Edgewood Manor Apartment Homes, LLC v. RSUI Indemnity Co.

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.