Scottsdale Insurance C O . v. SUBSCRIPTION PLUS , INC . and KARLEEN HILLERY

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-3484
S COTTSDALE I NSURANCE C O .,
Plaintiff-Appellant,
v.
S UBSCRIPTION P LUS , I NC . and K ARLEEN H ILLERY ,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 99-C-539-C—Barbara B. Crabb, Chief Judge.
____________
S UBMITTED J UNE 14, 2002—D ECIDED J ULY 15, 2002
____________
Before F LAUM , Chief Judge, and H ARLINGTON W OOD , J R .,
and P OSNER , Circuit Judges.
P OSNER , Circuit Judge. This appeal requires us to consider
the duty of a liability insurance company (Scottsdale) to de-
fend its insureds (Subscription Plus and Karleen Hillery)—
especially against bad claims. Subscription Plus, owned and
operated by Hillery, is in the business of processing maga-
zine subscriptions. It made a contract with Y.E.S.!, a sales
agency, whereby Y.E.S.! was to procure magazine subscrip-
tions for Subscription Plus. Salesmen employed by Y.E.S.!
travel around the country in vans, selling subscriptions.

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2 No. 01-3484
Joseph Wild, one of these salesmen, while traveling in a van
owned by Y.E.S.!’s owner and driven by another employee
of that company, was killed when the van crashed because
of the negligence of the driver, who was later convicted of
negligent homicide. Wild’s parents brought a diversity
personal injury suit in federal court against, among others,
Subscription Plus and Hillery, both insured under a CGL
(commercial general liability) policy issued by Scottsdale. In
Wild v. Subscription Plus, Inc., No. 01-3406, 2002 WL 1076748
(7th Cir. May 31, 2002), we affirmed the district court’s
dismissal of the Wilds’ claim against Subscription Plus;
because Y.E.S.! was an independent contractor, the negli-
gence of its employee (the driver of the van in which Wild
was killed) could not be imputed to Subscription Plus. The
Wilds’ claim against Hillery, Subscription Plus’s owner,
remains pending in the district court. But its fate is readily
predictable from the disposition of the claim against her
company, not to mention the principle of limited liability,
which generally insulates a corporate shareholder from
personal liability for torts committed by the corporation.
Before the district court handed down its decision in Wild,
Scottsdale had brought the present suit, also a diversity suit,
against its insureds, seeking a declaration that it had no
duty either to defend the suit by the Wilds or to indemnify
its insureds should they settle with the Wilds or suffer an
adverse judgment in the Wilds’ suit. Applying Oklahoma
law, which all agree governs the interpretation of the insur-
ance policy, the district judge, prior to deciding the merits
of the Wilds’ suit, ruled that Scottsdale had a duty to defend
the suit. Later, however, though again before disposing of
the tort suit, she ruled that the insurance company had no
duty to indemnify the two insureds, because the accident
was not covered by the policy after all. Scottsdale appeals
from the judgment that it had a duty to defend and from the
court’s correlative order, based on Oklahoma insurance law,

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No. 01-3484 3
that it reimburse the insureds for the expense of defending
against the tort suit.
At our request, the parties submitted supplemental briefs
addressing the bearing of our decision affirming the dis-
missal of the Wilds’ suit. The insurance company points out
that in a parallel suit brought by another victim of the van
accident but pending in a Wisconsin state court rather than
in a federal district court, the state judge has held that the
company has no duty to defend (his decision is on appeal to
the state’s intermediate appellate court); the company asks
us therefore to direct the district court to abstain in favor
of the state proceeding. The insureds counter that findings
made by the district court in the Wild litigation and upheld
by this court—namely that Y.E.S.! was an independent
contractor, that the driver of the van was its employee, and
that Y.E.S.!’s owner was the van’s owner—demonstrate that
the insurance company’s grounds for refusing to defend the
Wilds’ suit against the insureds had no merit. For example,
Scottsdale relies on an exclusion in the CGL policy for
bodily injury “arising out of the ownership, maintenance,
use or entrustment to others of any . . . ‘auto’ [defined else-
where in the policy as ‘a land motor vehicle’] . . . owned or
operated by or rented or loaned to any insured.” Because
the van was not owned or operated by, or rented or loaned
to, either of the insureds, nor used by it (as it would have
been had the van’s driver been an employee of Subscription
Plus), the exclusion is inapplicable. Scottsdale points out
that its insureds could have but did not elect “business
auto” insurance as part of the CGL policy, but that is just the
mirror image of the exclusion.
Scottsdale further argues, however, that under conven-
tional principles of tort law (presumably those of Wisconsin,
which as we assumed in Wild v. Subscription Plus, Inc.,
supra, at *5-6, surely would govern the tort issues in the

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4 No. 01-3484
Wild litigation), the van driver’s negligence, being criminal,
was a “supervening cause” (more informatively, superseding
cause, see, e.g., Henry v. Merck & Co., 877 F.2d 1489, 1495
n. 10 (10th Cir. 1989)) of Wild’s death. Stewart v. Wulf,
271 N.W.2d 79, 85-86 (Wis. 1978); Jutzi-Johnson v. United
States, 263 F.3d 753, 756 (7th Cir. 2001). In that event the
insureds, even if they had been the driver’s employers,
would not be liable. The relevance of this argument is
obscure, to say the least. It amounts to arguing that the
Wilds’ case against the insureds was weak; but so what? The
duty to defend is not just a duty to defend against good
claims. That would merge the duty to defend with the duty
to indemnify, since the latter arises only when the claim
against the insured has enough merit to produce a judgment
for the claimant, or a settlement.
We shall return to this point, but first we note that the
premise of Scottsdale’s argument—that the van driver’s
criminal negligence was a superseding cause that got the
insureds off the liability hook—is unsound. As made clear
by decisions in cases similar to this one, see Powell v.
Drumheller, 653 A.2d 619, 624 (Pa. 1995), and Pavlides v. Niles
Gun Show, Inc., 637 N.E.2d 404, 410 (Ohio App. 1994),
criminal acts are not superseding causes per se. It is true
that acts that are either criminal or intentionally tortious
(these are overlapping categories) are more likely to be
adjudged superseding causes than merely negligent acts.
See Tobias v. County of Racine, 507 N.W.2d 340, 342-43
(Wis. App. 1993); Henry v. Merck & Co., supra, 877 F.2d at
1495; Gaines-Tabb v. ICI Explosives, USA, Inc., 160 F.3d 613,
620 (10th Cir. 1998). But the distinction between the two
classes of act collapses in a case such as this, where negli-
gent conduct is made criminal because of its consequences.
“Take two cases. In one a reckless driver narrowly misses
hitting a child; in the other, a no more reckless driver hits a
child. As far as mental state is concerned, both are equally

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No. 01-3484 5
blameworthy; but the second driver will be punished much
more heavily. The reason is that the community attaches
moral significance to consequences as well as to states of
mind.” Milner v. Apfel, 148 F.3d 812, 815 (7th Cir. 1998)
(citations omitted). Similarly, two acts may be negligent to
the same degree, but if one causes harm and the other does
not, the former may result in a criminal prosecution and the
latter merely in the issuance of a traffic ticket.
The driver of the Y.E.S.! van was prosecuted because of
the lethal consequences of his negligence (six others besides
Wild were killed, and several more were injured); but it was
still negligence; there was no other culpable cause. “Ani-
mating the doctrine [of superseding cause] is the idea that
it is unreasonable to make a person liable for such improba-
ble consequences of negligent activity as could hardly figure
in his deciding how careful he should be.” Beul v. ASSE Int’l,
Inc., 233 F.3d 441, 447 (7th Cir. 2000). There is nothing im-
probable about negligence.
But there is a deeper problem with applying the doctrine
of superseding causes to this case: there was no other cause
to “supersede” the van driver’s negligence, no other candi-
date, in other words, for a culpable cause. In a loose sense
of “cause,” it is true, one not freighted with overtones of
culpability or any other conception of legal or moral re-
sponsibility, Wild’s death had many causes—his presence
in the van, for example, or for that matter his birth. But such
“causes” are irrelevant to liability. A superseding cause
is something culpable that intervenes between the defen-
dant’s negligence and the plaintiff’s injury, some action of
a third party that makes the plaintiff’s injury an unfore-
seeable consequence of the defendant’s negligence. “Once
the defendant’s negligence is established, because injury of
some kind was to be anticipated, intervening causes which
could not reasonably be foreseen, and which are no normal

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6 No. 01-3484
part of the risk created, may bring about results of an
entirely different kind.” W. Page Keeton et al., Prosser and
Keeton on the Law of Torts § 44, pp. 311-12 (5th ed. 1984). The
van driver’s criminal negligence was not an intervening
cause of Wild’s death. (What could it have intervened be-
tween?) There was no intervening cause. With the present
case compare Leposki v. Railway Express Agency, Inc., 297
F.2d 849, 849-51 (3d Cir. 1962), where the defendant’s
truck leaked gasoline and the plaintiff was injured when
a kid dropped a lighted match into the pool of gasoline
that formed from the leak. The dropping of the lighted
match intervened between the defendant’s negligence in
spilling the gasoline and the plaintiff’s injury. See also Giebel
v. Richards, 591 N.W.2d 901, 904 (Wis. App. 1999).
The basis of Subscription Plus’s liability for the driver’s
tort, had he been an employee of Subscription Plus, would
have been the doctrine of respondeat superior; and pro-
vided the driver was acting within the scope of employment
when the accident occurred, his state of mind would have
made no difference, since the doctrine is applicable to in-
tentional and reckless as well as merely negligent tort-
feasing. Horn v. Duke Homes, 755 F.2d 599, 605 (7th Cir.
1985). The proviso is critical. The employee’s state of mind
will often be relevant to deciding whether he was acting
within the scope of his employment or had embarked on
a frolic of his own; whether, for example, if he was a bill
collector, he had struck the debtor in an effort to collect the
debt owed his employer or had struck him out of personal
malice. In ambiguous circumstances, “the tortfeasing em-
ployee must think (however misguidedly) that he is doing
the employer’s business in committing the wrong” for the
employer to be liable. Hunter v. Allis-Chalmers Corp., 797
F.2d 1417, 1421-22 (7th Cir. 1986); see also Olson v. Connerly,
457 N.W.2d 479, 483 (Wis. 1990) (“an employee may be

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No. 01-3484 7
found to have acted within the scope of his or her employ-
ment as long as the employee was at least partially actu-
ated by a purpose to serve the employer”); Stephenson v.
Universal Metrics, Inc., 633 N.W.2d 707, 712 (Wis. App.
2001); Rice v. Nova Biomedical Corp., 38 F.3d 909, 913 (7th Cir.
1994); Fitzgerald v. Mountain States Tel. & Tel. Co., 68 F.3d
1257, 1262-63 (10th Cir. 1995); Wood v. United States, 995 F.2d
1122, 1129 (1st Cir. 1993) (en banc). But once that intention
is established, the fact that the tort was intentional, or that
the employee knew there was a high risk of injury and so
was reckless and not merely negligent in failing to take
steps to avoid it, falls out of the picture.
The present case is in illuminating contrast to our decision
in Jutzi-Johnson, cited earlier, where the defendant jail of-
ficials were accused of negligence in failing to prevent the
suicide of an inmate and the argument was that the suicide
was a superseding cause (we held it wasn’t). When, as in
this case, the defendant’s liability is based on the doctrine of
respondeat superior, the action of the defendant’s employee
is what creates liability, not what cuts it off. See L.L.N. v.
Clauder, 563 N.W.2d 434, 445 n. 21 (Wis. 1997); State ex rel.
Oklahoma Bar Ass’n v. Taylor, 4 P.3d 1242, 1251 n. 31 (Okla.
2000); Nelson v. Pollay, 916 P.2d 1369, 1374 n. 23 (Okla. 1996).
Speaking of frolics, we have been on one of our own, since
even if the criminal act of the van’s driver had been a super-
seding cause and as a result the insureds could not possibly
have lost the Wilds’ suit against them, the insurance com-
pany would not have been excused from its duty to defend
the insureds in that litigation. When a liability insurance
policy imposes a duty to defend (not all such policies do—
the insured may prefer to pick up the tab for his defense
rather than pay a higher premium for the policy), the “in-
surer must defend even if the allegations are groundless,
false or fraudulent.” Hartford Accident & Indemnity Co. v. Gulf

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8 No. 01-3484
Ins. Co., 776 F.2d 1380, 1382 (7th Cir. 1985); see also First
Bank of Turley v. Fidelity & Deposit Ins. Co., 928 P.2d 298, 303
n. 10 (Okla. 1996); Ruder & Finn Inc. v. Seaboard Surety Co.,
422 N.E.2d 518, 521 (N.Y. 1981). Insurance policies used to
say just that. The current trend is toward the language
found in the policy in this case, language that promises a
defense “against any suit.” But the effect is the same. Peter
J. Kalis, Thomas M. Reiter & James R. Segerdahl, Policy-
holder’s Guide to the Law of Insurance Coverage § 4.02, p. 4-5
(1997). (If anything, the new language is broader.) Any other
rule would have the paradoxical effect that the less meritori-
ous the suit, the less protection a liability insurance policy
would give the defendant. If the suit against the insured
were meritorious, the insurance company would pick up the
tab for defending, but if the suit had no merit the expense of
defending it would be borne by the insured. That would
make no sense. The insured who has bought a liability
policy that entitles him to defense as well as indemnification
wants to be defended against claims of liability regardless
of their merit. He doesn’t want to be stuck with the lawyer’s
bill just because he wins and therefore doesn’t need to look
to the insurer for indemnification. If he wanted that he
would just buy indemnification, and not defense. The para-
dox is particularly acute here because the Wilds would
probably have had a good case against Subscription Plus if
the van’s driver had been an employee of Subscription Plus,
yet if he had been, and this was clear from the outset,
Scottsdale would have had no duty to defend, by virtue of
the policy’s automobile exclusion.
The insurance company’s other arguments for why it had
no duty to defend are no stronger. We are given only
momentary pause by the district judge’s ruling that the
company had no duty to indemnify the insureds, that is,
that there was no insurance coverage under the policy for
the accident after all. The duty of an insurance company to

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No. 01-3484 9
defend and its duty to indemnify the insured are not wholly
congruent even when the duties are stated in the same
terms. The obvious difference, the one that we’ve just been
dwelling on, is that there is a duty to defend when, because
the claim against the insured is groundless, the duty to
indemnify is not triggered. But there is more. As we ex-
plained in Lockwood International, B.V. v. Volm Bag Co., 273
F.3d 741, 746 (7th Cir. 2001), “the insured needs a defense
before he knows whether the claim that has been made
against him is covered by the policy, assuming there is
doubt on the question. If the duty to defend were no
broader than the duty to indemnify, there would be the
paradox that an insured exonerated after trial would have
no claim against the insurance company for his defense
costs, since the company would have no duty to indemnify
him for a loss resulting from a judgment or settlement in the
suit against the insured.” See also First Bank of Turley v.
Fidelity & Deposit Ins. Co., supra, 928 P.2d at 303-04 and
nn. 14, 16. That is the paradox to which Scottsdale, unmind-
ful of Lockwood, appeals in this case.
Still, if a court rejects the duty to indemnify for reasons
equally applicable to the duty to defend, as the district
judge, whose ruling on indemnity surprisingly makes no
reference to her earlier ruling on the duty to defend, appears
to have done, that rejection bears upon the other duty. The
district judge thought it clear that the policy did not cover
the accident, both because of the automobile exclusion and
because the driver’s criminal negligence was a superseding
cause. We have made clear why we think the judge was
wrong on both points—which means that Scottsdale had a
(potential) duty to indemnify as well as a duty to defend.
But as the insureds, doubtless because they have not and
probably never will have to pay a cent to the Wilds, are not
appealing from the ruling that there was no duty to indem-
nify, the point is moot.

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10 No. 01-3484
But what, finally, of the pendency in the Wisconsin
appellate court of the state trial judge’s diametrically op-
posed ruling on Scottsdale’s duty to defend? (His grounds,
both advanced by Scottsdale in this appeal and rejected by
us earlier in this opinion, were that the accident fell within
the policy’s automobile exclusion and that the van driver’s
criminal negligence was a superseding cause of the acci-
dent.) It is for just such conflicts that the doctrines of res
judicata and collateral estoppel are designed. The Wisconsin
courts will have to decide, on the basis of Wisconsin law,
whether the ruling of the district judge here affirmed that
Scottsdale had a duty to defend, and therefore (see First
Bank of Turley v. Fidelity & Deposit Ins. Co., supra, 928 P.2d at
305 and n. 26) owes the insureds the cost of the defense that
it should have borne, is entitled to preclusive effect in the
Wisconsin litigation. This is not a situation in which a party
is subjected to two inconsistent orders and cannot obey
both; Scottsdale could be made to pay the expenses of the
insureds in the federal court case but not in the state court
case.
A FFIRMED .
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-97-C-006—7-15-02

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