The Fifth Circuit’s February 6, 2013 decision in Pride Transportation v. Continental Casualty Co. clarifiesthe application of the Stowers doctrine to multiple defendant/multiple insured scenarios. The court, siting in diversity, confirmed that Texas recognizes no cause of action against an insurer for wrongfully accepting an offer to settle a plaintiff’s claims against some but not all defendants within policy limits.
In Pride, the defendant trucking company was sued along with its driver as a result of a collision involving evident liability and substantial injuries and damages. The plaintiff offered to settle all his claims against the driver only in exchange for Pride’s policy limits, expressly leaving pending the claims against Pride, whose policies of insurance covered both Pride and its driver. The plaintiff refused to agree to a settlement including both the driver and Pride. The insurance carriers accepted and paid the policy limits demand to settle for the driver only, perhaps fearing Stowers liability if they failed to do so. Because Pride’s policy limits had been exhausted by this partial settlement, this left Pride in the underlying auto collision case with no remaining insurance protection, and under the policies, the exhaustion of the policy limits also allowed the carriers to withdraw from any further defense obligations. Before the underlying collision case was tried, separate litigation ensued between Pride and its insurers.
The district court in that case granted the insurers summary judgment and the Fifth Circuit affirmed. The court reasoned that the same Stowers rules that apply in the partial settlement of multiple plaintiff cases should apply in the partial settlement of multiple defendant cases. The multiple plaintiff scenario was long since determined by the Texas Supreme Court’s 1994 decision in Farmers Insurance Co. v. Soriano. In that case, the court concluded that “when faced with a settlement demand arising out of multiple claims and inadequate proceeds, an insurer may enter into a reasonable settlement with one of the several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims.” Likewise, reiterating its holding four years after Soriano in Travelers Indemnity Co. v. Citgo Petroleum Corp., the Fifth Circuit reminded the parties in Pride that “an insurer is not subject to liability for proceeding, on behalf of a sued insured, with a reasonable settlement . . . once a settlement demand is made, even if the settlement eliminates . . . coverage for a co-insured as to whom no Stowers demand has been made.”
Pride tried to distinguish the holding in Travelers by arguing that in that case the reasonableness of the partial settlement had been undisputed, whereas Pride was disputing the reasonableness of this settlement for the driver, and this raised a fact issue requiring jury determination. However, Pride’s attack on the settlement’s reasonableness was quite narrow. There seems to have been no dispute that the plaintiff’s claims against the driver almost certainly exceeded the policy limits. In fact, the court found that because of the likelihood and degree of potential exposure to excess judgment for the driver, the partial settlement was reasonable as a matter of law and did not result in a breach of the insurance contracts. Pride’s claim of unreasonableness was limited to the fact that the insurers paid the underlying plaintiff even though he refused to protect the driver from Pride’s cross action for indemnity arising whenever an agent’s negligence exposes its principle to liability in respondeat superior. Therefore, the driver’s settlement wasn’t really final — she could still end up having to pay by way of indemnity whatever the plaintiff recovered from Pride.
The court made short shrift of this argument. Under Soriano, “To be unreasonable, [Pride] must show that a reasonably prudent insurer would not have settled the . . . claim when considering solely the merits of the . . . claim and the potential liability of its insured on the claim.” The court also re-affirmed another of its holdings, this one from St. Paul Fire & Marine Ins. Co. v. Convalescent Services, Inc., that an insurer has no duty “to consider claims that are excluded from coverage when making its determination of whether a settlement is reasonable.” The court then went on to note that Pride’s insurance policies had the usual exclusions for claims between co-insureds under the same policies, including Pride’s indemnity claim against its driver. As such, the insurers had no duty to take into account the uncovered and unresolved indemnity liability of the driver in evaluating the reasonableness of the plaintiff’s settlement demand, which, under the undisputed liability facts of the collision case, then became reasonable as a matter of law.
Insurance carriers will welcome Pride as reaffirming the rule that in Texas they cannot be sued for wrongfully making a settlement, only for refusing one. Under Soriano and Pride, the only exception is when the settlement made is not reasonable, judged solely by its own merits and without reference to any other claimant or defendant, and without consideration of any claims not covered under the relevant policy or policies. Of course, it is also the case that a carrier can be liable for failing to accept a Stowers demand and will not be immunized for doing so simply by later paying another claim arising from the same occurrence. There the case would still be one of classic Stowers liability for failure to pay, not for making a payment.
Plaintiffs will also take comfort from Pride. The matter is straightforward: make a formally correct Stowers demand within policy limits. The carrier will then face possible Stowers liability if it refuses, regardless of whether there are other plaintiffs with claims from the same occurrence and regardless of whether there are other defendants covered under the same policy. Perhaps most helpful to plaintiffs is the court’s reiteration of the rule that in determining the reasonableness of a Stowers demand, the insurance company must consider “solely the merits of the . . . claim and the potential liability of its insured on the claim,” and not possible coverage issues or other quandaries. This eliminates a plethora of excuses that might otherwise be raised to defeat the effectiveness under Stowers of such a demand.