Extra-Contractual Liability For Failure To Settle Within Liability Policy Limits Is Not Automatic - Revisiting the Stowers Doctrine
An adjuster is assigned a new third party liability claim arising out of an automobile collision. Liability may be in issue. She receives a settlement demand from an aggressive Plaintiff’s attorney for currently undisclosed “policy limits” just three weeks after the incident. The attorney warns the adjuster of the application of the “Stowers” doctrine.
The adjuster has limited information concerning the nature and extent of the third party claim. She is concerned that if she fails to settle within the liability policy limits as requested, the carrier will have unlimited exposure should there be an excess judgment entered against the insured at trial.
This is a common misconception. The Stowers doctrine never created automatic extra-contractual exposure should the carrier decline to settle the third party claim within the insured’s liability policy limits.
Background on G.A. Stowers Furniture Co. v. American Indemnity Co.
The phrase “Stowers demand” is derived from the Court of Commission of Appeals of Texas (now the Texas Supreme Court) decision in G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. 1929).
Stowers Furniture Company had an auto liability insurance policy with American Indemnity Company. The policy limit was $5,000. Under the policy, Stowers Furniture gave full control of the settlement process to American Indemnity.
On January 23, 1920, a Stowers Furniture employee was driving a truck in Houston. The truck became disabled. The employee left the truck on the road without turning on any lights to warn oncoming traffic. Mamie Bichon collided with the disabled truck. She sued Stowers Furniture for personal injury damages of $20,000.
Prior to trial, Miss Bichon offered to settle her claim against Stowers Furniture for $4,000. Under the policy, American Indemnity exercised complete control over the claims process. It refused to accept Miss Bichon’s offer.
Ms. Bichon was awarded $14,107.14 after a jury verdict. The verdict was in excess of the $5,000.00 policy limits.
Stowers Furniture then sued American Indemnity claiming that it should have settled when Ms. Bichon offered to settle for $4,000. It asked the court to rule that American Indemnity was responsible for the amount of the verdict in excess of the policy limits in addition to the $5,000 it was contractually obligated to pay.
The trial court directed a verdict in favor of American Indemnity. The Court of Appeals affirmed the decision in favor of American Indemnity. The Court of Commission of Appeals of Texas reversed.
Contrary to popular belief, the high court did not require American Indemnity to pay a judgment in excess of the insured’s policy limits. It simply remanded the case to the lower court for a new trial to determine whether the carrier had acted reasonably in not settling the case within those policy limits. The case subsequently settled.
This Stowers decision is widely misinterpreted as creating some type of automatic extra-contractual liability on the part of a carrier that fails to settle a claim within an insured’s liability policy limits, regardless of the circumstances. To the contrary, the Stowers holding simply creates a duty on the part of the insurance carrier to act reasonably when evaluating the ability to settle a claim within the insured’s liability policy limits.
The Stowers Duty
As is typical in Texas law, liability follows control. The Stowers court found that the indemnity policy made the carrier the sole and exclusive agent of the insured, with complete control over the claims process/litigation. With such complete control, the failure to act reasonably in settling the claim would constitute negligence. As the sole and exclusive agent with complete control, the carrier would be:
held to that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business; and if an ordinarily prudent person, in the exercise of ordinary care, as viewed from the standpoint of the assured, would have settled the case, and failed or refused to
do so, then the agent, which in this case is the indemnity company, should respond in damages. Id. at 547. The insurance company was found to be “duty bound to exercise ordinary care to protect the interest of the assured up to the amount of the policy.” Id.
In remanding the case to the lower court for a new trial to determine whether the carrier had acted reasonably in not settling the case within the insured’s policy limits, the court noted that:
knowledge on the part of the indemnity company is also an issue. The facts and circumstances surrounding the original injury, and the extent of same, would not raise the issue of negligence on the part of the indemnity company unless it had knowledge thereof, or by the exercise of ordinary care could have had such knowledge.
Id. at 548. Accordingly, Stowers liability is determined by the facts and circumstances presented to the liability carrier at the time the opportunity to settle the case within the insured’s policy limits occurs.
Stowers liability has withstood challenges since 1929. In 1994, the Texas Supreme Court reaffirmed the Stowers decision and clarified the exact requirements in the case of Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842 (Tex.1994). The Court found that in order to prove a Stowers claim, the insured must establish that:
(1) the claim against the insured is within the scope of coverage; (2) the demand [was] within policy limits; and (3) the terms of the demand [were] such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.
Id. at 849.
Full and Final Release Required
In the case of Trinity Universal Ins. Co.v. Bleeker, 966 S.W.2d 489 (Tex.1998), the Texas Supreme Court determined that a valid Stowers demand must include the offer of a full and final release of the insured from further liability.
What Are the Practical Requirements of a Stowers Demand?
Accordingly, based on the above cited cases, a proper Stowers demand has five requirements:
1.The demand must be within the policy limits;
2.Liability must be reasonably clear;
3.A reasonable insurer would accept the demand;4. The demand must be unconditional; and
5. The demand must offer a full release.
How a Stowers Claim Is Prosecuted
The Stowers claim does not exist prior to a trial. It is created when the trial results in a judgment entered in excess of the insured’s liability policy limits.
Further, the potential Stowers claim is owned by the insured, not the third party claimant.
Assume the liability carrier had the opportunity to settle the claim prior to or during trial within the liability policy limits and did not do so for whatever reason. After a trial, a judgment is entered against the insured in excess of his liability policy limits. The Plaintiff’s attorney would 1) normally ask the insured to voluntarily assign his Stowers claim to the Plaintiff in return for a covenant not to seek to collect the judgment against the insured personally; or 2) ask the court to compel the insured to assign the Stowers claim as an asset to satisfy the judgment. Either way, the Plaintiff pursues the Stowers claim directly against the carrier standing in the shoes of the insured as his assignee.
The “Reasonableness” Factor
The question of whether an insurance company acted reasonably when presented with an unconditional demand to settle within an insured’s liability policy limits is to be viewed in light of the information available to the carrier at the time of the demand.
The obvious drawbacks in seeking an answer to this “reasonableness” factor are that:
a)reasonableness is always a factual issue in the hands of a future trier of fact; and
b)the future trier of fact must make this reasonableness determination in hindsight while trying not to be influenced by the knowledge that an excess judgment actually occurred.
Regardless, an error in judgment is not a failure to use ordinary care that dictates liability. In Highway Ins. Underwriters v. Lufkin-Beaumont Motor Coaches, 215 S.W.2d 904, 928 (Tex. Civ. App.- Beaumont 1948), the court noted:
Only due care is required of Insurer, and therefore we agree with Insurer that Insurer did not become liable to Insured merely because a decision to reject Alexander’s offers proved to be wrong. Due care leaves room for an error of judgment, without liability necessarily resulting.
Consistent with this principal, a jury charge in a Stowers case would include an instruction similar to:
You are instructed that under the law in Texas, an insurer is required to exercise ordinary care in considering whether an offer of settlement should be accepted, but an insurer does not necessarily become liable merely because the decision to reject an offer of settlement proves to be wrong.
Always Act “Reasonably”
It is therefore critical to act “reasonably” when faced with a Stowers demand. Always timely respond. If more information is necessary before an intelligent evaluation of the claim can be made, respond that the demand is premature and detail the additional information needed. Avoid making requests for information immaterial to the claim (for example, there is no need to require five years of past medical if the claim is for a broken leg). If the time for response is too short because of the need to proceed through several layers of management authority, ask for a reasonable amount of additional time to respond. Always be cordial in your correspondence and keep the lines of communication open.
In short, if someone is going to appear unreasonable, let it be Plaintiff’s attorney.