New Ponce Shopping Center, S.E. v. Integrand Assur. Co., 95-2291

• Decision Date: 07 May 1996
• Docket Number: No. 95-2291,95-2291
• Citation: 86 F.3d 265
• Parties: The NEW PONCE SHOPPING CENTER, S.E. and Aaron Sokol, Plaintiffs--Appellees, v. INTEGRAND ASSURANCE COMPANY, Defendant--Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 265

86 F.3d 265

The NEW PONCE SHOPPING CENTER, S.E. and Aaron Sokol Plaintiffs--Appellees, v. INTEGRAND ASSURANCE COMPANY, Defendant--Appellant.

No. 95-2291.

United States Court of Appeals First Circuit.

Heard May 7, 1996.

Decided June 25, 1996.

Jose E. Otero Matos, with whom Irizarry, Otero & Lpez, was on brief, Santurce, PR, for appellant.

Enrique Peral, with whom Munoz Boneta Gonzalez Arbona Bentez & Peral, was on brief, Hato Rey, PR, for appellees.

Before LYNCH, Circuit Judge, COFFIN, Senior Circuit Judge, and CUMMINGS, ^* Circuit Judge.

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 Mara 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 Perez was engaged by New Ponce to obtain additional necessary permits.

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, Perez 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 Benjamn Acosta to investigate and adjust the fire loss. Acosta learned of the demolition plans through meetings with General Manager Morales and Engineer Perez. 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." 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 Perez 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 Joaqun Castrillo, a senior vice-president at Integrand. Castrillo told Sokol that 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 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, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477. 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 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.

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, 95 S.Ct. 75, 42 L.Ed.2d 71 (1974). In Garcy, the owner of a seven-story building entered a contract with a wrecking company...