(Article from Insurance Law Alert, January 2021)
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Our December 2020 Alert discussed an Eleventh Circuit decision holding that under Georgia law, a primary insurer was liable to an excess insurer for negligently failing to settle underlying claims against the policyholder. Last month, the Fifth Circuit followed suit, ruling that a primary insurer violated its common law duty under Texas law to accept a settlement offer within primary policy limits. American Guarantee & Liability Ins. Co. v. ACE American Ins. Co., 983 F.3d 203 (5th Cir. Dec. 21, 2020).
The suit against the policyholder, the Brickman Group, arose out of a fatal car accident. Brickman was insured under an ACE primary policy with a $2 million limit and an American Guarantee excess policy with a $10 million limit. On the eve of trial, plaintiffs made a $2 million settlement demand. ACE countered at $500,000, which plaintiffs rejected. At trial, the judge issued several evidentiary rulings adverse to Brickman. During jury deliberations, plaintiffs made two more settlement demands. The first was a high/low offer of $1.9 to $2.0 million “with costs.” ACE rejected the demand, believing it was outside of its settlement valuation because the inclusion of costs would put the value beyond its policy limit. A third offer renewed plaintiffs’ original offer to settle for $2 million. Brickman declined and the next day, the jury returned a verdict of nearly $40 million. The parties ultimately settled for $10 million. ACE and American Guarantee each paid their policy limits.
Thereafter, American Guarantee sued ACE for equitable subrogation, alleging that ACE violated its duty under G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929) by rejecting the settlement offers. Under Texas law, a primary insurer has a Stowers duty to “exercise ordinary care in the settlement of claims.” However, the Stowers duty arises only if the claim is within the scope of coverage, the demand is within policy limits, and a prudent insurer would accept the terms of the demand. In addition, the settlement terms must be clear and unconditional. The district court ruled that all three settlement offers satisfied the Stowers requirements and therefore triggered ACE’s duty to settle. The district court further ruled that ACE’s first rejection was reasonable, but that the other two were not.
The Fifth Circuit affirmed on different grounds. The Fifth Circuit ruled that the second offer did not trigger ACE’s Stowers duty because it was not “clear.” The court explained that inclusion of “costs” in the high/low offer rendered it ambiguous. However, the Fifth Circuit agreed that the third offer triggered ACE’s Stowers duty. Addressing this matter of first impression under Texas law, the Fifth Circuit rejected ACE’s contention that the third offer was conditional. ACE claimed that there were adverse interests among the plaintiffs—the parent of the deceased, alongside her minor children whom she represented as “next friend.” ACE argued that those potentially adverse interests required settlement approval by a court and/or guardian ad litem, which in turn, rendered the offer inherently conditional. The Fifth Circuit disagreed, noting the lack of evidence that the settlement offer was more favorable to the parent plaintiff than the minor children. In addition, the court emphasized Texas law does not require third-party approval in every case in which a parent serves as next friend for minor children. The court explained: “because such appointments are not required, we cannot conceive that every settlement generated in a case involving claims of a parent on behalf of herself and children violates Stowers because of a bare potential conflict of interest.”
Having concluded that the third offer triggered ACE’s Stowers duty, the court addressed whether an “ordinarily prudent insurer” would have accepted it. The court ruled that, based on the developments at trial, ACE should have recognized the potential exposure of an excess judgment and had a duty to accept the offer.