The New Ponce v. Intergrand

• Court: Court of Appeals for the First Circuit
• Decided: June 25, 1996
• Docket: 95-2291
• Status: Published

Opinion

USCA1 Opinion

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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