1. law, govt and politics

CONSTRUCTING AND DECONSTRUCTING
THE STOWERS DEMAND LETTER
MICHAEL W. HUDDLESTON
Shannon, Gracey, Ratliff & Miller, L.L.P.
2500 Lincoln Plaza
500 North Akard Street
Dallas, Texas 75201
Telephone: 214.245.3075
Telefax: 214.245.3097
E-Mail: [email protected]
State Bar of Texas
3 ANNUAL ADVANCED
INSURANCE LAW COURSE
March 30-31, 2006
Dallas
RD
CHAPTER 4
Any opinions expressed in this article are the author’s alone and not necessarily those of Shannon, Gracey,
Ratliff & Miller, L.L.P., or its clients. The author wishes to acknowledge and thank his colleague, Michael W.
Huddleston, for his generous assistance in the preparation of this paper. Any errors herein remain the sole
responsibility of the author.
Curriculum Vitae
Michael W. Huddleston
Shannon, Gracey, Ratliff & Miller, L.L.P.
Shareholder
500 North Akard, Suite 2500,
Dallas, Texas 75201
214/245-3075
[email protected]
EDUCATIONAL BACKGROUND
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Southern Methodist University J.D. - 1983; Texas A&M University 1980 (G.P.A. - 4.0) B.A. Summa Cum Laude
PROFESSIONAL ACTIVITIES
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Insurance Section of the State Bar of Texas
A Founding Officer and Past-Chair
Dallas Bar Association Tort & Insurance Practice Section
Council Member (2004-2005)
Dallas Bar Association Appellate Section
Founding Officer and Past-Chair
Master, Mack Taylor Inn of Court
Member of the State Bar College
Best Lawyers in America 2006
Texas Monthly Magazine – Texas Super Lawyer
Chambers & Partners, Chambers USA, “America’s Leading Lawyers for Business,
Leading Individuals in the field of Insurance Law,” (2003-2006)
LAW RELATED PUBLICATIONS AND SEMINARS
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American Bar Association, Tort Trial & Insurance Practice Section
“Navigating the Insurance Litigation Dispute Through Stormy Seas,” 2006: A Reimbursement
Odyssey, The Stange Journey of Frank's Casing Crew,
14th Annual Insurance Coverage, Litigation Committee Midyear Program,
The Ritz-Carlton, Marina del Rey, California, February 16-18, 2006;
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South Texas College of Law, Texas Insurance Law Symposium, Punitive Damages Coverage,
(January 28, 2005);
University of Texas, 10th Annual Insurance Law Institute, Use and Abuse of Insurance Experts
(December 7-9, 2005);
The Texas Institute of Continuing Legal Education, Construction Law Section of the State Bar of
Texas, The Basic Course in Construction Law, Insurance Basics for the Construction Practitioner
(Oct. 2005)
State Bar of Texas, Second Annual Advanced Insurance Law Course, Hard Choices--A Policyholder's
Perspective on Post-Verdict Options (March 31-April 1, 2005);
American Bar Association, Insurance Coverage Litigation Committee CLE/Seminar, "Dancing After
the Party is Over: How to Keep the Judgment Debtor Policyholder Out of Bankruptcy While
Litigating Coverage," (Tucson, Ariz., March 3-5, 2005)
Dallas Bar Association, Noon at the Belo Mansion, CLE on "Insurance Coverage for Punitive
Damages," (January 27, 2005)
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SIGNIFICANT APPELLATE DECISIONS
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State Farm v. Gandy (Tex. 1996)(eliminating "sweetheart" liability insurance deals)
Christophersen v. Allied-Signal (5th Cir. 1990)(en banc)(adopting test for expert testimony preDaubert)
Rose v. Doctors Hospital (Tex. 1990)(holding statutory med-mal caps constitutional)
St. Paul Fire v. Convalescent Services (5th Cir. 1999)(no duty to settle based on uncovered claims)
State Farm v. Williams (Tex. App.--Dallas 1990, writ denied)(proof of prejudice to establish waiver
and estoppel)
Pennsylvania Nat. v. Kitty Hawk Airways (5th Cir. 1992)(same).
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Father of two
Book-collector (Churchill and Lloyd George)
Jazz/Rock saxophonist
Journeyman Golfer
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HOBBIES
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Table of Contents
I.
Introduction ............................................................................................................................................................ 1
II. The Legal Basics ....................................................................................................................................................... 1
A.
Basic Duties and Requirements ......................................................................................................................... 1
1. Duty ............................................................................................................................................................... 1
a. Sources and Nature.................................................................................................................................... 1
b. Frank's Impact ........................................................................................................................................... 1
c. Subsidiary Considerations......................................................................................................................... 2
2. Elements ........................................................................................................................................................ 2
B. Statute of Frauds in Tort--In Writing or Not......................................................................................................... 3
C. Covered Claim ...................................................................................................................................................... 4
D.
Within Limits ..................................................................................................................................................... 6
E.
1.
2.
F.
Offer of a Complete Release .............................................................................................................................. 7
G.
1.
2.
3.
4.
5.
6.
7.
H.
III.
Unconditional Offer ........................................................................................................................................... 7
General Rule .................................................................................................................................................. 7
Excess Carriers .............................................................................................................................................. 7
Frank's Casing--A New Strategy for Policyholders? ......................................................................................... 8
The Underlying Facts .................................................................................................................................... 8
Scenario One--Stowers Demand--Be Careful What You Ask For .............................................................. 10
a. Matagorda Rationale--Pushing a Settlement the Insured Cannot Pay..................................................... 10
b. Estoppel?--Transforming the Matagorda Rationale from Ability to Pay to Reasonableness Based on
Liability Exposure ................................................................................................................................... 10
c. Public Policy Benefits of Reimbursement............................................................................................... 12
Scenario No. 2--Express Agreement Offer Should Be Accepted ................................................................ 12
Concurring Opinions--Seeds of Conflict ..................................................................................................... 13
a. Justice Hecht ........................................................................................................................................... 13
b. Justice Wainwright .................................................................................................................................. 14
c. Justice O'Neill ......................................................................................................................................... 14
Motion for Rehearing .................................................................................................................................. 15
Response to Rehearing ................................................................................................................................ 16
Post-Decision Amicus Briefs....................................................................................................................... 16
a. TCJL Amicus Brief ................................................................................................................................. 16
b. Texas Association of Defense Counsel Amicus Letter ........................................................................... 16
c. Amicus of Pilco, Inc................................................................................................................................ 16
d. United Policyholders Amicus.................................................................................................................. 17
Multiple Claimants/Insureds ............................................................................................................................ 17
Practical Suggestions for Drafting Stowers Demands ..................................................................................... 18
A.
Offer Must Be "Clear and Undisputed"--So, Put It In Writing ........................................................................ 18
B.
Timing or Buying Time ................................................................................................................................... 18
C.
Reasonable Time Limits .................................................................................................................................. 19
D.
Definite Identification of Parties...................................................................................................................... 19
E.
Definite Amount Within Limits ....................................................................................................................... 19
F.
Resolve Any Doubts About the Limits Prior to Making the Offer .................................................................. 20
G.
Bulk Offers....................................................................................................................................................... 20
-i-
H.
Bifurcated Offers--Excess Carriers and Insured Contributions ....................................................................... 20
I.
Offer a Full Release, Including Any Liens ...................................................................................................... 21
J.
Consider Whether a Detailed Discussion of the Case is Warranted ................................................................ 21
K.
Argue Coverage ............................................................................................................................................... 22
L.
If in Doubt, Send It To Defense Counsel......................................................................................................... 22
M.
Special Problems Presented Where Risk Allocation is Involved..................................................................... 22
N.
Consent to Settle .......................................................................................................................................... 22
O.
Mediation? ....................................................................................................................................................... 22
- ii -
Table of Authorities
Cases
American Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994) ................................................... 1, 3, 4, 5
American States Ins. Co. of Texas v. Arnold, 930 S.W.2d 196 (Tex. App.–Dallas 1996, writ denied) ........................ 19
Ansonia Assoc. Ltd. v. Public Service Mut. Ins. Co., 257 A.D.2d 84, 692 N.Y.S.2d 5 (1999)....................................... 7
Atlantic Lloyds Ins. Co. v. Butler, 137 S.W.3d 199 (Tex. App.--Houston [1st Dist.] 2004, pet. denied) ..................... 18
Birmingham Fire Ins. Co. v. American Nat’l Fire Ins. Co., 947 S.W.2d 592
(Tex. App.–Texarkana 1997, writ denied).................................................................................................................. 3
Bleeker is Nationwide Mut. Ins. Co. v. Chaney, 2002 WL 31178068 (N.D. Tex. 2002).............................................. 10
Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 106 Cal.Rptr. 535, 22 P.3d 313 (2001) ........................................... 13
Dear v. Scottsdale Ins. Co., 947 S.W.2d 908 (Tex. App. –Dallas 1997, writ denied) .................................................... 5
Excess Underwriters at Lloyd's v. Frank's Casing Crew & Rental Tools, Inc., 2005 WL 1252321, at *1 (Tex., May
27, 2005) (motion for rehearing granted Jan. 6, 2006) ................................................................................... 2, 10, 11
Excess Underwriters at Lloyds, London v. Frank's Casing Crew & Rental Tools, 92 S.W.3d 178 (Tex. App.-Houston [14th Dist.], 2002, petition pending) .......................................................................................................... 11
Fulks v. CIGNA Lloyds Ins. Co., 1996 Tex. LEXIS (Tex. App.–Houston [1st Dist.], July 25, 1996, no writ) ............... 3
G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. Comm'n App. 1929, holding approved)
.................................................................................................................................................................................... 1
Hanson v. Republic Ins. Co., 5 S.W.2d 324 (Tex. App.–Houston [1st Dist.] 1999, no writ) .......................................... 8
Highway Ins. Underwriters v. Lufkin-Beaumont Motor Coaches, Inc., 215 S.W.2d 904 (Tex. App.--Beaumont 1948,
writ ref'd n.r.e.) ........................................................................................................................................................... 1
In re Dana Corp., 138 S.W.3d 298 (Tex. 2004) ........................................................................................................... 22
Insurance Corp. of America v. Webster, 906 S.W.2d 77 (Tex. App.--Houston [1st Dist.] 1995, writ denied) .......... 3, 8
Jones v. Highway Ins. Underwriters, 253 S.W.2d 1018 (Tex. Civ. App.--Galveston 1952, writ ref'd n.r.e.) ................ 8
Keck, Mahin & Cate v. National Union Fire Ins. Co., 20 S.W.3d 692 (Tex. 2000)....................................................... 8
Lira v. Shelter Ins. Co., 913 P.2d 514 (Co. 1996)........................................................................................................... 7
London Mkt. Cos. v. Schattman, 811 S.W.2d 550, 552 (Tex. 1991, orig. proceeding)................................................... 4
Maryland Ins. Co. v. Head, 938 S.W.2d 27 (Tex. 1996) ................................................................................................ 5
Matagorda County v. Texas Ass’n of Counties Govt. Risk Mgmt. Pool, 52 S.W.3d 128 (Tex. 2000)............................ 2
Medical Malpractice Joint Underwriting Assoc. of Mass. v. Goldberg, 425 Mass. 46, 680 N.E.2d 121 (1997) ......... 14
Mid-Century Ins. Co. v. Childs, 15 S.W.3d 187 (Tex. App.–Texarkana 2000, no pet. h.) ........................................... 20
Mt. Airy Ins. Co. v. Doe Law Firm, 668 So.2d 534 (Ala. 1995) ................................................................................... 14
PPG Industries, Inc. v. Transamerica Ins. Co., 84 Cal. Rptr. 2d 455 (1999) ................................................................. 7
Pullin v. Southern Farm Bureau Cas. Ins. Co., 874 F.2d 1055 (5th Cir. 1989) ....................................................... 5, 22
Rocor International, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 77 S.W.3d 253 (Tex. 2002)..... 1, 3, 4, 17
Rosell v. Farmers Texas County Mut. Ins. Co., 642 S.W.2d 278 (Tex. App.–Texarkana 1982, no writ)................. 5, 22
Soto v. State Farm Ins. Co., 635 N.E.2d 1222 (N.Y. 1994)............................................................................................ 6
St. Paul Fire & Marine Ins. Co. v. Convalescent Services, Inc., 193 S.W.2d 340 (5th Cir. 1999).................................. 5
St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., 917 S.W.2d 29 (Tex. App.—Amarillo 1995), aff’d in part,
rev’d in part on other grounds, 974 S.W.2d 51 (Tex. 1998)...................................................................................... 5
State Farm Automobile Ins. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998)....................................................................... 5
State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38 (Tex. 1998)......................................................................... 8
Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994) ........................................................................ 5, 9, 19
Travelers Ins. Co. v. Citgo Petroleum Corp., 166 F.3d 761 (5th Cir. 1999).................................................................. 19
Trinity Universal Ins. Co. v. Bleeker, 944 S.W.2d 672 (Tex. App.–Corpus Christi 1997),
rev’d, 966 S.W.2d 489 (Tex. 1998) ........................................................................................................................ 3, 9
Val's Painting & Drywall, Inc. v. Allstate Ins. Co., 53 Cal.App.3d 576, 126 Cal.Rptr. 267 (1975)............................. 14
Vitek, Inc. v. Floyd, 51 F.3d 530 (5th Cir. 1995) ........................................................................................................... 20
Watters v. Guaranty Nat. Ins. Co., 300 Mont. 91 (2000).............................................................................................. 10
Westchester Fire Ins. Co. v. Admiral Ins. Co., 152 S.W.3d 172 (Tex. App.--Fort Worth 2004, pet. pending)............ 21
Western Alliance Ins. Co. v. Northern Ins. Co., 176 F.3d 825 (5th Cir. 1999) .............................................................. 20
Willcox v. American Home Assurance Co., 900 F. Supp..850 S.D. Tex. 1995) ........................................................... 24
Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343 (9th Cir. 1983) .................................................... 6
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Other Authorities
Jerry, The Insurer's Right to Reimbursement of Defense Costs, 42 ARIZ. L. REV. 13, 70 n. 220 (2000) ..................... 13
- iv -
Constructing and Deconstructing the Stowers Demand Letter
Constructing and Deconstructing
the Stowers Demand Letter
Chapter 4
II. The Legal Basics
A. Basic Duties and Requirements
I.
Introduction
1. Duty
This paper is intended to convey some practical
ideas regarding the preparation and handling of
Stower1s letters. Some confusion exists as to exactly
what a Stowers demand is in the first instance. Some
believe that it is a letter from the insured to the carrier,
demanding that the carrier accept an offer of
settlement within policy limits.2 To this author, the
Stowers demand is in fact the letter outlining an
unconditional offer to settle within the policy limits of
the insured's policy. This is the letter upon which this
paper focuses.
a. Sources and Nature
In Stowers, the court set forth the basic cause of
action for the negligent failure of a carrier to accept a
settlement offer within the policy limits of a liability
policy. Id. at 547. Unlike some other jurisdictions, a
carrier in Texas has no duty to initiate or make
settlement offers absent a valid Stowers demand.
American Physicians Insurance Exchange v. Garcia,
876 S.W.2d 842, 849 (Tex. 1994)(holding carrier has
no duty to "make or solicit settlement proposals.").
The Stowers demand is the fulcrum of proximate
cause in a suit against the carrier for negligent failure
to settle. It would be a challenge to find any other
instance in tort law where a letter takes on such
importance. For insureds and claimants, it is truly a
magical missive. For carriers, it has become the focus
of intense analysis and carping, as they search for
reasons why a given demand letter fails to meet the
somewhat obscure requirements that have been
developed by the courts for such letters. Hence, the
letters are the key to the kingdom for the insured and
claimants, but they are also a major source of
dyspepsia, chronic depression, stark terror, and, yes,
malpractice exposure.
Stowers is negligence standard: "[A]n indemnity
company is held to that degree of care and diligence
which a man of ordinary prudence would exercise in
the management of his own business." Stowers,
supra. Thus, Texas has rejected theories of strict
liability for excess judgments followed in some
jurisdictions.
In Stowers, the court held that the right to control
the defense and settlement of the underlying claim
supported the duty to act reasonably regarding
settlement demands within limits.
In Rocor
International, Inc. v. National Union Fire Ins. Co. of
Pittsburgh, Pa., 77 S.W.3d 253 (Tex. 2002), the Court
held that the duty to settle may attach to an excess
carrier that has no duty to defend under the terms of
the contract but which exercises control over the
settlement process. Accordingly, a duty may arise as
a result of a voluntary assumption of the duty.
This paper does not attempt to resolve the
numerous thorny legal debates regarding some aspects
of the Stowers demand requirements. Alchemy and
metaphysics of this nature are better considered in a
séance. Instead, we will use the legal problems to
help develop some practical suggestions as to how to
navigate making such a demand in a way that
maximizes the chances it will pass legal muster and
that will enhance the impact it may have on the
carrier.
b. Frank's Impact
In Excess Underwriters at Lloyd's v. Frank's
Casing Crew & Rental Tools, Inc., 2005 WL
1252321, at *1 (Tex., May 27, 2005)(motion for
rehearing granted Jan. 6, 2006), the Court examined
many aspects of the Stowers duty for purposes of
determining whether an insured's demand for
settlement under Stowers could serve as a basis for
estopping the insured from contesting the
reasonableness of the settlement amount. The reason
this was important in that case was that the carrier
settled and sought reimbursement from the insured.
1
G.A. Stowers Furniture Co. v. American Indemnity Co.,
15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holding
approved).
2
Under current Texas law, a demand by the insured is not
treated as a prerequisite to bringing a Stowers action for
amounts in excess of the policy limits. Highway Ins.
Underwriters v. Lufkin-Beaumont Motor Coaches, Inc., 215
S.W.2d 904, 929 (Tex. App.--Beaumont 1948, writ ref'd
n.r.e.).
1
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
limits of insurance coverage greatly
exceed the potential damages for which
the insured may be liable. It is an
objective assessment of the insured's
potential liability.
The Court had previously found that a carrier could
not settle and seek reimbursement absent an express
agreement with the insured, noting the fact a carrier
should not be able to potentially foist an unreasonable
settlement on the insured. Matagorda County v.
Texas Ass’n of Counties Govt. Risk Mgmt. Pool, 52
S.W.3d 128 (Tex. 2000). The Frank's Court stated:
Id.
We have said that the duty imposed by
Stowers is to "exercise 'that degree of care
and diligence which an ordinarily prudent
person would exercise in the management of
his own business.'" We have also said that
the Stowers duty is viewed from the
perspective of an insurer: "the terms of the
demand are such that an ordinarily prudent
insurer would accept it." Both statements
are correct."
c.
Subsidiary Considerations
In Garcia, the court had stated that in the context
of
Stowers,
"‘evidence
concerning
claims
investigation, trial defense, and conduct during
settlement negotiations is necessarily subsidiary to the
ultimate issue of whether the claimant’s demand was
reasonable under the circumstances, such that a
reasonable insurer would accept it.’" Id. Thus, these
factors are part of the basic considerations regarding
liability and damages exposure that are a part of the
basic Stowers test.
Frank's, supra. The Court stated that when the
insured sends a Stowers demand to settle within limits,
"it [cannot] not thereafter take the position that the
settlement offer was reasonable if the insurer bore the
cost of settling but unreasonable if the insured
ultimately bore the cost." Id. The Court then provides
the legal basis for its rule, estoppel:
2. Elements
In American Physicians Ins. Exch. v. Garcia, 876
S.W.2d 842 (Tex. 1994), the court summarized the
Stowers elements as follows:
(1) [T]he claim against the insured is within
the scope of coverage [at the time the offer
is made], (2) the demand is within policy
limits, and (3) the terms of the demand are
such that an ordinary prudent insurer would
accept it, considering the likelihood and
degree of the insured’s potential exposure to
an excess judgment.
Once a insured asserts that a settlement
offer has triggered a Stowers duty, and the
insurer then accepts that settlement offer
or a lower one, the insured is estopped
from asserting that the settlement is too
financially burdensome for the insured to
bear if it turns out the claims against the
insured are not covered.
Id. at 849. A demand that is in excess of policy limits,
even if based on a mistake of law or fact, is
insufficient to amount to a proper Stowers demand.
The court did not address the responsibilities of
multiple carriers, including primary, excess and
reinsurers, which must jointly fund a settlement. Id. at
855 n. 25.
Id.
The Frank's Court blended and ultimately
transmogrified the concern in Matagorda as to
whether the insured was having a financial burden
imposed on it that was beyond its finances. When the
Court is finished, the sole concern in Matagorda is
transformed into whether the underlying settlement
was reasonable based on the "'likelihood and degree of
the insured's potential exposure to an excess
judgment,'" not on whether it has the capacity to pay
or not. The Court summarized the rule as follows:
The courts have refused to allow variations on
Stowers that go outside of the Garcia elements. For
example, in Fulks v. CIGNA Lloyds Ins. Co., 1996
Tex. LEXIS (Tex. App.–Houston [1st Dist.], July 25,
1996, no writ), the court held that absent coverage,
Stowers did not apply. The court rejected arguments
that liability could be predicated on the failure of the
carrier to communicate its position regarding
The reasonableness of a settlement offer is
not judged by whether the insured has no
assets or substantial assets, or whether the
2
Constructing and Deconstructing the Stowers Demand Letter
coverage, thus resulting in the claimant continuing the
suit and not settling of the meager available policy
limits.
Chapter 4
that Stowers demands be made in writing. Rule 11
states:
Unless otherwise provided in these rules,
no agreement between attorneys or parties
touching any suit pending will be enforced
unless it is in writing, signed, and filed
with the papers as a part of the record, or
unless it be made in open court and
entered of record.
This Stowers duty is only activated by a valid
Stowers settlement demand. The demand must at the
very least identify the releasing parties, the parties to
be released, be for an unconditional amount within
policy limits and propose to release the insured/s fully
for a definite sum of money, and offer to provide a
release from any outstanding liens. Stowers, supra, at
547; see also Trinity Universal Ins. Co. v. Bleeker,
966 S.W.2d 489, 491 (Tex. 1998); Insurance Corp. of
America v. Webster, 906 S.W.2d 77, 81 (Tex. App.-Houston [1st Dist.] 1995, writ denied). All terms
must be clear and not subject to dispute. Rocor
International, Inc. v. National Union Fire Ins. Co. of
Pittsburgh, Pa., 77 S.W.3d 253 (Tex. 2002)
TEX. R. CIV. P. 11. The Texas Supreme Court
reversed Bleeker on other grounds, finding that there
had not been a sufficient offer to provide release from
liens. The Court did not address the issue of whether
the offer must be in writing.
In his article, Essential Requirements to Trigger a
Duty Under the Stowers Doctrine and Unfair Claims
Settlement Act, Brent Cooper suggests that the Bleeker
court of appeals was wrong in its determination that
Rule 11 does not apply to settlement offers. He cites
London Mkt. Cos. v. Schattman, 811 S.W.2d 550, 552
(Tex. 1991, orig. proceeding), which illustrates the role
of Rule 11 when parties dispute an agreement. The
Court there explained that “once the existence of such
an agreement becomes disputed, it is unenforceable
unless it comports with these (Rule 11) requirements.”
However, it appears that this turns on whether a suit is
“pending.” Rule 11 specifically refers to a “suit
pending” and the cited case discusses this rule in
reference to discovery requests. Thus, for pre-suit
demands, Rule 11 on its face would be inapplicable.
B. Statute of Frauds in Tort--In Writing or Not
Some cases suggest that a "formal" demand is
probably not required. Birmingham Fire Ins. Co. v.
American Nat’l Fire Ins. Co., 947 S.W.2d 592, 599600 (Tex. App.–Texarkana 1997, writ denied).
However, informal or "back-channel" "suggestions"
regarding what the case could be settled for, coming
for example from either the plaintiff’s attorney or the
ad litem, are insufficient to satisfy Garcia. Id. An
"offer" is "‘[a] proposal to do a thing or pay an
amount, usually accompanied by an expected
acceptance, counter-offer, return promise or act.’"
Id. at 599 n. 2 (quoting BLACK’S LAW DICTIONARY
1081 (1990)). A demand within limits must be
distinguished from a "suggestion." Id.
Other Texas law indicates that an oral offer will be
sufficient so long as both parties agree that a Stower
offer was made and that the terms were clear. In Rocor
International, Inc. v. National Union Fire Ins. Co. of
Pittsburgh, Pa., 77 S.W.3d 253 (Tex. 2002), the court
explained that:
In Trinity Universal Ins. Co. v. Bleeker, 944
S.W.2d 672 (Tex.App.- Corpus Christi), rev’d, 966
S.W.2d 489 Tex. 1998),3 the court directly addressed
the validity of oral offers and held that oral offers are
valid in contract law to the same extent as written
offers. The court rejected that argument that Rule 11
of the Texas Rules of Civil Procedure, which requires
settlement offers to be in writing in order to be
binding when accepted, creates a firm requirement
In Garcia we stated that the Stowers
remedy of shifting the risk of an excess
judgment onto the insurer is not
appropriate unless there is proof that the
insurer was presented with a reasonable
opportunity to settle within the policy
limits. Garcia, 876 S.W.2d at 849. We
implied that a formal settlement demand
is not absolutely necessary to hold the
insurer liable, see id., although that
would certainly be the better course. But
3
Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489
(Tex. 1998), reversed this holding by determining as a
threshold issue that the settlement offer in that case was not
valid because it did not provide a full release. Therefore,
the Court did not confirm or reject the lower court’s
reasoning with respect to oral offers.
3
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
to such uncovered claims.
The court rejected
arguments that a Stowers duty to settle was triggered
where the carrier knew that the insured had significant
punitive exposure and that the insured would be
willing to contribute to settlement. The court also
rejected Ranger v. Guin arguments to the effect that
the carrier was negligent in its evaluation and in
communicating that evaluation to the insured. Id.
The court held that Guin was subsumed within
Stowers and was strictly subject to its elements,
including coverage and the need for a verdict in
excess of limits, under current Texas law as reflected
in Garcia, Maryland Ins. Co. v. Head, 938 S.W.2d 27,
28 (Tex. 1996), and State Farm Automobile Ins. Co.
v. Traver, 980 S.W.2d 625, 628 (Tex. 1998). By
analogy, the court looked to Texas Farmers Ins. Co. v.
Soriano, 881 S.W.2d 312 (1994), noting that where
there are multiple claims and inadequate proceeds, the
carrier may look to only the merits of the particular
claim and the corresponding particular liability of the
insured. Id. at 344. The court reasoned:
at a minimum we believe that the
settlement’s terms must be clear and
undisputed. That is because “settlement
negotiations are adversarial and…often
involve hard bargaining on both sides.” Id.
. . . Given the tactical considerations
inherent in settlement negotiations, an
insurer should not be held liable for failing
to accept an offer when the offer’s terms
and scope are unclear or are the subject
of dispute.
Id. (emphasis added).
The Court determined that the oral offer was not a
proper settlement demand in Rocor because the
proposal did not clearly state the settlement’s terms,
nor did it mention a release. Accordingly, the court
found that there was no extra-contractual liability.
C. Covered Claim
Thus, because the Texas Supreme Court
does not impose a duty upon insurers to
consider other covered claims when faced
with a settlement demand by one claimant,
we believe that the Court would not
impose a duty upon insurers to consider
claims that are not covered—here, the
punitive damages claims—by its policy
during settlement negotiations involving
one claimant.
A carrier has no Stowers duty to settle as to
uncovered claims. American Physicians Ins. Exch. v.
Garcia, 876 S.W.2d 842, 849 (Tex. 1994).
Moreover, a carrier is under no obligation to pay more
to settle covered claims in order to have the claimant
include punitive damages within the settlement. For
covered claims, the carrier has complete discretion to
settle and cannot commit a tort unless a demand
within the limits is unreasonably refused and there is a
judgment for covered damages in excess of the policy
limits. Dear v. Scottsdale Ins. Co., 947 S.W.2d 908,
916-17
(Tex.
App.
–Dallas
1997,
writ
denied)(Hankinson, J.). In Rosell v. Farmers Texas
County Mut. Ins. Co., 642 S.W.2d 278, 279 (Tex.
App.–Texarkana 1982, no writ), the carrier refused to
accept a bulk offer to settle for two occurrence policy
limits where one of the two claims was not, in the
carrier's opinion, worth a full single limit. The court
held that the carrier did not have to pay more for the
weak claim in order to get a settlement of the strong
claim. Accord Pullin v. Southern Farm Bureau Cas.
Ins. Co., 874 F.2d 1055, 1056 (5th Cir. 1989) (Texas
law).
Id. at 345. The court also rejected the argument that
the court of appeals opinion in St. Paul Surplus Lines
Ins. Co. v. Dal-Worth Tank Co., 917 S.W.2d 29 (Tex.
App.—Amarillo 1995), aff’d in part, rev’d in part on
other grounds, 974 S.W.2d 51 (Tex. 1998), supported
a claim for negligent claims handling. The court did
so based on the then recent holding in Traver, supra,
that the Stowers duty subsumes the duty of ordinary
care in handling, investigating and evaluating the
claim. Finally, the court refused to address the issue
of whether the carrier could be found liable for
damages not otherwise covered as a result of some
tortious conduct. Numerous courts have found such
claims barred because they seek to do indirectly what
is not permitted directly in those jurisdictions, provide
coverage for punitive damages. Id. at 346 n. 13.
In St. Paul Fire & Marine Ins. Co. v.
Convalescent Services, Inc., 193 S.W.2d 340, 342-43
(5th Cir. 1999), the court, quoting American
Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842,
846 (Tex. 1994), held that a carrier excluding
coverage for punitive damages has no duty to settle as
The courts in other jurisdictions have refused to
allow tort claims for bad faith and similar theories to be
4
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
against public policy. Id. Both the trial court and the
intermediate court accepted the argument, granting the
motion and affirming respectively. Id. The New
York Court of Appeals upheld the lower courts’
decisions, stating:
made with respect to punitive damages where coverage
for such damages has been found to be contrary to public
policy. For example, in Zieman Mfg. Co. v. St. Paul Fire
& Marine Ins. Co., 724 F.2d 1343 (9th Cir. 1983), the
insured brought suit against the insurer alleging that the
insurer breached the duty to defend and acted in bad faith
in the handling/defending of a suit against the insured.
The insurer provided a full defense through an outside
firm. The insured also retained its own counsel. Id. at
1345. During the lawsuit, an offer to settle was made in
the $200,000 to $250,000 range. The insured urged the
insurer to settle and even offered to contribute $20,000 of
its own funds. Id. The insurer rejected the offer, and the
case was ultimately tried resulting in a verdict of
$387,107 in compensatory damages and $30,000 in
punitive damages. Id.
As we have noted on other occasions,
since punitive damages are not designed to
compensate an injured Plaintiff for the
actual injury that the person may have
suffered, their only real purpose is to
punish and deter the wrongdoer [citations
omitted]. While the deterrent value of the
rule against indemnification may be
somewhat attenuated in this context, the
rule's equally important goal of preserving
the
condemnatory
and
retributive
character of punitive damage awards
remains clear and undiminished. That
goal cannot be reconciled with a
conclusion that would allow the insured
wrongdoer to divert the economic
punishment to an insurer because of the
insurer's unrelated, independent wrongful
act in improperly refusing a settlement
within policy limits.
The insurer in Zieman paid the entire
compensatory damages costs and defense legal fees.
The insured subsequently sued the insurer for payment
of the punitive damages award for failure to settle and
exposing the insured to the risk of punitive damages.
In response, the court stated the following:
There is no basis whatever for that claim.
[The evidence] clearly demonstrates that
counsel retained for [the insured] and
counsel for the other entities facing
exposure
to
the
Stewart
claim
conscientiously valued the same as having
a jury verdict potential of no more than
$100,000. They were wrong, of course,
but that does not even suggest bad faith.
The proposition that an insurer must settle,
at any figure demanded within the policy
limits, an action in which punitive
damages are sought is nothing short of
absurd.
Id. The court added:
Where an insurer has acted in bad faith in
relation to an available pre-trial settlement
opportunity, it is guilty only of placing its
insured at risk that a jury will deem him or
her so morally culpable as to warrant the
imposition of punitive damages. Stated
another way, an insurer's failure to agree
to a settlement, whether reasonable or
wrongful, does no more than deprive the
insured of a chance to avoid the possibility
of having to suffer a punitive award for his
or her own misconduct. Regardless of
how egregious the insurer's conduct has
been, the fact remains that an award of
punitive damages that might ensue is still
directly attributable to the insured's
immoral and blameworthy behavior.
Id. at 1346.
In Soto v. State Farm Ins. Co., 635 N.E.2d 1222
(N.Y. 1994), a judgment for $420,000 in
compensatory damages and $450,000 in punitive
damages was rendered against the insured. An action
was then brought against the insurer, for the full
amount of the judgment alleging failure to settle
within policy limits. Id. at 1223.
Our system of civil justice may be
organized so as to allow a wrongdoer to
escape the punitive consequences of his
own malfeasance in order that the injured
plaintiff may enjoy the advantages of a
The insurer in Soto moved to dismiss the
complaint for failure to state a claim because New
York law held coverage for punitive damages was
5
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
The California Supreme Court reached a similar
conclusion in PPG Industries, Inc. v. Transamerica
Ins. Co., 84 Cal. Rptr. 2d 455 (1999). The court held
that the insured could not recover amounts including
punitive damages awarded in the underlying suit from
the carrier in a bad faith case. The court concluded
the insured caused this injury by its own heinous acts.
Thus, the court expanded the public policy bar against
indemnity for punitive damages to implied indemnity.
swift and certain pretrial settlement.
However, the benefit that a morally
culpable wrongdoer obtains as a result of
this system, i.e., being released from
exposure to liability for punitive damages,
is no more than a necessary incident of the
process. It is certainly not a right whose
loss need be made subject to
compensation when a favorable pretrial
settlement offer has been wasted by a
reckless or faithless insurer.
The leading case for the opposing point of view is
Ansonia Assoc. Ltd. v. Public Service Mut. Ins. Co.,
257 A.D.2d 84, 692 N.Y.S.2d 5 (1999). In that case,
the court found that the carrier’s assertion that
punitive damages were not covered was tantamount to
economic duress. Id. at 7. The court noted that the
insured is put in the position of having to choose
between going to trial and getting hit for substantial
uncovered damages or having to settle the claim and
potentially lose coverage for compensatory damages
by settling without the consent of the carrier. The
court did not address whether the insurer’s cavalier
indifference to its insured’s exposure to potentially
ruinous punitive damages, without more, constitutes
bad faith. Id. at 7-8.
Id. at 1224-25 (emphasis added).
The Supreme Court of Colorado considered
similar issues in a suit entitled Lira v. Shelter Ins. Co.,
913 P.2d 514 (Co. 1996). In Colorado, an insurer has
no duty to settle the compensatory part of a suit in
order to minimize the insured's exposure to punitive
damages. Id. at 516. Therefore, the court concluded,
that the insurance company's duty to settle "did not
encompass a duty to protect the petitioner from
exposure to punitive damages." Id. at 517. The court
reasoned:
The contract between the parties expressly
precluded recovery for punitive damages
incurred by the insured. The insured may
not later utilize the tort of bad faith to
effectively shift the cost of punitive
damages to his insurer when such
damages are expressly precluded by the
underlying insurance contract.
D.
....
The policy limits are also altered by settlement of
other claims. Thus, if payment has been made to one
of multiple claimants, then a demand that is for the
full policy limits, without reducing the amount based
on the settlement, is not an offer within limits
sufficient to invoke Stowers. Soriano, 881 S.W.2d at
315. Similarly, if the policy limits are exhausted
through payment under a separate section of the
policy, then no Stowers liability can attach because
any offer of settlement would be an offer in excess of
the limits. Hanson v. Republic Ins. Co., 5 S.W.2d 324
(Tex. App.–Houston [1st Dist.] 1999, no writ).
Within Limits
Garcia is a classic example of a failure to make an
offer within limits. The limits are often subject to a
great deal of debate from a coverage analysis
standpoint. The hard work of predicting the limits
applicable has to be done prior to the making of the
offer.
[To hold otherwise would] force insurers
to settle cases involving punitive damages
in order to avoid liability for the same
punitive damages in subsequent bad faith
actions. Such a result would be contrary
to the principle that insurers have no
absolute duty to settle in order to protect
their insureds from punitive judgments.
See Zieman, 724 F.2d at 1346.
Id. at 517. The court declined to extend the tort of bad
faith to encompass liability for punitive damages from
the underlying lawsuit. Id.
An error of law by the claimant in making its
demand for limits will still prevent the offer from
being sufficient to satisfy the elements of Stowers.
State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d
6
Constructing and Deconstructing the Stowers Demand Letter
38, 41 (Tex. 1998). Thus, the ability to discover the
policy and properly interpret it is critical for the
claimant. Some plaintiff’s counsel suggest that the
need for accuracy regarding the limits of liability also
requires disclosure of reservation of rights letters
under some circumstances.
E.
Unconditional Offer
1.
General Rule
Chapter 4
2.
Excess Carriers
Excess carriers generally have no duty to accept a
settlement within their limits until there has been a
tender of the underlying limits or exhaustion of
underlying limits by the primary carrier. Keck, Mahin
& Cate v. National Union Fire Ins. Co., 20 S.W.3d
692 (Tex. 2000). Apparently, the excess carrier must
also have taken over the defense of the case. Id.
Thus, the failure of the excess carrier in Keck to
respond to the initial settlement demand of $3.6
million could not be used as contributory negligence
where the offer came prior to tender of the primary
limits and prior to takeover of the defense. Id.
Texas courts have repeatedly held that conditional
settlement offers are insufficient to impose Stowers
liability. Jones v. Highway Ins. Underwriters, 253
S.W.2d 1018, 1022 (Tex. Civ. App.--Galveston 1952,
writ ref'd n.r.e.). In Insurance Corp. of Am. v.
Webster, 906 S.W.2d 77 (Tex. App–Houston [1st
Dist.] 1995, writ denied), the court held that two
offers that were conditioned on the insurer’s
representations about the limits of coverage were in
fact conditional and thus failed to satisfy Stowers.
Because other insurance was in fact in existence, the
carrier could not accept the settlement offers. Thus,
the court held that liability could not be imposed on
that carrier.
The court thus held that even if the excess carrier
was negligent in failing to "explore coverage issues
more diligently, reserved its rights . . . investigated
the merits of the third-party claim more thoroughly,
hired independent counsel to monitor the third-party
claim, supervised its claim adjuster more closely, and
demanded to settle the claim months before trial," it
was not actionable because it was based on conduct
prior to the tender of the primary limits and because in
this pre-tender situation the excess carrier has no duty
to defend or indemnify. Id. The court added that pretender, the excess carrier had no duty to monitor the
defense or to anticipate that the defense was being
mishandled by the primary carrier and the defense
counsel selected by the insured, noting the general tort
rule that a party has no duty to anticipate the
negligence of another. Id.
The situation presented in Webster is very
troubling. This author has been involved in at least
one case where an interesting variation of the Webster
problem arose. In that case, the plaintiff demand
settlement for the "carrier's policy limits." The parties
disputed whether the plaintiff’s attorney had ever
inquired about whether there were other policies with
different companies and thus whether there had been
any representations regarding this issue. Certainly, if
the offer does not indicate that it is contingent on there
being no other such policies, then the carrier would
not be able to avoid the demand for limits regardless
of whether it knew of the existence of an additional
policy or not.
F.
Offer of a Complete Release
A split of authority has arisen after Garcia as to
whether the demand must include a promise to
provide a complete release to the insured. In
Birmingham, supra, the court held that a demand from
an excess carrier that the primary carrier tender its
limits did not satisfy Stowers because it did not
propose to release the insured fully. 947 S.W.2d at
599-600 (citing Texas Farmers Ins. Co. v. Soriano,
881 S.W.2d 312, 314 (Tex. 1994)).
The clear message from Webster is that plaintiffs
need to set up a misrepresentation of limits claim as a
hedge on whether there is additional coverage some
place other than in their Stowers offer. It could be
handled by using interrogatories, simply relying on
disclosures, or through separate correspondence.
Also, protection could be incorporated into the final
settlement documents after acceptance of the offer.
None of these methods is perfect, but they do assist in
avoiding the problem of rendering the Stowers
demand ineffective.
In Trinity Universal Ins. Co. v. Bleeker, 944
S.W.2d 672 (Tex. App.–Corpus Christi 1997), rev’d,
966 S.W.2d 489 (Tex. 1998), the Court of Appeals
held that the settlement offer did not need to
specifically offer a complete release in conjunction
with the demand for policy limits if the letter mentions
7
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
was not a full release offer. In effect, the insurer
defined "settlement offer" to mean an offer within the
policy limits in exchange for a full and final release.
The Guaranty court concluded that the statutory cause
of action at issue there did not include a definition of
"settlement."
The court held that treating a
"settlement offer" as requiring an offer of a full
release including liens in effect added words that the
legislature did not include in the first instance. The
court held that a “settlement” between the two parties
was legally possible without executing full and final
release of all liability.
the Stowers doctrine by name. Also, the fact that the
settlement demand made no comment regarding how
outstanding hospital liens were to be handled did not
render the demand ineffective. Id.
The Supreme Court disagreed, stating:
As a threshold matter, "a settlement demand
must propose to release the insured fully in
exchange for a stated sum of money."
Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489
(Tex. 1998). In Bleeker, the offers to settle did not
indicate that certain hospital liens would be released
as well. Thus, the court held that any implied
release was not a full release in the context of that
case. Id. at 491.
The second case that discussing and applying
Bleeker is Nationwide Mut. Ins. Co. v. Chaney, 2002
WL 31178068 (N.D. Tex. 2002). The claimant tried
to rely upon an implied release of lien, urging that she
never excluded a release of any pertinent lien. The
court hled that absent an offer to fully release that
compies with section 55.007(a) of the Texas Property
Code, there is no valid Stowers demand. The court
found that the letter demand did not expressly or
impliedly release the lien. The decision was affirmed
by the Fifth Circuit on other grounds. 78 Fed. Appx.
348 (5th Cir. 2003).
One question left open by Bleeker is whether there
is any available method for proving that the offer
included a full release. In other words, if the letter did
not state as much, then could common practice and
understanding or even subjective testimony from the
plaintiff’s attorney supply the missing element? The
Supreme Court appears to be moving towards greater
certainty as to the terms and communication of the
terms of Stowers demands. The emerging rule
appears to be that Stowers demands are disfavored and
thus must strictly and expressly comply with the
applicable rules or be found insufficient to invoke the
tort remedy of an extra-contractual claim. Thus, like
conditions of forfeiture, the Stowers demand is
disfavored in part because of its drastic potential
consequences. Needless to say, the Bleeker ruling has
led to a number of malpractice claims against
plaintiff’s counsel based on failed Stowers demands.
G.
Frank's Casing--A
Policyholders?
New
Strategy
for
As noted, the Supreme Court held that an insurer
may settle and seek reimbursement from its insured
where the insured has made a demand under Stowers that
the carrier settle the case within the policy limits. The
decision deals with Stowers standards in assessing what
the demand from the policyholder really means.
Therefore, it is important to our review of general duties
under Stowers. The decision, if unchanged on rehearing,
could also provide carriers with a strategic alternative to
risking a Stowers claim.
Another issue that has not been addressed since
Bleeker is whether that decision requires a specific
reference to liens if there are in fact no liens. Can a
carrier attack an otherwise valid Stowers demand
where the plaintiff fails to state liens will be released
if there are in fact no liens. Similarly, can this issue
be raised if the liens are legally ineffective or
unenforceable?
1.
The Underlying Facts
Frank's Casing installed a drilling platform in the
Gulf of Mexico that ultimately collapsed. The owner,
ARCO, sued Frank's, which had a primary liability
insurance policy in the amount of $1 million and an
excess through a Lloyd's syndicate for $10 million.
The excess underwriters reserved their rights
regarding certain coverage issues.
Excess
Underwriters at Lloyds, London v. Frank's Casing
Crew & Rental Tools, 2005 WL 1252321, at *1 (Tex.,
Since Bleeker, two cases have discussed Bleeker
negatively. The first was in Watters v. Guaranty Nat.
Ins. Co., 300 Mont. 91 (2000). This Montana case
declined to follow the holding in Bleeker. It also
involved an automobile accident. The insurer argued
that there was no valid settlement offer because there
8
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
reimbursement. Id. Frank's would
not agree to this proposal.
May 27, 2005) (motion for rehearing granted Jan. 6,
2006).
The settlement history of the case includes
virtually every approach to handling settlement where
significant coverage exists for a large part of the
claim:
•
•
Frank's rejected an offer just below
the combined limits of the primary
and excess limits.
The excess carrier tried to settle the
portion of the claim involving the
excess limits for a separate amount,
which was rejected by the claimant
ARCO.
•
An offer of $8.8 million, $1.2
million below the combined limits
of the excess and primary policies,
was then made by ARCO.
•
The excess underwriters proposed to
Frank's that the excess carrier pay
one-third and Frank's two-thirds of
the amounts in excess of the primary
limits of $1 million, which Frank's
rejected.
•
In the alternative, the excess
underwriters proposed a flat
payment of $5 million of the $7.55
excess amount in return for an
agreement to resolve the coverage
issues through arbitration, which
Frank's also rejected.
•
Frank's solicited a new demand
from ARCO, which was made in the
amount of $7.5 million.
•
Frank's then made a Stowers
demand to the carrier, urging it to
settle by accepting the latest offer
within policy limits.
•
The excess underwriters offered to
front the excess amount above the
primary limits if the insured would
agree to the underwriters seeking
•
The carrier informed the insured
that it would settle the case for the
excess amount and intended to seek
reimbursement from Frank's if it
were determined that the claim was
not covered. Id.
•
ARCO and Frank's counsel dictated
the settlement into the record in the
trial court where the underlying case
was being tried.
•
Frank's objected that the carrier "did
not preserve its ability to contest
'coverage'" after the dictation of the
settlement into the record. (See
Concurring opinion of Justice
Wainwright at *14.)
•
The Settlement Agreement and
Release in the underlying suit was
signed by Frank’s and underwriters,
and it stated that the releases and
covenants in the agreement did not
apply to any claims between Frank's
and Underwriters. (Id. at *16.)
•
The underwriters went forward and
settled, paying $7 million, which
was the amount in excess of the then
reduced primary limits ($500,000).
Interestingly, the Supreme Court stated that the excess
policy required Frank's approval of any settlement.
The clause quoted in the court's opinion, in footnote 5,
states that the insured must make a claim for any loss
it has paid and for which it seeks coverage within
twelve months after liability has been fixed by final
judgment after actual trial or by written agreement
joined by the insured, the claimant and the
underwriter. Id. at 2 n. 5. This is certainly not a
"consent" clause, at least as most practitioners know
them.
The settlement agreement with ARCO preserved
claims between the underwriters and Frank's. Id. at 2.
The underwriters filed suit before execution of the
ARCO agreement. The trial court promptly found that
there was no coverage, but, based on Matagorda, it
9
Constructing and Deconstructing the Stowers Demand Letter
found that the excess underwriters had no right of
reimbursement. Id.
reasonable but does not ask that the offer be accepted?
The latter would appear to be the applicable rule in
light of the Frank's Court's emphasis on the insured
urging actual "acceptance" of the offer, not simply its
reasonableness. There would appear to be little
difference between these two positions. Moreover,
just because an insured urges acceptance of the offer
does not mean that the insured is agreeing that it has
the financial wherewithal to pay the amount of the
settlement if there is no coverage.
The court of appeals somewhat reluctantly
affirmed, noting that the case carried "Matagorda
County to a logical conclusion that is somewhat
disquieting . . . ." Excess Underwriters at Lloyds,
London v. Frank's Casing Crew & Rental Tools, 92
S.W.3d 178 (Tex. App.--Houston [14th Dist.], 2002,
petition pending). The court suggested this was a
matter that had to be taken up with the Texas Supreme
Court. The Supreme Court granted the petition for
review on January 6, 2006.
b. Estoppel?--Transforming the Matagorda
Rationale from Ability to Pay to
Reasonableness
Based
on
Liability
Exposure
2. Scenario One--Stowers Demand--Be Careful
What You Ask For
The Court then immediately blends demanding
acceptance with reasonableness. The Court stated that
when the insured sent a Stowers demand to settle
within limits, "it could not thereafter take the position
that the settlement offer was reasonable if the insurer
bore the cost of settling but unreasonable if the
insured ultimately bore the cost." Id. The Court then
provides the legal basis for its rule, estoppel:
a. Matagorda Rationale--Pushing a Settlement
the Insured Cannot Pay
The Frank's Court found that the concern in
Matagorda was ameliorated in "at least two
situations":
(1)
(2)
Chapter 4
when an insured has demanded that
its insurer accept a settlement offer
that is within policy limits, or
Once a insured asserts that a settlement offer
has triggered a Stowers duty, and the insurer
then accepts that settlement offer or a lower
one, the insured is estopped from asserting
that the settlement is too financially
burdensome for the insured to bear if it turns
out the claims against the insured are not
covered.
when an insured expressly agrees
that the settlement offer should be
accepted.
In these situations, the insurer has the right to be
reimbursed if it has timely asserted its reservation of
rights,4 notified the insured that it intends to seek
reimbursement, and paid to settle claims that were not
covered.
Id. This statement appears to be erroneous.
An insured making a Stowers demand is merely
saying, (a) the claim is covered, and (b) the offer is
reasonable (given the liability and damage facts of the
underlying case and the fact that it is covered). The
insured is not providing a financial statement or
admission that it could actually afford such a
settlement if it were not insured. This is an estoppel
based upon an admission that does not connect with
the ultimate deemed conclusion.
Id. (emphasis added).
Interestingly, the Frank's Court recognized that in
Matagorda refused to allow reimbursement even
though the insured had (a) informed the insured in
writing that the settlement was reasonable, and (b)
stipulated to the reasonableness of the settlement in
the subsequent declaratory action on coverage. Id.
Does this mean Matagorda reached the wrong result?
If not, then is a carrier barred from obtaining
reimbursement if the insured admits the settlement is
Just what is admitted by the insured making a
Stowers demand? Once again, the Frank's Court
blended and ultimately transmogrified the concern in
Matagorda as to whether the insured was having a
financial burden imposed on it that was beyond its
finances. When the Court is finished, the sole concern
4
The Court gave no explanation of a circumstance where
the reservation would be untimely.
10
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
the insured has agreed is reasonable and to
seek recoupment from the insured if the
claims against it were not covered. From
the insured's point of view, it is in
precisely the same position it would have
been in absent [sic] any insurance policy,
except that the insurer is now the insured's
creditor rather than the injured party.
in Matagorda is transformed into whether the
underlying settlement was reasonable based on the
"'likelihood and degree of the insured's potential
exposure to an excess judgment,'" not on whether it
has the capacity to pay or not. The Court summarized
the rule as follows:
The reasonableness of a settlement offer is
not judged by whether the insured has no
assets or substantial assets, or whether the
limits of insurance coverage greatly
exceed the potential damages for which
the insured may be liable. It is an
objective assessment of the insured's
potential liability.
Id. at *4.
The Court missed a very important point. In
Matagorda, the Court emphasized that declaratory
actions were available prior to resolution of the
underlying tort claim. Thus, the carrier did not need a
right of reimbursement to avoid the Stowers demand.
An early determination of coverage or not thus
resulted in the claimant having to realistically appraise
the value of an uninsured judgment against the
insured. The insured avoided a potentially ruinous
reimbursement claim. The Frank's Court wholly
ignores the crucial underpinnings of its reasoning in
Matagorda.
Id. In order to reach this result, the Court also blended
competing and different statements of the Stowers
standard. The Court noted:
We have said that the duty imposed by
Stowers is to "exercise 'that degree of care
and diligence which an ordinarily prudent
person would exercise in the management
of his own business.'" We have also said
that the Stowers duty is viewed from the
perspective of an insurer: "the terms of
the demand are such that an ordinarily
prudent insurer would accept it." Both
statements are correct."
The reality is, of course, that the Court in
Matagorda was very, very wrong in assuming that
declaratory actions were a true palliative in every
case. The courts and parties alike have realized that
declaratory actions regarding indemnity are not
workable except where it is determined that there is no
duty to defend and thus no duty to indemnify. It
seldom makes sense to litigate in a declaratory action
the "actual facts" involved in the underlying suit
before those facts have actually been litigated in that
suit. It would be simpler and more persuasive if the
Court had admitted its numerous erroneous
assumptions in Matagorda and simply started from
scratch.
Id.(emphasis added). The Court then again explained
that the focus of reasonableness was on liability and
likely exposure, not the ability to pay. That would
appear to be correct, so than how is it the Court
concludes that the insured's admitting Stowers applies
is an admission that it has the financial wherewithal to
settle the case, the real concern expressed in
Matagorda?
The equating of a Stowers test that focuses on the
perspective of the "reasonable person in the "exercise
and management of his own business" with a test that
focuses on whether a "reasonable insurer" would have
accepted the offer would appear to be very much in
error. Many practitioners in Texas have hotly debated
which standard applies, one looking at the reasonable
uninsured business-person and one that looks at the
reasonable insurer. The latter, some would say,
clearly allows consideration of coverage defenses,
even if unsuccessful, as part of the mix of factors.
Some say the former clearly does not allow such
consideration.
Finally, the Court then admitted that whether the
insured could actually afford the settlement for which
it demands is simply not a persuasive factor. The
Court reasoned:
Insurance coverage should not be created
where none exists merely because an
insured could not
afford to pay a
judgment if the case were tried or to fund
a settlement demand from an injured
party. The insurer should be entitled to
settle with the injured party for an amount
11
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
for excess carriers? One also wonders how there ever
could have been a valid Stowers demand sufficient to
supply all of the admissions necessary to serve as the
basis of the estoppel theory of reimbursement
discussed.
c. Public Policy Benefits of Reimbursement
The Frank's Court finally recognized that
allowing reimbursement does have positive effects
from a public policy standpoint. Settlement is
encouraged, especially where coverage is in dispute,
thus inuring to the benefit of claimants. Id. The risk
of recovery is shifted to the insurer where the insured
has insufficient resources to pay for the
reimbursement claim. Id. Importantly, the Court
reasoned that the two-edged sword of a Stowers
demand and resulting extra-contractual liability and
disallowing reimbursement forced carriers into a
Hobson's choice that created coverage where none
existed. The carrier was forced to settle to avoid
extra-contractual liability and thus provide coverage
that might be found unavailable or risk extracontractual liability by refusing to settle and then
losing the coverage question. Id. (discussing Blue
Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 106
Cal.Rptr. 535, 22 P.3d 313, 321 (2001)).
One must ask how a consent to settle requirement
makes any difference in addressing the Matagorda
concern about an unreasonable settlement being
foisted on the insured. If required and the insured
consents, the insured has obviously conceded
reasonableness. The insured in Matagorda did not
have to consent to settle, but it certainly accepted the
benefits of settlement. In fact, as noted, the insured
stipulated to the reasonableness of the settlement. So
why was reimbursement not allowed in that case?
Again, Frank's reaches results and uses reasoning that
is simply diametrically opposed to Matagorda,
making clear again that it is in reality overruling
Matagorda ,not merely distinguishing it.
Because of the consent requirement read into the
contract by the Court, it concluded that the insured
had the option of continuing the litigation or
consenting to settle. The Court observed:
3. Scenario No. 2--Express Agreement Offer
Should Be Accepted
The insured had control over whether to
settle for the sum offered by ARCO or
continue the litigation. An insured who
agrees to the settlement and benefits by
having claims against it extinguished
cannot complain that it must reimburse its
insurer if the claims against the insured
were not covered by the policy.
The Frank's court stated that the primary rationale
of Matagorda was the need to ameliorate the concern
that a carrier with the unilateral right to settle and seek
reimbursement could agree to a settlement that was
financially out of the insured's financial ballpark.
2005 WL at *3 In Matagorda, the Frank's Court
emphasized, the policy gave the insurer the right to
settle without the consent of the insured. Id. The
Court distinguished Matagorda as a case where the
insured's consent was not required by the policy and in
fact was not given. In Frank's, the Court held that the
excess carrier could not settle without the consent of
the insured.
Id. at *5. These statements are true of any settlement
eliminating the insured's liability, regardless of
whether the policy requires consent or not. If the
insured allows the settlement to go through, it has
accepted the benefits and conceded reasonableness.
The policy provision cited as requiring "consent to
settle" by the insured was nothing more than a form of
"no action" clause. Because the excess policy was
apparently an "indemnity" policy, this clause set forth
the conditions under which the insured could pay and
then present a claim to the carrier. The assumption of
the clause is that the insured is the one instigating
settlement, not the carrier. Indeed, the portions of the
policy quoted by the Court indicate that the carrier did
not have the duty or right to control defense or
settlement of the underlying suit. Is the Court
developing a new duty of care regarding settlement
In direct conflict with Matagorda, the Frank's
Court finds that a quasi-contractual right of
reimbursement is implied in these circumstances. Id.
In Matagorda, the Court held that there could be a
right of reimbursement only if the insured authorized
the settlement and agreed to pay the insurer if the
coverage defense prevailed. Id. The Frank's Court
openly rejects the Matagorda Court's analysis of three
12
Constructing and Deconstructing the Stowers Demand Letter
out-of-state cases5 and a law review article6 that
allegedly supported the written and express agreement
requirement. The court found that only one case cited
by the Matagorda Court actually upheld a written
agreement requirement and that the law review article
also did not state that a written agreement was always
required. Id. Quoting Matagorda, the Court shows
that it expressly required a written agreement as the
only circumstance under which reimbursement would
be permitted.
The Court then stated that any
suggestion that Matagorda was limited to one
circumstance had to be clarified. Thus, there "are
additional circumstances that will give rise to a right
of reimbursement. Those include the circumstances in
the case presently before us." Id. at *6.
Chapter 4
the right to reimbursement. As long as the settlement
offer made was reasonable, the right should be
available. Id. The key is the Stowers threat to the
carrier to settle where reasonable, which applies
regardless of whether the insured actually demands
that the carrier accept the offer. It is open to question
after Frank's as to whether the Supreme Court is
signaling that there must be a demand by the insured
that the carrier settle in order to have the Stowers
doctrine apply.
In short, Hecht agreed with Justice Wainwright's
concurring opinion that an agreement should be
implied in fact to allow reimbursement where the
carrier has given notice of its desire to settle and seek
reimbursement.7 He summarized his view as follows:
4. Concurring Opinions--Seeds of Conflict
An insured should not be allowed to
unreasonably withhold consent to
settlement to force the insurer to pay a
claim and abandon coverage issues at the
risk of incurring stiff statutory liabilities.
An insurer's right to recoup from its
insured the amount paid to settle a claim
depends on
two things:
the
reasonableness
of
settlement,
and
coverage. That is the essence of today's
decision.
Three concurring opinions were issued in Frank's.
Note from the outset that two justices, Brister and
Johnson, did not participate in the decision. Thus, the
opinion had a base majority of five justices. Justice
O'Neill joined in Part I and Part II (C) and (D), while
Justice Wainwright joined only in Part II (C). Part I is
essentially a history of the case and provides no
arguments and authorities in support of the Court's
conclusion. Part II (C), in which seven members of
the Court joined, involves the "second situation in
which reimbursement will be permitted," where thee
is "a coverage dispute, the insured has expressly
agreed the third-party's settlement offer should be
accepted, and the insurer has notified the insured that
it intends to seek reimbursement." Id.
Id. at *10.
Justice Hecht indicated he believed that carriers
were put to a Hobson's choice where reimbursement
was unavailable: (1) waive the coverage defenses and
settle, or (2) stick to the coverage defenses, refuse to
settle based on them, and face a ruinous extracontractual judgment and resulting statutory and
common law claims in the aftermath. Id. at *7.
"When insurers are forced to pay doubtful claims, the
premiums paid by policyholders who have purchased
coverage must be used to satisfy claims against
policyholders who have not purchased coverage." Id.
at *8. This obviously has a significant detrimental
effect on the insurance purchasing public.
a. Justice Hecht
Justice Hecht simply states that he believes that
Matagorda was wrongly decided and cannot survive.
Id. at *7. Justice Hecht emphasized that neither
Matagorda nor Frank's involved a settlement "forced"
on the insured; both insureds, he stated, wanted to
"'have their cake and eat it too. . . .'" Id. Hecht also
noted that a "demand" was not needed to effectuate
5
Medical Malpractice Joint Underwriting Assoc. of Mass.
v. Goldberg, 425 Mass. 46, 680 N.E.2d 121 (1997); Mt.
Airy Ins. Co. v. Doe Law Firm, 668 So.2d 534 (Ala. 1995);
and Val's Painting & Drywall, Inc. v. Allstate Ins. Co., 53
Cal.App.3d 576, 126 Cal.Rptr. 267 (1975).
7
The problem with an implied in fact agreement based on
the reservation of rights is that, prior to Matagorda,
insureds would regularly object to any such reservation,
which effectively destroyed an implied in fact agreement.
Thus, the preferred approach for carriers is a implied in law
or quasi-contractual right of reimbursement.
6
Jerry, The Insurer's Right to Reimbursement of Defense
Costs, 42 ARIZ. L. REV. 13, 70 n. 220 (2000).
13
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
or counter it. Justice Wainwright stated that Frank's
admitted it accepted the conditioned offer, but it still
contested reimbursement because there had been no
"'clear and unequivocal consent to seek
reimbursement.'" Id. at *16.
Justice Hecht dismissed the arguments of Justice
O'Neill that the presence of a consent requirement was
critical to the availability of a right of reimbursement.
Id.
Hecht posited what difference a consent
requirement could make if the insured in fact
consented to the settlement anyway. Id. He also
rejected O'Neill's arguments that reasonableness
involved consideration of what the case could have
settled for if there had been no coverage at all. In
other words, the insured's exposure for settlement
would somehow be less if there was no coverage
versus its exposure under a carrier brokered settlement
based upon the claimant's belief that there was or
might be coverage.
Justice Wainwright indicated that the only way
that Frank's could have avoided an agreement implied
in fact would have been to refuse the $7.5 million
payment and proceeded to trial, or it could have made
a counter-offer rejecting the reimbursement condition.
Id. at *17. Now, what do you think would have
happened if Frank's had made such a counter-offer? Is
the carrier still faced with the Stowers dilemma:
waive coverage or risk a ruinous award of damages?
That is not a solution. Thus, Justice Wainwright's
approach falls short of resolving the problem. He
does note, however, that the real solution may be in
reviewing and revising the Stowers duty/problem
itself. Id. at *18.
Justice Hecht explained that there were some
limits to the extent that he was willing to allow
reimbursement. "[N]o one suggests that an insurer
may unilaterally settle a claim for an unreasonable
amount, or in circumstances that actually (rather than
hypothetically) prejudice the insured. Neither the
present case nor Matagorda County involved such a
situation . . . In the off-chance that such a situation
could arise, statutory prohibitions against unfair
practices by insurers offer full relief: actual damages,
additional damages, and attorneys fees." Id. at *9.
c. Justice O'Neill
Justice O'Neill attempted to limit the majority
decision strictly to the situation where the insured's
consent to settle is required by the policy. Id. at *10.
She concluded that a right to reimbursement was
implied in law because Frank's consented to the
settlement and because the carrier could not have
settled without that consent. Id. at *12. Merely
expressing agreement to the settlement of the case
should not subject an insured to a reimbursement
claim, according to O'Neill. Id. The emphasis on
consent is apparent. Personal lines policies, i.e.
homeowners and personal automobile policies, place
the exclusive right to settle with the carrier. Id. Thus,
O'Neill apparently is carving an exception that would
remove individual homeowners from the specter of
reimbursement claims.
b. Justice Wainwright
Justice Wainwright stated that the parties in
Frank’s "reached an agreement on reimbursement"
and that agreement should be enforced. Id. Thus, the
remaining portions of the Court's opinion were, in his
opinion, unnecessary.
Nevertheless, Wainwright
stated that the carrier's right of reimbursement flowed
from the condition of reimbursement it placed on
accepting the offer; the equities of the parties'
situations alone would not be enough. Id. at *15.
Indeed, he emphasized that making the Stowers
demand alone was insufficient to justify a right of
reimbursement, noting that threatening to sue does not
alter the parties' contract. Id. The core rationale,
according to Wainwright, was Frank's' "acquiescence
in the settlement . . . ." This action, he reasoned,
bound Frank's "under principles of contract law to the
condition that Excess Underwriters would be able to
seek reimbursement." The facts in this regard that he
noted included the demand to act reasonable and
accept the settlement before a ruling on contract
claims in the underlying suit. Excess Underwriters
agreed to do so on the condition that it be allowed
reimbursement rights. Frank's did not reject this offer
14
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
International Inc. v. Nat'l Union Fire Ins. Co., 77
S.W.3d 253, 262 (Tex. 2002); American Physicians
Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex.
1994). Additional cites to first-party bad faith cases
also provides no support for this position. It is, of
course, a rule the court could consider as an
alternative to reimbursement in future cases.
Justice O'Neill correctly pointed out that the focus
of the Stowers duties is not a clean fit with
reimbursement rights because these doctrine assume
the existence of coverage and focus on only
reasonableness based on liability exposure.
A
settlement in the absence of coverage, she reasons,
would be far less than one with actual coverage or
potential coverage. Id. at *11. Thus, asking for
compliance with Stowers also assumes coverage. The
insured is saying, O'Neill reasons, that the settlement
would be reasonable if there was coverage, not that
the amount would be reasonable if there was no
coverage. Id.
Frank's is right that California has disallowed
"coverage" as an excuse or defense to the Stowers
reasonableness standard. This is part of the price for
getting reimbursement. It ultimately provides a
greater benefit to policyholders because impecunious
policyholders against whom reimbursement would be
worthless still get to bar the use of coverage defenses
as an excuse for failing to settle.
5. Motion for Rehearing
Rehearing has now been granted in Frank's. The
actual motion for rehearing filed, as opposed to the
amicus briefs, emphasizes that the Court has
effectively overruled Matagorda and has failed to
address the delicate balance of interests analyzed in
that case. (Motion for Rehearing of Frank's Casing at
1-2.)
Frank's also urges that allowing a settlement
demand to create a right of reimbursement will create
conflicts of interest requiring independent counsel.
One would expect that such a right already existed
based on the coverage defenses, depending in part on
what the defenses are. (Id. at 8-9.) Frank's then states
that defense counsel selected by the insurer could
never recommend settlement as reasonable because to
do so would harm the interests of its true client, the
insured, by creating an extra-contractual right of
reimbursement. (Id.) This is a two-edged sword
because it would be hard to show the carrier had a
duty to settle absent a reasonable offer to settle based
on counsel's recommendation.
For example, as noted above, Matagorda noted
there was no need to imply reimbursement rights
through quasi-contract because carriers could avoid
the dilemma of Stowers demands where coverage was
questionable by seeking a prompt determination of
coverage.
Despite talking a great deal about
expanding the ability of carriers and insureds to
determine the duty to indemnify before resolution of
the underlying suits, the Supreme Court has
recognized only one real instance where that can be
done, where there is no duty to defend. In any
situation where the actual facts of the underlying
claim are involved, the declaratory action presents the
chaotic situation of dual discovery in the declaratory
and underlying suit and potential injury to the
insured's liability situation in that underlying suit.
Declaratory actions, in contrast to the suggestions of
Frank's, have not been a panacea.
Frank's argues that the insurer will have an
incentive to put off getting a coverage determination.
This of course ignores the fact that the insured can
easily bring a declaratory action itself.
Frank's correctly points out that the "Loss
Payable" clause cited by the Court as a consent to
settle requirement simply does not require consent.
Instead, it provides for the factual conditions
necessary before the insured may seek to be
indemnified for settled or satisfying a judgment
against it. (Id. at 11.)
The motion for rehearing states that the Court in
Frank's adopts the "California reimbursement rule."
(Id. at 3.) The primary basis urged is that the Stowers
rules are different in the two states. Frank's urges on
rehearing that in Texas a carrier can urge that it was
reasonable in refusing to settle under the Stowers
standard because it had a legitimate coverage defense.
(Id. at 4.) The cases cited for this proposition simply
do not support this conclusion. See, e.g., Rocor
Frank's also argues that the reservation or notice
of the intent to seek reimbursement was untimely and
thus waived. (Id. at 13.)
Finally, Frank's disagrees with the Court's
determination that the law in Louisiana, potentially
15
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
conflicts for insurance defense counsel. (Letter Brief
at 2.) Strangely, this brief argues that a Stowers extracontractual suit with an assignment of rights against
the carrier, including claims for statutory penalties,
attorneys fees and punitive damages is preferable to a
reimbursement claim between the insured and the
carrier, who agree about the need to settle the
underlying suit but disagree about whether it is
covered or not.
applicable under choice of law analysis, allows for
reimbursement. (Id. at 14-15.)
6. Response to Rehearing
Underwriters correctly points out in its response
that declaratory actions are not a palliative and that
carriers, in order to get the benefit of the rules against
assignability in Gandy, must still seek in good faith to
get an early determination of coverage. Underwriters
also urges that the Stowers standard does not allow a
carrier to avoid liability for failing to settle when
reasonable if the carrier had a good but unsuccessful
coverage defense. (Response at 7.)
c. Amicus of Pilco, Inc.
"This decision is not good for business in Texas
unless you are in the insurance business"
Pilco argues that the right of reimbursement
should be a negotiated term in an insurance contract.
Unfortunately, Pilco fails to recognize that the need
for an implied in law right of reimbursement stems
from tort law, Stowers, superimposed under common
law doctrine to an existing contractual relationship.
7. Post-Decision Amicus Briefs
a. TCJL Amicus Brief
The business community, excepting of course
liability carriers, has had a very negative response to
Frank's. The Amicus Brief of the Texas Civil Justice
League ("TCJL") urges that Frank's is bad for
business. TCJL notes its involvement in returning
reason, fairness and predictability to the Texas civil
justice system, which has clearly benefited insurers.
The TCJL argues that Frank's unfairly tips the
balance of fairness in favor of insurers.
Pilco asserts a parade of the horribles for Texas
policyholders if reimbursement is allowed as an
implied right. Again, Pilco fails to recognize that
reimbursement claims had been made in Texas for
many years with great frequency prior to the decision
in Matagorda. In contrast to Pilco's arguments,
reimbursement, appropriately, requires insureds to
assess and deal with coverage issues early in the case
and appreciate their impact on the litigation. Is it a
bad thing that insured's may have to contribute to
settlements to avoid reimbursement claims in an effort
by both insurer and insured to end the underlying
litigation and resolve a coverage dispute?
The TCJL emphasizes that Matagorda has clearly
been overturned. It then urges that this require
admission of that fact and then proper analysis of the
rules of stare decisis. Predictability is lost where
precedent is not adhered. (TCJL Amicus at 4.) As
recent confirmation hearings involving Judge Alito
show, stare decisis, particularly overturning precedent,
is a decision that has long-range impact on judges.
Not surprisingly, TCJL cites the Court to an article on
stare decisis by Chief Justice Jefferson. (Id. at 5,
quoting Wallace Jefferson, State Jurisprudence, the
Role of the Courts, and the Rule of Law, 8 TEX. REV.
L. & POL. 271, 275 (SPRING 2004).)
Pilco also asserts that a contract may not be
implied in law if an express contract exists. (Pilco
Amicus at 9.) The very cases cited in the brief show
that there must be an absence of an express contract
controlling the circumstances presented. See, e.g.,
Atlantic Lloyds Ins. Co. v. Butler, 137 S.W.3d 199,
227 (Tex. App.--Houston [1st Dist.] 2004, pet.
denied).
b. Texas Association of Defense Counsel
Amicus Letter
Pilco correctly points out the absurdity and
unsoundness of the Court's estoppel theory as a basis
for reimbursement. Pilco notes that estoppel generally
requires precise proof of specific elements in order to
apply. Normally, estoppel cannot be used to create
rights that do not otherwise exist under the terms of
the contract.
In a short letter brief to the Court, the Texas
Association of Defense Counsel urges the Court to
only allow reimbursement when there is an express
agreement. Echoing the motion for rehearing of
Frank's, the TADC asserts that reimbursement rights
tied to reasonableness of the settlement creates
16
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
1/3 share of the settlement (2) it would arbitrate
coverage; and (3) it would pay $5 million of the $7.5
million offer. This is hardly the take it or leave it,
institutional litigant seeking war, which is the focus of
United Policyholder's phantasmagoria.
d. United Policyholders Amicus
The United Policyholder's amicus begins with its
usual history of insurance as a risk transfer device
intended to insure. No mention is made of the fact
that the Frank's case involves an insured trying to
avoid having to reimburse over $7 million paid for
coverage it did not pay for and did not have. It is hard
to develop enormous sympathy for such a potential
lagniappe.
H. Multiple Claimants/Insureds
In Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d
312, 315 (Tex. 1994) (Enoch, J.), the supreme court
held:
We conclude that when faced with a
settlement demand arising out of multiple
claims and inadequate proceeds, an insurer
may enter into a reasonable settlement
with one of the several claimants even
though such settlement exhausts or
diminishes the proceeds available to
satisfy other claims. Such an approach,
we believe, promotes settlement of
lawsuits and encourages claimants to
make their claims promptly.
United Policyholders then turns to the fact that
carriers have a duty of good faith that requires them to
protect the insured's interests above their own. This
amicus fails to note that the Texas Supreme Court has
repeatedly held that liability carriers have no duty of
good faith to insureds.
United Policyholders also trots out some of its
repository of insurance industry "history" in order to
urge that carriers are "waging a 'war' against
policyholders." (UP Amicus at 8.) As "institutional
litigants," United Policyholders asserts, carriers have
great power to wage war and boast of the vast number
of briefs they file. (Id. at 9.) United Policyholders
still does not address the fact that all the litigation
horsepower in the world does not alter the fact that
there is no coverage for the $7 million in settlement
payments made in Frank's.
A claimant may challenge the reasonableness of
settlements made with other claimants. Thus, a carrier
entering into unreasonable settlements with other
claimants may still be subject to Stowers liability.
Unreasonableness depends on traditional factors, such
as the merits of the claim. The mere fact that another
claim may be more serious does not make the
settlement with the lesser claim unreasonable. Id. at
316. The test is whether a reasonably prudent insurer
would not have settled the claim "when considering
solely the merits of the" settled claim and the
"potential liability of its insured on the claim." Id. at
316. The court noted that in any event the claimant
would have to show that it would in fact have
accepted the actual limits if the other claim had not
been settled. Id. at 316 n. 4.
United Policyholders appears to assume that
insureds are defenseless. This is anything but the
case. First, the insured need not wait for the carrier to
determine coverage because it can bring a declaratory
action against the carrier itself. Second, insureds
should be attuned to coverage issues from the moment
they receive a reservation of rights letters. Third, if
they are concerned about conflicts relating to
settlement assessment, they can and should select
independent counsel rather than relying on the use of
carrier selected counsel. Fourth, if they are concerned
about coverage, they can agree to arbitration of the
coverage dispute in the midst of the underlying suit.
Fifth, if they are concerned about coverage, then they
can asses the exposure and seek a compromise with
the carrier that fairly allocates the risk of coverage or
not.
The Fifth Circuit applied Soriano to a situation
where the carrier settled on behalf of one insured,
leaving claims against another insured under the
policy. Travelers Ins. Co. v. Citgo Petroleum Corp.,
166 F.3d 761 (5th Cir. 1999). The court held the
applicable test is whether the carrier would have
settled the particular claim against the particular
insured when considering solely the merits of the
claim and the potential liability of its insured. Id. at
765 (citing American States Ins. Co. of Texas v.
Arnold, 930 S.W.2d 196 (Tex. App.–Dallas 1996, writ
United Policyholders and the other amicus curiae
also ignore the facts of Frank's. The carrier tried
numerous solutions to the impasse: (1) it would pay a
17
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
settlement was reasonable, the carrier violated no duty
to the insured by resolving claims that would have
otherwise resulted in a judgment in excess of policy
limits. The court also rejected the holding of the trial
court that the failure to get releases from all potential
claimants created a conflict of interests and that the
carrier had a duty to more fully investigate the
remaining claims.
denied)(suit by excess carrier against primary who left
the excess with defense and indemnity of additional
insured after settling on behalf of another insured and
exhausting limits) and Vitek, Inc. v. Floyd, 51 F.3d
530 (5th Cir. 1995)(involving additional insured barred
by bankruptcy court permitting carrier to exhaust
limits as to debtor/insured)). The court noted that a
policy limits demand had been made as to the insured
the carrier settled on behalf of and not the other
insured. The court noted that was not addressing the
duties of a carrier faced with simultaneous Stowers
demands. Id. at 767.
III. Practical Suggestions for Drafting Stowers
Demands
A. Offer Must Be "Clear and Undisputed"-So, Put It In Writing
In Western Alliance Ins. Co. v. Northern Ins. Co.,
176 F.3d 825 (5th Cir. 1999), the court held that where
an offer within limits was made as to the named
insured before an additional insured was later added
to the suit, the carrier would not be protected under
Soriano and Citgo when it later settled using the entire
policy limits on behalf of the later added named
insured. The court found that the facts presented an
exhaustion of limits that was predated by a breach of
the duty to indemnify. Id. at 828. In fact, the two
insurers agreed to settle, with a modest contribution
being made by the additional insured secondary
carrier; after the named insured was added to the suit,
the same carrier, the primary carrier for this named
insured, paid its limits to settle as to that insured.
When the primary carrier for the additional insured
sued the other carrier, the other carrier raised
exhaustion of limits as a defense. It should be noted
that this was not a true extra-contractual or Stowers
case. The carriers agreed to each contribute to settle
and then resolve who should pay what.
No one should bank on the Supreme Court finding
that a purely oral Stowers demand is sufficient. While
they have suggested that a "formal demand" is not
absolutely necessary, the demand's terms "must, at a
minimum, be 'clear and undisputed'. . . ." D. Plaut,
Stowers Update: New Aspects of An Old Claim,
South Texas College of Law--Texas Ins. Law
Symposium, I-8 (Jan. 26-27, 2006)(discussing and
quoting Rocor). Oral offers are subject to dispute and
are rarely likely to be "clear and undisputed."
B. Timing or Buying Time
Determining when to send the demand requires
careful consideration of the reasonableness standard.
The carrier needs to have had a reasonable
opportunity to ascertain the basic facts impacting the
liability and damages exposure in the case. This will
thus result in timing be varied based on the nature of
the case.
This decision is highly questionable. For one
thing, absent Stowers duties being invoked, the carrier
was entitled to decide not to settle early in the case.
The mere fact an opportunity existed for paying
indemnity dollars does not equal a duty to do so.
Moreover, both carriers in this case were primary
carriers. As long as the carrier settling for its named
insured knew that other coverage existed for the other
insured under its own policy, one must ask why it
should be challenged for protecting an insured with
only one policy, not two.
Few pre-suit Stowers demands will succeed.
Most carriers do not even hire an attorney for the
insured until after suit has been filed.
The biggest problem for claimants regarding
timing is consideration of whether there are multiple
claimants and limited limits. Soriano encourages a
race to make the Stowers offer. This pits one
plaintiff's attorney against another.
The "me first" attitude is protective, but
dangerous. If there has not been time to adequately
asses the financial position of the defendant/insured,
settling for low limits could result create malpractice
exposure for the plaintiff's counsel.
In Mid-Century Ins. Co. v. Childs, 15 S.W.3d 187
(Tex. App.–Texarkana 2000, no pet. h.), the court held
that the carrier acted properly by settling two claims
out of multiple claims for the policy limits. Following
Soriano, the court concluded that as long as the
18
Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
Ethical issues obviously exist regarding joint
plaintiff offers by a lawyer representing a group of
plaintiffs. It is unclear whether a carrier would have
the right to challenge the sufficiency of a demand
based on ethical considerations.
One solution is for plaintiffs' counsel to band
together early and seek a joint solution. One would
expect this would require some form of agreement or
consent from the clients as well. This approach
assures no one will take the money and run. All
concerned can assess the financial condition of the
insured and make intelligent choices without a timecrunch.
E. Definite Amount Within Limits
It is axiomatic that you have to have the limits
correct in order to make a valid demand. It is also a
basic consideration to make sure that the demand is
for a definite amount within the limits.
Another solution is to seek to include in the pretrial scheduling order an agreement or an order
barring settlement and exhaustion of funds by a single
party. Where coverage issues exist, the trial court can
arrange to have such issues decided in a separate
declaratory action. The best approach is to confirm
any such arrangement with a Rule 11 agreement that
is enforceable.
Making a proper demand on a declining limits policy
is particularly tricky. The best approach here would
appear to be to ask for a dollar less than the remaining
limits, allowing any necessary reduction for additional
defense fees that must be paid to finalize settlement.
Timing can also be affected by pending, important
coverage decisions. The pendency of the issue of the
insurability of punitive damages is one example.
The issue of a proper declining limits offer was
presented in part in Westchester Fire Ins. Co. v.
Admiral Ins. Co., 152 S.W.3d 172, 191-93 (Tex.
App.--Fort Worth 2004, pet. pending), which is
pending on petition for review before the Supreme
Court. This type of policy has variously been
described as exhausting, wasting, burning or eroding.
In short, the costs of defense erode the policy limits.
So, the limits are a moving target. In that case, the
claimants orally indicated they were seeking "policy
limits." A written settlement offer was made for the
policy limits of the primary policy: $1 million. The
letter added that the excess carrier should be apprised
that the case could be settled "at this time, within the
limits of the primary policy." Id. at 193. Oral
testimony provided by the plaintiffs' counsel indicated
he made a demand to settle for the policy limits of the
primary policy, which he understood at the time to be
$1 million. Id. The limits were actually less than $1
million because of defense cost erosion. While the
letter indicated the offer was conditioned on the limits
being $1 million, the plaintiffs' counsel testified that
no condition was intended. The case subsequently
went to mediation, where confusion continued to
reign. Again, testimony was presented in the absence
of a written document, indicating the offer was to take
$1 million or whatever the limits were. Additional
testimony showed that the plaintiffs said they would
come off $1 million if the defendant would come up
to $500,000. The plaintiffs never came down from $1
million. Id. Added to this mess was the expert
opinion of Gary Beck, indicating that he thought a
Stowers demand had been made. Id. at 195. Similar
C. Reasonable Time Limits
Most plaintiffs believe that short time limits
increase the pressure on the carrier. It typically does
not.
Remember that the time within which the offer
can be accepted will be part of the determination of
whether the carrier was reasonable in refusing to
settle. Thus, the shorter the time provided, the more
likely it is that the carrier's position of reasonableness
is enhanced.
The best philosophy is to "give them as much rope
as they want." A basic thirty-day offer is standard.
Freely granting extensions is also advisable. If the
carrier obtains extensions and then refuses to settle,
there are any number of negative implications harmful
to their defense of the Stowers suit. Failing to give
them the time again potentially gives them an out.
D. Definite Identification of Parties
The demand letter should clearly identify who is
making the offer and to whom it is being made. This
author frequently sees demand letters where there is
confusion over who is offering and which entities are
to be released. Vagueness or confusion in the letter
imperils the chances the demand will stick.
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Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
arises where there is some form of "per person" limit
and the offer is conditioned on settlements being
effectuated with all claimants. A carrier need not pay
more for a weak claim in order to get a settlement as
to the stronger claim.
testimony was presented by Rickey Brantley, the ad
litem for one of the claimants. Id.
The court held that this evidence amounted to
more than a scintilla that there was a valid Stowers
demand. This reasoning would appear to erroneously
shift to the jury the responsibility of considered legal
questions.
As discussed above, in Rosell v. Farmers Texas
County Mut. Ins. Co., 642 S.W.2d 278, 279 (Tex.
App.–Texarkana 1982, no writ), the carrier refused to
accept a bulk offer to settle for two occurrence policy
limits where one of the two claims was not, in the
carrier's opinion, worth a full single limit. The court
held that the carrier did not have to pay more for the
weak claim in order to get a settlement of the strong
claim. Accord Pullin v. Southern Farm Bureau Cas.
Ins. Co., 874 F.2d 1055, 1056 (5th Cir. 1989) (Texas
law).
The court also addressed whether the carrier could
have settled in light of the fact that the mediation
settlement discussions did not involve a
communicated consent to settle from the insured. Id.
The defense counsel did not get the consent letter until
after the mediation. Id. Strangely, the court held that
the carrier "failed to conclusively prove that it did not
have an opportunity to settle the claim after receiving"
the insured's consent. Id. The ruling seems to
erroneously presuppose the existence of a valid
Stowers offer and a duty to initiate settlement.
Bulk offers for a single limit can actually make
the Stowers case much stronger. The insured in such
a setting obviously is given a chance of getting much
more for the money. The damages exposure to be
consideration allows combining all of the exposure
reflected in the claims being settled.
It should be noted that the case presents a number
of additional issues to the Supreme Court that are not
apparent on the face of the court of appeals' opinion:
(1) whether the settlement offers offered a full release;
(2) whether the offers included non-covered items;
and (3) whether the offer/s were conditional.
(Admiral's Petition for Review, 2005 WL 575475, at
*7.)
H. Bifurcated Offers--Excess
Insured Contributions
Carriers
and
One cannot make a bifurcated offer without
making a conditional offer. For example, if the offer
to the carrier is contingent on the insured kicking in
some of its own money, then the offer is conditional.
Can it never be a valid Stowers demand? Yes.
F. Resolve Any Doubts About the Limits
Prior to Making the Offer
Any statement in the demand suggesting that it is
based on representations or is otherwise conditioned
on the correctness of the correct amount of the limits
being stated creates a danger that the demand will be
treated as conditional and therefore ineffective. The
best course is to have binding discovery responses and
at least estoppel letters/correspondence establishing
the limits before making the offer.
Discovery
involving the insurer should also be considered where
appropriate. In re Dana Corp., 138 S.W.3d 298 (Tex.
2004)(involving discovery of policies and information
regarding the status of the remaining limits of
liability; discussing in part Tex. R. Civ. P. 192.3(f)).
The Supreme Court certainly suggested in
Maldonado that proof that the carrier was informed of
the insured's willingness to satisfy the terms of the
"condition" would likely be sufficient to trigger the
carrier's duty to settle. In that case, of course, the
carrier did not receive sufficient notice.
One approach to this problem is to make the
bifurcated offer in such a fashion that the insured is
given a certain amount of time to consider whether it
wishes to contribute as requested, and if the insured
agrees, it then must notify the carrier, whose own duty
will run a specified number of days from the date of
the insured's notice to the carrier of its acceptance of
the terms.
G. Bulk Offers
Offers made on behalf of multiple individual
plaintiffs can be dangerous where some claims are
worth more than limits and some are not. This usually
The goal is to make clear that there is in fact a
conditional requirement, provide the mechanism for
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Constructing and Deconstructing the Stowers Demand Letter
its satisfaction and then allow a reasonable time after
the condition is satisfied for the carrier to accept. This
is intended not fit the rule that even when an offer is
conditional, it will be binding when the specified
conditions have occurred. Webster, 906 S.W.2d at 77.
Chapter 4
I.
Offer a Full Release, Including Any Liens
The most dangerous practice I have seen since the
release of Bleeker is the offer of indemnity from any
liens. Obviously, most plaintiffs would be a poor
source of protection against any significant lienholder.
Some plaintiffs' attorneys will offer indemnity
themselves, which is slightly better.
A similar approach can be taken with excess
carriers. In other words, the offer needs to clearly
state what is expected from the primary carrier and
what is expected from the excess carrier. The
mechanism for the satisfaction of the condition that
the primary carrier tender limits should be part of the
demand. Without a tender, the excess carrier has no
duty to settle, generally. For example, the following
offer could be made:
The indemnity approach is dangerous. The
Supreme Court has said a full release must be offered,
not some triangular indemnity arrangement. Why
take the chance?
1. $1 million paid by Slippery Rock Ins. Co.
(primary);
It is certainly advisable to recite that what is being
offered is intended to fully comply with the
requirements of Bleeker. This should be used as a
"back-up" or additional part of the offer, not the sole
offer regarding the release. It should follow an
unconditional and unequivocal statement that the offer
is to provide full releases, including releases from any
liens.
2. $5 million paid by Mondo Excess Ins. Co.
(excess).
J. Consider Whether a Detailed Discussion of the
Case is Warranted
This offer will remain open to Slippery Rock for
thirty days. If Slippery Rock agrees to the tender of
the designated amount as part of a total settlement of
$6 million, it will then provide notice to the insured
and/or Mondo Ins. Co. The offer will then remain
open to Mondo to accept this offer for the additional
amount of $5 million for a term of 15 days.
The best approach, in this author's opinion, is for
all critical information regarding the case to be in the
insured's, the defense lawyer's and the carrier's hands
as it is developed. The longer it is in the file, the less
likely that the carrier can urge that it did not have the
time to adequately determine whether to settle.
Plaintiff A and B agree to provide a complete
release, including the release of any liens or other
encumbrances, for the following consideration:
The thought obviously is that while the offer is
initially conditional, the satisfaction of the condition
sets the stage for an unconditional offer. The
communication and time enlargement provisions seek
to solve problems such as those in Maldonado.
Focusing on key facts and citing to clearly
available documents is the most effective approach.
Exaggeration and hyperbole will not help, and likely
will hurt. Remember, sometimes the best approach
may be to hope the carrier will actually pass on the
offer and thus open the limits.
A similar difficulty exists where there is a selfinsured retention or sizeable deductible. A bifurcated
offer may be required in such settings, particularly
where the coverage above is not invoked until there is
a tender or exhaustion of the deductible/SIR.
It does little good to cite to old bad faith/extracontractual cases. This highlights that you cannot be
taken as seriously. This author has seen hundreds of
letters citing Allstate v. Kelly, supra, long after the
case lost any real significance.
SIR's are troublesome in any event. The insured
in control of its own money is often more intransigent
regarding settlement than a liability insurer.
Currently, Texas law holds that a self-insurer has no
Stowers duty to settle.
Care should be taken to make sure that any factual
discussion or argument is not counter to the interests
of the insured regarding coverage. Hammering too
hard on facts involving alleged malice can move the
case in a potentially uncovered direction.
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Constructing and Deconstructing the Stowers Demand Letter
Chapter 4
The main thing to remember is that argument
regarding facts o the underlying claim and coverage
issues is not required under Stowers.
In Willcox v. American Home Assurance Co., 900
F. Supp..850 S.D. Tex. 1995), the offer was
conditioned on payment by two insurers whose
policies could not be stacked. In addition to exceeding
the correct limits, the offer was found to be
conditional. Moreover, the court found the offer was
also conditional in that it stated that it was for the
amount stated unless the insured could demonstrate
the limits were less, in which case the demand was
automatically amended to equal that lesser amount.
Id. at 858. The court found this violated the
conditional offer rule expressed in Webster, supra.
L. If in Doubt, Send It To Defense Counsel
N. Consent to Settle
Where the insured is represented by counsel, the
letter should be directed to the defense counsel for the
insured. If the insured has independent or coverage
counsel, they should be copied. If you know the
identity and contact information for the adjuster, copy
them.
Absent a policy provision requiring the consent of
the insured, a carrier does not have to have the consent
of the insured in order to settle. Dear v. Scottsdale,
supra. Consent is required in a large number of
professional liability policies. Obviously, a Stowers
demand on an insured with such a policy will depend
on whether this condition to the duty to settle has been
satisfied. In other words, if the insured does not "tee
up the carrier," no one else can.
K. Argue Coverage
Argument regarding known coverage issues can
be helpful. This can easily be done in separate letters.
Carrier handling problems can also be
emphasized, along with any problems in the handling
of the defense.
With bifurcated offers, you have to make sure that
each piece of the offer goes to the affected party. In
other words, the offers need to go to the primary
carrier and excess carrier or their representatives as
well.
M. Special Problems Presented
Allocation is Involved
Where
Obviously, care must be taken to get the insured's
attention long prior to the demand letter. The demand
letter, however, can point out in detail all of the
problems facing the insured if the settlement offer is
not accepted and the carrier refuses to settle. In other
words, a road map to what is likely in the insured's
best interests may prove helpful.
Risk
Cases layered with multiple policies covering the
same insured, and the resolution of the allocation or
coordination of benefits, can be a devilish problem for
the plaintiffs counsel trying to make a Stowers
demand. The layering approach suggested above as to
bifurcated claims is more difficult where it is entirely
unclear which policies and in what order will go first,
second, etc. The best example of this problem area is
asbestos or long-tail injury cases.
O. Mediation?
The mediation privilege makes many nervous
about making offer in that setting. There is also a
great deal of debate about whether to make a limits
demand before or after the mediation.
No hard a fast rule applies, except that any
attempt to Stowerize the insurer should be made in
writing, even in a mediation setting.
Because the insured "picks-the-line" of coverage
under APIE v. Garcia, supra, an offer specifying
anything other than the amount could prove as
troublesome as making a contingent or conditional
offer.
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