In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 04-4147 & 05-1471
ILLINOIS SCHOOL DISTRICT AGENCY,
an intergovernmental cooperative,
Plaintiff-Appellant,
v.
PACIFIC INSURANCE COMPANY, LIMITED,
a Connecticut Corporation,
Defendant-Appellee.
____________
Appeals from the United States District Court
for the Central District of Illinois.
No. 02 C 3173—Jeanne E. Scott, Judge.
____________
ARGUED FEBRUARY 7, 2006—DECIDED DECEMBER 5, 2006
____________
Before BAUER, RIPPLE and WOOD, Circuit Judges.
RIPPLE, Circuit Judge. The Illinois School District Agency
(“Agency”) appeals the district court’s partial grant of
summary judgment on behalf of Pacific Insurance Com-
pany, Ltd. (“Pacific”). The district court held that Agency
was not entitled to recover costs attributable to certain
claims because those claims were not covered by an
insurance policy Pacific issued to Agency. In our view,
Agency came forward with sufficient evidence that Pa-
cific’s policy should have covered an estoppel claim made
2 Nos. 04-4147 & 05-1471
against Agency in the underlying litigation. Because this
evidence presents a genuine issue of material fact, we
reverse the grant of summary judgment to Pacific and
remand the case for further proceedings consistent
with this opinion.
I
BACKGROUND
A. Facts
Agency is an intergovernmental cooperative. It con-
sists of member Illinois school districts and is organized
to provide joint self-insurance for the member school
districts. Essentially, Agency functions as an insurance
provider for the member school districts.
There are two insurance policies at issue in this case. The
first is a general liability insurance policy (“General
Liability Policy”) that Agency issued to one of its member
districts, the East Moline School District (“East Moline”).
The other policy is an errors and omissions policy (“E & O
Policy”) which Agency purchased from Pacific. The E & O
Policy was not a reinsurance policy; rather, it covered
Agency’s own liability for its actions. First State Manage-
ment Group, Inc. (“First State”) acted as Pacific’s agent
in administrating claims Agency made on the Pacific
policy, but is not a party to this appeal.
The current dispute is best understood in light of a
series of lawsuits among East Moline, Pacific, Agency and
other parties concerning the interpretation of these insur-
ance contracts. We therefore shall discuss briefly each of
these actions.
Nos. 04-4147 & 05-1471 3
1. The Mancilla Action
In April of 1994, the Mancilla family sued East Moline
for injuries that resulted when an East Moline student
brought mercury home from school (“Mancilla action”).
The suit was filed in the Circuit Court of Rock Island
County, Illinois. Agency, through its third-party adminis-
trator, Martin Boyer Company (“Martin Boyer”), initially
agreed to defend East Moline. Martin Boyer determined
that East Moline’s defense was covered by the General
Liability Policy.
Later, however, Agency hired a new third-party admin-
istrator, Hinz Claim Management (“Hinz”). Hinz re-
viewed the Mancilla action and concluded that the suit
was not within East Moline’s coverage under the General
Liability Policy because claims for mercury poisoning
were excluded by an absolute pollution exclusion. In
April of 1996, two years after the suit was initiated,
Hinz notified East Moline that Agency would no longer
provide a defense to the Mancilla action. In November
of 1997, the Mancilla action was settled for $628,040 plus
costs and fees.
2. The East Moline Action
In June of 1996, East Moline filed a suit in Illinois state
court (“East Moline action”). It sought a declaratory judg-
ment against Agency that the General Liability Policy
obligated Agency to reimburse East Moline for costs
incurred in the defense of the Mancilla action. East Moline
alleged that Agency had acted in “bad faith” under 215
ILCS 5/155, that Agency had waived its right to assert a
defense under the General Liability Policy and that Agency
was estopped from denying East Moline defense of the
suit.
4 Nos. 04-4147 & 05-1471
In March of 1998, the district court granted summary
judgment on the contract claim in favor of Agency. It
held that the mercury claim fell within the pollution
exclusion and thus was outside the scope of coverage. In
2001, the court granted Agency summary judgment on the
bad faith and waiver claims. In July of 2001, the estoppel
claim went to trial, and Agency prevailed.
3. The Martin Boyer Action
Agency sued Martin Boyer in state court to recover
defense fees and costs that it had incurred defending
itself in the East Moline action (“Martin Boyer action”).
Agency obtained a judgment in the amount of $564,000
from Martin Boyer in July of 2004. There is no evidence
in the record that Agency has received this award.
4. The Current Action
Agency next made a demand on Pacific under the E & O
Policy. In this action, Agency likewise sought reimburse-
ment of all costs in defending the East Moline action. Pacific
refused to reimburse Agency for the full costs, and Agency
then filed the present action. The complaint alleged four
counts. Count I sought a declaratory judgment that Pacific
was obligated to pay all of Agency’s costs for the East
Moline action. Count II alleged that Pacific breached the
policy by failing to pay the full costs and sought recovery
of those costs. Count III alleged that Pacific vexatiously
refused to pay these costs in violation of 215 ILCS 5/155.1
1
The Amended Complaint also alleged a count, Count IV,
against Pacific’s agent First State alleging that First State had
(continued...)
Nos. 04-4147 & 05-1471 5
See R.23. In short, Agency sought declaratory and mone-
tary relief for the cost of defending itself against each of
the claims that East Moline brought against it in the East
Moline action: the claim that Agency breached the con-
tract with East Moline; the claim that Agency had acted in
bad faith in violation of 215 ILCS 5/155; the claim that
Agency was estopped from denying coverage; and the
claim that Agency had waived the right to deny coverage.
Pacific raised a number of affirmative defenses. One
of those defenses was that a policy exclusion in the E & O
Policy (“Exclusion (d)”) prevented Agency from obtain-
ing declaratory and monetary relief on its claims against
Pacific. The text of Exclusion (d), listed in the E & O Policy,
reads as follows:
This Insurance shall not indemnify the Insured for loss
incurred from any claim:
***
(d) for obligations or responsibilities assumed by the
Insured under any contract unless liability there-
fore would have attached to the Insured by
reason of the Insured’s negligent acts, errors or
omissions or by reason of the Insured’s actual or
alleged breach of duty, neglect, error, misstate-
ment, misleading statement or other act or omis-
sion in the absence of such a contract com-
1
(...continued)
breached its contract with the Agency on behalf of Pacific. See
R.23 at 10-11. First State was dismissed from the action by the
district court on July 13, 2004, after the district court granted
summary judgment in First State’s favor, and Agency has not
appealed that dismissal. See R.67 at 17.
6 Nos. 04-4147 & 05-1471
mitted in the Insured’s capacity as stated in the
Insuring Agreements.
R.1, Ex.A at 1-2. Pacific’s answer also included various
other affirmative defenses, including: that Agency failed
to allocate between covered and uncovered claims and
that Agency did not provide timely notice to Pacific of
the East Moline action as required by the E & O Policy.
Pacific then moved for summary judgment. Agency
cross-moved for summary judgment on a number of
Pacific’s affirmative defenses, including the defense that
Agency failed to allocate between covered and non-covered
claims and that Agency failed to give timely notice to
Pacific of the East Moline action.
B. District Court Proceedings
On July 13, 2004, the district court entered partial sum-
mary judgment in favor of Pacific and partial summary
judgment in favor of Agency. The court noted that the
parties do not dispute that East Moline’s claim that the
General Liability Policy required Agency to defend the
Mancilla action is a contract claim excluded from coverage
under Exclusion (d) of the E & O Policy. However, the
parties also agree Agency’s costs of defending against
East Moline’s bad faith failure to defend claim are covered
by the E & O Policy because this claim is non-contractual.
R.67 at 10. The parties further agreed that Illinois law
controls the interpretation of the insurance policies. The
parties disagreed as to whether Agency’s costs of defend-
ing itself against East Moline’s waiver and estoppel claims
are excluded from the E & O Policy that Agency ob-
tained from Pacific. Id.
Nos. 04-4147 & 05-1471 7
The district court granted partial summary judgment to
Pacific on Agency’s claim that Pacific was to reimburse
it for the costs it incurred while defending the estoppel
and waiver claims brought by East Moline. The court
also granted partial summary judgment to Agency on
Pacific’s affirmative defense that Agency failed to give
Pacific timely notice of the East Moline action as required by
the E & O Policy.
The district court reached its decision by concluding
that East Moline’s waiver claim was not covered by the
E & O Policy. The court noted that Exclusion (d) excludes
from coverage any losses that arise by contract unless the
basis for liability would have attached even in the ab-
sence of a contract. In East Moline’s suit against Agency,
East Moline alleged that Agency had waived its right to
assert the Absolute Pollution Exclusion in the General
Liability Policy. Agency thus remained obligated to treat
the claims against East Moline in the Mancilla action as
covered by the Policy. The court held that the alleged
liability was based on the General Liability Policy and,
due to Agency’s waiver of its rights under the pollution
exclusion, would not have attached absent that agreement.
Therefore, the court held that East Moline’s waiver
claim was a contract claim and excluded from coverage
pursuant to Exclusion (d) of Agency’s E & O Policy.
The district court then held that the estoppel claim
involving the pollution exclusion is excluded from E & O
Policy coverage by Exclusion (d). The district court stated
that, in an insurance context, estoppel arises when an
insured tenders the defense of a claim to an insurer, and
the insurer does not either 1) defend under a full reserva-
tion of rights or 2) file a declaratory judgment action to
determine whether the claim is covered and whether
8 Nos. 04-4147 & 05-1471
the insurer has a duty to defend. Id. at 11-12 (citing Em-
ployers Ins. of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d
1122, 1135 (Ill. 1999)). Had East Moline prevailed on its
estoppel theory, Agency would have been obligated to treat
the claim from the Mancilla action as a claim covered by
the General Liability Policy. Id. at 12. Because liability
would have been defined by the General Liability Policy
and would not have arisen in absence of that agreement,
the estoppel claim was also within the E & O Policy’s
Exclusion (d).
Next, Pacific asserted that it was not obligated to reim-
burse Agency for the costs of defending East Moline’s
bad faith claim because Agency did not allocate defense
costs between this covered claim and other uncovered
claims. Id. Pacific argued that the E & O Policy dictated
that costs should be allocated on a pro rata basis between
uncovered and covered claims. However, the district
court held that the Policy did not contain such a provision.
Id. at 13.
The court then held a bench trial on the remaining
issues, namely the amount and reasonableness of the
fees Agency sustained in defending against East Moline’s
§ 155 claim. The district court rejected Pacific’s contention
that the previous Martin Boyer action in state court barred
recovery. R.83 at 7. The court also rejected Pacific’s argu-
ment that the district court should abstain under Colorado
River Water Conservation District v. United States, 424 U.S.
800 (1976), because the proceedings were not parallel and
because they were between different parties involving
different contracts. Id. at 9-10.
The court then analyzed the legal defense costs sub-
mitted by Agency. It determined that some should be
reimbursed under the policy because they furthered either
Nos. 04-4147 & 05-1471 9
the case in general or the bad faith claim. Other costs,
relating exclusively to the estoppel and waiver claims, were
held by the district court to be non-reimbursable under the
E & O Policy. The district court entered a judgment against
Pacific for $98,638.66; the district court determined this
amount to be the cost of defending East Moline’s § 155
claim against Agency. Id. at 21. Agency now appeals the
grant of partial summary judgment in favor of Pacific.
II
DISCUSSION
A. Estoppel Claim
1.
Agency submits that, in the East Moline litigation, it
had to defend against a claim of equitable estoppel and that
such a claim is covered by Pacific’s E & O Policy. In
addressing this contention, we must examine the text of
Exclusion (d) of the E & O Policy to ascertain whether
it excludes coverage of Agency in the event of an “equita-
ble estoppel” claim. Under Illinois law, if the words of
an insurance policy are unambiguous, we must give
them their plain, ordinary and popular meaning; if the
words are susceptible to more than one reasonable inter-
pretation, they are “ambiguous and will be construed in
favor of the insured and against the insurer that drafted
the policy.” Maremont Corp. v. Cont’l Cas. Co., 760 N.E.2d
550, 554 (Ill. App. Ct. 2001). In Illinois, the interpretation
of an insurance policy is a question of law. See, e.g., Zurich
Ins. Co. v. Walsh Constr. Co. of Ill., Inc., 816 N.E.2d 801, 805
(Ill. App. Ct. 2004).
10 Nos. 04-4147 & 05-1471
In our view, the most reasonable reading of Exclusion
(d) is that Pacific is not liable “for obligations or responsi-
bilities assumed by the Insured under any contract” unless
liability would have attached, independently of the con-
tract language, to Agency by reason of Agency’s “negligent
acts, errors, or omissions.” In the case of equitable estop-
pel, Agency’s liability would arise not because it was
contractually obligated to defend East Moline, but because
it had taken control of East Moline’s defense to East
Moline’s disadvantage. Such an act could be a “negligent”
act that is not excluded from coverage by Exclusion (d).
The remedy would be one in equity, not one determined
by the terms of the contract. In fact, contractual obliga-
tions may be irrelevant.2 In such a situation, any alleged
estoppel applies not due to the terms of a contract between
the insurer and the insured, but rather because of the
insurer’s actions themselves. Accordingly, an equitable
estoppel claim is outside the terms of the policy excep-
tion because the claim is not based on the contract. Rather,
it seeks a remedy for Agency’s negligent action in taking
up East Moline’s defense, controlling it even though it
was not contractually obligated to do so, and then ceas-
ing this defense to the detriment of East Moline. Follow-
ing Illinois law, we therefore shall construe the policy in
favor of the insured, and, for the reasons set forth below,
2
In Nationwide Mutual Insurance Co. v. Filos, 673 N.E.2d 1099,
1104 (Ill. App. Ct. 1996), the insurer was estopped from deny-
ing coverage after it began to provide a defense for its insured,
even though the insurance policy that would have required the
insurer to defend the insured had expired seven years before
the date of the loss. Id. at 1103-05; see also id. at 1104 (noting
that an insurer may “be estopped from denying coverage,
notwithstanding that coverage for the risk did not in fact exist”).
Nos. 04-4147 & 05-1471 11
we conclude that a claim of “equitable estoppel” is not one
that is excluded from policy coverage by Exclusion (d) of
the E & O Policy.
In Agency’s view, the E & O Policy covered the cost of
its defending against East Moline’s estoppel claim be-
cause the claim was one for equitable estoppel, not con-
tractual estoppel. It regards Exclusion (d) as excluding
only liability that “(1) is assumed under contract, and
(2) would not have arisen in absence of the contract.”
Appellant’s Br. at 8 (emphasis in original). Agency urges
that the estoppel claim brought against it by East Moline
meets neither of these two prongs.
Agency submits that Illinois recognizes two distinct
theories of estoppel. It labels them “contractual estoppel”
and “equitable estoppel.” “[C]ontractual estoppel,” it
continues, is the type of estoppel relied upon by the dis-
trict court. Under this theory, an insurer that believes it
has no duty to defend a tendered claim can avoid liability
if it either: 1) defends under a reservation of rights or
2) seeks a declaratory judgment that it has no obligation
to defend. If an insurer simply declines to defend and is
later found to have denied wrongfully coverage, the
insurer is estopped from raising policy defense to coverage.
Id. at 9 (citing Employers Ins., 708 N.E.2d at 1134-35). Thus,
according to Agency, “contractual estoppel” is “premised
on the notion that, by wrongfully refusing to provide a
defense, the insurer has breached the terms of its own
policy of insurance.” Id. at 9.
Agency submits that the district court misapprehended
the claim asserted in the East Moline action. It submits
that East Moline alleged “equitable estoppel”—not
“contractual estoppel.” “Equitable estoppel,” according
to Agency, arises when there has been a showing that
12 Nos. 04-4147 & 05-1471
the insurer induced the insured to surrender control of
the defense, to the insured’s detriment. Id. (citing Mary-
land Cas. Co. v. Peppers, 355 N.E.2d 24, 29 (Ill. 1976)). It
arises out of “conduct, not contract, and as such it may
arise even in the absence of a contract.” Id. at 10-11 (em-
phasis in original). Because Exclusion (d) only excludes
liabilities assumed by contract that would not have arisen
in the absence of contract, Agency submits that Exclusion
(d) would not exclude a claim of “equitable estoppel.”
Pacific does not disagree with Agency’s description of
the two different theories of estoppel recognized in Illinois
law. It correctly accepts that Illinois case law supports
the distinction. See Consol. Rail Corp. v. Liberty Mut. Ins. Co.,
416 N.E.2d 758, 763 (Ill. App. Ct. 1981) (distinguishing
between a theory of estoppel where there is a contractual
potential for coverage, but the insurer refuses coverage
from the outset and a theory of estoppel where an insurer
assumes the defense of an insured and then withdraws
that defense). The Supreme Court of Illinois has also
stated that this contractual estoppel doctrine “has roots in
the principle of equitable estoppel . . . [and] has since
developed into a distinct doctrine that stands on its own.”
Employers Ins., 708 N.E.2d at 1135. Furthermore, the
Supreme Court of Illinois has applied the “equitable”
theory when an insurer undertakes the defense of an
insured and later attempts to withdraw that defense, to the
detriment of the insured. See Maryland Cas. Co., 355 N.E.2d
at 29 (stating that an insurer may be estopped from assert-
ing a noncoverage defense where the insurer undertook
defense of an action, but requiring prejudice to the insured
as a result of the insurer’s undertaking said defense); cf.
Nationwide Mut. Ins. Co. v. Filos, 673 N.E.2d 1099, 1104
(Ill. App. Ct. 1996) (stating that an insurer can be estopped
Nos. 04-4147 & 05-1471 13
from denying coverage “where an insurer defends an
action on behalf of an insured, with knowledge of facts
that would provide a defense to coverage, but without
a reservation of rights”).
2.
We now turn to the record before us. In its response to
Pacific’s motion for summary judgment, Agency sub-
mitted that the East Moline action went to trial “solely on
the basis of equitable estoppel.” In support of that asser-
tion, it attached a court order of July 12, 2001 in the East
Moline action. In that order, the state trial court had
stated that “the issue to be decided is whether or not actual
prejudice occurred to the plaintiff as a result of defen-
dant’s withdrawal of coverage and defense” in the
Mancilla action. The state court further had noted that it
had “previously ruled that the issue is an equitable re-
quest based on estoppel.” R.57, Ex.3. The state court also
had stated that it did “have questions about the applica-
tion of the ‘absolute pollution exclusion,’ but recognize[d]
that in lieu [sic] of the rulings of the appellate court and
previous rulings in this court, [the] issue is no longer before
[it].” Id.
The state court’s statement indicates that the equitable
relief sought was not based on the contractual liability
under the General Liability Policy and its exclusions. The
state court evinced a strong concern about the equities in
the case, stating that it “would like to exercise whatever
equitable powers [it] might have and award plaintiff their
[sic] costs of defending the underlying lawsuit.” Id. This
view of the state court’s opinion is strengthened by the
fact that the state court previously had found, on sum-
14 Nos. 04-4147 & 05-1471
mary judgment, that Agency did not have a duty to de-
fend under the contract based on the absolute pollution
exclusion. The state court, in the statement we have just
quoted, attempted to determine the effect of Agency’s
taking over the defense and later withdrawing. Such an
inquiry is consistent with equitable estoppel, not con-
tractual estoppel.
Notably, the state court opinion also discusses the
possibility of prejudice to East Moline as a result of
Agency’s withdrawal of its defense in the East Moline
action. Illinois courts have said that prejudice “is not a
critical factor” in a contractual estoppel case. Consol. Rail
Corp., 416 N.E.2d at 764 (emphasis added). Indeed, in
Consolidated Rail, the court said that contractual estoppel
arises when the insurer “breached the contract with its
client” by refusing to defend where potential coverage
exists, and it is in that case that “[p]rejudice is not a
critical factor.” Id. at 764. Moreover, the Illinois appellate
court noted that equitable estoppel could be based on
situations in which an “insurer assumes the defense and
then attempts to withdraw that defense to the detriment
of the insured.” It stressed that, in that case, estoppel
could not apply unless the insured “experienced some
loss, injury, damage or prejudice.” Id. at 763 (emphasis
added).
Because we do not have the entire state court record
before us and can only rely on what the parties have
attached to their summary judgment motions, we cannot
ascertain definitively the basis of the state court’s decision
in the East Moline action. However, the fact that the state
trial court looked to prejudice in assessing the estoppel
argument raises the distinct possibility that the trial court
understood East Moline to have raised an estoppel argu-
Nos. 04-4147 & 05-1471 15
ment. Another portion of the record, while ambiguous,
supports, to some degree, the contention that an equitable
estoppel theory may have been advanced by East
Moline against Agency in the East Moline action. On April
25, 2002, an attorney representing Agency sent a letter
to First State, Pacific’s agent, discussing the claims brought
by East Moline against the Agency in the East Moline
action. See R.57, Ex.5. The letter described East Moline’s
estoppel claim as one that was brought “because [Agency]
had assumed complete and exclusive control of the de-
fense of the Mancilla action for over two years without
ever reserving its rights under the coverage agreements,
without ever notifying [East Moline] of any potential
coverage question and without ever filing a declaratory
judgment action.” Id. at 3. The letter’s language, although
also discussing matters more compatible with con-
tractual estoppel, contains language (“complete and ex-
clusive control”) compatible with the equitable estoppel
defense.
It is clear, then, that, in this case, Agency placed in issue
whether, in the earlier state litigation, it had been re-
quired to defend against an equitable estoppel claim that
was covered by the E & O Policy issued by Pacific.
B. Pacific’s Other Contentions
Pacific raises three other contentions on appeal. First,
Pacific argues that Agency failed to give Pacific proper
notice of the pending East Moline action, as required by
the policy; it contends that, consequently, Agency should
not recover under the E & O Policy. Appellee’s Br. at 22.
Next, Pacific contends that Agency should not recover
because it failed to allocate between covered and uncov-
16 Nos. 04-4147 & 05-1471
ered expenses, which Pacific claims was Agency’s duty.
Id. at 23-24. Finally, Pacific argues that Agency’s judg-
ment against Martin Boyer constitutes a complete bar
to Agency’s current action against Pacific under the Illi-
nois doctrine allowing only one recovery for an in-
jury, irrespective of the availability of multiple remedies.
Id. at 25. Alternatively, Pacific claims that the district
court should have abstained from ruling on Agency’s
claims under the Colorado River doctrine. Id. at 26.
Although Pacific did not file a cross-appeal, it now
advances these arguments by stating, correctly, that we
can affirm the district court on any ground supported
by the record. See Williams v. Seniff, 342 F.3d 774, 793 (7th
Cir. 2003). However, although an appellee can advance
arguments in support of a district court’s judgment based
on “any matter appearing in the record,” an appellee
cannot, absent a cross-appeal, “attack the decree with a
view either to enlarging his own rights thereunder or of
lessening the rights of his adversary.” Morley Co. v. Mary-
land Cas. Co., 300 U.S. 185, 191 (1937). The Supreme Court
of the United States further has stated that a party who
does not cross-appeal is “bound by the decree in the
court below” and cannot be heard “except in support of
the decree from which the appeal of the other party is
taken.” Id. at 191-92. We have noted that “an appellee’s
brief is not the appropriate place for a victorious party
to contest one adverse finding by the district court—that
is the province of a cross-appeal.” Meridian Mut. Ins. Co.
v. Meridian Ins. Group, Inc., 128 F.3d 1111, 1117 (7th Cir.
1997). Keeping these limitations in mind, we now turn to
Pacific’s specific claims.
Pacific’s first argument, that Agency failed to give Pacific
timely notice, was disposed of by the district court at the
Nos. 04-4147 & 05-1471 17
summary judgment stage when the district court granted
Agency’s motion for summary judgment on that affirma-
tive defense. See R.67 at 17. Because the court granted
summary judgment to Agency, not to Pacific, on this
affirmative defense, Pacific cannot now relitigate this
defense on appeal absent the filing of a cross-appeal. If
Pacific were to succeed, it would impermissibly expand
Pacific’s rights at the expense of Agency. See United States
ex rel. Stachulak v. Coughlin, 520 F.2d 931, 937 (7th Cir. 1975)
(rejecting an attempt by an appellee to contest a district
court’s finding without filing a cross-appeal when “it
[was] plain” that the appellee was “not merely attempting
to support the judgment but rather to expand his rights
under the decree,” as the effect of the appellee’s argu-
ment would alter the judgment in a manner favorable to
the appellee).
Pacific’s second argument regarding the allocation of
costs, however, was not disposed of by the district court at
the summary judgment stage; the court granted sum-
mary judgment to neither Pacific nor Agency on this
affirmative defense. Therefore, we shall discuss the merits
of this defense only insofar as it relates to any possible
recovery under the estoppel claim. Because Pacific has not
filed a cross-appeal, the judgment against it and in favor
of Agency on the bad faith claim cannot be reduced due
to the Supreme Court’s admonition in Morley. Morley
limits our consideration even if we were to find that Pacific
had raised a viable affirmative defense that would have
applied to Agency’s claims for the cost of defending the
bad faith claim under the E & O Policy.
Turning to the merits of Pacific’s second contention,
Pacific argues that Agency had a duty to allocate between
non-covered and covered claims, and that Agency failed
18 Nos. 04-4147 & 05-1471
to do so. All parties agree that some of Agency’s East
Moline action defense costs, such as the contractual liability
claim defense, are not recoverable under the E & O Policy.
The parties further agree that some of Agency’s defense
costs, such as the defense of the bad faith claim, are
recoverable. Pacific appears to be arguing that Agency
had a duty, under the policy, to allocate between non-
covered and covered claims when submitting a claim for
reimbursement under the E & O Policy. However, Pacific
points to no section of the E & O Policy mandating
that Agency allocate the defense costs incurred between
covered and uncovered claims. Therefore, it appears that
allocation of costs are not required to obtain benefits under
the E & O Policy. Of course, if the district court rules in
Agency’s favor on remand, Agency then will bear the
burden of proving the amount of costs expended in
defending the estoppel claim in the East Moline action. See
St. Michael’s Orthodox Catholic Church v. Preferred Risk Mut.
Ins. Co., 496 N.E.2d 1176, 1179 (Ill. App. Ct. 1986) (holding
that, at trial, “[w]here part of a loss resulted . . . from a
peril not covered by insurance, the insured must show
the amount of loss that is covered by [its] policy”).3
Pacific’s final argument, regarding the alleged double
recovery, was also not decided against Pacific on sum-
3
Pacific also is arguing that it should only pay a pro rata
share of the costs incurred by Agency in defending the East
Moline action. Pacific cites to authority supporting the proposi-
tion that Illinois courts have upheld pro rata allocation of
defense fees and other expenses. However, this contention
appears to be a premature argument because no costs have
been awarded on the estoppel claim, and therefore we shall
not address it in substance.
Nos. 04-4147 & 05-1471 19
mary judgment. However, this argument was rejected
by the district court in its post-bench trial judgment. The
court declined to determine whether a recovery from
both Martin Boyer and Pacific would result in an imper-
missible double recovery, noting that “[t]here is no evi-
dence that Agency has received any payment from Martin
Boyer. Should the Agency receive such payment, those
funds may possibly be set off against the judgment in this
case to avoid a double recovery.” R.83 at 9. On remand,
Pacific can come forward with such evidence and reargue
that a recovery should be barred as to any judgment
granted by the district court on the estoppel claim.4
4
Pacific also argues on appeal that the district court should
have stayed the proceedings under the doctrine of Colorado River
Water Conservation District v. United States, 424 U.S. 800 (1976),
due to the state-court Martin Boyer action. Pacific raised this
argument during the bench trial, and the court declined to
stay the proceedings. Such a refusal was appropriate. Judgment
was entered in the Martin Boyer action before the district
court granted summary judgment and before the district court
granted a final judgment after a bench trial in this case. There-
fore, because a state court action was no longer pending,
Colorado River abstention would have been inappropriate. See
Bass v. Butler, 258 F.3d 176, 179 (3d Cir. 2001) (stating that
Colorado River abstention “provides for federal deference to
ongoing, not completed, parallel state proceedings”); Rosser v.
Chrysler Corp., 864 F.2d 1299, 1308-09 (7th Cir. 1988) (stating that
a stay, not a dismissal, is appropriate under the Colorado River
doctrine, because the reason to defer to the state court is to
“avoid[ ] piecemeal litigation,” and because after the state
court proceeding is completed, the federal court may reach
“remaining issues” not disposed of in the state court).
20 Nos. 04-4147 & 05-1471
Conclusion
For the reasons set forth in this opinion, the district
court’s partial grant of summary judgment in favor of
Pacific is reversed. The case is remanded for further
proceedings consistent with this opinion. Agency may
recover its costs in this court.
REVERSED and REMANDED
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—12-5-06