What happens when an insurer does not act reasonably in deciding whether to settle a claim within policy coverage and policy limits?  A federal jury in Houston recently delivered a verdict finding that a primary liability insurer breached its so-called Stowers duty, absolving the excess insurer of any responsibility for an $11.2 million verdict in the underlying liability action.

In Westport Insurance Corp. v. Pennsylvania National Mutual Insurance Co., Westport, the primary professional liability insurer for an insurance agency, Insurance Alliance, sought to have the agency’s umbrella insurer, Penn National, reimburse Westport amounts it paid over and above the remaining primary policy limits of $3.3 million.  Penn National argued that at least 4 settlement offers were presented to Westport prior to trial, each within Westport’s remaining policy limits, and that Westport acted unreasonably and imprudently in declining to accept them.  The Westport primary policy had a $5 million per claim/$5 million aggregate limit that had been substantially eroded by other claims, though the amount of erosion was contested and subject to revision throughout the lengthy proceeding.  The Penn National umbrella policy was follow-form and had a $15 million per claim and $15 million aggregate limit.

In the underlying action—the lawsuit that spawned the Stowers dispute between Westport and Penn National—Lake Texoma Highport, a boat port on Lake Texoma, requested that Insurance Alliance  procure first-party property insurance policy with no sub-limits, no co-insurance requirements, and replacement cost coverage. Highport suffered flood damage and made a claim against its insurance policy.  At that time, it first learned that the policy Insurance Alliance procured had sub-limits and a co-insurance requirement.  Highport sued Insurance Alliance, which tendered defense and indemnity to Westport, its professional liability (errors/omissions) insurer.  Westport defended under reservation of rights.  At trial, the jury awarded Highport $8.7 million in damages, $2.7 million in attorney’s fees, and $1.8 million in pre-judgment interest.  Insurance Alliance filed an appeal which was successful.

Under a fairly complex set of facts, Westport ultimately paid the judgment subject to certain offsets for settlements from other parties that Highport had sued.  Throughout the trial and appellate process, Westport attempted to have Penn National contribute amounts above the remaining policy limits of the primary policy. Penn National refused, resulting in Westport filing suit against Penn National.  Penn National filed a counterclaim against Westport, alleging Westport failed to accept 4 reasonable pre-trial offers from Highpoint, all of which were within policy limits and coverage. As such, Penn National (stepping into the shoes of Insurance Alliance) argued that Westport failed to act as a reasonably prudent insurer would have acted considering the likelihood and degree of Insurance Alliance’s potential exposure to an excess judgment.

The insurance dispute between Westport and Penn National was submitted to a Houston federal jury in December 2022.  The jury found that Westport failed to act as an ordinarily prudent insurer under the same or similar circumstances by not accepting any or all of Highpoint’s 4 pre-trial settlement demands.

As the Westport case illustrates, the Stowers doctrine is a powerful tool for policyholders and sometimes umbrella insurers to wield when a third-party claimant makes a policy limit settlement demand.  The Stowersduty, which an insurer owes to a policyholder, is triggered when (1) a claim is made against the policyholder within the scope of coverage, (2) a demand to settle is made that is within policy limits, and (3) the terms of the demand are such that a an ordinarily prudent insurer would accept the settlement demand, considering the likelihood and degree of the policyholder’s potential exposure to an excess judgment.

The attorneys in our Austin and Dallas offices have significant experience in preparing, handling and assisting in responding to settlement demands and determining whether those demands are properly characterized as Stowers demands.  Please contact us with any questions you may have at info@gstexlaw.com.

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