What happens when a plaintiff is awarded legal damages that are higher than what the defendant’s insurance policy covers? Is the plaintiff required to accept the limits? Does the insurance company pay the limit and let the plaintiff pursue the remainder? Does the insured have a say in any of it?
These issues, which potentially have major consequences for all three sides, fall under an important section of Texas law known as the Stowers doctrine. Developed through years of court rulings, the Stowers doctrine establishes insurers’ duties in third-party liability claims.
The doctrine is named for a case that began with the G. A. Stowers Furniture Co. in Houston. Late one January night in 1920, an employee was on a delivery when his truck struck a wagon stopped on the roadside. With the truck disabled, the employee left it in the unlit roadway. A little later, a Ford coupe hit the delivery truck and overturned, seriously injuring a woman who was a car passenger. She sued G. A. Stowers Furniture Company for $20,000.
Through its insurer, American Indemnity Co., Stowers was covered for injuries arising from car accidents, though the policy was limited to $5,000. The policy also gave American Indemnity control over defense and settlement.
The accident victim offered to settle for $4,000. American Indemnity offered $2,500, but it later admitted knowing the case was worth much more. The carrier also admitted that, in failing to accept the demand, it did not act reasonably. A jury awarded the victim $14,000. Stowers paid the award then sued American Indemnity.
The case reached the Texas Supreme Court, which issued a benchmark ruling in deciding that, since American Indemnity controlled the defense and settlement, the company had a duty to protect its client up to the policy limit. The court also held that, in such cases, the insurance company is liable for the full amount of the judgment, even if it exceeds the policy.
The Stowers doctrine establishes three criteria to trigger such a case: The claim against the insured is within the scope of coverage; the demand for a settlement is within the policy limits; and the settlement terms are such that an ordinarily prudent insurance company would accept them.
Those requirements create countless pitfalls that require careful review. Potential coverage issues, multiple claimants, multiple insured parties and the effect of liens all must be considered, along with the wording of the settlement demand and whether it was offered in writing.
Lugenbuhl’s experienced legal team offers several recommendations for parties involved in a Stowers case:
Lugenbuhl shareholder Donna Thomisee’s area of practice focuses on all aspects of litigation and insurance coverage and defense, from intake through the trial and appellate processes. View her profile to learn more about her experience or visit our Insurance practice section to learn more about our firm’s expertise and services.
The content of this article is not intended to serve as an exhaustive review of the laws, statutes or issues related to Stowers cases and is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.