COMMERCIAL LAW REVIEW | G01| INSURANCE LAW DIGEST
#46 Keppel Cebu Shipyard, Inc. (KCSI) v. Pioneer Ins.
[G.R. Nos. 180880-81, Sept. 25, 2009, 601 SCRA 96]
Topic: Subrogation
Ponente: Nachura, J.
Author: Rufino, Alvin Angelo C.
ER: KCSI and WG&A executed a Shiprepair Agreement wherein KCSI would
reconstruct WG&A’ s M/V Superferry 3 using its dry docking facilities. Prior
to the execution of the Shiprepair Agreement, Superferry 3 was already
insured by WG&A with Pioneer. In the course of its repair, M/V Superferry 3
was gutted by fire. WG&A declared the vessels damage as pervasive and as
a total constructive loss and, hence, filed an insurance claim with Pioneer.
Pioneer paid the insurance claim of WG&A in turn, executed a Loss and
Subrogation Receipt in favor of Pioneer. Pioneer claimed for reimbursement
but KSCI did not heed to such demand. Pioneer asseverates that it is now
entitled to be subrogated to the rights of WG&A to claim the amount of the
loss. KCSI counters that a total constructive loss was not adequately proven
by Pioneer, and that there is no proof of payment of the insurance proceeds.
SC ruled that Pioneer has been subrogated to the claim of its assured, WG&A.
Hence, KCSI is ordered to pay Pioneer the amount of ₱360M (vessel’s insured
value) less ₱30.2M (salvage value) recovered by Pioneer from M/V
"Superferry 3," or the net total amount of ₱329.8M
DOCTRINE: Subrogation is the substitution of one person by another with
reference to a lawful claim or right, so that he who is substituted succeeds
to the rights of the other in relation to a debt or claim, including its remedies
or securities. The principle covers a situation wherein an insurer has paid a
loss under an insurance policy is entitled to all the rights and remedies
belonging to the insured against a third party with respect to any loss covered
by the policy. It contemplates full substitution such that it places the party
subrogated in the shoes of the creditor, and he may use all means that the
creditor could employ to enforce payment.
Payment by the insurer to the insured operates as an equitable assignment
to the insurer of all the remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the
insurance claim. The doctrine of subrogation has its roots in equity. It is
designed to promote and to accomplish justice; and is the mode that equity
adopts to compel the ultimate payment of a debt by one who, in justice,
equity, and good conscience, ought to pay.
Facts:
KCSI and WG&A Jebsens Ship management, Inc. (WG&A) executed a Ship
repair Agreement wherein KCSI would renovate and reconstruct WG&A’s M/V
"Superferry 3" using its dry docking facilities.
Prior to the execution of the Ship repair Agreement, "Superferry 3" was
already insured by WG&A with Pioneer for US$8.4M.
In the course of its repair, M/V "Superferry 3" was gutted by fire. Claiming
that the extent of the damage was pervasive, WG&A declared the vessel’s
damage as a "total constructive loss" and, hence, filed an insurance claim
with Pioneer.
Pioneer then paid the insurance claim of WG&A in the amount of US$8.4M or
P360M. WG&A, in turn, executed a Loss and Subrogation Receipt in favor of
Pioneer.
Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but
the latter denied any responsibility for the loss of the subject vessel.
As KCSI continuously refused to pay despite repeated demands, Pioneer filed
a Request for Arbitration before the Construction Industry Arbitration
Commission (CIAC).
Pioneer asseverates that there existed a total constructive loss so that it had
to pay WG&A the full amount of the insurance coverage and that it was
entitled to be subrogated to the rights of WG&A to claim the amount of the
loss. On the other hand, KCSI contends that a total constructive loss was not
adequately proven by Pioneer, and that there is no proof of payment of the
insurance proceeds.
CIAC ordered KCSI to pay Pioneer the amount of 25M (half of the P50M max
liability under the contract) as WG&A is partially liable too. Pioneer appealed
to the CA. The latter initially dismissed the case but on MR by Pioneer, the
award of P25M by CIAC was reinstated. Hence, this petition.
Issue: Whether subrogation by Pioneer is proper (if yes, to what extent).
Ruling:
Yes.
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 COMMERCIAL LAW REVIEW | G01| INSURANCE LAW DIGEST

Ratio: WHEREFORE, the Petition of Pioneer is PARTIALLY GRANTED and KCSI is

ordered to pay Pioneer the amount of ₱360M less ₱30.2M equivalent to the
 Payment of the insurance proceeds is proven by the Loss and salvage value recovered by Pioneer from M/V "Superferry 3," or the net total
Subrogation Receipt executed by WG&A in favor of Pioneer. amount of ₱329.8M, plus interest. Costs against KCSI.

 The clauses stated in the Ship repair Agreement, limiting KCSI’s

liability only up to P50M and that KCSI stands as a co-assured of
WG&A, are void. The Ship repair Agreement are unfair and
inequitable. It was established during arbitration that WG&A did not
voluntarily and expressly agree to these provisions. Engr. Elvin F.
Bello, WG&A’s fleet manager, testified that he did not sign the fine-
print portion of the Ship repair Agreement, because he did not want
WG&A to be bound by them. However, considering that it was only
KCSI that had shipyard facilities large enough to accommodate the
dry docking and repair of big vessels owned by WG&A, such as M/V
"Superferry 3," in Cebu, he had to sign the front portion of the Ship
repair Agreement; otherwise, the vessel would not be accepted for
dry docking. Indeed, the assailed clauses amount to a contract of
adhesion imposed on WG&A on a "take-it-or-leave-it" basis. Hence,
this agreement is void. To allow KCSI to limit its liability to only
P50M, notwithstanding the fact that there was a constructive total
loss in the amount of P360M, unfairly sanctions the exercise of a
degree of diligence short of what is ordinarily required. Hence, the
clause in the subject agreement allowing this is void. Undeniably,
the insurance procured by WG&A from Pioneer named only the
former as the assured. There was no manifest intention on the part
of WG&A to constitute KCSI as a co-assured under the policies. To
have deemed KCSI as a co-assured under the policies would have had
the effect of nullifying any claim of WG&A from Pioneer for any loss
or damage caused by the negligence of KCSI. No ship owner would
agree to make a ship repairer a co-assured under such insurance
policy. Otherwise, any claim for loss or damage under the policy
would be rendered nugatory. WG&A could not have intended such a
result.
 Nevertheless, the salvage value of the damaged M/V "Superferry 3"
should be considered in the award so that unjust enrichment on the
part of Pioneer is avoided. It was proven before the CIAC that the
machinery and the hull of the vessel were sold for ₱30.2M. Hence,
this amount should be deducted from the Court’s award.

DISPOSITIVE PORTION: