As lawyers retained by insurance companies to defend against Texas personal injury lawsuits brought against their insureds, we frequently encounter situations where the so called Stowers Doctrine is invoked. It is a doctrine that we have seen put forward against our clients, or have put forward ourselves on their behalf. We have used it both offensively and defensively. The Stowers doctrine in Texas imposes a duty on insurance companies to settle third party claims that have been brought against their insured under circumstances that would cause a reasonably prudent uninsured to settle.
But what exactly is the Stowers Doctrine according to the actual decision of the early 20th century court that famously gave the doctrine life? It seems no one ever goes back to look at the nuanced language of that old case.
The doctrine is based on a court decision that goes way back to 1929. In Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929) the court held that that a defending third party insurance company that fails to defend a third-party case in the way it would if its liability were not limited by contract will be liable for any damages in excess of the policy limits for which the policyholder ultimately becomes liable. The court considered an automobile liability coverage case where the insurance company asserted the absolute right to conduct defense of lawsuits against its insured and then rejected a settlement offer of what amounted to 80 percent of the limit of liability. The insurance company took the position that it had little to lose by going to trial because its liability was limited by the terms of the policy. Unfortunately, and predictably, the automobile insurance policyholder was held to be liable to the underlying plaintiff for nearly 300 percent of the policy limits in the underlying trial.
The policyholder then brought the coverage action against the insurance company. The court rejected the insurer’s argument and held that: Wherein an insurance company makes such a contract [giving it the exclusive right to defend]; it, by the very terms of the contract, assumed the responsibility to act as the exclusive and absolute agent of the insured in all matters pertaining to the questions in litigation, and as such agent, it ought to be held to that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business.
As a result, the court held that the insurer was liable to Stowers for the policy limits and further duties consistent with exercising the “degree of care and diligence which a man of ordinary care and prudence would exercise in the management of his own business.”
The Stowers court further held that: It is the duty of the court to give effect to all of the provisions of the policy, and it would certainly be a harsh rule to say that the indemnity company, in a case such this, owed no duty whatever to the insured further than the face of the policy, regardless of whether it was negligent in discharging its duties as the sole and exclusive agent of the insured, in full and complete control. Such exclusive authority to act in a case of this kind does not carry with it the right to act arbitrarily.
The court remanded the case for a new trial . It did not award extra-contractual damages.
The doctrine that was put forth by the court is Stowers has been held to only apply to third-party cases in which the insurance company has defended or otherwise tendered coverage to its policyholder, and the policyholder argues that such defense or coverage has been inadequate. Southstar Corp. v. St. Paul Surplus Lines Ins. Co., 42 S.W.3d. 187 (Tex. App. 2001). The court in that case held that, When and insurance policyholder alleges only that the insurance company wrongfully failed to defend, the policyholder is limited to bringing claims for damages under the insurance contract and for extracontractual damages to make itself whole under the Stowers doctrine. The policyholder also may, however, in addition to its Stowers claims, bring claims for breach of the duty of good faith and fair dealing, but only when the policyholder makes allegations that the insurance company breached duties implicating public policy that arise independent of the contract itself. As the Stowers doctrine has evolved over the years it has had the effect essentially of holding insurance companies to an ordinary negligence standard as it has related to the handling of the claim by the insurer.
The duty of an insurance carrier to settle under Stowers is not absolute. The insurance company does not have to settle if a reasonable uninsured would not do so. Such language is fertile ground for subjectivity, which is often the great seed of much flowering litigation later. So while Stowers may be old, it is certainly not forgotten, and seems poised to survive the next millennium.
Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Fort Worth, Texas insurance attorneys in Tarrant County who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.