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Defense and Settlement

Texas Supreme Court Confronts Another "Stowers" Question

Lyndon Bittle | November 25, 2020

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Is a judgment in excess of policy limits an essential prerequisite for a claim against an insurer that failed to accept a reasonable offer to settle a lawsuit within its policy limits? That question is currently before the Texas Supreme Court on a petition for writ of mandamus.

The case of In re Farmers Texas County Mut. Ins. Co., No. 19-0701 (argued Sept. 30, 2020), arose from a lawsuit based on an auto accident involving Cassandra Longoria (Farmers' insured) and Gary Gibson. Farmers appointed its in-house counsel to defend Longoria. Gibson offered to settle the lawsuit for $350,000, well within Longoria's $500,000 liability policy limit.

Longoria urged Farmers to accept the offer, expressing concerns that the risk of an excess verdict was heightened by defense counsel's failure to timely designate expert witnesses. Farmers refused to pay more than $250,000. Longoria contributed $100,000 to close the settlement but retained her right to seek recovery from Farmers. Longoria then sued Farmers, asserting breach of contract as well as negligent failure to settle under G. A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex. Comm'n App. 1929, holding approved).

Farmers responded to the suit with a motion to dismiss under Texas Rule 91a, which authorizes dismissal of a claim that "has no basis in law" (i.e., "the allegations, taken as true, together with inferences reasonably drawn from them do not entitle the claimant to the relief sought"). Tex. R. Civ. P. 91a. A motion under that rule must be decided based solely on the facts alleged in the plaintiff's petition.

The trial court denied the motion on all counts. The San Antonio Court of Appeals denied Farmers' request for mandamus on the Stowers claim but granted mandamus on the contract claim, holding Longoria's petition did not state a viable claim that the insurer breached its contractual duty to "settle or defend" and thus had "no basis in law or fact." In re Farmers Texas County Mut. Ins. Co., 604 S.W.3d 421, 428 (Tex. App.—San Antonio 2019, orig. proceeding).

On Appeal to the Texas Supreme Court

Farmers sought mandamus from the Texas Supreme Court, arguing that both lower courts had abused their discretion in ruling on the Stowers claim and that it had no adequate remedy on appeal. See Petition for Writ of Mandamus, 2019 WL 3935277 (Aug. 12, 2019).

Farmers' mandamus petition posits a bright-line rule: "[T]here can be no Stowers claim in the absence of an excess judgment against the insured." It relies on several previous opinions by the Texas Supreme Court, including its holding that risk of exposure to an excess judgment is a key consideration in assessing the reasonableness of a settlement demand in American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994), and that the "injury producing event [in a Stowers case] is the underlying judgment in excess of policy limits" in Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 829 (Tex. 1990). Farmers' counsel acknowledged at oral argument that this case presented unique facts not found in previous cases and that Farmers' position would be the same if it had refused to contribute anything to the insured's settlement.

Longoria filed a counter-petition for mandamus on the grounds that "the trial court correctly denied Farmers' 91a Motion To Dismiss Longoria's breach of contract claim for having no basis in law, when the petition alleged that Farmers breached the insuring contract by mishandling her defense and withholding payments for a covered loss." See Petition for Writ of Mandamus, In re Longoria, 2019 WL 4684862 (Sept. 13, 2019).

Longoria relied on cases holding that an insured may assert "rights granted under Stowers together with rights under the contract of insurance." State Farm Mut. Auto Ins. Co. v. Traver, 980 S.W.2d 625, 629 (Tex. 1998). Longoria further argued that the court of appeals abused its discretion in granting mandamus on the contract claim by engaging in appellate fact-finding and deciding that claim on a ground not presented by Farmers.

To refute Farmers' "bright-line rule," Longoria cited the holding in American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 482 (Tex. 1992), that an excess insurer may sue a primary insurer to recover settlement payments through equitable subrogation of the insured's Stowers rights. At oral argument, Longoria's counsel emphasized this was a case of first impression in the Texas Supreme Court that should not be resolved on the sparse record of a Rule 91a motion.


In addition to important substantive issues arising from its own prior holdings, this case presents the court an opportunity to consider the positions on settlement duties adopted by the American Law Institute's new Restatement of the Law, Liability Insurance, which I discussed in a previous Expert Commentary, "New Liability Restatement and Settlement of Catastrophic Claims" (December 2018). Section 27(2) of the Restatement would hold an insurer that breaches a settlement duty liable for the amount of reasonable, noncollusive settlement by the insured or an excess insurer under certain circumstances.

Longoria notes that a comment to this section cites Canal as reflecting "substantial authority that an above-limits verdict is not required before an action can be brought against an insurer that breached the duty to make reasonable settlement decisions." Both parties cite commentators and cases from other jurisdictions in support of their respective positions.

Given the unusual procedural posture of the Farmers case—mandamus proceedings based on the denial of a Rule 91a motion to dismiss—the court might prefer to defer addressing the substantive issues pending development of a more complete record. Such an approach would be complicated by the court of appeals' mixed holding—leaving one portion of the trial court's ruling intact while overturning another.

Very little attention was paid at oral argument to the appellate court's order dismissing Longoria's contract claim. The Texas Supreme Court could pretermit the merits of that claim by vacating the appellate court's mandamus based on Longoria's procedural objections.

The court will likely issue its opinion sometime in the first half of 2021. Stay tuned.

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