NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with Fed. R. App. P. 32.1
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Argued January 10, 2008
Decided January 22, 2008
Before
Hon. FRANK H. EASTERBROOK, Chief Judge
Hon. KENNETH F. RIPPLE, Circuit Judge
Hon. ILANA DIAMOND ROVNER, Circuit Judge
No. 06-4372
Appeal from the United
NUTMEG INSURANCE COMPANY, States District Court for the
Plaintiff-Appellant, Northern District of Illinois,
Eastern Division.
v.
EAST LAKE MANAGEMENT & No. 05 C 1328
DEVELOPMENT CORPORATION, John F. Grady, Judge.
Defendant-Appellee.
Order
In this action under the diversity jurisdiction, an insurer contends that the pol-
icy it issued does not apply to a claim that East Lake, the insured, failed to pay in-
terest on security deposits for rental properties and failed to give the tenants timely
notice when East Lake transferred its managerial role to another firm. The district
court held that an exclusion in the policy is ambiguous, resolved that ambiguity in
the insured’s favor, and entered judgment against Nutmeg. 2006 U.S. Dist. LEXIS
85665 (N.D. Ill. Nov. 21, 2006).
We affirm the judgment on a different ground, and without deciding whether the
district court correctly perceived an ambiguity in this policy. The underlying litiga-
tion by the tenants against East Lake began in November 2000. Nutmeg hired
No. 06-4372 Page 2
counsel to defend its insured, and the litigation proceeded for two years before
Nutmeg first suggested that its policy might not cover the tenants’ claims. A letter
in December 2002 alerted East Lake that Nutmeg reserved the right to deny cover-
age. Another two years passed before Nutmeg informed East Lake that it was actu-
ally denying coverage. The federal litigation, seeking a declaratory judgment that
the policy does not cover the claims, was filed in 2005.
Whether we treat the delay as two years or four, that is too long under Illinois
law, which the parties agree supplies the rule of decision. If delay produces only a
claim of estoppel, then an insurer may still prevail by showing that the wait did not
injure the insured. (Illinois calls this a “prejudice” requirement.) See Western Casu-
alty & Surety Co. v. Brochu, 105 Ill. 2d 486, 475 N.E.2d 872 (1985). Nutmeg says
that there was no injury, because, after receiving the reservation-of-rights letter,
East Lake agreed to be represented by the law firm that Nutmeg had hired back in
2000. East Lake also agreed to a settlement of the state case. But East Lake re-
sponds that these steps just made the best of a bad situation: a new law firm would
have had to be paid out of East Lake’s pocket to get up to speed. East Lake contends
that it would have conducted the suit differently, including making an early settle-
ment proposal, had it known that it was litigating on its own dime.
Whether these possibilities add up to prejudice doesn’t matter, however, if Nut-
meg’s delay is a form of waiver under state law. In Illinois an insurer waives any
right to deny coverage if it conducts the defense for a sufficiently long period with-
out informing its client that it reserves the right to deny coverage. See, e.g., Na-
tional Discount Shoes, Inc. v. Royal Globe Insurance Co., 99 Ill. App. 3d 54, 57, 424
N.E.2d 1166, 1169 (1st Dist. 1981) (collecting authority). Illinois treats lengthy de-
lay as waiver. See, e.g., Gibraltar Insurance Co. v. Varkalis, 46 Ill. 2d 481, 263
N.E.2d 823 (1970) (17 months). Nutmeg waited too long, whether we treat its delay
as two years or four. The insurer has not pointed to any Illinois decision allowing an
insurer to contest coverage despite a two-year-and-up delay in reserving its rights.
Waiver of the right to deny coverage means that an insurer must pay whether or
not the policy covers the casualty. See National Discount Shoes. Nutmeg maintains
that the claims advanced in the state case against East Lake are uninsurable as a
matter of state law, and that neither estoppel nor waiver can require an insurer to
cover uninsurable claims. The district judge held that the claims in the underlying
litigation are indeed insurable, but we bypass that question. We could not find any
Illinois cases on the subject, but other states have held that an insurer’s defense of
uninsurability may be waived or forfeited along with other limitations on coverage.
See, e.g., Tomerlin v. Canadian Indemnity Co., 61 Cal. 2d 638, 394 P.2d 571 (1964);
Griggs v. Bertram, 88 N.J. 347, 363 n.4, 443 A.2d 163, 171 n.4 (1982). We see no reason
to think that Illinois would hold otherwise.
AFFIRMED