Texas Policyholder Who Paid Part of Settlement May Seek Recovery From Insurer

A woman who chipped in $100,000 toward a settlement after a car crash can sue her insurer to seek recovery of that cost, but cannot seek damages in excess of the policy limits for negligent failure to settle because there was no final judgment in the case, the Texas Supreme Court ruled.

Plaintiff’s attorney Thomas G. Kemmy said during oral arguments that Texas’ high court has never before ruled on what recourse is available to a policyholder who faces the kind of dilemma that was imposed on his client Cassandra Longoria.

Farmers Texas County Mutual Insurance Co. refused to pay more than $250,000 to settle a liability claim even though the policy limit was $500,000. Longoria agreed to contribute $100,000 toward the settlement only because a jury verdict might have cost her up to $2 million, he said.

The insurer’s attorney argued that the Farmers owes nothing because there was no breach of contract and no negligence.

“Farmers should not be bound to a settlement that it did not agree to,” attorney Kent Chambers told the court.

The Supreme Court’s 6-3 decision gave both sides less than they sought. The majority ruled that Longorio may proceed with her suit alleging Farmers breached the terms of its contract by forcing her to contribute her own money to the settlement. However, Longoria may not seek damages for Farmers’ alleged negligence in failing to settle the claim within policy limits.

Such demands are called “Stowers claims” in Texas, named after a 1929 state Supreme Court decision holding that insurers can be liable for damages in excess of the policy’s limits if they refuse a pay a reasonable settlement amount.

“We agree with the insurer that the insured has no Stowers claim for negligent failure to settle because there was no judgment or settlement in excess of policy limits,” the majority opinion says. “But the insured can pursue her claim that the insurer breached its obligation to indemnify her for amounts she was legally responsible to pay under the settlement.”

Gary Gibson was injured when Longoria rear-ended his vehicle. He sued Longoria seeking $1 million in damages. The case went to mediation and Gibson accepted the mediator’s suggestion that the case settle for $350,000. Farmers, however, refused to pay more than $250,000.

Longoria agreed to pay $100,000 toward the settlement after Gibson rejected the insurer’s counteroffer and advised that he would seek $2 million in damages. She then filed suit against Farmers alleging negligent failure to settle. She claimed that the carrier has mishandled the defense of Gibson’s claim by failing to appoint an expert before trial. The suit states that Farmers either “suggested” or “demanded” that she contribute toward the settlement, even though Gibson had agreed to settle for less than the policy limit.

Farmer’s filed a motion to dismiss the case. Chambers said during oral arguments that the Supreme Court has established a “bright-line rule” there there can be no negligence for failure to settle a claim without a court judgment in excess of the policy limits.

While the Supreme Court accepted that argument, the majority held that Longoria may sue for the $100,000 that she was forced to contribute to the settlement.

“Having solicited Longoria’s contribution, Farmers can hardly contend that it was unauthorized,” the opinion says. “In short, Farmers structured a within-limits settlement but did not pay it fully, giving rise to a claim whether its consent to settle contingent on the insured’s payment breached its duty to indemnify her.”

Chief Justice Nathan L. Hecht, Jeffrey S. Boyd and Jimmy Blacklock dissented, in part, to the majority’s ruling. They wrote a separate opinion stating that Longoria’s breach-of-contract claim should also be dismissed.