New Liability Restatement and Settlement of Catastrophic Claims
Lyndon Bittle | December 7, 2018
Insurers controlling the defense of their insureds generally must accept reasonable offers to settle within policy limits or risk liability for a judgment against the insured exceeding policy limits.
As I discussed in the February 2017 IRMI Expert Commentary article, the Stowers duty to settle within policy limits is triggered in Texas when three conditions are met.
- 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.
Source: Seger v. Yorkshire Ins. Co., 503 S.W.3d 388, 395-96 (Tex. 2016)
To satisfy this test, the settlement demand must explicitly propose a complete release of all claims and potential liens against the insured. Trinity Univ. Ins. Co. v. Bleeker, 966 S.W.2d 489 (Tex. 1998). Other jurisdictions have similar rules, although many courts do not require an offer within limits to trigger a duty to engage in settlement negotiations. See, e.g., Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 393 N.W.2d 161 (Mich. 1986).
The American Law Institute's new Restatement of the Law, Liability Insurance (adopted in May 2018) posits a broader "duty to make reasonable settlement decisions," which it describes as "more closely tailored to the conflict of interest that underlies the legal duty" and the "most common" standard.
What difference would it make if courts in Texas and other jurisdictions adopted the new Restatement's approach to settlement obligations, in whole or in part? The greatest difference would likely be in cases involving catastrophic damages and multiple levels of insurance covering the defendant.
Multiple Insureds or Multiple Claimants
As I explained in my February 2017 Expert Commentary article, jurisdictions apply conflicting rules where there are multiple claimants or multiple insureds and damages exceeding the limits of the primary policy. Under Texas law, insurers may generally settle with one of many claimants or settle claims against one of many insureds. See, e.g., Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994). The Fifth Circuit, interpreting Texas law, held that when an insurer received a Stowers demand to settle claims against an insured law firm but not the insured individual lawyer, it was obligated to accept the offer. OneBeacon Ins. Co. v. T. Wade Welch & Assoc., 841 F.3d 669 (5th Cir. 2016). Other courts consider settling to release one insured, while leaving other insureds "bereft of coverage, an act of bad faith." Lehto v. Allstate Ins. Co., 36 Cal. Rptr. 814 (Cal. App. 1995).
In short, actions that insurers might be obligated to take under Texas law could constitute bad faith in other states. The Restatement does not address the multiple-insured scenario, other than the general proscription in § 24 to "make reasonable settlement decisions." In the multiple-claimant scenario, the Restatement says "the insurer has a duty to the insured to make a good faith effort to settle the actions in a manner that minimizes the insured's overall exposure." Such a duty would counsel against the "first come, first served" approach.
Multiple Insurers
Adopting the Restatement's approach to settlement could make a big difference where a defendant facing catastrophic damages is insured by multiple policies. Sending an effective Stowers demand in that situation raises particularly complicated issues.
Most businesses with substantial liability risks maintain a tower of insurance coverage, which begins with a primary policy with policy limits of $1 million (sometimes $2 million). Excess layers are stacked on top, often in increments of $5 million–$10 million. Where an incident causes catastrophic injuries that far exceed the primary limits, lawsuits cannot reasonably be expected to settle within those limits. A reasonable "global" demand, offering to settle a lawsuit for an amount that is within the total limits of multiple policies but not within the limit of the primary policy, might not impose an effective settlement duty on any of the insurers. See AFTCO Enter., Inc. v. Acceptance Indem. Ins. Co., 321 S.W.3d 65 (Tex. App.—Houston (1st Dist. 2010, pet. denied).
Two general rules are in play. First, a "demand above [primary] policy limits, even if reasonable, does not trigger the Stowers duty to settle." Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765 (Tex. 2007). Second, although an "excess insurer owes its insured a duty to accept reasonable settlements, … that duty is not typically invoked until the primary insurer has tendered its policy limits." Keck, Mahin & Cate v. National Union Fire Ins. Co., 20 S.W.3d 692 (Tex. 2000) ("KMC").
In this scenario, each insurer must consider the Stowers demand from its own perspective and in light of its own duties to the insured. Where the damages greatly exceed primary limits, the primary insurer may never receive an offer to settle within its limits. However, in such circumstances, "an ordinary prudent insurer … considering the likelihood and degree of the insured's potential exposure to an excess judgment," Seger, 503 S.W.3d at 395-96, would probably accept an offer to tender its limits to a settlement, thereby serving its insured's interest as well as its own. Indeed, it may be difficult to articulate a good-faith reason to refuse such an opportunity. Moreover, the Stowers rules grow out of insurers' common-law duty to exercise ordinary care in the settlement of claims to protect their insureds against judgments in excess of policy limits, and the doctrine is often justified, in part, because it "encourages prompt and reasonable settlements." Phillips v. Bramlett, 288 S.W.2d 876, 881 (Tex. 2009).
These public policies take on added importance when an insured company faced with a potential catastrophic judgment (that could also impact its reputation in the market) urges its insurers to cooperate in accomplishing a reasonable settlement.
Some cases indicate an excess insurer's duty to accept a reasonable settlement can be triggered if the primary insurer tenders its limits after a demand above those limits is made and before it is withdrawn. In KMC, the primary insurer did not tender its limit "until the trial began, well after the [combined] settlement demand had been withdrawn." 20 S.W.3d at 701. In other words, the primary insurer may tender its limits toward a global settlement where "an ordinarily prudent insurer" would do so in the circumstances, thereby invoking the excess insurer's "duty to accept reasonable settlements." Id.
And, applying the Fifth Circuit's logic in T. Wade Welch, if the primary may take such an action, in some circumstances it must do so or risk the consequences. Where rigid adherence to the "demand within policy limits" requirement arguably undermines the essential purpose of the rules, could Texas courts adopt the T. Wade Welch analysis to find the primary insurer has a duty to accept an offer to tender its limits as part of a reasonable offer involving excess levels?
The new Restatement of Liability Insurance would support such a result by positing a "duty to contribute" in these circumstances: "An insurer's duty to make reasonable settlement decisions includes the duty to make its policy limits available to the insured for the settlement of a covered legal action that exceeds those policy limits if a reasonable insurer would do so in the circumstances." Restatement § 24(3), cmt. h.
Although the Restatement differs from Texas law by substituting a broader "duty to make reasonable settlement decisions" for the "duty to accept reasonable settlement offers," the Texas Supreme Court could adopt the principle underlying section 24(3) without abandoning its current position requiring a settlement demand. That is, by slightly modifying the Restatement's language, it could hold that "an insurer presented with an offer to contribute its policy limits toward a settlement exceeding those limits would make its limits available to the insured if a reasonable insurer would do so in the circumstances." Such a holding would shift the focus to the excess insurer, consistent with the court's suggestion in KMC that an excess insurer's "duty to accept reasonable settlements" may be triggered when "the primary insurer has tendered its policy limits." 20 S.W.3d at 70.
In any event, once the primary insurer tenders its limit toward a settlement, the first excess insurer must assess the Stowers elements in connection with the settlement demand affecting its own coverage. In other words, it "drops down" into the role previously filled by the primary insurer. See KMC, 20 S.W.3d at 701. It should accept the demand if it is within its policy limits and its terms "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" above its own limits. Seger, 503 S.W.3d at 395-96.
And, even if the demand exceeds the insurer's limits so that it cannot "accept" the demand without the participation of another insurer, the insurer should assess whether a "reasonably prudent insurer" would tender its limit toward a settlement in the interests of its insured under the standards discussed herein applicable to the primary insurer.
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