In the

United States Court of Appeals

For the Seventh Circuit ____________

Nos. 03-2867, 03-2868, 03-3550

TACO BELL CORPORATION,

Plaintiff-Appellee/Cross-Appellee,

v.

CONTINENTAL CASUALTY COMPANY,

Defendant-Third Party Plaintiff-Appellee/Cross-Appellant,

v.

ZURICH AMERICAN INSURANCE COMPANY,

Defendant-Third Party Defendant-Appellant.

____________

Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 01 C 0438—Harry D. Leinenweber, Judge.

____________

ARGUED SEPTEMBER 27, 2004—DECIDED NOVEMBER 5, 2004

____________

Before POSNER, KANNE, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge. Taco Bell has sued two insurance

companies, Zurich and Continental, each of which had issued

it a liability-insurance policy. The basis of federal jurisdiction
2 Nos. 03-2867, 03-2868, 03-3550

is diversity of citizenship, and the substantive issues are

governed, the parties tacitly agree, by Illinois law. The suit

seeks a declaration that the insurance companies have a duty

to pay for Taco Bell’s defense against a diversity lawsuit that

has been brought against it in a federal district court in

Michigan by a design agency named Wrench. (That suit has

already given rise to nine judicial opinions, beginning with

Wrench LLC v. Taco Bell Corp., 1998 WL 480871 (W.D. Mich.

1998), and is still going strong.) Taco Bell settled with Continental. The district court, on summary judgment, awarded the declaratory relief sought by Taco Bell—and despite the settlement

awarded it against Continental as well as Zurich. The court

also ordered Zurich to pay Taco Bell $142,000 for defense costs

already incurred by the latter in the Wrench litigation and an

additional $45,000 for the cost to Taco Bell of litigating this

declaratory-judgment suit against Zurich. Finally, the court

ordered Zurich to pay Continental $1.8 million, representing

one-half the Taco Bell defense costs that Continental had paid.

(We have rounded off the dollar figures.) Zurich appeals, as

does Continental, which would like the judgment against it

vacated and also would like Zurich to be ordered to pay a

larger share of Taco Bell’s defense costs.

The amended complaint in Wrench’s suit (now on appeal to

the Sixth Circuit after the award of substantial damages to

Wrench) alleges the following: In 1995 Wrench developed a

marketing gimmick that it called “Psycho Chihuahua,” which

“involved the image of a clever, feisty Chihuahua dog with an

attitude,” the idea being “to use the humor of seeing a small

dog character with a big dog’s attitude.” At a trade show the

following year, Taco Bell expressed interest in using the design

to promote its restaurants. Wrench proposed to Taco Bell “an

advertising campaign based on a Chihuahua with an attitude

obsessed with Taco Bell food, describing the Chihuahua to be

used in the campaign as edgy and feisty, with a spicy Mexican

personality and an insatiable craving for Taco Bell food.”

Beginning in the summer of 1997, Taco Bell, without obtaining
Nos. 03-2867, 03-2868, 03-3550 3

permission from Wrench, began running television commercials on the theme of “a Chihuahua obsessed with the thought

of Taco Bell food to the exclusion of anything else, including

a female Chihuahua.” What is more, the next year Taco Bell

based its entire national advertising campaign on “the same

basic idea of a Chihuahua with an attitude that is obsessed

with Taco Bell food. Taco Bell has also used several of the

specific commercial ideas provided by [Wrench] in its campaign, including the idea of using a live dog manipulated by

computer graphic imaging, the idea of having a boy Chihuahua passing up a girl Chihuahua for Taco Bell food, the idea

of using a bobbing head doll in a commercial, the idea of

having a Chihuahua sneaking into the rear window of a car to

obtain Taco Bell food, the idea of a Chihuahua popping his

head out through a hole at the end of a commercial, and the

idea of using a consistent tag line at the end of every commercial to keep the Chihuahua as a consistent icon for Taco Bell.”

These alleged appropriations of Wrench’s design ideas are, so

far as bears on our case, charged as misappropriation in

violation of the common law of Michigan.

The insurance policies that Continental and Zurich issued to

Taco Bell were similar but covered occurrences in different

periods. Continental’s covered the period January 1, 1997, to

October 6, 1997, and Zurich’s ran from October 7, 1997, to the

end of 1998. Both policies covered “advertising injury,” defined in both as “injury arising out of paid announcements in

the . . . broadcast media resulting from . . . misappropriation

of advertising ideas or style of doing business.” It is apparent

that Wrench’s complaint charges advertising injury. But Zurich

appeals to the policy exclusion for advertising injury “arising

out of oral or written publication of material whose first publication took place before the beginning of the policy period.”

The first “Chihuahua” ads ran before the coverage under

Zurich’s policy began, and Zurich argues that therefore Taco

Bell’s entire Chihuaha-inspired advertising campaign, most of

which occurred later, had first been published before the

policy took effect; if so, Zurich is off the hook.
4 Nos. 03-2867, 03-2868, 03-3550

The purpose of the “prior publication” exclusion (a common

clause in liability-insurance contracts, though rarely litigated)

can be illustrated most clearly with reference to liability

insurance for copyright infringement. Suppose a few months

before insurance coverage began on October 7, 1997, the insured

published an infringing book that it continued selling after

October 6. The “prior publication” exclusion would bar coverage because the wrongful behavior had begun prior to the

effective date of the insurance policy. The purpose of insurance is to spread risk—such as the risk that an advertising

campaign might be deemed tortious—and if the risk has

already materialized, what is there to insure? Matagorda

Ventures, Inc. v. Travelers Lloyds Ins. Co., 203 F. Supp. 2d 704,

716 (S.D. Tex. 2000). The risk has become a certainty. That

would be true in this case had Taco Bell during the period

covered by Zurich’s policy just rebroadcast the commercials it

had broadcast before October 7, 1997.

The later commercials were different from the earlier ones,

however, though that in itself need not be decisive. Suppose a

magazine article that infringed copyright and was published

before the policy period began was republished later as part of

an anthology. The anthology would be a different, probably a

much different, work from the magazine, but the wrongful

act—the copying of the copyrighted article without authorization—would be the same and so the prior-publication

exclusion would, we believe (we can find no reported cases on

the question), click in. Zurich argues in like vein that while the

commercials broadcast after October 6 were different from the

earlier ones, they used the same misappropriated design,

namely the idea of the Chihuahua with attitude, etc.

Zurich is wrong. Wrench’s complaint alleges—and the duty

of an insurance company to defend against a suit against its

insured is determined by the allegations of the complaint in

that suit rather than by what is actually proved, Dixon Distributing Co. v. Hanover Ins. Co., 641 N.E.2d 395, 398 (Ill. 1994);

American Alliance Ins. Co. v. 1212 Restaurant Group, L.L.C., 794

N.E.2d 892, 897 (Ill. App. 2003); Roman Catholic Diocese v.
Nos. 03-2867, 03-2868, 03-3550 5

Maryland Casualty Co., 139 F.3d 561, 565 (7th Cir. 1998) (Illinois

law)—that those later commercials appropriated not only the

“basic idea” (“Psycho Chihuahua”) but other ideas as well that

are protected by Michigan’s common law of misappropriation,

like the idea of the Chihuahua’s poking its head through a

hole at the end of the commercial. This is a modest idea. Who

knows whether it’s really protected by Michigan law (there are

no cases on point other than the district court decision in

Wrench’s suit, which as we said is currently on appeal) yet not

preempted by federal copyright law. But that is not the issue.

The charge of misappropriation of the idea of the Chihuahua’s

head popping out of a hole is a claim of advertising injury,

meritorious or not; and Taco Bell bought insurance against

having to pay the entire expense of defending against such

claims. 

At some point a difference between the republished version

of an unlawful work and the original version would be so slight

as to be immaterial. See Ringler Associates Inc. v. Maryland

Casualty Co., 96 Cal. Rptr. 2d 136, 150 (App. 2000); P.J. Noyes

Co. v. American Motorists Ins. Co., 855 F. Supp. 492, 495 (D.N.H.

1994). But that observation cannot save the insurer when the

republication contains new matter that the plaintiff in the

liability suit against the insured alleges as fresh wrongs.

Wrench’s complaint claims that Taco Bell stole the “basic idea”

before October 7, 1997, and used it in its earliest commercials,

which predated Zurich’s coverage, but that it stole additional,

subordinate but still protected, ideas as well and incorporated

them into the later commercials.

The only thing that gives the slightest color to Zurich’s

invocation of the “prior publication” exclusion is a certain

vagueness in the misappropriation tort compared to copyright

infringement. The copyright infringer copies an expressive

work (or a significant part of it) that is “fixed in any tangible

medium of expression,” 17 U.S.C. § 102(a); Erickson v. Trinity

Theatre, Inc., 13 F.3d 1061, 1071 (7th Cir. 1994); Martha Graham

School & Dance Foundation, Inc. v. Martha Graham Center of

Contemporary Dance, Inc., 380 F.3d 624, 632 (2d Cir. 2004), and
6 Nos. 03-2867, 03-2868, 03-3550

that therefore has pretty definite metes and bounds. The

misappropriator, or at least this alleged misappropriator, takes

an idea; and the boundaries of an idea can be quite uncertain.

If Wrench’s idea of a “Psycho Chihuahua” advertising

campaign is defined broadly enough, it encompasses all the

subordinate ideas embodied in the later commercials. But this

possibility is irrelevant. We repeat that the duty to defend is

determined by what is charged in the complaint. Wrench’s

complaint charges the misappropriation of the subordinate

ideas as separate torts, and those torts occurred during the

period covered by Zurich’s policy.

Zurich has other strings to its bow, however. Its policy requires the insured to notify it “promptly” of an event that

might trigger liability under the policy (an “occurrence,” in

insurance-speak), and adds that “in the event of noncompliance” with the requirement Zurich “shall not be required to

establish prejudice resulting from noncompliance but shall be

automatically relieved of liability with respect to the claim.”

Wrench filed its suit against Taco Bell on January 16, 1998; Taco

Bell didn’t notify Zurich of the suit until June 8, 1998, four and

a half months later.

An insurer wants to be notified of a suit against its insured

as soon as possible, to give it ample time to investigate the

case, determine whether its duty to defend has been triggered,

and if so prepare the defense of the case: hence “promptly.”

And it doesn’t want to have to prove “prejudice,” and needn’t

do so even if the policy doesn’t explicitly excuse such proof, as

it did here. Northbrook Property & Casualty Ins. Co. v. Applied

Systems, Inc., 729 N.E.2d 915, 922 (Ill. App. 2000); American

Country Ins. Co. v. Bruhn, 682 N.E.2d 366, 370 (Ill. App. 1997);

Hartford Accident & Indemnity Co. v. Rush-Presbyterian-St. Luke’s

Medical Center, 595 N.E.2d 1311, 1314-16 (Ill. App. 1992);

Highlands Ins. Co. v. Lewis Rail Service Co., 10 F.3d 1247, 1249-50

(7th Cir. 1993) (Illinois law). Yet these cases are explicit that

Illinois law, albeit rather in the teeth of the wording of the

notice clauses in insurance policies, makes the prejudice to the

insurer from late notice “a factor in assessing the reasonable-
Nos. 03-2867, 03-2868, 03-3550 7

ness of the notice,” unless the delay is extreme, as in

Northbrook Property & Casualty Ins. Co. v. Applied Systems, Inc.,

supra, 729 N.E.2d at 920 (17 months), and General Casualty Co.

v. Juhl, 669 N.E.2d 1211, 1214-15 (Ill. App. 1996) (13 months); see

also Highlands Ins. Co. v. Lewis Rail Service Co., 10 F.3d 1247, 1250

(7th Cir. 1993) (6 years). This result can be defended by

reference to the general principle of contract law that breaches

that are technical, harmless, and therefore “immaterial” do not

allow the “victim” of the breach to walk away from the contract

to the great harm of the party that committed the harmless

breach. E.g., Elda Arnhold & Byzantio, L.L.C. v. Ocean Atlantic

Woodland Corp., 284 F.3d 693, 700 (7th Cir. 2002) (Illinois law);

Arrow Master, Inc. v. Unique Forming Ltd., 12 F.3d 709, 714-15

(7th Cir. 1993) (Illinois law); cf. Jacob & Youngs, Inc. v. Kent, 129

N.E. 889 (1921) (Cardozo, J.). For that would be a disproportionate sanction contrary to commercial custom and unlikely

to have been actually intended by the parties. So, since the

delay here was modest, Zurich can invoke the notice clause

only if there is some evidence that it suffered at least some

prejudice from Taco Bell’s delay.

It argues that it did because the commercials continued to

run during the four and a half months that elapsed between

Wrench’s suit and the notification of the suit to Zurich, and if

only it had known about the suit it would have taken steps to

prevent Taco Bell from continuing to run the commercials. But

what steps could it have taken? The insurance policy didn’t

authorize it to review Taco Bell’s commercials and if it thought

them tortious force Taco Bell to yank them. If Taco Bell was

willing to take the risk of liability to Wrench by continuing to

run the commercials after Wrench sued—as it was—why

would it have desisted at Zurich’s urging? Maybe it would

have done so had Zurich said it wouldn’t defend the suit

otherwise, though we know that this would have been an

empty threat. But the decisive fact is that that when Zurich did

receive notice of the litigation, it took no steps to try to make

Taco Bell cancel the commercials even though they were continuing to run and thus increasing Wrench’s damages and
8 Nos. 03-2867, 03-2868, 03-3550

therefore also Zurich’s potential liability to Taco Bell on the

insurance policy. There is no reason to suppose that if Zurich

had received notice earlier it would have taken such steps; its

incentive would not have been much greater, though a little

greater because more of the injury to Wrench and the resulting

liability of Taco Bell and derivately of Zurich would have lain

in the future.

We conclude that Zurich’s defenses to its duty to defend fail.

But Zurich has three complaints that we have now to consider

about the amount of defense costs that it has been ordered to

pay Taco Bell and Continental. The first has to do with a selfinsured retention clause in Zurich’s policy. Only after Taco

Bell paid the first $2 million of defense costs would Zurich’s

duty to pay kick in. There was no similar provision in Continental’s policy. Taco Bell has incurred defense costs of some

$5.8 million, of which more than $3.5 million have been paid

by Continental, and the district court ordered Zurich to

reimburse Continental for one-half of the excess of those costs

over the $2 million retention, or (roughly, for remember that

we’re rounding off dollar figures) $1.8 million. Zurich argues

that what the court should have done was to divide the total

defense costs in half (this on the assumption, which we

examine later, that 50-50 is the proper method of allocating

defense costs between the two insurers) and then subtract the

retention from Zurich’s share. That would yield a figure for

reimbursement to Continental not of $1.8 but of $.8 million

($2.8 million—$2.0 million), which would require an adjustment in Zurich’s favor of $1 million.

Zurich is right. Taco Bell agreed that it would pay the first

$2 million of any defense costs for which Zurich would otherwise be responsible. Were there no retention provision, Zurich

would be responsible, under the district court’s 50-50 method

of allocation, for $2.8 million in defense costs. But the retention

provision cut this by $2 million. Continental did not negotiate

a self-retention provision and is not entitled to benefit from

Zurich’s provision.
Nos. 03-2867, 03-2868, 03-3550 9

Next Zurich complains about the amount of defense costs

incurred by Taco Bell. Zurich submitted an affidavit by a firm

that hires itself out to review lawyers’ bills and that opined

that Taco Bell had overpaid the lawyers who represented it in

the Wrench litigation. We are unimpressed, as was the district

court. When Taco Bell hired its lawyers, and indeed at all

times since, Zurich was vigorously denying that it had any

duty to defend—any duty, therefore, to reimburse Taco Bell.

Because of the resulting uncertainty about reimbursement,

Taco Bell had an incentive to minimize its legal expenses (for

it might not be able to shift them); and where there are market

incentives to economize, there is no occasion for a painstaking

judicial review. Kallman v. Radioshack Corp., 315 F.3d 731, 742

(7th Cir. 2002); Medcom Holding Co. v. Baxter Travenol Laboratories,

Inc., 200 F.3d 518, 520 (7th Cir. 1999); Balcor Real Estate Holdings,

Inc. v. Walentas-Phoenix Corp., 73 F.3d 150, 153 (7th Cir. 1996);

cf. Blum v. Stenson, 465 U.S. 886, 892-96 (1984). The affidavit of

the firm that picked through Taco Bell’s legal bills is excruciatingly detailed. The amount of time and money that went

into its preparation and would be incurred in adjudicating its

accuracy probably exceeds the potential excesses that it identifies.

Although the cases that we have just cited are all diversity

cases arising in Illinois, none discusses Illinois law; and Zurich

points us to Kaiser v. MEPC American Properties, Inc., 518

N.E.2d 424, 427-28 (Ill. App. 1987), which holds that even in a

case in which fee shifting is specified in a contract that does

not in so many words limit the entitlement to “reasonable fees,”

not only must the party asking for an award of fees prove that

they are reasonable but in addition “the petition for fees must

specify the services performed, by whom they were performed,

the time expended thereon and the hourly rate charged therefor.

Because of the importance of these factors, it is incumbent

upon the petitioner to present detailed records maintained

during the course of the litigation containing facts and computations upon which the charges are predicated.” This was

said in general, rather than with specific reference to a case in

which there is an adequate market test of the fees. But what is
10 Nos. 03-2867, 03-2868, 03-3550

more important is that even in a diversity suit the requirements of proof are governed by federal rather than state law.

“The decision to hold an evidentiary hearing when making an

attorney’s fee award is a matter of procedure, and is therefore

governed by federal law under the Erie doctrine.” Shakey’s, Inc.

v. Covalt, 704 F.2d 426, 435 (9th Cir. 1983); see also Mangold v.

California Public Utilities Comm’n, 67 F.3d 1470, 1478 (9th Cir.

1995); Karl’s, Inc. v. Sunrise Computers, Inc., 21 F.3d 230, 232 (8th

Cir. 1994); Schafler v. Fairway Park Condominium Ass’n, 324 F.

Supp. 2d 1302, 1309-12 (D. Fla. 2004); but see Security Mutual Life

Ins. Co. of New York v. Contemporary Real Estate Associates, 979

F.2d 329, 331-32 (3d Cir. 1992). (That is why the Seventh Circuit

cases cited earlier, though diversity suits, did not discuss state

law.) For they concern how a particular court system, having

regard for its resource constraints and the competing claims on

its time, balances the cost of meticulous procedural exactitude

against the benefits in reducing error costs.

Furthermore, although Zurich’s policy entitled it to assume

Taco Bell’s defense, in which event Zurich would have selected,

supervised, and paid the lawyers for Taco Bell in the Wrench

litigation, it declined to do so—gambling that it would be

exonerated from a duty to defend—with the result that Taco

Bell selected the lawyers. Had Zurich mistrusted Taco Bell’s

incentive or ability to economize on its legal costs, it could,

while reserving its defense that it had no duty to defend, have

assumed the defense and selected and supervised and paid for

the lawyers defending Taco Bell in the Wrench litigation, and

could later have sought reimbursement if it proved that it had

indeed had no duty to defend Taco Bell. Clemmons v. Travelers

Ins. Co., 430 N.E.2d 1104, 1109 (Ill. 1981); General Agents Ins. Co.

of America, Inc. v. Midwest Sporting Goods Co., 812 N.E.2d 620 (Ill.

App. 2004). So presumably it had some confidence in Taco Bell’s

incentive and ability to minimize legal expenses. We add that

the duty to defend would be significantly undermined if an

insurance company could, by the facile expedient of hiring an

audit firm to pick apart a law firm’s billing, obtain an evidentiary hearing on how much of the insured’s defense costs it
Nos. 03-2867, 03-2868, 03-3550 11

had to reimburse. Cf. Charter Oak Fire Ins. Co. v. Hedeen & Cos.,

280 F.3d 730, 739 n. 4 (7th Cir. 2002); Willis Corroon Corp. v.

Home Ins. Co., 203 F.3d 449, 453 (7th Cir. 2000).

Last, Zurich complains about being ordered to reimburse the

expenses that Taco Bell incurred in obtaining a declaration that

Zurich was indeed obligated to defend against Wrench’s suit. In

Green v. J.C. Penney Auto Ins. Co., 806 F.2d 759 (7th Cir. 1986),

we held that an insurer must reimburse the insured for the

expenses of obtaining a declaration that the insurer has a duty

to defend or indemnify. At the time, the Illinois Appellate Court

was divided on the issue, compare Trovillion v. U.S. Fidelity and

Guaranty Co., 474 N.E.2d 953, 958 (Ill. App. 1985), with Tuell v.

State Farm Fire & Casualty Co., 477 N.E.2d 70, 74 (Ill. App.

1985); Preferred Risk Mutual Ins. Co. v. U.S. Fidelity & Guaranty

Co., 395 N.E.2d 1180, 1184-85 (Ill. App. 1979), so we went with

what we thought the better rule. Later the case on which we

had relied (Trovillion) was overruled, Bonnie Owen Realty, Inc.

v. Cincinnati Ins. Co., 670 N.E.2d 1182, 1188 (Ill. App. 1996), and

it became the unanimous view of that court that the standard

“American rule” should apply to such cases, meaning that there

was no duty of reimbursement unless the insurer had only a

frivolous defense to the declaratory-judgment suit, which is

not contended here. Whether to shift attorneys’ fees, as distinct

from the procedure used to determine whether the amount

sought is reasonable, falls on the substantive side of the

substantive-procedural divide created by Erie and subsequent

decisions if though only if the decision to shift or not shift is

based on a substantive state policy. Compare Chambers v.

NASCO, Inc., 501 U.S. 32, 51-52 (1991); Alyeska Pipeline Service

Co. v. Wilderness Society, 421 U.S. 240, 259 n. 31(1975), and

McMahan v. Toto, 256 F.3d 1120, 1132 (11th Cir. 2001), with

First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d

501, 529 (6th Cir. 2002), and In re Larry’s Apartment, L.L.C., 249

F.3d 832, 837-38 (9th Cir. 2001). So Illinois law governs the

question. But Taco Bell argues that we are bound by Green

because it is our decision, even though it’s no longer a reliable
12 Nos. 03-2867, 03-2868, 03-3550

prediction of how the Supreme Court of Illinois would rule if

the issue were presented to it.

What is true is that the district court was bound by Green, as

a lower court cannot overrule the decision of a higher one.

Reiser v. Residential Funding Corp., 380 F.3d 1027, 1029-30 (7th

Cir. 2004). But we are not bound. The duty of a federal court

in a diversity suit is to predict what the state’s highest court

would do if presented with the identical issue. E.g., Adams v.

Catrambone, 359 F.3d 858, 862 (7th Cir. 2004); Mutual Service

Casualty Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 612 (7th

Cir. 2001); Private Mortgage Investment Services, Inc. v. Hotel &

Club Associates, Inc., 296 F.3d 308, 312 (4th Cir. 2002). In light

of the Illinois Appellate Court’s unanimity, the best prediction

differs from what it was when Green was decided, and so that

decision is no longer authoritative, just as in a case in which a

U.S. Supreme Court decision shows that a previous decision

by a lower court was unsound, even though the Supreme

Court doesn’t mention the decision. Cf. Thomas v. American Home

Products, Inc., 519 U.S. 913, 915 (1996) (Scalia, J., concurring).

We turn now to Continental’s cross-appeal. Continental

makes two arguments. The first is that the district judge

should not have entered a judgment against it after it settled

with Taco Bell. This is true. The settlement ended its dispute

with Taco Bell, so there was no longer a controversy for the

court to resolve. Continental therefore wants us to order the

judgment vacated, and neither Taco Bell nor Zurich objects.

But as the judgment has no significance, we don’t see why we

should vacate it. Continental has paid Taco Bell in accordance

with the settlement, and the only concern Continental has expressed about the judgment is that some “third party” might

notice it and do something with it. But what could a third

party do with a judgment that orders Continental to do what

it has already done, namely reimburse Taco Bell for defense

costs? The judgment is pointless, but an order vacating it

would be equally so. If we’re missing something, Continental

can file a motion in the district court under Fed. R. Civ. P. 60(b).
Nos. 03-2867, 03-2868, 03-3550 13

Continental argues in addition that Zurich should bear the

lion’s share of the defense costs because most of the offending

commercials were broadcast after October 6, 1997, when

Continental’s policy expired. It wants those costs allocated

between the insurers in the ratio that the time during the

period of misappropriation in which Continental’s policy was

in force bears to the much longer time in which Zurich’s policy

was in force. But such an allocation, which would assign the

lion’s share of the costs to Zurich, would be even more

arbitrary than the district court’s 50-50 split. Had Wrench sued

only in respect of the misappropriation that occurred before

October 7, 1997, it is entirely speculative what fraction of the

defense costs that Taco Bell ultimately incurred in defending

against the suit would have been incurred. Remember that

while the later commercials contain misappropriations that the

earlier ones did not, such as the hole-in-the-commercial idea,

those commercials also repeat the basic misappropriation—the

misappropriation of the idea of a “Psycho Chihuahua” advertising campaign. Although Zurich’s “prior publication” defense

to its duty to defend Taco Bell from Wrench’s suit has failed,

probably most of the damages alleged by Wrench can be traced

to what we are calling the basic misappropriation, which was

published while Continental’s policy was in force.

What is true though unremarked by the parties is that the

ground on which the district court split the defense costs

equally between the two insurers was highly questionable. The

court relied on “other insurance” clauses in the two policies.

An “other insurance” clause limits an insurer’s liability when

the risk he has insured against is also covered by another

insurer’s policy. American Alliance Ins. Co. v. IARW Ins. Co.,

Ltd., 165 F.3d 558, 559-60 (7th Cir. 1999) (Illinois law); South

Carolina Ins. Co. v. Fidelity & Guaranty Ins. Underwriters, Inc.,

489 S.E.2d 200, 202 (S.C. 1997). If two insurers have identical

other-insurance clauses in policies that cover the same risk, a

common and deliciously simple solution is to divide the liability between them 50-50. North American Specialty Ins. Co. v.
14 Nos. 03-2867, 03-2868, 03-3550

Liberty Mutual Ins. Co., 697 N.E.2d 347, 349 (Ill. App. 1998); U.S.

Fidelity & Guaranty Co. v. Alliance Syndicate Inc., 676 N.E.2d 278,

280 (Ill. App. 1997), though there are other possibilities. South

Carolina Ins. Co. v. Fidelity & Guaranty Ins. Underwriters, Inc.,

supra, 489 S.E.2d at 206; 1 Barry R. Ostrager & Thomas R.

Newman, Handbook on Insurance Coverage Disputes, ch. 11 (11th

ed. 2002). But this analysis does not fit the case in which the

two policies, each with an “other insurance” clause, insure

merely the same kind of risk, but not the same risk because the

policies are successive. To apply “other insurance” clauses in

such a case would make insurers liable in part for occurrences

outside the period covered by their policies. Douglas R.

Richmond, “Issues and Problems in ‘Other Insurance,’

Multiple Insurance and Self-Insurance,” 22 Pepp. L. Rev. 1373,

1376-77 (1995).

As if life weren’t complicated enough, however, there is an

argument for treating risks in separate periods as the same risk

when a single tortious act continues in successive periods, see

Continental Casualty Co. v. Hartford Fire Ins. Co., 116 F.3d 932

(D.C. Cir. 1997); Federal Ins. Co. v. Cablevision Systems Development Co., 836 F.2d 54, 57-58 (2d Cir. 1987)—and while each of

Taco Bell’s Chihuahua commercials involved multiple alleged

appropriations some of which occurred only in the second

period (that is, the period of Zurich’s policy), all the commercials contained an appropriation of the basic idea (“Psycho

Chihuahua”). We need not chase this particular hare to

ground, however, as the parties have not suggested any better

method of dividing the costs between the two insurance

companies in the circumstances of utter uncertainty prevailing

here than doing so 50-50. Continental’s proposed “time on the

risk” allocation is even less attractive, for the reason indicated

earlier, that most of Wrench’s damages probably stemmed from

the republication of the basic idea for the Psycho Chihuahua advertising campaign. So we won’t disturb the district court’s

allocation.
Nos. 03-2867, 03-2868, 03-3550 15

To summarize, Zurich is entitled to a $1 million reduction in

the amount that it must reimburse Continental and a

$44,935.75 reduction in the amount that it must reimburse

Taco Bell. In all other respects the judgment is affirmed.

AFFIRMED IN PART, REVERSED IN PART.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—11-5-04