New Fifth Circuit Decision Revisits Stowers Liability in the Multiple-Insured Context
If you were paying attention to friends and family over the holidays and not reading slip opinions, you may have missed the recent Fifth Circuit decision in OneBeacon Ins. Co. v. T. Wade Welch & Assocs., 841 F.3d 669 (5th Cir. 2016). Wade Welch held that a valid Stowers demand could offer to settle with one and not all insureds under a policy. Id. at 677-82.
Under Texas law, an insurer may be liable for negligently failing to settle within policy limits claims made against an insured. Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 314 (Tex. 1994); G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544, 547-48 (Tex. Comm’n App. 1929, holding approved). A Stowers duty is triggered by a settlement demand when: (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. State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38, 41 (Tex. 1998); American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994).
The application of the Stowers doctrine in the “multiple claimant” context was squarely presented and resolved in Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994). In Soriano, the Texas Supreme Court adopted a first in time, first in right rule holding “an insurer may enter into a reasonable settlement with one of . . . several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims.” 881 S.W.2d at 315. Put another way, when determining whether to accept a settlement demand in a case involving multiple claims and inadequate proceeds, an insurer may consider only the merits of that particular claim and the corresponding potential liability of its insured. The Texas Supreme Court explained that “[t]his standard is nothing more than what is required of an insurer under Stowers.” Id.
The Fifth Circuit previously addressed Stowers liability in the “multiple-insured” context in Travelers Indemnity Co. v. Citgo Petroleum Corp., 166 F.3d 761, 764 (5th Cir. 1999). In Citgo, the Fifth Circuit held that, when faced with a settlement demand over a policy with multiple insureds, an insurer fulfilling its Stowers duty “is free to settle suits against one of its insureds without being hindered by potential liability to co-insured parties who have not yet been sued.” In coming to this conclusion, the Fifth Circuit was persuaded by the Texas Supreme Court’s decision in Soriano. Citgo, 166 F.3d at 765 (citing Soriano, 881 S.W.2d at 314–16). Not surprisingly, Wade Welch followed Citgo and held that a valid Stowers demand could, in fact, offer to settle with one but not all insureds under the policy.
It should be noted that a previous Texas appellate decision – Patterson v. Home State Cty. Mut. Ins. Co., 2014 WL 1676931, at *10 (Tex. App.–Houston [1st Dist.] 2014, pet. denied) – seems to be in conflict with Wade Welch. In Patterson, the First Court of Appeals found no valid Stowers demand where only the insured employer and not the employee (an additional insured) would have been released. However, in that case, the insured employer had explicitly indicated to its attorney that it “did not want ‘any settlement demands to be accepted that didn’t involve a release of all of the claims against both [the employer and the employee.]’ ” Id. In light of Patterson, it is certainly possible that we will see continued litigation of this multiple-insured Stowers question until the Texas Supreme Court finally resolves it.