ESSEX INSURANCE COMPANY v. SANDERSVILLE RAILROAD COMPANY et al

Filing 50

ORDER DENYING 44 Motion for Summary Judgment. The Court will convene a telephone conference for the purpose of determining if this Order disposes of this case or, otherwise, what further steps are appropriate. Ordered by US DISTRICT JUDGE MARC THOMAS TREADWELL on 7/25/2017. (tlh)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
MACON DIVISION
EVANSTON INSURANCE COMPANY,
Plaintiff,
v.
SANDERSVILLE RAILROAD
COMPANY,
Defendant.

)
)
)
)
)
)
)
)
)
)
)

CIVIL ACTION NO. 5:15-CV-247 (MTT)

ORDER
In this declaratory judgment action, Plaintiff Evanston Insurance Company1
seeks to determine its obligations to its insured—Defendant Sandersville Railroad
Company—in relation to a FELA claim brought by its employee, John Flowers.
Previously, the Court determined that the pollution exclusion in Evanston’s policy barred
coverage for Flowers’s claim. Doc. 43. Evanston has again moved for summary
judgment, this time seeking declarations that (a) based on the allegations of Flowers’s
complaint, it owed no duty to defend Sandersville Railroad and (b) based on an
obligation created by its reservation of rights letters, it is entitled to recover expenses
incurred in its defense of Flowers’s lawsuit on behalf of Sandersville Railroad. Doc. 44
at 1. The Court concludes that Evanston has not shown as a matter of law that it did
not owe Sandersville Railroad a duty to defend. The Court further concludes that
Evanston has not shown as a matter of law that its reservation of rights letters obligated
Sandersville Railroad to repay the defense costs. Accordingly, Evanston’s motion is
DENIED.

1

The original plaintiff in this suit was Essex Insurance Company. Doc. 1. Evanston was substituted
after Essex merged into Evanston on June 30, 2016. Docs. 36, 39, 40.

I. BACKGROUND
Sandersville Railroad purchased a comprehensive general liability (CGL) policy
from Evanston that provides coverage for FELA.2 Doc. 43 at 2-3. The policy has a
standard pollution exclusion. Id. at 2.
On January 4, 2013, Flowers’s attorney provided Sandersville Railroad with
notice of a FELA claim, and on January 7, 2014, Flowers’s attorney sent Sandersville
Railroad a demand letter regarding the claim. Docs. 19-1 ¶ 16; 20-3 at 2; 23-2 ¶ 2.
Sandersville Railroad notified Evanston of the claim, and Evanston sent a reservation of
rights letter in April 2014. Doc. 20-3 at 2. In this letter, Evanston noted that Flowers
was “making a claim for occupational illness from welding fume exposure during his
employment at [Sandersville Railroad]”—namely that he had “contracted ‘welder’s lung’
disease from occupational exposure to welding fumes while welding railroad cars
owned by Sandersville Railroad.” Id. at 2, 7. Evanston stated its position that the
policy did not cover the claim because of the pollution exclusion and reserved its rights
“as to whether the pollution exclusion applies to bar coverage for this claim,” and “with
respect to the investigation, settlement, and defense of the claim.” Id. As to the latter,
Evanston stated that “[u]pon exhaustion of [Sandersville Railroad’s] self-insured
retention, [Evanston] will pay the reasonable costs of defense for [Sandersville
Railroad’s] chosen defense counsel, subject to a reservation of rights to withdraw from
providing the defense upon a determination that there is no coverage[,]” and subject to
a reservation of “the right to reimbursement of costs paid if it establishes that it owes no
coverage to [Sandersville Railroad].” Id. Evanston also reserved the right, should
Flowers file suit, “to file a declaratory judgment action to obtain an adjudication that
[Evanston] does not owe any defense or indemnity for the claims alleged.” Id. The
2

As a railroad, Sandersville Railroad is not subject to state workers’ compensation laws. See
generally New York Cent. R. Co. v. Winfield, 244 U.S. 147 (1917). Rather, its employees have the
protection of the Federal Employees Liability Act (FELA), 45 U.S.C. § 51, et seq.

-2-

letter concluded by stating that neither Evanston nor Sandersville Railroad waived any
rights under the policy or the law. Id. at 8. Sandersville Railroad did not object to this
letter. See Doc. 46-1 ¶¶ 9-10. The parties agree that the policy itself does not give
Evanston the right to recover defense costs. Doc. 19-1 ¶ 48.
On June 17, 2014, Flowers filed suit against Sandersville Railroad under FELA.
Docs. 23-2 ¶ 9; 18-4; 20-4. In his complaint, Flowers alleged:
ln early 2012, [he] developed shortness of breath and was
diagnosed with advanced lung disease. He was advised to
avoid further exposure to workplace toxins, including welding
fumes. As a result, [he] lost wages and benefits . . . suffered
reduced earning capacity . . . sustained mental and physical
pain and suffering and . . . [incurred] medical bills and other
costs associated with his care and treatment.
Doc. 20-4 ¶ 5. Flowers alleged that Sandersville Railroad was negligent by failing to:
provide a reasonably safe place to work . . . , by failing to
provide him proper personal protective equipment in the
form of adequate breathing protection; by failing to
adequately ventilate the areas where Mr. Flowers was
required to weld; by failing to promulgate and implement
proper procedures and safeguards for Mr. Flowers [sic]
proper breathing protection; by failing to properly warn and
train Mr. Flowers of the dangers and signs of occupational
lung disorders, and by failing to provide proper supervision.
Id. ¶ 6. Flowers further alleged that Sandersville Railroad’s negligence “posed an
unreasonable risk of illness and injury” and “caused or contributed, in whole or in part,
to Mr. Flowers’ injuries and damages as . . . alleged.” Id. ¶ 7.
When Flowers filed his complaint, Evanston did not, by supplement to its
reservation of rights letter or otherwise, address whether, based on the allegations of
the complaint, it owed Sandersville Railroad a duty to defend. See generally Doc. 23-2
¶¶ 4-15 (outlining history of Evanston’s reservation of rights).
After Sandersville Railroad exhausted its self-insured retention in early 2015, it
tendered the defense of the lawsuit to Evanston. Docs. 19-1 ¶¶ 44-45; 23-2 ¶ 13.
Evanston did not, as Georgia law allows, seek a stay of Flowers’s lawsuit so that it
-3-

could seek declaratory relief determining whether its policy covered the Flowers claim or
whether it was obligated to defend Sandersville Railroad.3 Rather, on May 18, 2015,
Evanston issued a second reservation of rights letter. Docs. 20-5; 23-2 ¶ 14.
It is clear that Evanston’s second letter was, subject to a very few changes, a
“cut-and-paste” of the first. The letters each contained an introduction and four
sections: Section I. Factual Background; Section II. Policy Details; Section III.
Reservation of Rights; and Section IV. Conclusion. In its introduction and Section I.
Factual Background, the second letter added to the first that it was “a supplemental
bilateral reservation of rights with respect to coverage issues on this claim,” noting the
first letter was sent in April of 2014. Doc. 20-5 at 2. Otherwise, the second letter
provided less factual background regarding Flowers’s claim than the first. While the first
letter provided a few sentences describing the claims made by Flowers’s attorney in his
initial demand letter on Flowers’s behalf, this information was omitted, without
replacement, in the second letter. Compare Doc. 20-3 at 2 with Doc. 20-5 at 2.
Although the second letter stated that Evanston’s adjuster had been “advised” that a
lawsuit had been filed, the letter made no mention of Flowers’s complaint or any
particular allegation of the complaint. Doc. 20-5 at 2.

3

Of course, this Court could not stay Flowers’s state court action. 28 U.S.C. § 2283 (“A court of the
United States may not grant an injunction to stay proceedings in a State court except as expressly
authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its
judgments.”); Pac. Indem. Co. v. Acel Delivery Serv., Inc., 432 F.2d 952, 955 (5th Cir. 1970) (rejecting,
pursuant to 28 U.S.C. § 2283, insurer’s request for stay of state court action against insured during
pendency of insurer’s declaratory judgment action to determine coverage); see also Bonner v. City of
Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc) (adopting as binding precedent decisions of
former Fifth Circuit rendered prior to October 1, 1981). But an insurer’s right to enjoin an action pending
resolution of coverage issues is well-established under Georgia law. See, e.g., Yost v. Se. Fid. Ins. Co.,
255 Ga. 179, 179, 336 S.E.2d 248, 249 (1985) (holding that superior court did not abuse its discretion in
staying underlying action during pendency of declaratory judgment action); see also Facility Invs., LP v.
Homeland Ins. Co. of N.Y., 321 Ga. App. 103, 109-10, 741 S.E.2d 228, 233-34 (2013) (noting that once
an insurer learns of grounds for noncoverage, it may either deny coverage or file a declaratory judgment
action).

-4-

Section II. Policy Details was identical, word-for-word, in the two letters, though it
should not have been. Compare Doc. 20-3 at 3-6 with Doc. 20-5 at 3-6. Due to
Evanston’s cut-and-paste drafting, the second letter replicated coverage provision
A.1.a.(1)—addressing defense obligations prior to the exhaustion of Sandersville
Railroad’s self-insured retention—from the first letter, instead of substituting the thenapplicable coverage provision A.1.a.(2)—addressing defense obligations after the
exhaustion of Sandersville Railroad’s self-insured retention. Compare Doc. 20-3 at 3-6
with Doc. 20-5 at 3-6. See also generally Doc. 18-3 at 18 (relevant policy provision).
Accordingly, the policy provision stating Evanston’s defense obligations following the
exhaustion of the self-insured retention was never mentioned in the letter.
Section III. Reservation of Rights, as in the first letter, contained the following
subsections: A. Applicable Policy; B. Pollution Exclusion; C. Investigation, Settlement
and Defense of the Claim; D. Reimbursement of Defense Costs; E. Declaratory
Judgment Action; and F. Other Insurance. Of these, A. Applicable Policy; C.
Investigation, Settlement and Defense of the Claim; D. Reimbursement of Defense
Costs; and F. Other Insurance were identical in the two letters. Compare Doc. 20-3 at
6-7 with Doc. 20-5 at 6-7. Evanston changed a few phrases of B. Pollution Exclusion in
the second letter—“his attorney alleges” was replaced with “he alleges,” “this claim is
under investigation” was omitted, and “however” was omitted—otherwise it was identical
to the first letter. Compare Doc. 20-3 at 6 with Doc. 20-5 at 6-7. Evanston omitted “if
and when the claimant files a lawsuit against the insured” from E. Declaratory Judgment
Action in the second letter, but otherwise it, too, was identical to the first letter.
Compare Doc. 20-3 at 7 with Doc. 20-5 at 7. Evanston added to the second letter a
subsection—G. Cooperation and Consent—describing the duties of Sandersville
Railroad to inform and cooperate with Evanston in the defense of the suit, as well as
reserving Evanston’s rights “in respect to Sandersville Railroad’s compliance with the
conditions of the policy.” Compare Doc. 20-3 at 7-8 with Doc. 20-5 at 7-8. Lastly,
-5-

Section IV. Conclusion was identical in the two letters. Compare Doc. 20-3 at 8 with
Doc. 20-5 at 8.
In short, the second letter, sent after the filing of Flowers’s complaint and
accordingly representing Evanston’s first opportunity to address whether it owed
Sandersville Railroad a duty to defend based on the allegations of Flowers’s complaint,
did not recognize this in any fashion, either by describing allegations of the complaint or
explaining why they did not implicate a duty to defend by Evanston. Rather, all of the
operative reservation or rights language and facts in the second letter mirrored the first
letter, which, being sent before Flowers filed his complaint, could not address any duty
to defend. As with the first letter, Sandersville Railroad did not object to the second
letter. See Doc. 46-1 ¶¶ 9-10.
On June 24, 2015, Evanston filed this declaratory judgment action seeking a
determination that its policy did not provide coverage for Flowers’s lawsuit and that it
was entitled to recoup any defense costs paid in regard to the lawsuit. Doc. 1.
Sandersville Railroad settled with Flowers with no contribution from Evanston on
November 20, 2015. Doc. 19-1 ¶ 51. The parties thereafter filed cross motions for
summary judgment in this action. Docs. 18; 20.
The Court, in its September 28, 2016 Order (Doc. 43), granted Evanston’s
motion in part, ruling that Evanston had no duty to indemnify Sandersville Railroad and
no further duty to defend against the action. Doc. 43 at 20. By the time the parties filed
their cross-motions for summary judgment in this action, it was undisputed that Flowers
claimed that he suffered from siderosis, or “welders’ lung,” and that his occupational
lung disease was caused by exposure to welding fumes containing iron. Doc. 23-2 ¶ 1.
But these facts were not alleged in Flowers’s complaint. Doc. 23-2 ¶ 11 (Sandersville
Railroad’s response to Evanston’s statement of material facts, clarifying this point); see
generally Doc. 20-4. The Court ruled that “based on the summary judgment record, the
pollution exclusion” in the policy excluded coverage for Flowers’s lawsuit. Id. As the
-6-

Court noted then: “The relevant facts . . . significantly, are not limited to the allegations
of the Flowers complaint. Rather, the parties have put additional facts in the record to
assist in the determination of whether Evanston’s pollution exclusion excludes coverage
for Flowers’s claims.” Id. at 2 (emphasis added). The Court denied summary judgment
on the parties’ cross motions regarding Evanston’s attempt to recoup its defense costs,
noting that the parties failed to address whether Evanston had a duty to defend based
on the allegations of Flowers’s complaint.4 Id. at 20-23. The Court stated that “[t]he
parties may renew their motions for summary judgment on these issues by way of
motions filed with briefs addressing these remaining issues.” Id. at 23.
Evanston has now moved for summary judgment “[a]s to Count 1,” that
“Evanston owed no duty to defend Defendant Sandersville Railroad Company for Mr.
John Larry Flowers’ Complaint against Sandersville Railroad Company,” and “[a]s to
Count 3,” that “Evanston is entitled to reimbursement from Defendant Sandersville
Railroad Company for all defense fees and costs paid in connection with” Flowers’s
lawsuit. Doc. 44 at 1.
II. STANDARD OF REVIEW
A court shall grant summary judgment “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). “A factual dispute is genuine only if ‘a reasonable
jury could return a verdict for the nonmoving party.’” Info. Sys. & Networks Corp. v. City
of Atlanta, 281 F.3d 1220, 1224 (11th Cir. 2002) (quoting United States v. Four Parcels
of Real Prop., 941 F.2d 1428, 1437 (11th Cir. 1991)). The burden rests with the moving
party to prove that no genuine issue of material fact exists. Id. The party may support
its assertion that a fact is undisputed by “citing to particular parts of materials in the

4

At a hearing held to determine the parties’ positions on the subject, Evanston conceded that it cannot
recoup its defense costs if it had a duty to defend. See Doc. 43 at 22.

-7-

record, including depositions, documents, electronically stored information, affidavits or
declarations, stipulations (including those made for purposes of the motion only),
admissions, interrogatory answers, or other materials.” Fed. R. Civ. P. 56(c)(1)(A).
“If the moving party bears the burden of proof at trial, the moving party must
establish all essential elements of the claim or defense in order to obtain summary
judgment.” Anthony v. Anthony, 642 F. Supp. 2d 1366, 1371 (S.D. Fla. 2009) (citing
Four Parcels of Real Prop., 941 F.2d at 1438). The moving party must carry its burden
by presenting “credible evidence” affirmatively showing that, “on all the essential
elements of its case on which it bears the burden of proof at trial, no reasonable jury
could find for the nonmoving party.” Four Parcels of Real Prop., 941 F.2d at 1438. In
other words, the moving party’s evidence must be so credible that, if not controverted at
trial, the party would be entitled to a directed verdict. Id.
“If the moving party makes such an affirmative showing, it is entitled to summary
judgment unless the nonmoving party, in response, ‘come[s] forward with significant,
probative evidence demonstrating the existence of a triable issue of fact.’” Id. (quoting
Chanel, Inc. v. Italian Activewear of Fla., Inc., 931 F.2d 1472, 1477 (11th Cir. 1991))
(alteration in original). However, “credibility determinations, the weighing of the
evidence, and the drawing of legitimate inferences from the facts are jury functions, not
those of a judge. . . . The evidence of the non-movant is to be believed, and all
justifiable inferences are to be drawn in his favor.” Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 255 (1986). Thus, the Court “‘can only grant summary judgment if everything
in the record demonstrates that no genuine issue of material fact exists.’” Strickland v.
Norfolk S. Ry. Co., 692 F.3d 1151, 1154 (11th Cir. 2012) (quoting Tippens v. Celotex
Corp., 805 F.2d 949, 952 (11th Cir. 1986)).
In contrast, “[w]hen the nonmoving party has the burden of proof at trial, the
moving party is not required to ‘support its motion with affidavits or other similar material
negating the opponent’s claim.’” Four Parcels of Real Prop., 941 F.2d at 1437 (quoting
-8-

Celotex Corp. v. Cartrett, 477 U.S. 317, 323 (1986)). The moving party “simply may
show . . . that there is an absence of evidence to support the nonmoving party’s case.”
Id. at 1438 (internal quotation marks and citation omitted). “Assuming the moving party
has met its burden, the non-movant must then show a genuine dispute regarding any
issue for which it will bear the burden of proof at trial.” Info. Sys. & Networks Corp., 281
F.3d at 1224-25 (citing Celotex Corp., 477 U.S. at 324).
III. DISCUSSION
“The remaining issues are: (1) whether, based on the allegations of Flowers’s
complaint rather than on the broader summary judgment record, Evanston owed a duty
to defend Sandersville Railroad after the exhaustion of its self-insured retention; and, if
it is determined that Evanston had no such duty, (2) whether, pursuant to its reservation
of rights letter, Evanston can recoup the defense costs tendered to Sandersville
Railroad.” Doc. 43 at 20-21. As Evanston concedes, it cannot recoup its defense costs
under a reservation of rights if it had a duty to defend based on the allegations of
Flowers’s complaint. See, e.g., Doc. 44-1 at 18 (“In the present case, Evanston does
not contend it would have a right to reimbursement if there had been a duty to defend.”).
Cf. Ga Interlocal Risk Mgmt. Agency v. City of Sandy Springs, 337 Ga. App. 340, 34647, 788 S.E.2d 74, 79 (2016) (recognizing that an “insurer’s right to reimbursement of
defense costs and fees” even under the “majority” view is limited to situations “where it
is determined that the insurer had no duty to defend”).
A.

Whether, based on the allegations of Flowers’s complaint, Evanston had a
duty to defend
Under Georgia law, “an insurer’s duty to pay and its duty to defend are separate

and independent obligations.” Penn-Am. Ins. Co. v. Disabled Am. Veterans, Inc., 268
Ga. 564, 565, 490 S.E.2d 374, 376 (1997) (citation and quotation marks omitted). “The
insurer may be obligated to defend, even though it was not ultimately liable for any
judgment . . . .” Id. at 565, 490 S.E.2d at 376-77 (citation, quotation marks, and
-9-

alteration omitted). “[T]he insurer is obligated to defend where . . . the allegations of the
complaint against the insured are ambiguous or incomplete with respect to the issue of
insurance coverage.” Id. at 565, 490 S.E.2d at 376. And “it is only where the complaint
sets forth true factual allegations showing no coverage that the suit is one for which
liability insurance coverage is not afforded and for which the insurer need not provide a
defense.” Id. “Where the claim is one of potential coverage, doubt as to liability and
[the] insurer’s duty to defend should be resolved in favor of the insured.” Id. (citation
and quotation marks omitted).
Accordingly, the question is whether, as a matter of law, the allegations of
Flowers’s complaint unambiguously exclude coverage.5 Id. (“To excuse the duty to
defend the [complaint] must unambiguously exclude coverage . . . .” (citation and
quotation marks omitted)). On a practical level, this question boils down to whether
Flowers’s complaint is unambiguous and complete in alleging that Flowers’s injuries
arose “out of the . . . discharge, dispersal, seepage, migration, release or escape of
‘pollutants.’”6 See Doc. 43 at 7, 14.
5

Evanston, rightly, does not argue that the allegations of the complaint coupled with other information
available at the time the complaint was filed, say the demand letter, should be considered when
determining whether the allegations of the complaint negated a duty to defend. If Evanston wanted these
facts to be considered in relation to its defense obligations, it could have secured a stay of Flowers’s
lawsuit while seeking declaratory relief as to its obligations to Sandersville Railroad. See note 3 supra.

6

Sandersville Railroad argues that the Court should not only consider ambiguity and incompleteness in
the factual allegations, but should also consider the legal uncertainty as to the scope of the pollution
exclusion. Doc. 46 at 17-18. First, the Court does not find any support in Georgia case law for the
proposition that legal uncertainty is considered in determining the duty to defend. Second, the Court
cannot say there was legal uncertainty regarding pollution exclusions when Flowers filed his lawsuit.
Georgia law governing the breadth of pollution exclusions was not ambiguous following Reed v. AutoOwners Insurance Co., 284 Ga. 286, 667 S.E.2d 90 (2008). See Doc. 43 at 8-9. Bituminous Casualty,
the older decision by the Eleventh Circuit relied on by Sandersville Railroad using contrary, outdated
reasoning, does not change this. See Id. at 10-11 & n.5; see also Bituminous Cas. Corp. v. Advanced
Adhesive Tech., Inc., 73 F.3d 335 (11th Cir. 1996). The Georgia Supreme Court’s subsequent decision
in Smith, though helpful and solidifying, did not clarify any ambiguity left by Reed; it simply enforced
Reed’s holding. Ga. Farm Bureau Mut. Ins. Co. v. Smith, 298 Ga. 716, 720, 784 S.E.2d 422, 425 (2016)
(“[O]ur decision in Reed controls the manner in which pollution exclusions in CGL policies are to be
construed by the courts of this State, the Court of Appeals erred in failing to apply this Court’s analysis in
Reed to the facts of this case.”). Still, pollution exclusions are somewhat arcane, and whether a
complaint’s allegations unambiguously implicate a pollution exclusion can be difficult to determine. See,
e.g., Barrett v. Nat’l Union Fire Ins. Co. of Pittsburgh, 304 Ga. App. 314, 321, 696 S.E.2d 326, 332 (2010)

-10-

Flowers’s three-page complaint is not a model of clarity. In relevant part, he
alleges that as a welder he worked “in very close and poorly ventilated conditions.”
Doc. 20-4 ¶ 4. He then alleges he “developed shortness of breath[,] . . . was diagnosed
with advanced lung disease[,] [and] was advised to avoid further exposure to workplace
toxins, including welding fumes.” Id. ¶ 5. Immediately following this allegation, he
claims “[a]s a result,” he lost wages, sustained pain and suffering, and incurred medical
expenses. Id. Flowers then alleges that Sandersville Railroad was negligent because it
failed to provide a safe place to work, failed to provide adequate breathing protection,
failed to ventilate the areas where he welded, failed to adopt procedures and
safeguards for breathing protection, failed to warn and train him regarding the dangers
and signs of occupational lung disorders, and failed to provide proper supervision. Id.
¶ 6.
No doubt because of Flowers’s spare allegations, Evanston massages and
supplements these allegations. Evanston asserts that “Flowers alleged that he
contracted ‘welder’s lung’ disease from exposure to welding fumes during the course of
his employment for Sandersville.” Doc. 44-1 at 2-3. This is not true. Flowers’
complaint does not mention “welder’s lung disease,” a phrase that suggests some
causal connection to his work as a welder at Sandersville Railroad. Rather, the
complaint simply alleges that Flowers “was diagnosed with advanced lung disease.”
Doc. 20-4 ¶ 5. Evanston doubles down on this incorrect assertion with its next—that
“Flowers specifically alleged he was injured from ‘exposure to workplace toxins,
including welding fumes.’” 7 Doc. 44-1 at 7 (emphasis added). That specific allegation
(reversing the trial court’s dismissal based on pollution exclusion clause where “the allegations [of the
complaint] do not show . . . a definitive ‘but-for’ causal link” between plaintiff’s brain injury and the release
of natural gas). So, while the legal scope of pollution exclusions is settled, that does not mean they are
easy to apply factually, as this case has illustrated.
7

Evanston made this characterization in its statement of material facts; Sandersville Railroad took
issue with the characterization then and has since maintained its opposition. Docs. 23-2 ¶ 1 (clarifying
that “the actual [Flowers complaint] alleges only that he developed ‘advanced lung disease.’”); ¶ 11

-11-

is not in the complaint. To the contrary, the complaint does not allege, “specifically” or
generally, that Flowers’s advanced lung disease was caused by workplace toxins, such
as welding fumes. As noted above, Flowers simply alleged that he was “advised to
avoid further exposure to workplace toxins, including welding fumes.” Doc. 20-4 ¶ 5.
Evanston does not argue what perhaps it could have argued. Perhaps it should
have conceded that a literal reading of Flowers’s complaint does not unambiguously
lead to the conclusion that he is alleging that he contracted lung disease as a result of
workplace exposure to toxins and then argued that, if considered in a more practical
light, it can be inferred from Flowers’s allegations that he is alleging an injury that falls
within the pollution exclusion. While that argument is certainly preferable to reworking
Flowers’s complaint to make it allege something it does not, that argument too runs
afoul of Georgia law. Again, the question is whether the allegations of the complaint
“unambiguously exclude coverage.” Even if Flowers’s allegations are examined in such
a practical light, an inference of a claim within the pollution exclusion is not the only
inference that can be drawn. For example, it can be inferred that Flowers is
complaining about Evanston’s response to a lung disease that was not caused by
workplace toxins. Again, he simply asserts that he has a lung disease and that “as a
result of that lung disease,” he was advised to avoid further exposure to workplace
toxins. Evanston’s interpretation of Flowers’s complaint is accordingly not the only
reasonable interpretation, and, it must be remembered, the Court must resolve the
ambiguity in favor of the insured—Sandersville Railroad. Cf. Hoover v. Maxum Indem.
Co., 291 Ga. 402, 408, 730 S.E.2d 413, 418 (2012); Penn-Am. Ins. Co., 268 Ga. at 565,
490 S.E.2d at 376. Accordingly, the Court cannot say, as a matter of law, that the
(clarifying that Flowers’s complaint “does not specifically allege that [Flowers’s lung disease] was caused
by welding fumes; rather, the Complaint alleges that he was ‘advised’ (by his doctor) to avoid welding
fumes”); 46 at 18 (“[T]he Flowers complaint is open-ended as the potential causes of his injury. While the
Flowers complaint does refer to welding fumes and lack of breathing protection, it also indicates these are
not exclusive causes of his injury.”).

-12-

allegations of Flowers’s complaint establish that Evanston did not owe Sandersville
Railroad a duty to defend.
B.

Whether, even assuming Evanston had no duty to defend, it has a right to
recoup defense costs
Even if Evanston had no duty to defend Sandersville Railroad, Evanston has not

shown as a matter of law that it is entitled to reimbursement of defense costs.
Courts are divided on whether an insurer that has defended an insured under a
reservation of rights is entitled to recoup its defense costs when it is thereafter
adjudicated that the insurer was not obligated to defend. See Ill. Union Ins. Co. v. NRI
Constr., Inc., 846 F.Supp.2d 1366, 1374 (N.D. Ga. 2012). Courts following what is often
referred to as the “majority rule” allowing recoupment8 hold that an insured can defend
the insured and create a right to recoup its defense costs, but only “where the insurer
(1) timely and explicitly reserves its right to recoup the costs; and (2) provides specific
and adequate notice of the possibility of reimbursement.” Id. Courts following the
minority rule do not allow recoupment even where the insurer timely provides such a
reservation of rights. Id. at 1375. The Georgia Court of Appeals recently noted this split
and stated that this question remains unresolved in Georgia. Ga Interlocal Risk Mgmt.
Agency, 337 Ga. App. at 346, 788 S.E.2d at 79.
Evanston urges the Court to follow Illinois Union, a Northern District of Georgia
case (cited above), in its prediction that Georgia will follow the majority rule. Doc. 44-1
at 9, 12. Evanston contends that Georgia will follow the majority rule because it is
consonant with Georgia law—case law governing the effect of bilateral reservations of
rights as to coverage defenses, Georgia unjust enrichment and implied contract law,
8

See Am. & Foreign Ins. Co. v. Jerry's Sport Ctr., Inc., 606 Pa. 584, 594, 601, 2 A.3d 526, 532, 536
(2010) (recognizing that this has been characterized as the majority rule). There is a recent trend of
courts not allowing recoupment, which calls into question whether jurisdictions allowing recoupment
actually remain in the majority. See Gen. Star Indem. Co. v. Driven Sports, Inc., 80 F. Supp. 3d 442, 461
n.14 (E.D.N.Y. 2015). But for convenience, the Court will refer to the rule set out in Illinois Union as the
majority rule. See Ill. Union Ins. Co., 846 F. Supp. 2d at 1374.

-13-

and Georgia public policy.9 Doc. 44-1 at 9-15. The Court need not predict whether
Georgia will follow the majority rule or the minority rule because Evanston has not
demonstrated that it has properly reserved its rights as required by the majority rule.
If Georgia follows the majority rule, the Court predicts, as it appears that
Evanston itself concedes, a reservation of rights as to defense obligations must meet
Georgia’s requirements for a reservation of rights as to coverage obligations. See Doc.
49 at 4-7 (recognizing that the insurer must “fairly inform” an insured of the insurer’s
position regarding defense obligations). But Evanston’s letter attempting to reserve a
right to defense cost recoupment does not meet these requirements. Under Georgia
law,
In order to inform an insured of the insurer’s position
regarding its defenses, a reservation of rights must be
unambiguous. If it is ambiguous, the purported reservation
of rights must be construed strictly against the insurer and
liberally in favor of the insured. A reservation of rights is
not valid if it does not fairly inform the insured of the
insurer’s position.
Hoover, 291 Ga. at 406, 730 S.E.2d at 417 (citations, quotations, and alterations
omitted). The reservation of rights should also “inform the insured of the specific basis
for the insurer’s reservations . . . .” World Harvest Church, Inc. v. GuideOne Mut. Ins.
Co., 287 Ga. 149, 152, 695 S.E.2d 6, 10 (2010) (citations, quotations, and alterations
omitted). “[A] mere allegation that the insurer contend[s] that the insured was not
covered by the policy, without more, does not show any reservation on its part of a right
to insist that the coverage of the policy was not extended to him.” Id. (citations,
quotations, and alterations omitted). A reservation of rights that does not meet these

9

Evanston has not argued that the reservation of rights letter created an express contract allowing
recoupment. Cf. O.C.G.A. § 13-3-1 (“To constitute a valid contract, there must be parties able to contract,
a consideration moving to the contract, the assent of the parties to the terms of the contract, and a
subject matter upon which the contract can operate.”).

-14-

requirements is disregarded. Hoover, 291 Ga. at 406, 730 S.E.2d at 417; World
Harvest Church, Inc., 287 Ga. at 152, 695 S.E.2d at 9.
Sandersville Railroad notes: “Although Evanston now contends that it never had
a duty to defend the underlying lawsuit . . . , it did not take that position at the time of the
reservation of rights letter . . . .” Doc. 46 at 7. Sandersville Railroad contends that
Evanston’s reservation of rights letters are ambiguous because, “Evanston did not deny
that a duty to defend existed under the insurance contract, and Evanston’s letters did
not fairly notify Sandersville [Railroad] that Evanston was acting outside of the parties[’]
contract to provide Sandersville [Railroad] defense funds that were subject to a
recoupment obligation.” Id. at 11. The Court agrees.
Throughout its dealings with Sandersville Railroad in this case, Evanston has
overlooked, or at least muddled, the distinction between the duty to defend and the duty
to indemnify as well as the importance of this distinction in relation to any recoupment of
defense costs. This is best seen in the language Evanston used in its reservation of
rights letters, by which it attempted to obligate Sandersville Railroad to reimburse the
defense costs. In both letters, Evanston stated that it “reserves the right to
reimbursement of defense costs paid if it establishes that it owes no coverage to the
insured.” Doc. 20-5 at 7 (emphasis added).10 Georgia law clearly states that the duty to
defend is broader than the duty to indemnify and there are accordingly many situations
where the insurer has no coverage for the claim but nonetheless owes a duty to defend
the insured against it.11 The distinction between the two is clearly illustrated by what
10

In the Court’s view, Evanston’s representation that it was “reserving” the right to recoup defense costs
is confusing, perhaps even misleading or even plain wrong. There was no right to recover defense costs
in the policy or otherwise then-existing under Georgia law. Rather, Evanston, in addition to reserving its
right to assert a coverage defense based on the pollution exclusion, was seeking to lay the foundation for
a new right.
11

While it is perhaps conceivable to read “coverage” as encompassing the duty to defend and the duty
to indemnify, that is not how the term is commonly used. See, e.g., Hoover, 291 Ga. at 404, 730 S.E.2d
at 416; Richmond v. Ga. Farm Bureau Mut. Ins. Co., 140 Ga. App. 215, 217-18, 231 S.E.2d 245, 247-48
(1976). It should be remembered that a reservation of rights must be construed strictly against the

-15-

has happened here. Evanston, based on evidence well outside of the complaint,
established that it had no coverage for this occurrence. But, as Evanston
acknowledges, that in no way establishes that it is entitled to reimbursement of defense
costs paid. Rather, it can recover its defense costs only if there was no duty to defend.
Evanston’s confusion is also highlighted by the very fact that the two letters it
sent were nearly identical, the second letter attaching no substantive significance to the
intervening filing of Flowers’s complaint. Evanston’s second letter was its opportunity to
explain that it did not believe that it had a duty to defend because the allegations of
Flower’s complaint, taken as true, unambiguously fell within the pollution exclusion and
accordingly excluded coverage. But the second letter does not even mention the
Flowers’s complaint. See generally Doc. 20-5. For that matter, nothing in the letter
definitively indicates that Evanston had ever seen the complaint.12 Id. Evanston’s
second letter relied on the same facts relied on in the first letter—facts not pled in
Flowers’s complaint—to assert its position: that the pollution exclusion might negate
coverage. See id. at 2, 6-7. Clearly, the first letter, because it was sent prior to the
filing of Flowers’s complaint, did not, and clearly could not, offer an informed position on
Evanston’s defense obligations. It did not attempt to. The first letter did not contest
whether Evanston had a duty to defend or offer a basis for doing so. When Evanston
resent that letter (despite the few, nonsubstantive changes noted above), the letter did
not magically transform into a letter addressing these issues. To the contrary, the

insurer and liberally in favor of the insured. Moreover, as discussed below, it is pertinent that this
language was used in Evanston’s first letter, which clearly could not be taken as addressing Evanston’s
duty to defend as Flowers’s complaint was yet to be filed.
12
The letter mentions allegations, stating: “He [Flowers’s] alleges that he contracted ‘welder’s lung’
disease from occupational exposure to welding fumes while welding railroad cars owned by Sandersville
Railroad.” Id. at 6 (emphasis added). But that identical characterization of Flowers’s claims was present
in the first letter (though “He” in the second letter replaces “His attorney” in the first). See Doc. 20-3 at 7.
Because this was Evanston’s summary of the claim before Flowers even filed his complaint and, as
explained above, is not even found in Flowers’s complaint, it does not indicate any interaction with the
allegations of Flowers’s complaint (distinct from Evanston’s knowledge of the claim from other sources).

-16-

second letter demonstrates that Evanston was oblivious of its need to fairly inform
Sandersville Railroad of its current position—that the allegations of the complaint, taken
as true, unambiguously and completely exclude coverage because they fall within the
pollution exclusion.
It seems that Evanston first realized these problems with its letters when it read
Sandersville Railroad’s response brief pointing them out.13 But instead of addressing
the problems head-on, Evanston calls Sandersville Railroad’s argument—that
“Evanston did not deny that a duty to defend existed under the insurance contract, and
Evanston’s letters [accordingly] did not fairly notify Sandersville that Evanston was
acting outside the parties contract”—“astonishing” and “blatantly wrong.” Doc. 49 at 4
(quoting Doc. 46 at 11). Instead of acknowledging the problems with its reservation of
rights letters, Evanston, much in the way it rewrote Flowers’s complaint, rewrites the
record stating: “The letters could not be more clear . . . . they conspicuously and
unambiguously stated that Evanston owed no defense or indemnity.” Id. at 5 (emphasis
added). It is this statement that the Court finds “astonishing” and “blatantly wrong.” As
noted above, Evanston’s letters never state a position that Evanston did not owe
Sandersville Railroad a defense, let alone why. To properly inform Sandersville
Railroad in the reservation of rights letter what it was attempting to do, it was incumbent
upon Evanston to advise Sandersville Railroad that it would have the right to
reimbursement of defense costs paid if it established that the allegations of the
complaint unambiguously exclude coverage because the allegations, taken as true,
necessarily fall within the pollution exclusion. But, as explained, Evanston did not.
Evanston cannot fix that problem now. Cf. Hoover, 291 Ga. at 407, 730 S.E.2d at 418

13

Even in its initial brief in support of its latest motion for summary judgment, Evanston argues that
“Sandersville consented in bilateral reservation of rights agreements to reimburse the money if it was
determined there was no coverage.” Doc. 44-1 at 9 (emphasis added).

-17-

(holding that any reason to deny coverage not asserted in the reservation of rights is
waived).
Accordingly, Evanston’s letters are defective and ineffective to support any right
to recoup the defense costs and, regardless of whether Georgia follows the majority or
minority rule, Evanston is not entitled to summary judgment.
III. CONCLUSION
In conclusion, Evanston has not shown as a matter of law that it did not owe a
duty to defend. And even if it had, Evanston has not shown as a matter of law that its
reservation of rights letters fairly informed Sandersville Railroad of Evanston’s position,
which is prerequisite to any recoupment of defense costs. Accordingly, Evanston’s
motion for summary judgment (Doc. 44) is DENIED.
The Court will convene a telephone conference for the purpose of determining if
this Order disposes of this case or, otherwise, what further steps are appropriate.
SO ORDERED, this 25th day of July, 2017.
S/ Marc T. Treadwell
MARC T. TREADWELL, JUDGE
UNITED STATES DISTRICT COURT

-18-