NONPRECEDENTIAL DISPOSITION

To be cited only in accordance with Fed. R. App. P. 32.1

United States Court of Appeals

For the Seventh Circuit

Chicago, Illinois 60604

Argued January 10, 2008

Decided January 22, 2008

Before

Hon. FRANK H. EASTERBROOK, Chief Judge

Hon. KENNETH F. RIPPLE, Circuit Judge

Hon. ILANA DIAMOND ROVNER, Circuit Judge

No. 06-4372

NUTMEG INSURANCE COMPANY,

Plaintiff-Appellant,

v.

EAST LAKE MANAGEMENT &

DEVELOPMENT CORPORATION,

Defendant-Appellee.

Appeal from the United 

States District Court for the 

Northern District of Illinois, 

Eastern Division.

No. 05 C 1328

John F. Grady, Judge.

Order

In this action under the diversity jurisdiction, an insurer contends that the policy it issued does not apply to a claim that East Lake, the insured, failed to pay interest on security deposits for rental properties and failed to give the tenants timely 

notice when East Lake transferred its managerial role to another firm. The district 

court held that an exclusion in the policy is ambiguous, resolved that ambiguity in 

the insured’s favor, and entered judgment against Nutmeg. 2006 U.S. Dist. LEXIS

85665 (N.D. Ill. Nov. 21, 2006).

We affirm the judgment on a different ground, and without deciding whether the 

district court correctly perceived an ambiguity in this policy. The underlying litigation by the tenants against East Lake began in November 2000. Nutmeg hired 
No. 06-4372 Page 2

counsel to defend its insured, and the litigation proceeded for two years before 

Nutmeg first suggested that its policy might not cover the tenants’ claims. A letter 

in December 2002 alerted East Lake that Nutmeg reserved the right to deny coverage. Another two years passed before Nutmeg informed East Lake that it was actually denying coverage. The federal litigation, seeking a declaratory judgment that 

the policy does not cover the claims, was filed in 2005.

Whether we treat the delay as two years or four, that is too long under Illinois 

law, which the parties agree supplies the rule of decision. If delay produces only a 

claim of estoppel, then an insurer may still prevail by showing that the wait did not 

injure the insured. (Illinois calls this a “prejudice” requirement.) See Western Casualty & Surety Co. v. Brochu, 105 Ill. 2d 486, 475 N.E.2d 872 (1985). Nutmeg says 

that there was no injury, because, after receiving the reservation-of-rights letter, 

East Lake agreed to be represented by the law firm that Nutmeg had hired back in 

2000. East Lake also agreed to a settlement of the state case. But East Lake responds that these steps just made the best of a bad situation: a new law firm would 

have had to be paid out of East Lake’s pocket to get up to speed. East Lake contends 

that it would have conducted the suit differently, including making an early settlement proposal, had it known that it was litigating on its own dime.

Whether these possibilities add up to prejudice doesn’t matter, however, if Nutmeg’s delay is a form of waiver under state law. In Illinois an insurer waives any 

right to deny coverage if it conducts the defense for a sufficiently long period without informing its client that it reserves the right to deny coverage. See, e.g., National Discount Shoes, Inc. v. Royal Globe Insurance Co., 99 Ill. App. 3d 54, 57, 424 

N.E.2d 1166, 1169 (1st Dist. 1981) (collecting authority). Illinois treats lengthy delay as waiver. See, e.g., Gibraltar Insurance Co. v. Varkalis, 46 Ill. 2d 481, 263 

N.E.2d 823 (1970) (17 months). Nutmeg waited too long, whether we treat its delay 

as two years or four. The insurer has not pointed to any Illinois decision allowing an 

insurer to contest coverage despite a two-year-and-up delay in reserving its rights.

Waiver of the right to deny coverage means that an insurer must pay whether or 

not the policy covers the casualty. See National Discount Shoes. Nutmeg maintains 

that the claims advanced in the state case against East Lake are uninsurable as a 

matter of state law, and that neither estoppel nor waiver can require an insurer to 

cover uninsurable claims. The district judge held that the claims in the underlying 

litigation are indeed insurable, but we bypass that question. We could not find any 

Illinois cases on the subject, but other states have held that an insurer’s defense of 

uninsurability may be waived or forfeited along with other limitations on coverage. 

See, e.g., Tomerlin v. Canadian Indemnity Co., 61 Cal. 2d 638, 394 P.2d 571 (1964);

Griggs v. Bertram, 88 N.J. 347, 363 n.4, 443 A.2d 163, 171 n.4 (1982). We see no reason 

to think that Illinois would hold otherwise.

AFFIRMED