                          In the
 United States Court of Appeals
             For the Seventh Circuit
                       ____________

Nos. 05-3127 & 05-3282
JOHN R. TALMAGE d/b/a TALMAGE AUTO CENTER,
                       Plaintiff-Appellant/Cross-Appellee,

                             v.

CHARLES B. HARRIS, CNA INSURANCE COMPANY, and
DOAR, DRILL & SKOW, S.C.,
                 Defendants-Appellees/Cross-Appellants.
                       ____________
         Appeals from the United States District Court
             for the Western District of Wisconsin.
        No. 03-C-658—Barbara B. Crabb, Chief Judge.
                       ____________
   ARGUED SEPTEMBER 19, 2006—DECIDED MAY 3, 2007
                  ____________


 Before RIPPLE, MANION, and WOOD, Circuit Judges.
  WOOD, Circuit Judge. On April 3, 1995, a fire swept
through the premises of the auto repair business that John
Talmage operated in New Richmond, Wisconsin. After he
notified his insurance carrier of the loss, Talmage made
extensive repairs to the business. The present case arose
after the insurance company decided that it had paid
enough, and the lawyer Talmage hired agreed to a settle-
ment of his claims against the insurer. The lawyer,
Charles B. Harris, did not handle matters to Talmage’s
satisfaction, however, which led Talmage ultimately to
2                                  Nos. 05-3127 & 05-3282

file a legal malpractice action. The district court dis-
missed some claims and others went to trial before a jury,
which ruled in Talmage’s favor in part and awarded him
modest damages. The district court reduced those damages
further. On appeal, Talmage complains that the district
court made a number of evidentiary errors and unduly
restricted his damages. Harris cross-appealed from the
district court’s refusal to order judgment as a matter of
law in his favor. We conclude that the district court’s
evidentiary rulings were within the scope of its discre-
tion and that it did not err otherwise in its handling of
the case, and we therefore affirm.


                             I
   Talmage’s business, the Talmage Auto Center, offered
complete auto services and collision repair. At the time of
the fire, it was insured by United Fire & Casualty Com-
pany (“United Fire”). The policy provided coverage for
fire loss, with an aggregate limit of $489,000. The day
after the fire, Talmage properly notified United Fire of the
event. United Fire assigned an adjuster named John H.
Holt to handle the file. Holt was new to the task: he had
never adjusted a claim as large as Talmage’s, nor had he
previously worked with a fire claim involving an auto
repair facility. Holt told Talmage to find a contractor to
perform the necessary repair work, but neither Holt nor
Talmage was able to find someone suitable. At that point,
United Fire neither prepared its own estimate of the
amount of the claim nor asked a contractor to prepare
one. Talmage thought that the loss was approximately
$527,700, including damage to the building, damage to
business personal property, loss of income, employee
tools, and other miscellaneous items. Talmage and Holt
agreed that Talmage and his employees would perform the
repair work themselves. Holt told Talmage to document
Nos. 05-3127 & 05-3282                                  3

the time that they devoted to the work and to save the
receipts for the materials they purchased; United Fire,
Holt promised, would reimburse Talmage. Later, United
Fire hired an accountant, Jennifer Bestul, to review and
organize the records that Talmage had submitted; Bestul
recommended that United Fire adjust the loss on a time-
and-materials basis.
  Although Talmage regularly submitted the time rec-
ords and receipts that were accumulating, United Fire did
not reimburse him in accordance with Holt’s promises.
Nevertheless, it did make significant partial payments:
between April 17, 1995, and May 20, 1996, it paid him
$309,309.66. Dissatisfied because he thought that more
was due, Talmage turned to Holt’s supervisor, Kelly Hart,
but Hart was no help. Later, United Fire removed Holt
from the job and replaced him with Stan Stensrud; by this
time, Talmage had done enough repairs to enable him to
reopen the business. Stensrud took a fresh look at the
entire claim and decided, at a time when the repairs
were 80% complete, to change the method of calculating
the fire loss. Instead of a straight time-and-materials
system, Stensrud decided to rely on an outside estimate.
  In the meantime, on May 28, 1996, Talmage retained
Doar, Drill & Skow, S.C., the law firm of attorney Charles
Harris, to represent him in settling his claims against
United Fire. On Talmage’s behalf, Harris prepared a proof
of claim statement for United Fire that itemized the
losses, documented them, and presented a total claim of
$527,701.95. With a large gap separating the parties’
assessments of the amounts due, Talmage and United
Fire agreed to submit to an appraisal proceeding in
December 1996, as required by the policy. There were
three appraisers—one selected by Talmage, one by United
Fire, and a third selected by the first two.
  The appraisal proceeding dragged on for quite some
time, while the parties collected documents and deposed
4                                 Nos. 05-3127 & 05-3282

witnesses. In April 1997, Harris filed a lawsuit against
United Fire on Talmage’s behalf in Wisconsin state court,
asserting claims for breach of contract and bad faith. More
than a year later, on July 20, 1998, the parties attended
an appraisal hearing. Rather than proceeding to the
merits, however, they decided to explore settlement.
Ultimately, United Fire offered to settle all of Talmage’s
outstanding claims for an additional $114,000 over and
above the $309,309 it had previously advanced. Harris
recommended that Talmage accept this offer, even though
it was lower than the $200,000 that Talmage believed he
was owed. According to Talmage, Harris assured him
that he could accept the $114,000 and still pursue his
bad faith claim separately. Relying on that advice,
Talmage took the $114,000, and the state court approved
the settlement.
   Afterward, Talmage believed that Harris and his law
firm were pursuing the “reserved” bad faith claim. Be-
tween September 1998 and November 2000, he called
Harris’s office many times to inquire about the status of
his case, but apparently no one gave him any information.
Only on November 21, 2000, did Harris inform Talmage
for the first time that the firm was not willing to handle
this claim. In the meantime, the two-year statute of
limitations in Wisconsin for the intentional tort of bad
faith committed by an insurance company had expired.
Harris did not mention this fact either in his letter to
Talmage or otherwise. As a result of Harris’s inaction,
Talmage was unable to pursue his bad faith claim against
United Fire. He filed this malpractice action on November
19, 2003, relying on the district court’s diversity juris-
diction. (By that time, Talmage was a citizen of Montana;
Harris was a Wisconsin citizen; the firm is a “service
corporation” incorporated in Wisconsin with its principal
place of business there; and CNA Insurance (the law firm’s
carrier) is incorporated in Delaware and has its principal
place of business in Illinois.)
Nos. 05-3127 & 05-3282                                     5

                             II
  At various points before the trial, the district court
narrowed the scope of Talmage’s case. It ruled that
Talmage had not pointed to enough evidence to proceed on
his claims for (1) additional fire loss, (2) the expenses
allegedly due to him from interest charges that he had
paid on his credit cards while awaiting reimbursement
from United Fire, and (3) punitive damages. In the final
pre-trial order, the court rejected Talmage’s objection to
certain evidence relating to appraisals or valuation of the
property, and it decided to grant the defendants’ request
that Talmage be precluded from claiming a net fire loss
expense of $141,036 (the difference between his alleged
proof of loss and the amount he accepted in settlement
from United Fire). Chief Judge Crabb explained that the
only way Talmage could prevail would be if he could have
persuaded a jury to award him $513,000 (an amount
$24,000 over the policy limit). She concluded that Talmage
had no evidence to support either that or any other
number, and he had no expert testimony indicating that
Harris’s advice to take the (net) $430,000 offered in the
settlement was negligent legal representation.
  The claim that Harris committed malpractice by fail-
ing to pursue the bad faith action against United Fire went
to trial before a jury. As the district court pointed out, in
order to prevail Talmage had to prove first that he had a
winning claim against United Fire for bad faith denial of
coverage, and second that Harris acted improperly in
failing to pursue that claim. Talmage wanted to prove
United Fire’s bad faith through the testimony of Russell
Bohach, a lawyer, who was prepared to testify about the
standard of reasonableness for handling an insurance
claim. The district court permitted that testimony, al-
though it later regretted the decision, finding in a post-
trial ruling that Bohach lacked sufficient knowledge of
the insurance industry to qualify as an expert on those
6                                    Nos. 05-3127 & 05-3282

matters. Nonetheless, the court also found that its error
in permitting Bohach’s testimony was harmless, because
the jury was able to understand this case on its own. The
crux of the case, as the court saw it, was whether United
Fire reasonably believed that Talmage’s invoices were
unreliable, and if its decision to delay additional payments
until it could resolve its concerns was also justified. The
jury resolved the underlying dispute about United Fire
as well as the malpractice claim in Talmage’s favor—
a decision that the district court refused to upset after the
trial.
  Defendants were more successful in their challenge to
the amount of damages. The jury awarded $68,322.67 in
damages, which represented both the legal fees Talmage
paid to Harris ($32,632.00) and losses Talmage suffered
because of a forced sale of his business ($35,690.67). The
district court agreed with the defendants that the evidence
was insufficient to establish a causal link between United
Fire’s delay in payments and any decline in the value of
Talmage’s business. (At the trial, the court had refused to
allow Talmage to seek damages for interest he had paid
on his credit cards for the same reason.) The court accord-
ingly reduced the damages award to $32,632.00.


                             III
  Talmage raises a bevy of arguments on appeal, some of
which relate to the pre-trial and trial rulings of the district
court and others to its post-trial decisions. We address
them, insofar as possible, in chronological order.


    A. Exclusion of Talmage’s claim for contract damages
  Before the trial, the district court ruled in response to
a motion in limine filed by Harris that Talmage would not
Nos. 05-3127 & 05-3282                                   7

be permitted to pursue a claim for additional losses from
the fire. Talmage was seeking an additional $141,036, over
and above the interim payments and settlement payment
he had received from United Fire. This was essentially a
partial summary judgment, although it was not labeled as
such. We review the district court’s decision de novo. See
Rehling v. City of Chicago, 207 F.3d 1009, 1014 (7th Cir.
2000).
   The district court found that Talmage had not pointed
to evidence in the record that would support a finding
that he would have collected any additional money at all,
in light of the $114,000 settlement and the earlier pay-
ments. Before this court, he argues that his fire loss
claim had two components: damages that he sought from
United Fire at the time of the appraisal proceeding, and
damages that were not included in the claim presented
for appraisal (because they dealt with United Fire’s al-
leged bad faith). Harris argues that Talmage’s claim for
additional damages is precluded as a matter of law. The
settlement that was reached in conjunction with the
appraisal proceeding had the effect of settling the state
court action that Talmage had brought. He asserts that
it is barred under the doctrine of claim preclusion, which
under Wisconsin law makes a final judgment conclusive
“in all subsequent actions between the same parties as
to all matters which were litigated or which might have
been litigated in the former proceedings.” Lindas v. Cady,
515 N.W.2d 458, 463 (Wis. 1994).
  Claim preclusion, however, is not the proper doctrine for
this situation. To begin with, we have a different claim—
legal malpractice—between different parties. Although
the “case within a case” for Talmage’s legal malpractice
claim is his action against United Fire, there is no way
that he could have litigated his present claim against
Harris and the law firm in that earlier case. Issue preclu-
sion is another possibility, but under Wisconsin law that
8                                  Nos. 05-3127 & 05-3282

cannot apply unless “the issue or fact was actually liti-
gated and determined in the prior proceeding by a valid
judgment in a previous action and . . . the determination
was essential to the judgment.” In re Estate Rille ex rel.
Rille,728 N.W.2d 693, 702 (Wis. 2007); see also Restate-
ment (2d) of Judgments § 27 (1982). Normally, when a
case is resolved by settlement or stipulation, courts will
find that the “valid final judgment” requirement of issue
preclusion has not been satisfied. E.g., Deminsky v.
Arlington Plastics Machinery, 657 N.W.2d 411, 428 (Wis.
2003); see 18A Charles A. Wright and Arthur R. Miller,
Fed. Prac. & Proc. 2d § 4443. Cf. Buckhannon Bd. and
Care Home, Inc. v. West Virginia Dept. of Health and
Human Resources, 532 U.S. 598, 600 (2001) (prevailing
party status for attorneys’ fees purposes not achieved by
voluntary change in defendant’s conduct; must have
judgment on the merits or court-ordered consent decree).
   Nonetheless, the fact remains that Talmage entered
into a contractual settlement with United Fire that
stipulates the amount he was willing to accept for the
fire losses. Had he not settled, he would have had to
convince the trier of fact in the state court action to award
him more than $200,000 in additional damages (thereby
taking his total recovery up to approximately $513,000).
The district court properly concluded that Talmage could
not satisfy this burden of proof without expert testimony.
As Chief Judge Crabb pointed out, a fire-damaged com-
mercial building presents a complex valuation problem:
which part of the rebuilding or replacement was necessi-
tated by the fire; is the new structure a simple replace-
ment or is it an improvement over the old; if it is a bit of
both, how should the costs be allocated? Talmage’s lawyer
conceded that he did not have this kind of evidence. He
argued that it was unnecessary, because United Fire had
agreed (through the inexperienced Holt) to pay him on
a time-and-materials basis. Talmage cannot mean this
Nos. 05-3127 & 05-3282                                   9

literally, however: at a minimum he would have been
limited to reasonable expenditures and time. Had he
decided to replace a 2,000 square-foot business with a
20,000 square-foot mini-mall, he would have had to bear
most of the additional expense. The record does not
reveal how much of his work was required to restore the
business to its pre-fire condition and how much repre-
sented improvements. Without that evidence, his claim
that the settlement was inadequate has no support and
was properly rejected by the district court.


 B. Exclusion of Talmage’s interest damages
  The critical question for this part of the case is causa-
tion. Talmage’s theory was that United Fire’s delays and
under-payments required him to carry large balances on
his credit cards, for which he paid a substantial amount of
interest. The only evidence Talmage offered on this point
was a report from his accounting expert, Kleinheiz. The
report displayed and quantified the interest charges that
he paid during the period after the shop was destroyed. It
does not, however, segregate charges related to the
reconstruction from other charges he may have incurred
during that period. This evidence fell so far short of
anything revealing a causal link between the interest
paid and United Fire’s alleged bad faith that the district
court properly kept it from the jury. We see no need to
discuss whether the primary failing was the lack of ex-
pert testimony or the lack of evidence, period.


 C. Admission of expert reports
  In this instance, Talmage is complaining that the dis-
trict court erred by admitting certain reports, rather than
by excluding information. Harris wanted to introduce
several appraisal reports at the trial without calling
10                                 Nos. 05-3127 & 05-3282

their authors as witnesses. Talmage objected on hearsay
grounds. See FED. R. EVID. 801. The reports contained
estimates by appraisers of the amount of the loss caused
by the fire. The district court decided that the reports
could come in as evidence of United Fire’s state of mind.
See United States v. Hanson, 994 F.2d 403, 406 (7th Cir.
1993) (“An out of court statement that is offered to
show its effect on the hearer’s state of mind is not hear-
say.”). Talmage argues that reports authored by others
could not show what United Fire was thinking.
  Here again, Talmage is missing the point. The key issue
is not the state of mind of the appraisers, which might
have required analysis under FED. R. EVID. 803(3), but
the effect of the report on United Fire’s state of mind. The
truth or falsity of the reports is irrelevant to the latter
question, and thus they did not fall within the definition of
hearsay in Rule 801. One contested issue was United
Fire’s “knowledge or reckless disregard of the lack of a
reasonable basis for denying the claim.” Weiss v. United
Fire and Cas. Co., 541 N.W.2d 753, 757 (Wis. 1995). This
is a subjective test. Id.; see also Anderson v. Continental
Ins. Co., 271 N.W.2d 368, 376 (Wis. 1978). Harris was
entitled to introduce the expert appraisal reports to
show that United Fire did not have the requisite state of
mind. If it did not, then at the secondary level Harris
would not have been negligent by failing to pursue the
bad faith claim.


  D. Bohach’s expert testimony
  As we mentioned earlier, Talmage wanted to, and did,
present Attorney Russell Bohach as an expert on the ques-
tion of bad faith in the insurance industry. Bohach, as
the district court recognized in its post-trial ruling, had
extensive knowledge about the law of bad faith claims. The
problem was that the court concluded, after the trial was
Nos. 05-3127 & 05-3282                                   11

over, that it should not have qualified Bohach as an
expert on United Fire’s conduct because he lacked knowl-
edge of the insurance industry and its customs and
practices. It is more than a little odd that Talmage is
complaining about this, because the jury did hear Bohach’s
testimony and it ruled in Talmage’s favor on the legal
malpractice claim (and hence on the underlying bad
faith claim). No relief we could order on this point would
help Talmage, and we thus reject it on that basis.


  E. Punitive damages
  The district court decided that there was no evidence
in the record that would have supported a punitive
damages award in the litigation against United Fire. We
agree with that assessment. As the Wisconsin Supreme
Court observed, “[p]roof of a bad faith claim does not
necessarily make the award of punitive damages appro-
priate. The intent necessary to maintain an action for
bad faith is distinct from what must be shown to recover
punitive damages.” Trinity Evangelical Lutheran Church
and School-Freistadt v. Tower Ins. Co., 661 N.W.2d 789,
797 (Wis. 2003) (internal citation omitted). In order to
recover punitive damages, the plaintiff must show “(1) evil
intent deserving of punishment or of something in the
nature of special ill-will; or (2) wanton disregard of duty;
or (3) gross or outrageous conduct.” Id.
  There is no evidence in this record that comes close to
any of those criteria. To the contrary, even though it may
have had some doubts about the case, United Fire repeat-
edly sent checks to Talmage, up to the point where it had
paid him almost $310,000 without a fuss. Talmage ac-
knowledges this, of course, but he suggests that the
company deliberately waited until he had expended his
own funds repairing his shop and then it changed the
reimbursement formula. Nothing supports this hypoth-
12                                 Nos. 05-3127 & 05-3282

esis; United Fire’s actions are equally if not more consis-
tent with the reason it offered, which was its growing
concern about over-payment. There is also no support
for a punitive damages award in the malpractice action.
While the jury was entitled to conclude that Harris was
negligent in failing to warn Talmage about the expiring
statute of limitations on his bad faith claim, nothing in
the record points to the kind of evil intent, “wanton”
disregard, or outrageous conduct that would be necessary
for punitive damages.


  F. Reduction of the jury award
  The reason why the district court reduced Talmage’s
damages from $68,322.67 to $32,632 was not a general
sense that the evidence did not support the larger amount.
Thus, this was not a remittitur, offered as an alternative
to a grant of a new trial. It was instead a ruling as a
matter of law (implicitly under FED. R. CIV. P. 50(b)) that
the jury never should have been permitted to consider the
elements of damage represented by the larger amount. Our
review is therefore de novo. See McNabola v. Chicago
Transit Authority, 10 F.3d 501, 515 (7th Cir. 1993).
  The $35,959.67 that the district court lopped off repre-
sented the alleged decline in the value of Talmage’s
business caused by United Fire’s delays in reimbursing
him. In rejecting this after the trial, the district court
analogized it to the interest costs claim that it had refused
to permit at the trial. As the court put it, “[t]he evidence
does not show when the insurer’s delay in payments
amounted to bad faith, so that the jury could determine
what relationship the bad faith delay had to the decline
in value of plaintiff ’s business, as distinguished from a
decline attributable to delays that were reasonable.” The
problem, in other words, was not in the proof of how much
value was lost; it was, once again, a failure to show
Nos. 05-3127 & 05-3282                                   13

causation. We, too, can find nothing in the record that
would have permitted the jury to draw the necessary lines,
and we therefore find no reversible error in the court’s
decision to limit Talmage’s damages to the fees he paid
to Harris.


                            IV
   Last, we consider the issue Harris has presented in his
cross-appeal: whether the district court erred when it
refused to grant his motion for judgment as a matter of
law, which was based on Talmage’s failure to support his
bad-faith case with expert testimony. Under Wisconsin
law, in order to establish a claim for a bad-faith denial of
coverage or refusal to pay, an insured “must show the
absence of a reasonable basis for denying benefits of the
policy and the defendant’s knowledge or reckless dis-
regard of the lack of a reasonable basis for denying the
claim.” Weiss, 541 N.W.2d at 757 (quoting Anderson, 271
N.W.2d at 691). Expert testimony may be relevant to the
first point, but the district court concluded that it was
not essential.
  Relying on Weiss, the court reasoned that “the acts and
omissions in dispute in this case are not so esoteric that
a lay jury could not decide them.” The jury was able to
assess whether, under all the circumstances, the insurer
behaved reasonably when it refused to pay Talmage the
full amount he was requesting for his expenses in rebuild-
ing his business premises. Harris points to no inflexible
rule of Wisconsin law demanding expert testimony in
circumstances like these, and it is unclear whether such a
law would bind a federal district court in any event.
Whether the jury needs expert testimony for a particular
claim is a question within the district court’s discretion,
and we see no abuse of that discretion here.
14                                Nos. 05-3127 & 05-3282

                        * * *
  Finding no reversible error either in Talmage’s appeal
or Harris’s cross-appeal, we AFFIRM the judgment of the
district court.

A true Copy:
      Teste:

                      ________________________________
                      Clerk of the United States Court of
                        Appeals for the Seventh Circuit




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