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by Megan Zeller

In Texas, one of the biggest issues liability insurers face is when an excess verdict is awarded against the insured. Prior to trial, Texas requires insurers to exercise ordinary care in the settlement of covered claims to protect insureds from excess judgments under the Stowers doctrine. See G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544, 547 (Tex. Comm’n App. 1929, holding approved). Although excess insurers may be involved at this initial stage, the reasonable duty to settle is usually solely at issue for the primary insurer. As a result, not only can a primary insurer face a Stowers lawsuit by the insured for failure to reasonably settle a case, but a primary insurer can also face a Stowers lawsuit by any excess insurer that is then stuck paying for the excess verdict.

A recent case from the Northern District of Texas, Dallas Division, demonstrates the risks that primary insurers face when dealing with the aftermath of an excess verdict with an excess insurer. Here, an excess insurer (Endurance) sued a primary insurer (Hiscox) on an excess judgment, arguing that a reasonable insurer would have accepted the settlement. See Endurance American Ins. Co. et al. v. Lloyd’s Syndicate 3624, 2024 WL 3625671 (N.D. Tex. July 31, 2024).

The underlying case involved a plaintiff (the “Plaintiff”) who was electrocuted and filed suit against a property management company. Hiscox, as the primary insurer, defended the property management company and engaged in numerous settlement discussions with Plaintiff throughout litigation. Initially Plaintiff offered to settle the suit in writing for $3,000,000.00, which was above Hiscox’s policy limits. Even though this demand was labeled a “Stowers Demand,” it was undisputed that this demand was not a proper Stowers demand, as it did not meet the second Stowers prerequisite:

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.

See Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 848–49 (Tex. 1994).

Plaintiff then offered to settle the case in writing for $1,000,000.00, which was the full value of the Hiscox insurance policy. This demand was clearly labeled “Stowers Demand.” However, less than a week after making the $1,000,000.00 settlement offer, and prior to the demand’s deadline, Plaintiff’s counsel indicated over the phone that Plaintiff would settle for $500,000.00. Ultimately, Hiscox failed to settle with either demand and the jury awarded Plaintiff $3,500,000.00.

As a result of the excess verdict, Endurance brought suit against Hiscox. Hiscox then filed a motion for summary judgment, arguing that: (1) a reasonably prudent insurer would not have accepted the terms of the demands, and that (2) the demands were not proper Stowers demands. The Court, however, struck down both arguments, and found that these issues were fact-issues that would be decided by a jury.

Specifically, Hiscox argued that no reasonably prudent insurer would have accepted the $1,000,000.00 demand because the timing of the phone call regarding the $500,000.00 demand made it unreasonable for Hiscox to accept the $1,000,000.00 offer. The Court, however, was not swayed by this argument. First, the Court noted that Endurance produced an expert who disputed this position and argued that a $1,000,000.00 demand was reasonable for the circumstances. Moreover, the Court relied on previously-established caselaw, where “the question whether an insurer has had a reasonable amount of time to respond to a Stowers demand will generally present a quintessential, constituent fact issue that is subsumed within the jury's application of the reasonably prudent insurer standard.” Bramlett v. Med. Protective Co. of Ft. Wayne, Ind., No. 3:10-CV-2048-D, 2013 WL 796725, at *5 (N.D. Tex. Mar. 5, 2013) (Fitzwater, C.J.). As a result, the Court found that a motion for summary judgment on this issue was improper, and that this issue should proceed to trial.

Hiscox also argued that the $500,000.00 demand was not a proper Stowers demand because it was not labeled a Stowers demand like the prior two demands, and was made over the phone. While this argument may be somewhat compelling, the caselaw is nonetheless clear: verbal demands may be considered proper Stowers demands if they contain sufficiently clear terms to trigger the Stowers duty. See, e.g., Westport Ins. Corp. v. Pennsylvania Nat'l Mut. Cas. Ins. Co., No. CV H-16-1947, 2018 WL 6313478, at *28–29 (S.D. Tex. Aug. 31, 2018). Once again, the Court found this sufficient evidence to be a fact-issue for the jury.

As a result, Hiscox now faces either settling with Endurance or going to trial on these issues. Again, jury verdicts in Stowers cases rarely favor the primary insurer, and as a result, are highly risky. Even if the primary insurer has a valid argument under the reasonableness standard, the primary insurer is still nonetheless at the mercy of the jury if they decide to go forward with a Stowers trial. Accordingly, if a primary insurer denies a Stowers demand purely on a reasonableness standard, we recommend that the primary insurer have a clear-cut argument that an average juror would be able to agree with, considering the circumstances. Part of this analysis includes a thorough jury verdict and settlement analysis to ensure the primary insurer understands what they are up against if a case does end up going above the policy limits. In cases like these, it is extremely important that a primary carrier conduct as much of the risk analysis it can during the Stowers demand negotiations. 

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.