We recently got an email from a law student named Mary R. who wanted to know more about Stowers Doctrine. She asked:
My Bar Program did not mention the Stower's doctrine, but I remember my professor mentioning it a couple of semesters ago. I would like to know if this is only for third party claimants or is it for the primary insured or beneficiary of the policy?
Mary R.
The Stowers Doctrine Mary referenced above was brought into existence in the landmark case G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2D. 544 (Tex. Comm'n App. 1929, holding approved). The case centered on a furniture store owner who was taken advantage of by his insurance carrier, prompting a lawsuit that went to Texas' then-highest court, ending in a ruling that forever changed Texas insurance law.
Like most court decisions, there are a lot of moving parts to the Stowers case. However, there is one key takeaway from the Stowers case with major implications for personal injury law: Insurance carriers have a duty to administer a claim in a non-negligent fashion and can be sued when they breach that duty.
But as Mary inquired, who benefits from that? Does Stowers Doctrine help the defendant/insured motorist, or does it help their victim? The answer is that it helps both, in a roundabout way we'll explore in this article.
Before we do, though, you need to know some of the basics about casualty (aka liability) insurance. When a motorist buys liability insurance coverage, they essentially pay their insurance carrier to assume the financial burden of a verdict rendered against the motorist, up to a pre-determined amount called the “policy limits.” For instance, one might purchase a policy with a $500,000 policy limit. The whole idea behind policy limits is that it represents the most an insurance carrier will pay out on their customer's behalf. So, even if someone sues the wrongdoer and gets a million dollar verdict against them, the worst thing that happens to the insurance company is that they have the pay the amount of the policy limits.
Stowers Doctrine changes that.
The thing that makes Stowers Doctrine so important is that it creates a scenario where the policy limits effectively disappear. Exactly how and why an insurance carrier can be forced to pay more than the policy limits is somewhat complex, hence Mary’s confusion. Rather than bore her to death with technical jargon, I decided to take a different approach to explaining Stowers Doctrine. Here’s the response I emailed to her…
Mary, Forget About Insurance Carriers and Instead Imagine the Duties of a Bodyguard
Pretend you have a problem with a bully who really wants to beat you up. You hire a bodyguard—let's call him Steve—to negotiate with the bully and talk him down. You explain to Steve that, as your bodyguard, he may have to take a punch to the face in order to protect you. Steve says, "No problem. That's what you pay me for. I'm not agreeing to take 50 punches to the face for you, but I will take one punch, if it'll solve your problems."
Later, Steve confronts the bully. The bully says, "I tell you what, Steve. If you let me punch you in the face once, then I'll leave Mary alone forever. After all, that's what Mary has paid you to do. But if you refuse, then I'll unleash my entire repertoire of karate moves on Mary." Unfortunately for you, Steve the bodyguard chickens out. He decides he doesn't want to get punched in the face like he promised you he would and like you paid him to do. With Steve out of the way, the bully then finds you and beats you up, as promised.
If that were to happen, surely you'd think "Wait a minute. I paid Steve a bunch of money to take that punch in the face to spare me the full beating. This is an outrage!"
But what if it were actually worse than that? What if before chickening out, Steve decided to provoke the bully? He bluffed and blustered and worked the bully into a frenzy and then bowed out, leaving you to take a profound beating. Under these circumstances, you’d be more than outraged. Rather, you’d rightly feel that Steve sold you out for his own benefit and that he should be punished.
THAT is the essence of Stowers Doctrine.
When someone pays a bodyguard (i.e. their liability insurance carrier) to take a punch in the face (i.e. to pay money in a settlement), and also entrusts the bodyguard to handle the peace talks (i.e. the settlement negotiations), the bodyguard incurs a duty to protect their customer by taking a hit for them, so long as it’s reasonable to do so under the circumstances.
Here's How it Breaks Down
Let's say a defendant (bad guy) is covered by a small insurance policy and he negligently causes an accident wherein a plaintiff (victim) incurs huge losses that exceed the available policy limits. The plaintiff then files a claim against the defendant’s liability insurance policy. It’s obvious to anyone that the value of the defendant’s insurance policy is less than the amount a jury is likely to award the plaintiff for his injuries if he took the case to trial. This means that, if the plaintiff tries the case rather than settling, the defendant’s insurance policy will only be able to cover part of the verdict, leaving the defendant to pay from his own pocket any amount above and beyond the insurance policy limits.
For instance, if Carol is awarded $100,000 by a jury for injuries caused by Raphael, and Raphael only purchased a $50,000 insurance policy, then he will be obligated to pay the remaining $50,000 out of his own pocket. Such a scenario where a defendant owes more than what his insurance policy can cover is referred to as an “excess judgment.”
Stowers Doctrine essentially holds that an insurance carrier owes certain duties to its insured when administering a claim. Namely, they have an obligation not to negligently administer the claim. Most reasonable people regard it as negligence when an insurance carrier chooses not to settle with a severely injured person who has adequately demonstrated that they'll likely win at trial, and the result of the insurance company's inaction is a large jury verdict against their insured. In other words, the insurance carrier has an obligation to protect their customer from an excess judgment, if the opportunity presents itself.
To appreciate why the court created this doctrine, consider the alternative. Imagine you negligently caused a car accident that resulted in a plaintiff suffering a leg amputation. If they sue you and win, you’re potentially going to be indebted to that plaintiff for years to come as you struggle to pay for their prosthetic leg, loss of income, costs of rehab, etc. This rightly scares the heck out of you, so you pray your insurance carrier can convince the injured person to accept the value of your insurance policy as full and final payment, thereby sparing you the inevitable courtroom thrashing. Sure enough, the plaintiff decides that he wants to move on with his life. Even though he finds the thought of you paying him money until the end of time appealing, he’d rather just take your $100,000 liability policy and avoid all the headaches of a jury trial.
However, your insurance carrier tries to play hardball. They only offer the plaintiff $70,000 in an attempt to save themselves $30,000. You think, “Are they crazy? Surely his injuries are worth millions. If he’s giving them a chance to settle for only $100,000, they should take it.” Your insurance carrier thinks they can muscle the plaintiff into submission and they hold fast at their $70,000 offer. The plaintiff gets fed up and decides that he wants blood. He hires his local bus-bench-ad lawyer, and they’re off to the races, as your financial future flashes before your eyes.
In a world without the Stowers Doctrine, you’d be out of luck. Your insurance carrier could mishandle the defense and will then walk you into the gallows that look like a courtroom, only their neck isn’t in the noose, yours is. They can sell you out, and there's nothing you can do about it.
On the contrary, in a world where we do have Stowers Doctrine, once the plaintiff obtains the excess judgment against you --assuming your insurance carrier refused to settle with them for policy limits-- you now have a cause of action wherein you can sue your insurance carrier for the amount the excess judgment cost you. You can then use the money you get from your insurance company to pay the judgment you owe to the plaintiff. In other words, your life isn't ruined by the excess judgment. Instead, Stowers Doctrine says you can make your insurance carrier pay for it.
So, to answer your question, Mary, the Stowers claim is “owned” by the defendant who is covered by the liability policy. He benefits under Stowers Doctrine because it forces the insurance carrier to defend him to the best of their ability, which often means agreeing to take the “punch to the face” to spare their insured the full Chuck Norris-grade beatdown.
But there is also a benefit to the victim of the accident in that the defendant’s Stowers cause of action can be transferred to the plaintiff. In other words, the defendant’s right to sue their insurance carrier is treated like an asset. You can almost think of it as an "I owe you" that belongs to the defendant, yet he can give it to the plaintiff, and the plaintiff can then "cash it in" with the insurance carrier.
It Helps to Think of it as a Sequence of Events.
I sat down with Keith Purdue, our firm's head litigation attorney, and asked him to describe the typical Stowers scenario. Here's how he described it...
Broken down to its practical steps, the process usually plays out like this:
- The defendant is negligent and causes a serious injury or fatality.
- The plaintiff provides ample documentation and evidence to illustrate that they are likely to beat the insured defendant in court and that the likely jury award will exceed the value of the defendant’s insurance policy.
- The plaintiff then writes the defendant’s liability insurance carrier and says (paraphrasing) “Pay me the full policy limits (which are worth less than what a jury will likely award me) and I will leave your insured alone and close the matter forever.” This “do or die” ultimatum is called a Stowers Demand.*
- Despite the fact that a reasonably prudent insurance carrier would normally agree to settle for an amount within the policy limits, the insurance carrier nevertheless refuses to settle, thereby forcing the matter to trial.
- The jury awards the plaintiffs a verdict that exceeds the limits of the defendant's insurance policy (i.e. an excess judgment).
- The defendant now has a Stowers cause of action against their insurance carrier. He can sue his insurance carrier for negligently defending him and saddling him with the amount of the jury award above and beyond the limits of his insurance policy.
- Rather than being forced to pay out of pocket for the huge jury award, the defendant “gifts” their newfound lawsuit (against the insurance company) to the plaintiff.
- The plaintiff can now "borrow" the defendant’s Stowers cause of action and sue the defendant’s insurance carrier for the full value of the jury award, policy limits be damned.
The short answer to your question, Mary, is that both the defendant and the plaintiff can benefit from Stowers Doctrine. The defendant benefits because it makes his insurance carrier live up to their obligation to provide him with an adequate defense. The plaintiff benefits because he can force the defendants to offer a policy limits settlement, or else make them pay dearly if they fool around.
Naturally, if the plaintiff’s case isn’t meritorious or significantly valuable, then the insurance carrier is of course free to tell the plaintiff to go fly a kite. But if the plaintiff’s case is indeed meritorious and will likely result in a high-dollar jury verdict, a Stowers Demand cuts through all the insurance company gamesmanship and forces them to take a position. It’s the ultimate way of saying “pay up or get sued,” because, if the carrier doesn’t pay their relatively low-value policy limits, they face the possibility of being on the hook for whatever dollar value the jury comes up with.
*I must also point out that attorney Purdue made it crystal clear that Stowers Demands are highly technical documents that must include some very specific phrasing or the court will hold that they're unenforceable. Nothing in this article will equip you to create a Stowers Demand, so Keith recommends that you call him rather than attempt it on your own.