Hunton Insurance Recovery Blog

In a significant decision, Starstone Ins. SE v. City of Chicago, No. 23-2712 (7th Cir. Apr. 02, 2025), the US Court of Appeals for the Seventh Circuit has ruled that an insurer must cover $3.75 million in attorney fees incurred by the city of Chicago in an underlying civil rights lawsuit that settled for over $18 million.

Case Background

This coverage dispute arose from an underlying lawsuit involving a man who served over 20 years in prison for murder. After being released, the man sued the City of Chicago and several Chicago police officers for violating his civil rights. The jury in the civil rights case returned verdicts in his favor, amounting to more than $17 million, and his lawyers then sought more than $6 million in attorney’s fees and costs. The case was settled for $18.75 million, of which $3.75 million represented attorney’s fees and costs. The central issue in the coverage dispute was whether the insurer was responsible for covering these legal fees/costs under the city’s insurance policy. The insurer argued that the policy it had issued to the city only covered “damages,” and legal fees/costs did not fall within the policy’s definition of “damages.”

Seventh Circuit’s Decision

The Seventh Circuit began the opinion with a discussion of federal jurisdiction over the insurer which is organized as an “SE,” a form of a European company under the European Union’s European Company Statute. The court grappled with the question of whether the insurer was a corporation for purposes of federal jurisdiction. The court compared the insurer to other non-traditional corporations from other parts of the world, and ultimately found the insurer to have the essential characteristics of a corporation. Therefore, the court found that it could exercise jurisdiction over the insurer.

The focal point of the decision, however, was whether the insurer was responsible for the component of the settlement attributed to underlying plaintiff’s attorneys’ fees and costs. The Seventh Circuit upheld the district court’s decision, affirming that the insurer must cover these fees and costs. The policy’s main coverage clause stated: “We shall pay you, or on your behalf, the ultimate net loss, in excess of the retained limit, that the insured becomes legally obligated to pay by reason of liability imposed by law or assumed under an insured contract because of bodily injury or property damage arising out of an occurrence during the Policy Period.”

In reaching this conclusion, the court observed that the policy stated the insurer would cover the “ultimate net loss” in excess of the retained limit, and that under Illinois law, language in an insurance policy must be taken to mean what the words in the policy say. The district court found that the $18.75 million settlement was an “ultimate net loss” under the policy that the city was “legally obligated to pay by reason of liability imposed by law.” It reasoned that an ordinary reader would interpret the policy’s language of “ultimate net loss” to mean the amount the insured pays out of pocket, and “legally obligated to pay” to mean “legally obligated to pay” and not some version of “legally obligated to pay as damages.” Because the city was liable for the settlement from underlying litigation, the district court found the city’s liability was an ultimate net loss that the city was legally obligated to pay. As a result, the insurer had a duty to indemnify the city as its policyholder for its attorney’s fees in the underlying action, and the Seventh Circuit concurred.

Key Takeaways

This ruling has significant implications for policyholders.

• Governing Law Matters: The district court sat in Illinois, so Illinois law applied to the policy language dispute. If the court determined it could not have exercised jurisdiction over the insurer, the law of the European Union could have applied to the dispute, which would have changed the outcome. Starstone re-emphasizes the outcome-determinative role that governing law can have on the interpretation of policy language.
• Policy Language is Paramount: This decision turned on the wording of the policy—not the general principles of fee-shifting or the American Rule. The court found that the terms of the policy, and not the insurer’s supposed intentions, controls.
• Insurers Can Not Re-Write Coverage After the Fact: Courts will hold insurers to the language they drafted and put in their policies—no matter how expensive the outcome. Here, the court held the insurer to the language that it drafted and included in the policy.

Final Thoughts

The Seventh Circuit’s ruling serves as a crucial reminder for policyholders to carefully examine the language of their insurance policies. A policy’s language remains crucial to the resolution of any coverage disputes between policyholders and insurers. Experienced coverage counsel can help policyholders understand the language of their policies.