The Stowers Doctrine: Settling for Policy Limits

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Imagine you are the representative of an insurance company handling a bodily injury claim. The injured plaintiff has $25,000 in medical expenses. Your insured’s policy has a limit of $30,000. The plaintiff makes a settlement demand for the policy limits. Because you know that $30,000 represents the extent of your company’s liability, you decide that you have nothing to lose by refusing to settle and taking the case all the way to trial. If the judgment is under the policy limit, you’ve saved some money; if it’s over, it doesn’t really matter to you because your company isn’t responsible for anything more.

Sounds good, right? Not if you’re the defendant. If your insurance company had settled the claim, its liability – and yours – would have been resolved at that time. Now, however, you are responsible for paying whatever amount is left over aft er your insurance company has paid your policy.

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In Texas, a judicial remedy called the Stowers doctrine – named aft er the Texas Supreme Court case G.A. Stowers Furniture Co. v. American Indemnity Co. – was created to eliminate this problem. The Stowers doctrine recognizes that the holder of an insurance policy has a cause of action against his insurance company if the company negligently refuses a settlement offer within policy limits. By incorporating negligence and the corresponding standard of care, the doctrine requires insurance companies to exercise reasonable care in responding to settlement demands that are within the policy limits.

As you can imagine, plaintiff s’ attorneys everywhere were elated with Stowers. However, it’s important to note that the duty implied by Stowers only arises when three elements are met: (1) the claim is within the scope of the insured’s policy; (2) the settlement demand is within policy limits and includes a full release of the insured; and (3) a reasonably prudent insurer would accept the settlement demand, given the terms of the demand and the facts of the claim.

The third element that asks what a “reasonably prudent insurer” would do creates an issue. How does a court determine how a “reasonably prudent insurer” acts?

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The Texas Supreme Court has explained that an insurance company’s duty is to accept a settlement demand if a person of ordinary prudence managing his own business affairs would have accepted the offer. If the insurance company fails to use reasonable care in responding to a settlement demand within policy limits, the courts have allowed the insured to recover from his insurance company the full amount of any judgment that is rendered above policy limits (usually, the insured will assign his cause of action to the injured plaintiff ). Therefore, an insurance company may be responsible for the entirety of the judgment rendered against the insured, even though the judgment amount exceeds policy limits.

The doctrine and its effects have created a new type of settlement demand in Texas: the Stowers demand. A plaintiff’s attorney will craft a specific demand letter, aiming to fulfill all the necessary requirements. Stowers demands are oft en seen in medical malpractice cases, particularly claims where the injured plaintiff has sustained neurological damage and may require lifelong care. A plaintiff ’s attorney may also send a Stowers demand when confronted with a minimum-amount policy.

So, how do you create an effective Stowers demand? First, the demand must be within policy limits. An insurance company’s Stowers duty is not triggered unless the settlement demand is for policy limits or for a specific amount that is below the policy limits. A demand that is above policy limits does not activate the Stowers duty, even if such a demand is objectively reasonable.

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Second, the demand must offer a full release of the insurance company and its insured. A good Stowers demand will offer a “full and unconditional release from any and all claims and potential claims raised.” It will also offer a release from all liens and subrogation interests.

Finally, the demand must give the insurer a reasonable amount of time to respond; which the standard response time is 30 days. If the deadline is too short or if the demand is made before all the facts regarding liability and damages have come to light, an insurance company may be relieved of its duty to settle.  Chad West

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