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What Is Extracontractual Liability for an Insurance Company, Including a Stowers Claim?

Claims against an insurance company for failing to fulfill the terms of an insurance policy can be complex and difficult. In many cases, the issue can be the definition of certain words in the contract. Sometimes, there can be claims against an insurance company that seek damages above, beyond, or outside the policy limits. These claims are called extracontractual liability for an insurance company.

The types of extracontractual liability faced by an insurance company continues to evolve. In first-party insurance claims, the insurance company is always subject to acting in bad faith to deny or underpay a claim. They also can be held to account at times though for recommending or promoting the use of a preferred vendor who does shoddy repair work. In the third-party insurance claims context, where the insurance company has a duty to defend and indemnify its policyholder against certain claims up to a limit, extracontractual liability can exist for failing to resolve the claim appropriately – which is known in Texas as the Stowers doctrine.

What is the Stowers Doctrine in Texas?

The doctrine stems from a 1929 case called Stowers Furniture Company v. American Indemnity Company, 15 S.W.2d 44 (Tex. 1929), in which a reasonable settlement offer made within the confines of a policy limit was rejected by the insurance company despite the fact that liability was fairly clear. When the case went to trial, there was then a verdict issued in excess of the policy limits and settlement offer. That left the insured responsible for the excess judgment. The insured then brought suit against its own insurance company for failing to act in good faith and reasonably accept a settlement offer that would not have left the policyholder holding the bag for an excess amount.

The Stowers doctrine holds that, under that type of scenario—with many caveats added since then—an insurance company can be held responsible for the entire jury award even though it goes well beyond the insurance limits.

Stowers claims exist for all kinds of “third-party” claims brought against a person who has insurance coverage, including errors and omission (or malpractice) claims, general liability on a commercial policy, and directors and officers issues. For example, there may be a claim against an engineer or construction company that has an insurance policy with a $1 million limit, under circumstances where it is likely the professional is liable for the customer’s damages in an amount that exceeds the $1,000,000 limit. The customer’s attorney communicates an offer to settle at policy limits though (i.e., $1 million or whatever remains if defense costs reduce what the insurance company must pay) and essentially forgo the possibility of extra damages for a quicker resolution and payment. The insurance company has a right in its contract to approve any settlement and rejects the offer because it wants to try and force a lower resolution to save itself money. The other side then takes it to trial, and a jury comes back with a verdict of damages of $1.5 million. What happens then?

Under the policy, the insurance company would say it is responsible to pay $1 million of the judgment and the policyholder is solely responsible for the extra $500,000 in damages. If, however, the insurance company did not have a reasonable basis on which to reject the settlement offer when it was made earlier, then, under the Stowers doctrine the insurance company can be held responsible not only for payment for its insurance policy limits but also the entire extracontractual amount of $500,000. Why? Because the insurance company put its own interests ahead of its policyholder in rejecting a settlement offer that would have left the insured not responsible to pay. That is a form of bad faith that is prohibited by Texas law.

What is a Stowers Demand?

Plaintiff’s attorneys in a third-party claim can leverage the Stowers doctrine to your benefit. A Stowers demand is made when the plaintiff sends a carefully-crafted letter that offers to settle at or within policy limits and, thus, puts the insurance company on notice that the Stowers doctrine applies to its response.

A Stowers demand letter typically must lay out all the controlling facts to give the insurance company reason to know that its policyholder is probably going to be held liable for the underlying claim, and that the amount of damages that will result can exceed the policy limits. It then offers to settle at or below the policy limits and fully release the defendant from all future liability as a result.

There are many important features of a Stowers demand letter that can make it one of the most critical aspects of a case, because, if it applies, that letter will be the evidence in a follow-on Stowers suit seeking to hold an insurance company liable for extracontractual damages. Insurance companies and their regular legal counsel thus employ specialists in the doctrine whose entire job is to scrutinize such letters and respond in a way to minimize the insurance company’s extracontractual liability. It is important to have a skilled attorney investigate your claims early and prepare a Stowers letter that gives you the best chances of achieving a favorable settlement or holding the insurance company liable for an excess judgment on the back end.

Wright Commercial Litigation Takes on Tough and Complex Insurance Claims Disputes

If you have a claim against a professional, large company, or other enterprises for a matter likely covered by their insurance, or you are one of those types of persons being sued yourself and you need independent legal advice beyond your assigned insurance counsel on how to deal with your own insurance company who may not be acting in your best interests, then you need a knowledgeable and skilled commercial insurance claims attorney on your side. You can count on the insurance company to have a small army of adjusters, experts, and lawyers fighting against you, and so you deserve someone who can fight back and protect your own interests.

The Dallas-Fort Worth boutique legal practice of Wright Commercial Litigation, which is based in Collin County but helps clients throughout Texas, assists small businesses, larger enterprises, property owners, and others with their insurance claims and other complex legal disputes. Contact the firm here to request an initial consultation to see if your case is one the firm may be able to assist with as well.