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United States Court of Appeals,
Fifth Circuit.
No. 911123.
PENNSYLVANIA NATIONAL MUTUAL CASUALTY INSURANCE CO.,
PlaintiffAppellant, CrossAppellee,
v.
KITTY HAWK AIRWAYS, INC., and Jeffrey Thomason Pollard, DefendantsAppellees,
CrossAppellants.
June 30, 1992.
Appeals from the United States District Court for the Northern District of Texas.
Before DAVIS, JONES, and EMILIO M. GARZA, Circuit Judges.
PER CURIAM:
Insurer Pennsylvania National Mutual Casualty Insurance Co. ("Pennsylvania National")
appeals a grant of summary judgment in favor of its insured--Kitty Hawk Airways, Inc. ("Kitty
Hawk")--and Kitty Hawk's former employee, Jeffrey Thomason Pollard. The district court granted
Kitty Hawk's motion for summary judgment on the grounds that Pennsylvania National is estopped
from raising a defense of non-coverage by its assumption and continuation of Kitty Hawk's defense
for more than one year before raising a reservation of its rights. Finding that the doctrines of estoppel
and waiver do not apply, we reverse the portion of the district court's judgment holding that
Pennsylvania National is estopped from denying coverage and render judgment in favor of
Pennsylvania National on its non-coverage claim.
I
Kitty Hawk is the named insured of a policy issued by Pennsylvania National providing
personal injury liability coverage--including coverage for any liability resulting from defamatory
statements made in the course of Kitty Hawk's business.1 However, "Exclusion (c)" of that policy
1Specifically, the policy provides that:
The company will pay on behalf of the insured all sums which the insured

explicitly excludes "personal injury sustained by any person as a result of an offense directly or
indirectly related to the employment of such person by the named insured...." Id. (emphasis in
original).
Pursuant to this policy, Pennsylvania National retained attorneys to provide Kitty Hawk and
F. Ken Dunn--the vice-president and co-owner of Kitty Hawk--wit h an unqualified defense in a
Texas defamation lawsuit brought by Pollard in May 1984.2 In July 1985--a month after Pollard
amended his suit to assert that Kitty Hawk's defamatory statements related to Pollard's severance
from employment--Pennsylvania National sent Kitty Hawk a reservation of rights letter explaining
that Exclusion (c) might bar coverage.
In February 1987, Kitty Hawk's general counsel demanded that Pennsylvania National provide
an unqualified defense, but Pennsylvania National refused to withdraw its reservation. A few months
later, Kitty Hawk again made a demand for an unqualified defense but noted that the defense provided
shall become legally obligated to pay as damages because of injury (herein called
"personal injury") sustained by any person or organization and arising out of one
or more of the following offenses committed in the conduct of the named
insured's business:
Group B--the publication or utterance of a libel or slander or of other defamatory
or disparaging material, or a publication or utterance in violation of an individual's
right of privacy, except publications or utterances in the course of or related to
advertising, broadcasting or telecasting activities conducted by or on behalf of the
named insured....
Record Excerpts of Appellee Kitty Hawk Airways, Inc. at tab 1, p. 055, Pennsylvania
Nat'l Mutual Casualty Ins. Co. v. Kitty Hawk Airways, Inc. and Jeffrey Thomason
Pollard, No. 911123 (5th Cir. filed Aug. 14, 1991) (emphasis in original).
2Pollard was employed by Northwest Airlines in December of 1983, and Northwest terminated
that employment in January or February of 1984--soon after receiving Kitty Hawk's response to a
routine employment inquiry. Pollard's suit alleged that Kitty Hawk and Dunn published libelous
and slanderous statements about Pollard, which resulted in his being terminated by Northwest.
Specifically, Kitty Hawk stated in its response that Pollard--an employee of Kitty Hawk from
February through June of 1979--was admonished in April 1979 for drinking alcohol at a time
when he was supposed to be available for flight duty. This incident was documented in an April
24, 1979 warning letter from the president of Kitty Hawk to Pollard.

by Pennsylvania National had been "able and competent."3 Pennsylvania National rejected this
demand and continued Kitty Hawk's defense subject to its reservation.
In October 1987, a jury found that Kitty Hawk had defamed Pollard. Pennsylvania National
refused to satisfy the judgment and filed this action in federal court, seeking a declaration that it was
not obligated to provide coverage under the policy. Kitty Hawk and Pollard filed counterclaims,
seeking a declaration that Pennsylvania National owed coverage and asserting claims under the Texas
Insurance Code.
All three parties filed motions for summary judgment. The district court held that Exclusion
(c) is unambiguous and that Pollard's claim falls within that exclusion. The district court concluded,
however, that Pennsylvania Nat ional is estopped from denying coverage because its year delay in
conveying a reservation prejudiced Kitty Hawk. The court also found that, under Texas law, Pollard's
damages are limited to the amount of his policy--that is, Pollard cannot recover the double damages
he seeks pursuant to section 16 of article 21.21 of the Texas Insurance Code.
II
Based upon the plain language of the Pennsylvania NationalKitty Hawk policy, we agree
with the district court--Exclusion (c) is unambiguous and Pollard's claim falls within this exclusion.4
Therefore, we focus on Kitty Hawk's contention that Pennsylvania National is precluded from raising
the defense of non-coverage by the doctrine of estoppel.5
3See infra note 17 and accompanying text.
4See Pennsylvania Nat'l Mutual Casualty Ins. Co. v. Kitty Hawk Airways, Inc. and Jeffrey
Thomason Pollard, No. CA 3873033R, slip op. at 35 (N.D.Tex.1990) (Memorandum
Opinion and Order).
5The doctrines of waiver and estoppel, although used somewhat interchangeably by the district
court, are distinct and separate doctrines: waiver requires the voluntary surrender of a known
right (for example, if the insurer knows that it can raise a non-coverage defense but chooses not
to), while estoppel requires a showing that the insured was prejudiced by the insurer's conduct.
See State Farm Lloyds, Inc. v. Williams, 791 S.W.2d 542, 552 (Tex.App.--Dallas 1990, no writ);

We are a federal court applying Texas law,6 and it is well-settled Texas law that "the
doctrines of waiver and estoppel cannot be used to create insurance coverage where none exists
under the terms of the policy."7 Williams, 791 S.W.2d at 550;8 Yancey v. Floyd West & Co., 755
S.W.2d 914, 922 (Tex.App.--Fort Worth 1988, no writ) (applying this general rule to hold that
doctrine of estoppel did not entitle insurance agent claiming that he was prejudiced by reliance on
insurer's statements to liability coverage). However, there is a well-established exception--the
"Wilkinson exception"9--to this general rule: "[I]f an insurer assumes an insured's defense without
declaring a reservation of rights or obtaining a non-waiver agreement, and with knowledge of facts
indicating non-coverage, all policy defenses, including those of non-coverage, are waived, or the
insurer may be estopped from raising them." Williams, 791 S.W.2d at 550 (emphasis in original),
citing Wilkinson, 601 S.W.2d at 520.10 Our inquiry as to whether the Wilkinson exception applies
see also Union Nat'l Bank of Little Rock v. Moriarity, 746 S.W.2d 249, 252 n. 3
(Tex.App.--Texarkana 1987, no writ). We use the term "estoppel" in our discussion since Kitty
Hawk's primary claim is that it relied on Pennsylvania National for its defense against Pollard's suit
and was prejudiced by a conflict of interest. However, see infra note 11.
6This case is a diversity action brought pursuant to 28 U.S.C. § 1332. See Salve Regina
College v. Russell, U.S. , 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991) (Where
plaintiff filed diversity action, concluding "that a court of appeals should review de novo a district
court's determination of state law.") (italics omitted).
7One of the policy girders buttressing this rule is the potential for conflicts--that is, the
potential for an insurer representing an insured in a lawsuit to, fearful that the defense it provides
may fail and result in a judgment against the insured and indemnity claim against the insurer,
simultaneously prepare a non-coverage defense against the insured. See Williams, 791 S.W.2d at
551. "Another related reason is the harm potentially or inherently suffered by an insured who
lacks the right to completely control his defense." Id. at 552.
8Citing Texas Farmers Ins. Co. v. McGuire, 744 S.W.2d 601, 60203 (Tex.1988); Republic
Ins. Co. v. Silverton Elevators, Inc., 493 S.W.2d 748, 751 (Tex.1973); Minnesota Mut. Life Ins.
Co. v. Morse, 487 S.W.2d 317, 320 (Tex.1972); Annotation, Doctrine of Estoppel or Waiver as
Available to Bring Within Coverage of Insurance Policy Risks Not Covered by Its Terms or
Expressly Excluded Therefrom, 1 A.L.R.3d 1139, 114450 (1965); 3 R. LONG & M. RHODES,
THE LAW OF LIABILITY INSURANCE § 17.16, at 1759, 1765 (1988).
9See Farmers Texas County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520, 522
(Tex.Civ.App.--Austin 1980, writ ref'd n.r.e.)
10Also citing Pacific Indem. Co. v. Acel Delivery Serv., Inc., 485 F.2d 1169, 1173 (5th
Cir.1973) (applying Texas law), cert. denied, 415 U.S. 921, 94 S.Ct. 1422, 39 L.Ed.2d 476
(1974); Annotation, Liability Insurance: Insurer's Assumption of or Continuation in Defense of
Action Brought Against the Insured as Waiver or Estoppel as Regards Defense of Non-coverage

is guided by recent Texas cases holding that this exception trumps the general no-expanded-coverage
rule where an insured shows: (1) that the insurer had sufficient knowledge of the facts or
circumstances indicating non-coverage but (2) assumed or continued to defend its insured without
obtaining an effective reservation of rights or non-waiver agreement and, as a result, (3) the insured
suffered some type of harm.11 See Texas Farmers Ins. Co. v. McGuire, 744 S.W.2d 601, 603 n. 1
(Tex.1988);12 Williams, 791 S.W.2d at 55253 (drawing deductions from survey of relevant Texas
case law).
We find that Pennsylvania National, the drafter of Exception (c), had sufficient knowledge
to challenge its coverage of Kitty Hawk but assumed and continued Kitty Hawk's defense for more
than a year before obtaining an effective reservation of rights--thereby satisfying the first two
requirements for applying the Wilkinson exception.13 That leads us to the third requirement--that
or Other Defense Existing at Time of Accident, 38 A.L.R.2d 1148, 115055 (1954); 7C J.
APPLEMAN & W. BERDAL, INSURANCE LAW AND PRACTICE § 4692, at 28995 (1979); 3 R.
LONG & M. RHODES, THE LAW OF LIABILITY INSURANCE § 17.16, at 1767 (1988); A. WINDT,
INSURANCE CLAIMS AND DISPUTES § 2.06, at 3233 (1988).
11Regardless of whether the insured relies upon the doctrine of estoppel or the doctrine of
waiver to challenge the non-coverage defense of its insurer, courts generally require a showing
that the insurer's assumption of its insured's defense without reserving its rights harmed the
insured. Williams, 791 S.W.2d at 552 (citations omitted).
12Specifically, the Texas Supreme Court, summarizing the Texas Court of Appeals holding in
Farmers Texas County Mutual Ins. Co. v. Wilkinson, 601 S.W.2d 520 (Tex.Civ.App.--Austin
1980, writ ref'd n.r.e.), noted that: "If an insurer, with knowledge of facts indicating
non-coverage, assumes or continues the defense of its insured without obtaining a non-waiver
agreement or a reservation of rights, it waives all policy defenses, including those of
non-coverage, or it may be estopped from raising them." McGuire, 744 S.W.2d at 603 n. 1.
13Pennsylvania National argues that it could not have notified Kitty Hawk any earlier because it
was unaware of its non-coverage defense until Pollard amended his suit in June 1985 to assert that
Kitty Hawk's defamatory statements involved Pollard's severance from employment. As the
district court found, however, even Pollard's original Texas state court petition contained facts
sufficient to predicate this defense: The original petition stated that Kitty Hawk employed Pollard
from February through June 1979, that the Kitty Hawk letter forming the basis for Pollard's claim
was dated April 24, 1979, and that Kitty Hawk had defamed Pollard in this letter. At the very
least, this information was sufficient to require Pennsylvania National to investigate the facts
thoroughly enough to make an informed decision about coverage. See Pacific Indem. Co. v. Acel
Delivery Serv., Inc., 485 F.2d 1169, 1174 (5th Cir.1973), cert. denied, 415 U.S. 921, 94 S.Ct.
1422, 39 L.Ed.2d 476 (1974).

is, determining whether Pennsylvania National's delay in reserving its rights harmed Kitty Hawk.
Specifically, we must determine what constitutes a sufficient showing of harm and apply that standard
to the case before us.
Williams provides the most recent expression of what constitutes sufficient proof of harm
under the Wilkinson exception. In Williams, State Farm provided a defense for the insured's estate
in the underlying suit without reserving its right to assert non-coverage in the future. State Farm then
denied coverage and refused to respond to the judgment rendered against the property of the insured's
estate. Although State Farm's policy did not cover the estate's liability, the court remanded the case
for further proceedings to determine if State Farm had waived its right to deny, or should be estopped
from denying, coverage. Addressing the third prong of the Wilkinson exception, the court held that,
unless the insured suffers a "clear and unmistakable" harm from its insurer's defense, "the insured
must show how he was harmed." Williams, 791 S.W.2d at 553. Because the record contained scant
information on the conduct and quality of State Farm's defense of the estate, the court concluded that
it could not presume that State Farm's defense had harmed the estate.
The intermediate Texas courts have not unanimously adopted the Williams test for harm.14
We are nevertheless persuaded that the Texas Supreme Court would adopt this test at least in cases
where counsel provided to the insured by its insurer has no opportunity to manipulate facts relating
to the insurer's non-coverage defense. In this limited circumstance, our decision in Pacific
Indemnity15 does not control.
Our review of the record convinces us that the facts of this case do not support a conclusion
that Pennsylvania National's defense of Kitty Hawk resulted in a "clear and unmistakable" conflict of
14See, e.g., Wilkinson, 601 S.W.2d at 52122; Automobile Underwriters' Ins. Co. v. Murrah,
40 S.W.2d 233, 235 (Tex.Civ.App.--Dallas 1931, writ ref'd).
15Pacific Indem. Co. v. Acel Delivery Serv., Inc., 485 F.2d 1169 (5th Cir.1973), cert. denied,
415 U.S. 921, 94 S.Ct. 1422, 39 L.Ed.2d 476 (1974).

interest or harm, or that Kitty Hawk has demonstrated that it suffered actual harm or prejudice. Kitty
Hawk has produced no evidence that the attorneys provided by Pennsylvania National acted in any
manner, during the course of the defense, that was prejudicial to Kitty Hawk. Kitty Hawk points to
no evidence that Pennsylvania National in its defense of Kitty Hawk manipulated the defense of its
insured to better its future claim of non-coverage. Indeed, Pennsylvania National does not base its
non-coverage defense on an issue that was material to the underlying suit: Exclusion (c), on which
Pennsylvania National premises its non-coverage defense, withdraws coverage for defamatory
statements that relate directly or indirectly to the employment of the defamed person, and this issue
of employment relatedness was not contested in the underlying suit. In fact, the defamatory letter
specifically refers to Pollard's employment-related conduct. Kitty Hawk points to no evidence
reflecting that Pennsylvania Mutual had an opportunity to manipulate the facts on this point to bolster
its non-coverage defense.16
In addition, Kitty Hawk had over two years to retain new counsel after Pennsylvania National
notified Kitty Hawk that Exclusion (c) might bar coverage. Nevertheless, Kitty Hawk chose to
continue on with Pennsylvania National's representation. In fact, in a letter demanding that
Pennsylvania National provide an unqualified defense, Kitty Hawk admitted that it did not "have any
complaints whatsoever with the able and competent manner in which the defense ha[d] been handled
to date."17 Therefore, the fact that Kitty Hawk may have voluntarily relinquished rights associated
with the control of its defense does not establish that it suffered any harm. Accordingly, we hold that,
16Compare Pacific Indemnity, 485 F.2d at 117576 (recognizing prejudice when insurer's
defense deprived its insured of an opportunity to investigate the facts while in close proximity to
their occurrence and to conduct timely discovery and the insurer's failure to answer
interrogatories adequately resulted in sanctions against the insured) and Employers Casualty Co.
v. Tilley, 496 S.W.2d 552, 56061 (Tex.1973) (holding conflict of interest created when attorney,
acting on behalf of the insurer in defending claim against an insured, simultaneously prepared a
defense against the insured for the insurer) with Ideal Mut. Ins. Co. v. Myers, 789 F.2d 1196,
1202 (5th Cir.1986) (no conflict of interest arose where insurer provided a reservation of rights
notice and attorney did not work against the insured on the conflicting coverage question).
17Second Supplemental Record on Appeal, vol. II, at 28999, Pennsylvania Nat'l Mutual
Casualty Ins. Co. v. Kitty Hawk Airways, Inc., and Jeffrey Pollard, No. 911123 (5th Cir. filed
Aug. 26, 1991).

when, as in this case, the facts do not suggest that counsel provided by an insurer to defend its insured
has acted to prejudice (or even had an opportunity to prejudice) the insured's claim of policy
coverage, no inference of harm to the insured arises.18
III
For the foregoing reasons, we REVERSE that portion of the district court's judgment holding
that Pennsylvania National is estopped from denying coverage and RENDER judgment in favor of
Pennsylvania National on its non-coverage claim.
* * * * * *

18Our holding that Pennsylvania National's non-coverage defense bars damages arising from
Kitty Hawk's defamation of Pollard makes it unnecessary for us to address whether Pollard may
recover double damages from Pennsylvania National pursuant to section 16 of article 21.21 of the
Texas Insurance Code.