Texas Supreme Court Declines Opportunity to Review Appellate Decision Clarifying Insurer’s Settlement Obligations In Multi-Plaintiff/Multi-Insured Context

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Last year in Patterson, et al. v. Home State County Mut. Ins. Co., 2014 Tex. App. LEXIS 4460, 2014 WL 1676931 (Tex.App., Apr. 24, 2014), the Texas First Court of Appeals (Houston) held that an insurer was not obligated to accept a settlement demand unless that offer encompassed all claimants and released all insureds from liability.  On September 11th, the state’s highest court surprised many by denying the policyholders’ Petition for Writ of Error, and it thereby left the appellate panel’s ruling in place.

The Underlying Case

Diane Patterson died in a trucking accident when a truck driven by Charles Hitchens (Driver) rear-ended her car while stopped.  Allegedly, Driver tested positive for cocaine metabolites.  Patterson’s family, including her estate, husband, and children, sued Driver, his employer, Texas Stretch, and the owner of the truck, Brewer Leasing (Owner).  Home State County Mutual Insurance Company (Insurer) provided insurance coverage to Owner.  Patterson alleged that Driver was a permissive user of the truck and was therefore an insured under Owner’s insurance policy with Insurer.  Insurer provided a defense to Owner and shared defense responsibility for Driver with another carrier.

During the course of the underlying case, several settlement offers were made.  First, Patterson’s children offered to settle their claims against Owner in exchange for the payment of Insurer’s policy limits.  This offer explicitly excluded any claims asserted by Patterson’s widower and her estate.  Insurer rejected the offer.  Patterson’s widower then made a policy limits demand which excluded any claims asserted by Patterson’s children against Owner.  Insurer also rejected this demand.  According to depositions taken in the subsequent action, Owner instructed defense counsel that it did not wish to settle unless the settlement would cover all claims and all parties.

After rejecting the second settlement offer, Insurer filed a motion to interplead its policy limits into the court registry, from where they could be distributed as the court determined appropriate.  All claimants then offered to settle for Insurer’s policy limits; however, this demand excluded settlement for any claims against Driver.  Insurer rejected this offer as well.  The trial court allowed interpleader and distributed the interpled proceeds to the various claimants.  Insurer informed Owner and Driver that its defense duties were exhausted.

On the day of trial, Owner reached a settlement with the claimants that included an assignment of rights and a covenant to not execute any judgment obtained against Owner.  Trial commenced, with Owner not appearing.  The Pattersons obtained a judgment against Owner in excess of $8,000,000.

The Stowers Lawsuit

The Pattersons sued Insurer, contending that Insurer failed to accept a reasonable settlement demand.  Under Texas law an insurer is responsible for any excess judgment rendered against its insured when the insurer fails to accept a reasonable, unconditional settlement demand which is within policy limits.  This is called the Stowers doctrine after the case in which it was originally articulated, G.A. Stowers Furniture Co. v. Amer. Indem. Co., 15 S.W.2d 544 (Tex. 1929).  The Pattersons contended that Insurer breached this duty when it failed to accept any of the three settlement offers made during the underlying lawsuit.  Insurer filed a motion for summary judgment, which the trial court granted.  The Pattersons then appealed.

The First Court of Appeals affirmed the summary judgment.  The Court noted that the first two settlement offers would not trigger any settlement obligation by Insurer as those offers left Owner open to further litigation and liability.  Specifically, the first offer excluded a release from Patterson’s widower and the second offer excluded a release from Patterson’s children.  As such, in the event Insurer accepted one of the settlements, Owner would still face claims from other claimants.  Because neither offer would extinguish Owner’s liability, the Court held that neither offer would trigger Insurer’s duty to accept the settlement.

The Court then examined the third settlement offer.  The Court noted that this settlement offer would cover the claims of all parties against Owner, but would not effect a release of liability as to Driver, who also was insured under the same policy with Owner.  Accordingly, the third settlement offer would not effect a complete release of all insureds and therefore would not trigger Insurer’s duty to accept the settlement.  The Court also noted that Owner had informed counsel that Owner did not wish to settle unless the settlement covered all claims and all parties.

Curious Omissions?

The Court of Appeals opinion is notable for the cases which it does not discuss or distinguish.  Texas courts have struggled with the application of an insurer’s duty to settle when multiple claimants exist and when multiple insureds are present.  The First Court of Appeals neither mentioned nor distinguished various cases briefed on this topic, including Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex.1994) and Pride Transp. v. Continental Casualty, 511 Fed.Appx. 347 (5th Cir. 2013).

The Subsequent Proceedings

The Pattersons filed a Petition for Writ of Error with the Texas Supreme Court, arguing that the Court of Appeals misapplied Texas law regarding the circumstances under which an insurer’s duty to settle would be triggered.  This petition was supported by amicus briefs filed by several noted commentators.  The Texas Supreme Court then asked Insurer for a response, which ordinarily leads to a petition being granted such that full issue briefing can occur.  However, two weeks ago after a response was filed, the Texas Supreme Court denied the petition.  Under Texas law, a denial has no precedential value, leaving the Court of Appeals’ rationale in place.

Implications

Application of the Stowers duty in the multi-party, multi-insured context remains difficult.  Although not stated as a basis for the holding, the Insurer’s decision to reject any settlement offer which failed to account for all parties appears to have weighed on the Court of Appeals. Additionally, the implications of Insurer’s efforts to implead money into the court, and the impact of interpleader on the Insurer’s duties was not addressed by the Court of Appeals.  As such, Patterson leaves unanswered a number of questions regarding an insurer’s duty to settle and provides implicit support for an insurer’s decision-making when the insured does not support settlement.  Insurers faced with a Stowers demand in the multi-party, multi-insured context should take great care in deciding how to respond to such demands.
 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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