Dallas Court of Appeals Refuses To Expand Texas Stowers Duties On Liability Insurers

Cain v. Safeco Lloyds Ins. Co. (Tex. App.--Dallas, November 29, 2007) (See Safeco Decision)

This case features a doomed effort to expand an auto insurer's bad faith liability for allegedly mishandling the defense of a lawsuit.  The plaintiff was a passenger in a car involved in a single car accident.  Safeco insured the driver.  Safeco repeatedly offered to settle the ensuing lawsuit by paying policy limits, but the plaintiff refused and obtained a $4 million judgment at trial.

Taking an assignment of the driver's rights under the policy, the plaintiff sued Safeco seeking damages in excess of the policy limits under bad-faith theories under common law and the Texas Insurance Code, including an unusual claim to extend the insurer's Stowers duties to include negligent defense of the underlying lawsuit.  Under the Texas Stowers doctrine, an insurer of a covered claim is required to exercise that degree of ordinary care and diligence which an ordinary person would exercise in the management of his/her own business in responding to settlement demands within policy limits. (Stowers Furniture Co. v. American Indem. Co., 12 S.W.2d 544 (Tex. Comm'n App. 1929)  The insurer that unreasonably refuses to accept a settlement demand within policy limits would be required to pay a judgment against the insured in excess of the policy limits.

Safeco never received a demand within policy limits, and in fact offered several times to settle for policy limits.  Therefore, Safeco never breached its Stowers duty under current law.  Cain, however, sought to expand current law by arguing that the Stowers doctrine has expanded the duty to provide a reasonable defense to the insured, and Safeco failed to provide a reasonable defense.  For support of this theory, Cain relied on two earlier cases holding that an insurer's duty of care included investigation and preparation of a lawsuit and reasonable attempts to settle.  (Ecotech Int'l, Inc. v. Griggs & Harrison, 928 S.W.2d 644 (Tex. App.-San Antonio, 1996; Wheelways Ins. Co. v. Hodges. 872 S.W.2d 776 (Tex. App. Texarkana 1994). 

The Dallas Court of Appeals refused to expand the Stowers doctrine and pointed out that after the Ecotech and Hodges cases, the Texas Supreme Court abolished the common law duty of good faith and fair dealing under most liability policies (Maryland Ins. Co. v. Head Indus. Coatings & Serv., Inc. 938 S.W.2d 27 (Tex. 1996)) upon which the earlier cases were based and also absolved the insurer of liability for mishandling the defense by defense counsel (State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998)).  Moreover, the Cain Court refused to create new law by expanding the Stowers doctrine beyond the limits prescribed in American Physicians Exch. v. Garcia, 876 S.W.2d 849 (Tex. 1994).

Cain's attorneys are presumably not ignorant of current law.  This case is interesting because it illustrates how the law changes.  Practitioners take a shot at establishing a new defense or (in this case) a new theory for liability.  The canons of legal ethics do not bar attorneys from making arguments for reasonable extensions of existing law when they have a good faith basis for doing so.  Most such attempts do not succeed, particularly in the lower courts.  But hope springs eternal that at some time the idea whose time has come will be received and new law will be made.  The law evolves, for good or ill, by efforts such as this.