Taco Bell Corp. v. Continental Casualty Co.

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

Nos. 03-2867, 03-2868, 03-3550
TACO BELL CORPORATION,
Plaintiff-Appellee/Cross-Appellee,
v.

CONTINENTAL CASUALTY COMPANY,
Defendant-Third Party Plaintiff-Appellee/Cross-Appellant,

v.

ZURICH AMERICAN INSURANCE COMPANY,
Defendant-Third Party Defendant-Appellant.

____________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 01 C 0438—Harry D. Leinenweber, Judge.
____________
ARGUED SEPTEMBER 27, 2004—DECIDED NOVEMBER 5, 2004
____________

Before POSNER, KANNE, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. Taco Bell has sued two insurance
companies, Zurich and Continental, each of which had issued
it a liability-insurance policy. The basis of federal jurisdiction
2 Nos. 03-2867, 03-2868, 03-3550

is diversity of citizenship, and the substantive issues are
governed, the parties tacitly agree, by Illinois law. The suit
seeks a declaration that the insurance companies have a duty
to pay for Taco Bell’s defense against a diversity lawsuit that
has been brought against it in a federal district court in
Michigan by a design agency named Wrench. (That suit has
already given rise to nine judicial opinions, beginning with
Wrench LLC v. Taco Bell Corp., 1998 WL 480871 (W.D. Mich.
1998), and is still going strong.) Taco Bell settled with Continen-
tal. The district court, on summary judgment, awarded the de-
claratory relief sought by Taco Bell—and despite the settlement
awarded it against Continental as well as Zurich. The court
also ordered Zurich to pay Taco Bell $142,000 for defense costs
already incurred by the latter in the Wrench litigation and an
additional $45,000 for the cost to Taco Bell of litigating this
declaratory-judgment suit against Zurich. Finally, the court
ordered Zurich to pay Continental $1.8 million, representing
one-half the Taco Bell defense costs that Continental had paid.
(We have rounded off the dollar figures.) Zurich appeals, as
does Continental, which would like the judgment against it
vacated and also would like Zurich to be ordered to pay a
larger share of Taco Bell’s defense costs.
The amended complaint in Wrench’s suit (now on appeal to
the Sixth Circuit after the award of substantial damages to
Wrench) alleges the following: In 1995 Wrench developed a
marketing gimmick that it called “Psycho Chihuahua,” which
“involved the image of a clever, feisty Chihuahua dog with an
attitude,” the idea being “to use the humor of seeing a small
dog character with a big dog’s attitude.” At a trade show the
following year, Taco Bell expressed interest in using the design
to promote its restaurants. Wrench proposed to Taco Bell “an
advertising campaign based on a Chihuahua with an attitude
obsessed with Taco Bell food, describing the Chihuahua to be
used in the campaign as edgy and feisty, with a spicy Mexican
personality and an insatiable craving for Taco Bell food.”
Beginning in the summer of 1997, Taco Bell, without obtaining
Nos. 03-2867, 03-2868, 03-3550 3

permission from Wrench, began running television commer-
cials on the theme of “a Chihuahua obsessed with the thought
of Taco Bell food to the exclusion of anything else, including
a female Chihuahua.” What is more, the next year Taco Bell
based its entire national advertising campaign on “the same
basic idea of a Chihuahua with an attitude that is obsessed
with Taco Bell food. Taco Bell has also used several of the
specific commercial ideas provided by [Wrench] in its cam-
paign, including the idea of using a live dog manipulated by
computer graphic imaging, the idea of having a boy Chihua-
hua passing up a girl Chihuahua for Taco Bell food, the idea
of using a bobbing head doll in a commercial, the idea of
having a Chihuahua sneaking into the rear window of a car to
obtain Taco Bell food, the idea of a Chihuahua popping his
head out through a hole at the end of a commercial, and the
idea of using a consistent tag line at the end of every commer-
cial to keep the Chihuahua as a consistent icon for Taco Bell.”
These alleged appropriations of Wrench’s design ideas are, so
far as bears on our case, charged as misappropriation in
violation of the common law of Michigan.
The insurance policies that Continental and Zurich issued to
Taco Bell were similar but covered occurrences in different
periods. Continental’s covered the period January 1, 1997, to
October 6, 1997, and Zurich’s ran from October 7, 1997, to the
end of 1998. Both policies covered “advertising injury,” de-
fined in both as “injury arising out of paid announcements in
the . . . broadcast media resulting from . . . misappropriation
of advertising ideas or style of doing business.” It is apparent
that Wrench’s complaint charges advertising injury. But Zurich
appeals to the policy exclusion for advertising injury “arising
out of oral or written publication of material whose first pub-
lication took place before the beginning of the policy period.”
The first “Chihuahua” ads ran before the coverage under
Zurich’s policy began, and Zurich argues that therefore Taco
Bell’s entire Chihuaha-inspired advertising campaign, most of
which occurred later, had first been published before the
policy took effect; if so, Zurich is off the hook.
4 Nos. 03-2867, 03-2868, 03-3550

The purpose of the “prior publication” exclusion (a common
clause in liability-insurance contracts, though rarely litigated)
can be illustrated most clearly with reference to liability
insurance for copyright infringement. Suppose a few months
before insurance coverage began on October 7, 1997, the insured
published an infringing book that it continued selling after
October 6. The “prior publication” exclusion would bar cover-
age because the wrongful behavior had begun prior to the
effective date of the insurance policy. The purpose of insur-
ance is to spread risk—such as the risk that an advertising
campaign might be deemed tortious—and if the risk has
already materialized, what is there to insure? Matagorda
Ventures, Inc. v. Travelers Lloyds Ins. Co., 203 F. Supp. 2d 704,
716 (S.D. Tex. 2000). The risk has become a certainty. That
would be true in this case had Taco Bell during the period
covered by Zurich’s policy just rebroadcast the commercials it
had broadcast before October 7, 1997.
The later commercials were different from the earlier ones,
however, though that in itself need not be decisive. Suppose a
magazine article that infringed copyright and was published
before the policy period began was republished later as part of
an anthology. The anthology would be a different, probably a
much different, work from the magazine, but the wrongful
act—the copying of the copyrighted article without au-
thorization—would be the same and so the prior-publication
exclusion would, we believe (we can find no reported cases on
the question), click in. Zurich argues in like vein that while the
commercials broadcast after October 6 were different from the
earlier ones, they used the same misappropriated design,
namely the idea of the Chihuahua with attitude, etc.
Zurich is wrong. Wrench’s complaint alleges—and the duty
of an insurance company to defend against a suit against its
insured is determined by the allegations of the complaint in
that suit rather than by what is actually proved, Dixon Distrib-
uting Co. v. Hanover Ins. Co., 641 N.E.2d 395, 398 (Ill. 1994);
American Alliance Ins. Co. v. 1212 Restaurant Group, L.L.C., 794
N.E.2d 892, 897 (Ill. App. 2003); Roman Catholic Diocese v.
Nos. 03-2867, 03-2868, 03-3550 5

Maryland Casualty Co., 139 F.3d 561, 565 (7th Cir. 1998) (Illinois
law)—that those later commercials appropriated not only the
“basic idea” (“Psycho Chihuahua”) but other ideas as well that
are protected by Michigan’s common law of misappropriation,
like the idea of the Chihuahua’s poking its head through a
hole at the end of the commercial. This is a modest idea. Who
knows whether it’s really protected by Michigan law (there are
no cases on point other than the district court decision in
Wrench’s suit, which as we said is currently on appeal) yet not
preempted by federal copyright law. But that is not the issue.
The charge of misappropriation of the idea of the Chihuahua’s
head popping out of a hole is a claim of advertising injury,
meritorious or not; and Taco Bell bought insurance against
having to pay the entire expense of defending against such
claims.
At some point a difference between the republished version
of an unlawful work and the original version would be so slight
as to be immaterial. See Ringler Associates Inc. v. Maryland
Casualty Co., 96 Cal. Rptr. 2d 136, 150 (App. 2000); P.J. Noyes
Co. v. American Motorists Ins. Co., 855 F. Supp. 492, 495 (D.N.H.
1994). But that observation cannot save the insurer when the
republication contains new matter that the plaintiff in the
liability suit against the insured alleges as fresh wrongs.
Wrench’s complaint claims that Taco Bell stole the “basic idea”
before October 7, 1997, and used it in its earliest commercials,
which predated Zurich’s coverage, but that it stole additional,
subordinate but still protected, ideas as well and incorporated
them into the later commercials.
The only thing that gives the slightest color to Zurich’s
invocation of the “prior publication” exclusion is a certain
vagueness in the misappropriation tort compared to copyright
infringement. The copyright infringer copies an expressive
work (or a significant part of it) that is “fixed in any tangible
medium of expression,” 17 U.S.C. § 102(a); Erickson v. Trinity
Theatre, Inc., 13 F.3d 1061, 1071 (7th Cir. 1994); Martha Graham
School & Dance Foundation, Inc. v. Martha Graham Center of
Contemporary Dance, Inc., 380 F.3d 624, 632 (2d Cir. 2004), and
6 Nos. 03-2867, 03-2868, 03-3550

that therefore has pretty definite metes and bounds. The
misappropriator, or at least this alleged misappropriator, takes
an idea; and the boundaries of an idea can be quite uncertain.
If Wrench’s idea of a “Psycho Chihuahua” advertising
campaign is defined broadly enough, it encompasses all the
subordinate ideas embodied in the later commercials. But this
possibility is irrelevant. We repeat that the duty to defend is
determined by what is charged in the complaint. Wrench’s
complaint charges the misappropriation of the subordinate
ideas as separate torts, and those torts occurred during the
period covered by Zurich’s policy.
Zurich has other strings to its bow, however. Its policy re-
quires the insured to notify it “promptly” of an event that
might trigger liability under the policy (an “occurrence,” in
insurance-speak), and adds that “in the event of noncompli-
ance” with the requirement Zurich “shall not be required to
establish prejudice resulting from noncompliance but shall be
automatically relieved of liability with respect to the claim.”
Wrench filed its suit against Taco Bell on January 16, 1998; Taco
Bell didn’t notify Zurich of the suit until June 8, 1998, four and
a half months later.
An insurer wants to be notified of a suit against its insured
as soon as possible, to give it ample time to investigate the
case, determine whether its duty to defend has been triggered,
and if so prepare the defense of the case: hence “promptly.”
And it doesn’t want to have to prove “prejudice,” and needn’t
do so even if the policy doesn’t explicitly excuse such proof, as
it did here. Northbrook Property & Casualty Ins. Co. v. Applied
Systems, Inc., 729 N.E.2d 915, 922 (Ill. App. 2000); American
Country Ins. Co. v. Bruhn, 682 N.E.2d 366, 370 (Ill. App. 1997);
Hartford Accident & Indemnity Co. v. Rush-Presbyterian-St. Luke’s
Medical Center, 595 N.E.2d 1311, 1314-16 (Ill. App. 1992);
Highlands Ins. Co. v. Lewis Rail Service Co., 10 F.3d 1247, 1249-50
(7th Cir. 1993) (Illinois law). Yet these cases are explicit that
Illinois law, albeit rather in the teeth of the wording of the
notice clauses in insurance policies, makes the prejudice to the
insurer from late notice “a factor in assessing the reasonable-
Nos. 03-2867, 03-2868, 03-3550 7

ness of the notice,” unless the delay is extreme, as in
Northbrook Property & Casualty Ins. Co. v. Applied Systems, Inc.,
supra, 729 N.E.2d at 920 (17 months), and General Casualty Co.
v. Juhl, 669 N.E.2d 1211, 1214-15 (Ill. App. 1996) (13 months); see
also Highlands Ins. Co. v. Lewis Rail Service Co., 10 F.3d 1247, 1250
(7th Cir. 1993) (6 years). This result can be defended by
reference to the general principle of contract law that breaches
that are technical, harmless, and therefore “immaterial” do not
allow the “victim” of the breach to walk away from the contract
to the great harm of the party that committed the harmless
breach. E.g., Elda Arnhold & Byzantio, L.L.C. v. Ocean Atlantic
Woodland Corp., 284 F.3d 693, 700 (7th Cir. 2002) (Illinois law);
Arrow Master, Inc. v. Unique Forming Ltd., 12 F.3d 709, 714-15
(7th Cir. 1993) (Illinois law); cf. Jacob & Youngs, Inc. v. Kent, 129
N.E. 889 (1921) (Cardozo, J.). For that would be a dispropor-
tionate sanction contrary to commercial custom and unlikely
to have been actually intended by the parties. So, since the
delay here was modest, Zurich can invoke the notice clause
only if there is some evidence that it suffered at least some
prejudice from Taco Bell’s delay.
It argues that it did because the commercials continued to
run during the four and a half months that elapsed between
Wrench’s suit and the notification of the suit to Zurich, and if
only it had known about the suit it would have taken steps to
prevent Taco Bell from continuing to run the commercials. But
what steps could it have taken? The insurance policy didn’t
authorize it to review Taco Bell’s commercials and if it thought
them tortious force Taco Bell to yank them. If Taco Bell was
willing to take the risk of liability to Wrench by continuing to
run the commercials after Wrench sued—as it was—why
would it have desisted at Zurich’s urging? Maybe it would
have done so had Zurich said it wouldn’t defend the suit
otherwise, though we know that this would have been an
empty threat. But the decisive fact is that that when Zurich did
receive notice of the litigation, it took no steps to try to make
Taco Bell cancel the commercials even though they were con-
tinuing to run and thus increasing Wrench’s damages and
8 Nos. 03-2867, 03-2868, 03-3550

therefore also Zurich’s potential liability to Taco Bell on the
insurance policy. There is no reason to suppose that if Zurich
had received notice earlier it would have taken such steps; its
incentive would not have been much greater, though a little
greater because more of the injury to Wrench and the resulting
liability of Taco Bell and derivately of Zurich would have lain
in the future.
We conclude that Zurich’s defenses to its duty to defend fail.
But Zurich has three complaints that we have now to consider
about the amount of defense costs that it has been ordered to
pay Taco Bell and Continental. The first has to do with a self-
insured retention clause in Zurich’s policy. Only after Taco
Bell paid the first $2 million of defense costs would Zurich’s
duty to pay kick in. There was no similar provision in Conti-
nental’s policy. Taco Bell has incurred defense costs of some
$5.8 million, of which more than $3.5 million have been paid
by Continental, and the district court ordered Zurich to
reimburse Continental for one-half of the excess of those costs
over the $2 million retention, or (roughly, for remember that
we’re rounding off dollar figures) $1.8 million. Zurich argues
that what the court should have done was to divide the total
defense costs in half (this on the assumption, which we
examine later, that 50-50 is the proper method of allocating
defense costs between the two insurers) and then subtract the
retention from Zurich’s share. That would yield a figure for
reimbursement to Continental not of $1.8 but of $.8 million
($2.8 million—$2.0 million), which would require an adjust-
ment in Zurich’s favor of $1 million.
Zurich is right. Taco Bell agreed that it would pay the first
$2 million of any defense costs for which Zurich would other-
wise be responsible. Were there no retention provision, Zurich
would be responsible, under the district court’s 50-50 method
of allocation, for $2.8 million in defense costs. But the retention
provision cut this by $2 million. Continental did not negotiate
a self-retention provision and is not entitled to benefit from
Zurich’s provision.
Nos. 03-2867, 03-2868, 03-3550 9

Next Zurich complains about the amount of defense costs
incurred by Taco Bell. Zurich submitted an affidavit by a firm
that hires itself out to review lawyers’ bills and that opined
that Taco Bell had overpaid the lawyers who represented it in
the Wrench litigation. We are unimpressed, as was the district
court. When Taco Bell hired its lawyers, and indeed at all
times since, Zurich was vigorously denying that it had any
duty to defend—any duty, therefore, to reimburse Taco Bell.
Because of the resulting uncertainty about reimbursement,
Taco Bell had an incentive to minimize its legal expenses (for
it might not be able to shift them); and where there are market
incentives to economize, there is no occasion for a painstaking
judicial review. Kallman v. Radioshack Corp., 315 F.3d 731, 742
(7th Cir. 2002); Medcom Holding Co. v. Baxter Travenol Laboratories,
Inc., 200 F.3d 518, 520 (7th Cir. 1999); Balcor Real Estate Holdings,
Inc. v. Walentas-Phoenix Corp., 73 F.3d 150, 153 (7th Cir. 1996);
cf. Blum v. Stenson, 465 U.S. 886, 892-96 (1984). The affidavit of
the firm that picked through Taco Bell’s legal bills is excru-
ciatingly detailed. The amount of time and money that went
into its preparation and would be incurred in adjudicating its
accuracy probably exceeds the potential excesses that it identifies.
Although the cases that we have just cited are all diversity
cases arising in Illinois, none discusses Illinois law; and Zurich
points us to Kaiser v. MEPC American Properties, Inc., 518
N.E.2d 424, 427-28 (Ill. App. 1987), which holds that even in a
case in which fee shifting is specified in a contract that does
not in so many words limit the entitlement to “reasonable fees,”
not only must the party asking for an award of fees prove that
they are reasonable but in addition “the petition for fees must
specify the services performed, by whom they were performed,
the time expended thereon and the hourly rate charged therefor.
Because of the importance of these factors, it is incumbent
upon the petitioner to present detailed records maintained
during the course of the litigation containing facts and com-
putations upon which the charges are predicated.” This was
said in general, rather than with specific reference to a case in
which there is an adequate market test of the fees. But what is
10 Nos. 03-2867, 03-2868, 03-3550

more important is that even in a diversity suit the require-
ments of proof are governed by federal rather than state law.
“The decision to hold an evidentiary hearing when making an
attorney’s fee award is a matter of procedure, and is therefore
governed by federal law under the Erie doctrine.” Shakey’s, Inc.
v. Covalt, 704 F.2d 426, 435 (9th Cir. 1983); see also Mangold v.
California Public Utilities Comm’n, 67 F.3d 1470, 1478 (9th Cir.
1995); Karl’s, Inc. v. Sunrise Computers, Inc., 21 F.3d 230, 232 (8th
Cir. 1994); Schafler v. Fairway Park Condominium Ass’n, 324 F.
Supp. 2d 1302, 1309-12 (D. Fla. 2004); but see Security Mutual Life
Ins. Co. of New York v. Contemporary Real Estate Associates, 979
F.2d 329, 331-32 (3d Cir. 1992). (That is why the Seventh Circuit
cases cited earlier, though diversity suits, did not discuss state
law.) For they concern how a particular court system, having
regard for its resource constraints and the competing claims on
its time, balances the cost of meticulous procedural exactitude
against the benefits in reducing error costs.
Furthermore, although Zurich’s policy entitled it to assume
Taco Bell’s defense, in which event Zurich would have selected,
supervised, and paid the lawyers for Taco Bell in the Wrench
litigation, it declined to do so—gambling that it would be
exonerated from a duty to defend—with the result that Taco
Bell selected the lawyers. Had Zurich mistrusted Taco Bell’s
incentive or ability to economize on its legal costs, it could,
while reserving its defense that it had no duty to defend, have
assumed the defense and selected and supervised and paid for
the lawyers defending Taco Bell in the Wrench litigation, and
could later have sought reimbursement if it proved that it had
indeed had no duty to defend Taco Bell. Clemmons v. Travelers
Ins. Co., 430 N.E.2d 1104, 1109 (Ill. 1981); General Agents Ins. Co.
of America, Inc. v. Midwest Sporting Goods Co., 812 N.E.2d 620 (Ill.
App. 2004). So presumably it had some confidence in Taco Bell’s
incentive and ability to minimize legal expenses. We add that
the duty to defend would be significantly undermined if an
insurance company could, by the facile expedient of hiring an
audit firm to pick apart a law firm’s billing, obtain an eviden-
tiary hearing on how much of the insured’s defense costs it
Nos. 03-2867, 03-2868, 03-3550 11

had to reimburse. Cf. Charter Oak Fire Ins. Co. v. Hedeen & Cos.,
280 F.3d 730, 739 n. 4 (7th Cir. 2002); Willis Corroon Corp. v.
Home Ins. Co., 203 F.3d 449, 453 (7th Cir. 2000).
Last, Zurich complains about being ordered to reimburse the
expenses that Taco Bell incurred in obtaining a declaration that
Zurich was indeed obligated to defend against Wrench’s suit. In
Green v. J.C. Penney Auto Ins. Co., 806 F.2d 759 (7th Cir. 1986),
we held that an insurer must reimburse the insured for the
expenses of obtaining a declaration that the insurer has a duty
to defend or indemnify. At the time, the Illinois Appellate Court
was divided on the issue, compare Trovillion v. U.S. Fidelity and
Guaranty Co., 474 N.E.2d 953, 958 (Ill. App. 1985), with Tuell v.
State Farm Fire & Casualty Co., 477 N.E.2d 70, 74 (Ill. App.
1985); Preferred Risk Mutual Ins. Co. v. U.S. Fidelity & Guaranty
Co., 395 N.E.2d 1180, 1184-85 (Ill. App. 1979), so we went with
what we thought the better rule. Later the case on which we
had relied (Trovillion) was overruled, Bonnie Owen Realty, Inc.
v. Cincinnati Ins. Co., 670 N.E.2d 1182, 1188 (Ill. App. 1996), and
it became the unanimous view of that court that the standard
“American rule” should apply to such cases, meaning that there
was no duty of reimbursement unless the insurer had only a
frivolous defense to the declaratory-judgment suit, which is
not contended here. Whether to shift attorneys’ fees, as distinct
from the procedure used to determine whether the amount
sought is reasonable, falls on the substantive side of the
substantive-procedural divide created by Erie and subsequent
decisions if though only if the decision to shift or not shift is
based on a substantive state policy. Compare Chambers v.
NASCO, Inc., 501 U.S. 32, 51-52 (1991); Alyeska Pipeline Service
Co. v. Wilderness Society, 421 U.S. 240, 259 n. 31(1975), and
McMahan v. Toto, 256 F.3d 1120, 1132 (11th Cir. 2001), with
First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d
501, 529 (6th Cir. 2002), and In re Larry’s Apartment, L.L.C., 249
F.3d 832, 837-38 (9th Cir. 2001). So Illinois law governs the
question. But Taco Bell argues that we are bound by Green
because it is our decision, even though it’s no longer a reliable
12 Nos. 03-2867, 03-2868, 03-3550

prediction of how the Supreme Court of Illinois would rule if
the issue were presented to it.
What is true is that the district court was bound by Green, as
a lower court cannot overrule the decision of a higher one.
Reiser v. Residential Funding Corp., 380 F.3d 1027, 1029-30 (7th
Cir. 2004). But we are not bound. The duty of a federal court
in a diversity suit is to predict what the state’s highest court
would do if presented with the identical issue. E.g., Adams v.
Catrambone, 359 F.3d 858, 862 (7th Cir. 2004); Mutual Service
Casualty Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 612 (7th
Cir. 2001); Private Mortgage Investment Services, Inc. v. Hotel &
Club Associates, Inc., 296 F.3d 308, 312 (4th Cir. 2002). In light
of the Illinois Appellate Court’s unanimity, the best prediction
differs from what it was when Green was decided, and so that
decision is no longer authoritative, just as in a case in which a
U.S. Supreme Court decision shows that a previous decision
by a lower court was unsound, even though the Supreme
Court doesn’t mention the decision. Cf. Thomas v. American Home
Products, Inc., 519 U.S. 913, 915 (1996) (Scalia, J., concurring).
We turn now to Continental’s cross-appeal. Continental
makes two arguments. The first is that the district judge
should not have entered a judgment against it after it settled
with Taco Bell. This is true. The settlement ended its dispute
with Taco Bell, so there was no longer a controversy for the
court to resolve. Continental therefore wants us to order the
judgment vacated, and neither Taco Bell nor Zurich objects.
But as the judgment has no significance, we don’t see why we
should vacate it. Continental has paid Taco Bell in accordance
with the settlement, and the only concern Continental has ex-
pressed about the judgment is that some “third party” might
notice it and do something with it. But what could a third
party do with a judgment that orders Continental to do what
it has already done, namely reimburse Taco Bell for defense
costs? The judgment is pointless, but an order vacating it
would be equally so. If we’re missing something, Continental
can file a motion in the district court under Fed. R. Civ. P. 60(b).
Nos. 03-2867, 03-2868, 03-3550 13

Continental argues in addition that Zurich should bear the
lion’s share of the defense costs because most of the offending
commercials were broadcast after October 6, 1997, when
Continental’s policy expired. It wants those costs allocated
between the insurers in the ratio that the time during the
period of misappropriation in which Continental’s policy was
in force bears to the much longer time in which Zurich’s policy
was in force. But such an allocation, which would assign the
lion’s share of the costs to Zurich, would be even more
arbitrary than the district court’s 50-50 split. Had Wrench sued
only in respect of the misappropriation that occurred before
October 7, 1997, it is entirely speculative what fraction of the
defense costs that Taco Bell ultimately incurred in defending
against the suit would have been incurred. Remember that
while the later commercials contain misappropriations that the
earlier ones did not, such as the hole-in-the-commercial idea,
those commercials also repeat the basic misappropriation—the
misappropriation of the idea of a “Psycho Chihuahua” advertis-
ing campaign. Although Zurich’s “prior publication” defense
to its duty to defend Taco Bell from Wrench’s suit has failed,
probably most of the damages alleged by Wrench can be traced
to what we are calling the basic misappropriation, which was
published while Continental’s policy was in force.
What is true though unremarked by the parties is that the
ground on which the district court split the defense costs
equally between the two insurers was highly questionable. The
court relied on “other insurance” clauses in the two policies.
An “other insurance” clause limits an insurer’s liability when
the risk he has insured against is also covered by another
insurer’s policy. American Alliance Ins. Co. v. IARW Ins. Co.,
Ltd., 165 F.3d 558, 559-60 (7th Cir. 1999) (Illinois law); South
Carolina Ins. Co. v. Fidelity & Guaranty Ins. Underwriters, Inc.,
489 S.E.2d 200, 202 (S.C. 1997). If two insurers have identical
other-insurance clauses in policies that cover the same risk, a
common and deliciously simple solution is to divide the lia-
bility between them 50-50. North American Specialty Ins. Co. v.
14 Nos. 03-2867, 03-2868, 03-3550

Liberty Mutual Ins. Co., 697 N.E.2d 347, 349 (Ill. App. 1998); U.S.
Fidelity & Guaranty Co. v. Alliance Syndicate Inc., 676 N.E.2d 278,
280 (Ill. App. 1997), though there are other possibilities. South
Carolina Ins. Co. v. Fidelity & Guaranty Ins. Underwriters, Inc.,
supra, 489 S.E.2d at 206; 1 Barry R. Ostrager & Thomas R.
Newman, Handbook on Insurance Coverage Disputes, ch. 11 (11th
ed. 2002). But this analysis does not fit the case in which the
two policies, each with an “other insurance” clause, insure
merely the same kind of risk, but not the same risk because the
policies are successive. To apply “other insurance” clauses in
such a case would make insurers liable in part for occurrences
outside the period covered by their policies. Douglas R.
Richmond, “Issues and Problems in ‘Other Insurance,’
Multiple Insurance and Self-Insurance,” 22 Pepp. L. Rev. 1373,
1376-77 (1995).
As if life weren’t complicated enough, however, there is an
argument for treating risks in separate periods as the same risk
when a single tortious act continues in successive periods, see
Continental Casualty Co. v. Hartford Fire Ins. Co., 116 F.3d 932
(D.C. Cir. 1997); Federal Ins. Co. v. Cablevision Systems Develop-
ment Co., 836 F.2d 54, 57-58 (2d Cir. 1987)—and while each of
Taco Bell’s Chihuahua commercials involved multiple alleged
appropriations some of which occurred only in the second
period (that is, the period of Zurich’s policy), all the commer-
cials contained an appropriation of the basic idea (“Psycho
Chihuahua”). We need not chase this particular hare to
ground, however, as the parties have not suggested any better
method of dividing the costs between the two insurance
companies in the circumstances of utter uncertainty prevailing
here than doing so 50-50. Continental’s proposed “time on the
risk” allocation is even less attractive, for the reason indicated
earlier, that most of Wrench’s damages probably stemmed from
the republication of the basic idea for the Psycho Chihuahua ad-
vertising campaign. So we won’t disturb the district court’s
allocation.
Nos. 03-2867, 03-2868, 03-3550 15

To summarize, Zurich is entitled to a $1 million reduction in
the amount that it must reimburse Continental and a
$44,935.75 reduction in the amount that it must reimburse
Taco Bell. In all other respects the judgment is affirmed.
AFFIRMED IN PART, REVERSED IN PART.

A true Copy:
Teste:

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

USCA-02-C-0072—11-5-04