In the

United States Court of Appeals

For the Seventh Circuit

No. 08-3570

JAMES RIVER INSURANCE COMPANY,

Plaintiff-Appellant,

v.

KEMPER CASUALTY INSURANCE COMPANY,

Defendant-Appellee.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 07 C 4233—Harry D. Leinenweber, Judge.

ARGUED SEPTEMBER 24, 2009—DECIDED OCTOBER 28, 2009

Before POSNER, MANION, and TINDER, Circuit Judges.

POSNER, Circuit Judge. This diversity suit pits the James

River insurance company against the Kemper insurance

company. James River seeks a declaration that it had no

duty to defend or indemnify two lawyers (and their law

firm, but we can ignore that detail) who were sued for

malpractice and whom Kemper had also insured. As is

often true in a declaratory-judgment suit, the plaintiff in
2 No. 08-3570

the suit is really the defendant. For James River wants

nothing from Kemper, while Kemper wants James River

to contribute to the expense it incurred in defending the

lawyers in the malpractice suit and in paying the settlement that ended the suit. The district court granted

summary judgment in favor of Kemper.

Both insurance policies are “claims made” policies.

That means they insure against liability based on legal

claims against the insured filed during the period

covered by the policy (the “policy period,” as it is

called), provided those claims are based on acts committed after the policy’s “retroactive date.” The policy

period in the Kemper policy was September 27, 2000, to

September 27, 2002, and the retroactive date was

January 1, 1937. The policy period in the James River

policy was November 8, 2004, to November 8, 2005, and

the retroactive date was November 8, 2002. (The sixweek gap between the end of Kemper’s coverage and the

beginning of James River’s is immaterial.) The malpractice

suit (the “claim”) accused the lawyers of wrongful acts

during both the period covered by Kemper’s policy and

the later period covered by James River’s policy.

The lawyers had represented the wife in a divorce

case. In December 1999, well within the coverage of

Kemper’s policy for acts giving rise to claims, the parties

made a property settlement as a prelude to the entry of

a divorce decree. The settlement gave the wife a big

chunk of her soon-to-be ex-husband’s employee stock

options. But in February of the following year the

employer wrote the parties that the method by which the
No. 08-3570 3

property settlement had tried to transfer the stock

options was invalid. Two months later the insureds

instituted on the ex-wife’s behalf a proceeding in state

court against her ex-husband, complaining of his failure

to effectuate the transfer. The proceeding was pending

when, in July 2001, his employer declared bankruptcy

and the employee stock options evaporated.

The malpractice suit accused the lawyers of professional

negligence in failing to get the stock options transferred

before the bankruptcy rendered the options worthless.

They could and should have done this, the suit

charged, either by insisting that the property settlement

(drafted by the husband’s lawyer) use a proper method

of conveyance, or by amending the settlement. Instead

they had negligently decided to institute a legal proceeding that dragged on until the stock options became

worthless.

The alleged misconduct occurred mainly during

Kemper’s policy period, but not entirely; the plaintiff

alleged that it continued into 2003 (which was during the

James River policy period), when the Illinois appellate

court dismissed the proceeding to recover the options.

The options were worthless by then, so it’s hard to see

how the ruling could have hurt the plaintiff. Its significance rather was in confirming the futility of the proceeding and thus reinforcing the claim that the

lawyers should have been doing something else to

recover the options, rather than just appealing their

defeat in the trial court.

The malpractice suit further alleged that the defendants

had concealed a business relationship that they had
4 No. 08-3570

with the husband’s divorce lawyer. This charge also

overlapped the coverage of the two polices, as did the

further charge that the defendants had conspired to

prevent the plaintiff from bringing the malpractice

suit against her former lawyers until the statute of limitations had run.

James River points to several exclusions in its policy

that it contends excuse it from having to pay for the

lawyers’ defense against the claim of wrongful acts committed during the James River policy period, or to pay any

part of the settlement that resolved the malpractice suit.

Kemper argues that James River has the burden of proving

that the exclusions apply, and that is correct, but it is

important to distinguish between two grounds for that

placement of the burden.

The first ground is simply that James River is the plaintiff, and plaintiffs have the burden of proof except with

respect to defenses. The second ground is based on insurance law. If the insureds (the lawyers) had been suing

James River, it would have had the burden of proving

that its insurance policy didn’t cover any of the claims

against them. That is the rule in Illinois. Hildebrand v.

Franklin Life Ins. Co., 455 N.E.2d 553, 564 (Ill. App. 1983);

Sokol & Co. v. Atlantic Mutual Ins. Co., 430 F.3d 417, 422-23

(7th Cir. 2005) (Illinois law). And the allocation of the

burden of proof in a diversity case (or any other case

governed by state law) is determined by state law. Raleigh

v. Illinois Dept. of Revenue, 530 U.S. 15, 20-21 (2000); Dick

v. New York Life Ins. Co., 359 U.S. 437, 446 (1959); In re

Stoecker, 179 F.3d 546, 551-52 (7th Cir. 1999). At least this
No. 08-3570 5

is so when there is no direct conflict with a federal statute,

or with a rule adopted under the Rules Enabling Act.

Walker v. Armco Steel Corp., 446 U.S. 740, 747-58 (1980). The

allocation of burden of proof (in the sense of burden of

persuasion—which side loses a tie) absolutely determines

the outcome in cases where the evidence is in equipoise,

and by doing so advances the substantive policies of a

state, cf. Thorogood v. Sears, Roebuck & Co., 547 F.3d 742, 746

(7th Cir. 2008); Harbor Ins. Co. v. Continental Bank Corp., 922

F.2d 357, 364-65 (7th Cir. 1990), here a policy of favoring

insureds in litigation with their insurance companies.

American States Ins. Co. v. Koloms, 687 N.E.2d 72-75 (Ill.

1997); Connecticut Specialty Ins. Co. v. Loop Paper Recycling,

Inc., 824 N.E.2d 1125, 1130 (Ill. App. 2005). To apply a

different rule in a diversity suit would make the happenstance of diversity provide a decisive advantage to

one of the litigants if the evidence was evenly balanced.

This suit, however, is not between an insured and

an insurance company, but between two insurance companies (the insureds were parties but are no longer), and

the real plaintiff is Kemper, which is seeking a money

judgment against James River. A plaintiff has the

burden of proof, except with regard to affirmative defenses, and this should be the rule also for a declaratoryjudgment defendant who is the real plaintiff, the

declaratory-judgment action having been brought merely

to accelerate the defendant’s suit for damages or other

relief. By seeking declaratory relief in lieu of simply

balking at a demand for payment, an insurance company

protects itself from being found to have refused the insured’s demand in bad faith, a finding that would expose

the company to having to pay punitive damages.
6 No. 08-3570

It is sensible to place the burden of proof of an affirmative defense on the defendant, rather than making the

plaintiff prove a negative; and the sense of the rule is not

diminished just because the “defendant” has made

himself a “plaintiff” by filing a declaratory-judgment

action rather than waiting to be sued. Lenience extended

to insureds who find themselves in litigation with an

insurance company has no place when the plaintiff in a

suit against an insurer is another insurer. As explained in

Royal Indemnity Co. v. Wingate, 353 F. Supp. 1002, 1004

(D. Md.), affirmed without opinion, 487 F.2d 1398

(4th Cir. 1973), in a declaratory-judgment action “the

burden of proof should not be mechanically placed on

the doorstep of the plaintiff simply because it is the one

seeking relief . . . . [I]t would seem unwise to apply

any general formulation with respect to the burden of

proof but rather to address such a question from the

standpoint of which party must lose where there is

failure of proof.”

Still, that approach, sensible as it seems, is not universally followed. 10B Charles A. Wright, Arthur R. Miller &

Mary Kay Kane, Federal Practice and Procedure § 2770, pp.

677-80 (3d ed. 1998). But is it law in Illinois? After we said

in International Hotel Co. v. Libbey, 158 F.2d 717, 721 (7th Cir.

1946), though without explanation, that “when an issue of

fact is tendered by the complaint and denied by the

answer, the plaintiff must prove its complaint, even though

it is a complaint for a declaratory judgment,” the Supreme

Court of Illinois, quoting this language from our opinion

without any elaboration, said that this was the rule in

Illinois. Board of Trade of City of Chicago v. Dow Jones & Co.,
No. 08-3570 7

456 N.E.2d 84, 87 (Ill. 1983). Neither case was an insurance

case, but the “rule” was repeated in Stoneridge Development

Co. v. Essex Ins. Co., 888 N.E.2d 633, 650 (Ill. App. 2008).

How the state’s supreme court would decide the question were it posed in an insurance case in which the

pros and cons of the rule were argued, we do not know;

but neither need we decide in order to resolve the

present case. There are no issues of fact and therefore

no reason for Kemper to have raised the question of the

burden of proof. And anyway Illinois law treats

exclusions in an insurance policy as affirmative defenses. Raprager v. Allstate Ins. Co., 539 N.E.2d 787, 791-

92 (Ill. App. 1989); Wahls v. Aetna Life Ins. Co., 461

N.E.2d 466, 470 (Ill. App. 1983); Illinois School Dist. Agency

v. Pacific Ins. Co., 471 F.3d 714, 716-17 (7th Cir. 2006)

(Illinois law). That is another example of a procedural

rule that has a substantive motivation and therefore

binds the federal courts in diversity suits.

James River bases its appeal mainly on a provision of

its policy that excludes any claim “directly or indirectly

arising from . . . any common fact, circumstances, transaction advice or decision involved in a ‘professional service’

reported as a claim or potential claim under any prior

Policy.” The lawyer defendants in the malpractice suit

duly reported the malpractice claim to both insurers

when the claim was filed in May 2005; and it is apparent

that the wrongful acts alleged to have occurred during

the James River policy period arose from the decisions

that the insured lawyers had made during the Kemper

policy period. Those were the decisions relating to their
8 No. 08-3570

efforts to obtain the stock options for their client both in

the initial property settlement and after the husband’s

employer refused to transfer the options, contending that

the method of transfer in the property settlement was

invalid. The Illinois appellate ruling is the only wrongful

act alleged to have occurred entirely during the later

policy period (though we repeat our puzzlement that a

judicial ruling could be an act of malpractice rather than

at most evidence of malpractice by a lawyer handling the

case in which the ruling was rendered), and it too arose

from the lawyers’ initial handling of the stock-options

issue.

We mustn’t press the concept of “arising from” too

hard, however. What if the defendants in the malpractice

suit, because their resources had been depleted by the

suit, cut corners in handling an unrelated matter during

James River’s policy period and were sued for malpractice; would James River’s prior-policy provision

exclude coverage for that suit? It would not, because

“arising from” implies a tighter connection than a mere

“but for” cause creates. Maybe if Columbus hadn’t discovered America the federal courts of appeals would not

have been created in 1891; but it would be odd to say

that the federal appellate judiciary “arose from” Columbus’s voyages.

It is true that Illinois cases say that “arising from” is

satisfied by a showing of “but for” causation. E.g., American

Economy Ins. Co. v. DePaul University, 890 N.E.2d 582, 588

(Ill. App. 2008); Shell Oil Co. v. AC&S, Inc., 649 N.E.2d 946,

951-52 (Ill. App. 1995). But what they mean is that a claim
No. 08-3570 9

need not have been foreseeable to be deemed to arise from

an act by the insured. Illinois distinguishes between “but

for” causation (which the cases call “cause in fact”) and

“legal cause,” which means foreseeability. City of Chicago

v. Beretta U.S.A. Corp., 821 N.E.2d 1099, 1127 (Ill. 2004);

Abrams v. City of Chicago, 811 N.E.2d 670, 674-75 (Ill. 2004);

Majetich v. P.T. Ferro Construction Co., 906 N.E.2d 713, 717

(Ill. App. 2009); Cleveland v. Rotman, 297 F.3d 569, 573

(7th Cir. 2002) (Illinois law). If Illinois understood “but

for” literally, to mean just a condition that had to exist

for the event in question to occur (a subsequent act of

malpractice, in this case), liability insurance companies

would have no way of setting premiums equal to

expected cost; they would be insuring against a range of

possible claims so vast that an estimate of the probability

that a claim within that range would actually be filed

would be arbitrary.

The outer bounds of “but for” causation applied to

insurance cases are suggested by the American Economy

case, cited above. An office worker was injured by ultraviolet radiation from fluorescent lights installed by a

contractor in her workplace. She had lupus, and it was

the interaction of the radiation with her condition that

caused the injuries; they would not have occurred, she

claimed, had “commercially available and reasonably

priced diffusers or filters that would diffuse or reduce

the ultraviolet (UV) rays emitted by the fluorescent lights

to a safe level” been installed. 890 N.E.2d at 585. It

is understandable why in determining the scope of

a liability-insurance policy a court would think it

irrelevant whether the contractor should have foreseen
10 No. 08-3570

the presence of workers suffering from lupus or some

other light-sensitive disease and taken precautions accordingly. For one doesn’t purchase liability insurance

just to protect oneself against being sued for inflicting

foreseeable injuries; one buys protection against any

claim arising from the potential liability-causing activity

in which one engages, and a claim can arise from the

activity without being foreseeable.

There are limits to what can be said to “arise from” some

event. But they are not based on unforseeability. If Christopher Columbus had bought insurance against liability

for claims arising out of his voyages and had later been

sued for assaulting an Indian in Hispaniola, he could not

have required the insurance company to defend him on

the ground that had it not been for his voyage to Hispaniola he would not have assaulted anyone there.

A way to help partition liability between successive

insurers, and thus decide when a claim made during the

policy period of the second insurer should be deemed

to arise out of activity during the policy period of the

first insurer, is to ask what sense it would make for the

defense of the malpractice suit, and the cost of the indemnification of the defendants in that suit, to be shared

between two insurance companies. The suit against the

insureds in this case alleged an intertwined set of

wrongful acts that straddled the two policy periods. It

wouldn’t be feasible to apportion defense or settlement

costs between acts committed in the two periods. Overlapping coverage, requiring apportionment of defense and

indemnity costs between insurers, is sometimes unavoid-
No. 08-3570 11

able, see, e.g., Outboard Marine Corp. v. Liberty Mutual Ins.

Co., 670 N.E.2d 740, 757 (Ill. App. 1996), but there is no

reason to manufacture occasions for such apportionment.

As in Continental Casualty Co. v. Coregis Ins. Co., 738 N.E.2d

509, 523 and n. 3 (Ill. App. 2000), it is apparent that the

second insurer (James River) excluded coverage in situations in which the wrongful acts committed during its

policy period were a continuation of wrongful acts committed during the policy period of the previous insurer—and they were.

But that does not end the case. The district court ruled

that Kemper’s policy was not a “prior Policy” within the

meaning of the James River policy, and if that is right

then the exclusion we’ve been discussing does not apply.

Kemper’s policy grants the insured an “extended reporting period option”: for a fixed fee, the insured can

extend the period within which it is required to report a

claim against it to Kemper. The claim must still have

arisen from professional services rendered between the

retroactive date of January 1, 1937, and the end of the

policy period, which remember was September 27, 2002,

but it can be reported later. The lawyers purchased a fiveyear extension, which therefore expired on September 27,

2007, well after the James River policy period, which

ended in November 2005. (The malpractice suit was

filed in 2005, but that was within the extended reporting

period, which is why Kemper had to defend it and indemnify the insureds for the settlement with the plaintiff.)

Therefore, the judge ruled, Kemper’s policy was not

“prior” to James River’s.
12 No. 08-3570

The extended-reporting-period option (or “tail coverage” as it is called) may seem a curious animal. It may

seem that an insured would want such an option (for

which he would have to pay Kemper $48,033, which was

225 percent of the regular annual premium of $21,348)

only if he expected to be sued, and one would think

that such an expectation would greatly increase the risk

to the insurance company of incurring liability on the

policy and thus the cost to the company of the additional coverage sought. The price of the extension of the

reporting period seems, in those circumstances, awfully

low, though typical of lawyers’ professional liability

policies. Michael Davidson, “Choosing the Right Tail

Coverage,” 19 Experience 34, 35 (2009); Bert Linder, “Lawyers Professional Liability Insurance Marketplace,” 609

PLI/Lit 371, 427 (1999). The insurer is protected to a

degree by the dollar limits on liability in the policy;

yet because of the potential for adverse selection (that is,

the purchase of insurance by persons who have an aboveaverage likelihood of experiencing the insured-against

event), such “’tail’ coverage must be rated for the individual risk. The risk’s [i.e., the insured’s] history of insured

exposures, previous types and amounts of insurance, the

possibility of partial exhaustion of the aggregate limits,

the amount and types of hazards relating to latent

injury potential and the insured’s previous loss history are

among the many factors which may influence the price

of the ‘tail’ coverage.” James K. Killelea, “Format of

Liability Insurance Policies,” 296 PLI/Lit 229, 243 (1985).

In any event, the reporting period is not the policy

period—Kemper’s policy is explicit that a claim
No. 08-3570 13

reported in the extended reporting period must have

arisen “prior to the end of the policy period.” And

nothing in the prior-policy exclusion in James River’s

policy limits the time within which a claim under a

prior policy must be reported for the exclusion to apply.

James River cites two other exclusions. One is for a

claim “directly or indirectly arising out of or resulting

from any conspiracy” and the other a claim “directly

or indirectly arising out of or resulting from any act

committed with knowledge of its wrongful nature or

with the intent to cause damage.” The principal wrongful

acts alleged against the insured lawyers in James River’s

policy period concern the conspiracy to prevent the

client from filing a timely suit; and a claim of conspiracy

is explicitly excluded. The negligent failure both to

reveal the conflict of interest involving the husband’s

lawyer, and to accomplish the transfer of the stock

options before the bankruptcy, is alleged to have continued until May 2003 (which was within the James River

policy period), when the Illinois Appellate Court rejected

the ex-wife’s suit to obtain the promised options. The

bankruptcy had occurred nearly two years before the

appellate ruling, and after the bankruptcy the only

further harm the lawyers could do their client was to

cover up their negligence so that she wouldn’t sue them.

So only the negligent failure to disclose the conflict of

interest could have harmed the client by delaying her

suing them. But the alleged negligent failure persisted

into James River’s policy period and doesn’t fall into the

policy’s conspiracy or wrongful-knowledge exclusions.
14 No. 08-3570

Nevertheless the prior-policy exclusion applies. The

lawyers’ alleged misconduct occurred within the policy

period, and the suit was filed during the tail. Kemper’s

policy applies, and it therefore follows that James River’s

does not, since it excludes coverage of conduct covered

by a prior insurer; all the wrongful acts alleged in the

malpractice suit arose from events that took place in

Kemper’s policy period.

The judgment is reversed with instructions to enter

the declaratory judgment requested by the plaintiff.

REVERSED WITH INSTRUCTIONS.

10-28-09