Skip to Content
Defense and Settlement

First Come, First Served—Must an Insurer Accept a Settlement Offer That Does Not Release All Insureds?

Lyndon Bittle | February 24, 2017

On This Page
Business tug of war

The scope of an insurer's duty to settle continues to be a hot topic, at least in Texas. The Fifth Circuit, when interpreting Texas law in OneBeacon Ins. Co. v. T. Wade Welch & Assocs., 841 F.3d 669 (5th Cir. Tex. 2016), recently affirmed a $2.8 million judgment against an insurer for negligently failing to accept a "Stowers" demand that offered to release only one of two insureds.

Although previous cases in the Fifth Circuit and the Texas Supreme Court held an insurer may accept such an offer, neither court had expressly held it must do so or risk liability for an excess judgment against the insured.

As I discussed in a previous IRMI Commentary (August 2016), No Home Run If You Don't Touch All the Bases: Collecting Judgments Against Nonsettling Insurers, Texas (like most other states) imposes a duty on insurers controlling the defense of their insureds to accept reasonable offers to settle within policy limits. See Seger v. Yorkshire Ins. Co., 503 S.W.3d 388 (Tex. 2016); G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex. Comm'n App. 1929). The Stowers duty to settle within policy limits is triggered when the following three conditions are met.

  • The claim against the insured is within the scope of coverage;
  • There is a demand within policy limits; and
  • The terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured's potential exposure to an excess judgment.

Seger, 503 S.W.3d at 395-96 (citing American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994)); see also Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 315 (Tex. 1994). To satisfy this test, the settlement demand must explicitly propose a complete release of all claims against the insured. See Soriano, 881 S.W.2d at 314; Trinity Univ. Ins. Co. v. Bleeker, 966 S.W.2d 489, 491 (Tex. 1998) (Stowers demand ineffective where hospital liens not released). An insurer that foregoes a reasonable settlement offer that triggers the Stowers duty exposes itself to liability for a judgment against the insured exceeding policy limits. Phillips v. Bramlett, 288 S.W.3d 876, 879 (Tex. 2009); see also Cumunale v. Traders & Gen. Ins. Co., 328 P.2d 198 (Cal. 1958).

When there are multiple claimants or multiple insureds, the rules become more complicated and vary from state to state. In California, the "reasonable offer" that can trigger the insurer's duty to settle must include joinder of all claimants and "a complete release of all insureds." Graciano v. Mercury Gen. Corp., 179 Cal. Rptr. 717, 726 (Cal. App. 2014). Indeed, California courts consider settling to release one insured, while leaving other insureds "bereft of coverage, an act of bad faith." Lehto v. Allstate Ins. Co., 36 Cal. Rptr. 814, 822 (Cal. App. 1995). Likewise, an insurer's acceptance of a settlement offer that did not include a release by the state workers compensation fund "would have amounted to an abdication of its responsibilities to its own insured," so rejecting such an offer was not bad faith. Coe v. State Farm Mut. Auto. Ins. Co., 136 Cal. Rptr. 331, 337–38 (Cal. App. 1977).

On the other hand, the Montana Supreme Court has held that in some circumstances "it is an unfair trade practice per se … for an insurer to condition the payment of … policy limits on the third-party's agreement to provide a full and final release of all liability in favor of an insured." Shilhanek v. D-2 Trucking, Inc., 70 P.3d 721, 725 (Mont. 2003) (quoting Watters v. Guaranty Nat'l Ins. Co., 3 P.3d 626, 638 (Mont. 2000)). New Mexico and Wisconsin have reached similar conclusions. See Dairyland Ins. Co. v. Herman, 954 P.2d 56, 65 (N.M. 1997); Blank v. USAA Prop. & Cas. Co., 546 N.W.2d 512, 515 (Wis. App. 1996).

Multiple Claimants Scenarios

The Texas Supreme Court has not spoken directly to the multiple-insured issue but has dealt with the multiple-claimant scenario, holding "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 several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims." Soriano, 881 S.W.2d at 315; see also Carter v. State Farm Mut. Auto., 33 S.W.3d 369, 372 (Tex. App. Fort Worth 2000). The court in Soriano cited eight other jurisdictions that had "reached a similar conclusion" and three with contrary holdings. While it did not hold an insurer must accept a separate settlement offer, the court acknowledged an insurer "would surely face questions" if it refused a reasonable offer to settle claims by one of several claimants. Id. at 315.

In Bleeker, 966 S.W.2d at 491, the court questioned, but did not decide, whether an offer to settle claims by some but not all claimants could effectively trigger the Stowers duty to settle. (The settlement demand in that case was rendered ineffective by the failure to offer a release of hospital liens for the claimants making the demand.) In Pride Transp. v. Continental Cas. Co., 511 Fed. Appx. 347 (5th Cir. Tex. 2013), a federal district court applying Texas law held that, whether the insurer was "Stowers-duty bound or not," it acted reasonably in accepting a settlement offer that did not release all claims. Pride Transp. v. Continental Cas. Co., 804 F. Supp. 2d 520, 530 (N.D. Tex. 2011).

Other courts applying Texas law have extended Soriano to the multiple-insured scenario and held an insurer may accept an offer to settle claims against one insured but not others without violating its Stowers duty. See Travelers Indem. Co. v. Citgo Petrol. Corp., 166 F.3d 761, 768 (5th Cir. 1999); American States Ins. Co. v. Arnold, 930 S.W.2d 196 (Tex. App. Dallas 1996, writ denied). The Alaska Supreme Court, noting the different approaches to the multiple-insured issue by the Fifth Circuit in Citgo and the California appellate court in Lehto, held "the latter approach is the better one" because "a settlement to the benefit of one insured while leaving others open to liability could cause unfairness." Williams v. GEICO Cas. Co., 301 P.3d 1220, 1226 (Alaska 2013).

While some Texas courts have held an insurer may accept an offer that does not include all insureds, at least one court has held the insurer is not obligated to accept such an offer. Patterson v. Home State Cnty. Mut. Ins. Co., 2014 Tex. App. LEXIS 4460, *24-27 (Tex. App.–Houston [1st Dist.] Apr. 24, 2014, pet. denied). In Patterson, a fatal accident between an 18-wheeler and a car gave rise to wrongful death claims against the truck driver (Hitchens) and his employer (Brewer) by the deceased auto driver's surviving husband and children. Id. at *1-2. Plaintiffs' counsel made three separate policy-limits settlement offers—one to settle only the children's claims, one to settle the husband's claim, and one to settle all claims against Brewer but not Hitchens. Home State refused each offer in turn.

In the subsequent coverage action, plaintiffs asserted Home State breached its Stowers duty; the trial court granted summary judgment for the insurer. The court of appeals affirmed, holding none of the demands triggered Home State's Stowers duty. The first two offers failed to include all claimants that "could have exposed Brewer to an excess judgment by one of the other claimants." Id. at *9. And the "third settlement offer did not constitute an unconditional offer to fully release the insureds." Id. at *10 (emphasis added). Additionally, the court noted Brewer had objected to any settlement that did not include Hitchens but did not address the legal significance of that evidence.

Relying on Graciano and Patterson, I opined in August that, generally, "an insurer is not required to accept an offer to settle claims against one insured while leaving other insureds unprotected." In T. Wade Welch, however, the Fifth Circuit contradicted this opinion.

OneBeacon Ins. Co. v. T. Wade Welch & Assocs.

The case involved malpractice claims by the DISH Network against a law firm and an individual lawyer. DISH offered to settle its claims against the law firm, but not the additional-insured lawyer, for a payment of OneBeacon's policy limit. Although the law firm urged the offer be accepted, OneBeacon refused.

In the ensuing lawsuit, the insurer argued it could not be liable for an excess judgment because the offer did not trigger a Stowers duty. The trial court disagreed, and the jury found OneBeacon was grossly negligent in violating its Stowers duties and had knowingly violated provisions of the Texas Insurance Code. Id. at 675.

The Fifth Circuit affirmed, holding DISH's "letter demanding policy limits in exchange for a full release of its claims against the [law firm] was a valid Stowers demand which OneBeacon rejected." Id. at 679. It declined to follow Patterson, noting it was not obligated to follow an intermediate appellate court's holding and emphasizing the employer in that case had directed Home State not to accept any settlement offer that did not release the additional-insured employee. Moreover, the Fifth Circuit insisted the insurer's obligation to accept a reasonable offer to settle for one insured was governed by its holding in Citgo, which had relied on Soriano.

Citgo held an insurer is "free to settle suits against one of its insureds without being hindered by potential liability to coinsured parties," relying on the logic of Soriano's similar holding concerning multiple claimants. 166 F.3d at 765. The Fifth Circuit acknowledged "several out-of-state courts have found that there is a general duty not to favor one insured over another," but it concluded "the weight of contemporary authority [was] in line" with its contrary holding. Id. at 766.

T. Wade Welch takes this position one step further, imposing a duty-to-accept offer it previously held an insurer was permitted to accept. Based on its interpretation of Citgo and Soriano, the court's logic would compel the same result in both multiple-insured and multiple-claimant cases—if the insurer is presented a reasonable offer to settle some claims it may accept, it must do so or risk liability for an excess judgment.


If T. Wade Welch correctly states Texas law, many insurers will be surprised at the limitation of their options in responding to settlement offers. Actions they may be obligated to take under Texas law may constitute bad faith in other jurisdictions. Plaintiffs' counsel will find new arrows in their quiver as they try to obtain policy limits without releasing all potential claims but will need to be careful to avoid being left out by the "first-come, first-served" approach. And, whether this rule benefits or harms a particular insured will depend heavily on the circumstances. Will you be the one released by settlement or the one left out in the cold?

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.