In the
United States Court of Appeals
For the Seventh Circuit
Nos. 11-2775, 11-2789 & 11-2961
A MERICAN S AFETY C ASUALTY INSURANCE C O .,
Plaintiff, Counterdefendant, Appellant,
and
S COTTSDALE INSURANCE C O .,
Plaintiff, Counterdefendant, Appellee,
v.
C ITY OF W AUKEGAN, ILLINOIS,
Defendant-Appellee, Counterplaintiff-Appellant,
v.
INTERSTATE INDEMNITY C O .,
Counterdefendant-Appellant.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 1990—Virginia M. Kendall, Judge.
A RGUED F EBRUARY 21, 2012—D ECIDED M ARCH 16, 2012
2 Nos. 11-2775, 11-2789 & 11-2961
Before E ASTERBROOK, Chief Judge, B AUER, Circuit Judge,
and SHADID, District Judge.
E ASTERBROOK, Chief Judge. In 1989 S. Alejandro
Dominguez was arrested for home invasion and
sexual assault. In 1990 he was convicted of these of-
fenses. In 1993 he was released on parole. In 2002 he
was exonerated by DNA evidence, and in 2005 he
received a pardon from the Governor of Illinois. As a
matter of Illinois law, his claim for malicious prosecu-
tion accrued in 2002 with his exoneration. Cult Awareness
Network v. Church of Scientology International, 177 Ill. 2d
267 (1997) (“favorable termination” of the proceeding is
an element of the tort). As a matter of federal law, his
constitutional claims under 42 U.S.C. §1983 accrued in
1989 and 2002. Claims related to wrongful arrest accrue
on the date of the arrest, see Wallace v. Kato, 549 U.S. 384
(2007), but claims related to wrongful conviction do not
accrue until the conviction has been invalidated, see
Heck v. Humphrey, 512 U.S. 477 (1994).
Dominguez sued in 2004 under both state and federal
law. His claims based on wrongful arrest were dismissed
as untimely. His claims based on malicious prosecution
(state law) and concealment of exculpatory evidence
(federal law) were tried. A jury returned a verdict in
his favor and awarded approximately $9 million
against Paul Hendley of the Waukegan police; the
City of Waukegan was dismissed as a party but is liable
Of the Central District of Illinois, sitting by designation.
Nos. 11-2775, 11-2789 & 11-2961 3
as an indemnitor. We affirmed that judgment. Dominguez
v. Hendley, 545 F.3d 585 (7th Cir. 2008).
Waukegan has insurance covering misconduct by its
law-enforcement personnel. Scottsdale Insurance under-
wrote the primary policies for 1989 and 1990; American
Safety Casualty Insurance underwrote the primary
policy for 2002. (The City had excess policies too; we
disregard most of them to simplify the exposition.)
Other insurers issued policies for the years in between.
Waukegan notified its carriers of Dominguez’s suit—and
all refused to defend or indemnify. Each carrier asserted
that the policy for some other year applied. Instead of
doing the sensible thing—providing the City with a
defense while deciding among themselves, perhaps
through arbitration, which was responsible—all of the
carriers left Waukegan to its own devices. None lifted
a finger to assist the City, and none bothered to seek a
declaratory judgment of non-coverage until after the
jury had returned a verdict for Dominguez.
American Safety began this proceeding in 2007 under
the diversity jurisdiction—against its customer, the City,
rather than against the other carriers to work out which
policy or policies applied. Waukegan brought some
other carriers into the suit and filed a counterclaim,
seeking attorneys’ fees and penalties under 215 ILCS 5/155
on the ground that American Safety and some other
insurers had acted vexatiously and unreasonably by
failing to defend or seek declaratory relief before the
trial began. The district court issued a series of opinions
concluding that American Safety’s policy applies, that
4 Nos. 11-2775, 11-2789 & 11-2961
it must indemnify Waukegan for the verdict against
Hendley (plus interest), and that it must reimburse the
City for the legal expenses it incurred in defending
Dominguez’s suit and the declaratory-judgment action.
The two principal opinions appear at 776 F. Supp. 2d
670 (N.D. Ill. 2011), and 776 F. Supp. 2d 717 (N.D. Ill.
2011). We mention a third opinion later.
The district court concluded that National Casualty Co.
v. McFatridge, 604 F.3d 335 (7th Cir. 2010), determines
which policy applies. McFatridge holds that, under
Illinois law, the issuer of the policy in force on the date
a convict is exonerated must defend and indemnify an
insured whose law-enforcement personnel violate the
Constitution (or state law) in the process of securing
a criminal conviction. American Safety, joined by an
excess carrier (Interstate Indemnity Co.) and the
American Insurance Association as amicus curiae, asks
us to overrule McFatridge or certify the issue to the Su-
preme Court of Illinois.
McFatridge relied on a rule of both state law (Cult Aware-
ness Network) and federal law (Heck): to prevail for mali-
cious prosecution or constitutional wrongs that led to
a conviction, the plaintiff must be exonerated. Because
the victim has no claim until then, the relevant “occur-
rence” for the purpose of determining insurance
coverage is exoneration, the final element of the legal
claim. We supported this conclusion by observing that
Security Mutual Casualty Co. v. Harbor Insurance Co., 65
Ill. App. 3d 198 (1978), had held exactly this as a matter
of Illinois law. Although the Supreme Court of Illinois
Nos. 11-2775, 11-2789 & 11-2961 5
reversed the appellate court’s decision, see 77 Ill. 2d 446
(1979), it did so on the basis of an arbitration clause
rather than any disagreement with the court’s resolution
of the merits. When we decided McFatridge in 2010,
Security Mutual had been unquestioned substantively
in Illinois for 32 years, and we saw no reason to think
that it misstated Illinois law. It has now stood unques-
tioned for 34 years—no court in Illinois has so much
as hinted at doubts about its conclusion, or that of
McFatridge—and we therefore have no greater reason
today than we did in 2010 to believe that the Supreme
Court of Illinois will take a different view.
American Safety and Interstate Indemnity contend
that McFatridge erred in looking to the state (and federal)
elements of the claim rather than to the language of
the insurance policy. The policy that American Safety
issued applies to “occurrences” during the policy year
(it is not a claims-made policy) and, through a chain
of references, defines “occurrence” for law-enforcement
coverage this way:
injury, other than “Bodily Injury”, arising out of
one or more of the following offenses: (a) False
arrest, detention or imprisonment; (b) Malicious
prosecution; . . . (g) Violations of the Federal
Civil Rights Act of 1871 or 42 U.S.C. 1983 and
similar laws.
Dominguez was arrested in 1989 and prosecuted in 1990;
those must be the years of the “occurrences” under this
definition, American Safety and Interstate Indemnity
insist. But how could “malicious prosecution” have
6 Nos. 11-2775, 11-2789 & 11-2961
occurred in 1990 when, as a matter of state law, exonera-
tion is an element of the tort? Hendley’s misconduct oc-
curred in 1989 and 1990, but the policy does not define
the “occurrence” as misconduct by a law-enforcement
officer. It defines the “occurrence” as the tort under state
or federal law—and, in both bodies of law, the tort
occurs when its last element comes into being. For mis-
conduct that causes imprisonment, that final element is
exoneration, which happened in 2002. Until then,
Dominguez could not establish either “malicious pros-
ecution” or a “violation” of §1983. (American Safety
does not contend that exoneration is just a precondition
to suit, rather than an element of the tort.)
American Safety, Interstate Indemnity, and the Ameri-
can Insurance Association observe that only one other
state, Louisiana, has held that exoneration marks
the “occurrence” for insurance coverage of malicious-
prosecution claims. Sauviac v. Dobbins, 949 So. 2d 513,
519 (La. App. 2006). Courts in six states and the District
of Columbia have held that the “occurrence” occurs
when the wrongful prosecution is filed or ends in con-
viction. See Zurich Insurance Co. v. Peterson, 232 Cal. Rptr.
807, 813 (Cal. App. 1986); Billings v. Commerce Insurance
Co., 458 Mass. 194, 197–200 (2010); American Family
Mutual Insurance Co. v. McMullin, 869 S.W.2d 862, 864
(Mo. App. 1994); Paterson Tallow Co. v. Royal Globe
Insurance Cos., 89 N.J. 24, 36–37 (1982); Newfane v. General
Star National Insurance Co., 14 A.D.3d 72, 76–77 (N.Y.
2004); Consulting Engineers, Inc. v. Insurance Co. of North
America, 710 A.2d 82, 86–88 (Pa. Super. 1998), affirmed
without opinion, 560 Pa. 247 (2000); S. Freedman & Sons v.
Nos. 11-2775, 11-2789 & 11-2961 7
Hartford Fire Insurance Co., 396 A.2d 195, 199 (D.C. App.
1978). (A dozen or so federal district courts and courts
of appeals have predicted that states would reach one
or another result on this subject; we disregard them
because decisions by state tribunals are the benchmark
in diversity litigation.) McFatridge thus represents a
minority view, which the insurers (and the Associa-
tion) urge us to abandon.
A minority it may be, but McFatridge does follow the
lead of the only Illinois appellate decision on the issue.
Contrary decisions pay little attention to the language
of the policies. American Safety’s policy defines “occur-
rence” (perhaps the policies in other cases did not), and
as we have stressed the definition identifies the tort
rather than the misconduct as the “occurrence.” The
most fully reasoned of the contrary decisions is
Billings, which did not discuss the policy’s language
but did rely on a norm in Massachusetts insurance
law that, when a tort spans multiple years, the year in
which injury occurs marks the “occurrence.” Think,
for example, of a defectively designed product. The
negligent design may happen in Year One, the product
be manufactured in Year Three, and the injury occur
in Year Five. In Massachusetts and most other states
the “occurrence” is assigned to Year Five rather than
the year of the negligent design, manufacture, or other
delict. See Allan D. Windt, 3 Insurance Claims and
Disputes §11:4 (5th ed. 2011) (collecting cases from many
jurisdictions). Billings observed that the first injury
from malicious prosecution comes at the time of the
prosecution. That’s true enough—but Billings may have
8 Nos. 11-2775, 11-2789 & 11-2961
generalized inaccurately from the doctrine that the
injury marks the occurrence. For most torts the injury is
the final element; there’s no tort without injury, and
once injury does occur the tort is complete. What
happens later is irrelevant. But that’s not true of
malicious prosecution or constitutional wrongs that lead
to criminal convictions. For these torts, exoneration is
the final element. Perhaps the lesson Billings should
have drawn from the cases is that the final element of
the tort marks the occurrence. That’s the lesson
McFatridge drew.
Scottsdale Insurance Company, which underwrote
Waukegan’s coverage in 1989 and 1990, was one of the
insurers in McFatridge and believes that our decision
is sound—and that the position of its own trade associa-
tion is incorrect. Scottsdale has an obvious interest in
avoiding liability in this litigation, but there are also
strong practical reasons behind its position. Under
McFatridge and Security Mutual, insurers can adjust their
exposure by changing the language in their policies,
defining the “occurrence” as the misconduct rather
than the completed tort. The Association’s position,
by contrast, would impose on insurers a rule that
they cannot change by contract (except by moving
from occurrence to claims-made policies). Why would
a trade association want such an outcome?
The American Insurance Association’s position also
implies a long tail on liability, which is opposite to the
industry’s usual view that liability should be as close as
possible to the policy dates. Insurers want to be able to
Nos. 11-2775, 11-2789 & 11-2961 9
close the books on their obligations, so that they know
whether they have made a profit—and so that they can
adjust prices to reflect the current riskiness of the
activity they are insuring. Yet the Association’s submis-
sion implies a long tail on liability, and a corresponding
need to retain reserves for decades. Here the “occur-
rence” would be 12 years after the 1990 policy expired,
and the suit 14 years after the policy’s expiration. It
could just as well be 22 or 32 years afterward, as it may
take a long time to demonstrate innocence conclusively.
Delay harms not only the insurers but also their cus-
tomers. Municipalities such as Waukegan often secure
insurance through brokers, which may go out of business
during the years between coverage and exoneration;
insurers themselves may go out of business. If the munici-
pality handles its own insurance procurement, it may
send the files to storage after five or ten years, then en-
counter difficulty in identifying who provided coverage
many years earlier. Something like this seems to have
happened in this very case. Waukegan notified Amer-
ican Safety and other carriers in 2004, soon after
Dominguez filed suit, but did not notify Scottsdale
until 2006. It took Waukegan more than two years to
track down the policies from 1989 and 1990, which were
in effect 15 years before Dominguez sued. But Waukegan
had no trouble finding the policies that covered the
year 2002, when Dominguez was exonerated.
Much of the trade association’s brief supposes that
McFatridge established a “multiple trigger” approach.
Insurers have long opposed doctrines that make
10 Nos. 11-2775, 11-2789 & 11-2961
multiple policies responsible for a single loss. Such doc-
trines increase the number of risks within each policy
year and can effectively nullify policy limits. If ten
policies are applied to a single casualty, and each policy
has a $1 million limit per occurrence, the insured ends
up with $10 million in coverage per occurrence, even
though it paid for only $1 million in coverage. Continuous-
trigger rulings in asbestos cases have been the ruin of
more than one insurance company. But McFatridge
rejected an argument for continuous or multiple triggers.
One episode of malicious prosecution (or constitutional
violations leading to wrongful conviction) has just one
trigger: exoneration. There can be a second claim. As
the Supreme Court held in Wallace, wrongful arrest
is a distinct theory of liability that can be pursued im-
mediately after the arrest. Dominguez made a claim for
wrongful arrest in 1989, but he lost under the statute of
limitations (two years in Illinois). His suit in 2004 was
13 years too late. This means that only the policies
covering Waukegan for the year 2002 matter.
American Safety, Interstate Indemnity, and the Associa-
tion ask us to certify this subject to the Supreme Court
of Illinois if we are inclined to stick with McFatridge.
Certification may be appropriate when decisions of
intermediate state courts conflict, but as we have ob-
served there is just one relevant decision in Illinois. Cer-
tification may be appropriate when an issue is recurring
and important, but the fact that state courts in Illinois
have not had any decisions on this subject since 1978
implies that it is not often litigated. (Perhaps insurers
regularly work year-of-coverage disputes out among
Nos. 11-2775, 11-2789 & 11-2961 11
themselves, or through arbitration, as we suggested
they should have done here.) Certification also may be
appropriate when the nature of the parties’ citizenship,
or a link between state and federal claims, makes it
likely that the litigation regularly will occur in federal
court. Then certification may be the only way to allow
the state courts to resolve an issue of state law. See Todd
v. Societe BIC, S.A., 9 F.3d 1216 (7th Cir. 1993) (en banc);
Chicago v. StubHub!, Inc., 624 F.3d 363 (7th Cir. 2010). As
far as we can see, however, most insurance disputes in
Illinois are litigated in state court; there’s no reason why
the year of the “occurrence” for malicious prosecution
claims cannot be resolved by the Illinois judiciary, which
can disapprove McFatridge if persuaded that we have
misunderstood Illinois law. The reason this case is in
federal court is that American Safety filed here. If it
genuinely wanted the views of the state judiciary, it
should have brought this declaratory-judgment action
in state court.
This completes our discussion of the only issues raised
by Interstate Indemnity and the trade association. Ameri-
can Safety presents several additional challenges to
the district court’s decision. One is that it did not have
to defend Waukegan until the City had incurred and
paid legal expenses exceeding the $100,000 deductible
(which the policy calls a “self-insured retention”).
Waukegan’s legal bill in the Dominguez suit exceeded
$1 million, so it must have incurred $100,000 in fees
long before the trial, yet American Safety still refused to
defend it. No matter, the insurer replies; until the City
paid the bill it hadn’t exhausted the deductible and still
12 Nos. 11-2775, 11-2789 & 11-2961
had to defend itself. If it did not have a duty to defend
until after the trial was over, American Safety insists,
it cannot be held liable under 215 ILCS 5/155 for unrea-
sonable and vexatious failure to defend. We think, how-
ever, that this line of argument exemplifies American
Safety’s unreasonable and vexatious treatment of
Waukegan.
Let us start with the policy’s language. It provides:
“We shall have the right and duty to select counsel
and defend any claims to which [this policy] applies. Our
right and duty to defend ends when we have used up
the applicable limit of insurance in the payment of judg-
ments and settlements.” This language sets an end (at
the policy limit) on the duty to defend; it does not post-
pone the beginning of the duty until Waukegan has
paid $100,000 from its own pocket. The insurer wants us
to add a condition that can’t be found in the policy—or
for that matter in Illinois law. It does not cite any statute
or decision providing that an insurer’s duty to defend
begins only after the insured’s expenses exceed the de-
ductible. Many Illinois cases imply that the duty to
defend begins the moment suit is filed. See, e.g., Steadfast
Insurance Co. v. Caremark Rx, Inc., 373 Ill. App. 3d 895
(2007); Casualty Insurance Co. v. Town & Country Pre-School
Nursery, Inc., 147 Ill. App. 3d 567 (1986). American Safety
does not cite or discuss any of them.
Doubtless a policy could be written to postpone the
defense obligation until the deductible has been paid out.
United States Fire Insurance Co. v. Scottsdale Insurance Co.,
264 S.W.2d 160, 173 (Tex. App. 2008), involved such a
Nos. 11-2775, 11-2789 & 11-2961 13
policy. But American Safety does not contend that the
duty-to-defend language of its own policy is similar to
the policy in United States Fire. Instead it rests on
some language in the deductible clause that, American
Safety insists, shows that it has no obligation at all until
the deductible has been disbursed. Yet it is essential to
read all of a policy’s clauses together. Giving the deduct-
ible clause an interpretation that effectively nullifies
the defense clause would be unsound. Both clauses can
be given meaning if the “obligation” to which the de-
ductible clause refers is the obligation to indemnify, not
the obligation to defend.
What sense would it make for an insurer to put
defense off until the insured has retained and paid a
team of lawyers to undertake the tasks? American
Safety reads the deductible as abrogating the duty to
defend—its argument, recall, is that it never had to
defend Waukegan, even though the City incurred and
paid more than $1 million in legal fees—which would
make the defense clause in the policy empty. Even
a $1,000 deductible could make a promised defense
unavailable, unless the client took care to pay its lawyer
a retainer equal to the deducible. Then, having paid
the retainer, the client would tell its lawyer “Never mind!”
and hand the defense over to the insurer. Or Waukegan
(which had good credit and did not not need to pay a
retainer to hire counsel) might have asked for its lawyer
to send it a bill at the $100,000 point, paid, and then
handed the defense over to American Safety, which
would have had to hire a new law firm that would
have covered the same ground, at extra expense (and
14 Nos. 11-2775, 11-2789 & 11-2961
perhaps needing a delay that the court would not toler-
ate). This would also be true if the deductible were ad-
ministered on an accrual basis, rather than a cash basis
as American Safety insists it must be.
The defense clause in an insurance policy has two
functions. One is to give the client access to counsel
without the need to pay in advance (a benefit that Ameri-
can Safety wants to deny its insured). The other—and
the more important from the insurer’s perspective—is
to give the insurer the right to control the defense.
Insurers know which law firms have the expertise for
the job; and, since the insurer has a great deal of money
at stake (American Safety and Interstate Indemnity had
an aggregate $10 million exposure in the Dominguez
litigation), it needs a defense that will protect its inter-
est. (If an insurer thinks that the damages may exceed
the policy limits, it might be inclined to protect its own
interest at the expense of its customer’s. See R.G. Wegman
Construction Co. v. Admiral Insurance Co., 629 F.3d 724,
rehearing denied, 634 F.3d 731 (7th Cir. 2011). But that’s
not a problem in the current situation.) Waukegan, by
contrast, does not necessarily know which lawyers are
good at defending suits like the one Dominguez
filed—and, more to the point, is not seeking to protect
its own pocketbook.
Waukegan knew that one of its insurers would have
to pay in the end, even though they quarreled among
themselves about which would be responsible. With
other people’s money at stake, would Waukegan pay
top dollar for a good law firm? Would it monitor the
Nos. 11-2775, 11-2789 & 11-2961 15
defense as carefully as an insurer? We don’t understand
why American Safety or any other insurer would want
its client to manage the defense of a suit such as the
one Dominguez filed. Indeed, American Safety contends
that Waukegan and its law firm bungled the defense
by agreeing to indemnify Hendley. We discuss below
American Safety’s argument that this lets it off the hook.
It is enough for now to say that, by insisting that an
insured manage and pay for the defense in a suit such
as this, an insurer disserves its own interests. It is
the sort of desperate argument that an insurer may ad-
vance after it failed to defend for other reasons; pre-
vailing on that argument in this suit would have saved
American Safety about a million dollars but would
have cost it much more in the long run.
American Safety’s next argument is that damages
under 215 ILCS 5/155 are inappropriate because it
could not have anticipated McFatridge, and its refusal
to defend therefore was not unreasonable or vexatious.
McFatridge was decided in 2010, but Security Mutual
was decided in 1978; it told American Safety that exonera-
tion marked the “occurrence.” American Safety not only
refused to accept the sole decision on the subject by an
Illinois court but also failed to cooperate with other
insurers so that Waukegan could be protected while the
carriers wrangled among themselves about which policy
applies. Leaving Waukegan in the lurch, with each
insurer pointing the finger at another, was unreasonable.
If American Safety was in genuine doubt, it could have
filed a declaratory-judgment action (preferably against
16 Nos. 11-2775, 11-2789 & 11-2961
the other insurers rather than Waukegan) in 2004;
instead it sat on its hands. The district court did not err
in concluding that §155 covers this situation.
Next comes American Safety’s argument that it was
entitled to be passive because in 2004, shortly after
Dominguez’s suit began, the City told American Safety
that it had been dismissed as a party. See Monell v. New
York City Department of Social Services, 436 U.S. 658
(1978) (municipalities cannot be held vicariously liable
in suits under §1983). The City was held liable in the end
as an indemnitor of Hendley’s obligation to Dominguez—
but American Safety maintains that the City never
should have allowed its lawyer to agree to indemnify
Hendley and that it cannot be responsible for payments
the City made voluntarily; the policy covers Waukegan’s
legal obligations but not gratuitous outlays.
It comes with ill grace for an insurer that steadfastly
refused to defend its customer to insist that it is relieved
of liability because the insured erred in conducting a
defense that was thrust upon it. The City maintains that
it did not blunder, because its concession in the suit
was compelled by Illinois law. The district court held
that the City is right about this (776 F. Supp. 2d at 700–01),
and in this court American Safety has ignored the
ground on which the district judge ruled against it. But
the whole to-and-fro puzzles us. Hendley was himself
an insured under the policy, which covers the City and
its law-enforcement personnel. American Safety must
indemnify Hendley. It makes no difference whether it
pays Dominguez directly (on behalf of Hendley) or indi-
Nos. 11-2775, 11-2789 & 11-2961 17
rectly (by reimbursing the City, which paid Dominguez
on behalf of Hendley).
Part of what Waukegan paid Dominguez on behalf
of Hendley represents attorneys’ fees awarded in
Dominguez’s favor under 42 U.S.C. §1988(b). American
Safety apparently recognizes that attorneys’ fees under
§1988 are treated as costs rather than damages but con-
tends that, because the City paid these fees as part of
its obligation to indemnify Hendley, they turned
into damages and are excluded, because Dominguez
received more than $1 million (the policy limit) in com-
pensatory damages. This sounds like a dispute between
American Safety and Interstate Indemnity (the excess
carrier) about which of them is responsible for what part
of the judgment, yet American Safety did not appeal
against Interstate Indemnity. Waukegan does not care
which carrier covers this expense; it is entitled to
payment from one of the insurers. That American Safety
is trying to eliminate part of the compensation needed
to make Waukegan whole is yet another mark of a vexa-
tious litigation strategy.
At all events, this line of argument fails for a reason
we have already mentioned: the policy covers Hendley
as one of Waukegan’s law-enforcement employees. From
Hendley’s perspective, Dominguez’s attorneys’ fees are
“costs” under §1988. Cf. Yang v. Chicago, 195 Ill. 2d 96
(2001) (treating an award of attorneys’ fees to a
prevailing plaintiff under §1988 as costs rather than
damages for the purpose of a state statute). Doubtless
a policy could be written to count a prevailing plaintiff’s
18 Nos. 11-2775, 11-2789 & 11-2961
attorneys’ fees toward a cap on the insurer’s total outlay,
just as a policy could count defense expenses against the
limit, but the actual policy does not treat either defense
expenses or costs as “damages” to which the $1 million
limit applies.
Finally we have an appeal by Waukegan against
Scottsdale, whose policy does not cover any of the liabil-
ity. Scottsdale’s policy did cover Dominguez’s false-arrest
claim, but that claim was dismissed as untimely.
The district court entered judgment in Scottsdale’s fa-
vor. Waukegan contends, however, that Scottsdale is
estopped to assert any policy defense (such as non-cover-
age) because it neither offered to defend the City nor
filed a declaratory-judgment action until after the jury
had returned its verdict for Dominguez, and that for
the same reason Scottsdale is liable under §155.
Because the judgment in the City’s favor against Ameri-
can Safety and Interstate Indemnity appears to make
Waukegan whole, its appeal may be unimportant. But
just in case we have missed something, we add that the
district court’s dismissal of the City’s claim against
Scottsdale, see 2009 U.S. Dist. L EXIS 25742 (N.D. Ill. Mar. 30,
2009), is entirely justified. The policy Waukegan pur-
chased from Scottsdale required the City to notify the
insurer “immediately” after a claim was made. It took
the City more than two years, however, to find the
policy and notify the insurer. Scottsdale did not learn
about the litigation until September 27, 2006, just six days
(four business days) before the trial began, and three
weeks before the jury returned its verdict. Scottsdale
Nos. 11-2775, 11-2789 & 11-2961 19
filed its declaratory-judgment action on January 5,
2007, acting much quicker than the City (or any of the
insurers notified in 2004) had done. Scottsdale’s delay
cannot be seen as unreasonable or vexatious.
Nonetheless, Waukegan contends, an insurer is forbid-
den to stand on the terms of its policy—and must pay
damages under §155—if for any reason it does not
assume the defense at trial or get a declaratory-
judgment action on file by the trial’s end. On this under-
standing, if the City had withheld notice until the day
after the jury’s verdict, then Scottsdale automatically
would be liable. That can’t possibly be the law in Illinois
or anywhere else; it would induce clients to play games
with their insurers and, by vitiating every policy’s terms,
make insurance impossibly expensive (if the market
did not collapse outright).
Waukegan says that Employers Insurance of Wausau v.
Ehlco Liquidating Trust, 186 Ill. 2d 127 (1999), supports
its position, no matter how implausible it seems and
no matter how destructive it would be to insurance
markets. Illinois requires an insurer that denies coverage
either to defend under a reservation of rights or to seek
a declaratory judgment of non-coverage; if it takes
neither step while the underlying litigation proceeds, it
is estopped to deny coverage. See, e.g., Waste Manage-
ment, Inc. v. International Surplus Lines Insurance Co., 144 Ill.
2d 178, 207–08 (1991). Ehlco extends this doctrine to
defenses based on late notice. If an insurer believes that
its client’s violation of the policy’s notice requirement
relieves it of the duty to defend or indemnify, the
20 Nos. 11-2775, 11-2789 & 11-2961
insurer must nonetheless defend (under a reservation of
rights) or seek a declaratory judgment; if it abandons
its client without doing one of these things, it loses the
benefit of the late-notice defense. 186 Ill. 2d at 154.
Waukegan gave Scottsdale a notice—years late, to be
sure, but notice nonetheless. Scottsdale did not defend
Dominguez’s suit or seek a declaratory judgment before
it reached judgment. As Waukegan sees things, Ehlco
blocks Scottsdale from urging any defense—not only
late notice, but also the fact that the policies Scottsdale
issued for 1989 and 1990 simply don’t apply, given
that Dominguez was not exonerated until 2002.
Scottsdale responds that Ehlco supposes that the
insurer had enough notice to act. In Ehlco the insurer
waited 11 years after being notified by its client. The
underlying suit (by the EPA) involved liability for the
costs of environmental cleanup. Ehlco notified the
carrier about the dispute in 1982; the EPA did not sue
until 1988; the insurer declined to defend its client and
did not seek a declaratory judgment until 1993, about
nine months after the suit was settled. When the insurer
did seek a declaratory judgment, its only argument was
that the client should have given notice in 1978, when it
learned about the contamination, rather than in 1982,
when it learned that the EPA might demand a costly
cleanup. That’s the defense that the Supreme Court
of Illinois held foreclosed by the insurer’s delay (coupled
with its refusal to defend its client against the EPA’s
claims).
The district court agreed with Scottsdale that Ehlco’s
understanding of estoppel applies only when the insurer
Nos. 11-2775, 11-2789 & 11-2961 21
has enough time to assess the nature of the underlying
suit, compare the plaintiff’s allegations against the
policy’s terms, and research the governing law so that
it can intelligently evaluate the client’s request for a
defense. In Illinois estoppel is a penalty designed to
induce insurers to protect clients who are at risk, rather
than to sit idly while the underlying suit proceeds. The
estoppel doctrine, like the penalty provisions of §155,
is supposed to discourage unreasonable and vexatious
conduct. Yet Scottsdale did not behave unreasonably;
it takes more than four days (which is all the time
Scottsdale had) to hire a law firm, analyze the complaint
in light of the policy, research the applicable law, obtain
the approval of responsible claims supervisors, and
get a declaratory-judgment suit under way. Insurance
companies have multiple layers of review; bureaucracies
need time to act.
The intermediate appellate courts of Illinois have con-
cluded that Ehlco does not block an insurer from con-
tending that it had so little time that, even acting
diligently, it could not have supplied a defense or com-
menced a suit for a declaratory judgment before the
underlying litigation reached judgment. See, e.g., State
Automobile Mutual Insurance Co. v. Kingsport Development,
LLC, 364 Ill. App. 3d 946, 960 (2006) (insurer entitled
to a “reasonable time” in which to decide and act);
Northern Insurance Co. of New York v. Chicago, 325 Ill. App.
3d 1086, 1095 (2001) (no duty to defend, and no estoppel,
if the client does not give the insurer “an opportunity
to participate” in the underlying suit). Waukegan asks
us to reject these decisions, but the Supreme Court of
22 Nos. 11-2775, 11-2789 & 11-2961
Illinois has left them in place. We think it unlikely that
the state’s highest court would agree with Waukegan’s
understanding of Ehlco.
The City also contends that Scottsdale could have
secured more time by asking the district judge to
postpone the trial. That contention is more than a little
odd; Waukegan was running its own defense, and it
could have asked for a delay if the City wanted to
provide Scottsdale with time to analyze the situation.
The district judge was unlikely to treat the City’s own
failure to comply with its notice obligation as a
good reason to postpone, indefinitely, a jury trial less
than a week away. Time had been reserved on the
judge’s schedule; witnesses had been notified and had
rearranged their own lives in order to testify. Last-minute
delays in complex litigation are seldom appropriate.
Scottsdale acted with all the dispatch Waukegan had
any right to expect; the district judge sensibly held
that Scottsdale cannot be liable for either defense or
indemnity expenses in the Dominguez litigation.
A FFIRMED
3-16-12