The Fifth Circuit recently rebuffed an attempt by Chubb subsidiary Ace American Insurance Co. (“Ace”) to evade liability from its excess insurer, Zurich North America subsidiary American Guarantee & Liability Insurance Co. (“AGLIC”), after Ace unreasonably rejected a settlement offer within its policy limits in violation of its Stowers duty. See Am. Guarantee & Liab. Ins. Co. v. ACE Am. Ins. Co., 19-20779, 2020 WL 7487067 (5th Cir. Dec. 21, 2020). As a result, Ace must now pay approximately $7.27 million in damages to AGLIC to cover its costs to settle the underlying lawsuit plus prejudgment interest and court costs.

In the underlying lawsuit, Mark Braswell was killed after his road bike collided with a stopped truck, owned by the Brickman Group Ltd., L.L.C  (the “Brickman Group”). Id. at *1. His survivors (his mother, wife, and two children (the “Braswells”)) filed suit against the Brickman Group, who was insured under a primary policy issued by Ace and an excess policy issued by AGLIC. After trial and before the jury reached a verdict, the Braswells’ counsel made two settlement demands. Id. The first demand was a “high/low of ‘$1.9MM to $2.0MM with costs.” Id. at *2. Ace believed this demand of “with costs” would push the total settlement cost beyond its policy limits of $2 million and rejected the demand. Id. The last settlement demand was for Ace’s policy limits of $2 million. Id. The district court found both demands invoked Ace’s Stowers duties and that Ace breached those duties by rejecting each of the demands. The Fifth Circuit disagreed that the first demand invoked a Stowers duty, however the appellate court agreed that the Braswells’ third demand was sufficiently clear and triggered the insurer’s duty to reevaluate liability and guard against excess exposure. Id.

Under Texas law, Stowers requires an insurer “to exercise ordinary care in the settlement of claims to protect its insureds against judgments in excess of policy limits.” Id. at *3. An insurer’s Stowers duty is triggered when: “(1) the claim against the insured is within the scope of coverage, (2) there is a demand within policy limits, and (3) the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.” Id. Moreover, Stowers only applies when “the settlement’s terms [are] clear and undisputed” and when the settlement offer is “unconditional” and does not “carry[] risks of further liability.” Id.

On appeal, Ace argued that its Stowers duty was not triggered because the Braswells’ settlement demand was conditional. Id. at *4. Ace based its argument on the contention that because Mark Braswell’s wife’s claims (that were asserted alongside her minor childrens’, which she represented as next friend) could have generated adverse interests, requiring at least court and perhaps guardian ad litem approval for any settlement demand to be deemed unconditional. Id.

As no Texas court had considered this argument before, the Fifth Circuit made an Erie guess, and found that there was “no evidence that the settlement offer was more favorable to [the mother] than her children or that [the mother] was operating with interests adverse to those of her children.” Id. at *4, 6. Indeed, the Fifth Circuit noted that Ace offered “nothing in the record suggesting that, had the third settlement offer been accepted, [the mother] would have placed maximizing compensation for her own injuries above her children’s claims.” Id. at*6. Absent such evidence, Texas courts do not require the appointment of a guardian ad litem, thereby requiring third-party approval of settlement. Id. And without such requirement, the Fifth Circuit explained that it “cannot conceive that every settlement generated in a case involving claims of a parent on behalf of herself and children violates Stowers because of a bare potential conflict of interest.” Id. Accordingly, the Fifth Circuit held that the Braswells’ settlement demand triggered Ace’s Stowers duty “because it ‘proposed to release the insured fully’ and it was not conditional.” Id.

The Fifth Circuit’s decision is a reminder for policyholders to timely communicate all settlement demands to their insurer(s) and document their requests that insurers reevaluate exposure whenever an opportunity is presented to settle a claim, especially when settlement can be achieved within policy limits. The decision also underscores the importance that demands be unconditional. Finally, the decision serves as a warning to insurers that courts will hold them to their Stowers obligations when the elements have been met.