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Case No. Henson, Jr. v. UCPB General Insurance, Inc.

9 G.R. No. G.R. No. 223134, August 14, 2019
Claims Settlement and Subrogation

• From 1989 to 1999, National Arts Studio and Color Lab (NASCL) leased the front portion of
the ground floor of a two (2)-storey building then owned by petitioner.
• In 1999, NASCL gave up its initial lease and instead, leased the right front portion of the
ground floor and the entire second floor of the said building, and made renovations with the
building's piping assembly. Meanwhile, Copylandia Office Systems Corp. (Copylandia)
moved in to the ground floor.
• On May 9, 2006, a water leak occurred in the building and damaged Copylandia's various
equipment, causing injury to it in the amount of P2,062,640.00.
• As the said equipment were insured with respondent, Copylandia filed a claim with the
former. Eventually, the two parties settled on November 2, 2006 for the amount of
P1,326,342.76.
FACTS: • This resulted in respondent's subrogation to the rights of Copylandia over all claims and
demands arising from the said incident.
• On May 20, 2010, respondent, as subrogee to Copylandia's rights, demanded from, inter alia,
NASCL for the payment of the aforesaid claim, but to no avail. Thus, it filed a complaint for
damages against NASCL.
• The RTC ruled in respondent's favor and accordingly, ordered the: (a) dropping of CHI as
party-defendant; and (b) joining of petitioner as one of the party-defendants in the case.
• The CA affirmed the RTC ruling. It held that respondent's cause of action has not yet
prescribed since it was not based on quasi-delict, which must be brought within four (4) years
from the date of the occurrence of the negligent act. Rather, it is based on an obligation
created by law, which has a longer prescriptive period often (10) years reckoned from its
accrual.

Whether or not respondent's claim has yet to prescribe.-NO

ISSUE/S:

In ruling that respondent's claim against petitioner has yet to prescribe, the courts a quo cited Vector
Shipping Corporation v. American Home Assurance Company (Vector). The Court, in Vector, agreed
with the CA that the claim has yet to prescribe, which has a longer prescriptive period often (10)
years, reckoned from the time of the loss
but qualified that "the present action was not upon a written contract, but upon an obligation created
by law.

In Vector, the Court held that the insured's (i.e., American Home's) claim against the debtor (i.e.,
Vector) was premised on the right of subrogation pursuant to Article 2207 of the Civil Code and
hence, an obligation created by law. While indeed American Home was entitled to claim against
HELD: Vector by virtue of its subrogation to the rights of the insured (i.e., Caltex), the Court failed to discern
that no new obligation was created between American Home and Vector for the reason that a
subrogee only steps into the shoes of the subrogor; hence, the subrogee-insurer only assumes the
rights of the subrogor-insured based on the latter's original obligation with the debtor.

To expound, subrogation's legal effects under Article 2207 of the Civil Code are primarily between the
subrogee-insurer and the subrogor-insured: by virtue of the former's payment of indemnity to the
latter, it is able to acquire, by operation of law, all rights of the subrogor-insured against the debtor.
The debtor is a stranger to this juridical tie because it only remains bound by its original obligation to
its creditor whose rights, however, have already been assumed by the subrogee. In Vector's case,
American Home was able to acquire ipso jure all the rights Caltex had against Vector under their
contract of affreightment by virtue of its payment of indemnity. If at all, subrogation had the effect of
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obliging Caltex to respect this assumption of rights in that it must now recognize that its rights against
the debtor, i.e., Vector, had already been transferred to American Home as the subrogee-insurer. In
other words, by operation of Article 2207 of the Civil Code, Caltex cannot deny American Home of its
right to claim against Vector. However, the subrogation of American Home to Caltex's rights did not
alter the original obligation between Caltex and Vector.

As legal subrogation is not equivalent to conventional subrogation, no new obligation is created by

virtue of the insurer's payment under Article 2207 of the Civil Code; also, as legal subrogation is not
the same as an assignment of credit (as the former is in fact, called an "equitable assignment"), no
privity of contract is needed to produce its legal effects. Accordingly, "the insurer can take nothing by
subrogation but the rights of the insured, and is subrogated only to such rights as the insured
possesses. This principle has been frequently expressed in the form that the rights of the insurer
against the wrongdoer cannot rise higher than the rights of the insured against such wrongdoer, since
the insurer as subrogee, in contemplation of law, stands in the place of the insured and succeeds to
whatever rights he may have in the matter. Therefore, any defense which a wrongdoer has
against the insured is good against the insurer subrogated to the rights of the insured," and
this would clearly include the defense of prescription.

Based on the above-discussed considerations, the Court must heretofore abandon the ruling
in Vector that an insurer may file an action against the tortfeasor within ten (10) years from the time
the insurer indemnifies the insured. Following the principles of subrogation, the insurer only
steps into the shoes of the insured and therefore, for purposes of prescription, inherits only
the remaining period within which the insured may file an action against the wrongdoer. To be
sure, the prescriptive period of the action that the insured may file against the wrongdoer begins at
the time that the tort was committed and the loss/injury occurred against the insured. The
indemnification of the insured by the insurer only allows it to be subrogated to the former's rights, and
does not create a new reckoning point for the cause of action that the insured originally has against
the wrongdoer.

With these in mind, the Court therefore sets the following guidelinesrelative to the application
of Vector and this Decision vis-a-vis the prescriptive period in cases where the insurer is subrogated
to the rights of the insured against the wrongdoer based on a quasi-delict:

1. For actions of such nature that have already been filed and are currently pending before the
courts at the time of the finality of this Decision, the rules on prescription prevailing at the time the
action is filedwould apply. Particularly:

(a) For cases that were filed by the subrogee-insurer during the applicability of the Vector ruling (i.e.,
from Vector's finality on August 15, 201360 up until the finality of this Decision), the prescriptive period
is ten (10) years from the time of payment by the insurer to the insured, which gave rise to an
obligation created by law.

Rationale: Since the Vector doctrine was the prevailing rule at this time, issues of prescription must
be resolved under Vector's parameters.

(b) For cases that were filed by the subrogee-insurer prior to the applicability of the Vector ruling (i.e.,
before August 15, 2013), the prescriptive period is four (4) years from the time the tort is committed
against the insured by the wrongdoer.

Rationale: The Vector doctrine, which espoused unique rules on legal subrogation and prescription
as aforedescribed, was not yet a binding precedent at this time; hence, issues of prescription must be
resolved under the rules prevailing before Vector, which, incidentally, are the basic principles of legal
subrogation vis-a-vis prescription of actions based on quasi-delicts.

2. For actions of such nature that have not yet been filed at the time of the finality of this Decision:
(a) For cases where the tort was committed and the consequent loss/injury against the insured
occurred prior to the finality of this Decision, the subrogee-insurer is given a period not exceeding
four (4) years from the time of the finality of this Decision to file the action against the
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wrongdoer; provided, that in all instances, the total period to file such case shall not exceed ten (10)
years from the time the insurer is subrogated to the rights of the insured.

Rationale: The erroneous reckoning and running of the period of prescription pursuant to
the Vector doctrine should not be taken against any and all persons relying thereon because the
same were based on the then-prevailing interpretation and construction of the Court. Hence,
subrogees-insurers, who are, effectively, only now notified of the abandonment of Vector, must be
given the benefit of the present doctrine on subrogation as ruled in this Decision.

However, the benefit of the additional period (i.e., not exceeding four [4] years) under this Decision
must not result in the insured being given a total of more than ten (10) years from the time the insurer
is subrogated to the rights of the insured (i.e., the old prescriptive period in Vector); otherwise, the
insurer would be able to unduly propagate its right to file the case beyond the ten (10)-year period
accorded by Vector to the prejudice of the wrongdoer.

(b) For cases where the tort was committed and the consequent loss/injury against the insured
occurred only upon or after the finality of this Decision, the Vector doctrine would hold no
application. The prescriptive period is four (4) years from the time the tort is committed against the
insured by the wrongdoer.

Rationale: Since the cause of action for quasi-delict and the consequent subrogation of the insurer
would arise after due notice of Vector's abandonment, all persons would now be bound by the
present doctrine on subrogation as ruled in this Decision.

Application to the Case at Bar

In this case, it is undisputed that the water leak damage incident, which gave rise to Copylandia's
cause of action against any possible defendants, including NASCL and petitioner, happened on May
9, 2006. As this incident gave rise to an obligation classified as a quasi-delict, Copylandia would have
only had four (4) years, or until May 9, 2010, within which to file a suit to recover damages. When
Copylandia's rights were transferred to respondent by virtue of the latter's payment of the former's
insurance claim on November 2, 2006, as evidenced by the Loss and Subrogation
Receipt, respondent was likewise bound by the same prescriptive period. Since it was only on:
(a) May 20, 2010 when respondent made an extrajudicial demand to NASCL, and thereafter, filed its
complaint; (b) October 6, 2011 when respondent amended its complaint to implead CHI as party-
defendant; and (c) April 21, 2014 when respondent moved to further amend the complaint in order to
implead petitioner as party-defendant in lieu of CHI, prescription - if adjudged under the present
parameters of legal subrogation under this Decision - should have already set in.

However, it must be recognized that the prevailing rule applicable to the pertinent events of
this case is Vector. Pursuant to the guidelines stated above, specifically under guideline 1 (a),
the Vector doctrine - which was even relied upon by the courts a quo - would then apply. Hence, as
the amended complaint impleading petitioner was filed on April 21, 2014, which is within ten (10)
years from the time respondent indemnified Copylandia for its injury/loss, i.e., on November 2, 2006,
the case cannot be said to have prescribed under Vector. As such, the Court is constrained to deny
the instant petition.
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The foregoing application hews more with the fundamental principles of civil law, especially on the
well-established doctrines on subrogation. Article 1303 of the Civil Code states that "[s]ubrogation
transfers to the person subrogated the credit with all the rights thereto appertaining, either against the
debtor or against third persons x x x." In Loadstar Shipping Company, Inc. v. Malayan Insurance
Company, Inc., the Court had clearly explained that because of the nature of subrogation as a mode
of "creditor-substitution," the rights of a subrogee cannot be superior to the rights possessed by a
subrogor.

To better understand the concept of legal subrogation under Article 2207 of the Civil Code as a form
of "equitable assignment," it deserves mentioning that there exist intricate differences between
assignment and subrogation, both in their legal and conventional senses. In Ledonio v. Capitol
Development Corporation:47

An assignment of credit has been defined as an agreement by virtue of which the owner of a credit
(known as the assignor), by a legal cause - such as sale, dation in payment or exchange or donation -
and without need of the debtor's consent, transfers that credit and its accessory rights to another (known
as the assignee), who acquires the power to enforce it, to the same extent as the assignor could have
enforced it against the debtor.
ANNEX
On the other hand, subrogation, by definition, is the transfer of all the rights of the creditor to a third
person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation
is that which takes place without agreement but by operation of law because of certain
acts.Conventional subrogation is that which takes place by agreement of parties.

Although it may be said that the effect of the assignment of credit is to subrogate the assignee in the
rights of the original creditor, this Court still cannot definitively rule that assignment of credit and
conventional subrogation are one and the same.

In an assignment of credit, the consent of the debtor is not necessary in order that the assignment
may fully produce legal effects (as notice to the debtor suffices); also, in assignment, no new
contractual relation between the assignee/new creditor and debtor is created. On the other hand, in
conventional subrogation, an agreement between all the parties concerning the substitution of the
new creditor is necessary. Meanwhile, legal subrogation produces the same effects as
assignment and also, no new obligation is created between the subrogee/new creditor and
debtor.