Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-14-01356/USCOURTS-ca7-14-01356-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

---

In the

United States Court of Appeals

For the Seventh Circuit ____________________

Nos. 14-1242, 14-1356, 14-1359

KMART CORPORATION,

Plaintiff-Appellant/Cross-Appellee,

v.

FOOTSTAR, INC.,

Defendant-Cross-Appellant,

and 

LIBERTY MUTUAL FIRE INSURANCE 

COMPANY,

Defendant-Appellee/Cross-Appellant.

___________________

Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 09-cv-3607 — Susan E. Cox, Magistrate Judge.

____________________

ARGUED SEPTEMBER 19, 2014 — DECIDED FEBRUARY 4, 2015

____________________

Before BAUER, ROVNER, and WILLIAMS, Circuit Judges.

Case: 14-1356 Document: 44 Filed: 02/04/2015 Pages: 20
2 Nos. 14-1242, 14-1356, 14-1359

WILLIAMS, Circuit Judge. Under an agreement between 

Footstar and Kmart, Footstar operated the footwear departments in various Kmart stores as though they were islands. 

Footstar employees could only work in those departments 

unless they had written permission from Kmart. On July 27, 

2005, a Footstar employee tried to help a customer get an infant carrier off a shelf outside the footwear department and 

the customer was injured. She sued, and Kmart eventually 

sought indemnification for the settlement and defense costs 

from Footstar and its insurer, Liberty Mutual. We affirm the 

magistrate judge’s finding that Footstar and Liberty Mutual 

both had a duty to defend beginning the day Kmart formally 

requested coverage since the injury was potentially coverable under the agreement and insurance policy. However, we 

reverse and hold neither Liberty Mutual nor Footstar had a 

duty to indemnify Kmart because the injury did not occur 

“pursuant to” or “under” the agreement between Kmart and 

Footstar. That agreement specifically precluded Footstar 

employees from working outside of the footwear department, where the injury occurred, and actions taken in contravention of the agreement were not “pursuant to” or “under” it. We also affirm the magistrate judge’s decisions that 

Liberty Mutual did not deny coverage in bad faith and that 

Kmart did not breach the relevant notice provisions such 

that Liberty Mutual and Footstar could withhold defense 

costs. We also find any argument about prejudgment interest has been waived. 

I. BACKGROUND

Footstar and Kmart entered into an agreement authorizing Footstar to operate the footwear department in hundreds 

of Kmart stores throughout the country. In essence, the 

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Nos. 14-1242, 14-1356, 14-1359 3

footwear department was a store within the larger Kmart 

store. As Section 3.3 of the Master Agreement between 

Kmart and Footstar noted, “[Footstar] shall have the right to 

sell only the Licensed Footwear specified in this Agreement

in the Footwear Departments, and shall sell or furnish no 

other merchandise or services in the Stores without the prior 

written permission of [Kmart].” 

Section 18.1 of the Master Agreement required Footstar 

to defend and indemnify Kmart under certain conditions:

[Footstar] shall reimburse, indemnify, defend 

and hold harmless [Kmart] ... from and against 

any and all damage ... arising out of [Footstar’s] performance or failure to perform under 

this Agreement .... 

That same section also required Footstar to obtain additional insurance coverage for Kmart: 

[Footstar] agrees to obtain and keep in force ... 

appropriate insurance for claims against 

[Kmart] and [Footstar] for personal injury ... 

arising out of or relating to the goods and services provided pursuant to this Agreement ...

Footstar fulfilled its obligation to obtain additional insurance by contracting with Liberty Mutual. Pursuant to that 

Policy, Liberty Mutual would defend and indemnify Footstar 

as well as Kmart, as an additional insured, under certain 

conditions. For Kmart, that coverage was dictated by Section 

II, which reads in relevant part: 

WHO IS AN INSURED is amended to include 

... [any entity] for whom you have agreed in 

writing to provide liability insurance. But: 

Case: 14-1356 Document: 44 Filed: 02/04/2015 Pages: 20
4 Nos. 14-1242, 14-1356, 14-1359

The insurance provided by this amendment: 

1. Applies only to “personal injury” or “property damage” arising out of (a) “your 

work” ... ; 

2. Applies only to coverage and limits of insurance required by the written agreement, 

but in no event exceeds either the scope of 

coverage or the limits of insurance provided by this policy; ....

On July 27, 2005, a customer named Judy Patrick walked 

into a Kmart store in Hollywood, Florida. According to her 

complaint, she asked for assistance from Alex Sehat, who 

turned out to be a Footstar employee, in getting a stroller 

down from a shelf. Sehat, along with a Kmart employee, 

reached up and attempted to bring the stroller down. As 

they were bringing it down, an infant carrier inside the 

stroller fell and struck Patrick in the face. The accident took 

place in the infant/stroller department, which is entirely outside of the Footstar department. 

Patrick sued Kmart on May 17, 2006, alleging negligence, 

with no mention of Footstar in her initial complaint. See Patrick v. Kmart Corp., No. 06-7117 (Fla. Cir. Ct.). But Patrick’s 

counsel discovered during the course of the litigation that 

Sehat was actually a Footstar employee and called Footstar 

in May 2007 to get Sehat’s employment records. Footstar 

contacted Liberty Mutual, as evidenced by an internal claim 

file created by a Liberty Mutual representative on June 6, 

2007, in which Liberty Mutual employees began entering 

notes. Though potentially privileged, the notes were apparently inadvertently turned over during discovery of the present dispute. Because we do not need to use the notes to deCase: 14-1356 Document: 44 Filed: 02/04/2015 Pages: 20
Nos. 14-1242, 14-1356, 14-1359 5

cide the case, we will not discuss the potentially privileged 

information. 

On January 24, 2008, Kmart defense counsel wrote to 

Footstar formally requesting defense and indemnification for 

the first time. Footstar forwarded the request to Liberty Mutual on January 30, and Patrick amended her complaint two 

days later to include Footstar as a defendant. Liberty Mutual 

wrote Kmart refusing to defend or indemnify, stating: “Footstar is not responsible for the referenced claim as it is not a

product liability incident.” Kmart settled with Patrick eight 

months later for $300,000 and $10,000 in Kmart gift cards. 

Kmart then filed a complaint in this action originally 

against Footstar only, but then added Liberty Mutual, alleging both owed Kmart a duty of defense and indemnification 

for the Patrick suit. The magistrate judge entered partial 

summary on Kmart’s breach of contract and declaratory 

judgment counts, finding both defendants owed a duty to 

defend, but only as of January 24, 2008, when Kmart first requested defense. The court found Liberty Mutual and Footstar also had a duty to indemnify but only for Footstar’s relative fault, which a jury apportioned at 15%. The court also 

found Liberty Mutual did not act in bad faith by denying 

coverage and Kmart did not breach the notice provisions of 

the Policy and Master Agreement. Kmart appealed naming 

only Liberty Mutual as an Appellee, while Liberty Mutual 

and Footstar cross-appealed.

II. ANALYSIS

The issues on appeal are whether: (1) Footstar and/or 

Liberty Mutual had a duty to indemnify Kmart; (2) Liberty 

Mutual and/or Footstar had a duty to defend Kmart and, if 

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6 Nos. 14-1242, 14-1356, 14-1359

so, when that duty began; (3) Liberty Mutual acted in bad 

faith by denying coverage; (4) Kmart breached the notice 

provisions of the Policy and Master Agreement; and (5) the 

court erred in denying Kmart’s motion for prejudgment interest. 

We review the magistrate judge’s grant of summary 

judgment de novo. Doe v. Archdiocese of Milwaukee, 772 F.3d 

437, 440 (7th Cir. 2014). Our review is under New Jersey law 

for the Policy and Illinois law for the Master Agreement 

since they both had forum selection clauses. We will give effect to the choice of law clauses so long as that law respects 

such clauses, which both parties argue (and we find) Illinois 

and New Jersey do. Jackson v. Payday Fin., LLC, 764 F.3d 765, 

774–75 (7th Cir. 2014). 

A. Liberty Mutual and Footstar Did Not Have a Duty to 

Indemnify

Liberty Mutual and Footstar appeal the magistrate 

judge’s determination that they had a duty to indemnify 

Kmart for the Patrick suit. The magistrate judge found Liberty Mutual and Footstar liable because it determined the injury arose from Footstar’s work. However, Liberty Mutual

/Footstar contend the court ignored the requirement that any 

injury had to arise “pursuant to” or “under” the Master 

Agreement to trigger indemnification, and the Master 

Agreement explicitly prohibited Sehat’s out-of-department 

action that resulted in the injury. We agree with Liberty Mutual and Footstar. 

Insurance contracts are interpreted under the same rules 

of construction that are generally applicable to other contracts. Norem v. Lincoln Benefit Life Co., 737 F.3d 1145, 1148–49 

Case: 14-1356 Document: 44 Filed: 02/04/2015 Pages: 20
Nos. 14-1242, 14-1356, 14-1359 7

(7th Cir. 2013) (Illinois law); Selective Ins. Co. of Am. v. Hudson 

E. Pain Mgmt., 46 A.3d 1272, 1276 (N.J. 2012) (New Jersey 

law). The duty to indemnify “only arises where the insured’s 

activity and the resulting damages actually fall within the 

coverage of the policy.” Rosalind Franklin Univ. of Med. & Sci.

v. Lexington Ins. Co., 8 N.E.3d 20, 39 (Ill. App. Ct. 2014) (Illinois law); Polarome Int’l., Inc. v. Greenwich Ins. Co., 961 A.2d 

29, 48 (N.J. Super. Ct. App. Div. 2008) (noting duty to indemnify exists under New Jersey law for those “occurrences for 

which the policy provides coverage”). In order to determine 

whether an activity actually falls within the coverage of the 

policy, we review the plain language of the policy. Kieffer v. 

Best Buy, 14 A.3d 737, 743 (N.J. 2011) (New Jersey law); 

Rosalind, 8 N.E.3d at 36 (Illinois law). “Words and phrases 

that are not defined in the policy are to be given their plain 

and ordinary meaning.” Norem, 737 F.3d at 1149 (Illinois 

law); Pizzullo v. N.J. Mfrs. Ins. Co., 952 A.2d 1077, 1088–89 

(N.J. 2008) (New Jersey law). “[I]ndemnity contracts are to 

be strictly construed, and any ambiguity in the agreement is 

to be construed most strongly against the indemnitee,” in 

this case, Kmart. Blackshare v. Banfield, 857 N.E.2d 743, 746 

(Ill. App. Ct. 2006) (Illinois law); Kieffer, 14 A.3d at 743 (New 

Jersey law). 

We begin with Liberty Mutual’s obligations in the Policy. 

Under subpart 1 of the additional insured clause, Liberty 

Mutual was liable to Kmart for injuries “arising out of” 

Footstar’s “work.” Under subpart 2, the Policy applies only 

to “coverage and limits of insurance required by” the Master 

Agreement, but coverage will “in no event exceed[] either 

the scope of coverage or the limits of insurance provided by 

this policy.” The parties dispute what acts give rise to insurance under the Policy. Kmart argues the only acts covered 

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are those that fall under subpart 1 and one need not even 

look at the Master Agreement. Kmart says under subpart 2, 

“scope of coverage” means the type of insurance (e.g., blanket, malpractice, personal injury) and “limits” means the 

payout (e.g., a $5 million policy) and therefore subpart 2 does 

not affect which acts give rise to coverage. Conversely, Liberty Mutual argues subpart 1 could set forth the acts that give 

rise to coverage, but so could subpart 2. It says the phrase 

“scope of coverage or limits of insurance” explains which 

underlying acts will be insured, and the Policy will cover the 

narrower of those acts between the Policy or the Master 

Agreement. In other words, Liberty Mutual/Footstar argue if 

subpart 2’s incorporation of the Master Agreement provides 

more narrow coverage, it controls and we need not look at 

subpart 1. 

We agree with other courts that have analyzed these exact subparts in Liberty Mutual’s Policy and found that subpart 2 incorporates the Master Agreement and requires us to 

look at the Master Agreement to determine what acts could 

give rise to coverage. See Liberty Mut. Ins. Co. v. Cont’l Res.

Inc., No. 10-35, 2011 U.S. Dist. LEXIS 80152, at *17–18, *24–26

(D. Mont. Apr. 25, 2011) (interpreting contract based on subpart 2); Jones v. Francis Drilling Fluids Ltd., 642 F. Supp. 2d 

643, 663–64 (S.D. Tex. 2009) (referring to master services 

agreement based on subpart 2); Nat’l Union Fire Ins. Co. v. 

Liberty Mut. Ins. Co., No. 03-80106, 2008 U.S. Dist. LEXIS 

14291, at *12–13 (S.D. Fla. Feb. 26, 2008) (noting subpart 2 

“specifically refers to and incorporates the lease agreement”). This reading reflects the parties’ intent that Footstar 

obtain a certain type of additional insurance for Kmart. The 

parties’ intent is clearly reflected in the Master Agreement 

that certain acts will be covered, and Liberty MutuCase: 14-1356 Document: 44 Filed: 02/04/2015 Pages: 20
Nos. 14-1242, 14-1356, 14-1359 9

al/Footstar’s reading of the Policy ensures those acts get covered since it specifically incorporates the Master Agreement. 

Kmart’s reading does not necessarily achieve the same result 

since it does not incorporate the Master Agreement. We are 

to interpret the Policy to ensure the “expectations of the parties will be fulfilled,” and Liberty Mutual/Footstar’s reading 

achieves that result. Flomerfelt v. Cardiello, 997 A.2d 991, 996 

(N.J. 2010). The best case scenario for Kmart is that subpart 2 

is ambiguous, in which case we would still adopt Liberty 

Mutual/Footstar’s reading because the clause should be interpreted against Kmart as the indemnitee. See Kieffer, 14 

A.3d at 743. 

The next step under the Policy’s terms is to determine 

which coverage is more narrow: (1) subpart 1, which limits 

coverage to injuries “arising out of [Foostar’s] work” where 

Footstar’s “work” is defined as “Work or operations performed by you or on your behalf,” or (2) the terms of the 

Master Agreement, which cover “personal injury ... arising 

out of or relating to the goods and services provided pursuant to this Agreement.” Both provide coverage for acts “arising out of” Footstar’s work, which is a phrase New Jersey 

and Illinois courts have broadly interpreted. See, e.g., Fed. 

Home Loan Mortg. Corp. v. Scottsdale Ins. Co., 316 F.3d 431, 444 

(3d Cir. 2003) (“New Jersey courts have given a broad and 

liberal interpretation to common insurance policy language 

pertaining to coverage for additional insured parties for injuries ‘arising out of’ work performed by the main policyholder.”); Am. Econ. Ins. Co. v. DePaul Univ., 890 N.E.2d 582, 

588 (Ill. App. Ct. 2008) (“‘[A]rising out of’ is ‘both broad and 

vague, and must be liberally construed in favor of the insured; accordingly, ‘but for’ causation, not necessarily proximate causation, satisfies this language.’ Further, ‘arising out 

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10 Nos. 14-1242, 14-1356, 14-1359

of’ has been held to mean originating from, having its origin 

in, growing out of and flowing from.” (alterations omitted) 

(citations omitted) (some internal quotation marks omitted)). 

However, “arising out of” does not exist in a vacuum in 

either subpart 1 or the Master Agreement. Both are modified, in subpart 1 by “[Footstar’s] work” and in the Master 

Agreement by “goods and services provided pursuant to 

this Agreement.” This is where the difference in coverage 

becomes apparent. The Policy covers any act that arises out 

of Footstar’s work or operations, whatever and wherever 

that may be. Conversely, the Master Agreement limits the 

coverage to only that work provided for in the Agreement, 

meaning only those acts performed in the footwear department. See Master Agreement, Section 3.3 (stating that Footstar “shall sell or furnish no other merchandise or services in the 

Stores without the prior written permission of [Kmart]” (emphasis added)). So, when Sehat helped Patrick with the carrier, it 

is possible her injury arose from his “work” since his work 

brought him to the store. But he was not working “pursuant 

to” the Master Agreement since he was acting outside the 

footwear department. In fact, he was explicitly violating the 

Master Agreement. That is why Kmart originally filed a 

breach of contract count against Footstar relating to Section 

3.3—Kmart knew that Sehat was acting beyond his contractual authority and violated Section 3.3. Since Sehat was acting in an extra-contractual manner and not “pursuant to this 

Agreement,” there is no indemnification requirement. 

Turning to Footstar, it had a duty to indemnify for those 

injuries “arising out of [Footstar’s] performance or failure to 

perform under this Agreement.” Again, any indemnification 

obligation only relates to those acts taken “under [the] 

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Nos. 14-1242, 14-1356, 14-1359 11

Agreement.” A breach of contract, however, was not a “performance” under the Master Agreement—it was an act taken 

in direct violation of the contract. For the same reasons as 

with Liberty Mutual, Footstar had no indemnification obligation for its performance. 

Kmart might have been able to argue that Footstar failed 

to perform under the Agreement by violating Section 3.3, but 

it chose to proceed under a different theory in front of the 

magistrate judge and therefore waived the argument on appeal. See Frey Corp. v. City of Peoria, 735 F.3d 505, 509 (7th Cir. 

2013) (“A party ‘waive[s] the ability to make a specific argument for the first time on appeal when the party fail[s] to 

present that specific argument to the district court, even 

though the issue may have been before the district court in 

more general terms.’”). In its motion for summary judgment 

in front of the magistrate judge, Kmart implicitly argued 

there was no breach of Section 3.3 because it contends Footstar agreed that its employees could assist Kmart customers 

in all areas of the store. In support, Kmart argues that there 

was an oral modification to Section 3.3 in the1990s allowing 

Footstar employees to act outside the footwear department 

without written permission. Not only is the evidence of any 

modification weak, but the Master Agreement was amended 

and restated in 2005, after this alleged revision, without any 

change to Section 3.3. So, the fully integrated Master Agreement shows no evidence that Footstar employees could act 

beyond providing Footstar services without written permission and we agree with the magistrate judge that Kmart has 

not demonstrated a change to Section 3.3. Kmart also argues 

that Footstar’s interrogatory admissions that a Footstar employee was “permitted” to assist a customer who is “palpably in need of assistance ... particularly in the event of a poCase: 14-1356 Document: 44 Filed: 02/04/2015 Pages: 20
12 Nos. 14-1242, 14-1356, 14-1359

tential threat to the customer’s safety” and could help a customer “if necessary” without breaching the agreement is an 

acknowledgment that Footstar employees could go beyond 

the footwear department without permission. We reject that 

argument and instead read it is as admission that Footstar 

employees had an obligation to act humanely towards a customer threatened by danger. That is not the same thing as 

admitting that Section 3.3’s writing requirement no longer 

existed. Since Section 3.3 remained in effect and Kmart did 

not pursue a theory of breach of that section in front of the 

magistrate judge (we can only speculate that it did not do so 

because admitting a breach would have likely relieved Liberty Mutual from any indemnity obligation since Liberty Mutual did not have the “failure to perform” language in its 

portion of the Master Agreement), Kmart has waived the argument here.

Kmart’s final argument for indemnity is that the injury 

arose from Footstar’s obligation to “control” the premises, as 

it claims is required under Section 12.1 of the Master Agreement. Kmart points to language in the Patrick complaint that 

Footstar “negligently and carelessly ... control[led]” the 

premises by “failing to properly remove unsecured overhead merchandise ... thereby creating an unsafe, dangerous, 

and hazardous condition ... and it further represented to its 

patrons that its premises was safe and suitable when, in fact, 

it was not because of the hazardous condition.” Kmart also 

points to the allegations in the complaint that Footstar negligently “fail[ed] to provide adequate warnings” regarding 

unsafe conditions. All of this, Kmart alleges, shows that the 

accident arose from Footstar’s duty to “control.” Section 12.1 

states that Footstar: 

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Nos. 14-1242, 14-1356, 14-1359 13

shall exercise control over such employees, including hiring, firing, promoting, determining 

wages and work procedures and the like 

(“Employee Action”), which control shall be at 

Footstar’s direction subject to [union contracts,

rules and regulations, and laws]. Footstar shall 

be responsible for all Employer Actions and 

shall reimburse, indemnify, defend and hold 

[Kmart] harmless from and against any and all 

loss, damage, cost, expense or penalty, or any 

claim or action therefor, arising out of any such 

Employer Action. 

This section represents Footstar’s obligation to control its 

employees through various acts (e.g., hiring and firing, determining policies). There is nothing in this section that requires Footstar to control any premises, let alone the premises outside of the footwear department. In fact, as discussed, 

Footstar was explicitly supposed to stay out of other parts of 

the store. See Master Agreement, Section 3.3. So, the accident 

did not arise from Footstar’s performance or failure to perform under Section 12.1. 

We finally reject Kmart’s argument that Liberty Mutual 

was estopped from denying coverage. An insurer under 

New Jersey law is only estopped after timely notice and a 

direct request for coverage. Griggs v. Bertram, 443 A.2d 163,

168 (N.J. 1982) (noting estoppel applies “[u]pon the receipt 

from its insured of a claim or notification of an incident that 

may give rise to a claim”). Kmart did not make a direct request from Liberty Mutual, instead sending word through 

Footstar, and did not give notice until one-and-a-half years 

after receiving the complaint, which can hardly be timely. 

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14 Nos. 14-1242, 14-1356, 14-1359

Our holding means we do not need to determine whether 

the court properly handled the issue of Footstar or Liberty 

Mutual’s relative fault since there is no indemnification requirement and relative fault is not a factor.

B. Liberty Mutual and Footstar Had a Duty to Defend 

and Are Liable for Defense Costs from When They 

Received Notice 

Kmart argues that even if Liberty Mutual and Footstar 

did not have a duty to indemnify, they still had a duty to defend. The duty to defend is broader than the duty to indemnify. Chandler v. Doherty, 702 N.E.2d 634, 637 (Ill. App. Ct. 

1998) (“In Illinois, an insurer may be required to defend its 

insured even when there will ultimately be no obligation to 

indemnify.”); Jolley v. Marquess, 923 A.2d 264, 274 (N.J. Super. 

Ct. App. Div. 2007) (“The duty to defend is broader than the 

duty to indemnify” under New Jersey law). An insurer has a 

duty to defend unless “the allegations set forth in the complaint fail to state facts that bring the case within, or potentially within, the coverage of the policy.” Health Care Indus. 

Liab. Ins. Program. v. Momence Meadows Nursing Ctr., Inc., 566 

F.3d 689, 694 (7th Cir. 2009) (quoting Valley Forge Ins. Co. v. 

Swiderski Elecs., Inc., 860 N.E.2d 307, 315 (Ill. 2006)); Abouzaid 

v. Mansgard Gardens Assoc., LLC, 23 A.3d 338, 346 (N.J. 2011) 

(“‘Potentially coverable’ claims require a defense.”). If there 

are competing reasonable interpretations of the policy, “the 

court must construe the policy in favor of the insured.” Employers Ins. Of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 

1122, 1130 (Ill. 1999) (Illinois law); Voorhees v. Preferred Mut. 

Ins. Co., 607 A.2d 1255, 1261 (N.J. 1992) (New Jersey law). 

The complaint alleged that Footstar caused Patrick’s injuries by “negligently and carelessly ... failing to properly reCase: 14-1356 Document: 44 Filed: 02/04/2015 Pages: 20
Nos. 14-1242, 14-1356, 14-1359 15

move” the infant stroller from the shelf. Based on these allegations and the expansive way “arising out of” has been interpreted by Illinois and New Jersey courts, the claim could 

have been “potentially coverable” under subpart 1. See 

Abouzaid, 23 A.3d at 346. There is certainly an argument that 

Patrick’s injury arose from Sehat’s “work or operation[]”, especially if the injury does not have to be “pursuant to” the 

Master Agreement, as required by subpart 2. See Cnty. of 

Hudson v. Selective Ins. Co., 752 A.2d 849, 853 (N.J. Super. Ct. 

App. Div. 2000) (holding that the fact that employee’s job required him to be at a location where he was injured meant 

the injury arose from his work). As to Footstar, it was possible that Sehat’s actions were “potentially covered,” Momence, 

566 F.3d at 694, and arose out of his performance under the 

Master Agreement since, but for the Master Agreement, he 

would not have been working in the store. See Am. Econ., 890 

N.E.2d at 588 (defining “arising out of” as including “but 

for” causation). Though we have rejected these readings for 

indemnity purposes, two triers of fact found that the injury 

arose from Footstar’s work, including the jury and the magistrate judge, showing the injury was potentially coverable 

under the terms of the Master Agreement and Policy. 

We also affirm the magistrate judge’s finding that Liberty 

Mutual and Footstar do not have to pay defense costs before 

January 24, 2008 when Kmart provided an official request 

for coverage. New Jersey law requires notice be given to the 

insurer to trigger the duty to defend. “[T]he insured being 

sued is responsible for promptly conveying to its insurance 

company the information that it believes will trigger coverage .... [I]f the insured does not properly forward the information to the insurance company, the insured cannot demand reimbursement from the insurer for defense costs the 

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16 Nos. 14-1242, 14-1356, 14-1359

insurer had no opportunity to control.” SL Indus., Inc. v. Am. 

Motorists Ins. Co., 607 A.2d 1266, 1272 (N.J. 1992). It is true 

that Liberty Mutual knew about the suit before January 24, 

2008. At the same time, Kmart sat on its knowledge of the 

suit for one-and-a-half years before providing actual notice. 

Neither party has clean hands when it comes to this argument, but Kmart’s failure to provide actual notice is dispositive. Id.; see also Chem. Leaman Tank Lines, Inc. v. Aetna Caus. & 

Sur. Co., 817 F. Supp. 1136, 1158, 1161 (D.N.J. 1993) (finding 

insured cannot recover defense costs predating notice to insurer). Since actual notice was not given until late January 

2008, Liberty Mutual did not have a duty to defend until that 

point. Kmart does not make any argument that Footstar was 

liable for costs before that date, and so any argument as to 

Footstar is waived. Hernandez v. Cook Cnty. Sheriff's Office, 

634 F.3d 906, 913–14 (7th Cir. 2011) (arguments not made in 

opening briefs are waived). 

C. Liberty Mutual Did Not Act in Bad Faith 

While Liberty Mutual had a duty to defend, the flip side 

is that Liberty Mutual had a defensible position and therefore did not act in bad faith in denying coverage. “[I]n order 

to prove a claim of bad faith under New Jersey law, a plaintiff must prove that: ‘(1) the insurer lacked a ‘fairly debatable’ reason for its failure to pay a claim, and (2) that the insurer knew or recklessly disregarded the lack of a reasonable 

basis for denying the claim.’” Certain Underwriters at Lloyd’s 

of London v. Alesi, 843 F. Supp. 2d 517, 531 (D.N.J. 2011) (citation omitted). “What is dispositive is whether, based on the 

facts existing at the time of the denial, a reasonable insurer 

would have denied the claim, so that even if the insurer 

gives an erroneous reason for denying coverage, if there is a 

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Nos. 14-1242, 14-1356, 14-1359 17

valid basis for denying coverage, the insurer is not liable for 

bad faith.” On Air Entm’t Corp. v. Nat’l Indemn. Co., 210 F.3d 

146, 153 n.11 (3d Cir. 2000). Though Liberty Mutual’s denial 

letter erroneously refused coverage based on the nature of 

the complaint—there was an indemnification requirement 

for personal injury and not just products liability—our discussion makes clear that Liberty Mutual’s position was, at 

the very least, “fairly debatable” at the time Liberty Mutual 

denied coverage. 

D. Footstar and Liberty Mutual Cannot Deny Defense 

Costs Based on Kmart’s Breach of the Notice Provisions

Kmart did not alert Liberty Mutual or Footstar to the suit 

until thirty months after it first learned about the claim and

one-and-a-half years after the suit was filed. This was in contravention of the notice provisions in both the Master 

Agreement (requiring Kmart to “timely advise [Footstar] of 

any lawsuit, claim or proceeding”) and the Policy (requiring 

Kmart to notify Liberty Mutual “as soon as practicable of an 

‘occurrence’ or an offense which may result in a claim”). 

However, that does not mean that Kmart’s actions precluded 

it from recovering defense costs. Under New Jersey law, “an 

insurer must show that it was appreciably prejudiced by its 

insured’s failure to cooperate in order to disclaim coverage 

based on that failure.” Hager v. Gonsalves, 942 A.2d 160, 163

(N.J. Super. Ct. App. Div. 2008). In order to show prejudice 

resulting from a late notice, the insured has to show “a ‘likelihood of success’ in defending liability or damages if those 

opportunities had been available.” Trs. of Univ. of Pa. v. Lexington Ins. Co., 815 F.2d 890, 898 (3d Cir. 1987). Liberty Mutual has not presented any evidence that the case would have 

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18 Nos. 14-1242, 14-1356, 14-1359

turned out differently had it been involved earlier. It rests its 

argument on the fact that it might have convinced Kmart to 

settle for less earlier—there were settlement discussions that 

Kmart turned down prior to actually settling. However, Liberty Mutual has denied coverage and responsibility from the 

get-go. Not only is there no evidence that Liberty Mutual

would have handled the case differently had it had notice, 

but its practice calls into question whether it would have 

even joined in the settlement discussions. Absent any evidence that the case would have come out differently had the 

insurer been involved earlier, we find no bad faith on Liberty 

Mutual’s part. 

Under Illinois law, prejudice is a factor, but not a dispositive one like in New Jersey. Country Mut. Ins. Co. v. Livorsi 

Marine, Inc., 856 N.E.2d 338, 346 (Ill. 2006). With that said, 

the Illinois Supreme Court has highlighted that an important 

factor is whether the insuring party (Footstar) had actual notice of the lawsuit, meaning “sufficient information to locate 

and defend the suit.” W. Am. Ins. Co. v. Yorkville Nat. Bank, 

939 N.E.2d 288, 296 (Ill. 2010). In that case, the Illinois Supreme Court upheld the trial court’s finding that the notice 

provision had not been breached despite twenty-seven 

months passing between when the lawsuit was filed and 

when the insured sent official notice. Id. at 294. The trial 

court found that the insurer had actual knowledge “within a 

few months of the lawsuit” being filed, and that weighed in 

favor of finding no breach of notice. Id. at 296. Here, Footstar 

was aware of the suit and had sufficient information to locate and defend the suit less than a month after it was filed. 

Footstar has not shown any prejudice, as discussed above, 

and so we find no material breach of the notice provision.

Moreover, the Master Agreement contained a non-waiver 

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Nos. 14-1242, 14-1356, 14-1359 19

clause, which stated that Kmart cannot waive any of its 

rights (which would presumably include right to defense 

and indemnification) through “silence, acquiescence or inaction.” Such clauses are enforceable in Illinois, and Footstar 

has not presented any evidence that Kmart waived this 

clause. See Roboserve, Inc. v. Kato Kagaku Co., 78 F.3d 266, 277 

(7th Cir. 1996). Kmart could therefore not waive its right to 

defense by inaction. 

E. Kmart Waived its Prejudgment Interest Argument

Finally, Kmart asserts in its appellate briefing that it was 

entitled to prejudgment interest based on Liberty Mutual 

and Footstar’s contractual obligation, and the magistrate 

judge abused its discretion by denying such interest. See 

BKCAP, LLC v. CAPTEC Franchise Trust 2000-1, 688 F.3d 810, 

815 (7th Cir. 2012) (reviewing prejudgment interest decision 

for abuse of discretion). However, this argument was “underdeveloped, conclusory, or unsupported by law” in front 

of the magistrate judge and is therefore waived on appeal. 

C&N Corp. v. Gregory Kane & Ill. River Winery, Inc., 756 F.3d 

1024, 1026 (7th Cir. 2014). Kmart referenced prejudgment interest only three times in front of the magistrate judge: once 

in each of the “Wherefore” clauses of its motion and memorandum in support of summary judgment, and in one sentence in its Motion for Entry of Judgment. Kmart did not assert which contract gave rise to prejudgment interest (the 

Master Agreement, the Policy, or both); which state law and 

prejudgment interest statute governed (Illinois or New Jersey); and did not cite a single case supporting its position 

that it is entitled to prejudgment interest. This argument is 

waived. 

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20 Nos. 14-1242, 14-1356, 14-1359

III. CONCLUSION

For the foregoing reasons, we AFFIRM IN PART and

REVERSE IN PART the judgment of the magistrate judge and 

remand for proceedings consistent with this opinion. 

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