In the uncertain times ushered in by the COVID-19 pandemic, observers of the insurance law landscape can find footing in an old, familiar story: a single insured left deeply dissatisfied by her insurance provider’s coverage for an accident lawsuit against her. But in In re: Farmers Texas County Mutual Insurance Co., a novel question of settlement authority offers the chance to make new law.
The insured, Cassandra Longoria, sued Farmers Texas County Mutual Insurance for negligent failure to settle and breach of contract. Following a 2016 motor vehicle accident, Gary Gibson sued Longoria for injuries he allegedly suffered as a result of the accident. Longoria’s policy limit was $500,000. Gibson sought damages for $1 million. By the time the parties engaged in mediation, Longoria had hired her own counsel because of the risk of liability in excess of the policy. Consistent with the mediator’s recommendation, Gibson sent a Stowers demand, advising Farmers that he would accept a proposed settlement of $350,000. Under Texas law, the Stowers doctrine requires insurance companies to settle cases within policy limits when a reasonable settlement offer has been made. When the insurance company refuses a reasonable settlement offer, it is liable not only for the policy limits, but any extra money awarded in excess of the limits.
When Farmers countered at $250,000, Gibson told them to pound sand. Assuming the $350,000 was reasonable, under Stowers, Farmers would have been responsible for any excess judgment over the policy limits. However, facing trial on the merits, Longoria agreed to settle and pay the $100,000 balance herself, and then sued Farmers for reimbursement, relying on Stowers. In the District Court for Bexar County, Texas, Farmers moved to dismiss, arguing that no cause of action for negligent failure to settle existed because there was no final judgment in excess of the policy limit and, because of the settlement, there never would be. Farmers also argued that its duty to defend or settle was limited because the policy allowed Farmers to act “as it considered appropriate.”
The district court rejected both of Farmers’ arguments and ordered the company to indemnify Longoria for the $100,000 she had borne. In response, Farmers petitioned the Texas Fourth Court of Appeals for a writ of mandamus. On the breach of contract claim, the appellate court sided with Farmers, finding the “as it considered appropriate” language sufficient to justify its $250,000 settlement offer. But the Stowers issue was far more interesting—having never been addressed before by a Texas court. On the issue of whether an insured has a Stowers cause of action against her insurance company when the case settles pre-trial and the insured has paid a portion of the settlement because the insurer refused to pay the entirety of the demand, the appellate court found Farmers’ argument less than persuasive. Without taking a concrete position on that question, the court concluded Farmers was not entitled to mandamus relief on the Stowers claim.
The Texas Supreme Court takes it from here, having granted Farmers’ petition asking the Court to overturn the lower courts’ decisions. Should the court take the insureds’ side, it could signal a significant shift in settlement power dynamics—one that would greatly enhance a policyholder’s opportunity to forge a reasonable settlement, with implications reaching far beyond fender-benders.