In the recent case of In re Farmers Tex. Cty. Mut. Ins. Co., No. 19-0701 (Apr. 23, 2021), the Texas Supreme Court held the insured's liability in excess of policy limits is an essential prerequisite for a Stowers failure-to-settle claim, but that liability can arise either from a judgment or settlement.
At the same time, the court held the insurer might have breached its contract by conditioning settlement on a contribution by the insured (opinion by Justice Busby). (See my previous Expert Commentary on this case, November 2020, "Texas Supreme Court Confronts Another Stowers Question.")
The Facts of the Case
The lawsuit arose from 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 increased 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 and retained her right to seek recovery from Farmers. Longoria then sued Farmers, asserting breach of contract as well as negligent failure to settle under Stowers.
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" and 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." In re Farmers Tex. Cty. Mut. Ins. Co., 604 S.W.3d 421, 428 (Tex. App.—San Antonio 2019, orig. proceeding).
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. Farmers posited a bright-line rule: "[T]here can be no Stowers claim in the absence of an excess judgment against the insured." It relied on several previous holdings by the court, including that risk of exposure to an excess judgment is a key consideration in assessing the reasonableness of a settlement demand and that the injury-producing event in a Stowers case is an underlying judgment in excess of policy limits.
Longoria filed a counterpetition for mandamus, arguing that the court of appeals erred by dismissing 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." Longoria relied on cases holding that an insured may assert Stowers claims together with claims under the insurance contract. To refute Farmers' "bright-line rule," Longoria cited precedent that an excess insurer may sue a primary insurer to recover settlement payments through equitable subrogation of the insured's Stowers rights.
The Court's Ruling
The court granted both mandamus petitions in part and overruled the appellate court on both claims. The court framed the question as to whether Farmers' alleged "behavior fits into certain of the modern doctrinal pigeonholes of Texas insurance law: specifically, whether an insured who contributes to a within-limits settlement in response to a solicitation or demand by her insurer can bring a claim for reimbursement under Stowers or the insurance policy."
First, the court adopted a variation of Farmers' bright-line Stowers rule: the insured cannot sue "for negligent failure to settle because her liability did not exceed policy limits." Reconciling the lines of authority cited by the parties, the court held liability exceeding policy limits can be based on either a judgment or settlement.
As for the breach of contract, the court held that "Longoria has not alleged a viable claim for breach of Farmers' contractual obligation to defend, but she has alleged a breach of its indemnity obligation." The duty to defend is accompanied by the right to control the defense, including the selection of defense counsel, and under Texas law, Farmers could not be held vicariously liable for the counsel's alleged failure to timely designate experts. Longoria did not allege any other recognized ground for finding a breach of the duty to defend.
On the other hand, the allegations that Farmers withheld $100,000 in settlement funds and insisted Longoria contribute that amount to a reasonable settlement stated a potential claim for breach of the insurer's duty to indemnify. The court rejected Farmers' (and the dissent's) argument that no duty to indemnify arose because Longoria was not "legally obligated to pay" the amount she paid to close the settlement.
Finally, the court devoted several pages to potential grounds on which Farmers might or might not be required to reimburse Longoria, noting it could not reach the merits of those grounds in reviewing a Rule 91a order: "We do not decide today what the policy as a whole required, whether Farmers breached it by consenting to settle within policy limits but making the insured's release contingent on her contribution, or whether Longoria can prove damages." Those issues and others require an evidentiary record and determinations in the trial court.
Chief Justice Hecht, joined by Justices Boyd and Blacklock, agreed that Longoria could not state a claim under Stowers but would also have barred recovery under the policy.