UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 95-2291
THE NEW PONCE SHOPPING CENTER, S.E.
AND AARON SOKOL,
Plaintiffs - Appellees,
v.
INTEGRAND ASSURANCE COMPANY,
Defendant - Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Daniel R. Dom nguez, U.S. District Judge]
Before
Lynch, Circuit Judge,
Coffin, Senior Circuit Judge,
and Cummings,* Circuit Judge.
Jos E. Otero Matos, with whom Irizarry, Otero & L pez was
on brief for appellant.
Enrique Peral, with whom Mu oz Boneta Gonz lez Arbona
Ben tez & Peral was on brief for appellees.
June 25, 1996
* Of the Seventh Circuit, sitting by designation.
CUMMINGS, Circuit Judge. Fire destroyed a building in
Ponce, Puerto Rico, that likely would have been demolished at the
owner's behest absent the fire. The insurance company refused to
pay the policy amount, arguing that the owner lacked an insurable
interest by virtue of the almost certain plans for demolition.
The district court rejected that argument. We affirm on the
basis that the owner had not abandoned the building pursuant to
an "irrevocable commitment" to demolish it.
I.
Plaintiff The New Ponce Shopping Center ("New Ponce")
is a partnership that owns several commercial properties in
Ponce, Puerto Rico. In 1985, New Ponce purchased the Santa Mar a
Shopping Center, all of which it renovated except for La Bolera
Building: La Bolera was under a lease contract to Venancio
Santos that would not expire until October 1992. Although Santos
attempted to renew the contract, Aaron Sokol, New Ponce's
managing partner, refused -- apparently because New Ponce
intended to construct a high rise residential condominium
building on the site. There is other evidence of New Ponce's
intent to demolish La Bolera at the end of the lease:
preliminary permits had been sought and obtained from the proper
government agency since September 1992; La Bolera obtained
quotations from four persons to demolish the building; and
Engineer Lombardo P rez was engaged by New Ponce to obtain
additional necessary permits.
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After Santos' lease ended in October 1992, La Bolera
Building was not put to any purpose; rather, the building was
broken into several times and became a hangout for
"undesirables." Wigberto Morales, General Manager of the
shopping center, testified that he did not increase security at
the building because he knew it was to be demolished. On January
15, 1993, P rez submitted documents for permission to demolish La
Bolera, including a letter signed by Sokol stating that
demolition was urgent to avoid vandalism and crime; the letter
also mentioned New Ponce's intent to construct the condominium.
Four days later on January 19, La Bolera was destroyed by fire.
There is no question that prior to the fire New Ponce intended to
proceed with its plans to demolish the building.
La Bolera Building was insured by Defendant Integrand
Assurance Company ("Integrand") for up to $699,750 against, among
other things, loss by fire. Integrand immediately hired Benjam n
Acosta to investigate and adjust the fire loss. Acosta learned
of the demolition plans through meetings with General Manager
Morales and Engineer P rez. It is apparent from Acosta's
subsequent correspondence with New Ponce that he believed New
Ponce could change its demolition plans. In a letter to Morales,
he stated that if "you decide to repair and/or reconstruct the
affected structure, [Integrand] requires that you refrain from
demolishing or removing any part of the same since [Integrand]
would opt to order that the affected property be put into the
same or better conditions than it was at the time of the fire."
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The letter continued: "If you decide to proceed with the already
projected demolition . . . , [Integrand] will understand that it
will be free of responsibility . . . ." A fax sent to New
Ponce's insurance broker is to like effect. The fax also stated
that, should New Ponce decide to repair or rebuild, it should
send the necessary plans and specifications in order to obtain
construction permits.
Managing Partner Sokol met with Acosta on February 3,
1993. During that meeting, Sokol confirmed the demolition plans,
but said that in light of the option exercised by Integrand, New
Ponce had decided to reconstruct La Bolera Building. On February
9, Sokol sent the necessary plans and specifications to Acosta.
Engineer P rez and Integrand's contractor discussed the scope of
the reconstruction and agreed on the work that needed to be done;
the parties exchanged correspondence regarding La Bolera's
reconstruction. Integrand's contractor initially estimated the
cost at $1,265,766 if the entire structure required replacement,
plus $250,000 to bring the structure up to code and $55,000 in
salvage and demolition expenses. In a revised estimate, the
contractor said he could reconstruct for $350,000 plus $200,000
for code compliance. Acosta then stated that New Ponce should
pay $283,790 of the cost: $83,790 as a penalty for
underinsurance and $200,000 for code compliance.
Sokol again met with Acosta and objected to the cost
figures. Unwavering, Acosta referred Sokol to Joaqu n Castrillo,
a senior vice-president at Integrand. Castrillo told Sokol that
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Integrand never exercised an option to rebuild La Bolera and did
not intend to do so. He instead offered New Ponce $200,000,
which Sokol immediately rejected. In a subsequent letter to
Sokol, Castrillo said that Integrand rejected responsibility
under the insurance policy because Sokol misrepresented New
Ponce's plans to demolish La Bolera and withheld the existence of
a contract for demolition and of permits for a future
condominium.
New Ponce filed suit in district court on May 25, 1993,
seeking compensation for the fire loss and damages. A bench
trial was held in January and March of 1995. The presiding
magistrate judge found in favor of New Ponce, and judgment was
entered against Integrand for $594,787.50. That amount
represents 80% of the amount of the insurance policy, less 15%
pursuant to a vacancy clause in the policy. Integrand argues on
appeal that it is not responsible for the loss since New Ponce
was committed to demolishing the property prior to the fire.
Integrand also contests the amount of damages.
II.
Both the district court and the parties fail to specify
the jurisdiction that supplies the applicable legal rules to this
case. It is important to do so because a federal court sitting
in diversity is not creating general federal common law. Even
where the state or territory has no controlling authority, the
federal court's task is limited to predicting what the highest
court of that state or territory would decide if presented with
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the question. Nieves v. University of Puerto Rico, 7 F.3d 270,
274-75 (1st Cir. 1993). Generally, where the parties ignore
choice of law issues on appeal, we indulge their assumption that
a particular jurisdiction's law applies. Evergreen Marine Corp.
v. Six Consignments of Frozen Scallops, 4 F.3d 90, 95 n.5 (1st
Cir. 1993). But here nothing in the briefs or the record reveals
any assumption other than that the district court would apply
some general law of insurance unconnected to a particular
jurisdiction.
Thus our first task is to determine the controlling
law. A federal court sitting in a diversity case must apply the
choice of law rules of the forum state. Klaxon Co. v. Stentor
Elec. Mfg. Co., 313 U.S. 487, 496. Puerto Rico, the forum
territory in this case, has approved the "dominant or significant
contacts" test for contract and tort actions. A.M. Capen's Co.
v. American Trading & Prod. Corp., 74 F.3d 317, 320 (1st Cir.
1996); In re San Juan DuPont Plaza Hotel Fire Litig., 45 F.3d
569, 576 (1st Cir. 1995). Under that test, the laws of the
jurisdiction with the most significant contacts to the disputed
issues will apply. 74 F.3d at 320. We have little difficulty
concluding that a Puerto Rico court would apply Puerto Rico law:
the insured property is located in Puerto Rico, all of the events
surrounding the issues presented in this case occurred in Puerto
Rico, including all of the meetings between the parties, and
(from what we can discern in the record) the insurance contract
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was entered into in Puerto Rico. We also have not located a
choice-of-law provision in any of the record insurance policies.
Integrand's principal argument is that New Ponce did
not have an insurable interest in La Bolera at the time of the
fire because it planned to demolish the building and construct a
condominium in its place. We have not uncovered, nor have the
parties cited to us, any applicable Puerto Rico law on the
question of insurable interest in a similar context. Given the
uniform approach taken in the few reported cases that have
addressed the question, we conclude that the Supreme Court of
Puerto Rico would adopt the approach of those courts.
The insured must have an insurable interest in a
property before he may recover damages under an insurance policy
for destruction of that property. Chicago Title & Trust Co. v.
United States Fidelity & Guar. Co., 511 F.2d 241, 246 (7th Cir.
1975). The insurable interest requirement may at first glance
appear unfair to policyholders, because presumably a policyholder
would not pay premiums to insure a property that has no economic
value to him. But the insurable interest requirement serves
three policies that would not be served by merely deferring to
the policyholder's decision to pay for insurance. Requiring an
insurable interest as a prerequisite to recovery prevents
gambling through insurance polices, prevents rewarding and
thereby tempting the destruction of property, and confines
insurance contracts to indemnity. Id. at 247.
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Several courts have applied the insurable interest
requirement in cases where a building is destroyed prior to
demolition. The leading case is Garcy Corp. v. Home Ins. Co.,
496 F.2d 479 (7th Cir.), cert. denied, 419 U.S. 843 (1974). In
Garcy, the owner of a seven-story building entered a contract
with a wrecking company for demolition of the building. Although
surrounding structures had been removed, demolition had not begun
on the main building when it was destroyed by fire. The question
presented was whether the owner had an insurable interest such
that he could recover under several fire insurance policies. The
court adopted the standard that an insured retains an insurable
interest so long as the building has not been abandoned pursuant
to an "irrevocable commitment" to demolition. Id. at 481; see
also Gendron v. Pawtucket Mut. Ins. Co., 384 A.2d 694, 697 (Me.
1978). The court found no irrevocable commitment to demolition
and awarded damages to the owner because "the seven-story
building was not in the process of demolition" when it burned.
496 F.2d at 481 (emphasis in original).
A review of the cases decided both before and after
Garcy will demonstrate that the "irrevocable commitment"
requirement is not met in the present case. Mere evidence that
the insured contemplated demolition and even took steps in that
direction prior to loss does not change his insurable interest in
the property. For example, in American Ins. Co. v. Treasurer,
Sch. Dist. No. 37, 273 F.2d 757 (10th Cir. 1959) (Oklahoma law),
prior to partial destruction by a tornado of a school building,
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the insured had received bids for demolition and had in fact
begun construction on a replacement building. Nonetheless, the
court found for the insured, refusing to rely on "unascertained
and speculative future events." Id. at 759. In Knuppel v.
American Ins. Co., 269 F.2d 163 (7th Cir. 1959) (Illinois law),
the court held that plaintiff's apparent decision to have the
building, which was later destroyed by fire, demolished did not
affect his insurable interest where there was testimony that he
was undecided at the time of the fire whether to demolish; the
court so held even though plaintiff had obtained a proposal from
a contractor who offered to demolish the building. Id. at 165-
166. Accord Godwin v. Iowa State Ins. Co. of Keokuk, Iowa, 27
S.W.2d 464, 466-67 (Mo. Ct. App.), cert. denied, 282 U.S. 880
(1930); Gendron, supra. In Leggio v. Millers Nat'l Ins. Co., 398
S.W.2d 607 (Tex. Ct. App. 1965), the court held that an insurable
interest existed despite plans of demolition where all essential
steps had not been taken prior to the fire. The lease required
the lessee to submit specifications to the landlord prior to the
removal of existing structures, which had not been done. Id. at
611.
Even where a contract for demolition is fully executed,
an insurable interest in the property still exists so long as
nothing has been done pursuant to the contract. American Home
Fire Assurance Co. of N.Y. v. Mid-West Enter. Co., 189 F.2d 528,
534 (10th Cir. 1951) (Oklahoma law) (citing additional
authority); accord Garcy, supra. This is so because "it cannot
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be stated with certainty that [the demolition] would, in fact, be
commenced . . . . Performance of the contract may have been
delayed by a number of other factors . . . . So too, plaintiff
could have chosen to repudiate the contract prior to demolition."
Tublitz v. Glens Falls Ins. Co., 431 A.2d 201, 202 (N.J. Super.
Ct. Law Div. 1981). Even where the insured is under a legal duty
to demolish a building, courts have found an insurable interest.
In Bailey v. Gulf Ins. Co., 406 F.2d 47 (10th Cir. 1969)
(Oklahoma law), the building in question had been declared a
nuisance by the city and ordered demolished, but the court
nonetheless concluded that the insurance company was not shielded
from liability. Id. at 48-49 (citing additional authority).
Where courts have found no insurable interest, the
facts revealed a stronger commitment to demolition than present
here. In Woodruff v. Southeastern Fire Ins. Co., 426 F.2d 555
(5th Cir. 1970) (Alabama law), the insured property burned during
the process of demolition. The court held that there was no
insurable interest where the facts revealed a "complete and
permanent abandonment of any use of the structure of the
building." Id. at 562. To the same effect are Lieberman v.
Hartford Fire Ins. Co., 287 N.E.2d 38 (Ill. App. Ct. 1972), in
which the insured had not only signed contracts for demolition,
but demolition had begun three days prior to the fire, and Deni
v. General Accident Ins. Co. of Am., 572 N.Y.S.2d 549 (N.Y. App.
Div.), appeal denied, 580 N.Y.S.2d 198 (1991), in which
demolition had also commenced.
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Even the most permissive cases require that the insured
has entered a binding contract under circumstances making escape
from the contract difficult or unlikely. For example, in Royal
Ins. Co. v. Sisters of Presentation, 430 F.2d 759 (9th Cir. 1970)
(California law), the owners of an old convent building moved
into a new building subsequent to signing contracts that included
demolition of the old building. When the old building was
destroyed by fire, the trial judge awarded damages to the
insured. The Ninth Circuit reversed, holding that there was no
insurable interest since the contracts were all specifically
enforceable: in no event would the owners have had a right to
reinhabit the old building. Id. at 761-62. The existence of an
enforceable contract for demolition was held to eliminate the
insurable interest in a property destroyed by fire in Board of
Educ. of Hancock County v. Hartford Fire Ins. Co., 19 S.E.2d 448
(W. Va. 1942). The court stated its reluctance to complicate
litigation by allowing evidence of an intent to demolish where
demolition had not begun, but concluded:
[I]f the settled policy of the board of
education, that it was legally bound to
execute and the performance of which it
had definitely entered upon, by the acts
of the board itself, had eliminated the
possible use of the . . . building, they
should not be indemnified against its
loss to the extent of being paid by
insurer its actual going value.
Id. at 450. The board of education had both signed a binding
contract and begun to perform that contract by notifying the
builder when it would surrender possession of the property. Id.
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In the present case, there is ample evidence that New
Ponce intended to demolish La Bolera. The company had taken
substantial steps in that direction prior to the fire: it had
obtained preliminary permits from local authorities and obtained
quotations for demolition. But neither these actions nor
uncontested evidence of New Ponce's actual intent to demolish La
Bolera constitute an irrevocable commitment to do so. La Bolera
was certainly not in the process of demolition when fire
destroyed it, and New Ponce had not even entered into a binding
contract for demolition. Under the reasoning of the cases cited
above, New Ponce retained an insurable interest in La Bolera on
January 19, 1993, when it burned. Thus the district court
properly awarded damages to New Ponce under the insurance policy.
Integrand also argues that the amount of damages
awarded by the district court was not supported by the evidence.
Integrand has not pointed to any evidence other than its
assertion that New Ponce had no insurable interest to contest the
court's award, and we have already disposed of that contention.
As the district court fully explained, it was presented with
numerous appraisals as high as $1,265,700 for the cost of
rebuilding and repairing La Bolera. It reasonably decided that
the most objective figure, given the range of appraisals, was the
amount of the insurance policy, $699,750, which it found to
represent 80% of the value of the building. It then deducted 15%
pursuant to a vacancy clause in the policy and entered judgment
for $594,787.50. We find no error with the district court's
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assessment of damages and Integrand has failed to demonstrate to
this Court that the award was not supported by the evidence.
III.
Integrand's remaining arguments do not merit
discussion. For the foregoing reasons, the decision of the
district court is AFFIRMED.
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