Thе parties in this appeal disagree about how the law of Puerto Rico assesses damages when an insurance company wrongfully refuses to pay a policy claim. The facts underlying this diversity action are as follows:
The main mast of plaintiff Noble’s sailboat, Indigo, collapsed while it was under sail just south of Puerto Rico. He sought reimbursement for the loss from his insurance company, the defendant. But, the insurance company, having examined the boat, jumped to the conclusion that a rusty mast cable caused the accident. It pointed to a policy exclusion for accidents caused by “wear and tear and gradual deterioratiоn;” and it refused to pay. Noble sued; the company looked into the matter further; and on the day of trial it conceded that it was wrong. The rusty cable had nothing to do with the accident; and, it should have paid the claim. In the meantime, Noble had sold the boat in unrepaired condition.
Since the parties still did not agree about how much the company should pay, they continued to litigate, finally submitting the case to the district court on the basis of the plaintiff’s deposition, an insurance company adjuster’s memorandum, briefs and the following stipulations:
1. There is coverage under the policy which was issued.
2. The defendant erroneously denied coverage.
3. The sound market value of the yacht Indigo before the casualty was $130,-000.
4. The insured value under the policy was $130,000.
5. The reasonable cost for repairs was $23,900.
6. The vessel was sold in distress because the vessel was damaged for the amount of $55,000.
7. Noble did not obtain funds to repair the yacht.
8. At the time оf the damages, and at the time the vessel was for sale, Noble was residing in Texas.
The district court awarded plaintiff $23,-900 for the cost of repairs and $35,000 additional damages flowing from the company’s “erroneous denial оf coverage.” Both parties appeal, the defendant claiming that the $35,000 consequential damage award is too large and the plaintiff claiming that it is too small.
1. At the outset defendant argues that the plaintiff’s action, insofar as it seeks consequential damages (flowing from the company’s refusal to pay repair costs *53 on time), is a “tort” action, arising under Article 1802 of Puerto Rico’s Civil Code, 31 L.P.R.A. § 5141. Defendant notes that this Article obliges a person to pay for damages that he “causes ... to another through fault or negligence.” And, defendant claims that the district court did not find “fault.or negligence” in its course of conduct.
We do not believe that defendant is correct, however, in characterizing this action as one in tort. The policy itself required defendant to pay “within thirty days after proof of [covered] loss or damage.” One might view plaintiff’s suit as one for breach of this prоvision.
See Prieto v. Maryland Casualty Co.,
[t]hose who in fulfilling their obligations are guilty of fraud, negligence, оr delay and those who in any manner whatsoever act in contravention of the stipulations of [their contractual obligations] ... shall be subject to indemnify for the losses and damages caused thereby.
A majority of statеs characterize actions like the one here as “contract,” while a minority characterize them as “tort.” A.V. Windt,
Insurance Claims and Disputes
§§ 6.35, 6.36 (1982). The courts of Puerto Rico have not decided the question.
Morales v. Automatic Vending Services, Inc.,
Regardless, there is sufficient evidence of “fault” here to satisfy eithеr provision of the Civil Code. The district court did not use the words “fault,” “negligence,” or “fraud” in describing defendant’s conduct. Yet, it said that “the reasons given by defendant to deny coverage were erroneous and invalid.” It added thаt “the defendant breached [its] duty [to act fairly and in good faith] by erroneously denying coverage; by waiting until the day of the trial to admit coverage.” And, in awarding attorney’s fees, it implicitly found that defendant had been “obstinatе” in litigating the case
(see
page 55,
infra )
—a finding that in context must reflect a judgment that defendant had unreasonably withheld payment. A fair reading of the district court’s opinion reveals that it found a delay in payment that was, at the very least, negligent. Defendant points out that its stipulation that its refusal to pay was “erroneous” does not logically imply negligence. But, to read the district court’s finding as one of “innocent” error is to ignore the opinion’s tone, the court’s actions, and the evidence. Defendant conceded, for example, that it checked with sailboat experts about the rusty cable only
after
it denied coverage; it did not explain why it did not check with experts first. In our view, the record is more than sufficient to support a finding of “fault.”
Raymond v. Eli Lilly Co.,
2. The parties agree that defendant should pay plaintiff $23,900 for repairs; but they both argue that the court’s award of $35,000 in additional damages due to the delay in payment was erroneous. We agree that the court incorrectly calculated this portion of the award.
The principles underlying the calculation are clear. Damages in Puerto Rico are compensatory.
Torres v. Castillo Alicea,
If the defendant had paid plaintiff for repairs on time, plaintiff would have owned a boat worth $130,000 (its value to which the partiеs stipulated). Thus plaintiff, who no longer owns the boat, must receive $130,000 in its stead. Plaintiff received $55,000 from Indigo’s buyer. The court awarded $23,900 as the cost of repairs. Hence, plaintiff should receive an additional $51,100, not $35,000.
Defendаnt argues that plaintiff did not adequately mitigate damages; he should have repaired the boat before selling it; he then presumably would have obtained $130,000 for it instead of $55,000. Defendant correctly points to a duty to mitigatе damages.
Sociedad de Ganaciales Valldejuli-Lopez v. Jeronimo Corporation,
The district court may have felt that the $55,000 sale price was inadеquate, that buyers should have paid more for a boat that could be put back into $130,000 condition for repair costs of only $23,900. But, nothing in the record suggests that plaintiff failed adequately to promote the boat’s salе. Common sense suggests that buyers will purchase a boat with a broken mast — a boat that cannot be sailed and about which their knowledge is thereby limited — only at a discount.
Defendant cannot argue that the boat was not wоrth $130,000, for it stipulated that value. The remainder of the parties’ arguments about value are either without merit or were not raised in the court below.
Johnson v. Allyn & Bacon,
3. Plaintiff correctly argues that the district court should have awarded pre *55 judgment interest. Puerto Rico Rule of Civil Procedure 44.3(b) provides:
... the court may impose on an obstinate party the payment of legal interest to be computed on the amount of the judgment from the time the causе of action accrues in actions of debt, and in actions for damages, from the time the complaint is filed until judgment is entered.
Although the translation of the rule uses the word “may,” the rule in Spanish reads “el tribunal ... impondrá,” which meаns that “the court ... will impose.” And in interpreting this language, the Commonwealth Supreme Court has held that, once a district court finds that a party has been “obstinate,” it
must
award prejudgment interest to the other side.
Insurance Company of Puerto Rico v. Tribunal Superior,
In determining the amount of prejudgment interest, thе court should consider the “repair costs” and the “consequential damages” separately. In seeking repair costs, plaintiff is, in essence, collecting a debt, for defendant owes him that money in accordance with the terms of the policy. Cf. Colondres Velez v. Bayron Velez, — D.P.R. —, 83 J.T.S. 108 (Dec. 7, 1983) (action for collection of money owed under a buying-selling contract is action for collection of debt for purposes of P.R.R. Civ.P. 44.3(b)). Hence, as Rule 44.3(b) states, prejudgment interest on the award for the cost of repairs ($23,900) runs from the time “the cause of action accrues.” In seeking to recover for the delay in payment, however, plaintiff has brought an action for “damagеs” (whether in “contract” or “tort” is irrelevant). Hence, prejudgment interest on the award of consequential damages ($51,100) must be computed “from the time the complaint is filed.”
Plaintiff’s request for an interest rate of 12 percent to 17 percent must be denied, for Rule 44.3(b) states that prejudgment interest is to be “legal interest,” and legal interest in Puerto Rico is 6 percent. Article 1649 of the Civil Code, 31 L.P.R.A. § 4591;
see Roldan Medina v. Serra,
The judgment of the district court is vacated and the case is remanded for further proceedings consistent with the opinion.