R.C. Wegman Construction Co. v. Admiral Insurance

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-2836
R.C. W EGMAN C ONSTRUCTION C OMPANY,
Plaintiff-Appellant,
v.
A DMIRAL INSURANCE C OMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 08 C 6479—James B. Zagel, Judge.
S UBMITTED JUNE 29, 2012—D ECIDED JULY 19, 2012
Before E ASTERBROOK, Chief Judge, and P OSNER and
T INDER, Circuit Judges.
P OSNER, Circuit Judge. This appeal is a sequel to our
decision last year reported at 629 F.3d 724 (7th
Cir. 2011), in which we reversed the dismissal of
Wegman’s suit against its primary insurance carrier,
Admiral; the suit charges Admiral with having failed
to discharge its duty of good faith to its insured by (as
2 No. 11-2836
we put it in another case) “gambl[ing] with the insured’s
money by forgoing reasonable opportunities to settle a
claim on terms that will protect the insured against an
excess judgment.” Twin City Fire Ins. Co. v. Country
Mutual Ins. Co., 23 F.3d 1175, 1179 (7th Cir. 1994) (Illinois
law); see also Haddick ex rel. Griffith v. Valor Ins., 763
N.E.2d 299, 303-04 (Ill. 2001); Founders Ins. Co. v. Shaikh, 937
N.E.2d 1186, 1191-92 (Ill. App. 2010); O’Neill v. Gallant
Ins. Co., 769 N.E.2d 100, 109-10 (Ill. App. 2002). The
suit had been brought in an Illinois state court but it
was within the federal diversity jurisdiction and had
been removed by Admiral to the federal district court
in Chicago. The substantive issues were and are con-
trolled by Illinois law.
A man named Budrik had sued Wegman for injuries
that he’d sustained in an accident on a construction site
managed by Wegman and was demanding almost
$6 million to settle the suit. Wegman alleged that Admiral,
having been given timely notice of the lawsuit, “knew that
the Budrik Lawsuit presented a realistic possibility of a
potential loss to Wegman . . . in excess of the [applicable]
Admiral Policy limit,” which was only $1 million, but
failed to warn Wegman of this possibility. Had it done
so, Wegman would (or so at any rate it alleged) promptly
have sought and eventually obtained indemnity from
its excess insurer, AIG, because the policy limit in the
excess policy was $10 million. A prudent insured
notifies its excess insurer of any claim that might exceed
the policy limits of the insured’s primary policy. But
Wegman, the complaint continues, “did not realize that
the Lawsuit presented a realistic possibility of a loss in
No. 11-2836 3
excess of the Admiral Policy limits until [September 2007,]
a few days before the trial of the Budrik Lawsuit when a
Wegman executive was casually discussing the Budrik
Lawsuit with a relative who happened to be an attorney.”
Wegman immediately notified AIG—which refused
coverage on the ground that it had not received timely
notice (Budrik had filed his suit against Wegman four
years before Wegman notified AIG). Budrik went on to
obtain a judgment against Wegman for slightly more
than $2 million, which exceeded Admiral’s policy limit,
thereby costing Wegman more than $1 million—and it is a
small company.
Shortly after the district court had dismissed Wegman’s
suit against Admiral, precipitating the first appeal to us,
Wegman had filed suit in an Illinois state court against
AIG, challenging AIG’s denial of coverage. Wegman
argued that its notice to AIG had been timely. But then
on remand from our decision in the first appeal, Admiral
moved the district court to stay Wegman’s suit against it
because the suit might be rendered moot by the decision
of the state court in Wegman’s suit against AIG. For,
should that court agree that AIG’s excess policy covered
Budrik’s claim, Wegman would recoup the part of
Budrik’s judgment that Admiral had refused to pay. The
district court granted the stay, and Wegman appeals.
A district court’s stay of a proceeding pending before
it is an interlocutory order, and therefore normally not
appealable, but there are exceptions. Wegman argues for
an exception for stays that are based on the rule, an-
nounced in Colorado River Water Conservation District v.
4 No. 11-2836
United States, 424 U.S. 800 (1976), that a federal district
court may abstain in favor of a state court in which a
parallel suit is pending if exceptional circumstances
warrant an abdication of federal jurisdiction and not
merely a delay in the proceeding in the district court. In
Colorado River the Court ruled in favor of abstention
on the basis of a variety of circumstances, including
what it thought an implicit congressional aversion to
having such a suit (which involved a federal claim on
behalf of Indians to water rights) proceed in a federal
court when a parallel suit that would resolve the
entire dispute between the parties was under way in a
state court.
Colorado River abstention can take the form either of a
stay or of a dismissal, but the name is not critical to
appealability. Later cases suggest that either form of
order is appealable because when the condition for Colo-
rado River abstention is satisfied the order of abstention,
whatever it’s called, is actually final. The reason is that
abstention pursuant to Colorado River is based on a deter-
mination that the case should proceed to judgment in
the state court; and that judgment would be res judicata
in the federal court and thus end the federal suit, making
the stay the practical equivalent of a dismissal with
prejudice. As the Supreme Court later explained in
Moses H. Cone Memorial Hospital v. Mercury Construction
Corp., 460 U.S. 1, 10 and n. 11 (1983) (footnotes and
citation omitted), “the District Court predicated its stay
order on its conclusion that the federal and state actions
involved ‘the identical issue of arbitrability of the claims
of Mercury Construction Corp. against the Moses H. Cone
No. 11-2836 5
Memorial Hospital.’ That issue of arbitrability was the
only substantive issue in the federal suit. So a stay of the
federal suit pending resolution of the state suit meant
there would be no further litigation in the federal forum;
the state court’s judgment on the issue would be res
judicata. Thus . . . Mercury was ‘effectively out of
court.’ . . . [This] does not disturb the usual rule that a stay
is not ordinarily a final decision for purposes of § 1291,
since most stays do not put the plaintiff ‘effectively out of
court.’ ” See also CIGNA Healthcare of St. Louis, Inc. v. Kaiser,
294 F.3d 849, 852 (7th Cir. 2002); Wilderman v. Cooper &
Scully, P.C., 428 F.3d 474, 476-77 (3d Cir. 2005).
In his brief oral ruling granting a stay in this case, the
district judge didn’t even mention Colorado River. As in
Doctor’s Associates, Inc. v. Duree, 375 F.3d 618, 622 (7th
Cir. 2004) (a case similar to the present one, because,
though it involved a dismissal rather than a stay, it was
a dismissal without prejudice and in the circumstances
was the equivalent of a stay), “all we can say is that the
district court thought it was a good idea to wait until
the Illinois . . . court issued its decision.” Wegman
thinks it a bad idea, because it wants to proceed with
discovery against Admiral and because it wants punitive
as well as compensatory damages from Admiral for
breach of an insurer’s duty of good faith to its insured,
which it’s not seeking against AIG. But that is neither
here nor there. All that is important, so far as the
appealability of the judge’s order is concerned, is that
although Wegman’s two suits—against Admiral in
federal district court and against AIG in state court—are
6 No. 11-2836
related, they do not satisfy the condition for abstaining
under Colorado River: that the parties’ dispute should be
litigated to judgment in the state court, obviating further
proceedings in federal court. If Wegman loses its suit
against AIG in state court, that will not end its dispute
with Admiral; for in remanding the case against
Admiral to the district court we assumed that Wegman’s
notice to its excess insurer had indeed been untimely and
therefore that Wegman had no claim against AIG. If the
assumption turns out to be correct and Wegman strikes
out against AIG, as is entirely possible, Wegman will be
able to resume its litigation against Admiral in the
district court. Thus, that court is not finished with the
case. The stay it granted really is a stay, and not a
dismissal (with prejudice) called a stay.
The appeal must therefore be
D ISMISSED.
7-19-12