At a Glance

• Third-party plaintiffs may make time-limited settlement demands to insurers to settle claims against their insureds within a specified period. (States have differing names and laws for these demands)
• Insurers should carefully evaluate time-limited settlement demand law in the relevant jurisdiction to respond to a demand appropriately and to avoid liability for an excess judgment against its insured.

Insurers should carefully review and respond to time-limited settlement demands because they risk liability for excess judgments against their insureds if they do not. Third-party plaintiffs may make time-limited settlement demands to insurers to settle claims against their insureds within a specified period. States have different names for and laws governing time-limited settlement demands. In Texas, time-limited settlement demands are called “Stowers Demands.”

Texas first developed its cost-shifting framework associated with time-limited settlement demands in G.A. Stowers Furniture Co. v. American Indemnity Co. (Tex. Ct. App. 1929). Stowers requires insurers to evaluate time-limited settlement demands that a third-party plaintiff makes with the “degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business.” Id. at 547. If the insurer fails to use this degree of care and diligence, the insurer risks being liable for a judgment the third-party plaintiff obtains against its insured, even if the judgment is in excess of the insured’s policy limits.

However, this excess judgment liability only attaches to a third party’s time-limited settlement demand when the demand satisfies the following requirements: “(1) the claim against the insured is within the scope of coverage, (2) the demand is within the policy limits, and (3) the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.” Am. Physicians Ins. Exch. v. Garcia, 867 S.W.2d 842, 849 (Tex. 1994). Additionally, the demand must completely release the insured from any liability for the third-party’s claim. See Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489, 491 (Tex. 1998).

To avoid liability for excess judgments against its insured, an insurer should take care to craft a proper response to any Stowers Demand it receives. The insurer’s first steps often include documenting the Stowers Demand, notifying its insured of the demand and ensuring that it responds to the demand within the time limit the demand specifies. After taking these preliminary steps, the insurer must reasonably investigate the third party’s claim. If the insurer decides to reject the Stowers Demand, the insurer should have a well-documented, clearly explained, good-faith reason to reject the claim. If a court later finds that an insurer failed to take these steps when responding to a Stowers Demand, the insurer may face liability for any excess judgment imposed against its insured because the insurer failed to act as an “ordinarily prudent insurer” would while responding to the demand.

Although the Stowers doctrine is specific to Texas, it is not unique — most states have rules that operate similarly. Insurers should carefully evaluate time-limited settlement demand law in the relevant jurisdiction to respond to a demand appropriately and to avoid liability for an excess judgment against its insured.