Insurance Law Blog

May 5, 2014
Dear Colleague,

On Thursday, April 24, 2014, the First District Court of Appeals in Houston affirmed summary judgment in favor of an insurer that had denied a claimant recovery in excess of policy limits based upon an alleged violation of the Stowers doctrine. See Patterson v. Home State County Mutual Insurance Co., 2014 WL 1676931 (Tex. App.--Houston [1st Dist.] Apr. 24, 2014, no pet. h.). In doing so, the court of appeals found that the claimant had failed to present settlement demands that would have triggered the insurer’s duty under Stowers to settle liability claims against its insured.

The underlying lawsuit was filed by Marcus Patterson on behalf of himself, his wife’s estate and his children following the death of his wife in an automobile accident. His claims were against the driver of an eighteen-wheeler (“Hitchens”), the driver’s employer (“Brewer”) and a leasing company (“Stretch”). During the course of the dispute, Patterson made three settlement offers. In the first letter, he proposed releasing all claims against Brewer in exchange for the payment of policy limits to his children, and in the second, he made the same proposal but with the payment of policy limits to himself. Before the third settlement offer was made, the insurer for Brewer, Home State County Mutual Insurance Co., interplead the policy proceeds into the court’s registry because, aside from the Patterson claims, four other claimants contended they were injured in the same accident. Thereafter, the third settlement letter was sent in which Patterson offered to settle all the claims against Brewer in exchange for the policy limits. Home State rejected each of the three offers.

Ultimately, on the day of trial, Brewer and Patterson executed a settlement agreement with a covenant not to execute provision and an assignment of Brewer’s Stowers claims against Home State. Patterson proceeded to trial against Hitchens and Brewer, though, obtaining a negligence award against Hitchens and a post-answer default judgment against Brewer in favor of himself, his wife’s estate and his children far in excess of the policy limits.

Subsequently, Patterson pursued Home State in the Stowers action, claiming the company had negligently failed to settle in the wrongful-death lawsuit. Home State countered that it was entitled to judgment as a matter of law because its insured had indicated it did not want Home State to accept any of the settlement offers unless an offer was made to release Hitchens and Brewer from all the Pattersons’ claims in exchange for payment of the policy proceeds. The trial court agreed with Home State and the instant appeal followed.

On appeal, and after overruling Patterson’s “mootness” claim, the court reviewed the factors needed to trigger an insurer’s liability under Stowers for damages in excess of policy limits. Further, as a threshold matter, the court noted that, under Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489 (Tex. 1998), the settlement demand must propose to release the insured fully. According to Home State, the three settlement offers did not purport to release all the insureds or all the claimants’ claims. Additionally, none of the offers were unconditional in nature. Finally, as noted above, the named insured under the policy did not want Home State to accept the offers as presented.

In reviewing the settlement offers, the court agreed that the first two settlement offers did not trigger a Stowers obligation because they did not purport to fully release Brewer, which still would have faced excess liability to any claimant that had not been named in the settlement demand. The court said: “Indeed, by settling in the full amount of the policy limits with only one of the claimants, Home State could have potentially exposed Brewer to an excess judgment by one of the other claimants. Accordingly, we hold that the first and second settlement offers did not trigger Home State’s Stowers duty to settle.” And, with respect to the third offer, while it included an offer of a release from all the claimants, it did not include a release of the claims asserted against Hitchens, who remained a potential insured. Thus, the court found it was not an “unconditional” offer. Finally, the court noted that the insured’s personal counsel did not want Home State to accept any release all the claims against all the insureds. Thus, the court of appeals affirmed the trial court’s ruling that the settlement offers did not trigger Home State’s duty to settle under Stowers.

Notably, in its analysis of the Stowers issues, the court never addressed the Supreme Court of Texas’s decision in Tex. Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994), where the Court found that an insurer did not act negligently in settling with a single claimant within policy limits even though it left an insufficient amount of policy proceeds with which to settle the remaining claims. The court’s decision also did not address the Fifth Circuit Court of Appeals’ decision in Pride Transportation v. Continental Cas. Co., 511 F. App’x 347 (5th Cir. 2013), which held that an insurer acted reasonably in settling claims against one insured for policy limits even though it left another insured open to liability without coverage. Together, those cases and others seem to support Patterson’s position that the insurer could have (and should have) accepted any of the three offers even though there were multiple claimants and multiple insureds.

In light of the court’s failure to address these pertinent cases—and others like them—it will be interesting to see whether the Supreme Court of Texas will grant review in Patterson (assuming, of course, that a petition for review is filed). While at first blush it appears that the Houston Court of Appeals has backtracked on well-settled law that an insurer can in fact settle and exhaust policy limits even if doing so leaves other insureds exposed or in situations where it leaves other claimants without an insurance recovery, one factor that may foreclose review is the fact that the insured did not want the insurer to settle any portion of the case without a full release of all claims for all the insureds. Because the Stowers cause of action belongs to the insured, the assignment of the claim to a third-party claimant still subjects that claimant to the same defenses the insurer would have had against the insured. Where an insured tells its insurer that it does not want to settle the case unless certain conditions are met, finding that the insurer acted unreasonably is difficult. Accordingly, although the Houston Court of Appeals may have “technically” misstated the law, this case likely can be chalked up to its unique facts because the insured instructed the insurer not to accept the demands.

BONUS MATERIAL: As many of you know, Doug Skelley is the “Right of the Press” guy. He gathers all of the insurance cases issued by Texas courts, reads the good ones, and sends a weekly e-mail to members of the Insurance Law Section. Doug recently presented a paper that can best be described as a Best of Right off the Press for 2013-2014 (at least to date). A copy can be found here. It has not made the New York Times Bestseller list yet, but we remain cautiously optimistic.  

Lee Shidlofsky
Member of Shidlofsky Law Firm

Douglas P. Skelley
Member of Shidlofsky Law Firm