                                                  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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No. 1-05-2441


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

facility.

        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"

barred St. Paul from asserting, for the first time in its

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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