Stowers Doctrine

The Stowers Doctrine is a Texas common-law doctrine imposing on a liability insurer a duty to settle third-party claims against its insured when settlement within policy limits would be reasonably prudent. The doctrine penalizes insurers that unreasonably refuse settlement offers within policy limits by making them liable for the entire excess judgment if the case results in a judgment exceeding limits. Stowers is a Texas creation, its principles influence other states (often called "duty to settle" or "duty of good faith") but the specific Texas framework is distinctive. The doctrine emerged in 1929 and has been refined over nearly a century of Texas Supreme Court decisions.

The three-prong Garcia test

Under American Physicians Insurance Exchange v. Garcia (Tex. 1994), an insurer's Stowers duty is triggered when three conditions are met: (1) the claim against the insured is within the scope of coverage; (2) the demand is within the policy limits; (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. All three prongs must be satisfied; failure of any prong defeats the Stowers claim. The third prong, reasonableness of acceptance, is the most heavily litigated and turns on facts of the underlying case (severity of injury, defendant's liability exposure, available defenses, etc.).

Origin, the 1929 case

The 1929 G.A. Stowers Furniture case involved a $5,000 auto liability policy. After a delivery truck accident causing serious injuries, the plaintiff offered to settle for $4,000 (within limits). American Indemnity refused. The case went to trial, and the jury returned a verdict of $12,207, well above the $5,000 policy limit. With interest and costs, Stowers paid about $14,107. Stowers (the insured) sued American Indemnity for negligent failure to settle. The Commission of Appeals, in an opinion whose holdings the Texas Supreme Court approved, held that the insurer's control over the litigation under the policy carried a corresponding duty to exercise reasonable care in deciding whether to settle. Failure to exercise that care exposed the insurer to liability for the entire excess judgment.

The "sum certain" requirement

Rocor International v. National Union (Tex. 2002), drawing on Garcia, held that a Stowers demand must at a minimum clearly state a sum certain and propose to fully release the insured. The stated sum may be the policy limits. An oral proposal whose terms were unclear and disputed, and that did not mention a release, did not qualify. Case law also requires that the insurer have a reasonable time to accept, which is a question of fact (see below).

The excess-judgment requirement

In re Farmers (Tex. 2021) held that Texas precedent has recognized a Stowers cause of action only when the insured's liability exceeds policy limits, whether by judgment or settlement, and declined to extend Stowers to cases with no liability above the limits. In that case the claim settled for $350,000 against a $500,000 limit, with the insured contributing $100,000, and the court held the Stowers claim should have been dismissed. The insured's separate contract claim for breach of the duty to indemnify could proceed.

Reasonable time to accept

Stowers demands must allow a reasonable time for the insurer to evaluate and respond. Westport Insurance Corp. v. Pennsylvania National Mutual Casualty Ins. Co., 117 F.4th 653 (5th Cir. 2024), affirmed a ruling that there was no legally sufficient evidence the insurer acted unreasonably in not accepting a demand made early in the case, before its merits could be evaluated, that expired 45 minutes after it was made. Allstate Insurance Co. v. Kelly, 680 S.W.2d 595 (Tex. App.-Tyler 1984), found 14 days reasonable. The reasonableness of the deadline is a question of fact.

Statutory parallel, § 541.060(a)(2)(A)

Section 541.060(a)(2)(A) of the Texas Insurance Code creates a statutory parallel to the Stowers doctrine: it makes it an unfair settlement practice to fail to attempt in good faith to effectuate prompt, fair, and equitable settlement of a claim for which the insurer's liability is reasonably clear. Rocor International (Tex. 2002) held that Stowers supplies the framework for applying the parallel statutory settlement duty, though it applied the pre-1995 version of the statute rather than the current text. Section 541.060(a) applies to claims by an insured or beneficiary. A prevailing plaintiff under § 541.152 may obtain actual damages, court costs and attorney's fees, and up to three times actual damages for a knowing violation.

Damages and remedies

Successful Stowers claim damages include: (1) the entire excess judgment, the difference between the underlying judgment and the policy limits; (2) post-judgment interest on the underlying judgment. Claims under § 541.060 can add (3) up to treble damages for knowing violations under § 541.152(b); (4) attorney's fees on the statutory claim under § 541.152(a). Combined Stowers/§ 541 claims can substantially expand damages.

Excess insurer's Stowers rights

American Centennial Insurance Co. v. Canal Insurance Co., 843 S.W.2d 480 (Tex. 1992), held that an excess carrier may bring an equitable subrogation action against the primary carrier (and defense counsel), standing in the insured's shoes, and declined to permit a direct action. When an excess judgment exhausts primary limits and reaches excess coverage, the excess insurer can pursue the insured's claim against the primary for negligent failure to settle within primary limits. This creates strong pressure on primary insurers to settle when reasonable demands are made, the excess insurer becomes an active monitor of primary settlement decisions in significant cases.

Full entry: Stowers Doctrine