United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 09-2460
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Beckon, Inc., *
*
Plaintiff-Appellant, *
*
v. *
*
AMCO Insurance Company, *
*
Defendant-Appellee, *
* Appeal from the United States
AMCO Insurance Company, * District Court for the
* Eastern District of Missouri.
Counter Claimant- *
Appellee, *
*
v. *
*
Beckon, Inc., *
*
Counter Defendant- *
Appellant. *
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Submitted: March 10, 2010
Filed: August 12, 2010
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Before BYE, ARNOLD, and COLLOTON, Circuit Judges.
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BYE, Circuit Judge.
This appeal involves an insurance coverage dispute over the validity of an
insurance policy AMCO Insurance Company issued to Beckon, Inc., insuring the
latter's business operations as well as the building it occupied but did not own. The
district court concluded the entire policy was void on the grounds Beckon lacked an
insurable interest in the building. Beckon appeals the district court's grant of summary
judgment in favor of AMCO. We reverse and remand for further proceedings.
I
Beckon is in the business of repairing industrial machines used in the beverage
container industry. The company started in 1985. In its first several years, Beckon
operated out of the garage of its owner, John Herbst. In September 1992, Beckon
moved into a 22,000 square foot building located at 455 East Clinton Place in
Kirkwood, Missouri (hereinafter the building).
The terms under which Beckon occupies the building are somewhat atypical.
The building is owned by Rosalinda Rosemann, the widow of the founder of Roto-
Die Company, Inc. Roto-Die occupied the building pursuant to a twenty-year lease
starting in 1977. In the fall of 1990, Roto-Die moved to a new location and vacated
the building even though the twenty-year lease remained in effect. The lease required
Roto-Die "to use reasonable diligence in the care and protection of said premises" and
to keep the building "in good order and repair and free from any nuisance or filth upon
or adjacent thereto." The lease allowed Roto-Die to sublet the building.
During the two years the building was vacant, it was vandalized. In a move that
benefitted both companies, Roto-Die reached an oral agreement with Herbst to allow
Beckon to occupy the building in exchange for acting as its caretaker, i.e., to maintain
the building and prevent it from being vandalized. The agreement also required
Beckon to pay the utilities for the building, which Beckon did, while Roto-Die
continued to pay the real estate taxes and sewer bills. Roto-Die instructed Herbst to
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"treat the building as your own," or words to that effect. Among other things, Herbst
understood this to mean he should insure the building, which he did, unaware that
Roto-Die also continued to insure the building.
When Herbst inquired about purchasing the building, Roto-Die told him a sale
was a possibility sometime in the future. While Herbst was not told as much, the
building was never sold or formally leased to Beckon because Rosemann's interest in
the building was limited to a life tenancy, and the remaindermen who would jointly
own the building upon her death were embroiled in litigation.
After taking possession, Beckon treated the building as its own, making
numerous improvements. Beckon enlarged and replaced the bay doors, remodeled the
offices, remodeled the floors and bathrooms, changed the lighting, painted the
building, expanded the mezzanine, covered the driveway with asphalt, and installed
a large (five ton) hoist. Beckon was not reimbursed for these improvements.
Starting in 1992 and throughout its occupancy of the building, Beckon
purchased insurance covering the building, the contents of the building, and its own
business operations. In 2004, Beckon switched insurers because Zurich, its insurer
at the time, determined Beckon's business operations did not fit within any of Zurich's
underwriting programs. Beckon's insurance agent filed an online application with
AMCO on Beckon's behalf. The underwriting report AMCO obtained while
considering the application listed Beckon as a renter, i.e., "Rents 15,000 sq. ft. in one
story brick building."
In October 2004, AMCO approved the application and issued a policy of
insurance to Beckon. The policy insured Beckon against damage to the building and
its contents, i.e., "business personal property." The policy listed various "Additional
Coverages," for loss of business income, extra expenses, equipment breakdown, etc.
Separate premiums were charged for the building and the business personal property.
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AMCO renewed the policy for one-year terms in October 2005, and again in October
2006. Beckon paid all premiums.
Between1992 and 2006, Beckon had no insurance claims in connection with the
building. Then, two events occurred within a span of months. On March 4, 2007,
sparks from a welder operated by an independent contractor ignited some insulation
inside the building and caused a fire. The fire damaged the work areas of the building,
and damaged or destroyed many of the building's contents. For example, Beckon
estimated damages of $18,000 alone to the five-ton hoist it had installed in the
building. In order to carry on its business, Beckon rented space in another location
in Fenton, Missouri, while the building was repaired. The cost of renting the
temporary space in Fenton approached $10,000 per month. Beckon's temporary rental
expenses continued for nearly two years until it was finally able to move back into the
building in early 2009. On August 24, 2007, while Beckon waited for AMCO to
respond to its fire claim, part of the building's roof blew off during a wind storm.
Rain water damaged an interior office area. Beckon repaired the roof at a cost of
approximately $35,000, and again reported the loss to AMCO.
Between the time of the fire and the wind storm, AMCO investigated Beckon's
ownership interest in the building. After determining Beckon did not own the
building, AMCO did not cancel the policy or claim it was void based on the
misrepresentation of a material fact. Rather, on April 23, 2007, AMCO continued to
provide insurance to Beckon, and issued a Change of Declarations Endorsement to the
policy which added Rosemann and Roto-Die as additional insureds. AMCO charged
Beckon an increased premium for adding the additional insureds, which Beckon paid.
AMCO failed to accept or deny Beckon's fire claim by September 14, 2007, the
date it was required to do so under the terms of the policy (as extended by agreement
of the parties). Finally, on October 1, 2007, AMCO denied Beckon's claim for the fire
damage to the building on the grounds Beckon lacked an insurable interest in the
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building. On October 16, 2007, AMCO denied Beckon's claim for wind damage to
the building on the same grounds. Later, on November 27, 2007, AMCO paid
$532,810.58 under the separate coverage Beckon had purchased for the business
personal property damaged in the fire.
Shortly thereafter, Beckon filed suit against AMCO in federal district court
asserting claims for breach of contract and vexatious refusal to pay the two building
losses (i.e., the fire loss and the wind loss). AMCO's answer asserted numerous
defenses not previously raised by AMCO in its letters denying Beckon's insurance
claims, including an allegation Beckon made material misrepresentations in the
procurement of the policy. AMCO also brought a counterclaim seeking to recoup the
$532,810.58 it paid Beckon for losses caused by the fire and covered under the
business personal property section of the policy.
AMCO filed a motion for summary judgment. The primary basis for AMCO's
motion was that Beckon allegedly misrepresented that it owned the building in its
2004 application. Secondarily, AMCO argued Beckon lacked an insurable interest in
the building because it had no legal or equitable title to the building.
Without addressing the issue of misrepresentation, the district court granted
summary judgment in favor of AMCO on the grounds Beckon lacked an insurable
interest in the building. The district court concluded it did not need to reach the
question of fraud in the procurement of the policy because the lack of an insurable
interest in the building voided the entire policy. The district court also entered
judgment for AMCO on its counterclaim in the amount of $532,810.58, the amount
AMCO had already paid under the business personal property section of the policy.
Beckon filed a timely appeal.
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II
We review the district court's grant of summary judgment de novo. Rand Corp.
v. Yer Song Moua, 559 F.3d 842, 845 (8th Cir. 2009). We also review de novo the
district court's interpretation of Missouri law. Bockelman v. MCI Worldcom, Inc.,
403 F.3d 528, 531 (8th Cir. 2005).
A
At the outset, we reject AMCO's contention that the lack of an insurable interest
in one of several classes of property insured under a single policy is grounds for
voiding an entire policy. Under Missouri law:
[w]here the policy separates the property insured into distinct classes and
specifies the amount of insurance upon each, the contract is severable
into as many contracts as there are separate classes of property insured
on separate valuations, and the fact that the policy may be void as to the
insurance on one class will not necessarily impair its validity as to
another.
Fager v. Commercial Union Assurance Co., 176 S.W. 1064, 1065 (Mo. Ct. App.
1915).
The policy's limits for the replacement cost of the building were separate from
its limits for the business personal property. See Appellant's Appx. at 100 (setting a
policy limit of $675,000 for the replacement cost of the building, and a policy limit
of $529,500 for the business personal property). In addition, AMCO disclosed
separate premiums for the building and the business personal property in the original
application, id. at 86, reflecting AMCO's ability to evaluate independently the risks
involved with respect to the separate classes of property insured. The coverage
Beckon purchased for its own business personal property was for a separate class of
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property insured on a separate valuation than the coverage Beckon purchased for the
building.
There is no dispute Beckon had an insurable interest in its own business
personal property. Thus, even assuming the building coverage was void due to
Beckon's lack of an insurable interest in the building, it does not follow that the
validity of the insurance Beckon purchased for its own business personal property was
impaired. See Fager, 176 S.W. at 1065; see also Raney v. Home Ins. Co., 246 S.W.
57, 58 (Mo. Ct. App. 1922) (noting the insurer paid and did not appeal a claim for
personal property destroyed in a house fire even though it claimed the insured lacked
an insurable interest in the house itself); Sun State Roofing Co., Inc. v. Cotton States
Mut. Ins. Co., 400 So.2d 842, 844 (Fla. Dist. Ct. App. 1981) (concluding, in a suit
brought for coverage under a fire policy, "the trial court erred when it found [the
insured's] entire cause of action failed for lack of an insurable interest" because the
insured had an uncontested insurable interest in the personal property destroyed in the
fire).
As a result, AMCO was not entitled to have the entire policy voided even
assuming Beckon lacked an insurable interest in the building. The district court
therefore erred when it granted summary judgment on AMCO's counterclaim and
ordered Beckon to return the $532,810.58 AMCO paid under the business personal
property section of the policy.
Contrary to AMCO's contentions at oral argument, our decision does not
conflict with Patterson v. State Automobile Mutual Insurance Co., 105 F.3d 1251 (8th
Cir. 1997) (applying Missouri law), where we affirmed the forfeiture of an entire
policy. Patterson did not turn upon the lack of an insurable interest, but rather upon
a specific misrepresentation provision in that policy, coupled with a jury's
determination the insured made a material misrepresentation with regard to one of
multiple coverages provided in the policy. See id. at 1253-54. Here, neither the
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district court nor a jury has yet considered whether Beckon made a material
misrepresentation in procuring the policy. Thus, while fraud may be grounds for
voiding an entire policy under the provisions of a particular policy, the lack of an
insurable interest with respect to one of several classes of insured property, standing
alone, is not a basis for voiding an entire policy.
B
We next decide whether Beckon had an insurable interest in the building itself.
Missouri strongly favors finding an insurable interest, indicating its courts should
"make every effort to find insurable interest, and to sustain coverage, when there is
any substantial possibility that the insured will suffer loss from the destruction of the
property." Dimmitt v. Progressive Cas. Ins. Co., 92 S.W.3d 789, 792 (Mo. 2003)
(quoting G.M. Battery & Boat Co. v. L.K.N. Corp., 747 S.W.2d 624, 627 (Mo. 1988)).
In general, a person has an insurable interest in the subject matter insured
where he has such a relation or concern in such subject matter that he
will derive pecuniary benefit or advantage from its preservation, or will
suffer pecuniary loss or damage from its destruction, termination, or
injury by happening of the event insured against.
Dimmitt, 92 S.W.3d at 792 (quoting G.M. Battery, 747 S.W.2d at 626).
Under Missouri law, the lack of title is immaterial to determining whether a
party has an insurable interest. See G.M. Battery, 747 S.W.2d at 627 ("The material
circumstance in determining insurable interest is not title, but possibility of loss.").
As a result, neither Beckon's lack of title to the building, nor the somewhat atypical
agreement giving rise to its use and occupation of the building, is particularly relevant
in determining whether Beckon had an insurable interest in the building. Our concern
is with whether Beckon derived a pecuniary benefit from the building's preservation,
or suffered a pecuniary loss from its destruction.
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Applying Missouri's broad definition of insurable interest, we conclude Beckon
had an insurable interest in the building under the facts of this case. Beckon's
agreement with Roto-Die gave Beckon the right to occupy and use the building. As
a result of the fire, Beckon temporarily lost its use of the building and had to rent
space in another location to carry on its business operations. Beckon incurred
approximately $10,000 per month in rental expenses for nearly two years. Thus, the
possession and use of the building clearly had a pecuniary value to Beckon. See
DeWitt v. Am. Family Mut. Ins. Co., 667 S.W.2d 700, 705 (Mo. 1984) ("[A]n
insurable interest may be derived from possession, enjoyment, or profits of the
property." (internal quotations and citation omitted)); G.M. Battery, 747 S.W.2d at
627 (concluding the loss of the remaining six-month term of a lease, together with
several other potential consequences, were "very real possibilities for loss" that
established an insurable interest).
In addition, Beckon made numerous improvements to the building, such as
enlarging and replacing the bay doors, remodeling the offices, remodeling the floors
and bathrooms, changing the lighting, expanding the mezzanine, and installing a five-
ton hoist. As a result of the fire, Beckon estimated damages of $18,000 to its hoist
alone. To whatever extent the fire damaged or destroyed any of the improvements
Beckon made to the building, Beckon's consequent pecuniary loss would give rise to
an insurable interest in the building. See Studio Frames Ltd. v. Standard Fire Ins. Co.,
483 F.3d 239, 245 (4th Cir. 2007) (applying the same test as Missouri's for
establishing an insurable interest, and holding a tenant had an insurable interest in a
building where it spent its own money on improvements to the building and thus
"stood to suffer a loss if the building was damaged or destroyed.").
In an attempt to persuade us Beckon did not have an insurable interest, AMCO
relies on two cases, Raney and Lumbermens Mutual Insurance Co. v. Edmister, 412
F.2d 351 (8th Cir. 1969) (applying Missouri law). We are not persuaded by either.
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Raney, decided in 1922 by the Missouri Court of Appeals, involved an
insurance claim made by the occupant of a home, Wm. M. Raney, who had transferred
title to his nine-year-old son in order to defeat a possible judgment against him by a
third party. After transferring title, Raney used the home as his own, improved it with
his own means, and collected rent on the property. When the home was destroyed by
fire, Raney made an insurance claim. 246 S.W. at 58-59. The court held Raney did
not have an insurable interest in the home, focusing on his lack of title. Id. at 59. The
court also emphasized Raney's "fraudulent purpose" in transferring title to his minor
son to avoid a judgment. Id. at 60. Significantly, Raney never addressed or discussed
the standard the Supreme Court of Missouri now follows to determine an insurable
interest, under which title to the property is immaterial and the focus is upon whether
the insured "will derive pecuniary benefit or advantage from [a building's]
preservation, or will suffer pecuniary loss or damage from its destruction, termination,
or injury by happening of the event insured against." Dimmitt, 92 S.W.3d at 792.
We are "bound by decisions of the highest state court when interpreting state
law." Progressive N. Ins. Co. v. McDonough, 608 F.3d 388, 390 (8th Cir. 2010). The
Missouri Court of Appeals did not discuss or address in Raney the standard the
Supreme Court of Missouri subsequently articulated and now follows to determine an
insurable interest. We therefore do not find AMCO's reliance on Raney persuasive.
We are likewise unpersuaded by AMCO's reliance upon Edmister, a case
decided by this court in 1969, prior to the Supreme Court of Missouri's decisions in
DeWitt, G.M. Battery, and Dimmitt. Edmister, like Raney, involved a claim brought
by insureds who remained in possession of, and continued to insure, a dwelling after
transferring title to it. After a fire destroyed the property, the insureds claimed an
insurable interest based upon their occupancy of the property, its use as a business
headquarters, and approximately $1,500 spent on improvements. 412 F.2d at 352-53.
The court held neither the insureds' status as tenants, nor the use of the dwelling as a
business headquarters, nor the improvements made to the property, were "sufficient
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to constitute an insurable interest under the defendant's policy covering this property."
Id. at 354. The court, however, also focused upon the fact the policy was issued when
the insureds were still fee owners of the property, and the subsequent transfer in
ownership was not disclosed. The court stated "full disclosure should have been made
to the insurer by the assureds" after "the drastic change in the insurable interest[.]" Id.
at 356. The court determined the lack of disclosure was a material misrepresentation
and the insurer was "certainly misled in allowing the policy to remain in effect." Id.
at 357.
A respected insurance treatise has criticized the insurable interest reasoning in
Edmister, stating "the court makes an assumption, not justified from the facts
presented in the opinion, that the plaintiffs were reasonably aware that their occupancy
of the premises did not give them a valuable insurable interest – to them the
occupancy might have been very valuable." 4 J. Appleman, Insurance Law & Practice
§ 2241, at 84 (Supp. 2008). The treatise also suggests "[i]n attempting to reach a
desirable result, the court fell into the 'hard cases make bad law' trap" and warns
practitioners to "be cautious at taking many of the court's statements at face value."
Id. In G.M. Battery, the Supreme Court of Missouri characterized the "denial of
recovery" in Edmister as turning on the fact the insured "misled the insurance
company as to the state of his title." 747 S.W.2d at 627. See also DeWitt, 667
S.W.2d at 707 n.5 (distinguishing Edmister as a case which turns upon a material
misrepresentation, and noting the "critical" treatment its insurable interest reasoning
has received). Thus, we believe the highest court of Missouri has cabined Edmister
as a material misrepresentation case, rather than one which turns upon the lack of an
insurable interest.
AMCO also suggests Edmister stands for the proposition that a policy can be
voided as an illegal gambling contract when an insured only holds a limited or
qualified insurable interest (such as a tenant's occupancy, or an insured's interest in
improvements to the property), and yet the policy provides coverage for the entire
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property. See AMCO's Brief at 19. In G.M. Battery, however, the Supreme Court of
Missouri did not void a policy on the grounds that an insurer provided more coverage
than that which was commensurate with the limited or qualified interest held by an
insured. Instead, the court noted:
[Missouri law] places the risk of overinsurance on the insurer rather than
on the insured. The insurer may protect itself by strictly defining the
interest covered by its policy, or by obtaining representations or
warranties about the state of the title, if it deems this information
important. What it cannot do is to issue a policy, collect the premiums,
and then argue that the value of the insured's insurable interest in the
property is less than the coverage it underwrites.
G.M. Battery, 747 S.W.2d at 627-28 (emphasis added). Similarly, in DeWitt, the
Supreme Court of Missouri placed the burden upon insurers to provide coverage
which corresponds to a limited or qualified interest held by an insured:
Absent fraud, misrepresentation or collusion the valuation in the policy
is conclusive upon the parties. An insurer has an obligation to attempt
to ascertain the basis of an insured's interest in the property prior to
contracting to insure the property. In some cases this may require actual
inspection of the property, in other cases such as the instant one, merely
making a verbal attempt to ascertain the insured's status will be
sufficient. The record before us reveals no evidence of the insurer's
attempt to ascertain from the insured her interest in the property. Where
the plaintiff had a reasonable and justifiable basis for believing she had
an insurable interest in the property, the insurer cannot issue a policy and
collect premiums thereunder and later complain that the insured's interest
was overvalued if the insurer never attempted to ascertain that interest
through reasonable inquiry. Thus, if the insured's valuation is accepted
without investigation, the insurer cannot thereafter contend that there
was fraudulent overvaluation.
DeWitt, 667 S.W.2d at 708 (internal quotations and citation omitted).
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"When the highest court of a state disposes of an issue of state law contrary to
the resolution of the issue theretofore suggested by a federal court, the latter ruling
must give way." Smith v. F.W. Morse & Co., Inc., 76 F.3d 413, 429 n.12 (1st Cir.
1996); see also Kinnison v. Houghton, 432 F.2d 1274, 1277 (10th Cir. 1970)
(indicating federal courts, in a diversity case, must follow an intervening state court
decision even when a prior federal appellate decision cannot be harmonized with the
state court decision).
We are bound by the Supreme Court of Missouri's interpretation of state law.
At least as to the points of law for which AMCO relies upon Edmister, we believe
Edmister is inconsistent with the current state of Missouri law. We therefore decline
to consider it.
C
Finally, AMCO asks us to affirm the district court on the alternative ground that
Beckon made false and material misrepresentations in the procurement of the policy,
and the policy should be voided in its entirety on that ground. Beckon asks us not to
affirm on this alternative ground because it was not addressed by the district court and
is "rife with disputed facts." Beckon's Reply Brief at 21.
We decline to affirm on this alternative ground. The issue of misrepresentation
was "not considered by the district court, and we leave [it] to be addressed in the first
instance on remand, without expressing any view as to [its] merit." Discovery Group
LLC v. Chapel Dev., LLC, 574 F.3d 986, 990 (8th Cir. 2009).
III
We reverse and remand for further proceedings consistent with this opinion.
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