Native American Arts v. Hartford Cas. Ins., 04-3861.

• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)
• Writing for the Court: Wood
• Citation: 435 F.3d 729
• Parties: NATIVE 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.
• Docket Number: No. 04-3862.,No. 04-3861.,04-3861.,04-3862.
• Decision Date: 25 January 2006

435 F.3d 729 NATIVE 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. No. 04-3861. No. 04-3862. United States Court of Appeals, Seventh Circuit. Argued May 4, 2005. Decided January 25, 2006.

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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

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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,

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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...