Court Opinion

ID: 2995512
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:20:45.087704+00
Date Added: 2024-06-11T18:01:26.054525
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

Nos. 00-3487 & 00-3627

CHARTER OAK FIRE INSURANCE COMPANY,
a Connecticut Corporation,

Plaintiff-Appellant/
Cross-Appellee,

v.

HEDEEN & COMPANIES, C.V. HEDEEN’S FUN
FACTORY, C.V. HEDEEN’S FUN CITY, U.S.A., FUNMAKER,
CLEMENS V. HEDEEN, JR., AND PATTI JO HEDEEN,

Defendants-Appellees/
Cross-Appellants.

Appeals from the United States District Court
for the Eastern District of Wisconsin.
No. 97-C-0037--John W. Reynolds, Judge.

ARGUED May 16, 2001--DECIDED February 4, 2002

  Before HARLINGTON WOOD, JR., COFFEY, and
WILLIAMS, Circuit Judges.

  HARLINGTON WOOD, JR., Circuit Judge.
These appeals arise out of a declaratory
judgment action filed by Charter Oak Fire
Insurance Company ("Charter Oak") against
Hedeen and Companies, Funmaker, C.V.
Hedeen’s Fun City, U.S.A., C.V. Hedeen’s
Fun Factory, Clemens V. Hedeen, Jr., and
Patti Jo Hedeen, who we will refer
tocollectively as "the Hedeens." The
district court granted summary judgment
in favor of the Hedeens, but refused to
award the full amount of damages the
Hedeens were seeking. The parties then
filed these timely cross-appeals. The
district court had jurisdiction pursuant
to 28 U.S.C. sec. 1332, and appellate
jurisdiction exists under 28 U.S.C. sec.
1291.

I.   BACKGROUND

  Clemens V. Hedeen, Jr. ("Hedeen") is a
toy inventor from Sturgeon Bay,
Wisconsin, who has established various
businesses the purposes of which are to
develop toys and market toy concepts to
toy manufacturers. Clemens Hedeen and
Patti Jo Hedeen are the general partners
of Hedeen and Companies and Funmaker.
Clemens Hedeen is the sole proprietor of
both C.V. Hedeen’s Fun City, U.S.A. and
C.V. Hedeen’s Fun Factory. Charter Oak
entered into a series of commercial
general liability insurance contracts
with Hedeen International, C.V. Hedeen’s
Fun Factory and Those Characters from
Wisconsin, and Clemens V. Hedeen, Jr. DBA
as the named insureds. These policies,
which we will refer to collectively as
"the contract" because they are identical
in all applicable ways, were effective
between January 4, 1993 and January 4,
1997 and provided liability coverage for
covered third-party claims of "property
damage," "bodily injury," and
"advertising injury."

  In June 1986, Hedeen, through Funmaker,
entered into a royalty agreement with
Lewis Galoob Toys, Inc. ("Galoob"), a
large manufacturer and retailer of toys.
Under the agreement, Galoob agreed to pay
royalties to Hedeen for the right to
develop and market a line of miniature
toy vehicles called "Micro Machines." In
1987, Galoob became the exclusive
marketer of Micro Machines, and at that
time, Galoob registered the "MICRO
MACHINES" name and logo with the United
States Patent and Trademark Office.

  Micro Machines grew in popularity,
ultimately becoming by some estimates a
$700 million line of toys. Disputes arose
between Hedeen and Galoob as to the scope
of their royalty agreement, resulting in
several supplemental royalty agreements.
By May 1996, Galoob had paid Hedeen
approximately $18.5 million in royalties
for the Micro Machine line. The disputes
between Galoob and Hedeen persisted
throughout this royalty period. Hedeen
claimed a right to royalties in new Micro
Machine products that were developed from
images licensed from third parties,
including Star Wars, Star Trek, and Power
Ranger lines of Micro Machines. Galoob
asserted that these new products were
outside the scope of the royalty
agreements. In 1995, Hedeen began sending
letters to Galoob asserting breach of
contract with respect to the royalty
agreements. On June 2, 1995, Galoob filed
a declaratory judgment action in the
United States District Court for the
Northern District of California (the
"Galoob lawsuit") against the Hedeens
based on the royalty agreements. In
addition to the declaratory judgment,
Galoob sought an injunction restraining
the Hedeens from using the Micro Machines
trademark.

  Hedeen tendered the defense of the
original Galoob complaint to Charter Oak
in June 1995. Charter Oak refused to
defend, and Hedeen now concedes that
Charter Oak did not have a duty to defend
the original complaint. At the end of
June 1995, the Hedeens filed their answer
and a counterclaim against Galoob,
seeking damages including additional
royalties. Galoob filed a First Amended
Complaint on September 3, 1996. The
amended complaint alleged, among other
things, as follows:

Since approximately 1993, the Hedeens
have used Galoob’s MICRO MACHINE and/or
MICRO MACHINE LOGO trademarks in
connection with their own business
activities, despite having no right,
title or interest therein. Specifically,
the Hedeens, doing business under the
name C.V. Hedeen’s Fun Factory, have sent
business letters under letterhead setting
forth the words "MICRO MACHINE" inside a
drawing of a toy train locomotive. The
Hedeens’ use of this letterhead is
without permission or authority from
Galoob, and has created actual confusion,
mistake and deception among the
commercial public, and is likely to cause
further confusion, mistake and deception,
as to the true and correct source, origin
and sponsorship of the product line of
toys and other goods sold under the MICRO
MACHINE and MICRO MACHINE LOGO
trademarks.
The amended complaint sought both an
injunction and money damages for this
alleged violation of the Lanham Act.
Hedeen requested that Charter Oak provide
a defense for the amended complaint,
asserting that potential coverage existed
under the "advertising injury" provision
of the contract. Charter Oak declined.

  In January 1997, Charter Oak filed the
present lawsuit in the United States
District Court for the Eastern District
of Wisconsin, seeking a declaratory
judgment that it was not required to
provide a defense in the Galoob lawsuit.
The Hedeens filed a counterclaim, seeking
a declaratory judgment in their favor as
well as their costs and fees incurred in
the Galoob lawsuit and in the Wisconsin
action./1 On cross-motions for summary
judgment, the district court concluded
that Charter Oak was required to defend
against Galoob’s First Amended Complaint
and granted declaratory judgment in favor
of the Hedeens. The parties then began
discovery and briefing to determine the
Hedeens’ fees and expenses. In December
1999, the district judge appointed a
special master pursuant to Fed. R. Civ.
P. 53 to review the parties’ submissions.

  The special master filed her
recommendation on May 10, 2000,
concluding that the Hedeens should
recover $143,419.27 plus interest for
their fees and expenses in Charter Oak’s
declaratory judgment action. Neither
party objected to this amount, and the
district court adopted the special
master’s recommendation. With respect to
the Galoob case, the Hedeens sought
$684,471.63 in fees and costs. The
special master recommended that the
Hedeens be awarded $537,133.22 plus
interest. Both parties objected to this
recommendation. The district court denied
the Hedeens’ objection and granted in
part the objections raised by Charter
Oak, reducing the award by $75,993.75
after disallowing a portion of the
recommended fees for one of the Hedeens’
attorneys, Robert Vizas. The district
court denied Charter Oak’s general
objection that the recommended award
improperly included fees and expenses
incurred to pursue the Hedeens’ royalty
claims against Galoob and awarded fees
and expenses relating to the Galoob
lawsuit in the amount of $461,139.47 plus
interest.

  Charter Oak filed this timely appeal,
arguing that the district court erred in
concluding that trademark infringement
was covered under the contract. In the
alternative, Charter Oak contends that
even if it is required to defend against
actions for trademark infringement, the
alleged infringement in the Galoob case
did not occur in the course of the
Hedeens’ advertising and was, therefore,
outside the contract. Finally, Charter
Oak challenges the district court’s fee
award as it relates to the Galoob case,
arguing that the majority of the fees
awarded arose from activity relating not
to the defense of the trademark
infringement claim but rather to the
Hedeens’ affirmative claims for
additional royalties. The Hedeens filed a
timely cross-appeal, challenging the
district court’s reduction of their fees
and costs from the Galoob action.

II.   ANALYSIS

  We review the district court’s grant of
summary judgment de novo. Ritchie v.
Glidden Co., 242 F.3d 713, 720 (7th Cir.
2001). "As a federal court sitting in
diversity, we apply state substantive law
and federal procedural law." Id. (citing
Erie R.R. Co. v. Tompkins, 304 U.S. 64,
78 (1938)). Under Wisconsin law, "[a]n
insurance carrier’s duty to defend
insured in a third-party suit is broader
than its duty of indemnification and is
predicated on allegations in a complaint
which, if proved, would give rise to
recovery under the terms and conditions
of the insurance policy." Elliott v.
Donahue, 485 N.W.2d 403, 407 (Wis. 1992).
"The duty to defend is broader than the
duty to indemnify, because the duty to
defend is triggered by arguable, as
opposed to actual, coverage." General
Cas. Co. of Wis. v. Hills, 561 N.W.2d
718, 722 n.11 (Wis. 1997). "In
determining an insurer’s duty to defend,
we apply the factual allegations present
in the complaint to the terms of the
disputed insurance policy. We liberally
construe those allegations and assume all
reasonable inferences." Doyle v. Engelke,
580 N.W.2d 245, 248 (Wis. 1998). "Any
doubt as to the existence of the duty to
defend must be resolved in favor of the
insured." Wausau Tile, Inc. v. County
Concrete Corp., 593 N.W.2d 445, 459 (Wis.
1999). As we have recognized, under
Wisconsin law, "[w]hat is important is
not the legal label that the plaintiff
attaches to the defendant’s (that is the
insured’s) conduct, but whether that
conduct as alleged in the complaint is at
least arguably within one or more of the
categories of wrongdoing that the policy
covers." Curtis-Universal, Inc. v.
Sheboygan Emergency Med. Servs., Inc., 43
F.3d 1119, 1122 (7th Cir. 1994) (citing
cases).

  The "advertising injury" provision of
the contract provided, "We will pay those
sums that the insured becomes legally
obligated to pay as damages because of
personal injury or advertising injury to
which this coverage applies. We will have
the right and duty to defend any suit
seeking those damages." The contract went
on to state, "This insurance applies to:
. . . ’Advertising injury’ caused by an
offense committed in the course of
advertising your goods, products or
services" and defined "adverting injury"
to include injury arising out of the
"[m]isappropriation of advertising ideas
or style of doing business" and
"[i]nfringement of copyright, title or
slogan."

  Charter Oak first contends that
trademark infringement is not a covered
offense under the contract because the
contract definition of "advertising
injury" does not expressly reference
trademark infringement, one of "the
oldest and best known intellectual
property offenses."/2 Charter Oak argues
that the specific inclusion of
"infringement of copyright" in the list
of advertising injuries leads to the
conclusion that the absence of an express
reference to "trademark infringement"
means that trademark infringement is not
covered under the contract. However, the
contract also references "infringement of
. . . title or slogan," conduct which is
not a distinct, recognized offense. As we
recognized in interpreting identical
language in Curtis-Universal,
infringement of title "presumably"
involves titles "of books, songs,
products, services, and so forth" and is
not clearly limited, as Charter Oak
asserts, to the infringement of a non-
copyrightable title of a creative work.
See Curtis-Universal, 43 F.3d at 1124. In
Zurich Insurance Company v. Amcor
Sunclipse North America, 241 F.3d 605,
608 (7th Cir. 2001) ("Amcor Sunclipse"),
in analyzing the word "title" in the
phrase "infringement of copyright, title
or slogan," we held that "[r]eading these
words together implies that
’infringement’ means using someone else’s
words, so that ’title’ refers to names
and related trademarks, following the
phrase ’copyright infringement.’"

  In ShoLodge, Inc. v. Travelers Indemnity
Company of Illinois, 168 F.3d 256, 259-60
(6th Cir. 1999), cited by Charter Oak,
the Sixth Circuit interpreted the word
"title" in the phrase "infringement of
copyright, title, or slogan" as
unambiguously referring only "to the non-
copyrightable title of a book, film, or
other literary or artistic work." The
Eighth Circuit adopted the ShoLodge
court’s reasoning in Callas Enterprises,
Inc. v. The Travelers Indemnity Company
of America, 193 F.3d 952, 956-57 (8th
Cir. 1999). However, building on the
comments in Amcor Sunclipse, 241 F.3d at
608, and Curtis-Universal, 43 F.3d at
1124, we find that the term "infringement
of . . . title" as used in the contract
is broad enough to encompass claims of
trademark infringement as alleged in the
amended Galoob complaint, and reject the
contrary holdings of ShoLodge and Callas.
We, therefore, need not address the
applicability of the "misappropriation of
advertising ideas or style of doing
business" provision of the contract, and
we turn our attention to an analysis of
whether the injury as alleged was
committed in the course of advertising
the Hedeens’ goods, products, or services
as required for coverage under the
contract.

  The amended Galoob complaint alleged
that the Hedeens sent "business letters"
on letterhead which included the Mirco
Machines trademark and that this practice
"created actual confusion, mistake and
deception among the commercial public"
and resulted in "unlawful profits" for
the Hedeens. Under the contract, in order
for the advertising injury provision to
apply, the alleged offense must have been
"committed in the course of advertising
[the Hedeens’] goods, products or
services," an element which Charter Oak
contends is missing in the present case.
The contract does not define
"advertising," however, the Wisconsin
Supreme Court has recognized the
dictionary definition of "advertise" to
be "’[t]o call the attention of the
public to a product or business; . . . to
proclaim the qualities or advantages of
(a product or business) so as to increase
sales’" and "’to call public attention to
esp. by emphasizing desirable qualities
so as to arouse a desire to buy or patronize.’"
Atlantic Mut. Ins. Co. v. Badger Med.
Supply Co., 528 N.W.2d 486, 490 (Wis.
1995) (citations omitted). Charter Oak
cites Amcor Sunclipse, 241 F.3d at 607-
08, for the proposition that a series of
one-on-one customer solicitations does
not constitute "advertising" under the
"advertising injury" provision of the
contract. The allegations of the Galoob
complaint, however, are broader than the
facts in Amcor Sunclipse which involved
the "sale of an existing product, to
established customers." Id. at 607. In
Western States Insurance Company v.
Wisconsin Wholesale Tire, Inc., 184 F.3d
699, 702-03 (7th Cir. 1999), cited in the
Amcor Sunclipse case, this court noted
the difference between "advertising" and
"marketing" and recognized that Wisconsin
courts give "’advertising injury’ clauses
an ordinary-language reading." The
conduct alleged in the amended Galoob
complaint does not fall clearly under a
"marketing" label. There is no mention of
the number or identity of the recipients
of the business letters. However, the
complaint alleges that the use of the
letterhead impacted "the commercial
public" and resulted in "unlawful
profits" for the Hedeens. Furthermore,
the Hedeens are involved in a business
with a very limited commercial audience.
We find that under the allegations of the
complaint, liberally construed, it is at
least arguable that the trademark was
used in the course of the Hedeens’
advertising, triggering Charter Oak’s
duty to defend./3

  Because Charter Oak breached its duty to
defend, the Hedeens were entitled to a
fee award. Both Charter Oak and the
Hedeens challenge the amount at which the
district court set that award. After the
district court found Charter Oak had
breached its duty to defend, the court
set a schedule for briefing on the issue
of damages. The Hedeens filed materials
seeking all of their costs and expenses
in the Galoob action from August 1996
until its conclusion. The Hedeens did not
make any showing that the amount sought
related to the defense of the Galoob suit
rather than their counterclaims. On
September 29, 1998, the district court
issued an order stating that the Hedeens
could recover only the fees and expenses
relating to their defense and not to the
counterclaims. If there was an overlap,
the Hedeens were required to submit a
detailed narrative explanation of how the
fees related to both the defense and the
counterclaims. Charter Oak then had the
opportunity to make specific objections
to the Hedeens’ submissions.

  After receiving voluminous submissions
from both parties, the district court
referred the matter to a special master.
The special master reviewed the parties’
submissions line-by-line to determine
whether the fees and expenses requested
by the Hedeens related to the defense of
the Galoob suit. On May 10, 2000, the
special master issued a detailed,
seventy-three page recommendation. As
previously noted, the district court
reduced the special master’s recommended
award in connection with the Galoob case
by $75,993.75 after disallowing a portion
of the recommended fees for Robert Vizas
and awarded the Hedeens $461,139.47.

  Charter Oak asserts that the district
court’s fee award as it relates to the
Galoob case was erroneous because the
majority of the fees awarded arose from
activity relating not to the defense of
the trademark infringement claim but
rather to the Hedeens’ affirmative claims
for additional royalties. Charter Oak
first contends that the district court
employed the wrong legal standard in
making its fee award. Charter Oak urges
us to apply the offensive versus
defensive posture analysis set out in
Smart Style Industries, Inc. v.
Pennsylvania General Insurance Company,
930 F. Supp. 159 (S.D.N.Y. 1996). The
district court, however, recognized the
correct standard under Wisconsin law,
which holds that when an insurer breaches
its duty to defend, the insured can
recover damages which naturally flow from
that breach, including costs and
attorney’s fees incurred by the insured
in defending the suit. Towne Realty, Inc.
v. Zurich Ins. Co., 548 N.W.2d 64, 68
(Wis. 1996) (quotations and citations
omitted). "Only legal expenses incurred
while ’defending the suit’ against the
insured are recoverable." Id. The Towne
Realty court expressly held that defense
of the suit does not extend to
countersuits, noting "[a]t the risk of
stating the obvious, a countersuit
initiated by the insured cannot logically
be a suit seeking damages from the
insured." Id. at 69 (emphasis in
original).

  Charter Oak next contends that the fees
and costs incurred in connection with the
trademark infringement claim were at most
$16,871.38. However, even if the
complaint at issue contains other
theories of liability not covered by the
insurance policy, an insurer is obligated
to defend the entire action if just one
theory of liability appears to fall
within the coverage of the policy. School
Dist. of Shorewood v. Wausau Ins. Cos.,
488 N.W.2d 82, 88 (Wis. 1992). As we
recently recognized in Lockwood
International, B.V. v. Volm Bag Company,
Inc., No. 01-1275, 2001 WL 1549239, at *1
(7th Cir. Dec. 6, 2001) (applying
Wisconsin law), an insurer generally
bears the entire expense of conducting
its insured’s defense even though its
duty to indemnify is "limited to so much
of the judgment or settlement as was
fairly allocable to the claims . . . that
were covered by the policy." This
difference is based on the fact that it
is more difficult to apportion defense
costs than damages. Id. The district
court applied the proper legal standard,
allowing all fees incurred in defending
the Galoob action, and we turn our
analysis to the factual findings
regarding whether certain amounts were
recoverable under this standard.

  "Because this case involves both a
special master and a district judge, two
standards of review are relevant: the
standard the district judge applies to
the special master’s report and the
standard we apply to the district court’s
opinion." Cook v. Neidert, 142 F.3d 1004,
1009 (7th Cir. 1998). A district court
accepts a special master’s findings of
fact unless they are clearly erroneous.
Id. at 1010 (citing Fed. R. Civ. P.
53(e)(2)). We review the district court’s
decision for an abuse of discretion. Id.
at 1011. Charter Oak fails to show that
the district court’s decision
characterizing the fees allowed as
relating to the defense of the amended
Galoob complaint was an abuse of
discretion. The special master’s finding,
adopted by the district court, that the
fees awarded related to the defense of
the Galoob action was not clearly
erroneous; in fact, we note that the
special master’s report was thorough,
well-reasoned, and fully supported.
Charter Oak’s claim of error fails.
Charter Oak further argues that the
Hedeens cannot recover some specific
amounts billed to them by outside counsel
because these amounts relate to
administrative and clerical tasks which
should be considered overhead costs and
not costs to be passed on to a client.
Charter Oak objected to these amounts
before the special master. The special
master recommended that the district
court allow these challenged amounts. The
special master recognized that in
practice insurance companies often
negotiate with law firms as to rates and
matters for which the firm will be
reimbursed. As a result of such
negotiations, insurance companies are
sometimes able to pay lower rates than
private litigants might obtain. The
special master believed that because
Charter Oak declined to defend, it should
not be allowed to second guess the
Hedeens’ payment arrangements, which the
special master characterized as
reasonable. The special master noted that
the Hedeens were "cost conscious" and
that the Hedeens had proven themselves to
be capable of scrutinizing the legal
bills they received to try to keep
charges in line. The district court
adopted the special master’s
recommendation. Once again, our review of
the record shows that the district court
did not abuse its discretion in adopting
the recommendation./4

  In their cross-appeal, the Hedeens
challenge (1) the district court’s
reduction of fees for attorney Vizas and
(2) the district court’s adoption of the
special master’s recommendation that the
Hedeens’ "directly incurred expenses" be
disallowed. With respect to Vizas’ fees,
the Hedeens sought reimbursement in the
amount of $81,468.75 for fees paid to
Robert Vizas, who was described as lead
counsel for the litigation. According to
the Hedeens, Vizas was to be heavily
involved in strategy decisions and in
trial, but not in the day-to-day
preparation of the case. Vizas was not a
partner at Legal Strategies Group
("LSG"), the law firm representing the
Hedeens in the Galoob suit, rather he was
referred to as "Of Counsel" to the firm.
For the most part, Vizas billed his time
to the Hedeens separately from
LSG’sbilling, and the Hedeens paid Vizas
directly.

  With the exception of January and
February 1997, the only documentation
submitted in connection with Vizas’ fees
is the total number of hours billed per
month without any descriptive detail. The
special master, however, reviewed
annotations to entries for other
attorneys contained in bills from LSG
which referenced activities which
included Vizas and used these annotations
to patch together support for Vizas’
fees. The special master stated that she
believed there was sufficient evidence in
the materials submitted to conclude that
most of Vizas’ time after September 1996
related to both the defense and the
counterclaims. The district court
disagreed. The district judge,
reiterating that the Hedeens had the
burden of proving the fees sought related
to the defense of the Galoob suit, found
that the Hedeens’ submissions of hourly
totals without clarification was
insufficient to meet this burden and
disallowed Vizas’ fees in total, with the
exception of the fees incurred in January
and February 1997. In January and
February 1997, in addition to the
separate, direct bills from Vizas to the
Hedeens, Vizas’ fees were reflected on
the LSG bills. The LSG bills provided
annotations for these Vizas fees. The
district court believed these annotations
were sufficient to establish that a
portion of the fees related to the
defense of the Galoob suit. The district
judge awarded $13,537.50 in fees for
these two months, disallowing only four
hours for which there were no
specifically detailed annotations. The
Hedeens ask that the special master’s
recommendation allowing the majority of
Vizas’ fees be reinstated; however, we
agree with the district judge. The
Hedeens had the burden of showing Vizas’
fees related to the defense of the Galoob
suit, and they failed to offer any
justification or explanation for the
majority of fees sought. The district
court did not abuse its discretion in
denying all fees for which no explanation
was provided.
  Turning to the "directly incurred
expenses," the Hedeens argue that they
are entitled to recover directly
incurred, internal costs which they
contend were incurred in an attempt to
reduce the expense of the Galoob
litigation by diverting work that would
otherwise have been performed by outside
personnel to in-house employees. The
Hedeens sought $75,403.31 in directly
incurred expenses, including salary for
two in-house attorneys and an in-house
accountant and expenses for travel,
postage, copying, phone usage, Lexis, and
subsistence for relocated employees. The
special master believed that the Hedeens
failed to establish with sufficient
detail that these internal costs would
have been avoided had Charter Oak
provided a defense, noting that "in a
case of this magnitude an insured, even
were its insurer providing it with a
defense, would be likely to invest
significant in-house resources in
monitoring and helping in the preparation
of the suit, above and beyond whatever
obligations to cooperate in the defense
the policy might impose." The district
court adopted the special master’s
recommendation and disallowed the
directly incurred expenses. Once again,
the Hedeens fail to show that the
district court abused its discretion in
adopting the recommendation of the
special master. The Hedeens had the
burden of showing that these expenses
would not have been incurred had Charter
Oak defended the Galoob action. The
conclusion that the Hedeens failed to
meet this burden is not clearly
erroneous.

III.   CONCLUSION

  The decision of the district court is
AFFIRMED.

FOOTNOTES

/1 The Galoob lawsuit was settled in 1997, with the
Hedeens transferring all of their rights in Micro
Machines to Galoob in exchange for $32 million.

/2 The term "trademark infringement" is not used in
the contract, and therefore, it is not addressed
under either the definition of an advertising
injury or in the exclusions from coverage.

/3 Citing Elliott, 485 N.W.2d at 406, Charter Oak
asserts in its reply brief "that an insurer does
not breach its contractual duty to defend by
denying coverage where the issue of coverage is
fairly debatable, if the insurer provides cover-
age and a defense once the existence of coverage
is established." However, as the Elliott court
expressly recognized, "[a]n insurer may need to
provide a defense to its insured when the sepa-
rate trial on coverage does not precede the trial
on liability and damages." Id. at 406 (internal
quotations and citations omitted). See also Reid
v. Benz, 629 N.W.2d 262, 267 (Wis. 2001).

/4 Charter Oak’s opening brief includes a challenge
to a portion of the fees awarded by the district
court in connection with the Wisconsin declarato-
ry judgment lawsuit. Charter Oak asserts that it
should be liable for only $22,591.01, the amount
of fees and costs incurred up to August 14, 1998,
the date on which the district court found the
existence of a duty to defend. Charter Oak argues
that the additional fees sought in connection
with the Wisconsin lawsuit were not incurred in
establishing coverage and are, therefore, not
recoverable. Charter Oak raised this argument in
the district court, but it did not specifically
object to the special master’s recommended fee
award for the Wisconsin lawsuit. We need not
consider whether Charter Oak’s failure to object
to the special master’s fee determination consti-
tutes a waiver, because this claim fails on its
merits. The Wisconsin Supreme Court has recog-
nized that when an insurer breaches its contrac-
tual duty to defend, the insurer is "liable to
the insured for all damages that naturally flow
from the breach." Newhouse v. Citizens Sec. Mut.
Ins. Co., 501 N.W.2d 1, 6 (Wis. 1993). These
damages "include: (1) the amount of the judgment
or settlement against the insured plus interest;
(2) costs and attorney fees incurred by the
insured in defending the suit; and (3) any addi-
tional costs that the insured can show naturally
resulted from the breach." Id. As the special
master noted, this is an unusual case in that the
Hedeens incurred over $100,000 in attorney’s fees
in proving up the attorney’s fees from defending
the Galoob action. However, the amount of the
Galoob fee award was vigorously contested by
Charter Oak. The additional fees incurred by the
Hedeens in establishing the amount they were
entitled to recover were not unreasonable and
flow naturally from Charter Oak’s breach of its
duty to defend. The district court correctly
refused to limit the Hedeens’ recovery to fees
and costs incurred up to August 14, 1998.