Meridian Security Insurance C O . v. David L. Sadowski

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-2855
M ERIDIAN S ECURITY I NSURANCE C O .,
Plaintiff-Appellant,
v.
D AVID L. S ADOWSKI , et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 05 C 517—James B. Zagel, Judge.
____________
A RGUED F EBRUARY 9, 2006—D ECIDED M ARCH 22, 2006
____________
Before B AUER , E ASTERBROOK , and W OOD , Circuit Judges.
E ASTERBROOK , Circuit Judge. Meridian Security Insur-
ance filed this action under the diversity jurisdiction. 28
U.S.C. §1332(a)(1). It asked the district court to issue a
declaratory judgment that it need not defend or indemnify
its insured, The Rose Depot of Arlington Heights, against a
claim pending in state court. Kamal Haddad, who filed that
suit on behalf of a class, sought damages on account of
unsolicited advertising faxes that The Rose Depot had sent
to prospective customers.
The Telephone Consumer Protection Act prohibits most
unsolicited commercial solicitations by facsimile and
permits the court to award $500 per fax, a sum that may be

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2 No. 05-2855
trebled if “the defendant willfully or knowingly violated this
subsection or the regulations prescribed under this subsec-
tion”. 47 U.S.C. §227(b)(3). Haddad proposed to represent a
class of “more than 50” recipients of fax ads, and Meridian
calculated the stakes of its federal suit by multiplying
$1,500 (the maximum award per fax) by 51 (the minimum
size of the class), which yields $76,500, or $1,500 more than
the minimum required for federal jurisdiction. See Brill v.
Countrywide Home Loans, Inc., 427 F.3d 446 (7th Cir.
2005), which holds that $1,500 multiplied by the number of
class members is the amount “in controversy” under the
Telephone Consumer Protection Act. The expense of
providing a legal defense against Haddad’s suit also counts
for purposes of §1332, but Meridian did not try to estimate
this, thinking that the indemnity alone suffices.
Without holding a hearing under Fed. R. Civ. P. 12(b)(1),
the district court dismissed the complaint for want of
jurisdiction. The district court started with the norm that
a dispute about an insurer’s duty to indemnify generally
is not ripe for decision until the insured has been called
on to pay—for until then the precise ground of liability, and
thus the relation of the insured’s liability to the policy’s
coverage and exclusions, is uncertain. See, e.g., Lear Corp.
v. Johnson Electric Holdings Ltd., 353 F.3d 580 (7th Cir.
2003); Nationwide Insurance Co. v. Zavalis, 52 F.3d 689,
693 (7th Cir. 1995); Travelers Insurance Cos. v. Penda
Corp., 974 F.2d 823, 833 (7th Cir. 1992). Then, relying
exclusively on other decisions issued by judges in the
Northern District of Illinois, the court held that the stakes
of any portion of a dispute not ripe for federal adjudication
never count toward the amount in controversy under §1332.
Because Meridian has not alleged that attorneys’ fees
alone will exceed $75,000, the court dismissed the suit
outright. This put Meridian in an awkward position, for
Illinois (where Haddad’s suit was pending) requires an
insurer to defend its client on demand, no matter how clear

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No. 05-2855 3
the policy may be that there is no such duty, unless it
prosecutes an action for a declaratory judgment that
the claim is outside the policy’s coverage. See State Farm
Fire & Casualty Co. v. Martin, 186 Ill. 2d 367, 371, 710
N.E.2d 1228, 1230-31 (1999). We have held that suits
materially identical to Haddad’s do not require either
defense or indemnity under policies materially identical
to Meridian’s. See American States Insurance Co. v. Capital
Associates of Jackson County, Inc., 392 F.3d 939 (7th Cir.
2004) (Illinois law). Yet the district court’s decision left
Meridian without a pending declaratory-judgment action or
any apparent way to secure a federal adjudication, and thus
with a state-law duty to defend The Rose Depot notwith-
standing the policy’s limitations. (Illinois might have
allowed Meridian to pursue a declaratory-judgment action
in its own courts, despite the passage of time in which none
was on file, but as an out-of-state corporation with deep
pockets, Meridian was unenthusiastic about that option.)
While Meridian’s appeal was pending, Haddad and The
Rose Depot settled for $7,500; attorneys’ fees for the defense
came to about $14,000. So Meridian’s total obligation if the
policy covers Haddad’s claims turns out to be about $21,500.
But these developments do not affect jurisdiction, which
depends on the amount that was in controversy when the
federal suit began. See St. Paul Mercury Indemnity Co. v.
Red Cab Co., 303 U.S. 283, 293 (1938). Post-filing events
may mean that Meridian cannot recover costs (and must
pay defendants’ costs) even if it prevails, see 28 U.S.C.
§1332(b), but do not terminate jurisdiction that was proper
at the outset. Thus we must decide whether the controversy
exceeded $75,000 before the underlying dispute was
resolved.
The district court supposed that ripeness always is a
jurisdictional doctrine. Yet “ripeness is peculiarly a question
of timing” rather than a limit on subject-matter jurisdiction.

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4 No. 05-2855
Regional Rail Reorganization Act Cases, 419 U.S. 102, 140
(1974). See also, e.g., Buckley v. Valeo, 424 U.S. 1, 113-18
(1976). Although a plaintiff’s asserted injury may depend on
so many future events that a judicial opinion would be
advice about remote contingencies—and this aspect of
ripeness is part of the case-or-controversy requirement, see
Reno v. Catholic Social Services, Inc., 509 U.S. 43, 57 n.18
(1992); Socialist Labor Party v. Gilligan, 405 U.S. 583
(1972)—these parties’ disagreement about potential indem-
nity is part of a larger controversy that is neither conjec-
tural nor speculative. Meridian’s potential obligation to
indemnify The Rose Depot was in controversy from the
moment this suit began and could have been resolved while
the state suit was ongoing. Because the duty to defend
extends to many suits in which there will be no duty to
indemnify—for defense depends on what the plaintiff
alleges, while indemnity is limited to what the plaintiff
proves, see Lockwood International, B.V. v. Volm Bag Corp.,
273 F.3d 741, 745-47 (7th Cir. 2001)—a declaratory judg-
ment that the insurer need not defend means that it need
not indemnify either, whether or not the plaintiff makes
good on his contentions. Had the district court concluded, as
Meridian maintained, that the insurance does not cover
Haddad’s allegations, it would have prevailed on defense
and indemnity at a stroke. No more is needed to show that
the value of indemnity was “in controversy” on the date this
federal case began.
Many decisions in this and other circuits count the
potential outlay for indemnity toward the amount in
controversy, whether or not adjudication about indemnity
should be deferred until the state case is over. See, e.g.,
Grinnell Mutual Reinsurance Co. v. Shierk, 121 F.3d
1114 (7th Cir. 1997); Motorists Mutual Insurance Co. v.
Simpson, 404 F.2d 511, 515 (7th Cir. 1968); Maryland
Casualty Corp. v. United Corp., 111 F.2d 443, 447 (1st
Cir. 1940); U.S. Fidelity & Guaranty Co. v. Pierson, 97 F.2d

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No. 05-2855 5
560, 562 (8th Cir. 1938); Hartford Insurance Group v. Lou-
Con, Inc., 293 F.3d 908, 911-12 (5th Cir. 2002); Farmers
Insurance Co. v. McClain, 603 F.2d 821, 823 (10th Cir.
1979). The contrary argument has been made often enough
that both of the principal treatises on federal practice cover
the topic, and both conclude that the potential indemnity
obligation counts toward the jurisdictional minimum. 12
Moore’s Federal Practice-Civil §57.22[8][b] (2005 rev.);
Charles Alan Wright, Arthur R. Miller & Edward H.
Cooper, 14B Federal Practice & Procedure §3710 at 262-70
(3d ed. 1998). Wright, Miller, and Cooper add that the
argument for the exclusion of the potential indemnity
“never has been accepted by the federal courts.” Id. at 268.
This passage needs amendment, now that several judges in
the Northern District of Illinois have swallowed the bait,
but it could be revised in light of today’s decision to say that
the position “never has been accepted by any federal court
of appeals.”
Appellees offer additional arguments in defense of their
judgment, as they are entitled to do. One is that, because
none of the class members would be entitled to recover more
than $1,500, the rule against aggregating multiple litigants’
claims to reach the jurisdictional floor, see Snyder v. Harris,
394 U.S. 332 (1969), prevents a federal court from exercis-
ing jurisdiction. Yet Meridian has not aggregated multiple
parties’ claims. From its perspective there is only one
claim—by its insured, for the sum of defense and indemnity
costs. Hunt v. Washington State Apple Advertising Commis-
sion, 432 U.S. 333, 347-48 (1977), holds that the anti-
aggregation rule does not apply to a federal declaratory-
judgment action between a single plaintiff and a single
defendant, just because the unitary controversy between
these parties reflects the sum of many smaller controver-
sies. No more need be said on this subject.
Appellees’ other contention—which echoes some language
in the district court’s opinion—is that Meridian did not

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6 No. 05-2855
† Although this opinion does not overrule any decision, the extent
to which “reasonable probability that jurisdiction exists” has
(continued...)
“prove” a “reasonable probability that jurisdiction exists.”
The requirement of “proof” comes from McNutt v. General
Motors Acceptance Corp., 298 U.S. 178, 189 (1936) (if
plaintiff’s “allegations of jurisdictional facts are challenged
by his adversary in any appropriate manner, he must
support them by competent proof.”). The “reasonable
probability” language comes from Shaw v. Dow Brands,
Inc., 994 F.2d 364, 366 (7th Cir. 1993), and has been
repeated in six other decisions of this circuit plus more than
80 decisions of district judges within our jurisdiction—and,
as far as we can ascertain, by no judge outside this circuit.
See Middle Tennessee News Co. v. Charnel of Cincinnati,
Inc., 250 F.3d 1077, 1081 (7th Cir. 2001); Target Market
Publishing, Inc. v. Advo, Inc., 136 F.3d 1139, 1142 (7th Cir.
1998); Anthony v. Security Pacific Financial Services, Inc.,
75 F.3d 311, 315 (7th Cir. 1996); Rexford Rand Corp. v.
Ancel, 58 F.3d 1215, 1218 (7th Cir. 1995); NLFC, Inc. v.
Devcom Mid-America, Inc., 45 F.3d 231, 237 (7th Cir. 1995);
Gould v. Artisoft, Inc., 1 F.3d 544, 547 (7th Cir. 1993).
Judges of the seven district courts within this circuit now
regularly dismiss suits under the diversity jurisdiction with
the observation that the plaintiff has not “proved” that
there is a “reasonable probability” that the judgment will
exceed the threshold.
Shaw’s mention of “reasonable probability that juris-
diction exists” thus has been taken to mean that uncer-
tainty about the stakes must be resolved against the
proponent of jurisdiction. That’s not what Shaw set out
to establish. In retrospect it is clear that the turn of
phrase was infelicitous. We now retract that language;
it has no role to play in determining the amount in con-
troversy. †

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No. 05-2855 7
(...continued)
become a catchphrase has led us to circulate this opinion before
release to all active judges under Circuit Rule 40(e). No judge
favored a hearing en banc.
McNutt holds that the proponent of federal jurisdic-
tion has the burden of proof (which is to say, bears the
risk of non-persuasion). General Motors Acceptance Corpo-
ration had asked a federal court to enjoin state officials
from enforcing a law that regulated the purchase and sale
of retail installment contracts. Although GMAC asserted
that the amount in controversy requirement (then $3,000)
was satisfied, it did not try to explain how. It alleged only
that it bought and sold millions of dollars of financing paper
annually. The Court held this insufficient, as the contro-
versy concerned the effect of the state statute and not
GMAC’s gross receipts. Because GMAC was unwilling even
to allege the difference between the value of its business
free from the state’s requirement and its value if the law
were enforced, the Court held that jurisdiction had not been
established. Near the close of this opinion the Justices
remarked that jurisdictional facts, if contested, must be
supported by “competent proof.” That statement rested on
the Court’s understanding of §5 of the Act of March 3, 1875,
18 Stat. 472, which has been superseded by the Federal
Rules of Civil Procedure. But the Civil Rules, which took
effect a little more than two years after McNutt, do not alter
the requirement that a party that chooses federal court
set out the basis of federal jurisdiction and prove any
contested factual allegation. See Fed. R. Civ. P. 8(a)(1),
12(b)(1); Lujan v. Defenders of Wildlife, 504 U.S. 555, 561-
62 (1992).
What the proponent of jurisdiction must “prove” is
contested factual assertions—for example, where each party
resides plus any plans for change of residence, in order to
establish domicile, or what state issued a corporation’s

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8 No. 05-2855
charter. Jurisdiction itself is a legal conclusion, a conse-
quence of facts rather than a provable “fact.” The Court
made that clear two years after McNutt, holding in St. Paul
Mercury that “the sum claimed by [the proponent of federal
jurisdiction] controls if the claim is apparently made in good
faith. It must appear to a legal certainty that the claim is
really for less than the jurisdictional amount to justify
dismissal.” 303 U.S. at 288-89 (footnotes omitted). Although
the proponent of jurisdiction may be called on to prove facts
that determine the amount in controversy—such as the
economic effect that compliance with the law would have
had on GMAC—once these facts have been established the
proponent’s estimate of the claim’s value must be accepted
unless there is “legal certainty” that the controversy’s value
is below the threshold. See Rising-Moore v. Red Roof Inns,
Inc., 435 F.3d 813 (7th Cir. 2006); Pratt Central
Park Limited Partnership v. Dames & Moore, Inc., 60 F.3d
350 (7th Cir. 1995); The Barbers, Hairstyling for Men &
Women, Inc. v. Bishop, 132 F.3d 1203 (7th Cir. 1997).
As we remarked in Rising-Moore, this standard usually
operates in a transparent and simple way when the case
begins in federal court and the complaint asserts an amount
in controversy, as Meridian did here. Defendants might
have called on Meridian to prove that it actually had issued
an insurance policy to The Rose Depot, that Haddad really
sought to represent more than 50 other recipients of junk
faxes, and that The Rose Depot had notified Meridian of the
claim and tendered its defense. Those are facts, though
none of the allegations about them has been contested.
Whether damages will exceed $75,000 is not a fact but a
prediction, and with respect to that subject the court must
decide whether “to a legal certainty . . . the claim is really
for less than the jurisdictional amount”. For the reasons
given above (and in Brill), a court cannot say that; Haddad’s
suit exposed Meridian to the expense of mounting a legal
defense plus the risk of $76,500 or more in indemnity.

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No. 05-2855 9
Shaw, where the “reasonable probability” language
originated, dealt with one of those situations in which it can
be tough to apply the St. Paul Mercury standard. Shaw
began his suit in state rather than federal court. Illinois,
where Shaw filed suit, limits what a complaint can say
about remedies to matters that determine the appropriate
court. A plaintiff may state, for example, that he wants
more than $15,000 (which allocates the suit to the circuit
court), less than $15,000 (which puts it in a specialized
court with expedited procedures), or less than $5,000 (which
diverts it to a small-claims tribunal). Other states, of which
Indiana is an example (discussed in Rising-Moore), forbid
all mention of how much money the plaintiff hopes to
recover. These rules get rid of headline-grabbing but
unrealistic demands. Unfortunately, they also complicate
the question whether a suit may be removed, for if the
plaintiff does not say what he wants, how can the St. Paul
Mercury standard be applied? That’s the question with
which this court wrestled in Shaw.
What we held there, and have reiterated in decisions such
as Rising-Moore and Brill, is that the removing defendant,
as proponent of federal jurisdiction, must establish what
the plaintiff stands to recover. We have suggested several
ways in which this may be done—by contentions, interroga-
tories or admissions in state court; by calculation from the
complaint’s allegations (as in Brill); by reference to the
plaintiff’s informal estimates or settlement demands (as in
Rising-Moore); or by introducing evidence, in the form of
affidavits from the defendant’s employees or experts, about
how much it would cost to satisfy the plaintiff’s demands
(see Rubel v. Pfizer Inc., 361 F.3d 1016 (7th Cir. 2004)). The
list is not exclusive; any given proponent of federal jurisdic-
tion may find a better way to establish what the controversy
between the parties amounts to, and this demonstration
may be made from either side’s viewpoint (what a judgment
would be worth to the plaintiff, or what compliance with an

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10 No. 05-2855
injunction would cost the defendant). See In re Brand Name
Prescription Drugs Antitrust Litigation, 123 F.3d 599, 610
(7th Cir. 1997). Once the estimate has been made—and
contested factual allegations that support the estimate have
been established in a hearing under Rule 12(b)(1) by
admissible evidence (that’s what “competent” proof
means)—then the St. Paul Mercury standard comes to the
fore, and the case stays in federal court unless it is legally
certain that the controversy is worth less than the jurisdic-
tional minimum.
In passing, Shaw remarked that the “competent
proof” required when factual allegations must be estab-
lished means “proof to a reasonable probability that juris-
diction exists.” The context for this phrase is: “the burden
rests on the defendant in a removal action to prove that the
amount in controversy is sufficient. Wilson v. Republic Iron
& Steel Co., 257 U.S. 92, 97 (1921). Defendants seeking
removal may meet that burden by a preponderance of the
evidence, McNutt v. General Motors Acceptance Corp., 298
U.S. 178, 189 (1936), which we take to mean proof to a
reasonable probability that jurisdiction exists.” 994 F.2d at
366. The phrase was coined as another way to put the
established point that facts have been established only
when supported by a preponderance of the evidence.
Footnote 2, dropped immediately after the word “exists”,
states the norm of St. Paul Mercury and explains that
“reasonable probability” is a lower hurdle than many
district courts had employed. But every attempt to restate
an old norm (“preponderance of the evidence”) in new words
(“reasonable probability”) carries the risk that new lan-
guage will be understood as a new rule. That’s what has
happened. The phrase has acquired a life of its own.
Many decisions by district courts in this circuit—of which
the decision under review is one example, and Wilson v.
McRae’s, Inc., No. 05 C 2125 (N.D. Ill. Aug. 29, 2005), is
another—employ the phrase not as a variant on the prepon-

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No. 05-2855 11
derance standard (which is how Shaw used it) but as a
replacement for the standard of St. Paul Mercury. Instead
of asking whether contested factual allegations have been
established by a preponderance of the admissible evidence,
some district judges have asked whether these facts
demonstrate a “reasonable probability” that the judgment
will exceed $75,000. Excessive attention to the phrase
“reasonable probability that jurisdiction exists” may lead a
judge to neglect St. Paul Mercury (as in the decision under
review) or get its point backward (the opinion in Wilson,
after quoting the “reasonable probability” language, stated
that jurisdiction is proper only if “ ‘to a legal certainty’ the
court is convinced that [that the plaintiff] is entitled to over
$75,000 in damages” (slip op. 6-7)).
Language that came into being as a restatement of
“more likely than not” (the usual preponderance stan-
dard) for matters of fact has been misapplied to the infer-
ences drawn from facts. And it has been used to displace the
Supreme Court’s rule for handling uncertainty about what
will happen at trial (jurisdiction exists unless it is legally
impossible for the recovery to exceed the minimum) with a
much different standard (jurisdiction does not exist unless
there is a “reasonable probability” that the recovery will
exceed the minimum). All legal phrases have some potential
for misuse, which must be tolerated when there is no good
alternative. But there are very good alternatives to “reason-
able probability”—the preponderance standard (for factual
disputes) and the holding of St. Paul Mercury (for predic-
tions about the value of the judgment). The new phrase
causes problems without offsetting benefits. “Reasonable
probability that jurisdiction exists”, a phrase with no
provenance and no following outside this circuit, is banished
from our lexicon.
To recap: a proponent of federal jurisdiction must, if
material factual allegations are contested, prove those
jurisdictional facts by a preponderance of the evidence.

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12 No. 05-2855
Once the facts have been established, uncertainty about
whether the plaintiff can prove its substantive claim, and
whether damages (if the plaintiff prevails on the merits)
will exceed the threshold, does not justify dismissal. See,
e.g., Johnson v. Wattenbarger, 361 F.3d 991 (7th Cir. 2004).
(Rising-Moore and Brill are other recent instantiations of
this principle.) Only if it is “legally certain” that the
recovery (from plaintiff’s perspective) or cost of complying
with the judgment (from defendant’s) will be less than the
jurisdictional floor may the case be dismissed. None of
Meridian’s jurisdictional allegations was contested, so the
standard of proof is irrelevant. And, when Meridian filed
this suit, a court could not be sure that the plaintiffs in
state court were bound to recover less than $75,000 from
The Rose Depot. So this case is properly in federal court
under the diversity jurisdiction.
The judgment of the district court is vacated, and the case
is remanded with instructions to resolve the dispute on the
merits.

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No. 05-2855 13
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—3-22-06

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