Edgewood Manor Apartment Homes v. RSUI Indemnity Company

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-1480
EDGEWOOD MANOR APARTMENT
HOMES, LLC, and SOUTHLAND
MANAGEMENT CORPORATION ,
Plaintiffs-Appellants,
v.
RSUI INDEMNITY COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 08-C-920 — Charles N. Clevert, Jr., Judge.
No. 12-1508
SOUTHLAND MANAGEMENT
CORPORATION ,
Plaintiff-Appellant,
v.
RSUI INDEMNITY COMPANY,
Defendant-Appellee.
2 Nos. 12-1480 & 12-1508
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 11-C-626 — Charles N. Clevert, Jr., Judge.
ARGUED SEPTEMBER 5, 2012 — DECIDED OCTOBER 25, 2013
Before POSNER, KANNE , and SYKES, Circuit Judges.
SYKES, Circuit Judge. These consolidated appeals raise an
interesting question of insurance law: Does a claim for
“replacement cost” proceeds under a property-insurance
policy survive the insured’s sale of the damaged property in its
unrepaired state? The issue is buried under layers of
transactional and procedural complexity; we will simplify
where possible. Edgewood Manor Associates, Ltd.
(“Edgewood Associates”) owned an apartment complex in
Gulfport, Mississippi, that was insured against property
damage under a policy issued by RSUI Indemnity Company.
In the event of a covered loss, RSUI promised to pay “actual
cash value” proceeds and also “replacement cost” proceeds.
Southland Management Corporation, a limited partner and the
managing general partner of Edgewood Associates, was the
named insured.
The apartment complex was badly damaged in Hurricane
Katrina. RSUI paid actual-cash-value proceeds and the parties
began negotiating for the additional replacement-cost
proceeds. In the midst of these negotiations, Southland
contracted to sell the property in its unrepaired state to
Nos. 12-1480 & 12-1508 3
Edgewood Manor Apartment Homes, LLC (“Edgewood
Manor”), a new company formed by a Wisconsin-based real-
estate firm for the purpose of purchasing the apartment
complex. Before the closing Southland notified RSUI of its
intention to sell the property and assign the claim for
replacement-cost proceeds to the buyer. RSUI responded that
if Southland sold the property before completing repairs, it
could not recover replacement-cost proceeds and neither could
the buyer. Undeterred, Southland went ahead with the sale.
Southland and Edgewood Manor, the buyer, then sued
RSUI in federal court in Wisconsin seeking a declaration that
the insurer was obligated to pay the claim. Southland later
brought a related breach-of-contract action in federal court in
Mississippi, which was transferred to Wisconsin and has
proceeded along with the earlier-filed case. In the meantime
Edgewood Manor repaired the property.
The litigation continued for years on the assumption that
the replacement-cost claim had been assigned to Edgewood
Manor along with the sale of the property. After much proce-
dural wrangling, the truth finally came out: The insurance
claim had not been assigned after all. The district court
dismissed both cases.
We affirm in part and reverse in part. In the absence of an
assignment, Edgewood Manor lacks standing to sue RSUI, so
its claim was properly dismissed. Southland, on the other
hand, still owns the replacement-cost claim and remains a
proper plaintiff. Southland had an insurable interest when the
policy was issued and at the time of the loss; the sale of the
property in its unrepaired state did not extinguish its right to
4 Nos. 12-1480 & 12-1508
recover on the mature claim. Although the policy specifies that
replacement-cost proceeds will not be paid until the property
is repaired, it does not require that the insured complete the
repairs itself. Southland’s claims for declaratory judgment and
breach of contract should not have been dismissed.
I. Background
Edgewood Associates, a limited partnership, owned the
apartment complex in Gulfport, and Southland was a limited
partner, managing general partner, and the named insured
under an excess policy issued by RSUI covering damage to the
property. The policy incorporated the terms of the primary
policy on the property and provided excess coverage for the
period December 1, 2004 to December 1, 2005. In the event of
a covered loss, the policy obligated RSUI to pay Southland on
an actual-cash-value basis and also on a replacement-cost basis.
By way of background, actual-cash-value insurance will
compensate an insured for the value of damage to the covered
property in its depreciated state. For example, if property
worth $10,000 deteriorates and is worth only $8,000 at the time
of loss, the insured will receive $8,000. Because actual-cash-
value proceeds may not be sufficient to permit an insured to
repair or rebuild the damaged property to its original specifica-
tions, insurers offer optional replacement-cost coverage for the
full cost of repair or replacement. Southland purchased this
extra coverage for the apartment complex.
RSUI’s obligation to pay on a replacement-cost basis came
with two qualifiers, however. The policy provides:
Nos. 12-1480 & 12-1508 5
d. We will not pay on a replacement cost basis
for any loss or damage:
(1) Until the lost or damaged property is
actually repaired or replaced; and
(2) Unless the repairs or replacement are
made as soon as reasonably possible after
the loss or damage.
The policy also prohibits the insured from assigning the policy:
“Your rights and duties under this policy may be not trans-
ferred without our written consent except in the case of death
of an individual named insured.”
On August 29, 2005, Hurricane Katrina heavily damaged
the apartment complex. The primary insurer paid its coverage
limits for the actual cash value of the damage, and RSUI paid
the excess actual cash value. Southland and RSUI then began
negotiating over the replacement-cost proceeds. Southland did
not repair the property, however. Instead, in mid-2007 South-
land and Edgewood Associates entered into an agreement to
sell the apartment complex to Gorman & Co., Inc., a Wisconsin
real-estate firm. The purchase agreement was revised many
times to address (among other complexities) the evolving issue
of the replacement-cost proceeds under the RSUI excess policy.
As amended on November 26, 2007, the purchase agree-
ment included a warranty by Edgewood Associates that the
insurance payment would be at least $3.1 million. This version
of the agreement also provided that Edgewood Associates
would pay or assign $1.1 million of the insurance proceeds to
Gorman at closing and would donate the remaining $2 million
6 Nos. 12-1480 & 12-1508
to “Impact Seven,” a nonprofit organization, with the under-
standing that the nonprofit would lend the money to the
buyer. The transaction apparently was structured this way for
tax purposes.
Before the sale closed, Southland notified RSUI that it
intended to sell the property and assign its replacement-cost
claim or otherwise transfer its right to payment to the buyer.
RSUI responded that an assignment or other transfer was
prohibited under the policy’s “no transfer” provision. South-
land countered that the “no transfer” provision only prohibited
an assignment of the policy itself, not the mature claim to
replacement-cost proceeds.
This dispute was never resolved, but the transaction was
restructured again, apparently in response to the continuing
uncertainty over payment of the insurance proceeds. Gorman
assigned its right to purchase the property to Edgewood
Manor, a newly created entity for which Gorman was the
managing partner. The parties then amended the purchase
agreement to rearrange the distribution of the insurance
recovery. Under the amended agreement, Edgewood Manor
would receive the proceeds through a circuitous series of
transactions. Omitting details not relevant here, under the final
iteration of the agreement, Southland retained ownership of
the replacement-costs claim but appointed Edgewood Manor
as its attorney-in-fact with respect to negotiations with RSUI.
Southland promised to direct RSUI to pay the replacement-cost
proceeds to Mississippi Title Company as escrow agent.
Mississippi Title would then disburse the proceeds to Impact
Nos. 12-1480 & 12-1508 7
Seven, the nonprofit previously designated as the conduit, and
Impact Seven would lend the money to Edgewood Manor.
The restructured deal closed on February 12, 2008, and
Edgewood Associates conveyed the property to Edgewood
Manor. To wrap up loose ends, the next day Edgewood Manor
and Impact Seven entered into a contract under which the
nonprofit promised to lend the insurance proceeds to
Edgewood Manor.
In the meantime, the question of replacement-cost proceeds
remained unsettled. In March 2008 RSUI—apparently unaware
that the sale already had occurred—advised Southland that no
replacement-cost payments would be due unless and until
repairs or replacements were made. The insurer took the
position that until Southland made repairs or replacements, it
would have no mature claim to assign. Months later Gorman
(indirectly, the new property owner) took over negotiations,
notifying RSUI that the sale was complete. Gorman did not,
however, explain the final terms of the sale. In particular,
Gorman never explained that the transaction did not include
an assignment of the insurance claim but instead involved a
promise by Southland to donate the proceeds to Impact Seven
for Edgewood Manor’s benefit. RSUI continued to deny any
obligation to make replacement-cost payments.
With negotiations at an impasse, in October 2008 Southland
and Edgewood Manor sued RSUI in federal district court in
Eastern Wisconsin seeking a declaration that RSUI owed the
insurance proceeds; they also sought damages for bad-faith
delay or denial of the claim. The case proceeded to cross-
motions for summary judgment. RSUI argued that Edgewood
8 Nos. 12-1480 & 12-1508
Manor was not a proper plaintiff because it had not produced
evidence of an assignment, and alternatively, that any assign-
ment was invalid in light of the “no transfer” provision in the
policy. RSUI also argued that Southland lost its insurable
interest when it sold the property. Finally, RSUI argued that
Southland was not entitled to replacement-cost proceeds
because it had not repaired the property prior to the sale.
With the summary-judgment motions pending, Southland
filed a second action in federal court in Mississippi asserting a
breach-of-contract claim against RSUI. By this time Edgewood
Manor had repaired the property and the breach-of-contract
claim ripened. The Mississippi case was transferred to the
Eastern District of Wisconsin and proceeded in tandem with
the declaratory-judgment/bad-faith suit.
The district court eventually ordered the parties to clarify
the complicated facts surrounding the sale of the apartment
complex. At that point nothing in the record established that
Southland had, in fact, assigned the claim for replacement-cost
proceeds to Edgewood Manor, so the question of who owned
the claim remained unclear. In response Southland and
Edgewood Manor submitted an affidavit from Edward
Matkom, Gorman’s general counsel, explaining that Edgewood
Associates owned the property at the time of the loss and that
Southland was its managing partner and the named insured
under the excess policy. But the Matkom affidavit was vague
on the precise nature of Edgewood Manor’s interest in the
insurance claim, saying only that “Edgewood Manor is the
current title owner of the Property, and in accordance with the
Nos. 12-1480 & 12-1508 9
terms of the sale of the Property[,] [has] an interest in the
proceeds that are the subject of this litigation.”
Although it did not resolve the mystery of the supposed
“assignment,” the Matkom affidavit was enough to convince
the district judge that Edgewood Manor had an interest in the
insurance proceeds sufficient to support its standing to sue.
The judge also concluded that Southland’s status as a named
insured, coupled with the possibility that it retained a partial
interest in the proceeds after the still-undisclosed “assign-
ment,” was enough to support Southland’s standing. The judge
concluded that the plaintiffs’ entitlement to replacement-cost
proceeds could not be decided on summary judgment but that
RSUI was entitled to judgment on the bad-faith claim. On
March 23, 2011, the court entered an order denying the plain-
tiffs’ summary-judgment motion, granting RSUI’s motion with
respect to the bad-faith claim only, and setting a status confer-
ence for the following week.
At that conference held on March 30, RSUI reminded the
court that it still did not know who owned the insurance claim
because evidence of an assignment had not been produced.
The judge instructed RSUI to propound a request for this
evidence by letter within a week, with a response due from the
plaintiffs by the end of the month. These instructions did not
produce the desired clarity. RSUI’s attorney sent a letter
requesting all documents pertaining to the purported assign-
ment. Counsel for the plaintiffs responded that the information
was irrelevant.
On May 5, the next scheduled status conference, RSUI again
requested evidence of the assignment, arguing that without
10 Nos. 12-1480 & 12-1508
proof of an assignment, it had no obligations to either party
because Edgewood Manor would not be in privity and
Southland could not recover because it had not repaired the
property prior to the sale. The judge ordered the plaintiffs to
“provide to RSUI all materials respecting the sale, assignment
or transfer of rights or proceeds under RSUI’s policy relevant
to this action and discoverable in this case.” In response
Southland and Edgewood Manor filed a copy of “Amendment
Eight” to the purchase agreement setting forth the final
arrangements regarding the insurance proceeds. Counsel’s
transmittal letter stated that “this is the only relevant docu-
ment related to the terms of the allocation of proceeds between
Southland and Edgewood Manor.”
At the next status conference on July 13, 2011, the issue of
the assignment was finally resolved. The judge noted that
Amendment Eight contained no reference to an assignment of
the insurance proceeds and questioned the plaintiffs’ attorney
about the exact nature of Edgewood Manor’s interest in the
declaratory-judgment action. Counsel responded that
Edgewood Manor’s interest was based “primarily” on the
contents of Amendment Eight (and to a lesser extent on earlier
amendments) and also on counsel’s personal conversations
with his clients. The judge was understandably dissatisfied
with this nonresponsive answer and pressed the question of
Edgewood Manor’s standing in light of the absence of an
assignment. RSUI jumped in, asserting that it was now clear
that Edgewood Manor had no direct interest in the
replacement-cost proceeds because there had been no assign-
ment of the claim. Instead, Southland retained the claim, and
Edgewood Manor’s interest was at best indirect through a
Nos. 12-1480 & 12-1508 11
series of promised payments culminating in a donation to
Impact Seven, which would lend the money to Edgewood
Manor.
At this point the district court called a recess and an off-the-
record discussion ensued. When the proceedings resumed
11 minutes later, RSUI moved to dismiss the declaratory-
judgment action, essentially reiterating the argument it had
made in its summary-judgment motion: (1) without an assign-
ment Edgewood Manor lacked a direct interest in the insurance
proceeds and thus had no standing to sue RSUI; and
(2) Southland had no right to recover replacement-cost
proceeds because it had not repaired the apartment complex
before selling it. The judge granted the motion on the spot and
invited a dispositive motion in the companion breach-of-
contract action.
Southland and Edgewood Manor moved to vacate the
judgment under Rule 59(e) of the Federal Rules of Civil
Procedure, submitting another affidavit from Matkom and
copies of the purchase agreement; Amendments One, Three,
Four, and Eight; and a document called “Loan Agreement
Number 2.” In the meantime RSUI moved to dismiss the
breach-of-contract action based on the preclusive effect of the
court’s ruling in the declaratory-judgment action. The court
declined to consider the plaintiffs’ additional evidence because
it was not newly discovered and denied the Rule 59(e) motion.
In a separate order, the court construed RSUI’s motion to
dismiss the breach-of-contract action as a motion for judgment
on the pleadings, see FED . R. CIV . P. 12(c), and granted it. This
appeal followed.
12 Nos. 12-1480 & 12-1508
II. Discussion
The plaintiffs raise multiple procedural and substantive
claims of error. For the most part, our review is de novo. As we
explain, the district court’s dismissal of the declaratory-
judgment action is best construed as an order granting a new
or renewed motion for summary judgment; we review a
decision granting summary judgment de novo. Minn. Life Ins.
Co. v. Kagan, 724 F.3d 843, 848 (7th Cir. 2013). The same
standard of review applies to the order entering judgment on
the pleadings in the breach-of-contract action. Scherr v. Marriott
Int’l, Inc., 703 F.3d 1069, 1073 (7th Cir. 2013). We review the
denial of the plaintiffs’ Rule 59(e) motion deferentially, for an
abuse of discretion only. Blue v. Hartford Life & Accident Ins. Co.,
698 F.3d 587, 598 (7th Cir. 2012). The parties agree that the
claims are governed by Mississippi law.
A. Procedural Arguments
The plaintiffs raise a plethora of procedural challenges to
the district court’s orders dismissing their declaratory-
judgment action and denying their Rule 59(e) motion. The
court did not specifically characterize the dismissal order, but
the record suggests that it was a summary judgment entered
on a new or renewed oral motion from RSUI. Under the rules
applicable to summary judgment, we detect no procedural
error.
The plaintiffs’ first objection is that the motion was not in
writing. They rely on the general rule that “[a] request for a
court order must be made by motion” and “[t]he motion
Nos. 12-1480 & 12-1508 13
must … be in writing unless made during a hearing or trial.”
FED . R. CIV . P. 7. RSUI’s motion plainly falls within the “unless”
clause; counsel made the motion “during a hearing,” so the
writing requirement did not apply. Moreover, the status
conference was scheduled for the express purpose of address-
ing dispositive issues of law and fact that had been under
discussion for some time, so there can be no complaint of
unfair surprise. The existence of an assignment and its effect on
the claim for replacement-cost proceeds had been key issues in
the cross-motions for summary judgment. The court declined
to resolve these issues on summary judgment, so they re-
mained very much in play.
At the May 5 status conference, RSUI advised the court that
the plaintiffs still had not produced evidence of an assignment
and argued that “absent proof of assignment prior to or at the
time of the sale, there is no obligation to pay insurance pro-
ceeds, period.” The district court agreed and ordered counsel
to produce the requested documents. The judge gave everyone
notice of what would come next: “We will schedule this matter
for further proceedings promptly 45 days down the road, and
we’ll determine at that time whether or not this case can be
resolved by motion, on documents, or whether or not the
better course would be to have a hearing or trial.” (Emphasis
added.) Under these circumstances, and because they were in
exclusive possession of the relevant facts about the lack of an
assignment, the plaintiffs should have anticipated RSUI’s oral
motion.
The plaintiffs next object that RSUI’s motion was not
accompanied by a written brief. They invoke Local Rule 7,
14 Nos. 12-1480 & 12-1508
which provides that “[e]very motion … must be accompanied
by … a supporting memorandum and, when necessary, affi-
davits, declarations, or other papers; or … a certificate stating
that no memorandum or other supporting papers will be
filed.” E.D. WIS. CIV . L.R. 7. The plaintiffs also rely on the local
rule pertaining to summary-judgment motions:
With each motion for summary judgment, the
moving party must file: (A) a memorandum of
law; (B) a statement setting forth any material
facts to which all parties have stipulated; (C) a
statement of proposed material facts as to which
the moving party contends there is no genuine
issue and that entitle the moving party to a
judgment as a matter of law; … (iii) failure to
submit such a statement constitutes grounds for
denial of the motion; and (D) any affidavits,
declarations, and other materials referred to in
Fed. R. Civ. P. 56(c).
E.D. WIS. CIV . L.R. 56(b).
Although the moving party’s failure to file a supporting
memorandum “is sufficient cause for the [c]ourt to deny the
motion,” E.D. WIS. CIV . L.R. 7(d), we have repeatedly held that
the district court has broad discretion to require strict compli-
ance with local rules or to relax the rules and excuse noncom-
pliance. E.g., Modrowski v. Pigatto, 712 F.3d 1166, 1169 (7th Cir.
2013). In other words, “litigants have no right to demand strict
enforcement of local rules by district judges.” Id. The district
court was not required to wait for further briefing; the legal
issues were already fully briefed. Once the facts surrounding
Nos. 12-1480 & 12-1508 15
the transaction were clarified, the matter was ready for
decision.
The plaintiffs also argue that RSUI’s oral motion violated
Rule 56 because it was not “served” at least 10 days before the
hearing. This argument is frivolous; the plaintiffs rely on an
obsolete version of Rule 56(c). The rule was amended in 2009
to remove the 10-day service requirement and substitute a new
briefing schedule. See FED . R. CIV . P. 56(c) (rev. ed. West 2009,
eff. Dec. 1). The rule was rewritten again in 2010, eliminating
the timing requirement altogether. FED . R. CIV . P. 56(c) (rev. ed.
West 2010, eff. Dec. 1).1
The plaintiffs insist that they were entitled to at least some
kind of advance notice as a matter of due process, referring
opaquely to “the due process requirements noted by the
U.S. Supreme Court in Celotex.” But Celotex does not refer to
due process at all; instead, it explains the requirements of
Rule 56. Celotex Corp. v. Catrett, 477 U.S. 317, 322–28 (1986). It
is true that for sua sponte summary judgments, Rule 56(f)
specifically requires “notice and a reasonable time to respond.”
This was not a sua sponte summary judgment.
Finally, the plaintiffs contend that the district court was
wrong to disregard the additional evidence submitted with
their Rule 59(e) motion: the second Matkom affidavit and the
numerous attached exhibits (the purchase agreement; Amend-
ments One, Three, Four, and Eight; and the Loan Agreement
Number 2). But a Rule 59(e) motion is not a fresh opportunity
1
The 2010 Amendments became effective December 1, 2010, and therefore
were applicable to RSUI’s July 13, 2011 oral summary-judgment motion.
16 Nos. 12-1480 & 12-1508
to present evidence that could have been presented earlier. See
Sigsworth v. City of Aurora, 487 F.3d 506, 512 (7th Cir. 2007);
LB Credit Corp. v. Resolution Trust Corp., 49 F.3d 1263, 1267
(7th Cir. 1995). To prevail on a Rule 59(e) motion, the moving
party “must clearly establish (1) that the court committed a
manifest error of law or fact, or (2) that newly discovered
evidence precluded entry of judgment.” Blue, 698 F.3d at 598
(internal quotation marks omitted).
The second Matkom affidavit and its attachments were
obviously in the plaintiffs’ possession and should have been
disclosed earlier. Indeed, RSUI repeatedly asked for docu-
ments relating to the precise nature of Edgewood Manor’s
interest in the insurance claim; the court had ordered this
evidence produced and the plaintiffs had persistently insisted
that it was irrelevant. This evidence was hardly “newly
discovered,” as Rule 59(e) requires; instead, it was belatedly
produced.
Running through the plaintiffs’ procedural arguments is a
vague complaint about unfairness, but this objection rings
hollow under the circumstances here. Having evaded the
matter for so long, the plaintiffs cannot have been surprised
when the court entertained an immediate dispositive motion
once the truth about the nonexistent “assignment” came to
light. We find no procedural error in the district court’s
decisions.
Nos. 12-1480 & 12-1508 17
B. Substantive Arguments
1. Edgewood Manor
Edgewood Manor maintains that even without an assign-
ment or other direct entitlement to the replacement-cost
proceeds, it has standing to sue RSUI for declaratory judgment.
We disagree. To establish its standing, Edgewood Manor must
show that it has an “ ‘injury in fact’—an invasion of a legally
protected interest which is … concrete and particularized”—
and that its injury is fairly traceable to the defendant’s conduct
and likely to be redressed by the requested relief. Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560–61 (1992). These are the
constitutional minimums for standing to sue in federal court;
there are also “prudential” standing requirements, one of
which is that “the plaintiff generally must assert his own legal
rights and interests, and cannot rest his claim to relief on the
legal rights or interests of third parties.” Warth v. Seldin,
422 U.S. 490, 499 (1975); see also Rawoof v. Texor Petroleum Co.,
521 F.3d 750, 757 (7th Cir. 2008). Prudential-standing rules,
unlike constitutional ones, are not jurisdictional and therefore
may be disregarded in certain circumstances. See Warth,
422 U.S. at 500–01 (identifying various situations in which a
litigant may assert rights of third parties); see also Rawoof,
521 F.3d at 757.
“The party invoking federal jurisdiction bears the burden
of establishing these elements[,] … [and] each element must be
supported … with the manner and degree of evidence required
at the successive stages of the litigation.” Lujan, 504 U.S. at 561
(citations omitted). At the summary-judgment stage, “the
plaintiff can no longer rest on … ‘mere allegations,’ but must
18 Nos. 12-1480 & 12-1508
‘set forth’ by affidavit or other evidence ‘specific facts.’ ” Id.
(citations omitted).
There is no question that Edgewood Manor lacked a direct
interest in the replacement-cost proceeds under the RSUI
excess policy. Contrary to the assumption that prevailed
during most of the litigation, the replacement-cost claim was
never assigned to Edgewood Manor when it purchased the
property. Instead, Southland retained the claim and promised
that the proceeds would be paid to the Mississippi Title
Company, which in turn would disburse the money to Impact
Seven, which would loan the money to Edgewood Manor.
Although this indirect interest may be sufficient to establish
constitutional standing, see Morrison v. YTB Int’l, Inc., 649 F.3d
533, 536 (7th Cir. 2011), Edgewood Manor plainly lacks stand-
ing under the prudential rule that a litigant cannot sue to
enforce the legal rights of another.
The relief sought in the declaratory-judgment action is a
ruling regarding the rights of the parties to the RSUI excess
insurance policy. Southland is the named insured and contin-
ues to own the replacement-cost insurance claim. Edgewood
Manor apparently has a contractual right to recover from
Southland some or all of the proceeds Southland may receive
from RSUI on the replacement-cost claim (albeit through
conduits). But the declaratory-judgment action concerns only
the legal rights of the parties to the excess policy. Edgewood
Manor did not receive an assignment of the insurance claim
when it purchased the apartment complex and may not sue to
Nos. 12-1480 & 12-1508 19
enforce Southland’s rights against RSUI.2 See G & S Holdings
LLC v. Cont’l Cas. Co., 697 F.3d 534, 540–42 (7th Cir. 2012). The
district court properly dismissed Edgewood Manor’s claim for
lack of standing.
2. Southland
RSUI argues that Southland cannot recover replacement-
cost proceeds because it lost its insurable interest when it sold
the property. An elementary principle of insurance law, in
Mississippi and elsewhere, is that the insured must have an
insurable interest in the subject of the policy.3 “The reason for
2
Edgewood M anor suggests that the analysis must be different in a
declaratory-judgment action because one of the purposes of the Declaratory
Judgment Act, 28 U.S.C. §§ 2201–02 (2006), is to avoid multiplicity of suits
by having all interested parties joined in the action. The argument seems to
be that in enacting the Declaratory Judgment Act, Congress modified the
prudential-standing rule prohibiting litigants from asserting the rights of
others. See Warth v. Seldin, 422 U.S. 490, 501 (1975) (“Congress may grant an
express right of action to persons who otherwise would be barred by
prudential standing rules.”). If that is Edgewood M anor’s argument, it is
misplaced. The Declaratory Judgment Act provides a cause of action only
to those seeking a declaration of their own legal rights. 28 U.S.C. § 2201(a)
(“In a case of actual controversy within its jurisdiction, … any court of the
United States … may declare the rights and other legal relations of any
interested party seeking such declaration … .” (emphasis added)). This action
seeks a declaration of rights under the excess policy, so Edgewood M anor
is necessarily seeking to enforce the rights of another: Southland, the named
insured and owner of the replacement-cost claim.
3
In some states an insurable interest is required by statute. In M ississippi
(continued...)
20 Nos. 12-1480 & 12-1508
the rule requiring an interest in property upon which insurance
is sought is to prevent the coverage from becoming a wagering
contract contrary to public policy.” Se. Fid. Ins. Co. v. Gann,
340 So. 2d 429, 434 (Miss. 1976). The requirement also guards
against moral hazard: “To allow persons without insurable
interests to procure such insurance would create economic
incentives in such persons to cause loss.” JEFFREY JACKSON ,
MISSISSIPPI INSURANCE LAW AND PRACTICE § 4:1 (2012).
Where, as here, the subject of the insurance policy is
property, the insured must have an insurable interest in the
covered property. It need not be a strictly legal interest in the
sense of title; the fact that the insured will suffer an economic
loss if the property is damaged will suffice even if the insured
lacks an ownership interest in the property. Necaise v. U.S.A.A.
Cas. Co., 644 So. 2d 253, 258 (Miss. 1992) (“All that is required
for one to have an insurable interest in property is that the
insured will suffer an economic loss if the property is de-
stroyed.”); Gann, 340 So. 2d at 433 (“[The insured] had an
insurable interest in the property even though the legal title
was elsewhere. He was subject to economic loss at the time the
policies were issued if the building were destroyed.”).
RSUI argues that Southland lost its insurable interest after
it sold the apartment complex. But Mississippi law does not
require that an insured continue to hold its interest in the
3
(...continued)
an insurable interest for life-insurance policies is required by
section 83-5-251 of the M ississippi Code, but the insurable-interest require-
ment for property insurance apparently remains a feature of common law
only.
Nos. 12-1480 & 12-1508 21
damaged property through the filing of a lawsuit; the insurable
interest is measured either at the time of policy formation or at
the time of loss. As a leading treatise on insurance law ex-
plains:
There is authority that the insurable interest in
property must exist at the time the insurance
contract is entered into while other cases hold
that since the contract is one of indemnity, the
insurable interest must exist when loss is sus-
tained. The view that the interest must exist both
at the inception of the contract and when the loss
is sustained has also found expression.
3 LEE R. RUSS IN CONSULTATION WITH THOMAS F. SEGALLA ,
COUCH ON INSURANCE § 41:18 (3d ed. 2011). Mississippi
appears to follow the rule that the insured must have an
insurable interest at the time of contract formation. See Necaise,
644 So. 2d at 257 (“[A]n insurable interest must exist in an
insured when the contract is entered for it to be effective.”
(alteration in Necaise) (internal quotation marks omitted));
Gann, 340 So. 2d at 433 (“[T]he general rule [is] that an insur-
able interest in property must exist in an insured when the
contract is entered for it to be effective.”).
Whether measured at the time of contract formation or the
time of loss, the parties have identified no authority suggesting
that any state, let alone Mississippi, requires that an insured
continue to maintain an insurable interest in the property while
the claim is being negotiated and through litigation. That rule
would be hard to justify. Neither of the rationales for the
insurable-interest requirement—preventing wagering contracts
22 Nos. 12-1480 & 12-1508
and avoiding contracts that create incentives to cause loss—has
any force after the loss has occurred.
There is no dispute that Southland had an insurable interest
in the Gulfport property when it purchased the policy and at
the time of the loss. Southland was a limited partner and the
managing general partner of Edgewood Associates, the owner
of the apartment complex, so any fortuitous damage to the
property had a direct bearing on Southland’s economic
fortunes, both at the time of policy formation and when the
property was damaged in Hurricane Katrina. That is enough.
See Necaise, 644 So. 2d at 258; Gann, 340 So. 2d at 433. Indeed,
RSUI tacitly admitted that Southland had an insurable interest
by making actual-cost-value payments to Southland. The fact
that Southland and Edgewood Associates later sold the
property—after the loss occurred and prior to suit—is irrele-
vant.
RSUI also argues that it has no obligation to pay
replacement-cost proceeds because Southland sold the prop-
erty in its unrepaired state. This argument reads the policy as
if it required the insured to repair the property itself. The
policy nowhere contains that requirement. To repeat, the
relevant provision conditioning recovery is as follows:
d. We will not pay on a replacement cost basis
for any loss or damage:
(1) Until the lost or damaged property is
actually repaired or replaced; and
Nos. 12-1480 & 12-1508 23
(2) Unless the repairs or replacement are
made as soon as reasonably possible after
the loss or damage.
This language does not defeat Southland’s claim. To the
contrary, the conditions are written in the passive voice,
leaving the subject unspecified. This drafting choice suggests
that it does not matter who repairs the property. See BRYAN A.
GARNER, GARNER’S DICTIONARY OF LEGAL USAGE 659 (3d ed.
2011) (“[T]he passive voice has its occasional legitimate
uses—usually, when the actor is either unimportant or un-
known … .”).
If RSUI wanted to impose a prerequisite that the insured
repair or replace the property itself, it could have written the
conditions as follows:
d. We will not pay on a replacement cost basis
for any loss or damage:
(1) Until you actually repair or replace the
lost or damaged property;
(2) Unless you make the repairs or replace-
ment as soon as reasonably possible after
the loss or damage.
Or it could have stated clearly—as it did in the “tenants’
improvements and betterments” provision located nearby in
the policy—that it would not pay on a replacement-cost basis
for loss or damage if others pay for repairs or replacement.
24 Nos. 12-1480 & 12-1508
More specifically, section 3d.(4) governs replacement-cost
coverage for loss or damage to “tenants’ improvements and
betterments”:
With respect to tenants’ improvements and
betterments, the following also apply:
…
(4) We will not pay for loss or damage to
tenants’ improvements and betterments if
others pay for repairs or replacement.
This language expressly excludes recovery of replacement-cost
benefits for damage to tenants’ improvements and betterments
if others pay for repairs or replacement. The inclusion of this
explicit limitation on recovery of replacement-cost proceeds for
damage to “tenants’ improvements and betterments” suggests
that the same limitation cannot be found by implication in the
more general provision governing replacement-cost coverage.
Stated differently, the limitation in section d.(4) would be
superfluous if sections d.(1) and d.(2) already required that the
insured make repairs or replacements itself with respect to all
replacement-cost claims.
RSUI insists that although the policy language does not
expressly require the insured to repair the property itself, a
“repair it yourself” requirement should be judicially inferred
in order to avoid conferring a windfall on the insured. No
Mississippi authority has adopted that construction; as far as
we can tell, there is no Mississippi caselaw on this issue at all.
RSUI relies on three nonauthoritative cases that have adopted
this gloss. See Athena Rest., Inc. v. Sheffield Ins. Co., 681 F. Supp.
Nos. 12-1480 & 12-1508 25
561 (N.D. Ill. 1988); Paluszek v. Safeco Ins. Co. of Am., 517 N.E.2d
565 (Ill. App. Ct. 1987); Harrington v. Amica Mut. Ins. Co.,
645 N.Y.S.2d 221 (N.Y. App. Div. 1996). These courts reason
that allowing an insured to sell the property in its unrepaired
state and later recover repair costs incurred by the buyer does
more than simply indemnify the insured against loss; it allows
the insured to profit. To avoid a “windfall,” these courts
implied a “repair it yourself” requirement.
We see several flaws in this reasoning. First, replacement-
cost insurance is specifically designed as more than a pure
indemnity contract. As one court has explained:
The actual cash value policy is a pure indemnity
contract. Its purpose is to make the insured
whole but never to benefit him because a fire
occurred. … Replacement cost coverage, on the
other hand, reimburses the insured for the full
cost of repairs, if he repairs or rebuilds the build-
ing, even if that results in putting the insured in a
better position than he was before the loss.
Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349, 352 (Ind.
1982) (emphasis omitted and added) (citations omitted). The
“windfall” arises because the insured receives compensation
for depreciation that occurred prior to the loss, but that’s an
inherent feature of this kind of coverage.
Suppose an owner purchases a house with four bedrooms
for $100,000. After some years its condition deteriorates and
the structure is worth only $75,000. If a fire were to destroy the
house, the owner is made whole when her insurer pays the
actual-cost value of the damage—$75,000—a measure of loss
26 Nos. 12-1480 & 12-1508
that deducts for depreciation. Maybe the owner can rebuild a
four-bedroom house for that amount using lower-quality
materials, or maybe she can rebuild the house to standard-
quality specifications but with only three bedrooms. Either
way the repaired or rebuilt structure is worth the same as the
damaged one was at the time of the loss, and the insured is
made whole in the sense meant by actual-cost indemnity
insurance.
But if the insured purchases replacement-cost coverage, her
recovery is measured by reference to the cost of rebuilding the
house to its original specifications without a deduction for
depreciation. This leaves her better off—she owns a new house
rather than an older deteriorated one—but that’s the nature of
replacement-cost coverage. RSUI’s argument about “windfall”
does not support an implied “repair it yourself” requirement.
RSUI argues that an owner who repairs or replaces the
damaged property experiences an additional “loss,” but the
same is not true if the owner sells the property in its unrepair-
ed state. It’s not clear that this distinction makes a difference
here. No doubt the sale price of the unrepaired property will
reflect the cost to rebuild, a measure of loss that the owner has
insured against by paying higher premiums for replacement-
cost coverage. We’re not convinced that this distinction is
enough to justify a judicially implied “repair it yourself”
requirement, at least in the absence of clearer policy language
supporting it.
So why bother requiring that a property be repaired at all
if not to ensure that the insured does not enjoy a windfall? The
repair requirement has a more concrete function: It ensures
Nos. 12-1480 & 12-1508 27
that replacement cost is valued accurately. In the absence of
actual repair, the claim would be based on estimates; when
actual repairs are completed, the replacement-cost valuation
becomes certain and verifiable. The reasonable-time condition
adds a requirement of promptness.
The cases RSUI cites are not binding in Mississippi, and one
is simply inapplicable here. Athena Restaurant involved a
“tenants’ improvements and betterments” provision that
expressly required the insured to complete the repair or
replacement itself. 681 F. Supp. at 562. As we have noted, the
RSUI policy contains a similar provision, which suggests that
the policy’s general replacement-cost coverage should not be
limited in a similar way by judicial implication. It is true that
the Illinois Appellate Court’s decision in Paluszek supports
RSUI’s position, 517 N.E.2d at 567–69, and the Appellate
Division of the New York Supreme Court followed Paluszek in
Harrington, 645 N.Y.S.2d at 223–25. But there is persuasive
authority pointing in the opposite direction as well. In Ruter v.
Northwestern Fire & Marine Insurance Co., 178 A.2d 640, 643 (N.J.
Super. Ct. App. Div. 1962), the New Jersey Appellate Division
interpreted a similar repair-or-replacement requirement and
held that the policy did not require that the insured repair or
replace the property himself. On balance, we are not convinced
that the Mississippi courts would read a “repair it yourself”
requirement into a replacement-cost provision in the absence
of specific policy language imposing that condition on recov-
ery. No such language is present here.
Our conclusion requires that we reverse the summary
judgment in favor of RSUI on Southland’s declaratory-
28 Nos. 12-1480 & 12-1508
judgment and breach-of-contract actions; the claims concern
the same subject matter and are controlled by the same legal
principles. Other issues remain open on remand. The policy
requires that the property be repaired within a reasonable time,
and that subject was not explored in the district court or here.
There may be other coverage defenses as well.
Judgment was properly entered for RSUI on the bad-faith
claim, however. The district court’s decision was made on the
understanding that the replacement-cost claim had been
assigned to Edgewood Manor. We now know that the court’s
belief was wrong, through no fault of its own. So although we
affirm the judgment for RSUI on the bad-faith claim, we do so
on a somewhat different analysis.
Mississippi recognizes two kinds of extracontractual
damages against insurers for bad-faith denial or delay in
processing a claim. Punitive damages are available where an
insurer (1) lacks any legitimate or arguable basis for its denial
or delay of the claim; and (2) acts either (a) with malice, or
(b) with gross negligence or reckless disregard for the rights of
others. See Caldwell v. Alfa Ins. Co., 686 So. 2d 1092, 1095
(Miss. 1996). Mississippi also allows a lesser measure of
extracontractual damages—attorney’s fees, costs, and damages
for emotional harm—where an insurer (1) lacks any legitimate
or arguable basis for its denial or delay, and (2) acts with some
lesser standard of culpability. See Universal Life Ins. Co. v.
Veasley, 610 So. 2d 290, 295–96 (Miss. 1992). So both forms of
extracontractual recovery have at least two elements in
common: (1) the absence of an arguable basis to deny or delay
the claim, and (2) some level of culpability.
Nos. 12-1480 & 12-1508 29
In addition, the cases on extracontractual damages for bad
faith appear to presuppose a third, implicit element of the
claim: that the insured actually prevail on its claim for recovery
under the insurance contract, whether by adjudication or the
insurer’s payment of benefits. A leading treatise on insurance
law in Mississippi explains that this is an element for extra-
contractual damages. JACKSON , supra, § 13:2 (“[T]he insured
must first demonstrate that the claim or obligation was in fact
owed. Prevailing on the contract claim is a condition precedent
to prevailing on the claim of bad faith.”); see also Essinger v.
Liberty Mut. Fire Ins. Co., 529 F.3d 264, 271 (5th Cir. 2008) (citing
the treatise’s discussion approvingly). The Fifth Circuit also has
intuited this requirement. See O'Malley v. U.S. Fid. & Guar. Co.,
776 F.2d 494, 500 (5th Cir. 1985) (“[The insured] has not
presented, nor have we found, any Mississippi case allowing
an insured to recover against an insurance company for alleged
bad faith in handling a claim if the insured does not prevail on
the issue of coverage.”). We are aware of no Mississippi deci-
sions allowing extracontractual damages in the absence of an
insurer’s payment of a claim or an adjudication of coverage.
Put simply, an insured cannot show that an insurer’s denial of
a claim was unjustifiably wrong if it cannot show that the denial
was wrong at all.
A threshold complication here is that the claim presented
to RSUI for payment is materially different from the claim on
which Southland may or may not eventually prevail. South-
land initially told RSUI that it planned to sell the apartment
complex and assign its claim for replacement-cost proceeds to
the buyer of the property. All subsequent communications
with RSUI were made by representatives for Gorman on behalf
30 Nos. 12-1480 & 12-1508
of Edgewood Manor, the buyer. So RSUI had every reason to
believe it was evaluating Edgewood Manor’s claim, not
Southland’s. Furthermore, both Southland and Edgewood
Manor pressed the claim while the property remained
unrepaired, a key reason why RSUI refused to pay. These
factual ambiguities are fatal to Southland’s bad-faith claim.
Until the ownership of the claim was clarified and repairs were
made, RSUI had an arguable basis to resist making
replacement-cost payments. Summary judgment was properly
entered for RSUI on the bad-faith claim.
Accordingly, we AFFIRM the judgment in favor of RSUI on
the bad-faith claim. We AFFIRM the judgment dismissing
Edgewood Manor from the declaratory-judgment action for
lack of standing. We REVERSE the judgment in favor of RSUI on
the claim for declaratory judgment and the claim for breach of
contract, and REMAND for further proceedings consistent with
this opinion.