IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 06-10887

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

United States Court of Appeals

Fifth Circuit

F I L E D

August 25, 2008

Charles R. Fulbruge III

Clerk
No. 06-10887

2

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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3

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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4

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.
No. 06-10887

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Abouttwo 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 ofthe “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.
No. 06-10887

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,

6

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
No. 06-10887

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.

7

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. 
No. 06-10887

8

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).
No. 06-10887

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.”

9

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 thatthe 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 thatthe 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 exhaustfumes 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
No. 06-10887

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out ofthe 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,
No. 06-10887

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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.
No. 06-10887

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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
No. 06-10887

13

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
No. 06-10887

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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.