by Matthew Steven Paradowski
In April 2015 an opinion issued by the First District Court of Appeals in Houston caught the rapt attention of liability insurers and insurance law practitioners in the State of Texas, as it appeared to fundamentally alter the Stowers duty—the sole common law duty owed by liability insurers to its insureds to accept a reasonable settlement demand within policy limits. The opinion, Patterson v. Home State County Mutual Insurance Company, spawned a wave of commentary and speculation as to its meaning and legitimacy. 01-12-00365-CV, 2014 WL 1676931 (Tex. App.—Houston [1st Dist.] Apr. 24, 2014), review denied (Sept. 11, 2015).
Some have suggested that Patterson expressly narrows the application of Stowers to those demands which are not only reasonable and within policy limits, but which also offer to settle all claims, by all claimants, against all insureds. Unless the significance of Patterson were in doubt, an Amicus Brief filed by the “Texas Policyholder Coverage Lawyers”—a virtual Who’s Who of prominent insurance plaintiffs’ lawyers—argued in support of overturning Patterson on appeal before the Texas Supreme Court. Amicus Brief of Texas Policyholder Coverage Lawyers, Patterson v. Home State County Mutual Insurance Company, 2014 WL 6907586 (Tex.). The “Texas Policyholder Coverage Lawyers” asserted that Patterson was plainly wrong, and if it remained good law, would “produce uncertainty for insurers, insureds, claimants, risk managers, and insurance law practitioners.” 2014 WL 6907586 *2.
Patterson and the Texas Policyholder Coverage Lawyers argued to the Texas Supreme Court that the appellate court’s opinion in Patterson was wrong because it ignored a line of cases involving a carrier’s Stowers exposure in multi-claimant and multi-insured cases. See, e.g., Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994); Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761, 768 (5th Cir. 1999); Pride Transp. v. Cont’l Cas. Co., 511 Fed. App’x. 347, 353 (5th Cir. 2013). Soriano and its progeny essentially stand for the following proposition as stated by the Fifth Circuit Court of Appeals: “[a]lthough the Stowers duty imposes liability on insurers who reject reasonable demands covered under their policies…the Stowers duty [does not] impose liability on insurers for accepting demands.” Pride Transp. 511 Fed. App’x. 347, 351. The effect of the Soriano line of cases is that a carrier is not exposed to Stowers liability if it accepts a claimant’s settlement demand to the detriment of another claimant, nor if it accepts a settlement demand on behalf of one insured to the detriment of another.
Consistent with this policy, Patterson confirms that in the context of multiple claimants or multiple insureds, a settlement demand that fails to settle all claims against all insureds does not constitute a proper Stowers demand at all. See Patterson at *9 – 10. Though this rule seems to further the policy behind Soriano, some commenters have suggested that courts evaluating Stowers in this context should ignore Patterson altogether. See Michael Huddleston, The Year In Review 2014: Insurance Law, 78 Tex. B. J. 1, 37 (2015). The reason for this position, of course, is that it makes it much more difficult to “Stowerize” a carrier if claimants competing for the same limited insurance proceeds must coordinate their interests in making a proper Stowers demand.
But the Texas Supreme Court has since declined to accept review of Patterson, and Patterson is now good law until we hear otherwise. Though the Texas Supreme Court did not bestow Patterson with the rarely used “petition refused” ratification, its denial leaves Patterson without conflicting authority among Texas appellate courts. Contrary to the hand-wringing of certain segments of the insurance bar, the result is not a new uncertain world. Patterson, in my view, simply sheds light on a previously murky area in the application of Stowers and clarifies its scope in the most complex cases—those with multiple parties and large exposures—and will allow carriers to confidently evaluate their Stowers obligations where it is vitally important to get it right.
A brief recitation of the facts and holding of Patterson is necessary here. Marcus Patterson’s wife was killed in an automobile accident. Mr. Patterson filed a lawsuit on behalf of: (1) Himself; (2) his deceased wife’s estate; and (3) his children. The Patterson Lawsuit was filed against: (1) Charles Hitchens, the driver of the eighteen-wheel truck involved in the accident (“Hitchens”); (2) Brewer Leasing (“Brewer”); and (3) Texas Stretch, Inc.
Brewer and Hitchens were both insureds under a liability policy issued by Home State County Mutual Insurance Company. Three settlement demands were made in the Patterson lawsuit, all of which failed to trigger Home State’s Stowers duty. The basic parameters of these demands were as follows:
- A policy limits demand by Mr. Patterson on behalf of his children to settle all of their claims against Brewer;
- A policy limits demand by Mr. Patterson on his own behalf to settle all of his claims against Brewer; and
- A policy limits demand by Mr. Patterson on behalf of himself and his children to settle all of their claims against Brewer.
In the time between the second and third demands, Home State interpleaded the policy limits in the registry of the court on the grounds that other persons besides the Pattersons suffered injury as the result of the accident and were potential claimants. After the three settlement demands were rejected, and before trial, the Pattersons and Brewer entered into an apparent sweetheart deal assigning Brewer’s Stowers claims against Home State to the Pattersons in exchange for an agreement not to execute against Brewer. The Pattersons then proceeded to trial and took an award against the Brewer and Hitchens in excess of the Home State policy limits. The Pattersons then sued Home State under Stowers.
The court held the first two settlement demands failed to trigger Stowers because if accepted “Home State could have potentially exposed Brewer to an excess judgment by one of the other claimants.” The first two settlement demands, in other words, did not include an offer to settle by all the claimants. Patterson at *9. Some have speculated that this holding was necessary because a wrongful death claim is essentially owned by all of the decedent’s beneficiaries. See Tex. Civ. Prac. & Rem. Code § 71.004. However, the court merely held that the first and second settlement offers failed to trigger Stowers because they were not unconditional and did not propose to release the insured fully, which have long been requirements under Texas law. Patterson at *9; citing State Farm Lloyds Ins. Co. v. Maldonado, 963 S.W.2d 38, 41 (Tex. 1998) (Stowers demand must be unconditional); Trinity Universal Ins. Co. v. Bleeker, 966 S.W.2d 489, 491 (Tex. 1998) (Stowers demand must release the insured fully).
Perhaps the more controversial portion of the court’s holding in Patterson involved the third settlement demand which was made on behalf of all claimants and proposed to settle their claims against Brewer, but not Hitchens. The court held that the third settlement demand failed to trigger Stowers because “Patterson’s third settlement offer did not constitute an unconditional offer to fully release the insureds in exchange for a settlement.” Patterson, 2014 WL 1676931at *10.
The apparent concern that Patterson ignores the Soriano line of cases is misplaced. Soriano and its progeny hold that a carrier is not exposed to additional Stowers liability should it choose to accept a settlement demand by one claimant or against one insured in a multi-party case. High exposure, multi-party cases can be a challenge to resolve, and Soriano has never been interpreted to expose a carrier to an endless procession of Stowers claims should it choose to resolve one part of a complex case over another. This policy encourages the settlement of claims because a carrier knows it will not find itself being second-guessed later in a Stowers lawsuit. See Citgo Petroleum, 166 F.3d at at 767 (“an insurer faced with liabilities of multiple insured parties that exceed its policy limits would face an excess liability threat regardless of whether it attempted to create a comprehensive settlement…”).
Patterson furthers the public policy behind Soriano. Where Soriano emboldens carriers to accept demands to settle part of a complex case without later facing Stowers liability, the sister policy of Patterson allows carriers to decline to accept such demands without later being second-guessed. This rule will only foster the resolution of complex cases and promote reasonable settlements as claimants must work together to collectively resolve their claims against all insureds.