Liability insurance policies often contain alternative dispute resolution clauses, including: (1) Binding arbitration only; (2) Mediation and, if mediation is unsuccessful, then binding arbitration; (3) Election between mediation and arbitration, with insured having veto power over the insurer’s selection; and (4) Mediation or binding arbitration with a waiting period before suit is filed if mediation is selected. See Ernest Martin, Jr, Hot Tips on Managing the Liability Crisis Through Insurance, Haynes and Boone, LLP (June 24, 2004).
The Stowers Doctrine
In Texas, the landmark decision recognizing an insurer’s duty to settle a third-party liability claim is G.A. Stowers Furniture Co. v. American Indemnity Co. See 15 S.W.2d 544, 544-46 (Comm’n App. 1929, holding approved). In Stowers, the court held that when a primary liability insurance carrier defends an insured person against a covered claim made by a third party, the primary insurer has a common law duty to exercise reasonable care in responding to a settlement demand that is within the policy’s limits. Thus, if an insurance company that is given the opportunity to settle within its policy limits fails to do so, it could potentially become responsible not only for any excess judgment, but also liable to their own insured for breach of the duty of good faith and fair dealing, D.T.P.A., claims under the Texas Insurance Code another claims. This duty of reasonable care is known as the Stowers Doctrine.
The Elements of Stowers
The Texas Supreme Court further clarified the Stowers duty in American Physicians Insurance Exchange v. Garcia. See American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994). In Garcia, the court went on to explained that the Stowers doctrine is activated when a third party seeking to impose liability on an insured makes a demand to settle the claims and the following circumstances exists:
- The claim against the insured is within the scope of the policy’s coverage;
- The settlement demand is within policy limits or a stated sum of money within the policy’s limits;
- The proposed settlement is one that will result in a full release of the insured; and
- The terms of the settlement 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.
Stowers: Recent Cases
Two recent Texas cases reinforce the use of the Stowers doctrine as a prevalent practice. After a 2001 automobile accident with Francisco Rangel, Edward McDonald was admitted to Memorial Hermann Hospital, and the hospital filed a “Notice of Hospital Lien” saying, “The name of the person alleged to be liable for damages arising from the injury is any and all responsible parties. The lien is for the amount of the hospital charges for services provided to the injured individual during the first 100 days of the injured individual’s hospitalization.” McDonald v. Home State County Mut. Ins. Co., 01-09-00838-CV, 2011 WL 1103116 (Tex. App. — Hous. [1st Dist.] Mar. 24, 2011, no pet.). McDonald’s lawyer sent Rangel’s insurance company a notice wherein it was explicitly stated that this was to be a Stowers offer. As the deadline in the notice passed, McDonald’s lawyer let Rangel’s insurance company know that he felt the Stowers duty had thereby been breached and settlement efforts had terminated. The case went to trial, where both parties filed motions for summary judgment. The court of appeals found the “settlement demand insufficient to trigger a Stowers duty because it did not include a release of the lien, and, therefore, an ordinarily prudent insurer would not accept the settlement demand. Specifically, the court found that the demand did not explicitly offer any release of potential claims against Rangel.” See Lee H. Shidlofsky, Insurance Law Newsletter. Vol. 5 Issue 1. May 27, 2011, at 2 “[T]he court rejected McDonald’s contention that the Insurer impliedly accepted a Stowers duty here by not discussing the lien’s release with McDonald in its settlement discussions. Instead, the court reasoned that the Insurer still could have required the release as part of any later formal settlement.”
A different court recently answered “the question as to how to Stowerize an excess carrier—although doing so requires the assistance of the primary carrier in the first instance.” After a truck collision on Highway 287, defendants filed suit against the other driver as well as the truck company of the other driver, alleging vicarious liability. See Pride Transp. v. Cont’l Cas. Co., 2011 WL 1197306 (N.D. Tex. Mar. 31, 2011). The defendants made a settlement offer to the other driver with no mention of releasing claims against the company, and later, the insurance companies involved moved for summary judgment arguing a Stowers duty to accept the settlement that had not been accepted. After outlining the Stowers doctrine, the court “found that an insurer may enter into a reasonable settlement with one of several claimants even though it would exhaust or diminish the money available to satisfy the other claims.” Also, “a valid Stowers demand mandates that an insurer settle on behalf of a single insured even if it exhausts the policy limits and thereby exposing the remaining insureds, so this result prevents an insurer from settling on behalf of one insured and having to choose between continuing to defend a non-settling insured beyond policy limits or facing liability for treating the nonsettling insureds unequally.”
Implications of Stowers on Mediation
The Stowers doctrine intersects with mediation law in several issues. First, if there is not a judgment, there cannot be a Stowers cause of action. Because a “Stowers cause of action does not accrue until the judgment in the underlying case becomes final.” Therefore, there cannot be a Stowers cause of action if the case is settled in mediation before a Stowers demand is made. Another issue is the effect of a Stowers demand at the time of the mediation. Since any settlement which does not exceed the policy limits would automatically bar any future contractual claim, as a prerequisite is a judgment in excess of the policy limits, settlement at mediation almost always results in making a Stowers issue moot. Lastly, we should consider the effect of mediation negotiations on the Stowers demand. If a demand is made during mediation, and such demand is less than the policy limits, and the case does not settle during mediation, then such demand would seem to have no effect in a future Stowers claims. The reason is that mediation confidentiality would not allow mediation negotiations to be used as evidence in court. See Steven C. Laird, New Mediation Techniques, Texas Trial Lawyers Association (September 17-18, 1998).