pioneer.

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The clauses stated in the Ship repair Agreement, limiting KCSI’s liability only up to P50M and that KCSI stands as a co-assured of WG&A, are void. The Ship repair Agreement are unfair and inequitable. It was established during arbitration that 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 fineprint portion of the Ship repair Agreement, 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 Ship repair Agreement; otherwise, the vessel would not be accepted for dry docking. Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a "take-it-or-leave-it" basis. Hence, this agreement is void. To allow KCSI to limit its liability to only P50M, notwithstanding the fact that there was a constructive total loss in the amount of P360M, unfairly sanctions the exercise of a degree of diligence short of what is ordinarily required. Hence, the clause in the subject agreement allowing this is void. Undeniably, the insurance procured by WG&A from Pioneer named only the former as the assured. There was no manifest intention on the part of WG&A to constitute KCSI as a co-assured under the policies. 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. No ship owner would agree to make a ship repairer a co-assured under such insurance policy. Otherwise, any claim for loss or damage under the policy would be rendered nugatory. WG&A could not have intended such a result. Nevertheless, the salvage value of the damaged M/V "Superferry 3" should be considered in the award so that unjust enrichment on the part of Pioneer is avoided. It was proven before the CIAC that the machinery and the hull of the vessel were sold for ₱30.2M. Hence, this amount should be deducted from the Court’s award.

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WHEREFORE, the Petition of Pioneer is PARTIALLY GRANTED and KCSI is ordered to pay Pioneer the amount of ₱360M less ₱30.2M equivalent to the salvage value recovered by Pioneer from M/V "Superferry 3," or the net total amount of ₱329.8M, plus interest. Costs against KCSI.

DISPOSITIVE PORTION:

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