As the Fifth Circuit reminded us in a December 21 decision, primary insurers can find themselves in excess insurers’ shoes if they reject settlement demands within their policy limits. In American Guaranty & Liability Insurance Co. v. ACE American Insurance Co., the Fifth Circuit upheld a lower court ruling requiring a primary insurer that rejected a $2 million policy-limits demand to pay the entire judgment because “a prudent insurer would have accepted” the settlement demand.
Before trial, the primary insurer rejected a $2 million policy-limits demand that would have insulated the excess insurer from liability. During jury deliberations, the primary insurer rejected another $2 million policy-limits demand after two adverse evidentiary rulings “aggravated [the insured’s] greatest known weaknesses in this case.” The primary insurer did so even though its own case manager recognized the possibility of an excess verdict due to the adverse evidentiary rulings. The jury rendered a verdict of $40 million, which the trial court reduced to $28 million due to the decedent’s comparative negligence. Plaintiffs settled with the insured for $10 million – $8 million more than the plaintiffs had repeatedly sought through their policy-limits demands.
The court emphasized that under these circumstances, the primary insurer should have realized the probability of an excess judgment “had materially worsened.” Based on the trial’s progression, a prudent insurer would have accepted the offer, and failure to do so breached the Stowers duty-to-settle standard in Texas. Stowers requires an insurer “to exercise ordinary care in the settlement of claims to protect its insureds against judgments in excess of policy limits.” The court held that the third $2 million settlement demand indisputably triggered a Stowers duty.
This decision reminds us that excess insurers can pressure reluctant primary insurers to accept policy-limits demands. Policyholders and their excess insurers can point to this detailed discussion of the underlying facts and the reasoning that led to the Fifth Circuit’s decision to support policy-limits demands. If the primary insurer rejects a policy-limits demand, the excess insurer that contributes to the settlement can – and likely will – seek recovery from the primary insurer. And if the excess insurer refuses to contribute to the settlement, the insured can – and likely will – seek recovery from the primary insurer along with exemplary damages for the primary insurers’ bad-faith refusal to settle. Policyholders and their excess insurers should invoke Stowers and similar duty-to-settle standards in other states to encourage primary insurers to satisfy their settlement obligations. In doing so, they can point to this example of insurer conduct that at least two courts found wanting.