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Texas Stowers Doctrine & The Stowers Demand

Texas Stowers Doctrine & The Stowers Demand

Stowers Demand

The case between Stowers Furniture Co. and American Indemnity Co. is a landmark case that led to the creation and implementation of the “Stowers Doctrine” in Texas. This doctrine effectively establishes an extracontractual duty on insurance companies to act in good faith when deciding whether to reject a pretrial settlement offer that is within policy limits.

Understanding the Stowers Doctrine

The insurance company’s “duty to defend” provides insurers total control over the actions of the defense. What this means is that the insurer (not the insured) has complete control whether to settle a liability claim under the policy terms or not.

Even if the injured party makes a settlement offer prior to trial for an amount that falls within the limitations of the policy, the insurer has no obligation to accept the offer and is still permitted to make the decision to go to trial with the claim. Under the Stowers Doctrine, in the event the insurer unreasonably rejects a pretrial settlement offer that falls within the limits of the policy and forces the claim to go to trial, and loses, they may be held liable for the entire judgment even if the jury recommended compensation which exceeds the limits of the policy.

Using an Example

Brian was involved in a car accident which was not his fault. He suffers serious injuries requiring surgery, and cannot immediately return to work. After treating, Brian is left with $30,000 in medical bills and has missed two months of work, totaling $10,000 in lost wages (not to mention pain and suffering). Brian’s attorney files a personal injury claim against the defendant’s insurance company and issues a Stowers demand for $35,000 (the defendant’s insurance policy limits).

Even though the defendant’s policy limits would cover this amount (and the settlement offer is more than reasonable), the insurance company knows that even if they lose in court, the most they would be liable for is $35,000 (his policy limits). As such, the insurance company chooses to deny the offer and takes the case to court, forcing the victim to spend unnecessary time and money on trial preparation. At trial, the jury ends up awarding Brian $100,000.

Prior to the existence of the Stowers Doctrine, the insurance company would have only been liable for $35,000. Now, the insurance company is responsible for paying the entire jury award of $100,000 due to their failure to act in good faith in regard to the pretrial settlement offer.

G.A. Stowers Furniture Co. v. American Indemnity Co.

On January 23, 1920 an employee of the Stowers Furniture Company was operating one of its trucks at approximately 7:00 p.m. in the city of Houston, when it collided with a wagon someone had left on the street near the curb. The contact between the wagon and truck seriously damaged the truck and rendered it inoperable. He left it unattended in the middle of an unlit street, where shortly afterwards, a Ford coupe struck the truck and seriously injured the occupant, who then sued Stowers Furniture Co. for $20,000.

At the time of both the injury and the filing of the lawsuit, Stowers Furniture was covered by a policy issued by the American Indemnity Company in the amount of $5,000 to protect it from any damages awarded for accidental injuries to another person or persons during the operation of one of the company’s motor vehicles. According to the terms of the policy, the insured should not volunteer to settle any claim for which the Indemnity Company might be liable without the written consent of the company. It further stated the Indemnity Company would defend the interest of the Stowers Furniture Company up to the policy limitations, even if it held no merit.

Prior to the case going to trial, the victim offered to accept a settlement of $4,000, but the defendant refused to pay more than $2,500 (even though policy limits were $5,000).

When the case went to trial, a judgment was rendered in favor of the injured party in the amount of $12,207 plus costs, and affirmed by the Court of Civil Appeals. The Supreme Court refused a writ of error. The total amount that Stowers Furniture Company paid (including interest) was $14,103.15. Afterward, American Indemnity paid Stowers Furniture $5,000 plus interest and requested a release from further liability, which Stowers refused to provide.

After they made the payment, Sowers Furniture demanded that American Indemnity reimburse them for the total amount of the judgment, which they refused, forcing them to file a lawsuit in an effort to recover the damages. The case was not permanently settled until 1929.

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