Native American Arts v. Hartford Cas. Ins.

Decision Date25 January 2006
Docket NumberNo. 04-3862.,No. 04-3861.,04-3861.,04-3862.
Citation435 F.3d 729
PartiesNATIVE AMERICAN ARTS, INC., as assignee of Stravina Operating Company, LLC, Plaintiff-Appellant, v. HARTFORD CASUALTY INSURANCE COMPANY & Hartford Insurance Company of the Midwest, Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Michael P. Mullen (argued), Mullen & Foster, Chicago, IL, for Plaintiff-Appellant.

Robert A. Chaney (argued), Jeffrey A. Goldwater, Bollinger, Ruberry & Garvey, Terry D. Weissman, Neal, Gerber & Eisenberg, Chicago, IL, for Defendants-Appellees.

Before RIPPLE, ROVNER, and WOOD, Circuit Judges.

WOOD, Circuit Judge.

This case dates back to 2001, when Native American Arts, Inc. (NAA), sued two divisions of Stravina Operating Company, LLC. Stravina asked its insurers to defend it against NAA's complaints, but they refused. Eventually, NAA and Stravina settled, and as part of that settlement, Stravina assigned its rights under its old insurance policies to NAA. Relying on those assignments, NAA initiated the present litigation against Stravina's primary insurers, Hartford Casualty Insurance Company and Hartford Insurance Company of the Midwest (collectively referred to as Hartford), and Stravina's excess insurer, Great American Insurance Company, claiming that they had breached a duty to defend Stravina from NAA's original lawsuits. After reviewing the applicable policies, the district court found that the insurers had no such duty to defend Stravina. NAA appealed, and we affirm.

I

In the summer of 2001, NAA filed separate complaints against Bloom Brothers and Artistic Impressions, two divisions of Stravina. The complaints alleged that from at least the late 1990s, Stravina manufactured and sold inauthentic Native American crafts and jewelry. NAA charged that Stravina was deceiving the public and harming manufacturers of authentic Native American goods by suggesting that its products too were authentic. If this proved to be true, the complaints asserted, the defendants' actions would violate the Indian Arts and Crafts Act, 25 U.S.C. § 305, et seq., which forbids selling merchandise "in a manner that falsely suggests it is . . . an Indian product." § 305e(a). As we noted recently in another case brought by NAA, Native American Arts, Inc. v. The Waldron Corp., although the Indian Arts and Crafts Act dates back to 1935, until 1990 the Act's only sanction was criminal. 399 F.3d 871, 873 (7th Cir.2005). And that remedy has been purely theoretical: in its seventy years of existence, no charges have ever been filed under the criminal provision of the Act. Id. In 1990, Congress added teeth to the legislation, creating a private cause of action that enabled injured plaintiffs—sellers of authentic Indian arts and crafts—to recover substantial damage awards from violators of the Act. Id.; see 25 U.S.C. § 305e(a)(2), (b), (c).

Upon receiving NAA's first complaint in April 2001, Stravina asked Hartford to defend it. After reviewing the complaint, however, Hartford denied coverage, informing Stravina that the policy did not obligate it to defend claims based on the Indian Arts and Crafts Act. Stravina alerted Hartford to the second NAA complaint two years later, and once again, Hartford informed Stravina that it had concluded that Stravina's insurance coverage did not extend to this type of allegation.

In August 2003, with Stravina's insurers on the sidelines, NAA and Stravina settled both lawsuits. Stravina paid NAA $150,000 and agreed on a "settlement value" for NAA of $3 million, which NAA could seek through an assignment of Stravina's rights under its old insurance policies. (In each settlement agreement, the parties allocated $1 million to each of the three policy years covered by Hartford and Great American; because the insurance companies had declined to participate in the process, they had no say over this agreed amount.) Soon thereafter, NAA filed two complaints in the Northern District of Illinois against the defendants, alleging that Stravina's insurance coverage included a duty to defend against NAA's original lawsuits, and at this point also a duty to indemnify. After the complaints were consolidated, the district court granted the defendants' motion for summary judgment. The court agreed with Hartford's original assessment, finding that the policies did not include a duty to defend complaints alleging violations of the Indian Arts and Crafts Act. The district court's decision included Stravina's excess insurer, Great American Insurance Company, but Great American was dismissed from this appeal after it reached a settlement with NAA.

II

Because this case is based on diversity jurisdiction, we look to state law to determine the scope of Stravina's insurance coverage. See Allen v. Transamerica Ins. Co., 128 F.3d 462, 466 (7th Cir.1997). While NAA and the defendants disagree about which state's law applies—NAA says Illinois, the defendants, California—we need not engage this debate. Although California and Illinois law differ on the consequences of an insurer's breach of its duty to defend (in particular, the consequences for the duty to indemnify after a duty to defend has been established), both states take essentially the same approach to determining whether an insurer has a duty to defend in the first place. Compare Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill.2d 384, 189 Ill. Dec. 756, 620 N.E.2d 1073, 1079 (1993) with Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 24 Cal.Rptr.2d 467 861 P.2d 1153, 1160 (1993). At this stage of the litigation, therefore, Illinois would apply its own law, and the federal court must follow suit. See, e.g., Dearborn Ins. Co. v. Int'l Surplus Lines Ins. Co., 308 Ill.App.3d 368, 241 Ill.Dec. 689, 719 N.E.2d 1092, 1096 (1999); see also Jean v. Dugan, 20 F.3d 255, 260 (7th Cir.1994) ("Where there is no disagreement among the contact states, the law of the forum state applies.").

In Illinois, to determine whether an insurer has a duty to defend its insured, "the court must look to the allegations in the underlying complaint and compare these allegations to the relevant coverage provisions of the insurance policy." Crum & Forster, 189 Ill.Dec. 756, 620 N.E.2d at 1079. If the facts alleged in the underlying complaint fall within, or even potentially within, the coverage provisions of the policy, the insurer must defend the insured. Id. In assessing whether the duty exists, a court must construe the allegations in the underlying complaint liberally and any doubt in coverage must be resolved in favor of the insured. See Ill. State Med. Ins. Servs., Inc. v. Cichon, 258 Ill.App.3d 803, 196 Ill.Dec. 277, 629 N.E.2d 822, 826 (1994). Nonetheless, deference only goes so far; if the policy terms are unambiguous, the court must apply their plain and ordinary meaning. Crum & Forster, 189 Ill.Dec. 756, 620 N.E.2d at 1078.

NAA argues that Hartford's duty to defend arose because the complaints alleged an "advertising injury." Stravina's policy read: "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 insurance applies. We will have the right and duty to defend any `suit' seeking those damages." Save for a few irrelevant changes, Stravina's policy during the period of coverage at issue here defined "advertising injury" as:

a. Oral or written publication of material in your "advertisement" that slanders or libels a person or disparages a person's or organization's goods, products or services;

b. Oral or written publication of material in your "advertisement" that violates a person's right of privacy;

c. Copying, in your "advertisement," a person's or organization's "advertising idea" or style of "advertisement"; or

d. Infringement of copyright, slogan, or title of any literary or artistic work, in your "advertisement."

The policy defined "advertisement" as "a dissemination of information or images that has the purpose of inducing the sale of goods, products or services through: (1) Radio; (2) Television; (3) Billboard; (4) Magazine; (5) Newspaper; or [(6)] Any other publication that is given widespread public distribution." While this definition is broad, the policy contained an exception: an advertisement "does not include the design, printed material, information or images contained in, on or upon the packaging or labeling of any goods or products."

Hartford argues that this exception to the definition applies here. In its view, Stravina's products were merely labeled misleadingly and since, under the policy, labels do not constitute advertisements, there can be no advertising injuries. If NAA's original complaints were this narrow, Hartford's argument might be persuasive. NAA's complaints, however, alleged not only that Stravina mislabeled its products, but also that Stravina violated the Indian Arts and Crafts Act by suggesting its products were authentic "in advertising activity[,] including the distribution of catalogues and brochures as well as other advertising and marketing methods." Given the breadth of NAA's complaints, we find that at least some of NAA's allegations concerned advertisements.

We find as well that the complaints adequately alleged that Stravina's advertisements were injurious. Stravina's policies included as part of the definition of such an injury the copying of another "organization's `advertising idea'," which the policy defined circularly as "any idea for an advertisement," or the copying of another's "style of advertisement." NAA's complaints mirrored this language, alleging that Stravina effectuated many of its violations of the Indian Arts and Crafts Act by "misappropriat[ing ... NAA's] advertising ideas and style of doing business." NAA's...

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