The Stowers Doctrine: What is it, and How Does it Protect Me?

You have been involved in a motor vehicle accident, and the other driver has filed a lawsuit against you. Your insurer has informed you that it has retained the law firm of Ramey, Chandler, Quinn & Zito, P.C. to defend you in said lawsuit. Your primary concern is: how much is this going to cost me? The short answer: except in rare instances, most likely nothing! Your insurer will cover your attorneys’ fees and any settlement or judgment amount that falls within your current policy limits. However, what happens in the event that a judgment is awarded against you in excess of your current policy limits? In light of the Stowers doctrine, our firms works diligently alongside your insurer to make sure that never happens.

Under most modern insurance policies, an insurer holds sole control over the defense and settlement of a claim arising under the insurance policy. Thus, in your present situation, your insurance carrier owes you a duty to defend you against claims being brought by the other driver involved in your motor vehicle accident that fall within the scope of coverage under your policy of insurance. In terms of litigation, this duty includes selecting and hiring a qualified law firm to represent you in your lawsuit. In terms of settlement, and pursuant to the Stowers doctrine, this duty includes exercising care in assessing whether to accept or reject a settlement demand.

 

What is the Stowers Doctrine?

The Stowers doctrine originates from a 1929 Texas Supreme Court case, G.A. Stowers Furniture Company vs. American Indemnity Company.  In this case, the furniture company, Stowers, held automobile liability coverage from American Indemnity in the amount of $5,000.00, which covered accidents involving the furniture company’s employees and any injuries stemming therefrom. An accident occurred in which one of the furniture company’s vehicles was struck by another vehicle with a passenger. The passenger was injured in the accident and sued the furniture company for $20,000.00. The injured party demanded $4,000.00 to settle her claims. American Indemnity rejected the offer and decided to take the case to trial with the hope that a jury would award the injured passenger less than she demanded. However, juries can be unpredictable. The trial resulted in an outcome contrary to what American Indemnity had hoped, and the jury awarded the injured passenger more than twice the amount of the furniture company’s policy limits. The furniture company paid the amount of the judgment and then sued American Indemnity for reimbursement.

The Texas Supreme Court ultimately determined that American Indemnity had a duty to protect its insured, the furniture company, up to the furniture company’s coverage limits under its insurance policy with American Indemnity, and that American Indemnity’s failure to pay a reasonable settlement that was within the policy limits constituted a breach of its duty to protect its insured. As a result, it was later determined American Indemnity was responsible for the full amount of the judgment awarded against the furniture company, including the portion of the judgment in excess of the furniture company’s policy limits. The Court provided reasons as to why the Stowers duty exists:

The provisions of the policy giving the indemnity company absolute and complete control of the litigation, as a matter of law, carried with it a corresponding duty and obligation, on the part of the indemnity company, to exercise that degree of care that a person of ordinary care and prudence would exercise under the same or similar circumstances, and a failure to exercise such care and prudence would be negligence on the part of the indemnity company.

 

How Does the Stowers Doctrine Work in Practice?  

Now, the Stowers doctrine only applies, triggering your insurance carrier’s duty to settle thereunder, where a demand to settle a claim covered by the insurance policy for an amount within policy limits is made. This is because your insurer has no duty to settle a claim not covered by the policy. In 1994, the Texas Supreme Court clarified the exact requirements that trigger an insurer’s duty under the Stowers doctrine as follows:

1. The claim brought against the insured falls within the scope of coverage under the policy of insurance. In the context of your present claim, your policy of insurance has to include coverage for damages stemming from a motor vehicle accident.

2. The demand cannot exceed policy limits. As stated above, your insurer has no duty to settle any claims against you for more than your applicable policy limits.

3. The insured’s liability must be reasonably clear. If there is any dispute as to whether the insured is at fault for causing the accident, the Stowers demand may be considered insufficient (but that’s okay, because we would not want your insurer to pay policy limits if you were not at fault for causing the accident, anyways!).

4. The offer must be reasonable. In other words, the injured party’s demand must be in line with the loss that occurred and the injuries sustained as a result thereof.

5. The demand must be unconditional and offer a full release. A full release would shield you from any further liability stemming from the motor vehicle accident.

 

How this typically works is that the injured party or the injured party’s lawyer will send what we call a “Stowers demand” that must satisfy each of the above-referenced requirements. At that point, your insurer’s Stowers duty is “triggered.” Our firm will then work diligently in unity with your insurer to assess the injured party’s Stowers demand to assess whether the demand should be accepted or not. In some instances, the injured party’s Stowers demand may clearly not satisfy the requirements listed above, and your insurer may decide to reject it outright or respond with a more reasonable counteroffer. Such decisions are not typically made lightly, and the insurer typically makes sure to exercise due care with your best interests in mind. In other instances, where the injured party undoubtedly satisfies the requirements above, your insurer would likely decide to accept the settlement demand. Thus, under the right circumstances, the Stowers doctrine encourages the prompt settlement of claims being brought against you without you having to pay any money out of your own pockets and protects against the risk of a jury verdict and resulting judgment in excess of your policy limits. If the insurance carrier decides to reject the Stowers demand and that decision is later determined to have been unreasonable, then the insurer, rather than you, could be responsible to pay any part of the judgment in excess of your policy limits. The Stowers doctrine ultimately highlights the importance of the insurer, the insured (you), and counsel working together with your best interests in mind.