Losers, Winners & Stowers
by Paul K. Stafford
In the law, as in the game of life, there are winners and losers…but there is also Stowers.
In Stowers, the court articulated the duty of an indemnity company to its insured, stating that “[t]he 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.” The court held that the insurer breached its duty, and awarded damages of $14,103.15 to a furniture company, thus establishing the Stowers doctrine. Under that doctrine, upon an excess verdict on a covered claim, a policyholder has a cause of action against its liability insurer for negligently refusing a reasonable settlement offer within policy limits. G. A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex Comm’n App. 1929).
The Stowers doctrine is triggered through a Stowers demand, which requires a written demand to settle a case within policy limits in exchange for a full and final release of the claim. In accordance with Stowers and its progeny, an insurer that rejects a reasonable settlement offer could be liable to its insured.
In Texas, there is also “lawsuit reform.” In May, 2011, Governor Perry signed into law House Bill 274, a/k/a “Loser Pays,” which became effective on September 1, 2011. H.B. 274 provides, among other things, that plaintiffs in civil cases who file a lawsuit and “lose” that lawsuit will be required to pay the court costs and attorneys’ fees of those defendants whom they sued. In addition, and as in other jurisdictions and the Federal Rules, H.B. 274 addresses frivolous lawsuits by providing for the “dismissal of causes of action that have no basis in law or fact on motion and without evidence.” Trial courts must also grant or deny motions to dismiss within 45 days of filing, and award attorneys’ fees and costs to the prevailing party.
H.B. 274 effectively penalizes a litigant for rejecting a settlement offer that is ultimately greater than what the judge or jury awards at trial. In fact, under H.B. 274, sometimes even the “winner” pays. H.B. 274 awards attorneys’ fees to defendants if they make a settlement offer, the offer is rejected, and if the jury finds for the plaintiff and makes an award that is less than 80 percent of the settlement offer. H.B. 274 also eliminates the distinction between economic and non-economic damages found in previous “loser pays” laws and expands the amount of recoverable attorneys’ fees and costs to the total amount of the damages awarded. Therefore, a plaintiff could “win” damages at trial, but subsequently “lose” all of the recovery to the “loser,” although they could not lose more than the total amount of the recovery.
How will the Stowers doctrine fare in light of H.B. 274? More aptly, what new or nuanced interpretation, if any, will be given to the terms “ordinary care,” “prudence” and “reasonable?” The answer to these questions are yet to be determined; however, litigators, the business community, and other interested persons are best served through awareness of the changes resulting from H.B. 274, as well as its potential impact on the litigation strategy and settlement decisions of an indemnity company.
Litigators should advise their clients that, in light of H.B. 274, an indemnity company may be more likely to increase the number of liability claims that are denied, or to decrease the dollar amounts of settlement offers with the intention of prevailing at trial and recovering attorneys’ fees and costs. Such decisions by an insurer may be more easily justified through H.B. 274 as “reasonable” or “that degree of care and diligence which a man of ordinary care and prudence would exercise in the management of his own business.”
H.B. 274 also addresses the designation of responsible third partiesby providing that limitations may bar a defendant from joining a responsible third party if the defendant “failed to comply with its obligations, if any, to timely disclose that the person may be designated as a responsible third party under the Texas Rules of Civil Procedure.”
Accordingly, litigators must diligently investigate all potential parties and responsible third parties as soon as practicable in a claim or pending case, and should promptly disclose the person or entity as a potential party or responsible third party.
In sum, the Stowers doctrine creates tension between policyholder and insurer to settle a case. Expect that tension to increase under H.B. 274.
Paul K. Stafford is President-Elect of the DBA and is principal attorney at The Stafford Law Firm, focusing on insurance, commercial, and business litigation. He can be reached at email@example.com.