by Jay English and Susan Taylor
“[An] indemnity company is held to that degree of care and diligence which a man of ordinary care and prudence would exercise in the management of his own business.” G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929, holding approved). Nearly 90 years later, “Stowers demand” is one of the most bandied-about phrases in law offices across Texas, and courts continue to interpret Stowers.
Drafting The Stowers Demand
The Fifth Circuit explained in OneBeacon Insurance Co. v. T. Wade Welch & Assoc., 841 F.3d 669 (5th Cir. 2016) that “[T]he Stowers duty to settle is activated by a settlement demand when three prerequisites are met: 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. [citation omitted] The demand must also offer to release fully the insured in exchange for a sum equal to or less than the policy limits. Id. at 848-49. For an in-depth review of Stowers, Michael Huddleston’s paper, “The Duty to Settle in Texas,” explores recent Stowers developments.
Ineffective Stowers demands include (but are not limited to):
· a settlement offer for an act that is not covered by the policy;
· a settlement offer that exceeds the policy limits, which requires extra care in cases where more than one insurer provides coverage, either primary or excess, or where the policy is a wasting policy;
· a settlement offer that purports to release the insured fully, but does not address outstanding liens;
· a conditional settlement offer;
· a settlement offer for the entire policy limits when the insurer has settled with another claimant; and
· a settlement offer that is unclear as to terms or parties.
Historical Background of Stowers
Less obvious are cases in which the likelihood and degree of the insured’s potential exposure to an excess judgment are open to interpretation. The case underlying the Stowers opinion is one example. Vincent Morgan and Michael Sean Quinn’s fascinating article, “Looking Back at Stowers After 75 Years,” provides a guide to the people and issues behind Stowers.
On January 23, 1920, the G. A. Stowers Furniture Company’s van ran into a wood wagon on the rainy, dark streets of Houston, damaging the van and making its lights inoperable. While the van driver went to the nearest telephone to get help, a taxi ran into the furniture van, injuring the taxi’s passenger, Mamie Bichon. Ms. Bichon sought to recover her medical expenses of $174 for a surgical procedure and week-long hospital stay, $33 for destroyed clothing, and $20,000 as unspecified damages for her injuries, including arterial bleeding, heart strain, heart murmur, and valve disease (or approximately $258,000 in total damages in today’s dollars).
American Indemnity Company, Stowers’ insurer, rejected Bichon’s first pretrial settlement offer of the $5,000 policy limit, then rejected Bichon’s second settlement offer of $4,000, unless Stowers agreed to contribute $1500. Stowers refused, the case went to trial, and Ms. Bichon obtained judgment, including costs of suit and interest, for $14,103.15 (approximately $180,000 today). Stowers unsuccessfully appealed the judgment, paid Ms. Bichon, sued American Indemnity for the full amount of the judgment, and courts and lawyers have been invoking the Stowers name ever since. In retrospect, while one can fault American Indemnity for asking its insured to contribute to a settlement well under the policy limits, one can also see that it might not have expected the plaintiff to recover nearly seventy times the verified medical expenses and lost clothing damages when evaluating the “likelihood and degree of the insured’s potential exposure to an excess judgment.” (As the Morgan and Quinn article indicates, contemporary racial attitudes may have contributed to the jury verdict.)
Recent Developments: Patterson and OneBeacon
According to one unpublished opinion. the insured may direct the insurer to reject an offer to settle that does not release all insureds, and no Stowers liability will attach. Patterson v. Home State Cty. Mut. Ins. Co.,No. 01-12-00365-CV, 2014 WL 1676931 (Tex. App.—Houston [1st Dist.] Apr. 24, 2014, pet. denied) (mem. op.). However, the Fifth Circuit declined to follow Patterson in its OneBeacon opinion, noting that Patterson conflicts with Fifth Circuit and Texas supreme court precedent allowing for settlement of claims against one insured.
Stowers demands are as vital today as in 1920, and deserve careful crafting and attention from lawyers.
Jay English, of English Law Group, PLLC, can be reached at email@example.com. Susan Taylor is a sole practitioner who assists other lawyers with legal research and writing. She can be reached at firstname.lastname@example.org.