Can an insurer seek to escape liability for denial of a settlement demand under the Stowers doctrine by filing a declaratory judgment action in federal court after the jury has already rendered a verdict in excess of the settlement demand and insurance policy limits? In July of 2024, we reported that at least one court thought that the insurer could. https://www.gstexlaw.com/policy-limits-demand-not-stowers-demand/ However, the United States Court of Appeals for the Fifth Circuit recently reversed that ruling.

As a refresher, in Golden Bear Insurance Company v. 34^th S&S, L.L.C. d/b/a Concrete Cowboy, et. al. a fight between Concrete Cowboy’s bouncer and two patrons on New Years Eve in 2018  resulted in personal injuries and a lawsuit. During the course of the lawsuit, plaintiffs sent a settlement demand to Concrete Cowboy, who was being defended under a commercial general liability insurance policy underwritten by Golden Bear. In the demand, Plaintiffs sought payment of the policy limits and offered a full release of all claims. Golden Bear chose not to settle the claim, and the jury awarded $3.2 million at trial. After trial, Golden Bear tendered its policy limits, which left Concrete Cowboy personally liable for approximately $2.2 million. Concrete Cowboy argued that Golden Bear was responsible for the judgment in excess of policy limits under the Stowers doctrine.

Following a post-trial mediation, Golden Bear filed a complaint in federal court under the federal Declaratory Judgment Act seeking a declaration that it had no obligation to pay the remainder of the judgment. The other parties then filed a claim in state court against Golden Bear based on its breach of its Stowers duty. The federal defendants also argued that the federal claims should be dismissed as Golden Bear’s claim in federal court was invalid. After Golden Bear filed a motion for summary judgment, the federal court denied the federal defendants’ motion to dismiss and granted Golden Bear’s motion for summary judgment. On appeal, the United States Court of Appeals for the Fifth Circuit reversed the trial court’s ruling and determined the federal case should be dismissed. The Court reasoned as follows.

The Declaratory Judgment Act is a procedural device for parties to adjudicate their legal rights before the dispute ripens into misconduct. Under Stowers, Golden Bear’s alleged misconduct—negligently refusing to settle the claim—is already complete; the original jury returned a verdict exceeding the policy limit. Golden Bear cannot invoke the Act to retroactively argue that it never had a duty to begin with because the demand letter was too vague.

Allowing the complaint to proceed in federal court under the Act, the Court further explained, would “enable a prospective negligence action defendant to obtain a declaration of non-liability,”  which “is not one of the purposes of the declaratory judgment act”.  After this ruling, it is unclear how insurers will proceed when deciding whether to settle and whether the Stowers doctrine applies. Will insurers file declaratory actions prior to making settlement decisions or will the duty of settlement be decided in state court after final judgement is issued if an insured chooses to file suit for breach of a Stowers duty? The state court case in this matter may provide additional guidance once a decision is made.

The attorneys in our Austin and Dallas office routinely make and receive settlement demands and are asked to evaluate potential exposure relative to remaining policy limits. If you should have any questions, please contact us at info@gstexlaw.com.

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