                                In the

     United States Court of Appeals
                  For the Seventh Circuit
                      ____________________
No. 14-3084
JOE PANFIL, et al.,
                                                  Plaintiffs-Appellees,

                                  v.

NAUTILUS INSURANCE COMPANY,
                                                Defendant-Appellant.
                      ____________________

          Appeal from the United States District Court for the
            Northern District of Illinois, Eastern Division.
             No. 1:12-CV-06481 — James B. Zagel, Judge.
                      ____________________

   ARGUED FEBRUARY 11, 2015 — DECIDED AUGUST 20, 2015
                ____________________

   Before FLAUM, WILLIAMS, and HAMILTON, Circuit Judges.
    WILLIAMS, Circuit Judge. Pedro Castro-Cortes was work-
ing for Astro Insulation, Inc., a subcontractor of JRJ Ada,
LLC (“JRJ”), when he fell through a hole on the property of
JRJ. He sued JRJ for personal injury in Illinois state court (the
“underlying lawsuit”), claiming that he suffered severe and
permanent injury, both externally and internally, as a result
of the fall. JRJ is an Illinois limited liability company with
two members, Joe Panfil and Renee Michelon. After being
2                                                   No. 14-3084

served in the underlying lawsuit, Panfil, Michelon, and JRJ
filed a report with Nautilus Insurance Company, seeking
coverage under a general commercial liability policy. Nauti-
lus refused to defend, so the plaintiffs brought this action for
breach of contract. On summary judgment, the district court
determined that Nautilus breached its duty to defend be-
cause there was at least the potential for coverage of the un-
derlying lawsuit. We agree and affirm.
                     I. BACKGROUND
    JRJ sought insurance from Nautilus for a Chicago proper-
ty that it was remodeling. Nautilus issued a Nautilus Com-
mercial General Liability policy (“the Policy”) that listed
JRJ’s property as the premises to which the insurance ap-
plied, but only named Panfil and Michelon (JRJ’s two mem-
bers) as the insureds.
    Castro-Cortes worked for Astro Insulation, a subcontrac-
tor of JRJ. He was performing insulation work at JRJ’s prop-
erty when he fell through a hole. He sued JRJ, and JRJ re-
quested defense from Nautilus. Nautilus denied coverage on
the ground that the underlying lawsuit was against JRJ, but
the named insureds in the Policy were Panfil and Michelon.
Nautilus also premised its denial on a provision in the Policy
called the “Contractor-Subcontracted Work Endorsement.”
When JRJ requested Nautilus reconsider its denial of cover-
age, Nautilus identified an additional basis for denial, the
“Employee Exclusion.”
    Because Nautilus did not defend in the underlying law-
suit, JRJ, Panfil, and Michelon brought this action for breach
of contract in Illinois state court. Nautilus removed the case
to the United States District Court for the Northern District
No. 14-3084                                                         3

of Illinois. Both parties filed cross-motions for summary
judgment on the question of whether Nautilus had a duty to
defend JRJ, and Nautilus also sought summary judgment on
the question of whether it had a duty to indemnify. The dis-
trict court granted the plaintiffs’ motion and denied Nauti-
lus’s motion. First, the court found that the Policy should be
reformed to include JRJ as an insured. (Nautilus does not
appeal this finding.) Second, the court found that Nautilus
breached its duty to defend and, consequently, was es-
topped from asserting policy defenses to coverage. Nautilus
filed a motion to reconsider the summary judgment order on
the ground that it had no duty to defend because the under-
lying lawsuit was not covered by the Policy. The district
court granted the motion insofar as it reconsidered its order,
but confirmed its earlier holding that Nautilus had a duty to
defend. Nautilus appeals.
                          II. ANALYSIS
    We review both the district court’s grant of summary
judgment and its construction of the insurance policy de no-
vo. Lyerla v. AMCO Ins. Co., 536 F.3d 684, 687 (7th Cir. 2008).
The parties agree that Illinois law governs the interpretation
of the insurance policy here. Under Illinois law,
      An insurer taking the position that a complaint poten-
      tially alleging coverage is not covered by a policy which
      provides that the insurer has the right and duty to de-
      fend any claims brought against the insured cannot
      simply refuse to defend the insured. It must defend the
      suit under a reservation of rights or seek a declaratory
      judgment that there is no coverage. If the insurer fails to
      do this, it is estopped from later raising policy defenses
      to coverage … because the duty to defend is broader
      than the duty to pay.
4                                                   No. 14-3084

Murphy v. Urso, 430 N.E.2d 1079, 1082 (Ill. 1981). This estop-
pel doctrine applies only where an insurer has breached its
duty to defend. Emp’rs Ins. of Wausau v. Ehlco Liquidating
Trust, 708 N.E.2d 1122, 1135 (Ill. 1999). So, a court first in-
quires whether the insurer had a duty to defend. Id. Relevant
here, an insurer has no duty to defend where “there clearly
was no coverage or potential for coverage.” Id. But “[a]n in-
surer is obligated to defend its insured if the underlying
complaint contains allegations that potentially fall within the
scope of coverage.” Lyerla, 536 F.3d at 688 (citing Gen. Agents
Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d
1092, 1098 (Ill. 2005)). “An insurer may not justifiably refuse
to defend an action against its insured unless it is clear from
the face of the underlying complaint that the allegations fail
to state facts which bring the case” even potentially within
the policy’s coverage. Id. (emphasis in original) (internal cita-
tions omitted).
    The underlying complaint and insurance policy must be
liberally construed in favor of the insured. U.S. Fid. & Guar.
Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930 (Ill. 1991).
When an insurer denies a duty to defend based on an exclu-
sionary clause, its application must be “clear and free from
doubt.” Hurst-Rosche Eng’rs, Inc. v. Commercial Union Ins. Co.,
51 F.3d 1336, 1342 (7th Cir. 1995) (quoting Transamerica Ins.
Co. v. South, 975 F.2d 321, 327 (7th Cir. 1992)). A provision is
ambiguous if it is subject to more than one reasonable inter-
pretation and all doubts and ambiguities must be resolved in
favor of the insured. U.S. Fid. & Guar. Co., 578 N.E.2d at 930.
   Here, it is clear that if Nautilus had a duty to defend, it
breached that duty. Nautilus did not seek a declaratory
judgment as to coverage and refused to defend the underly-
No. 14-3084                                                    5

ing lawsuit on behalf of JRJ. Nautilus argues that it had no
duty to defend. We disagree. We cannot say that there clear-
ly was not at least the potential for coverage based upon the
allegations in the underlying complaint, so Nautilus was ob-
ligated to defend. See Travelers Ins. Cos. v. Penda Corp., 974
F.2d 823, 827 (7th Cir. 1992).
   To reach this conclusion, we must look at the language of
the contract. The Policy states that Nautilus “will pay those
sums that the insured becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage’ to
which this insurance applies” and it “will have the right and
duty to defend the insured against any ‘suit’ seeking those
damages.” This comprehensive general liability insuring
provision is followed by a series of exclusions, two of which
are relevant to this appeal. First, the Contractor-
Subcontracted Work Endorsement exclusion states: “This
insurance does not apply to ‘bodily injury’, ‘property dam-
age’ or ‘personal and advertising injury’ arising out of work
performed by any contractors or subcontractors unless such
work is being performed specifically and solely for you.”
Second, the Employee Exclusion provides:
      This insurance does not apply to:
      e. Employer’s Liability
      “Bodily injury” to:
      (1) An “employee” of any insured arising out of and in
          the course of:
              a. Employment by any insured; or
              b. Performing duties related to the conduct of
                  any insured’s business;
6                                                         No. 14-3084

      …
      The definition of “employee” in the Definitions section
      is replaced by the following:
      “Employee” is any person or persons who provide ser-
      vices directly or indirectly to any insured, regardless of
      where the services are performed or where the “bodily
      injury” occurs including, but not limited to … a contrac-
      tor, a subcontractor, an independent contractor, and any
      person or persons hired by, loaned to, employed by, or
      contracted by any insured or any insured’s contractor,
      subcontractor, or independent contractor.

    Nautilus argues that the underlying lawsuit is clearly ex-
cluded from coverage by the Employee Exclusion. Castro
was an employee of a subcontractor who was injured during
the course of his employment. The plaintiffs do not dispute
those facts or that the Employee Exclusion, alone, would
preclude coverage. However, they contend that we cannot
just look at the Employee Exclusion. The Employee Exclu-
sion must be read alongside all the terms of the Policy, par-
ticularly the Contractor-Subcontracted Work Endorsement.
    In the plaintiffs’ view, under the Contractor-
Subcontracted Work Endorsement, coverage for subcontrac-
tors is excluded unless the “work is performed specifically
and solely” for the insured. Since the injury arose out of
work performed by a subcontractor who was working spe-
cifically and solely for JRJ, they argue that the Employee Ex-
clusion seemingly precludes coverage completely, while the
Contractor-Subcontracted Work Endorsement preserves
coverage for specific occurrences like the one in the underly-
ing lawsuit. They contend that ambiguity is created by the
contradicting exclusions, and since ambiguities must be re-
solved in favor of the insured, there is coverage.
No. 14-3084                                                    7

    If the language in an insurance policy is subject to more
than one reasonable interpretation, an ambiguity exists
which must be resolved in favor of coverage. F.D.I.C. v. Am.
Cas. Co. of Reading, Pa., 998 F.2d 404, 408 (7th Cir. 1993). In
our view, reading the two exclusions together, the Policy is
subject to more than one reasonable interpretation. Under
the first interpretation, the Employee Exclusion contradicts
the Contractor-Subcontracted Work Endorsement. “What
the policy giveth in one exclusion, the policy then taketh
away in the very next exclusion.” Cherrington v. Erie Ins.
Prop. & Cas. Co., 745 S.E.2d 508, 526 (W. Va. 2013) (citing
Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037,
1045 (7th Cir. 1987)). That Nautilus cannot do. See id.; see also
Purrelli v. State Farm Fire & Cas. Co., 698 So.2d 618, 619–20
(Fla. App. Ct. 1997) (policy found to be ambiguous and re-
solved in favor of the insured where policy purported to in-
sure for intentional torts but exclude acts “intended” by the
insured). So under this interpretation, we would find cover-
age.
    Under the second interpretation, the Contractor-
Subcontracted Work Endorsement, in conjunction with the
Employee Exclusion, just means to preserve coverage for in-
juries to non-“employees” arising out of the work of subcon-
tractors working solely for the insured. The effect of the
Contractors-Subcontracted Work Endorsement is to limit
any coverage for injury at the construction site to injury aris-
ing out of work done by contractors or subcontractors work-
ing solely for the insured. And the Employee Exclusion plac-
es a second, separate limit on coverage, which further re-
stricts bodily injury coverage to injuries sustained by non-
“employees.” Coverage still remains for bodily injury to
non-“employees” arising out of the work of contractors or
8                                                            No. 14-3084

subcontractors working solely for the insured. The cumula-
tive restrictions on coverage provided under the Employee
Exclusion and the Contractors-Subcontracted Work En-
dorsement take away some, but not all, coverage.
    The burden of proving that a claim falls within an exclu-
sion rests on the insurer, because “(1) the insured’s intent in
purchasing an insurance policy is to obtain coverage, there-
fore any ambiguity jeopardizing such coverage should be
construed consistent with the insured’s intent, and (2) the
insurer is the drafter of the policy and could have drafted
the ambiguous provision to be clear and specific.” Hurst-
Rosche Eng’rs, Inc., 51 F.3d at 1342 (citations omitted). In de-
termining coverage, we must construe the policy as a whole.
Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d
1204, 1212 (Ill. 1992). As the drafter, Nautilus could have
written the Policy to make clear that the Contractor-
Subcontracted Work Endorsement preserved coverage for
bodily injury to non-“employees” only. It did not do so. In-
stead, we have an endorsement that most naturally reads to
preserve coverage for bodily injury arising out of the work
of subcontractors where the injury is to anyone; it is unlim-
ited. And when read in this manner, it contradicts the Em-
ployee Exclusion. What the policy gives in one exclusion, it
takes away in the next. The two provisions conflict, so there
is an ambiguity which is resolved in favor of JRJ. See W. Cas.
& Sur. Co. v. Brochu, 475 N.E.2d 872, 876 (Ill. 1985); U.S. Fid.
& Guar. Co., 578 N.E.2d at 930.1


    1 One other point. We seek to ascertain the intention of the parties to
the contract, Outboard Marine Corp., 607 N.E.2d at 1212, but we are lim-
ited in our ability to do so by this record. We do not know if the $1,785
paid for contractors-subcontracted work in the premium is a reasonable
No. 14-3084                                                          9

    This is a close case. Nautilus argues that because excep-
tions to exclusions do not create coverage, the exception in
the Contractors-Subcontracted Work Endorsement does not
provide an additional basis for coverage such that it could be
considered repugnant to the Employee Exclusion. While true
that an exception to an exclusion does not provide coverage,
it does preserve coverage already granted in the insuring
provision. Stoneridge Dev. Co. v. Essex Ins. Co., 888 N.E.2d
633, 656 (Ill App. Ct. 2008). So, as the district court men-
tioned, it offers some indication as to what the Policy was
meant to cover. And a reasonable interpretation of the Con-
tractor-Subcontracted Work Endorsement is that it preserves
coverage for injuries to workers at the construction site so
long as those workers are working specifically and solely for
JRJ. The endorsement does not limit the bodily injury to in-
juries for non-employees. When policy language is suscepti-
ble to more than one reasonable meaning, it is considered
ambiguous and will be construed against the insurer. Gillen
v. State Farm Mut. Auto. Ins. Co., 830 N.E.2d 575, 582 (Ill.
2005).
    We also note that Nautilus argues it has no duty to de-
fend because of a principle it draws from Brochu: “If any one
of the exclusions applies there is no coverage” and an excep-
tion to an exclusion remains subject to and limited by all


amount for coverage limited to non-employees. Neither party has pre-
sented any evidence regarding standard rates in the insurance industry
for coverage for employee and subcontractor injuries at construction
sites. And defense counsel could not answer at oral argument whether
Nautilus sold separate coverage for employee and subcontractor injuries
and how much such coverage usually costs.
10                                                          No. 14-3084

other related exclusions. 475 N.E.2d at 876–77. However, we
find Brochu of little use in deciding this case. In Brochu, the
insured relied on an exception to support its argument that
coverage existed. However, that exception was not intended
to apply to the underlying action. See Brochu, 475 N.E.2d at
877. So, the exception did not conflict with any other exclu-
sions by preserving coverage which another exclusion ex-
cluded. See id. But here, it is clear that the exception to the
exclusion in the Contractors-Subcontracted Work Endorse-
ment preserves coverage for the underlying lawsuit. And in
our view, under one reasonable interpretation, it conflicts
with the Employee Exclusion.
   We emphasize that the bar to finding a duty to defend is
low. The complaint in the underlying lawsuit and the Policy
must be liberally construed in favor of the insured. U.S. Fid.
& Guar. Co., 578 N.E.2d at 930. Because we cannot say that
Castro-Cortes’s complaint is not potentially within the cov-
erage of the Policy, we hold that Nautilus had a duty to de-
fend the plaintiffs in the underlying lawsuit.2
                        III. CONCLUSION
   For the foregoing reasons, the judgment of the district
court is AFFIRMED.



     2At the time the district court decided the parties’ summary judg-
ment motions, the underlying lawsuit was still ongoing. So, upon find-
ing that Nautilus had a duty to defend, the issue of whether Nautilus
had a duty to indemnify was not ripe. See Travelers Ins. Co., 974 F.2d at
833 (duty to indemnify arises only after insured becomes legally obligat-
ed to pay damages in underlying action). While Nautilus raises the in-
demnification issue here, it is not properly before this court and remains
for the district court to determine.
