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).

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
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

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
3

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
4

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. 
5

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 coinsured 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
6

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
7

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
8

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
9

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.
10

“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
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

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 coinsured 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
(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 RII School Dist., 823 S.W.2d 515 (Mo. App. 1992).

12

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
13

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,
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

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
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

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,
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

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
17

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
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

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
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

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
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

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
21

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
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

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
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

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
24

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
25

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
26

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
27

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
13 Utica is not a departure from the prior law of this Circuit,

but is instead a logical application of previously stated

principles.

28

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