Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-15-03243/USCOURTS-ca7-15-03243-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 15-3243

CINCINNATI INSURANCE COMPANY,

Plaintiff-Appellant,

v.

ESTATE OF TONI CHEE, et al.,

Defendants-Appellees.

____________________

Appeal from the United States District Court

for the Central District of Illinois.

No. 12-3236 — Richard Mills, Judge.

____________________

ARGUED APRIL 13, 2016 — DECIDED JUNE 13, 2016

____________________

Before EASTERBROOK, MANION, and ROVNER, Circuit Judges.

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 accusing him of negligent driving, and the other against the 

Case: 15-3243 Document: 37 Filed: 06/13/2016 Pages: 8
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hospital and the attending physicians, accusing them of 

malpractice. The defendants in the second suit filed thirdparty actions against Sam, seeking contribution or other recompense from him should they be held liable to the estate. 

State Farm Mutual Automobile Insurance Company is defending Sam’s interests in both suits. Its policy promises indemnity 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 million) 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 involved 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 comprehension. Defining terms helps make policies clear; punctuation 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 practicable after Toni’s death.

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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 involved 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 requirement. Cincinnati asserts that the delay in receiving notice could have been prejudicial (evidence might have been 

lost) but does not identify any concrete prejudice. So the policy 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 remotely 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 insurance 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 alternative method by which the insured arranges for funding of 

legal liabilities which would also be insured under this policy.” 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 paying any liability exceeding that amount.

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Quite the contrary. The defense clause of Cincinnati’s policy provides:

We will have the right and duty to defend the insured against 

any suit seeking damages because of bodily injury, personal injury 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 discretion, 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 underlying insurance has been paid out (by the Chees or the primary insurer), Cincinnati obtains the right to settle the claim 

or suit. But neither the duty to defend nor the duty to indemnify 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 unreasonable 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 exclusion 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 

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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 physicians, who are seeking contribution from Sam. This led the 

district court to conclude that the exception overrides the exclusion 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 between 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 increases the insurer’s expected payout.

The estate’s second suit, against the hospital and physicians, 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 recovery 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, 

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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 statecourt suit, Estate of Toni Chee v. Medical Providers, Cincinnati 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 defendants 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 intrafamily 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 insurers 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 

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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 matter 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 indemnity, if any, depends on what happens in the underlying litigation. That makes it inappropriate to try to resolve that 

matter in an anticipatory action seeking a declaratory judgment, beyond stating the point that neither defense nor indemnity is appropriate in the estate’s suit against Sam. Trying to pin down what duties of indemnity Cincinnati might 

owe in the other suit under various possible outcomes 

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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 extent that it requires Cincinnati to defend Sam’s interests in 

the suit between the estate and the medical defendants. Otherwise the judgment is reversed, and the case is remanded 

for the entry of a declaratory judgment consistent with this 

opinion.

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