Higher Settlement Demands and Verdicts Result in More Stowers Opinions, But Not Clearer Guidelines

The increase in large verdicts over the last few years has led to more excess judgments – that is, judgments in excess of available insurance limits or first level primary limits, which has led to an increased number of Stowers lawsuits being filed and tried. This has, in turn, resulted in more written opinions that flesh out the particular elements of the Stowers tort and that provide increased guidance to practitioners who prosecute and defend these claims.

What is Stowers?

G.A. Stowers Furniture Co. v American Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929, holding approved), concerns the duty of liability insurers to settle third-party claims against insureds. Generally speaking, Stowers and its progeny require an insurer to exercise ordinary care in the settlement of claims to protect insureds against excess judgments. The duty is activated by a settlement demand when:

• 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.

In addition to these elements, Texas courts have held that the demand must clearly state a sum is certain and is unconditional. Only a handful of cases discuss the sum is certain and unconditional requirements or furnish the Texas practitioner with guidance on the practical proof problems associated with these issues for both insured and insurer counsel. Four cases decided in 2024 do, however, discuss one or more of these issues.

The Fifth Circuit: A 45-minute deadline is unreasonable, but verbal demands are acceptable

A case that addressed both the sum is certain and unconditional offer requirements, as well as whether breach of the Stowers duty is a defence to excess insurer liability for a covered excess judgment, is Westport Ins. Co. v Penn. Nat’l Mut. Cas. Ins. Co., 114 F.4th 653 (5th Cir. 2024). Westport was a dispute between a primary insurer (Westport), and an excess insurer (Penn National) over liability for an excess judgment against the mutual insured. The insured, Insurance Alliance (IA), an insurance agency, was held liable for failing to procure requested insurance coverage to protect a marina that was damaged in a storm.

Westport insured IA under a primary policy with USD5 million limits of liability, while Penn National’s excess policy had USD15 million limits of liability. Prior to entry of an excess judgment totalling USD13.7 million, Westport and the underlying plaintiff, Lake Texoma Highport, LLC (Highport), had engaged in multiple settlement discussions in which Westport rejected at least five settlement demands. After a settlement with Highport in which Westport ultimately paid an amount far in excess of its limits and Penn National paid approximately USD380,000, Westport and Penn National sued one another over liability for the settlement.

Westport sued Penn National for its failure to pay the full amount of the covered judgment in excess of the Westport limits, while Penn National pleaded that Westport breached its Stowers duty by failing to accept Highport’s prejudgment settlement demands. Both sides moved for summary judgment. The court granted and denied both parties’ motions in part. The issues remaining after the cross motions went to trial.

The jury returned a verdict in favour of Penn National, finding that Westport breached its Stowers duty in connection with four of Highport’s settlement demands. The district court set aside the jury’s determination as to one of the demands but upheld the jury’s findings against Westport and entered judgment based on the other three. Its final judgment allowed Penn National to recover damages from Westport in the amount of the approximately USD380,000 that it paid. Both sides appealed.

Stowers is not a defence to payment of an excess judgment

The Fifth Circuit first held that the district court erred in recognising Stowers as a breach of contract defence. In short, Penn National could not rely on Stowers to avoid paying the portion of the judgment excess of Westport’s limits. Penn National was contractually obligated to pay the excess portion, and it could later bring a Stowers claim against Westport to recover its payment. Because the judgment entered by the district court was correct, however, the Fifth Circuit held that the district court’s error was harmless.

A 45-minute deadline is unreasonable

In addressing whether the settlement demands were valid under Stowers, the Fifth Circuit upheld the district court’s ruling setting aside the jury’s determination that one of the Stowers demands was valid because the jury’s finding was unsupported by the evidence admitted at trial. Specifically, the district court held that there was not legally sufficient evidence that Westport acted unreasonably in rejecting the offer because IA did not have the opportunity to evaluate the merits of the parties’ positions given the offer’s 45-minute time limit.

The ultimate issue under Stowers is whether a claimant’s demand was reasonable under the circumstances such that an ordinarily prudent insurer would accept it. The Fifth Circuit has held that a reasonable opportunity to consider an offer has both a substantive and procedural component. The Fifth Circuit has previously established that the substantive component refers to the reasonableness of the terms of the offer, while the latter component concerns the amount of time to either accept or reject the offer given the consequences of the decision. Even though, applying the proper standard, 23 hours has been upheld as being sufficient to raise a factual issue on reasonableness, the Highport demand, which was made in the preliminary stages of the litigation and with a 45-minute time limit, was unreasonable in the Fifth Circuit’s view.

Stowers does not require release of all potential indemnity claims

Additionally, the Fifth Circuit held that the failure of the demands to address a contractual indemnity claim later asserted against IA by an insurance intermediary used to obtain the policy did not render the demands invalid under Stowers. Instead, the court concluded that a full release of the claims being asserted in the lawsuit by Highport was sufficient to offer a full release and that Stowers does not require the release of potential, unasserted and distinct claims made by third parties. In other words, the failure to address the potential contractual indemnity claim did not render the demand conditional.

Verbal demands can be sufficiently certain

Finally, in addressing whether some of the settlement demands were sufficient in terms of demanding a certain sum, the court held that verbal demands that implicitly incorporated terms that had been part of earlier settlement discussions were sufficient to qualify as valid demands under Stowers. The court upheld the jury’s determinations that these demands were valid, confirming that, like the overall question as to whether an insurer acted unreasonably in refusing to accept the demands, the question of whether the demands were sufficiently definite was a question of fact. In analysing the evidence submitted with regard to the definiteness and reasonableness issues, the Fifth Circuit relied not only upon the parties’ course of dealing in settlement discussions, but also on testimony regarding Westport’s understanding of the offers’ terms at the time the offers were made.

Southern District Holds the Certainty of an Offer a Factual Issue

Similarly, in Endurance Am. Ins. Co. v Lloyd’s Syndicate 3624, 2024 WL 3625621 (N.D. Tex. July 31, 2024), a federal district court, in denying summary judgment on the question of whether Stowers demands were adequate to trigger the duty to settle, relied upon the parties’ course of dealing in connection with their settlement discussions, as well as on expert testimony and the contents of the insurer’s files regarding reasonableness and adequacy of the settlement offers made.

Endurance American Insurance Company, the excess carrier, asserted claims against the primary insurer, Hiscox, for recovery of the amounts it paid in excess of the underlying primary limits. During the litigation, the claimant made two written demands to settle the claim. Each of the previous demands discussed the evidence against the insured and the claimant’s injuries extensively, and the parties’ agreed they were certainly sufficient under Stowers. After the written demands, the claimant’s attorney told defence counsel over the phone that the claimant’s “real number” was USD500,000. Hiscox moved for summary judgment, contending that the verbal settlement demand did not, as a matter of law, trigger the Stowers duty.

The court held that the parties’ course of dealing and Hiscox’s own claim materials created a factual issue as to whether the phone conversation constituted a valid Stowers demand.

The Fifth Circuit: A Demand for “All Policy Limits” Is Not Certain Enough

Interestingly, however, the court in Golden Bear Ins. Co. v 34th S&S, LLC, 2024 WL 3321508 (S.D. Tex. June 26, 2024), granted summary judgment in favour of the insurer with regard to the adequacy of a Stowers demand, specifically whether the demand was sufficiently specific in asking for a certain sum.

The demand at issue offered to settle all claims “in exchange for the payment of all policy limits of any and all insurance contracts”. The district court held that the demand lacked the necessary specificity to invoke an obligation under Stowers. As noted by the district court: “Stowers ‘applies only when the “settlement’s terms [are] clear and undisputed”, and “must clearly state a sum certain”. The court cited Am. Guarantee And Liability Ins. Co. v ACE Am. Ins. Co., 990 F.3d 842, 847 (5th Cir. 2021). This decision is significant because in Texas practice demands asking for the limits of all applicable policies are not terribly uncommon, and the issue of sufficient definiteness in terms of demanding a sum certain is often presented when a policy has wasting limits.

Most of the cases addressing the issue have held, like the Fifth Circuit in Westport, that the sufficient definiteness of a settlement demand is a question of fact that can be influenced by the surrounding circumstances. 34th S&S, LLC is a case, however, that decided the issue as a matter of law. It is presently on appeal, so there is the potential for more clarity on some of these issues in 2025.

The Northern District: Reserve Information May be Discoverable in a Stowers Action

Finally, in Carpenter v Twin City Fire Ins. Co., 2024 WL 947589 (N.D. Tex. March 4, 2024), a federal district court addressed some of the discovery issues that are often presented in Stowers cases. For example, the court addressed whether discovery of the insurer’s file contents after presentation of a Stowers demand would be permitted because the decision as to reasonableness is properly based on the information that the insurer knew at the time it rejected a settlement demand.

The district court refused to place the date of the settlement demand as a hard and fast date after which the insurer’s file contents and subsequent evaluations could not be discovered. In that connection, the district court noted that reserves were discoverable in Stowers cases because they may speak to whether the insurer expected a judgment exceeding the policy limits, and therefore whether the insurer was reasonable in refusing a settlement demand within limits. The court also noted that discovery requests asking for documents that related to the specific underlying lawsuit, including documents discussing the value of the claims or the chances of an adverse or favourable judgment were not overly broad in terms of permissible discovery in a Stowers case.

The court noted, however, that parties do not have a right to discover privileged information, even when it is otherwise relevant and proportional to the case. In other words, the district court noted that attorney-client privilege may limit discovery of certain documents by the plaintiff, even in a Stowers action.

The bottom line is that as the trend of higher settlement demands, settlements, and verdicts continues, the frequency of Stowers claims will likely increase, as will the number of Stowers trials. These trials and their appeals will likely result in an increase in the number of judicial opinions discussing the specific elements of Stowers and the litigation and discovery issues concerning each of the elements of the Stowers cause of action. Whether this creates clarity or further uncertainty remains to be seen.

Texas Supreme Court Precludes Statutory Interest and Attorney’s Fees in Certain Bad Faith Cases

In early 2024, the Texas Supreme Court seemed to rein in the proliferation of first-party property cases that developed following two of its 2019 decisions. The 2019 decisions:

• permitted policyholders to recover Prompt Payment Act penalty interest and attorney’s fees in first-party property claims that had gone through appraisal; and
• precluded other extracontractual claims – including claims for breach of the duty of good faith and fair dealing and statutory violations.

The cases resulted in an increase in insureds filing first-party property cases, invoking appraisal, obtaining an appraisal award, and then demanding payment of Prompt Payment Act interest and attorney’s fees.

In Rodriguez v Safeco Insurance Co. of Indiana, 684 SW3d 789 (Tex. 2024), the Supreme Court of Texas provided insurance carriers a pathway to prevent litigation of an appraised case. The court held that, in cases involving damage caused by “forces of nature,” when an insurer pays an appraisal award and any potential penalty interest, a policyholder cannot not recover attorney’s fees.

The court based its decision on the language of Section 542A.007 of the Texas Insurance Code, which limits an insured’s ability to recover attorney’s fees based upon the amounts demanded in the required pre-suit notice and the amount recovered in a judgment. The court noted that, when a carrier pays an appraisal award plus any possible statutory interest, there cannot be an “amount to be awarded in a judgment to the claimant for the claimant’s claim under the insurance policy”. Noting it was just a simple mathematical calculation, this virtually eliminated the recovery of attorney’s fees in weather-related cases if the correct amounts have been paid.

The result has been more creative arguments by policyholder lawyers, as well as a conflict between the federal courts as to how the Prompt Payment Act penalty interest should be calculated, what interest rate should apply, and what is the triggering event for the beginning of the running of the interest penalty.

But at least one federal court requires mutual intent to settle

At least one federal court recently held that an insurer is not entitled to summary judgment on a Prompt Payment Act claim when it paid the appraisal award and interest because the carrier could not show evidence of a mutual intent to settle that claim.

The court held that the statute requires the penalty interest rate be assessed “on the date of judgment” and that there had been no judgment yet. According to this court’s reasoning, there is a factual issue as to the amount of penalty interest owed, and the only way to establish the correct amount of penalty interest owed is to have a trial determine the date the interest should be calculated from and the applicable interest rate. Therefore, there is no way to calculate the actual award. This result is likely an outlier as several other federal courts have held to the contrary, but the issue remains alive with no ruling from the Texas Supreme Court.

Texas Supreme Court Requires Insureds to Demand Specific Amounts From Each Carrier in a Market, But Goes No Further

Another contentious issue has been what constitutes proper pre-suit notice under the Texas Insurance Code. The Code provides that the notice must include:

• a statement of the acts or omissions giving rise to the claim;
• the specific amount alleged to be owed by the insurer on the claim for damage to or loss of covered property; and
• the amount of reasonable and necessary attorney’s fees incurred by the claimant, specifically calculated by hours.

While this seems straightforward, the specifics of notice have been litigated extensively since its inception and most recently addressed by the Texas Supreme Court in In re The Lubbock Independent School District, 2024 WL 4575104 (Tex. October 25, 2024). Unfortunately, while the court could have squarely addressed the issue of what may constitute the “specific amount,” it sidestepped holding as to what it actually means.

The school district sent a single pre-suit notice letter to two towers of insurers that provided layers of coverage for two separate storms under two separate policy years. Without distinguishing between insurers or storms, the letter claimed the “specific amount” was USD20 million less applicable deductibles and prior payments, if any. However, the letter specifically stated that the insured would not accept that amount in settlement. The letter also stated that the damages ultimately sought at trial would well exceed the damages known to date, and after filing the suit, the district claimed total damages between USD100 and USD200 million.

The insurers moved to abate the litigation, arguing the notice failed to comply with the statute. The trial court denied abatement, but the intermediate appellate court granted the abatement, concluding that the statute “does not permit claimants to generally allege any amount of money”, but requires the notice “to state ‘the specific amount’ allegedly owed by each insurer for each claim”.

More particularly, the court held that the statute “does not permit a claimant to equivocate, or suggest an estimate, or offer a placeholder sum that might be changed after further investigation takes place but instead requires the notice to clearly articulate the precise sum alleged to be owed”.

Noting that it had not previously construed the “specific amount” language, the Texas Supreme Court seemed to approve various federal court opinions that have held that the “specific amount” requires only a specific dollar amount, and not a fixed and final total sum.

However, the court sidestepped the ultimate issue, affirming the abatement because the notice did not separate the amounts allegedly owed by each insurer for each claim arising from the two separate storms. The court specifically held that “our decision should not be read as an approval of the court of appeals’ construction of the statute’s ‘specific amount’ requirement”.

With this opinion, the state of the law is unclear. While it is best practice to include the specific amount owed by the insurer in a pre-suit demand, that may ultimately not be required under Texas law.