## Facts

- Fajardo Shopping Center, S.E. owned a three-building commercial shopping center in Fajardo, Puerto Rico; the principal structure (Building I) had many commercial tenants.
- Sun Alliance Insurance Company of Puerto Rico, Inc. issued FSC a “special multi-peril” all-risk policy covering direct physical loss during December 19, 1988 to April 22, 1991, subject to stated exclusions.
- In September 1989, Hurricane Hugo struck Puerto Rico; FSC claimed the storm severely damaged structural components, particularly double-tee concrete roof beams, rendering portions unsafe and requiring major roof replacement.
- SAIC advanced $150,000 for emergency repairs.
- FSC submitted an engineering report estimating substantial roof replacement costs and later submitted updated proofs of loss asserting close to $2 million in covered damage.
- SAIC retained an engineer who attributed the observed conditions primarily to preexisting design/construction deficiencies rather than hurricane forces and treated much of the claimed loss as excluded, offering only limited additional payment after credits and policy adjustments.
- FSC sued in federal district court to recover policy benefits, asserting that the hurricane materially caused or triggered the structural damage.

## Issues

1. Whether hurricane-related structural damage constituted a covered “direct physical loss” under an all-risk policy despite an exclusion for loss “caused by faulty design, construction, and workmanship.”
2. Whether summary judgment was proper on causation and on the amount of covered damages.
3. Whether prejudgment interest and attorneys’ fees were properly awarded under Puerto Rico law based on alleged obstinate or frivolous claim handling.

## Decision

- The First Circuit affirmed summary judgment for FSC on liability, concluding the record established at least some covered hurricane-caused physical loss and SAIC failed to show a triable dispute that would defeat coverage as a matter of law.
- The court reversed in part and remanded on damages, holding that disputes over the scope and cost of covered repairs presented genuine issues of material fact unsuitable for summary judgment.
- The court partially vacated and remanded the awards of prejudgment interest and attorneys’ fees for reconsideration in light of the revised posture on damages and the standards for “obstinacy” under Puerto Rico law.

## Legal Principles

- An all-risk property policy covers fortuitous direct physical loss unless the insurer proves a specific, clearly applicable exclusion.
- Exclusions are construed narrowly, and ambiguities are construed against the insurer.
- The presence of preexisting defects does not automatically bar coverage when a covered peril materially causes, aggravates, or triggers physical damage; absent clear policy language excluding combined-cause losses, coverage may exist even where excluded conditions contributed.
- Summary judgment is proper only when no genuine dispute of material fact exists; liability may be decided as a matter of law while the extent and valuation of covered loss may still require fact-finding.
- Under Puerto Rico law, prejudgment interest and attorneys’ fees in insurance disputes depend on a finding that the insurer’s refusal to pay was obstinate; close, technically complex disputes may affect that determination.

## Conclusion

The First Circuit held that the all-risk policy covered hurricane-triggered physical damage even if latent construction weaknesses contributed, but it required further proceedings to determine the amount of covered loss and to reassess prejudgment interest and attorneys’ fees under Puerto Rico’s obstinacy standard.


Fajardo Shopping Ctr., S.E. v. Sun Alliance Ins. Co. of P.R., Inc., 167 F.3d 1 (1st Cir. 1999)