Stowers Doctrine Explained
The Stowers Doctrine holds that a liability insurer that undertakes the defense of an insured has a duty to act in good faith in settling a liability claim. It is named for a seminal Texas case, G. A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929).
Whether to settle a liability claim is completely at the discretion of the liability insurer under the terms of most insurance agreements, with those having a self-insured retention being the main exception. In those cases, the insured must pay a set amount of money before the carrier is compelled to act.
If the claimant/plaintiff makes an offer to settle a liability claim before a trial, for an amount within the liability policy limit, the insurer is not obligated to accept the offer and has the contractual right to take the claim to trial. Failure to settle within the prescribed time frames may prevent the carrier from doing so at a later point in time.
To protect insureds from abusive practices, courts impose an extracontractual duty on insurance carriers to act in good faith when deciding whether to accept or reject a settlement offer that is within policy limits. If the insurer acts unreasonably, failing to resolve the claim within the limits and choses to take the claim to trial, loses, and the jury returns a verdict against the insured for an amount above policy limits, then the insurer may be liable to pay the entire judgment under the Stowers Doctrine, even the excess portion above policy limits.
To be valid, the demand must be for the entirety of the case, and within the limits of coverage. There are no carve outs or exceptions other than a full and final release. Only when there is a judgment against an insured in excess of policy limits can an insured then proceed to pursue a carrier for bad faith under the Stowers Doctrine.
To be certain to protect your own interests in tenuous litigation, sometimes, the primary insurer may be reluctant to pay its limits, but you as the insured and/or the excess carrier want to mitigate/extinguish exposure. In that situation, you and/or the excess insurer may issue a “hammer letter,” demanding the primary insurer settle the claim within the limits of the primary policy. This is always a prudent measure of self-protection in situations like these.
While Stowers is a creature particular to Texas, almost every state has a similar rule, sometimes called an Offer of Judgment (OOJ). There may be additional penalties beyond excess judgment, such as assumption of legal fees, etc. The premise remains the same.
But it is important to understand, just receiving a Stowers Demand from a claimant/plaintiff attorney does not automatically mean your exposure is at or near the policy limit. For a Stowers Demand to be valid, five requirements must be met:
The claim against the insured is within the scope of coverage;
Liability is reasonably clear;
The demand is within the limits of the policy;
The settlement terms are such that an ordinarily prudent insurer would accept it when considering the likelihood and degree of the insured’s potential exposure to an excess judgment; and
The demand offers the insurer an unconditional, full release for liability.
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