FIFTH DIVISION June 24, 2016

No. 1-13-0291

______________________________________________________________________________

IN THE APPELLATE COURT OF ILLINOIS FIRST JUDICIAL DISTRICT ______________________________________________________________________________

FHP TECTONICS CORPORATION, ) Appeal from the Circuit Court ) of Cook County. Plaintiff-Appellant, ) ) v. ) ) AMERICAN HOME ASSURANCE COMPANY; NES ) RENTALS HOLDINGS, INC., d/b/a NES Traffic Safety; ) and VICKY JEAN COOPER, Individually and as Special ) No. 11 CH 55239 Administrator of the Estate of John I. Rivera, Deceased, ) ) Defendants ) ) ) (American Home Assurance Company, Defendant- ) Appellee). ) The Honorable ) Rita Mary Novak, ) Judge presiding. _____________________________________________________________________________

JUSTICE BURKE delivered the judgment of the court, with opinion.* Justices Gordon and Lampkin concurred in the judgment and opinion.

OPINION

¶1 This case arises out of an insurance coverage dispute between plaintiff, FHP Tectonics

Corporation (FHP), and defendant, American Home Assurance Company (American). FHP filed

a complaint for declaratory judgment and other relief against American, seeking, inter alia, a

* This case was recently reassigned to Justice Burke. 1-13-0291

declaration that American owed FHP a duty to defend and indemnify in an underlying case. The

trial court dismissed with prejudice the counts of FHP’s complaint relating to its duty to defend.

Thereafter, FHP filed an amended motion to reconsider, arguing for the first time that it should

be allowed leave to replead. Following a hearing, the court denied FHP’s motion.

¶2 FHP appeals, arguing (1) the trial court erred by dismissing the matter with prejudice

without allowing it the opportunity to amend the complaint, and (2) American is estopped from

denying coverage to FHP. For the following reasons, we affirm.

¶3 I. BACKGROUND

¶4 A. The Policy at Issue

¶5 FHP entered into a contract with the Illinois State Toll Highway Authority for

construction on the Tri-State Tollway. FHP, in turn, entered into a subcontract with NES Rentals

Holdings, Inc. (d/b/a NES Traffic Safety, LP) (hereinafter NES). The subcontract required that

NES maintain insurance coverage, including commercial general liability insurance of at least $5

million per occurrence for bodily injury, personal injury, and property damage liability. FHP was

to be listed as an additional insured on a primary, noncontributory basis for any liability arising

directly or indirectly from the work.

¶6 NES obtained commercial general liability coverage from American, with the effective

date of October 1, 2006, through October 1, 2007. The policy lists NES as the named insured.

Under “Coverage A,” which relates to bodily injury and property damage liability, the policy

provides that American will “pay those sums that the insured becomes legally obligated to pay as

damages because of ‘bodily injury’ or ‘property damage’ ” to which the insurance applies.

Further, the policy specifies that American has the “right and duty to defend the insured against

2 1-13-0291

any ‘suit’ seeking those damages.” A “Self-Insured Retention” (SIR) endorsement modifies the

policy, however, to delete the aforementioned paragraph and instead provide as follows:

“We will pay on behalf of the Insured those sums in excess of the

‘Retained Limit’ that the Insured becomes legally obligated to pay

as damages because of ‘bodily injury’ or ‘property damage’ to

which this insurance applies. We will have the right but not the

duty to defend any ‘suit’ seeking those damages. We may at our

discretion and expense, participate with you in the investigation of

any ‘occurrence’ and the defense or settlement of any claim or

‘suit’ that may result.”

The SIR endorsement specifies that “[y]ou are responsible for the payment of” fees and costs

incurred, and if American incurs an obligation under the policies to pay damages resulting from a

claim, “you will be responsible for a percentage of the defense costs.” The policy defines “you”

and “your” as the named insured shown in the declarations and any other person or organization

qualifying as a named insured under the policy.

¶7 Another endorsement, entitled “An Additional Insured-Where Required Under Contract

or Agreement,” extends coverage to “[a]ny person or organization to whom you become

obligated to include as an additional insured under this policy, as a result of any contract or

agreement you enter into which requires you to furnish insurance to that person or organization

of the type provided by this policy, but only with respect to liability arising out of your

operations or premises owned by or rented to you.”

¶8 The policy also contains an “Other Insurance” clause, which applies when other

insurance is simultaneously available to the insured for a loss American covers under

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“Coverages A or B” of its coverage section. Pursuant to the “Other Insurance” clause, American

insurance is primary except in certain situations when it is excess. An “Additional Insured-

Primary Insurance” (AI-PI) endorsement modifies the policy, however, to add that “coverage

under this policy afforded to an additional insured will apply as primary insurance where

required by contract, and any other insurance issued to such additional insured shall apply as

excess and noncontributory insurance.”

¶9 B. The Underlying Action

¶ 10 The dispute in this case arose after Vicky Jean Cooper, individually and as special

administrator of the estate of John I. Rivera, filed suit against FHP and several other defendants.

In her fourth amended complaint, Cooper alleged that in December 2006, an employee of one of

FHP’s subcontractors was transporting a load of fill when he abruptly changed lanes and stopped

or decelerated to enter the construction site. Rivera crashed into the truck, sustaining fatal

injuries. Cooper’s complaint set forth a wrongful death claim and a survival claim against FHP,

alleging that FHP acted negligently in several ways.

¶ 11 FHP tendered a claim to American. 1 In January 2009, American denied coverage on the

basis that (1) the additional insured endorsement provided coverage only if liability arose out of

NES’s performance of ongoing operations and the loss did not involve any activities of NES, and

(2) its policy sat over a $500,000 retention limit and did not provide coverage for any entity until

the $500,000 retention was met.

¶ 12 C. The Present Coverage Action

¶ 13 1. FHP’s Complaint for Declaratory Judgment

1 FHP tendered its claim to American after Cooper filed her first complaint. 4 1-13-0291

¶ 14 In December 2010, FHP filed a complaint for declaratory judgment and other relief

against NES, American, and Cooper. Counts II, III, and V of the complaint were directed at

American. In count II, FHP sought a declaration that American owed a duty to defend and

indemnify FHP as an additional insured because the accident arose out of NES’s ongoing work,

for which American’s policy provided or potentially provided coverage. In count III, FHP argued

that American was estopped from denying coverage because 28 months had elapsed since FHP

tendered its defense and American had failed to either file a declaratory judgment action or

defend FHP under a reservation of rights. Finally, in count V, FHP argued that it was entitled to

defense counsel of its choice at American’s expense due to a conflict of interest.

¶ 15 2. American’s Motion to Dismiss FHP’s Complaint

¶ 16 In March 2011, American filed a motion to dismiss FHP’s complaint pursuant to sections

2-615 and 2-619 of the Code of Civil Procedure (Code) (735 ILCS 5/2-615, 2-619 (West 2010)).

American argued that it did not owe a duty to defend, as the policy provided that American had

“the right but not the duty to defend any ‘suit’ ” seeking “damages because of ‘bodily injury’ or

‘property damage’ to which” the insurance applied. Further, American argued, because it had no

obligation to defend, an actual controversy did not exist as to (1) whether American was

estopped from asserting coverage defenses or (2) whether FHP was entitled to defense counsel of

its choice. American further argued that its duty to indemnify FHP was not ripe for

consideration, as FHP had not incurred any liability.

¶ 17 In May 2011, FHP filed a response, arguing the trial court should deny American’s

motion because (1) an actual controversy existed between FHP and American as to American’s

duty to defend; (2) American was estopped from asserting its “right to defend” policy defense

and was estopped under the “mend the hold doctrine” from asserting any policy defense other

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than the defenses stated in its letter; and (3) American was required to provide FHP with counsel.

Later that month, American filed a reply.

¶ 18 In August 2011, the parties appeared before the trial court. Following a hearing, the court

dismissed with prejudice FHP’s counts against American relating to American’s duty to defend.

The court found the policy did not give rise to a duty to defend. Further, the court stated, because

the policy did not set out a duty to defend, estoppel did not apply. The court also held the “mend

the hold” doctrine did not apply, as it required a showing of prejudice, which FHP had not

shown. The court explained that the mend the hold doctrine “certainly does not apply simply

because the insurance company did not list every conceivable defense in [the] denial of coverage

letter.” In its denial of coverage letter, American denied FHP’s claim because (1) the loss did not

involve any activities of NES, and (2) its policy sat over a $500,000 self-insured retention.

¶ 19 The trial court also dismissed the claims relating to American’s duty to indemnify but did

so without prejudice, finding those claims were not ripe. 2

¶ 20 3. FHP’s Motion to Reconsider and Motion for Leave to Amend Its Motion to Reconsider

¶ 21 FHP subsequently filed a motion to reconsider. In its motion, FHP did not argue that the

policy was ambiguous, nor did it request leave to amend its complaint. After American filed an

opposition to FHP’s motion, FHP filed a reply, arguing for the first time that under the plain

language of the AI-PI endorsement, the American/NES policy provided primary insurance

coverage on a noncontributory basis for FHP. FHP further alleged the terms of the AI-PI

endorsement directly conflicted with the terms of the SIR endorsement, thereby creating

ambiguity as to coverage for FHP. On American’s motion, the court struck the new allegations in

2 FHP had also filed a claim against NES. The trial court’s order gave FHP 28 days to file an amended complaint against NES. 6 1-13-0291

FHP’s reply brief, declining to consider any matters that were not connected to the arguments

raised in FHP’s motion for reconsideration.

¶ 22 In March 2012, FHP filed a motion for leave to amend its motion to reconsider to include

an argument that the court should not have dismissed its complaint with prejudice. FHP argued it

could allege facts establishing American owed a duty to defend in the underlying litigation.

Specifically, FHP posited that the language of the SIR endorsement directly conflicted with the

language of the AI-PI endorsement, thus making the policy ambiguous. FHP argued that because

the terms of the SIR endorsement directly conflicted with the AI-PI endorsement and the AI-PI

endorsement afforded greater coverage, the terms of the AI-PI endorsement controlled.

¶ 23 FHP attached to its motion another Cook County circuit court decision. FHP asserted that

in that case, the court held American owed a duty to defend an additional insured under the

American/NES policy because of the ambiguity created by the conflicting language of the SIR

endorsement and the AI-PI endorsement. FHP argued that if granted leave to amend its motion to

reconsider, it could plead facts establishing it was entitled to coverage and a defense under the

American/NES policy. Therefore, FHP posited, the court improperly dismissed its complaint for

declaratory judgment with prejudice.

¶ 24 4. FHP’S Amended Motion to Reconsider

¶ 25 In March 2012, the trial court granted FHP’s motion for leave to amend its motion to

reconsider. Thereafter, FHP filed an amended motion to reconsider in which it included its claim

that it could plead facts establishing American owed a duty to defend FHP based on the

ambiguity between the SIR endorsement and AI-PI endorsement. FHP argued the court should

amend its August 2011 order to allow FHP to replead.

7 1-13-0291

¶ 26 American filed an opposition to FHP’s amended motion to reconsider, positing FHP

waived its arguments by failing to raise them earlier in opposition to American’s motion to

dismiss FHP’s complaint. Further, American argued, FHP failed to provide any authority to

support its claim that it was allowed to amend its motion to reconsider to add new arguments. In

addition, American asserted that FHP was precluded from amending its complaint after the court

granted American’s motion to dismiss with prejudice and entered final judgment. American also

posited that even if FHP could amend its complaint, FHP had presented no facts, nor did any

facts exist, that would change the court’s decision to dismiss because American did not owe a

duty to defend any insured under the American policy. Finally, American alleged that FHP

should be subject to sanctions under Illinois Supreme Court Rule 137 (eff. Feb. 1, 1994).

¶ 27 FHP filed a reply, arguing its amended motion to reconsider and the exhibits attached

thereto set forth the facts establishing it was entitled to relief. FHP further posited it had set forth

facts establishing the language of the SIR endorsement conflicted with the AI-PI endorsement,

creating ambiguity and thereby requiring American to defend FHP.

¶ 28 In August 2012, a hearing commenced on FHP’s amended motion to reconsider and

American’s motion for sanctions. Following the hearing, the trial court denied FHP’s motion to

reconsider, finding the amended pleading could not correct the defects in the original complaint

because the contract was unambiguous and did not provide for a duty to defend. The court

indicated it did not believe a basis existed to allow amendment “because as a matter of law FHP

cannot establish that there was a duty to defend in this insuring agreement.” Thereafter,

American withdrew its motion for sanctions.

¶ 29 In September 2012, FHP filed a notice of appeal from the trial court’s August 2011 and

August 2012 orders. On American’s motion, this court dismissed FHP’s appeal for lack of

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jurisdiction. Thereafter, FHP filed a motion in the trial court to amend its August 2012 order to

include Illinois Supreme Court Rule 304(a) (eff. Feb. 26, 2010) language. The trial court

subsequently entered an order including such language, and this appeal followed.

¶ 30 II. ANALYSIS

¶ 31 On appeal, FHP argues (1) the trial court erred by dismissing the matter with prejudice

without allowing it to amend its complaint, and (2) American is estopped from denying coverage

to FHP. We address FHP’s arguments in turn.

¶ 32 A. Whether the Trial Court Should Have Allowed FHP the Opportunity to Amend Its Complaint

¶ 33 FHP first posits the trial court erred by refusing to allow it to amend its complaint. FHP

maintains that it could plead facts establishing American had a duty to defend. Specifically, FHP

posits it could plead the policy terms were ambiguous and American was a primary insurer to

FHP.

¶ 34 The trial court rejected FHP’s request to amend its complaint in the context of denying

FHP’s amended motion to reconsider. Where the trial court denies a motion to reconsider that is

based on new matters, such as new arguments or legal theories that were not presented during the

course of the proceedings leading to the issuance of the challenged order, we apply an abuse of

discretion standard. Compton v. Country Mutual Insurance Co.,

(2008). We likewise employ an abuse of discretion standard when reviewing a trial court’s

decision to allow or deny a motion to amend pleadings. Clemons v. Mechanical Devices Co.,

(2002); see also Holzrichter v. Yorath,

(“The

decision to deny a motion for leave to amend a complaint is reviewed under the abuse of

discretion standard.”).

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¶ 35 In determining whether to allow a party to amend its pleading, a trial court should

generally consider “(1) whether the proposed amendment would cure the defective pleading; (2)

whether other parties would sustain prejudice or surprise by virtue of the proposed amendment;

(3) whether the proposed amendment is timely; and (4) whether previous opportunities to amend

the pleading could be identified.” Loyola Academy v. S&S Roof Maintenance, Inc.,

(1992).

¶ 36 Notably, however, the factors outlined above apply only to amendments proposed prior

to final judgment. Compton,

. After final judgment, a plaintiff has no

statutory right to amend a complaint and the court does not err by denying a motion for leave to

amend. Tomm’s Redemption, Inc. v. Hamer,

. This is because

section 2-616(a) of the Code provides that amendments may be allowed on just and reasonable

terms “ ‘[a]t any time before final judgment,’ ” but the Code does not contain a corresponding

provision requiring such latitude where a party seeks to amend its pleading after the court has

entered final judgment.

(quoting 735 ILCS 5/2-616(a) (West 2010)). Instead, after final

judgment, “a complaint may only be amended in order to conform the pleadings to the proofs.”

(citing 735 ILCS 5/2-616(c) (West 2010)). A complaint cannot be amended “to add new

claims and theories or to correct other deficiencies.”

¶ 37 Here, the trial court entered final judgment regarding FHP’s claims relating to

American’s duty to defend when it dismissed those claims with prejudice in August 2011. See

Hachem v. Chicago Title Insurance Co.,

(the court’s dismissal

of the plaintiffs’ complaint with prejudice constituted a final judgment). FHP first sought to

amend its complaint when it filed its amended motion to reconsider, after final judgment was

entered. Further, FHP did not propose any facts which would establish a viable cause of action

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and allow for such an amendment. Under these facts, the court did not err by denying FHP’s

amended motion to reconsider in which it sought to amend its complaint. 3 See Tomm’s

Redemption, Inc.,

; see also Hachem,

(the court did not abuse its discretion by denying the plaintiffs’ oral motion to amend their

complaint where the plaintiffs made their motion after the court dismissed their complaint and

the plaintiffs did not explain how they would cure the defective pleading or why they had not

sought leave to amend earlier).

¶ 38 B. Estoppel and the Mend the Hold Doctrine

¶ 39 FHP also argues that American is estopped from denying coverage under its “right to

defend” theory because American did not defend the underlying lawsuit under a reservation of

rights or file a declaratory judgment action. FHP contends our court’s decision in Employers

Reinsurance Corp. v. E. Miller Insurance Agency, Inc.,

(2002), supports a

finding of estoppel. In addition, FHP posits, the principles of the mend the hold doctrine apply to

American’s actions.

¶ 40 1. Estoppel

¶ 41 The doctrine of estoppel prohibits an insurer from simply denying coverage when a

complaint alleges facts potentially covered by the insurance policy. Employers Insurance of

Wausau v. Ehlco Liquidating Trust,

(1999). Instead, an insurer must seek a

declaratory judgment that the policy does not provide coverage or defend the suit under a

reservation of rights.

If an insurer fails to take either action and the court subsequently finds

the insurer has wrongfully denied coverage, the insurer may not assert policy defenses to avoid

3 We note that the trial court dismissed FHP’s amended motion to reconsider on the basis that FHP could not plead facts establishing there was a duty to defend and not on the basis that FHP’s motion to amend was untimely. However, as a court of review, we may affirm the trial court’s judgment on any basis appearing in the record. Vaughn v. City of Carbondale,

. 11 1-13-0291

coverage. Id. at 150-51. Estoppel does not apply, however, where an insurer had no duty to

defend. Bartkowiak v. Underwriters at Lloyd’s, London,

. “In

other words, the estoppel doctrine cannot create coverage where none existed in the first place.”

¶ 42 Thus, we turn first to whether the policy provided coverage. In construing an insurance

policy, our primary goal is to determine and enforce the parties’ intent, as expressed in the

policy. Crum & Forster Managers Corp. v. Resolution Trust Corp.,

(1993).

We construe the policy as a whole, “taking into account the type of insurance for which the

parties have contracted, the risks undertaken and purchased, the subject matter that is insured and

the purposes of the entire contract.”

Where terms of a policy are unambiguous, we will apply

them as written, affording them their plain and ordinary meaning.

On the other hand, if a

policy is ambiguous, we will liberally construe an insurer’s liability in favor of coverage.

Bartkowiak,

. A policy is ambiguous when it is open to more than

one reasonable interpretation.

However, “we will not strain to find ambiguity where the

policy contains none.”

¶ 43 FHP argues the policy terms were ambiguous and gave rise to a duty to defend.

Specifically, FHP asserts the SIR endorsement itself was ambiguous. Further, FHP posits, the

policy as a whole is ambiguous because the SIR endorsement conflicts with the AI-PI

endorsement.

¶ 44 The SIR endorsement provides as follows:

“We will pay on behalf of the Insured those sums in excess of the

‘Retained Limit’ that the Insured becomes legally obligated to pay

as damages because of ‘bodily injury’ or ‘property damage’ to

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which this insurance applies. We will have the right but not the

duty to defend any ‘suit’ seeking those damages. We may at our

discretion and expense, participate with you in the investigation of

any ‘occurrence’ and the defense or settlement of any claim or

‘suit’ that may result.”

Later, the SIR endorsement states that “[y]ou are responsible for the payment of” fees and costs,

and if American incurs an obligation under the policies to pay damages, “you will be responsible

for a percentage of the defense costs.” The policy defines “you” and “your” as the named

insured. Based on the SIR endorsement’s use of the word “you” in the last sentence of the

endorsement, FHP argues the entire SIR endorsement is applicable only to the named insured,

NES.

¶ 45 We are not persuaded by FHP’s argument. The beginning of the SIR endorsement plainly

states that American will pay on behalf of “the Insured” any sums above the retained limit that

“the Insured” is required to pay as “damages because of ‘bodily injury’ or ‘property damage.’ ”

The policy then goes on to state that American has “the right but not the duty to defend any ‘suit’

seeking those damages.” This portion of the SIR endorsement does not use the words “you” or

“your” or in any way limit itself to only the named insured. Although the SIR endorsement

subsequently states that American may participate with “you,” i.e., the named insured, in the

investigation of any occurrence and defense or settlement of any claim, we disagree that the later

portion of the endorsement shows the entire endorsement pertained only to the named insured.

See Sherwood Construction Co. v. American Home Assurance Co., No. CIV-09-1395-HE,

, at *4-5 (W.D. Okla. Dec. 1, 2011) (rejecting the insured’s argument that the use of

the word “you” in the last sentence of a paragraph, which contained the same language as the

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SIR endorsement in this case, meant the entire paragraph applied only to the named insured

because the “operative sentence does not contain the word ‘you’ and is not limited to the named

insured”) 4

¶ 46 The holding in American National Fire Insurance Co. v. National Union Fire Insurance

Co. of Pittsburgh, Pa,

(2003), does not convince us otherwise. There, one

section of a notice requirement in an insurance policy provided that “[y]ou must see to it that we

are notified as soon as practicable of an ‘occurrence’ or an offense which may result in a claim.”

(Internal quotation marks omitted.)

. The next section of the notice requirement

provided that “[i]f a claim is made or ‘suit’ is brought against any insured, you must” take certain

actions. (Internal quotation marks omitted.)

The policy defined “you” and “your” as the

named insured or any person qualifying as a named insured.

. The American National

court concluded the additional insured could not have violated the aforementioned sections of the

notice requirement because those sections applied to the named insured.

The court also found

the policy’s self-insured retention endorsement applied only to the named insured, where the

endorsement stated “[y]ou will continue to be responsible for the payment of the Retention

Amount.” (Internal quotation marks omitted.)

. However, the court found the additional

insured did violate another section of the policy, which applied to “[y]ou and any other involved

insured.” (Internal quotation marks omitted.)

.

¶ 47 In American National, the portions of the policy which the court found did not apply to

the additional insured explicitly applied only to “you,” i.e., the named insured. By contrast, the

disputed portion of the SIR endorsement in this case–the portion stating American has a right but

4 We recognize that unpublished federal decisions are not binding or precedential on our court. King’s Health Spa, Inc. v. Village of Downers Grove,

. However, nothing prevents us from using the same reasoning and logic that was used in an unpublished federal decision.

14 1-13-0291

not a duty to defend–is not limited to “you.” Instead, it states, simply, that American has no duty

to defend. It is only the next portion of the SIR endorsement paragraph, relating to American’s

participation in the investigation of any occurrence or defense or settlement of any claim, that is

limited to “you.” Moreover, the fact that the policy did not include language similar to the “[y]ou

and any other involved insured” language in American National is not dispositive. The SIR

endorsement stated “[w]e will have the right but not the duty to defend any ‘suit’ ” seeking

certain damages. The endorsement was in no way limited to one type of insured, and we will not

read such a limitation into the policy where it is not expressly stated.

¶ 48 FHP’s argument that the AI-PI endorsement creates ambiguity is equally unavailing. The

AI-PI endorsement provides that coverage under the policy for an additional insured “will apply

as primary insurance where required by contract.” FHP notes that the subcontract between FHP

and NES required NES to name FHP as an additional insured on its commercial general liability

policy. FHP posits that the use of the term “primary insurance” indicates a duty to defend and

pay defense costs immediately. Thus, FHP maintains that if American had no duty to defend,

then the policy was not primary as to FHP, rendering the use of the term “primary” ambiguous.

¶ 49 First, we note, the AI-PI endorsement modifies the “Other Insurance” section of the

contract. The “Other Insurance” section appears under the “Conditions” portion of the policy, not

the “Coverages” section. The “Other Insurance” clause sets out American’s obligations in the

event that “other valid and collectible insurance is available to the insured for a loss we cover

under Coverages A or B of this Coverage Part.” (Emphasis added.) By its own terms, then, the

“Other Insurance” clause does not affirmatively grant coverage to an insured. Instead, it provides

a method of apportionment among other insurance providers when coverage is triggered under

Coverages A or B. It thus follows that if American had no duty to provide coverage for FHP

15 1-13-0291

under the policy, the “Other Insurance” clause and the AI-PI endorsement modifying the “Other

Insurance” clause were not triggered. See John Burns Construction Co. v. Indiana Insurance

Co.,

(2000) (“the purpose of an ‘other insurance’ clause is not to trigger

coverage but to provide a method of apportioning coverage that would be triggered otherwise”);

see also Zurich Insurance Co. v. Raymark Industries, Inc.,

(1986)

(noting that an “other insurance” clause, which applied where an insured had “other insurance

against a loss covered by this policy,” applied only when a preliminary determination was made

that a “loss” was covered by the policy (internal quotation marks omitted)).

¶ 50 Furthermore, even if the AI-PI endorsement could somehow be construed as

affirmatively granting coverage, FHP’s cited authority does not support its argument that

“primary insurance” necessarily means an insurer has a duty to defend. In Royal Insurance Co. v.

Process Design Associates, Inc.,

(1991), our court discussed the nature

of primary insurance in the context of distinguishing primary insurance from excess insurance,

stating as follows: “Primary insurance is coverage whereby liability attaches immediately upon

the happening of the occurrence that gives rise to liability; excess insurance provides coverage

whereby liability attaches only after a predetermined amount of primary coverage has been

exhausted.”

Likewise, in Home Indemnity Co. v. General Accident Insurance Co. of America,

(1991), the appellate court discussed the differences between primary

and excess insurance, explaining that “the protections under the excess policy do not begin until

those of the primary policy end” and “[t]hus, a primary insurer has the primary duty to defend

and pay defense costs.” Neither Royal Insurance Co. nor Home Indemnity Co. stand for the

proposition that a primary insurance policy necessarily means the insurer has a duty to defend.

Instead, the statements in both Royal Insurance Co. and Home Indemnity Co. relate to the timing

16 1-13-0291

of when a duty to defend arises in a primary policy versus an excess policy. Our supreme court

has made clear that an insurer’s duty to defend “arises from the undertaking to defend as stated

in the contract of insurance.” (Emphasis added.) Zurich Insurance Co. v. Raymark Industries,

Inc.,

(1987); see also Employers Reinsurance Corp.,

(“[c]ertainly, this court has recognized the ability of insurance companies to reserve a duty to

indemnify their clients as opposed to a duty to defend them”). Here, the language of the

insurance policy did not set out a duty to defend. 5

¶ 51 FHP’s reliance on Employers Reinsurance Corp. does not convince us that estoppel

applies. There, the insurer filed a declaratory judgment action to determine its obligations to

defend or indemnify its insureds. Employers Reinsurance Corp.,

. The

insurer did not raise its claim that it had a right but not a duty to defend until it filed its response

to a motion for judgment on the pleadings.

. On appeal, our court stated that while it

was “possible that [the insurer] never explicitly contracted to have a duty to defend its insureds

and only reserved the right to defend them,” the insurer never raised that issue in its declaratory

judgment action pleadings.

. The court agreed that the insurer was required to include

its “right to defend” coverage defense in its complaint, and the insurer’s failure to do so was

“fatal to that claim.”

¶ 52 Notably, the insurer in Employers Reinsurance Corp. failed to include its “right to

defend” argument in its complaint for declaratory judgment, raising it for the first time in its

response to a motion for judgment on the pleadings. Here, however, American raised its “right to

defend” argument in the declaratory judgment proceedings at the time it filed its motion to

5 Based on our determination, we need not address American’s related argument, that the policy did not provide coverage to FHP because FHP was a third-party beneficiary and had no greater rights than NES, to whom FHP admitted the SIR endorsement applied. 17 1-13-0291

dismiss FHP’s declaratory judgment complaint. Accordingly, Employers Reinsurance Corp. does

not aid American.

¶ 53 FHP also argues that the doctrine of “unclean hands” precludes American from taking

advantage of its own wrongdoing, i.e., its failure to comply with Illinois law, and then

distinguishing itself from all other insurance companies that followed Illinois law. However, the

doctrine of “unclean hands” does not apply unless a party’s misconduct rises “to the level of

fraud or bad faith.” Gambino v. Boulevard Mortgage Corp.,

(2009). Here,

FHP has not alleged or shown that American engaged in fraud or acted in bad faith.

¶ 54 2. Mend the Hold Doctrine

¶ 55 We further reject FHP’s assertion that American was prohibited from setting forth its

“right but not a duty to defend” argument based on the mend the hold doctrine. Traditionally, the

mend the hold doctrine has been explained 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,

(2007) (quoting County of Schuyler v. Missouri Bridge & Iron Co.,

(1912)).

In the insurance context, courts have precluded insurers from denying a claim on one basis and

then changing its basis for denial during litigation. Liberty Mutual Insurance Co. v. American

Home Assurance Co.,

(2006). However, our court has refused to apply

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the mend the hold doctrine “in the absence of unfair surprise or arbitrariness.” Liberty Mutual

Insurance Co.,

; see also Trossman,

(the

counterplaintiffs could not prevail under the doctrine of mend the hold where they failed to show

detriment, unfair surprise, or prejudice).

¶ 56 Here, FHP argues it was prejudiced by American’s actions because it was forced to file

this declaratory judgment action and too much time had passed for it to tender its claim to

another insurer. It further argues it was prejudiced because when it drafted its complaint for

declaratory judgment, it framed its allegations around the reasons American set out in its January

2009 denial of coverage letter. FHP argues the trial court then dismissed its claims with prejudice

because of American’s new “right but not a duty to defend” argument without allowing FHP to

add allegations relative to that argument.

¶ 57 FHP’s claims of prejudice are meritless. First, as American notes, whether American set

forth its duty to defend argument or another basis for denial in its denial letter, FHP was on

notice that American was denying coverage and would not defend FHP. No matter the rationale

American provided, FHP’s recourse would have been to sue for a declaration of coverage, which

is exactly what it did. Further, FHP was on notice of American’s denial and could have then

tendered its claim to another insurer. Moreover, the trial court’s refusal to allow FHP to amend

its complaint was not based on any actions taken by American. Instead, it was based on the

court’s determination that FHP could not set out facts showing American had a duty to defend.

FHP does not explain how the court would have ruled any differently if American had set out its

“right but not a duty to defend” claim in its denial of coverage letter. In sum, FHP has failed to

show it suffered any prejudice from American’s actions.

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¶ 58 FHP’s reliance on Coulter v. American Employer’s Insurance Co.,

(1948), is misplaced. In Jones v. Universal Casualty Co.,

(1994), our

court stated that “if Coulter is to be read as a pronouncement that in any case where an insurer

refuses coverage on one ground, it waives the right, or is estopped, to deny converage on another

ground, we must respectfully disagree with the Fourth District’s statement in Coulter. *** We

believe that the better rule is that insureds must show that they relied to their detriment upon the

insurer’s failure to assert a particular defense.”

As we have previously noted, more recent

cases explicitly recognize that the mend the hold doctrine requires a showing of unfair surprise

or detriment. See Liberty Mutual Insurance Co.,

; Trossman,

. FHP also relies on the Cook County case that it attached to its amended motion to

reconsider in which the court found the insurer waived its claim that it had no duty to defend by

failing to raise that claim until it filed its motion to dismiss. The court’s decision in that case

notwithstanding, on the facts in this case, we conclude the mend the hold doctrine does not

apply.

¶ 59 III. CONCLUSION

¶ 60 For the reasons stated, we affirm the trial court’s judgment.

¶ 61 Affirmed.

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