Bankers Trust Co. V. Old Republic Insurance Co‪.‬

POSNER, Circuit Judge. This appeal and (conditional) cross-appeal bring up to us a tangle of jurisdictional and procedural issues arising out of complex federal litigation. Back in the early 1980s, Bankers Trust, a large bank, made a large loan in (alleged) reliance on appraisals of the borrower's oil and gas reserves by Lee A. Keeling & Associates, Inc. ("LKA"). The borrower defaulted and Bankers Trust lost $30 million. In 1985 it brought a diversity tort suit in the federal district court in Oklahoma against LKA, charging that the latter had negligently overestimated the borrower's reserves. That suit is still pending, with trial finally scheduled for this coming May. In 1986, Old Republic Insurance Company, which had issued a liability insurance policy to LKA, brought a diversity suit in federal district court in Chicago against its insured, seeking to rescind the policy on the ground that LKA had known when it took out the policy that Bankers Trust might sue it, and had in breach of a condition in the policy failed to warn Old Republic of this possibility. Cf. Truck Insurance Exchange v. Ashland Oil, Inc., 951 F.2d 787 (7th Cir. 1992). The following year, Bankers Trust filed the present suit, which is also a diversity suit, against Old Republic. It seeks a declaration that if Bankers Trust wins a judgment in the Oklahoma suit, Old Republic must indemnify LKA up to the limits of the policy. Two months after this suit was filed, Old Republic settled its suit with LKA. The parties agreed that Old Republic would be liable on the policy only up to $425,000. Bankers Trust then amended its complaint in the present case to add a count charging that the settlement was fraudulent and should not affect Old Republic's contingent duty to indemnify LKA for up to $3 million of any judgment that Bankers Trust should win in Oklahoma. Although Old Republic is merely an excess insurer of LKA, the primary insurer claims to have exhausted its policy limit of $2 million in the pretrial phase of the Oklahoma suit, which the primary insurer is defending on LKA's behalf.