Courtyard Homes at Sycamore Springs built and sold the residential units in a subdivision outside Indianapolis in the White River floodplain. The original developer had taken several steps to protect the homes in this low-lying area from the possibility of flooding. Courtyard reversed some of those protections when it filled in one of the retention ponds to build more units and converted some single-family units to duplexes. In September of 2003, a retention pond overflowed and flooded several homes during a period of heavy rains. The Homeowners Association brought suit against Courtyard, demanding that it reduce future flooding hazards. Courtyard tendered its defense to its insurer, Continental Casualty Company. Continental denied coverage and filed a declaratory judgment action. Meanwhile, the Homeowners Association and Courtyard settled the state court case for $335,000. The Association agreed to accept $35,000 of that from Courtyard. Judge McKinney (S.D. Ind.) granted summary judgment to Continental on the grounds that the complaint sought only property improvements, not compensation for loss. The Homeowners Association appeals.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Bauer and Evans affirmed. The Court agreed with the district court that the insurance policy did not cover any cost of improving flood protection. The Court also recognized, as did the district court, that part of the $335,000 settlement may have covered compensation for some homeowners' losses in addition to property improvements. But neither the settling parties nor the district court judge allocated that amount between improvements and compensation -- now it is too late.