In the
United States Court of Appeals
For the Seventh Circuit
No. 10-3261
C ONTINENTAL C ASUALTY C OMPANY,
Plaintiff-Appellee,
v.
S YCAMORE S PRINGS H OMEOWNERS A SSOCIATION, INC.,
Defendant-Appellant.
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:09-cv-0007-LJM-DML—Larry J. McKinney, Judge.
A RGUED A PRIL 1, 2011—D ECIDED JULY 22, 2011
Before E ASTERBROOK, Chief Judge, and B AUER and E VANS,
Circuit Judges.
E ASTERBROOK, Chief Judge. A residential developer
built a new subdivision of Indianapolis in the floodplain
of the White River. Both the developer and the buyers
(who have organized as Sycamore Springs Homeowners
Association) knew that the land is low-lying and prone
to flooding. Sheehan, the developer, constructed levees
and floodwalls to protect the houses; it also built re-
2 No. 10-3261
tention ponds and a stormwater holding system. The
Courtyard Homes at Sycamore Springs, LLC, handled the
construction and sale of buildings in the subdivision’s
Parcel D. Courtyard had Sheehan fill one of the retention
ponds, so that it could build additional homes; it also
constructed duplexes where Sheehan had planned single-
family housing. The result was a reduction in Parcel D’s
ability to absorb rainwater (more of the ground was
covered with concrete) and greater demands on the
stormwater system. On September 1, 2003, heavy rains
fell in Indianapolis, and several homes in the subdivi-
sion were inundated when a retention pond overflowed.
The Homeowners Association sued Courtyard
Homes in state court. Courtyard tendered the defense to
Continental Casualty Company, whose policy covers ac-
cidental property damage. Continental denied that its
policy applies, concluding that any loss was the expected
result of a deliberate reduction in the subdivision’s
ability to deal with heavy rain or a rising river. Continental
filed a declaratory-judgment action under the diversity
jurisdiction, asking a federal court to vindicate its under-
standing of the policy’s coverage. The Association and
Courtyard settled the state suit for $335,000; the Associa-
tion agreed to collect no more than $35,000 of this from
Courtyard while seeking the rest from Continental as
Courtyard’s assignee. Continental does not contest this
maneuver, even though it may mean that the insurer
must pay substantially more than the amount re-
quired to indemnify its insured. But the stratagem
proved unavailing, for the federal court concluded that
Continental’s policy does not apply. 2010 U.S. Dist.
L EXIS 90378 (S.D. Ind. Aug. 31, 2010).
No. 10-3261 3
The district court did not decide whether the Associa-
tion’s loss was caused by an accident. Instead it con-
cluded that the Association had not suffered “property
damage” as the policy defines that phrase. In state court
the Association had not asked for the money required
to restore the subdivision to its original condition. In-
stead its complaint demanded that Courtyard take steps
that would reduce future flooding hazards. In other
words, the Association wanted a subdivision better
than the one Courtyard had built, not recompense for
injury caused by the rain on November 1, 2003. The
district judge recognized that the Association might have
wanted a little of each: compensation for loss plus im-
provements for the future. But the judge understood the
complaint to seek only the latter—and as the case was
settled, and the settlement agreement did not apportion
the $335,000 between fixing things that had been
damaged and making changes to curtail future loss, there
is no basis for requiring Continental to pay. Its policy
covers out-of-pocket losses but not improvements. To
put this differently: the flood in November 2003 reveals
that the homes are worth less than the buyers thought,
but Continental did not insure the market value of the
real estate.
The Association contends that the district judge misun-
derstood the nature of the state suit. That suit cannot
have sought prospective relief, the Association insists,
because the complaint demanded money rather than an
injunction. Yet money may be used to make tomorrow’s
improvements as surely as it may be used to reimburse
yesterday’s losses. The choice between money and equita-
4 No. 10-3261
ble relief affects who does the work, not what work will
be done. An injunction could have compelled Courtyard
to make improvements; money enables the Association
(or a contractor of its choice) to make them.
The Association does not contend that Continental’s
policy requires it to pay for capital improvements. No
insurer would write such a policy; the moral hazard would
be overpowering. Protected by a policy covering the
costs of improvements, a builder would produce a sub-
standard project and demand that the insurer finish the
job; builder and buyers could split the savings. Insurers,
recognizing this incentive, would raise the price of their
policies so high that no builder planning to do the job
right would find the offer attractive. The result would
be the collapse of the insurance market. No one would
gain, and honest builders would lose because insurance
would no longer be available. That’s why Continental’s
policy does not cover the expense of improving the sub-
division’s flood defenses.
Like the district judge, we recognize that the $335,000
may have included compensation for loss (for example,
carpets and books in the homes’ basements may have
been damaged during the flood) in addition to paying
for capital improvements (for example, larger storm-
water drains and tanks to replace the capacity of the
missing retention pond). But neither the parties to the
settlement nor the state judge tried to apportion the
recovery. The Association might have asked the federal
district judge to do this but it did not. Its request that
we remand for this purpose comes too late. The district
No. 10-3261 5
judge did not err in declining to undertake this task sua
sponte—and we doubt that the judge should have
engaged in the exercise had he been asked. It would be
problematic to give weight to an apportionment, made
without Continental’s consent, in the original settlement
agreement. A self-serving declaration years later about
what the money “really” was for would not carry much
weight.
Given the conclusion that the $335,000 does not
represent an award for property damage, we need not
consider Continental’s argument that the loss was not
accidental. It is easy to see how the unanticipated out-
come of a calculated choice can be an “accident.” The
designers and builders of the Titanic knew exactly what
kind of steel they were using in its hull, but they did not
appreciate how brittle the steel would become in cold
water and thus did not anticipate what would happen
when it scraped against an iceberg. The Titanic’s sinking
was accidental even though the effect of cold water and
ice on the steel was dictated by the laws of physics.
The Association contends that the subdivision’s water
problem is accidental in the same sense: Engineers
who designed the water retention and removal system
thought that the inflow would be lower and the water-
handling capacity higher, and this error in modeling
and design makes it sensible to call the problem an acci-
dent. An auto crash caused by a design defect is as
much an “accident” as one caused by a manufacturing
defect, even though the car with the negligent design was
built according to spec. But a policy of property-damage
insurance for cars (or ocean liners) does not require the
6 No. 10-3261
insurer to pay for rebuilding the product to reduce the
chance of future accidents; the policy covers only the
losses caused by accidents that have already occurred.
The parties’ briefs dwelt at length on the question
whether Indiana gives assignees, as well as policy holders,
the benefit of the contra proferentum principle—the
rule that ambiguities in an insurance policy are con-
strued against the insurer. The district court held that
this rule does not apply when an assignee such as the
Association makes a claim under the policy. We need not
decide whether this is right. It is the language of the
Association’s own complaint in state court—and the
absence of any effort to apportion the $335,000—rather
than any ambiguous language in the policy that entitles
Continental to judgment.
A FFIRMED
7-22-11