IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 97-20924
THE TRAVELERS INDEMNITY COMPANY;
THE TRAVELERS INDEMNITY COMPANY
OF CONNECTICUT,
Plaintiffs-Counter Defendants-Appellees,
versus
CITGO PETROLEUM CORP.; CITGO
REFINING AND CHEMICALS, INC.,
Defendants-Counter Claimants-Appellants.
Appeal from the United States District Court for the
Southern District of Texas, Houston
January 29, 1999
Before GARWOOD and HIGGINBOTHAM, Circuit Judges.1
GARWOOD, Circuit Judge:
Plaintiffs-appellees Travelers Indemnity Company and Travelers
Indemnity Company of Connecticut (collectively, Travelers) brought
in the district court below this diversity action for declaratory
judgment seeking a determination of its duty to defend and
1
Chief Judge King was a member of the oral argument panel to
which this case was assigned, but subsequently recused herself
prior to our decision herein, and the case is consequently decided
by a quorum. 18 U.S.C. § 46(d).
indemnify defendants-appellants Citgo Petroleum Corporation and
Citgo Refining & Chemicals, Inc. (collectively, Citgo) under three
insurance policies. Citgo counterclaimed for breach of the
insurance contracts and violation of Texas insurance law. The
district court granted summary judgment in favor of Travelers.
Citgo appeals. We affirm.
Facts and Proceedings Below
Travelers issued three insurance policies to Wright Petroleum
(Wright): a business auto policy, a catastrophe umbrella policy,
and a comprehensive general liability policy (CGL policy). Citgo,
which had a form of franchise agreement with Wright (a wholesaler
and retailer of petroleum products), was made an additional insured
as to each of these policies by valid endorsement thereto.2 The
business auto and umbrella policies each contained provisions
allowing Travelers to settle claims at its discretion, and stated
that Travelers’ duties under the policy would terminate when the
applicable policy limits had been exhausted. The language used in
the business auto policy was as follows: “We may investigate or
settle any claim or suit as we consider appropriate. Our duty to
defend or settle ends when the Liability coverage limit of
insurance has been exhausted by payments of judgments or
2
Travelers claims that Citgo Refining and Chemicals, Inc. was
not properly covered under the CGL policy, since the endorsement
for this policy named only “CITGO.” Due to our resolution of the
other issues in the case, we find it unnecessary to examine the
scope of the endorsement.
2
settlements.” The umbrella policy contains a similarly worded
provision.
The underlying lawsuit that created the current dispute
originated in a collision between one of Wright’s tanker trucks
and an automobile driven by Richard Friedrichs that occurred on
October 10, 1992, in McAllen, Texas, and as a result of which both
Friedrichs and the tanker truck driver, a Wright employee, were
killed. At the time of the accident, the truck was carrying
petroleum products for Citgo as well as several other oil companies
and allegedly ran a red light at the intersection where the
collision occurred. Later the same year, Friedrichs’ survivors
sued Wright in the 92nd Judicial District Court of Hidalgo County,
Texas. Citgo was not then named as a defendant in the suit.
Travelers, in accordance with the requirements of the business auto
and catastrophe umbrella policy, conducted Wright’s defense. On
August 30, 1993, the plaintiffs presented a settlement demand. One
day before expiration of the plaintiffs’ offer, settlement for $1.5
million was agreed to. A disagreement later arose as to the
wording of the release. On September 16, 1994, a release was
executed releasing Wright, the estate of the tanker truck driver,
and all others who were then named defendants in the lawsuit, in
exchange for Travelers’ tendering the full policy limits——$1.5
million dollars——of both the auto and the umbrella policies to
plaintiffs. Citgo, which at that time was not and had never been
named a defendant in the lawsuit and as to which plaintiffs had not
3
made any offer to settle, was not included in the release. It can
be inferred that at least several months before September 1994,
Travelers was aware that plaintiffs insisted on reserving their
right to sue Citgo.
On September 29, 1994, the plaintiffs in the underlying suit
amended their complaint to name as defendants Citgo and several
other oil companies, charging them with negligence in continuing to
deal with Wright when they knew or should have known of its
inadequate safety standards. Citgo demanded a defense and
indemnity from Travelers in the amended action. Travelers refused,
citing the exhaustion of the policy limits of the business auto and
umbrella policies and claiming that coverage under the CGL policy
was barred by an exclusion regarding the operation of automobiles.
Travelers brought this diversity based declaratory judgment
action in district court below seeking a determination that it had
no duty to Citgo. Citgo counterclaimed for a declaration that
Travelers was bound to defend and indemnify it under the policies
and also claimed breach of contract for their failure to do so,
fraudulent misrepresentation and unfair or deceptive trade
practices under Texas law, breach of the duty of good faith and
fair dealing, and negligence. Travelers moved for summary judgment
and both parties requested that attorneys’ fees be awarded to the
prevailing party.
The district court granted Travelers’ motion for summary
judgment and awarded it attorneys’ fees. Citgo appeals.
4
Discussion
I. Settlement Under the Auto and Umbrella Policies.
Central to all of Citgo’s contentions regarding the auto and
umbrella policies is its claim that under Texas law an insurer
cannot favor one insured over another in obtaining settlements. By
settling on behalf of Wright, Travelers favored Wright over Citgo
and thus allegedly breached this duty. We conclude that this
argument is without merit. Under Texas law, an insurer defending
its insured on a covered claim owes that insured a tort law duty to
accept a reasonable settlement offer within policy limits rather
than unreasonably risk an adverse judgment substantially over the
policy limits. Texas courts have also held that an insurer is free
to favor a claim by one claimant over a claim by another claimant
in pursuit of this duty. We find that the logic of these positions
requires that an insurer be free to settle suits against one of its
insureds without being hindered by potential liability to co-
insured parties who have not yet been sued. Since we reject
Citgo’s invitation to create a special duty for insurers when
multiple parties are covered under the policy, we also reject its
contention that settling a claim in accordance with Texas law is a
violation of the insurer’s independent contractual duty to perform
reasonably.
A. The Stowers duty and multiple insured parties.
In Texas, the basic tort duty for insurers facing settlement
5
offers is the Stowers duty. See G.A. Stowers Furniture Co. V.
American Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm’n App. 1929,
holding approved). Under Stowers, an insurer, defending an insured
in a lawsuit on a covered claim, when faced with a settlement offer
within policy limits, must accept the offer on behalf of its
insured when an ordinarily prudent insurer would do so in light of
the reasonably apparent likelihood and degree of that insured’s
potential exposure to a valid judgment in the suit in excess of
policy limits. American Physicians Insurance Exchange v. Garcia,
876 S.W.2d 842, 848-49 (Tex. 1994). In this context, the Stowers
duty is the only tort duty the insurer must comply with; the duty
of good faith in handling insurance claims does not apply. See
Maryland Insurance Co. v. Head Industrial Coatings and Services,
Inc., 938 S.W.2d 27, 28 (Tex. 1996).
The Stowers duty creates difficulties, however, when multiple
parties and other potential claims in excess of policy limits are
involved. In such cases, fulfillment of the Stowers duty will
reduce the funds available to satisfy the claims of other
plaintiffs or the defense of other insured parties. However, if
insurers are subject to both liability for failure to settle under
Stowers and liability for disparate treatment of nonsettling
insureds, insurers would find the policy limits they carefully
bargained for of little utility. Under Stowers, they would be
obliged to settle up to the limit of a policy or face a lawsuit by
6
the covered insured as to whom the settlement within policy limits
was offered. But if they in fact settled, they would leave
themselves open to claims by the insureds excluded from the
settlement, and any additional recovery would be in excess of the
limits they had originally relied on.
The Texas Supreme Court has definitively resolved this dilemma
in regards to claims by multiple plaintiffs. An insurer is allowed
to fulfill its Stowers duty to its insured by settling with one
claimant, even though the result is to leave the insured exposed to
another claim. See Texas Farmers Insurance Co. v. Soriano, 881
S.W.2d 312, 315 (Tex. 1994). In Soriano, an insurer opted to
settle a relatively minor claim for twenty-five percent of the
policy limit when a formal demand was served, despite indications
that a settlement with a significantly larger claimant at the
policy limit might have been possible. The court held that an
insurer could only be liable for settling a claim if (a) they had
previously rejected a valid settlement offer within policy limits
from the other claimant or (b) the settlement they reached was
unreasonable “considering solely the merits of the” settled “claim
and the potential liability of its insured on” that “claim.” Id.
at 316 (emphasis added). Neither condition was met, so the insurer
was entitled to settle the initial claim. Once the first
settlement was reached, the insurer had no Stowers duty to settle,
since the major claimant did not present a settlement offer within
7
the remaining policy limit.
Citgo attempts to distinguish Soriano by pointing out that an
insurer owes a higher duty to its insured than it does to
claimants. Thus, Citgo argues, while the lesser “duty” (if any) to
claimants may allow an insurer to choose which claimant to settle
with, a similar discrimination is not permitted when the interests
of multiple insureds are at stake. While this may be correct as
far as it goes, and Soriano is not directly applicable, we find the
case persuasive in this instance because the party complaining in
Soriano was not the second claimant——it was the insured. The
insured argued that its insurer had settled the “wrong” claim,
exposing him to personal liability in the more dangerous suit. Id
at 314. Soriano, like the case before us, involved the insurer’s
duty to its insured.
Citgo next attempts to argue that the reference to reasonable
settlement in Soriano allows a court to examine whether settlement
was proper in light of all potential claims against all the insured
parties. However, as noted, the Soriano court made it clear that
reasonableness would only be measured by looking at the initial
demand for settlement in isolation. Id. at 316 (The test is
whether “a reasonably prudent insurer would not have settled the
Lopez claim when considering solely the merits of the Lopez claim
and the potential liability of its insured on the claim.”). In
Soriano, evidence that the larger claimant was willing to settle
8
within policy limits (but had not then made an offer) was deemed
irrelevant in the absence of evidence that the settlement reached
with the other claimant, considered alone, was unreasonable. Id.
at 315-16. Citgo does not assert on appeal that Travelers’
settlement on behalf of Wright was unreasonable—or that there is a
fact issue in that regard—considering solely the merits of the
settled claim and Wright’s potential liability on that claim.
Two cases construing Texas law have addressed the resolution
of the problem when multiple insureds, rather than multiple
claimants, are involved. Like Soriano, they have stressed that an
insurer is free to make a reasonable settlement of the claim before
it without considering other possible claims affecting the same
policy limits. In American States Insurance Co. Of Texas v.
Arnold, a Texas court confronted a situation in which an insurer,
having settled up to its policy limits and obtained a release on
behalf of its named insured, refused to defend an additional
insured in a separate action arising out of the same accident. 930
S.W.2d 196 (Tex.App.--Dallas 1996, writ denied) (Hankinson, J.).
The excess insurer of the additional insured conducted the defense
and sued the primary insurer to recover its costs. The court
reversed summary judgment in favor of the excess insurer and
rendered judgment for the original insurer, finding it breached no
duty in obtaining the settlement, and its duties to the additional
insured terminated when the settlement exhausted the policy limits.
9
“We conclude that, under the unambiguous policy language and
circumstances of this particular case, American States’s settlement
of Cassady’s personal injury claim against Mayes’s estate for its
bodily injury policy limits terminated any obligation to defend
Arnold, as an additional insured, in the Cassady lawsuit.” Id. at
202-03.
This Court has also to some extent addressed the question in
a case involving the interpretation of an insurance policy under
Texas law. See Vitek, Inc. v. Floyd, 51 F.3d 530 (5th Cir. 1995).
In Vitek, the bankruptcy court had allowed a trustee to settle on
behalf of the estate with the bankrupt’s liability insurers, who
pledged to remit the remainder of their policy limits to the estate
for the benefit of the creditors. The bankruptcy court aided the
settlement efforts by issuing injunctive orders protecting the
insurers respecting other suits. A co-insured party objected,
claiming that it would be barred by the settlement from suing the
insurers for its policy rights, while being left exposed to suits.
The district court blocked the settlement unless the co-insured
party was extended protection under the injunction.
While the context of the case removed the need to discuss the
specifics of Stowers and the exhaustion of policy limits, the
insurance portion of Vitek dealt with the issue before this Court.
The insurers in Vitek chose to craft a settlement that benefitted
one of its insureds——exhausting their policy limits and in the
10
process leaving an exposed co-insured party without coverage under
the policy. The district court required the injunction to be
extended to the co-insured because it adopted the position Citgo
urges, that an insurer cannot favor one insured over another. We
rejected this contention, finding that a insurer was free to make
such a settlement, although we held open the possibility that a co-
insured party might have an action against the insurer for breach
of good faith under these circumstances. Id. at 537-38. The Texas
Supreme Court has since indicated that in such a context an action
for breach of good faith against the insurer cannot be maintained.
See Maryland Insurance, 938 S.W.2d at 28.
Citgo argues that Vitek and Arnold insufficiently considered
contrary authority. While several out-of-state courts have found
that there is a general duty not to favor one insured over another,
the weight of contemporary authority is in line with Arnold. Citgo
contends that Smoral v. Hanover Insurance Co. is the “leading case”
supporting its position. 322 NYS2d 12 (N.Y.App. [1st Dept.] 1971).
In Vitek, we specifically found that Smoral could only be read to
permit actions for breach of the duty of good faith, which has
since been barred in Texas by Maryland Insurance. See Vitek, 51
F.3d at 536-37. In any case, Smoral has not been followed outside
of New York and the California Courts of Appeals.3 Every other
3
Three California courts have adopted an interpretation of
Smoral akin to that urged by Citgo. See Shell Oil Co. v. National
Union Fire Ins. Co. Of Pittsburgh, Pa., 44 Cal. App. 4th 1633, 1645
11
court to consider the issue has rejected its application. See
Millers Mutual Ins. Association of Illinois v. Shell Oil Co., 959
S.W.2d 864, 869-871 (Mo. App. 1997) (Collecting cases and
concluding that “[t]hese parties contracted for this insurance
policy. The clause in question is unambiguous. . . . Had Shell
desired additional language providing for a continuing duty to
defend upon settlement for the policy limits on behalf of one
insured, it could have required [the named insured] to obtain a
different policy.”); Bohn v. Sentry Ins. Co., 681 F.Supp. 357, 365
(E.D. La. 1988), aff’d 868 F.2d 1269 (5th Cir. 1989); Underwriters
Guarantee Ins. Co. v. Nationwide Mut. Fire Ins. Co., 578 So.2d 34,
35 (Fla. App. 1991); Country Mutual Ins. Co. v. Anderson, 628
N.E.2d 499, 503-504 (Ill. App. 1993); Pekin Ins. Co. v. Home Ins.
Co., 479 N.E.2d 1078, 1081 (Ill. App. 1985); Anglo-American Ins.
Co. v. Molin, 670 A.2d 194, 199 (Pa. Cmwlth. 1995).
Citgo also maintains that good policy requires that we go
against Arnold and read our prior decision in Vitek narrowly. The
Soriano court maintained that its rule would encourage settlements.
Soriano, 881 S.W.2d at 315. Citgo argues that when multiple
(Cal.App., 2nd Dist. [Div.2] 1996); Lehto v. Allstate Ins. Co., 31
Cal. App. 4th 60 (Cal. App., 2d Dist. [Div.5] 1994); Strauss v.
Farmers Ins. Exch., 26 Cal. App. 4th 1017 (Cal. App., 1st Dist.
[Div.4] 1994). Citgo’s reliance on a Missouri case is misplaced——it
dealt with apportionment of insurance proceeds after judgment
against the insureds, not settlement. See Countryman v. Seymour R-
II School Dist., 823 S.W.2d 515 (Mo. App. 1992).
12
insured parties rather than multiple claimants are involved, the
Soriano approach will discourage settlement. This, Citgo asserts,
is because the partial settlements obtained under an Arnold rule do
not prevent continued litigation against the exposed co-insured,
with the plaintiff now bankrolled by the proceeds of the
settlement. Thus, according to Citgo, the encouragement of partial
settlement by Arnold’s rule discourages true, global settlement
that would keep a case out of court entirely. It is true that an
Arnold rule may encourage a certain level of strategic behavior on
the part of plaintiffs. It would encourage plaintiffs to first sue
defendants with inadequate resources, or defendants that had not
only a large potential exposure but also a low probability of being
found ultimately liable.
However, the Soriano court was also keenly sensitive to the
plight of an insurer presented with a valid claim for settlement
under Stowers. “Had Farmers opted not to settle . . . but, in the
face of that demand, to renew its offer [to the party with the
larger claim] instead, Farmers would surely face questions about
liability under Stowers for failing to settle [with the other,
lesser claimant].” Soriano, 881 S.W.2d at 315. Citgo’s position
in essence means that fulfilling the Stowers duty by exhausting
policy limits (or reducing them to a level inadequate for further
settlement) triggers potential liability to any other insured that
is not included in the settlement. Thus under Citgo’s proposal,
13
an insurer faced with liabilities of multiple insured parties that
exceed its policy limits would face an excess liability threat
regardless of whether it attempted to create a comprehensive
settlement or acted as Travelers did here.4 Allowing the insurer
to focus on only the claim actually before it, and rely on the
bright-line test of Soriano, avoids this dilemma.
Moreover, while we recognize that the Travelers’ position may
lead to some strategic behavior on the part of plaintiffs, we are
skeptical that the rule proposed by Citgo would better serve the
policy goal of encouraging settlements in these cases. In essence,
Citgo is asking that settlement holdout power be given to each
insured party, regardless of whether or not it has actually been
sued.5 The difficulty with this position is readily apparent when
one considers the type of situations in which Stowers intersects
4
Insurers faced with the rule Citgo proposes would either
charge an extra premium to cover the enhanced risk of excess
liability whenever multiple insureds are involved or avoid such
endorsements entirely. This result may not be in the best interest
of insured parties as a class, and in any case does nothing to
remove the burden on insurers who have negotiated the terms of
policies in reliance on the effectiveness of policy limits.
5
If Citgo’s rule were adopted, the only rational course for
insurers would be to formally or informally make all their insureds
parties to any settlement negotiations. No insurer would settle at
its policy limits with potential excess liability to a disgruntled
co-insured lurking in the background. And because the proposed “no
insurer may favor one insured over another insured” rule would seem
to come into play whenever any party received a larger percentage
of the policy coverage than another, in practice any settlement
would have to be backed by an agreement amongst all the insureds
regarding liability or a judicial allocation.
14
with multiple insured policies to produce the dilemma seen here.
A valid Stowers demand in the context of multiple insureds
requires that the settlement offer be reasonable and the insured
party reasonably fear liability over the policy limit. In other
words, for the issue to come up at all there usually has to be an
objective possibility that the liability of at least one of the
insureds would ultimately exceed the policy limits.
It is almost certain, then, that no happy compromise will
emerge that can settle the case for all of the insureds within the
policy limits. Whatever litigation an Arnold rule produces will
not come at the expense of readily available comprehensive
settlements. The mandatory interjection of new parties and new
issues into settlements that Citgo’s rule would likely produce
seems calculated to increase the costs of negotiations and decrease
the likelihood of their ultimate success.6
At all events, we are unconvinced that Citgo’s arguments
concerning the policy implications of Arnold justify our calling
into question the weight of persuasive Texas precedent. We decline
to carve out an exception to Soriano’s general rule when an insurer
is faced with hypothetical claims against a co-insured party,
6
The public interest in abetting settlement is solely concerned
with the saving of litigation costs that it produces. Garcia, 876
S.W.2d at 851. If holdout problems under Citgo’s suggested rule
produce some situations where the entire dispute must be taken to
court by all of the parties, this increase in litigation costs may
outweigh the price of an Arnold rule even if the latter produces a
larger number of cases that go to trial.
15
rather than a hypothetical settlement offer from a another claimant
against the same insured party. Accordingly, we follow Arnold and
hold that under Texas law an insurer is not subject to liability
for proceeding, on behalf of a sued insured, with a reasonable
settlement, as defined in Soriano at 316, once a settlement demand
is made, even if the settlement eliminates (or reduces to a level
insufficient for further settlement) coverage for a co-insured as
to whom no Stowers demand has been made.7
B. Reasonable performance of the contract
Nor do we find Citgo’s argument in the alternative that
Travelers did not act reasonably in the face of the settlement
demand persuasive. As noted, Citgo does not contend that
Travelers’ settlement on behalf of Wright was unreasonable under
the Soriano test, namely “considering solely the merits of the”
plaintiffs’ claims against Wright “and the potential liability of”
Wright on those claims. Id. at 316. Further, Citgo now concedes
that there is no tort duty of good faith and fair dealing in a
third party claimant cases. See Maryland Insurance, 938 S.W.2d at
29. While Citgo mentions that Texas insurance statutes may create
an independent duty to act reasonably, it has not directed us to
any relevant statute. However, Citgo claims that there is an
independent contractual duty to act reasonably in performing the
7
We do not address the duties of an insured faced with multiple
and concurrent outstanding separate Stowers demands as to different
insureds where the demands in total exceed the policy limits.
16
contract. The decision to exhaust the policy limits by settling on
behalf of Wright is claimed to have violated that duty. Citgo also
complains that Travelers acted unreasonably by ignoring the notice
provisions of the contract, not investigating plaintiffs’
intentions in regard to Citgo, and representing Wright in a
separate action that Citgo filed against Wright following the
settlement.
Travelers’ argument that it acted reasonably in performing the
contract is straightforward. Under Soriano and the explicit
language of the policy, Travelers had a right to settle when it was
presented with a demand within its policy limits. Indeed,
Travelers apparently had a Stowers duty to Wright to settle as it
did; Citgo does not contend to the contrary. Further, under Texas
law, an insurer’s duty to defend an insured is only triggered by
the actual service of process upon its insured and its relay to the
insurer. See, e.g., Members Ins. Co. v. Branscum, 803 S.W.2d 462,
466-67 (Tex.App.--Dallas 1991, no writ). At the time of the
settlement, this duty on Travelers’ part had arisen as to Wright,
a defendant in the lawsuit, but not as to Citgo, which had not then
been sued. However, Citgo contends that the duty to defend and
the duty to indemnify are separate, and the facts surrounding the
case could trigger the latter, even though the duty to defend Citgo
was not yet implicated. This is incorrect. While a party may have
a duty to defend but ultimately determine there is no duty to
17
indemnify, without a predicate triggering of the duty to defend,
indemnification does not arise. See Farmers Texas County Mutual
Insurance Co. v. Griffin, 955 S.W.2d 81, 82-84 (Tex.1997). Once
this settlement had exhausted the policy limits, the provisions of
the policy terminated Travelers’ duties under the contract,
including its duties to Citgo as a co-insured.8 Since Travelers
was entitled—indeed apparently required—to settle the initial claim
against its insured, and since Citgo has not alleged that the
settlement, standing alone, was unreasonable, we find that the
decision to settle on behalf of Wright constituted reasonable
performance of the contract as a matter of law.
In light of the inevitability of settlement given the choice
of the plaintiff in the underlying suit to defer suit against Citgo
and our interpretation of the Soriano rights in this situation, we
find that any deficiency in the notice given to Citgo or the
investigation done by Travelers was harmless. Even if notice had
been given and the intention of the plaintiffs in the underlying
suit were clear, Citgo would have found invocation of the policy
impossible prior to its exhaustion and termination. The filing of
one motion on behalf of Wright in its post-settlement dispute with
Citgo by a lawyer furnished Wright by Travelers was similarly
8
The relevant policy language from the auto policy provides:
“We may investigate or settle any claim or suit as we consider
appropriate. Our duty to defend or settle ends when the Liability
coverage limit of insurance has been exhausted by payments of
judgments or settlements.”
18
harmless. At that point, Travelers had exhausted the policy limit
and had no obligation to either Citgo or Wright. That the lawyer
Travelers furnished Wright briefly continued to represent its
former insured Wright and thereby came into conflict with its
former insured Citgo is not shown to have caused any harm to Citgo
as a result of any conflict of interest which might conceivably be
involved in such a situation.
II. Comprehensive General Liability Policy
Citgo also challenges the district court’s finding that the
accident was not covered under its Comprehensive General Liability
policy. Resolution of this issue hinges on the interpretation of
the exclusion clauses of that policy. Under Texas law, an
insurance contract will be not be construed neutrally unless it is
susceptible of only one reasonable construction. If multiple
interpretations are reasonable, the court must construe the
contract against the insurer, and this applies with special force
when exceptions to liability are examined. See Western Heritage
Ins. Co. v. Magic Years Learning Centers and Child Care, Inc., 45
F.3d 85, 88 (5th Cir. 1995) (Texas law).
The district court found Citgo’s recourse to the CGL policy
was barred by the policy’s auto exclusion——which is defined to
include the truck involved in the accident.9 The exclusionary
9
The policy definitions clearly provide that the truck involved
in the accident qualifies as an “auto” for the purposes of this
clause, and Citgo does not contest this.
19
clause reads:
“This insurance does not apply to ‘bodily injury’ or
‘property damage’ arising out of the ownership,
maintenance, use or entrustment to others of any
aircraft, ‘auto’ or watercraft owned or operated by or
rented or loaned to any insured. Use includes operation
and ‘loading or unloading.’”
The initial response to Citgo’s challenge to this
determination is to ask what an auto exclusion can possibly be for,
if it is not applicable to a truck running a red light, crushing a
car, and killing its occupant, as the underlying plaintiffs
consistently alleged was the cause of the accident and Friedrichs’
death in their complaints, both as against Wright and subsequently
as against Citgo.
The policies that Citgo and Travelers bargained for here were
interlocked and mutually exclusive. The applicable language in the
business auto policy providing its coverage is virtually identical
to the language of the CGL excluding coverage.10 Some accidents
would be covered by the auto policy, others by the CGL. A single
accident could not be covered by both. While we recognize that
10
The business auto policy provides for coverage of suits for
bodily injury or property damage “caused by an accident and arising
from the ownership, maintenance or use of a covered auto.” For
liability purposes, “covered auto” is stated by the business auto
policy to include all vehicles owned by the named insured. The
endorsement that included Citgo defined Citgo as an insured “but
only for his, her, or its liability because of acts or omissions of
an ‘insured.’” Wright was the named insured, so Citgo would thus be
covered under the business auto policy if it became liable for
anything arising from the ownership, maintenance, or use of an auto
owned by Wright. This coverage language in the business auto
policy essentially tracks the exclusionary clause of the CGL
policy.
20
parties are allowed to make arguments in the alternative, no
one——least of all Citgo, if our resolution of Travelers’ duties
under the auto policy had been otherwise——would seriously argue that
Citgo is not covered under the auto liability policy. Yet Citgo
strenuously argues that it also is entitled to CGL coverage and the
auto exclusion in the CGL policy does not apply.
Citgo argues for the first time on appeal that the
severability clause in the CGL policy precludes its being excluded
from coverage on the basis of the acts of another insured. We find
that the circumstances of this case do not allow an exception to
the general rule that we will not examine untimely arguments and
deem this contention waived. See Atlantic Mut. Ins. v. Truck
Insurance Exchange, 797 F.2d 1288, 1293 (5th Cir. 1986) (legal
theory relying on exclusion clause in insurance policy waived when
not raised below). Citgo thus is left with its continued
insistence that the plaintiffs’ claims in the underlying suit
against Citgo, as opposed to their claims against Wright, do not
relate to the ownership, maintenance, entrustment, or use of an
auto, but rather are general allegations of negligence that exceed
the scope of the CGL auto exclusion clause. Therefore, Citgo
argues, the CGL policy provides it coverage.
Citgo first argues that because it did not own the truck (and
the truck was not operated by it or rented or loaned to it) and
did not use or maintain the truck or entrust it to another, and the
21
plaintiffs’ pleadings in the underlying suit do not allege
otherwise but rather allege that the truck was owned, operated, and
used by Wright, that therefore the CGL’s auto exclusion clause does
not apply to the claims against Citgo. We disagree. We find that
a reading of the CGL policy’s auto exclusion clause as a whole
indicates that it serves to exclude the claims against Citgo
insofar as they derive from the use, operation, or ownership of the
truck by Wright. The clause does not require that the defendant
in the lawsuit own, operate, or rent the vehicle. Rather, it
requires that “any insured” own, operate, or rent the vehicle, and
that the injury arise out of the use of that vehicle. Wright was
an insured party—indeed the named insured—in the CGL policy, and
the accident and resulting death of Friedrichs clearly arose, and
was alleged by plaintiffs in the underlying suit against Citgo to
have arisen, out of Wright’s use of Wright’s truck.
The fact that the alleged wrongs with which the underlying
plaintiffs’ pleadings charge Citgo11 do not directly include its
11
The amended complaint naming Citgo in the underlying lawsuit
specifically accuses Citgo and other defendant petroleum companies
of improperly checking on the qualifications of Wright’s drivers,
not enforcing the same safety standards on Wright’s drivers that
they applied to their own fleets when they handled delivery to
franchisees, and continuing to deliver petroleum and allow Wright
access to their facilities even though they knew its drivers were
incompetent. The underlying plaintiffs’ complaint is not alleging
some kind of abstract psychic harm traceable to Citgo’s failure to
follow statutory and company policies in these respects; it is
arguing that this failure was a cause of the truck’s being
improperly operated by Wright and thus a cause of the accident and
resultant injury.
22
ownership, maintenance, use, or entrustment of the truck does not
mean that the damages sought by those pleadings do not arise out of
Wright’s ownership, use, maintenance, or entrustment of the truck.
The underlying plaintiffs’ pleadings against Citgo specifically
allege that: Friedrichs was killed when at an intersection in
McAllen the automobile he was driving was struck by Wright’s truck
being driven by Wright’s employee in the course and scope of his
employment for Wright; that the collision resulted from the truck
driver’s disregarding and running the red light controlling the
intersection; and that the truck driver was “obviously, visibly and
physically legally incompetent and unfit to operate his vehicle,”
which Citgo knew or should have known.12 When determining whether
an insurer has a duty to defend, Texas courts focus on the factual
allegations underlying the claimed injury, not the legal theories
involved. See Nat. Union Fire Ins. Co. of Pittsburgh v. Merchants
Fast Motor Lines, Inc., 939 S.W.2d 139, 142 (Tex. 1997) (reversing
denial of summary judgment for insurer when no facts in the
complaint touched on covered conduct). The complaint in the
underlying lawsuit rests as to Citgo on charges of failure to
consistently apply corporate safety standards to franchisees,
negligently allowing Wright access to its products and facilities,
and failure to meet statutory standards of conduct in those
12
There is no allegation that any of the products being carried
by the truck had anything to do with Friedrich’s death or the
collision.
23
respects. But the factual basis for all the claims against Citgo,
as reflected in the pleadings of the underlying plaintiffs, is as
follows: that the damages sought are for Friedrichs’ death; that
his death was caused by Wright’s truck, being driven by its
employee in the course of his employment, striking the automobile
being driven by Friedrichs at the intersection; that this collision
was caused by Wright’s truck driver’s disregarding and running the
red light at the intersection; that this was the result of the
truck driver’s being incompetent and unfit to operate the truck;
that if Citgo had exercised its asserted right and duty to oversee
Wright’s transportation of Citgo products, and had intervened when
it knew or should have known Wright was employing substandard truck
drivers, including this driver, the truck would not have been
operated improperly as it was on the occasion in question and so
the collision would not have occurred. The “conduct” charged to
Citgo—not preventing Wright’s negligent operation of the truck—as
well as the damages for the death caused by the truck’s running
into the automobile, plainly arise out of the use of the truck, and
hence are within the automobile exclusion of the CGL policy.
We recognize that Texas courts will allow claims against an
insured to proceed when two separate and independent “but for”
causes of the injury sued on——one excluded under the policy and one
not——are involved. Thus, the fact that a hospital’s negligent
supervision of a mental ward might be excluded by a professional
conduct clause was irrelevant when a jury found that the failure to
24
secure windows in the ward——which clearly was not excluded——was an
independent proximate cause. Guaranty Nat. Ins. Co. v. North River
Ins. Co., 909 F.2d 133, 137 (5th Cir. 1990) (Texas law).
Similarly, the negligent maintenance and handling of a handgun was
an independent cause of a shooting death, so that the fact the
accident incidentally involved the excluded act of repairing a car
did not prevent coverage. Warrilow v. Norrell, 791 S.W.2d 515, 526
(Tex.App.--Corpus Christi 1989, writ denied). See also Waseca
Mutual Ins. Co. v. Noska, 331 N.W.2d 917, 921 (Minn. 1983) (auto
exclusion could not bar recovery when trial court found act of
loading barrels with live embers was independent cause of fires).
Here, there can be no doubt that but for the negligent driving
of the truck, there would be no lawsuit. The plaintiffs in the
underlying lawsuit are not complaining that Citgo’s alleged
negligence was a separate or independent proximate cause of the
harm——it is not alleged, for example, that the accident may have
been caused or Friedrichs’ injuries exacerbated by Citgo’s delivery
of fuel that spontaneously combusted. Rather plaintiffs argue that
Citgo had a right and responsibility to oversee the Wright drivers
and could have prevented the negligent driving of this Wright
driver by exercising that power. This Court, construing Texas law,
has found that when allegations of antecedent negligence are
related to the underlying conduct giving rise to the suit, rather
than creating a separate, independent cause of the injury, the fact
25
that the conduct that created the injury is excluded conduct under
the policy defeats coverage. “We find that Texas law is clear:
where a claim against an insured would not exist ‘but for’ conduct
explicitly excluded by the policy, the dependent claims are also
not covered under the policy, regardless of whether the insured
against whom the derivative claims are directed actually engaged in
the excluded acts.” Cauntillo Independent School District v. Nat.
Union Fire Ins. Co. Of Pittsburgh, 99 F.3d 695, 704-05 (5th Cir.
1995). See also Commercial Union Ins. Co. v. Roberts, 7 F.3d 86,
89-90 (5th Cir. 1993) (“Dr. Roberts’ intentional acts and his
negligent acts converge. The allegations are not mutually
exclusive; rather, they are related and interdependent. Without
the underlying sexual molestation there would have been no injury
and obviously, no basis for a suit against Dr. Roberts for
negligence.”).
Texas courts agree. See Fidelity Guaranty Ins. Underwriters,
Inc. v. McManus, 633 S.W.2d 787, 790 (Tex. 1982) (rejecting
argument that negligent entrustment of automobile was a separate
cause of accident not covered by exclusion when there would have
been no accident without the negligent use of the auto, clearly
excluded under the policy); Burlington Ins. Co. v. Mexican American
Unity Council, 905 S.W.2d 359, 363 (Tex.App.--San Antonio 1995, no
writ) (finding that assault and battery exclusion prevented
coverage despite allegations that youth home was negligent in
26
allowing resident to leave complex——“the origin of her damages is
the assault and battery, which is not separate and independent from
the alleged negligence of MAUC.”); Centennial Ins. Co. v. Hartford
Accident and Indemnity Co., 821 S.W.2d 192,194 (Tex.App.--Houston
1991, no writ) (negligent hiring of employee could not have caused
injury without employee’s negligent operation of car). Cf. Grinell
Mutual Reinsurance Co. v. Employers Mutual Casualty Co., 494 N.W.2d
690, 694 (Iowa 1993) (school’s negligent supervision of the loading
of a bus was not excluded vehicle-related conduct and could have
been found a separate proximate cause). Here, the cause of the
accident was Wright’s negligent operation of the truck on October
10, 1992, in McAllen. Without that negligence of Wright’s, any
antecedent error in Citgo’s handling of its transportation
arrangements with Wright could not have caused the injury. Citgo’s
liability, if any, was necessarily derivative, not separate and
independent. Accordingly, we hold that under Texas law, Travelers
properly denied coverage to Citgo under the comprehensive general
policy.
III. The Award of Attorneys’ Fees
Lastly, Citgo challenges the award of attorneys’ fees to
Travelers. Travelers brought this suit in federal court as a
declaratory judgment action. The Federal Declaratory Judgement
Act, 28 U.S.C. § 2202, does not itself independently authorize the
award of attorney’s fees. The Texas Declaratory Judgement Act
27
does, however. Tex. Civ. Prac. & Rem. Code §§ 37.001 et. seq.
Subsequent to the district court’s judgment, this Court ruled that
the Texas Act is procedural rather than substantive, and therefore
it does not authorize an award of costs in a federal court
declaratory judgement diversity action. See Utica Lloyd’s of Texas
v. Mitchell, 138 F.3d 208, 210 (5th Cir. 1998).13 In the court
below, Citgo not only failed to challenge the award of attorneys’
fees to the prevailing party, but also requested them on its own
behalf on the same basis it now asserts is invalid. Accordingly,
we find that under the circumstances of this case any argument
against the award of attorneys’ fees has been waived.
Conclusion
For the foregoing reasons, we AFFIRM the district court’s
grant of summary judgment in favor of Travelers.
AFFIRMED
13
Utica is not a departure from the prior law of this Circuit,
but is instead a logical application of previously stated
principles.
28