FOURTH DIVISION November 2, 2006
No. 1-05-2441
LIBERTY MUTUAL INSURANCE COMPANY, ) Appeal from a Massachusetts Mutual Insurance ) the Circuit Court Company, Individually and as Subrogee ) of Cook County. of United Parcel Service, Inc., ) ) Plaintiff-Appellant, ) ) v. ) ) AMERICAN HOME ASSURANCE COMPANY, INC., ) a New York Stock Insurance Company, ) and ST. PAUL MERCURY INSURANCE COMPANY, ) a Minnesota Stock Insurance Company, ) Honorable ) Anthony L. Young. Defendants-Appellees. ) Judge Presiding.
PRESIDING JUSTICE QUINN delivered the opinion of the court:
Plaintiff Liberty Mutual Insurance Company (Liberty) appeals
from an order of the circuit court of Cook County granting
summary judgment in favor of defendant St. Paul Mercury Insurance
Company (St. Paul) on Liberty’s claims for equitable subrogation,
prejudgment interest, and attorney fees and costs for vexatious
and unreasonable delay under section 155 of the Illinois
Insurance Code (Insurance Code) (215 ILCS 5/155)(West 2000)).
Liberty also appeals from an order of the circuit court granting
St. Paul’s motion to strike a letter that was an exhibit to No. 1-05-2441
Liberty’s reply brief and all references thereto in the reply
brief.
On appeal, Liberty contends that: (1) Liberty proved each
element of its claim for equitable subrogation as a matter of
law; (2) St. Paul’s "abandoned and unused materials" exclusion
did not apply; (3) the doctrine of "mend the hold" barred St.
Paul from asserting that the "abandoned and unused materials"
exclusion applied; (4) the circuit court erred by striking the
"St. Paul settlement letter"; (5) there was no breach of the St.
Paul policy; and (6) St. Paul is guilty of vexatious and
unreasonable delay under section 155 of the Insurance Code. For
the following reasons, we affirm.
I. BACKGROUND
A. The Underlying Lawsuit
On June 20, 2001, Dorothy Palcowski filed her first amended
complaint, which alleged injuries sustained after she tripped and
fell over protruding nails on a ramp, while working as a security
guard at the United Parcel Service (UPS) facility located in
Hodgkin, Illinois (UPS facility). Palcowski alleged that her
injuries occurred on April 2, 2000. The complaint named UPS,
Tarcom Corporation (Tarcom), and the ServiceMaster Company
(ServiceMaster) as defendants. Palcowski’s employer, Initial
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Security, was named as a third-party defendant. UPS had
subcontracted with Tarcom to perform construction work relating
to building guardhouses at the UPS facility. UPS had also
subcontracted with ServiceMaster to provide housekeeping at the
facility.
B. UPS’s Contract with Tarcom and St. Paul’s Insurance Policy
UPS’s contract with Tarcom for the guardhouse construction
project was dated August 23, 1999. Pursuant to that contract,
Tarcom was required to make UPS an additional insured on its
commercial general liability (CGL) policy. The contract required
that the completed operations coverage afforded by the CGL policy
shall be effective for a period of two years after completion of
the work.
Tarcom purchased a CGL policy from St. Paul (the St. Paul
policy), which provided CGL limits of $1 million per occurrence.
In a letter dated September 27, 2001, St. Paul acknowledged that
UPS was an additional insured under the policy pursuant to the
"Additional Protected Persons Endorsement." The "Additional
Protected Persons Endorsement" of the St. Paul policy provides in
pertinent part:
"This endorsement changes your Contractor Commercial
General Liability Protection.
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How Coverage Is Changed
There are two changes which are described below.
1. The following is added to the Who Is Protected
Under This Agreement section. This change adds
certain protected persons and limits their
protection.
Additional protected person. The person or
organization named below is an additional
protected person as required by a contract or
agreement entered into by you. But only for
covered injury or damage arising out of:
! your work for that person or organization;
! your completed work for that person or
organization if your contract or agreement
requires such coverage;
! premises you own, rent, or lease from that
person or organization; or
! your maintenance, operation, or use of
equipment leased from that person or
organization.
We explain what we mean by your work and your
completed work in the Products and completed work
total limit section.
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***
Other Terms
All other terms of your policy remain the same.
Person Or Organization:
Any person or organization which a Named Insured has by
written contractual agreement executed prior to an
occurrence or accident agreed to name as an additional
insured.
Your completed work means your work that is completed
at the earliest of the following times, including work
that may need service, maintenance, correction, repair
or replacement, but which is otherwise complete:
! When all of the work called for in your contract
has been completed.
! When all of the work to be done at the work site
has been completed, if your contract calls for
work at more than one site.
! When that part of the work at the work site has
been put to its intended use by any person or
organization, other than another contractor or
subcontractor working on the same project.
But we won’t consider the following to be your
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completed work:
! Uninstalled equipment, abandoned or unused
materials, or tools.
Your work means:
! any work that you’re performing or others are
performing for you; or
! any service that you’re providing or others are
providing for you."
C. Defense and Settlement of the Underlying Lawsuit
After Palcowski filed her first amended complaint, UPS sent
identical letters to St. Paul, Zurich American Insurance Company
(Zurich), and American Home Assurance Company (American Home or
AIG). UPS was named an additional insured on the insurance
policy issued by Zurich pursuant to UPS’s contract with
ServiceMaster for maintenance services at the UPS facility. UPS
was also an additional insured on the insurance policy issued by
American Home pursuant to UPS’s contract with Initial Security
for security guard services at the UPS facility. In its letters
to St. Paul, Zurich, and American Home, UPS elected each of the
three policies to provide exclusive defense and indemnification
to UPS, to the exclusion of UPS’s own policy with Liberty. St.
Paul agreed to defend UPS, but subject to a reservation of rights
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with respect to indemnification. Zurich and American Home did
not offer to defend UPS.
On January 8, 2003, Palcowski reached a settlement agreement
with UPS for $270,000, and the underlying lawsuit was dismissed
on January 9, 2003. The settlement funds were apportioned among
the defendants as follows: $235,000 was allocated to extinguish
the liability of UPS ($215,000 paid by Liberty and $20,000 paid
by Zurich); $17,500 to extinguish the liability of ServiceMaster
(paid by Zurich); and $17,500 to extinguish the liability of
Tarcom (attributable to Tarcom's potential liability only).
D. The Present Declaratory Judgment Action
On May 20, 2002, UPS and Liberty filed a complaint for
declaratory judgment against Zurich and American Home, seeking to
secure coverage under those policies. St. Paul was defending UPS
in the underlying lawsuit under a reservation of rights and was
not named in the complaint. On October 31, 2002, American Home
filed a motion for summary judgment with respect to Liberty’s
claims. In exchange for Zurich’s payment of $20,000 on behalf of
UPS in the underlying settlement, Zurich was dismissed from the
present declaratory judgment action in an agreed order dated
February 7, 2003. The agreed order also indicated that Zurich’s
policy was "deselected."
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On February 7, 2003, Liberty filed an amended complaint for
declaratory judgment against St. Paul and American Home,
asserting claims for equitable subrogation and damages under
section 155 of the Illinois Insurance Code for vexatious and
unreasonable delay in settling the underlying suit and
reimbursing Liberty. Liberty’s amended complaint also dropped
UPS as a plaintiff and Zurich as a defendant.
St. Paul and American Home filed answers to Liberty’s
amended complaint. St. Paul also filed a cross-claim against
American Home and a third-party claim against Zurich, seeking
equitable contribution from both insurers in the event that St.
Paul was found liable to Liberty.
E. The Cross-Motions for Summary Judgment
On August 2, 2004, Liberty filed a cross-motion for summary
judgment with respect to its claims against American Home and a
motion for summary judgment with respect to its claims against
St. Paul. Liberty subsequently settled its claims against
American Home and the circuit court granted American Home’s
motion to dismiss all claims against it on July 15, 2005.
American Home takes no part in this appeal.
On June 14, 2005, St. Paul filed a response to Liberty’s
motion for summary judgment and a cross-motion for summary
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judgment against Liberty. In its combined response and cross-
motion for summary judgment, St. Paul argued that it had no
indemnity obligation to UPS where: (1) St. Paul’s policy
exclusion for "abandoned and unused materials" applied, and (2)
UPS breached St. Paul’s policy conditions by deselecting or
deactivating the Zurich policy, thereby eliminating St. Paul’s
right to equitable contribution from Zurich. St. Paul also moved
for summary judgment with respect to Liberty’s claim under
section 155 of the Insurance Code.
On June 28, 2005, Liberty filed a reply memorandum in
support of its motion for summary judgment against St. Paul. In
its reply, Liberty argued that the doctrine of "mend the hold"
barred St. Paul from asserting, for the first time in its
response to Liberty’s motion for summary judgment, that the
"abandoned and unused materials" exclusion of its policy applied
in this case. Liberty argued that St. Paul failed to raise the
exclusion in its reservation of rights letter, its answer to the
amended complaint for declaratory judgment, or in its settlement
offer letter sent by St. Paul’s counsel to Liberty’s counsel on
November 11, 2004. Liberty attached the St. Paul settlement
offer letter to its reply memorandum. In its reply, Liberty also
argued that St. Paul’s exclusion did not apply, that UPS did not
breach the St. Paul policy conditions, and that St. Paul owed
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damages and attorney fees under section 155 of the Insurance
Code. Liberty also filed a separate motion for summary judgment
on the section 155 claim.
On July 8, 2005, St. Paul filed a motion to strike portions
of Liberty’s reply memorandum, including the settlement offer
letter sent by St. Paul’s counsel to Liberty’s counsel on
November 11, 2004. St. Paul argued that the letter was a
confidential offer of settlement and that the parties had agreed
that it would not be disclosed. On July 8, 2005, St. Paul also
filed a reply memorandum in support of its cross-motion for
summary judgment and a memorandum in opposition to Liberty’s
motion for summary judgment on the section 155 claim.
On July 11, 2005, Liberty filed a response to St. Paul’s
motion to strike portions of Liberty’s reply memorandum. Liberty
argued that the St. Paul settlement letter was admissible because
it contained a statement of St. Paul’s coverage position, an
offer of settlement, and the settlement offer itself was
redacted. Liberty asserted that the letter was therefore
relevant to Liberty’s "mend the hold" argument and Liberty’s
section 155 claim. Liberty also denied that it ever agreed to
withhold the letter from the court.
On July 15, 2005, the circuit court denied Liberty’s motion
for summary judgment and granted St. Paul’s motion for summary
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judgment and entered judgment in favor of St. Paul. The circuit
court stated: "I think this case hinges on the language of the
policy. I think the ramp in question was abandoned by St. Paul’s
insured, and I don’t think the mend the hold doctrine applies
here because the reservation of rights letter, I think, is close
enough to point you in the right direction."
On July 22, 2005, the circuit court allowed St. Paul’s
motion to strike the settlement letter and references to the
letter in Liberty’s reply memorandum. Liberty now appeals from
the circuit court’s orders.
II. ANALYSIS
Summary judgment is proper where, when viewed in the light
most favorable to the nonmoving party, the pleadings,
depositions, admissions, and affidavits on file reveal that there
is no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law. Home Insurance
Co. v. Cincinnati Insurance Co., 213 Ill. 2d 307, 315 (2004);
Connecticut Specialty Insurance Co. v. Loop Paper Recycling,
Inc., 356 Ill. App. 3d 67, 71-2 (2005). We review the circuit
court’s grant of summary judgment de novo. Connecticut Specialty
Insurance Co., 356 Ill. App. 3d at 72. We may also affirm the
entry of summary judgment on any basis appearing in the record,
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regardless of whether the circuit court relied upon that ground.
Home Insurance Co., 213 Ill. 2d at 315.
A. Liberty’s Claim for Equitable Subrogation
Liberty first contends that it established each and every
element of its claim for equitable subrogation. The elements of
an equitable subrogation claim are as follows: "(1) the defendant
carrier must be primarily liable to the insured for a loss under
a policy of insurance; (2) the plaintiff carrier must be
secondarily liable to the insured for the same loss under its
policy; and (3) the plaintiff carrier must have discharged its
liability to the insured and at the same time extinguished the
liability of the defendant carrier." (Emphasis in original.)
Home Insurance Co., 213 Ill. 2d at 323. However, St. Paul
maintains that it was not primarily liable to the insured because
the St. Paul policy’s completed work coverage for UPS was
eliminated by the exclusion for "abandoned and unused materials."
St. Paul asserts that the ramp that Palcowski fell on was
abandoned by Tarcom when it finished its construction work at
UPS, approximately three months prior to Palcowski’s injury. We
agree.
When construing an insurance policy, the primary function of
the court is to ascertain and enforce the intentions of the
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parties as expressed in the agreement. Connecticut Specialty
Insurance Co., 356 Ill. App. 3d at 72. A court must construe the
policy as a whole and take into account the type of insurance
purchased, the nature of the risks involved, and the overall
purpose of the contract. If the words of a policy are clear and
unambiguous, they must be afforded their plain, ordinary and
popular meaning. Connecticut Specialty Ins. Co., 356 Ill. App.
3d at 72-3.
The "Additional Protected Persons Endorsement" of the St.
Paul policy provided coverage for UPS for Tarcom’s "completed
work." The St. Paul policy specifically excluded "uninstalled
equipment, abandoned or unused materials, or tools" from its
definition of "completed work." We find that none of the
deposition testimony created a genuine issue of fact as to the
application of the "abandoned materials" exclusion in this case.
Joel Hubbell testified at his deposition that he was the
project engineer for UPS in charge of the guardhouse construction
project until January 2, 2000. Hubbell testified that the
purpose of the wooden ramps that Tarcom built during the
guardhouse construction project was for a "temporary entrance
into the building." Hubbell testified that "[w]e couldn’t take
people through the construction site, so that was the area that
people used to get from the parking lot through the fence line
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and into the building." Hubbell testified that he was not aware
of any type of traffic involving maintenance vehicles using the
ramps and that it "was not their purpose." Hubbell also
testified that the removal of the wooden ramps that Tarcom built
in conjunction with the guardhouse project would have been part
of Tarcom’s punch list and it would have been Tarcom’s
responsibility to remove any temporary ramps before it left the
site. St. Paul’s reply brief in support of its cross-motion for
summary judgment against Liberty includes an exhibit entitled
"UPS Guardhouses Punch List." The punch list includes
instructions for Tarcom to "remove and clean up temp ramps,
gates, fence etc." for both guardhouses constructed at the UPS
Frank Kermend testified at his deposition that he was
Tarcom’s project superintendent at the UPS facility. Kermend
testified that Tarcom built two temporary ramps near the
guardhouses being constructed "for employees to get in through
the parking lot to work." Kermend testified that Tarcom had
completed its work and was no longer present at the UPS facility
when Palcowski’s injuries occurred. Kermend testified that the
workers he supervised were gone from the UPS facility by February
2000. Kermend testified that Tarcom was responsible for removing
temporary ramps and fencing that were part of the guardhouse
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project. Kermend testified that at the time of Palcowski’s
injury, the ramp was not in the same position that Tarcom had
placed it during construction of the guardhouse. Kermend
testified that he remembered moving ramps pursuant to a punch
list. While Kermend testified that he was asked to leave a ramp,
he later testified he did not remember anyone from UPS
instructing him to leave any of the temporary ramps at the site.
Glen Wyant testified at his deposition that he was project
engineer for the UPS facility from January to April 2000. Wyant
testified that the guardhouses were 99% complete at that time and
that he would examine minor details a few times a week. Wyant
testified that to the best of his knowledge, Tarcom installed the
ramp in question in fall 1999, but did not know whether Tarcom
was authorized by UPS to install it. Wyant testified that he did
not recall seeing the ramp in question between January and April
2000. Wyant also testified that he did not recall when the ramp
was removed or who ordered its removal. Wyant testified that the
ramp Palcowski fell on was adjacent to a housekeeping entrance on
the north side of a guardhouse. Wyant testified that Tarcom was
not using the ramp for anything in April 2000. Wyant testified
that the ramp had been in place since fall 1999, and that he
believed that the ramp was placed at that entrance at
ServiceMaster’s request. Wyant testified that ServiceMaster used
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the ramp for its tractor to haul garbage out to the parking lot.
Liberty argues on appeal that Tarcom was instructed to move
the temporary ramp, upon which Palcowski was injured, to a
permanent location at the UPS facility and that the ramp was
therefore not abandoned by Tarcom. However, in its motion for
summary judgment, Liberty argued that "[i]t is undisputed that
Palcowski tripped and fell over a nail protruding from a wooden
ramp built by Tarcom, and which Tarcom was responsible for moving
or discarding upon the completion of work." We find that St.
Paul was entitled to summary judgment on Liberty’s subrogation
claim where the evidence shows that Tarcom was responsible for
removal of the ramp in question and the ramp left at the UPS
facility falls within the "abandoned materials" exclusion.
Liberty cites U.S. Sanitary Specialties Corp. v. Globe
Indemnity Co., 204 F.2d 774 (7th Cir. 1953), in support of its
argument that the "abandoned materials" exclusion does not apply
where Tarcom was asked to move the ramp to a permanent location.
However, we find Liberty’s reliance on this case unconvincing.
In U.S. Sanitary Specialties Corp., the United States Court of
Appeals for the Seventh Circuit considered whether an "abandoned
or unused material" exception applied to exclude coverage. In
that case, a corporation’s salesman demonstrated a floor wax by
applying it to a small portion of the courthouse floor. The
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salesman failed to subsequently remove the wax, and on the day
following the sale of wax to county officials, a third party
slipped on the waxed spot and was injured. The court found that
the wax used in the demonstration was not "abandoned," but was
used and worked into a spot on the floor. The court found that
the wax then "lost its identity" and became a glossy finish on
the floor. The court noted that the "abandoned or unused
material" exception referred "only to tools, equipment and
materials which on completion of an operation should have been
removed by the assured from the premises where the operation
occurred but which, instead, were abandoned there by the insured
and later were instrumental in causing an accident." U.S.
Sanitary Specialties Corp., 204 F.2d at 777.
Unlike the wax in that case, here, the evidence showed that
Tarcom built the temporary ramps in conjunction with the
guardhouse project and was responsible for removing them after
the project was completed and that Palcowski was injured upon one
of the ramps that Tarcom failed to remove. Also, unlike the
floor wax in U.S. Sanitary Specialties Corp., the ramp built by
Tarcom did not "lose its identity" when it was used.
Liberty also argues that the St. Paul policy provided
coverage in this case without regard to whether Tarcom or UPS was
at fault. However, in this case, the St. Paul policy limited the
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scope of coverage to Tarcom’s "work" or "completed work." The
St. Paul policy further provides that "completed work" does not
include "abandoned or unused materials." As previously
discussed, the evidence showed that the temporary ramp present at
the UPS facility after Tarcom had completed its work was
"abandoned" and therefore not covered by the St. Paul policy.
Accordingly, Liberty’s argument relating to the fault of Tarcom
and UPS is inapposite.
B. The "Mend the Hold" Doctrine
Liberty next contends that the doctrine of "mend the hold"
response to Liberty’s motion for summary judgment, that the ramp
at issue fell within the "abandoned and unused materials"
exclusion of the policy. The "mend the hold" doctrine has been
referred to in the following terms: "Where a party gives a
reason for his conduct and decision touching anything involved in
a controversy, he cannot, after litigation has begun, change his
ground and put his conduct upon another and different
consideration. He is not permitted thus to amend his hold. He
is estopped from doing it by a settled principle of law."
Trossman v. Philipsborn, No. 1-04-0588 (August 21, 2006), citing
County of Schuyler v. Missouri Bridge & Iron Co., 256 Ill. 348,
353 (1912); see also Gibson v. Brown, 214 Ill. 330, 341 (1905);
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Townsend v. Postal Benefit Ass’n of Illinois, 262 Ill. App. 483,
489 (1931).
We find that the "mend the hold" doctrine is inapplicable in
this case for the following two reasons. First, cases in which
courts have applied the doctrine involve situations in which the
offending party changed the initial reason for not performing a
contract to a completely different reason during litigation. See
Smith v. Union Automobile Indemnity Co., 323 Ill. App. 3d 741,
746 (2001), discussing Larson v. Johnson, 1 Ill. App. 2d 36, 38-
39 (1953). In Larson, the defendant initially relied upon the
defense that the contract at issue had been procured through
connivance, fraud, and misrepresentation. Later, the defendant
altered its position and argued that a lease provision in the
contract was indefinite and therefore unenforceable. Larson, 1
Ill. App. 2d at 38-39.
In the insurance context, courts have precluded insurers
from denying a claim on one basis and then changing the basis for
denial during litigation. In Coulter v. American Employers’
Insurance Co., 333 Ill. App. 631 (1948), the court declined to
consider the defendant insurer’s argument that the insured failed
to give proper notice of an accident when it had previously based
its denial of coverage solely upon the contention that the
accident at issue was outside the scope of the policy’s coverage.
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Coulter, 333 Ill. App. at 634. In Townsend, the defendant
initially claimed that the plaintiff was not a member of the
insured group at the time of her death but later asserted failure
to give proper notice of the insured’s death as a completely
different defense. The court barred the defendant from asserting
the latter defense.
In this case, St. Paul’s coverage position has been
consistent. Unlike the insurers in the cases cited by Liberty,
St. Paul never completely changed its position. On September 27,
2001, St. Paul issued a reservation of rights letter to UPS in
which it agreed to defendant UPS in the underlying action, but
St. Paul also specifically reserved the right to disclaim
coverage. St. Paul stated:
"[S]ome of the claims made and damages sought are not
covered by this policy. The St. Paul [policy] affords
coverage to [UPS] as an additional insured for injury
or damage arising out of Tarcom’s work. If it is
determined that the injuries sustained by plaintiff did
not arise out of the work of Tarcom Corp. but rather
another subcontractor, St. Paul disclaims any
obligation to indemnify on behalf of [UPS]."
St. Paul’s letter then directed UPS to the "Additional Protected
Persons Endorsement" of the St. Paul policy and included the
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provisions of that endorsement in the letter, including the
definitions of Tarsom’s "work," "completed work," and exclusion
for "abandoned or unused materials."
Also, St. Paul’s answer to Liberty’s complaint contains the
affirmative defense that the St. Paul policy does not indemnify
Liberty for damages that did not arise out of Tarcom’s work and
that Liberty’s claims are barred because it suffered no loss
within the provisions of the St. Paul policy. At all times,
Liberty was aware that St. Paul was relying on the provisions of
its policy to exclude coverage for claims that did not fall
within those provisions, specifically within the provisions
relating to Tarcom’s work. St. Paul did not switch positions in
the middle of litigation; therefore, the "mend the hold" doctrine
does not apply in this situation.
Second, Liberty has not demonstrated that it was surprised
or prejudiced in any way by St. Paul’s assertion that Palcowski’s
damages did not arise out of Tarcom’s work or completed work but,
rather, that the ramp fell under the "abandoned or unused
materials" exclusion of the policy. This court has refused to
apply the doctrine in the absence of unfair surprise or
arbitrariness. See Trossman, slip op. at ____, citing Smith, 323
Ill. App. 3d at 746-47; William J. Templeman Co. v. United States
Fidelity & Guaranty Co., 317 Ill. App. 3d 764, 771-72 (2000). We
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therefore conclude that the circuit court properly declined to
apply the "mend the hold" doctrine in this case.
C. The St. Paul Settlement Letter
Liberty next contends that the circuit court erred by
striking the settlement offer letter sent by St. Paul’s counsel
to Liberty’s counsel on November 11, 2004. Liberty argues that
it redacted portions of the letter containing any settlement
offer and that the remainder of the letter contained a
straightforward statement of St. Paul’s coverage position, which
was offered to show that it was inconsistent with St. Paul’s
later claim that the "abandoned or unused materials" exclusion
applied in this case.
The admissibility of evidence is within the sound discretion
of the circuit court and will not be reversed absent clear abuse.
Leonardi v. Loyola University of Chicago, 168 Ill. 2d 83, 92
(1995). Evidentiary rulings will not be reversed unless the
error was substantially prejudicial and affected the outcome of
the trial. Jackson v. Pellerano, 210 Ill. App. 3d 464, 471
(1991).
As a general rule, matters concerning settlements and
negotiations are not admissible. Garcez v. Michel, 282 Ill. App.
3d 346, 348-49 (1996). Illinois courts cite two primary concerns
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in prohibiting the admission of such evidence: (1) an agreement
to settle does not constitute an admission of guilt and is
therefore irrelevant; and (2) admitting evidence of settlements
and negotiations would contravene public policy by discouraging
litigants from settling before trial. Garcez, 282 Ill. App. 3d
at 349.
Liberty cites Quinlan v. Stouffe, 355 Ill. App. 3d 830
(2005), and Stathis v. Geldermann Securities, Inc., 295 Ill. App.
3d 844 (1998), in support of its argument that the settlement
letter was admissible in this case. We find Liberty’s reliance
on those cases unavailing. In Quinlan, this court found the
defendants’ testimony concerning a settlement meeting to be
admissible where the testimony contained no offer of settlement,
was not related to either party’s admission of guilt, and would
not discourage any future out-of-court settlement. This court
noted that the testimony directly related to the issue of whether
the parties had formed a valid oral contract, and if so, the
relevant terms of the contract. Quinlan, 355 Ill. App. 3d at
837.
In this case, the settlement letter sent by St. Paul’s
counsel to Liberty’s counsel stated: "In light of the fact that
this declaratory judgment action has been pending since May 9,
2002 with no clear end in sight, St. Paul offers the following in
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full settlement of this case. St. Paul makes this offer under
the express understanding that neither you nor your clients will
share the contents of these negotiations with any other defendant
in this litigation or their counsel." While the copy of this
letter contained in the record has certain portions of the exact
monetary settlement offer redacted, the letter contains a
discussion of St. Paul’s reasons for making such settlement
offer, including an analysis of the parties’ liabilities. Unlike
Quinlan, this letter contains an offer of settlement and a
discussion of the reasoning behind that offer. Admission of the
letter would raise the exact concerns behind the general rule of
inadmissibility, by discouraging litigants from settling before
trial.
In Stathis, this court found no abuse of discretion where
the circuit court permitted testimony regarding the parties’
negotiations to show that the plaintiff subsequently changed his
position and prior testimony on the same issue had already been
presented by the plaintiff’s son. This court noted that while
offers of compromise or settlement are generally inadmissible,
"[s]tatements otherwise made by a party or on his behalf during
the course of negotiations, which are inconsistent with the
party’s present position, however, may be introduced in evidence
against him." Stathis, 295 Ill. App. 3d at 861. Liberty
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maintains that the settlement letter was admissible to show that
St. Paul’s coverage position in the letter was inconsistent with
its later position that the "abandoned or unused materials"
exclusion applied, and to show the applicability of the "mend the
hold" doctrine. However, the letter states that "St. Paul offers
the following in full settlement of this case," and does not set
forth St. Paul’s coverage position. In addition, as previously
discussed, Liberty has not shown that St. Paul’s coverage
position was inconsistent or that Liberty was surprised or
prejudiced in any way by St. Paul’s assertion that the "abandoned
or unused materials" exclusion of the policy applied in this
case. Accordingly, we find no abuse of discretion in excluding
this evidence.
D. UPS’s Deselection of the Zurich Policy
Liberty next contends that UPS did not breach any condition
in the St. Paul policy by deselecting the Zurich policy. Liberty
has asserted that UPS deselected the Zurich policy upon Zurich’s
payment of $20,000 on behalf of liability attributable to UPS in
the underlying lawsuit. St. Paul argued before the circuit
court, and maintains before this court, that the purported
deselection was not proper and that if UPS did properly deselect
Zurich, UPS breached the conditions of St. Paul’s policy,
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specifically the "Recovering Damages From A Third Party" clause,
and Liberty is not entitled to any indemnity from St. Paul.
While this issue was fully briefed and argued before the
circuit court, the court did not make any specific findings
relating to this issue. Because, as previously discussed, St.
Paul does not owe indemnity based on the language of the
"Additional Protected Persons Endorsement," we need not address
St. Paul’s alternative argument.
E. Costs and Attorney Fees
Liberty lastly contends that St. Paul litigated this case
when it knew or ought to have known that it had no meritorious
defense to coverage. Thus, Liberty argues that, pursuant to
section 155 of the Insurance Code (215 ILCS 5/155 (West 2000)),
it is entitled to reimbursement of attorney fees and sanctions
against St. Paul. Section 155(1) of the Insurance Code provides:
"In any action by or against a company wherein
there is in issue the liability of a company on a
policy or policies of insurance or the amount of the
loss payable thereunder, or for an unreasonable delay
in settling a claim, and it appears to the court that
such action or delay is vexatious and unreasonable, the
court may allow as part of the taxable costs in the
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action reasonable attorney fees [and] other costs ***."
215 ILCS 5/155(1) (West 2000).
Liberty argues that St. Paul engaged in vexatious and
unreasonable conduct in asserting its basis for coverage denial,
making irrelevant discovery requests, and advancing frivolous
coverage arguments. However, where a bona fide dispute
concerning coverage exists, costs and sanctions are
inappropriate. State Farm Mutual Automobile Insurance Co. v.
Smith, 197 Ill. 2d 369, 380 (2001). In this case, the circuit
court determined that St. Paul correctly relied on the "abandoned
or unused materials" exclusion in denying coverage. We also
determined that the exclusion was applicable in this case.
Therefore, we find that there existed a bona fide dispute
concerning St. Paul’s potential coverage. Accordingly, costs and
sanctions are inappropriate in this case.
III. Conclusion
For the above-stated reasons, we affirm the judgment of the
circuit court of Cook County.
Affirmed.
NEVILLE and MURPHY, JJ., concur.
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