Cincinnati Insurance Company v. Eastern Atlantic Insurance Company and Integrity Underwriters, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-2576
Cincinnati Insurance Company,
Plaintiff-Appellant,
v.
Eastern Atlantic Insurance Company and
Integrity Underwriters, Inc.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 6763--James F. Holderman, Judge.
Argued May 10, 2001--Decided August 2, 2001
Before Posner, Easterbrook, and Diane P.
Wood, Circuit Judges.
Posner, Circuit Judge. The plaintiff in
this diversity suit (governed, all agree,
by Illinois law) is an insurance company
that we’ll call "Cincinnati." The
complaint seeks a declaration that
Cincinnati has no duty to defend the two
defendants, "Eastern" and "Integrity,"
under the basic liability policy that it
had issued to them and under an umbrella
liability policy that it had issued to
Integrity alone. Eastern is another
insurance company, while Integrity is an
insurance agency that produces business
for Eastern. The district court granted
judgment on the pleadings for the
defendants, holding that Cincinnati has a
duty to defend under both policies.
The litigation against Eastern and
Integrity that Cincinnati refuses to
defend began when Eastern sued another
insurance agency that produced business
for it, "Midwest," for breach of contract
and related wrongs. Midwest
counterclaimed and added a third-party
claim against Integrity, which we’ll
pretend, for simplicity’s sake, is part
of the counterclaim. It is against the
counterclaim that Eastern and Integrity
asked Cincinnati to defend.

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So far as bears on this appeal, the
counterclaim charges Eastern with
tortiously interfering with an agreement
between Midwest and still another
insurance agency, "Shewmake," which had
assisted Midwest in obtaining insurance
customers for Eastern. A means of
interference that the counterclaim
specifically alleges is a letter that
Eastern wrote to Midwest demanding that
it fire the Shewmake agency. The letter
unfortunately is not a part of the
record, but according to the counterclaim
it expressed "concern over Mr. Shewmake’s
character" and was "intentionally and
maliciously sent for the purpose of
inducing [Midwest] to terminate [its]
relationship with" him. Why would Eastern
care about Midwest’s relationship with
Shewmake? Apparently because Midwest
produced insurance business not only for
Eastern but, presumably with the aid of
Shewmake, for Eastern’s competitors as
well; and indeed the counterclaim also
charges Eastern and Integrity with
tortious interference with "valid
business relationships" that Midwest had
developed with other insurance companies,
besides Eastern, for which Midwest
procured business. The theory of the
counterclaim appears to be that Eastern
wanted the Eastern customers that Midwest
had obtained to switch to Integrity and
the other insurance companies for which
Midwest worked to drop Midwest, as "by
causing notification to falsely be given
to [those other] insurance carriers that
[Midwest was] engaged in activities which
could trigger liability under their
Errors and Omissions policies." If
Midwest went out of business and
Integrity procured business only for
Eastern, Eastern would pick up business
that Midwest had formerly given other
insurance companies.
In short, the counterclaim charged
interference with contractual and other
business relations, achieved by various
nefarious means; hence tortious
interference by Eastern and its tool, the
misnamed Integrity. The insurance
policies on the basis of which Eastern
and Integrity seek defense and indemnity,
however, do not mention tortious
interference. As far as this case is
concerned, the basic policy (commercial
general liability--"CGL" in the trade)
covers "oral or written publication of
material that slanders or libels a person

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or organization or disparages a person’s
or organization’s goods, products or
services," while the umbrella policy
covers "libel, slander or defamation of
character." The basic policy excludes,
however, injury "arising out of oral or
written publication of material if done
by or at the direction of the insured
with knowledge of its falsity," while the
umbrella policy requires in addition to
injury an "occurrence" defined as
something that "unexpectedly or
unintentionally results in personal
injury," and by this means excludes
intentional or expected injury. The
discrepancy between the basic and
umbrella coverage may seem disquieting,
since most individuals buy an umbrella
policy believing that it provides
uniformly larger limits; this umbrella
has holes in it. But the purchasers here
are not individuals; they are companies
that may want greater coverage for some
risks but not all. Anyway, no issue is
made of the existence of the discrepancy,
as distinct from the difference it may
make in the defendants’ rights under the
two policies.
The allegations of Midwest’s
counterclaim suggest that, like Shewmake
(who has not, however, so far as we know
at any rate, sued Eastern or Integrity),
Midwest was defamed by the "false
notification" of its insurer clients that
it was engaged in activities that would
trigger claims against them; by the same
token, the allegations suggest
disparagement of Midwest’s services. (The
tort of commercial disparagement is
codified in Illinois in 815 ILCS
510/2(8)--despite which one court has
questioned whether the tort exists in
that state. Becker v. Zellner, 684 N.E.2d
1378, 1387-88 (Ill. App. 1997). Eastern’s
suit, like the present suit, is governed
by Illinois law.) Defamation and
disparagement are explicitly covered by
the basic policy, and defamation by the
umbrella policy. But neither tort is
named in the counterclaim. No matter.
Coverage does not depend on the
characterization of the wrong by the
plaintiff (in this case counterplaintiff,
Midwest). Modern pleading requires the
pleading only of a claim, not of a legal
theory; and so if a specific tort or
other legal wrong named in the insurance
policy has to be named in the suit for
liability coverage to exist, insurance

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protection could be lost as the result of
a totally inconsequential omission by the
drafter of the complaint. Such a rule
would also be an invitation to strategic
pleading.
The rule therefore is instead that the
insured is covered against particular
conduct alleged against it regardless of
the label placed on that conduct by the
pleader. As the Supreme Court of Illinois
said in Outboard Marine Corp. v. Liberty
Mutual Ins. Co., 607 N.E.2d 1204, 1212
(Ill. 1992), "Refusal to defend is
unjustifiable unless it is clear from the
face of the underlying complaint that the
facts alleged do not fall potentially
within the policy’s coverage" (emphasis
added). "The complaint need not allege or
use language affirmatively bringing the
claims within the scope of the policy, as
the question of coverage should not hinge
exclusively on the draftsmanship skills
or whims of the plaintiff in the
underlying action." Western Casualty &
Surety Co. v. Adams County, 534 N.E.2d
1066, 1068 (Ill. App. 1989). (For a case
so holding that is factually similar to
ours, see Tews Funeral Home, Inc. v. Ohio
Casualty Ins. Co., 832 F.2d 1037, 1044
(7th Cir. 1987) (per curiam), applying
Illinois law.) As we said in reference to
another state’s law (materially
identical, however, to Illinois law in
this regard), "The insurer’s obligations
are not circumscribed by the plaintiff’s
choice of legal theories. The plaintiff’s
complaint, upon which the insurer’s duty
depends, need not even set forth the
plaintiff’s legal theories. What is
important is not the legal label that the
plaintiff attaches to the defendant’s
(that is, the insured’s) conduct, but
whether that conduct as alleged in the
complaint is at least arguably within one
or more of the categories of wrongdoing
that the policy covers. So, for example,
if the complaint alleges facts that if
proved would show that the insured had
infringed the plaintiff’s copyright, the
policy kicks in even if the complaint
charges the insured only with fraud or
intentional infliction of emotional
distress." Curtis-Universal, Inc. v.
Sheboygan Emergency Medical Services,
Inc., 43 F.3d 1119, 1122 (7th Cir. 1994)
(citations omitted).
Both insurance policies, however,
exclude intentional misconduct, though

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very differently defined; and we must
consider whether the allegations of
Midwest’s counterclaim bring Eastern’s or
Integrity’s claims against Cincinnati
within the exclusions. The umbrella
policy limits coverage to an
"occurrence," which the policy defines as
something that "unexpectedly or
unintentionally results in personal
injury," thus excluding conduct intended
to injure. The basic policy excludes
injury "arising out of oral or written
publication of material if done by or at
the direction of the insured with
knowledge of its falsity." The
counterclaim is replete with allegations
of deliberate misconduct by Eastern and
Integrity, but these allegations do not
take the case out of the basic policy.
They are much more likely to have been
intended as a pitch for punitive damages
than as a limitation of the claim--a
limitation because merely negligent
defamation is actionable in Illinois when
the victim is not a public figure. Troman
v. Wood, 340 N.E.2d 292, 299 (Ill. 1975).
Such a limitation would be foolish; why
would Midwest commit itself to abandon
its claim for defamation merely because
of inability to prove facts inessential
to such a claim, though helpful in
jacking up damages? Proof of
deliberateness would merely be the icing
on the cake. It is also possible that
Midwest is describing as deliberate
misconduct a case in which deliberate
disparagements are made even if the
disparager is merely negligent with
regard to their truth. Unless he knows
that his disparagements are false, he is
not within the basic policy’s exclusion.
So Cincinnati had a duty to defend both
Eastern and Integrity under the basic
policy. The umbrella policy’s exclusion
of conduct intended (or expected) to
injure is broader than the basic
policy’s, raising the spectre of illusory
coverage by excluding all intentional
torts except "unintentional" intentional
torts. Hurst-Rosche Engineers, Inc. v.
Commercial Union Ins. Co., 51 F.3d 1336,
1345-46 (7th Cir. 1995); Tews Funeral
Home, Inc. v. Ohio Casualty Ins. Co.,
supra, 832 F.2d at 1045; North Bank v.
Cincinnati Ins. Cos., 125 F.3d 983, 986-
87 (6th Cir. 1997). (Notice the paradox:
the broader the exclusion, the more
likely it is to fail, if by making the
coverage illusory it suggests a deep

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ambiguity in the insurance policy.) Some
of the torts expressly covered by the
umbrella policy are intentional torts,
such as false arrest, battery, and
malicious prosecution, and the cases just
cited hold that the policy should not be
interpreted as taking back with one hand
what it gave with another, by excluding
coverage of those torts because they are
intentional.
But it is important to this case that
the exclusion is not of intentional torts
as such (nor is defamation an intentional
tort in any simple sense), but of
tortious conduct in which there is an
intent to injure or an expectation of
injuring. And in the case of defamation,
at least, the exclusion does not track
the tort. Apart from the exotic case in
which defaming a fictitious person has
the unintended and unexpected consequence
of defaming a real person with the same
name as the fictitious character,
resulting in liability if the defendant
should have known better, or the slightly
more common case, treated similarly, of
mistaken identification, e.g., Ryder v.
Time, Inc., 557 F.2d 824, 825-26 (D.C.
Cir. 1976), defamation is often not
intended or expected to injure anyone.
The defamer may have made a good-faith
though inadequate attempt to conceal the
victim’s name, may have thought the
victim’s reputation already impaired
beyond possibility of further damage, or,
the most common case, may have thought
the defamatory statement true, in which
event there would be no injury in a legal
sense. So intent to injure or expectation
of injuring is not an element of the tort
of defamation, as it is of tortious
interference with contract or with
advantageous business relations (which is
not a tort covered by the insurance
policy, though we have seen that there is
still a duty to defend if the facts
constituting a covered tort, such as
defamation, are alleged). Because the
exclusion, therefore, though broad, is
not so broad as to make the coverage
illusory, it must be enforced according
to its terms. Fuisz v. Selective Ins.
Co., 61 F.3d 238, 243-45 (4th Cir. 1995).
Still, Integrity may have acted
maliciously yet not have intended a legal
harm. It might, for example, have made
disparaging statements about Midwest that
it hoped would do Midwest in but believed

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to be true. Id. But Integrity has failed
in its brief in this court to respond to
Cincinnati’s contention that the umbrella
policy’s exclusion bars its claim. Now an
appellee’s failure to respond to an
argument by the appellant is not in
itself a forfeiture requiring that we
reverse the judgment appealed from. The
argument may be nondispositive or
frivolous. The entire appeal, indeed, may
be frivolous, in which event even the
appellee’s failure to file a brief will
not warrant reversal. See 7th Cir. R.
31(d); In re Rios, 901 F.2d 71 (7th Cir.
1990) (per curiam). But Cincinnati’s
argument concerning the scope of the
umbrella policy’s exclusion is not
frivolous or nondispositive, and from
Integrity’s failure to mention it we
infer that Integrity acquiesces, rightly
or wrongly (our analysis in the preceding
paragraph suggests wrongly), in
Cincinnati’s interpretation of the policy
as excluding even the "innocent"
defamations that we have listed, as in
West American Ins. Co. v. Vago, 553
N.E.2d 1181, 1185 (Ill. App. 1990), a
battery case. That acquiescence operates
as a waiver, and we conclude that
Cincinnati has no duty to defend
Integrity under the umbrella policy.
We close with a procedural matter. The
jurisdictional statements in the parties’
opening briefs were incorrect. The
appellant, Cincinnati, alleged that
Eastern was a "Pennsylvania corporation
that does business in the state of
Illinois" and Integrity "a Florida
corporation that does business in the
state of Illinois." There is no reference
to the principal place of business of
either defendant, even though for
purposes of the diversity jurisdiction of
the federal courts a corporation is a
citizen of the state of its principal
place of business as well as of the state
in which it is incorporated. 28 U.S.C.
sec. 1332(c)(1). Cincinnati’s counsel
seems to have been laboring under the
profound misconception that a defendant
must do business in the state in which
the case is brought in order to be within
the district court’s jurisdiction. The
appellees’ brief, either through sharing
this misconception or through sheer
carelessness, incorrectly states that the
appellant’s jurisdictional statement is
complete and correct; it is incomplete.
Both jurisdictional statements therefore

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violate the rules of this court. See 7th
Cir. R. 28(a)(1), (b).
We directed the parties to file
supplemental statements of jurisdiction.
They filed a joint statement that while
at last complete and correct, and showing
that the case is indeed within the
diversity jurisdiction, lamely states
that the reason for the erroneous
allegations of jurisdiction in the
original briefs was that the complaint
had alleged jurisdiction so. That is a
feeble excuse. Error does not excuse its
repetition. We have warned litigants
about the precise pattern observed here--
a patently erroneous jurisdictional
statement by the appellant, and a
patently erroneous statement by the
appellee that the appellant’s
jurisdictional statement is complete and
correct. Professional Service Network,
Inc. v. American Alliance Holding Co.,
238 F.3d 897, 902-03 (7th Cir. 2001). We
quote the rule to make clear that there
is no ambiguity that could excuse
counsel’s performance: "If any party is a
corporation, the statement [of
jurisdiction] shall identify both the
state of incorporation and the state in
which the corporation has its principal
place of business." 7th Cir. R. 28(a)(1).
The parties’ counsel, having been given
an opportunity to explain their violation
of the rule, are hereby reprimanded. The
district court’s judgment is affirmed
insofar as it rejects Cincinnati’s claim
that it has no duty to defend Eastern and
Integrity under the basic policy, but it
is reversed insofar as it rejects
Cincinnati’s claim to have no duty to
defend Integrity under the umbrella
policy, and the case is remanded for
entry of judgment in Cincinnati’s favor
on the second claim.

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