FIRST DIVISION

agreement. However, petitioner denied her claim saying that the

Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history. Doctors at the MMC
[G.R. No. 125678. March 18, 2002]
allegedly discovered at the time of Ernanis confinement that he was
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF hypertensive, diabetic and asthmatic, contrary to his answer in the
application form. Thus, respondent paid the hospitalization expenses
APPEALS and JULITA TRINOS, respondents.
herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was
attended by a physical therapist at home. Later, he was admitted at
DECISION
the Chinese General Hospital. Due to financial difficulties, however,
respondent brought her husband home again. In the morning of April
YNARES-SANTIAGO, J.:
13, 1990, Ernani had fever and was feeling very weak. Respondent
Ernani Trinos, deceased husband of respondent Julita Trinos, was constrained to bring him back to the Chinese General Hospital
applied for a health care coverage with petitioner Philamcare Health where he died on the same day.
Systems, Inc. In the standard application form, he answered no to the
On July 24, 1990, respondent instituted with the Regional Trial
following question:
Court of Manila, Branch 44, an action for damages against petitioner
and its president, Dr. Benito Reverente, which was docketed as Civil
Have you or any of your family members ever consulted or been
Case No. 90-53795. She asked for reimbursement of her expenses
treated for high blood pressure, heart trouble, diabetes, cancer, liver
[1]
plus moral damages and attorneys fees. After trial, the lower court
disease, asthma or peptic ulcer? (If Yes, give details).
ruled against petitioners, viz:
The application was approved for a period of one year from March
1, 1988 to March 1, 1989. Accordingly, he was issued Health Care
Agreement No. P010194. Under the agreement, respondents husband
was entitled to avail of hospitalization benefits, whether ordinary or
emergency, listed therein. He was also entitled to avail of out-patient
benefits such as annual physical examinations, preventive health care
and other out-patient services.

WHEREFORE, in view of the forgoing, the Court renders judgment in

favor of the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital
coverage of the late Ernani Trinos in the amount of P76,000.00 plus
interest, until the amount is fully paid to plaintiff who paid the same;

Upon the termination of the agreement, the same was extended 2. Defendants to pay the reduced amount of moral damages of
for another year from March 1, 1989 to March 1, 1990, then from P10,000.00 to plaintiff;
March 1, 1990 to June 1, 1990. The amount of coverage was increased
3. Defendants to pay the reduced amount of P10,000.00 as exemplary
to a maximum sum of P75,000.00 per disability.[2]
damages to plaintiff;
During the period of his coverage, Ernani suffered a heart attack
and was confined at the Manila Medical Center (MMC) for one month 4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
beginning March 9, 1990. While her husband was in the hospital,
[3]
respondent tried to claim the benefits under the health care SO ORDERED.

On appeal, the Court of Appeals affirmed the decision of the trial

5. In consideration of the insurers promise, the insured pays a
court but deleted all awards for damages and absolved petitioner
premium.[8]
Reverente.[4] Petitioners motion for reconsideration was denied.
[5]
Hence, petitioner brought the instant petition for review, raising the
Section 3 of the Insurance Code states that any contingent or
primary argument that a health care agreement is not an insurance unknown event, whether past or future, which may damnify a person
contract; hence the incontestability clause under the Insurance having an insurable interest against him, may be insured
Code[6] does not apply.
against. Every person has an insurable interest in the life
and health of himself. Section 10 provides:
Petitioner argues that the agreement grants living benefits, such
as medical check-ups and hospitalization which a member may Every person has an insurable interest in the life and health:
immediately enjoy so long as he is alive upon effectivity of the
agreement until its expiration one-year thereafter. Petitioner also
(1) of himself, of his spouse and of his children;
points out that only medical and hospitalization benefits are given
under the agreement without any indemnification, unlike in an
(2) of any person on whom he depends wholly or in part for
insurance contract where the insured is indemnified for his
education or support, or in whom he has a pecuniary
loss. Moreover, since Health Care Agreements are only for a period of
interest;
one year, as compared to insurance contracts which last longer,
[7]
petitioner argues that the incontestability clause does not apply, as
(3) of any person under a legal obligation to him for the
the same requires an effectivity period of at least two years. Petitioner
payment of money, respecting property or service, of
further argues that it is not an insurance company, which is governed
which death or illness might delay or prevent the
by the Insurance Commission, but a Health Maintenance Organization
performance; and
under the authority of the Department of Health.
(4) of any person upon whose life any estate or interest
Section 2 (1) of the Insurance Code defines a contract of
vested in him depends.
insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability
In the case at bar, the insurable interest of respondents husband
arising from an unknown or contingent event. An insurance contract in obtaining the health care agreement was his own health. The health
exists where the following elements concur:
care agreement was in the nature of non-life insurance, which is
primarily a contract of indemnity. [9] Once the member incurs hospital,
1. The insured has an insurable interest;
medical or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay for the same
2. The insured is subject to a risk of loss by the happening of
to the extent agreed upon under the contract.
the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons
bearing a similar risk; and

Petitioner argues that respondents husband concealed a material

fact in his application. It appears that in the application for health
coverage, petitioners required respondents husband to sign an
express authorization for any person, organization or entity that has
any record or knowledge of his health to furnish any and all
information relative to any hospitalization, consultation, treatment or

any other medical advice or examination.[10]Specifically, the Health limited to return of all Membership Fees paid. An undisclosed or
Care Agreement signed by respondents husband states:
misrepresented information is deemed material if its revelation would
have resulted in the declination of the applicant by Philamcare or the
assessment of a higher Membership Fee for the benefit or benefits
We hereby declare and agree that all statement and answers
applied for.[13]
contained herein and in any addendum annexed to this application
are full, complete and true and bind all parties in interest under the
Agreement herein applied for, that there shall be no contract of health
The answer assailed by petitioner was in response to the question
care coverage unless and until an Agreement is issued on this
relating to the medical history of the applicant. This largely depends
application and the full Membership Fee according to the mode of
on opinion rather than fact, especially coming from respondents
payment applied for is actually paid during the lifetime and good
husband who was not a medical doctor. Where matters of opinion or
health of proposed Members; that no information acquired by any
judgment are called for, answers made in good faith and without
Representative of PhilamCare shall be binding upon PhilamCare unless intent to deceive will not avoid a policy even though they are untrue.
[14]
set out in writing in the application; that any physician is, by these
Thus,
presents, expressly authorized to disclose or give testimony at
anytime relative to any information acquired by him in his professional (A)lthough false, a representation of the expectation, intention, belief,
capacity upon any question affecting the eligibility for health care
opinion, or judgment of the insured will not avoid the policy if there is
coverage of the Proposed Members and that the acceptance of any
no actual fraud in inducing the acceptance of the risk, or its
Agreement issued on this application shall be a ratification of any
acceptance at a lower rate of premium, and this is likewise the rule
correction in or addition to this application as stated in the space for
although the statement is material to the risk, if the statement is
Home Office Endorsement.[11](Underscoring ours)
obviously of the foregoing character, since in such case the insurer is
not justified in relying upon such statement, but is obligated to make
In addition to the above condition, petitioner additionally required further inquiry. There is a clear distinction between such a case and
the applicant for authorization to inquire about the applicants medical one in which the insured is fraudulently and intentionally states to be
history, thus:
true, as a matter of expectation or belief, that which he then knows,
to be actually untrue, or the impossibility of which is shown by the
facts within his knowledge, since in such case the intent to deceive
I hereby authorize any person, organization, or entity that has any
the insurer is obvious and amounts to actual fraud.[15] (Underscoring
record or knowledge of my health and/or that of __________ to give to
ours)
the PhilamCare Health Systems, Inc. any and all information relative
to any hospitalization, consultation, treatment or any other medical
advice or examination. This authorization is in connection with the
The fraudulent intent on the part of the insured must be
application for health care coverage only. A photographic copy of this
established to warrant rescission of the insurance contract.
[16]
authorization shall be as valid as the original.[12] (Underscoring ours)
Concealment as a defense for the health care provider or insurer to
avoid liability is an affirmative defense and the duty to establish such
Petitioner cannot rely on the stipulation regarding Invalidation of defense by satisfactory and convincing evidence rests upon the
provider or insurer. In any case, with or without the authority to
agreement which reads:
investigate, petitioner is liable for claims made under the
Failure to disclose or misrepresentation of any material information by contract. Having assumed a responsibility under the agreement,
petitioner is bound to answer the same to the extent agreed upon. In
the member in the application or medical examination, whether
the end, the liability of the health care provider attaches once the
intentional or unintentional, shall automatically invalidate the
Agreement from the very beginning and liability of Philamcare shall be member is hospitalized for the disease or injury covered by the

agreement or whenever he avails of the covered benefits which he

Anent the incontestability of the membership of respondents
has prepaid.
husband, we quote with approval the following findings of the trial
court:
Under Section 27 of the Insurance Code, a concealment entitles
the injured party to rescind a contract of insurance. The right to (U)nder the title Claim procedures of expenses, the defendant
rescind should be exercised previous to the commencement of an Philamcare Health Systems Inc. had twelve months from the date of
action on the contract.[17] In this case, no rescission was issuance of the Agreement within which to contest the membership of
made. Besides, the cancellation of health care agreements as in the patient if he had previous ailment of asthma, and six months from
insurance policies require the concurrence of the following conditions: the issuance of the agreement if the patient was sick of diabetes or
hypertension. The periods having expired, the defense of concealment
or misrepresentation no longer lie.[23]
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the
policy of one or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address
shown in the policy;
4. Must state the grounds relied upon provided in Section 64 of the
Insurance Code and upon request of insured, to furnish facts on which
cancellation is based.[18]

Finally, petitioner alleges that respondent was not the legal wife
of the deceased member considering that at the time of their
marriage, the deceased was previously married to another woman
who was still alive. The health care agreement is in the nature of a
contract of indemnity. Hence, payment should be made to the party
who incurred the expenses. It is not controverted that respondent paid
all the hospital and medical expenses.She is therefore entitled to
reimbursement. The records adequately prove the expenses incurred
by respondent for the deceaseds hospitalization, medication and the
professional fees of the attending physicians.[24]

None of the above pre-conditions was fulfilled in this case. When

WHEREFORE, in view of the foregoing, the petition is
the terms of insurance contract contain limitations on liability, courts
DENIED.
The assailed decision of the Court of Appeals dated
should construe them in such a way as to preclude the insurer from
[19]
non-compliance with his obligation.
Being a contract of adhesion, December 14, 1995 is AFFIRMED.
the terms of an insurance contract are to be construed strictly against
SO ORDERED.
the party which prepared the contract the insurer. [20] By reason of the
exclusive control of the insurance company over the terms and
Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.
phraseology of the insurance contract, ambiguity must be strictly
interpreted against the insurer and liberally in favor of the insured,
especially to avoid forfeiture.[21] This is equally applicable to Health
Care Agreements. The phraseology used in medical or hospital service
THIRD DIVISION
contracts, such as the one at bar, must be liberally construed in favor
of the subscriber, and if doubtful or reasonably susceptible of two
interpretations the construction conferring coverage is to be adopted, VIOLETA R. LALICAN,
and exclusionary clauses of doubtful import should be strictly Petitioner,
construed against the provider.[22]
- versus -

THE INSULAR LIFE ASSURANCE COMPANY LIMITED, AS REPRESENTED BY

Under the terms of Policy No. 9011992, Eulogio was to pay the
THE PRESIDENT VICENTE R. AVILON,
premiums
on a quarterly basis in the amount of P8,062.00, payable
Respondent.
every 24 April, 24 July, 24 October and 24 January of each year, until
G.R. No. 183526
the end of the 20-year period of the policy. According to the Policy
Contract, there was a grace period of 31 days for the payment of each
premium subsequent to the first. If any premium was not paid on or
DECISION
before the due date, the policy would be in default, and if the
premium remained unpaid until the end of the grace period, the policy
CHICO-NAZARIO, J.:
would automatically lapse and become void.[8]
Challenged in this Petition for Review on Certiorari[1] under Rule
45 of the Rules of Court are the Decision [2] dated 30 August 2007 and
the Orders dated 10 April 2008[3]and 3 July 2008[4] of the Regional Trial
Court (RTC) of Gapan City, Branch 34, in Civil Case No. 2177. In its
assailed Decision, the RTC dismissed the claim for death benefits filed
by petitioner Violeta R. Lalican (Violeta) against respondent Insular
Life Assurance Company Limited (Insular Life); while in its questioned
Orders dated 10 April 2008 and 3 July 2008, respectively, the RTC
declared the finality of the aforesaid Decision and denied petitioners
Notice of Appeal.

Eulogio paid the premiums due on 24 July 1997 and 24 October

1997. However, he failed to pay the premium due on 24 January 1998,
even after the lapse of the grace period of 31 days. Policy
No. 9011992, therefore, lapsed and became void.

Eulogio submitted to the Cabanatuan District Office of Insular

Life, through Malaluan, on 26 May 1998, an Application for
Reinstatement[9] of Policy No. 9011992, together with the amount
of P8,062.00 to pay for the premium due on 24 January 1998. In a
letter[10] dated 17 July 1998, Insular Life notified Eulogio that his
Application for Reinstatement could not be fully processed because,
The factual and procedural antecedents of the case, as culled although he already deposited P8,062.00 as payment for the 24
from the records, are as follows:
January 1998 premium, he left unpaid the overdue interest thereon
amounting to P322.48. Thus, Insular Life instructed Eulogio to pay the
Violeta is the widow of the deceased Eulogio C. Lalican amount of interest and to file another application for
(Eulogio).
reinstatement. Eulogio was likewise advised by Malaluan to pay the
premiums that subsequently became due on 24 April 1998 and 24 July
During his lifetime, Eulogio applied for an insurance policy with 1998, plus interest.
Insular Life. On 24 April 1997, Insular Life, through Josephine Malaluan
(Malaluan), its agent in Gapan City, issued in favor of Eulogio Policy
On 17 September 1998, Eulogio went to Malaluans house and
No. 9011992,[5] which contained a 20-Year Endowment Variable submitted a second Application for Reinstatement [11] of Policy
Income Package Flexi Plan worth P500,000.00,[6] with two riders No. 9011992, including the amount ofP17,500.00, representing
valued atP500,000.00 each.[7] Thus, the value of the policy amounted payments for the overdue interest on the premium for 24 January
to P1,500,000.00. Violeta was named as the primary beneficiary.
1998, and the premiums which became due on 24 April 1998 and 24
July 1998. As Malaluan was away on a business errand, her husband

received Eulogios second Application for Reinstatement and issued a

Violeta returned the letter dated 10 March 1999 and the check
receipt for the amount Eulogio deposited.
enclosed therein to the Cabanatuan District Office of Insular
Life. Violetas counsel subsequently sent a letter [14] dated 8 July
A while later, on the same day, 17 September 1998, Eulogio 1999 to Insular Life, demanding payment of the full proceeds of Policy
died of cardio-respiratory arrest secondary to electrocution.
No. 9011992. On 11 August 1999, Insular Life responded to the said
demand letter by agreeing to conduct a re-evaluation of Violetas
Without knowing of Eulogios death, Malaluan forwarded to the claim.
Insular Life Regional Office in the City of San Fernando, on 18
September 1998, Eulogios second Application for Reinstatement of
Without waiting for the result of the re-evaluation by Insular
Policy No. 9011992 and P17,500.00 deposit. However, Insular Life no Life, Violeta filed with the RTC, on 11 October 1999, a Complaint for
longer acted upon Eulogios second Application for Reinstatement, as Death Claim Benefit,[15] which was docketed as Civil Case No.
the former was informed on 21 September 1998 that Eulogio had 2177. Violeta alleged that Insular Life engaged in unfair claim
already passed away.
settlement practice and deliberately failed to act with reasonable
promptness on her insurance claim. Violeta prayed that Insular Life be
On 28 September 1998, Violeta filed with Insular Life a claim ordered to pay her death claim benefits on Policy No. 9011992, in the
for payment of the full proceeds of Policy No. 9011992.
amount of P1,500,000.00, plus interests, attorneys fees, and cost of
suit.
In a letter[12] dated 14 January 1999, Insular Life informed
Violeta that her claim could not be granted since, at the time of
Insular Life filed with the RTC an Answer with Counterclaim,
[16]
Eulogios death, Policy No. 9011992 had already lapsed, and Eulogio
asserting that Violetas Complaint had no legal or factual
failed to reinstate the same. According to the Application for bases. Insular Life maintained that Policy No. 9011992, on which
Reinstatement, the policy would only be considered reinstated upon Violeta sought to recover, was rendered void by the non-payment of
approval of the application by Insular Life during the applicants the 24 January 1998 premium and non-compliance with the
lifetime and good health, and whatever amount the applicant paid in requirements for the reinstatement of the same. By way of
connection thereto was considered to be a deposit only until approval counterclaim, Insular Life prayed that Violeta be ordered to pay
of said application. Enclosed with the 14 January 1999 letter of Insular attorneys fees and expenses of litigation incurred by the former.
Life to Violeta was DBP Check No. 0000309734, for the amount
of P25,417.00, drawn in Violetas favor, representing the full refund of
Violeta, in her Reply and Answer to Counterclaim, asserted that
the payments made by Eulogio on Policy No. 9011992.
the requirements for the reinstatement of Policy No. 9011992 had
been complied with and the defenses put up by Insular Life were
On 12 February 1998, Violeta requested a reconsideration of purely invented and illusory.
the disallowance of her claim. In a letter[13] dated 10 March 1999,
Insular Life stated that it could not find any reason to reconsider its
After trial, the RTC rendered, on 30 August 2007, a Decision in
decision rejecting Violetas claim. Insular Life again tendered to Violeta favor of Insular Life.
the above-mentioned check in the amount of P25,417.00.

The RTC found that Policy No. 9011992 had indeed lapsed and
Eulogio needed to have the same reinstated:
[The] arguments [of Insular Life] are not without
basis. When the premiums for April 24 and July 24,
1998 were not paid by [Eulogio] even after the lapse of
the 31-day grace period, his insurance policy
necessarily lapsed. This is clear from the terms and
conditions of the contract between [Insular Life] and
[Eulogio] which are written in [the] Policy provisions of
Policy No. 9011992 x x x.[17]

The RTC, taking into account the clear provisions of the Policy
Contract between Eulogio and Insular Life and the Application for
Reinstatement Eulogio subsequently signed and submitted to Insular
Life, held that Eulogio was not able to fully comply with the
requirements for the reinstatement of Policy No. 9011992:
The well-settled rule is that a contract has the force of
law between the parties. In the instant case, the terms
of the insurance contract between [Eulogio] and [Insular
Life] were spelled out in the policy provisions of
Insurance Policy No. 9011992. There is likewise no
dispute that said insurance contract is by nature a
contract of adhesion[,] which is defined as one in which
one of the contracting parties imposes a ready-made
form of contract which the other party may accept or
reject but cannot modify. (Polotan, Sr. vs. CA, 296 SCRA
247).
xxxx
The New Lexicon Websters Dictionary defines ambiguity
as the quality of having more than one meaning and an
idea, statement or expression capable of being
understood in more than one sense. In Nacu vs. Court
of Appeals, 231 SCRA 237 (1994), the Supreme
Court stated that[:]
Any ambiguity in a contract, whose terms
are susceptible of different interpretations
as a result thereby, must be read and

construed against the party who drafted

it on the assumption that it could have
been avoided by the exercise of a little
care.
In the instant case, the dispute arises from the
afore-quoted provisions written on the face of
the
second
application
for
reinstatement. Examining the said provisions, the
court finds the same clearly written in terms that
are simple enough to admit of only one
interpretation. They are clearly not ambiguous,
equivocal or uncertain that would need further
construction. The same are written on the very
face of the application just above the space
where
[Eulogio]
signed
his
name. It
is
inconceivable that he signed it without reading
and understanding its import.
Similarly, the provisions of the policy provisions (sic)
earlier mentioned are written in simple and clear
laymans language, rendering it free from any ambiguity
that would require a legal interpretation or
construction. Thus, the court believes that [Eulogio] was
well aware that when he filed the said application for
reinstatement, his lapsed policy was not automatically
reinstated and that its approval was subject to certain
conditions. Nowhere in the policy or in the
application for reinstatement was it ever
mentioned that the payment of premiums would
have the effect of an automatic and immediate
renewal of the lapsed policy. Instead, what was
clearly stated in the application for reinstatement
is that pending approval thereof, the premiums
paid would be treated as a deposit only and shall
not bind the company until this application is
finally approved during my/our lifetime and good
health[.]
Again, the court finds nothing in the aforesaid
provisions that would even suggest an ambiguity either
in the words used or in the manner they were
written. [Violeta] did not present any proof that
[Eulogio] was not conversant with the English
language. Hence, his having personally signed the
application for reinstatement[,] which consisted only of

one page, could only mean that he has read its

contents and that he understood them. x x x
Therefore, consistent with the above Supreme Court
ruling and finding no ambiguity both in the policy
provisions of Policy No. 9011992 and in the application
for reinstatement subject of this case, the court finds no
merit in [Violetas] contention that the policy provision
stating that [the lapsed policy of Eulogio] should be
reinstated during his lifetime is ambiguous and should
be construed in his favor. It is true that [Eulogio]
submitted his application for reinstatement, together
with his premium and interest payments, to [Insular
Life] through its agent Josephine Malaluan in the
morning of September 17, 1998.Unfortunately, he died
in the afternoon of that same day. It was only on the
following day, September 18, 1998 that Ms. Malaluan
brought the said document to [the regional office of
Insular
Life]
in San
Fernando,
Pampanga
for
approval. As correctly pointed out by [Insular Life]
there was no more application to approve
because the applicant was already dead and no
insurance company would issue an insurance
policy to a dead person.[18] (Emphases ours.)

The RTC, in the end, explained that:

While the court truly empathizes with the [Violeta] for
the loss of her husband, it cannot express the same by
interpreting the insurance agreement in her favor
where there is no need for such interpretation. It is
conceded that [Eulogios] payment of overdue premiums
and interest was received by [Insular Life] through its
agent Ms. Malaluan. It is also true that [the] application
for reinstatement was filed by [Eulogio] a day before his
death. However, there is nothing that would
justify a conclusion that such receipt amounted
to an automatic reinstatement of the policy that
has already lapsed. The evidence suggests
clearly that no such automatic renewal was
contemplated in the contract between [Eulogio]
and [Insular Life]. Neither was it shown that Ms.
Malaluan was the officer authorized to approve
the application for reinstatement and that her

receipt of the documents submitted by [Eulogio]

amounted to its approval.[19] (Emphasis ours.)
The fallo of the RTC Decision thus reads:
WHEREFORE, all the foregoing premises considered
and finding that [Violeta] has failed to establish by
preponderance of evidence her cause of action against
the defendant, let this case be, as it is
herebyDISMISSED.[20]

On 14 September 2007, Violeta filed a Motion for Reconsideration [21] of

the afore-mentioned RTC Decision. Insular Life opposed[22] the said
motion, averring that the arguments raised therein were merely a
rehash of the issues already considered and addressed by the RTC. In
an Order[23] dated 8 November 2007, the RTC denied Violetas Motion
for Reconsideration, finding no cogent and compelling reason to
disturb its earlier findings. Per the Registry Return Receipt on record,
the 8 November 2007 Order of the RTC was received by Violeta on 3
December 2007.
In the interim, on 22 November 2007, Violeta filed with the RTC
a Reply[24] to the Motion for Reconsideration, wherein she reiterated
the prayer in her Motion for Reconsideration for the setting aside of
the Decision dated 30 August 2007. Despite already receiving on 3
December 2007, a copy of the RTC Order dated 8 November 2007,
which denied her Motion for Reconsideration, Violeta still filed with the
RTC, on 26 February 2008, a Reply Extended Discussion elaborating
on the arguments she had previously made in her Motion for
Reconsideration and Reply.
On 10 April 2008, the RTC issued an Order, [25] declaring that the
Decision dated 30 August 2007 in Civil Case No. 2177 had already
attained finality in view of Violetas failure to file the appropriate notice
of appeal within the reglementary period. Thus, any further

discussions on the issues raised by Violeta in her Reply and Reply

Violeta further posits that the Court should address the
Extended Discussion would be moot and academic.
question of law arising in this case involving the interpretation of the
second sentence of Section 19 of the Insurance Code, which provides:
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with
Section. 19. x x x [I]nterest in the life or health of a
Motion,[26] praying that the Order dated 10 April 2008 be set aside and
person insured must exist when the insurance takes
that she be allowed to file an appeal with the Court of Appeals.
effect, but need not exist thereafter or when the loss
occurs.
In an Order[27] dated 3 July 2008, the RTC denied Violetas Notice of
Appeal with Motion given that the Decision dated 30 August 2007 had
On the basis thereof, Violeta argues that Eulogio still had
long since attained finality.
insurable interest in his own life when he reinstated Policy No.
9011992 just before he passed away on 17 September 1998. The RTC
Violeta directly elevated her case to this Court via the instant Petition should have construed the provisions of the Policy Contract and
for Review on Certiorari, raising the following issues for consideration: Application for Reinstatement in favor of the insured Eulogio and
against the insurer Insular Life, and considered the special
1.
Whether or not the Decision of the court a
circumstances of the case, to rule that Eulogio had complied with the
quo dated August 30, 2007, can still be reviewed
requisites for the reinstatement of Policy No. 9011992 prior to his
despite having allegedly attained finality and
despite the fact that the mode of appeal that has
death, and that Violeta is entitled to claim the proceeds of said policy
been availed of by Violeta is erroneous?
as the primary beneficiary thereof.
2.

Whether or not the Regional Trial Court in

its original jurisdiction has decided the case on a
question of law not in accord with law and
applicable decisions of the Supreme Court?

The Petition lacks merit.

At the outset, the Court notes that the elevation of the case to
us via the instant Petition for Review on Certiorari is not justified. Rule
41, Section 1 of the Rules of Court, [28] provides that no appeal may be
taken from an order disallowing or dismissing an appeal. In such a
case, the aggrieved party may file a Petition for Certiorari under Rule
65 of the Rules of Court.[29]

Violeta insists that her former counsel committed an honest mistake

in filing a Reply, instead of a Notice of Appeal of the RTC Decision
dated 30 August 2007; and in the computation of the reglementary
period for appealing the said judgment. Violeta claims that her former
counsel suffered from poor health, which rapidly deteriorated from the
Furthermore, the RTC Decision dated 30 August 2007, assailed
first week of July 2008 until the latters death just shortly after the
filing of the instant Petition on 8 August 2008. In light of these in this Petition, had long become final and executory. Violeta filed a
circumstances, Violeta entreats this Court to admit and give due Motion for Reconsideration thereof, but the RTC denied the same in an
Order dated 8 November 2007. The records of the case reveal that
course to her appeal even if the same was filed out of time.
Violeta received a copy of the 8 November 2007 Order on 3
December 2007.Thus, Violeta had 15 days[30] from said date of
receipt, or until 18 December 2007, to file a Notice of

Appeal. Violeta filed a Notice of Appeal only on 20 May 2008, more consequence, no court (not even this Court) can exercise appellate
than five months after receipt of the RTC Order dated 8 November jurisdiction to review a case or modify a decision that has become
2007 denying her Motion for Reconsideration.
final.[32] When a final judgment is executory, it becomes immutable
and unalterable. It may no longer be modified in any respect either by
Violetas claim that her former counsels failure to file the proper the court, which rendered it or even by this Court. The doctrine is
remedy within the reglementary period was an honest mistake, founded on considerations of public policy and sound practice that, at
attributable to the latters deteriorating health, is unpersuasive.
the risk of occasional errors, judgments must become final at some
definite point in time.[33]
Violeta merely made a general averment of her former
counsels poor health, lacking relevant details and supporting The only recognized exceptions to the doctrine of immutability and
evidence. By Violetas own admission, her former counsels health unalterability are the correction of clerical errors, the so-called nunc
rapidly deteriorated only by the first week of July 2008. The events pro tunc entries, which cause no prejudice to any party, and void
pertinent to Violetas Notice of Appeal took place months before July judgments.[34] The instant case does not fall under any of these
2008, i.e., a copy of the RTC Order dated 8 November 2007, denying exceptions.
Violetas Motion for Reconsideration of the Decision dated 30 August
2007, was received on 3 December 2007; and Violetas Notice of Even if the Court ignores the procedural lapses committed herein, and
Appeal was filed on 20 May 2008. There is utter lack of proof to show proceeds to resolve the substantive issues raised, the Petition must
that Violetas former counsel was already suffering from ill health still fail.
during these times; or that the illness of Violetas former counsel would
have affected his judgment and competence as a lawyer.
Violeta makes it appear that her present Petition involves a question
of law, particularly, whether Eulogio had an existing insurable interest
Moreover, the failure of her former counsel to file a Notice of in his own life until the day of his death.
Appeal within the reglementary period binds Violeta, which failure the
latter cannot now disown on the basis of her bare allegation and self- An insurable interest is one of the most basic and essential
serving pronouncement that the former was ill. A client is bound by requirements in an insurance contract. In general, an insurable
his counsels mistakes and negligence.[31]
interest is that interest which a person is deemed to have in the
subject matter insured, where he has a relation or connection with or
The Court, therefore, finds no reversible error on the part of the concern in it, such that the person will derive pecuniary benefit or
RTC in denying Violetas Notice of Appeal for being filed beyond the advantage from the preservation of the subject matter insured and
reglementary period. Without an appeal having been timely filed, the will suffer pecuniary loss or damage from its destruction, termination,
RTC Decision dated 30 August 2007 in Civil Case No. 2177 already or injury by the happening of the event insured against. [35] The
became final and executory.
existence of an insurable interest gives a person the legal right to
insure the subject matter of the policy of insurance. [36] Section 10 of
A judgment becomes "final and executory" by operation of the Insurance Code indeed provides that every person has an
law. Finality becomes a fact when the reglementary period to appeal insurable interest in his own life.[37] Section 19 of the same code also
lapses and no appeal is perfected within such period. As a states that an interest in the life or health of a person insured must

exist when the insurance takes effect, but need not exist thereafter or
when the loss occurs.[38]
To reinstate a policy means to restore the same to premium-paying
status after it has been permitted to lapse. [39] Both the Policy Contract
Upon more extensive study of the Petition, it becomes evident that and the Application for Reinstatement provide for specific conditions
the matter of insurable interest is entirely irrelevant in the case at for the reinstatement of a lapsed policy.
bar. It is actually beyond question that while Eulogio was still alive, he
had an insurable interest in his own life, which he did insure under
The Policy Contract between Eulogio and Insular Life identified
Policy No. 9011992. The real point of contention herein is whether the following conditions for reinstatement should the policy lapse:
Eulogio was able to reinstate the lapsed insurance policy on his
10. REINSTATEMENT
life before his death on 17 September 1998.
The Court rules in the negative.
Before proceeding, the Court must correct the erroneous
declaration of the RTC in its 30 August 2007 Decision that Policy
No. 9011992 lapsed because of Eulogios non-payment of the
premiums which became due on 24 April 1998 and 24 July
1998. Policy No. 9011992 had lapsed and become void earlier, on 24
February 1998, upon the expiration of the 31-day grace period for
payment of the premium, which fell due on 24 January 1998, without
any payment having been made.

You may reinstate this policy at any time within three

years after it lapsed if the following conditions are met:
(1) the policy has not been surrendered for its cash
value or the period of extension as a term insurance
has not expired; (2) evidence of insurability satisfactory
to [Insular Life] is furnished; (3) overdue premiums are
paid with compound interest at a rate not exceeding
that which would have been applicable to said premium
and indebtedness in the policy years prior to
reinstatement; and (4) indebtedness which existed at
the time of lapsation is paid or renewed.[40]

Additional conditions for reinstatement of a lapsed policy were

stated in the Application for Reinstatement which Eulogio signed and
That Policy No. 9011992 had already lapsed is a fact beyond
submitted, to wit:
dispute. Eulogios filing of his first Application for Reinstatement with
Insular Life, through Malaluan, on 26 May 1998, constitutes an
I/We agree that said Policy shall not be considered
admission that Policy No. 9011992 had lapsed by then. Insular Life did
reinstated until this application is approved by
the Company during my/our lifetime and good
not act on Eulogios first Application for Reinstatement, since the
health and until all other Company requirements
amount Eulogio simultaneously deposited was sufficient to cover only
for the reinstatement of said Policy are fully
the P8,062.00 overdue premium for 24 January 1998, but not
satisfied.
the P322.48 overdue interests thereon. On 17 September 1998,
I/We further agree that any payment made or to be
Eulogio submitted a second Application for Reinstatement to Insular
made in connection with this application shall be
Life, again through Malaluan, depositing at the same time P17,500.00,
considered as deposit only and shall not bind the
to cover payment for the overdue interest on the premium for 24
Company until this application is finally approved
by the Company during my/our lifetime and good
January 1998, and the premiums that had also become due on 24
health. If this application is disapproved, I/We also
April 1998 and 24 July 1998. On the very same day, Eulogio passed
agree to accept the refund of all payments made in
away.

connection herewith, without interest, and to surrender

the receipts for such payment.[41] (Emphases ours.)

In

the

instant

case,

Eulogios

death

rendered

impossible

our president, vice-president or persons authorized by

the Board of Trustees and only in writing. [44] (Emphasis
ours.)
full

Malaluan did not have the authority to approve Eulogios Application

for Reinstatement. Malaluan still had to turn over to Insular Life
Eulogios Application for Reinstatement and accompanying deposits,
for processing and approval by the latter.
The Court agrees with the RTC that the conditions for
reinstatement under the Policy Contract and Application for
Reinstatement were written in clear and simple language, which could
not admit of any meaning or interpretation other than those that they
Relevant herein is the following pronouncement of the Court in Andres so obviously embody. A construction in favor of the insured is not
v. The Crown Life Insurance Company,[42] citing McGuire v. The called for, as there is no ambiguity in the said provisions in the first
place. The words thereof are clear, unequivocal, and simple enough so
Manufacturer's Life Insurance Co.[43]:
as to preclude any mistake in the appreciation of the same.
The stipulation in a life insurance policy giving
the insured the privilege to reinstate it upon written
Violeta did not adduce any evidence that Eulogio might have
application does not give the insured absolute
failed to fully understand the import and meaning of the provisions of
right to such reinstatement by the mere filing of an
his Policy Contract and/or Application for Reinstatement, both of which
application. The insurer has the right to deny the
reinstatement if it is not satisfied as to the insurability
he voluntarily signed. While it is a cardinal principle of insurance law
of the insured and if the latter does not pay all overdue
that a policy or contract of insurance is to be construed liberally in
premium and all other indebtedness to the
favor of the insured and strictly as against the insurer company, yet,
insurer. After the death of the insured the
insurance Company cannot be compelled to
contracts of insurance, like other contracts, are to be construed
entertain an application for reinstatement of the
according to the sense and meaning of the terms, which the parties
policy
because
the
conditions
precedent
to
themselves have used. If such terms are clear and unambiguous, they
reinstatement can no longer be determined and
must be taken and understood in their plain, ordinary and popular
satisfied. (Emphases ours.)
sense.[45]
compliance with the conditions for reinstatement of Policy
No. 9011992. True, Eulogio, before his death, managed to file his
Application for Reinstatement and deposit the amount for payment of
his overdue premiums and interests thereon with Malaluan; but Policy
No. 9011992 could only be considered reinstated after the
Application for Reinstatement had been processed and approved by
Insular Life during Eulogios lifetime and good health.

It does not matter that when he died, Eulogios Application for

Reinstatement and deposits for the overdue premiums and interests
were already with Malaluan. Insular Life, through the Policy Contract,
expressly limits the power or authority of its insurance agents, thus:
Our agents have no authority to make or modify this
contract, to extend the time limit for payment of
premiums, to waive any lapsation, forfeiture or any of
our rights or requirements, such powers being limited to

Eulogios death, just hours after filing his Application for

Reinstatement and depositing his payment for overdue premiums and
interests with Malaluan, does not constitute a special circumstance
that can persuade this Court to already consider Policy No. 9011992
reinstated. Said circumstance cannot override the clear and express
provisions of the Policy Contract and Application for Reinstatement,
and operate to remove the prerogative of Insular Life thereunder to

approve or disapprove the Application for Reinstatement.Even though

the Court commiserates with Violeta, as the tragic and fateful turn of
events leaves her practically empty-handed, the Court cannot
arbitrarily burden Insular Life with the payment of proceeds on a
lapsed insurance policy. Justice and fairness must equally apply to all
parties to a case. Courts are not permitted to make contracts for the
parties. The function and duty of the courts consist simply in enforcing
and carrying out the contracts actually made.[46]
Policy No. 9011992 remained lapsed and void, not having been
reinstated in accordance with the Policy Contract and Application for
Reinstatement before Eulogios death.Violeta, therefore, cannot claim
any death benefits from Insular Life on the basis of Policy
No. 9011992; but she is entitled to receive the full refund of the
payments made by Eulogio thereon.
WHEREFORE, premises considered, the Court DENIES the
instant Petition for Review on Certiorari under Rule 45 of the Rules of
Court. The Court AFFIRMS the Orders dated 10 April 2008 and 3 July
2008 of the RTC of Gapan City, Branch 34, in Civil Case No. 2177,
denying petitioner Violeta R. Lalicans Notice of Appeal, on the ground
that the Decision dated 30 August 2007 subject thereof, was already
final and executory. No costs.
THIRD DIVISION

KEPPEL CEBU SHIPYARD, INC., Respondent.

G.R. Nos. 180880-81
G.R. Nos. 180896-97
NACHURA, J.:
Before us are the consolidated petitions filed by the partiesPioneer
Insurance

and

Surety

Shipyard,

Inc.[2] (KCSI)to

Corporation[1] (Pioneer)
review

and

oncertiorari the

Keppel

Decision[3] 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 Agreement[5] wherein KCSI would
renovate and reconstruct WG&As 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 AGREEMENT[6]

KEPPEL CEBU SHIPYARD, INC.,Petitioner,

- versus PIONEER INSURANCE AND SURETY CORPORATION, Respondent.
X----------------------------X

Company: WG & A JEBSENS SHIPMANAGEMENT INC.

Address: Harbour Center II, Railroad & Chicago Sts.
Port Area, City of Manila

PIONEER INSURANCE AND SURETY CORPORATION, Petitioner,

- versus -

Cebu

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 Owners 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:
1.

2.

3.

4.

5.

The Owner shall inform its insurer

of Clause 20[7] and 22 (a)[8] (refer at
the back hereof) and shall include
Keppel Cebu Shipyard as a coassured in its insurance policy.
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.
Owners sub-contractors or workers
are not permitted to work in the yard
without the written approval of the
Vice President Operations.
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 Owners workers, or
damages to the vessel or other
property however caused.
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.
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.

7.

The ships 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.

9.

The Owner shall be liable to

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

10.

The invoice shall be based on

quotation
reference 99-KCSI211 dated December 20, 1999 tariff
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.

(Signed)
BARRY CHIA SOO HOCK _________(Signed)__________
(Printed
Name/Signature
Above
Name/Signature Above Name)

Name) (Printed

Vice President Operations Authorized Representative

Keppel Cebu Shipyard, Inc. for and in behalf of:

16 June 2000
Our Claim Ref: MH-NIL-H0-99-00018
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-H0-990000169 (I.V.) by reason as follows:
Fire on board at Keppel Cebu Shipyard
on 08 February 2000

gutted by fire. Claiming that the extent of the damage was pervasive,

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.

WG&A declared the vessels damage as a total constructive loss and,

WILLIAM, GOTHONG & ABOITIZ, INC.

WG & A Jebsens Shipmgmt.

JAN. 26, 2000 . ________________________
Date Date
On February 8, 2000, in the course of its repair, M/V Superferry 3 was

hence, filed an insurance claim with Pioneer.

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:
LOSS AND SUBROGATION RECEIPT

&/OR ABOITIZ SHIPPING CORP.

Armed with the subrogation receipt, Pioneer tried to collect CIAC. The CIAC granted the withdrawal on October 22, 2001, thereby
from KCSI, but the latter denied any responsibility for the loss of the dismissing the claim of WG&A against KCSI. Hence, the arbitration
subject vessel. As KCSI continuously refused to pay despite repeated proceeded with Pioneer as the remaining claimant.
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 attorneys 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

In the course of the proceedings, Pioneer and KCSI stipulated,

among others, that: (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 KCSIs shipyard.[11]
As regards the disputed facts, below are the respective
positions of the parties, viz.:
Pioneers 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 of Law
exists in Property Insurance
is not Dependent Upon Privity of Contract.
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 Keppels premises. In its Draft Decision,

Claimant stated:

A.

B.

C.

D.

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.
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.
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 drydocking and repairs of the vessel.
The practice of allowing a
shipowner and its sub-contractors
to perform maintenance works
while the vessel was within
respondents 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 Vessels Safety Manual cannot be relied upon

as proof of the Masters 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
responsible
for
the
negligent
acts
welder. According to Claimant;

employer
of
the

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.

C.

The mere fact that Dr. Joniga

requested Sevillejo to perform
some of the Owners 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.

B.

Claimant
enumerated
negligence.

Seventh, the shipowner had no legal duty to apply for a

hotworks permit since it was not required by the yard,
and the owners hotworks were conducted by welders
who remained employees of the yard.Claimant
contends that the need, if any, for an owners
application for a hot work permit was canceled out by
the yards actual knowledge of Sevillejos whereabouts
and the fact that he was in deck A doing owners
hotworks.

A.

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.

yard

Yards water supply was inadequate.

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)

(ii)
(iii)
(iv)
(v)

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.

of

According to Claimant:

The yard, not Dr. Joniga, gave

the welders their marching orders,
and
Dr. Jonigas authority to
request the execution of owners
hot works in the passenger areas
was expressly recognized by the
Yard
Project
Superintendent
Orcullo.

further badges

Non-removal
theory.

of

the

life

jackets

Hole-in-the[-]floor theory.
Need for a plan theory.
The unauthorized hot works theory.
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.
KCSIs 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
voluntary, and there was no
resulting
subrogation
to
the
Vessel.
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
Vessels 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 Claimants 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. Jonigas and
the Vessels deliberate decision to have Angelino
Sevillejo undertake cutting work in inherently
dangerous conditions created by them.
(a)

The Claimants 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 Yards 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 pre-existing 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 doors 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 Vessels 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 Vessels
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 Yards Safety Rules and
without removing the flammable ceiling
and life jackets below, contrary to the
requirements not only of the Yards Safety
Rules but also of the demands of
standard safe practice and the Vessels
own explicit safety and hot work policies.
(f)

4.

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.

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
Yards
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 quasidelict.
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.
Eve
n assuming that the Yard was
Angelino Sevillejos 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 Yards 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
Claimants 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.

2.

Claimants counsel contends that

the cutting of the bulkhead door was
covered by the 26 January 2000 Work
Order.
Claimants 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.

Claimants counsel contends that

under Article 1727 of the Civil Code, The
contractor is responsible for the work
done by persons employed by him.

4.

Claimants 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.

Claimants counsel also contends,

to make the Vessels 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
Decision

[13]

October

28,

2002,

the

CIAC

rendered

its

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]

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 petitioners 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

Holding that the liability for damages was limited to P50,000,000.00, promulgated by the Special Division of Five Former Fifteenth Division
the CIAC ordered KCSI to pay Pioneer the amount of P25,000,000.00, of the CA in light of the dissent of Associate Justice Lucas P. Bersamin,
with interest at 6% per annum from the time of the filing of the case

[17]

joined by Associate Justice Japar B. Dimaampao. The fallo of the

up to the time the decision is promulgated, and 12% interest per Amended Decision reads
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]

WHEREFORE, premises considered, the Court

hereby decrees that:
1. Pioneers 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:

B. THE LIMITATION CLAUSE IS CONTRARY

TO PUBLIC POLICY.

1.1 Pioneers Petition (CA-G.R. SP No. 74018)

is PARTIALLY GRANTED as the Yard is hereby ordered
to pay Pioneer P25 Million without legal interest;

C. THE VESSEL OWNER DID NOT AGREE

THAT THE YARDS LIABILITY FOR LOSS OR
DAMAGE TO THE VESSEL ARISING FROM YARDS
NEGLIGENCE
IS
LIMITED
TO
THE
SUM
OF P50,000,000.00 ONLY.

2. The Yard is hereby declared as equally

negligent, thus, the total GRANTING of its Petition (CAG.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.
SO ORDERED.[18]
Hence, these petitions. Pioneer bases its petition on the
following grounds:
I
THE COURT OF APPEALS ERRED IN BASING ITS
ORIGINAL DECISION ON NON-FACTS LEADING IT TO
MAKE
FALSE
LEGAL
CONCLUSIONS; NONFACTS REMAIN
TO
INVALIDATE
THE AMENDED
DECISION. THIS ALSO VIOLATES SECTION 14, ARTICLE
VIII OF THE CONSTITUTION.

II
THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL
LIABILITY
OF
THE
YARD
TO
THE
SUM
OF P50,000,000.00, IN THAT:
A. STARE
DECISIS RENDERS
INAPPLICABLE ANY INVOCATION OF LIMITED
LIABILITY BY THE YARD.

D. IT IS INIQUITOUS TO ALLOW THE YARD

TO LIMIT LIABILITY, IN THAT:
(i) THE YARD HAD CUSTODY AND
CONTROL OVER THE VESSEL (M/V
SUPERFERRY 3) ON 08 FEBRUARY 2000
WHEN IT WAS GUTTED BY FIRE;
(ii) THE DAMAGING FIRE INCIDENT
HAPPENED IN THE COURSE OF THE
REPAIRS EXCLUSIVELY PERFORMED BY
YARD WORKERS.
III
THE COURT OF APPEALS ERRED IN ITS RULING THAT
WG&A WAS CONCURRENTLY NEGLIGENT, CONSIDERING
THAT:
A. DR. JONIGA, THE VESSELS PASSAGE
TEAM LEADER, DID NOT SUPERVISE OR
CONTROL THE REPAIRS.
B. IT WAS THE YARD THROUGH ITS
PROJECT
SUPERINTENDENT
GERMINIANO
ORCULLO THAT SUPERVISED AND CONTROLLED
THE REPAIR WORKS.
C. SINCE ONLY YARD WELDERS COULD
PERFORM HOT WORKS IT FOLLOWS THAT THEY
ALONE COULD BE GUILTY OF NEGLIGENCE IN
DOING THE SAME.

D. THE YARD AUTHORIZED THE HOT

WORK OF YARD WELDER ANGELINO SEVILLEJO.
E. THE
NEGLIGENCE
OF
ANGELINO
SEVILLEJO WAS THE PROXIMATE CAUSE OF THE
LOSS.
F. WG&A
WAS
NOT
GUILTY
OF
NEGLIGENCE, BE IT DIRECT OR CONTRIBUTORY
TO THE LOSS.
IV
THE COURT OF APPEALS CORRECTLY RULED THAT
WG&A SUFFERED A CONSTRUCTIVE TOTAL LOSS OF ITS
VESSEL BUT ERRED BY NOT HOLDING THAT THE YARD
WAS LIABLE FOR THE VALUE OF THE FULL
CONSTRUCTIVE TOTAL LOSS.
V
THE COURT OF APPEALS ERRED IN NOT HOLDING THE
YARD LIABLE FOR INTEREST.

VI
THE COURT OF APPEALS ERRED IN NOT HOLDING THE
YARD SOLELY LIABLE FOR ARBITRATION COSTS.[19]
On the other hand, KCSI cites the following grounds for the allowance
of its petition, to wit:
1. ABSENCE OF YARD RESPONSIBILITY
IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS
TO ADOPT, WITHOUT EXPLANATION, THE CIACS RULING
THAT THE YARD WAS EQUALLY NEGLIGENT BECAUSE OF
ITS FAILURE TO REQUIRE A HOT WORKS PERMIT FOR
THE CUTTING WORK DONE BY ANGELINO SEVILLEJO,
AFTER THE COURT OF APPEALS ITSELF HAD SHOWN
THAT RULING TO BE COMPLETELY WRONG AND
BASELESS.
2. NO CONSTRUCTIVE TOTAL LOSS
IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF
APPEALS TO RULE, WITHOUT EXPLANATION, THAT THE
VESSEL WAS A CONSTRUCTIVE TOTAL LOSS AFTER
HAVING ITSELF EXPLAINED WHY THE VESSEL COULD
NOT BE A CONSTRUCTIVE TOTAL LOSS.
3. FAILURE OR REFUSAL TO ADDRESS
KEPPELS 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,
KEPPELS
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 PIONEERS PAYMENTS TO
THE VESSEL OWNER IN VIEW OF THE CO-INSURANCE
CLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY

PIONEER ALONE
ARBITRATION.

SHOULD

BEAR

THE

COSTS

OF

4. FAILURE TO CREDIT FOR SALVAGE RECOVERY

EVEN IF THE COURT OF APPEALS 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
damages? If so, how much?

on

the

award

of

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 Courts Ruling

A. The issue of negligence

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

Undeniably, the immediate cause of the fire was the hot work done by from the ceiling void, causing the immediate spread of the fire to the
Angelino Sevillejo (Sevillejo) on the accommodation area of the other areas of the ship.
vessel, specifically on Deck A. As established before the CIAC
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. 1Mullen,[23] pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).[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 Sevillejos assigned tasks,
the same not having been authorized under the Work Order [25] dated

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 KCSIs 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 KCSIs 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 KCSIs Vice President for Operations before WG&A
could effect any work performed by its own workers or subcontractors. In the exercise of this authority, KCSIs Vice-President for
Operations, in the letter dated January 2, 1997, banned any hot works
from being done except by KCSIs 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 vessels passage team leader in charge of its hotel

department, specifically requested KCSI to finish the hot works started

At the CIAC proceedings, it was adequately shown that

by the vessels contractors on the passenger accommodation decks. between February 4 and 6, 2000, the welders of KCSI: (a) did the
[27]

This was corroborated by the statements of the vessels hotel welding works on the ceiling hangers in the lobby of Deck A; (b) did

manager Marcelo Rabe[28] and the vessels quality control officer the welding and cutting works on the deck beam to access aircon
Joselito Esteban.[29] KCSI knew of the unfinished hot works in the ducts; and (c) did the cutting and welding works on the protection
passenger

accommodation

areas. Its

safety

supervisor

Esteban bars

at

the

tourist

Cabalhug confirmed that KCSI was aware that the owners of this of P150.00/welder/hour.

dining
[32]

salon

of

Deck

B, [31] at

rate

In fact, Orcullo, Project Superintendent of

vessel (M/V Superferry 3) had undertaken their own (hot) works prior KCSI, admitted that as early as February 3, 2000 (five days before the
to arrival alongside (sic) on 26th January, and that no hot work permits fire) [the Yard] had acknowledged Dr. Jonigas authority to order such
could thereafter be issued to WG&As own workers because this was works or additional jobs.[33]
not allowed for the Superferry 3. [30] This shows that Dr. Joniga had
authority only to request the performance of hot works by KCSIs
welders as needed in the repair of the vessel while on dry dock.

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

Third. KCSI welders covered by the Work Order performed hot works only. The Work Order was only a special arrangement between KCSI
on various areas of the M/V Superferry 3, aside from its promenade and WG&A that meant additional cost to the latter.
deck. This was a recognition of Dr. Jonigas 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.

Fourth. At the time of the fire, Sevillejo was an employee of KCSI and
was subject to the latters direct control and supervision.
Indeed, KCSI was the employer of Sevillejopaying 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 KCSIs 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 KCSIs supervision of Sevillejos 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), KCSIs 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

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]

that it did its duty when it prohibited Sevillejo from continuing the hot
work. However, it is noteworthy that, after purportedly scolding In this light, therefore, Sevillejo, being one of the specially trained
Sevillejo for working without a permit and telling him to stop until the welders specifically authorized by KCSI to do the hot works on M/V
permit was acquired and the other safety measures were observed, Superferry 3 to the exclusion of other workers, failed to comply with
Rebaca left without pulling Sevillejo out of the work area or making the strict safety standards of KCSI, not only because he worked
sure that the latter did as he was told. Unfortunately for KCSI, Sevillejo without the required permit, fire watch, fire buckets, and
reluctantly proceeded with his cutting of the bulkhead door at Deck A extinguishers, but also because he failed to undertake other
after Rebaca left, even disregarding the 4-inch marking set, thus precautionary measures for preventing the fire. For instance, he could
have, at the very least, ensured that whatever combustible material
cutting the door level with the deck, until the fire broke out.
may have been in the vicinity would be protected from the sparks
caused by the welding torch. He could have easily removed the life
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, KCSIs own fire expert, who observed
that

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 was doing, but failed to supervise him with the degree of care
checked that no fire had started yet. Nothing more. Also, inasmuch as warranted by the attendant circumstances.
KCSI had the power to substitute Sevillejo with another electric arc
welder, Rebaca should have replaced him.
Neither can Dr. Joniga be faulted for not removing the life
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 constitutesnegligence. 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

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&As [40] and KCSIs[41] 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]

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

These circumstances, taken collectively, yield the inevitable

more conclusion that Sevillejo was negligent in the performance of his

imminent thedanger, the higher degree of care warranted. [39] In this assigned task. His negligence was the proximate cause of the fire on
aspect, KCSI failed to exercise the necessary degree of caution and board M/V Superferry 3. As he was then definitely engaged in the
foresight called for by the circumstances.

performance of his assigned tasks as an employee of KCSI, his

negligence gave rise to the vicarious liability of his employer [43] under

We cannot subscribe to KCSIs 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

Article 2180 of the Civil Code, which provides

Art. 2180. The obligation imposed by article 2176 is
demandable not only for ones 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

We find in favor of Pioneer, subject to the claim of KCSI as to the

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.

salvage value of M/V Superferry 3.

In marine insurance, a constructive total loss occurs under any of the

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 employees
negligence.
B. The right of subrogation
Pioneer asseverates that there existed a total constructive loss so that
it had to pay WG&A the full amount of the insurance coverage and, by
operation of law, it was entitled to be subrogated to the rights of
WG&A to claim the amount of the loss. It further argues that the
limitation of liability clause found in the Shiprepair Agreement is null
and void for being iniquitous and against public policy.

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

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.

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

deemed incorporated in every locally executed contract; and (2) the

marine

insurance

policies

in

question

expressly

provided

the

following:
IMPORTANT
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 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
exceed P270,000,000.00, the amount equivalent to of the vessels
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&As claim, and now demands from KCSI the
full amount of P360,000,000.00, by virtue of subrogation.

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:

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.

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

In the face of this apparent conflict, we hold that Section 139 peril under the marine insurance policies obtained by WG&A from
of the Insurance Code should govern, because (1) Philippine law is Pioneer. The estimates given by the three disinterested and qualified

shipyards

show

that

exceed P270,000,000.00,

the
or

damage
of

the

to

the

total

ship

value

would
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

Art. 2207. If the plaintiffs 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.

verify and confirm the extent of the damage. The Adjustment Report
verified and confirmed that the damage to the vessel amounted to a

Subrogation is the substitution of one person by another with

constructive total loss and that the claim for P360,000,000.00 under reference to a lawful claim or right, so that he who is substituted
the policies was compensable.[46] It is also noteworthy that KCSI did succeeds to the rights of the other in relation to a debt or claim,
not cross-examine Henson Lim, Director of Richards Hogg, whose including its remedies or securities. The principle covers a situation
affidavit-direct testimony submitted to the CIAC confirmed that the wherein an insurer has paid a loss under an insurance policy is
entitled to all the rights and remedies belonging to the insured against

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

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]

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

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]
We cannot accept KCSIs 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 coassured in the insurance policies, as found in the Shiprepair
Agreement.

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 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

Clauses 20 and 22(a) of the Shiprepair Agreement are without circumstances and likely consequences. There must be persuasive
[52]
This
factual and legal foundation. They are unfair and inequitable under evidence to show an actual intention to relinquish the right.

the premises. It was established during arbitration that WG&A did not has not been demonstrated in this case.
voluntarily and expressly agree to these provisions. Engr. Elvin F.
Bello, WG&As fleet manager, testified that he did not sign the fineprint 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]
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]

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]
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 annum from the date the award becomes final and executory until its
effect of nullifying any claim of WG&A from Pioneer for any loss or full satisfaction.
damage caused by the negligence of KCSI. No ship owner would agree
to make

a ship repairer a co-assured under such insurance

D. On the payment for the cost of arbitration

policy.Otherwise, any claim for loss or damage under the policy would It is only fitting that both parties should share in the burden of the
be rendered nugatory. WG&A could not have intended such a result. cost of arbitration, on a pro rata basis. We find that Pioneer had a
[54]

valid reason to institute a suit against KCSI, as it believed that it was

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&As claim for the upkeep of the wreck until the same

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

were sold amounts to P8,521,737.75 (or US$157,809.96), to be Corporation in G.R. No. 180896-97 and the Petition of Keppel Cebu
deducted from the proceeds of the sale of the machinery and the hull, Shipyard, Inc. in G.R. No. 180880-81 are PARTIALLY GRANTED and
for a net recovery of US$673,812.87, or equivalent to P30,252,648.09, the Amended Decision dated December 20, 2007 of the Court of
at P44.8977/$1, the prevailing exchange rate when the Request for Appeals is MODIFIED. Accordingly, KCSI is ordered to pay Pioneer the
Arbitration was filed. Not considering this salvage value in the award amount of P360,000,000.00 less P30,252,648.09, equivalent to the
would amount to unjust enrichment on the part of Pioneer.

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

C. On the imposition of interest

annum reckoned from the time the Request for Arbitration was filed

Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of

Appeals,

[55]

the

award

in

favor

of

Pioneer

in

the

until this Decision becomes final and executory, plus twelve percent

amount (12%) interest per annum on the said amount or any balance thereof

of P350,146,786.89 should earn interest at 6% per annum from the from the finality of the Decision until the same will have been fully
filing

of

the

case

executory. Thereafter,

until
the

the

rate

of

award
interest

becomes
shall

final
be

and paid. The arbitration costs shall be borne by both parties on a pro

12% per rata basis. Costs against KCSI.