
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.                                         -2-                    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."                                         -3-          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                                         -4-          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                                         -5-          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                                         -6-          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.                                             ___                                         -7-                    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,                                         -8-          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                      ______ _____  _____                                         -9-          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.                                         -10-                    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.                                                                       ___                                         -11-                    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                                         -12-          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.                            ________                                         -13-
