Opinion ID: 149882
Heading Depth: 2
Heading Rank: 4

Heading: St. Paul may need to reimburse the JLJ settlement payment.

Text: St. Paul argues, as held the district court, that the plaintiffs failed to designate which of the claims addressed by the settlement were covered by the St. Paul CGL policy and, therefore, St. Paul properly declined to reimburse the settlement. The plaintiffs argue that they have no burden to allocate, citing Federal Ins. Co. v. Binney & Smith, Inc., 393 Ill.App.3d 277, 332 Ill.Dec. 448, 913 N.E.2d 43, 53-54 (2009). They acknowledge that JLJ's threatened damages in the underlying action were undifferentiated as to the various claims, and they argue that there is no practical way of allocating the settlement. In Binney, an Illinois appellate court confirmed that an insurer must reimburse an insured for its settlement expenses when the settlement was made in reasonable anticipation of liability [7] for damage covered by the insurer's policies, U.S. Gypsum Co. v. Admiral Ins. Co., 268 Ill.App.3d 598, 205 Ill.Dec. 619, 643 N.E.2d 1226, 1244 (1994), and the settlement's primary focus was a claim covered under the insurer's policy, see Commonwealth Edison v. Nat'l Union Fire of Pittsburg, Pa., 323 Ill.App.3d 970, 256 Ill.Dec. 675, 752 N.E.2d 555, 565 (2001). See Binney, 332 Ill.Dec. 448, 913 N.E.2d at 48-49, 53-54. Both Gypsum and Edison relied on the record developed in the underlying action, including allegations in the complaint and evidence presented in the coverage action ( Edison ) or the evidence presented in underlying companion cases that went to trial before settling ( Gypsum ) to conclude that the settlement resolved litigation primarily focused on covered damage. See, e.g., Gypsum, 205 Ill.Dec. 619, 643 N.E.2d at 1244-47; Edison, 256 Ill.Dec. 675, 752 N.E.2d at 565. Edison explains that an insured is not required to apportion its liability for different claims because that would either require the coverage litigation to be a retrial of the merits of the insured's underlying lawsuit and/or would discourage settlement because the insured would essentially have to prove its own liability for the underlying conduct even if it had not made that concession in arriving at a settlement. See Edison, 256 Ill.Dec. 675, 752 N.E.2d at 565-66 (discussing Gypsum). Illinois courts do require the insured to establish when the covered claims arose to allocate responsibility for paying the settlement based on which insurer's policy was in effect at the time. See Binney, 332 Ill.Dec. 448, 913 N.E.2d at 54, 56-57; see also St. Michael's Orthodox Catholic Church v. Preferred Risk Mut. Ins. Co., 146 Ill.App.3d 107, 100 Ill.Dec. 111, 496 N.E.2d 1176, 1179 (1986) (because the insured failed to meet its burden to prove that some of the roof damage occurred during the effective dates of the insurer's policy, judgment was wrongly rendered for insured); Fidelity & Cas. v. Mobay Chem. Corp., 252 Ill.App.3d 992, 192 Ill.Dec. 191, 625 N.E.2d 151, 159 (Ill.App.Ct.1992) (placing burden on insureds to allocate settlements for periods of policy coverage and non-coverage). The district court, relying on Illinois School District Agency v. Pacific Insurance Company, held that the plaintiffs had to allocate the settlement into covered and uncovered claims. See 471 F.3d 714, 723 (7th Cir.2006) (holding that the policy at issue included no duty to allocate defense costs but that if, on remand, the insurer owed the insured a duty to defend a contested claim, the insured might have to prove how much it spent defending that contested claim). This case relied on the specific contract at issue and cited St. Michael's, which addresses allocation based on when claims arose rather than based on liability. Legal commentators have noted the lacuna in the caselaw regarding apportionment of settlements in lieu of litigation that would likely have involved both covered and uncovered claims. See, e.g., ALLAN D. WINDT, 2 INSURANCE CLAIMS AND DISPUTES § 6:31 (Supp. Mar. 2010). Some states place on the insurer the burden of proving (by a preponderance of the evidence) that specific settlement costs could be allocated solely to claims for relief that are not even potentially covered by the insurance policy. See, e.g., Buss v. Superior Ct., 16 Cal.4th 35, 65 Cal.Rptr.2d 366, 939 P.2d 766, 778 (1997) (holding that an insurer may seek reimbursement of defense costs that may be allocated to claims that are not even potentially covered because a party desiring relief carries the burden of proof); COUCH ON INSURANCE 3D § 226:129, at XXX-XXX-XXX (2005). Other courts place the burden to segregate claims on the insured. See, e.g., Comsys Info. Tech. Servs., Inc. v. Twin City Fire Inst. Co., 130 S.W.3d 181, 198-200 (Tex. Ct.App. [Houston-14th Dist.] 2003), pet. denied. Still others vary the burden: initially on the insured to prove coverage, on the insurer to prove the existence of an exclusion, and back to the insured to prove an exception to an exclusion. Lastly, courts generally addressing corporate directors and officers liability insurance policies (D & O policies) sometimes use the larger-settlement rule, where an insurer is responsible for the settlement except to the extent it is larger because of uncovered claims. See, e.g., Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d 955, 961-62 (7th Cir.1995) (Illinois law). [8] Consistent with the Illinois policy that a coverage action should not require the insureds to conclusively establish their own liability in the interest of promoting settlement, we think the proper inquiry is whether the claims were not even potentially covered by the insurance policy. See, e.g., Gypsum, 205 Ill.Dec. 619, 643 N.E.2d at 1244 (noting the benefits of settlement). A competing policy interest is equityit is inequitable to require an insurer to pay for a settlement that is clearly not within the terms of its policy. Consequently, our prediction is that Illinois courts, in cases in which it is possible that none of the settlement was attributable to the dismissal of claims for damage covered by the insurer's policy, would evaluate whether a primary focus of the claims that were settled was a potentially covered loss (burden on the insured). Conversely, if it can be established that the claims were not even potentially covered (burden on the insurer), then the insurer is not required to reimburse the settlement. This primary focus language is derived from the Commonwealth Edison case. See Edison, 256 Ill.Dec. 675, 752 N.E.2d at 565; see also Binney, 332 Ill.Dec. 448, 913 N.E.2d at 54 (citing Edison ). Because, in this case, the parties contest whether the settlement was made in anticipation of covered claims, the burden should be on the insured to prove coverage of the settlement in the first place and then on the insurer to prove the existence of exclusions barring coverage. As the district court held, several of the allegations in the underlying action's complaint deal with claims and conduct outside of the policy coverage, including the trademark claims based on the product names and JLJ's false advertising claim. See Santa's Best III, WL 4328192, at -9. We agree with these holdings based on the plain language of St. Paul's policy. The only remaining coverage dispute, therefore, is whether the allegations and record evidence supporting the trade dress claim suggest that the primary focus of settlement was damages payments for a covered infringement of slogan claim. The district court concluded that plaintiffs had not made an allocation of the settlement and therefore denied any reimbursement for the settlement. Although the district court's inquiry is close to the one we predict Illinois courts would require, we will remand to allow the district court to consider the record evidence (and supplemental briefing or an evidentiary hearing if it so chooses, although it may choose not to do so) of whether a primary focus of the underlying action was a covered loss. In addition, St. Paul may attempt to prove that the MPMK exclusion applies to defeat recovery under the policy.