Indiana Insurance v. Pana Community Unit School District No. 8

In the
United States Court of Appeals
For the Seventh Circuit
____________

Nos. 02-1500 & 02-1501
INDIANA INSURANCE COMPANY,
an Indiana corporation,
Plaintiff-Appellee,
v.

PANA COMMUNITY UNIT SCHOOL DISTRICT NUMBER 8,
Defendant-Third Party
Plaintiff-Appellant,
v.

INSURANCE MANAGEMENT BUREAU, also known as
Independent Risk Managers, Inc.,
Third Party
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Central District of Illinois.
No. 98-C-3121—Richard Mills, Judge.
____________
ARGUED SEPTEMBER 25, 2002—DECIDED DECEMBER 31, 2002
____________

Before BAUER, ROVNER, and WILLIAMS, Circuit Judges.
BAUER, Circuit Judge. In 1992, Defendant-Appellee
Indiana Insurance Company (“Indiana”) issued an insur-
2 Nos. 02-1500 & 02-1501

ance policy to PANA Community School District Num-
ber 8 (“PANA”) for property and casualty insurance. After
making payments to PANA following a fire which dam-
aged its property, Indiana filed a complaint for declaratory
judgment seeking a judicial declaration that it had fully
satisfied its contractual obligations to PANA. PANA filed
a counterclaim for breach of contract. The district court
granted Indiana’s motion for partial summary judgment
and denied PANA’s motion for summary judgment. PANA
appeals, arguing that the district court erred in its sum-
mary judgment determination. For the reasons set forth
below, we conclude that the district court correctly granted
summary judgment and affirm.

BACKGROUND
PANA is a municipal corporation organized under the
Illinois School Code that provides public educational
services to students through two elementary schools, a
junior high school, a senior high school, and an adult
educational center. Among the buildings that PANA owns
is a junior high school, which consists of a north and
south building. The north building is approximately 35,000
square feet and the south building is less than 19,000
square feet. Classes are held in the north building while
the south building has been used for storage since the
Illinois Department of Education condemned the building
in 1981 or 1982.
Under Section 5/10-20.21 of the Illinois School Code,
PANA must publicly bid contracts in excess of $10,000.00.
In 1992, PANA, acting through its insurance consultant,
Insurance Management Bureau (“IMB”), issued bid specifi-
cations soliciting proposals for property coverage for the
various school buildings owned by PANA. The bid specifica-
tions requested blanket coverage on a replacement cost
basis for all buildings unless otherwise noted. Replacement
Nos. 02-1500 & 02-1501 3

cost value is the cost of replacing the property in like utility
without deduction for depreciation. The bid specifications
provided that the south building of the junior high school
was to be insured at a value of $50,000.00 for demolition
and debris removal only. Indiana, through Richard A.
Lees, a licensed insurance producer, submitted a propos-
al pursuant to the bid specifications that was accepted
by PANA. Indiana issued an insurance policy which pro-
vided coverage for the south building of the junior high
school in the amount of $50,000.00 but did not include the
south building under the blanket coverage provisions,
valuing its replacement cost as “0.”
Indiana issued renewal policies to PANA from 1993
through 1995, continuing to exclude the south building
from blanket coverage and providing only $50,000.00 cov-
erage for demolition and debris removal for the south
building.
In 1995, PANA’s new superintendent of schools, Larry
Marsh, hired ValueQuest International, Ltd. (ValueQuest)
to appraise the replacement cost of all of PANA’s build-
ings. ValueQuest prepared a report that reflected a replace-
ment cost for the junior high school of $1,872,396.00.
In 1996, PANA decided to rebid its insurance needs, re-
questing that IMB lay the groundwork for the rebidding
process. While working on the rebidding project, IMB
reviewed the ValueQuest report and discovered a discrep-
ancy between the ValueQuest appraisal of the junior high
school and the replacement cost of the junior high school
set forth in the 1995 statement of values. Larry Marsh
explained to the IMB representative, Renee Smith, that
the ValueQuest appraisal did not incorporate a value for
the south building of the junior high school.
In March 1996, Renee Smith sent a fax to Larry Marsh
confirming the discrepancies in the different evaluations
of the junior high school. She also recommended that
4 Nos. 02-1500 & 02-1501

PANA should fully insure the south building. Based on
this advice, Marsh obtained the services of the school
district’s architects, Gatewood Hance & Associates, to
appraise the junior high school. Gatewood Hance & Associ-
ates prepared a building replacement cost estimate re-
flecting an appraisal of the PANA junior high school
buildings at 35,730 square feet with replacement cost of
$2,325,920.00. After receiving the Gatewood appraisal of
March 14, 1996, Smith assumed that the figure of 35,730
square feet pertained to the South Building.
On March 15, 1996, Smith prepared to incorporate sev-
eral modifications to the PANA bid specifications. These
changes included combining the replacement cost of
$1,616,031.00 established by ValueQuest for the north
building with the replacement cost of $2,325,920.00 esti-
mated by Gatewood. Smith also intended to specify that
blanket coverage was wanted for both junior high school
buildings.
While in the process of implementing these changes to
the 1996 bid specifications, IMB came under new owner-
ship. However, after an abrupt change of ownership, the
new owner, Debra Callen, ordered Smith’s computer to be
turned off and the changes to the 1996 bid specifica-
tions were lost.
When IMB published the 1996 bid specifications, they
did not include Smith’s modifications. Thus, neither Indi-
ana nor Richard Lees were ever made aware of Smith’s
attempted modifications. The statement of values for the
1996 bid specifications listed the replacement cost for the
north building as $1,616,031.00 and “0” for the south
building. In addition, the 1996 bid specifications required
blanket coverage for all of PANA’s buildings according to
the building’s replacement cost. The statement of values
for the 1996 bid specifications appeared as follows:
Nos. 02-1500 & 02-1501 5

STATEMENT OF VALUES
Item Specify A Building B Personal Property Repl. Cost
No. of the Insured
1. Administration Building A 444,183
14 East Main Street, Pana, Illinois B 783,250
2. Pana Adult Center A 414,045
400 West Orange, Pana, Illinois B 93,706
3. Washington School A 2,562,911
200 South Sherman, Pana, Illinois B 370,455
4. Lincoln School A 2,416,739
614 East Second, Pana, Illinois B 402,083
5. Senior High School A 5,123,472
201 West Eighth, Pana, Illinois B 1,304,609
6. Tool Shed (at High School) A 5,791
201 West Eighth, Pana, Illinois B 4,624
7. Storage Building (at High School) A 10,857
201 West Eighth, Pana, Illinois B 10,356
8. Junior High Building
(North Building) A 1,616,031
9. Junior High Building
(South Building) A 0
10. Contents of Junior High Buildings
(North & South) B 356,355
11. Property in the Open at Items 1-10 46,239
TOTAL: 15,965,706
On May 20, 1996, PANA awarded Indiana the contract
for casualty and property insurance coverage from July
1996 through June 1997. The contract went into effect
on July 1, 1996, and was renewed for a one-year period
6 Nos. 02-1500 & 02-1501

running from July 1, 1997 to July 1, 1998. On July 1, 1996,
Indiana issued the insurance policy to PANA. Since the
south building was not assigned a replacement or insurable
value, Indiana did not charge a premium for blanket cov-
erage of the south building.
On October 4, 1997, fire damaged both junior high school
buildings. Indiana investigated, adjusted, and paid all com-
ponents of the claim submitted by PANA pursuant to the
Indiana policy with the exception of PANA’s claim for
structural damage to the south building. Indiana did,
however, pay PANA $50,000.00 pursuant to the demoli-
tion and debris removal coverage for the south building
provided by the 1997 policy. When PANA sought payment
for replacement costs for the south building, Indiana de-
nied PANA’s claim based upon the 1997 policy. Shortly
thereafter, Indiana filed its initial complaint seeking de-
claratory relief.
In response to Indiana’s complaint, PANA filed an
answer, a counterclaim for breach of contract and reforma-
tion, and a third-party complaint against IMB, the agent
who issued the Indiana policy. On December 3, 2001, the
district court entered an order granting Indiana’s motion
for partial summary judgment and denying PANA’s cross
motion for summary judgment. The district court then
relinquished pendent jurisdiction over PANA’s third-party
complaint, thereby dismissing the case in its entirety. In
reaching its decision, the court determined that the in-
surance policy unambiguously limited liability and thus
Indiana was not liable for the replacement costs of the
south building of the junior high school.

ANALYSIS
We review the district court’s grant of summary judg-
ment de novo, viewing the evidence in the light most
favorable to the non-moving party. Spearman v. Ford Motor
Nos. 02-1500 & 02-1501 7

Co., 231 F.3d 1080, 1084 (7th Cir. 2000). A decision grant-
ing a motion for summary judgment is proper when the
record shows that there is no genuine issue as to any
material fact and that the moving party is entitled to
judgment as a matter of law. Rivera v. Grossinger Autoplex,
274 F.3d 1118, 1121 (7th Cir. 2001). Judgment as a matter
of law is proper when a party “fails to make a showing
sufficient to establish the existence of an element essential
to that party’s case, and on which that party will bear
the burden of proof at trial.” Celotex Corp. v. Catrett, 477
U.S. 317, 322 (1986).
This case concerns a diversity suit for breach of con-
tract. The parties do not contest that Illinois law applies
to the substantive issues. When neither party raises a
conflict of law issue in a diversity case, the applicable law
is that of the state in which the federal court sits. Wood
v. Mid-Valley Inc., 942 F.2d 425, 426 (7th Cir. 1991).

I. Interpreting PANA’s Blanket Insurance Contract
In construing an insurance policy, a court must ascer-
tain the intent of the parties to the contract. Int’l Min-
erals & Chem. Corp. v. Liberty Mut. Ins. Co., 522 N.E.2d
758, 764 (Ill. App. Ct. 1988). To ascertain the meaning
of the policy’s words and the intent of the parties, we
construe the policy as a whole with due regard to the risk
undertaken, the subject matter that is insured, and the
purposes of the entire contract. See, e.g., Zurich Ins. Co. v.
Raymark Indus., Inc., 514 N.E.2d 150 (Ill. 1987); Dora
Township v. Ind. Ins. Co., 400 N.E.2d 921 (Ill. 1980). Illinois
law requires that provisions of an insurance agreement
be interpreted in the factual context of the case. Putzbach
v. Allstate Ins. Co., 494 N.E.2d 192, 195 (Ill. App. Ct. 1986).
PANA argues that no language within Indiana’s in-
surance policy or the 1996 bid specifications expressly
8 Nos. 02-1500 & 02-1501

excluded the south junior high school building from cov-
erage. PANA quotes a Fourth Circuit decision which
describes a blanket policy as one which “invariably covers
and attaches to every item of property described in the
policy and insures the property collectively.” Monumental
Paving & Excavating, Inc. v. Penn. Mfrs.’ Assoc. Ins. Co.,
176 F.3d 794, 799 (4th Cir. 1999), quoting Nat’l Bank v.
Fid. and Cas. Co., 125 F.2d 920, 924 (4th Cir. 1942). PANA
then notes there were no express terms specifying that
claims under blanket coverage are limited to the amount
identified for replacement costs on the statement of val-
ues. It concludes that there was a clear and unambiguous
inclusion of the entire junior high school under the blanket
coverage because any property described on a policy’s state-
ment of values would be included under the blanket
coverage provisions.
In its argument, PANA is engaging in conduct it ac-
cuses the district court of doing; going outside the four
corners of the policy. Taken substantively, PANA’s state-
ment that nothing expressly excluded the building from
coverage is correct. However, the insurance policy and
bid specifications unambiguously show that the south
building was never intended to be included. PANA also
ignores two important facts. First, the bid specifications
provided that coverage “shall be on a blanket basis with
replacement cost coverage for buildings, personal property,
and property in the open to apply to all locations un-
less otherwise noted.” (Emphasis added). Second, the bid
specifications listed each building under the policy with
the corresponding replacement cost. These replacement
figures ranged from a high school valued at $5,123,472.00
to a tool shed valued at $5,791.00. The north building of the
junior high school had a replacement cost of $1,616,031.00
and was listed separately from the south building, which
had a replacement cost of “0”. Thus, the failure to desig-
nate a replacement cost for the south building has spe-
Nos. 02-1500 & 02-1501 9

cial import, considering that “coverage shall be on a blan-
ket basis with replacement cost coverage.” We fail to see
how such coverage can be applied when no replacement
cost exists for the south building. We also fail to see how
PANA can downplay the significance of the fact that it
chose to assign a replacement value solely to the north
building while leaving the south building with a zero. It
was PANA’s responsibility to prepare and submit the
statement of values upon which the blanket coverage
was based and to establish the replacement cost value for
each building. The zero value designated for the south
junior high school building was completely PANA’s respon-
sibility.
PANA cites Dash Messenger Service, Inc. v. Hartford
Insurance Company, 582 N.E.2d 1257 (Ill. App. Ct. 1991),
as support for its position. Dash Messenger Service noted
that if an insurer does not intend to insure against a
risk likely to be inherent in the insured’s business, the
insurer should expressly exclude that risk from the cov-
erage of the policy. Dash Messenger Service, Inc., 582
N.E.2d at 1263. This provision of the law, however, focuses
on the type of injuries that may be incurred and risks in-
herent in the insured’s business. The issue in cases such
as Dash Messenger Service and Bremen State Bank v.
Hartford Accidental & Indemnity Co., 427 F.2d 425 (7th
Cir. 1970), centered on how the loss was actually incurred
and whether the type and cause of injury was intended
to be covered under the policy. For example, in Bremen
State Bank, this Court, interpreting Illinois law, reversed
a district court’s decision in favor of a bond company
because it should have specifically excluded inherent
risks from the coverage of the policy. However, the question
in Bremen State Bank was whether “a loss resulting
from misplacement of money . . . was contemplated as be-
ing covered” by an indemnity bond. Bremen State Bank,
427 F.2d at 427. Like Dash Messenger Service, Bremen
10 Nos. 02-1500 & 02-1501

State Bank was concerned with how the underlying loss
occurred. In this case, the question is not whether the
type of harm suffered (fire damage) was meant to be in-
cluded under the coverage but rather, whether the south
building was covered under the policy. Whether the cover-
age includes certain property, as opposed to whether
the coverage includes how the injury was sustained, are
two different questions. PANA’s reliance on Dash Mes-
senger Service is misplaced.
While there was no express exclusion of the south build-
ing from coverage, we agree with the district court that
the evidence shows there was no express or implied in-
tent to include coverage of the building. In contemplating
what the provisions of an insurance agreement may mean,
we must consider them in the factual context of the case.
See Anetsberger v. Metro. Life Ins. Co., 14 F.3d 1226, 1232
(7th Cir. 1994) (interpreting Illinois law). The bid specifica-
tions for 1996 reveal that a tool shed was important enough
to be valued for the policy. The zero designated for the
south building shows how PANA truly viewed the worth of
this condemned storage facility. In addition, PANA re-
quested a quote for Ordinance and Law coverage, which is
designed to cover the increased cost of construction im-
posed by new building codes, for only the north building
but not the south building. Indiana also never charged, and
PANA never paid, a single premium with respect to the
south building. For these reasons, we find that the district
court was correct when it determined the south building
was never insured under the blanket coverage.
PANA next asserts that Indiana’s determination as to
the meaning of the “0” on the statement of values had
no basis in any insurance manuals, industry practice, or the
law. PANA also faults the district court for creating what
it calls “a new contractual provision out of whole cloth”
when it determined the “0” represented a sublimit to
which the blanket replacement cost coverage did not apply.
Nos. 02-1500 & 02-1501 11

It claims that Indiana’s position and the district court’s
ruling concerning the meaning of the zero designation
were erroneous because they amounted to little more
than a subjective interpretation of a potentially ambig-
uous term.
If the words in an insurance policy are susceptible to
more than one reasonable interpretation, they are ambigu-
ous, United States Fid. & Guar. Co. v. Wilkin Insulation
Co., 578 N.E.2d 926, 930 (Ill. 1991), and will be construed
against the insurer who drafted the policy, Outboard
Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204,
1212 (Ill. 1992). A provision is ambiguous if it is reason-
ably susceptible to multiple interpretations. In re Osborne,
763 N.E.2d 855, 857 (Ill. App. Ct. 2002). When a policy’s
words are unambiguous, a court must afford them their
plain, ordinary, and popular meaning. Employers Ins. v.
James McHugh Constr. Co., 144 F.3d 1097, 1104 (7th Cir.
1998). A court should consider the plain meaning of the
policy language and should not search for a nonexis-
tent ambiguity. Dash Messenger Serv., Inc. v. Hartford
Ins. Co., 582 N.E.2d 1257, 1260 (Ill. App. Ct. 1991).
PANA makes the argument throughout its briefs that
Indiana lacks authority for various propositions it makes.
However, not every argument needs case law for sup-
port. When there is a dearth of case law on a point, we
will often turn to notions of common sense. See Potratz
v. Dep’t of Law Enforcement, 506 N.E.2d 1050, 1051 (Ill.
App. Ct. 1987). In our estimation, zero means zero. Con-
sidering the facts and circumstances surrounding the
contract, designating the replacement cost of something
as “0” leads to no other conclusion except that the build-
ing is of nominal value. The inherent meaning of the
figure “0” on a statement of values is fairly obvious in
delineating that item’s lack of worth. We can see no other
reasonable interpretation of such an unambiguous term.
Thus, the district court’s straightforward determination
12 Nos. 02-1500 & 02-1501

about what an unambiguous figure means does not imply
the court read something into the contract, as PANA
suggests. To disallow a court to do what the district court
did in this case would confound the process of reviewing
contract disputes. In fact, PANA’s argument is asking us
to do something which Dash Messenger Service specifically
warned against: searching for a nonexistent ambiguity.
See Dash Messenger Serv., 582 N.E.2d at 1260. To deter-
mine that the figure “0” is ambiguous would be an analyti-
cal leap of faith. Because the “0” is unambiguous, we give
the figure its ordinary meaning, which means the south
building had no replacement cost and thus the building
was not part of the blanket coverage. No insurance man-
ual, policy, industry standard, or case law is needed to
understand the meaning of “0.”
When interpreting an insurance policy, the parties’ in-
tent is the most significant factor. Weeks v. Aetna Ins. Co.,
501 N.E.2d 349, 352 (Ill. App. Ct. 1986). Intent may be
ascertained from the circumstances surrounding the
issuance of the policy, including the situation of the parties
and the reason the insured obtained the policy. Dora
Township v. Ind. Ins. Co., 400 N.E.2d 921, 922 (Ill. 1980).
The entire insurance contract, rather than an isolated
part, should be read to determine whether an ambiguity
exists. See Cobbins v. Gen. Accident Fire & Life Assurance
Corp., 290 N.E.2d 873 (Ill. 1972).
Despite the obvious meaning of the figure “0,” we also
point out that the building in question was condemned
fifteen years ago and was used merely for storage. To
then claim that this obsolete building was intended to
be within the coverage is too big a stretch. Considering
the building’s decrepit state and the clear indication that
Indiana never intended to charge PANA for its coverage, it
is evident that the parties did not intend to include the
building under the policy. For these reasons, we affirm the
Nos. 02-1500 & 02-1501 13

district court’s ruling that the zero designation was an
unambiguous term which clearly limited the liability of
Indiana.

II. Reformation
PANA finally claims that it was entitled to have the
contract reformed because of a mutual mistake by the
parties. PANA argues that when it accepted Indiana’s bid,
there had been a meeting of the minds, but the 1996 pol-
icy demonstrates that both parties were mistaken as to
coverage issues.
“Reformation is available when the parties, having
reached an agreement and having then attempted to
reduce it to writing, fail to express it correctly in the writ-
ing.” Restatement (Second) of Contracts § 155 cmt. a. The
purpose of reformation is “to make a writing express the
agreement that the parties intended it should.” Id. A par-
ty can obtain a contract reformation by showing through
clear and convincing evidence that: (1) there has been a
meeting of the minds resulting in an actual agreement
between the parties; (2) the parties agreed to reduce their
agreement to writing; and (3) at the time the agreement
was reduced to writing and executed, some agreed upon
provision was omitted or one not agreed upon was in-
serted either through mutual mistake or through mistake
by one party and fraud by the other. Alliance Syndicate
v. Parsec, Inc., 741 N.E.2d 1039, 1048 (Ill. App. Ct. 2000).
PANA’s reformation claim relies heavily on the flawed
position that the zero designation for the south building
was ambiguous. This takes us full circle; “0” on the state-
ment of values is clear and unambiguous.
Perhaps realizing the obstacles this argument poses,
PANA highlights Indiana’s insertion of a contractual
provision not agreed upon into the policy. It is undisputed
14 Nos. 02-1500 & 02-1501

that Indiana added a demolition and debris removal
provision that was not included in the 1996 bid specifica-
tions.1 PANA, however, never questioned or objected to
Indiana providing demolition and debris removal coverage
of $50,000.00. More importantly, we fail to see the signifi-
cance of Indiana’s error in including debris and removal
coverage. PANA makes a futile attempt to link the debris
coverage with the zero designation for the south building.
PANA argues that Indiana added the debris removal
provision based on Indiana’s own erroneous interpreta-
tion of the zero designation. We fail to see any correla-
tion between the zero designation and debris removal
provision. The debris removal provision offers no insight
or explanation as to why a “0” was assigned to the south
building. More importantly, it in no way suggests that
the zero designation was the result of some flawed inter-
pretation on Indiana’s part.
The parties clearly agreed to how the south building of
the junior high school was to be treated under the policy.
There was no provision accidently omitted from the policy.
Further, Indiana never learned that PANA had changed
its position with regard to the south building. Indiana
never intended to provide coverage for a building valued
at “0.” Indiana did not include the south building in its
determination of whether to provide coverage or its final
bid amount, nor did Indiana ever charge PANA for premi-
ums related to the south building. If any mistake occurred,
it was a unilateral mistake by PANA. For these reasons,

1
While Indiana may have erred in its inclusion of the debris
removal coverage, PANA does not assert, nor could it successfully,
that this alleged mistake warrants reformation. The $50,000.00
of debris removal was never disputed by either party and was
promptly paid by Indiana. PANA broaches the issue merely in
connection with its argument that Indiana erroneously inter-
preted the zero designation on the statement of values.
Nos. 02-1500 & 02-1501 15

we find the district court was correct in its determina-
tion that there was not a mutual mistake.
Accordingly, we AFFIRM the decision of the district court.

A true Copy:
Teste:

________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—12-31-02