The Seventh Circuit found "replacement cost" proceeds were still payable after the insured's sale of damaged property in its unrepaired state. Edgewood Manor Apt. Homes LLC v. RSUI Indem. Co., 2013 U.S. App. LEXIS 21939 (7th Cir. Oct. 25, 2013).
Edgewood Manor Associates, Ltd. owned an apartment complex in Gulfport, Mississippi that was insured by RSUI Indemnity Company. In the event of a covered loss, RSUI agreed to pay "actual cash value" proceeds and, for an additional premium, "replacement costs" proceeds. Southland Management Corporation, a limited partner of Edgewood Associates, was the named insured.
Hurricane Katrina badly damaged the apartment complex. RSUI paid the actual cash value proceeds, but the parties were unable to negotiate for the additional replacement cost proceeds. The court explained that because the actual cash value proceeds may not be sufficient to permit an insured to repair or rebuild damaged property to its original specifications, insurers offered optional replacement-cost coverage for the full cost of repair or replacement. Southland purchased this extra coverage for the apartment complex.
The replacement cost coverage portion of the policy said the proceeds would not be paid,
(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 prohibited the insured from assigning the policy without RSUI's consent.
When negotiations for the replacement cost coverage broke down, Southland informed RSUI that it was selling the property and assigning the replacement-cost claim to the buyer. RSUI responded that an assignment was prohibited under the policy. Southland countered that the anti-assignment provision only prohibited an assignment of the policy itself, not the mature claim to the replacement-cost proceeds.
The property was sold to Edgewood Manor. Southland and Edgewood Manor then sued RSUI. RSUI successfully moved for summary judgment before the district court.
On appeal, the Seventh Circuit agreed that Edgewood Manor's suit was properly dismissed because there had never been an actual assignment of the policy's proceeds. Edgewood Manor therefore lacked standing.
RSUI argued that Southland could not recover replacement-cost proceeds because it lost its insurable interest when it sold the property. The Seventh Circuit disagreed. Under Mississippi law, that fact that the insured would suffer an economic loss if the property was damaged was sufficient to satisfy the insurable interest requirement even if the insured did not have an ownership interest. The insured only needed to have an insurable interest at the time of contract formation. An insured was not required to maintain an insurable interest in the property while the claim was being negotiated and through litigation.
RSUI tacitly admitted that Southland had an insurable interest by making actual cost value payments under the policy. The fact that Southland later sold the property - after the loss occurred and prior to suit - was irrelevant. Therefore, Southland's suit to acquire the replacement-cost proceeds was improperly dismissed by the district court.