Guaranty Bank v. Chubb Corporation

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

No. 07-3367
GUARANTY BANK,
Plaintiff-Appellant,
v.

CHUBB CORPORATION, et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 05-C-1301—Rudolph T. Randa, Chief Judge.
____________
ARGUED APRIL 9, 2008—DECIDED JULY 17, 2008
____________

Before POSNER, RIPPLE, and MANION, Circuit Judges.
POSNER, Circuit Judge. The plaintiff in this diversity
suit governed by Wisconsin law, Guaranty Bank, appeals
from the grant of summary judgment in favor of the
defendant, Great Northern Insurance Company. (The
plaintiff is no longer seeking relief against the other
two defendants, affiliates of Great Northern, and we
shall ignore them.) Great Northern had issued a liability
insurance policy to Guaranty Bank that covered “ad-
vertising injury,” but refused to defend the bank against
a suit by Midwest Guaranty Bank, and that refusal, the
2 No. 07-3367

bank argues, was a breach of the duty to defend created
by the policy.
Midwest’s suit, filed in a federal district court in Michi-
gan, complained that Guaranty Bank had “publicly an-
nounced its intent to enter the same geographic market as
Midwest Guaranty Bank under the name GUARANTY
BANK” and that the use of such a similar name “create[s]
a likelihood of confusion among Midwest Guaranty Bank’s
customers and others as to the source of Guaranty Bank’s
financial services and products, as well as the financial
services and products of Midwest Guaranty Bank,” and
indeed actual confusion, all in violation of federal and
Michigan unfair competition law, including Michigan’s
common law of trademark infringement. The suit sought
both injunctive relief and damages.
The suit was filed toward the end of November 2002,
and on June 5 of the following year the district court in
Michigan issued a preliminary injunction forbidding
Guaranty Bank to use its name in conjunction with the
sale of banking and related financial services in south-
ern Michigan. Six days later Guaranty Bank notified
Great Northern Insurance Company of the suit and asked
it to defend. Great Northern refused. Two and a half
months later, Guaranty Bank settled Midwest’s suit for
$200,000. Besides having to pay Midwest the amount of
the settlement, Guaranty Bank incurred some $150,000 in
attorneys’ fees, almost 90 percent of them before tendering
the defense of the suit to Great Northern. Its suit against
Great Northern seeks both the attorneys’ fees and the
amount of the settlement, the latter on the theory that by
failing to defend, Great Northern should be estopped
(forbidden) to deny coverage. That theory is essential to
Guaranty Bank’s claim for the amount of the settlement (as
No. 07-3367 3

distinct from its attorneys’ fees), because we shall see at
the end of this opinion that the conduct that Guaranty
Bank was sued for engaging in was not covered by
the policy.
The policy required the insured to notify the insurer
“immediately” of a claim for which a defense was
sought; yet for unexplained reasons Guaranty Bank had
waited more than six months to notify Great Northern of
Midwest Guaranty Bank’s suit. Wisconsin law provides
that “if the insured shows that it was not reasonably
possible to give the notice within the prescribed time and
that notice was given as soon as reasonably possible,” the
failure to give notice within the time limit fixed by the
policy does not invalidate the insured’s claim. Wis.
Stat. § 632.26(1)(b). Even if, as in this case, the insured
delays unreasonably in giving notice, the delay still does
not terminate the insurer’s duties under the policy “if the
insurer was not prejudiced by the failure, but the risk of
nonpersuasion is upon the [insured],” id., § 632.26(2),
which in this case was Guaranty Bank, on which, there-
fore, the district judge placed the burden of proof.
We think the judge was right to do that, though analysis
is a bit complicated by the existence of another provision
of Wisconsin law, Wis. Stat. § 631.81(1), which pro-
vides that if notice of a claim is given to the insurer
within a year after the claim arose, as it was in this case,
the claim is not invalid (whatever the policy says)
“unless the insurer is prejudiced thereby.” In Gerrard
Realty Corp. v. American States Ins. Co., 277 N.W.2d 863,
872 (Wis. 1979), the Wisconsin Supreme Court said this
provision meant “that an insured’s notice is not deemed
untimely and precluding recovery against the policy if
the notice is furnished as soon as reasonably possible
4 No. 07-3367

within one year of the time notice is required by the terms
of the insurance policy, and the insurer is unable to prove
prejudice or that it was possible to give notice within the
time limit required in the policy” (emphasis added). See
also Zenith Ins. Co. v. Employers Ins. of Wausau, 141 F.3d 300,
307-08 (7th Cir. 1998); Lopardo v. Fleming Cos., 97 F.3d 921,
927 (7th Cir. 1996); 2 Arnold P. Anderson, Wisconsin
Insurance Law § 12.13 (5th ed. 2004).
The clause that we have italicized, which shifts the
burden of proof on the issue of prejudice to the insurer,
could be questioned. There is nothing in section 631.81(1),
upon which the court relied, about burden of proof. The
burden of proof is given in section 632.26(2), which does
not suggest that the requirements that it imposes are
affected by whether notice was given as soon as reason-
ably possible within a year.
We are bound by the Wisconsin Supreme Court’s inter-
pretation of Wisconsin law, whether we think it right or
wrong. And although the burden-shifting statement that
we quoted from Gerrard is a dictum because the notice
of claim in that case had been given more than a year
after the policy required that it be given, it is quoted
approvingly by the Wisconsin Supreme Court in a much
later case, Neff v. Pierzina, 629 N.W.2d 177, 186 (Wis.
2001), and as far as we can determine has not been ques-
tioned. The dictum in Gerrard contains an important
qualification, however: the burden of proof on the issue
of prejudice shifts to the insurer only if “notice [of the
claim] is furnished [by the insured to the insurer] as soon as
reasonably possible within one year.” 277 N.W.2d at 872
(emphasis added); Neff v. Pierzina, supra, 629 N.W.2d at
184-85, 187. In such a case, the insured is faultless, so that
shifting the burden of proving prejudice to the insurer
makes a certain amount of sense and so perhaps does
No. 07-3367 5

permissible violence to the statutory text. This cannot
help the insured in the present case, however, because it
failed to notify the insurer “as soon as reasonably possi-
ble.”
But suppose we are wrong in our reading of Gerrard,
and the burden of proving prejudice was on the insur-
ance company, contrary to what the district court
thought and we think. A misallocation of the burden of
proof can invalidate a grant of summary judgment, if
for example the basis for the grant was that the other
party had the burden of proof but had failed to present
any evidence. Celotex Corp. v. Catrett, 477 U.S. 317, 322-24
(1986); Marcial v. Coronet Ins. Co., 880 F.2d 954, 959 (7th
Cir. 1989). Great Northern presented no evidence that its
ability to defend Guaranty Bank against Midwest Guaranty
Bank’s suit was impaired by the late notice of the suit. But a
court is of course entitled to take judicial notice of judicial
proceedings, in this case the proceedings in Midwest’s suit.
Those proceedings include the preliminary injunction that
the federal district court in Michigan issued before Guar-
anty Bank had gotten around to notifying Great Northern
of the suit. Although the findings made by the judge in
granting the preliminary injunction would of course not
bind the jury when the case was tried on the merits, the
injunction would create momentum in favor of the plaintiff
and up its settlement demands, increasing the cost of
defending the suit, since that cost rises with the stakes. So
clear is this that no reasonable jury could find that Great
Northern was not prejudiced by Guaranty Bank’s inexpli-
cable failure to give prompt notice. RTE Corp. v. Maryland
Casualty Co., 247 N.W.2d 171, 178-79 (Wis. 1976), and cases
cited there; Sanderfoot v. Sherry Motors, Inc., 147 N.W.2d
255, 259 (Wis. 1967).
6 No. 07-3367

Moreover, the lenity that the Wisconsin legislature
and supreme court display toward insureds who miss
notice deadlines in their insurance policies is designed
for the protection of individuals rather than substantial
commercial enterprises. Insurance policies tend to be
opaque, and an individual hit with a lawsuit for the first
time may be confused about how to proceed. But when a
sophisticated business fails to give timely notice of suit
to its insurance company, the likeliest reason is not con-
fusion but that the business thought its exposure trivial
and feared that bringing the insurance company into the
picture would result in higher premiums when it bought
its next policy. A sophisticated insured might also delay
notifying its insurance company in order to keep control
of the defense, spending generously for counsel on the
insurer’s dime even though the insurer might be able
to defend the suit more cheaply. Many courts nowadays
relax the rule of contra proferentum (the rule that ambigu-
ities in a written contract are to be resolved against the
party that drafted the contract), even in insurance con-
tracts, when the parties are commercially sophisticated.
E.g., Farmers Automobile Ins. Ass’n v. St. Paul Mercury
Ins. Co., 482 F.3d 976, 977-78 (7th Cir. 2007); First State
Underwriters Agency of New England Reinsurance Corp. v.
Travelers Ins. Co., 803 F.2d 1308, 1311-12 (3d Cir. 1986); F.S.
Smithers & Co. v. Federal Ins. Co., 631 F.2d 1364, 1368 (9th
Cir. 1980); Eagle Leasing Corp. v. Hartford Fire Ins. Co., 540
F.2d 1257, 1261 and n. 4 (5th Cir. 1976); 1 Barry R. Ostrager
& Thomas R. Newman, Handbook on Insurance Coverage
Disputes § 1.03[c], p. 34 (11th ed. 2002); David S. Miller,
Note, “Insurance as Contract: The Argument for Abandon-
ing the Ambiguity Doctrine,” 88 Colum. L. Rev. 1849, 1857-
60 (1988); cf. First National Bank of Manitowoc v. Cincinnati
Ins. Co., 485 F.3d 971, 976-77 (7th Cir. 2007) (Wisconsin
No. 07-3367 7

law); see generally Beanstalk Group, Inc. v. AM General Corp.,
283 F.3d 856, 858-59 (7th Cir. 2002). Wisconsin appears to
be moving in this direction, State Bank of Viroqua v. Capitol
Indemnity Corp., 214 N.W.2d 42, 42 n. 1 (Wis. 1974); Tri City
National Bank v. Federal Ins. Co., 674 N.W.2d 617, 621 (Wis.
App. 2003), though how far and how fast are uncertain.
Zenith Ins. Co. v. Employers Ins. of Wausau, supra, 141 F.3d at
304-05. The state’s supreme court has not spoken to the
issue.
Guaranty Bank argues that regardless of the burden of
proof there could have been no prejudice because
Great Northern, by arguing in the alternative that it
would have had no duty to defend even if it had re-
ceived prompt notice of Midwest Guaranty Bank’s law-
suit, has admitted that the delay in notice did not affect
its behavior, and unless a delay affects the insurer’s
behavior it cannot harm (“prejudice”) him. If there was
no duty to defend, Great Northern is off the hook regard-
less of the adequacy of notice, and we shall consider
that possibility in a moment. But if it had a duty to de-
fend, then even though it denies that now, it might have
decided to defend the case had Guaranty Bank tendered
the defense in a timely manner. The consequences to an
insurer of a mistaken refusal to defend can be very
grave because the consequences for the insured of such
a refusal can be very grave. The insured will have to go
and find himself a lawyer. He may not find one, or he
may have only enough information about the legal serv-
ices market, and money to spend on the lawsuit, to be
able to hire a weak lawyer. So he may lose (or lose worse)
a case that a lawyer hired by the insurance company
would have won—and the facts determined in that case
may make it impossible for him to establish coverage;
8 No. 07-3367

for example, the court may have found deliberate wrong-
doing on his part, taking him out of the policy’s coverage.
Therefore, “if the lack of a defender causes the insured to
throw in the towel in the suit against it, the insurer may
find itself obligated to pay the entire resulting judgment
or settlement even if it can prove lack of coverage. That is
what happened in Newhouse by Skow v. Citizens Security
Mutual Ins. Co., 176 Wis. 2d 824, 501 N.W.2d 1 (1993), and
is the reason why an insurance company that wants to
avoid liability for breach of the duty to defend will often
seek a declaratory judgment of noncoverage, to negate
any inference of arguable coverage and hence of a duty
to defend, before the company has to decide whether to
accept the tender of the defense.” Hamlin Inc. v. Hartford
Accident & Indemnity Co., 86 F.3d 93, 94 (7th Cir. 1996)
(Wisconsin law).
Some states go so far as to estop the insurer to deny
coverage if he breaches his duty to defend, 1 Barry R.
Ostrager & Thomas R. Newman, Handbook on Insurance
Coverage Disputes § 2.05[c], p. 78-79 (11th ed. 2002), so
that the insured prevails even if he could not have estab-
lished coverage had he had the world’s best lawyer.
Wisconsin may be one of these states, Carney v. Village of
Darien, 60 F.3d 1273, 1277 (7th Cir. 1995) (Wisconsin law);
Radke v. Fireman’s Fund Ins. Co., 577 N.W.2d 366, 369-70
(Wis. App. 1998); Kenefick v. Hitchcock, 522 N.W.2d 261,
266 (Wis. App. 1994); Grube v. Daun, 496 N.W.2d 106,
123 (Wis. App. 1992); Professional Office Buildings, Inc. v.
Royal Indemnity Co., 427 N.W.2d 427, 431 (Wis. App. 1988),
though we expressed doubt in Hamlin Inc. v. Hartford
Accident & Indemnity Co., supra, 86 F.3d at 94-95; see also
Production Stamping Corp. v. Maryland Casualty Co., 544
N.W.2d 584, 586, 588 (Wis. App. 1996). Given the poten-
No. 07-3367 9

tially harsh sanction for refusing to defend, Great North-
ern might have agreed to defend the case had it re-
ceived prompt notice. It might have thought, and might
have been right to think, that it could negotiate a prompt
settlement, modest in amount, at a minimal expense in
attorneys’ fees.
We are also persuaded by Great Northern’s alternative
ground for the dismissal of the lawsuit—that there was
no duty to defend because there wasn’t even arguable
coverage of Guaranty Bank’s liability to Midwest Guaranty
Bank. The insurance policy, so far as bears on this case,
defines an “advertising injury” as an injury “caused by an
offense of infringing, in that particular part of your ad-
vertisement about your goods, products or services, upon
their [the victims’] . . . registered collective mark, registered
service mark or other registered trademarked name,
slogan, symbol or title.” There is an express exclusion for
advertising injury to “any intellectual property law or
right” “other than one described in the definition of
advertising injury”—that is, other than (so far as relates
to this case) a registered trademark. So unless Midwest
Guaranty Bank was suing for infringement of a reg-
istered trademark, any damages it obtained would not
be covered by Great Northern’s policy.
Guaranty Bank points out that in determining duty to
defend, we are just to lay the complaint alongside the
insurance policy and see whether it is possible that the
complaint is alleging an injury that the policy covers.
Fireman’s Fund Ins. Co. v. Bradley Corp., 660 N.W.2d 666, 673
(Wis. 2003); Doyle v. Engelke, 580 N.W.2d 245, 285 n. 3 (Wis.
1998); Elliott v. Donahue, 485 N.W.2d 403, 407 (Wis. 1992);
Carney v. Village of Darien, supra, 60 F.3d at 1277; 2 Ander-
son, supra, § 7.22, pp. 14-15. Otherwise the duty to de-
10 No. 07-3367

fend would often be empty. The insurance company
could refuse to defend in the hope that the facts as they
emerged in the litigation that its insured had asked it to
defend would reveal that there was no coverage. The
reductio ad absurdum would be a rule that the duty to defend
is not violated whenever an insured wins his lawsuit,
regardless of how much he had spent to win it, since if he
won, this must mean that he had not committed the act that
he had bought insurance against liability for committing.
But it is plain both that Great Northern had not insured
Guaranty Bank against being sued for infringing an
unregistered trademark and that Midwest Guaranty
Bank was not claiming such an infringement. We do not
put much weight on the failure of Midwest’s com-
plaint to mention “registered” trademark—the omission
merely left the registration status of Midwest’s trade
name unspecified. What is critical is that the claim of
trademark infringement was described in the complaint
as a “common law” claim. (The complaint also charges
unfair competition both under Michigan common law
and under 15 U.S.C. § 1125(a), which, unlike 15 U.S.C.
§ 1114(1)(a), protects unregistered marks.) There is no
such animal as a registered common law trademark. Dana
Shilling, Essentials of Trademark and Unfair Competition 4
(2002); Richard Raysman et al., Intellectual Property Licens-
ing: Forms and Analysis § 4.02[4], p. 4-10 (1999). If it is
registered, it is registered pursuant to a statute, either
the Lanham Act or a state statute. Michigan has a trade-
mark registration statute, Mich. Comp. Laws §§ 422.34,
429.33, .35, .42, and it is not preempted by the Lanham Act
because it does not limit federal rights. Attrezzi, LLC v.
Maytag Corp., 436 F.3d 32, 41-42 (1st Cir. 2006); 3 McCarthy
on Trademarks and Unfair Competition § 22:2, p. 22-3 (4th
No. 07-3367 11

ed. 2004). But Guaranty Bank did not sue under the stat-
ute, and so far as appears never registered its mark under
any law.
Any doubts on this score are dispelled by the “civil cover
sheet” that the district court in Michigan requires be
filed with every complaint. Signed by the plaintiff’s
counsel, it describes the cause of action as “Defendant has
recently adopted and begun using a name confusingly
similar to the Plaintiff’s,” and adds, in a space that asks
for the trademark number and date if it is a trademark
suit, that “the MIDWEST GUARANTY MARK is not
federally registered.” It could not be state-registered either,
because no number or date is given for the trademark.
The civil cover sheet is not technically part of the com-
plaint, but it is filed at the same time and by the same firm
that prepared the complaint, and when taken together
with the allegation in the complaint of a violation only of a
common law trademark conclusively establishes that
the suit was not for infringement of a registered trade-
mark and therefore did not allege an advertising injury
even if the public announcement of Guaranty Bank’s
intention to enter Midwest Guaranty Bank’s market was
an advertisement within the meaning of Great Northern’s
policy; this cannot be determined from the complaint
because the nature of the public announcement is not
indicated.
AFFIRMED.

USCA-02-C-0072—7-17-08