                              In the

    United States Court of Appeals
                For the Seventh Circuit
                    ____________________
No. 14-2694
NATIONAL AMERICAN INSURANCE COMPANY,
                                                 Plaintiff-Appellee,

                                v.

ARTISAN AND TRUCKERS CASUALTY COMPANY,
                                   Defendant-Appellant.
                    ____________________

        Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
       No. 13 CV 1290 — Michael T. Mason, Magistrate Judge.
                    ____________________

    ARGUED DECEMBER 9, 2014 — DECIDED AUGUST 6, 2015
                ____________________

   Before POSNER, RIPPLE, and KANNE, Circuit Judges.
    KANNE, Circuit Judge. This case provides a warning for
insurance companies who refuse to defend their insureds.
On August 23, 2010, Viktor Barengolts was driving a tractor-
trailer on Route 30 in Wheatland Township, Illinois. That
same day, on that same road, Gustavo and Maria Bernal
were driving in their pickup truck. Their fates joined when
Barengolts’s tractor-trailer rear-ended the Bernals’ truck. Se-
2                                                      No. 14-2694

rious injuries and property damage resulted. The Bernals
sued.
    Whom did they sue? Smartly, everyone. In their Second
Amended Complaint, the Bernals first sued Unlimited Car-
rier—the company whose placard appeared on the tractor at
the time of the accident—and Viktor Barengolts, the appar-
ent driver.1
   They next sued, in counts 3 through 4, Unlimited Carrier
and Eduard Gaidishev. Gaidishev was in the tractor with
Barengolts during the accident. At the time the Bernals filed
their complaint, it was unclear whether Gaidishev had been
the driver instead of Barengolts.
    Notably, in each of these first four counts, the complaint
alleged an agency relationship with either Viktor Barengolts
or Eduard Gaidishev as the agent and Unlimited Carrier as
the principal.
    Counts 5 through 8, by contrast, alleged an agency rela-
tionship with Michael Barengolts, Viktor’s father, who
owned the tractor.


1 Count 1 accounted for Gustavo’s injuries and Count 2 accounted for
Maria’s injuries. The Bernals replicated this one-two step throughout
their complaint, which alleged eight counts in total.
No. 14-2694                                                 3

   Specifically, counts 5 and 6 alleged that “Viktor Baren-
golts was operating a tractor … as the agent and/or servant
of Michael Barengolts[.]” Thus, in these counts, Michael
Barengolts, not Unlimited Carrier, was the alleged principal.
   Counts 7 and 8 replicated this theory with one change:
they alleged Gaidishev rather than Viktor Barengolts was
operating the tractor.
    In summary, these latter counts ostensibly pled vicarious
liability with either Viktor Barengolts or Eduard Gaidishev
as the agent and Michael Barengolts as the principal. These
counts also stated that “[a]t all times relevant … Unlimited
Carrier exercised authority and control” over the tractor.
We’ll return to this point later.
    As soon as Viktor learned of the Bernals’ lawsuit, he con-
tacted Appellant Artisan and Truckers Casualty Company
(“Artisan”), his insurance provider, to determine coverage.
Artisan denied him coverage. It told Viktor that the policy’s
Contingent Liability Endorsement (“CLE”) excluded cover-
age because he was driving the tractor on behalf of Unlim-
ited Carrier at the time of the accident.
    Some background. Artisan Policy 07572918-0 lists Viktor
as an insured and Michael as an additional insured. So they
ordinarily should be covered under the policy. Michael’s
tractor is also covered; it is included in the “auto coverage
schedule” in the policy agreement. At first blush, then, it
would appear that Artisan was on the hook to cover and de-
fend the Barengolts against the Bernals’ lawsuit.
   Indeed, Artisan expressly agreed to “pay damages … for
bodily injury, property damage, and covered pollution cost
or expense, for which an insured becomes legally responsi-
4                                                  No. 14-2694

ble because of an accident arising out of the ownership,
maintenance or use of an insured auto.”
    But not so fast, says Artisan. It points to the CLE, which
states:
      Except as specifically modified in this Endorse-
      ment, all provisions of the Commercial Auto Policy
      Apply.
      …
      Liability coverage for an insured auto described in
      the Declarations is changed as follows:
      1. These coverages do not apply when the insured
      auto is being operated, maintained or used for or
      on behalf of anyone else or any organization
      whether or not for compensation.
Because the tractor displayed placards for Unlimited Carrier
at the time of the accident, Artisan construed it as being
“used for or on behalf of” Unlimited Carrier—an organiza-
tion, and a use, not covered by the policy. So Artisan refused
to defend Viktor and Michael Barengolts against the lawsuit.
    For example, counsel for Unlimited Carrier wrote to Arti-
san on January 7, 2011, demanding that it defend Viktor and
Michael. Artisan refused. On April 8, 2011, counsel for the
Barengoltses tendered the defense to Artisan. Counsel also
requested the evidence on which Artisan based its decision
to deny coverage. Artisan refused to defend and refused to
offer any such evidence. Counsel for the Barengoltses again
wrote to Artisan, this time on August 18, 2011. That letter
also provided notice that counsel would seek reimbursement
from Artisan for defense costs, attorney’s fees, and any mon-
ey judgments stemming from the lawsuit. Artisan once again
refused.
No. 14-2694                                                  5

    Then Viktor and Michael exposed a fact that they
thought could change Artisan’s decision: Michael Barengolts,
the owner of the tractor, did not actually sign a lease with
Unlimited Carrier for use of the tractor until eight days after
the accident. To be sure, the placard for Unlimited Carrier
was displayed on the tractor at the time of the accident. But
the absence of the signature on the lease agreement seemed
to at least create a question as to whether Artisan should
cover Viktor and Michael for the Bernals’ lawsuit. Conse-
quently, on February 17, 2012, counsel for the Barengoltses
sent another letter to Artisan, again tendering the defense
and seeking indemnity for Viktor and Michael. Counsel en-
closed a copy of the lease agreement with the letter. Artisan,
unflappable, said the lease issue did not change its position
with respect to the CLE. It again refused to defend.
    While Artisan was busy refusing to defend, Appellee Na-
tional American Insurance Company (“NAICO”) was busy
defending. It had issued a policy to Unlimited Carrier on
December 7, 2009, and that policy was in effect on the date of
the accident. Interestingly, besides covering and defending
Unlimited Carrier, NAICO also agreed to defend Viktor and
Michael Barengolts. Its policy with Unlimited Carrier stated
that it would cover “[a]nyone … while using with your per-
mission a covered ‘auto’ you own, hire, or borrow[,]” subject
to some exceptions. The NAICO policy further provided
coverage for an “agent or driver of the lessor [of a covered
‘auto’] while the ‘auto’ is leased to you under a written
agreement[,]” subject to some conditions. Perhaps recogniz-
ing some uncertainty regarding application of the policy,
NAICO defended Viktor and Michael under a reservation of
rights. But defend it did.
6                                                   No. 14-2694

   The case ultimately settled at mediation on November 1,
2012. Pursuant to the settlement agreement, NAICO paid
$50,000 to Gustavo Bernal and $48,750 to Maria Bernal on
behalf of Viktor and Michael Barengolts, Eduard Gaidishev,
and Unlimited Carrier. Also in accordance with the settle-
ment agreement, Viktor and Michael assigned to NAICO
their rights to recover under the Artisan Policy.
    That assignment brings us, finally, to this lawsuit. On
February 19, 2013, NAICO filed a four-count complaint
against Artisan in the Northern District of Illinois. In count 1,
NAICO sought a declaratory judgment against Artisan, as-
serting that: (1) Artisan had a duty to defend and indemnify
Viktor and Michael in the Bernal case; (2) Artisan breached
that duty; and (3) Artisan is now estopped from raising poli-
cy defenses to its duty to defend and indemnify Viktor and
Michael. Counts 2 and 3 raised claims of equitable and con-
tractual subrogation, respectively, and Count 4 sought equi-
table contribution.
    NAICO’s complaint alleged facts it uncovered during its
discovery in the Bernal case. First and foremost, NAICO al-
leged that Viktor Barengolts “was not under dispatch or in
the process of picking up a load” for Unlimited Carrier at the
time he hit the Bernals, implying he was not in the course of
some purported agency relationship. Second, and as we not-
ed above, Michael Barengolts did not sign an equipment
lease with Unlimited Carrier until August 31, 2010—eight
days after the accident. The day after Michael signed the
lease, Viktor signed his remaining employment documents.
And finally, in light of the outstanding paperwork, Viktor
and Michael did not have authority to display the Unlimited
Carrier placard on the trailer until September 1, 2010.
No. 14-2694                                                     7

    More important, NAICO’s complaint alleged that Arti-
san’s duty to defend sprang from counts 5 through 8 in the
Bernals’ underlying complaint. Recall those counts pled vi-
carious liability with Michael Barengolts named as the prin-
cipal—not Unlimited Carrier. And if Michael Barengolts was
the principal, then Artisan’s duty to defend would be trig-
gered. See Menard, Inc. v. Country Preferred Ins. Co., 992
N.E.2d 643, 648 (Ill. App. Ct. 2013) (holding duty to defend
applies when “the underlying complaint alleges facts that
fall within, or potentially within, the policy’s coverage”).
    Consistent with its approach in the underlying action,
Artisan denied all liability in its Answer. It then filed a coun-
terclaim seeking a declaratory judgment that it owed noth-
ing for the Bernals’ settlement. NAICO eventually filed a
motion for summary judgment regarding (1) Artisan’s duty
to defend and indemnify Viktor and Michael, and (2) appli-
cation of estoppel. Artisan responded, and then filed a cross-
motion for summary judgment.
    The parties consented to dispositive proceedings before
U.S. Magistrate Judge Michael T. Mason. On May 15, 2014,
Magistrate Judge Mason found that Artisan had a duty to
defend against the Bernals’ lawsuit, and that it breached that
duty. Nat’l Am. Ins. Co. v. Progressive Corp., 43 F. Supp. 3d 873,
888 (N.D. Ill. 2014). Given the breach, Judge Mason estopped
Artisan from asserting defenses under its policy with Viktor
and Michael Barengolts, and granted summary judgment
(with reimbursement and costs) in favor of NAICO. Progres-
sive Corp., 43 F. Supp. 3d at 888.
   Artisan appeals that decision. In its statement of the is-
sues, it challenges Judge Mason’s ruling regarding its duty to
8                                                          No. 14-2694

defend and indemnify. It also challenges the estoppel rul-
ing.2
   Artisan argues that it had no duty to defend Viktor and
Michael because, even if one assumes counts 5 through 8
sufficiently pled Michael as vicariously liable for the acci-
dent, those same counts also pled that Unlimited Carrier
“exercised authority and control” over the tractor. In its
view, that fact meant that the tractor was used for, or on be-
half of, Unlimited Carrier—an exclusion contemplated by
the CLE. Michael Barengolts’s agency relationship to the
driver, Artisan concludes, is therefore immaterial to the out-
come of ultimate liability and coverage.
    We review a district court’s grant of summary judgment
de novo. Hanover Ins. Co. v. N. Bldg. Co., 751 F.3d 788, 791 (7th
Cir. 2014). Summary judgment is appropriate where the ad-
missible evidence reveals no genuine issue of any material
fact. Fed. R. Civ. P. 56(c); Lawson v. CSX Transp., Inc., 245 F.3d
916, 922 (7th Cir. 2001). A fact is “material” if it is one identi-
fied by the law as affecting the outcome of the case. Anderson

2 Artisan does not challenge the reasonableness of the settlement agree-
ment or the calculation of reimbursement to NAICO, which totaled
$140,154.04. It focuses instead on its alleged duty to defend, understand-
ing the disposition of that claim impacts whether it must reimburse
NAICO for defense and indemnification costs in the underlying action.
No. 14-2694                                                     9

v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). An issue of ma-
terial fact is “genuine” if “the evidence is such that a reason-
able jury could return a verdict for the nonmoving party.”
Anderson, 477 U.S. at 248. We “construe all facts and reason-
able inferences in the light most favorable to the non-moving
party.” Apex Digital, Inc. v. Sears, Roebuck, & Co., 735 F.3d 962,
965 (7th Cir. 2013). On cross-motions for summary judgment,
we draw inferences “in favor of the party against whom the
motion under consideration was made.” McKinney v. Cadle-
way Props., Inc., 548 F.3d 496, 500 (7th Cir. 2008).
    In diversity cases, we apply federal procedural law and
state substantive law. Allen v. Cedar Real Estate Grp., LLP, 236
F.3d 374, 380 (7th Cir. 2001) (citing Erie R.R. v. Tompkins, 304
U.S. 64, 78 (1938)). Questions of insurance-policy
interpretation are substantive. Alexander v. Erie Ins. Exch., 982
F.2d 1153, 1157 (7th Cir. 1993). So our interpretation of this
insurance policy must be according to state law. Both parties
agree that the applicable state law is the law of Illinois.
    Under Illinois law, courts liberally construe both the
terms of an insurance policy and the allegations in the
underlying complaint in favor of the insured. State Farm Fire
& Cas. Co. v. Perez, 899 N.E.2d 1231, 1235 (Ill. 2008) (“[A]ny
doubts and ambiguities are resolved against the insurer.”).
An insurer’s duty to defend is broad; it exists when a
complaint alleges facts that are “potentially within” the
scope of the insurance policy’s coverage. Menard, 992 N.E.2d
at 648. With these principles, we turn to the facts at bar.
   Counts 1 through 4 allege that either Viktor Barengolts or
Eduard Gaidishev “was operating the tractor … as an agent
and/or employee of Unlimited Carrier.” If these counts
represented the entirety of the Bernals’s underlying
10                                                 No. 14-2694

complaint, we think Artisan would be on a solid footing. For
the CLE excludes coverage “when the insured auto is being
operated, maintained or used for or on behalf of anyone
else,” (i.e., an uninsured) or an organization such as
Unlimited Carrier.
    But the complaint has four other counts. Those counts
allege that either Viktor Barengolts or Eduard Gaidishev
“was operating the tractor as the agent and/or servant of
Michael Barengolts.” Michael Barengolts is an additional
insured under the Artisan policy. So is the subject tractor, for
that matter. Under the theory pled in counts 5 through 8,
then, we agree with the district court these allegations
“potentially fall within the scope of coverage.” Nat’l Am. Ins.
Co., 43 F. Supp. 3d at 882. They name an insured as the
principal, which is enough to establish a theory of vicarious
liability.
    Importantly, it does not matter that some of the counts
fall within Artisan’s exclusion. In Md. Cas. Co. v. Peppers, 355
N.E.2d 24 (Ill. 1976), the Supreme Court of Illinois addressed
a three-count complaint that alleged some theories that were
covered by a policy and some theories that were not. The
court found the insurance company had a duty to defend the
lawsuit despite the presence of a proscribed theory of
recovery. Peppers, 355 N.E.2d at 28 (“This duty to defend
extends to cases where the complaint alleges several causes
of action or theories of recovery against an insured, one of
which is within the coverage of a policy while the others
may not be.”). That is what happened here.
   Additionally, we note that counts 5 through 8 are
consistent with the Illinois presumption that the driver of a
vehicle is an agent of the vehicle’s owner. Bell v. Reid, 454
No. 14-2694                                                    11

N.E.2d 1117, 1119 (Ill. App. Ct. 1983). Although that
presumption is rebutted where the owner has leased the
vehicle to a third party who then provides it to a driver,
Gann v. Oltesvig, 491 F. Supp. 2d 771, 775 (N.D. Ill. 2007), here
it is undisputed that the lease was not signed at the time of
the August 23, 2010, accident.
    Nevertheless, Artisan seeks refuge in the additional
allegations found in counts 5 through 8. Recall that after
describing the agency relationship with the principal,
Michael Barengolts, these counts then stated that “Unlimited
Carrier exercised authority and control over” the tractor. In
Artisan’s view, this language trumps any liability of Michael
Barengolts because it evokes the federal scheme of placard
liability. Artisan argues that insurance should cover the
party who is “ultimately liable,” and that ultimate liability is
determined by whose placard appeared on the vehicle.
Because Unlimited Carrier’s placard appeared on Michael
Barengolts’s tractor here, it is ultimately liable for the
accident. And if Unlimited Carrier is ultimately liable,
Artisan concludes, it had no duty to defend the Barengolts.
We reject this argument.
    Artisan treats the duty to defend as if it were
coterminous with the duty to indemnify. Significantly, the
duty to defend is far broader than the duty to indemnify.
Transcontinental Ins. Co. v. Nat’l Union Fire Ins. Co., 662 N.E.2d
500, 508 (Ill. App. Ct. 1996). Under Illinois law, “the duty of
an insurance company to defend against a suit against its
insured is determined by the allegations of the complaint in
that suit rather than by what is actually proved[.]” Taco Bell
Corp. v. Cont’l Cas. Co., 388 F.3d 1069, 1073 (7th Cir. 2004)
(citing Dixon Distrib. Co. v. Hanover Ins. Co., 641 N.E.2d 395,
12                                                      No. 14-2694

398 (Ill. 1994)) (emphasis added) (additional citations
omitted).
    By contrast, the duty to indemnify is determined once
liability has been affixed. Outboard Marine Corp. v. Liberty
Mut. Ins. Co., 607 N.E.2d 1204, 1221 (Ill. 1992). While
Artisan’s concept of “ultimate liability” may translate to its
duty to indemnify the Barengolts, it has no application to its
duty to defend them. The pleadings, together with the terms
of the policy, determine that duty. L.A. Connection v. Penn-
Am. Ins. Co., 843 N.E.2d 427, 430 (Ill. App. Ct. 2006).
    Second, the overarching purpose of placard liability3 is to
provide an injured party with a quickly “identifiable and
financially accountable source of compensation.” R. Clay
Porter & Elenore Cotter Klingler, The Mythology of Logo
Liability: An Analysis of Competing Paradigms of Lease Liability
for Motor Carriers, 33 Transp. L.J. 1, 7 (2005) (quoting Carolina
Cas. Ins. Co. v. Ins. Co. of N. Am., 595 F.2d 128, 137 (3d Cir.
1979)). Sometimes called “logo liability,” this doctrine
“hold[s] federally authorized carriers … that are licensed by
the United States Department of Transportation (USDOT)
and display their USDOT certificate number on their trucks,


3 Placard liability finds its roots in the Interstate Commerce Act, as
amended by Pub. L. No. 84-957, reprinted in 1956 U.S.C.C.A.N. 1163.
No. 14-2694                                                     13

vicariously liable for the negligence of drivers operating
under a lease.” U.S. Bank v. Lindsey, 920 N.E.2d 515, 525 (Ill.
App. Ct. 2009) (citations omitted).
    But placard liability is not exclusive. Just because a
plaintiff can quickly identify and sue the company whose
placard appeared on the vehicle that struck him does not
mean that the same plaintiff cannot sue—and recover
from—others who may also be at fault. The placard is a good
starting point for a plaintiff, see Great W. Cas. Co. v. Nat’l Cas.
Co., 53 F. Supp. 3d 1154, 1179 (D.N.D. 2014) (noting the
regulatory scheme does not “supplant, diminish, or
otherwise provide safe harbor from existing tort liability of
carriers and lessor-operators under state law”), and we have
no doubt that in many cases it may also be the ending point.
But whatever the case may be, plaintiffs are free to raise
claims against other alleged tortfeasors, be they joint or solo,
and if those claims raise a possibility for coverage under a
policy, then insurance companies deny coverage at their
“peril.” Peterson Sand & Gravel v. Md. Cas. Co., 881 F. Supp.
309, 313 (N.D. Ill. 1995).
    To the extent that Artisan suggests placard liability is the
sole means of recovery for plaintiffs like the Bernals, we
disagree. The case it advances for this proposition, Occidental
Fire & Cas. Co. v. Padgett, 446 N.E.2d 937 (Ill. App. Ct. 1983),
expressly states that the federal regulatory scheme (i.e.,
placard liability) is “not controlling.” Id. at 940. What is
more, that case does not discuss the duty to defend as it
relates to allegations pled in a complaint. Artisan’s reliance
on Occidental, therefore, is misplaced.
   Artisan’s remaining point that Unlimited Carrier’s
“authority and control over” the tractor somehow renders
14                                                  No. 14-2694

the agency relationship with Michael Barengolts immaterial
is unavailing. The terms of the CLE do not exclude coverage
when a person or organization exercises “authority and
control over” the tractor. Instead, the CLE excludes coverage
when the tractor “is being operated, maintained or used for
or on behalf of” an uncovered person or any organization.
This distinction is important at the duty to defend stage,
because it suggests at minimum a possibility that the
accident was within the scope of the policy’s coverage. And
that puts Artisan on notice. Assuming for the sake of
argument that the language regarding “authority and
control” muddled the vicarious liability alleged against
Michael Barengolts, the liberal construction mandate applies
and weighs in favor of defending Viktor and Michael. Perez,
899 N.E.2d at 1235. Context shows these counts were plainly
different from the first four, which expressly alleged
vicarious liability against Unlimited Carrier.
   In sum, Artisan had a duty to defend. By repeatedly
refusing to defend Michael and Viktor Barengolts against the
Bernals’ lawsuit, Artisan breached that duty. Artisan’s other
arguments to the contrary are without merit.
   That brings us to the doctrine of estoppel. Once a
complaint is filed against an insured like Viktor or Michael
Barengolts, and that complaint alleges claims that may fall
within the scope of policy coverage, an insurer (such as
Artisan) refusing coverage faces three courses of action: (1)
defend the lawsuit under a reservation of rights like NAICO
did here; (2) seek a declaratory judgment excluding
coverage; or (3) do nothing and refuse to defend. Peterson
Sand & Gravel, Inc., 881 F. Supp. at 313. If the insurer does not
defend under a reservation of rights or seek a declaratory
No. 14-2694                                                   15

judgment, then “it will be estopped from later raising policy
defenses to coverage.” State Farm Fire & Cas. Co. v. Martin,
710 N.E.2d 1228, 1231 (Ill. 1999). Estoppel incentivizes action
over inaction, which ultimately inures to the benefit of the
insured. By defending under a reservation of rights or
seeking a declaratory judgment, an insurance company can
eliminate the risk of estoppel altogether.
    Here, Artisan gambled and lost. It did not defend
Michael and Viktor Barengolts under a reservation of rights.
And it did not seek a declaratory judgment in the
underlying action. Instead, it refused—on at least seven
occasions—to defend. Because “[a]n insurer that believes an
insured is not covered under a policy cannot simply refuse
to defend the insured[,]” Mt. Hawley Ins. Co. v. Certain
Underwriters at Lloyd’s, 19 N.E.3d 106, 111 (Ill. App. Ct. 2014)
(quoting A-1 Roofing Co. v. Navigators Ins. Co., 958 N.E.2d
695, 700 (Ill. App. Ct. 2011)), the district court did not err in
estopping Artisan from raising policy-coverage defenses.
Accordingly, we hold that Artisan is estopped from asserting
any coverage defenses under its policy with Michael and
Viktor Barengolts. And because it cannot assert such
defenses, it must reimburse NAICO the amount authorized
by the settlement agreement, including costs for NAICO’s
efforts in defending and indemnifying Michael and Viktor
Barengolts in the Bernals’ lawsuit.
   The judgment of the district court is AFFIRMED.
