Cincinnati Insurance Company v. Estate of Toni Chee

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 15-3243
C INCINNATI I NSURANCE C OMPANY ,
Plaintiff-Appellant,
v.
ESTATE OF TONI C HEE, et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court
for the Central District of Illinois.
No. 12-3236 — Richard Mills, Judge.
____________________
A RGUED A PRIL 13, 2016 — DECIDED J UNE 13, 2016
____________________
Before EASTERBROOK, M ANION , and R OVNER , Circuit Judg-
es.
EASTERBROOK, Circuit Judge. Sam Chee was driving and
his wife Toni Chee was a passenger in August 2010 when
their car slammed into a tree. Toni was seriously injured and
taken to a hospital, where she died within a week. Her estate
has filed two suits in courts of Illinois: one against Sam ac-
cusing him of negligent driving, and the other against the

-- 1 of 8 --

2 No. 15-3243
hospital and the attending physicians, accusing them of
malpractice. The defendants in the second suit filed third-
party actions against Sam, seeking contribution or other rec-
ompense from him should they be held liable to the estate.
State Farm Mutual Automobile Insurance Company is de-
fending Sam’s interests in both suits. Its policy promises in-
demnity of $250,000 per person (and $500,000 total) for auto
accidents. State Farm has offered to pay the policy limits, but
its offer has not been accepted because of a dispute about the
terms of the release it wants the estate to sign.
The Chees have an excess policy (with a limit of $5 mil-
lion) issued by Cincinnati Insurance Company, which has
denied Sam’s request for defense and indemnity. It filed this
suit under the diversity jurisdiction seeking a declaratory
judgment that its policy does not apply, and it appeals from
the district court’s adverse decision. 2015 U.S. Dist. LEXIS
110002 (C.D. Ill. Aug. 20, 2015).
Cincinnati relies on three parts of its policy, the first of
which requires notice. It provides: “You and any other in-
volved insured must see to it that we are notified as soon as
practicable of an occurrence which may result in a claim or
suit.” (We have removed from this and other language the
quotation marks that clutter the original and impede com-
prehension. Defining terms helps make policies clear; punc-
tuation to mark defined terms over and over just makes a
mess.) The accident occurred in August 2010, but Sam did
not notify Cincinnati until 26 months later—though Toni’s
estate alerted Cincinnati (via a broker) 16 months after the
accident. Sixteen months is not remotely as soon as practica-
ble after Toni’s death.

-- 2 of 8 --

No. 15-3243 3
But the notice requirement is a sub-paragraph in a longer
provision that specifies the consequence of noncompliance
with a list of duties. The opening paragraph provides: “In
case of an occurrence, claim or suit you and any other in-
volved insured will perform the following duties. We have
no duty to provide coverage under this policy if your or any
other insured’s failure to comply with the following duties is
prejudicial to us.” The obligation to provide notice “as soon
as practicable” follows and is subject to the prejudice re-
quirement. Cincinnati asserts that the delay in receiving no-
tice could have been prejudicial (evidence might have been
lost) but does not identify any concrete prejudice. So the pol-
icy tells us that the delay does not affect its duties.
Cincinnati’s second argument starts from the fact that it
issued an excess policy and that State Farm is still defending
Sam Chee. Cincinnati maintains that it is entitled to sit on
the sidelines until State Farm writes a check. This is not re-
motely what the policy says, however. It requires the Chees
to maintain other coverage of at least $250,000 per person
and $500,000 per occurrence. It is undisputed that the Chees
did this, though Cincinnati’s policy also allowed them to
choose self-insurance for the initial layer: “Underlying in-
surance means the policies of insurance listed in Schedule A
… and the insurance available to the insured under all other
insurance policies applicable to the occurrence. Underlying
Insurance also includes any type of self-insurance or alterna-
tive method by which the insured arranges for funding of
legal liabilities which would also be insured under this poli-
cy.” Thus Cincinnati is not liable for the first $250,000 per
person (or $500,000 in aggregate) of loss. But the policy does
not excuse Cincinnati from supplying a defense or from pay-
ing any liability exceeding that amount.

-- 3 of 8 --

4 No. 15-3243
Quite the contrary. The defense clause of Cincinnati’s pol-
icy provides:
We will have the right and duty to defend the insured against
any suit seeking damages because of bodily injury, personal inju-
ry or property damage to which this insurance applies. We will
have no duty to defend the insured against any suit seeking
damages for bodily injury, personal injury or property damage
to which this insurance does not apply. We may, at our discre-
tion, investigate any occurrence and settle any claim or suit that
may result when:
a. The applicable limit of the underlying insurance and any
other insurance have been exhausted by payment of claims;
or
b. Damages are sought for bodily injury, property damage or
personal injury to which no underlying insurance or other
insurance applies.
This is straightforward. If the policy applies to the claim,
Cincinnati must defend. Once the applicable limit of under-
lying insurance has been paid out (by the Chees or the pri-
mary insurer), Cincinnati obtains the right to settle the claim
or suit. But neither the duty to defend nor the duty to in-
demnify depends on disbursal of the applicable limit. And
for good reason. If another insurer’s payment were essential
to Cincinnati’s duties, then the bankruptcy—or just the un-
reasonable conduct—of the primary insurer would leave the
insured bereft of coverage. Who would buy such a policy?
No matter; Cincinnati did not write such a policy.
This leaves Cincinnati’s argument that its policy does not
apply at all because both Sam and Toni are insureds. An ex-
clusion says that “[t]his insurance does not apply” to any
“[b]odily injury or personal injury to any insured.” Toni
Chee was an insured, and the parties agree that her estate

-- 4 of 8 --

No. 15-3243 5
also is an insured. But the exclusion has an exception
“[w]hen a third party acquires a right of contribution against
you or any relative.” This exception is required by 215 ILCS
5/143.01(a). Toni’s estate has sued a hospital and some physi-
cians, who are seeking contribution from Sam. This led the
district court to conclude that the exception overrides the ex-
clusion and leaves the policy fully applicable.
Let us take this in stages. Suppose there were only one
suit in state court: Estate of Toni Chee v. Sam Chee. Then the
exclusion would apply, because both litigants are insureds
under Cincinnati’s policy. Exclusions such as this reflect a
widely held belief that intra-family suits are designed not to
settle accounts among family members but to extract money
from third parties—that, but for insurance, there would be
no litigation at all. To avoid being seen as a honeypot to be
drained by cooperation between family members (or be-
tween one family member and an estate that will principally
benefit other family members, perhaps even Sam himself),
an insurer puts these familial claims outside the policy. That
reduces moral hazard: the tendency of insurance to alter the
behavior of the insured persons in a way that materially in-
creases the insurer’s expected payout.
The estate’s second suit, against the hospital and physi-
cians, changes matters. It is the sort of litigation that would
occur even if the Chees were uninsured. Providing coverage
therefore does not pose a problem of moral hazard that the
insurer needs to guard against. Indeed, an insurer would
want to encourage suits against third parties, because recov-
ery may reduce the insurer’s maximum exposure. But a suit
against a third party poses a risk that the third party will try
to recover from the insured person—hence the exception,

-- 5 of 8 --

6 No. 15-3243
which says that Cincinnati does provide coverage when a
third party has a right of contribution against an insured or
an insured’s relative. This means that in the second state-
court suit, Estate of Toni Chee v. Medical Providers, Cincin-
nati must provide a defense, and if the medical providers
win a judgment against Sam Chee then Cincinnati may have
to indemnify him for that award. The money will go to the
third parties, not to Sam, and the prospect therefore does not
create moral hazard.
The district court held that, because the medical defend-
ants in Suit #2 want contribution from Sam, Cincinnati must
provide a defense and indemnity in Suit #1 as well. That’s
not what the exception says, however. It requires Cincinnati
to defend and indemnify the third-party claim, not the intra-
family or intra-insured claim. Otherwise all the exclusion
would accomplish would be to induce the insured to file a
frivolous third-party claim, which predictably would lead
the third party to try to deflect liability back on the insured.
If that process overcame the exclusion of coverage for suits
among insureds, it might as well be omitted from the policy.
Moral hazard would burgeon, implying higher prices for
coverage, if insurers were willing to provide any coverage—
moral hazard can cause markets for insurance to collapse.
Illinois law supplies the rule of decision in this diversity
litigation. If Illinois had announced that 215 ILCS 5/143.01(a)
and language such as that in Cincinnati’s policy require in-
surers to defend and indemnify all suits whenever any one
of them entails a request for contribution, then our task
would be to apply that understanding until Illinois changed
the statute and insurers revised their policies. But Sam’s brief
does not identify any decision of an Illinois court reading

-- 6 of 8 --

No. 15-3243 7
language like that in Cincinnati’s policy as overcoming an
intra-insured-suit exclusion for all purposes once any third
party requests contribution. We could not find a pertinent
decision from any state’s judiciary, so we are on our own. We
think that the exception is best read as limited to third-party
demands for contribution and does not affect claims by one
insured against another.
The district court observed that the two suits have been
consolidated and thought that this means they should be
treated as one suit. Cincinnati replies that they have been
consolidated for discovery and other pretrial proceedings,
not for decision on the merits. We think that the nature of the
consolidation does not matter. If as we have concluded the
contribution exception for third-party claims applies only to
claims by the third parties, it doesn’t matter how many suits
are pending, or in how many courts. If the estate had named
Sam, the hospital, and the physicians in one suit, joining
them under the Illinois equivalent of Fed. R. Civ. P. 20(a)(2),
still the exception for contribution would apply only to the
medical defendants’ claims against Sam. As a practical mat-
ter joinder might require Cincinnati to defend the whole
suit, but it would not call for indemnity of a judgment that
the estate obtained directly against Sam.
What we have said so far shows that the duty of indem-
nity, if any, depends on what happens in the underlying liti-
gation. That makes it inappropriate to try to resolve that
matter in an anticipatory action seeking a declaratory judg-
ment, beyond stating the point that neither defense nor in-
demnity is appropriate in the estate’s suit against Sam. Try-
ing to pin down what duties of indemnity Cincinnati might
owe in the other suit under various possible outcomes

-- 7 of 8 --

8 No. 15-3243
would be premature. See Panfil v. Nautilus Insurance Co., 799
F.3d 716, 722 n.2 (7th Cir. 2015); Lear Corp. v. Johnson Electric
Holdings Ltd., 353 F.3d 580, 583–85 (7th Cir. 2003); Grinnell
Mutual Reinsurance Co. v. Reinke, 43 F.3d 1152 (7th Cir. 1995);
Travelers Insurance Cos. v. Penda Corp., 974 F.2d 823, 833–34
(7th Cir. 1992).
The judgment of the district court is affirmed to the ex-
tent that it requires Cincinnati to defend Sam’s interests in
the suit between the estate and the medical defendants. Oth-
erwise the judgment is reversed, and the case is remanded
for the entry of a declaratory judgment consistent with this
opinion.

-- 8 of 8 --