                               In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 12-2930
CE DESIGN LTD. and PALDO SIGN AND DISPLAY CO., on
 behalf of themselves and all others similarly situated,
                                           Plaintiffs-Appellees,

                                 v.

KING SUPPLY CO., LLC, doing business as KING
 ARCHITECTURAL METALS, INC.,
                                                           Defendant,

VALLEY FORGE INSURANCE CO., et al.,
                           Proposed Intervenors/Appellants.
                     ____________________

         Appeal from the United States District Court for the
            Northern District of Illinois, Eastern Division.
        No. 09 C 2057 — Sidney I. Schenkier, Magistrate Judge.
                     ____________________

       ARGUED MAY 27, 2015 — DECIDED JUNE 29, 2015
                ____________________

   Before POSNER, MANION, and HAMILTON, Circuit Judges.
   POSNER, Circuit Judge. This litigation began in 2009, when
CE Design filed a class action suit under the Telephone Con-
sumer Protection Act, 47 U.S.C. § 227, against King Supply,
2                                                   No. 12-2930


which removed the suit to the federal district court in Chica-
go. King Supply had been issued commercial general liabil-
ity and commercial umbrella policies by three insurance
companies, but upon its request for coverage they dis-
claimed any obligation to defend or indemnify their insured
against CE Design’s lawsuit. They based their disclaimer
primarily on provisions in the insurance policies that ap-
peared to exempt liability under the Telephone Consumer
Protection Act from the policies’ coverage.
    The district court certified the class (consisting of recipi-
ents of advertising faxes from King Supply) and designated
CE Design as class representative. We reversed the district
court on the basis of various irregularities and remanded for
further proceedings. CE Design Ltd. v. King Architectural Met-
als, Inc., 637 F.3d 721 (7th Cir. 2011). On remand, CE Design
and its coplaintiff agreed with King Supply to settle the case
for $20 million, the limit of the insurance policies. Their
agreement, made in September 2011 and approved by the
district court in July of the following year, provided that on-
ly 1 percent of the judgment ($200,000) could be executed
against King Supply. The rest would have to come from the
insurance policies. It appears that if forced to pay more than
$200,000 King Supply would have had to declare bankrupt-
cy.
    Upon learning of the proposed settlement (but not of all
its terms, which the parties had agreed not to reveal to the
insurers—we don’t understand the justification for such a
provision, but it has no bearing on this appeal), the insurers
filed a declaratory judgment action in Texas (King Supply’s
principal place of business and also where the insurance pol-
icies had been issued), disclaiming coverage. The suit was
No. 12-2930                                                   3


dismissed for lack of jurisdiction over several of the parties,
including CE Design, but a similar suit (though with the par-
ties reversed) was filed in an Illinois state court and we were
told at oral argument that that court has recently ruled that
the insurance policies don’t cover King Supply’s liability
under the Telephone Consumer Protection Act but that CE
Design is appealing that decision.
    In January 2012, after the settlement agreement in the
present (the federal) case but before the district court ap-
proved it, the insurers moved to intervene in the case under
Fed. R. Civ. P. 24(a) and (b). They hoped to persuade the dis-
trict court to delay approval of the settlement until there was
a state-court determination of whether they owed King Sup-
ply coverage, and also, if they failed to obtain a favorable
determination in the state-court system, to persuade the dis-
trict court (and if necessary our court on appeal) that the set-
tlement was collusive and unreasonable and should there-
fore be rejected. The district court denied the motion to in-
tervene as untimely. The insurers appeal.
    The district court thought the insurers should have
moved to intervene in 2009, when they had disclaimed cov-
erage of the claims that King Supply, their insured, had vio-
lated the Telephone Consumer Protection Act. For the insur-
ers knew or should have known by then, the court said, that
the parties to the TCPA suit—CE Design and King Supply—
were likely to negotiate a settlement that would place liabil-
ity on the insurers. For King Supply couldn’t afford more
than the $200,000 that it agreed to pay the class out of its
own pocket, and that left only the insurance policies as a
source of compensation to the class—and neither class coun-
sel nor the members of the class would care whose pocket
4                                                  No. 12-2930


the settlement proceeds came out of. The insurers riposte
that until they learned the terms of the settlement they had
assumed their denial of coverage had taken them off the
hook. And indeed, as we’ve noted, they’ve succeeded in per-
suading the Illinois trial court that their denial of coverage
was justified. They don’t propose to repeat in the federal
proceeding their challenge to coverage; rather they seek in-
tervention in order to challenge the settlement as improper
because the amount—the $20 million—so greatly exceeds
King Supply’s ability to compensate the class (and class
counsel), and also because it overstates the value of the
plaintiffs’ claims. The insurers argue that King Supply sold
them down the river by failing to defend against class coun-
sel’s $20 million money grab. They say that at first King
Supply had fought the class action suit and so they had no
incentive to intervene (and incur legal fees). They argue in
short that the settlement is improper because it is the prod-
uct of betrayal by King Supply and because they were de-
nied prompt disclosure of its terms.
    This may seem a strange argument. A person or firm
takes out insurance in order to shift liability for losses in-
curred if the insured risk materializes; the insurer is com-
pensated for taking the risk off the insured’s shoulders by
the premiums that the insured pays to shift the risk. The in-
sured might therefore be thought to have no duty to mitigate
the risk assumed by the insurer (in this case, by incurring
potentially heavy litigation costs to defend against being
held liable to the involuntary recipients of its faxed solicita-
tions, alleged to violate the Telephone Consumer Protection
Act). But as well explained in Don R. Sampen & Alec M.
Barinholtz, “Enforcement of Settlements between Insureds
and Claimants,” 35 Insurance Litigation Reporter 409 (2013),
No. 12-2930                                                    5


“a growing phenomenon in insurance coverage-related liti-
gation is the incidence of settlements reached between in-
sureds and claimants without the participation of insurers.
The settlements typically involve a stipulated judgment en-
tered against the insured accompanied by a covenant not to
execute against the insured given … by the claimant, and an
agreement that the judgment is enforceable only against in-
surance proceeds. Such settlements give rise to several con-
cerns by insurers, a major one being the lack of any real ad-
versarial relationship between the insured and claimant after
reaching the decision that the insurer will bear the full finan-
cial loss. The lack of adversity may lead to the negotiation of
‘sweetheart’ deals where the only effective checks on the
amount of the settlement are: (a) the insurer’s policy limits, if
not disregarded by a finding of bad faith against the insurer,
and (b) a court’s determination that the settlement amount is
reasonable.” The result may be arbitrary redistributions of
wealth from insurers to the plaintiffs who sued the insured,
often with weak claims. The insurers in this case were right
to worry that class counsel in the Telephone Consumer Pro-
tection Act class action suit and the defendant in that suit,
King Supply, might collude to mulct the insurance company
for an excessive recovery, favorable to the class and to class
counsel and harmless to the class action defendant.
    But they should have begun worrying when the suit was
filed rather than almost three years later. Almost all class ac-
tions are settled, and as we’ve noted in recent cases a class
action settlement may be the product of tacit collusion be-
tween class counsel and defendant. See, e.g., Pearson v.
NBTY, Inc., 772 F.3d 778, 786–87 (7th Cir. 2014); Redman v.
RadioShack Corp., 768 F.3d 622, 629 (7th Cir. 2014); Eubank v.
Pella Corp., 753 F.3d 718, 720 (7th Cir. 2014). The reason is
6                                                     No. 12-2930


that the optimal settlement for these antagonists is one that
awards large attorneys’ fees to class counsel but modest
damages to the class members, for then the overall cost of
the settlement to the defendant is capped at a relatively
modest level while the class counsel receive generous attor-
neys’ fees. The class members receive little—but they have
no control over the litigation or the terms of settlement. The
twist in this case is that the defendant, King Supply, could
afford to agree to a very generous settlement of the class
claim because 99 percent of the cost (all but the $200,000)
would be borne by its insurers rather than by it. The settle-
ment would be generous to the class members as well as
class counsel, but virtually harmless to the defendant.
     The Supreme Court of Illinois has noted in such a case
the insurer’s argument “that, in settlement agreements such
as the one at issue … the insured’s own money is never at
risk and, therefore, the insured has no incentive to contest
liability or damages with the injured plaintiff. According to
[the insurer], since the insured is essentially paying with the
insurer’s money, the insured can, and will, agree to any
amount of damages the injured plaintiff requests.” Guillen ex
rel. Guillen v. Potomac Ins. Co. of Illinois, 785 N.E.2d 1, 13 (Ill.
2003). The court went on to rule that “with respect to the in-
sured’s decision to settle, the litmus test must be whether,
considering the totality of the circumstances, the insured’s
decision ‘conformed to the standard of a prudent unin-
sured.’” Id. at 14 (emphasis in original).
    The insurers should have foreseen the danger of such a
settlement from the outset; had they wished to challenge it
on the ground that class counsel and King Supply were con-
spiring to overcompensate the class, they should have
No. 12-2930                                                   7


moved to intervene at the outset of the litigation, not nearly
three years later, when the settlement had been negotiated
and was about to be presented to the district court for ap-
proval. At that late stage the only object of the intervention
could be to block the settlement and put the class action suit
back to where it had been in 2009. So gratuitous an extension
of a multi-year litigation should not be encouraged.
    From the get-go the insurers had reason to believe that
the class action could well harm their interests, and Fed. R.
Civ. P. 24(a) and (b) require that the motion to intervene be
timely. It was not in this case, which had dragged on for
years and would be doomed to drag on for additional years
were the motion to be granted. A prospective intervenor
must move to intervene as soon as it “knows or has reason
to know that [its] interests might be adversely affected by
the outcome of the litigation.” Sokaogon Chippewa Community
v. Babbitt, 214 F.3d 941, 949 (7th Cir. 2000). The insurers’ mo-
tion to intervene in the federal litigation was untimely and
therefore rightly denied. See Larson v. JPMorgan Chase & Co.,
530 F.3d 578, 583–84 (7th Cir. 2008).
    Rather than intervene belatedly, the insurers might have
been expected to exercise from the outset of the class action
their right under the insurance policies to control and con-
duct the insured’s (King Supply’s) defense. Then they could
have refused to agree to a settlement that cost them $20 mil-
lion (minus $200,000). At argument their lawyer said they’d
decided not to take over the defense because that would
have required them to incur legal fees. Yet expending a few
hundred thousand dollars on legal fees to defend against a
possible loss of $20 million would have been a reasonable
investment.
8                                                   No. 12-2930


    Granted, when the insurers moved to intervene they
were in an awkward position. The district court had not de-
cided whether to approve the settlement and the insurers
were still at risk of losing the coverage dispute in the Illinois
court system. Having denied coverage they couldn’t control
King Supply’s defense, against its will, by intervening, for by
denying coverage they had disclaimed any duty to indemni-
fy King Supply, placing that company in an awkward posi-
tion if the insurers controlled its defense; the insurers would
have no skin in the game. So even if the insurers had filed a
timely motion to intervene, their interest might well have
been deemed too contingent on uncertain events to justify
granting their motion. See, e.g., Travelers Indemnity Co. v.
Dingwell, 884 F.2d 629, 638–39 (1st Cir. 1989); Restor-A-Dent
Dental Laboratories, Inc. v. Certified Alloy Products, Inc., 725
F.2d 871, 874–76 (2d Cir. 1984); cf. Ross v. Marshall, 426 F.3d
745, 757–60 (5th Cir. 2005). It may therefore have made more
sense for them to have ignored the present litigation entirely,
rather than trying to become a party to it, and to have relied
on the Illinois courts to rule that the insurance policies do
not cover liability for violating the Telephone Consumer
Protection Act, or that King Supply had failed to deal in
good faith with their insurers in settling the case as it did.
     The insurers have won just the first round in the Illinois
litigation; it remains to be determined whether their victory
will withstand appellate review. But all that matters in this
appeal is that in the present litigation they mishandled their
response to the class action suit against their insured.
                                                      AFFIRMED.
No. 12-2930                                                  9

    HAMILTON, Circuit Judge, concurring. I join fully Judge
Posner’s opinion for the court affirming the denial of the in-
surers’ motion to intervene as untimely. I write separately to
note my agreement with the district court’s alternative but
more important holding, which Judge Posner’s opinion
acknowledges but does not actually resolve: the insurance
companies lacked the sort of interest in the case that would
justify mandatory or permissive intervention.
   Even if the insurers had sought to intervene back in 2009,
the district court said, intervention still would have been de-
nied. CE Design Ltd. v. King Supply Co., 2012 WL 2976909, at
*13–15 (N.D. Ill. July 20, 2012). Having denied coverage for
both defense and indemnification, the district court rea-
soned, the insurers lacked an “interest in the property or
transaction that is the subject of the action” needed to inter-
vene as of right under Rule 24(a) and lacked “a claim or de-
fense that shares with the main action a common question of
law or fact” needed for permissive intervention under Rule
24(b). I agree.
    The question is important because such disputes can
arise any time a liability insurer denies coverage. The world
is a dangerous and litigious place. People and businesses
buy liability insurance in large part for peace of mind—the
knowledge that if one is sued, the insurer will provide a le-
gal defense and will indemnify for a covered loss up to the
policy limits.
    When an insurer breaches its duty to defend or indemni-
fy its insured, it’s not just any breach of contract. An insur-
er’s breach abandons its insured and deprives it of the peace
of mind it has bought. Moreover, most contract law assumes
that the victim of a seller’s breach can “cover” for the breach
10                                                               No. 12-2930

by buying a substitute product or service. That assumption
does not apply to a liability insurer’s breach. There is no
market for insuring risks already realized. Once a claim for
potential loss is known, no other insurer will step up to pro-
vide coverage at a reasonable premium. The abandoned in-
sured is left truly on its own. 1
    The premise of these insurers’ motion to intervene,
whether timely or not, is that insurers who might later be
found to have breached their coverage contract need to in-
tervene to protect themselves from a settlement they might
be required to pay without having participated in the deal.
The insurers say they are either entitled or should be permit-
ted to join the underlying tort suit to try to derail a settle-
ment that their insured has reached to try to save it from the
worst consequences of the insurers’ breach.
   The district court here correctly rejected that premise. In-
surers gain an interest in an underlying tort suit—and re-


     1  For that reason, courts generally provide fairly light scrutiny to set-
tlements like this one, in which the abandoned insured makes a deal
with the injured plaintiffs for a modest payment from the insured with
perhaps much more to come from the insurer, typically by means of a
covenant not to execute or an assignment of available insurance proceeds
to the plaintiffs, if coverage can be shown. See, e.g., Home Federal Savings
Bank v. Ticor Title Ins. Co., 695 F.3d 725, 736 (7th Cir. 2012); Cincinnati Ins.
Co. v. Young, 852 N.E.2d 8, 14 (Ind. App. 2006); Midwestern Indemnity Co.
v. Laikin, 119 F. Supp. 2d 831, 838–42 (S.D. Ind. 2000); Frankenmuth Mutu-
al Ins. Co. v. Williams, 690 N.E.2d 675, 679 (Ind. 1997); United Services Au-
tomobile Ass’n v. Morris, 741 P.2d 246, 253–54 (Ariz. 1987); Miller v.
Shugart, 316 N.W.2d 729, 733–35 (Minn. 1982); Restatement (Second) of
Judgments § 57 (1982). For the Illinois standard regarding the reason-
ableness of such settlements, see Guillen ex rel. Guillen v. Potomac Ins. Co.
of Illinois, 785 N.E.2d 1, 14 (Ill. 2003).
No. 12-2930                                                   11

quire protection from a settlement in that case—if and only if
they lose the coverage issue (typically in a separate suit) and
are therefore on the hook to indemnify the insured.
    I realize, of course, that it seems unlikely there was an ac-
tual breach in this case. The Illinois trial court has found the
insurers had no duty to cover King Supply in this case, and
the policy language seems pretty clearly in their favor. But
the motion to intervene, whether timely or not, was de-
signed to protect the insurers if and only if they ultimately
lose the coverage issue. For purposes of the intervention is-
sue, we need to assume for now that the insurers will be
found to have breached.
    The First Circuit rejected a similar effort by insurers
denying coverage to intervene to challenge a settlement
made by their insured in Travelers Indemnity Co. v. Dingwell,
884 F.2d 629, 638–41 (1st Cir. 1989). The court held that the
insurers did not have the sort of interest in the underlying
tort case that would allow them to intervene either by right
or by permission to challenge the settlement. The court rea-
soned that when an insurer denies coverage, its interest in
the underlying tort case is entirely contingent on whether
the insurer was within its rights to deny coverage. A court
deciding coverage might determine that the liability was not
covered, so permitting intervention to argue about the valid-
ity of any settlement in the tort case would “grant the insur-
er a double bite at escaping liability.” Id. at 639 (citation
omitted).
    The First Circuit’s opinion in Travelers is careful, thor-
ough, and persuasive, and we should follow it. If anything,
its reasoning applies with even greater force in this case
where the insurers did not agree, as they did in Travelers, to
12                                                          No. 12-2930

pay for the tort defense. Consistent with Travelers on the lack
of an interest to support intervention, see also Restor-A-Dent
Dental Laboratories, Inc. v. Certified Alloy Products, Inc., 725
F.2d 871, 874–76 (2d Cir. 1984) (affirming denial of insurer’s
motion for intervention as of right and by permission in un-
derlying tort case in effort to clarify whether adverse judg-
ment would be covered loss or not); Cincinnati Ins. Co. v.
Young, 852 N.E.2d 8, 13–16 (Ind. App. 2006) (reversing grant
of insurer’s motion under analogous Indiana procedure to
intervene to appeal insured’s liability where coverage was
contested). 2
   Adopting the reasoning found in these cases, the district
court correctly found that the motion to intervene would
have been denied even if it had been timely.




     2The Fifth Circuit took a different approach in Ross v. Marshall, 426
F.3d 745, 757–60 (5th Cir. 2005), holding that an insurer that had defend-
ed a tort case under a reservation of rights was entitled to intervene in
the underlying tort case to appeal after those parties had settled with an
assignment of defendant’s insurance coverage to plaintiffs. In that case,
however, the district court had also held that the loss was covered under
the insurance policy. Id. at 750. That holding in my view gave the insurer
a direct interest in the tort case, distinguishing the case from Dingwell
and Restor-A-Dent.
