Farmers Automobile Insurance Association v. S T . Paul Mercury Insurance Company

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-2810
F ARMERS A UTOMOBILE I NSURANCE A SSOCIATION ,
Plaintiff/Counterdefendant-Appellant,
v.
S T . P AUL M ERCURY I NSURANCE C OMPANY ,
Defendant/Counterplaintiff-Appellee.
____________
Appeal from the United States District Court
for the Central District of Illinois.
No. 05-1331—Michael M. Mihm, Judge.
____________
A RGUED J ANUARY 16, 2007—D ECIDED A PRIL 10, 2007
____________
Before E ASTERBROOK , Chief Judge, and P OSNER and E VANS ,
Circuit Judges.
P OSNER , Circuit Judge. The Farmers insurance company
bought what is called “Employment Practices Liability”
coverage from St. Paul insurance company. The cover-
age is for “Employment Wrongful Acts,” broadly defined
to include any error, misstatement, neglect, breach of duty,
etc., in connection with an alleged wrongful dismissal,
sexual harassment, retaliation, or other unlawful treat-
ment of an employee. See generally Krueger Int’l, Inc. v.

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2 No. 06-2810
Royal Indemnity Co., No. 06-2611 (7th Cir. Apr. 9, 2007).
Coverage was triggered, Farmers alleges in this diversity
suit against St. Paul, when a class action was filed in an
Illinois state court against Farmers on behalf of its claims
adjusters, seeking overtime pay pursuant to the Illinois
Minimum Wage Law, 820 ILCS 105/4a(1), the state’s
counterpart to the Fair Labor Standards Act, 29 U.S.C.
§§ 201-219 (2000 & Supp. 2006). (The suit is pending.) St.
Paul refused coverage, pointing to an exclusion in the
insurance policy for
any actual or alleged violation of the Fair Labor Stan-
dards Act (except the Equal Pay Act), the National
Labor Relations Act, the Worker Adjustment and
Retraining Notification Act, the Consolidated Omnibus
Reconciliation Act of 1983, the Occupational Safety and
Health Act, any workers’ compensation, unemploy-
ment insurance, social security, or disability benefits
law, other similar provisions of any federal state or local
statutory or common law or any rules or regulations
promulgated under any of the foregoing.
(Emphasis added.) The Fair Labor Standards Act is of
course the federal minimum wage and overtime pay
law, and so the question is whether Illinois’s statutory
overtime pay provision is “similar.” The district judge
answered yes and granted summary judgment for St. Paul.
Farmers has appealed. The question of similarity is one of
contract interpretation to be answered, the parties agree,
under Illinois law.
It is curious to see an insurance company, in the role of
insured, asking a court to make law adverse to insurance
companies. But Farmers’ status as an insurer relates to
only one of its arguments, which is that it is entitled to
invoke the rule of contra proferentum. That rule requires that

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No. 06-2810 3
contracts (especially insurance contracts), if ambiguous, be
construed against the drafter—and hence, in a suit over an
insurance policy, against the insurer. E.g., Gillen v. State
Farm Mutual Automobile Ins. Co., 830 N.E.2d 575, 581-84 (Ill.
2005); Bucci v. Essex Ins. Co., 393 F.3d 285, 290 (1st Cir.
2005); Eagle Leasing Corp. v. Hartford Fire Ins. Co., 540 F.2d
1257, 1260-62 (5th Cir. 1976); Lytle v. Freedom Int’l Carrier,
S.A., 519 F.2d 129, 135 (6th Cir. 1975). Partly because
insurance contracts tend to be products of negotiation
among insurance companies, Outboard Marine Corp. v.
Liberty Mutual Ins. Co., 607 N.E.2d 1204, 1218-19 (Ill. 1992);
see also Eljer Mfg. Inc. v. Liberty Mutual Ins. Co., 972 F.2d
805, 810 (7th Cir. 1992) (Illinois law); Morton Int’l, Inc. v.
General Accident Ins. Co, 629 A.2d 831, 849-50 (N.J. 1993),
and partly because the companies, being averse to uncer-
tainty (they are insurance companies, after all), are reluc-
tant to alter policy language once its meaning has been
settled by judicial decision, Continental Casualty Co. v.
Pittsburgh Corning Corp., 917 F.2d 297, 299 (7th Cir. 1990);
Michael B. Rappaport, “The Ambiguity Rule and Insurance
Law: Why Insurance Contracts Should Not Be Construed
Against the Drafter,” 30 Ga. L. Rev. 171, 211 (1995), the
language of insurance policies is often imprecise (like other
products of multiparty compromise) and esoteric, and
courts are reluctant to require the hapless insured to
unravel its mysteries.
The argument for contra proferentum is pretty feeble
when the policyholder is a sophisticated commercial
enterprise rather than an individual consumer, see, e.g.,
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, 1260-61 (5th Cir. 1976); see generally Bean-
stalk Group, Inc. v. AM General Corp., 283 F.3d 856, 858-59

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4 No. 06-2810
(7th Cir. 2002)—especially when it is another insurance
company. Employers Reinsurance Corp. v. Mid-Continent
Casualty Co., 358 F.3d 757, 767 (10th Cir. 2004); United States
Fire Ins. Co. v. General Reinsurance Corp., 949 F.2d 569, 573-
74 (2d Cir. 1991). Nevertheless, some states don’t limit
contra proferentum to policies sold to commercially unso-
phisticated individuals. Illinois is one of them, reasoning
that “any insured, whether large and sophisticated or
not, must enter into a contract with the insurer which is
written according to the insurer’s pleasure by the insurer.
Generally, since little or no negotiation occurs in this
process, the insurer has total control of the terms and the
drafting of the contract.” Outboard Marine Corp. v. Liberty
Mutual Ins. Co., supra, 607 N.E.2d at 1219; see also Minne-
sota School Boards Ass’n Ins. Trust v. Employers Ins., 331 F.3d
579, 581-82 (8th Cir. 2003) (Minnesota law); Empire Fire &
Marine Ins. Co. v. Liberty Mutual Ins. Co., 699 A.2d 482, 494
(Md. App. 1997). “[T]otal control” is an exaggeration;
the insured cannot be forced to accept the contract drafted
by the insurance company. But no matter; we must bow
to the rule adopted by the Supreme Court of Illinois to
guide the interpretation of contracts governed, as this one
is, by Illinois law. The rule presumably is limited by its
logic, and hence to cases in which there is no negotiation
over the terms of the insurance contract. See Benjamin
Moore & Co. v. Aetna Casualty & Surety Co., 843 A.2d 1094,
1103-04 (N.J. 2004); AIU Ins. Co. v. Superior Court, 799 P.2d
1253, 1264-66 (Cal. 1990). But so far as appears there
was none here.
This is not to buy Farmers’ contention that the word
“similar” is so hopelessly vague that it cannot be given any
effect in an insurance-policy exclusion. The contention is
astonishing because of its implications for Farmers’ use of

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No. 06-2810 5
the word in exclusions in its own policies, see, e.g., Schomas
v. Farmers Automobile Ins. Ass’n, 302 N.E.2d 196, 198 (Ill.
App. 1973), and in any event unsound because of its
neglect of context. Standing alone, the word “similar”
partakes of the vagueness of other verbal signifiers of
matters of degree, such as “substantial,” “significant,” and
“probable.” But context can give it a precise meaning, as
this case illustrates.
The Fair Labor Standards Act requires employers
engaged in interstate commerce to pay their hourly-wage
employees time and a half for any time they work in excess
of 40 hours a week. The Illinois Minimum Wage Law
imposes the identical requirement except that it is not
limited to employers who operate in interstate commerce,
though it is of course limited to Illinois workers. The
difference in scope, being unrelated to the purpose of
the exclusion from coverage of violations of laws similar
to the FLSA, doesn’t bear on the question of similarity. The
purpose of the exclusion is equally applicable to both
statutes. It is to avoid “moral hazard,” which, in its most
extreme form, is the temptation of an insured to precipitate
the event insured against if the insurance goes beyond
merely replacing a loss. “It’s why an insurer will not insure
your house against fire for more than it’s worth,” Moran
Foods, Inc. v. Mid-Atlantic Market Development Co., 476
F.3d 436, 439 (7th Cir. 2007); see also Federal Ins. Co. v.
Hartford Steam Boiler Inspection & Ins. Co., 415 F.3d 487, 499
(6th Cir. 2005), and why liability-insurance policies are
presumed not to insure against breaches of contract.
Krueger Int’l, Inc. v. Royal Indemnity Co., supra. Insurance
against a violation of an overtime law, whether federal or
state, would enable the employer to refuse to pay overtime
and then invoke coverage so that the cost of the overtime

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6 No. 06-2810
would come to rest on to the insurance company. The
employer would have violated the overtime law with
impunity, unjustly enriching itself by the difference
between the overtime wage for the hours in question and
the straight wage. No insurance company would know-
ingly write a policy that would enable the insured
to trigger coverage any time it wanted a windfall.
Farmers cites us to Illinois cases which say that words
left undefined in an insurance policy should be interpreted
with reference to the average person’s understanding.
Gillen v. State Farm Mutual Auto Ins. Co., supra, 830 N.E.2d
at 582-84; Outboard Marine Corp. v. Liberty Mutual Ins. Co.,
supra, 607 N.E.2d at 1215-16. But that is a blind guide in the
present case because the average person has no under-
standing of the exclusion of claims based on the Fair Labor
Standards Act and similar statutes. The language is not
addressed to the average person, but to employers, and
they know what the Fair Labor Standards Act is, know
there are state counterparts, and could not think they’d
bought insurance that would enable them to disregard the
state overtime provisions. The interpretation of a docu-
ment is relative to the understanding of the intended
readership, Morgan Stanley Group Inc. v. New England Ins.
Co., 225 F.3d 270, 275-76 (2d Cir. 2000); see also Southwest-
ern Bell Telephone Co. v. Public Utility Commission, 208 F.3d
475, 486 (5th Cir. 2000), not to the average Joe. It is no more
relevant that he would not understand the exclusion of
claims based on the Fair Labor Standards Act and similar
statutes than that someone ignorant of the English lan-
guage wouldn’t understand it either.
Farmers argues alternatively that the “similar” clause
must be struck from the policy because it makes the policy
illusory. Given the word’s vagueness, there is a reading of

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No. 06-2810 7
“similar” that would have that effect. The Fair Labor
Standards Act, the National Labor Relations Act, and the
other statutes mentioned by name in the exclusion are
all about the rights of employees, and so there is a sense
in which laws that forbid wrongful dismissal, discrim-
ination, retaliation, and other “employment wrongful acts”
are similar because those laws also confer rights on em-
ployees. But an interpretation of “similar” that nullified
the policy would be as silly as an interpretation that
nullified the “similar” exclusion. Any exclusion narrows
coverage; that is its purpose. To narrow coverage is not to
make coverage illusory. St. Paul does not argue that
“similar” should be understood so broadly as to have
that effect. Nor must it be so understood in order that
the judgment in St. Paul’s favor be
A FFIRMED .
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—4-10-07

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