Lockwood Int'l, B.V. v. Volm Bag Co., Inc.

• Decision Date: 06 December 2001
• Docket Number: PLAINTIFFS-APPELLEES,No. 01-1275,DEFENDANT-APPELLANT,01-1275
• Citation: 273 F.3d 741
• Parties: (7th Cir. 2001) LOCKWOOD INTERNATIONAL, B.V. AND LOCKWOOD ENGINEERING, B.V., PLAINTIFFS, AND NORTH RIVER INSURANCE COMPANY AND FIDELITY AND GUARANTY INSURANCE COMPANY, INTERVENING, v. VOLM BAG COMPANY, INC.,
• Court: U.S. Court of Appeals — Seventh Circuit

Page 741

273 F.3d 741 (7th Cir. 2001)

LOCKWOOD INTERNATIONAL, B.V. AND LOCKWOOD ENGINEERING, B.V., PLAINTIFFS AND NORTH RIVER INSURANCE COMPANY AND FIDELITY AND GUARANTY INSURANCE COMPANY, INTERVENING PLAINTIFFS-APPELLEES, v. VOLM BAG COMPANY, INC., DEFENDANT-APPELLANT.

No. 01-1275

U.S. Court of Appeals, Seventh Circuit

Argued June 5, 2001

December 06, 2001

Appeal from the United States District Court for the Eastern District of Wisconsin. No. 96 C 673--Rudolph T. Randa, Judge.

Robert L. Gegios, Kohner, Mann & Kailas, Milwaukee, Wi, David A. Guntlett (argued), Gauntlett & Associates, Irvine, CA, for Appellant.

Jeffery A. Schmeckpeper (argued), Kasdorf, Lewis & Switlik, Milwaukee, WI, Susan R. Tyndall, CMT Legal Group, LTD, Waukesha, WI, for Appellee.

Before Flaum, Chief Judge, and Posner and Manion, Circuit Judges.

Posner, Circuit Judge.

This diversity suit, based on Wisconsin law, presents a novel but potentially quite important issue of insurance law: whether a liability insurer, asked to defend (or pay the defense costs in) a suit against its insured that contains some claims that are covered by the insurance policy and others that are not, can limit its responsibility to defend by paying the plaintiff in the liability suit to replead the covered claims as uncovered claims.

For simplicity we treat the case as a three-cornered dispute among a single plaintiff, Lockwood; a single intervenor, North River, the insurance company; and a single defendant, Volm. It began with Lockwood, a foreign manufacturer of machines for weighing and bagging produce, suing Volm, which Lockwood had appointed to be its exclusive North American distributor. Lockwood's complaint charged that Volm had secretly formed and funded a new company, Munter, staffed by former employees of Lockwood that Volm had lured to work for Munter. Having done so, the complaint continued, Volm stole Lockwood's intellectual property and manufactured machines that copied Lockwood's. To complete its infamy, Volm then-- by disparaging Lockwood and its products (even spreading false rumors about Lockwood's financial solidity), by soliciting purchases of Lockwood products and then substituting knock-offs of them manufactured by Munter, and by warning customers that Lockwood machines infringed a Volm patent (acquired by fraud, the complaint alleged)-- had induced customers for weighing and bagging machines to switch their orders from Lockwood's machines to Munter's. The complaint charged that these acts constituted breach of fiduciary duty, tortious interference with contract, unfair competition, and conspiracy. The suit is still pending.

North River had issued a commercial general liability (CGL) policy to Lockwood. Under the heading "personal injury," the policy covers product and producer disparagement. Under the heading of "advertising injury," it covers (so far as bears on this case and does not duplicate "personal injury") misappropriation of "advertising ideas or style of doing business" or "infringement of copyright," provided the misappropriation or infringement occurs "in the course of advertising" the insured's products. Since the complaint expressly charged disparagement of Lockwood and its products, and strongly implied (especially in the bait and switch allegation) that Volm had appropriated Lockwood's "advertising ideas or style of doing business," North River agreed to handle Volm's defense. Had the case gone through to judgment or settlement in the usual way, North River would probably have borne the entire expense of conducting Volm's defense, e.g., School District of Shorewood v. Wausau Ins. Cos., 488 N.W.2d 82, 88 (Wis. 1992); Curtis-Universal, Inc. v. Sheboygan Emergency Medical Services, Inc., 43 F.3d 1119, 1122 (7th Cir. 1994) (Wisconsin law); United States v. Security Management Co., Inc., 96 F.3d 260, 268 (7th Cir. 1996) (same); Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178, 1183 (7th Cir. 1980); Allan D. Windt, In surance Claims & Disputes sec. 4.12, pp. 199-200 (3d ed. 1995), although its duty of indemnifying Volm for any damages that it was determined through judgment or settlement to owe Lockwood would have been limited to so much of the judgment or settlement as was fairly allocable to the claims in Lockwood's suit that were covered by the policy. E.g., Valley Bancorporation v. Auto Owners Ins. Co., 569 N.W.2d 345, 349 (Wis. App. 1997); Employers Mutual Liability Ins. Co. v. Hendrix, 199 F.2d 53, 59 (4th Cir. 1952). The difference reflects the greater difficulty of apportioning defense costs than damages. E.g., Grube v. Daun, 496 N.W.2d 106, 122 (Wis. App. 1992); cf. Jeffrey W. Stempel, Law of Insurance Contract Disputes sec. 9.03[c], pp. 9-67 to 9-68 (2d ed. 2000). But the rationale of a rule often limits its scope, and does here: if defense costs are readily apportionable between the covered and the uncovered claims, the insurance company need pay only for the former. Buss v. Superior Court, 939 P.2d 766, 776 (Cal. 1997); SL Industries, Inc. v. American Motorists Ins. Co., 607 A.2d 1266, 1280 (N.J. 1992); Budd Co. v. Travelers Indemnity Co., 820 F.2d 787, 791 (6th Cir. 1987); Windt, supra, sec. 5.11, p. 323.

Four years into Lockwood's suit, North River paid Lockwood $1.5 million to file an amended complaint that would delete the covered claims. Lockwood agreed to credit that amount against any judgment it might obtain against Volm. Since the policy limit was only $1 million, the agreement (to which Volm was not a party) protected Volm up to the policy limit against having to pay any covered claims. With the agreement in hand, North River, which had already intervened in the litigation to obtain a declaration of its duties to the insured, asked the district court to rule that it had no further duty to defend or indemnify Volm, since the effect of the amended complaint was to eliminate any possible liability of Volm to pay the covered claims in Lockwood's original complaint. The district judge agreed and entered a partial final judgment against Volm, which was immediately appealable because it resolved the claim of one of the parties, namely North River. Fed. R. Civ. P. 54(b). Volm then appealed. It asks us to rule that North River must continue to pay its defense costs notwithstanding the settlement between North River and Lockwood.

North River's lawyer acknowledged at argument--what is anyway obvious--that either he or other counsel for North River had gone over the amended complaint with Lockwood's counsel line by line to make sure that all insured claims had been deleted. In other words, the insurance company sat down with its insured's adversary to contrive a complaint that would eliminate any remaining contractual obligation of the insurance company to defend the insured. (We limit our attention to defense costs, ignoring indemnity, in view of the fact that North River's settlement agreement with Lockwood gave Volm more than the policy limit; thus only defense costs are at issue in this appeal.) It did this without consulting the insured or obtaining the latter's agreement. We have difficulty imagining a more conspicuous betrayal of the insurer's fiduciary duty to its insured than for its lawyers to plot with the insured's adversary a repleading that will enable the adversary to maximize his recovery of uninsured damages from the insured while stripping the insured of its right to a defense by the insurance company. The limits of coverage, whether limits on the amount to be indemnified under the policy or, as in the present case, on the type of claims covered by the policy, create a conflict of interest between insurer and insured. Mowry v. Badger State Mutual Casualty Co., 385 N.W.2d 171, 177-78 (Wis. 1986); Transport Ins. Co. v. Post Express Co., 138 F.3d 1189, 1192 (7th Cir. 1998);Charter Oak Fire Ins. Co. v. Color Converting Industries Co., 45 F.3d 1170, 1173 (7th Cir. 1995). The insurer yielded to the conflict, in effect paying its insured's adversary to eliminate the insured's remaining insurance coverage.

It is true as North River points out that if in the course of litigation the covered claims fall out of the case through settlement or otherwise, the insurer's duty to defend his insured ceases. E.g., Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 416 (Minn. 1997); Conway Chevrolet-Buick, Inc. v. Travelers Indemnity Co., 136 F.3d 210, 214-15 (1st Cir. 1998); North Bank v. Cincinnati Ins. Cos., 125 F.3d 983, 986 (6th Cir. 1997). That is the easiest case for readily apportioning defense costs between covered and uncovered claims. Nor can the insured prevent...