Is the Pendulum Swinging on Stowers’

Through its history in Texas jurisprudence, the Stowers doctrine, which creates excess liability for insurers based upon rejection of the settlement demand within limits, has shifted between a restricted concept and a broad base for miscellaneous insurer conduct in defense of the insured. The Westchester Fire opinion, which has received a great deal of attention because of the court’s ruling that punitive damages are insurable, is also notable for its regeneration of a broad and indefinite application of the Stowers doctrine. Westchester Fire Ins. Co. v. Admiral Ins. Co., No. 02-01-00227 (Tex. App.—Fort Worth, July 12, 2003)(Cayce, J., dissenting).

The Stowers Case
The Stowers doctrine was created by the case of G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex. Comm. App. 1929, opn. approved). In that case, the court concluded that, under Texas law, an insurer could be liable at common law, under a tort theory, for a failure to accept a settlement demand, within limits, if a judgment in excess of limits were later rendered. Thus, Stowers was the first, and most entrenched, extracontractual doctrine in Texas.

Expansion of the Stowers Doctrine
The Stowers doctrine expanded over time. In 1987, the same year the Texas Supreme Court recognized a duty of good faith and fair dealing [Arnold v. National Cty. Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987)], the court held that not only was there a duty to accept a settlement demand within limits, but that the insurer had a duty to negotiate, and to generally fairly handle the defense of the insured, and that breach of any of these duties could lead to liability for an excess judgment. See Ranger Cty. Mut. Ins. Co. v. Guin, 723 S.W.2d 656 (Tex. 1987). The court also reasoned that counsel, hired by an insurer, was the “sub-agent” of the insurer in the defense of the insured.

The Supreme Court extended the doctrine and acknowledged an excess carrier’s right to assert a Stowers claim against a primary carrier in American Centennial Ins. Co. v. Canal Ins. Co. (Tex. 1992).

After its expansion, the pendulum swung and the Stowers doctrine was restricted and taken back to its roots by the Supreme Court’s opinion in American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842, (Tex. 1994). In Garcia, the court outlined the specific requirements for a Stowers claim: (1) the claim against the insured is within the scope of coverage; (2) the demand is within the policy limits; and (3) the terms of the demand are 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.

Following Garcia, the Stowers doctrine no longer extended to miscellaneous acts of alleged negligence in the defense of the insured—a limitation that was reinforced by the Supreme Court’s opinion in State Farm Cas. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998). In Traver, the Supreme Court held that an attorney, even when hired by the insurer, was an independent contractor for whom the insurer was not vicariously liable. The limitations of Garcia, requiring a written demand that a reasonable insurer would accept, also limited the ability to create Stowers exposure by a “short fuse” deadline before any investigation had been completed.

The Westchester Fire Case
Westchester Fire involves an equitable subrogation claim by the excess insurer against the primary insurer for failure to settle within primary limits. The majority of the court’s opinion is devoted to the issue of whether punitive damages were insurable, under the law at the time judgment was entered. There was also a dispute, however, as to whether the requisite elements of a Stowers claim had been established. In the Westchester Fire case, the court appears to have ignored the history of the Stowers doctrine and the mandates of the Texas Supreme Court, under the recognized and expansive view of the Stowers doctrine. The court paid lip service to the requirements of Garcia, but then failed to apply those requirements.

The policy at issue in Westchester Fire was an eroding policy, which included defense costs within limits. Early in the case, plaintiffs’ counsel was provided with a copy of the declaration page—revealing both the limits and the inclusion of defense costs within limits. Plaintiff’s counsel indicated, orally, to defense counsel that he would be seeking policy limits.

Several months after those conversations, and receipt of the declarations page, plaintiff’s counsel inquired as to the remaining aggregate limits. Defense counsel responded that the insured’s president had testified that the entire $2 million aggregate on the primary was available. Subsequently, prior to a scheduled mediation, plaintiff’s counsel sent two letters—one indicating the claim exceeded policy limits, to ensure the excess carrier was on notice of the mediation, and one offering to settle for policy limits of $1 million. The second letter, sent one week before mediation, also requested the excess carrier be apprised that the case could be settled “within the limits of the primary insurance company.”

The case did not settle at mediation, and all subsequent offers were in excess of primary limits. After the case resulted in a judgment in excess of limits, a Stowers claims was asserted. At trial, Admiral was granted directed verdict. The appeals court reversed based, in part, on its conclusion there was some evidence to support a Stowers claim.

According to the court, there was evidence the initial policy limits were misrepresented in discussions with the plaintiff. The court also found the conversations between counsel, in which the plaintiff indicated, orally, that it would take “policy limits” to settle the case were some evidence of an offer to settle within limits. In addition, it found that Admiral had not conclusively proved there was no opportunity to settle after mediation.

Erosion of the Stowers Elements
The court’s analysis erodes the requirement of a demand within limits. Not only did the court consider casual conversation, it broadly construed the offer for $1 million (which was no longer the available limits), in light of general references to policy limits. The court also seems to have paid undue credence to the suggestion that the plaintiff believed the full limits were available. The plaintiff had obtained, through discovery, a copy of the policy and was aware that defense costs reduced limits. Moreover, the suggestion that counsel’s misrepresentation of limits creates Stowers liability for the carrier ignores the dictates of Traver and reinstitutes the idea of an agency relationship between counsel and the insurer. Further, the discussion of an opportunity to settle after mediation—when no offer within limits was outstanding—appears to return to the pre-Garcia notion that an insurer has a duty not only to accept reasonable demands within limits, but to make offers and to attempt to negotiate a settlement within limits.

This paradigm shift is unnecessary. The Supreme Court has frequently reiterated that Stowers is a limited negligence doctrine, imposed on a contractual relationship. An insurer who wrongly interferes with the settlement process already faces exposure under article 21.21. See Rocor Internat’l Inc. v. National Union Fire Ins. Co., 77 S.W.3d 253 (Tex. 2002).

The contractual, statutory, and common law protection should be enough. The rules are clear, there. There is no need to encourage ambiguous or ill-timed settlement demands, designed to create, rather than resolve litigation.

The reasoning in Westchester Fire presents problems for all insurers, and represents a significant retrenchment of the protections afforded by the Supreme Court in Garcia. It is particularly of concern, however, to insurers writing policies with defense costs within limits—such as professional liability, directors and officers, and other claims-made coverages. Implicit in the court’s discussion is a suggestion that an insurer may need to negotiate settlement, before the limits are significantly depleted, or face Stowers exposure.

A motion for rehearing and rehearing en banc has been filed, so the court of appeals opinion may not be the final word. The Stowers doctrine deserves further attention and should not be curtailed in an opinion where its significance is overshadowed by the discussion of punitive damages.

Topics Carriers Texas Excess Surplus Chubb