Texas Supreme Court Holds Stowers Action Not Available Where There Is No Judgment Or Settlement In Excess Of Policy Limits
The Supreme Court of Texas recently held that there is no Stowers action available for negligent failure to settle where there was no judgment in excess of policy limits. In re Farmers Tex. Cnty. Mut. Ins. Co., 621 S.W.3d 261 (Tex. 2021).
The underlying lawsuit arose out of an automobile accident. The plaintiff brought suit and the defendant’s insurer settled the claim within policy limits but obtained a release that was contingent on the insured paying $100,000 of the $350,000 settlement. The insured paid the $100,000 and then sued its insurer for reimbursement. The insurer then sought to dismiss the case on, inter alia, grounds that the insured’s claim for negligent failure to settle had no basis in law per Tex. R. Civ. P. 91a. The insurer argued that Texas law does not recognize a cause of action for negligent failure to settle (i.e., a Stowers claim) where there has not been a judgment against the insured exceeding policy limits. The trial court denied the motion to dismiss and the insurer sought mandamus relief. The court of appeals affirmed, with the majority holding that whether a Stowers claim always requires an excess judgment is not clearly established so as to be free from doubt. The insurer again sought mandamus relief.
The Texas Supreme Court determined that the insured had no Stowers claim for negligent failure to settle because there was no judgment or settlement in excess of policy limits. Under the Stowers doctrine, an insurer has a common-law duty to settle third-party claims against its insureds when it is reasonably prudent to do so. The duty arises when 1) the third party’s claim against the insured is within the scope of coverage; 2) the settlement demand is within 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. When these conditions are met and the insurer’s negligent failure to settle results in an excess judgment against the insured, then the insurer is liable under the Stowers doctrine. The Court recognized that it has consistently required that an insured be liable in excess of policy limits – whether as a result of judgment or settlement – prior to the insured being able to bring a Stowers claim. The Court thus declined to extend Stowers to cases in which there is no liability in excess of policy limits as the insurance contract fully addresses the parties’ common-law obligations in those circumstances.
Prepared by: Joshua McGraw
