18. Keppel Cebu Shipyard, Inc. vs.

Pioneer Insurance and Surety Corporation, GR 180880-81, September 25, 2009

FACTS: Keppel Cebu Shipyard, Inc. (KCSI) and WG&A Jebsens Shipmanagement, 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
pursuant to its restrictive safety and security rules and regulations. Prior to this, the vessel was also insured with Pioneer
for $8.47M. During its repair, the vessel was gutted by fire. WG&A declared its “total constructive loss” and filed an
insurance claim with Pioneer. Pioneer paid P8.47M for which WG&A issued a Loss and Subrogation Receipt. Pioneer then
tried to collect from KCSI, but the latter disclaimed responsibility refused to pay despite repeated demands. Thus, Pioneer
filed a Request for Arbitration before the Construction Industry Arbitration Commission (CIAC). Pioneer avers that it has
been subrogated to the claims of WG&A, and the KCSI was liable given that, among others, the proximate cause of the
accident was the negligence of its employee, Severino Sevillejo (welder) in cutting the bulkhead door. On the other hand,
KCSI disclaimed liability, imputing negligence on “Dr. Joniga’s and the Vessel’s deliberate decision to have Sevillejo
undertake cutting work in inherently dangerous conditions created by them.” KCSI also claimed that there was no proper
subrogation and that there was no “total constructive loss.” The CIAC ruled that both WG&A and KCSI were negligent,
ordering them to pay Pioneer pro-rata. The tribunal also held that the parties’ liability was limited to P50M, and that the
arbitration costs be shouldered proportionately both parties. Both parties appealed: Pioneer on the amount of damage,
and KCSI on its liability.

ISSUE: (1) Whether there was total constructive loss.

(2) Whether the right of subrogation covers total constructive loss of “Superferry 3”.

RULING:
(1) Yes, there was total constructive loss. In marine insurance, a constructive total loss occurs under any of the conditions
set forth in Section 139 of the Insurance Code, which provides: “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. Carefully considered, the word “may” in Section 139 of the Insurance Code is
intended to grant the insured the option or discretion to choose the abandonment of the thing insured, 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, which option or discretion is expressed as a right in Section 131 of the same Code.
(2) YES. 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. 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 Supreme Court 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. KCSI is ordered to pay Pioneer the net amount of P329,747,351.91 plus legal interests.

WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. No. 180896-97 and the Petition of Keppel
Cebu Shipyard, Inc. in G.R. No. 180880-81 are PARTIALLY GRANTED, and the Amended Decision dated December 20, 2007
of the Court of Appeals is MODIFIED. Accordingly, KCSI is ordered to pay Pioneer the amount ofP360,000,000.00 less
P30,252,648.09, equivalent to the salvage value recovered by Pioneer from M/V “Superferry3,” or the net total amount of
P329,747,351.91, with six percent (6%) interest per annum reckoned from the time the Request for Arbitration was filed until
this Decision becomes final and executory, plus twelve percent (12%)interest per annum on the said amount or any balance
thereof from the finality of the Decision until the same will have been fully paid. The arbitration costs shall be borne by both
parties on a pro rata basis. Costs against KCSI.