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Yesterday in this space, we considered the effects on Texas law of the rulings in Am. Guar. & Liab. Ins. Co. v. ACE Am. Ins. Co., ___ F.3d ___, No. 19-20779, 2020 WL 7487067 (5th Cir. December 21, 2020). This is a decision of a panel of the Fifth Circuit Court of Appeals in a case of alleged insurer bad faith or, to be more specific this being a Texas case, in a case of alleged violations of the Texas Stowers doctrine.
Readers will recall the posture of this case on appeal. The case was brought by an excess carrier, American Guarantee, against a primary carrier, ACE, to recover the amounts paid by the excess carrier above the primary's policy limits in a settlement of an underlying case against their common insured, Brickman Group Ltd., LLC. The excess carrier alleged that the primary carrier violated the Texas Stowers doctrine.
The Stowers doctrine is not really unique to Texas. It or a form of it is applied in Courts in insurance bad faith cases in many other jurisdictions in the nation.
"Under Stowers, an insurer is required to exercise ordinary care in responding to qualifying settlement demands; when presented with a “settlement demand[ ] within policy limits,” an insurer cannot respond negligently. Whether an insurer responds negligently hinges on whether '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.'” American Guarantee, 2020 WL 7487067, at *6 (citations omitted).
In an article published here yesterday, we took a look at one point of the decision, which was the effect on the Texas law of insurers' extracontractual or "bad faith" liability for sums beyond their policy limits. Today, we will consider the second point that the panel made in its decision in this case, a point that will unequivocally affect the law of insurer bad faith in the United States.
In this case, ACE, the primary carrier, refused to negotiate a settlement demand made during the trial of the underlying case against its insured, Brickman. The primary carrier took the position on this particular settlement demand that there was a potential conflict that might have prevented settlement. ACE contended that the parent making this settlement demand on her behalf and on behalf of her children suing the insured in the underlying case had a potential conflict, because she made the demand on her own behalf as well as on behalf of her children.
That would mean, the primary carrier contended, that it could not accept the mother's settlement demand because the children were not represented by a guardian, and the court in the underlying case had not approved settlement of the minors' claims against the insured.
In a case of what it saw as a case of first impression under Texas law, the Fifth Circuit panel rejected this position in its entirety. Breaking their decision out as the panel addressed the elements of ACE's position, first, Texas law did not require its State Courts to appoint guardians ad litem for the purpose of accepting settlements in such cases which, in any event, would have to be approved by the court in those cases. American Guarantee, 2020 WL 7487067, at *4-*6.
Second, a mere potential for conflict was not enough to prevent the primary carrier from even negotiating a settlement. American Guarantee, 2020 WL 7487067, at *6.
This decision under Texas law has echoes of a decision under Florida law. Both decisions represent a very important point that most judges see in the law of insurer bad faith that, judging from the decided case law, apparently some insurance carriers do not see when they handle liability claims.
The decision under Florida law came in the case of Berges v. Infinity Ins. Co., 896 So. 2d 665 (Fla. 2004). The decision has been distinguished in several succeeding cases, including a few in Florida federal and State courts, but it continues to exemplify the law in similar cases.
In Berges, a liability carrier contended that it could not settle the underlying case against its insured because the underlying case involved claims of minors and "the claimant has not obtained necessary court approvals of the settlement prior to making the offer." Berges, 896 So. 2d at 672.
In Berges, the majority opinion of a divided Florida Supreme Court rejected this argument in its entirety, just as the Fifth Circuit panel years later would reject a similar argument in American Guarantee:
Neither precedent nor the applicable statutes regarding settlements involving minors or on behalf of decedents require prior court approval for a valid settlement offer to be made. The focus in this case extends to Infinity’s entire course of conduct in handling the claim and in failing to consummate the settlement and pay the policy limits within the time limits demanded by Taylor.
Berges, 896 So. 2d at 675.
Although the American Guarantee panel did not cite to Berges, both decisions share something vital. The basic point common to the Berges and American Guarantee decisions is a point that most judges grasp in most cases across the United States: Liability carriers do not face extracontractual liability, or liability to pay money outside their contractual policy limits, because they cannot settle a given case.
The inability to settle a claim does not matter at all to the risk of "bad faith" exposure, not from a theoretical or even from a realistic view of the possibility of settling a given case against an insured.
The gravamen, gist, or crux of a "bad faith" action by whatever name, is a liability carrier's insistence on not doing anything toward settlement even in response to a settlement demand in a case filed against its insured.
Liability carriers do not have to settle cases filed against their insureds or face the risk of bad-faith exposure. In the eyes of most Courts across the United States, liability carriers do have to do something to negotiate settlement. Whether that "something" is legally sufficient in a given bad-faith case will often depend on what that "something" was, but objectively verifiable action and not posturing is required.
Standing on ceremony, as it were, and waiting for ideal situations to happen will not cut it. Again, judges do not require perfection. But they do require objectively verifiable, reasonable conduct to protect the insured from an excess judgment.
Experienced liability carriers that employ claims professionals know this.
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