DOCTRINE: AN INSURED MEMBER MAY BE COMPELLED TO
ARBITRATION PURSUANT TO THE RULES OF THE PROTECTION
AND INDEMNITY CLUB, WHICH WERE INCORPORATED IN THE
INSURANCE POLICY BY REFERENCE
CASE TITLE: Steamship Mutual Underwriting Association
(Bermuda) Limited vs. Sulpicio Lines, Inc., GR. No. 196072, (J.
Leonen) September 20, 2017
FACTS: Steamship was a Bermuda-based Protection and Indemnity
Club, managed outside London, England. It insures its membersshipowners against "third party risks and liabilities" for claims
arising from (a) death or injury to passengers; (b) loss or damage to
cargoes; and (c) loss or damage from collisions. Sulpicio insured its
fleet of inter-island vessels with Steamship for Protection &
Indemnity risks through local insurance agents, Pioneer Insurance
and Surety Corporation (Pioneer Insurance) or Seaboard-Eastern
Insurance Co., Inc. (Seaboard- Eastern). One (1) of these vessels was
the M/V Princess of the World, evidenced by a Certificate of Entry
and Acceptance issued by Steamship.
On July 7, 2005, M/V Princess of the World was gutted by fire while
on voyage from Iloilo to Zamboanga City, resulting in total loss of its
cargoes. The fire incident was found by the DILG to be "accidental"
in nature. Sulpicio claimed indemnity from Steamship under the
Protection & Indemnity insurance policy. Steamship DENIED the
claim and subsequently rescinded the insurance coverage of
Sulpicio's other vessels on the ground that "Sulpicio was grossly
negligent in conducting its business regarding safety, maintaining
the seaworthiness of its vessels as well as proper training of its crew."
On June 28, 2007, Sulpicio filed a Complaint with the RTC of Makati
City against Steamship; one (1) of its directors, Gary Rynsard; and
its local insurance agents Pioneer Insurance and Seaboard-Eastern
for specific performance and damages. Steamship filed its Motion to
Dismiss and/or to Refer Case to Arbitration pursuant to Republic Act
No. 9285, or the Alternative Dispute Resolution Act of 2004 (ADR
Law), and to Rule 47 of the 2005/2006 Club Rules, which supposedly
provided for arbitration in London of disputes between Steamship
and its members. The other defendants filed separate motions to
dismiss.
The RTC denied the motions to dismiss and held that "arbitration did
not appear to be the most prudent action, considering that the other
defendants had already filed their respective answers." The CA found
no grave abuse of discretion on the part of the trial court in denying
Steamship's Motion to Dismiss and/or to Refer Case to Arbitration or
any convincing evidence to show that a valid arbitration agreement
existed between the parties.
In this petition, Steamship contends that the arbitration agreement
set forth in its Club Rules, which in turn is incorporated by reference
in the Certificate of Entry and Acceptance, is valid and binding upon
Sulpicio. It adds that by Sulpicio's own declarations in its letterapplication for membership of its vessels, Sulpicio acknowledged that
it had received a copy of the Club Rules and that its membership in
Steamship is subject to them. Moreover, throughout Sulpicio's
almost 20 years of membership, it has been aware of, and relied
upon, the terms of the Club Rules, as revealed in its various
correspondences through its brokers with Steamship. Thus, Sulpicio
is estopped to deny that it was aware of, and agreed to be bound by,
the Club Rules and their provisions. It adds that Sulpicio is merely
feigning ignorance of the Club Rules to escape the obligatory nature
of the arbitration agreement. Steamship further reiterates that
Section 25 of the ADR Law is plain and clear that when there are
multiple parties in an action, the court must "refer to arbitration
those parties bound by the arbitration agreement and let the action
remain as to those who are not bound."
ISSUE:
Whether or not Sulpicio, an insured member, may be compelled to
arbitration pursuant to the Rules of Protection and Indemnity Club,
which were incorporated in the insurance policy by reference.
HELD:
YES. This Court rules against Sulpicio's submission that there was
no valid arbitration agreement and if there were, it was not aware of
it. The contract between Sulpicio and Steamship is more than a
contract of insurance between a marine insurer and a shipowner. By
entering its vessels in Steamship, Sulpicio not only obtains insurance
coverage for its vessels but also becomes a member of Steamship.
A PROTECTION AND INDEMNITY CLUB, like Steamship, is an
association composed of shipowners generally formed for the specific
purpose of providing insurance cover against third-party liabilities of
its members. A protection and indemnity club is a mutual insurance
association, described in White Gold Marine Services, Inc. v. Pioneer
Insurance and Surety Corp. as follows:
A mutual insurance company is a cooperative enterprise where the
members are both the insurer and insured. In it, the members all
contribute, by a system of premiums or assessments, to the creation
of a fund from which all losses and liabilities are paid, and where the
profits are divided among themselves, in proportion to their interest.
Additionally, mutual insurance associations, or clubs, provide three
types of coverage, namely, protection and indemnity, war risks, and
defense costs.
A shipowner wishing to enter its fleet of vessels to Steamship must
fill in an application for entry form. The application form is signed by
the shipowner or its authorized representative. Steamship then
issues a Certificate of Entry and Acceptance of the vessels. Thus, a
contract of insurance is perfected between the parties upon
Steamship's issuance of the Certificate of Entry and Acceptance.
A contract of insurance, like other contracts, must be assented to by
both parties either in person or by their agents. So long as an
application for insurance has not been either accepted or rejected, it
is merely an offer or proposal to make a contract. The contract, to be
binding from the date of application, must have been a completed
contract, one that leaves nothing to be done, nothing to be completed,
nothing to be passed upon, or determined, before it shall take effect.
There can be no contract of insurance unless the minds of the parties
have met in agreement.
Section 49 of the Insurance Code defines an insurance policy as "the
written instrument in which a contract of insurance is set forth."
Section 50 of the Insurance Code provides that the policy, which is
required to be in printed form, "may contain blank spaces; and any
word, phrase, clause, mark, sign, symbol, signature, number, or
word necessary to complete the contract of insurance shall be written
on the blank spaces." Any rider, clause, warranty, or endorsement
attached and referred to in the policy by its descriptive title or name
is considered part of this policy or contract of insurance and binds
the insured.
Section 51 of the Insurance Code prescribes the information that
must be stated in the policy, namely: the parties in the insurance
contract, amount insured, premium, property or life insured, risks
insured against, and period of insurance. However, there is nothing
in the law that prohibits the parties from agreeing to other terms and
conditions that would govern their relationship, in which case the
general rules of the Civil Code regulating contracts will apply.
The Certificate of Entry and Acceptance plainly provides that the
Class 1 protection and indemnity coverage would be to the extent
specified and in accordance with the Act, the By-Laws, and the Rules
of the Club in force at the time of the coverage. The "Notes" in the
bottom portion of the Certificate states that these Rules "are printed
annually in book form" and disseminated to all members. M/V
Princess of the World was insured from February 20, 2005 to
February 20, 2006. Hence, the 2005/2006 Club Rules apply.
Sulpicio's acceptance of the Certificate of Entry and Acceptance
manifests its acquiescence to all its provisions. There is no showing
in the records or in Sulpicio's contentions that it objected to any of
the terms in this Certificate. Its acceptance, likewise, operated as an
acceptance of the entire provisions of the Club Rules.
The Club Rules contain the terms and conditions of the relationship
between the Steamship and its members including the scope, nature,
and extent of insurance coverage of its members' vessels. The
arbitration clause is found in Rule 47 of the 2005/2006 Club Rules.
Under Rule 47, any dispute concerning the insurance afforded by
Steamship must first be brought by a claiming member to the
Directors for adjudication. If this member disagrees with the decision
of the Director, the dispute must be referred to arbitration in London.
Despite the member's disagreement, the Managers of Steamship may
refer the dispute to arbitration without adjudication of the Directors.
This procedure must be complied with before the member can pursue
legal proceedings against Steamship.
There is no ambiguity in the terms and clauses of the Certificate of
Entry Acceptance. Contrary to the ruling of the CA, the Certificate
clearly incorporates the entire Club Rules—not only those provisions
relating to cancellation and alteration of the policy. The incorporation
of the Club Rules in the insurance policy is without any qualification.
This includes the arbitration clause even if not particularly
stipulated. Moreover, an arbitration agreement that was not
embodied in the main agreement but set forth in another document
is binding upon the parties, where the document was incorporated
by reference to the main agreement. The arbitration agreement
contained in the Club Rules, which in turn was referred to in the
Certificate of Entry and Acceptance, is binding upon Sulpicio even
though there was no specific stipulation on dispute resolution in this
Certificate.
Sulpicio became a member of Steamship by the very act of making a
contract of insurance with it. Sulpicio's agreement to abide by
Steamship's Club Rules, including its arbitration clause, can be
reasonably inferred from its submission of an application for entry of
its vessels to Steamship "subject to the Rules, receipt of which we
acknowledge." The ruling of this Court in Associated Bank v. CA is
applicable by analogy to this case. This Court held that mere
participation by the banks in the clearing operations of the PCHC
manifest their consent to the PCHC Rules, including the binding
effect of the arbitration agreements under these Rules.
IN THIS CASE, by its act of entering its fleet of vessels to Steamship
and accepting without objection the Certificate of Entry and
Acceptance covering its vessels, Sulpicio manifests its consent to be
bound by the Club Rules. The contract between Sulpicio and
Steamship gives rise to reciprocal rights and obligations. Steamship
undertakes to provide protection and indemnity cover to Sulpicio's
fleet. On the other hand, Sulpicio, as a member, agrees to observe
Steamship's rules and regulations, including its provisions on
arbitration.
Sulpicio cannot feign ignorance of the arbitration clause since it was
already charged with notice of the Club Rules due to an appropriate
reference to it in the Certificate of Entry and Acceptance. Assuming
its contentions were true that it was not furnished a copy of the
2005/2006 Club Rules, by the exercise of ordinary diligence, it could
have easily obtained a copy of them from Pioneer Insurance or
Seaboard-Eastern. In any case, Sulpicio's bare denials cannot
succeed in light of the preponderance of evidence submitted by
Steamship. Sulpicio was also reminded of the arbitration clause
during the negotiations preceding the institution of the present case.
Sulpicio is estopped from denying knowledge of the Rulebook by its
own acts and representations, as evidenced by its various letters to
Steamship, showing its familiarity with the Rulebook and its
provisions.
NOTE:
The RTC should suspend proceedings to give way to arbitration. Even
if there are other defendants who are not parties to the arbitration
agreement, arbitration is still proper. Thus, the RTC went beyond its
authority of determining only the issue of whether or not there was a
valid arbitration agreement between the parties when it denied
Steamship's Motion to Dismiss and/or to Refer Case to Arbitration
solely on the ground that it would not be the most prudent action
under the circumstances of the case. The RTC went against the
express mandate of Republic Act No. 9285. Consequently, the CA
erred in finding no grave abuse of discretion on the part of the trial
court in denying referral to arbitration.
WHEREFORE, the dispute between Sulpicio Lines, Inc. and
Steamship Mutual Underwriting (Bermuda) Limited is referred to
arbitration in London in accordance with Rule 47 of the 2005/2006
Club Rules.