### In the 

# United States Court of Appeals For the Seventh Circuit

____________________ No. 12

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CE D ESIGN L TD

. and P ALDO S IGN AND D ISPLAY C O

. , on

behalf of themselves and all others similarly situated, Plaintiff s

- Appell ees ,

v.

K ING S UPPLY C O ., LLC
, doing business as K ING

A RCHITECTURAL M ETALS , I NC ., Defendan t
,

V ALLEY F ORGE I NSURANCE C O ., et al
., Proposed Intervenors/Appellants.

____________________ Appeal from t he United States District Court for the Northern District of Illinois, Eastern Division

. No. 0 9 C 2057

— Sidney I. Schenkier
, Magistrate Judge

.

____________________
A RGUED M AY 27, 2015

— D ECIDED J UNE 29, 2015

____________________

Before P OSNER , M ANION , and H AMILTON , Circuit Judges

. P OSNER , Circuit Judge

. This litigation began in 2009, when CE Desi gn filed a class action suit under the Telephone Co nsumer Protection Act, 47 U.S.C. § 227, against King Supply,2 No. 12

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which removed the suit to the federal district court in Ch i c ago. King Supply had been issued commercial general l i abi lity and commercial umbrell a policies by three insurance companies , but upon its request for coverage they di sclaimed any o b ligation to defend or indemnify their insured against CE Design’s lawsuit . T hey based the ir disclaimer primarily on provisions in the insurance policies that a ppeared to e x empt liability under the Telephone Consumer Protection Act from the policies’ co v erage. The district court certified the class (consisting of recip ients of advertising faxes from King Supply) and designated CE Design as class representative. W e reversed the district court on the basis of various irregularities and remanded for further proceedings. CE Design Ltd. v. King Architectural Me tals, Inc ., 637 F.3d 721 (7th Cir. 2011). On remand, CE Design and its coplaintiff agreed with King Supply to se t tle the case for $20 million , the limit of the insurance policies . Their agreement , made in September 2011 and a p proved by the dis trict court in July of the following year
, provided that o nly 1 percent of the judgment ($200,000) could be ex e cuted agains t King Supply. The rest would have to come from the
insu r ance policies. It appears that if f orced to pay more than $200,000 King Supply would have had to declare ban k rup tcy. Upon learning of the proposed settlement (but not of all its terms, which the part ies had agreed not to reveal to the
insurers

— we don’t understand the justification for such a
pr o vision, but it has no bearing on this appeal), the insurers filed a declaratory judgment action in Texas (King Su p ply’s principal place of business and also wh ere the insurance po licies had been issued ), disclaiming coverage. The suit wasNo. 12

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dismissed for lack of jurisdiction over several of the parties, including CE Design , but a similar suit (though with the pa rties reversed) was filed in an Illinois state court and we were told a t oral argument that that court has recently ruled that the insurance policies don’t cover King Supply’s liability under the Telephone Consumer Pr o tection Act but that CE Design is appealing that dec i sion. In January 2012, after the settl ement agreement in the present (the federal) case but before the district court a pproved it, t he i n surers moved to intervene in the case under Fed. R. Civ. P. 24(a) and (b) . They hoped to persuade the di strict court to delay approval of the settlement unti l there was
a state

- court determination of wheth er they ow ed King Su pply coverage , and also, if they failed to obtain a favorable determination in the state

- court system, to persuade the di strict court (and if necessary our court on appeal) that the se ttle ment was collu sive and unreasonable and should ther efore be rejected

. The district court denied the motion to i ntervene as untimely. The insurers a p peal

. The district court though t the insurers should have moved to intervene in 2009, when they had disclaim ed co verage of the claims that King Supply , their insured, had vi olated the Telephone Consumer Protection Act. For the insu rers knew or should have known by then , the court said, that the parties to the TCPA suit

— CE Design and King Supply

— were likely to ne gotiate a settlement that would place liabi lity on the insurers. For King Su p ply couldn’t afford more than the $200,000 that it agreed to pay the class out of its own pocket , and that left only the insurance policies as a source of compensation to the clas s

— and neither class cou nsel n or the members of the class w ould care whose pocket4 No. 12

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the settlement proceeds came out of. The i n surers riposte that until they learned the terms of the settle ment they had assumed their denial of cove r age had taken them off the hook. And indeed , as we’ve noted, they’ve succeeded in pe rsuading the Illinois trial court that their denial of co v erage was justified . They don’t propose to repeat in the federal proceeding their challenge to coverage ; rather they seek i ntervention in ord er to challenge the settlement as im proper b e cause the amount

— the $20 million

— so greatly exceeds King Supply’s ability to co m pensate the class (and class counsel)
, and also because it overstates the value of the plaintiffs’ claims . The insurers a r gue that King Supply sold them down the river by failing to defend against class cou nsel’s $20 million mo n ey grab. They say that at first King Supply h ad fought the class action suit and so they had no incentive to intervene (and incur legal fees). They a r gue in sh ort that the settlement is improper because it is the pro duct of betrayal by King Supply and because they were d enied prompt di s closure of its terms

. This may seem a strange argument. A person or firm takes out insurance in order to shift liability for lo sses i ncurred if the insured risk materialize s ; the insurer is co mpensated for taking the risk off the insured’s shoulders by the premiums that the insured pays to shift the risk . The i nsured might therefore be thought to have no duty to mitigate the risk assumed by the in surer (in this case, by incurring pote n tially heavy litigation costs to defend against being held liable to the involuntary recipients of its faxed solicit ations
, alleged to violate the Tel ephone Consumer Pr o tection Act )

. But as well expla ined in Don R. Sampen & Alec M. Barinholtz, “Enforcement of Settlements between Insu r eds and Claimants, ” 35 Insurance Litigation Reporter 409 (2013),No. 12

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“a growing phenomenon in insurance coverage

- related lit igation is the incidence of settlements reached bet ween i nsu r eds and claimants without the participation of insurers. The settlements typically involve a stip u lated judgment e ntered against the insured accompanied by a covenant not to

ex e cute against the insured given

... by the claimant, and an agreement th at the judgment is enforceable only against i nsurance proceeds. Such settlements give rise to several co ncerns by insurers, a major one being the lack of any real a dversarial relationship b e tween the insured and claimant after reaching the decision that th e insurer will bear the full fina ncial loss. The lack of adversity may lead to the negotiation of ‘sweetheart’ deals where the only effective checks on the
amount of the settl e ment are: (a) the insurer’s policy limits, if not disregarded by a finding of ba d faith against the insurer, and (b) a court’s determination that the settlement amount is reasonable. ” The result may be arb i trary redistributions of wealth from insurers to the plaintiffs who sued the insured, often with weak claims

. T he insurers in this case were right to worry that class counsel in the Telephone Consumer Pr otection Act class action suit and the defendant in that suit, King Supply, might collude to mulct the insurance company for an excessive r e covery, favorable to the class and to class counsel and harmless to the class action defen d ant. But they should have begun w orrying when the suit was filed rather than almost three years later. Almost all class a ctions are settled, and as we’ve noted in recent cases a class action settlement may be the product of tacit collusion b etween class counsel and defen d ant. See, e.g., Pearson v. NBTY , Inc.

, 772 F.3d 778, 786

– 87 (7th Cir. 2014); Redman v. Radio S hack Corp. , 768 F.3d 622, 629 (7th Cir. 2014); Eubank v. Pella Corp ., 753 F.3d 718, 720 (7th Cir. 2014)

. The reason is6 No. 12

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that the optimal settlement for the se a n tagonists is one that awards large attorneys’ fees to class counsel but modest damages to the class members, for then the overall cost of the settlement to the defendant is capped at a relatively modest level while the class counsel receive generous atto rneys’ fees. T he class members receive li t tle

— but they have no control over the litigation or the terms of settlement

. The twist in this case is that the defendant, King Supply, could afford to agr ee to a very generous settlement of the class claim because 99 percent of the cost (all but the $200,000) would be borne by its insurers rather than by it . The settl ement would be generous to the class members as well as class cou n sel , but virtually harmle ss to the defendant

. The Supreme Court of Illinois has noted in such a case the insurer’s argument “that, in se t tlement agreements such as the one at issue

... the insured’s own money is never at risk and, therefore, the insured has no incentive to contest l iabi l ity or damages with the injured plaintiff. A c cording to [the insurer], since the insured is essentially paying with the
i n surer’s money, the insured can, and will
, agree to any amount of damages the injured plaintiff requests.” Gu i llen ex rel. Gu i llen v. Pot o mac Ins. Co. of Illinois , 785 N.E.2d 1, 13 (Ill. 2003). The court went on to rule that “with respect to the i nsured’s d e cision to settle, the litmus test must be whether, considering the totality of the circumstances, the insured’s decision ‘confor med to the standard of a prudent uni nsured .’” Id . at 14 (emphasis in original). The insurers should have foreseen the danger of such a settlement from the outset; had they wished to challenge it on the ground that class counsel and King Supply were co nspir ing to overcompensate the class, they should haveNo. 12

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moved to intervene at the outset of the litigation, not nearly three years later, when the settlement had been negot i ated and was about to be presented to the district court for a pproval . At that late stage the only object of the intervention could be to block the settlement and put the class action suit back to where it had been in 2009 . So gratuitous an e x tension of a multi

- year litigation should not be encouraged.

From the get

- go the insurers had reason t o believe that the class action could well harm their interests, and Fed. R. Civ. P. 24 (a) and (b) require t hat t he motion to intervene be timely

. It was not in this case, which had dragged on for years and would be doomed to drag on for addit i onal years

w ere the motion to be granted. A prospective intervenor
must move to intervene as soon as it “k n ows or has reason to know that [its] interests might be adversely affected by the outcome of the litig a tion.” Soka o gon Chippewa Community v. Babbitt
, 214 F.3d 94 1, 949 (7th Cir. 2000). The insurers’ m otion to intervene in the federal litigation was untimely and ther e fore rightly denied. See Larson v. JPMo rgan Chase & Co
., 530 F.3d 578, 583

– 84 (7th Cir. 2008).

Rather than intervene belatedly , the insurers might hav e been expected to exercise from the outset of the class a c tion their right under the insurance policies to control and co nduct the insured’s (King Supply’s) defense. Then they could have refused to agree to a settlement that cost them $20 mi llion (m i nus $ 200,000). At argument their lawyer said they’d decided not to take over the defense because that would have r e quired them to incur legal fees. Yet expending a few hundred thousand dollars on legal fees to defend against a possible loss of $20 million would have been a reasonable
investment

.8 No. 12

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Granted, when t he insurers moved to intervene they were in an awkward position. The district court had not d ecided whether to approve the se t tlement and the insurers were still at risk of losing the coverage dispute in t he Illinois court system

. Having denied coverage they couldn’t control King Supply’s defense
, against its will
, by intervening , for by denying coverage they had disclaimed any duty to inde m n ify King Supply, placing that company in an awkward p o s ition if th e i n surers controlled its defense ; the insurers would have no skin in the game

. So even if the insurers had filed a timely motion to intervene, their interest might well have been deemed too contingent on uncertain events to ju s tify granting their motion

. See, e.g., Travelers Indemnity Co. v. Din g well , 884 F.2d 629, 638

– 39 ( 1st Cir. 1989) ; Restor

- A

- Dent Dental Laboratories, Inc. v. Cert i fied Alloy Products, Inc. , 725 F.2d 871, 874

– 76 (2d Cir. 1984); cf. Ross v. Marshall , 426 F.3d 745, 757

– 60 (5th Cir. 2005)

. It may ther e fore have made more sense for them to have ignored the present litigation entirely
, rather than trying to become a party to it, and to have relied on the Ill i nois courts to rule that the insurance policies do not cover liabi l ity for violating the Telephone Consumer Protection Act
, or that King Su p ply had failed to deal in good faith with their insurers in se t tling the case as it did

. The insurers have won just the first round in the Illinois litigation; it remains to be determined whether thei r victory will withstand appellate review. But all that matters in this

a p peal is that in the present litigation they mishandled their response to the class action suit again s t their i n sured.

A FFIRMED

.No. 12

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H AMILTON , Circuit Judge , concurring

. I join full y Judge Posner’s opinion for the court affirming the denial of the i nsurers’ motion to intervene as untimely . I write separately to
note my agreement with the district court’s alternative but more important holding, which Judge Posner’s opinion acknowledge s but does not actually resolve: the insurance companies lacked the sort of interest in the case that would justify mandatory or permissi ve intervention. Even if the insurers had sought to intervene back in 2009, the district court said , intervention still would have been d enied. CE Design Ltd. v. King Supply Co. , 2012 WL 2976909, at *13

– 15 (N.D. Ill. July 20, 2012). Having denied coverage for both defense and indemnification, the district court re asoned, the insurers lacked an “interest in the property or transaction that is the subject of the action” needed to inte rvene as of right under Rule 24(a) and lacked “a claim or d efense that share s with the main action a common question of law or fact” needed for permissive intervention under Rule 24(b). I agree. The question is important because such disputes can arise any time a liability insurer denies coverage. The world is a dangerous and liti gious place. People and businesses buy liability insurance in large part for peace of mind

— the knowledge that if one is sued, the insurer will provide a l egal defense and will indemnify for a covered loss up to the policy limits.

When an insurer breaches its duty to defend or indemn ify its insured, it’s not just any breach of contract. An insu rer’s breach abandons its insured and deprives it of the peace of mind it has bought. Mo reover, mo st contract law assumes that the victim of a seller’s breach can “co ver” for the breach10 No. 12

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by buying a substitute prod uct or service. That assumption does not apply to a liability insurer’s breach. There is no market for insuring risks already realized. Once a claim for potential loss is known, no other insurer will step up t o pr ovide coverage at a reasonable premium. The abandoned i nsured is left truly on its own. 1 The premise of the se insurers’ motion to intervene, whether timely or not, is that insurers who might later be found to have breached their coverage contract need to i ntervene to protect themselves from a settlement they might be required to pay without having participated in the deal. The insurers say they are either entitled or should be permi tted to join the underlying tort suit to try to derail a settl ement tha t their insured has reached to try to save it from the worst consequences of the insurers’ breach.

T he district court here correctly rejected that premise. I nsurers gain an interest in an underlying tort suit

— and r e1 For that reason, courts generally provide fairly light scrutiny to se ttlements like this one, in which the abandoned insured makes a deal with the injured plaintiffs for a modest payment from the insured with perhaps much more to come from the insurer, typically by means of a covenant not to execute or an assignment of available insurance proceeds to the plaintiffs, if coverage can be shown. See, e .g., Home Federal Savings Bank v. Ticor Title Ins. Co ., 695 F.3d 725, 736 (7th Cir. 2012) ; Cincinnati Ins. Co. v. Young , 852 N.E.2d 8, 14 (Ind. App. 2006) ; Midwestern Indemnity Co. v. Laikin , 119 F. Supp. 2d 831, 838

– 42 (S.D. Ind. 2000); Frankenmuth Mut ual Ins. Co. v. Williams , 690 N.E.2d 675, 679 (Ind. 1997); Unit ed Services A utomobile Ass’n v. Morris , 741 P.2d 246, 253

– 54 (Ariz. 1987); Miller v. Shugart , 316 N.W.2d 729, 733

– 35 (Minn. 1982); Restatement (Second) of Judgments § 57 (1982 ). For the Illinois standard regarding the reason

a bleness of such settlements, se e Guillen ex rel. Guillen v. Potomac Ins. Co. of Illinois , 785 N.E.2d 1, 1 4 (Ill. 2003).No. 12

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quire protection from a settlement in tha t case

— if and only if they lose the coverage issue (typically in a separate suit) and are therefore on the hook to indemnify the insured.
I realize, of course, that it seems unlikely there was an a ctual breach in this case. The Illinois trial court has fou nd the insurers had no duty to cover King Supply in this case, and the policy language seems pretty clearly in their favor. But the motion to intervene, whether timely or not, was d esigned to protect the insurers if and only if they ultimately lose the cov erage issue. For purposes of the intervention i ssue, we need to assume for now that the insurers will be found to have breached. The First Circuit rejected a similar effort by insurers denying coverage to intervene to challenge a settlement made by their i nsured in Travelers Indemnity Co. v. Dingwell
, 884 F.2d 629, 638

– 41 (1st Cir. 1989) . The court held that the insurers did not have the sort of interest in the underlying tort case that would allow them to intervene either by right or by permission to chall enge the settlement

. The court re asoned that when an insurer denies coverage, its interest in the underlying tort case is entirely contingent on whether the insurer was within its rights to deny coverage. A court deciding coverage might determine that the liability was not covered, so permitting intervention to argue about the vali dity of any settlement in the tort case would “grant the insu rer a double bite at escaping liability.” Id. at 639 (citation omitted). The First Circuit’s opinion in Travelers is careful, tho rough, and persuasive, and we should follow it. If anything, its reasoning applies with even greater force in this case where the insurers did not agree, as they did in Travelers , to12 No. 12

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pay for the tort defense. Consistent with Travelers on th e lack of an interest to support intervention, see also Restor

- A

- Dent Dental Laboratories, Inc. v. Certified Alloy Products, Inc. , 725 F.2d 871, 874

– 76 (2d Cir. 1984) (affirming denial of insurer’s motion for intervention as of right and by permission in u nderlying tort case in effort to clarify whether adverse jud gment would be covered loss or not); Cincinnati Ins. Co. v. Young , 852 N.E.2d 8, 13

– 16 (Ind. App. 2006) (reversing grant of insurer’s motion under analogous Indiana procedure to intervene to appea l insured’s liability where coverage was contested). 2 Adopting the reasoning found in these cases, the district court correctly found that the motion to intervene would have been denied even if it had been timely.

2 The Fifth Circuit took a different approach in Ross v. Marshall , 426 F.3d 745, 757

– 60 (5th Cir. 2005), holding that an insurer that had defen ded a tort case under a reservation of rights was entitled to intervene in the underlying tort case to appeal after those parties had settled with an assignment of defendant’s insurance coverage to plaintiffs. In that case, however, the district court had also held that the loss was covered under the insurance policy. Id . at 750. That holding in my view gave the insurer a direct interest in the tort case , distinguishing the case from Dingwell and Restor

- A

- Dent.