Canal Insurance Company v. Xmex Transport, LLC et al
ORDER GRANTING 57 Motion for Summary Judgment; DENYING 58 Motion for Summary Judgment; DENYING 59 Motion for Summary Judgment Signed by Judge Kathleen Cardone. (dl1)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
EL PASO DIVISION
CANAL INSURANCE COMPANY,
XMEX TRANSPORT, LLC, et al.,
On this day, the Court considered the above-captioned case (the “Case”). The Case is a
declaratory judgment action concerning an insurer’s duties under a liability insurance policy.
Five parties to the Case have filed cross-motions for summary judgment (collectively the
“Motions”). Two of the Motions are substantive: Defendant Jessica Lopez’s Motion for
Summary Judgment Regarding Plaintiff Canal’s Duty to Defend (the “Lopez Motion”), ECF No.
57, and the Motion for Summary Judgment of Canal Insurance Company on the Duty to Defend
(the “Canal Motion”), ECF No. 59. The other three moving parties have adopted the Lopez
Motion by reference, and one of those parties seeks relief beyond that requested by Lopez. At
issue in the Motions is whether Canal had a duty to provide a defense to certain alleged insureds
in liability litigation in Texas state court concerning a fatal truck accident. All five moving
parties have filed a number of responses, replies, and supplemental briefs regarding the
Motions.1 The Court need rule upon three of the Motions to dispose of the instant controversy:
Canal filed in conjunction with the Canal Motion a list of Proposed Undisputed Facts (“Canal Proposed Facts”),
ECF No. 59-1. Lopez also filed a list of Proposed Undisputed Facts (“Lopez Proposed Facts”), ECF No. 61. Canal
For the reasons set forth herein, the Lopez Motion is GRANTED, the Trailer Defendants’
Motion is DENIED, and the Canal Motion is DENIED.
Factual and Procedural History
Unless otherwise noted, the following facts are undisputed:
On August 17, 2010, Lorenzo Munoz (“Munoz”) and Roger Franceware (“Franceware”)
were traveling eastbound on Interstate 20 in Mitchell County, Texas, in a 2007 International
truck bearing Vehicle Identification Number 2HSCNSCR57C432781 (the “Truck”). Canal
Proposed Facts ¶ 2; Lopez Resp. to Proposed Facts ¶ 2; Crash Report, ECF No. 59-2 at 71-73.2
The Truck was towing a trailer (the “Trailer”). Crash Report 73. The parties dispute whether
Munoz or Franceware was driving.3 See Munoz Pls.’ Am. Pet. of Mar. 10, 2014 (“Munoz Live
filed a response to the Lopez Motion (“Canal Response”), ECF No. 64, as well as a response to the Lopez Proposed
Facts (“Canal Response to Proposed Facts”), ECF No. 63. Lopez filed a response to the Canal Motion (“Lopez
Response”), ECF No. 66, as well as a response to the Canal Proposed Facts (“Lopez Response to Canal Proposed
Facts”), ECF No. 66-2. Canal filed a reply to the Lopez Response (“Reply to Lopez”), ECF No. 68. Lopez did not
file a reply in support of the Lopez Motion.
Defendant Rosa Franceware adopted by reference the Lopez Motion. See ECF No. 65. She has not otherwise
briefed the Motions.
Defendants A-Z Trailers, Inc., Dykes & Dykes Trailers, Inc., Goal Transports, Inc., and Jose M. Gomez
(collectively “Trailer Defendants”) also adopted by reference the Lopez Motion (“Trailer Defendants’ Motion”),
ECF No. 58. The Trailer Defendants filed their own response to the Canal Motion (“Trailer Defendants’ Response”),
ECF No. 69, to which Canal filed a reply (“Reply to Trailer Defendants”), ECF No. 71.
Defendants Lorena Munoz and Virginia Munoz (collectively “Munoz Defendants”) filed their own response to the
Canal Motion (“Munoz Response”), ECF No. 67, to which Canal filed a reply (“Reply to Munoz”), ECF No. 70.
The Court’s citations to documents filed in the Case refer to the page numbers superimposed upon them by the
Lopez, the Munoz Defendants, and Rosa Franceware filed multiple petitions in the State Court Litigation. See ECF
No. 1-1 through 1-9; ECF No. 57-1. None of the parties argue that Canal’s duty to defend changed over time as the
parties amended their pleadings. Accordingly, the Court refers to the allegations in each party’s last-filed petition,
that is, their live pleading. See Atl. Cas. Ins. Co. v. Ramirez, 651 F. Supp. 2d 686, 697 n.2 (N.D. Tex. 2009).
Petition”), ECF No. 57-1 at 4; Pls.’ Fifth Am. Pet. (“Lopez Live Petition”), ECF No. 51-1 at 5;
First Am. Plea in Intervention (“Franceware Live Petition”), ECF No. 50 at 9. The Truck left the
highway, crashed, and caught fire, killing both Munoz and Franceware. Canal Proposed Facts ¶
2; Lopez Resp. to Proposed Facts ¶ 2; Crash Report 73.
Munoz’s and Franceware’s survivors filed lawsuits in state court in El Paso, Texas
(collectively the “State Court Litigation”), in which they alleged that numerous parties associated
with the Truck or the Trailer were liable for Munoz’s and Franceware’s personal injuries and
wrongful deaths. See Munoz Live Pet. 1-12; Lopez Live Pet. 1-14; Franceware Live Pet. 4-26.
Each decedent’s survivors also alleged that the other decedent was among the responsible
parties. See Munoz Live Pet. 6; Lopez Live Pet. 6-7; Franceware Live Pet. 10-11. In brief, the
Munoz Defendants filed one lawsuit, Lopez filed a second lawsuit as administratrix of
Franceware’s estate and next friend of two of Franceware’s minor children, Franceware’s widow
Rosa Franceware intervened in both lawsuits, and the state court consolidated the two lawsuits
for trial. See ECF No. 62-1; Canal Ins. Co. v. XMEX Transp. LLC, No. 3:12-cv-178, 2013 WL
663742, at *1 (E.D. Tenn. Feb. 25, 2013).
Among the defendants in the State Court Litigation were the Trailer Defendants,
Defendant XMEX Transport, LLC (“XMEX”), Defendant Charles Strader, and non-party Moore
Freight Services, Inc. (“Moore Freight”). The underlying petitions alleged that the Trailer
Defendants have some interest in the Trailer, and that XMEX, Strader, and Moore Freight all
have some interest in the Truck. More specifically, Moore Freight and XMEX are trucking
companies. Moore Freight allegedly owned the Truck. See Munoz Live Pet. 3; Franceware Live
Pet. 9. However, Strader allegedly founded XMEX while he was an employee of Moore Freight,
and allegedly misappropriated Moore Freight’s equipment, including the Truck, to operate
XMEX. See Munoz Live Pet. at 5-6.
Most of the specific allegations and theories of liability set forth in the State Court
Litigation are not pertinent to the Motions. However, for reasons explained below, the parties’
allegations concerning the identity of the Truck and the employment status of Munoz and
Franceware are crucial to resolving the Motions.
First, the Munoz Defendants alleged that the Truck was a “2007 International” owned by
Moore Freight, and that Franceware was driving the Truck in the course and scope of his
employment with Moore Freight, XMEX, Strader, or certain of the Trailer Defendants. Munoz
Live Pet. 3-4. They additionally alleged alternative theories of liability against various
defendants in the case that the jury found that Munoz was driving the Truck. Id. at 6. The Munoz
Defendants finally alleged that Munoz was not employed by any of the defendants. Id. at 4.
Second, Lopez alleged that Munoz was driving the Truck in the course and scope of his
employment with Strader, XMEX, or Moore Freight, and that some combination of those parties
owned the Truck. Lopez Live Pet. 5-8. Lopez denied that Franceware was acting in the course
and scope of his employment with Strader, XMEX, or Moore Freight, but pleaded in the
alternative that Franceware was a truck driver employed by Strader, XMEX, or Moore Freight.
Id. at 6.
Third, Rosa Franceware pleaded that Franceware was “either the driver or passenger of a
 Moore Freight tractor.” Franceware Live Pet. 9. She further pleaded in the alternative that
Franceware either was or was not acting in the course and scope of his employment with Strader,
XMEX, or Moore Freight. Id. at 10. She finally pleaded that Munoz was acting in the course and
scope of his employment with one or more of Moore Freight, its principal Dan Moore, Strader,
XMEX, or other unspecified defendants. Id. at 11.
Thus, to summarize the allegations that are pertinent to the Motions, at least one party to
the State Court Litigation alleged that Franceware was acting in the course and scope of his
employment with XMEX, and at least one other party alleged that he was not. Similarly, at least
one party alleged that Munoz was acting in the course and scope of his employment with
XMEX, and at least one other party alleged that he was not. None of the pleadings in the State
Court Litigation specifically identified the Truck, for instance, by its VIN or license plate
number. The most specific description of the Truck in any of those pleadings was the allegation
in the Munoz Live Petition that the Truck was a “2007 International.”
On August 6, 2010, Canal issued a liability insurance policy numbered PIA06033700 to
XMEX (the “Policy”), ECF No. 1-10. The Policy was in effect at the time of the accident. Policy
1. Several defendants in the State Court Litigation asserted that the Policy obligated Canal to
provide them a defense and indemnify them in that litigation. Canal ultimately provided a
defense to XMEX and Strader under reservations of rights.4 Canal Br. on Mootness, ECF No. 75
¶ 2. Canal refused to provide a defense to the Trailer Defendants and Lopez, in her capacity as
the executor of Franceware’s estate.5 Trailer Defs. Br. on Mootness, ECF No. 74 ¶¶ 2, 5; Lopez
Br. on Mootness, ECF No. 76 ¶ 6.
Canal also provided a defense to Moore Freight under the terms of a separate policy it issued to Moore Freight. See
Canal Br. on Mootness ¶ 2. That policy is not at issue in the Case.
As Lopez was also a plaintiff in the State Court Litigation, it is not clear what providing a defense to her in her
capacity as the executor of Franceware’s estate would have entailed. There is no indication that the Munoz
Defendants and Rosa Franceware, who were similarly situated, also demanded a defense.
The State Court Litigation began on October 25, 2010. See ECF No. 1 at 5. Eighteen
months later, on April 17, 2012, Canal filed a declaratory action against all of the defendants in
the State Court Litigation, except Moore Freight, in the United States District Court for the
Eastern District of Tennessee. See Compl., Canal Ins. Co. v. XMEX Transp., LLC, No. 3:12-cv178-TWP-HBG (E.D. Tenn. Apr. 17, 2012). Canal sought, among other things, declarations that
the Policy did not require it to defend or indemnify any parties in the State Court Litigation. Id.
at 11. That court ultimately dismissed the case pursuant to its discretionary authority under the
Declaratory Judgment Act, refused to grant a change of venue to this court, and found that it
lacked personal jurisdiction over some of the defendants. See Canal Ins. Co. v. XMEX Transp.,
LLC, No. 3:12-cv-178, 2013 WL 663742, at *5, 8 (E.D. Tenn. Feb. 25, 2013).
Canal then filed the Case on May 7, 2013. See Compl. for Declaratory J., ECF No. 1. As
in the Tennessee action, Canal seeks declarations that the Policy does not require it to defend or
indemnify any of the defendants in the State Court Litigation. See id. at 12. Canal again named
as defendants all of the parties to the State Court Litigation except Moore Freight. See id. at 2-4.
However, Canal has not served several of the defendants, and several served defendants have not
appeared. See Joint Report of Parties Planning Meeting, ECF No. 46 at 1-2. Notably, XMEX and
Strader are among those who have not appeared.6 See id. at 1.
The Trailer Defendants moved to join Moore Freight under Federal Rule of Civil
Procedure 19(a), or in the alternative to dismiss for failure to join a party under Federal Rule of
Canal served XMEX and Strader by certified mail. See ECF No. 30; ECF No. 40. Such service is permissible
under the Tennessee Rules of Civil Procedure, and hence under the Federal Rules of Civil Procedure as well. See
Tenn. R. Civ. P. 4.04(10); Fed. R. Civ. P. 4(e)(1). As XMEX was the policyholder, the Court is discomfited by its
absence from this litigation. However, the parties have not hesitated and the Court sees no reason not to proceed in
Civil Procedure 12(b)(7). See, ECF No. 26. The Court denied that motion on October 22, 2013.
See Order, ECF No. 39.
Lopez then filed a motion requesting that the Court dismiss the Case pursuant to its
discretionary authority under the Declaratory Judgment Act, or in the alternative, abate the Case
in deference to the State Court Litigation. See Mot. to Dismiss, ECF No. 43. While that motion
was pending, the Court entered a scheduling order on January 29, 2014. See Scheduling Order,
ECF No. 49. The Court noted that under Texas law, it would be appropriate to immediately
adjudicate the duty to defend on the basis of the Policy and the pleadings in the State Court
Litigation, but that it would be inappropriate to adjudicate the duty to indemnify until after the
conclusion of the State Court Litigation. See id. The Court therefore ordered the parties to file
motions for summary judgment concerning the duty to defend within thirty days after it ruled on
the pending motion to dismiss. See id.
The Court denied the motion to dismiss. See March 4, 2014, Order, ECF No. 56. The
Court noted in its order that although either Texas law or Tennessee law might ultimately govern
its interpretation of the Policy, both states’ laws bifurcate the duty to defend and duty to
indemnify analyses. See id. at 13-16. Mindful of the parties’ representation that the State Court
Litigation was “just a few months away from trial after literally years of discovery and
procedural wrangling,” see id. at 17 n.10, the Court accordingly reiterated its order for the parties
to move for summary judgment as to the duty to defend within thirty days. See id. at 20.
The parties then timely filed the Motions. In the course of briefing the Motions, the
parties informed the Court that the State Court Litigation had proceeded to a jury verdict. 7 See
The Court does not address the jury’s findings because the parties make no argument that the Court should take
those findings into account in adjudicating the duty to defend.
Canal Resp. ¶ 1; Jury Verdict, ECF No. 62-1. The Court then sua sponte ordered the parties to
brief whether the return of the jury verdict mooted the dispute over the duty to defend. See May
12, 2014, Order, ECF No. 72. The parties have filed the requisite supplemental briefs on
mootness. See Trailer Defs. Br. on Mootness, ECF No. 74; Canal Br. on Mootness, ECF No. 75;
Lopez Br. on Mootness, ECF No. 76. All the parties argue that the dispute over the duty to
defend is not moot, and the Court agrees.
The Motions are now fully briefed. In sum, Lopez now asks the Court to declare that the
Policy obligates Canal to defend XMEX, Strader, and Franceware’s estate, and Canal asks the
Court to declare that it has no duty to defend those parties. Lopez Mot. ¶ 3; Canal Mot. ¶ 58.
Additionally, the Trailer Defendants move for a declaration that Canal is obligated to defend
them.8 See ECF No. 58; ECF No. 58-1.
The Policy first describes which vehicles and individuals it covers, and then sets forth a
number of exclusions from those baseline coverage provisions.
General coverage provisions
Section II.A of the Policy provides that
We will pay all sums an “insured” legally must pay as damages because of
“bodily injury” or “property damage” to which this insurance applies, caused by
an “accident” and resulting from the ownership, maintenance, or use of a covered
The filings of the Trailer Defendants are curious, to say the least. The Trailer Defendants adopted the Lopez
Motion by reference, see ECF No. 58, but the Lopez Motion makes no mention of the Trailer Defendants and does
not assert that Canal owes them a duty to defend. However, the Trailer Defendants also filed a proposed order, ECF
No. 58-1, by which they clearly request a declaration that Canal has a duty to defend them. The Court finds that the
Trailer Defendants have moved for summary judgment as to Canal’s duty to defend them. Beyond that, though, the
Trailer Defendants make no substantive argument, whether in conjunction with their motion or in their subsequent
response to the Canal Motion, as to whether Canal owes them a defense.
We have the right and duty to defend any “insured” against a “suit” asking for
such damages . . . However, we have no duty to defend any “insured” against a
“suit” seeking damages for “bodily injury” or “property damage” . . . to which
this insurance does not apply.
It is undisputed that the claimed damages in the Case resulted from “bodily injury,” that the
crash in question was an “accident,” and that the State Court Litigation is a “suit.” Thus, the
resolution of the Motions will turn on whether the Truck was a “covered auto” and whether each
relevant party was an “insured.”
Read together, the “Business Auto Declarations” page of the Policy and the Business
Auto Coverage Form define “covered autos” as only “specifically described autos.” Policy 23,
28. “Specifically described autos” are defined as “[o]nly those ‘autos’ described in Item Three of
the Declarations for which a premium charge is shown (and for Liability Coverage any ‘trailers’
while attached to any power unit described in Item Three).” Id. at 28.
Item Three of the declarations, which sets forth the “specifically described autos” that are
covered, lists the Vehicle Identification Numbers of three vehicles. Id. at 24. The Truck’s VIN is
not among those listed. See id. Additionally, all three listed vehicles are described as 2005
International trucks, whereas the Truck was a 2007 International. Id. The parties therefore agree
that, at least with the benefit of hindsight, the Truck was not a specifically described auto. Canal
Proposed Facts ¶¶ 5-6; Lopez Response to Proposed Facts ¶¶ 5-6.
Section I.B.2 of the Policy creates an exception to the general rule that only
specifically described autos are “covered autos.” It provides that for the type of liability
coverage in question,
an “auto” you acquire will be a covered “auto” for that coverage only if:
We already cover all “autos” that you own for that coverage or if it
replaces an “auto” you previously owned that had that coverage;
You tell us within 30 days after you acquire it that you want us to
cover it for that coverage.
Section I.C.3 of the Policy similarly provides that certain types of vehicles which are not
specifically described are nonetheless “covered autos.” Pertinently, these include temporary
substitute autos, which are defined as “[a]ny ‘auto’ you do not own while used with the
permission of its owner as a temporary substitute for a covered ‘auto’ you own that is out of
service [for various reasons]. A temporary substitute auto does not mean a vehicle that includes a
Thus, a “covered auto” under the Policy may either be a specifically listed auto, a
replacement auto, or a temporary substitute auto. Id. at 23, 28-29.
The Policy defines an “insured,” in pertinent part, as
You for any covered auto.
Anyone else while using with your permission a covered “auto”
you own, hire or borrow except:
The owner or anyone else from whom you hire or borrow a
covered “auto”. This exception does not apply if the
covered “auto” is a “trailer” connected to a covered “auto”
Anyone liable for the conduct of an “insured” described above but
only to the extent of that liability.
Id. at 29-30.
Thus, an “insured” under the Policy includes XMEX (the policyholder) for any “covered
auto,” anyone using a “covered auto” with XMEX’s permission, and anyone else who is liable
for the conduct of an insured. Id.
Exclusions from general coverage provisions
The Policy contains many exclusions from its general coverage provisions. Three of them
are pertinent to the Motions: the “Employee Exclusion,” the “Fellow Employee Exclusion,” and
the “Occupant Hazard Exclusion.”
First, Section II.B.4. of the Policy provides in pertinent part that coverage does not apply
for bodily injury to “[a]n employee of the ‘insured’ arising out of the and in the course of (1)
Employment by the ‘insured,’; or (2) Performing the duties related to the conduct of the
‘insured’s’ business.” Id. at 30.
Second, Section II.B.5 of the Policy provides in pertinent part that coverage does not
apply for bodily injury to “[a]ny fellow ‘employee’ of the ‘insured’ arising out of and in the
course of the fellow ‘employee’s’ employment or while performing duties related to the conduct
of your business.” Id. at 31.
Third, per the “Occupant Hazard Exclusion Endorsement” appended to the Policy,
Section II.B.14 of the Policy provides that coverage does not apply for “‘Bodily Injury’ sustained
by any person while in or upon, entering or alighting from the ‘auto’.” Id. at 52.
The MCS-90 endorsement
The Policy also includes a federally mandated endorsement known as the MCS-90, by
which Canal agreed to pay “any final judgment against the insured for public liability resulting
from negligence in the operation, maintenance or use of motor vehicles . . . regardless of whether
or not each motor vehicle is specifically described in the policy.” Id. at 54. “Basically, the MCS–
90 makes the insurer liable to third parties for any liability resulting from the negligent use of
any motor vehicle by the insured, even if the vehicle is not covered under the insurance policy.”
T.H.E. Ins. Co. v. Larsen Intermodal Servs. Inc., 242 F.3d 667, 671 (5th Cir. 2001). The MCS-90
is thus “in effect, suretyship by the insurance carrier to protect the public – a safety net . . . [I]t
simply covers the public when other coverage is lacking.” Id. at 672 (quoting Canal Ins. Co. v.
Carolina Cas. Ins. Co., 59 F.3d 281, 283 (1st Cir. 1995)).
Various parties extensively debate how the MCS-90 and a related federal regulation
should impact the Court’s analysis of the Policy’s employee exclusion.9 See Canal Mot. ¶¶ 3255; Lopez Mot. ¶ 20; Canal Resp. ¶¶ 14-17; Lopez Resp. ¶ 13; Munoz Defs. Resp. ¶¶ 27-38;
Reply to Munoz ¶¶ 20-23. For reasons explained below, the Court need not delve in to that
dispute. As the MCS-90 is thus of no relevance to the Court’s resolution of the Motions, it does
not further discuss the MCS-90.
A court must enter 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); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Weaver v. CCA Indus.,
Inc., 529 F.3d 335, 339 (5th Cir. 2008). “A fact is ‘material’ if its resolution in favor of one party
might affect the outcome of the lawsuit under governing law.” Sossamon v. Lone Star State of
Tex., 560 F.3d 316, 326 (5th Cir. 2009) (quoting Hamilton v. Segue Software, Inc., 232 F.3d 473,
477 (5th Cir. 2000) (per curiam)). A dispute about a material fact is genuine only “if the
evidence is such that a reasonable jury could return a verdict for the nonmoving party.”
Canal repeatedly argues that the MCS-90 does not expand its obligations to any insureds under
the Policy. See Canal Mot. ¶¶ 24-29; Reply to Trailer Defs. ¶ 22; Reply to Lopez ¶ 20; Reply to
Munoz Defs. ¶ 24. However, this argument is academic, as none of the parties claim that the
MCS-90 expands the Policy’s coverage.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Ellison v. Software Spectrum, Inc.,
85 F.3d 187, 189 (5th Cir. 1996).
“[The] party seeking summary judgment always bears the initial responsibility of
informing the district court of the basis for its motion, and identifying those portions of [the
record] which it believes demonstrate the absence of a genuine issue of material fact.” Celotex,
477 U.S. at 323; Wallace v. Tex. Tech. Univ., 80 F.3d 1042, 1046-47 (5th Cir. 1996). To show
the existence of a genuine dispute, the nonmoving party must support its position with citations
to “particular parts of materials in the record, including depositions, documents, electronically
stored information, affidavits or declarations, stipulations . . . , admissions, interrogatory
answers, or other materials[,]” or show “that the materials cited by the movant do not establish
the absence . . . of a genuine dispute, or that [the moving party] cannot produce admissible
evidence to support the fact.” Fed. R. Civ. P. 56(c). The court resolves factual controversies in
favor of the nonmoving party; however, factual controversies require more than “conclusory
allegations,” “unsubstantiated assertions,” or “a ‘scintilla’ of evidence.” Little v. Liquid Air
Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). Further, when reviewing the evidence, the
court must draw all reasonable inferences in favor of the nonmoving party, and may not make
credibility determinations or weigh evidence. Man Roland, Inc. v. Kreitz Motor Express, Inc.,
438 F.3d 476, 478-79 (5th Cir. 2006) (citing Reeves v. Sanderson Plumbing Prods., Inc., 530
U.S. 133, 150 (2000)). Thus, the ultimate inquiry in a summary judgment motion is “whether the
evidence presents a sufficient disagreement to require submission to a jury or whether it is so
one-sided that one party must prevail as a matter of law.” Anderson, 477 U.S. at 251-52.
Finally, when evaluating cross-motions for summary judgment, the “[c]ross-motions
must be considered separately, as each movant bears the burden of establishing that no genuine
issue of material fact exists and that it is entitled to judgment as a matter of law.” Shaw
Constructors v. ICF Kaiser Eng’rs, Inc., 395 F.3d 533, 538–39 (5th Cir. 2004).
The parties first dispute whether the general coverage provisions of the Policy, apart from
any exclusions, obligate Canal to provide a defense to any of the alleged insureds. This dispute
encompasses two separate questions: first, whether the allegations in the pleadings raised the
potential that the Truck was a covered auto under the Policy; and second, whether any of the
relevant parties qualify as insureds under the Policy. In the event Canal owes a duty to defend,
the parties also dispute whether the Employee Exclusion, Fellow Employee Exclusion, or
Occupant Hazard Exclusion negate the duty to defend. However, bound up with all these
disputes is a choice of law question: Canal argues that the Court should interpret the Policy in
accordance with Texas law, while Lopez argues that the Court should apply Tennessee law. The
Court first disposes of Canal’s argument that various defendants lack standing to request the
relief they seek, then analyzes the choice of law question, and finally addresses the parties’ other
disputes in turn.
Lopez and the Munoz Defendants have standing to contest Canal’s
duty to defend
Canal argues for the first time in its Reply to Lopez and Reply to Munoz that those
parties lack standing to contest Canal’s duty to defend because they were not insured under the
Policy. Reply to Lopez ¶¶ 1-6; Reply to Munoz ¶¶ 3-6. Canal’s grounds for this argument are not
entirely clear, as it cites both Texas case law concerning whether an injured party may sue an
insurer and federal cases concerning Article III standing. The distinction matters because
although “a court generally will not consider arguments raised for the first time in a reply brief,”
Lombardi v. Bank of Am., Civil Action No. 3:13-cv-1464-o, 2014 WL 988541, at *3 (N.D. Tex.
Mar. 13, 2014), “[f]ederal courts must be assured of their subject matter jurisdiction at all times
and may question it sua sponte at any stage of judicial proceedings.” In re Bass, 171 F.3d 1016,
1021 (5th Cir. 1999) (citation omitted). To the extent Canal’s argument relates to Article III
standing, it serves to question the Court’s subject matter jurisdiction. The Court therefore
considers Canal’s standing argument and finds it to be meritless.10
As an initial matter, Canal filed the Case and chose to name Lopez and Munoz as
defendants. As the Court noted in its order denying Lopez’s motion to dismiss, the Case presents
a justiciable controversy, and Lopez and the Munoz Defendants are proper parties. See March 4,
2014, Order 5; Dairyland Ins. Co. v. Makover, 654 F.2d 1120, 1123 (5th Cir. 1981) (“In a
declaratory judgment action brought by an insurer to determine coverage under a liability policy
issued to the insured, third parties claiming liability in state tort suits against the insured have
been held to be proper parties to the declaratory suit, even though their claims against the insurer
[were] contingent upon recovery of a judgment against the insured.”). It appears, then, that
although Canal frames its argument in terms of “standing,” Canal simply wants the Court to
disregard Lopez and the Munoz Defendants’ arguments regarding the duty to defend. As XMEX
and Strader have not appeared in the Case, and Lopez and the Munoz Defendants have argued
the duty to defend more substantively and vigorously than any other parties, the upshot of
Canal’s argument is that it should win by default because the defendants it chose to sue and seek
summary judgment against may not argue to the contrary.
Canal’s Texas law argument, which the Court need not consider because Canal raised it for the first time in its
reply briefs, is similarly unpersuasive. Canal cites a number of cases setting forth the Texas “no direct action” rule,
whereby an injured party cannot directly sue the alleged tortfeasor’s insurer before the tortfeasor’s liability is
established, unless the injured party was an intended third party beneficiary of the insurance policy. Reply to Lopez
¶¶ 2-3, 5; Reply to Munoz ¶¶ 4-5 That rule is inapplicable here because Canal, not Lopez or the Munoz Defendants,
brought the Case; those parties seek no relief from Canal.
Canal’s contention is incorrect. In Dairyland, the Fifth Circuit held that injured parties
named as defendants in a declaratory action had standing to appeal the district court’s decision
that the insurer did not owe its putative insured a duty to defend. 654 F.2d at 1123. The court
noted that “[a]lthough [the insurer] claims on appeal that the [injured parties’] interest in the
declaratory judgment action is not sufficient to grant them standing to appeal, it apparently
thought that [their] interest was sufficiently affected to name them as defendants.” Id. The court
explained that “it would be anomalous to hold here that an actual controversy exists between 
the injured party and  the insurer and yet deny [the injured party] the right to participate in the
controversy.” Id. (quoting Hawkeye Sec. Ins. Co. v. Graves, 302 F.2d 174 (7th Cir. 1962)). The
Fifth Circuit recently reaffirmed the principle set forth in Dairyland, holding that “our precedent
is clear that [an injured party] has standing to challenge [an insurer’s] claim that it owes no
coverage to its insured and has no duty to defend.” Looney Ricks Kiss Architects, Inc. v. State
Farm Fire & Cas. Co., 677 F.3d 250, 257 n.5 (5th Cir. 2012) (citing Dairyland, 654 F.2d at
Here too, Canal properly sued Lopez and the Munoz Defendants, and the Case presents a
justiciable controversy. See March 4, 2014, Order 5; Dairyland 654 F.2d at 1123. Although
Dairyland and Looney Ricks Kiss concerned a party’s standing to appeal, courts have applied the
reasoning of those cases equally to a party’s standing to move for summary judgment or oppose
an insurer’s motion for summary judgment in the district court. See, e.g., Commerce & Indus.
Ins. Co. v. Alexander, Civil Action No. H-11-3939, 2012 WL 3046011, at *2-3 (S.D. Tex. July
25, 2012) (insurer’s inclusion of injured party as defendant in declaratory action against insured
gave injured party standing to bring counterclaim seeking declaration that insurer owed the
insured a duty to defend). The Court accordingly concludes that Lopez and the Munoz
Defendants may challenge Canal’s claim that it has no duty to defend XMEX, Strader, or
The cases Canal relies upon do not undermine the Court’s conclusion. Allstate Insurance
Co. v. Wayne County, 760 F.2d 689 (6th Cir. 1985), which Canal cites for the proposition that
someone not party to an insurance policy may not assert the insurer’s duty to defend the insured,
in fact complements Dairyland and supports the Court’s conclusion. See Reply to Lopez ¶¶ 4-5.
Canal inexplicably states – twice – that this case applied Tennessee law, see id., when in fact the
only state law it referenced was that of Michigan, and the relevant part of its analysis concerned
Article III standing. Wayne County, 760 F.2d at 694-95. In any event, the Sixth Circuit explained
in Wayne County that the cases “involving actions among insurers, their insureds and third
parties in the declaratory judgment context” lead to the conclusion that
[w]hile it is clear that the injured party, often the plaintiff in a state court action,
has standing to adjudicate the rights of the insured vis-a-vis the insurer, the courts
have been reluctant to allow parties who assert no claim against the insured to
litigate the insurer’s obligations pursuant to the insurance contract.
Id. at 695.
Wayne County was an example of the latter scenario, because it concerned a dispute between the
insured’s employer and the insurer as to whether the insurer owed a defense to the insured. Id. at
691, 694. By contrast, here Lopez and the Munoz Defendants are injured parties – and plaintiffs
in a state court action – who seek to adjudicate the rights of the insured vis-à-vis the insurer. Per
Wayne County, “it is clear” that they may do so. See id. at 695.
The only case Canal cites which is on point is Canal Insurance Co. v. Cook, 564 F. Supp.
2d 1322 (M.D. Ala. 2008). In that case, as here, Canal filed a declaratory action against its
putative insureds and the injured party. Id. at 1324. Both Canal and the injured party moved for
summary judgment, but the insureds did not move for summary judgment. Id. The court
discussed Wayne County, and derived from it that as “a general rule, a person has no standing to
assert, under an insurance policy to which he is not a party and thus under which he is not
insured, the insurer has a duty to defend the insured.” Id. at 1326. The court therefore held that
chiefly for that reason, the injured party lacked standing to argue that Canal owed the insureds a
duty to defend. Id. at 1326-27. Thus, Cook supports Canal’s position.
The Court does not find Cook persuasive for two reasons. First, the court in Cook appears
to have misinterpreted Wayne County. Cook framed the holding in Wayne County as concerning
“whether someone uninsured by an insurance policy can assert the insurer’s duty to defend its
insured.” Id. at 1326. As explained above, however, Wayne County’s holding was not so general:
it concerned only whether a party which was not injured by the insured and was not a plaintiff in
state court could assert the insured’s right to a defense; it confirmed that “it is clear that the
injured party, often the plaintiff in a state court action, has standing to adjudicate the rights of the
insured vis-a-vis the insurer.” Wayne Cnty., 760 F.2d at 695. As the party whose standing was
challenged in Cook was an injured party who was the plaintiff in state court, Cook appears to
have misapplied Wayne County in holding that such a party lacked standing.
Second, the court in Cook did not address the evident paradox in finding, on the one
hand, that the injured party was a proper defendant in a declaratory action concerning Canal’s
duty to defend, and on the other hand, that it lacked standing to argue Canal’s duty to defend.
564 F. Supp. 2d at 1326-27. As the Fifth Circuit put it in Dairyland, “it would be anomalous to
hold here that an actual controversy exists between  the injured party and  the insurer and yet
deny [the injured party] the right to participate in the controversy.” 654 F.2d at 1123 (citation
omitted). It was for that reason that Dairyland held that an injured party which is otherwise a
proper declaratory defendant has standing to appeal a determination that the insurer owed its
insured no duty to defend. Id. That Cook does not delve into this anomaly in any way detracts
from its persuasiveness.
In sum, the Court does not find persuasive Canal’s argument that Lopez and the Munoz
Defendants lack standing to argue Canal’s duty to defend.
Choice of law
Because this is a diversity case, the Court applies state substantive law. See In re Katrina
Canal Breaches Litig., 495 F.3d 191, 206 (5th Cir. 2007) (citing Erie R.R. Co. v. Tompkins, 304
U.S. 64, 78 (1938)). Federal courts sitting in diversity apply the choice of law rules of the state in
which they sit. See St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202, 205 (5th Cir.
1996). The Court therefore applies Texas’ choice of law rules to determine which state’s
substantive law it must use to analyze the Policy.
“Which state’s law governs an issue is a question of law for the court to decide.” Hughes
Wood Prods., Inc. v. Wagner, 18 S.W.3d 202, 204 (Tex. 2000) (citing Duncan v. Cessna Aircraft
Co., 665 S.W.2d 414, 421 (Tex. 1984)). “Texas courts presume that other states’ laws are the
same as its own and the party advocating the use of a different state’s laws bears the burden of
rebutting that presumption.” Playboy Enters., Inc. v. Sanchez-Campuzano, 519 F. App’x 219,
225 (5th Cir. 2013); Excess Underwriters at Lloyds, London v. Frank’s Casing Crew & Rental
Tools, Inc., 246 S.W.3d 42, 53 (Tex. 2008). If that party does not meet its burden, Texas courts
presume that the outcome would be no different under foreign law, and apply Texas law. See
Flagship Credit Corp. v. Indian Harbor Ins. Co., 481 F. App’x 907, 910 (5th Cir. 2012); Excess
Underwriters, 246 S.W.3d at 53.
If a true conflict of laws exists, Texas uses the “most significant relationship” test to
determine which state’s law governs the conflict. Duncan, 665 S.W.2d at 420-22; accord Centex
Homes v. Lexington Ins. Co., No. 3:13-cv-719-BN, 2014 WL 1225501, at *5 (N.D. Tex. Mar. 25,
2014). “[I]n all choice of law cases, except those contract cases in which the parties have agreed
to a valid choice of law clause, the law of the state with the most significant relationship to the
particular substantive issue will be applied to resolve that issue.” Duncan, 665 S.W.2d at 421.
See also Hughes Wood Prods., 18 S.W.3d at 205 (stressing that courts are to consider the states’
relationship with the particular substantive issue, not their relationship with the case as a whole).
As relevant here, courts use the “most significant relationship to the particular substantive
issue” analysis when there is an actual conflict of law concerning which state’s law should be
used to interpret an insurance policy. See Reddy Ice Corp. v. Travelers Ins. Co., 145 S.W.3d 337,
340 (Tex. App. 2004) (citing Maxus Exploration Co. v. Moran Bros., Inc., 817 S.W.2d 50, 53
(Tex. 1991)); Restatement (Second) of Conflicts of Laws §§ 6, 8 (1971)) (when “a contract does
not contain an express choice of law provision, . . . . [and] absent a statutory directive, a court
must  ascertain which state has the most significant relationship to the issue presented for
The fact that two states’ laws are not identical is insufficient alone to establish a true
conflict: “Without relevant differences in the substantive laws, the court need not undertake a
choice of law analysis.” Hoffman v. L & M Arts, 774 F. Supp. 2d 826, 846 (N.D.Tex 2011); see
also Playboy Enters., 519 F. App’x at 225. Indeed, “[i]f the result would be the same under the
laws of either jurisdiction, there is no need to resolve the choice-of-law question.” Playboy
Enters., 519 F. App’x at 225; Ally Fin., Inc. v. Gutierrez, No. 13-CV-108, 2014 WL 261038, at
*6 (Tex. App. Jan. 23, 2014).
Here, the Policy contains no express choice of law provision so the Court must therefore
determine whether Texas or Tennessee law governs interpretation of the policy. Reddy Ice, 145
S.W.3d at 340. Before engaging in a choice-of-law analysis, however, the Court must first
determine if there is a true conflict between Texas and Tennessee law. See Flagship Credit, 481
F. App’x at 910 (holding that courts “should not  engage in [choice-of-law] analysis until first
finding a true conflict”). Lopez, as the party moving for the application of Tennessee law, has the
burden of showing that such a conflict exists. Playboy Enters., 519 F. App’x at 225; Excess
Underwriters, 246 S.W.3d at 53. If the Court finds that Lopez has failed to show that Tennessee
law would require a different result from Texas law in this case, the Court will presume that the
law of both states is the same and apply Texas law. Flagship Credit, 481 F. App’x at 910; Excess
Underwriters, 246 S.W.3d at 53.
The “Eight-Corners Rule” in Texas and Tennessee law
Lopez argues that although Texas and Tennessee law both require courts to examine only
the underlying pleadings and the insurance policy to adjudicate the duty to defend, “their laws
are not identical” because Texas permits the use of extrinsic evidence under some circumstances
while Tennessee does not. Lopez Mot. ¶ 6; Lopez Resp. ¶¶ 3-8. To the extent this difference
exists, it could be material because Canal seeks to use the fact that the truck referred to in the
pleadings was not among the vehicles listed on the Policy to prove that it has no duty to defend –
a fact which it can demonstrate only by reference to evidence extrinsic to the pleadings and the
As the Court explained in its order denying Canal’s motion to dismiss, Texas and
Tennessee prescribe similar formulas for adjudicating liability insurers’ duty to defend. March 4,
2014, Order 14-15. These formulas are variously referred to as the “eight-corners rule,” “fourcorners rule,” or “complaint allegation rule.” See id. For the sake of clarity, the Court uses only
the term “eight-corners rule.”
Under Texas law, courts use the “eight-corners rule” to determine whether an insurer has
a duty to defend its insured in the underlying liability proceedings. See, e.g., ACE Am. Ins. Co. v.
Freeport Welding & Fabricating, Inc., 699 F.3d 832, 839-40 (5th Cir. 2012). That rule requires
the court to assume that the plaintiff’s allegations in the underlying pleadings are true and
determine whether such facts fall within the scope of the insurance policy. Id. at 840. If the
pleadings only allege facts excluded by the policy, there is no duty to defend. Id. However, “an
insurer is obligated to defend the insured if the facts alleged in the petition, taken as true,
potentially assert a claim for coverage under the insurance policy. Id. (citing Colony Ins. Co. v.
Peachtree Constr. Ltd., 647 F.3d 248, 253 (5th Cir. 2011)). “Because the only two documents
relevant to the duty-to-defend inquiry are the insurance policy and the petition, an insurer’s duty
to defend can be determined at the moment the petition is filed.” Id. (citing Colony Ins. Co., 647
F.3d at 253).
Similarly, under Tennessee law, “whether a duty to defend arises depends solely on the
allegations contained in the underlying complaint. Accordingly, the insurer has a duty to defend
when the underlying complaint alleges damages that are within the risk covered by the insurance
contract and for which there is a potential basis for recovery.” Travelers Indem. Co. of Am. v.
Moore & Assocs., 216 S.W.3d 302, 305 (Tenn. 2007) (citations omitted). “The duty to defend is
broader than the duty to indemnify because the duty to defend is based on the facts alleged, while
the duty to indemnify is based upon the facts found by the trier of fact.” Id. Thus, the duty to
defend “is to be determined solely by the allegations contained in the complaint.” Interstate
Packaging Co. v. Century Indem. Co., No. 3:11-cv-00589, 2013 WL 1335120, at *4 (M.D. Tenn.
Mar. 29, 2013) (citing St. Paul Fire & Marine Ins. Co. v. Torpoco, 879 S.W.2d 831, 835 (Tenn.
1994)). “An insurer may not properly refuse to defend an action against its insured unless it is
plain from the face of the complaint that the allegations fail to state facts that bring the case
within or potentially within the policy’s coverage.” JNJ Logistics, L.L.C. v. Scottsdale Ins. Co.,
No. 2:10-cv-02741-JPM, 2013 WL 6903937, at *7 (W.D. Tenn. Dec. 31, 2013) (citing Tenn.
Farmers Mut. Ins. Co. v. Cherry, W2007–00342COAR3CV, 2008 WL 933479, at *5 (Tenn.
App. Ct. Apr. 7, 2008)).
Therefore, the Texas and Tennessee eight-corners rules appear to be identical, in that they
both require courts to adjudicate the duty to defend based only on the language of the insurance
policy and the allegations in the underlying litigation. However, a series of decisions from the
Fifth Circuit, buttressed by supportive dicta from the Texas Supreme Court, indicates that Texas
law allows exceptions to the “eight-corners rule,” such that under some circumstances, a court
may consider extrinsic evidence when adjudicating the duty to defend. See Star-Tex Res., L.L.C.
v. Granite State Ins. Co., 553 F. App’x 366, 371 n.4 (5th Cir. 2014); GuideOne Elite Ins. Co. v.
Fielder Rd. Baptist Church, 197 S.W.3d 305, 308-11 (Tex. 2006).
In Northfield Insurance Co. v. Loving Home Care, Inc., the Fifth Circuit made an “Erie
guess” that if the Texas Supreme Court were to recognize an exception to the eight-corners rule,
such exception would apply only in cases where “it is initially impossible to discern whether
coverage is potentially implicated and when the extrinsic evidence goes solely to a fundamental
issue of coverage which does not overlap with the merits of or engage the truth or falsity of any
facts alleged in the underlying case.” 363 F.3d 523, 531 (5th Cir. 2004). The Texas Supreme
Court endorsed that view in GuideOne Elite Insurance Co. v. Fielder Rd. Baptist Church, though
it held that no exception was warranted in that case. 197 S.W.3d 305. The Fifth Circuit
subsequently relied on Northfield and GuideOne in applying the exception and considering
extrinsic evidence meeting the conditions set forth in Northfield. See OOIDA Risk Retention
Grp., Inc. v. Williams, 579 F.3d 469, 476 (5th Cir. 2009). Since then, a number of Texas
intermediate appellate courts have applied the exception, and others have acknowledged the
exception but declined to apply it on the facts presented. See, e.g., Weingarten Realty Mgmt. Co.
v. Liberty Mut. Fire Ins. Co., 343 S.W.3d 859, 862-69 (Tex. App. 2011) (collecting cases and
applying the exception). The Fifth Circuit recently reaffirmed that although the Texas Supreme
Court has not definitively held that extrinsic evidence may be used, “this court has endorsed the
exception.” Star-Tex, 553 F. App’x at 371 n.4. The Court accordingly understands that Texas
law, as interpreted by the Fifth Circuit, allows the consideration of extrinsic evidence regarding
the duty to defend “when it is initially impossible to discern whether coverage is potentially
implicated and when the extrinsic evidence goes solely to a fundamental issue of coverage which
does not overlap with the merits of or engage the truth or falsity of any facts alleged in the
underlying case.” Id. at 372.
By contrast, Tennessee law does not appear to allow any exceptions to its eight-corners
rule. In Interstate Packaging, the court noted the existence of two cases which did appear to
countenance such an exception, one of them from 1964 and the other an unpublished opinion
from an intermediate appellate court in 1990. 2013 WL 1335120, at *4. The court found these to
be “not particularly persuasive” because “the Tennessee Supreme Court has more recently,
repeatedly, and clearly, stated the rule that the duty to defend is to be determined solely by the
allegations contained in the complaint.” Id. (citing Torpoco, 879 S.W.2d at 835; Moore, 216
S.W.3d at 305; Clark v. Sputnik’s, LLC, 368 S.W.3d 431, 439 (Tenn. 2012)) (citations omitted).
The Court agrees that Tennessee law does not allow the consideration of extrinsic evidence in
the duty to defend analysis, and therefore finds that the Texas and Tennessee approaches to the
eight-corners rule differ only in that Texas law recognizes an exception to the eight-corners rule
in limited circumstances.
As mentioned earlier, Lopez, as the party advocating the application of Tennessee law,
has the burden of establishing the initial conflict of law. See Playboy Enters., 519 F. App’x at
225; Excess Underwriters, 246 S.W.3d at 53. If the Court finds that the extrinsic evidence
exception is not applicable, then the underlying eight-corners analysis would be identical under
both Texas and Tennessee law and there would not be a true conflict. See Chartis, 930 F. Supp.
2d at 665 (no conflict where potential exception to rule under Texas law did not apply and state
laws otherwise identical). Therefore, the critical issue in determining whether Lopez has met her
burden is whether the Texas exception allowing extrinsic evidence under the eight-corners rule is
applicable in the Case. See Playboy Enters., 519 F. App’x at 225; see also Chartis Specialty Ins.
Co. v. Tesoro Corp., 930 F.Supp.2d 653, 665 (W.D. Tex. 2013) (finding no conflict where
potential exception to rule under Texas law did not apply and state laws were otherwise
The eight-corners analysis of the duty to defend is the same
under both Texas and Tennessee law
Lopez believes the Texas exception results in a conflict because it may permit the Court
to (1) consider Canal’s proposed extrinsic evidence showing that the VIN number of the Truck
was not specifically listed under the Policy and (2) look to extrinsic evidence to establish
Munoz’s and Franceware’s employment status in relation to the defendants. Lopez Resp. ¶¶3-7;
Lopez Mot. ¶19. The Court addresses each of these in turn.
Canal argues that “[if] the vehicle in the accident was not a specifically listed vehicle
under the Canal Policy, no duty to defend either Xmex or Strader or Franceware exists.” Canal
Mot. ¶ 11, 18. In support of this argument Canal offers an accident report showing that the VIN
number of the Truck was not specifically listed under the Policy. Canal Mot. ¶ 11. This evidence,
however, in no way affects the Court’s initial eight-corners analysis under Texas law.
As explained above, in addition to providing coverage for vehicles with VIN numbers
specifically listed on Item Three, the Policy also provides coverage for “[a]ny ‘auto’ you do not
own while used with the permission of its owner as a temporary substitute for a covered ‘auto’
you own that is out of service.” Policy 24, 28-29. Therefore, Canal’s duty to defend can arise
under the temporary substitute provision regardless of whether the Truck was specifically listed
in Item Three. While the extrinsic VIN number evidence may undermine coverage based upon
the specifically described autos provision in the Policy, it has nothing to do with the temporary
substitute vehicle coverage which is not dependent on the VIN numbers of the trucks. Therefore,
as discussed below, the Court agrees with Lopez that “[e]ven if the tractor was unlisted, [the]
pleadings raise the fair inference that XMEX and Franceware were using the tractor with Moore
Freight’s permission, making the tractor a potentially covered auto under Section [I.C.3] of the
Policy.” Lopez Resp. ¶ 12; Policy 29. Accordingly, the Court finds it is initially possible to
discern that coverage is potentially implicated by the underlying pleadings and Texas law does
not permit the Court to consider Canal’s extrinsic accident report in its eight-corners analysis.
See Star-Tex, 553 F. App’x at 371.
The Court further finds that Texas law would not permit extrinsic evidence on the issue
of Munoz’s and Franceware’s employment status. Courts may consider extrinsic evidence under
the Texas eight-corners exception only when it “does not overlap with the merits of or engage
the truth or falsity of any facts alleged in the underlying case.” Id. at 372. The underlying
pleadings clearly alleged that neither Munoz nor Franceware was employed by any of the
defendants. See Munoz Live Pet. 4; Lopez Live Pet. 6; Franceware Live Pet. 10. Accordingly,
any extrinsic evidence offered to prove otherwise would engage the truth or falsity of the
allegations in the underlying pleadings and would not be permissible under Texas law. See StarTex, 553 F. App’x at 372.
Because the Court has found that the Texas exception is not relevant, both Texas and
Tennessee law would apply identical eight-corners analyses to the Case. Accordingly, the result
would be the same under the laws of either jurisdiction and there is no need to resolve the
choice-of-law question. See Playboy Enters., 519 F. App’x at 225; Chartis, 930 F.Supp.2d at
665. The Court finds that Lopez has failed to meet her burden of establishing a true conflict,
presumes that Texas and Tennessee law are the same, and applies Texas law to determine if a
duty to defend exists under the insurance policy. See Flagship Credit, 481 F. App’x at 910;
Excess Underwriters, 246 S.W.3d at 53.
Canal has a duty to defend under the Policy
As noted above, the parties dispute whether the pleadings in the State Court Litigation
triggered Canal’s duty to defend. Issues regarding an insurer’s duty to defend are matters of law
and may be resolved by summary judgment when there are no genuine issues as to any material
fact. Star-Tex, 553 F. App’x at 369. The interpretation of insurance contracts is governed by the
same rules of construction used to interpret other contracts. Chrysler Ins. Co. v. Greenspoint
Dodge of Hous., Inc., 297 S.W.3d 248, 252 (Tex. 2009). “Words in the policies, if not defined,
are accorded their plain and ordinary meaning.” Tex. Molecular Ltd. P’ship v. Am. Specialty Ins.
Co., 424 F. App’x 354, 356 (5th Cir. 2011). Any ambiguities in the insurance policy are
interpreted in favor of coverage. Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London,
327 S.W.3d 118, 133 (Tex. 2010).
As the Court noted with regard to the choice of law issue, “an insurer is obligated to
defend the insured if the facts alleged in the petition, taken as true, potentially assert a claim for
coverage under the insurance policy.” Freeport Welding, 699 F.3d at 839-40. The only
documents relevant to this inquiry are the Policy and the underlying petitions. Id. “If there is
doubt as to whether or not the allegations of a complaint against the insured state a cause of
action within the coverage of a liability policy sufficient to compel the insurer to defend the
action, such doubt will be resolved in the insured’s favor.” PPI Tech. Servs., L.P. v. Liberty Mut.
Ins. Co., 515 F. App’x 310, 313-14 (5th Cir. 2013) (citing Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997)).
The pleadings allege adequate facts to raise the potential that
the auto was a covered temporary substitute vehicle
The Truck would be a “covered auto” under the Policy if it were specifically listed, or if
it were a temporary substitute auto for one of the specifically listed autos. Policy 28-29.
Munoz pleaded that Moore Freight owned the Truck and that it was under the control of
Moore Freight, XMEX, and Strader. See Munoz Live Pet. 3-4. Franceware similarly pleaded that
the Truck belonged to Moore Freight and that Moore Freight, XMEX, Dan Moore, and/or
Strader negligently “allow[ed] Defendant Munoz to operate its vehicle.” Franceware Live Pet. 9,
12. Lopez, though not directly alleging that Moore Freight owned the vehicle, pleaded that
Moore Freight, XMEX, and/or Strader negligently “allow[ed] Defendant Munoz to operate its
vehicle,” thereby indicating that the Truck was owned or controlled by one of those parties.
Lopez Live Pet. 7.
Furthermore, both Lopez and Franceware alleged facts indicating that Munoz was
operating the Truck in the course and scope of his employment with XMEX. Lopez Live Pet. 7;
Franceware Live Pet. 9, 11. Munoz similarly alleged that Franceware was driving the vehicle in
the course and scope of his employment for XMEX. Munoz Live Pet. 3-4.
The Court finds that a reasonable inference arising from those allegations is that XMEX
was using the Truck with the permission of its owner Moore Freight as all three pleadings stated
facts indicating that Moore Freight potentially owned the vehicle and that either Munoz or
Franceware was operating it on behalf of XMEX.11 This inference in turn raises the potential that
XMEX borrowed the auto as a covered temporary substitute.
While it is true that none of the three Defendants expressly pleaded that the Truck was
being used as a temporary substitute auto, “[w]here the complaint does not state facts sufficient
to clearly bring the case within or without the coverage, the general rule is that the insurer is
obligated to defend if there is, potentially, a case under the complaint within the coverage of the
policy.” Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377, 380 n.3 (Tex. 2012). “Stated
differently, in case of doubt as to whether or not the allegations of a complaint against the
insured state a cause of action within the coverage of a liability policy sufficient to compel the
insurer to defend the action, such doubt will be resolved in the insured’s favor.” Id.; see also PPI
Tech., 515 F. App’x at 313-14.
The Court accordingly resolves any doubt in favor of the insured and finds that the
pleadings sufficiently alleged facts raising the potential that XMEX was using the Truck with the
permission of Moore Freight as a temporary substitute for one of the listed vehicles.
Canal argues with citation to several Texas law cases that to find a duty to defend, the Court would have to
impermissibly read facts into the pleadings or imagine factual scenarios which might trigger coverage. Canal Reply
to Lopez ¶¶ 11-17. Canal is correct that the Court “may not[ ] . . . (1) read facts into the pleadings, (2) look outside
the pleadings, or (3) imagine factual scenarios which might trigger coverage.” Star-Tex, 553 F. App’x at 370.
Nonetheless, the Court “may draw inferences from the petition that may lead to a finding of coverage” and “must
consider ‘any reasonable inferences that flow from the facts alleged.’” Id. Any inferences drawn in this order
reasonably flow from the facts alleged in the pleadings and the Court need not read facts into the pleadings or
otherwise look outside them to reach its decision.
In reaching that conclusion, the Court finds highly instructive the Fifth Circuit’s decision
in Larsen. In that case, the Fifth Circuit considered an insurer’s duty to defend under Louisiana
law, which for present purposes is identical to that duty in Texas:
[T]he insurer’s duty to defend . . . is determined by the allegations of the injured
plaintiff’s petition, with the insurer being obligated to furnish a defense unless the
petition unambiguously excludes coverage.
Additionally, the allegations of the petition are liberally interpreted in determining
whether they set forth grounds which bring the claims within the scope of the
insurer's duty to defend the suit brought against the insured.
Larsen, 242 F.3d at 677 (quoting Am. Home Assurance Co. v. Czarniecki, 230 So. 2d 259, 259
Larsen, the insured trucking company, had an insurance policy from T.H.E. that provided
coverage only for specifically described autos. Id. at 670. The policy also provided that newly
acquired autos would be covered, but only if Larsen requested coverage within twenty-four hours
after acquiring the vehicle. Id. A truck Larsen acquired, which was not a specifically described
auto, was involved in an accident. Id. at 670-71. It was undisputed that Larsen did not inform
T.H.E. that it had acquired the truck until after the accident, twenty-two days after it acquired the
truck. Id. at 671.
The Fifth Circuit held that T.H.E. was required to defend Larsen. Id. at 678. The Court
[t]hough the tractor involved in the accident was not listed in the schedule of
covered autos, it nevertheless could have been covered had Larsen requested
coverage within twenty-four hours after acquiring it. T.H.E. admits in its brief that
once coverage is timely requested, coverage attaches immediately, but an invoice
reflecting the new premium is issued some time within the following thirty days.
The record also indicates that a final endorsement showing coverage for the new
vehicle could be issued by T.H.E. four to five months after coverage was
requested. Therefore, the allegations of the petitions did not “unambiguously
exclude coverage,” because it was entirely possible that at the time of the
accident, the tractor could have been covered.
In other words, Larsen found a duty to defend based solely on the possibility, not even
hinted to in the pleadings, that the truck in that case was a duly reported replacement auto. Id. at
678. The fact that the parties agreed that the acquisition of the vehicle had not been timely
reported did not change the result. Id. at 671, 678.
The Court similarly finds here that, liberally construing the allegations and resolving all
ambiguities in favor of the insured and the duty to defend, the allegations do not “clearly and
unambiguously fall outside the scope of coverage.” See Colony Nat. Ins. Co. v. Unique Indus.
Prod. Co., 487 F. App’x 888, 892-93 (5th Cir. 2012). Like in Larsen, it is entirely possible that at
the time of the accident the Truck could have been covered as a temporary substitute.
The Court further notes that the procedural history of the Case, although not a factor in
the Court’s legal analysis, is consistent with the conclusion that the pleadings triggered the duty
to defend. Canal waited eighteen months from when the first petition was filed in the State Court
Litigation to file its initial declaratory action in Tennessee. In response to Lopez’s argument in
her motion to dismiss that Canal had unreasonably delayed filing its case, Canal asserted that it
“sought declaratory relief for the issues pertaining to the claims made in the underlying tort
lawsuit once the coverage issues became apparent.” Canal Resp. in Opposition to Motion, ECF
No. 47 ¶ 41 (emphasis added). Along the same lines, Lopez asserts that the fact that the Truck
was not listed on the Policy “was determined only after months of heated litigation, long after
Canal’s duty to defend had already been triggered.” Lopez Resp. ¶ 5. Those points support the
conclusion that the pleadings in the State Court Litigation caused Canal, for whatever reason, to
provide a defense to XMEX and Strader, and that whatever facts led Canal to ultimately dispute
its duty to defend were not apparent at that early juncture.
The pleadings adequately alleged that each of XMEX, Strader,
and Franceware were an insured under the Policy
As stated earlier, the Policy provides that Canal has a duty to defend any “insured”
against a suit seeking damages because of bodily injury caused by an accident and resulting from
the ownership, maintenance, or use of a “covered auto.” Policy 29. The resolution of the Motions
therefore turns on whether the Truck was a “covered auto” and whether each relevant party was
an “insured.” Having found that the underlying pleadings sufficiently alleged that the Truck was
a covered auto, the Court now turns to a determination of whether the relevant parties qualify as
an “insured” for the purposes of the duty to defend.
For the following reasons, the Court concludes that the pleadings adequately alleged facts
indicating that each of XMEX, Strader, and Franceware were an “insured” under the Policy,
while the facts do not establish that the Trailer Defendants were “insured.”
The Policy defines an “insured,” in pertinent part, as
You for any covered auto.
Anyone else while using with your permission a covered “auto”
you own, hire or borrow except [certain exceptions not relevant
Anyone liable for the conduct of an “insured” described above but
only to the extent of that liability.
As the Court has already found that the pleadings adequately alleged facts indicating that
the Truck was a covered auto, XMEX is unambiguously an insured because it is the
policyholder. See Policy 1, 29 (defining insured as “you for any covered auto”).
Lopez argues that Strader is an insured for the purposes of the duty to defend because
“fairly interpreted, the Munoz Defendants’ pleadings allege that Strader, with XMEX’s
permission, used a covered auto that XMEX had borrowed from Moore Freight.” Lopez Mot. ¶
13. To the extent the pleadings in fact allege that XMEX borrowed the Truck from Moore, and
that Strader was using it with XMEX’s permission, Strader would indeed be an insured. See
Policy 29-30 (an insured includes “[a]nyone else while using with your permission a covered
‘auto’ you own, hire or borrow.”).
Lopez generally cites Section V of the Munoz Live Petition in support of her argument.
Thus, she apparently bases her argument on the following language:
Munoz was a passenger in a tractor owned by Defendant Moore, and under the
control of Defendants Moore, XMEX, and Strader.
Roger Franceware was carrying a load (hereinafter referred to as a “Renegade”
load) that was to profit not, Defendant Moore, but Defendant Xmex and
Defendant Strader, and was driving a 2007 International truck tractor owned by
Munoz Live Pet. 3-4.
The Court also finds illuminating the following additional language from that pleading:
Dan Moore had negligently allowed a high level employee of Defendant Moore,
Defendant Charles Strader to run renegade loads using Moore Freight Inc.
Dan Moore heard from his friend who had a trucking business that Charles
Strader was doing renegade loads, Dan Moore knew that Mr. Strader was not
entering loads in the computer, that a driver, Roger Franceware, had not turned in
logs for an entire month and had run up more than $6000.00 in fuel charges. Dan
Moore was told by his maintenance manager that several trailers were “pinged”
(located by GPS) in areas of Texas that they had no business in, and that in
locations in Kansas, there were more than two trailers dedicated to one tractor,
that Charles Strader had bought 3 trucks on August 5th and 15 trailers and that on
August 6, 2010 Charles Strader had bought liability insurance for Xmex
Id. at 5.
The Court, noting that Canal does not argue otherwise, agrees with Lopez’s
characterization of this pleading. Though the Munoz Defendants language does not precisely
conform to the terms of the Policy, they clearly allege that Moore Freight owned the Truck and
that it was under the control of some combination of Moore Freight, XMEX, and Strader. They
separately allege that Strader, on XMEX’s behalf, was using Moore Freight’s equipment to run
renegade loads. In other words, they alleged that Strader was using the Truck, and that Strader,
as XMEX’s principal, necessarily did so with XMEX’s permission. Though the pleadings do not
precisely allege how XMEX and Strader obtained the Truck from Moore Freight, their
implication, resolving all doubts in favor of the insured, is that Strader borrowed it on XMEX’s
“If there is ‘a doubt as to whether or not the allegations of a complaint against the insured
state a cause of action within the coverage of a liability policy sufficient to compel the insurer to
the defend action, such doubt will be resolved in the insured’s favor.’” PPI Tech., 515 F. App’x
at 313-14 (quoting Nat’l Union Fire, 939 S.W.2d at 141). The Court therefore finds that the
Munoz Live Petition adequately alleged facts indicating that Strader was potentially an insured
for purposes of the duty to defend. See Policy 29-30 (an insured includes anyone “using with
your permission a covered ‘auto’ you own, hire or borrow”).
As with Strader, Lopez argues that the Munoz Live Petition adequately alleges facts
indicating that Franceware was an insured. For the reasons stated above with regard to Strader,
and based upon the same language in the Munoz Live Petition, the Court agrees. Resolving all
doubts in favor of the insured, as the Court must, the Munoz Live Petition indicates that XMEX
borrowed the Truck from Moore Freight, and that Franceware was using it with XMEX’s
permission. See PPI Tech, 515 F. App’x at 313-14. The Court therefore finds that the Munoz
Live Petition adequately alleged facts indicating that Franceware was an insured. See Policy 2930 (an insured includes anyone “using with your permission a covered ‘auto’ you own, hire or
As noted above, the Trailer Defendants moved for a declaration that Canal is required to
provide them a defense, but none of the Motions provide any support for that assertion. The
Trailer Defendants first simply adopted by reference Lopez’s Motion for Summary Judgment
Regarding Plaintiff Canal’s Duty to Defend. ECF No. 58. Lopez’s Motion for Summary
Judgment, however, argues that Canal owes a duty to Franceware, Strader and XMEX, but does
not in any way addresses Canal’s duty to defend the Trailer Defendants.
The Trailer Defendants’ Response does not further elaborate on that issue. The most
substantive argument for their position is that they “would be an additional insured under any
policy issued by Canal to Xmex since Trailer Defendants’ trailer was hooked up to the tractor.”
Trailer Defs. Resp. ¶ 2. The Trailer Defendants do not explain the logic behind this assertion
anywhere in their brief. Instead, the Trailer Defendants assert only that “Canal’s duty to defend
was invoked by the Trailer Defendants’ pleadings in the state court litigation.” Trailer Defs.
Resp. ¶ 5; see id. ¶¶ 18, 19.12 The Trailer Defendants are not only defendants in the Case, they
are defendants in the State Court Litigation as well. Though courts, this Court among them,
sometimes colloquially refer to the “pleadings” in the underlying litigation when analyzing the
duty to defend, the case law indicates that it is only the plaintiff’s pleadings in the underlying
litigation, not the defendant’s pleadings, that trigger the duty to defend. See, e.g., Freeport
Welding, 699 F.3d at 840 (holding that under eight-corners rule the insurance policy and thirdparty plaintiff’s pleadings determine duty to defend). The Court is not aware of any case where a
court considered a state court pleading other than the plaintiff’s in analyzing the duty to defend.
In any event, the Court need not decide that the Trailer Defendants’ pleading is beyond
the bounds of the duty to defend analysis, because that pleading does not appear anywhere in the
record of the Case.13 As the Trailer Defendants do not discuss the substance of that absent
pleading and thus apparently rest on their statement that “Canal’s duty to defend was invoked by
the Trailer Defendants’ pleadings in the state court litigation,” the Court cannot assess this
argument, and accordingly rejects it.
Furthermore, the Court notes that the Trailer Defendants’ assertion that they are
additional insureds “under any policy issued by Canal to Xmex since Trailer Defendants’ trailer
was hooked up to the tractor” is simply not sufficient, alone, to allege a duty to defend. Trailer
Defs. Resp. ¶ 2. Canal’s duty to defend extends only to an “insured” who faces a suit for
damages because of bodily injury caused by an accident and resulting from the ownership,
The Trailer Defendants make reference to their own pleading in the State Court Litigation five separate times in
three widely separated paragraphs, thereby obviating the possibility that the Trailer Defendants intended to refer to
some other party’s pleading and erroneously referred to their own. Trailer Defs. Resp. ¶¶ 5, 18, 19.
As the Trailer Defendants do not state that their pleading is attached, it appears that the pleading’s absence is not
simply a failure to include an intended attachment.
maintenance, or use of a “covered auto.” Policy 29. The Trailer Defendants’ assertion that Canal
owes them a duty to defend because the Trailer was attached to the Truck speaks only to the
potential that the Trailer was a covered auto under the Policy. It does not, however, in any way
establish that the Trailer Defendants were an “insured” to whom Canal would owe a duty to
defend. These are two separate issues and the Trailer Defendants cannot show Canal’s duty to
defend without establishing that the Trailer Defendants are an “insured” under the Policy. Policy
29. The Trailer Defendants’ incorporation by reference of the Lopez Motion does not shed any
light on this issue as Lopez did not argue that Canal owed a duty to defend the Trailer
The party seeking summary judgment bears the initial burden of identifying those
portions of the record which it believes demonstrate the absence of a genuine issue of material
fact. Celotex, 477 U.S. at 323; Wallace v. Tex. Tech. Univ., 80 F.3d 1042, 1046-47 (5th Cir.
1996). The Trailer Defendants have failed to point the Court to any evidence which would
establish that the Trailer Defendants are insured under the Policy; therefore, they have failed to
establish that Canal owes a duty to defend. In light of the foregoing discussion, the Court finds
that no evidence has been presented showing that Canal owes a duty to defend the Trailer
Defendants and accordingly rejects the Trailer Defendants’ motion for summary judgment.
Applicability of Policy exclusions
The parties dispute whether the Employee Exclusion, Fellow Employee Exclusion, and
Occupant Hazard Exclusion negate Canal’s duty to defend. The Court addresses each exclusion
in turn. “Where, as here, the disputed provision is an exclusion, the insurer bears the burden of
establishing that the exclusion applies.” Tex. Molecular, 424 F. App’x at 357.
The Employee Exclusion and Fellow Employee Exclusion do
not negate Canal’s duty to defend
The parties exhaustively debate whether the Employee Exclusion and Fellow Employee
Exclusion preclude coverage under the Policy. For the purposes of the duty to defend analysis,
however, this debate is beside the point: the pleadings do not clearly allege facts indicating that
either Munoz or Franceware was an “employee” according to any definition of the term.
Specifically, the Munoz Defendants alleged that Munoz was not employed by any of the
defendants in the State Court Litigation. See Munoz Live Pet. 4. Lopez and Rosa Franceware
both pleaded in the alternative that Franceware was not employed by any of the defendants in the
State Court Litigation. See Lopez Live Pet. 6; Franceware Live Pet. 10. Because the Court must
resolve all doubts in favor of the insured, it is of no moment that each decedent’s survivors also
pleaded that the other decedent was acting in the course and scope of his employment. See
Colony, 487 F. App’x at 892. Because the pleadings do not unambiguously indicate that Munoz
or Franceware were employees, the Court holds that the employee exclusion and fellow
employee exclusion do not negate Canal’s duty to defend.
The Occupant Hazard Exclusion
The Occupant Hazard Exclusion Endorsement (“OHE”) provides that “[t]his insurance
does not apply to . . . ‘Bodily Injury’ sustained by any person while in or upon, entering or
alighting from the ‘auto.’” Policy 30, 52. Were the OHE enforceable, it would negate the duty to
defend because the pleadings clearly indicate that Munoz and Franceware suffered bodily
injuries while riding in the Truck.
Neither the Texas Supreme Court nor any other Texas appellate court appears to have
addressed whether such exclusions are valid under Texas law. At least two federal district courts
in Texas, however, have held that an OHE exclusion, nearly identical to that at issue here, would
violate Texas public policy. In OOIDA Risk Retention Group v. Williams, 544 F. Supp. 2d 540,
547 (N.D. Tex. 2008), rev’d on other grounds 579 F.3d 469 (5th Cir. 2009) and Canal Indemnity
Corporation v. Aguilar, C.A. No. 07-1379, 2008 WL 8053431 (S.D. Tex. Jan. 7 2008), the courts
found that such an exclusion conflicted with Texas legislative intent to require mandatory
liability insurance for commercial motor carriers. OOIDA Risk, 544 F. Supp. 2d at 546-57;
Aguilar, 2008 WL 8053431, at *3. There is no doubt that the Truck qualifies as a “commercial
motor vehicle” for the purposes of the relevant Texas statutes relied on in OOIDA Risk. See Tex.
Trans. Code §§ 548.001; 643.101. Having reviewed the statutes and considered the OOIDA Risk
court’s analysis, the Court agrees that the OHE policy conflicts with Texas public policy and is
unenforceable. See OOIDA Risk, 544 F. Supp. 2d at 546-57. In coming to this conclusion the
Court notes several federal courts of appeal have reached the same conclusion under the laws of
other states when faced with a similar, if not the same, exclusion. See Canal Ins. Co. v. Ashmore,
126 F.3d 1083, 1087 (8th Cir. 1997) (Arkansas law); Canal Ins. Co. v. Benner, 980 F.2d 23, 2425 (1st Cir. 1992) (per curiam) (Maine law); Great W. Cas. Co. v. Canal Ins. Co., 901 F.2d 1525,
1528 (10th Cir. 1990) (Kansas law).
Because the OHE is unenforceable as void against public policy, the Court holds that it
does not work to negate Canal’s duty to defend.
The Court finds that, based on the eight-corners rule, the underlying pleadings and Policy
read together raise the potential that the Truck was a covered auto under the Policy and that
XMEX, Strader, and Franceware were potential insureds, thus triggering Canal’s duty to defend
those three parties.
The Court further finds that no party has pointed the Court to any evidence in the record
sufficient to establish that the Trailer Defendants were insured under the Policy. As a result, the
Court finds that there is no evidence that the underlying pleadings triggered Canal’s duty to
defend the Trailer Defendants.
For the foregoing reasons, the Lopez Motion, ECF No. 57, is GRANTED, the Trailer
Defendants’ Motion, ECF No. 58, is DENIED, and the Canal Motion, ECF No. 59, is
SIGNED this 4th day of September, 2014.
UNITED STATES DISTRICT JUDGE
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