In the
United States Court of Appeals
For the Seventh Circuit

Nos. 99-3844, 99-3877 & 00-4295

Great Lakes Dredge & Dock Company,

Plaintiff, Counterdefendant-Appellee,

v.

City of Chicago, et al.,

Defendants, Counterplaintiffs-Appellees,

v.

Commercial Union Insurance Company, et al.,

Defendants-Appellants.

Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 94 C 2579--Joan B. Gottschall, Judge.

Argued November 1, 2000--Decided August 10, 2001


  Before Cudahy, Coffey, and Easterbrook,
Circuit Judges.

  Easterbrook, Circuit Judge. The Chicago
Flood of 1992 occurred when the Chicago
River sprung a leak and drained into a
tunnel system connecting many buildings
in the Loop. Events were set in motion in
August and September 1991, when Great
Lakes Dredge & Dock Co. replaced the
pilings ("dolphins") protecting the
Kinzie Street Bridge. Because of Great
Lakes’ carelessness, poor maps or other
directions provided by the City, or a
combination of events, Great Lakes drove
dolphins into the riverbed immediately
above one of the tunnels that had been
built almost a century earlier to move
coal and other freight without tying up
the City’s streets. Buildings in Chicago
no longer burn coal, but the old tunnels
have found new uses, such as carrying
chilled water for air conditioning or
hosting electric power and communications
lines. Cracks in the ceiling of the
tunnel, caused by the work in the River,
grew as the weeks passed. Deterioration
could have been stopped if the damage had
been detected during inspections and the
roof shored up pending repairs, but this
did not happen. On April 13, 1992, the
roof caved in and the waters of the
Chicago River rushed through the tunnel
system, flooding basements and streets
throughout downtown Chicago. Damage has
been estimated at more than $300 million
(and by some accounts more than $1.5
billion). Navigation on the River was
halted for about a month while the tunnel
was repaired. Jerome B. Grubart, Inc. v.
Great Lakes Dredge & Dock Co., 513 U.S.
527 (1995), affirming 3 F.3d 225 (7th
Cir. 1993), holds that Great Lakes’
request for limitation of liability under
46 U.S.C. sec.sec. 181-96 comes within
the admiralty jurisdiction. Our case
concerns not the amount of liability but
the allocation of responsibility among
Great Lakes’ insurers. As part of a
settlement the City of Chicago and a
class of injured parties have succeeded
to Great Lakes’ rights under the
policies, but for clarity we refer to
Great Lakes as the insured.

  Insurance coverage could have been
simple. Great Lakes acquires insurance to
match its fiscal year, from August
through July. Both the damage to the
tunnel and the flood occurred during one
policy year. At the beginning of August
1991 Great Lakes was the beneficiary of
three relevant policies: a primary policy
with a cap of $1 million and two excess
policies purchased by its corporate
parent Itel Corporation, and on which
Great Lakes was an additional insured: a
first excess policy providing $40 million
in coverage, and a second excess policy
providing $60 million in additional
coverage. Both of these excess policies
were underwritten by a consortium that
for convenience we call the "London
Insurers." (Details about the
participants would have been relevant and
likely would have led to dismissal if
jurisdiction depended on diversity of
citizenship, see Indiana Gas Co. v. Home
Insurance Co., 141 F.3d 314 (7th Cir.
1998), but admiralty jurisdiction saved
the day.) Things grew complicated when
Itel sold its subsidiary to the
Blackstone Dredging Partnership l.p. on
October 15, 1991--after the damage to the
roof of the tunnel, but before the flood.
The spinoff made it impossible for Great
Lakes to remain as an additional insured
on Itel’s policies. So as part of the
transaction Itel and Blackstone arranged
for Great Lakes to be deleted as an
insured on the first excess policy; the
London Insurers then wrote an identical
$40 million policy naming Blackstone as
the insured and Great Lakes as an
additional insured, charging exactly the
premium that had been refunded to Itel
for the cancellation of the remaining
term on the original policy. The $60
million second-tier excess policy was
canceled, but Blackstone purchased a $10
million second-tier excess policy from
Continental Insurance. Thus when the
damage to the tunnel’s roof occurred,
Great Lakes had $100 million worth of
excess coverage, all through the London
Insurers; when the roof collapsed, Great
Lakes had only $50 million in coverage,
of which $40 million was supplied by the
London Insurers and $10 million by
Continental. (The parties call the
policies in force when the dolphins were
driven the "first-period policies" and
the policies in force when the flood
occurred the "second-period policies." We
follow suit.)

  The change in both the identity of the
underwriters and the maximum coverage
between the first and second periods has
led to conflict. Continental contended in
the district court that the first-period
policies supply all of the coverage,
because that is when Great Lakes weakened
the tunnel’s roof. The London Insurers,
by contrast, contended that only the
second-period policies were triggered,
because they were in force when the flood
occurred. (They concede that the first-
period policies cover damage to the
tunnel itself, but this loss is trivial
compared with the damage sustained by
businesses whose basements were flooded
and by the utilities that had laid cables
in the tunnels.) Great Lakes contends
that all excess policies were triggered
and should be stacked--that the maximum
indemnity is not the $50 million or $100
million Great Lakes had in force at any
one time, but $150 million, the sum of
all policy limits in force in either
period. The district court agreed with
Great Lakes, issuing a declaratory
judgment that the London Insurers must
pay up to $140 million and Continental up
to $10 million, no matter who suffered
each loss and no matter when the losses
occurred. The judge added that all
insurers must pay prejudgment interest
and that the London Insurers must pay a
penalty of almost $1 million for bad
faith in delaying recognition that
Chicago was an additional insured on the
$1 million primary policy. See 57 F.
Supp. 2d 525 (N.D. Ill. 1999) (principal
ruling); 1999 U.S. Dist. Lexis 13914 (Aug.
25, 1999) (order resolving remaining
issues); 1999 U.S. Dist. Lexis 16296
(Sept. 28, 1999) (declaratory judgment).

  Only one of the policies was written out
in full, but the parties agree that its
language is universally applicable. Thus
all policies cover property damage caused
by an "occurrence," a term defined as:

an accident or a happening or event
or a continuous or repeated exposure
to conditions which unintentionally
results in . . . Property Damage .
. . during the policy period. All
such exposure to substantially the
same general conditions existing at
or emanating from one premises or
location shall be deemed one
Occurrence.

The district court concluded that both
the damage to the tunnel structure and
the losses from flood waters are
occurrences under this definition. While
this case was being litigated in the
district court the parties agreed that
Illinois law supplies the rule of
decision; the London Insurers have
changed their tune on appeal, arguing
that federal law governs in an admiralty
action. See Continental Casualty Co. v.
Anderson Excavating & Wrecking Co., 189
F.3d 512 (7th Cir. 1999) (applying
federal law to an insurance dispute in
admiralty). That new line of argument has
been met by a claim of forfeiture. To
simplify analysis we follow the parties’
original agreement, though with some
sidelong glances at admiralty law. See
Kamen v. Kemper Financial Services, Inc.,
500 U.S. 90, 100 n.5 (1991) (courts are
entitled, though not required, to apply a
body of law chosen by the parties even if
this is not the law the court would
choose on its own).

  The district judge rejected as
unsupported by either the policies’
language or Illinois case law the London
Insurers’ contention that only a person
who suffers injury while the policies are
in effect may resort to those policies.
This was the principal ground on which
the London Insurers sought to restrict
coverage of the first-period policies to
the cost of repairing the tunnel. Having
concluded that all of the policies apply
to all injuries, the district judge then
stacked the coverage limits on two
grounds: first, this is what Zurich
Insurance Co. v. Raymark Industries,
Inc., 118 Ill. 2d 23, 514 N.E.2d 150
(1987), did in an asbestosis case;
second, the policies omit an anti-
stacking clause found in a standard form
prepared by Lloyd’s of London. Both the
London Insurers and Continental have
appealed. Continental no longer argues
that all liability must be borne by the
London Insurers, but it does oppose
stacking and prejudgment interest. The
London Insurers object to stacking, to
the use of the first-period policies to
cover flood losses, to prejudgment
interest, and to the bad-faith penalty.
(A third appeal, No. 00-4295, concerns
the district judge’s costs award. We
stayed briefing on this appeal because
costs must be reconsidered in light of
our disposition of the merits.) We start
with stacking.

  1. Stacking. Great Lakes argues, and
the district court held, that it can pick
any policy during either period and
require its insurer to bear the whole
loss up to the limit of liability. If
this does not cover the loss, the insured
names a second policy, and so on until
all have been exhausted. The strategy is
known variously as "stacking" and "joint
and several liability" (an unusual use of
that phrase, but one entrenched in
insurance decisions). See Olin Corp. v.
Insurance Co. of North America, 221 F.3d
307, 322-24 (2d Cir. 2000). See also
Comment, Allocating Progressive Injury
Liability Among Successive Insurance
Policies, 64 U. Chi. L. Rev. 257 (1997).
A recent decision by this court concludes
that stacking is not an appropriate
response to a single tort that spans
multiple policy periods. See Sybron
Transition Corp. v. Security Insurance,
No. 00-1407 (7th Cir. July 12, 2001).
That would be clear enough if, for
example, the tunnel had collapsed before
Great Lakes finished driving the
dolphins. All responsibility would be
under the policies then in force; that
Great Lakes acquired a new corporate
parent in October, and a new set of
insurers, would not require those
insurers to pay just because some of the
victims of the tort had continuing
losses, or because the losses could not
be quantified until the new policy
period. One occurrence, one policy.
That’s what the definitional clause says.
Why should things be otherwise because
the piles were driven in the first period
and the roof caved in during the second?
In either case Great Lakes committed a
single tort, with the same injury. So
following the approach of Sybron (and
Olin, which Sybron followed) is
incompatible with stacking. But both Olin
and Sybron applied New York law; perhaps
Illinois law is different.

  Relying on Zurich Insurance, the
district court concluded that Illinois is
different. Zurich Insurance rejected the
position taken by some courts that the
sole trigger for coverage in
occupational-disease cases occurs when
the disease becomes manifest. Instead,
the Supreme Court of Illinois held, the
policies in force when asbestos is
inhaled and when the disease becomes
manifest are available for indemnity. The
opinion went on to say that the limits of
each policy are available, from which the
district court inferred that Illinois has
adopted joint and several liability. But
Zurich Insurance interpreted the language
of particular policies; the Supreme Court
of Illinois did not establish a principle
that transcends the text of insurance
contracts. At least two appellate
decisions in Illinois since Zurich
Insurance have concluded that the Supreme
Court of Illinois does not require joint
and several liability independent of
policies’ language. See Missouri Pacific
R.R. v. International Insurance Co., 288
Ill. App. 3d 69, 679 N.E.2d 801 (2d Dist.
1997); Outboard Marine Corp. v. Liberty
Mutual Insurance Co., 283 Ill. App. 3d
630, 670 N.E.2d 740 (2d Dist. 1996). See
also Roman Catholic Diocese of Joliet,
Inc. v. Interstate Fire Insurance Co.,
292 Ill. App. 3d 447, 456, 685 N.E.2d
932, 939 (1st Dist. 1997). Like the
intermediate appellate courts in Missouri
Pacific and Outboard Marine, we think it
likely that, when squarely faced with the
question, the Supreme Court of Illinois
will follow the better reasoned (and more
numerous) decisions of other
jurisdictions that make policies’
language the benchmark for stacking. See
not only Olin (representing New York law)
but also, e.g., Public Service Co. of
Colorado v. Wallis & Cos., 986 P.2d 924,
939-40 (Colo. 1999); Northern States
Power Co. v. Fidelity & Casualty Co., 523
N.W.2d 657, 662-64 (Minn. 1994); Owens-
Illinois Inc. v. United Insurance Co.,
650 A.2d 974, 985-96 (N.J. 1994); Sharon
Steel Corp. v. Aetna Casualty & Surety
Co., 931 P.2d 127, 140-42 (Utah 1997);
Gulf Chemical & Metallurgical Corp. v.
Associated Metals & Minerals Corp., 1
F.3d 365, 371-72 (5th Cir. 1993);
Commercial Union Insurance Co. v. Sepco
Corp., 918 F.2d 920, 923-25 (11th Cir.
1990). (We add, for completeness, that if
maritime rather than state law supplies
the rule of decision, we would hold, for
reasons given in Olin and Sybron, that
stacking is inappropriate unless the
policies provide for cumulation.)

  Great Lakes does not rely on any
language in the London Insurers’ or
Continental policies. Instead it observes
that the insurers could have put explicit
anti-stacking language in their policies.
The absence of such language implies,
Great Lakes insists, that cumulation of
policy limits is a coverage paid for by
the premium. Maybe so, although it is
familiar in both contractual and
legislative drafting that people over-
write, guarding against a misreading with
a plenitude of negations; then the
absence of one possible negation is a
poor reason to conclude that the text has
any particular meaning. Instead of
seeking to draw inferences from missing
language, we use more valuable clues.
Recall that the premium for the $40
million policy did not change when
Blackstone replaced Itel as Great Lakes’
parent corporation. Yet if the division
of the original policy into two on
October 15, 1991 (the date of its spinoff
from Itel) raised the effective policy
limit for the 1991-92 fiscal year to $80
million, surely an additional premium
would have been charged. There ain’t no
such thing as a free lunch, even in the
insurance business. Great Lakes never
carried more than $101 million of
coverage at any moment, and in connection
with the spinoff it cut that maximum to
$51 million. Yet, if stacking is allowed,
coverage went from $101 million on
October 14 to $151 million on October 16,
even though the premium reflected a
reduction to $51 million. That is
exceedingly unlikely. The parties’
transactions thus demonstrate that there
is only one limit for the 1991-92 policy
year, even though the corporate
reorganization led to the creation of two
policies, each in force for a shorter
period. This conclusion also respects the
language of the policies. They do not use
the text from the 1971 model form, but
they do say: "All such exposure to
substantially the same general conditions
existing at or emanating from one
premises or location shall be deemed one
Occurrence." This means that the whole
loss from the tunnel collapse is "one
Occurrence" even if parts of the injury
were felt in two policy periods. Thus it
remains only to determine which period is
the right one.

  2. Trigger and allocation. The $1
million policy was in force the entire
year, as was a $40 million first-excess
policy (so for this policy it is
unnecessary to determine whether the
trigger falls in the first period or the
second). Continental no longer contests
the district court’s conclusion that its
$10 million second-excess policy was
triggered by the collapse, so Continental
must indemnify Great Lakes for any loss
in the $41 million to $51 million band.
(The portion of the district court’s
judgment providing that an excess policy,
once triggered, is available from the
first dollar of loss, is untenable;
Continental need not pay until the
underlying limits have been exhausted.)

  The only remaining question about
triggering and allocation is whether the
London Insurers’ $60 million first-
period, second-excess policy is
available. In principle the answer could
be yes; Chicago suffered a loss when its
tunnel was damaged while the first-period
policies were in force. But no one thinks
that it would have cost more than $41
million (or even more than $1 million) to
repair the tunnel, and the second-excess
policy does not come into play until all
underlying policies have been exhausted.
This makes it impossible to see how the
second-excess policy that ended on
October 15, 1991, could have been
triggered, unless the future claims of
businesses harmed by the flood are
projected back into the policy period.
Yet in Illinois, as elsewhere, an
occurrence policy is not triggered unless
loss to the claimant happened while that
policy was in force. E.g., Pekin
Insurance Co. v. Janes & Addems
Chevrolet, Inc., 263 Ill. App. 3d 399,
636 N.E.2d 34 (4th Dist. 1994); Seegers
Grain Co. v. Kansas City Millwright Co.,
230 Ill. App. 3d 565, 595 N.E.2d 113 (1st
Dist. 1992); Great American Insurance Co.
v. Tinley Park Recreation Commission, 124
Ill. App. 2d 19, 259 N.E.2d 867 (1st
Dist. 1970). This is exactly what the
policy itself provides, in direct
language, by defining "property damage"
as an "accident or happening or event
[that] . . . results in a . . . physical
injury to . . . tangible property . . .
during the policy period" (emphasis
added). No loss to businesses in the Loop
occurred until April 1992.

  Great Lakes relies on cases such as
Zurich Insurance that address
occupational diseases, pollution,
products liability, or other events
characterized by long delay between the
wrongful act and the manifestation of
harm. In cases of this kind, Zurich
Insurance held, policies in force at the
time of the wrongful acts, in addition to
those in force while the harm occurred
and became manifest, may be triggered.
See also Eljer Manufacturing, Inc. v.
Liberty Mutual Insurance Co., 972 F.2d
805 (7th Cir. 1992). The extent to which
the Supreme Court of Illinois subscribes
to this principle has been called into
question by Travelers Insurance Co. v.
Eljer Manufacturing, Inc., 2000 Ill. Lexis
1712 (Dec. 1, 2000), which held (in
circumstances identical to our Eljer
decision) that the installation of a
defective product does not trigger
coverage until the harm from the defect
comes to pass. But the extent to which
the Supreme Court of Illinois subscribes
to its own opinion in Eljer (and thus
disagrees with our Eljer holding from
1992) has been called into question by
the grant of rehearing in that case. See
2001 Ill. Lexis 231 (Jan. 29, 2001). Eljer
has been rebriefed and reargued in the
Supreme Court of Illinois, and until a
fresh decision is released state
insurance law is up in the air.

  Waiting for that decision is
unnecessary, however, because the cases
such as Zurich Insurance and our opinion
in Eljer involve damage to the same
property over multiple periods. Here the
injured persons are distinct: the City
suffered injury when the dolphins were
driven into the tunnel’s ceiling during
the first period, and businesses (as well
as the City) were injured when the
ceiling collapsed and the flood occurred
during the second period. The definitions
in the policies show that the businesses
did not suffer property damage, and so
there was no "occurrence" triggering cov
erage, until the collapse in April 1992.

  What is more, even after the damage to
the tunnel, the loss was preventable. Our
problem is not at all like asbestosis,
where once fibers accumulate in the lung
there is nothing to do but wait and see
whether disease develops. Here there was
a cure: inspection and repair. That is to
say, even after the pile driving there
was still an insurable event: whether a
collapse would occur before the City
detected the damage and repaired the
tunnel. Not until the second per-iod did
the City fail to take precautions that
could have avoided all loss to
businesses. In February 1992 (while the
second-period policies were in force)
inspectors discovered a foot of water in
the tunnel and saw cracks in its ceiling,
yet failed to take steps that would have
prevented the roof’s collapse. See In re
Chicago Flood Litigation, 308 Ill. App.
3d 314, 320-21, 719 N.E.2d 1117, 1122
(1st Dist. 1999). Hence the "occurrence"
is in the second period so far as the
victims of the flood are concerned. The
London Insurers’ $60 million second-
excess policy therefore has not
beentriggered.

  3. Prejudgment interest. The district
court made the London Insurers and
Continental jointly and severally liable
for more than $2 million in prejudgment
interest for delay in funding an $11
million settlement that Great Lakes
reached with the City and some of the
injured businesses. Our ruling on the
stacking question requires revision of
that decision in part: Continental cannot
be held jointly and severally liable.
Moreover, because Continental’s policy
does not come into play until the
underlying limits of $41 million have
been exhausted, Continental is not
obliged to fund any of this settlement
and cannot be required to pay interest
for delay. The London Insurers’ $40
million first-excess policy was
triggered, however, and the London
Insurers do not dispute that they tarried
in providing indemnity.

  Both the district court and the parties
have treated prejudgment interest as a
matter to be resolved under admiralty
law. (They do not remark the
inconsistency of this approach with their
resort to Illinois law to determine other
issues.) Prejudgment interest is an
aspect of full compensation and therefore
is available under admiralty law; neither
equitable considerations nor the
existence of a bona fide dispute about
liability affect the running of interest.
See Milwaukee v. Cement Division of
National Gypsum Co., 515 U.S. 189, 195
(1995); In re Oil Spill by the Amoco
Cadiz, 954 F.2d 1279, 1331-32 (7th Cir.
1992). See also, e.g., West Virginia v.
United States, 479 U.S. 305, 310-11 n.2
(1987); General Motors Corp. v. Devex
Corp., 461 U.S. 648, 655 n.10 (1983). The
award of interest for the delay in
funding the settlement therefore is
unexceptionable.

  Part of the award, however, reflects not
delay in funding the settlement but delay
in handing over the entire limits of the
$40 million first-excess policy after
Great Lakes assigned its rights under
this policy to Chicago and a class of
injured parties. It is not clear to us
why the assignment created any obligation
to pay; an underlying loss still must be
established. This aspect of the district
judge’s decision seems to have been
influenced by her assignment of joint and
several liability; with stacking out of
the case the matter of interest on
amounts other than the settlement needs a
fresh look. Nor is it clear that interest
has been adequately separated from the
losses. (If, for example, compensation
for the time value of money is built into
a victim’s claim for damages, a separate
award of prejudgment interest would be
double counting.) So although we agree
with the district court that admiralty’s
norm of prejudgment interest should be
applied, we remand for a recalculation
that is limited to eligible amounts under
the $40 million first-excess policy and
does not include any interest
againstContinental.

  4. Bad-faith penalty. The primary $1
million policy had a separate limit of $1
million for legal expenses incurred in
defense of claims made against the
insured. The London Insurers disbursed
the policy limit of indemnity and
expended the full $1 million in legal
costs on behalf of Great Lakes.
Nonetheless, the district judge ordered
the London Insurers to pony up an extra
$500,000 in indemnity and an additional
$495,000 in defense outlays as penalties
for bad-faith failure to treat Chicago as
an additional insured--which it was, by
virtue of its contract with Great Lakes
and a clause in the policy promising
indemnity to Great Lakes’ customers. The
London Insurers did not tarry in
recognizing their obligation to defend
and indemnify Great Lakes, but
recognizing the obligation to Chicago,
which was not named on the face of the
policy, took additional time. Because the
London Insurers paid out the policy
limits on behalf of Great Lakes, Chicago
received none of the benefit even though
it was an insured. By requiring the
London Insurers to provide an extra
$500,000 in indemnity and (almost)
$500,000 in defense expenses, the
district court sought to put Chicago in
the position it would have occupied had
the London Insurers recognized that under
this policy they owed to Chicago the same
duties they owed to Great Lakes.

  The London Insurers’ principal response
on appeal is that the two-year delay in
responding to Chicago’s demands for
indemnity and defense should be chalked
up to a series of bureaucratic errors and
miscommunication among its brokers and
lawyers. Illinois authorizes penalties
for bad-faith refusals and delays by
insurers, see 215 ILCS 5/155 (a provision
authorizing awards of attorneys’ fees),
but negligence cannot be treated as "bad
faith," the London Insurers insist. Like
the district court, we find it difficult
to see how the problem can be ascribed
entirely to paperwork problems. The
London Insurers did not disburse the
policy limits until April 1995, well
after they had recognized that Chicago is
an additional insured. Cases such as
Travelers Indemnity Co. v. Citgo
Petroleum Corp., 166 F.3d 761, 764 (5th
Cir. 1999), which hold that it is not bad
faith to pay the policy limits on behalf
of one insured if no claim has been made
by or against another, therefore do not
help the London Insurers. See Western
Alliance Insurance Co. v. Northern Insur
ance Co., 176 F.3d 825, 828 (5th Cir.
1999). More to the point, however--for
neither of the fifth circuit’s cases
rests on Illinois law--is the fact that
Illinois does not use "bad faith" to
describe an insurer’s state of mind or to
distinguish between negligent and
intentional wrongdoing. It is just a
label applied to objectively unreasonable
conduct that injures an insured--which is
to say, negligence. See Transport
Insurance Co. v. Post Express Co., 138
F.3d 1189, 1192 (7th Cir. 1998) (Illinois
law); Twin City Fire Insurance Co. v.
Country Mutual Insurance Co., 23 F.3d
1175 (7th Cir. 1994) (Illinois law);
Adduci v. Vigilant Insurance Co., 98 Ill.
App. 3d 472, 475, 424 N.E.2d 645, 648
(1st Dist. 1981); Kavanaugh v. Interstate
Fire & Casualty Co., 35 Ill. App. 3d 350,
356, 342 N.E.2d 116, 120 (1st Dist.
1975). Illinois courts have adopted a
confusing label for a familiar concept,
one that lacks any requirement of
scienter.

  Appellate review of a bad-faith finding
is deferential. See Venture Associates
Corp. v. Zenith Data Systems Corp., 96
F.3d 275, 280 (7th Cir. 1996); PSI
Energy, Inc. v. Exxon Coal USA, Inc., 17
F.3d 969, 973 (7th Cir. 1994). We do not
think that the district court committed a
clear error or abused its discretion. It
is of course hard to know what sanction
is appropriate; the London Insurers ask
how the district court could be sure that
Chicago would have obtained the benefit
of $500,000 in indemnity and $495,000 in
legal expenses had they discharged their
duties. It is a good question; other
numbers would have been possible. But the
difficulty of reconstructing how things
would have gone in an alternate reality
is a principal reason why appellate
courts accept reasoned resolutions by
triers of fact, and because the district
judge’s split-the-limits approach is a
sensible one--the claims made by third
parties against Chicago greatly exceed
$500,000, so it could have used the
indemnity--we affirm this aspect of the
judgment except to the extent the
district judge added $345,287 in
prejudgment interest to the award of
$495,000 in legal expenses. As with the
award of interest on the settlement, it
is unclear whether the district judge
properly separated interest from loss. If
the $495,000 already includes
compensation for the time value of money,
there is no basis for prejudgment
interest too.

  This opinion requires revisions to many
aspects of the district court’s decision
and reconsideration of one aspect of the
prejudgment-interest dispute. Proceedings
on remand will affect the award of costs,
so we do not discuss appeal No. 00-4295
but remand that subject, too, for
adjustment as appropriate.

  The judgment of the district court with
respect to penalties under the primary
policy is affirmed. The judgment and the
award of costs are otherwise vacated, and
the case is remanded for further
proceedings consistent with this opinion.




  CUDAHY, Circuit Judge, concurring in part
and dissenting in part.

  I agree with the majority that the $40
million first excess policies should not
be stacked, but not because of some
purported trend in the Illinois case law.
There is ample support on other, more
compelling, grounds for declining to
stack two policies that appear separate
in form, but are one and the same in
substance. As the majority points out,
the premium for the $40 million policy in
force before the sale of Great Lakes by
Itel to Blackstone did not change after
the sale had taken place. If it were the
intention of the parties that coverage be
increased to $80 million as a result of
the transaction, there would have been no
way to escape the additional premium that
would go with the additional coverage. In
my view, these circumstances provide good
and sufficient support for an anti-
stacking result on the specific facts of
the duplicate policies. But by attempting
to support this proposition with Illinois
case law purportedly rejecting stacking
in general, the majority heads down the
wrong path, and calls into question the
Illinois Supreme Court’s authoritative
pronouncement on the subject.

  There is agreement here that Illinois
law governs the issues that are before
us. And on the question of stacking,
Illinois law has been authoritatively
announced in Zurich Ins. Co. v. Raymark
Indus., Inc., 118 Ill.2d 23, 514 N.E.2d
150 (1987). The majority inappropriately
seeks to escape the implications of that
opinion. Essentially, the majority tries
to limit Zurich by seeing it as tied to
the particular circumstances and policy
language of that case, rather than as
standing for a general principle. I do
not agree with that interpretation.
Zurich expressly rejected the premise
underlying the pro rata ("time on the
risk") approach outlined in Insurance Co.
of N. Am. v. Forty-Eight Insulations,
Inc., 633 F.2d 1212 (6th Cir. 1980),
aff’d on rehearing, 657 F.2d 814 (1981),
cert. denied, 454 U.S. 1109 (1981).
There, the Sixth Circuit held, in an
asbestos case, that the insurance
policies were triggered only by
claimants’ exposure to asbestos and that
thus there was a reasonable means of
allocating liability among the triggered
policies--based on the number of years of
exposure. Rejecting this approach, the
court in Zurich noted that the trial
court had "found nothing in the policy
language that permits proration." 118
Ill.2d at 57, 514 N.E.2d at 165. Rather
than indicating a specific reliance on
the policy language to bind it to its
conclusion that "stacking" was
appropriate, the Zurich court seems to
indicate that--absent policy language to
the contrary--joint and several liability
is the rule in Illinois.

  The majority looks to other cases (from
intermediate Illinois appellate courts)
that do not require stacking and
concludes that the Supreme Court of
Illinois would probably adopt anti-
stacking as a general rule if now
presented with that question. This is
particularly likely, the majority opinion
states, because other jurisdictions have
done so in well-reasoned opinions (New
York, Colorado, Minnesota, New Jersey and
Utah). The majority adds that even if we
were to apply maritime law, the reasoning
of Olin Corp. v. Insurance Co. of N. Am.,
221 F.3d 307 (2d Cir. 2000) and Sybron
Transition Corp. v. Security Ins., 2001
WL 788624 (7th Cir. July 12, 2001),
support the anti-stacking view. But we
are not applying maritime law or the law
of any other state; we are applying
Illinois law. And the relevant
intermediate appellate courts in Illinois
have distinguished Zurich on the grounds
that the cases before these lower courts,
unlike Zurich, involved what have been
characterized as single continuous
occurrences that implicated successive
policy periods and that in such a
situation a pro rata, time-on-the-risk
allocation is appropriate. See Missouri
Pacific Railroad Co. v. International
Ins. Co., 288 Ill.App.3d 69, 79-80, 679
N.E.2d 801, 808 (2d Dist. 1997); Outboard
Marine Corp. v. Liberty Mut. Ins. Co.,
283 Ill.App.3d 630, 642-45, 670 N.E.2d
740, 748-50. I do not believe that these
intermediate appellate courts have gone
so far as to reject joint and several
liability (stacking) when the policy
language and the specific facts do not
preclude it.

  As the district court noted, Outboard
Marine and Missouri Pacific were "single
continuous occurrence" cases. Thus:

In these cases, the facts, as viewed by
the appellate court, involved damage
continuously caused and continuously
sustained. The cause of the damage and
the damage caused were essentially
contemporaneous, with the causative agent
and the resulting damage occurring
repeatedly and continuously. In such
cases, because both the damage-causing
agency and the damages the agency caused
occurred continuously in each policy
period, a rule which required the policy
in effect when the first damage occurred
to cover damages caused in that and
successive policy periods would make no
sense. The sensible rule, as the
appellate court held, is to attempt to
make each policy respond to the damage
that occurred during its policy period.

Findings of Fact, Conclusions of Law and
Order at 39. The language of these cases
distinguishes them from the "triple
trigger" approach of Zurich, which found
that the policies were triggered at the
time of the original exposure to
asbestos, again at the time asbestosis
appeared and also at times in between
when the claimant manifested illness. See
Missouri Pacific, 288 Ill.App. at 79, 679
N.E.2d at 807-08 (citing Zurich, 118
Ill.2d at 44, 514 N.E.2d at 165);
Outboard Marine, 283 Ill.App.3d at 641,
670 N.E.2d at 748. The case before us
involves similar progressive damage, with
at least one trigger (the 1991 tunnel
damage) that, like exposure to asbestos,
results in some damage immediately to the
tunnel and later damage to the flooded
premises. On the other hand, Missouri
Pacific and Outboard Marine do not
concern a single trigger to which the
later damage may be attributed. And,
since the initial damage here may cause
progressively increasing injury over
time, "it makes sense to hold the policy
in effect at the time of the initial
injury responsible for all the claimant’s
damages, even though the progression of
the damage could over time trigger
additional policies." Findings of Fact,
Conclusions of Law and Order at 39.

  On the question whether the $60 million
first-period second excess policy is
available to cover the flood damage, the
proper interpretation of the policy
language, as well as the impact of
Zurich, leads me to a different
conclusion than that reached by the
majority. The majority believes that the
$60 million first-period policy was not
triggered because an insurance policy is
not triggered unless loss to the claimant
occurred while the policy was in force.
This is contrary to the most reasonable
reading of the policy language. The
majority opinion tells us that the policy
defines "property damage" as an "accident
or happening or event [that] . . .
results in a . . . physical injury to .
. . tangible property . . . during the
policy period" (emphasis added). That is
not exactly the case. The policy actually
defines "property damage" as:

(a) physical injury to or destruction of
tangible property, including the loss of
use thereof at any time resulting
therefrom; and/or

(b) loss of use of tangible property which
has not been physically injured or
destroyed; and/or

(c) evacuation losses arising from actual
or threatened physical injury to or
destruction of tangible property or
bodily injury.

The temporal limitation appears, not in
the definition of "property damage," but
in the definition of "occurrence," which
is "an accident or happening or event or
a continuous or repeated exposure to
conditions which unintentionally results
in . . . Property Damage . . . during the
policy period. All such exposure to
substantially the same general conditions
existing at or emanating from one
premises or location shall be deemed one
Occurrence." (Emphasis added.) This
temporal limitation appears only under
the definition of "occurrence." But the
policy provides coverage for "damages on
account of . . . Property damage . . .
caused by or arising out of each
occurrence happening anywhere in the
world." (Emphasis added.) Thus, any
damage "caused by or arising out of" any
occurrence will be covered, regardless
whether the damage occurred during the
policy period. The policy language
clearly supports the position of Great
Lakes.

  The majority then moves on from its
creative parsing of policy language to
rummage for Illinois case law to support
its position. Again, the opinion cites
cases from lower Illinois courts for a
proposition that is at odds with the
Illinois Supreme Court’s holding in
Zurich. For example, the majority relies
on Pekin Ins. Co. v. Janes & Addems
Chevrolet, Inc., 263 Ill.App.3d 399, 636
N.E.2d 34 (4th Dist. 1994), in which the
Illinois appellate court clearly
distinguished Zurich:

Plaintiffs argue under Zurich coverage
under a general liability policy is
triggered, not when the wrongful conduct
takes place, but when the complained-of
damage occurs. This is contrasted with
the protection provided by an
"occurrence" or "acts and omissions"
policy, which provides coverage for the
negligent acts or omissions which occur
during the policy period, regardless of
when the injury occurs or the claim is
made. In this case, the insured was
covered under a general liability policy
and coverage is triggered when the injury
occurs.

263 Ill.App.3 at 404, 636 N.E.2d at 38
(citations omitted). The district court
noted that this language indicated a
possible misunderstanding by the Pekin
court about the nature of occurrence
policies. Whether the Pekin court erred
or not, the district court concluded--and
I agree--that the policies interpreted in
Pekin are significantly different in
language from the policies before us.

  The majority has no good reason to
depart from the Illinois Supreme Court’s
pronouncement in Zurich, which indicated
that events characterized by a long delay
between the wrongful act and the
manifestation of harm may be covered both
by policies in force at the time of the
wrongful acts and those in force when the
harm becomes apparent. The fact that
Travelers Ins. Co. v. Eljer Mfg., Inc.,
2000 WL 1763322 (Ill. Dec. 1, 2000) is
being reheard certainly does not change
Zurich’s standing as authoritative
Illinois law. In Eljer, the court found
that installation of a potentially
defective product into a home constituted
injury to tangible property within the
meaning of the insurance policy. See id.
at *2 (interpreting New York law). This
conclusion in Eljer is not at odds with
Zurich; it does not even address Illinois
law on a subject relevant here./1

  According to the majority, we need not
wait for Illinois to resolve the question
whether a policy in force at the time of
the wrongful act covers liability for
injuries that are later manifested. For
the majority argues that Zurich and Eljer
are distinguishable on the ground that
they involve damage to a single property
(or person) over multiple periods. Here,
by contrast, the City suffered injury in
the first period, and the businesses in
the Loop (as well as the City) were
injured in the second period. Thus, the
majority argues that there was no trigger
for the property damage from the flood
pertaining to the first-period policies,
because no "occurrence" relating to flood
damage happened with respect to any
policies until the second period. To
distinguish the controlling Illinois
authority on the ground that it involved
damage to the same property (or to the
same person) over multiple periods is not
persuasive. First, this distinction is
not one indicated or relied on in the
language of Illinois cases, nor is it
otherwise apparent that the distinction
has significance. Second, to view the
1991 tunnel damage and the 1992 flood
damage as unrelated denies reality: there
was a progressive series of consequences
flowing from the 1991 damage, culminating
in the flood of 1992. How quickly or
sluggishly the consequences were revealed
should not be material. As in Zurich,
this case involves the manifestation of
damage (absestosis or a flood) resulting
from a single occurrence (inhalation of
asbestos fibers or cracking of a tunnel
wall).

  The majority cites Illinois cases for
the proposition that an occurrence policy
is not triggered unless loss to the
claimant occurred while the policy was in
force, but those cases are inapposite.
See Pekin, 263 Ill.App.3 at 404, 636
N.E.2d at 847 (and discussion of the
case, supra); Seegers Grain Co. v. Kansas
City Millwright Co., 230 Ill.App.3d 565,
566-67, 595 N.E.2d 113, 114 (1st Dist.
1992) ("The property damage covered under
completed operations coverage was
expressly defined in the policy to
include only property damage which
’occurs during the policy period.’");
Great American Ins. Co. v. Tinley Park
Recreation Comm’n, 124 Ill.App.2d 19, 21-
23, 259 N.E.2d 867, 868-69 (1st Dist.
1970). Great American turns on the
definition of the term "accident," which
constituted the only relevant occurrence,
and the court concluded that an
"accident" had not occurred until the
injury was manifest. 124 Ill.App.2d at
21-23, 250 N.E.2d at 868-69. Further,
Seegers and Great American are pre-
Zurich, policy language-specific, lower
Illinois court cases, and thus cannot
defeat Zurich’s clear mandate.

  In the case before us, there is no
mention of a "to the claimant" limitation
on coverage in the policies and no
Illinois law to support such a
requirement. To read the policies as not
requiring damage to the ultimate claimant
during the policy period would not only
be reasonable, but it would also be the
most plausible reading of the policy
language. Coverage for property damage
"caused by or arising out of" an
occurrence supports an unrestricted
reading. A similar "to the claimant"
argument was made in Travelers Ins. Co.
v. Penda Corp., 974 F.2d 823 (7th Cir.
1992), in which the insurer argued that
coverage was not available because the
underlying claimant did not actually own
the damaged property--even though the
policy provided coverage for liability
incurred "because of property damage."
974 F.2d at 830. This court observed that
"Illinois cases do not consider who owned
the property in question when determining
if a claim is within policy coverage."
Id.

  These points demonstrate the irrelevance
of the fact that different property
belonging to different claimants was
damaged in 1992 than was the case in
1991. At the very least, these arguments
demonstrating irrelevance show that such
a reading of the policies at hand is
reasonable. And where there is reasonable
disagreement, we construe the policy
against the insurer. "If the language of
a policy is ambiguous or otherwise
susceptible to more than one reasonable
interpretation, it will be construed in
favor of the insured." International
Minerals & Chemical Corp. v. Liberty Mut.
Ins. Co., 168 Ill.App.3d 361, 370, 522
N.E.2d 758, 764 (1988); see also Allen v.
Transamerica Ins. Co., 115 F.3d 1305,
1309 (7th Cir. 1997); Travelers, 974 F.2d
at 828.

  There is good reason for this policy--
especially here, where cause and effect
are clear. Without this approach,
insurers could completely escape
liability for damage caused by an event--
an occurrence--that happened "on their
watch." This would be an indefensible
result, given that the flood damage
resulted directly from an occurrence that
happened while the questioned policy was
in force. It is mere fortuity that the
tunnel wall took a few months to
collapse. No one would question London
Insurers’ liability if the tunnel had
promptly given way to the blow of the
pile driver.

  The majority goes on to bolster its
conclusion by pointing out that here the
flood loss was preventable (unlike-asbes-
tosis) because inspection and repair of
the tunnel could arguably have prevented
the flood. Thus the majority notes that
in February 1992 (when the second-period
policies were in effect) inspectors saw
cracks in the tunnel but failed to
prevent the roof’s collapse. I do not
understand the relevance of this
circumstance. Failure to repair has never
been argued as an independent intervening
cause of the collapse. The cause
continues to be an occurrence resulting
in damage to property that took place
during the first period. That some
inspectors saw a crack is certainly not
an adequate reason to absolve the
insurers of all liability.

  Therefore, on the issue of the
availability of the $60 million first-
period first excess policy to respond to
the flood damage, I must reject the
outcome reached by the majority. The
policy language and the controlling
Illinois law point to a different result.
I respectfully dissent.

FOOTNOTE

/1 The court did address Illinois law in Eljer, but
not in any way relevant to this case. It held
that coverage for potentially defective plumbing
systems was not triggered for systems that did
not leak, i.e., systems that did not manifest any
defect. See 2000 WL 1763322, at *2. The court did
not address the question whether, for plumbing
systems that proved faulty, installation trig-
gered coverage under Illinois law.
