Santa's Best Craft, LLC v. St. Paul Fire & Marine Insurance

In the

United States Court of Appeals
For the Seventh Circuit

Nos. 08-3572 & 08-3773

S ANTA’S B EST C RAFT, LLC;
S ANTA’S B EST; and H.S. C RAFT
M ANUFACTURING C O .,

Plaintiffs-Appellants/
Cross-Appellees,
v.

S T. P AUL F IRE AND M ARINE
INSURANCE C OMPANY,
Defendant-Appellee/
Cross-Appellant.

Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 1342—Robert W. Gettleman, Judge.

A RGUED N OVEMBER 4, 2009—D ECIDED JULY 1, 2010

Before C UDAHY, FLAUM, and E VANS, Circuit Judges.
C UDAHY, Circuit Judge. This is an insurance case about
twinkling Christmas lights. JLJ, Inc. and its licensee
2 Nos. 08-3572 & 08-3773

Inliten, LLC (collectively JLJ) sued Santa’s Best Craft, LLC
(SBC) over its marketing of “Stay-On” lights. The present
case is about an insurer’s duties to SBC and others in
that underlying action.
JLJ alleged that SBC copied JLJ’s “Stay Lit” lights pack-
aging design and that SBC sold Stay-On lights using
false and deceptive language. SBC asked its insurer,
St. Paul Fire and Marine Insurance Company (St. Paul),
for a defense and then sued St. Paul when none was
forthcoming. St. Paul counterclaimed with a declaratory
action about its duty to defend and then tendered hun-
dreds of thousands of dollars to SBC for its litigation
expenses after the district court held that St. Paul had
a duty to defend. The district court, however, agreed
with St. Paul that it was not obliged to cover defense
expenditures for SBC’s contract indemnitee Monogram
Licensing (Monogram) or to reimburse the settlement
payment that resolved the underlying action. Each party
appealed. We agree with the district court that St. Paul
had, but did not breach, a duty to defend. We also
agree that the district court properly declined to require
St. Paul to reimburse SBC for Monogram’s expenses, but
we remand for further proceedings to resolve whether
St. Paul owes prejudgment interest on litigation expenses
and reimbursement for the settlement expenses.

I. Background
A. The relevant parties.
The present litigation has its roots in August 2002, when
JLJ sent SBC a cease-and-desist letter, demanding that
Nos. 08-3572 & 08-3773 3

SBC change the packaging of its Stay-On lights. JLJ claimed
that the Stay-On lights boxes aped the look and slogans
of JLJ’s Stay Lit lights. SBC forwarded the letter to St. Paul,
which responded that the commercial general liability
(CGL) coverage policy SBC purchased did not cover
the claims in the demand letter. Specifically, St. Paul
claimed that false representation claims were not
covered by the policy in the first instance and that two
policy exclusions, relating to intellectual property and
material previously made known or used, meant that
it owed no defense for the remaining claims.
In November 2002, JLJ sued SBC in federal court in
the southern district of Ohio for Lanham Act trademark
infringement, false designation of origin, false ad-
vertising, trademark dilution and deceptive trade prac-
tices. See JLJ, Inc. v. Santa’s Best Craft, LLC, No. C-3-02-
00513 (S. D. Ohio). St. Paul again denied coverage. In 2004,
after JLJ joined as defendants Santa’s Best and H.S. Craft
Manufacturing Co., two principal members of SBC, as well
as Monogram, St. Paul continued an investigation of
its duties, but reserved the right to determine that the
policy provided no coverage.
SBC did not wait for St. Paul to finish its investiga-
tion. In February, SBC and the other plaintiffs filed this
declaratory action to compel St. Paul to defend them
and, in June, St. Paul counterclaimed for a declaratory
judgment that it had no such duty. In December 2004, the
underlying action settled after SBC and its members
agreed to pay JLJ $3.5 million and to refrain from using
the mark Stay-On or any colorable imitation of the Stay
Lit mark.
4 Nos. 08-3572 & 08-3773

As noted above, Monogram was added as a defendant
in the underlying action based on claims of unjust enrich-
ment and conspiracy for approving SBC’s use of the
allegedly offending marks and slogans. Monogram, a
General Electric (GE) Company subsidiary, and SBC had
entered into a trademark licensing agreement (Licensing
Agreement) in which SBC promised to “defend,
indemnify and hold harmless [Monogram] and GE . . .
from and against any and all claims . . . arising out of or
in connection with . . . the Licensed Products including . . .
any infringement of any rights . . . in connection with the
manufacture, advertising, promotion, sale, possession or
use of [the] Licensed Products.” Santa’s Best (recall, one
of the members of SBC, which is a limited liability com-
pany) reimbursed Monogram’s defense expenses of ap-
proximately $1.3 million. St. Paul’s CGL policy requires
it to defend its insured’s contract indemnitees, assuming
certain control and cooperation requirements are satis-
fied. These requirements include the indemnitee’s obliga-
tion to provide St. Paul notice of each legal paper “as
soon as possible after it is received”; St. Paul’s obligation
to first determine that there is no conflict between the
insured’s interests and those of the indemnitee; and the
indemnitee and insured’s agreement in writing that they
can share the same counsel. Monogram never tendered
a defense to St. Paul. Instead, in August 2004, the plain-
tiffs advised St. Paul that, under the Licensing Agree-
ment, they believed that Monogram was a contract
indemnitee and that St. Paul owed coverage. Monogram,
in the underlying action, was represented by counsel
separate from plaintiffs’, although the two legal teams
coordinated a defense.
Nos. 08-3572 & 08-3773 5

B. The district court’s orders.
The district court held that St. Paul had, but did not
breach, a duty to defend because the complaints in
the underlying action potentially sketched a claim for
infringement of slogan, which was covered as an “adver-
tising injury offense.” See Santa’s Best Craft v. St. Paul
Fire & Marine Ins. Co. (Santa’s Best I), 1:04-cv-01342,
2004 WL 1730332, at *10 (N.D. Ill. July 30, 2004). It also
held that the intellectual property exclusion did not
apply or that, even if it did, the allegations could be
construed as a infringement of a trademarked slogan,
which was an exception to the exclusion. See id. at **7-8.
In addition, the court held that the “material previously
made known or used” exclusion did not apply because
not all of the slogans were finalized until 2002, after
St. Paul’s policy became effective. See id. at **8-10. In a
subsequent order, the district court stayed the action
pending the outcome of state-court litigation involving
St. Paul. See Santa’s Best Craft v. St. Paul Fire & Marine
Ins. Co. (Santa’s Best II), 353 F. Supp. 2d 966 (N.D. Ill. 2005).
This state-court litigation primarily involved a
coverage action instituted by SBC against the last sig-
nificant party in this case—Zurich American Insurance
Company (Zurich), SBC’s insurer before St. Paul’s policy
took effect in January 2002. 1 Before they filed the present
lawsuit, the plaintiffs also looked for a defense from
Zurich and, even though Zurich provided one, they filed
a declaratory action in the Circuit Court of Cook County,

1
Zurich is not a party to the present appeal.
6 Nos. 08-3572 & 08-3773

Chancery Division, to address several issues about
Zurich’s reimbursement of the defense expenses. See
Santa’s Best Craft, LLC v. Zurich Am. Ins. Co., Case No. 04
CH 01885 (Cook County Ct., Ch. Div.) (Zurich action).
Zurich drew St. Paul into the action via a third-party
complaint for contribution. In a December 2005 order, the
Zurich court indicated that St. Paul “agree[d] that it is
bound by this Court’s determination as to the reason-
ableness of fees at issue both in this proceeding and also
in [our present case on appeal].” Santa’s Best Craft, LLC v.
Zurich Am. Ins. Co., Case No. 04 CH 01885 (Cook County
Ct., Ch. Div. Dec. 14, 2005). It entered a judgment of
$1.54 million in defense costs for the plaintiffs, of which
approximately $1.27 million were Monogram’s defense
costs.2 The Zurich court then denied the plaintiffs’ motion
for prejudgment interest for reasons stated on the record.
See id. To date, according to the parties’ briefing, all of the
costs the plaintiffs incurred in the underlying action
have been reimbursed except the Monogram defense
costs and the settlement payments (and possible interest
payments).
After the Zurich action was terminated, the district
court held that St. Paul did not owe the plaintiffs
a duty to indemnify them for settlement costs in the

2
For reasons neither party explained to the district court,
Zurich was “not currently responsible” for reimbursing plain-
tiffs for the Monogram costs. Santa’s Best Craft v. St. Paul Fire
& Marine Ins. Co. (Santa’s Best III), 1:04-cv-01342, 2008 WL
4328192, at *6 (N.D. Ill. Sept. 16, 2008).
Nos. 08-3572 & 08-3773 7

underlying action because some of the claims were not
covered under the CGL policy exclusions and because
the plaintiffs failed to allocate the settlement between
covered and non-covered claims. See Santa’s Best III, 1:04-
cv-01342, 2008 WL 4328192, at *9 (N.D. Ill. Sept. 16, 2008).
It also held that St. Paul did not owe prejudgment
interest or reimbursement for Monogram’s defense
costs because of other CGL policy exclusions and the
Zurich court’s findings. See id. at **6-7, 9.

II. Standard of Review
Since this is a diversity case, we apply state substantive
law and federal procedural law. See Hanna v. Plumer, 380
U.S. 460 (1965); Bevolo v. Carter, 447 F.3d 979, 982 (7th
Cir. 2006). No party raises a choice of law issue and
therefore, as did the district court, we apply the law of
the forum state, Illinois. See Casio, Inc. v. S.M.& R. Co., 755
F.2d 528, 531 (7th Cir. 1985). A district court’s grant of
summary judgment is reviewed de novo, Narducci v.
Moore, 572 F.3d 313, 318 (7th Cir. 2009), examining the
record in the light most favorable to the non-moving
party. Trade Fin. Partners, LLC v. AAR Corp., 573 F.3d
401, 406 (7th Cir. 2009). Insurance contracts are inter-
preted to effectuate the intent of the parties as expressed
through the contract language. See Nicor, Inc. v. Assoc.
Elec. & Gas Ins. Servs. Ltd., 860 N.E.2d 280, 285-86 (Ill. 2006).
Ambiguities are construed against the insurer, as drafter.
See, e.g., McKinney v. Allstate Ins. Co., 722 N.E.2d 1125,
1127 (Ill. 1999). The construction of an insurance
contract is a question of law, reviewed de novo. See
Nicor, Inc., 860 N.E.2d at 285.
8 Nos. 08-3572 & 08-3773

III. Discussion
A. Duty to defend.
The plaintiffs argue in support of the district court’s
decision that St. Paul owed them a defense because the
complaint in the underlying action included allegations
that made out a claim for “[u]nauthorized use of . . . any
slogan . . . of others in your advertising,” where a slogan
is defined as “a phrase that others use and intend to
attract attention in their advertising.” The term slogan
excludes a phrase “used as, or in, the name of” organiza-
tions or businesses other than the insured or “any of the . . .
products . . . of any person or organization, other than
[the insured].” St. Paul responds that these allegations
serve as background for JLJ’s trade dress infringement
claim, a claim that St. Paul is not required to defend
because the CGL policy has an exclusion for certain
intellectual property claims.
“To determine whether the insurer has a duty to defend
the insured, the court must look to the allegations in
the underlying complaint and compare these allegations
to the relevant provisions of the insurance policy. . . . If
the facts alleged in the underlying complaint fall within,
or potentially within, the policy’s coverage, the insurer’s
duty to defend arises.” Outboard Marine Corp. v. Liberty
Mut. Ins. Co., 607 N.E.2d 1204, 1212 (Ill. 1992) (internal
citations omitted). St. Paul’s policy provided that “[w]e’ll
have [the right and duty to defend] . . . even if all of the
allegations of the claim or suit are groundless, false, or
fraudulent.” And, Illinois law specifies that “[w]e give
little weight to the legal label that characterizes the under-
Nos. 08-3572 & 08-3773 9

lying allegations. Instead, we determine whether the
alleged conduct arguably falls within at least one of the
categories of wrongdoing listed in the policy.” Lexmark
Int’l, Inc. v. Transp. Ins. Co., 761 N.E.2d 1214, 1221 (Ill.
App. Ct. 2001). “[I]f the underlying complaints allege
several theories of recovery against the insured, the duty
to defend arises even if only one such theory is within
the potential coverage of the policy.” See id. (quoting
with internal citations omitted, U.S. Fidelity & Guar. Co.
v. Wilkin Insulation Co., 578 N.E.2d 926 (Ill. 1991)); see
also Outboard Marine Corp., 607 N.E.2d at 1220.
The district court properly found that the CGL policy
requires St. Paul to defend the plaintiffs. It held that the
insurer owed a duty to defend because the allegations
may potentially give rise to a claim for unauthorized use
of slogan. See Cincinnati Ins. Co. v. Zen Design Group, Ltd.,
329 F.3d 546, 553-57 (6th Cir. 2003) (Michigan law) (insurer
owed duty to defend an action with trademark and
trade dress claims partially based on the fact that the
competitor’s trademarked phrase “The Wearable Light”
was potentially an infringement of slogan).
St. Paul’s CGL policy covers “unauthorized use” of a
“slogan,” which suggests that the claims underlying this
conduct include as an element the defendant’s owner-
ship or, at least, control, over the slogan. See, e.g., Applied
Bolting Tech. Prods., Inc. v. U.S. Fidelity & Guar. Co., 942
F. Supp. 1029, 1034-35 (E.D. Pa. 1996) (Vermont law)
(holding that allegations that a company falsely adver-
tised that it complied with an industry standard did not
fall within insurance coverage for lawsuits about infringe-
10 Nos. 08-3572 & 08-3773

ment of slogan); see also B LACK’S LAW D ICTIONARY (7 TH
E D . 1999) (defining authorize as “1. To give legal authority;
to empower 2. To formally approve; to sanction.” and
unauthorized as “Done without authority; specif., made
without actual, implied or apparent authority.”) 3 St. Paul
contends that JLJ has no ownership or exclusive right to
the slogans on the packages and, therefore, cannot
have asserted an unauthorized use/infringement of
slogan claim. See Lexmark Int'l, 761 N.E.2d at 1226 (de-
clining to find a duty to defend based on infringe-
ment of slogan when the insured was accused of breach
of contract and unfair business practices but not accused
of lifting any of the plaintiff’s slogans). The present case
is distinguishable because Lexmark’s underlying suit did
not contain claims for relief based on the plaintiff’s own
advertising ideas or slogans, or claim ownership or the
exclusive right to the language it used. Id. In contrast,
the JLJ complaints contain allegations that SBC copied

3
Beyond the use of the words “authorize” or “unauthorized”
in the sections about infringement of slogan, the CGL policy
also used “authorize” as a verb in conjunction with the
indemnitee defense control and authority requirements, to
wit: “The indemnitee must give us authority in writing to
conduct its defense against the claim or suit,” suggesting
that the term “authority” may be either the first or second
Black’s Law Dictionary definition above. The policy’s indeter-
minate use of the word suggests that “unauthorized” might
encompass the informal second Black’s Law Dictionary defini-
tion of “authority” and therefore conduct that triggers
coverage under infringement of slogan need not consist of
formal claims of ownership.
Nos. 08-3572 & 08-3773 11

certain JLJ slogans, suggesting that JLJ had some claim
of ownership over them. Cf. Zen Design Group, 329 F.3d
at 555 n.9, 556-57 (discussing “assertions of ownership”
over the contested phrase such as the advertiser’s
trademarking of the slogan, its widespread use of the
slogan and the good will it developed that is associated
with the phrase).4 In addition, although many of these
allegations about slogans support JLJ’s trade dress
claim, as noted above, our inquiry is based on the allega-
tions in the complaint, not the legal labels attached to
them. See, e.g., id. at 554 n.4, 555-56 (noting that the com-
plaint’s failure to refer to the offending phrase as a
“slogan” and failure to include a specific claim labeled
“infringement of slogan” did not preclude the finding
that the insurer had a duty to defend based on allega-
tions of infringement of slogan). Given the presumptions
at play, the complaint triggered St. Paul’s duty to defend.
We now address whether any exclusions in St. Paul’s
policy apply so that St. Paul has no duty to defend.

4
We note that, under the language of the contract, this idea of
indicia of ownership or control does not mean that the under-
lying complaint must include allegations that the slogans
were trademarked or copyrighted. In other parts of the CGL
policy, St. Paul specifically refers to slogans or advertising
material as copyrighted or trademarked instead of using
the word “slogan” without modifier as St. Paul does in the
section about infringement of slogan.
12 Nos. 08-3572 & 08-3773

1. IP exclusion.
St. Paul contends that JLJ’s slogans are not trademarked
and therefore the claims are not covered because of the
intellectual property (IP) exclusion. Insurers have the
burden of proving that an exclusion applies. See, e.g. Ins.
Corp. of Hanover v. Shelborne Assocs., 905 N.E.2d 976, 982
(Ill. App. Ct. 2009). Insureds, in turn, have the burden to
prove that an exception to an exclusion restores cover-
age. See, e.g., 17A G. C OUCH , C OUCH ON INSURANCE
§ 254:13 (2009). St. Paul’s IP exclusion disallows coverage
for “injury or damage . . . that results from any actual
or alleged infringement or violation of any of the
following rights or laws: . . . trade dress, . . . trademark,
other intellectual property rights or laws.”An exception
to the IP exclusion is “unauthorized use of … trademarked
slogan … of others in your advertising.”
St. Paul argues that, because the conduct the plaintiffs
identify as making out a claim for infringement of slogan
is all conduct that, in the language of St. Paul’s policy,
“results from” a trade dress claim, the IP exclusion pre-
cludes coverage. Under any authority we could find
indicating when a non-covered claim may affect
coverage for a covered claim based on the similarity of
allegations, the fact that the trade dress allegations are
a subset of those alleging infringement of slogan does not
eliminate coverage under the policy. That is, unless a
slogan infringement claim would not have arisen but
for the trade dress violation claim (or necessarily arises
out of the trade dress violation claim)—clearly not the
case here—we cannot find that the exclusion for trade
Nos. 08-3572 & 08-3773 13

dress claims excuses St. Paul from a duty to defend the
underlying action. See, e.g., St. Paul Fire & Marine Ins. Co.
v. Antel Corp., 899 N.E.2d 1167, 1176 (Ill. App. Ct. 2008) (if
an insurer relies on an exclusion, it must be “clear and
free from doubt” that the exclusion applies); cf. Hugo
Boss Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608, 623 n.15
(2d Cir. 2001) (New York law) (suggesting that the
breach of contract exclusion might apply if, “but for” a
breach of contract, there would be no advertising injury
or other covered injury, but noting also that it was uncer-
tain what was meant by the “arising out of” language
of the exclusion); Cent. Mut. Ins. Co. v. StunFence, Inc., 292
F. Supp. 2d 1072, 1081-82 (N.D. Ill. 2003) (holding that
knowledge of falsity exception did not preclude cov-
erage because some of the claims were based on uninten-
tional, rather than knowing, conduct). The district court
properly found a duty to defend that was not affected by
the IP exclusion.
Additionally, the district court found, however, that
even if the IP exclusion applies, the differences between
trade dress and trademark have so narrowed that, if the
IP exclusion applied, the exception for trademarked
slogans likely did as well. It noted that what is or is not
trademarked is a decision for the court in the under-
lying action. We agree with the district court that, even
if the IP exclusion applied, the trademark exception
would require St. Paul to defend the action given the
uncertainty whether the court in the underlying action
would have decided the slogan qualified as trade-
markable. But, because St. Paul has not met its
burden to prove that the IP exclusion applies in the
first instance, we need not reach this alternative holding.
14 Nos. 08-3572 & 08-3773

2. Material previously made known or used exclusion.
St. Paul claims that its “material previously made
known or used” (MPMK) exclusion applies to defeat a
duty to defend with respect to the 2003-04 policy
period, but acknowledges that it did not make this argu-
ment with respect to the 2002-03 policy period (although
it argues that the exclusion defeats any duty to
indemnify under either policy because facts revealed in
the course of litigation demonstrated that much of the
offending behavior predated 2002). The district court
held that St. Paul was obligated by the 2002-03 policy
to defend the plaintiffs because the insurer must defend
if even one allegation of liability falls within the policy’s
coverage.
The MPMK exclusion bars coverage for personal or
advertising injury that results from “any material that
was first made known before this agreement begins” and
“any advertising idea or advertising material, or any
slogan or title, of others, whose unauthorized use in your
advertising was first committed before this agreement
begins.” Given that the parties agree that the allegations
in the relevant complaints describe some language first
used by the plaintiffs in 2002, this exclusion bars coverage
under the 2003-04 policy but not under the 2002-03 pol-
icy. 5 Cf. Taco Bell Corp. v. Continental Cas. Corp., 388 F.3d
1069, 1073 (7th Cir. 2004) (Illinois law) (unless the differ-

5
In a deposition taken for the Zurich action, SBC’s lawyer
testified that the settlement talks did not address allocating
settlement amounts based on the policy in effect at the time
of settlement.
Nos. 08-3572 & 08-3773 15

ences in the subsequent advertising are immaterial,
modified advertising can serve as “fresh wrongs” that
are not excluded from insurance coverage by a “prior
publication” exclusion).

B. Complying with the duty to defend.
The district court found no breach of the duty to defend
because St. Paul timely filed a cross-motion and a counter-
claim seeking a declaration that it did not have a duty
to defend. Under Illinois law, an insurer has three op-
tions if it contests its duty to defend: (1) seek a declara-
tory judgment regarding its obligations before trial of
the underlying action; (2) defend the insured under a
reservation of rights; or (3) refuse either to defend or to
seek a declaratory judgment at the insurer’s peril that it
might later be found to have breached its duty to
defend and estopped from asserting defenses as to pay-
ment based on non-coverage. See, e.g., County Mut. Ins. Co.
v. Olsak, 908 N.E.2d 1091, 1098 (Ill. App. Ct. 2009). That
is, if it declines to defend under a reservation of rights, to
avoid estoppel, the insurer must file a declaratory action
or answer and cross claim in an action against an insured.
See, e.g., L.A. Connection v. Penn-America Ins. Co., 843
N.E.2d 427, 431 (Ill. App. Ct. 2006) (collecting cases and
deciding that the weight of Illinois authority holds that
the insured may file the declaratory judgment action,
even though contrary authority exists); Roman Catholic
Diocese of Springfield in Ill. v. Md. Cas. Co., 139 F.3d 561, 565-
66 (7th Cir. 1998) (Illinois law). But see Supreme Laundry
Serv., L.L.C. v. Hartford Cas. Ins. Co., 521 F.3d 743, 749 (7th
16 Nos. 08-3572 & 08-3773

Cir. 2008) (Illinois law) (explaining, without citation, that
because the insured instituted the declaratory action
regarding coverage, the insurer was estopped from
raising a policy defense).6
St. Paul claims that it did not breach its duty to defend
because the plaintiffs initiated a declaratory judgment
action in February 2004, before St. Paul had time to
finish its investigation of coverage of the amended com-
plaint, tendered in January 2004. Moreover, St Paul
counterclaimed in June 2004, seeking a declaration that
it owed no duty to defend before the case reached settle-
ment, talks for which began in late 2004. Illinois courts
have three tests to measure the timeliness of the declara-
tory action. It must be filed: (1) before the underlying

6
We are not bound by our prior decisions regarding our
predictions of state law, especially if state law has evolved. See,
e.g., Taco Bell Corp., 388 F.3d at 1077. In Supreme Laundry,
however, the insurer’s policy defense was one not raised
until very late in the game, after the underlying action was
settled (the coverage action was also not filed until after the
underlying action was resolved in late 2005). See 521 F.3d at 745-
46. Supreme Laundry also did not involve a duty to indemnify.
See Mot. Judgment on the Pleadings, C.A. 1:06-cv-4476, Doc. 17,
at 3 n.1 (Nov. 7, 2006). The issues in the present case were, in
contrast, squarely addressed in Roman Catholic Diocese. More
importantly, our prediction of the Illinois Supreme Court’s
opinion on the matter, based on the trend in Illinois appellate
decisions, is that a declaratory judgment action initially filed
by the insured may satisfy an insurer’s duty to defend as
described in the main body of our opinion.
Nos. 08-3572 & 08-3773 17

action is resolved, see Employers Ins. of Wausau v. Ehlco
Liquidating Trust, 708 N.E.2d 1122, 1138 (Ill. 1999);
(2) before settlement or trial is imminent, Westchester
Fire Ins. Co. v. G. Heileman Brewing Co., 747 N.E.2d 955,
965 (Ill. App. Ct. 2001) (finding no breach when declara-
tory judgment was filed 15 months before settlement); or
(3) within a reasonable time of being notified of the under-
lying suit. L.A. Connection, 843 N.E.2d at 432-33 (timely
when insurer cross-claimed 4 months after it denied
insurance coverage); Sears, Roebuck & Co. v. Seneca Ins. Co.,
627 N.E.2d 173, 178 (Ill. App. Ct. 1993) (seven months not
untimely). St. Paul satisfies all of these timeliness tests.
Because St. Paul did not breach its duty to defend, we
do not address the plaintiffs’ arguments based on a breach.

C. Reimbursement of defense costs already advanced
to the plaintiffs.
In its cross-appeal, St. Paul asks us to reverse the
district court’s decision to deny St. Paul’s request for
reimbursement of costs it already submitted to the plain-
tiffs because of the district court’s finding that St. Paul
had a duty to defend. Because the district court did not
err, St. Paul’s request for leave to amend its counterclaim
to seek reimbursement was properly denied.

D. St. Paul may need to reimburse the JLJ settlement
payment.
St. Paul argues, as held the district court, that the plain-
tiffs failed to designate which of the claims addressed
18 Nos. 08-3572 & 08-3773

by the settlement were covered by the St. Paul CGL
policy and, therefore, St. Paul properly declined to reim-
burse the settlement. The plaintiffs argue that they have
no burden to allocate, citing Federal Ins. Co. v. Binney &
Smith, Inc., 913 N.E.2d 43, 53-54 (Ill. App. Ct. 2009).
They acknowledge that JLJ’s threatened damages in the
underlying action were undifferentiated as to the various
claims, and they argue that there is no practical way of
allocating the settlement.
In Binney, an Illinois appellate court confirmed that an
insurer must reimburse an insured for its settlement
expenses when the settlement was made in “reasonable
anticipation of liability” 7 for damage covered by the
insurer’s policies, U.S. Gypsum Co. v. Admiral Ins. Co., 643
N.E.2d 1226, 1244 (Ill. App. Ct. 1994), and the settlement’s
primary focus was a claim covered under the insurer’s
policy, see Commonwealth Edison v. Nat’l Union Fire of
Pittsburg, Pa., 752 N.E.2d 555, 565 (Ill. App. Ct. 2001). See
Binney, 913 N.E.2d at 48-49, 53-54. Both Gypsum and
Edison relied on the record developed in the under-
lying action, including allegations in the complaint and
evidence presented in the coverage action (Edison) or the
evidence presented in underlying companion cases that
went to trial before settling (Gypsum) to conclude that the
settlement resolved litigation primarily focused on covered
damage. See, e.g., Gypsum, 643 N.E.2d at 1244-47; Edison,

7
The district court held that the settlement was reasonable. See
Santa’s Best III, 2008 WL 4328192, at *8. St. Paul does not chal-
lenge the reasonableness of the settlement on appeal.
Nos. 08-3572 & 08-3773 19

752 N.E.2d at 565. Edison explains that an insured is not
required to apportion its liability for different claims
because that would either require the coverage litigation
to be a retrial of the merits of the insured’s underlying
lawsuit and/or would discourage settlement because the
insured would essentially have to prove its own liability
for the underlying conduct even if it had not made that
concession in arriving at a settlement. See Edison, 752
N.E.2d at 565-66 (discussing Gypsum). Illinois courts do
require the insured to establish when the covered claims
arose to allocate responsibility for paying the settlement
based on which insurer’s policy was in effect at the
time. See Binney, 913 N.E.2d at 54, 56-57; see also St. Mi-
chael’s Orthodox Catholic Church v. Preferred Risk Mut. Ins.
Co., 496 N.E.2d 1176, 1179 (Ill. App. Ct. 1986) (because the
insured failed to meet its burden to prove that some of the
roof damage occurred during the effective dates of the
insurer’s policy, judgment was wrongly rendered for
insured); Fidelity & Cas. v. Mobay Chem. Corp., 625 N.E.2d
151, 159 (Ill. App. Ct. 1992) (placing burden on insureds
to allocate settlements for periods of policy coverage and
non-coverage).
The district court, relying on Illinois School District
Agency v. Pacific Insurance Company, held that the plaintiffs
had to allocate the settlement into covered and uncovered
claims. See 471 F.3d 714, 723 (7th Cir. 2006) (holding that
the policy at issue included no duty to allocate defense
costs but that if, on remand, the insurer owed the
insured a duty to defend a contested claim, the insured
might have to prove how much it spent defending that
contested claim). This case relied on the specific contract
20 Nos. 08-3572 & 08-3773

at issue and cited St. Michael’s, which addresses alloca-
tion based on when claims arose rather than based
on liability.
Legal commentators have noted the lacuna in the
caselaw regarding apportionment of settlements in lieu
of litigation that would likely have involved both
covered and uncovered claims. See, e.g., A LLAN D. W INDT,
2 INSURANCE C LAIMS AND D ISPUTES § 6:31 (Supp.
Mar. 2010). Some states place on the insurer the burden
of proving (by a preponderance of the evidence) that
specific settlement costs could be allocated solely to
claims for relief that are not even potentially covered by
the insurance policy. See, e.g., Buss v. Superior Ct., 939 P.2d
766, 778 (Cal. 1997) (holding that an insurer may seek
reimbursement of defense costs that may be allocated to
claims that are not even potentially covered because a
party desiring relief carries the burden of proof); C OUCH
ON INSURANCE 3 D § 226:129, at 226-127-128 (2005). Other
courts place the burden to segregate claims on the in-
sured. See, e.g., Comsys Info. Tech. Servs., Inc. v Twin City
Fire Inst. Co., 130 S.W.3d 181, 198-200 (Tex. Ct. App.
[Houston-14th Dist.] 2003), pet. denied. Still others vary
the burden: initially on the insured to prove coverage,
on the insurer to prove the existence of an exclusion,
and back to the insured to prove an exception to an
exclusion. Lastly, courts generally addressing corporate
directors and officers liability insurance policies (D&O
policies) sometimes use the larger-settlement rule, where
an insurer is responsible for the settlement except to the
extent it is larger because of uncovered claims. See, e.g.,
Nos. 08-3572 & 08-3773 21

Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d 955, 961-62
(7th Cir. 1995) (Illinois law).8
Consistent with the Illinois policy that a coverage
action should not require the insureds to conclusively
establish their own liability in the interest of promoting
settlement, we think the proper inquiry is whether the
claims were not even potentially covered by the insurance
policy. See, e.g., Gypsum, 643 N.E.2d at 1244 (noting the
benefits of settlement). A competing policy interest is
equity—it is inequitable to require an insurer to pay for
a settlement that is clearly not within the terms of its
policy. Consequently, our prediction is that Illinois
courts, in cases in which it is possible that none of the
settlement was attributable to the dismissal of claims for
damage covered by the insurer’s policy, would evaluate
whether a “primary focus” of the claims that were
settled was a potentially covered loss (burden on the
insured). Conversely, if it can be established that the
claims were not even potentially covered (burden on the
insurer), then the insurer is not required to reimburse
the settlement. This “primary focus” language is derived
from the Commonwealth Edison case. See Edison, 752 N.E.2d
at 565; see also Binney, 913 N.E.2d at 54 (citing Edison).
Because, in this case, the parties contest whether the
settlement was made in anticipation of covered claims, the
burden should be on the insured to prove coverage of
the settlement in the first place and then on the insurer

8
In that case, we declined to allocate the burden of proof.
See id. at 964 n.11.
22 Nos. 08-3572 & 08-3773

to prove the existence of exclusions barring coverage. As
the district court held, several of the allegations in the
underlying action’s complaint deal with claims and
conduct outside of the policy coverage, including the
trademark claims based on the product names and JLJ’s
false advertising claim. See Santa’s Best III, WL 4328192,
at **8-9. We agree with these holdings based on the
plain language of St. Paul’s policy.
The only remaining coverage dispute, therefore, is
whether the allegations and record evidence supporting
the trade dress claim suggest that the primary focus
of settlement was damages payments for a covered in-
fringement of slogan claim. The district court concluded
that plaintiffs had not made an allocation of the settle-
ment and therefore denied any reimbursement for the
settlement. Although the district court’s inquiry is close
to the one we predict Illinois courts would require, we
will remand to allow the district court to consider the
record evidence (and supplemental briefing or an eviden-
tiary hearing if it so chooses, although it may choose not
to do so) of whether a primary focus of the underlying
action was a covered loss. In addition, St. Paul may
attempt to prove that the MPMK exclusion applies to
defeat recovery under the policy.

E. St. Paul does not have to reimburse SBC for Mono-
gram’s defense expenditures.
Under the License Agreement, Monogram gave SBC
permission to market its Christmas lights under the GE
brand. The plaintiffs contend that this Agreement required
them to defend and indemnify Monogram for any litiga-
Nos. 08-3572 & 08-3773 23

tion arising out of products marketed with the GE label
and that St. Paul was required to reimburse expenditures
for this purpose because Monogram was their contract
indemnitee.
St. Paul’s CGL policy covers the advertising injury
of insureds’ indemnitees if several conditions are met.
The plaintiffs argue that they complied with all precon-
ditions to reimbursement that were feasible in view of
St. Paul’s failure to timely defend, and (or, alternatively)
the defense of Monogram was “reasonably related” to
their own defense, requiring St. Paul to reimburse them
for Monogram’s costs.
In December 2005, the plaintiffs amended their com-
plaint in the present case to seek reimbursement for
Monogram’s expenses, which were paid by Santa’s Best.
The district court determined that St. Paul owed Mono-
gram nothing because Santa’s Best was under no obliga-
tion to pay Monogram’s expenses and, therefore, even
if SBC were a contract indemnitee under the St. Paul
policy, SBC is responsible for its own liabilities, not
those of Santa’s Best. See Santa’s Best III, 2008 WL 4328192,
at **6-7. Alternatively, the district court noted that the
plaintiffs failed to tender the complaint for many
months and a conflict of interest existed between Mono-
gram and the plaintiffs. See id.
St. Paul is not required under its policy to reimburse
the Monogram expenses. The CGL policy required
St. Paul to determine that there was no conflict between
24 Nos. 08-3572 & 08-3773

the insured’s interests and those of the indemnitee 9 and
required the indemnitee to provide St. Paul with a copy
of any demand and give notice of the claim or suit.1 0
In support of the plaintiffs’ motions for partial summary
judgment quantifying defense expenses, counsel for the
plaintiffs and Santa’s Best as well as SBC’s CFO testified
via declaration that a separate firm represented Mono-
gram in the underlying action because of a “potential
conflict of interest” between the plaintiffs and Monogram
that precludes Monogram’s representation by counsel
for the plaintiffs. The plaintiffs now argue that they
never conceded there was a conflict of interest. They cite
a later declaration in support of a separate summary
judgment motion, in which the CFO testified that the
claims against Monogram and against the plaintiffs “are

9
“We must determine there’s no conflict between your
interests and those of the indemnitee, based on the allegations
in the claim or suit and on what we know about the factual and
legal basis for the damages being sought.”In its Defendant’s
Response to Plaintiffs’ Motion for Summary Judgment on the
Monogram defense issue, St. Paul explained that the plaintiffs
claimed, in a sworn affidavit filed with the district court, that
a conflict of interest prevented Monogram and the plaintiffs
from having common counsel in the underlying action.
10
St. Paul’s policy provides: “You and the indemnitee must ask
us to conduct and control the defense of that indemnitee
against the claim or suit under this agreement.” This require-
ment does not limit when the indemnitee and the insured can
“ask”—it is arguable that this condition was met by
August 2004.
Nos. 08-3572 & 08-3773 25

essentially the same” and that “[t]he work of all defense
counsel . . . benefitted Santa’s defense.” Regardless
whether the earlier declarations constituted a conces-
sion, the CFO’s declaration does not call into doubt the
district court’s determination that a conflict existed
between Monogram and the plaintiffs such that they
did not comply with all preconditions to St. Paul’s pro-
viding Monogram’s defense. We acknowledge that
certain of St. Paul’s requirements were impossible for
the plaintiffs to satisfy because St. Paul did not immedi-
ately defend it in the underlying action. That said, the
plaintiffs could have complied with other requirements
but chose not to.
Assuming, arguendo, that they did not waive the argu-
ment, the plaintiffs also argue that, because defense of
Monogram was “reasonably related” to their defense, St.
Paul should cover Monogram’s expenses. The plaintiffs
note that Monogram’s liability is largely derivative of their
own. See Ryland Mortgage Co., Inc. v. Travelers Indem. Co.,
177 F. Supp. 2d 435, 439-40 (D. Md. 2001) (stating in dicta:
if defense expenses are “reasonably related” to a covered
claim, the expenses may be wholly apportioned to this
covered claim so that an insurer must reimburse some
defense costs that aid in the defense of an uncovered
claim; same goes for coverage of defense expenses for an
uninsured party), vacated on other grounds, 70 Fed. App’x.
673 (4th Cir. July 18, 2003); Fed. Realty Inv. Trust v. Pac.
Ins. Co., 760 F. Supp. 533, 537 (D. Md. 1991) (requiring
insurer to cover all uncovered claims, including against
uncovered parties, if the insured proves, by a preponder-
ance of the evidence, that the defense of these uncovered
26 Nos. 08-3572 & 08-3773

claims is reasonably related to covered claims/parties).1 1
Separately, in the particular case of directors and officers
insurance (D&O policies), several courts use a “reasonably
related” rule to require the insurer issuing the D&O
policy to cover some defense expenditures also used to
defend the directors and officers’ uninsured corporation.
See, e.g., Safeway Stores, Inc. v. Nat’l Union Fire Ins. Co., 64
F.3d 1282, 1289 (9th Cir. 1995) (noting that the insurer
conceded that the defense costs were covered under the
D&O policy).
While insurance contracts should be construed against
the drafter, nothing in the St. Paul’s policy supports the
plaintiffs’ argument here that the Illinois Supreme
Court would apply a “reasonably related” test to hold
that Monograms’ costs are covered. In Illinois, as the
plaintiffs acknowledge, a duty to defend encompasses
“defensive” claims that serve to reduce liability—but its
courts are mum on coverage for uninsured parties.
See Great West Cas. Co. v. Marathon Oil Co., 315 F. Supp. 2d
879, 882-83 (N.D. Ill. 2003). Cf. Int’l Ins. Co. v. Rollprint
Packaging Prods., Inc., 728 N.E.2d 680, 684-85 (Ill. App. Ct.
2000) (holding that the insurer did not have to reim-
burse defense expenses related to an offensive counter-
claim). The plaintiffs therefore ask us to extend our limited
acceptance of the “larger settlement rule” for certain
D&O policies to require reimbursement for defense ex-

11
The Fourth Circuit has noted that the “reasonably related”
rule is generally confined to D&O polices, not at issue here.
See Perdue Farms, Inc. v. Travelers Cas. & Surety Co. of Am.,
448 F.3d 252, 260 (4th Cir. 2006).
Nos. 08-3572 & 08-3773 27

penses of related parties unless total defense costs are
higher because of the uninsured party’s defense. Cf. Cater-
pillar, Inc., 62 F.3d at 962 (emphasizing that the proper
allocation method is primarily an issue of contract).
None of these cases allows us to predict that the Illinois
Supreme Court would require an insurer to reimburse
the defense costs of all parties whose defense may have
benefitted an insured, given the contract provisions at
issue here. The plaintiffs’ “reasonably related” rule
would swallow the contract provisions limiting St. Paul’s
liability to its insureds’ contract indemnitees. St. Paul
also argues that Monogram’s defense expenditures were
not in fact reasonably related to the plaintiffs’ and ques-
tions whether defense costs would have been the same
whether or not Monogram was a party to the underlying
action—it notes, for example, that Monogram had
separate counsel. We need not address this argument,
although Monogram’s separate counsel, which incurred
a known amount of expenses, militates against such a
finding were we able to make one. We conclude that
St. Paul does not owe reimbursement for Monogram’s
defense costs, and we therefore need not address
St. Paul’s further arguments on this issue.

F. St. Paul may owe prejudgment interest on the de-
fense costs.
In its briefing, St. Paul appears to acknowledge that
the plaintiffs would like us to determine whether St. Paul
owes prejudgment interest for the plaintiffs’ general
defense costs, in addition to those costs incurred by
Monogram and the settlement payment. St. Paul contends
28 Nos. 08-3572 & 08-3773

that an order in the Zurich action works to collaterally
estop an award of interest and, moreover, the sums are
unliquidated. The district court denied the plaintiffs’
motion for prejudgment interest because it held that St.
Paul was not responsible for the settlement payment or
Monogram’s expenses—it did not address pre-judgment
interest as to plaintiffs’ defense costs apart from those
sums. See Santa’s Best III, 2008 WL 4328192, at *9.
An Illinois statute allows prejudgment interest for
written sums. 815 ILCS 205/2 provides:
§ 2. Creditors shall be allowed to receive at the rate
of five (5) per centum per annum for all moneys
after they become due on any bond, bill, promissory
note, or other instrument of writing; on money lent
or advanced for the use of another; on money
due on the settlement of account from the day of
liquidating accounts between the parties and ascer-
taining the balance; on money received to the use of
another and retained without the owner’s knowledge;
and on money withheld by an unreasonable and
vexatious delay of payment. In the absence of an
agreement between the creditor and debtor
governing interest charges, upon 30 days’ written
notice to the debtor, an assignee or agent of the credi-
tor may charge and collect interest as provided in
this Section on behalf of a creditor.
Prejudgment interest is available for sums due on insur-
ance policies. See, e.g., Couch v. State Farm Ins. Co., 666
N.E.2d 24, 27 (Ill. App. Ct. 1996). The decision to award
prejudgment interest is within the trial court’s sound
discretion and will not be reversed absent an abuse of
Nos. 08-3572 & 08-3773 29

that discretion. See Statewide Ins. Co. v. Houston Gen. Ins.
Co., 920 N.E.2d 611, 624 (Ill App. Ct. 2009).
Interest begins to accrue when the underlying attor-
neys’ fees become liquidated, i.e. “due and capable of exact
computation.” See Conway v. Country Cas. Ins. Co., 442
N.E.2d 245, 250 (Ill. 1982) (finding that insurer breached
its duty to defend). A sum is liquidated if calculation
does not require “judgment, discretion, or opinion.” See
Dallis v. Don Cunningham & Assocs., 11 F.3d 713, 719 (7th
Cir. 1993) (quoting First Nat’l Bank Co. of Clinton, Ill. v.
Ins. Co. of N. Am., 606 F.2d 760, 770 (7th Cir. 1979)). But,
a good-faith defense to liability does not bar prejudg-
ment interest if the amount is ascertainable. See, e.g.,
Couch, 666 N.E.2d at 27.
The court should examine the relevant insurance policy
and the circumstances of the case. See Cent. Nat. Chi. Corp.
v. Lumbermens Mut. Cas. Co., 359 N.E.2d 797, 802-03 (Ill.
App. Ct. 1977); DiLeo v. U.S. Fid. & Guar. Co., 248
N.E.2d 669, 676-77 (Ill. App. Ct. 1969) (holding that
interest began to accrue as specified by the terms of the
policy—60 days after the defendants were furnished the
proof of loss). St. Paul’s policy provides that it will:
pay the interest that accumulates before a judgment
and is awarded against the protected person on that
part of a judgment we pay. But if we make a settle-
ment offer to pay the available limit of coverage,
we won’t pay the prejudgment interest that accumu-
lates after the date of our offer.
Because the district court never explicitly considered the
issue of prejudgment interest as to St. Paul’s defense
30 Nos. 08-3572 & 08-3773

expenditures, it is instructed to make such a holding
on remand.
As for St. Paul’s arguments about collateral estoppel: the
Zurich court’s December 2005 order denied the plaintiffs’
motion for prejudgment interest on Zurich’s payments.
St. Paul agreed to be bound by certain rulings in the
Zurich action, and the December 2005 holding suggests
that the plaintiffs “may” be bound by the Zurich court’s
order’s language about prejudgment interest. See Santa’s
Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., No. 04 C
1342 (N.D. Ill. Mar. 21, 2006). Collateral estoppel bars
a party from asserting a claim that has been resolved in
another lawsuit between the same parties (or those in
privity with them). See Aaron v. Mahl, 550 F.3d 659, 665
n.5 (7th Cir. 2008). It applies if: “(1) the issue decided in
the prior adjudication is identical with the one presented
in the suit in question, (2) there was a final judgment on
the merits in the prior adjudication, and (3) the party
against whom estoppel is asserted was a party or in
privity with a party to the prior adjudication.” Gumma v.
White, 833 N.E.2d 834, 843 (Ill. 2005); see also Marrese v. Am.
Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985)
(applying state laws of preclusion to determine the
effect of a prior state court action on a federal diversity
case). The plaintiffs argue that, in the Zurich action,
they never litigated the issue of St. Paul’s duty to pay
prejudgment interest on the defense costs. It seems doubt-
ful that St. Paul is correct that the Zurich court’s order
affects prejudgment interest as to St. Paul’s defense
expenses generally but, on remand, the district court
should evaluate whether any issues decided in the
Nos. 08-3572 & 08-3773 31

Zurich action act as collateral estoppel for a determina-
tion about prejudgment interest on St. Paul’s defense
cost reimbursements. As noted above, on remand, the
parties are admonished to restrict their briefing to a
succinct statement of the issues and the district court
may certainly consider sanctions for any further
excessive commitments to briefing and arguing the
few remaining issues in this case, consistent with the
foregoing.
A FFIRMED in part,
R EVERSED and R EMANDED in part.

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