G.R. No.

125678

March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner
Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high blood pressure, heart
trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details). 1
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.
Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March
1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum
of P75,000.00 per disability.2
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical
Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried
to claim the benefits under the health care 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 allegedly discovered at the time of Ernanis confinement that he was hypertensive,
diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization
expenses 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 the Chinese General Hospital. Due to financial difficulties, however, respondent brought her
husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak.
Respondent was constrained to bring him back to the Chinese General Hospital where he died on the same
day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for
damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 9053795. She asked for reimbursement of her expenses plus moral damages and attorneys fees. After trial, the
lower court ruled against petitioners, viz:
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;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;

4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and
absolved petitioner Reverente.4 Petitioners motion for reconsideration was denied. 5 Hence, petitioner brought
the instant petition for review, raising the primary argument that a health care agreement is not an insurance
contract; hence the "incontestability clause" under the Insurance Code 6 does not apply.
1wphi1.nt

Petitioner argues that the agreement grants "living benefits," such as medical check-ups and hospitalization
which a member may immediately enjoy so long as he is alive upon effectivity of the agreement until its
expiration one-year thereafter. Petitioner also points out that only medical and hospitalization benefits are given
under the agreement without any indemnification, unlike in an insurance contract where the insured is
indemnified for his loss. Moreover, since Health Care Agreements are only for a period of one year, as
compared to insurance contracts which last longer,7 petitioner argues that the incontestability clause does not
apply, as the same requires an effectivity period of at least two years. Petitioner further argues that it is not an
insurance company, which is governed by the Insurance Commission, but a Health Maintenance Organization
under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent
event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of 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
5. In consideration of the insurers promise, the insured pays a premium. 8
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which
may damnify a person having an insurable interest against him, may be insured against. Every person has an
insurable interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting property or
service, of which death or illness might delay or prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was
his own health. The health care agreement was in the nature of non-life insurance, which is primarily a contract
of indemnity.9Once the member incurs hospital, medical or any other expense arising from sickness, injury or
other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the
contract.
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 Care Agreement signed by respondents husband states:
We hereby declare and agree that all statement and answers 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 care coverage unless and until
an Agreement is issued on this application and the full Membership Fee according to the mode of
payment applied for is actually paid during the lifetime and good health of proposed Members; that no
information acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless
set out in writing in the application; that any physician is, by these presents, expressly authorized to
disclose or give testimony at anytime relative to any information acquired by him in his professional
capacity upon any question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this application shall be a ratification of
any correction in or addition to this application as stated in the space for Home Office
Endorsement.11 (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about
the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of my health
and/or that of __________ to give to 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 application for health care coverage only. A photographic copy
of this authorization shall be as valid as the original. 12 (Underscoring ours)
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:
Failure to disclose or misrepresentation of any material information by the member in the application or
medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement
from the very beginning and liability of Philamcare shall be limited to return of all Membership Fees
paid. An undisclosed or 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 applied for.13
The answer assailed by petitioner was in response to the question relating to the medical history of the
applicant. This largely depends on opinion rather than fact, especially coming from respondents husband who
was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and
without intent to deceive will not avoid a policy even though they are untrue. 14 Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the
insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its
acceptance at a lower rate of premium, and this is likewise the rule although the statement is material
to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not
justified in relying upon such statement, but is obligated to make further inquiry. There is a clear
distinction between such a case and one in which the insured is fraudulently and intentionally states to
be 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 the insurer is obvious and amounts to actual fraud. 15 (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance
contract.16Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative
defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the
provider or insurer. In any case, with or without the authority to investigate, petitioner is liable for claims made
under the contract. Having assumed a responsibility under the agreement, petitioner is bound to answer the
same to the extent agreed upon. In the end, the liability of the health care provider attaches once the member
is hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits
which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of
insurance." The right to rescind should be exercised previous to the commencement of an action on the
contract.17 In this case, no rescission was made. Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following conditions:
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
None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain
limitations on liability, courts should construe them in such a way as to preclude the insurer from noncompliance with his obligation.19Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract the insurer.20 By reason of the exclusive
control of the insurance company over the terms and 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 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, and exclusionary
clauses of doubtful import should be strictly construed against the provider.22
Anent the incontestability of the membership of respondents husband, we quote with approval the following
findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had
twelve months from the date of issuance of the Agreement within which to contest the membership of

the patient if he had previous ailment of asthma, and six months from 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
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
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals
dated December 14, 1995 is AFFIRMED.
SO ORDERED.

PHILAMCARE HEALTH SYSTEMS, INC. vs.

COURT OF APPEALS
July 2, 2014 Leave a comment

G.R. No. 125678, March 18, 2002 (YNARES-SANTIAGO, J.)

FACTS:

Ernani Trinos applied for a health care coverage with Philamcare Health Systems, Inc. To the question
Have you or any of your family members ever consulted or been treated for high blood pressure, heart
trouble, diabetes, cancer, liver disease, asthma or peptic ulcer?, Ernani answered No. Under the
agreement, Ernani is entitled to avail of hospitalization benefits and out-patient benefits. The coverage
was approved for a period of one year from March 1, 1988 to March 1, 1989. The agreement was
however extended yearly until June 1, 1990 which increased the amount of coverage to a maximum
sum of P75,000 per disability.

During the period of said coverage, Ernani suffered a heart attack and was confined at the Manila
Medical Center (MMC) for one month. While in the hospital, his wife Julita tried to claim the benefits

under the health care agreement. However, the Philamcare denied her claim alleging that the
agreement was void because Ernani concealed his medical history. Doctors at the MMC allegedly
discovered at the time of Ernanis confinement that he was hypertensive, diabetic and asthmatic,
contrary to his answer in the application form. Thus, Julita paid for all the hospitalization expenses.

After Ernani was discharged from the MMC, he was attended by a physical therapist at home. Later, he
was admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent
brought her husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling
very weak. Respondent was constrained to bring him back to the Chinese General Hospital where he
died on the same day.

Julita filed an action for damages and reimbursement of her expenses plus moral damages attorneys
fees against Philamcare and its president, Dr. Benito Reverente. The Regional Trial court or Manila
rendered judgment in favor of Julita. On appeal, the decision of the trial court was affirmed but deleted
all awards for damages and absolved petitioner Reverente. Hence, this petition for review raising the
primary argument that a health care agreement is not an insurance contract; hence the
incontestability clause under the Insurance Code does not apply.

ISSUES:

(1) Whether or not the health care agreement is not an insurance contract

(2) Whether or not there is concealment of material fact made by Ernani

HELD:

(1)YES. Section2 (1)of the Insurance Code defines a contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage, or liability arising from
an unknown or contingent event.

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future,
which my damnify a person having an insurable against him, may be insured against. Every person has
an insurable interest in the life and health of himself.

Section 10 provides that every person has an insurable interest in the life and health (1) of himself, of
his spouse and of his children.

The insurable interest of respondents husband in obtaining the health care agreement was his own
health. The health care agreement was in the nature of non-life insurance, which is primarily a contract
of indemnity. Once the member incurs hospital, medical or any other expense arising from sickness,
injury or other stipulated contingent, the health care provider must pay for the same to the extent
agreed upon under the contract.

(2) NO. The answer assailed by petitioner was in response to the question relating to the medical
history of the applicant. This largely depends on opinion rather than fact, especially coming from
respondents husband who was not a medical doctor. Where matters of opinion or judgment are called
for answers made I good faith and without intent to deceive will not avoid a policy even though they
are untrue.

The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract. Concealment as a defense for the health care provider or insurer to avoid liability is
an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence
rests upon the provider or insurer. In any case, with or without the authority to investigate, petitioner is
liable for claims made under the contract. Having assumed a responsibility under the agreement,

petitioner is bound to answer to the extent agreed upon. In the end, the liability of the health care
provider attaches once the member is hospitalized for the disease or injury covered by the agreement
or wherever he avails of the covered benefits which he has prepaid.

Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against
the party which prepared the contract the insurer. By reason of the exclusive control of the insurance
company over the terms and phraseology of the insurance contract, ambiguity must be strictly
interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture. This is
equally applicable to Health Care Agreements.

https://thelawiscool.wordpress.com/2014/07/02/philamcare-health-systems-inc-vscourt-of-appeals/

Insurance Case Digest: Philamcare Health

Systems, Inc. V. CA (2002)
G.R. No. 125678

March 18, 2002

Lessons Applicable:

Elements (Insurance)

Blood Relationship (Insurance)

FACTS:

Ernani Trinos, deceased husband of Julita Trinos, applied for a health care coverage with

Philamcare Health Systems, Inc.

He answered the standard application form: Have you or any of your family members
ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver

disease, asthma or peptic ulcer? (If Yes, give details). - NO

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.

Upon the termination of the agreement, the same was extended for another year from
March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of
coverage was increased to a maximum sum of P75,000.00 per disability.

During the period of his coverage, Ernani suffered a heart attack and was confined at the

Manila Medical Center (MMC) for 1 month beginning March 9, 1990.

While her husband was in the hospital, Julina Trinos tried to claim the benefits

under the health care agreement.

Philamcare denied her claim saying that the Health Care Agreement was
void for concealing Ernanis medical history so she paid the hospitalization expenses
of P76,000.00 herself.
Doctors at the MMC allegedly discovered at the time of Ernanis

confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in
the application form.
After being discharged from the MMC, he was attended by a physical therapist at home.

Later, he was admitted at the Chinese General Hospital.

Due to financial difficulties, however, he was brought home again.

April 13, 1990 morning: Ernani had fever and was feeling very weak

He was brought to Chinese General Hospital where he died

July 24, 1990: She brought action for damages against Philamcare Health Systems Inc.

and its president, Dr. Benito Reverente

RTC: Philamcare and Dr. Benito Reverent to pay and reimburse P76k plus interest, moral

damages, exemplary damages, attorney's fees and cost of suit

CA: affirmed the decision of RTC but deleted all awards for damages and absolved

Philamcare
Philamcare brought an instant petition for review arguing that:
health care agreement is not an insurance contract; hence the "incontestability

clause" under the Insurance Code does not apply.

grants "living benefits," such as medical check-ups and hospitalization which a

member may immediately enjoy so long as he is alive upon effectivity of the agreement until
its expiration one-year thereafter
only medical and hospitalization benefits are given under the agreement without

any indemnification, unlike in an insurance contract where the insured is indemnified for his
loss
since Health Care Agreements are only for a period of one year, as compared to

insurance contracts which last longer; incontestability clause does not apply, as the same
requires an effectivity period of at least two years
insurance company is governed by the Insurance Commission, but a Health

Maintenance Organization under the authority of the Department of Health

ISSUE:
1.

W/N the health care agreement is a contract of insurance. - YES

2.

W/N the spouse being "not" legal wife can claim - YES

HELD: Petition is DENIED. CA AFFIRMED.

1. YES.

P.D. 612 Insurance Code

Sec. 2 (1)
(1) A "contract of insurance" is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event.
Sec. 3
Sec. 3. Any contingent or unknown event, whether past or future, which may
damnify a person having an insurable interest, or create a liability against
him, may be insured against, subject to the provisions of this chapter.
The consent of the husband is not necessary for the validity of an insurance
policy taken out by a married woman on her life or that of her children.
Any minor of the age of eighteen years or more, may, notwithstanding such
minority, contract for life, health and accident insurance, with any insurance
company duly authorized to do business in the Philippines, provided the
insurance is taken on his own life and the beneficiary appointed is the
minor's estate or the minor's father, mother, husband, wife, child, brother or
sister.
The married woman or the minor herein allowed to take out an insurance
policy may exercise all the rights and privileges of an owner under a policy.
All rights, title and interest in the policy of insurance taken out by an original
owner on the life or health of a minor shall automatically vest in the minor
upon the death of the original owner, unless otherwise provided for in the
policy.

In the case at bar, the insurable interest of respondent's husband in obtaining the health
care agreement was his own health.
in the nature of non-life insurance, which is primarily a contract of indemnity
Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care provider must pay for the

same to the extent agreed upon under the contract.

The answer in response to the question relating to the medical history of the applicant
largely depends on opinion rather than fact, especially coming from respondent's husband

who was not a medical doctor.

Where matters of opinion or judgment are called for, answers made in good faith

and without intent to deceive will not avoid a policy even though they are untrue.
The fraudulent intent on the part of the insured must be established to
warrant rescission of the insurance contract.

Concealment as a defense for the health care provider or insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the provider or insurer.

P.D. 612 Insurance Code

Sec. 27
Sec. 27. A concealment whether intentional or unintentional entitles the
injured party to rescind a contract of insurance.

cancellation of health care agreements as in insurance policies require the concurrence of

the following conditions: - none of these was made
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.

When the terms of insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with his

obligation.
Being a contract of adhesion, the terms of an insurance contract are to be construed

strictly against the party which prepared the contract - the insurer.
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems
Inc. had twelve months from the date of issuance of the Agreement within which to contest
the membership of the patient if he had previous ailment of asthma, and six months from 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.

2. YES.
P.D. 612 Insurance Code
Sec. 10
Sec. 10. Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in whom he
has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting property
orservice, of which death or illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.

not the legal wife (deceased was previously married to another woman who was still
alive)

health care agreement is in the nature of a contract of indemnity.

payment should be made to the party who incurred the expenses

http://www.philippinelegalguide.com/2011/09/insurance-case-digest-philamcarehealth_2723.html

Philamcare v CA G.R. No. 125678. March 18, 2002

J. Ynares-Santiago

Facts:
Ernani Trinos applied for a health care coverage with Philam. He answered no to a question asking if he or his
family members were treated to heart trouble, asthma, diabetes, etc.
The application was approved for 1 year. He was also given hospitalization benefits and out-patient benefits.
After the period expired, he was given an expanded coverage for Php 75,000. During the period, he suffered
from heart attack and was confined at MMC. The wife tried to claim the benefits but the petitioner denied it
saying that he concealed his medical history by answering no to the aforementioned question. She had to pay
for the hospital bills amounting to 76,000. Her husband subsequently passed away. She filed a case in the trial
court for the collection of the amount plus damages. She was awarded 76,000 for the bills and 40,000 for
damages. The CA affirmed but deleted awards for damages. Hence, this appeal.

Issue: WON a health care agreement is not an insurance contract; hence the incontestability clause under the
Insurance Code does not apply.

Held: No. Petition dismissed.

Ratio:
Petitioner claimed that it granted benefits only when the insured is alive during the one-year duration. It
contended that there was no indemnification unlike in insurance contracts. It supported this claim by saying that
it is a health maintenance organization covered by the DOH and not the Insurance Commission. Lastly, it
claimed that the Incontestability clause didnt apply because two-year and not one-year effectivity periods were
required.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or liability arising from an unknown
or contingent event.
Section 3 states: every person has an insurable interest in the life and health:
(1)

of himself, of his spouse and of his children.

In this case, the husbands health was the insurable interest. The health care agreement was in the nature of
non-life insurance, which is primarily a contract of indemnity. The provider must pay for the medical expenses
resulting from sickness or injury.
While petitioner contended that the husband concealed materialfact of his sickness, the contract stated that:

that any physician is, by these presents, expressly authorized to disclose or give testimony at anytime relative
to any information acquired by him in his professional capacity upon any question affecting the eligibility for
health care coverage of the Proposed Members.
This meant that the petitioners required him to sign authorization to furnish reports about his medical condition.
The contract also authorized Philam to inquire directly to his medical history.
Hence, the contention of concealment isnt valid.
They cant also invoke the Invalidation of agreement clause where failure of the insured to disclose
information was a grounds for revocation simply because the answer assailed by the company was the heart
condition question based on the insureds opinion. He wasnt a medical doctor, so he cant accurately gauge his
condition.
Henrick v Fire- in such case the insurer is not justified in relying upon such statement, but is obligated to make
further inquiry.
Fraudulent intent must be proven to rescind the contract. This was incumbent upon the provider.
Having assumed a responsibility under the agreement, petitioner is bound to answer the same to the extent
agreed upon. In the end, the liability of the health care provider attaches once the member is hospitalized for
the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has
prepaid.
Section 27 of the Insurance Code- a concealment entitles the injured party to rescind a contract of insurance.
As to cancellation procedure- Cancellation requires certain conditions:
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
None were fulfilled by the provider.
As to incontestability- The trial court said that under the title Claim procedures of expenses, the defendant
Philamcare Health Systems Inc. had twelve months from the date of issuance of the Agreement within which
to contest the membership of the patient if he had previous ailment of asthma, and six months from 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.

http://thedigester.blogspot.com/2012/07/philamcare-v-ca-gr-no-125678-march18.html
G.R. No. 183526

August 25, 2009

VIOLETA R. LALICAN, Petitioner,

vs.
THE INSULAR LIFE ASSURANCE COMPANY LIMITED, AS REPRESENTED BY THE PRESIDENT
VICENTE R. AVILON, Respondent.
DECISION
CHICO-NAZARIO, J.:
Challenged in this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court are the Decision 2 dated
30 August 2007 and the Orders dated 10 April 20083 and 3 July 20084 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.
The factual and procedural antecedents of the case, as culled from the records, are as follows:
Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).
During his lifetime, Eulogio applied for an insurance policy with Insular Life. On 24 April 1997, Insular Life,
through Josephine Malaluan (Malaluan), its agent in Gapan City, issued in favor of Eulogio Policy No.
9011992,5 which contained a 20-Year Endowment Variable Income Package Flexi Plan
worth P500,000.00,6 with two riders valued at P500,000.00 each.7 Thus, the value of the policy amounted
to P1,500,000.00. Violeta was named as the primary beneficiary.
Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a quarterly basis in the amount
of P8,062.00, payable every 24 April, 24 July, 24 October and 24 January of each year, until the end of the 20year 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 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 would
automatically lapse and become void.8
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 Reinstatement9 of Policy No. 9011992, together with the amount of P8,062.00 to pay for the
premium due on 24 January 1998. In a letter10 dated 17 July 1998, Insular Life notified Eulogio that his
Application for Reinstatement could not be fully processed because, although he already deposited P8,062.00
as payment for the 24 January 1998 premium, he left unpaid the overdue interest thereon amounting
to P322.48. Thus, Insular Life instructed Eulogio to pay the amount of interest and to file another application for
reinstatement. Eulogio was likewise advised by Malaluan to pay the premiums that subsequently became due
on 24 April 1998 and 24 July 1998, plus interest.
On 17 September 1998, Eulogio went to Malaluans house and submitted a second Application for
Reinstatement11 of Policy No. 9011992, including the amount of P17,500.00, representing payments for the
overdue interest on the premium for 24 January 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 receipt for the amount Eulogio deposited.
A while later, on the same day, 17 September 1998, Eulogio died of cardio-respiratory arrest secondary to
electrocution.
Without knowing of Eulogios death, Malaluan forwarded to the Insular Life Regional Office in the City of San
Fernando, on 18 September 1998, Eulogios second Application for Reinstatement of Policy No. 9011992
and P17,500.00 deposit. However, Insular Life no longer acted upon Eulogios second Application for
Reinstatement, as the former was informed on 21 September 1998 that Eulogio had already passed away.
On 28 September 1998, Violeta filed with Insular Life a claim for payment of the full proceeds of Policy No.
9011992.
In a letter12 dated 14 January 1999, Insular Life informed Violeta that her claim could not be granted since, at
the time of Eulogios death, Policy No. 9011992 had already lapsed, and Eulogio failed to reinstate the same.
According to the Application for Reinstatement, the policy would only be considered reinstated upon approval of
the application by Insular Life during the applicants "lifetime and good health," and whatever amount the
applicant paid in connection thereto was considered to be a deposit only until approval of said application.
Enclosed with the 14 January 1999 letter of Insular Life to Violeta was DBP Check No. 0000309734, for the
amount of P25,417.00, drawn in Violetas favor, representing the full refund of the payments made by Eulogio
on Policy No. 9011992.
On 12 February 1998, Violeta requested a reconsideration of 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 decision rejecting Violetas
claim. Insular Life again tendered to Violeta the above-mentioned check in the amount of P25,417.00.
Violeta returned the letter dated 10 March 1999 and the check enclosed therein to the Cabanatuan District
Office of Insular Life. Violetas counsel subsequently sent a letter 14 dated 8 July 1999 to Insular Life, demanding
payment of the full proceeds of Policy No. 9011992. On 11 August 1999, Insular Life responded to the said
demand letter by agreeing to conduct a re-evaluation of Violetas claim.
Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with the RTC, on 11 October
1999, a Complaint for Death Claim Benefit,15 which was docketed as Civil Case No. 2177. Violeta alleged that
Insular Life engaged in unfair claim settlement practice and deliberately failed to act with reasonable
promptness on her insurance claim. Violeta prayed that Insular Life be ordered to pay her death claim benefits
on Policy No. 9011992, in the amount of P1,500,000.00, plus interests, attorneys fees, and cost of suit.
Insular Life filed with the RTC an Answer with Counterclaim, 16 asserting that Violetas Complaint had no legal or
factual bases. Insular Life maintained that Policy No. 9011992, on which Violeta sought to recover, was
rendered void by the non-payment of the 24 January 1998 premium and non-compliance with the requirements
for the reinstatement of the same. By way of counterclaim, Insular Life prayed that Violeta be ordered to pay
attorneys fees and expenses of litigation incurred by the former.
Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements for the reinstatement of
Policy No. 9011992 had been complied with and the defenses put up by Insular Life were purely invented and
illusory.
After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular Life.

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.
1avvphi1

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.
xxx

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 hereby
DISMISSED.20
On 14 September 2007, Violeta filed a Motion for Reconsideration 21 of the afore-mentioned RTC Decision.
Insular Life opposed22 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 Reply24 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
Extended Discussion would be moot and academic.
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion,26 praying that the Order dated 10
April 2008 be set aside and that she be allowed to file an appeal with the Court of Appeals.

In an Order27 dated 3 July 2008, the RTC denied Violetas Notice of Appeal with Motion given that the Decision
dated 30 August 2007 had long since attained finality.
Violeta directly elevated her case to this Court via the instant Petition for Review on Certiorari, raising the
following issues for consideration:
1. Whether or not the Decision of the court a quo dated August 30, 2007, can still be reviewed despite
having allegedly attained finality and despite the fact that the mode of appeal that has been availed of
by Violeta is erroneous?
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?
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 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 circumstances, Violeta entreats this Court to admit and give due
course to her appeal even if the same was filed out of time.
Violeta further posits that the Court should address the question of law arising in this case involving the
interpretation of the second sentence of Section 19 of the Insurance Code, which provides:
Section. 19. x x x [I]nterest 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.
On the basis thereof, Violeta argues that Eulogio still had insurable interest in his own life when he reinstated
Policy No. 9011992 just before he passed away on 17 September 1998. The RTC should have construed the
provisions of the Policy Contract and Application for Reinstatement in favor of the insured Eulogio and against
the insurer Insular Life, and considered the special circumstances of the case, to rule that Eulogio had
complied with the requisites for the reinstatement of Policy No. 9011992 prior to his death, and that Violeta is
entitled to claim the proceeds of said policy as the primary beneficiary thereof.
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
Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had long become final and
executory. Violeta filed a Motion for Reconsideration thereof, but the RTC denied the same in an Order dated 8
November 2007. The records of the case reveal that Violeta received a copy of the 8 November 2007 Order on
3 December 2007. Thus, Violeta had 15 days30 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 than five months after receipt of
the RTC Order dated 8 November 2007 denying her Motion for Reconsideration.
Violetas claim that her former counsels failure to file the proper remedy within the reglementary period was an
honest mistake, attributable to the latters deteriorating health, is unpersuasive.

Violeta merely made a general averment of her former counsels poor health, lacking relevant details and
supporting evidence. By Violetas own admission, her former counsels health rapidly deteriorated only by the
first week of July 2008. The events pertinent to Violetas Notice of Appeal took place months before July 2008,
i.e., a copy of the RTC Order dated 8 November 2007, denying Violetas Motion for Reconsideration of the
Decision dated 30 August 2007, was received on 3 December 2007; and Violetas Notice of Appeal was filed on
20 May 2008. There is utter lack of proof to show that Violetas former counsel was already suffering from ill
health during these times; or that the illness of Violetas former counsel would have affected his judgment and
competence as a lawyer.
Moreover, the failure of her former counsel to file a Notice of Appeal within the reglementary period binds
Violeta, which failure the latter cannot now disown on the basis of her bare allegation and self-serving
pronouncement that the former was ill. A client is bound by his counsels mistakes and negligence. 31
The Court, therefore, finds no reversible error on the part of the RTC in denying Violetas Notice of Appeal for
being filed beyond the reglementary period. Without an appeal having been timely filed, the RTC Decision
dated 30 August 2007 in Civil Case No. 2177 already became final and executory.
A judgment becomes "final and executory" by operation of law. Finality becomes a fact when the reglementary
period to appeal lapses and no appeal is perfected within such period. As a consequence, no court (not even
this Court) can exercise appellate jurisdiction to review a case or modify a decision that has become
final.32 When a final judgment is executory, it becomes immutable and unalterable. It may no longer be modified
in any respect either by the court, which rendered it or even by this Court. The doctrine is founded on
considerations of public policy and sound practice that, at the risk of occasional errors, judgments must
become final at some definite point in time.33
The only recognized exceptions to the doctrine of immutability and unalterability are the correction of clerical
errors, the so-called nunc pro tunc entries, which cause no prejudice to any party, and void judgments. 34 The
instant case does not fall under any of these exceptions.
Even if the Court ignores the procedural lapses committed herein, and proceeds to resolve the substantive
issues raised, the Petition must still fail.
Violeta makes it appear that her present Petition involves a question of law, particularly, whether Eulogio had
an existing insurable interest in his own life until the day of his death.
An insurable interest is one of the most basic and essential requirements in an insurance contract. In general,
an insurable 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 concern in it, such that the person will derive pecuniary benefit or
advantage from the preservation of the subject matter insured and will suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening of the event insured against. 35 The 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 the
Insurance Code indeed provides that every person has an insurable interest in his own life. 37 Section 19 of the
same code also 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
Upon more extensive study of the Petition, it becomes evident that the matter of insurable interest is entirely
irrelevant in the case at 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 Policy No. 9011992. The real point of contention herein is
whether Eulogio was able to reinstate the lapsed insurance policy on his 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.
That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogios filing of his first Application for
Reinstatement with Insular Life, through Malaluan, on 26 May 1998, constitutes an admission that Policy No.
9011992 had lapsed by then. Insular Life did not act on Eulogios first Application for Reinstatement, since the
amount Eulogio simultaneously deposited was sufficient to cover only the P8,062.00 overdue premium for 24
January 1998, but not theP322.48 overdue interests thereon. On 17 September 1998, Eulogio submitted a
second Application for Reinstatement to Insular Life, again through Malaluan, depositing at the same
time P17,500.00, to cover payment for the overdue interest on the premium for 24 January 1998, and the
premiums that had also become due on 24 April 1998 and 24 July 1998. On the very same day, Eulogio passed
away.
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 and the Application for Reinstatement provide for specific conditions for the
reinstatement of a lapsed policy.
The Policy Contract between Eulogio and Insular Life identified the following conditions for reinstatement
should the policy lapse:
10. REINSTATEMENT
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 submitted, to wit:
I/We agree that said Policy shall not be considered reinstated until this application is approved by the Company
during my/our lifetime and good health and until all other Company requirements for the reinstatement of said
Policy are fully satisfied.
I/We further agree that any payment made or to be made in connection with this application shall be considered
as deposit only and shall not bind the Company until this application is finally approved by the Company during
my/our lifetime and good health. If this application is disapproved, I/We also agree to accept the refund of all
payments made in connection herewith, without interest, and to surrender the receipts for such
payment.41 (Emphases ours.)
In the instant case, Eulogios death rendered impossible full 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.
Relevant herein is the following pronouncement of the Court in Andres v. The Crown Life Insurance
Company,42 citing McGuire v. The Manufacturer's Life Insurance Co. 43:
"The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written application
does not give the insured absolute right to such reinstatement by the mere filing of an application. The insurer
has the right to deny the reinstatement if it is not satisfied as to the insurability of the insured and if the latter
does not pay all overdue premium and all other indebtedness to the insurer. After the death of the insured the
insurance Company cannot be compelled to entertain an application for reinstatement of the policy because the
conditions precedent to reinstatement can no longer be determined and satisfied." (Emphases ours.)
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 our
president, vice-president or persons authorized by the Board of Trustees and only in writing. 44 (Emphasis ours.)
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 so obviously embody. A construction in favor of the insured is not 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 as to preclude any mistake in the appreciation of the same.
Violeta did not adduce any evidence that Eulogio might have failed to fully understand the import and meaning
of the provisions of his Policy Contract and/or Application for Reinstatement, both of which he voluntarily
signed. While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed
liberally in favor of the insured and strictly as against the insurer company, yet, contracts of insurance, like
other contracts, are to be construed according to the sense and meaning of the terms, which the parties
themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their
plain, ordinary and popular sense.45
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.
SO ORDERED.
Insurance; insurable interest. Insurable interest is one of the most basic and essential requirements in an
insurance contract. In general, an insurable 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 concern in it, such that the person will
derive pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer
pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured
against. The existence of an insurable interest gives a person the legal right to insure the subject matter of the
policy of insurance. Section 10 of the Insurance Code indeed provides that every person has an insurable
interest in his own life. Section 19 of the same code also 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.
Violeta R. Lalican vs. The Insular Life Assurance Company Limited, as represented by the President Vicente
R. Avilon, G.R. No. 183526, August 25, 2009.
Insurance; reinstatement. To reinstate a policy means to restore the same to premium-paying status after it
has been permitted to lapse. Both the Policy Contract and the Application for Reinstatement provide for specific
conditions for the reinstatement of a lapsed policy. In the instant case, Eulogios death rendered impossible full
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.
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. Violeta R. Lalican vs. The Insular Life Assurance Company Limited, as represented by the
President Vicente R. Avilon, G.R. No. 183526, August 25, 2009.

https://lexoterica.wordpress.com/2009/09/14/august-2009-philippine-supreme-courtdecisions-on-commercial-law-tax-law-and-labor-law/#more-1298
EN BANC
[G.R. Nos. 180880-81 : June 07, 2011]
KEPPEL CEBU SHIPYARD, INC. V. PIONEER INSURANCE AND SURETY CORPORATION
[G.R. NOS. 180896-97. JUNE 7, 2011]
PIONEER INSURANCE AND SURETY CORPORATION V. KEPPEL CEBU SHIPYARD, INC.
Sirs/Mesdames:
Please take notice that the Court en banc issued a Resolution dated JUNE 7, 2011, which reads as follows:
"G.R. Nos. 180880-81 (Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety Corporation); G.R. Nos.
180896-97 (Pioneer Insurance and Surety Corporation v. Keppel Cebu Shipyard, Inc.). - On September 25, 2009,
the Court rendered a decision in these consolidated cases, the dispositive portion of which reads:
WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. Nos. 180896-97 and the Petition of Keppel
Cebu Shipyard. Inc. in G.R. Nos. 180880-81 are PARTIALLY GRANTED and the Amended Decision dated December 20,
2007 of the Court of Appeals is MODIFIED. Accordingly, KCSI is ordered to pay Pioneer the amount of P360,000,000.00
less P30,252,648.09, equivalent to the salvage value recovered by Pioneer from M/V "Superferry 3," or the net total
amount of P329,747,351.91, with six percent (6%) interest per annum reckoned from the time the Request for Arbitration
was filed until this Decision becomes final and executory, plus twelve percent (12%) interest per annum on the said
amount or any balance thereof from the finality of the Decision until the same will have been fully paid. The arbitration
costs shall be borne by both parties on a pro rata basis. Costs against KCSI.
Keppel Cebu Shipyard, Inc. (KCSI) filed a Motion for Reconsideration, which was denied in a Resolution dated June 21,
2010.
Thereafter, KCSI filed its Second Motion for Reconsideration to Refer to the Court En Banc and for Oral Arguments and its
letter dated July 30, 2010. KCSI later filed another letter dated September 29, 2010, requesting for the status of its
previous letter dated July 30, 2010.
In a Resolution[1] dated October 20, 2010, the Court disposed of KCSI's Second Motion for Reconsideration to Refer to the
Court En Banc and for Oral Arguments and its letters dated July 30, 2010 and September 29, 2010, thus:
WHEREFORE, premises considered, the Court resolves to DENY the Second Motion for Reconsideration to Refer to the Court
En Bane and for Oral Arguments of the Resolution dated June 21, 2010 and the Decision dated September 25, 2009 for
lack of merit. Accordingly, the (1) 1st Indorsement dated August 4, 2010 of the Office of the Chief Justice, referring the
attached letter dated July 30, 2010 of Atty. Emmanuel M. Lombos of SSHG Law Centre for appropriate action; (2) aforesaid
letter dated July 30. 2010; (3) 1st Indorsement dated October 1. 2010 of the Office of the Clerk of Court-Third Division,
referring the attached letter of Atty. Emmanuel M. Lombos of SSHG Law Center for appropriate action; and (4) aforesaid
letter dated September 29, 2010 are NOTED.
On November 4, 2010, the Decision became final and executory.
On November 23r 2010, KSCI filed a Motion to Re-Open Proceedings and Motion to Refer to the CourtEn Banc.
In the said motion, KCSI contended that it was denied due process when the Court reviewed and reversed the Court of
Appeals' finding of fact, despite its not having asked for case records containing the evidence presented at the Construction
Industry Arbitration Commission (CIAC), on the ground that a petition for review on certiorari is generally required to

append "such material portions of the record as would support the petition," as stated in the Court Resolution dated
October 20, 2010.[2]
KCSI stated that the most crucial finding of fact of the Court of Appeals was that both Pioneer and KCSI were guilty of
negligence that caused the fire which destroyed the vessel, M/V Super Ferry 3; thus, it held that both parties should be
liable for the loss on a proportionate basis. Both the Court of Appeals and the CIAC based their unanimous findings of fact
on the testimony of dozens of witnesses contained in the transcripts of record.
KCSI stated that even as it raised prohibited factual issues in its petition before the Court, Pioneer did not attach any of
those transcripts to its petition. Since it (KCSI) appealed only questions of law, it had no need to attach said transcripts,
and, therefore, did not supply any of those transcripts to the Court.
Thus, KCSI questioned how the Court could have weighed those many contradictory accounts of witnesses and how it could
have decided which witnesses and which portions of their testimonies to believe, since neither party attached and supplied
the transcripts, and the Court had none of the transcripts of record. KCSI asserted that without the transcripts of record,
the Court had no basis to review the issues of fact and to reverse the findings of fact of the CIAC and Court of Appeals,
which actually read the evidence and transcripts of record. It stated that the Court has repeatedly ruled that appellate
courts, such as itself, may not review issues of fact without reviewing the evidence.[3]
KCSI further moved that its Motion to Re-open Proceedings be referred to the Court en banc, which has the authority,
under A.M. No. 10-4-20-SC (The Internal Rules of the Supreme Court), to act on matters and cases including those "cases
that the Court en banc deems of sufficient importance to merit its attention." [4] It alleged that these consolidated cases are
of transcendental importance and of paramount public interest to merit referral to the Court en banc, so that the said cases
may be decided in accordance with law and the evidence.
On December 13, 2010, KCSI filed a Supplemental Motion (to the Motion to Re-Open Proceedings and the Motion to Refer
to the Court En Banc) alleging the following: (1) it was denied its substantive right to due process; (2) the limitation-ofliability clause under the Ship Repair Agreement between KCSI and WG&A is valid, such that WG&A is estopped to question
the same; and (3) the imposition of the six percent (6%) interest is unwarranted.
In the Supplemental Motion, KCSI argued that the limitation-of-liability clause under the Shiprepair Agreement between it
and WG&A was valid, and that WG&A was estopped to question it, since WG&A was fully aware not only of the standards of
KCSI, but also of other yards in the ship repair industry. KCSI pointed out that on at least 22 different occasions, it drydocked and repaired various ships owned and/or managed by Aboitiz Shipping Corporation, members of the Aboitiz Group
of Companies, WG&A, Inc., WG&A Jebsens Shipmanagement, Inc., and companies related to them under ship repair
agreements incorporating the same conditions, but these conditions were never previously questioned.
The Standard Terms of the Ship Repair Agreement provide:
20. The Contractor (KCSI) shall not be under any liability to the Customer (WG & A) either in contract or otherwise except
for negligence and such liability shall itself be subject to the following overriding limitations and exceptions, namely:
(a) The total liability of the Contractor to the Customer (including the liability to replace under Clause 17) or of any Subcontractor shall be limited in respect of any and/or all defect(s) or event(s) to the sum of Pesos Philippine Currency Fifty
Million only xxx
The issue on the limitation of liability was decided upon by this Court in its Decision dated September 25, 2009, thus:
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 circumstances and likely consequences. There must be persuasive evidence
to show an actual intention to relinquish the right. This has not been demonstrated in this case.
Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to limit its liability to
only P50,000,000.00, notwithstanding the fact that there was a constructive total loss in the amount of P360,000,000.00,
would sanction the exercise of a degree of diligence short of what is ordinarily required. It would not be difficult for a
negligent party to escape liability by the simple expedient of paying an amount very much lower than the actual damage or
loss sustained by the other.
There are serious allegations in the petition that if the decision of the Court is not vacated, there is a far-reaching effect on
similar cases already decided by the Court. Thus, by a vote of 4 to 1 in the Second Division that rendered the decision, the
case was elevated to the En Banc for acceptance, in accordance with the Internal Rules of the Supreme Court, particularly

Section 3 (n), Rule 2[5] thereof which states that the Court en banc can act on matters and cases that it deems of sufficient
importance to merit its attention. In regard to this matter, ten (10) members, or two-thirds of the Court en banc, voted to
grant KCSI's Motion to Refer to the Court En Banc its Motion to Re-Open Proceedings, while three (3) members dissented
and two (2) members did not take part.
In view of the foregoing, KCSI's Motion to Refer to the Court En Banc is GRANTED. The Court en banc shall determine
whether or not the allegations of KCSI are meritorious." Corona, C.J., and Bersamin, J., no part. Nachura, Velasco and
Brion, JJ., dissenting.

Endnotes:

[1]

Rollo, Vol. I, p. 3262.

[2]

Resolution dated October 20, 2010:

xxxx
Second. The elevation of the case records is merely discretionary upon this Court. Section 8, Rule 45 of the Rules of Court
provides that the Court may require the elevation of the complete records of the case or specified portions thereof within
fifteen (15) days from notice. It also bears mentioning that, under Section 4 (d) of the same rule, the petition for review
on certiorari filed shall be accompanied by a clearly legible duplicate original, or a certified true copy of the judgment or
final order or resolution certified by the clerk of court of the court a quo and the requisite number of plain copies thereof,
and such material portions of the record as would support the petition." Indeed with the attachments to the consolidated
petitions, the Court deemed it sufficient to rule on the merits of the case. (Rollo, Vol. II, p. 3264)
Citing Asia Brewery v. Court of Appeals, G.R. No. 103543, July 5, 1993, 224 SCRA 437; Roman Catholic Bishop of
Malolos, Inc. v. Intermediate Appellate Court, G.R. No. 72110, November 16, 1990, 191 SCRA 411; Robleza v. Court of
Appeals, 256 Phil. 98 (1989).
[3]

[4]

Rule 2, Sec. 3 (n).

[5]

Sec. 3. Court en banc matters and cases. - The Court en banc shall act on the following matters and cases:

xxxx
(n) cases that the Court en banc deems of sufficient importance to merit its attention: x x x

DISSENTING OPINION

BRION, J.:

I submit this Dissenting Opinion to express my objections against the reopening of the final judgment in this case and its
acceptance by the Court En Banc for its review on the merits.
In a September 25, 2009 decision, the Second Division, thru Justice Antonio Eduardo B. Nachura, modified the Court of
Appeals' (CA's) December 20, 2007 amended decision in CA-G.R. SP Nos. 74018 and 73934. It ordered Keppel Cebu
Shipyard. Inc. (KCSI) to pay Pioneer Insurance and Surety Corporation (Pioneer) P329,747,351.91, with 6% interest per

annum from the time the Request for Arbitration was filed until the decision's finality, plus 12% interest per annum on the
said amount or any balance thereof from the decision's finality until it is paid.
In a June 21, 2010 resolution, the Court denied with finality KCSI's first motion for reconsideration.
KCSI requested to have the cases referred to the Court En Banc and set for oral arguments its Second Motion for
Reconsideration and its July 30, 2010 letter. KCSI's September 29, 2010 letter requested for the status of its July 30, 2010
letter.
In an October 20, 2010 resolution, the Court denied the second motion for reconsideration and noted KCSIs July 30,
2010 and September 29, 2010 letters.
On November 4, 2010, the decision became final and executory and was recorded in the Book of Entries of
Judgments.
On November 23, 2010, or 19 days later, KCSI filed, without leave of court, the present Motion to Re-Open Proceedings
and Motion to Refer to the Court En Banc, claiming that the Court gravely erred when it failed to consider the CA's principal
and most crucial finding that both Pioneer and KCSI were guilty of negligence and that their joint negligence was the cause
of the fire that destroyed the vessel; thus, the shared liability of both parties on a 50-50 basis. In support of its motion to
refer the case to the Court En Banc, KCSI posited that these cases involve issues of transcendental importance and of
paramount public interest, as it would purportedly establish a precedent allowing courts to deny any litigant due process of
law.
Pioneer filed a Manifestation alleging that KCSI did not mention the fact that an Entry of Judgment had already been made,
and the September 25. 2009 decision had already been recorded in the Book of Entries of Judgments. It also stated that
on November 22, 2010, before KCSI filed its motion to re-open, it was given a copy of the motion for issuance of a writ of
execution that Pioneer filed with the Construction Industry Arbitration Commission (CIAC) on that date.
In a December 6, 2010 letter to the Office of the Chief Justice (OCJ). KCSI bewailed the Court's reversal of the purported
uniform findings of the CA and the CIAC without elevating the entire records of the case.
On December 13, 2010, KCSI filed its Supplemental Motion (to its Motion to Re-Open Proceedings and Motion to Refer to
the Court En Banc), alleging that it was denied its substantive rights to due process; that the limitation-of-liability clause
under the Shiprepair Agreement between KCSI and WG&A is valid, such that WG&A is estopped to question the same, and
that the imposition of the 6% interest is unwarranted.
The Court En Banc deliberated on the case and by a vote of 10 in favor[*] and three against, [**]with two abstentions, [***]
decided to lift the entry of judgment and to re-open the case. In acting as it did, the Court violated the most basic
principle underlying the legal system - the immutability of final judgments - thereby acting without authority
and outside of its jurisdiction. It grossly glossed over the violation of technical rules in its haste to override its
own final and executory ruling.
First. A basic principle that supports the stability of a judicial system as well as the social, economic and political ordering
of society, is the principle of immutability of judgments. A decision that has acquired finality becomes immutable and
unalterable, and may no longer be modified in any respect even if the modification is meant to correct erroneous
conclusions of fact or law and whether it will be made by the Court that rendered it or by the highest Court of
the land.[1] Once a judgment or order becomes final, all the issues between the parties are deemed resolved and laid to
rest.[2] No additions can be made to the decision, and no other action can be taken on it, [3] except to order its execution.[4]
As recited above, the decision in this case was originally resolved by the unanimous vote of a Division of the Court. The
Division also voted unanimously in denying the motion for reconsideration that subsequently came, and even in the denial
of the 2nd motion for reconsideration that followed. The Court changed its vote, however, on the subsequent (effectively,
the 3rd) motion for reconsideration, set aside the final judgment, and opened the case anew for review on the merits.
Faced with a renewed assault on the merits of a final judgment, the Court had only one recourse open to it to simply
note the motion (effectively the 3rd motion for reconsideration); it did not even have to deny this motion as it was way past
the prohibited phase of filing pleadings under the express terms of the Rules of Court. [5] That the Court instead opened the
case for further review despite the express prohibition of the Rules bodes ill for the respondent as this reopening cannot
but be a prelude to the reversal of the final and executory judgment.
The capacity, capability and potential for imaginative ideas of those engaged in the law, in arguing about the law and citing
justifications for their conclusions, have been amply demonstrated over the years and cannot be doubted. In this endeavor,
however, they should not forget that certain underlying realities exist that should be beyond debate and that cannot and
should not at all be touched even by the lawyers' convincing prowess. They should not forget that their arguments and

conclusions do not stand by themselves and do not solely address the dispute at hand: what they say and conclude create
ripple effects on the law and jurisprudence that ultimately become tsunamis enveloping the greater society where the law
stands as an instrument aimed at fostering social, political and economic order.
In the context of the actions of the Supreme Court the highest court that decides on the interpretation of the law with
binding effect for the whole country it cannot simply disregard fundamental principles (such as the principle of
immutability of judgments) in its actions without causing damage to itself and to the society that it serves. A supreme
court exists in a society and is supported by that society as a necessary and desirable institution because it
can settle disputes and can do this with finality. Its rulings lay to rest the disputes that can otherwise disrupt
the harmony in society.
This is the role that courts generally serve; specific to the Supreme Court as the highest court is the finality, at the
highest level, that it can bestow on the resolution of disputes. Without this element of finality, the core essence of courts,
and of the Supreme Court in particular, completely vanishes.
This is the reality that must necessarily confront the Court in its present action in reopening its ruling on a case that it has
thrice passed upon. After the Court's unsettling action in this case, society will inevitably conclude that the Court, by
its own action, has established that judgments can no longer achieve finality in this country; an enterprising
advocate, who can get a Justice of the Court interested in the reopening of the final judgment in his case, now has an even
greater chance of securing a reopening and a possible reversal, even of final rulings, because the Court's judgment never
really becomes final. Others in society may think further and simply conclude that this Supreme Court no longer has a
reason for its being, as it no longer fulfills the basic aim justifying its existence. At the very least, the Court loses
ground in the areas of respect and credibility.
Second. The Rules of Court amply provides the rules on the finality of judgments, [6] supported by established rulings on
this point.[7] In fact, the Rules itself expressly provides that no second motion for reconsideration shall be entertained.
[8]
The operational reason behind this rule is not hard to grasp a party has 15 days to move for reconsideration of a
decision or final resolution, and. thereafter, the decision lapses to finality if no motion for reconsideration is filed. If one is
filed, the denial of the motion for reconsideration signals the finality of the judgment. Thereafter, no 2 nd motion for
reconsideration shall be entertained. At that point, the final judgment begins to carry the effect of res adjudicata the
rule, expressly provided in the Rules of Court, that a judgment or final order is with respect to the matter directly adjudged
or as to any other matter that could have been adjudged, binding on the parties and can no longer be reopened:
[9]
execution or implementation of the judgment thereafter follows. [10] Most importantly, at that point, the court
even the Supreme Court loses jurisdiction over the case except for purposes of its execution.
In the present case, the Supreme Court no longer has jurisdiction to touch or reopen the case because the
judgment has lapsed to finality and an entry of final judgment has, in fact, been made evidencing its finality.
Even the Constitution itself recognizes that the reopening of a case that has lapsed to finality is outside the powers of the
Supreme Court; the express constitutional power given to the Supreme Court is to review judgments of lower
courts, on appeal or on certiorari, not to reopen and review its own judgment that has lapsed to finality.
[11]
Thus, the Court itself effectively becomes a transgressor for acting with grave abuse of discretion that the Constitution
itself, under Article VIII, Section 1, has mandated the Court to check in all areas and branches of government. It becomes
a question now of the old dilemna bedeviling all governments - who will guard and check on the guardians? Unnerving, to
say the least, for the ordinary citizen who goes about his or her daily life relying on the order that the community has
established by social compact.
Third. Finality of a judgment is a consequence that directly affects the immediate parties to the case. In a sense, it affects
the public as well because the public must respect the finality of the judgment that prevails between the immediate
parties. Where a ruling affects the public at large, as in the declaration of the constitutionality or unconstitutionality of a
statute, the Court's declaration is binding on the general public.
Under this scheme, it is only right and proper that the Supreme Court itself be bound by the finality of the judgment that
became so: by reason of the Rules that the Court itself promulgated, and by societal reasons deeper than what the Rules
of Court expressly provides. If the rules for the immediate parties and the public were to be one of finality, while the rule
for the Court is one of flexibility and non-binding effect because the Court may reopen at will and revisit even final rulings,
what results is a monumental imbalance in the legal structure that the Constitution and our laws could not have
intended. If an imbalance were intended or tolerated, then a serious re-study must perhaps be made for a society with a
heavy tilt towards unregulated power cannot but at some point fall, or, at the very least, suffer from it. If no imbalance is
intended and the system is correct, then the Court may be seriously out of sync in respecting the system and must rectify
its ways.
The most graphic example perhaps of the resulting imbalance is the effect of a reopened decision on the respondent, as in
this case. Let it be remembered that a judgment that becomes final does not do so in a vacuum. It affects the parties and
one effect is on the prevailing party whose rights under the final judgment vest on the proceeds of the judgment.
This vested right is the reason why a writ of execution follows. When and if a final judgment is reopened, the Court
effectively dispossesses the winning party of its right and entitlement to what the final decision decrees, all because the

Court at that point wants to change its mind on a matter that is already outside of its jurisdiction to rule
upon. This is no less than an act of injustice that is hard to live down for an institution whose guiding light and objective is
justice.
Fourth. The only recognized exceptions to the rule on the non-reviewability of final judgments are the correction of clerical
errors, the so-called nunc pro tunc entries which cause no prejudice to any party, void judgments, and when relief from
judgment is provided whenever circumstances transpire after the finality of the decision rendering its execution unjust and
inequitable.[12]
In considering the review of a final and executory decision, the nature of the decision must be taken into account. When
the final decision is valid, it cannot be the subject of review, even by the Court En Banc. Neither can a review be
entertained because of error in the judgment; "the Supreme Court is supreme because its judgment is final, not
because it cannot err." A judgment even if erroneous is still valid if rendered within the scope of the court's authority or
jurisdiction. It is only when the decision is void, as when there is denial of due process or when it is rendered by a court
without jurisdiction, that there can be a re-opening of the case. The reason, of course, is that a void judgment is no
judgment at all and a new one must be entered in the fulfillment of the court's dispute resolution function.
A still debatable instance when a final decision can be re-opened is through action on a second motion for reconsideration
under Section 3. Rule 15 of the Internal Rules of the Supreme Court.[13]The rule states:
Sec. 3. Second Motion for Reconsideration. - The Court shall not entertain a second motion for reconsideration and
any exception to this rule can only be granted in the higher interest of justice by the Court en banc upon a vote of at least
two-thirds of its actual membership. There is reconsideration "in the higher interest of justice" when the assailed decision
is not only legally erroneous, but is likewise patently unjust and potentially capable of causing unwarranted and
irremediable injury or damage to the parties. A second motion for reconsideration can only be entertained before the ruling
sought to be reconsidered becomes final by operation of law or by the Court's declaration.
Under this provision (that lays hidden in the Court's Internal Rules rather than in the Rules of Court), a second
motion for reconsideration shall not be entertained, except in the "higher interest of justice" by a two-thirds vote of the
Court En Banc's members. Aside from the voting requirements, a movant must substantially show that a reconsideration of
the Court's ruling is necessary in the higher interest of justice, which standard is satisfied upon proving that the assailed
ruling is both (1) legally erroneous, and (2) patently unjust and potentially capable of causing unwarranted and
irremediable injury or damage to the parties.
Even this avenue may be closed, however, as the Court is proscribed from accepting motions for reconsideration filed after
the finality of the assailed decision. In this case, KCSI filed its motion to reopen (a 3rd motion for reconsideration), without
leave of court, after the denial of its 2nd motion for reconsideration (itself a prohibited motion), when a motion for the
issuance of execution was already staring it in the face. This move can only be described as a brazen shot in the dark,
unsupported by legal reason that the majority in the Court saw fit to entertain.
It was through the opening provided by the questionable provision of the Internal Rules that KCSI's Motion to Re-Open
Proceedings and Motion to Refer to the Court En Banc sought its entry. Significantly, aside from a fig leaf reference to
violation of due process (for allegedly deciding the case without the original records), the presented justification essentially
referred to cited legal errors committed in the Court's three considerations of the case, i.e., in the original ponencia and in
the two reconsiderations that were denied.
An eyebrow-raising aspect is that all the Courts three considerations and ruling on the case were unanimous; not one
dissent or sliver of a dissent was ever made. Yet, those who voted for the reopening were the same Members of the
Division who supported the ponencia, except only for theponente. Most unsettling of all is the realization that the Court's
revisit of resolved issues, under the guise of "higher interest of justice," will mean the abandonment of settled principles of
law to accommodate KCSI's arguments that had been considered and unanimously turned down in the Court's decision and
resolutions.
These disturbing thoughts invariably lead to the question: if no finality can be secured even under the glaringly clear
circumstances of this case, can the country's adjudication system be in grave peril? I do not believe that the problem so far
is systemic; the system has had (and it still does have) its share of problems, but these have not been on the finality of
judgments as this principle has been with the Court in its more that a hundred years of existence. The problem, as I see it,
is individual and remediable. If only the Court and its Members will go back to first principles, and will truly reflect on the
place, role, and relevance of the Court in contemporary society, then our judicial system can be and can remain the stable
and reliable system that society expects it to be.
For all these reasons, I vote to simply NOTE WITHOUT ACTION KCSI's motion to re-open the case for further review on
the merits. To dismiss it is to grant it recognition that it does not deserve.
Very truly yours,

(Sgd.) ENRIQUETA E. VIDAL

Clerk of Court

http://www.chanrobles.com/scresolutions/2011juneresolutions.php?id=214

THIRD DIVISION

KEPPEL CEBU SHIPYARD, INC.,

Petitioner,

G.R. Nos. 18088081

- versus -

PIONEER INSURANCE AND

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

G.R. Nos. 18089697

Present:

YNARES-SANTIAGO, J.
,*
Chairperson,
- versus -

CHICO-NAZARIO,
VELASCO, JR.,
NACHURA, and

PERALTA, JJ.

Promulgated:
KEPPEL CEBU SHIPYARD, INC.,
Respondent.

September 25, 2009

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Before us are the consolidated petitions filed by the

partiesPioneer Insurance and Surety Corporation [1] (Pioneer) and
Keppel Cebu Shipyard, Inc.[2] (KCSI)to review on certiorari the
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]

Company: WG & A JEBSENS SHIPMANAGEMENT INC.

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

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.

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 co-assured in its insurance
policy.

2.

The Owner shall waive its right to claim for

any loss of profit or loss of use or damages
consequential on such loss of use resulting
from the delay in the redelivery of the above
vessel.

3.

Owners sub-contractors or workers are not

permitted to work in the yard without the
written approval of the Vice President
Operations.

4.

In consideration of Keppel Cebu Shipyard

allowing Owner to carry out own repairs
onboard the vessel, the Owner shall
indemnify and hold Keppel Cebu Shipyard
harmless from any or all claims, damages,
or liabilities arising from death or bodily
injuries to Owners workers, or damages to
the vessel or other property however
caused.

5.

On arrival, the Owner Representative,

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

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-KCSI-211 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) (Printed Name/Signature Above Name)

Vice President Operations Authorized Representative

Keppel Cebu Shipyard, Inc. for and in behalf of:
WG & A Jebsens Shipmgmt.

JAN. 26, 2000 . ________________________

Date Date

On February 8, 2000, in the course of its repair, M/V Superferry 3

was gutted by fire. Claiming that the extent of the damage was
pervasive, WG&A declared the vessels damage as a total
constructive loss and, 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

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-H099-0000168-00-D (H&M) and MH-H0-99-0000169 (I.V.) by
reason as follows:

Fire on board at Keppel Cebu Shipyard

on 08 February 2000

and in consideration of which the undersigned hereby

assigns and transfers to the said company each and all
claims and demands against any person, persons,
corporation or property arising from or connected with
such loss or damage and the said company is subrogated

in the place of and to the claims and demands of the

undersigned against said person, persons, corporation or
property in the premises to the extent of the amount
above-mentioned.

WILLIAM, GOTHONG & ABOITIZ, INC.

&/OR ABOITIZ SHIPPING CORP.
By: (Signed)
______________________________________
Witnesses: (Signed)
______________________________________
(Signed)
______________________________________

Armed with the subrogation receipt, Pioneer tried to collect

from KCSI, but the latter denied any responsibility for the loss of
the subject vessel. As KCSI continuously refused to pay despite
repeated demands, Pioneer, on August 7, 2000, filed a Request
for Arbitration before the Construction Industry Arbitration
Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking
the following reliefs:

1.
To pay to the claimant Pioneer Insurance and
Surety Corporation the sum of U.S.$8,472,581.78 or its
equivalent amount in Philippine Currency, plus interest
thereon computed from the date of the Loss and
Subrogation Receipt on 16 June 2000 or from the date of

filing of [the] Request for Arbitration, as may be found

proper;
2.
To pay to claimant WG&A, INC. and/or Aboitiz
Shipping
Corporation
and
WG&A
Jebsens
Shipmanagement, Inc. the sum of P500,000,000.00 plus
interest thereon from the date of filing [of the] Request
for Arbitration or date of the arbitral award, as may be
found proper;

3.
To pay
of P3,000,000.00 for
damages as may be
including arbitration
and the costs of suit.

to the claimants herein the sum

and as attorneys fees; plus other
established during the proceedings,
fees and other litigation expenses,

It is likewise further prayed that Clauses 1 and 2 on the

unsigned page 1 of the Shiprepair Agreement (Annex A)
as well as the hardly legible Clauses 20 and 22 (a) and
other similar clauses printed in very fine print on the
unsigned dorsal page thereof, be all declared illegal and
void ab initio and without any legal effect whatsoever.[10]

KCSI and WG&A reached an amicable settlement, leading the

latter to file a Notice of Withdrawal of Claim on April 17, 2001 with
the CIAC. The CIAC granted the withdrawal on October 22, 2001,
thereby dismissing the claim of WG&A against KCSI. Hence, the
arbitration proceeded with Pioneer as the remaining claimant.

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.

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 drydocking and repair of the vessel.

B.

The presence on board the M/V

Superferry 3 of its officers and crew does
not relieve the respondent of its
responsibility for said vessel.

C.

Respondent
Keppel
assumed
responsibility over M/V Superferry 3 when
it brought the vessel inside its graving
dock and applied its own safety rules to
the dry-docking and repairs of the vessel.

D.

The practice of allowing a shipowner

and its sub-contractors to perform
maintenance works while the vessel was
within 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 employer responsible

for the negligent acts of the welder. According to
Claimant;

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.

The yard, not Dr. Joniga, gave the

welders their marching orders, and

B.

Dr. Jonigas authority to request the

execution of owners hot works in the
passenger
areas
was
expressly
recognized
by
the
Yard
Project
Superintendent Orcullo.

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

hotworks permit since it was not required by the yard,
and the 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.

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.

The Claimant then disputed the statements of Manuel

Amagsila by claiming that Amagsila was a disgruntled
employee. Nevertheless, Claimant claims that Amagsila
affirmed that the five yard welders never became
employees of the owner so as to obligate the latter to be
responsible for their conduct and performance.

Claimant enumerated further badges of yard negligence.

According to Claimant:

A.

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)

Non-removal of the life jackets theory.

(ii)

Hole-in-the[-]floor theory.

(iii)

Need for a plan theory.

(iv)

The unauthorized hot works theory.

(v)

The Marina report theory.

The Claimant called the attention of the Tribunal (CIAC) on

the non-appearance of the welder involved in the cause
of the fire, Mr. Severino Sevillejo. Claimant claims that
this is suppression of evidence by Respondent.

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 preexisting holes on the deck floor and came into
contact with and ignited the flammable
lifejackets stored in the ceiling void directly
below; and ii) the bottom level of the bulkhead
door was immaterial, because the sparks and

slag could have come from the cutting of any

of the sides of the door. Consequently, the
cutting itself of the bulkhead door under the
hazardous conditions created by Dr. Joniga,
rather than the positioning of the 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 quasi-delict.

i.
The
Vessel
exercised
supervision and control over Angelino
Sevillejo when he was doing work at the
Promenade
Deck
restaurant
and
especially when he was instructed by Dr.
Joniga
to
cut
the
bulkhead
door. Consequently, the Vessel was the
party with actual control over his tasks
and is deemed his true and effective
employer for purposes of establishing
Article 2180 employer liability.
ii.
Even assuming that the Yard
was Angelino 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.

Claimants counsel contends that the cutting

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

2.

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
October
28,
2002,
the
CIAC
rendered
its
[13]
Decision
declaring both WG&A and KCSI guilty of negligence,
with the following findings and conclusions

The Tribunal agrees that the contractual obligation of the

Yard is to provide the welders and equipment to the
promenade deck. [The] Tribunal agrees that the cutting of
the bulkhead door was not a contractual obligation of the
Yard. However, by requiring, according to its own
regulations, that only Yard welders are to undertake
hotworks, it follows that there are certain qualifications of
Yard welders that would be requisite of yard welders
against those of the vessel welders. To the Tribunal, this
means that yard welders are aware of the Yard safety
rules and regulations on hotworks such as applying for a
hotwork permit, discussing the work in a production
meeting, and complying with the conditions of the
hotwork permit prior to implementation. By the
requirement that all hotworks are to be done by the Yard,
the Tribunal finds that Sevillejo remains a yard
employee. The act of Sevillejo is however mitigated in
that he was not even a foreman, and that the instructions
to him was (sic) by an authorized person. The Tribunal
notes that the hotworks permit require[s] a request by at
least a foreman. The fact that no foreman was included in
the five welders issued to the Vessel was never raised in
this dispute. As discussed earlier by the Tribunal, with the
fact that what was ask (sic) of Sevillejo was outside the
work
order,
the
Vessel
is
considered
equally
negligent. This Tribunal finds the concurrent negligence of
the Yard through Sevillejo and the Vessel through Dr.

Joniga as both contributory to the cause of the fire that

damaged the vessel.[14]

Holding
that
the
liability
for
damages
was
limited
to P50,000,000.00, the CIAC ordered KCSI to pay Pioneer the
amount of P25,000,000.00, with interest at 6% per annum from
the time of the filing of the case up to the time the decision is
promulgated, and 12% interest per annum added to the award, or
any balance thereof, after it becomes final and executory. The
CIAC further ordered that the arbitration costs be imposed on
both parties on a pro rata basis.[15]

Pioneer appealed to the CA and its petition was docketed as CAG.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

promulgated by the Special Division of Five Former Fifteenth
Division of the CA in light of the dissent of Associate Justice Lucas
P.
Bersamin,[17] joined
by
Associate
Justice
Japar
B.
Dimaampao. The fallo of the Amended Decision reads

WHEREFORE, premises
hereby decrees that:

considered,

the

Court

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:

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;

2. The Yard is hereby declared as equally negligent,

thus, the total GRANTING of its Petition (CA-G.R. SP No.
73934) is now reduced to PARTIALLY GRANTED, in so

far as it is ordered to pay PioneerP25 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:

THE COURT OF APPEALS ERRED IN BASING ITS

ORIGINAL DECISION ON NON-FACTS LEADING
IT
TO
MAKE FALSE LEGAL CONCLUSIONS; NON-FACTS 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.

B. THE LIMITATION CLAUSE IS CONTRARY TO

PUBLIC POLICY.

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.

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.

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 SHOULD BEAR
THE COSTS OF ARBITRATION.

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

Undeniably, the immediate cause of the fire was the hot work
done by Angelino Sevillejo (Sevillejo) on the accommodation area
of the vessel, specifically on Deck A. As established before the
CIAC

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 fiveliter drinking water container on it and as he did so,
smoke came up from under Deck A. He got another
container of water which he also poured whence the
smoke was coming. In the meantime, other workers in the
immediate vicinity tried to fight the fire by using fire
extinguishers and buckets of water. But because the fire
was inside the ceiling void, it was extremely difficult to
contain or extinguish; and it spread rapidly because it was
not possible to direct water jets or the fire extinguishers
into the space at the source. Fighting the fire was
extremely difficult because the life jackets and the
construction materials of the Deck B ceiling were
combustible and permitted the fire to spread within the
ceiling void. From there, the fire dropped into the Deck B
accommodation areas at various locations, where there
were combustible materials. Respondent points to cans of
paint and thinner, in addition to the plywood partitions
and foam mattresses on deck B (Exh. 1-Mullen, [23] pp. 7-8,
18; Exh. 2-Mullen, pp. 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 January 26, 2000 or under the Shiprepair
Agreement. KCSI further posits that WG&A was itself negligent,
through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga), for
failing to remove the life jackets from the ceiling void, causing the
immediate spread of the fire to the other areas of the ship.

We rule in favor of Pioneer.

First. The Shiprepair Agreement is clear that WG&A, as owner of

M/V Superferry 3, entered into a contract for the dry docking and
repair of the vessel under 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 LapuLapu 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 sub-contractors. 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 by the vessels contractors on the passenger
accommodation decks.[27] This was corroborated by the
statements of the vessels hotel manager Marcelo Rabe [28] and the
vessels quality control officer Joselito Esteban. [29] KCSI knew of the
unfinished hot works in the passenger accommodation areas. Its
safety supervisor Esteban Cabalhug confirmed that KCSI was
aware that the owners of this vessel (M/V Superferry 3) had
undertaken their own (hot) works prior to arrival alongside (sic) on
26th January, and that no hot work permits could thereafter be
issued to WG&As own workers because this was not allowed for
the Superferry 3.[30] This shows that Dr. Joniga had authority only
to request the performance of hot works by KCSIs welders as
needed in the repair of the vessel while on dry dock.

Third. KCSI welders covered by the Work Order performed hot

works on various areas of the M/V Superferry 3, aside from its
promenade deck. This was a recognition of Dr. 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.

At the CIAC proceedings, it was adequately shown that

between February 4 and 6, 2000, the welders of KCSI: (a) did the
welding works on the ceiling hangers in the lobby of Deck A; (b)

did the welding and cutting works on the deck beam to access
aircon ducts; and (c) did the cutting and welding works on the
protection bars at the tourist dining salon of Deck B, [31]at a rate
of P150.00/welder/hour.[32] In fact, Orcullo, Project Superintendent
of KCSI, admitted that as early as February 3, 2000 (five days
before the fire) [the Yard] had acknowledged Dr. Jonigas authority
to order such works or additional jobs. [33]

It is evident, therefore, that although the January 26, 2000

Work Order was a special order for the supply of KCSI welders to
the promenade deck, it was not restricted to the promenade deck
only. The Work Order was only a special arrangement between
KCSI and WG&A that meant additional cost to the latter.

Fourth. At the time of the fire, Sevillejo was an employee of KCSI

and was subject to the 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 that it did its duty
when it prohibited Sevillejo from continuing the hot
work. However, it is noteworthy that, after purportedly scolding
Sevillejo for working without a permit and telling him to stop until
the permit was acquired and the other safety measures were
observed, Rebaca left without pulling Sevillejo out of the work
area or making sure that the latter did as he was
told.Unfortunately for KCSI, Sevillejo reluctantly proceeded with
his cutting of the bulkhead door at Deck A after Rebaca left, even
disregarding the 4-inch marking set, thus cutting the door level
with the deck, until the fire broke out.

This conclusion on the failure of supervision by KCSI was

absolutely supported by Dr. Eric Mullen of the Dr. J.H. Burgoyne &
Partners (International) Ltd., Singapore, KCSIs own fire expert,
who observed that

4.3. The foregoing would be compounded by Angelino

Sevillejo being an electric arc welder, not a cutter. The
dangers of ignition occurring as a result of the two
processes are similar in that both electric arc welding and
hot cutting produce heat at the work area and sparks and
incendive material that can travel some distance from the
work area. Hence, the safety precautions that are
expected to be applied by the supervisor are the same for
both types of work. However, the quantity and incendivity

of the spray from the hot cutting are much greater than
those of sparks from electric arc welding, and it may
well be that Angelino Sevillejo would not have a
full appreciation of the dangers involved. This
made it all the more important that the supervisor,
who should have had such an appreciation,
ensured that the appropriate safety precautions
were carried out.[37]

In this light, therefore, Sevillejo, being one of the specially trained

welders specifically authorized by KCSI to do the hot works on M/V
Superferry 3 to the exclusion of other workers, failed to comply
with the strict safety standards of KCSI, not only because he
worked without the required permit, fire watch, fire buckets, and
extinguishers, but also because he failed to undertake other
precautionary measures for preventing the fire. For instance, he
could have, at the very least, ensured that whatever combustible
material may have been in the vicinity would be protected from
the sparks caused by the welding torch. He could have easily
removed the life jackets from the ceiling void, as well as the foam
mattresses, and covered any holes where the sparks may enter.

Conjunctively, since Rebaca was already aware of the

hazard, he should have taken all possible precautionary
measures, including those above mentioned, before allowing
Sevillejo to continue with his hot work on Deck A. In addition to
scolding Sevillejo, Rebaca merely checked that no fire had started
yet. Nothing more. Also, inasmuch as KCSI had the power to
substitute Sevillejo with another electric arc welder, Rebaca
should have replaced him.

There is negligence when an act is done without exercising

the competence that a reasonable person in the position of the

actor would recognize as necessary to prevent an unreasonable

risk of harm to another. Those who undertake any work calling for
special skills are required to exercise reasonable care in what they
do.[38] Verily, there is an obligation all persons have to take due
care which, under ordinary circumstances of the case, a
reasonable and prudent man would take. The omission of that
care constitutes negligence. Generally, the degree of care
required is graduated according to the danger a person or
property may be subjected to, arising from the activity that the
actor pursues or the instrumentality that he uses. The greater the
danger, the greater the degree of care required. Extraordinary risk
demands
extraordinary
care. Similarly,
the
more
imminent the danger, the higher degree of care warranted. [39] In
this aspect,

KCSI failed to exercise the necessary degree of caution and

foresight called for by the circumstances.

We cannot subscribe to 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 was doing, but failed to supervise him
with the degree of care warranted by the attendant
circumstances.

Neither can Dr. Joniga be faulted for not removing the life
jackets from the ceiling void for two reasons (1) the life jackets
were not even contributory to the occurrence of the fire; and (2) it
was not incumbent upon him to remove the same. It was shown
during the hearings before the CIAC that the removal of the life
jackets would not have made much of a difference. The fire would
still have occurred due to the presence of other combustible
materials in the area. This was the uniform conclusion of both
WG&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]

These circumstances, taken collectively, yield the inevitable

conclusion that Sevillejo was negligent in the performance of his
assigned task. His negligence was the proximate cause of the fire
on board M/V Superferry 3. As he was then definitely engaged in
the performance of his assigned tasks as an employee of KCSI, his

negligence gave rise to the vicarious liability of his

employer[43] under Article 2180 of the Civil Code, which provides

Art. 2180. The obligation imposed by article 2176 is

demandable not only for 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

The responsibility treated of in this article shall cease

when the persons herein mentioned prove that they
observed all the diligence of a good father of a family to
prevent damage.

KCSI failed to prove that it exercised the necessary diligence

incumbent upon it to rebut the legal presumption of its negligence
in supervising Sevillejo.[44] Consequently, it is responsible for the
damages caused by the negligent act of its employee, and its
liability is primary and solidary. All that is needed is proof that the
employee has, by his negligence, caused damage to another in
order to make the employer responsible for the tortuous act of the

former.[45] From the foregoing disquisition, there is ample proof of

the 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.

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 limitedliability clause up to P50,000,000.00, because WG&A acceded to
the provision when it executed the Shiprepair Agreement. KCSI
also claims that the salvage value of the vessel should be
deducted from whatever amount it will be made to pay to Pioneer.

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

salvage value of M/V Superferry 3.

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

the conditions set forth in Section 139 of the Insurance Code,
which provides

Sec. 139. A person insured by a contract of marine

insurance may abandon the thing insured, or any
particular portion hereof separately valued by the policy,
or otherwise separately insured, and recover for a total

loss thereof, when the cause of the loss is a peril insured

against:
(a) If more than three-fourths thereof in value is actually
lost, or would have to be expended to recover it from the
peril;

(b) If it is injured to such an extent as to reduce its value

more than three-fourths; x x x.

It appears, however, that in the execution of the insurance

policies over M/V Superferry 3, WG&A and Pioneer incorporated
by reference the American Institute Hull Clauses 2/6/77, the Total
Loss Provision of which reads

Total Loss

In ascertaining whether the Vessel is a constructive Total

Loss the Agreed Value shall be taken as the repaired
value and nothing in respect of the damaged or break-up
value of the Vessel or wreck shall be taken into account.

There shall be no recovery for a constructive Total Loss

hereunder unless the expense of recovering and repairing
the Vessel would exceed the Agreed Value in policies
on Hull and Machinery. In making this determination, only
expenses incurred or to be incurred by reason of a single
accident or a sequence of damages arising from the same
accident shall be taken into account, but expenses

incurred prior to tender of abandonment shall not be

considered if such are to be claimed separately under the
Sue and Labor clause. x x x.

In the course of the arbitration proceedings, Pioneer adduced

in evidence the estimates made by three (3) disinterested and
qualified shipyards for the cost of the repair of the vessel,
specifically: (a) P296,256,717.00, based on the Philippine currency
equivalent of the quotation dated April 17, 2000 turned in by
Tsuneishi Heavy Industries (Cebu) Inc.; (b)P309,780,384.15, based
on the Philippine currency equivalent of the quotation of
Sembawang
Shipyard
Pte.
Ltd., Singapore;
and
(c) P301,839,974.00, based on the Philippine currency equivalent
of the quotation of Singapore Technologies Marine Ltd. All the
estimates
showed
that
the
repair
expense
would
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.

KCSI denies the liability because, aside from its claim that it
cannot be held culpable for negligence resulting in the destructive
fire, there was no constructive total loss, as the amount of
damage was only US$3,800,000.00 or P170,611,260.00, the
amount of repair expense quoted by Simpson, Spence & Young.

In the face of this apparent conflict, we hold that Section 139

of the Insurance Code should govern, because (1) Philippine law is
deemed incorporated in every locally executed contract; and (2)
the marine insurance policies in question expressly provided the
following:

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 CA held that Section 139 of the Insurance Code is merely

permissive on account of the word may in the provision. This is
incorrect. Properly considered, the word may in the provision is
intended to grant the insured (WG&A) the option or discretion to
choose the abandonment of the thing insured (M/V Superferry 3),
or any particular portion thereof separately valued by the policy,
or otherwise separately insured, and recover for a total loss when
the cause of the loss is a peril insured against. This option or
discretion is expressed as a right in Section 131 of the same
Code, to wit:

Sec. 131. A constructive total loss is one which gives to a

person insured a right to abandon under Section one
hundred thirty-nine.

It cannot be denied that M/V Superferry 3 suffered widespread

damage from the fire that occurred on February 8, 2000, a
covered peril under the marine insurance policies obtained by
WG&A from Pioneer. The estimates given by the three
disinterested and qualified shipyards show that the damage to the

ship would exceed P270,000,000.00, or of the total value of the

policies P360,000,000.00. These estimates constituted credible
and acceptable proof of the extent of the damage sustained by
the vessel. It is significant that these estimates were confirmed by
the Adjustment Report dated June 5, 2000 submitted by Richards
Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had
enlisted to verify and confirm the extent of the damage. The
Adjustment Report verified and confirmed that the damage to the
vessel amounted to a constructive total loss and that the claim
for P360,000,000.00 under the policies was compensable. [46] It is
also noteworthy that KCSI did not cross-examine Henson Lim,
Director of Richards Hogg, whose affidavit-direct testimony
submitted to the CIAC confirmed that the vessel was a
constructive total loss.

Considering the extent of the damage, WG&A opted to abandon

the ship and claimed the value of its policies. Pioneer, finding the
claim compensable, paid the claim, with WG&A issuing a Loss and
Subrogation Receipt evidencing receipt of the payment of the
insurance proceeds from Pioneer. On this note, we find as
unacceptable the claim of KCSI that there was no ample proof of
payment simply because the person who signed the Receipt
appeared to be an employee of Aboitiz Shipping Corporation.
[47]
The Loss and Subrogation Receipt issued by WG&A to Pioneer
is the best evidence of payment of the insurance proceeds to the
former, and no controverting evidence was presented by KCSI to
rebut the presumed authority of the signatory to receive such
payment.

On the matter of subrogation, Article 2207 of the Civil Code

provides

Art. 2207. If the 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.

Subrogation is the substitution of one person by another with

reference to a lawful claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities. The principle covers a
situation wherein an insurer has paid a loss under an insurance
policy is entitled to all the rights and remedies belonging to the
insured against a third party with respect to any loss covered by
the policy. It contemplates full substitution such that it places the
party subrogated in the shoes of the creditor, and he may use all
means that the creditor could employ to enforce payment. [48]

We have held that payment by the insurer to the insured

operates as an equitable assignment to the insurer of all the
remedies that the insured may have against the third party whose
negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of, any
privity of contract. It accrues simply upon payment by the
insurance company of the insurance claim. The doctrine of
subrogation has its roots in equity. It is designed to promote and
to accomplish justice; and is the mode that equity adopts to
compel the ultimate payment of a debt by one who, in justice,
equity, and good conscience, ought to pay. [49]

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.

Clauses 20 and 22(a) of the Shiprepair Agreement are

without factual and legal foundation. They are unfair and
inequitable under the premises. It was established during
arbitration that WG&A did not voluntarily and expressly agree to
these provisions. Engr. Elvin F. Bello, WG&As fleet manager,
testified that he did not sign the fine-print portion of the
Shiprepair Agreement where Clauses 20 and 22(a) were found,
because he did not want WG&A to be bound by them. However,
considering that it was only KCSI that had shipyard facilities large
enough to accommodate the dry docking and repair of big vessels
owned by WG&A, such as M/V Superferry 3, in Cebu, he had to
sign the front portion of the Shiprepair Agreement; otherwise, the
vessel would not be accepted for dry docking. [50]

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]

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 circumstances and likely consequences. There must
be persuasive evidence to show an actual intention to relinquish
the right.[52] This has not been demonstrated in this case.

Likewise, Clause 20 is a stipulation that may be considered

contrary to public policy. To allow KCSI to limit its liability to
only P50,000,000.00, notwithstanding the fact that there was a
constructive total loss in the amount of P360,000,000.00, would
sanction the exercise of a degree of diligence short of what is
ordinarily required. It would not be difficult for a negligent party to
escape liability by the simple expedient of paying an amount very
much lower than the actual damage or loss sustained by the
other.[53]

Along the same vein, Clause 22(a) cannot be upheld. The

intention of the parties to make each other a co-assured under an
insurance policy is to be gleaned principally from the insurance
contract or policy itself and not from any other contract or
agreement, because the insurance policy denominates the
assured
and
the
beneficiaries
of
the
insurance
contract.Undeniably, the hull and machinery insurance procured
by WG&A from Pioneer named only the former as the
assured. There was no manifest intention on the part of WG&A to
constitute KCSI as a co-assured under the policies. To have
deemed KCSI as a co-assured under the policies would have had
the effect of nullifying any claim of WG&A from Pioneer for any
loss or damage caused by the negligence of KCSI. No ship owner
would agree to make a ship repairer a co-assured under such
insurance policy. Otherwise, any claim for loss or damage under
the policy would be rendered nugatory. WG&A could not have
intended such a result.[54]

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 were sold amounts to P8,521,737.75 (or
US$157,809.96), to be deducted from the proceeds of the sale of
the machinery and the hull, for a net recovery of US$673,812.87,
or equivalent to P30,252,648.09, at P44.8977/$1, the prevailing
exchange rate when the Request for Arbitration was filed. Not
considering this salvage value in the award would amount to
unjust enrichment on the part of Pioneer.

C. On the imposition of interest

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

Appeals,[55] the award in favor of Pioneer in the amount
of P350,146,786.89 should earn interest at 6% per annum from
the filing of the case until the award becomes final and
executory. Thereafter, the rate of interest shall be 12% per
annum from the date the award becomes final and executory until
its full satisfaction.
D. On the payment for the cost of arbitration

It is only fitting that both parties should share in the burden of the
cost of arbitration, on a pro rata basis. We find that Pioneer had a
valid reason to institute a suit against KCSI, as it believed that it
was entitled to claim reimbursement of the amount it paid to
WG&A. However, we disagree with Pioneer that only KCSI should
shoulder the arbitration costs. KCSI cannot be faulted for
defending
itself
for
perceived
wrongful
acts
and
conditions. Otherwise, we would be putting a price on the right to
litigate on the part of Pioneer.

WHEREFORE, the Petition of Pioneer Insurance and Surety

Corporation in G.R. No. 180896-97 and the Petition of Keppel Cebu

Shipyard,
Inc.
in
G.R.
No.
180880-81
arePARTIALLY
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 Superferry 3, or the net total amount
of P329,747,351.91, with six percent (6%) interest per annum
reckoned from the time the Request for Arbitration was filed until
this Decision becomes final and executory, plus twelve percent
(12%) interest per annum on the said amount or any balance
thereof from the finality of the Decision until the same will have
been fully paid. The arbitration costs shall be borne by both
parties on a pro rata basis. Costs against KCSI.

SO ORDERED.
http://sc.judiciary.gov.ph/jurisprudence/2009/september2009/180880-81.htm