NONPRECEDENTIAL DIS POS ITION To be cited only in accordance with Fed. R. A pp. P. 32.1


# United States Court of Appeals

F o r t h e S e v e n t h C i r c u i t C h i c a g o , I l l i n o i s 6 0 6 0 4 Argued January 10, 2008 Decided January 22, 2008



### B e f o r e

H o n

. F R A N K H. E A S T E R B R O O K , Chief Judge



### H o n

. K E N N E T H F. R I P P L E , Circuit Judge



### H o n

. I L A N A D I A M O N D R O V N E R , Cir cuit Judge

No. 06

- 4372

N U T M E G I N S U R A N C E C O M P A N Y , Plaintiff

- Appellant

,

v

.
E A S T L A K E M A N A G E M E N T & D E V E L O P M E N T C O R P O R A T I O N , 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 po licy it issued does not apply to a claim that East Lake, the insured, failed to pay i nterest on security deposits for rental properties a nd 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 amb i guity in the insured’s favor, and entered judgment against N utmeg. 2 006 U.S. Dist. L E X I S 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 litig ation by the tenants against Ea st Lake began in November 2000. Nutmeg hiredNo. 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 Nutme g reserved the right to deny cove rage. Another two years passed before Nutmeg informed East Lake that it was act ually denying coverage. The federal litigation, seeking a declaratory jud g ment that the policy does not cover the claims, was filed in 2005.

Whe ther 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 Cas ualty & 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 le t ter, East Lake ag reed 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 r esponds 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 settl ement proposal, had it known that it was litigating on its own dime.

Whether these possibilities add up to prejud ice doesn’t matter, however, if Nu tmeg’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 wit hout informing its client that it reserves the right t o 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 d elay as waiver. See, e.g., Gibraltar Insurance Co. v. Va rkalis

, 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 co n test 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 unin surable as a

ma t ter 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 i n surable, but we bypass that question. We could not find any Illinois cases on the su b ject, 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 I n demnity 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 othe r wise.

A F F I R M E D