In the

United States Court of Appeals

For the Seventh Circuit

No. 10-3522

RYERSON INC.,

Plaintiff-Appellant,

v.

FEDERAL INSURANCE COMPANY,

Defendant-Appellee.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 09 C 4173—Elaine E. Bucklo, Judge.

ARGUED FEBRUARY 16, 2012—DECIDED APRIL 12, 2012

Before POSNER, RIPPLE, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge. This diversity suit, governed by

Illinois law because filed in a district court located in

that state and neither party argued choice of law, Santa’s

Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d

339, 345 (7th Cir. 2010), pits an insured, Ryerson, against

its liability insurer, Federal Insurance Company. The

district court granted summary judgment in favor of

the insurance company.
2 No. 10-3522

In 1998 Ryerson (actually a predecessor, but we can

disregard that detail) sold a group of subsidiaries to

EMC Group, Inc. for $29 million. The following year

EMC sued Ryerson, seeking rescission of the sale and

restitution of the purchase price. The ground was that

Ryerson had concealed an ominous impending development affecting one of the subsidiaries: the subsidiary’s

largest customer had declared that unless it slashed its

prices the customer would build its own plant and stop

buying from the subsidiary. The customer repeated the

demand for a price cut to EMC when EMC acquired

the subsidiary from Ryerson; and when EMC failed to

accede to the demand, the customer, as it had threatened

to do, took its business elsewhere. EMC’s suit charged

Ryerson with fraudulent concealment intended to

induce EMC to buy the subsidiary, breach of contract

(the contract for the sale of the subsidiaries), and breach

of warranty (violation of assurances that Ryerson had

given EMC in the contract of sale).

Federal Insurance Company had issued Ryerson an

“Executive Protection Policy,” a liability insurance

policy that required Federal both to indemnify it for

judgment and settlement costs, and to reimburse it for

defense costs, reasonably incurred by Ryerson in suits

arising from risks covered by the policy. Federal

refused Ryerson’s demand for reimbursement of defense

costs, on the ground that EMC’s claim against Ryerson

was not a covered risk.

Three years into EMC’s suit against Ryerson, the

parties settled, with Ryerson agreeing to make “a post-
No. 10-3522 3

closing price adjustment” of $8.5 million “reflecting a

change in the purchase price paid by EMC to Ryerson

for the purchase” of the subsidiary that had gotten

into trouble with its customer. (Ryerson reported this

as a “selling price adjustment” on its Form 10-K.) The

settlement thus gave EMC a partial refund of the price

it had paid for the subsidiaries. With Federal adhering

to its position that EMC’s claim against Ryerson was not

a covered risk, and thus refusing to indemnify Ryerson

for the cost of the settlement, Ryerson brought this suit

for a declaratory judgment that Federal’s insurance

policy covered the $8.5 million that Ryerson had

refunded to EMC to settle the latter’s suit.

The insurance policy covers “all LOSS for which [the

insured] becomes legally obligated to pay on account of

any CLAIM . . . for a WRONGFUL Act [elsewhere defined

in the policy to include a ‘misleading statement’ or ‘omission’] . . . allegedly committed by” the insured. Federal

denies that “loss” includes restitution paid by an insured,

as distinct from damages, which are expressly denoted

in the policy as a covered loss. Federal is right; for otherwise fraud would be encouraged. Ryerson received

$29 million from EMC for the subsidiaries, and agreed

to give back $8.5 million to settle EMC’s fraud claims

against it. The refund represented a return of part or

maybe all of the profit that Ryerson had obtained by

inducing EMC to overpay. If Ryerson can obtain reimbursement of that amount from the insurance company,

it will have gotten away with fraud. It will get to keep

$29 million ($20.5 from EMC after the settlement and

$8.5 million from Federal) even though, if EMC’s claim
4 No. 10-3522

that Ryerson agreed to settle was not completely

meritless, some portion of the $29 million was proceeds

of fraud.

If disgorging such proceeds is included within the

policy’s definition of “loss,” thieves could buy insurance

against having to return money they stole. No one

writes such insurance. See Scottsdale Indemnity Co. v.

Village of Crestwood, No. 11-2385, 2012 WL 769730, at *3, *5

(7th Cir. March 12, 2012) (Illinois law); Federal Ins. Co. v.

Arthur Andersen LLP, 522 F.3d 740, 743-44 (7th Cir.

2008) (ditto); Mortenson v. National Union Fire Ins. Co.,

249 F.3d 667, 671-72 (7th Cir. 2001) (ditto), and no state

would enforce such an insurance policy if it were written. Id. at 672; Level 3 Communications, Inc. v. Federal

Ins. Co., 272 F.3d 908, 910 (7th Cir. 2001). You can’t, at

least for insurance purposes, sustain a “loss” of something you don’t (or shouldn’t) have. Id.; In re

TransTexas Gas Corp., 597 F.3d 298, 308-11 (5th Cir. 2010);

Safeway Stores, Inc. v. National Union Fire Ins. Co., 64

F.3d 1282, 1286 (9th Cir. 1995). And so there is no

insurable interest in the proceeds of a fraud. Cf. Grigsby

v. Russell, 222 U.S. 149, 154-55 (1911) (Holmes, J.);

3 Couch on Insurance §§ 41:3, 42:57, pp. 41-12, 42-96 (3d

ed. 2011).

Whether a claim for restitution is based on fraud or

on some other deliberate tortious or criminal act, or at

the other extreme of the restitution spectrum merely

on an innocent mistake or the rendition of a service

for which compensation is expected but contracting is

infeasible (as when a physician ministers to a person

who collapses unconscious on the street); and whether
No. 10-3522 5

the plaintiff is seeking the return of property or the

profits that the defendant made from appropriating it, a

claim for restitution is a claim that the defendant has

something that belongs of right not to him but to the

plaintiff. Tull v. United States, 481 U.S. 412, 424 (1987);

ConFold Pacific, Inc. v. Polaris Industries, Inc., 433 F.3d 952,

957-58 (7th Cir. 2006); Braunstein v. McCabe, 571 F.3d 108,

122 (1st Cir. 2009); Restatement (Third) of Restitution &

Unjust Enrichment § 1, comment c (2011); 1 Dan B. Dobbs,

Law of Remedies § 4.1(1), pp. 550-54 (2d ed. 1993). A

claim for “damages” in the proper sense of the word is

different. If a car driven negligently hits and injures a

pedestrian, the pedestrian will sue the driver for the

monetary equivalent of the harm done to him, not for

the “profit” that the accident generated for the driver.

It generated no profit; it gave him nothing.

EMC restyled its claim against Ryerson as one for

damages after it sold the subsidiary (thereby mooting

its claim to unwind the purchase). But the label isn’t

important. Level 3 Communications, Inc. v. Federal Ins. Co.,

supra, 272 F.3d at 910-11; Pan Pacific Retail Properties, Inc.

v. Gulf Ins. Co., 471 F.3d 961, 966-69 (9th Cir. 2006);

Unified Western Grocers, Inc. v. Twin City Fire Ins. Co., 457

F.3d 1106, 1115 (9th Cir. 2006). EMC was seeking to

recover a profit made at its expense by Ryerson’s

fraud, which means that if the insurance company were

liable to Ryerson, Ryerson would get to keep profits

of fraud. Having to surrender those profits was not a

“loss” to Ryerson within the meaning of the insurance

policy, as we held in the nearly identical case of Level 3

Communications, Inc. v. Federal Ins. Co., supra, 272 F.3d at
6 No. 10-3522

910; see also St. Paul Fire & Marine Ins. Co. v. Village of

Franklin Park, 523 F.3d 754, 756-57 (7th Cir. 2008); In re

TransTexas Gas Corp., supra, 597 F.3d at 310; Republic

Western Ins. Co. v. Spierer, Woodward, Willens, Denis &

Furstman, 68 F.3d 347, 351-52 (9th Cir. 1995); Bank of the

West v. Superior Court, 833 P.2d 545, 553 (Cal. 1992).

A judgment or settlement in a fraud case could

involve a combination of restitution and damages, and

then the insurance company would be liable for the

damages portion in accordance with the allocation

formula in the policy. Pan Pacific Retail Properties, Inc. v.

Gulf Ins. Co., supra, 471 F.3d at 967-69; Unified Western

Grocers, Inc. v. Twin City Fire Ins. Co., supra, 457 F.3d at

1114-16. EMC’s complaint against Ryerson demanded

“restitution of the monies paid for [the subsidiary] . . .

including transaction costs.” Reimbursing EMC’s transaction costs would not be restitution because Ryerson

gained nothing from the money that EMC paid

its lawyers and accountants to handle the acquisition.

But Ryerson’s lawyer concedes that his client made no

effort to allocate its loss between the loss of ill-gotten

gains and other costs, so any claim to those costs has

been forfeited.

Ryerson has, however, another ground of appeal. When

it first asked Federal Insurance Company to cover the

$29 million “loss,” Federal refused on grounds that it

no longer asserts, not on the “no loss” ground that

it prevailed on in the district court and that convinces

us as well. Ryerson argues that Federal’s change of

position violates the doctrine of “mend the hold,” which
No. 10-3522 7

forbids the defendant in a breach of contract suit (which

Ryerson’s suit against Federal is—a suit charging breach

of the insurance contract) to change its defenses, at least

without a good reason to do so, see Herremans v. Carrera

Designs, Inc., 157 F.3d 1118, 1123 (7th Cir. 1998), in the

midst of the suit. Schuyler County v. Missouri Bridge & Iron

Co., 100 N.E. 239, 240 (Ill. 1912); Horwitz-Matthews, Inc. v.

City of Chicago, 78 F.3d 1248, 1251-52 (7th Cir. 1996) (Illinois

law); First Commodity Traders, Inc. v. Heinold Commodities,

Inc., 766 F.2d 1007, 1013 (7th Cir. 1985) (ditto); cf. Harbor

Ins. Co. v. Continental Bank Corp., 922 F.2d 357, 362-64 (7th

Cir. 1990) (ditto); Robert H. Sitkoff, Comment, “ ‘Mend the

Hold’ and Erie: Why an Obscure Contracts Doctrine

Should Control in Federal Diversity Cases,” 65 U. Chi.

L. Rev. 1059 (1998).

But at least as understood in Illinois, mend the hold

does not forbid the defendant to add a defense after being

sued; that is, it does not confine him to the defense (or

defenses) that he announced before the suit. To require a

potential defendant to commit irrevocably to defenses

before he is sued would be unreasonable to the point of

absurdity. Until he receives and reads the complaint

he cannot have a clear idea of how best to defend. He

shouldn’t be put to the expense of having to identify

and articulate all possible legal defenses to a suit unless

and until there is a suit. The only lasting effect of the

expansive interpretation of the doctrine urged by Ryerson

would be that insurance companies would refuse to offer

any explanation for denying coverage until the insured

sued—as Federal would have been entitled to do, First

Commodity Traders, Inc. v. Heinold Commodities, Inc., supra,
8 No. 10-3522

766 F.2d at 1013—leaving insureds to speculate on the

grounds for denial and thus precipitating lawsuits many

of which would prove groundless.

And finally Federal’s change of defenses could not

have harmed Ryerson, because in denying coverage

Federal told Ryerson it was reserving the right to add

supplemental grounds for the denial. Compare Progressive Ins. Co. v. Brown ex rel. Brown, 966 A.2d 666, 668-69

(Vt. 2008). When there is no prejudice to the

opposing party, invoking the doctrine of mend the hold

to bar a valid defense is overkill. See Trossman v.

Philipsborn, 869 N.E.2d 1147, 1166-67 (Ill. App. 2007);

Larson v. Johnson, 116 N.E.2d 187, 191-92 (Ill. App. 1953);

cf. New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001).

AFFIRMED.

4-12-12