Insurance (Marine) Case Digests

July 21, 2017 | Author: MJReandelar | Category: Insurance Broker, Insurance, Shipping, Water Transport, Industries
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Insurance (Marine) Case Digests...


G.R. No. 13983

September 1, 1919

LA RAZON SOCIAL "GO TIAOCO Y HERMANOS," plaintiff-appellant, vs. UNION INSURANCE SOCIETY OF CANTON, LTD., defendant-appellee. STREET, J.: This is an action on a policy of marine insurance issued by the Union Insurance Society of Canton, Ltd., upon a cargo of rice belonging to the plaintiffs, Go Tiaoco Brothers, which was transported in the early days of May, 1915, on the steamship Hondagua from the port of Saigon to Cebu. On discharging the rice from one of the compartments in the after hold, upon arrival at Cebu, it was discovered that one thousand four hundred seventy-three sacks and been damages by sea water. The loss so resulting to the owners of rice, after proper deduction had been made for the portion saved, was three thousand eight hundred seventy five pesos and twentyfive centavos (P3,875.25). The trial court found that the inflow of the sea water during the voyage was due to a defect in one of the drain pipes of the ship and concluded that the loss was not covered by the policy of insurance. Judgment was accordingly entered in favor of the defendant and the plaintiffs appealed. The facts with reference to the manner in which the sea water effected entrance into the hold may be summarized as follows, substantially in accordance with the findings of the trial court: The drain pipe which served as a discharge from the water closet passed down through the compartment where the rice in question was stowed and thence out to sea through the wall of the compartment, which was a part of the wall of the ship. The joint or elbow where the pipe changed its direction was of cast iron; and in course of time it had become corroded and abraded until a longitudinal opening had appeared in the pipe about one inch in length. This hole had been in existence before the voyage was begun, and an attempt had been made to repair it by filling with cement and bolting over it a strip of iron. The effect of loading the boat was to submerge the vent, or orifice, of the pipe until it was about 18 inches or 2 feet below the level of the sea. As a consequence the sea water rose in the pipe. Navigation under these conditions resulted in the washing out of the cement-filling from the action of the sea water, thus permitting the continued flow of the salt water into the compartment of rice. The court found in effect that the opening above described had resulted in course of time from ordinary wear and tear and not from the straining of the ship in rough weather on that voyage. The court also found that the repairs that had been made on the pipe were slovenly and defective and that, by reason of the condition of this pipe, the ship was not properly equipped to receive the rice at the time the voyage was begun. For this reason the court held that the ship was unseaworthy.

The policy of insurance was signed upon a form long in use among companies engaged in maritime insurance. It purports to insure the cargo from the following among other risks: "Perils . . . of the seas, men of war, fire, enemies, pirates, rovers, thieves, jettisons, . . . barratry of the master and mariners, and of all other perils, losses, and misfortunes that have or shall come to the hurt, detriment, or damage of the said goods and merchandise or any part thereof." The question whether the insurer is liable on this policy for the loss caused in the manner above stated presents two phases which are in a manner involved with each other. One has reference to the meaning of the expression "perils of the seas and all other perils, losses, and misfortunes," as used in the policy; the other has reference to the implied warranty, on the part of the insured, as to the seaworthiness of the ship. The meaning of the expression "perils . . . of the seas . . . and all other perils, losses, and misfortunes," used in describing the risks covered by policies of marine insurance, has been the subject of frequent discussion; and certain propositions relative thereto are now so generally accepted as to be considered definitely settled. In the first place it is determined that the words "all other perils, losses, and misfortunes" are to be interpreted as covering risks which are of like kind (ejusdem generis) with the particular risks which are enumerated in the preceding part of the same clause of the contract. "According to the ordinary rules of construction," said Lord Macnaghten in Thames and Mersey Marine Insurance Co. vs. Hamilton, Fraser & Co. ([1887]), 12 A. C., 484, 501), "these words must be interpreted with reference to the words which immediately precede them. They were no doubt inserted in order to prevent disputes founded on nice distinctions. Their office is to cover in terms whatever may be within the spirit of the cases previously enumerated, and so they have a greater or less effect as a narrower or broader view is taken of those cases. For example, if the expression 'perils of the seas' is given its widest sense the general words have little or no effect as applied to that case. If no the other hand that expression is to receive a limited construction, as apparently it did in Cullen vs. Butler (5 M. & S., 461), and loss by perils of the seas is to be confined to loss ex marinae tempestatis discrimine, the general words become most important. But still, ever since the case of Cullen vs. Butler, when they first became the subject of judicial construction, they have always been held or assumed to be restricted to cases 'akin to' or resembling' or 'of the same kind as' those specially mentioned. I see no reason for departing from this settled rule. In marine insurance it is above all things necessary to abide by settled rules and to avoid anything like novel refinements or a new departure." It must be considered to be settled, furthermore, that a loss which, in the ordinary course of events, results from the natural and inevitable action of the sea, from the ordinary wear and tear of the ship, or from the negligent failure of the ship's owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions, is not a peril of the sea. Such a loss is rather due to what has been aptly called the "peril of the ship." The insurer undertakes to insure against perils of the sea and similar perils, not against perils of the ship. As was well said by Lord Herschell in

Wilson, Sons & Co. vs. Owners of Cargo per the Xantho ([1887], 12 A. C., 503,509), there must, in order to make the insurer liable, be "some casualty, something which could not be foreseen as one of the necessary incidents of the adventure. The purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen." In the present case the entrance of the sea water into the ship's hold through the defective pipe already described was not due to any accident which happened during the voyage, but to the failure of the ship's owner properly to repair a defect of the existence of which he was apprised. The loss was therefore more analogous to that which directly results from simple unseaworthiness than to that which results from perils of the sea. The first of the two decisions of the House of Lords from which we have quoted (Thames and Mersey Marine Insurance Co. vs. Hamilton, Fraser & Co. [1887], 12 A. C., 484) arose upon the following state of facts: In March, 1884, the Inchmaree was lying at anchor off Diamond Island and was about to start upon her voyage. To this end it became necessary to fill up her boilers. There was a donkey-engine with a donkey-pump on board, and the donkey-engine was set to pump up water from the sea into the boilers. Those in charge of the operation did not take the precaution of making sure that the valve of the aperture leading into one of the boilers was open. This valve happened to be closed. The result was that the water being unable to make its way into the boiler was forced back and split the air-chamber and so disabled the pump. It was held that whether the injury occurred through negligence or accidentally without negligence, it was not covered by the policy, since the loss did not fall either under the words "perils of the seas" or under the more general words "all other perils, losses, and misfortunes." Lord Bramwell, in the course of his opinion quoted with approbation as definition given by Lopes L.J. in Pandorf vs. Hamilton (16 Q. B. D., 629), which is as follows: In a sea-worthy ship damage to goods caused by the action of the sea during transit not attributable to the fault of anybody, is a damage from a peril of the sea. The second of the decision from the House of Lords from which we have quoted (Wilson, Son & Co. vs. owners of Cargo per the Xantho [1887], 12 A. C., 503) arose upon the following facts: The owners of certain cargo embarked the same upon the steamship Xantho. A collision took place in a fog between this vessel and another ship, Valuta. An action was thereupon instituted by the owners of the cargo against the owners of the Xantho. It was held that if the collision occurred without fault on the part of the carrying ship, the owners were not liable for the value of the cargo lost by such collision. Still another case was decided in the House of Lords upon the same date as the preceding two, which is equally instructive as the others upon the question now under consideration. We refer to Hamilton, Fraser & Co. vs.Pandorf & Co. ([1887], 12 A. C., 518), where it appeared that rice was shipped under a charter party and bills of lading which expected "dangers and accident of the sea." During the voyage rats gnawed a hole in a pipe on board the ship, whereby sea water effected an entrance into the

ship's hold and damaged the rice. It appeared that there was no neglect or default on the part of the shipowners or their servants in the matter of attending to the cargo. It was held that this loss resulted from an accident or peril of the sea and that the shipowners were not responsible. Said Bramwell: "No question of negligence exists in this case. The damage was caused by the sea in the course of navigation with no default in any one. I am, therefore, of opinion that the damage was caused by peril of the sea within the meaning of the bill of lading." The point which discriminates this decision from that now before us is that in the present case the negligence of the shipowners must be accepted as established. Undoubtedly, if in Hamilton, Fraser & Co. vs. Pandorf & Co. [1887], 12 A. C., 518), it had appeared that this hold had been gnawed by the rats prior to this voyage and the owners, after having their attention directed to it, had failed to make adequate repairs, the ship would have been liable. The three decisions in the House of Lords above referred to contain elaborate discussions concerning the liability of shipowners and insurers, respectively, for damage happening to cargo in the course of a sea voyage; and it would be presumptuous for us to undertake to add to what has been there said by the learned judges of that high court. Suffice it to say that upon the authority of those cases there is no room to doubt the liability of the shipowner for such a loss as occurred in this case. By parity of reasoning the insurer is not liable; for, generally speaking, the shipowner excepts the perils of the sea from his engagement under the bill of lading, while this is the very peril against which the insurer intends to give protection. As applied to the present case it results that the owners of the damages rice must look to the shipowner for redress and not to the insurer. The same conclusion must be reached if the question be discussed with reference to the seaworthiness of the ship. It is universally accepted that in every contract of insurance upon anything which is the subject of marine insurance, a warranty is implied that the ship shall be seaworthy at the time of the inception of the voyage. This rule is accepted in our own Insurance Law (Act No. 2427, sec. 106). It is also well settled that a ship which is seaworthy for the purpose of insurance upon the ship may yet be unseaworthy for the purpose of insurance upon the cargo (Act No. 2427, sec. 106). In Steel vs. State Line Steamship Co. ([1877], L. R. 3 A. C., 72), a cargo of wheat was laden upon a ship which had a port-hole insecurely fastened at the time of the lading. This port-hole was about one foot above the water line; and in the course of the voyage sea water entered the compartment where the wheat was stores and damaged the cargo. It was held that the ship was unseaworthy with reference to the cargo in question. In Gilroy, Sons & Co. vs. Price & Co. ([1893], 18 A. C., 56), a cargo of jute was shipped. During the voyage the vessel encountered stormy weather, as a consequence of which the cargo shifted its position and broke a pipe leading down through the hold from the water closet, with result that water entered the vessel and the jute was damaged. It was found that the cargo was improperly stowed and that the owners of the ship were chargeable with negligence for failure to protect the pipe by putting a case over it. It was accordingly held that the ship was unseaworthy.

From what has been said it follows that the trial court committed no error in absolving the defendant from the complaint. The judgment must therefore be affirmed, and it is so ordered, with costs.









reimbursefrom Compagnie Maritime Des Chargeurs Reunis and third party defendant E. Razon, Inc.  

CA: Affirmed but modified by adjudicating the third party complaint Filipino Merchants contended that Chao has no insurable interest and therefore the policy should be void and that it was fraud that it did not disclose of such fact

ISSUE: W/N Choa Tiek Seng as consignee of the shipment has insurable interest

HELD: YES. CA affirmed.


 G.R. No. 13983

GR: the burden of proof is upon the insured to show that a loss arose from a covered peril, but under an "all risks" policy the burden is not on the insured to

September 1, 1919

prove the precise cause of loss or damage for which it seeks compensation. The

LA RAZON SOCIAL "GO TIAOCO Y HERMANOS," plaintiff-appellant, vs. UNION INSURANCE SOCIETY OF CANTON, LTD., defendant-appellee.

insured under an "all risks insurance policy" has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage. - none was shown = liable

FACTS:  

Choa Tiek Seng, consignee of the shipment of fishmeal loaded, insured in

every interest in property, whether real or personal, or any relation thereto, or

"all risks policy" 600 metric tons of fishmeal in new gunny bags of 90 kilos each

liability in respect thereof, of such nature that a contemplated peril might directly

from Bangkok, Thailand to Manila against all risks under warehouse to

damnify the insured.

warehouse terms but only 59.940 metric tons was imported 

As vendee/consignee of the goods in transit has such existing interest. His

When it was unloaded unto the arrastre contractor E. Razon, Inc. and

interest over the goods is based on the perfected contract of sale. The perfected

Filipino Merchants's surveyor ascertained and certified that in such discharge

contract of sale between him and the shipper of the goods operates to vest in

105 bags were in bad order condition which was reflected in the survey report of

him an equitable title even before delivery or before be performed the conditions

Bad Order cargoes

of the sale. The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as

Before delivery to Choa, E. Razon's Bad Order Certificate showed that a

in this case, is immaterial in the determination of whether the vendee has an

total of 227 bags in bad order condition 

Section 13 of the Insurance Code defines insurable interest in property as

Choa brought an action against Filipino Merchants Insurance Co. who

insurable interest or not in the goods in transit. 

Article 1523 of the Civil Code provides that where, in pursuance of a contract

brought a third party complaint against Compagnie Maritime Des Chargeurs

of sale, the seller is authorized or required to send the goods to the buyer,

Reunis and/or E. Razon, Inc.

delivery of the goods to a carrier, whether named by the buyer or not, for, the

purpose of transmission to the buyer is deemed to be a delivery of the goods to

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its

the buyer, the exceptions to said rule not obtaining in the present case. The

decision, the appellate court distinguished between P & I Clubs vis-à-vis conventional

Court has heretofore ruled that the delivery of the goods on board the carrying vessels partake of the nature of actual delivery since, from that time, the foreign buyers assumed the risks of loss of the goods and paid the insurance premium covering them C & F contracts are shipment contracts. The term means that the price fixed

insurance. The appellate court also held that Pioneer merely acted as a collection agent of Steamship Mutual. Hence this petition by White Gold. Issues: 1. Is Steamship Mutual, a P & I Club, engaged in the insurance business in the

includes in a lump sum the cost of the goods and freight to the named


destination. It simply means that the seller must pay the costs and freight

2. Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?

necessary to bring the goods to the named destination but the risk of loss or damage to the goods is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. Moreover, the issue of lack of insurable interest was not among the defenses

averred in petitioners answer.

Held: Yes. Petition granted. Ratio: White Gold insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its assertion, it cites the definition as “an association composed of shipowners in general who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning that the

White Gold Marine Insurance vs. Pioneer Insurance Services G.R. No. 154514. July 28, 2005

members incur in favor of third parties.” They argued that Steamship Mutual’s primary purpose is to solicit and provide protection and indemnity coverage and for this purpose, it has engaged the services


of Pioneer to act as its agent.

White Gold procured a protection and indemnity coverage for its vessels from The

Respondents contended that although Steamship Mutual is a P & I Club, it is not

Steamship Mutual through Pioneer Insurance and Surety Corporation. White Gold

engaged in the insurance business in the Philippines. It is merely an association of

was issued a Certificate of Entry and Acceptance. Pioneer also issued receipts.

vessel owners who have come together to provide mutual protection against liabilities

When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew

incidental to shipowning.

the coverage.

Is Steamship Mutual engaged in the insurance business?

Steamship Mutual thereafter filed a case against White Gold for collection of sum of

A P & I Club is “a form of insurance against third party liability, where the third party is

money to recover the unpaid balance. White Gold on the other hand, filed a

anyone other than the P & I Club and the members.” By definition then, Steamship

complaint before the Insurance Commission claiming that Steamship Mutual and

Mutual as a P & I Club is a mutual insurance association engaged in the marine

Pioneer violated provisions of the Insurance Code.

insurance business.

The Insurance Commission dismissed the complaint. It said that there was no need

The records reveal Steamship Mutual is doing business in the country albeit without

for Steamship Mutual to secure a license because it was not engaged in the

the requisite certificate of authority mandated by Section 187 of the Insurance Code.

insurance business and that it was a P & I club. Pioneer was not required to obtain

It maintains a resident agent in the Philippines to solicit insurance and to collect

another license as insurance agent because Steamship Mutual was not engaged in

payments in its behalf. Steamship Mutual even renewed its P & I Club cover until it

the insurance business.

was cancelled due to non-payment of the calls. Thus, to continue doing business

here, Steamship Mutual or through its agent Pioneer, must secure a license from the Insurance Commission. Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance company is allowed to engage in the insurance business without a license or a certificate of authority from the Insurance Commission. 2. Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration issued by the Insurance Commission. It has been licensed to do or transact insurance business by virtue of the certificate of authority issued by the same agency. However, a Certification from the Commission states that Pioneer does not have a separate license to be an agent/broker of Steamship Mutual. Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states: SEC. 299 No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for insurance, or receive for services in obtaining insurance, any commission or other compensation from any insurance company doing business in the Philippines or any agent thereof, without first procuring a license so to act from the Commissioner… G.R. No. L-6106-07

April 18, 1958

MADRIGAL, TIANGCO and CO., plaintiff-appellant, vs. HANSON, ORTH and STEVENSON, INC., defendant-appellee. MADRIGAL, TIANGCO and CO., ET AL., plaintiffs-appellants, vs. ROMAN MABANTA, defendant-appellant. REHABILITATION FINANCE CORPORATION, intervenor. On 6 January 1948, for and in consideration of the sum of P1,750 to be paid monthly as rental, a motor launch named "Isla Verde" owned by the plaintiffs was chartered by the defendant for six months from the date of actual delivery and acceptance, under and by virtue of a contract which, among other terms, required delivery thereof on 20 January 1948, in seaworthy condition together with the necessary documents to enable her to navigate. Delivery of the motor launch was not made as agreed upon, because it was on 12 January 1948 only that the motor launch was dry docked at Malabon to undergo repairs; and on 28 January 1948 she was transferred to the dock of the defendant near the Hospicio de San Jose of the Isla Convalesencia and there some additional improvements were made on the motor launch. On the 29th, manned by a complement engaged by the defendant, the motor launch was put to sea and at

5:00 o'clock a.m. of the following day she sank off the coast of Limay, province of Bataan, becoming a total loss. To recover P50,000, the estimated value of the motor launch with all equipment and tackle and a monthly rental of P1,750, the plaintiffs brought this action. The Rehabilitation Finance Corporation, successor to the Agricultural and Industrial Bank, was allowed to intervene to recover P10,745.06, together with a daily interest thereon of P1.77 from 18 January 1950 until the (late of payment thereof, from the plaintiffs, should they be successful in their claim against either the defendant or the insurance company, against which an action was also brought by the plaintiff to recover the amount for which the motor launch was insured under a policy issued by the insurance company. As the intervenor has not appealed from the judgment dismissing its complaint, the same is no longer involved in these appeals. The defendant in his answer denies liability for the sinking of the motor launch and claims in a counterclaim P5,000 for unrealized profits; P2,500 for equipment and fishing tackle; P1,086.16 for the cost of repairs of four sets of nets and the value of the new ropes; and P1,485.28 for the value of 5 blocks of ice, 2,754 gallons of crude oil, 3 drums of motor oil and 300 fish boxes. After hearing the Court rendered judgment dismissing the complaint without pronouncement as to costs, on the ground that although it found that there had been delivery of the motor launch to the defendant, yet she was unseaworthy. For the same reason the action against Hanson, Orth and Stevenson, Inc. to recover the amount for which the motor launch was insured under a policy issued by it was dismissed with costs against the plaintiff. From the judgment rendered in civil case No. 4616 of the Court of First Instance of Manila, both the plaintiffs and the defendant have appealed (G.R. No. L-6107); and from that rendered in civil case No. 5756 of the same Court the plaintiff also has appealed (G.R. No. L-6106). The plaintiffs contend that, as found by the trial court, there was delivery of the motor launch to the defendant and that this finding not having been appealed by the defendant is now final. On the other hand, the defendant claims that the sinking of the motor launch off the coast of Limay, Bataan, was due to her unseaworthiness and not to the incompetence or negligence of the complement engaged by him (defendant) to man her. The preponderance of evidence leans towards the conclusion that there was no delivery of the motor launch in accordance with the terms of the contract, because there was no license issued by the Bureau of Customs, the license of the motor launch having expired on 6 June 1947 (Exhibit E) and the special permit, on 15 December 1947 (Exhibits F and 12); there was no license issued by the Bureau Fisheries authorizing the motor launch to engage in deep sea fishing; and the defendant refused to sign a document, dated 28 January 1948 purporting to acknowledge receipt or acceptance of the motor launch and to waive the delivery thereof on 20 January 1948 ( Exhibit 3) in accordance with the terms of the contract (Exhibit A). Nevertheless, even if the motor launch was not delivered on the date agreed upon, the fact that the defendant took possession thereof when she was put to on 29 January 1948; and that if on that trip the motor launch sank due to the negligence or incompetence of thepatron, engineer, or crew engaged by the defendant to manger, provided that she was seaworthy, the defendant would still be

responsible for the sinking of the motor launch, because he has to answer for the negligent acts of his agents. Hence whether there was actual delivery or it was merely a trial run becomes unimportant if the motor launch was unseaworthy. Again the preponderance of evidence leans toward the conclusion that the motor launch was unseaworthy. And this conclusion is supported by the fact that there was no typhoon; that the waves were those that were caused by the monsoon winds of the season (Exhibit 13-E) ; and that the or hit anything during her cruise in the bay (Exhibit 13-C). The claim of the plaintiffs that the big waves of the sea filled the engine room with water, one and one-half or two feet high, as a result of which the engine stopped, and that the water could not be pumped out by the bilge pump, cannot be believed, because according to Pedro Ala and Eugenio Maraginot they saw the water bubbling in the engine room (pp. 738, 808, t.s.n.) and this testimony is corroborated by Zoilo Belale, the patron, who said that he thought the water entered the engine room through the tail shaft but that he was wondering why it was filled with water so soon (Exhibit 13-B, p. 3). This was also found by the board of inquiry of the Bureau of Customs that investigated the sinking of the motor launch with a view to finding the responsibility of the patron. For, that reason the board exonerated the patron from any negligence arising from the sinking of the motor launch (Exhibit 13-C). The plaintiffs argue and contend that the board did not have jurisdiction to make such finding and that it was a mere conjecture. The cause of the sinking of the motor launch was connected with the responsibility of the patron for the sinking thereof. It is true that nobody saw the underneath plankings give way; but this fact may be inferred from the established facts that there was no typhoon; that there were no big waves; that the motor launch did not touch bottom or hit anything before she sank; and that the water was bubbling in the engine room.

of P2,500, the represents the purchase price of the by the plaintiffs to the defendant. Under the defendant is not entitled to the refund of said amount. As to the repairs made on old equipment and the acquisition of new ones, the charter party being silent about the same, the defendant cannot recover their cost from the plaintiffs. We agree to this pronouncement of the trial court. The finding that the motor launch was unseaworthy at the time she sank precludes recovery by the plaintiffs of the amount for which the motor launch was insured under the policy issued by the insurance company (paragraph 7 of the Marine Hull Policy, Annex A to the complaint filed in civil case No. 5756). The judgments appealed from are affirmed, without pronouncement as to costs.

The plaintiff s further contend that the motor launch was put to sea on 29 January 1948 an uneven keel; that she was not properly loaded, because the oil weighing 11 tons and water weighing 1 or 2 tons were placed at the astern, whereas only a few blocks of ice weighing 1,500 pounds were at the prow of the motor launch; that this unbalanced loading became worse because of the fishing nets attached to the rear of the motor launch, of the weight of the chain which was 140 kilos, of the stones which was 40 kilos and of the aldake which could be carried only by four persons if not wet and by six if wet. They conclude that the uneven keel of the motor launch constitutes negligence on the part of the complement and the direct cause of the sinking thereof. The fact that the motor launch was run and operated for 17 hours in the bay without mishap is strong proof that the cause of the sinking was not the uneven keel. It was a different cause which as above stated is inferred from established facts which need not be restated.

G.R. No. L-66935 November 11, 1985

Another contention is that the motor launch was thoroughly repaired and overhauled. But such repair did not include the hull. If only water entered the engine room through the tail shaft, it would not have been bubbling and could have been pumped out easily.

ISABELA ROQUE, doing business under the name and style of Isabela Roque Timber Enterprises and ONG CHIONG, petitioners, vs. HON. INTERMEDIATE APPELATE COURT and PIONEER INSURANCE AND SURETY CORPORATION, respondent.

As to the claim of the defendant in his counterclaim, the trial court made the following pronouncements.


With respect to the counterclaim of the defendant, the Court agrees with the plaintiffs that the amount of P5,000 cannot be recovered. As to the amount

Isabela Roque v IAC (Insurance)

On February 19, 1972, the Manila Bay Lighterage Corporation (Manila Bay), a common carrier, entered into a contract with the petitioners whereby the former would

load and carry on board its barge Mable 10 about 422.18 cubic meters of logs from

(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, ...

Malampaya Sound, Palawan to North Harbor, Manila. The petitioners insured the logs

From the above-quoted provisions, there can be no mistaking the fact that the term

against loss for P100,000.00 with respondent Pioneer Insurance and Surety

"cargo" can be the subject of marine insurance and that once it is so made, the


implied warranty of seaworthiness immediately attaches to whoever is insuring the


On February 29, 1972, the petitioners loaded on the barge, 811 pieces of logs at

cargo whether he be the shipowner or not.

Malampaya Sound, Palawan for carriage and delivery to North Harbor, Port of Manila, but the shipment never reached its destination because Mable 10 sank with the 811

Since the law provides for an implied warranty of seaworthiness in every contract of

pieces of logs somewhere off Cabuli Point in Palawan on its way to Manila.

ordinary marine insurance, it becomes the obligation of a cargo owner to look for a

Hence, petitioners commenced Civil Case No. 86599 against Manila Bay and

reliable common carrier which keeps its vessels in seaworthy condition. The shipper

respondent Pioneer.

of cargo may have no control over the vessel but he has full control in the choice of the common carrier that will transport his goods. Or the cargo owner may enter into a


contract of insurance which specifically provides that the insurer answers not only for

(1) Trial Court: found in favor of petitioners.

the perils of the sea but also provides for coverage of perils of the ship.

(2) Intermediate Appellate Court: absolved the respondent insurance company from liability on the grounds that the vessel carrying the insured cargo was unseaworthy

II. No, the IAC is correct.

and the loss of said cargo was caused not by the perils of the sea but by the perils of



A policy does not cover a loss or injury that must inevitably take place in the ordinary













course of things. There is no doubt that the term 'perils of the sea' extends only to ISSUES:

losses caused by sea damage, or by the violence of the elements, and does not


embrace all losses happening at sea. They insure against losses from extraordinary


occurrences only, such as stress of weather, winds and waves, lightning, tempests,










rocks and the like. These are understood to be the "perils of the sea" referred in the


policy, and not those ordinary perils which every vessel must encounter. "Perils of the


sea" has been said to include only such losses as are of extraordinary nature,


encounter. "Perils of the sea" has been said to include only such losses as are of extraordinary nature, or arise from some overwhelming power, which cannot be


guarded against by the ordinary exertion of human skill and prudence. Damage done

I. No. The IAC is correct.

to a vessel by perils of the sea includes every species of damages done to a vessel at

The liability of the insurance company is governed by law. Section 113 of the

sea, as distinguished from the ordinary wear and tear of the voyage, and distinct from

Insurance Code provides:

injuries suffered by the vessel in consequence of her not being seaworthy at the

In every marine insurance upon a ship or freight, or freightage, or upon any thing that

outset of her voyage (as in this case). It is also the general rule that everything which

is the subject of marine insurance, a warranty is implied that the ship is seaworthy.

happens thru the inherent vice of the thing, or by the act of the owners, master or

Section 99 of the same Code also provides in part. Marine insurance includes:

shipper, shall not be reputed a peril, if not otherwise borne in the policy.

(1) Insurance against loss of or damage to: It is quite unmistakable that the loss of the cargo was due to the perils of the ship

rather than the perils of the sea. The facts clearly negate the petitioners' claim under the insurance policy. In the present case the entrance of the sea water into the ship's hold through the defective pipe already described was not due to any accident which happened during

On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board "MV Asilda," a vessel owned and operated by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-liter Coca-Cola softdrink bottles to be transported from Zamboanga City to Cebu City for consignee Coca-Cola Bottlers Philippines, Inc., Cebu. 1 The shipment was insured with petitioner Philippine American General Insurance Co., Inc. (PHILAMGEN for brevity), under Marine Open Policy No. 100367PAG.

the voyage, but to the failure of the ship's owner properly to repair a defect of the existence of which he was apprised. The loss was therefore more analogous to that which directly results from simple unseaworthiness than to that which result from the perils of the sea.

"MV Asilda" left the port of Zamboanga in fine weather at eight o'clock in the evening of the same day. At around eight forty-five the following morning, 7 July 1983, the vessel sank in the waters of Zamboanga del Norte bringing down her entire cargo with her including the subject 7,500 cases of 1-liter Coca-Cola softdrink bottles. On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim with respondent FELMAN for recovery of damages it sustained as a result of the loss of its softdrink bottles that sank with "MV Asilda." Respondent denied the claim thus prompting the consignee to file an insurance claim with PHILAMGEN which paid its claim of P755,250.00. Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN which disclaimed any liability for the loss. Consequently, on 29 November 1983 PHILAMGEN sued the shipowner for sum of money and damages. In its complaint PHILAMGEN alleged that the sinking and total loss of "MV Asilda" and its cargo were due to the vessel's unseaworthiness as she was put to sea in an unstable condition. It further alleged that the vessel was improperly manned and that its officers were grossly negligent in failing to take appropriate measures to proceed to a nearby port or beach after the vessel started to list.

G.R. No. 116940 June 11, 1997 THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., petitioner, vs. COURT OF APPEALS and FELMAN SHIPPING LINES, respondents. This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to observe the extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of the insurer to be subrogated to the rights of the insured upon payment of the insurance claim.

On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that no right of subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any event, FELMAN had abandoned all its rights, interests and ownership over "MV Asilda" together with her freight and appurtenances for the purpose of limiting and extinguishing its liability under Art. 587 of the Code of Commerce. 2 On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the Court of Appeals set aside the dismissal and remanded the case to the lower court for trial on the merits. FELMAN filed a petition forcertiorari with this Court but it was subsequently denied on 13 February 1989. On 28 February 1992 the trial court rendered judgment in favor of FELMAN. 3 It ruled that "MV Asilda" was seaworthy when it left the port of Zamboanga as confirmed by certificates issued by the Philippine Coast Guard and the shipowner's surveyor attesting to its seaworthiness. Thus the loss of the vessel and its entire shipment could only be attributed to either a fortuitous event, in which case, no liability should

attach unless there was a stipulation to the contrary, or to the negligence of the captain and his crew, in which case, Art. 587 of the Code of Commerce should apply. The lower court further ruled that assuming "MV Asilda" was unseaworthy, still PHILAMGEN could not recover from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had breached its implied warranty on the vessel's seaworthiness. Resultantly, the payment made by PHILAMGEN to the assured was an undue, wrong and mistaken payment. Since it was not legally owing, it did not give PHILAMGEN the right of subrogation so as to permit it to bring an action in court as a subrogee. On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August 1994 respondent appellate court rendered judgment finding "MV Asilda" unseaworthy for being top-heavy as 2,500 cases of Coca-Cola softdrink bottles were improperly stowed on deck. In other words, while the vessel possessed the necessary Coast Guard certification indicating its seaworthiness with respect to the structure of the ship itself, it was not seaworthy with respect to the cargo. Nonetheless, the appellate court denied the claim of PHILAMGEN on the ground that the assured's implied warranty of seaworthiness was not complied with. Perfunctorily, PHILAMGEN was not properly subrogated to the rights and interests of the shipper. Furthermore, respondent court held that the filing of notice of abandonment had absolved the shipowner/agent from liability under the limited liability rule. The issues for resolution in this petition are: (a) whether "MV Asilda" was seaworthy when it left the port of Zamboanga; (b) whether the limited liability under Art. 587 of the Code of Commerce should apply; and, (c) whether PHILAMGEN was properly subrogated to the rights and legal actions which the shipper had against FELMAN, the shipowner. "MV Asilda" was unseaworthy when it left the port of Zamboanga. In a joint statement, the captain as well as the chief mate of the vessel confirmed that the weather was fine when they left the port of Zamboanga. According to them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an undetermined quantity of empty boxes for fresh eggs. They loaded the empty boxes for eggs and about 500 cases of Coca-Cola bottles on deck. 4 The ship captain stated that around four o'clock in the morning of 7 July 1983 he was awakened by the officer on duty to inform him that the vessel had hit a floating log. At that time he noticed that the weather had deteriorated with strong southeast winds inducing big waves. After thirty minutes he observed that the vessel was listing slightly to starboard and would not correct itself despite the heavy rolling and pitching. He then ordered his crew to shift the cargo from starboard to portside until the vessel was balanced. At about seven o'clock in the morning, the master of the vessel stopped the engine because the vessel was listing dangerously to portside. He ordered his crew to shift the cargo back to starboard. The shifting of cargo took about an hour afterwhich he rang the engine room to resume full speed. At around eight forty-five, the vessel suddenly listed to portside and before the captain could decide on his next move, some of the cargo on deck were thrown

overboard and seawater entered the engine room and cargo holds of the vessel. At that instance, the master of the vessel ordered his crew to abandon ship. Shortly thereafter, "MV Asilda" capsized and sank. He ascribed the sinking to the entry of seawater through a hole in the hull caused by the vessel's collision with a partially submerged log. 5 The Elite Adjusters, Inc., submitted a report regarding the sinking of "MV Asilda." The report, which was adopted by the Court of Appeals, reads — We found in the course of our investigation that a reasonable explanation for the series of lists experienced by the vessel that eventually led to her capsizing and sinking, was that the vessel wastop-heavy which is to say that while the vessel may not have been overloaded, yet the distribution or stowage of the cargo on board was done in such a manner that the vessel was in top-heavy condition at the time of her departure and which condition rendered her unstable and unseaworthy for that particular voyage. In this connection, we wish to call attention to the fact that this vessel was designed as a fishing vessel . . . and it was not designed to carry a substantial amount or quantity of cargo on deck. Therefore, we believe strongly that had her cargo been confined to those that could have been accommodated under deck, her stability would not have been affected and the vessel would not have been in any danger of capsizing, even given the prevailing weather conditions at that time of sinking. But from the moment that the vessel was utilized to load heavy cargo on its deck, the vessel was rendered unseaworthy for the purpose of carrying the type of cargo because the weight of the deck cargo so decreased the vessel's metacentric height as to cause it to become unstable. Finally, with regard to the allegation that the vessel encountered big waves, it must be pointed out that ships are precisely designed to be able to navigate safely even during heavy weather and frequently we hear of ships safely and successfully weathering encounters with typhoons and although they may sustain some amount of damage, the sinking of ship during heavy weather is not a frequent occurrence and is not likely to occur unless they are inherently unstable and unseaworthy . . . . We believe, therefore, and so hold that the proximate cause of the sinking of the M/V "Asilda" was her condition of unseaworthiness arising from her having been top-heavy when she departed from the Port of Zamboanga. Her having capsized and eventually sunk

was bound to happen and was therefore in the category of an inevitable occurrence (emphasis supplied). 6 We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the proximate cause of the sinking of "MV Asilda" was its being top-heavy. Contrary to the ship captain's allegations, evidence shows that approximately 2,500 cases of softdrink bottles were stowed on deck. Several days after "MV Asilda" sank, an estimated 2,500 empty Coca-Cola plastic cases were recovered near the vicinity of the sinking. Considering that the ship's hatches were properly secured, the empty Coca-Cola cases recovered could have come only from the vessel's deck cargo. It is settled that carrying a deck cargo raises the presumption of unseaworthiness unless it can be shown that the deck cargo will not interfere with the proper management of the ship. However, in this case it was established that "MV Asilda" was not designed to carry substantial amount of cargo on deck. The inordinate loading of cargo deck resulted in the decrease of the vessel's metacentric height 7 thus making it unstable. The strong winds and waves encountered by the vessel are but the ordinary vicissitudes of a sea voyage and as such merely contributed to its already unstable and unseaworthy condition. On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at bar. 8 Simply put, the ship agent is liable for the negligent acts of the captain in the care of goods loaded on the vessel. This liability however can be limited through abandonment of the vessel, its equipment and freightage as provided in Art. 587. Nonetheless, there are exceptional circumstances wherein the ship agent could still be held answerable despite the abandonment, as where the loss or injury was due to the fault of the shipowner and the captain. 9 The international rule is to the effect that the right of abandonment of vessels, as a legal limitation of a shipowner's liability, does not apply to cases where the injury or average was occasioned by the shipowner's own fault. 10 It must be stressed at this point that Art. 587 speaks only of situations where the fault or negligence is committed solely by the captain. Where the shipowner is likewise to be blamed, Art. 587 will not apply, and such situation will be covered by the provisions of the Civil Code on common carrier. 11 It was already established at the outset that the sinking of "MV Asilda" was due to its unseaworthiness even at the time of its departure from the port of Zamboanga. It was top-heavy as an excessive amount of cargo was loaded on deck. Closer supervision on the part of the shipowner could have prevented this fatal miscalculation. As such, FELMAN was equally negligent. It cannot therefore escape liability through the expedient of filing a notice of abandonment of the vessel by virtue of Art. 587 of the Code of Commerce. Under Art 1733 of the Civil Code, "(c)ommon carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case . . ." In the event of loss of goods, common carriers are presumed to have acted negligently. FELMAN, the shipowner, was not able to rebut this presumption.

In relation to the question of subrogation, respondent appellate court found "MV Asilda" unseaworthy with reference to the cargo and therefore ruled that there was breach of warranty of seaworthiness that rendered the assured not entitled to the payment of is claim under the policy. Hence, when PHILAMGEN paid the claim of the bottling firm there was in effect a "voluntary payment" and no right of subrogation accrued in its favor. In other words, when PHILAMGEN paid it did so at its own risk. It is generally held that in every marine insurance policy the assured impliedly warrants to the assurer that the vessel is seaworthy and such warranty is as much a term of the contract as if expressly written on the face of the policy. 12 Thus Sec. 113 of the Insurance Code provides that "(i)n every marine insurance upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is seaworthy." Under Sec. 114, a ship is "seaworthy when reasonably fit to perform the service, and to encounter the ordinary perils of the voyage, contemplated by the parties to the policy." Thus it becomes the obligation of the cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. He may have no control over the vessel but he has full control in the selection of the common carrier that will transport his goods. He also has full discretion in the choice of assurer that will underwrite a particular venture. We need not belabor the alleged breach of warranty of seaworthiness by the assured as painstakingly pointed out by FELMAN to stress that subrogation will not work in this case. In policies where the law will generally imply a warranty of seaworthiness, it can only be excluded by terms in writing in the policy in the clearest language. 13And where the policy stipulates that the seaworthiness of the vessel as between the assured and the assurer is admitted, the question of seaworthiness cannot be raised by the assurer without showing concealment or misrepresentation by the assured. 14 The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least two (2) instances has dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine Open Policy No. 100367-PAG reads "(t)he liberties as per Contract of Affreightment the presence of the Negligence Clause and/or Latent Defect Clause in the Bill of Lading and/or Charter Party and/or Contract of Affreightment as between the Assured and the Company shall not prejudice the insurance. The seaworthiness of the vessel as between the Assured and the Assurers is hereby admitted." 15 The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which states "(t)he seaworthiness of the vessel as between the Assured and Underwriters in hereby admitted . . . ." 16 The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two things: (a) that the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of unseaworthiness is assumed by the insurance company. 17 The insertion of such waiver clauses in cargo policies is in recognition of the realistic fact that cargo owners cannot control the state of the vessel. Thus it can be said that with such categorical waiver, PHILAMGEN has accepted the risk of unseaworthiness so

that if the ship should sink by unseaworthiness, as what occurred in this case, PHILAMGEN is liable.

G.R. No. L-16473

Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGEN's action against FELMAN is squarely sanctioned by Art. 2207 of the Civil Code which provides:

PHILIPPINE MANUFACTURING CO., plaintiff-appellant, vs. UNION INSURANCE SOCIETY OF CANTON, LTD., defendant-appellee.

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. In Pan Malayan Insurance Corporation v. Court of Appeals, 18 we said that payment by the assurer to the assured operates as an equitable assignment to the assurer of all the remedies which the assured 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 or upon payment by the insurance company of the insurance claim. 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 which equity adopts to compel the ultimate payment of a debt by one who in justice, equity and good conscience ought to pay. 19 Therefore, the payment made by PHILAMGEN to Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an action as subrogee against FELMAN. Having failed to rebut the presumption of fault, the liability of FELMAN for the loss of the 7,500 cases of 1-liter Coca-Cola softdrink bottles is inevitable. WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to pay petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred Fifty-five Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon counted from 29 November 1983, the date of judicial demand, pursuant to Arts. 2212 and 2213 of the Civil Code. 20 SO ORDERED.

November 22, 1921

The plaintiff is a corporation duly organized under the laws of the Philippine Islands with its principal office and place of business at Manila, and at the times alleged was the owner of the steel tank lighter named Philmaco. The defendant is an insurance company organized under the laws of Hongkong and duly authorized to transact business here. July, 1917, the defendant insured the plaintiff's lighter for the sum of P16,000, and issued its policy for such insurance, which recites that the steel tank lighter Philmaco is insured "for and during the space of twelve calendar-months from July 6, 1917 to July 5, 1918, both dates inclusive, upon the hull, machinery, tackle, apparel, boats or other furniture of the good ship or vessel", and that "the assured is and shall be rated and valued on hull, engine and pumping machinery, whereof this policy insures pesos sixteen thousand, P. I. C. Warranted against the absolute total loss of the lighter only. Warranted trading between Bitas, Tondo, or Pasig River and steamers in the Bay of Manila or harbor." In consideration thereof, the plaintiff paid the defendant P960 as a premium for such insurance. About July 1, 1918, and during the life of the policy and as a result of a typhoon, the lighter was sunk in the Manila Bay, of which the plaintiff notified the defendant and demanded payment of the full amount of its policy, which the defendant refused, and denied its liability. On February 25, 1919, the plaintiff commenced this action and, among other things, alleged in the complaint: That during the period of said insurance the said steel tank lighter Philmaco became a total loss by sinking in the waters of the Bay of Manila while operating within the places noted in the said insurance policy. That the loss of the said steel tank lighter was total and the full amount for which it was insured upon such loss immediately became due and payable, and prayed for judgment for the sum of P16,000, with legal interest and costs. For answer the defendant admits the issuance and delivery of the policy, and, as a further and separate defense, alleges that, under its terms, the defendant was only liable for an absolute total loss, and that there was not a total destruction of the lighter. After the testimony was taken, the lower court sustained this contention and rendered judgment for the defendant, from which the plaintiff appeals, claiming that the trial court erred in holding that there was not an absolute total loss, and in refusing to hold that policy covered a "constructive total loss, as well as an actual total loss", and that under the facts, it was entitled to recover the full amount of the policy.

As a result of a typhoon the vessel was sunk in the Manila Bay in front of the Manila Hotel. The plaintiff at once notified the defendant that the lighter was of no value, and offered to abandon the wreck as an absolute total loss to the plaintiff. The defendant refused the offer, and instructed plaintiff to salve the wreck, if it was possible to do so. Under such instructions, the plaintiff employed a third party to proceed with the salvage, which was commenced some time in July, 1918. After several attempts and on September 20, 1918, the storm-beaten hull was finally raised and between two barges was taken to the Pandacan Slipway. Upon the evidence for the plaintiff, the trial court found, and upon that point the testimony is conclusive, that the cost of salvage and the necessary repairs were substantially equal to the original cost of the lighter and its value as stipulated in the policy. The findings did not take into consideration any damages to the plaintiff for being deprived of the use of the lighter of the interest on the investment. Although the evidence is clear that the lighter was raised and floated to the slipway on September 20, 1918, it does not appear how long it remained there or when it was finally reconstructed and again placed in commission. The plaintiff having finally raised the lighter, reconstructed and placed it in commission, and having used a large portion of its hull in such reconstruction, the defendant claims that the loss was not an absolute total loss under the terms and provisions of the policy. That plaintiff having reconstructed a new lighter out the remains of the old one, it cannot claim or assert that the old one was a total loss. The defendant did not offer any evidence. The question is thus squarely presented whether, under the facts shown, the loss is an absolute total loss within the terms and provisions of the policy. The testimony is conclusive that the hull itself was very seriously damaged, and that in the reconstruction of the lighter the damaged hull was repaired, and that the lighter with such repaired hull was eventually placed in commission. Through the violence of the storm and the action of the waves, a large portion of its machinery and other equipment were lost or destroyed. The policy was executed at Manila and the lighter was sunk in the Manila Bay, and under the rule of construction, the physical conditions then and there existing should be read into and become a part of the policy. An act revising the insurance laws and regulating insurance business in the Philippine Islands, No. 2427, was enacted by the Philippine Legislature December 12, 1914, and, under the heading of "Loss", contains the following provisions: SEC. 120. A loss may be either total or partial. SEC. 121. Every loss which is not total is partial. SEC. 122. A total loss may be either actual or constructive. SEC. 123. An actual total loss is caused by: (a) A total destruction of the thing insured;

(b) The loss of the thing by sinking, or by being broken up; c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it. . . . Whatever may be the rule in other jurisdictions, the policy having been issued at Manila, it must be construed under the terms and provisions of those sections, and section 122 specifically says that "a total loss may be either actual or constructive," and that "the loss of the thing by sinking, or being broken up," is an actual loss or that "any damage to the thing which renders it valueless to the owner for the purposes for which he held it" is an actual loss. As we construe the record, at the time the lighter was sunk and in the bottom of the bay under the conditions then there existing, it was of no value to the owner, and, if it was of no value to the owner, it would be a actual total loss. To render it valueless to the owner, it is not necessary that there should be an actual or total loss or destruction of all the different parts of the entire vessel. The question here is whether, under the conditions then and there existing, and as the lighter laid in the bottom of the bay, was it of any value to the owner. If it was not of any value to the owner, then there was an actual loss or a "total destruction of the thing insured" within the meaning of the above sections of Act No. 2427 of the insurance code. The lighter was sunk about July 1, 1918. After several futile attempts, it was finally raised September 20, 1918. It is fair to assume that in its then condition much further time would be required to make the necessary repairs and install the new machinery before it could again be placed in commission. During all that time the owner would be deprived of the use of its vessel or the interest on its investment. When those questions are considered the testimony is conclusive that the cost of salvage, repair, and reconstruction was more than the original cost of the vessel of its value at the time the policy was issued. As found by the trial court "it is difficult to see how there could have been a more complete loss of the vessel than that which actually occurred." Upon the facts that shown here, any other construction would nullify the statute, and, as applied to the conditions existing in the Manila Bay, this kind of a policy would be worthless, and there would not be any consideration for the In their able brief, the distinguished counsel for the defendant point out that the policy itself provides that it "shall be of as much force and effect as the surest writing or policy of insurance made in London," and contend that the policy should be construed under the Marine Law of Great Britain, but as to what may be the law there is not alleged or proven. In Liverpool and Great Western Steam Co. vs. Phoenix Ins. Co. (129 U.S., 397; 32 L. ed., 788, 793), the court says:

The law of Great Britain since the Declaration of Independence is the law of a foreign country, and, like any other foreign law, is matter of fact, which the courts of this country cannot be presumed to be acquainted with, or to have judicial knowledge of, unless it is pleaded and proved. The rule that the courts of one country cannot take cognizance of the law of another without plea and proof has been constantly maintained at law and in equity, in England and America. That rule was followed by this court in Sy Joc Lieng vs. Encarnacion (16 Phil., 137, 139), where it says: When in a litigation the application of a foreign law, for example the law of China, is sought, it is necessary to prove before the courts of the Islands, in a satisfactory manner, the existence of such law as a question of fact; and when proof of such a law is lacking, it is improper to apply unknown laws to suits pending before the courts of the Islands. The notes to the Great Western Insurance Company vs. Fogarty (86 U. S., 216), say: In the English practice, a ship is a total loss when she has sustain such extensive damage that it would not be reasonably practical to repair her. The ordinary measure of prudence which the courts have adopted is this: If the ship, when repaired, will not be worth the sum which it would be necessary to expend upon her, the repairs are, practically speaking, impossible, and it is a case of total loss. (Citing a number of English authorities.) After a careful consideration of the important case, we hold that the decision of the trial court should be reversed, and that a judgment should be entered here in favor of the plaintiff against the defendant for P16,000, with interest thereon, from February 25, 1919, at the rate of 6 per cent per annum, and the costs and disbursements of this action in this and the lower court. So ordered.

Malayan Insurance Corp vs. CA G.R. 119599 March 20, 1997 Facts: TKC Marketing imported 3,000 metric tons of soya from Brazil to Manila. It was insured by Malayan at the value of almost 20 million pesos. The vessel, however, was stranded on South Africa because of a lawsuit regarding the possession of the soya. TKC consulted Malayan on recovery of the amount, but the latter claimed that it wasn’t covered by the policy. The soya was sold in Africa for Php 10 million, but TKC wanted Malayan to shoulder the remaining value of 10 million as well. Petitioner filed suit due to Malayan’s reticence to pay. Malayan claimed that arrest by civil authorities wasn’t covered by the policy. The trial court ruled in TKC’s favor with damages to boot. The appellate court affirmed the decision under the reason that clause 12 of the policy regarding an excepted risk due to arrest by civil authorities was deleted by Section 1.1 of the Institute War Clauses which covered ordinary arrests by civil authorities. Failure of the cargo to arrive was also covered by the Theft, Pilferage, and Non-delivery Clause of the contract. Hence this petition. Issues: 1. WON the arrest of the vessel was a risk covered under the subject insurance policies. 2. WON the insurance policies must strictly construed against the insurer. Held: Yes. Yes. Petition dismissed.


“A strained interpretation which is unnatural and forced, as to lead to an absurd

1. Section 12 or the "Free from Capture & Seizure Clause" states: "Warranted free of

conclusion or to render the policy nonsensical, should, by all means, be avoided.”

capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any attempt thereat… Should Clause 12 be deleted, the relevant current institute war

2. Indemnity and liability insurance policies are construed in accordance with the

clauses shall be deemed to form part of this insurance.”

general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract of insurance, being a contract

This was really replaced by the subsection 1.1 of section 1 of Institute War Clauses

of adhesion, means that any ambiguity should be resolved against the insurer.

(Cargo) which included “the risks excluded from the standard form of English Marine Policy by the clause warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof of hostilities or warlike operations, whether there be a declaration of war or not.” The petitioner’s claim that the Institute War Clauses can be operative in case of hostilities or warlike operations on account of its heading "Institute War Clauses" is not tenable. It reiterated the CA’s stand that “its interpretation in recent years to include seizure or detention by civil authorities seems consistent with the general purposes of the clause.” This interpretation was regardless of the fact whether the arrest was in war or by civil authorities. The petitioner was said to have confused the Institute War clauses and the F.C.S. in English law. “It stated that "the F.C. & S. Clause was "originally incorporated in insurance policies to eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause applies even if there be no war or warlike operations. In the same vein, it contended that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the

Pan Malayan Insurance Corporation vs Court of Appeals G.R. No. 81026 April 3, 1990 PAN MALAYAN INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.

FACTS: On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against private respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured a Mitsubishi Colt Lancer car with plate No. DDZ-431 and registered in the name of Canlubang Automotive Resources Corporation [CANLUBANG]; that on May 26, 1985, due to the "carelessness, recklessness, and imprudence" of the unknown driver of a pick-up with plate no. PCR-220, the insured car was hit and suffered damages in the amount of P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and, therefore, was subrogated to the rights of CANLUBANG against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite repeated demands, defendants, failed and refused to pay the claim of PANMALAY. private respondents filed a Motion to Dismiss alleging that PANMALAY had no cause of action against them. They argued that payment under the "own damage" clause of the insurance policy precluded subrogation under Article 2207 of the Civil Code, since indemnification thereunder was made on the assumption that there was no wrongdoer or no third party at fault.

Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result of hostilities or warlike operations." The court found that the insurance agency tried to interpret executive and political acts as those not including ordinary arrests in the exceptions of the FCS clause , and claims that the War Clauses now included executive and political acts without including ordinary arrests in the new stipulation.

DECISION OF LOWER COURTS: (1) Trial Court: dismissed for no cause of action PANMALAY's complaint for damages against private respondents Erlinda Fabie and her driver (2) CA: affirmed trial court. ISSUE: Whether or not the insurer PANMALAY may institute an action to recover the amount

it had paid its assured in settlement of an insurance claim against private respondents as the parties allegedly responsible for the damage caused to the insured vehicle. RULING: PANMALAY is correct. Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is destroyed or damaged through the fault or negligence of a party other than the assured, then the insurer, upon payment to the assured, will be subrogated to the rights of the assured to recover from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the insurer to the assured operates as an equitable that the insurer has been obligated to pay. Payment by the insurer to the assured operates as an equitable or negligence of a third party. CANLUBANG is apparently of the same understanding. Based on a police report assignment to the former of all remedies that the latter 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 or upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer. The exceptions are: (1) if the assured by his own act releases the wrongdoer or third party liable for the loss or damage, from liability, the insurer's right of subrogation is defeated (2) where the insurer pays the assured the value of the lost goods without notifying the carrier who has in good faith settled the assured's claim for loss, the settlement is binding on both the assured and the insurer, and the latter cannot bring an action against the carrier on his right of subrogation (3) where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby effecting "voluntary payment", the former has no right of subrogation against the third party liable for the loss

G.R. Nos. 180880-81

September 25, 2009

KEPPEL CEBU SHIPYARD, INC., Petitioner, vs. PIONEER INSURANCE AND SURETY CORPORATION, Respondent. x - - - - - - - - - - - - - - - - - - - - - - -x G.R. Nos. 180896-97 PIONEER INSURANCE AND SURETY CORPORATION, Petitioner, vs. KEPPEL CEBU SHIPYARD, INC., Respondent. DECISION

None of the exceptions are availing in the present case. Also, even if under the above circumstances PANMALAY could not be deemed subrogated to the rights of its assured under Article 2207 of the Civil Code, PANMALAY would still have a cause of action against private respondents. In the pertinent case of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, supra., the Court ruled that the insurer who may have no rights of subrogation due to "voluntary" payment may nevertheless recover from the third party responsible for the damage to the insured property under Article 1236 of the Civil Code. WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for damages against private respondents is hereby REINSTATED. Let the case be remanded to the lower court for trial on the merits.

NACHURA, J.: Before us are the consolidated petitions filed by the parties—Pioneer Insurance and Surety Corporation1(Pioneer) and Keppel Cebu Shipyard, Inc.2 (KCSI)—to review on certiorari the Decision3 dated December 17, 2004 and the Amended Decision 4 dated December 20, 2007 of the Court of Appeals (CA) in CA-G.R. SP Nos. 74018 and 73934. On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A) executed a Shiprepair Agreement5 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 for US$8,472,581.78. The Shiprepair Agreement reads— SHIPREPAIR AGREEMENT6

Company: Address:

WG & A JEBSENS SHIPMANAGEMENT INC. Harbour Center II, Railroad & Port Area, City of Manila


9. The Owner shall be liable to Keppel Cebu Shipyard for any death and/or bodily injuries for the [K]eppel Cebu Shipyard’s employees and/or contract workers; theft and/or damages to Keppel Cebu Shipyard’s properties and other liabilities which are caused by the workers of the Owner.


We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V "SUPERFERRY 3" and KEPPEL CEBU SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking and Repair of the above-named vessel ordered by the Owner’s Authorized Representative shall be carried out under the Keppel Cebu Shipyard Standard Conditions of Contract for Shiprepair, guidelines and regulations on safety and security issued by Keppel Cebu Shipyard. In addition, the following are mutually agreed upon by the parties:

10. The invoice shall be based on quotation reference 99-KCSI211 dated December 20, 1999tariff dated March 15, 1998. 11. Payment term shall be as follows: 12. The Owner and Keppel Cebu Shipyard shall endeavor to settle amicably any dispute that may arise under this Agreement. Should all efforts for an amicable settlement fail, the disputes shall be submitted for arbitration in Metro Manila in accordance with provisions of Executive Order No. 1008 under the auspices of the Philippine Arbitration Commission.

1. The Owner shall inform its insurer of Clause 207 and 22 (a)8 (refer at the back hereof) and shall include Keppel Cebu Shipyard as a co-assured in its insurance policy. 2. The Owner shall waive its right to claim for any loss of profit or loss of use or damages consequential on such loss of use resulting from the delay in the redelivery of the above vessel. 3. Owner’s sub-contractors or workers are not permitted to work in the yard without the written approval of the Vice President – Operations. 4. In consideration of Keppel Cebu Shipyard allowing Owner to carry out own repairs onboard the vessel, the Owner shall indemnify and hold Keppel Cebu Shipyard harmless from any or all claims, damages, or liabilities arising from death or bodily injuries to Owner’s workers, or damages to the vessel or other property however caused.



(Printed Name/Signature Above Nam

(Printed Name/Signature Above Name) Vice President Keppel Cebu Shipyard, Inc.


Authorized for and in WG & A Jebsens Shipmgmt.

JAN. 26, 2000. Date


5. On arrival, the Owner Representative, Captain, Chief Officer and Chief Engineer will be invited to attend a conference with our Production, Safety and Security personnel whereby they will be briefed on, and given copies of Shipyard safety regulations.

On February 8, 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.

6. An adequate number of officers and crew must remain on board at all times to ensure the safety of the vessel and compliance of safety regulations by crew and owner employed workmen.

On June 16, 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 9 in favor of Pioneer, to wit:

7. The ship’s officers/crew or owner appointed security personnel shall maintain watch against pilferage and acts of sabotage.


8. The yard must be informed and instructed to provide the necessary security arrangement coverage should there be inadequate or no crew on board to provide the expressed safety and security enforcement.

Our Claim US$8,472,581.78 ------------------------------------------------




RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of U.S. DOLLARS EIGHT MILLION FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE HUNDRED EIGHTY-ONE & 78/100 (US$ 8,472,581.78) equivalent to PESOS THREE HUNDRED SIXTY MILLION & 00/100 (Php 360,000,000.00), in full satisfaction, compromise and discharge of all claims for loss and expenses sustained to the vessel "SUPERFERRY 3" insured under Policy Nos. MH-H0-99-0000168-00-D (H&M) and MH-H0-99-0000169 (I.V.) by reason as follows: Fire on board on 08 February 2000





and in consideration of which the undersigned hereby assigns and transfers to the said company each and all claims and demands against any person, persons, corporation or property arising from or connected with such loss or damage and the said company is subrogated in the place of and to the claims and demands of the undersigned against said person, persons, corporation or property in the premises to the extent of the amount above-mentioned.





(Signed) ______________________________________ Witnesses: (Signed) ______________________________________ (Signed) ______________________________________

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, on August 7, 2000, filed a Request for Arbitration before the Construction Industry Arbitration Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking the following reliefs: 1. To pay to the claimant Pioneer Insurance and Surety Corporation the sum of U.S.$8,472,581.78 or its equivalent amount in Philippine Currency, plus interest thereon computed from the date of the "Loss and Subrogation Receipt" on 16 June 2000 or from the date of filing of [the] "Request for Arbitration," as may be found proper; 2. To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A Jebsens Shipmanagement, Inc. the sum of P500,000,000.00 plus

interest thereon from the date of filing [of the] "Request for Arbitration" or date of the arbitral award, as may be found proper; 3. To pay to the claimants herein the sum of P3,000,000.00 for and as attorney’s fees; plus other damages as may be established during the proceedings, including arbitration fees and other litigation expenses, and the costs of suit. It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the "Shiprepair Agreement" (Annex "A") as well as the hardly legible Clauses 20 and 22 (a) and other similar clauses printed in very fine print on the unsigned dorsal page thereof, be all declared illegal and void ab initio and without any legal effect whatsoever.10 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 on October 22, 2001, thereby dismissing the claim of WG&A against KCSI. Hence, the arbitration proceeded with Pioneer as the remaining claimant. INC. In the course of the proceedings, Pioneer and KCSI stipulated, among others, that: CORP. (1) on January 26, 2000, M/V "Superferry 3" arrived at KCSI in Lapu-Lapu City, Cebu, for dry docking and repairs; (2) on the same date, WG&A signed a ship repair agreement with KCSI; and (3) a fire broke out on board M/V "Superferry 3" on February 8, 2000, while still dry docked in KCSI’s shipyard.11 As regards the disputed facts, below are the respective positions of the parties, viz.: Pioneer’s Theory of the Case: First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer has been subrogated to the claim of its assured. The Claimant claims that it has the preponderance of evidence over that of the Respondent. Claimant cited documentary references on the Statutory Source of the Principle of Subrogation. Claimant then proceeded to explain that the Right of Subrogation: Is by Operation exists in Property is not Dependent Upon Privity of Contract.


Law Insurance

Claimant then argued that Payment Operates as Equitable Assignment of Rights to Insurer and that the Right of Subrogation Entitles Insurer to Recover from the Liable Party. Second, Respondent Keppel had custody of and control over the M/V "Superferry 3" while said vessel was in Respondent Keppel’s premises. In its Draft Decision, Claimant stated:

A. The evidence presented during the hearings indubitably proves that respondent not only took custody but assumed responsibility and control over M/V Superferry 3 in carrying out the dry-docking and repair of the vessel. B. The presence on board the M/V Superferry 3 of its officers and crew does not relieve the respondent of its responsibility for said vessel.

C. The mere fact that Dr. Joniga requested Sevillejo to perform some of the Owner’s hot works under the 26 January 2000 work order did not make Dr. Joniga the employer of Sevillejo. Claimant proffers that Dr. Joniga was not a Contractor of the Hot Work Done on Deck A. Claimant argued that: A. The yard, not Dr. Joniga, gave the welders their marching orders, and

C. Respondent Keppel assumed responsibility over M/V Superferry 3 when it brought the vessel inside its graving dock and applied its own safety rules to the dry-docking and repairs of the vessel. D. The practice of allowing a shipowner and its sub-contractors to perform maintenance works while the vessel was within respondent’s premises does not detract from the fact that control and custody over M/V Superferry 3 was transferred to the yard. From the preceding statements, Claimant claims that Keppel is clearly liable for the loss of M/V Superferry 3. Third, the Vessel’s Safety Manual cannot be relied upon as proof of the Master’s continuing control over the vessel. Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur. According to Claimant, the Yard is liable under the ruling laid down by the Supreme Court in the "Manila City" case. Claimant asserts that said ruling is applicable hereto as The Law of the Case. Fifth, the liability of Respondent does not arise merely from the application of the Doctrine of Res Ipsa Loquitur, but from its negligence in this case. Sixth, the Respondent Yard was the employer responsible for the negligent acts of the welder. According to Claimant;

B. Dr. Joniga’s authority to request the execution of owner’s hot works in the passenger areas was expressly recognized by the Yard Project Superintendent Orcullo. Seventh, the shipowner had no legal duty to apply for a hotworks permit since it was not required by the yard, and the owner’s hotworks were conducted by welders who remained employees of the yard. Claimant contends that the need, if any, for an owner’s application for a hot work permit was canceled out by the yard’s actual knowledge of Sevillejo’s whereabouts and the fact that he was in deck A doing owner’s hotworks. Eight[h], in supplying welders and equipment as per The Work Order Dated 26 January 2000, the Yard did so at its own risk, and acted as a Less Than Prudent Ship Repairer.1avvphi1 The Claimant then disputed the statements of Manuel Amagsila by claiming that Amagsila was a disgruntled employee. Nevertheless, Claimant claims that Amagsila affirmed that the five yard welders never became employees of the owner so as to obligate the latter to be responsible for their conduct and performance. Claimant enumerated further badges of yard negligence. According to Claimant: A. Yard’s water supply was inadequate.

In contemplation of law, Sevillejo was not a loaned servant/employee. The yard, being his employer, is solely and exclusively liable for his negligent acts. Claimant proceeded to enumerate its reasons: A. The "Control Test" – The yard exercised control over Sevillejo. The power of control is not diminished by the failure to exercise control. B. There was no independent work contract between Joniga and Sevillejo – Joniga was not the employer of Sevillejo, as Sevillejo remained an employee of the yard at the time the loss occurred.

B. Yard Fire Fighting Efforts and Equipment Were Inadequate. C. Yard Safety Practices and Procedures Were Unsafe or Inadequate. D. Yard Safety Assistants and Firewatch-Men were Overworked. Finally, Claimant disputed the theories propounded by the Respondent (The Yard). Claimant presented its case against: (i) Non-removal of the life jackets theory.

(ii) Hole-in-the[-]floor theory.

voluntary, and there was no resulting subrogation to the Vessel.

(iii) Need for a plan theory. (iv) The unauthorized hot works theory. (v) The Marina report theory. The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of the welder involved in the cause of the fire, Mr. Severino Sevillejo. Claimant claims that this is suppression of evidence by Respondent. KCSI’s Theory of the Case 1. The Claimant has no standing to file the Request for Arbitration and the Tribunal has no jurisdiction over the case: (a) There is no valid arbitration agreement between the Yard and the Vessel Owner. On January 26, 2000, when the ship repair agreement (which includes the arbitration agreement) was signed by WG&A Jebsens on behalf of the Vessel, the same was still owned by Aboitiz Shipping. Consequently, when another firm, WG&A, authorized WG&A Jebsens to manage the MV Superferry 3, it had no authority to do so. There is, as a result, no binding arbitration agreement between the Vessel Owner and the Yard to which the Claimant can claim to be subrogated and which can support CIAC jurisdiction. (b) The Claimant is not a real party in interest and has no standing because it has not been subrogated to the Vessel Owner. For the reason stated above, the insurance policies on which the Claimant bases its right of subrogation were not validly obtained. In any event, the Claimant has not been subrogated to any rights which the Vessel may have against the Yard because: i. The Claimant has not proved payment of the proceeds of the policies to any specific party. As a consequence, it has also not proved payment to the Vessel Owner. ii. The Claimant had no legally demandable obligation to pay under the policies and did so only voluntarily. Under the policies, the Claimant and the Vessel agreed that there is no Constructive Total Loss "unless the expense of recovering and repairing the vessel would exceed the Agreed Value" of P360 million assigned by the parties to the Vessel, a threshold which the actual repair cost for the Vessel did not reach. Since the Claimant opted to pay contrary to the provisions of the policies, its payment was

iii. There was also no subrogation under Article 1236 of the Civil Code. First, if the Claimant asserts a right of payment only by virtue of Article 1236, then there is no legal subrogation under Article 2207 and it does not succeed to the Vessel’s rights under the Ship [R]epair Agreement and the arbitration agreement. It does not have a right to demand arbitration and will have only a purely civil law claim for reimbursement to the extent that its payment benefited the Yard which should be filed in court. Second, since the Yard is not liable for the fire and the resulting damage to the Vessel, then it derived no benefit from the Claimant’s payment to the Vessel Owner. Third, in any event, the Claimant has not proved payment of the proceeds to the Vessel Owner. 2. The Ship [R]epair Agreement was not imposed upon the Vessel. The Vessel knowingly and voluntarily accepted that agreement. Moreover, there are no signing or other formal defects that can invalidate the agreement. 3. The proximate cause of the fire and damage to the Vessel was not any negligence committed by Angelino Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. On the contrary, the proximate cause of the fire was Dr. Joniga’s and the Vessel’s deliberate decision to have Angelino Sevillejo undertake cutting work in inherently dangerous conditions created by them. (a) The Claimant’s material witnesses lied on the record and the Claimant presented no credible proof of any negligence by Angelino Sevillejo. (b) Uncontroverted evidence proved that Dr. Joniga neglected or decided not to obtain a hot work permit for the bulkhead cutting and also neglected or refused to have the ceiling and the flammable lifejackets removed from underneath the area where he instructed Angelino Sevillejo to cut the bulkhead door. These decisions or oversights guaranteed that the cutting would be done in extremely hazardous conditions and were the proximate cause of the fire and the resulting damage to the Vessel. (c) The Yard’s expert witness, Dr. Eric Mullen gave the only credible account of the cause and the mechanics of ignition of the fire. He established that: i) the fire started when the cutting of the bulkhead door resulted in sparks or hot molten slag which fell through preexisting holes on the deck floor and came into contact with and ignited the flammable lifejackets stored in the ceiling void directly below; and ii) the bottom level of the bulkhead door was immaterial, because the sparks and slag could have come from the cutting of

any of the sides of the door. Consequently, the cutting itself of the bulkhead door under the hazardous conditions created by Dr. Joniga, rather than the positioning of the door’s bottom edge, was the proximate cause of the fire. (d) The Manila City case is irrelevant to this dispute and in any case, does not establish governing precedent to the effect that when a ship is damaged in dry dock, the shipyard is presumed at fault. Apart from the differences in the factual setting of the two cases, the Manila City pronouncements regarding the res ipsa loquitur doctrine are obiter dicta without value as binding precedent. Furthermore, even if the principle were applied to create a presumption of negligence by the Yard, however, that presumption is conclusively rebutted by the evidence on record. (e) The Vessel’s deliberate acts and its negligence created the inherently hazardous conditions in which the cutting work that could otherwise be done safely ended up causing a fire and the damage to the Vessel. The fire was a direct and logical consequence of the Vessel’s decisions to: (1) take Angelino Sevillejo away from his welding work at the Promenade Deck restaurant and instead to require him to do unauthorized cutting work in Deck A; and (2) to have him do that without satisfying the requirements for and obtaining a hot work permit in violation of the Yard’s Safety Rules and without removing the flammable ceiling and life jackets below, contrary to the requirements not only of the Yard’s Safety Rules but also of the demands of standard safe practice and the Vessel’s own explicit safety and hot work policies. (f) The vessel has not presented any proof to show that the Yard was remiss in its fire fighting preparations or in the actual conduct of fighting the 8 February 2000 fire. The Yard had the necessary equipment and trained personnel and employed all those resources immediately and fully to putting out the 8 February 2000 fire. 4. Even assuming that Angelino Sevillejo cut the bulkhead door close to the deck floor, and that this circumstance rather than the extremely hazardous conditions created by Dr. Joniga and the Vessel for that activity caused the fire, the Yard may still not be held liable for the resulting damage. (a) The Yard’s only contractual obligation to the Vessel in respect of the 26 January 2000 Work Order was to supply welders for the Promenade Deck restaurant who would then perform welding work "per owner[‘s] instruction." Consequently, once it had provided those welders, including Angelino Sevillejo, its obligation to the Vessel was fully discharged and no claim for contractual breach, or for damages on account thereof, may be raised against the Yard. (b) The Yard is also not liable to the Vessel/Claimant on the basis of quasi-delict.

i. The Vessel exercised supervision and control over Angelino Sevillejo when he was doing work at the Promenade Deck restaurant and especially when he was instructed by Dr. Joniga to cut the bulkhead door. Consequently, the Vessel was the party with actual control over his tasks and is deemed his true and effective employer for purposes of establishing Article 2180 employer liability. ii. Even assuming that the Yard was Angelino Sevillejo’s employer, the Yard may nevertheless not be held liable under Article 2180 because Angelino Sevillejo was acting beyond the scope of his tasks assigned by the Yard (which was only to do welding for the Promenade Deck restaurant) when he cut the bulkhead door pursuant to instructions given by the Vessel. iii. The Yard is nonetheless not liable under Article 2180 because it exercised due diligence in the selection and supervision of Angelino Sevillejo. 5. Assuming that the Yard is liable, it cannot be compelled to pay the full amount of P360 million paid by the Claimant. (a) Under the law, the Yard may not be held liable to the Claimant, as subrogee, for an amount greater than that which the Vessel could have recovered, even if the Claimant may have paid a higher amount under its policies. In turn, the right of the Vessel to recover is limited to actual damage to the MV Superferry 3, at the time of the fire. (b) Under the Ship [R]epair Agreement, the liability of the Yard is limited to P50 million – a stipulation which, under the law and decisions of the Supreme Court, is valid, binding and enforceable. (c) The Vessel breached its obligation under Clause 22 (a) of the Yard’s Standard Terms to name the Yard as co-assured under the policies – a breach which makes the Vessel liable for damages. This liability should in turn be set-off against the Claimant’s claim for damages. The Respondent listed what it believes the Claimant wanted to impress upon the Tribunal. Respondent enumerated and disputed these as follows: 1. Claimant’s counsel contends that the cutting of the bulkhead door was covered by the 26 January 2000 Work Order.

2. Claimant’s counsel contends that Dr. Joniga told Gerry Orcullo about his intention to have Angelino Sevillejo do cutting work at the Deck A bulkhead on the morning of 8 February 2000. 3. Claimant’s counsel contends that under Article 1727 of the Civil Code, "The contractor is responsible for the work done by persons employed by him." 4. Claimant’s counsel contends that "[t]he second reason why there was no job spec or job order for this cutting work, [is] the cutting work was known to the yard and coordinated with Mr. Gerry Orcullo, the yard project superintendent." 5. Claimant’s counsel also contends, to make the Vessel’s unauthorized hot works activities seem less likely, that they could easily be detected because Mr. Avelino Aves, the Yard Safety Superintendent, admitted that "No hot works could really be hidden from the Yard, your Honors, because the welding cables and the gas hoses emanating from the dock will give these hotworks away apart from the assertion and the fact that there were also safety assistants supposedly going around the vessel." Respondent disputed the above by presenting its own argument in its Final Memorandum.12 On October 28, 2002, the CIAC rendered its Decision 13 declaring both WG&A and KCSI guilty of negligence, with the following findings and conclusions— The Tribunal agrees that the contractual obligation of the Yard is to provide the welders and equipment to the promenade deck. [The] Tribunal agrees that the cutting of the bulkhead door was not a contractual obligation of the Yard. However, by requiring, according to its own regulations, that only Yard welders are to undertake hotworks, it follows that there are certain qualifications of Yard welders that would be requisite of yard welders against those of the vessel welders. To the Tribunal, this means that yard welders are aware of the Yard safety rules and regulations on hotworks such as applying for a hotwork permit, discussing the work in a production meeting, and complying with the conditions of the hotwork permit prior to implementation. By the requirement that all hotworks are to be done by the Yard, the Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however mitigated in that he was not even a foreman, and that the instructions to him was (sic) by an authorized person. The Tribunal notes that the hotworks permit require[s] a request by at least a foreman. The fact that no foreman was included in the five welders issued to the Vessel was never raised in this dispute. As discussed earlier by the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the work order, the Vessel is considered equally negligent. This Tribunal finds the concurrent negligence of the Yard through Sevillejo and the Vessel through Dr. Joniga as both contributory to the cause of the fire that damaged the vessel.14 Holding that the liability for damages was limited to P50,000,000.00, the CIAC ordered KCSI to pay Pioneer the amount of P25,000,000.00, with interest at 6% per

annum from the time of the filing of the case up to the time the decision is promulgated, and 12% interest per annum added to the award, or any balance thereof, after it becomes final and executory. The CIAC further ordered that the arbitration costs be imposed on both parties on a pro rata basis.15 Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018. KCSI likewise filed its own appeal and the same was docketed as CA-G.R. SP No. 73934. The cases were consolidated. On December 17, 2004, the Former Fifteenth Division of the CA rendered its Decision, disposing as follows: WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018) is DISMISSED while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED, dismissing petitioner’s claims in its entirety. No costs. The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata. SO ORDERED.16 Aggrieved, Pioneer sought reconsideration of the December 17, 2004 Decision, insisting that it suffered from serious errors in the appreciation of the evidence and from gross misapplication of the law and jurisprudence on negligence. KCSI, for its part, filed a motion for partial reconsideration of the same Decision. On December 20, 2007, an Amended Decision was promulgated by the Special Division of Five – Former Fifteenth Division of the CA – in light of the dissent of Associate Justice Lucas P. Bersamin,17 joined by Associate Justice Japar B. Dimaampao. The fallo of the Amended Decision reads— WHEREFORE, premises considered, the Court hereby decrees that: 1. Pioneer’s Motion for Reconsideration is PARTIALLY GRANTED, ordering The Yard to pay Pioneer P25 Million, without legal interest, within 15 days from the finality of this Amended Decision, subject to the following modifications: 1.1 – Pioneer’s Petition (CA-G.R. SP No. 74018) is PARTIALLY GRANTED as the Yard is hereby ordered to pay Pioneer P25 Million without legal interest; 2. The Yard is hereby declared as equally negligent, thus, the total GRANTING of its Petition (CA-G.R. SP No. 73934) is now reduced to PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer P25 Million, without legal interest, within 15 days from the finality of this Amended Decision; and

3. The rest of the disposition in the original Decision remains the same.




Hence, these petitions. Pioneer bases its petition on the following grounds: I







The Court’s Ruling A. The issue of negligence Undeniably, the immediate cause of the fire was the hot work done by Angelino Sevillejo (Sevillejo) on the accommodation area of the vessel, specifically on Deck A. As established before the CIAC –

KEPPEL’S MOTION FOR RECONSIDERATION FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO HAVE EFFECTIVELY DENIED, WITHOUT ADDRESSING IT AND ALSO WITHOUT EXPLANATION, KEPPEL’S PARTIAL MOTION FOR RECONSIDERATION OF THE ORIGINAL DECISION WHICH SHOWED: 1) WHY PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE VESSEL OWNER AND SO HAD NO STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY NOT BE REQUIRED TO REIMBURSE PIONEER’S PAYMENTS TO THE VESSEL OWNER IN VIEW OF THE CO-INSURANCE CLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY PIONEER ALONE SHOULD BEAR THE COSTS OF ARBITRATION. 4. FAILURE TO CREDIT FOR SALVAGE RECOVERY EVEN IF THE COURT OF APPEAL’S RULINGS ON ALL OF THE FOREGOING ISSUES WERE CORRECT AND THE YARD MAY PROPERLY BE HELD EQUALLY LIABLE FOR THE DAMAGE TO THE VESSEL AND REQUIRED TO PAY HALF OF THE DAMAGES AWARDED (P25 MILLION), THE COURT OF APPEALS STILL ERRED IN NOT DEDUCTING THE SALVAGE VALUE OF THE VESSEL RECOVERED AND RECEIVED BY THE INSURER, PIONEER, TO REDUCE ANY LIABILITY ON THE PART OF THE YARD TO P9.874 MILLION.20 To our minds, these errors assigned by both Pioneer and KCSI may be summed up in the following core issues: A. To whom may negligence over the fire that broke out on board M/V "Superferry 3" be imputed? B. Is subrogation proper? If proper, to what extent can subrogation be made? C. Should interest be imposed on the award of damages? If so, how much? D. Who should bear the cost of the arbitration? To resolve these issues, it is imperative that we digress from the general rule that in petitions for review under Rule 45 of the Rules of Court, only questions of law shall be entertained. Considering the disparate findings of fact of the CIAC and the CA which led them to different conclusions, we are constrained to revisit the factual circumstances surrounding this controversy.21

The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling,22 p. 20). Angelino Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water container on it and as he did so, smoke came up from under Deck A. He got another container of water which he also poured whence the smoke was coming. In the meantime, other workers in the immediate vicinity tried to fight the fire by using fire extinguishers and buckets of water. But because the fire was inside the ceiling void, it was extremely difficult to contain or extinguish; and it spread rapidly because it was not possible to direct water jets or the fire extinguishers into the space at the source. Fighting the fire was extremely difficult because the life jackets and the construction materials of the Deck B ceiling were combustible and permitted the fire to spread within the ceiling void. From there, the fire dropped into the Deck B accommodation areas at various locations, where there were combustible materials. Respondent points to cans of paint and thinner, in addition to the plywood partitions and foam mattresses on deck B (Exh. 1-Mullen,23 pp. 7-8, 18; Exh. 2-Mullen, pp. 1112).24 Pioneer contends that KCSI should be held liable because Sevillejo was its employee who, at the time the fire broke out, was doing his assigned task, and that KCSI was solely responsible for all the hot works done on board the vessel. KCSI claims otherwise, stating that the hot work done was beyond the scope of Sevillejo’s assigned tasks, the same not having been authorized under the Work Order 25 dated January 26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A was itself negligent, through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga), for failing to remove the life jackets from the ceiling void, causing the immediate spread of the fire to the other areas of the ship. We rule in favor of Pioneer. First. The Shiprepair Agreement is clear that WG&A, as owner of M/V "Superferry 3," entered into a contract for the dry docking and repair of the vessel under KCSI’s Standard Conditions of Contract for Shiprepair, and its guidelines and regulations on safety and security. Thus, the CA erred when it said that WG&A would renovate and reconstruct its own vessel merely using the dry docking facilities of KCSI. Second. Pursuant to KCSI’s rules and regulations on safety and security, only employees of KCSI may undertake hot works on the vessel while it was in the graving dock in Lapu-Lapu City, Cebu. This is supported by Clause 3 of the Shiprepair Agreement requiring the prior written approval of KCSI’s Vice President for Operations before WG&A could effect any work performed by its own workers or subcontractors. In the exercise of this authority, KCSI’s Vice-President for Operations, in

the letter dated January 2, 1997, banned any hot works from being done except by KCSI’s workers, viz.: The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel oil tanks to be carried out only by shipyard workers x x x.26 WG&A recognized and complied with this restrictive directive such that, during the arrival conference on January 26, 2000, Dr. Joniga, the vessel’s passage team leader in charge of its hotel department, specifically requested KCSI to finish the hot works started by the vessel’s contractors on the passenger accommodation decks.27 This was corroborated by the statements of the vessel’s hotel manager Marcelo Rabe28 and the vessel’s quality control officer Joselito Esteban.29 KCSI knew of the unfinished hot works in the passenger accommodation areas. Its safety supervisor Esteban Cabalhug confirmed that KCSI was aware "that the owners of this vessel (M/V ‘Superferry 3’) had undertaken their own (hot) works prior to arrival alongside (sic) on 26th January," and that no hot work permits could thereafter be issued to WG&A’s own workers because "this was not allowed for the Superferry 3."30 This shows that Dr. Joniga had authority only to request the performance of hot works by KCSI’s welders as needed in the repair of the vessel while on dry dock. Third. KCSI welders covered by the Work Order performed hot works on various areas of the M/V "Superferry 3," aside from its promenade deck. This was a recognition of Dr. Joniga’s authority to request the conduct of hot works even on the passenger accommodation decks, subject to the provision of the January 26, 2000 Work Order that KCSI would supply welders for the promenade deck of the ship. At the CIAC proceedings, it was adequately shown that between February 4 and 6, 2000, the welders of KCSI: (a) did the welding works on the ceiling hangers in the lobby of Deck A; (b) did the welding and cutting works on the deck beam to access aircon ducts; and (c) did the cutting and welding works on the protection bars at the tourist dining salon of Deck B,31 at a rate ofP150.00/welder/hour.32 In fact, Orcullo, Project Superintendent of KCSI, admitted that "as early as February 3, 2000 (five days before the fire) [the Yard] had acknowledged Dr. Joniga’s authority to order such works or additional jobs."33 It is evident, therefore, that although the January 26, 2000 Work Order was a special order for the supply of KCSI welders to the promenade deck, it was not restricted to the promenade deck only. The Work Order was only a special arrangement between KCSI and WG&A that meant additional cost to the latter. Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to the latter’s direct control and supervision. Indeed, KCSI was the employer of Sevillejo—paying his salaries; retaining the power and the right to discharge or substitute him with another welder; providing him and the other welders with its equipment; giving him and the other welders marching orders to work on the vessel; and monitoring and keeping track of his and the other welders’ activities on board, in view of the delicate nature of their work. 34 Thus, as such employee, aware of KCSI’s Safety Regulations on Vessels Afloat/Dry, which

specifically provides that "(n)o hotwork (welding/cutting works) shall be done on board [the] vessel without [a] Safety Permit from KCSI Safety Section," 35 it was incumbent upon Sevillejo to obtain the required hot work safety permit before starting the work he did, including that done on Deck A where the fire started. Fifth. There was a lapse in KCSI’s supervision of Sevillejo’s work at the time the fire broke out. It was established that no hot works could be hidden from or remain undetected by KCSI because the welding cables and the gas hoses emanating from the dock would give the hot works away. Moreover, KCSI had roving fire watchmen and safety assistants who were moving around the vessel. 36 This was confirmed by Restituto Rebaca (Rebaca), KCSI’s Safety Supervisor, who actually spotted Sevillejo on Deck A, two hours before the fire, doing his cutting work without a hot work permit, a fire watchman, or a fire extinguisher. KCSI contends that it did its duty when it prohibited Sevillejo from continuing the hot work. However, it is noteworthy that, after purportedly scolding Sevillejo for working without a permit and telling him to stop until the permit was acquired and the other safety measures were observed, Rebaca left without pulling Sevillejo out of the work area or making sure that the latter did as he was told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the bulkhead door at Deck A after Rebaca left, even disregarding the 4-inch marking set, thus cutting the door level with the deck, until the fire broke out. This conclusion on the failure of supervision by KCSI was absolutely supported by Dr. Eric Mullen of the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore, KCSI’s own fire expert, who observed that— 4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc welder, not a cutter. The dangers of ignition occurring as a result of the two processes are similar in that both electric arc welding and hot cutting produce heat at the work area and sparks and incendive material that can travel some distance from the work area. Hence, the safety precautions that are expected to be applied by the supervisor are the same for both types of work. However, the quantity and incendivity of the spray from the hot cutting are much greater than those of sparks from electric arc welding, and it may well be that Angelino Sevillejo would not have a full appreciation of the dangers involved. This made it all the more important that the supervisor, who should have had such an appreciation, ensured that the appropriate safety precautions were carried out.37 In this light, therefore, Sevillejo, being one of the specially trained welders specifically authorized by KCSI to do the hot works on M/V "Superferry 3" to the exclusion of other workers, failed to comply with the strict safety standards of KCSI, not only because he worked without the required permit, fire watch, fire buckets, and extinguishers, but also because he failed to undertake other precautionary measures for preventing the fire. For instance, he could have, at the very least, ensured that whatever combustible material may have been in the vicinity would be protected from the sparks caused by the welding torch. He could have easily removed the life jackets from the ceiling void, as well as the foam mattresses, and covered any holes where the sparks may enter.

Conjunctively, since Rebaca was already aware of the hazard, he should have taken all possible precautionary measures, including those above mentioned, before allowing Sevillejo to continue with his hot work on Deck A. In addition to scolding Sevillejo, Rebaca merely checked that no fire had started yet. Nothing more. Also, inasmuch as KCSI had the power to substitute Sevillejo with another electric arc welder, Rebaca should have replaced him. There is negligence when an act is done without exercising the competence that a reasonable person in the position of the actor would recognize as necessary to prevent an unreasonable risk of harm to another. Those who undertake any work calling for special skills are required to exercise reasonable care in what they do.38 Verily, there is an obligation all persons have – to take due care which, under ordinary circumstances of the case, a reasonable and prudent man would take. The omission of that care constitutes negligence. Generally, the degree of care required is graduated according to the danger a person or property may be subjected to, arising from the activity that the actor pursues or the instrumentality that he uses. The greater the danger, the greater the degree of care required. Extraordinary risk demands extraordinary care. Similarly, the more imminent the danger, the higher degree of care warranted.39 In this aspect, KCSI failed to exercise the necessary degree of caution and foresight called for by the circumstances. We cannot subscribe to KCSI’s position that WG&A, through Dr. Joniga, was negligent. On the one hand, as discussed above, Dr. Joniga had authority to request the performance of hot works in the other areas of the vessel. These hot works were deemed included in the January 26, 2000 Work Order and the Shiprepair Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do the cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what Sevillejo was doing, but failed to supervise him with the degree of care warranted by the attendant circumstances. Neither can Dr. Joniga be faulted for not removing the life jackets from the ceiling void for two reasons – (1) the life jackets were not even contributory to the occurrence of the fire; and (2) it was not incumbent upon him to remove the same. It was shown during the hearings before the CIAC that the removal of the life jackets would not have made much of a difference. The fire would still have occurred due to the presence of other combustible materials in the area. This was the uniform conclusion of both WG&A’s40 and KCSI’s41 fire experts. It was also proven during the CIAC proceedings that KCSI did not see the life jackets as being in the way of the hot works, thus, making their removal from storage unnecessary.42 These circumstances, taken collectively, yield the inevitable conclusion that Sevillejo was negligent in the performance of his assigned task. His negligence was the proximate cause of the fire on board M/V "Superferry 3." As he was then definitely engaged in the performance of his assigned tasks as an employee of KCSI, his negligence gave rise to the vicarious liability of his employer 43 under Article 2180 of the Civil Code, which provides—

Art. 2180. The obligation imposed by article 2176 is demandable not only for one’s own act or omission, but also for those of persons for whom one is responsible. xxxx Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry. xxxx The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage. KCSI failed to prove that it exercised the necessary diligence incumbent upon it to rebut the legal presumption of its negligence in supervising Sevillejo.44 Consequently, it is responsible for the damages caused by the negligent act of its employee, and its liability is primary and solidary. All that is needed is proof that the employee has, by his negligence, caused damage to another in order to make the employer responsible for the tortuous act of the former.45 From the foregoing disquisition, there is ample proof of the employee’s negligence. B. The right of subrogation Pioneer asseverates that there existed a total constructive loss so that it WG&A the full amount of the insurance coverage and, by operation of entitled to be subrogated to the rights of WG&A to claim the amount of further argues that the limitation of liability clause found in the Shiprepair is null and void for being iniquitous and against public policy.

had to pay law, it was the loss. It Agreement

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. KCSI insists on the validity of the limited-liability clause up to P50,000,000.00, because WG&A acceded to the provision when it executed the Shiprepair Agreement. KCSI also claims that the salvage value of the vessel should be deducted from whatever amount it will be made to pay to Pioneer. We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of M/V "Superferry 3." In marine insurance, a constructive total loss occurs under any of the conditions set forth in Section 139 of the Insurance Code, which provides— 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. It appears, however, that in the execution of the insurance policies over M/V "Superferry 3," WG&A and Pioneer incorporated by reference the American Institute Hull Clauses 2/6/77, the Total Loss Provision of which reads— Total Loss In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account. 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. In making this determination, only expenses incurred or to be incurred by reason of a single accident or a sequence of damages arising from the same accident shall be taken into account, but expenses incurred prior to tender of abandonment shall not be considered if such are to be claimed separately under the Sue and Labor clause. x x x. In the course of the arbitration proceedings, Pioneer adduced in evidence the estimates made by three (3) disinterested and qualified shipyards for the cost of the repair of the vessel, specifically: (a)P296,256,717.00, based on the Philippine currency equivalent of the quotation dated April 17, 2000 turned in by Tsuneishi Heavy Industries (Cebu) Inc.; (b) P309,780,384.15, based on the Philippine currency equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and (c)P301,839,974.00, based on the Philippine currency equivalent of the quotation of Singapore Technologies Marine Ltd. All the estimates showed that the repair expense would exceedP270,000,000.00, the amount equivalent to ¾ of the vessel’s insured value of P360,000,000.00. Thus, WG&A opted to abandon M/V "Superferry 3" and claimed from Pioneer the full amount of the policies. Pioneer paid WG&A’s claim, and now demands from KCSI the full amount ofP360,000,000.00, by virtue of subrogation.1avvphi1 KCSI denies the liability because, aside from its claim that it cannot be held culpable for negligence resulting in the destructive fire, there was no constructive total loss, as the amount of damage was only US$3,800,000.00 or P170,611,260.00, the amount of repair expense quoted by Simpson, Spence & Young. In the face of this apparent conflict, we hold that Section 139 of the Insurance Code should govern, because (1) Philippine law is deemed incorporated in every locally executed contract; and (2) the marine insurance policies in question expressly provided the following: I M P O R TAN T

This 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.(Underscoring supplied.) The CA held that Section 139 of the Insurance Code is merely permissive on account of the word "may" in the provision. This is incorrect. Properly considered, the word "may" in the provision 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 131 of the same Code, to wit: Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon under Section one hundred thirty-nine. It cannot be denied that M/V "Superferry 3" suffered widespread damage from the fire that occurred on February 8, 2000, a covered peril under the marine insurance policies obtained by WG&A from Pioneer. The estimates given by the three disinterested and qualified shipyards show that the damage to the ship would exceed P270,000,000.00, or ¾ of the total value of the policies –P360,000,000.00. These estimates constituted credible and acceptable proof of the extent of the damage sustained by the vessel. It is significant that these estimates were confirmed by the Adjustment Report dated June 5, 2000 submitted by Richards Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had enlisted to verify and confirm the extent of the damage. The Adjustment Report verified and confirmed that the damage to the vessel amounted to a constructive total loss and that the claim for P360,000,000.00 under the policies was compensable.46 It is also noteworthy that KCSI did not cross-examine Henson Lim, Director of Richards Hogg, whose affidavitdirect testimony submitted to the CIAC confirmed that the vessel was a constructive total loss. Considering the extent of the damage, WG&A opted to abandon the ship and claimed the value of its policies. Pioneer, finding the claim compensable, paid the claim, with WG&A issuing a Loss and Subrogation Receipt evidencing receipt of the payment of the insurance proceeds from Pioneer. On this note, we find as unacceptable the claim of KCSI that there was no ample proof of payment simply because the person who signed the Receipt appeared to be an employee of Aboitiz Shipping Corporation.47 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. On the matter of subrogation, Article 2207 of the Civil Code provides— 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. 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.48 We have held that 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.49

by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the right.52 This has not been demonstrated in this case. Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to limit its liability to only P50,000,000.00, notwithstanding the fact that there was a constructive total loss in the amount of P360,000,000.00, would sanction the exercise of a degree of diligence short of what is ordinarily required. It would not be difficult for a negligent party to escape liability by the simple expedient of paying an amount very much lower than the actual damage or loss sustained by the other.53

We cannot accept KCSI’s insistence on upholding the validity Clause 20, which provides that the limit of its liability is only up to P50,000,000.00; nor of Clause 22(a), that KCSI stands as a co-assured in the insurance policies, as found in the Shiprepair Agreement.

Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to make each other a co-assured under an insurance policy is to be gleaned principally from the insurance contract or policy itself and not from any other contract or agreement, because the insurance policy denominates the assured and the beneficiaries of the insurance contract. Undeniably, the hull and machinery 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.54

Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal foundation. They are unfair and inequitable under the premises. 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 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.50

Nevertheless, we concur with the position of KCSI that the salvage value of the damaged M/V "Superferry 3" should be taken into account in the grant of any award. It was proven before the CIAC that the machinery and the hull of the vessel were separately sold for P25,290,000.00 (or US$468,333.33) and US$363,289.50, respectively. WG&A’s claim for the upkeep of the wreck until the same were sold amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the sale of the machinery and the hull, for a net recovery of US$673,812.87, or equivalent to P30,252,648.09, at P44.8977/$1, the prevailing exchange rate when the Request for Arbitration was filed. Not considering this salvage value in the award would amount to unjust enrichment on the part of Pioneer.

Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a "take-it-or-leave-it" basis. A contract of adhesion is so-called because its terms are prepared by only one party, while the other party merely affixes his signature signifying his adhesion thereto. 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.51

C. On the imposition of interest

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. There was clearly no intention on the part of WG&A to relinquish such right. It is an elementary rule that a waiver must be positively proved, since a waiver

D. On the payment for the cost of arbitration

Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals, 55 the award in favor of Pioneer in the amount of P350,146,786.89 should earn interest at 6% per annum from the filing of the case until the award becomes final and executory. Thereafter, the rate of interest shall be 12% per annum from the date the award becomes final and executory until its full satisfaction.

It is only fitting that both parties should share in the burden of the cost of arbitration, on a pro rata basis. We find that Pioneer had a valid reason to institute a suit against KCSI, as it believed that it was entitled to claim reimbursement of the amount it paid to WG&A. However, we disagree with Pioneer that only KCSI should shoulder the arbitration costs. KCSI cannot be faulted for defending itself for perceived wrongful acts and conditions. Otherwise, we would be putting a price on the right to litigate on the part of Pioneer. 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 P360,000,000.00 less P30,252,648.09, equivalent to the salvage value recovered by Pioneer from M/V "Superferry 3," or the net total amount of P329,747,351.91, 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. SO ORDERED.

its full satisfaction. The arbitration costs shall be borne by both parties on at pro rata basis. 54 A final point. As both ECSI and WG&A are equally responsible for the loss of Superferry 3, questions arises should the liability of Pioneer to WG&A be proportionately limited? Is Pioneer entitled to any refund? Whether or not Pioneer is entitled to the restitution of any excess payment is a question that cannot be adjudicated in this case. The Court cannot make a final finding or pronouncement on the matter because WG&A is not a party In this case. WG&A should be heard in this regard as it may have defenses to fend off the possible claim for refund by Pioneer. It should be stressed that their relationship is governed by their contract of insurance, where their respective rights and obligations are defined, and by their subsequent settlement or arrangement, if any. Due process dictates that these should be threshed out in a separate action. Deedless to state, this decision is without prejudice to such action. WHEREFORE, the September 25, 2009 Decision of the Third Division is hereby MODIFIED. Accordingly, Keppel Cebu Shipyard, Inc. is ordered to pay Pioneer Insurance and Surety Corporation the amount of P 50,000,000.00 plus interest at the rate of 6% per annum from the filing of the case until the award becomes final and executory. Thereafter, the rate of interest shall be 12% per annum. From the date the award becomes final and executory until its fall satisfaction. The arbitration costs shall be borne by both parties on a pro rata basis. SO ORDERED.

G.R. Nos. 180880-81

September 18, 2012


G.R. No. L-32986

November 11, 1930

FRANCISCO JARQUE, plaintiff-appellee, vs. SMITH, BELL & CO., LTD., ET AL., defendants. UNION FIRE INSURANCE CO., appellant. The plaintiff was the owner of the motorboat Pandan and held a marine insurance policy for the sum of P45,000 on the boat, the policy being issued by the National Union Fire Insurance Company and according to the provisions of a "rider" attached to the policy, the insurance was against the "absolute total loss of the vessel only." On October 31, 1928, the ship ran into very heavy sea off the Islands of Ticlin, and it became necessary to jettison a portion of the cargo. As a result of the jettison, the National Union Fire Insurance Company was assessed in the sum of P2,610.86 as its contribution to the general average. The insurance company, insisting that its

obligation did not extend beyond the insurance of the "absolute total loss of the vessel only, and to pay proportionate salvage of the declared value," refused to contribute to the settlement of the general average. The present action was thereupon instituted, and after trial the court below rendered judgment in favor of the plaintiff and ordered the defendant National Union Fire Insurance Company to pay the plaintiff the sum of P2,610.86 as its part of the indemnity for the general average brought about by the jettison of cargo. The insurance company appealed to this court and assigns as errors (1) "that the lower court erred in disregarding the typewritten clause endorsed upon the policy, Exhibit A, expressly limiting insurer's liability thereunder of the total loss of the wooden vessel Pandan and to proportionate salvage charges," and (2) "that the lower court erred in concluding that defendant and appellant, National Union Fire Insurance Company is liable to contribute to the general average resulting from the jettison of a part of said vessel's cargo." I. As to the first assignment of error, little need be said. The insurance contract, Exhibit A, is printed in the English common form of marine policies. One of the clauses of the document originally read as follows: Touching the Adventures and Perils which the said National Union Fire Insurance Company is content to bear, and to take upon them in this Voyage; they are of the Seas, Men-of-War, Fire, Pirates, Rovers, Thieves, Jettison, Letters of Mart and Countermart, Surprisals, and Takings at Sea. Arrest, Restraint and Detainments, of all Kings Princes and People of what Nation, Condition or Quality so ever; Barratry of the Master and Marines, and of all other Perils, Losses and Misfortunes, that have or shall come to the Hurt, Detriment, or Damage of the said Vessel or any part thereof; and in case of any Loss or Misfortunes, it shall be lawful for the Assured, his or their Factors, Servants, or assigns, to sue, labour and travel for, in and about the Defense. Safeguard, and recovery of the said Vessel or any Charges whereof the said Company, will contribute, according to the rate and quantity of the sum herein assured shall be of as much force and Virtue as the surest Writing or Policy of Insurance made in LONDON. Attached to the policy over and above the said clause is a "rider" containing typewritten provisions, among which appears in capitalized type the following clause: AGAINST THE ABSOLUTE TOTAL LOSS OF THE VESSEL ONLY, AND TO PAY PROPORTIONATE SALVAGE CHARGES OF TEH DECLARED VALUE. At the bottom of the same rider following the type written provisions therein set forth are the following words: "Attaching to and forming part of the National Union Fire Insurance Co., Hull Policy No. 1055." It is a well settled rule that in case repugnance exists between written and printed portions of a policy, the written portion prevails, and there can be no question that as

far as any inconsistency exists, the above-mentioned typed "rider" prevails over the printed clause it covers. Section 291 of the Code of Civil Procedure provides that "when an instrument consists partly of written words and partly of a printed form and the two are inconsistent, the former controls the latter." (See also Joyce on Insurance, 2d ed., sec. 224, page 600; Arnould on Marine Insurance, 9th ed., sec. 73; Marine Equipment Corporation vs. Automobile Insurance Co., 24 Fed. (2d), 600; and Marine Insurance Company vs. McLahanan, 290 Fed., 685, 688.) II. In the absence of positive legislation to the contrary, the liability of the defendant insurance company on its policy would, perhaps, be limited to "absolute loss of the vessel only, and to pay proportionate salvage of the declared value." But the policy was executed in this jurisdiction and "warranted to trade within the waters of the Philippine Archipelago only." Here the liability for contribution in general average is not based on the express terms of the policy, but rest upon the theory that from the relation of the parties and for their benefit, a quasi contract is implied by law. Article 859 of the Code of Commerce is still in force and reads as follows: ART. 859. The underwriters of the vessel, of the freight, and of the cargo shall be obliged to pay for the indemnity of the gross average in so far as is required of each one of these objects respectively. The article is mandatory in its terms, and the insurers, whether for the vessel or for the freight or for the cargo, are bound to contribute to the indemnity of the general average. And there is nothing unfair in that provisions; it simply places the insurer on the same footing as other persons who have an interest in the vessel, or the cargo therein at the time of the occurrence of the general average and who are compelled to contribute (art. 812, Code of Commerce). In the present case it is not disputed that the ship was in grave peril and that the jettison of part of the cargo was necessary. If the cargo was in peril to the extent of call for general average, the ship must also have been in great danger, possibly sufficient to cause its absolute loss. The jettison was therefore as much to the benefit of the underwriter as to the owner of the cargo. The latter was compelled to contribute to the indemnity; why should not the insurer be required to do likewise? If no jettison had take place and if the ship by reason thereof had foundered, the underwriter's loss would have been many times as large as the contribution now demanded. The appealed judgment is affirmed with the cost against the appellant. So ordered. Malcolm, Villamor, Johns, Romualdez and Villa-Real, JJ., concur. Separate Opinions JOHNSON and STREET, JJ., dissenting:

In view of the fact that the policy of marine insurance which is the subject of this action contained a provision to the effect that the risk insured against was "the absolute total loss of the vessel only," the undersigned are of the opinion that the defendant insurance company is not liable to contribute to the gross average incident to the jettison of some of the freight embarked on the vessel which was the subject of insurance. It is true that article 859 of the Code of Commerce declares that the underwriters of the vessel, of the freight, and of the cargo shall be obliged to pay for the indemnity of the gross average in so far as is required of each one of these objects respectively, but that provision evidently states a general rule to be applied where there are no words in the contract in any wise qualifying the risk. This article, we think, should not be interpreted as abridging the freedom of contract between insurer and the insured; and where, as in the case before us, the words defining the risk plainly show that the risk is limited so as to exclude the obligation to contribute in case of jettison, the intention expressed in the contract ought to be given effect. If the insurance had been written upon the cargo, the case for the plaintiff would have been stronger; but it is certainly anomalous that an insurer of "the vessel only" should be held liable for the jettison of cargo, to which a contract of insurance done not extend. The language used in the policy of insurance in this case clearly limits the risk

affirmatively to the vessel only, and the contract should be given effect according to the intention of the parties. The opinion of the court appears to proceed in part at least upon the idea that the insurer had a real interest in the vessel, and that the insurance company was necessarily benefited by a jettison of cargo, since the act may possibly have resulted in saving the vessel from destruction. This idea appears to us to ignore the most fundamental conception underlying the law of insurance, which is that the contract of insurance is of an aleatory nature. By this is meant that the contract is essentially a wager. It results that the insurer has no real interest whatever in the thing insured; and the question of the liability of the insurer limits itself to the question whether the contingency insured may have been saved by jettison of the cargo is irrelevant to the risk. We are of the opinion that the judgment appealed from should be reversed and the defendant absolved from the complaint.

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