Supreme Court of Texas, No. 19-0701 (April 23, 2021)
Opinion by Justice Busby linked here.
Partial Dissent by Chief Justice Hecht linked here.
The lawsuit arose from an auto accident involving Cassandra Longoria (Farmers’ insured) and Gary Gibson. Farmers appointed its in-house counsel to defend Longoria. Gibson offered to settle the lawsuit for $350,000, well within Longoria’s $500,000 liability policy limit. Longoria urged Farmers to accept the offer, expressing concerns that the risk of an excess verdict was heightened by defense counsel’s failure to timely designate expert witnesses. Farmers refused to pay more than $250,000. Longoria contributed $100,000 to close the settlement, and retained her right to seek recovery from Farmers. Longoria then sued Farmers, asserting breach of contract as well as negligent failure to settle under Stowers.
Farmers responded to the suit with a motion to dismiss under Texas Rule 91a, on the grounds that Longoria’s claims had “no basis in law.” A motion under that rule must be decided based solely on the facts alleged in the plaintiff’s petition. The trial court denied the motion on all counts. The San Antonio Court of Appeals denied Farmers’ request for mandamus on the Stowers claim, but granted mandamus on the contract claim, holding Longoria’s petition did not state a viable claim that the insurer breached its contractual duty to “settle or defend.”
Farmers sought mandamus from the Supreme Court, arguing that both lower courts had abused their discretion in ruling on the Stowers claim and that it had no adequate remedy on appeal. Farmers’ mandamus petition posited a bright-line rule: “[T]here can be no Stowers claim in the absence of an excess judgment against the insured.” It relied on several previous decisions, including those holding that (i) risk of exposure to an excess judgment is a key consideration in assessing the reasonableness of a settlement demand, American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994), and (ii) that the “injury producing event [in a Stowers case] is the underlying judgment in excess of policy limits,” Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 829 (Tex. 1990).
Longoria filed a counter-petition for mandamus, arguing that the appeals court erred by dismissing the breach of contract claim for having no basis in law, “when the petition alleged that Farmers breached the insuring contract by mishandling her defense and withholding payments for a covered loss.” Longoria relied on cases holding that an insured may assert “rights granted under Stowers together with rights under the contract of insurance.” State Farm Mut. Auto Ins. Co. v. Traver, 980 S.W.2d 625, 629 (Tex. 1998). To refute Farmers’ “bright-line rule” on the Stowers claim, Longoria cited the holding in American Centennial Insurance Co. v. Canal Insurance Co., 843 S.W.2d 480, 482 (Tex.1992), that an excess carrier may sue a primary insurer to recover settlement payments, through equitable subrogation of the insured’s Stowers rights.
The Court granted both mandamus petitions in part and overruled the appellate court on both claims. First, it adopted a variation of Farmers’ bright-line Stowers rule: the insured cannot sue “for negligent failure to settle because her liability did not exceed policy limits.” Reconciling the lines of authority cited by the parties, the Court held liability exceeding policy limits can be based on either a judgment or settlement.
As for breach of contract, the Court held “Longoria has not alleged a viable claim for breach of Farmers’ contractual obligation to defend, but she has alleged a breach of its indemnity obligation.” Farmers could not be held vicariously liable for counsel’s alleged failure to timely designate experts, and Longoria did not allege any other recognized ground for finding a breach of the duty to defend. On the other hand, the allegations that Farmers withheld $100,000 in settlement funds and insisted Longoria contribute that amount to a reasonable settlement stated a potential claim for breach of the insurer’s duty to indemnify. The Court rejected Farmers’ (and the Dissent’s) argument that no duty to indemnify arose because Longoria was not “legally obligated to pay” the amount she paid to close the settlement.
Finally, the Court devoted several pages to potential grounds on which Farmers might or might not be required to reimburse Longoria, noting it could not reach the merits of those grounds in reviewing a Rule 91a order. Those issues and others require an evidentiary record and determinations in the trial court.
Chief Justice Hecht, joined by Justices Boyd and Blacklock, agreed that Longoria could not state a claim under Stowers, but would also have barred recovery under the policy.