Liberty Mutual Insurance Co. v. American Home Assurance Co. Inc.

Citation: Not availableDocket: 1-05-2441 Rel

Court: Appellate Court of Illinois; November 1, 2006; Illinois; State Appellate Court

Original Court Document: View Document

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Liberty Mutual Insurance Company (Liberty) appeals a Cook County circuit court's decision granting summary judgment to St. Paul Mercury Insurance Company (St. Paul) concerning claims for equitable subrogation, prejudgment interest, and attorney fees for alleged vexatious delay under the Illinois Insurance Code. Liberty argues it met all elements for equitable subrogation, that St. Paul's exclusion for "abandoned and unused materials" was inapplicable, and that the doctrine of "mend the hold" barred St. Paul from using this exclusion. Additionally, Liberty contends the circuit court improperly struck a settlement letter from St. Paul and asserts there was no breach of St. Paul’s policy, nor any vexatious delay. The court affirmed the lower court's rulings.

The background involves an underlying lawsuit initiated by Dorothy Palcowski, who claimed injuries from tripping over nails at a UPS facility, citing UPS, Tarcom Corporation, and ServiceMaster as defendants. UPS had a contract with Tarcom requiring it to name UPS as an additional insured on its commercial general liability (CGL) policy, which St. Paul issued, providing $1 million per occurrence coverage. St. Paul recognized UPS as an additional insured in a September 2001 letter. Following Palcowski's complaint, UPS sought defense and indemnification from St. Paul and other insurers, electing their policies over its own with Liberty. St. Paul agreed to defend UPS but reserved rights concerning indemnification.

On January 8, 2003, Palcowski and UPS settled for $270,000, leading to the dismissal of the related lawsuit the following day. The settlement included allocations of $235,000 to UPS, $215,000 from Liberty, $20,000 from Zurich, and $17,500 each from Zurich for ServiceMaster and from Tarcom for its potential liability. On May 20, 2002, UPS and Liberty initiated a declaratory judgment action against Zurich and American Home to determine insurance coverage. St. Paul was defending UPS under a reservation of rights but was not included in the initial complaint. Following Zurich's payment of $20,000, it was dismissed from the action on February 7, 2003, with its policy being "deselected." That same day, Liberty amended its complaint against St. Paul and American Home, dropping UPS as a plaintiff and Zurich as a defendant, while alleging equitable subrogation and claiming damages for unreasonable delay under section 155 of the Illinois Insurance Code. St. Paul and American Home responded, with St. Paul also filing cross-claims against American Home and a third-party claim against Zurich for equitable contribution.

On August 2, 2004, Liberty filed cross-motions for summary judgment against American Home and St. Paul, eventually settling with American Home, which was dismissed from the case on July 15, 2005. St. Paul opposed Liberty’s summary judgment, asserting it had no indemnity obligation due to an exclusion for "abandoned and unused materials" and UPS's breach of policy conditions by deselecting the Zurich policy. Liberty countered that St. Paul could not introduce the exclusion late in the proceedings and argued that it did not apply, asserting St. Paul owed damages and attorney fees under section 155. Liberty also filed a separate motion for summary judgment regarding its section 155 claim.

On July 8, 2005, St. Paul sought to strike portions of Liberty's reply memorandum, specifically a settlement offer letter dated November 11, 2004, claiming it was a confidential settlement offer that both parties had agreed not to disclose. On the same day, St. Paul filed a reply in support of its cross-motion for summary judgment and opposed Liberty's motion for summary judgment regarding a section 155 claim. Liberty responded on July 11, arguing that the settlement letter was admissible as it included St. Paul’s coverage position and a redacted settlement offer, relevant to its "mend the hold" argument. Liberty denied any agreement to withhold the letter from the court. On July 15, the circuit court denied Liberty's motion for summary judgment and granted St. Paul's motion, concluding that the case's outcome depended on the insurance policy language and that the "mend the hold" doctrine was inapplicable since the ramp was abandoned. On July 22, the court struck the settlement letter and related references from Liberty's memorandum, prompting Liberty to appeal the orders.

In analyzing Liberty’s equitable subrogation claim, it argued that it met all necessary elements: St. Paul was primarily liable to the insured, Liberty was secondarily liable, and Liberty had discharged its liability, extinguishing St. Paul’s liability. St. Paul contended it was not primarily liable due to a policy exclusion covering abandoned materials, asserting that the ramp had been abandoned prior to the injury. The court agreed with St. Paul’s position.

When interpreting an insurance policy, courts focus on determining and enforcing the parties' intentions as outlined in the agreement, considering the entire policy, the type of insurance, the associated risks, and the contract’s purpose. Clear and unambiguous policy language should be given its ordinary meaning. The "Additional Protected Persons Endorsement" in the St. Paul policy covered UPS for Tarcom’s "completed work," but specifically excluded "uninstalled equipment, abandoned or unused materials, or tools." 

In this case, deposition testimonies indicated no genuine dispute regarding the "abandoned materials" exclusion. Joel Hubbell, the project engineer for UPS, noted that the wooden ramps built by Tarcom were temporary and intended for access during construction, not for maintenance vehicle traffic. He confirmed that the removal of these ramps was part of Tarcom’s responsibilities as detailed in the punch list. 

Frank Kermend, Tarcom’s project superintendent, stated that Tarcom had completed its work and left the site before the incident involving Palcowski. He acknowledged that the ramps were part of Tarcom's obligations to remove and that the ramp was not in its original position at the time of the injury. Glen Wyant, another project engineer, testified that the guardhouses were nearly complete, and while he believed Tarcom installed the ramp in fall 1999, he was uncertain if UPS had authorized the installation.

Wyant testified he did not see the ramp involved in Palcowski's fall between January and April 2000, nor could he recall when or by whom it was removed. He noted the ramp was adjacent to a housekeeping entrance by a guardhouse, had been in place since fall 1999, and was used by ServiceMaster to haul garbage. Liberty contended that Tarcom was instructed to relocate the ramp to a permanent site at the UPS facility, arguing it was not abandoned. However, in seeking summary judgment, Liberty acknowledged that Palcowski tripped over a nail on the ramp, which Tarcom was responsible for moving or discarding post-completion of work. The court granted summary judgment to St. Paul on Liberty's subrogation claim, determining Tarcom was responsible for the ramp's removal and it fell under the "abandoned materials" exclusion. Liberty's reference to U.S. Sanitary Specialties Corp. v. Globe Indemnity Co. was deemed unpersuasive, as it addressed a different context of "abandoned materials." In that case, the wax applied to a floor was considered used and had lost its identity. By contrast, the ramp remained identifiable and was not removed by Tarcom after project completion, leading to Palcowski's injury. Furthermore, the St. Paul policy limited coverage to Tarcom’s completed work, explicitly excluding abandoned materials, confirming that the ramp was indeed abandoned and not covered under the policy, rendering Liberty's arguments regarding fault irrelevant.

The "mend the hold" doctrine prevents a party from changing the basis of their argument after litigation has commenced. Liberty argues that St. Paul is barred from asserting that the ramp falls within the "abandoned and unused materials" exclusion in its response to Liberty’s summary judgment motion. However, the doctrine is deemed inapplicable here for two main reasons. First, previous cases applying the doctrine involved parties shifting from one completely different defense to another during litigation, which is not the case with St. Paul. St. Paul has maintained a consistent coverage position, having issued a reservation of rights letter to UPS on September 27, 2001, where it agreed to defend UPS but reserved the right to deny coverage for claims not covered by the policy. Specifically, St. Paul indicated that it would not indemnify UPS if injuries were determined to arise from work not performed by Tarcom Corp., as outlined in the policy.

St. Paul referenced the "Additional Protected Persons Endorsement" of its policy in a letter to UPS, detailing definitions related to Tarcom’s "work," "completed work," and the exclusion for "abandoned or unused materials." St. Paul asserted an affirmative defense against Liberty’s claims, arguing that the policy does not cover damages unrelated to Tarcom's work and that Liberty suffered no loss as defined in the policy. Liberty was aware of St. Paul’s reliance on the policy provisions to exclude certain claims, and the court determined that St. Paul did not change its position during litigation, thus the "mend the hold" doctrine was not applicable. Liberty failed to prove it was surprised or prejudiced by St. Paul’s claims regarding coverage exclusions. The court affirmed its refusal to apply the "mend the hold" doctrine, referencing prior cases that emphasize the need for unfair surprise or arbitrariness for its application.

Regarding the St. Paul settlement letter dated November 11, 2004, Liberty contended that the circuit court erred by striking this letter. Liberty claimed it had redacted the settlement offer and that the remaining content illustrated St. Paul’s coverage stance, allegedly inconsistent with its later position on the "abandoned or unused materials" exclusion. The admissibility of evidence is at the circuit court's discretion and is not overturned without clear abuse. Generally, evidence regarding settlements is inadmissible to prevent discouraging litigants from settling. Liberty's citation of cases to support admissibility was found unpersuasive by the court, which distinguished those cases based on the specific context of settlement discussions. The court noted that in the settlement letter, St. Paul stated its offer in light of the prolonged litigation, emphasizing the confidentiality of the negotiations.

The letter in question contains a redacted monetary settlement offer from St. Paul, along with an analysis of the parties' liabilities. Unlike prior cases, this letter includes a settlement offer and the rationale behind it. Its admission could discourage pre-trial settlements, aligning with the general inadmissibility rule. The court previously ruled in Stathis that while settlement offers are typically inadmissible, inconsistent statements made during negotiations may be introduced as evidence. Liberty claims the letter should be admissible to demonstrate inconsistency in St. Paul’s coverage position and to invoke the "mend the hold" doctrine. However, the letter does not articulate St. Paul’s coverage position, and Liberty failed to show any inconsistency or prejudice from St. Paul’s application of the "abandoned or unused materials" exclusion. Hence, the court found no abuse of discretion in excluding the letter.

Liberty contends that UPS did not breach the St. Paul policy by deselecting the Zurich policy after Zurich paid $20,000 in the underlying lawsuit. St. Paul argues that if the deselection was proper, it breached the "Recovering Damages From A Third Party" clause, negating Liberty's claim for indemnity. The circuit court did not address this issue in its findings, and since St. Paul is not liable according to the "Additional Protected Persons Endorsement," the court need not consider St. Paul’s alternative argument.

Regarding costs and attorney fees, Liberty argues that St. Paul acted vexatiously by denying coverage despite knowing it had no valid defense, warranting reimbursement under section 155 of the Insurance Code. The section allows for recovery of attorney fees if the court finds the action or delay vexatious and unreasonable. However, since a bona fide dispute over coverage existed—supported by the circuit court's ruling on the applicability of the exclusion—costs and sanctions are not warranted. Consequently, the judgment of the circuit court of Cook County is affirmed.