Debunking the Stowers Myths :: Common Misconceptions Explained

By Amy Stewart Law

When an insurance company fails to act reasonably in rejecting or failing to respond to a settlement demand, it may be subject to extra-contractual liability under the long-standing Stowers doctrine. First articulated more than 80 years ago in G.A. Stowers Furniture Company v. American Indemnity Company, 15 S.W.2d 544 (Tex. Comm’n App. 1929), the common-law Stowers duty applies when:

1. The claim against the insured is within the scope of coverage
2. The demand for settlement is within the policy limits
3. The terms of the demand 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.  

If, under these circumstances, the insurer negligently ignores, delays in responding to, or declines the settlement opportunity, it may face common-law tort liability for a subsequent judgment against the insured, even if the judgment is excess of policy limits. Not surprisingly, the Stowers doctrine can be an effective tool for both claimants and insureds, by motivating a recalcitrant insurer to engage in settlement negotiations any time the underlying claim presents potential exposure in excess of policy limits.

While the basic parameters of the Stowers duty are well established, implementation of the doctrine as a practical matter has given rise to a number of misconceptions. In this practical eight-post series, we seek to address and explain the Stowers myths we encounter most frequently.        

MYTH #1: A settlement demand must state a specific dollar amount to trigger the Stowers duty.

While a settlement demand must be within policy limits to trigger the insurer’s duty to settle under Stowers, the demand need not seek a specific dollar amount. If the policy limits are $1,000,000 (and have not been eroded by other claims), a demand for $1,000,000 or anything less than $1,000,000 is sufficient to trigger Stowers liability, assuming the demand complies with Stowers in other respects. A demand for the “policy limits” is likewise sufficient to trigger Stowers liability. This is important because it is possible that other claims have been paid under the policy, reducing the remaining aggregate policy limits. Any erosion of the policy limits by other claims will not, of course, be apparent from the face of the policy. And a demand for a sum certain will not trigger the insurer’s Stowers obligations if the demand is higher than the remaining policy limits. Before demanding a sum certain, then, the claimant should confirm the amount of the remaining limits. The insured defendant may be able and willing to provide this information. Alternatively, the claimant may consider making a demand for “$1,000,000 or the remaining applicable policy limits, whichever is more,” which is also sufficient to trigger the Stowers duty.

If you have questions regarding the Stowers doctrine or if you need assistance in securing an insurer’s participation in a settlement, contact us. 

The next post in this series is “Myth #2 - The settlement demand must be in writing.” Stay tuned!