Don Davis owned a lumber mill that was subject to a $248,000 mortgage held by Diversified Financial Systems, Inc. Early in 1995, Aaron Harber became interested in forming a partnership with Davis for ownership and operation of the mill. Harber and Davis orally agreed upon the terms of a partnership. Harber contended that these terms included a purchase by Harber of Diversified's interest in the mortgage on the mill. Davis later informed Harber that he (Davis) would not proceed with the partnership. Nevertheless, Harber purchased Diversified's mortgage interest in April 1995. Harber did this in reliance on the oral partnership agreement with Davis-an agreement Harber intended to enforce despite Davis's refusal to proceed. During Harber's negotiations with Davis concerning their supposed partnership and with Diversified for purchase of its mortgage interest, Harber discovered that the mill was not covered by property insurance. Harber therefore purchased a policy from Underwriters at Lloyd's of London (Lloyd's). The policy, whose one-year term began in late May 1995, named Harber and U.S.A. Properties, Inc., a corporation set up and wholly owned by Harber, as insureds. In mid-June 1995, one of the buildings at the mill was destroyed by fire. Approximately two weeks later, in an effort to prompt negotiations in the dispute with Davis over whether a partnership existed or would be pursued, Harber filed suit to foreclose the Diversified mortgage. The mortgage was in default at that time. Harber and Davis soon entered into a settlement agreement that provided in part for the transfer of the mill property to Harber, in exchange for Harber's giving up all of his claims against Davis. The agreement also conveyed, to Harber, whatever interest Davis had in insurance proceeds related to the building that had been destroyed by fire. Harber and U.S.A. Properties submitted a claim to Lloyd's concerning the destroyed building. After Lloyd's denied the claim, Harber and U.S.A. Properties sued Lloyd's for payment according to the terms of the policy. A federal district court held that the plaintiffs lacked an insurable interest and that Lloyd's was therefore entitled to summary judgment.
Harber and U.S.A. Properties appealed. Was the district court's holding correct?

  • CreatedJuly 16, 2014
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