As the Fifth Circuit reminded us in a December 21 deUnder Pressure: Primary Insurer Must Reimburse Excess Insurer after Failing to Settle Case in Texascision, 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.

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Photo of Alex Purvis Alex Purvis

Alex Purvis is a litigator and policyholder coverage lawyer with a unique background, including experience in product liability, construction, and complex commercial litigation. He started his career as a litigation associate handling large-scale insurance coverage and subrogation matters. After joining Bradley in 2005…

Alex Purvis is a litigator and policyholder coverage lawyer with a unique background, including experience in product liability, construction, and complex commercial litigation. He started his career as a litigation associate handling large-scale insurance coverage and subrogation matters. After joining Bradley in 2005, Alex developed a reputation as a leading insurance coverage lawyer for commercial policyholders across the Southeast.

Photo of A. Kate Margolis A. Kate Margolis

Kate Margolis provides insurance coverage advice for policyholders. She knows that insurance coverage is essential to the long-term viability of any business. Kate helps policyholders preserve coverage both before and after a claim arises. She advises regarding terms and conditions and potential gaps…

Kate Margolis provides insurance coverage advice for policyholders. She knows that insurance coverage is essential to the long-term viability of any business. Kate helps policyholders preserve coverage both before and after a claim arises. She advises regarding terms and conditions and potential gaps in coverage when clients are evaluating their insurance programs.  For example, cyber insurance has fast become a crucial part of any insurance program. Kate recently co-authored the Guide to Cyber Insurance: Building a Program, Procuring Coverage, Managing Claims and Litigating Disputes, published by RIMS, the Risk Management SocietyTM.

When coverage disputes do arise, Kate is committed to cost-effective and creative solutions to achieve a satisfactory business resolution if possible and unrelenting advocacy when litigation is warranted. Kate has helped clients navigate roadblocks to coverage for nearly 20 years.

Photo of Jonathan M. Barnes Jonathan M. Barnes

Jonathan Barnes is an associate in Bradley’s Litigation Practice Group. He received his J.D. from the University of Mississippi School of Law and his B.A. in History from Belhaven University. Prior to joining the firm, Jonathan clerked for the Hon. Leslie H. Southwick…

Jonathan Barnes is an associate in Bradley’s Litigation Practice Group. He received his J.D. from the University of Mississippi School of Law and his B.A. in History from Belhaven University. Prior to joining the firm, Jonathan clerked for the Hon. Leslie H. Southwick on the U.S. Court of Appeals for the Fifth Circuit and for the Hon. Daniel P. Jordan III on the U.S. District Court for the Southern District of Mississippi.