What impact does a claim for contractual indemnity have on a Stowers demand? Does paying for a portion of a judgment give standing to an insurer in a subrogation claim for the entirety of the judgment? On appeal of a case we previously reported on, the Fifth Circuit answered these questions in a somewhat surprising fashion.

In 2008, Lake Texoma Highport LLC sued Insurance Alliance for failing to procure the requested blanket coverage to insure its marina, which was damaged by heavy rainfall. Insurance Alliance was insured with a $5 million per claim professional liability policy from Westport and a $15 million per claim umbrella liability policy from Penn National. Insurance Alliance joined as parties to the suit two insurance intermediaries that it had used to purchase the policy, CRC and Bowood. CRC demanded Insurance Alliance indemnify it pursuant to an indemnity and hold harmless clause in their brokerage contract. After participating in a few rounds of settlement discussions, CRC initiated arbitration against Insurance Alliance to enforce the contractual indemnity obligation.

During pendency of the Highport suit, Westport rejected five settlement demands within its policy limits.  At trial, a jury found Insurance Alliance liable to Highport for failing to procure the requested blanket coverage and awarded damages and fees to Highport of $13.7 million.  Westport agreed to pay its $5 million policy limits, but asserted that Penn National should pay the remainder. Penn National refused. Westport posted a supersedeas bond for nearly the entire amount of the judgment, which the parties later agreed could be released to Highport. Penn National ultimately paid the remaining $379,885 of the judgment to Highport.

Westport then filed a subrogation lawsuit against Penn National seeking to recover the amounts in excess of $5 million that is paid to fulfill the judgment. Penn National counterclaimed, arguing that Westport breached its Stowers duty by failing to accept the five settlement demands from Highport. The district court sent the Stowers issue to the jury.  The jury found Westport failed to act as a reasonably prudent insurer when not accepting four of Highport’s five settlement offers.

On appeal, Westport argued that the Stowers demands were invalid because they did not dispose of all of Insurance Alliances’ liability, namely the exposure to contractual indemnity owed to CRC. In addition, Westport argued that Penn National lacked standing to bring a Stowers claim because Penn National only paid $379,885 of the judgment, not the entire amount of the judgment in excess of the $5 million primary insurance policy limit.

Were the Stowers demands valid? The Stowers duty, 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.

Westport argued that none of Highport’s five settlement offers satisfied the Stowers prerequisites because none of them provided for settlement and release of CRC’s indemnity claim. The Court noted that CRC did not make a formal demand for indemnity until after three of the five demands were made and denied.  In that regard, the Court held that “a full release under Stowers does not require ‘the release of potential, unasserted, and distinct claims made by third parties.’ ” CRC’s claims for indemnity, made after three of the demands had been made and denied, fell into the ‘potential, unasserted’ category of claims.

However, the Court’s analysis did not end there. The Court drew a distinction between the common-law doctrine of equitable indemnity among co-tortfeasors and the contractual indemnity CRC sought to enforce. Whereas in equitable indemnity the special nature of the case’s circumstances demands that one party equitably indemnify the other, in contractual indemnity the allocation of risk is negotiated between the parties. As such, CRC and Insurance Alliances’ contractual indemnity dispute was separate from a determination and allocation of fault among co-defendants in the Highport suit, and “irrelevant for purposes of Westport satisfying its Stowers duty.”

Did Penn National have standing even though it only paid $359,885, and not the full $7.7 million verdict in excess of the Westport policy limit? Westport argued that Penn National lacked standing for that very reason. At the outset of its analysis, the Court noted that, under Texas law, an excess insurer “may bring an equitable subrogation action against the primary carrier” to enforce the primary insurer’s Stowers duty. The Court then examined the protection Stowers offers policyholders, including protecting policyholders from paying any money out of their own pockets and from having judgments in excess of their policy limits. As these protections would be stymied if Westport’s argument held sway, the Court held that Penn National’s payment of only $359,885, significantly less than the judgment amount in excess of Westport’s policy limit, gave Penn National standing to assert the Stowers claim.

Stowers demands, particularly when excess insurance is available, presents unique challenges not only to claimants, but to insurers. The attorneys in our Austin and Dallas offices have significant experience preparing, evaluating and responding to Stowers demands. Please contact us at info@gstexlaw.com with any questions you may have.

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