                           In the

United States Court of Appeals
              For the Seventh Circuit

Nos. 10-3839, 10-3856, 10-3883 & 10-3884

D WIGHT M ILLER et al.,
                                          Plaintiffs-Appellants,
                               v.

S T. P AUL M ERCURY INSURANCE C OMPANY,

                                            Defendant-Appellee.


          Appeals from the United States District Court
                 for the Central District of Illinois.
         No. 2:10-cv-02062—Michael P. McCuskey, Judge.



      A RGUED M ARCH 30, 2012—D ECIDED JUNE 29, 2012




  Before B AUER, P OSNER, and H AMILTON, Circuit Judges.
  H AMILTON , Circuit Judge. Director and officer liability
insurance policies commonly feature so-called insured
vs. insured exclusions that exclude from coverage losses
for claims brought by one “insured” against another
“insured,” often defined to include current and former
corporate directors and officers as well as the corpora-
tion itself. The exclusion serves to limit moral hazard.
Without such an exclusion, a D&O policy could require
2                 Nos. 10-3839, 10-3856, 10-3883 & 10-3884

the insurer to pay for the business mistakes of insured
directors and officers if the corporation (also an insured)
or if former officers or directors brought suit, collusive
or otherwise, against them. Complications arise, how-
ever, when insured defendants are sued by a group of
plaintiffs where some are insured and some are not, as
in these appeals. Defendant St. Paul Mercury In-
surance Company relied on the insured vs. insured exclu-
sion in its D&O policy when it refused to defend or
indemnify the insureds, Strategic Capital Bancorp, Inc.
(“SCBI”) and two of its former directors and officers, in a
suit where only three of five plaintiffs joining in the
complaint were insureds.
  All parties to the underlying lawsuit joined forces
as plaintiffs in this action against St. Paul to force it to
defend and indemnify the defendants in the underlying
lawsuit, or at least to cover a portion of defense costs
and losses (the proportion pursued by plaintiffs who
are not insureds) under the D&O policy’s allocation
provision. The district court agreed with St. Paul and
held that the presence of insureds as plaintiffs in the
underlying lawsuit meant that St. Paul had no duty to
defend or indemnify any part of the lawsuit, including
the claims brought by plaintiffs who are not insureds
under the policy. The district court granted a motion to
dismiss under Federal Rule of Civil Procedure 12(b)(6),
finding that the plain language of the insured vs. insured
exclusion barred coverage of the entire action where
any plaintiff is an insured and that the allocation pro-
vision did not apply to a complaint that included any
insureds as plaintiffs.
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                 3

   We affirm in part and reverse in part. We affirm the
district court to the extent it held that St. Paul has no
duty to defend or indemnify the claims brought by the
three insured plaintiffs. We reverse in part and hold
that St. Paul must defend and indemnify the claims
brought by the two non-insured plaintiffs. In Level 3
Communications, Inc. v. Federal Insurance Co., 168 F.3d 956
(7th Cir. 1999), we interpreted a very similar D&O policy
to require an allocation of indemnity and defense costs
where a lawsuit was brought by both insured and non-
insured plaintiffs. Our holding from Level 3 Communica-
tions did not rest on extraneous factual circumstances,
such as the proportion of damages sought by insured
plaintiffs as opposed to non-insured plaintiffs, or the
timing of the insured plaintiff’s joinder in the suit.


I. Facts and Procedural History
  The D&O policy at issue here contains an insured vs.
insured exclusion that removes the duty to defend or
indemnify for “Loss on account of any Claim made
against any Insured: . . . brought or maintained by or on
behalf of any Insured or Company in any capacity . . . .”
The allocation clause of the D&O policy provides:
    If on account of any Claim . . . the Insureds incur an
    amount consisting of both Loss covered by this
    Policy and loss not covered by this Policy because
    the Claim includes both covered and uncovered
    matters, such amount shall be allocated between
    covered Loss and uncovered loss based upon the
4                 Nos. 10-3839, 10-3856, 10-3883 & 10-3884

    relative legal exposures of the parties to covered
    and uncovered matters.
  The dispute here concerns a lawsuit that we call the
“Miller action” brought by five plaintiffs—Dwight
Miller, Wells Anderson, Gene King, Teresa King, and
Glenda L. Lane, as trustee of the Glenda L. Lane Trust.
Those plaintiffs sued SCBI and two of the company’s
directors and officers, John Gorman and Gary Svec. In
the state court complaint, each of the five plaintiffs as-
serted three claims against each defendant: fraud, civil
conspiracy, and violation of the Illinois Consumer
Fraud and Deceptive Business Practices Act. SCBI noti-
fied St. Paul of the Miller action and requested coverage
of defense costs and indemnity coverage under the
D&O policy issued by St. Paul to SCBI. St. Paul declined
to advance defense costs or otherwise indemnify
SCBI, citing the insured vs. insured exclusion as the
sole basis for its denial of coverage.
  Two plaintiffs in the Miller action (Miller and Ander-
son) are former directors of SCBI who are certainly
insureds under the D&O policy. A third plaintiff, Glenda
L. Lane as trustee of the Glenda L. Lane Trust, is also
included in the definition. She is a beneficiary of the
trust, so the trust is acting on her behalf, and she
is an insured as a former director of SCBI. The two
other plaintiffs in the Miller action, however, Gene King
and Teresa King, were never directors or officers of
SCBI and do not qualify as insureds under the policy.
  The coverage issue was presented to the district court
in two consolidated actions. SCBI moved at the outset
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                     5

for a preliminary injunction that would have declared a
duty to defend and indemnify under the policy. The
district court denied the motion for a preliminary injunc-
tion, finding that SCBI was not likely to succeed on the
merits of its claim. Strategic Capital Bancorp Inc. v. St. Paul
Mercury Ins. Co., 723 F. Supp. 2d 1053 (C.D. Ill. 2010). The
district court later granted St. Paul’s motion to dismiss,
concluding that the “the plain language of the ‘Insured
vs. Insured’ exclusion indicates that St. Paul has no duty
to defend or to indemnify in civil proceedings brought
or maintained by any Insured.” The district court effec-
tively barred coverage of both defense and indemnity
coverage for the claims of all five plaintiffs in the
Miller action based on the presence of insured plaintiffs.


II. Discussion
  We review de novo the district court’s interpretation of
the insurance policy, which presents a question of law.
E.g., First Nat’l Bank of Manitowoc v. Cincinnati Ins. Co., 485
F.3d 971, 976 (7th Cir. 2007). Illinois law governs, although
there is nothing unusual about the applicable state’s law,
as was true in Level 3 Communications, 168 F.3d at 957
(applying Nebraska law to a parallel insured vs. insured
exclusion and policy). The general rule for insurance
policies calls for liberal interpretation in favor of
coverage, but “this rule of construction only comes into
play when the policy is ambiguous.” Hobbs v. Hartford Ins.
Co. of the Midwest, 823 N.E.2d 561, 564 (Ill. 2005). As we
explain below, we can use common sense and the usual
tools of contract interpretation to interpret the language
in this policy without relying on the rule of ambiguity.
6                   Nos. 10-3839, 10-3856, 10-3883 & 10-3884

We address first and       briefly the proper treatment of
the Lane Trust as a        plaintiff. We then turn to the
principal issues, the      scope of St. Paul’s duty to
indemnify and its duty    to defend.


    A. The Lane Trust
  All parties agree that two of the plaintiffs in the Miller
action, Miller and Anderson, qualify as insureds and
that two other plaintiffs, Gene King and Teresa King, do
not. The dispute is over the status of the Lane Trust.
Under the St. Paul D&O policy, the insured vs. insured
exclusion extends to anyone who acts “on behalf of any
Insured or Company in any capacity . . . .” We agree
with the district court that the “distinction between
Lane the individual and Lane the trustee of her
namesake trust is not sufficient to remove her from
the definition of an ‘Insured.’” Lane is a beneficiary of
the trust. As a former director of SCBI, she is also an
insured. Applying the most basic concept of a trust, the
Lane Trust acts “on behalf of” its beneficiaries,
including Lane as an individual, when it pursues
damages in the Miller action for the ultimate benefit of
those beneficiaries. Otherwise it would be too easy to
evade the insured vs. insured exclusion by having an
insured merely assign her claims to a trust she con-
trols. The Lane Trust is an insured under the policy.


    B. St. Paul’s Duty to Indemnify
  The central question is whether the insured vs. insured
exclusion of this D&O policy bars coverage of a claim
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                   7

brought by both insured and non-insured plaintiffs in
the same lawsuit against another insured. Insured
vs. insured exclusions are “standard” in D&O policies.
Level 3 Communications, 168 F.3d at 957-58. They control
the cost of D&O insurance by removing from cov-
erage both “collusive suits — such as suits in which a
corporation sues its officers or directors in an effort to
recoup the consequences of their business mistakes,
thus turning liability insurance into business-loss insur-
ance”— as well as “suits arising out of those par-
ticularly bitter disputes that erupt when members of a
corporate, as of a personal, family have a falling out and
fall to quarreling.” Id. at 958 (internal citations omitted).
  The insured vs. insured exclusion in this case provides
that St. Paul shall not be liable for “Loss on account of any
Claim made against any Insured: . . . brought or main-
tained by or on behalf of any Insured or Company in
any capacity,” subject to several exceptions. It is clear
that the insured vs. insured exclusion would operate to
bar the entire action in a suit brought by only the
plaintiffs who are insureds: Miller, Anderson, and the
Lane Trust. It is equally clear that the insured vs. insured
exclusion would have no effect in a suit brought by
only the two non-insured plaintiffs, Mr. and Mrs. King.
The question here is how to apply the policy when
insured and non-insured plaintiffs join their individual
claims in one lawsuit.
  There are three possible answers, in broad terms. First,
one might say that as long as at least one non-insured
plaintiff is part of the lawsuit, the exclusion does not
8                 Nos. 10-3839, 10-3856, 10-3883 & 10-3884

apply and the insurer must indemnify any losses from
the entire lawsuit. That rule would produce arbitrary
results depending on whether insured plaintiffs did or
did not have a non-insured plaintiff join in the same
lawsuit. The rule would also make it easy for insured
plaintiffs to evade the terms and purposes of the
insured vs. insured exclusion by recruiting just one non-
insured plaintiff to join an otherwise collusive or intra-
mural lawsuit. No party advocates that answer here.
  Second, one might say, as St. Paul argues, that if just
one insured plaintiff is a party to a lawsuit, his presence
taints the entire suit and there is no duty to indemnify
any losses from any part of the lawsuit. St. Paul is
willing to take this proposed rule to its logical limit, to
bar coverage of an entire lawsuit brought by 99 non-
insured plaintiffs and just one insured plaintiff. This
rule also seems to invite arbitrary results depending on
whether many people with similar claims file one con-
solidated lawsuit or many separate lawsuits. Courts are
hesitant to interpret contracts in ways that encourage
an inefficient multiplication of parallel lawsuits.
  In response to this concern, St. Paul argues that if a
court consolidated separate complaints by insured and
non-insured plaintiffs, the consolidation would mean
there was no coverage for any of the claims. That rule
would mean that a court’s decision about case manage-
ment would have major substantive and economic conse-
quences. During oral argument, St. Paul went so far as
to argue that even if separate complaints by insured and
non-insured plaintiffs were merely consolidated for
coordinated pretrial proceedings, as under the federal
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                   9

multi-district litigation processes of 28 U.S.C. § 1407, they
should also be considered a single claim and coverage
would be barred. (As a fallback position, St. Paul argues
for a majority rule that would base coverage decisions
on either the proportion of insured to non-insured plain-
tiffs or the proportional amount of damages sought or
obtained by each group. Either rule would invite
equally arbitrary results.)
   A third answer for a lawsuit with both insured and non-
insured plaintiffs is the one we adopted in Level 3 Commu-
nications: apply the allocation clause of the D&O policy
to provide indemnity for losses on claims by non-insured
plaintiffs but not for losses on claims by insured plain-
tiffs. This answer minimizes the risk of arbitrary results
and discourages efforts to manipulate the result by the
ways in which individual claims happen to be combined
or separated. This answer also has the advantage of
conforming to the parties’ reasonable expectations: the
insurer owes no duty to indemnify for claims brought
by insured plaintiffs but does owe that duty for claims
brought by others. We conclude that this third answer
is the correct one under the St. Paul D&O policy at issue
here. To explain further, we review first our decision in
Level 3 Communications and its application here. We
then turn to St. Paul’s efforts to distinguish Level 3 Com-
munications from this case.


    1. Level 3 Communications
  In Level 3 Communications Inc. v. Federal Insurance Co.,
168 F.3d 956 (7th Cir. 1999), the issue was whether a D&O
10                Nos. 10-3839, 10-3856, 10-3883 & 10-3884

policy’s insured vs. insured exclusion barred coverage
of a lawsuit by seven non-insured plaintiffs after one
insured plaintiff joined the lawsuit six months later. We
held that “the insurance contract requires allocation of
covered and uncovered losses rather than barring all
recovery because of the presence of an insured on the
plaintiff’s side of the case.” Id. at 959. We ordered the
insurer to pay the insured corporation an amount equal
to the amount of the settlement in the fraud case minus
the amount that was paid to the insured plaintiff. Id. at
961. We reached this result by applying the allocation
clause of the policy to a “Claim,” defined by the policy as
“a civil proceeding commenced by the service of a com-
plaint or similar pleading.” Id. at 960. The insured vs.
insured exclusion of the policy removed from liability
“any ‘Claim made against an Insured Person’ if the Claim
[was] ‘brought or maintained by or on behalf of any
Insured.’ ” Id. at 957.
  With respect to allocation, we acknowledged that the
presence of just one insured plaintiff in the underlying
case “could conceivably contaminate the entire litigation,
particularly if the insured were a current officer or
director of the defendant and the principal plaintiff.” Id.
at 960. “But,” we wrote, “the contract deals with this
problem in another way, by requiring allocation of
covered and uncovered losses.” Id. Quoting the alloca-
tion provision, we explained: “If both sorts of loss
occur ‘because a Claim against the Insured Persons in-
cludes both covered and uncovered matters, . . . the
Insureds and the [Insurance] Company shall use their
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                11

best efforts to agree upon a fair and proper alloca-
tion of such amount between covered Loss and uncov-
ered loss.’ ” Id. at 960.
  The definition of the term “Claim” used in the insured
vs. insured exclusion did not prevent us from applying
the allocation clause to distinguish covered from uncov-
ered loss based on the status of a plaintiff as non-insured
and insured:
   Remember that a “Claim” is defined as a civil pro-
   ceeding, here the securities fraud suit against
   Kiewit [the corporation] and one of its directors. The
   “Claim” so defined was against Insured Persons, but
   it included uncovered matters because one of the
   plaintiffs was an Insured, with the result that his
   part of the Claim was not covered by the insurance
   contract.
     The contract may, as Federal argues, primarily
   contemplate a situation in which the suit for which
   indemnity is sought charges the insured with some
   wrongs that are covered by the insurance con-
   tract and some that are not, and damages are
   awarded for both sorts of wrong and have then to be
   allocated between the two groups. But a matter
   could be “uncovered” not because the policy ex-
   cluded a particular type of act but because it ex-
   cluded a particular type of claimant who had joined
   in the suit with persons whose claims were covered.
   That would be a suit against an Insured Person
   that involved uncovered as well as covered matters.
12                Nos. 10-3839, 10-3856, 10-3883 & 10-3884

Id. We also noted the “odd result” that would have fol-
lowed if we had adopted the insurer’s contrary argu-
ment: “that a claim fully covered when made could
become fully uncovered when another plaintiff was
permitted to join it.” Id.
  Finally, we explained that the allocation clause
would take care of hypothetical cases in which insured
plaintiffs play a more prominent role, such as when
“an Insured Person is the primary suitor.” Id. We sug-
gested that courts interpreting similar policy language
in the context of a more active insured plaintiff (that is,
a “primary suitor”) could maintain the integrity of the
insured vs. insured exclusion by allocating the “bulk of
the judgment or settlement . . . to [the insured’s] part of
the suit” and correspondingly reducing the exposure of
the insurance company. Id. at 961.
   The relevant terms of St. Paul’s policy in this case are
practically indistinguishable from those in the policy in
Level 3 Communications. The insured vs. insured exclu-
sion in Level 3 Communications excluded “liability on
account of any ‘Claim made against an Insured Person’
if the Claim is ‘brought or maintained by or on behalf
of any Insured.’ ” 168 F.3d at 957. The exclusion here
states: “The insurer shall not be liable for Loss on
account of any Claim made against any Insured . . .
brought or maintained by or on behalf of any Insured
or Company in any capacity . . . .” The definition of a
“Claim” in Level 3 Communications was “a civil proceeding
commenced by the service of a complaint or similar
pleading.” 168 F.3d at 960. The definition of a “Claim” in
the St. Paul policy is: “a civil proceeding against any
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                    13

Insured commenced by the service of a complaint or
similar proceeding.” The allocation provisions are just
as similar.1
  The allocation provision of the St. Paul policy offers
two avenues for allocating claims between covered and
uncovered losses. If either the first or second portion
applies, “such amount shall be allocated.” The facts
presented by this case fall within the terms of the
second portion, italicized for emphasis here:
    If on account of any Claim the Insureds who are
    covered for such Claim under this Policy incur Loss
    jointly with others, including any Insureds who are
    not covered for such Claim under this Policy, or the
    Insureds incur an amount consisting of both Loss
    covered by this Policy and loss not covered by this Policy
    because the Claim includes both covered and uncovered
    matters, such amount shall be allocated between
    covered Loss and uncovered loss based upon the
    relative legal exposures of the parties to covered
    and uncovered matters.
As in Level 3 Communications, the lawsuit that combines
claims by insured and non-insured plaintiffs presents a
“Claim” that includes both covered and uncovered mat-
ters, depending on the status of the different plaintiffs.


1
  In Level 3 Communications: “If both [covered and uncovered
losses] occur ‘because a Claim against the Insured Persons
includes both covered and uncovered matters, . . . the Insureds
and the [Insurance] Company shall use their best efforts to
agree upon a fair and proper allocation of such amount
between covered Loss and uncovered loss.’ ” 168 F.3d at 960.
14                 Nos. 10-3839, 10-3856, 10-3883 & 10-3884

The covered matters are the claims for damages by the
non-insured plaintiffs. The uncovered matters are the
claims brought by or on behalf of insured plaintiffs.
Under the reasoning of Level 3 Communications, St. Paul
owes a duty to indemnify its insureds for the claims
brought by the non-insured Kings but not those brought
by the insured Miller, Anderson, and Lane.


     2. Applying or Distinguishing Level 3 Communications
   To avoid this result, St. Paul argues we should limit
our holding in Level 3 Communications based on two
factual differences: timing and majority rule. Neither
has a basis in the policy language, and we reject both
proposed distinctions. First, St. Paul points out that the
insured plaintiff in Level 3 Communications did not join
the lawsuit until six months after it was filed. Our inter-
pretation of the key policy language did not depend on
the timing. Our reasoning was equally applicable to
simultaneous claims by insured and non-insured plain-
tiffs. The late joinder in Level 3 Communications certainly
highlighted how arbitrary the rule advocated by the
insurer would be, but if we were to distinguish that case
from this one based on that timing, we would be
adopting an equally arbitrary rule that could be evaded
easily by filing separate lawsuits or by having insured
plaintiffs join lawsuits a few months (or weeks, or days?)
after they were filed. Timing is not a valid distinction
between this case and Level 3 Communications.
  Second, St. Paul argues for a “majority rule” of sorts
that would base coverage decisions in mixed cases like
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                        15

this on either the number of or the proportion of
damages claimed by insured plaintiffs as opposed to non-
insured plaintiffs. Counting noses, we have three insured
plaintiffs and two non-insured plaintiffs in this case.
Counting the damages claimed, the three insured plain-
tiffs seek 81% of the total while the two non-insured
plaintiffs seek 19%. This proposed additional require-
ment for a majority of non-insured claimants or dollars
has no basis in the St. Paul policy language. It would
also invite similarly arbitrary results, depending again
on whether insured and non-insured plaintiffs filed
separate or joint complaints.2 What would happen if one
or more plaintiffs settled so as to shift the balance one
way or the other? And should the relevant majority be
the number of claimants or the number of dollars? By
contrast, the allocation provision in the St. Paul policy
gives us a fairly clear answer: coverage is not all-or-nothing
based on one of these (perhaps unstable) majorities.


2
  This potential for arbitrary results is apparent in St. Paul’s
effort to distinguish Megavail v. Illinois Union Insurance Co., No.
05-1374-AS, 2006 WL 2045862 (D. Or. July 19, 2006), which
followed our holding in Level 3 Communications and ordered
partial coverage. St. Paul argues there is a bright line between
the facts of Megavail and the facts presented here—“in that
only two of the six plaintiffs were insured” in Megavail, as
compared to three of five plaintiffs in this case. Under St.
Paul’s proposed nose-counting standard, a case brought by
99 insured and one non-insured plaintiff would not be
covered, but neither would a case brought by 51 insured and
49 non-insured. This “majority rule” is arbitrary and has
no basis in the policy language.
16                Nos. 10-3839, 10-3856, 10-3883 & 10-3884

Coverage is allocated based on “the relative legal exposure
of the parties to covered and uncovered matters.”
  In fact, the situation here was one we contemplated
in Level 3 Communications, as a case in which the “primary
suitor” would be an insured plaintiff whose claims
would be excluded from coverage. Courts facing such
cases could protect the insurer’s expectations and
enforce the insured vs. insured exclusion by allocating
the bulk of a judgment or settlement to the insured’s
part of the underlying lawsuit. 168 F.3d at 960-61. We
reject St. Paul’s proposed majority rule for treating a
lawsuit combining covered and uncovered claims as
either completely covered or completely uncovered.
   In proposing these factual distinctions that we reject,
St. Paul has relied heavily on Sphinx International Inc. v.
National Union Fire Insurance Co., 412 F.3d 1224 (11th
Cir. 2005). In that case, the Eleventh Circuit dealt with
a lawsuit that combined claims of insured and non-
insured plaintiffs similar to this case, but with very dif-
ferent policy terms. In Sphinx International, the primary
plaintiff in the underlying suit was a former director of
the company and thus an “insured” for purposes of the
D&O policy. On the same day that the insured plaintiff
filed a securities class action suit against Sphinx, he
published a nationwide notice soliciting other Sphinx
shareholders to join his suit. The former director then
amended his complaint to add as plaintiffs the share-
holders who accepted the invitation. Id. at 1225-26.
  The policy language applied by the court in Sphinx
International barred coverage of claims brought:
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                         17

   By or at the behest of . . . any DIRECTOR or
   OFFICER . . . unless such CLAIM is instigated and
   continued totally independent of, and totally without the
   solicitation of, or assistance of, or active participation of, or
   intervention of, any DIRECTOR or OFFICER of the
   COMPANY or any affiliate of the COMPANY.
Id. at 1231 (emphasis added). Because the former director
in Sphinx International actively solicited the other plain-
tiffs, the “plain and clear” language of the insured vs.
insured exclusion barred the entire lawsuit. Id.
  We have no disagreement with that reasoning, but we
find no similar language in the St. Paul policy that would
defeat coverage for a claim by a non-insured plaintiff
depending on whether she acted independently of
insured plaintiffs. A proper appreciation of the different
policy language in the two cases is more than suf-
ficient to support the Eleventh Circuit’s ruling without
reading into the decision any arbitrary limit on Level 3
Communications. In fact, the Eleventh Circuit made clear
that it was “not saying that Level 3 Communications was
wrongly decided,” but that its facts, including the
policy language, were “too dissimilar to our own to be
decisive.” Id.
  Finally, St. Paul argues that Level 3 Communications
should be distinguished because the St. Paul policy in-
cludes seven exceptions to the insured vs. insured exclu-
sion. All seven exceptions provide coverage of certain
claims brought entirely by insured plaintiffs. As an exam-
ple, one of the exceptions extends coverage to a claim
brought by a person who was a director or officer of the
company more than six years ago (that is, an insured), so
18                Nos. 10-3839, 10-3856, 10-3883 & 10-3884

long as the person brings the claim “without the solici-
tation, assistance or active participation” of a person
who was a director or officer of the company within
the last six years. St. Paul attempts to tease from these
exceptions a general standard for deciding coverage
issues based on the degree of involvement of insured
plaintiffs in the suit. St. Paul contends that, by negative
implication, the exceptions to the insured vs. insured
exclusion bar coverage of an entire claim when it
includes the “active” (as opposed to “passive”) participa-
tion of any insured plaintiff, regardless of whether the
other plaintiffs are insured or not.
   The flaw in St. Paul’s position is that it has no basis in
its policy language. The exceptions to the insured vs.
insured exclusion restore coverage for subsets of claims
brought by insureds themselves. The exceptions pro-
vide no guidance on how to treat claims by non-insured
plaintiffs who were never subject to the exclusion. St.
Paul’s argument here simply asks the courts to rewrite
its policy to read more like the policy in Sphinx Interna-
tional. Our job of course is to interpret the policy language
as written, not as a party wishes it had been written
in hindsight.
  For these reasons, we decline St. Paul’s invitation to
impose arbitrary limits on the reasoning of Level 3 Com-
munications, whether based on the timing of the
insureds’ entry into the lawsuit, the proportion of damages
sought by insureds, or the “active” versus “passive”
involvement of the insureds. The allocation clause in the
St. Paul policy leads to the proper result: claims brought
Nos. 10-3839, 10-3856, 10-3883 & 10-3884                 19

by or on behalf of insureds are excluded, while those
brought by non-insureds are not. St. Paul has a duty to
indemnify against losses to the non-insured plaintiffs.


  C. St. Paul’s Duty to Defend
   Having resolved St. Paul’s duty to indemnify, the final
issue presented is St. Paul’s duty to defend, which is
distinct from the duty to indemnify under Illinois law.
Conway v. Country Casualty Ins. Co., 442 N.E. 2d 245, 247
(Ill. 1982). The “Duty of the Insureds to Defend” provision
of the St. Paul policy provides in pertinent part, with
emphasis added:
    Subject to the Allocation section, the Insurer shall ad-
    vance, on behalf of the Insureds, Defense Costs which
    the Insureds have incurred in connection with
    Claims made against them, before disposition of such
    Claims, provided that to the extent that it is finally
    established that any such Defense Costs are not cov-
    ered under this Policy, the Insureds, severally ac-
    cording to their respective interests, agree to repay
    the Insurer such Defense Costs.
  The insured vs. insured exclusion in the policy applies
to “All Loss,” including defense costs. In their briefs, the
plaintiffs argued that the duty to defend requires
St. Paul to cover all defense costs, even that portion
attributable to the defense of otherwise uncovered claims
brought by insured plaintiffs. At oral argument, however,
plaintiffs’ counsel conceded that the allocation clause
should be applied to defense costs in the same manner
20                Nos. 10-3839, 10-3856, 10-3883 & 10-3884

as indemnity costs, thereby removing from coverage
those defense costs brought by or on behalf of insured
plaintiffs. We agree and hold that St. Paul has a duty to
defend against only the claims of non-insured plaintiffs.
St. Paul argues that it has no duty to defend against any
of the claims, but its argument fails for the same
reasons discussed above regarding its duty to indem-
nify. The allocation clause applies to the duty to defend
and thus calls for an allocation of costs between covered
and uncovered claims.


III. Conclusion
  We A FFIRM the district court’s decision in part, to the
extent it held that St. Paul is not required to defend
against or indemnify the claims by the insured plaintiffs,
Miller and Anderson, or by the Lane Trust, which acts on
behalf of an insured. We R EVERSE the district court’s
decision in part and hold that St. Paul must defend
against and indemnify the claims by the non-insured
plaintiffs, the Kings. The case is R EMANDED to the
district court for further proceedings consistent with
this opinion.




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