IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 25, 2008
No. 06-10887
Charles R. Fulbruge III
Clerk
COLUMBIA CASUALTY COMPANY
Plaintiff - Appellee
v.
GEORGIA & FLORIDA RAILNET INC
Defendant - Appellant
Appeal from the United States District Court
for the Northern District of Texas
Before KING, HIGGINBOTHAM, and SOUTHWICK, Circuit Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
After a bench trial in a declaratory judgment action, the district court
found that a railroad had no coverage under an insurance policy for a former
employee’s claims of injury. We affirm that decision.
BACKGROUND
The railroad that is the defendant in this suit is Georgia & Florida
RailNet, Inc. (“GFR”). It purchased a policy from the plaintiff, Columbia
Casualty Company. Columbia brought this declaratory judgment action to
determine its obligation to GFR for claims brought by a former GFR employee
in Georgia state court, though those claims had not yet been resolved. The
Georgia plaintiff, Ray Shiver, had been a locomotive engineer. The claim
No. 06-10887
relevant here is that defective and poorly maintained locomotives that Shiver
operated caused high levels of diesel exhaust fumes and hazardous dusts to
accumulate in the locomotive cab. Shiver alleged exposure to high-enough levels
of exhaust fumes as to cause severe and irreversible respiratory damage,
including chronic obstructive pulmonary disease and reactive airways
dysfunction. Shiver’s complaint sought damages under the Federal Employers
Liability Act (FELA) for “failing to provide . . . a reasonably safe place to work,
safe machinery, and for its negligence in inspection, maintenance, and warning
procedures,” and under the Locomotive Boiler Inspection Act (LBIA), for “failing
to provide [a] locomotive in a safe condition without unreasonable risk of
personal injury, and for exposing [him] to hazardous levels of dust and exhaust
. . . .” See 45 U.S.C.§§ 51-60 (FELA); 49 U.S.C. § 20701 (LBIA).
We will later describe the status of the state court suit.
The Columbia insurance policy
GFR has a liability policy with Columbia. It is a claims-made policy with
a $50,000 self-insured retention, which is also known as a “retained limit.” That
provision requires GFR to pay the first $50,000 on any claim. In the section of
the policy describing what is covered, Columbia states that it will “pay those
sums in excess of the ‘retained limit’ that the insured becomes legally obligated
to pay as ‘damages’ and to pay for related ‘claim expenses’ or any combination
thereof because of ‘bodily injury,’ . . . to which this insurance applies.”
The policy defines “bodily injury” as “bodily injury, sickness or disease
sustained by a person, including death resulting from any of these at any time.
Bodily injury also means mental injury, mental anguish or shock sustained by
that person or a relative of that person as a result of such injury.” The policy
defines “claims expenses” to include GFR’s legal and other fees incurred to
defend against claims:
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No. 06-10887
all expenses incurred by [Columbia] or by the insured in the
investigation, negotiation, arbitration, or defense of any “claims” for
“damages”, whether paid by us or by the insured including:
a. Legal fees, investigative fees, and costs incurred by us or the
insured in defense of a “claim”, all costs taxed against the insured
in any “claim” defended by us or the insured . . . .[and]
c. All reasonable expenses, other than loss earnings, incurred by
the insured at our request, excluding salaries or other forms of
compensation paid to partners, directors or officers or other
employed persons of the insured.
This explains what Columbia will pay. The same section of the policy also
specifies exclusions from coverage. Important for us is whether FELA claims are
excepted from the otherwise applicable exclusion. In two of the three exclusions
we quote below, there is an explicit exception for FELA claims. In the third –
the relevant one for injuries arising from pollutants such as diesel fumes – there
is no express FELA exception. The policy provides no coverage for
f. Any obligation of the insured under:
(1) A workers compensation, occupational disease, retirement,
disability benefits or unemployment compensation law, any state
employers liability law, unless specifically endorsed as applicable
onto this policy, or any similar law except the “Federal Employers
Liability Act” . . . .
g. “Bodily injury” to:
(1) An “employee” of the insured arising out of and in the course of:
(a) Employment by the insured; or
(b) Performing duties related to the conduct of the insured’s
business . . . .
This exclusion does not apply to the liability of insured under the
“Federal Employers Liability Act.”
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h. (1) “Bodily injury” . . . arising out of the actual,
alleged or threatened discharge, dispersal, seepage,
migration, release or escape of “pollutants” . . . .
(Emphasis added).
Finally, although Columbia does not have a duty to defend as that is
generally understood, the policy does have a section entitled “Duty to Defend”
in which Columbia has a right to be involved in limited ways in litigation:
At no time shall [Columbia] be called upon to assume charge of the
investigation, settlement or defense of any “claims” made against
the insured but we shall have the right and shall be given the
opportunity to associate with the insured in the control, defense or
trial of any “claims” which, in our opinion, involves or appears
reasonabl[y] likely to involve this insurance. If we avail ourselves
of such right and opportunity, the insured shall cooperate with us
in the control, defense or trial of such “claims”, so as to effect a final
determination thereof. Failure on the part of any insured to so
cooperate shall relieve us of liability for such “claims” and “claim
expenses” arising under this policy.
Proceedings in District Court
After receiving notice of the state suit, Columbia exercised its right to
“associate” with GFR by requesting and receiving from GFR’s defense counsel
numerous reports, transcripts of depositions, experts’ reports, legal analyses,
and expense accountings.
In July 2003, GFR advised Columbia that GFR was close to exhausting its
$50,000 self-insured retention limit based on legal expenses incurred defending
the underlying action; additional expenses would then be paid by Columbia. In
August 2003, Columbia responded that it was possible that two retained limits
totaling $100,000 applied because Shiver alleged two different injuries. GFR
disagreed, but in December 2004, Columbia advised GFR that it was formally
taking the position that two separate self-insured retention limits applied.
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No. 06-10887
About two weeks after Columbia notified GFR of its formal position, GFR’s
counsel sent Columbia a letter that attempted to allocate existing expenses
between Shiver’s inhalation claim and a separate claim, unrelated here, dealing
with a head injury. Columbia had requested that information. In February
2005, Columbia responded in a letter reserving its rights and denying coverage
for any of Shiver’s inhalation injuries. According to Columbia, it was not
responsible for any “bodily injury” arising out of exposure to diesel exhaust
fumes or hazardous dust because of the exclusion applying to injuries to
employees arising out of the “actual, alleged or threatened discharged, dispersal,
seepage, migration, release or escape of ‘pollutants.’” The parties again
exchanged letters outlining their disagreement on the pollution claim coverage
issue. Accordingly, GFR delayed court-ordered mediation in order to reassess
its ability to settle the underlying suit.
On April 27, 2005, with the underlying suit still pending in the Georgia
trial court, Columbia filed this action in federal district court for a declaratory
judgment. Columbia sought a declaration that (1) it had no duty to defend GFR
in the underlying suit; (2) it had no duty to indemnify for liabilities arising under
the LBIA because, except for suits brought under FELA, the policy excluded
liability for bodily injuries to GFR’s employees arising out of the course of their
employment; (3) it had no duty to indemnify GFR for Shiver’s inhalation claim
under FELA because of the pollution exclusion; and (4) GFR was responsible for
the $50,000 “retained limit” for every covered incident. In GFR’s answer, it
counterclaimed that Columbia’s denial of coverage for Shiver’s inhalation claim
constituted a breach of contract and of a duty of good faith and fair dealing.
GFR also alleged that Columbia’s waiting for about two years and eight months
to deny coverage, while “associating” itself with GFR in the defense of the state
suit the entire time, violated the Texas Insurance Code.
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No. 06-10887
On June 26, 2006, with the underlying suit still pending, the district court
held a one-day bench trial. The court adopted a list of uncontested issues of fact
and heard testimony from the parties describing their correspondence on the
underlying suit. After the close of trial, the court made oral findings on each of
the contested issues of fact set forth in the parties’ joint pretrial statement,
which the parties had agreed were the only fact issues necessary to resolve the
case. Among other findings, the district court determined that (1) Shiver’s
inhalation injuries were excluded from coverage under the pollution exclusion;
(2) Columbia never assumed GFR’s defense; (3) GFR failed to prove that
Columbia did not send GFR a timely letter reserving its rights; (4) GFR was not
harmed or otherwise prejudiced by the delay in Columbia’s denial of coverage,
even assuming that Columbia did not reserve its rights; (5) Columbia did not
intentionally lead GFR to believe that the inhalation-injury claim was covered;
and (6) Columbia did not make any false representations to GFR. Later, in a
short order incorporating its oral findings, the district court granted Columbia
declaratory relief, declaring that the inhalation-injury claim was not covered
under the policy. GFR’s counterclaims were denied.
GFR timely filed a notice of appeal to this court on August 17, 2006, which
we later stayed until September 10, 2007. On September 24, 2006, the Georgia
trial court granted GFR partial summary judgment in the underlying suit,
entering judgment against Shiver on his FELA claim, which is the only claim
relevant to us. Shiver filed an interlocutory appeal to the Georgia Court of
Appeals on October 6, 2006. On September 24, 2007, the Georgia Court of
Appeals affirmed the dismissal of Shiver’s FELA claims. Shiver’s petition for
writ of certiorari was denied by the Georgia Supreme Court on March 31, 2008.
GFR has been finally discharged from liability to its employee on the claim.1
1
Even though the state suit between the injured employee and the railroad is over, the
issue of claims expenses concerning the pollution claim must be resolved. In the policy,
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No. 06-10887
DISCUSSION
GFR raises four arguments on appeal: first, the district court lacked
subject matter jurisdiction to consider Columbia’s claims because they were not
ripe for review; second, Columbia breached the policy by refusing to cover the
inhalation claims; third, the district court should have presumed that GFR was
prejudiced by Columbia’s delayed denial of coverage; and fourth, Columbia’s
belated denial amounts to a per se violation of the Texas Insurance Code.
These challenges present both factual and legal questions for this court.
When a district court has conducted a bench trial, we review findings of fact for
clear error, and review legal issues de novo. Gebreyesus v. F.C. Schaffer &
Assocs., 204 F.3d 639, 642 (5th Cir. 2002). A district court’s interpretation of an
insurance contract is a question of law reviewed de novo. Am. States Ins. Co. v.
Bailey, 133 F.3d 363, 369 (5th Cir. 1998).
1. Ripeness
Questions of ripeness are reviewed de novo. Staley v. Harris County, 485
F.3d 305, 308 (5th Cir. 2007). GFR argues that because at the time of the
district court’s ruling the underlying state court suit was still pending, the
nature of Shiver’s FELA claims was still capable of evolving based on the facts
that came to light at trial. Moreover, Shiver might have adjusted his claim in
the course of the litigation. GFR argues that any decision the district court
made concerning Columbia’s eventual indemnity obligations was premature as
no case or controversy over those obligations would exist until after final
judgment in the underlying matter.
Columbia is obligated to “pay those sums in excess of the ‘retained limit’ that the insured
becomes legally obligated to pay as ‘damages’ and to pay for related ‘claim expenses’ or any
combination thereof because of ‘bodily injury,’ . . . to which this insurance applies.” We decide
today whether this policy applies to this alleged bodily injury. It does not.
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No. 06-10887
A federal court may not issue a declaratory judgment unless there exists
an actual case or controversy. Am. States, 133 F.3d at 368. An actual case or
controversy exists before the resolution of an insured’s underlying suit
concerning the insurer’s duty to defend. See, e.g., W. Heritage Ins. Co. v. River
Entm’t, 998 F.2d 311, 312-13 (5th Cir. 1993). However, whereas the duty to
defend is based upon the allegations in the pleadings, the duty to indemnify “is
triggered by the actual facts that establish liability in the underlying lawsuit.”
Guar. Nat’l Ins. Co. v. Azrock Indus. Inc., 211 F.3d 239, 243 (5th Cir. 2000).
Accordingly, in general an insurer’s duty to indemnify cannot be determined
until after the underlying suit has been resolved. See Collier v. Allstate County
Mut. Ins. Co., 64 S.W.3d 54, 62 (Tex. App. 2001).
There are exceptions. The Texas Supreme Court acknowledged that there
are situations in which “indemnity issues are not always nonjusticiable before
liability is resolved.” Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d
81, 84 (Tex. 1997). The Texas court had before it questions both of duty to
defend and of indemnification. It announced that the “duty to indemnify is
justiciable before the insured’s liability is determined in the liability lawsuit
when the insurer has no duty to defend and the same reasons that negate the
duty to defend likewise negate any possibility the insurer will ever have a duty to
indemnify.” Id.; see also Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d
523, 529 (5th Cir. 2004) (same). Since, in Griffin, only damages related to an
“auto accident” would be covered under the policy, and no “facts can be developed
in the underlying tort suit that can transform a drive-by-shooting into an ‘auto
accident,’” the court held – before resolution of the insured’s liability suit – that
the insurer did not have a duty to indemnify. 955 S.W.2d at 84. Cf. Utica Nat’l
Ins. Co. v. Am. Indem. Co., 141 S.W.3d 198, 203-05 (Tex. 2004) (refusing to rule
on indemnity question because it was dependant upon the factual resolution of
a causation issue).
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No. 06-10887
In addition, in a case in which the underlying policy did not provide for a
duty to defend, a Texas appellate court found it appropriate to decide, before the
underlying suit was resolved, that coverage could not possibly be available.
Roman Catholic Diocese of Dallas v. Interstate Fire & Cas. Co., 133 S.W.3d 887,
890 (Tex. App. 2004) (citing Griffin). Similarly, the Columbia policy here
provides for no duty to defend. The logic of Roman Catholic Diocese is
convincing, that where the duty to defend is not at issue and where it is
apparent before liability is resolved in the underlying case that the policy cannot
cover the claim, the question of indemnity may be determined.
GFR argues that the parties’ joint pretrial stipulations prevented the
district court from ruling on the indemnity coverage question because the parties
agreed that the question whether Shiver’s injuries were caused by the inhalation
of diesel exhaust fumes or hazardous dust in the course of his employment was
a disputed fact in the underlying suit. This question was disputed.2 However,
the district court’s conclusion that the inhalation claim was not covered under
the policy reflects the understanding that any resolution of the factual question
could not result in coverage under the policy. For example, if the injuries were
found to be the result of locomotive exhaust fumes or hazardous dust, they would
fall under the pollution exception to coverage. If the injuries were due to causes
unrelated to Shiver’s employment, then GFR would have no legal obligation to
pay damages to Shiver. Coverage would never be available.
Accordingly, we find no error with the district court’s decision to rule on
the indemnity question while the underlying suit was still pending. Nor on this
record is the district court’s factual finding that Shiver’s inhalation claims arose
2
From the parties’ joint pre-trial order: “The question of whether Shiver’s inhalation
injuries were caused by the inhalation of black rubber particulates emanating from the lining
in the cab of Defendant’s locomotive, or from diesel exhaust fumes or hazardous dusts, or from
another different airborne substance in the cab of Defendant’s locomotive, or from causes
unrelated to Shiver’s employment with Defendant is a disputed issue in the underlying case.”
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No. 06-10887
out of the alleged discharge, dispersal, migration, release, or escape of pollutants
clearly erroneous.
2. Inhalation claims
We now turn to the legal question of the district court’s interpretation of
the policy. The district court held that Columbia had no obligation to cover the
inhalation claims under the policy, necessarily rejecting GFR’s counterclaim for
breach of contract.
GFR argues that the inhalation claim should be covered by the policy
because Exclusions (f) and (g) of the policy grant coverage for FELA claims. It
is undisputed that Shiver’s inhalation-injury claim was under FELA. According
to GFR, the policy recognizes at least two “arising out of” situations that
implicate coverage: (1) cases where liability under the FELA is due to an
employee’s “bodily injury” arising out of his employment with GFR, which is
covered under Exclusions (f) and (g); and (2) cases where liability is due to an
employee’s “bodily injury” arising out of the release of “pollutants,” which is
excluded from coverage under Exclusion (h). GFR asserts that under Texas’s
broad interpretation of the phrase “arising out of,” Shiver’s FELA injuries are
rightly understood as both “arising out of” his employment with GFR (which
would be covered) and “arising out of” the release of pollutants (which would not
be covered). Under these circumstances, the pollution exclusion should not
preclude coverage because Texas law counsels that exclusionary language should
be read narrowly, and that language that is susceptible to two or more
constructions must be construed against the insurer. In GFR’s words, “the
inclusion trumps the exclusion.” We shall evaluate that pithy point.
As a preliminary matter, the term “inclusion” is a misnomer. GFR
wrongly equates an exception to an exclusion to an affirmation of coverage. The
policy’s coverage is bound here by the insuring clause, which limits payment to
claims “to which this insurance applies.” An exclusion subtracts from coverage,
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No. 06-10887
i.e., any exception to it is no longer specifically exempt from coverage. Yet
nothing gives the exception the affirmative status of being covered by the policy.
T.C. Bateson Constr. Co. v. Lumbermens Mut. Cas. Co., 784 S.W.2d 692, 699
(Tex. App. 1989) (because exclusion does not extend or grant coverage, exception
to it “merely removes [the excepted situation described] from the specific
exclusion relating to contractual liability”). We have held that an exclusion
cannot create coverage that would not otherwise exist under a policy. United
Nat’l Ins. Co. v. Hydro Tank, Inc., 497 F.3d 445, 452-53 (5th Cir. 2007)
Moreover, GFR’s interpretation would require us to cast aside several
established principles governing interpretation of the provisions of insurance
policies under Texas law. While it is the case that exceptions and limitations in
an insurance policy are strictly construed against the insurer, each part of the
contract must also be given effect and meaning. See Canutillo Indep. Sch. Dist.
v. Nat’l Union Fire Ins. Co., 99 F.3d 695, 700-01 (5th Cir. 1996); see also Hydro
Tank, Inc., 497 F.3d at 452 (“[E]ach policy provision is, to the greatest extent
possible, to be given independent significance and effect”). An interpretation
that gives a reasonable meaning to all provisions is preferable to one that leaves
a portion of the policy useless, inexplicable, or creates surplusage. Liberty Mut.
Ins. Co. v. Am. Employers Ins. Co., 556 S.W.2d 242, 245 (Tex. 1977). The
purpose of an exclusion is to take something out of the coverage that would
otherwise have been included in it. Id.
GFR implicitly accepts that the inhalation claim fits within the terms of
the pollution exclusion. GFR urges that the exclusion nonetheless does not
apply because the claim falls within the exception of two other exclusions. We
disagree, because GFR’s position in effect eliminates the pollution exclusion and
breaks the bounds of a reasonable construction of the policy’s terms. When
“policy terms are susceptible of only one reasonable construction, they will be
enforced as written.” See Guar. Nat’l, 211 F.3d at 243.
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No. 06-10887
A reasonable construction analysis starts with the text of the pollution
exclusion – Exclusion (h). It eliminates coverage for bodily injury “arising out
of the actual, alleged or threatened discharge, dispersal, seepage, migration,
release or escape of ‘pollutants’ . . . .” GFR would have this court add an
exception to that exclusion for claims brought under the FELA, simply because
two other exclusions have FELA exceptions. We conclude just the opposite. If
FELA claims were meant to be excepted from the exclusion, the drafters of the
policy showed a recurring ability to write such an exception. GFR presents no
reason why other exclusions should be affected by the two which contain the
FELA exception. Accord Hydro Tank, Inc., 497 F.3d at 452 (a single exception
to an exclusion cannot “impliedly neutralize” all other specific exclusions to
coverage); Lumbermens, 784 S.W.2d at 699 (exception to a contractual liability
exclusion does not negate other policy exclusions; exception remains subject to
and limited by all other relevant exclusions). Accordingly, the district court was
correct in finding the inhalation claim not covered by the policy.
3. Presumption of prejudice
In its next challenge, GFR argues that the district court should have
presumed that GFR was prejudiced by Columbia’s delayed denial of coverage.
It is not clear whether GFR argues this point in support of its claim that
Columbia was estopped from rejecting coverage of the inhalation claim, or its
claim that Columbia breached its duty of good faith and fair dealing.
Regardless, GFR’s argument must be rejected.
First, GFR bases its argument on the “undisputed” fact that “Columbia
first denied indemnity coverage and reserved its rights almost three years after
notice of the underlying FELA suit.” This is simply not the case. The timing of
Columbia’s reservation of rights was disputed, and the district court found that
GFR failed to prove that a reservation-of-rights letter was not sent well before
its eventual denial. Besides its bare assertion above, GFR neither challenges
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No. 06-10887
this factual finding, nor disputes the district court’s legal conclusion that it
carried the burden of proof.
Second, prejudice aside, GFR fails to establish the other requirements for
its estoppel and bad faith claims. For GFR to succeed with regard to estoppel in
this context, it must show that despite sufficient knowledge of facts indicating
non-coverage, Columbia “assumed or continued to defend its insured without
obtaining an effective reservation of rights or non-waiver agreement.” See Pa.
Nat’l Mut. Cas. Ins. Co. v. Kitty Hawk Airways, Inc., 964 F.2d 478, 481 (5th Cir.
1992). But Columbia never assumed any defense of GFR, and the district court
noted evidence – not disputed here – that a reservation-of-rights letter was sent
at the outset. For GFR to succeed with regard to its good faith and fair dealing
claim it must show, inter alia, that “there is an absence of a reasonable basis for
denying or delaying payment of benefits under the policy.” Republic Ins. Co. v.
Stoker, 903 S.W.2d 338, 340 (Tex. 1995). As explained in the previous section,
Columbia’s denial was justified.
4. Violation of Texas statute
Finally, GFR alleges that Columbia violated Section 541.060 of the Texas
Insurance Code. GFR again wishes us to disregard the district court’s factual
finding that there was insufficient evidence to show that a reservation-of-rights
letter had not been sent; it asserts that Columbia knowingly failed either to
reserve its rights or to deny coverage within a reasonable time. We have already
sustained the finding as to the reservation-of-rights issue. The only remaining
issue is whether the timing of Columbia’s denial was unacceptable.
Under Texas law, an insurance company engages in an “unfair method of
competition or an unfair or deceptive act” if it “fail[s] within a reasonable time
to . . . affirm or deny coverage of a claim to a policy holder.” Tex. Ins. Code Ann.
§ 541.060(a)(4). As a consequence of the duty to indemnify being based on facts
proven, not on the pleadings, the insurer “must decide the issue of coverage
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No. 06-10887
within a reasonable time after judgment or settlement.” Comsys Info. Tech.
Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 190 (Tex. App. 2003)
(interpreting repealed version of the Code’s requirement to deny coverage
“within a reasonable time”). Because the court proceedings in the underlying
case had not yet started as of Columbia’s February 2005 letter denying coverage
of the inhalation claim, the district court did not err in finding against GFR.
CONCLUSION
GFR has failed to show reversible error. The judgment of the district court
is AFFIRMED.
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