Texas Insurance Law On How Claims Are Paid

In 1929, a case was decided that has had deep effects on the claims handling process in Texas. The case was G. A. Stowers Furniture Company vs American Indemnity Company. The case arose out of a situation in Galveston, Texas, but applies to any place in Texas including Dallas, Fort Worth, Arlington, Grand Prairie, Irving, Weatherford, or any other city or town in the State.

In this case, Stowers had a $5,000 insurance policy with American. A claim was made against Stowers wherein the claimant was willing to settle the claim for $4,000. The claim was potentially worth much more. American decided to deny the claim. American’s thinking was that the worst that could happen to them was that if the case were tried and lost that American would be out $5,000 which was the top limit on the policy. So instead of settling the case for $4,000 the case went to trial and a judgment was taken against Stowers for over $14,000. American paid the policy limits of $5,000 and walked away leaving Stowers to make up the difference.

Stowers sued American saying American refused to act as a reasonable and prudent insurer would have acted and thus cost Stowers money. Stowers said it was unreasonable for American to have not settled the case for $4,000, when they could have, rather than expose Stowers to a judgment in excess of the policy limits. The court agreed with Stowers.

This law, now known as the “Stowers Doctrine” in Texas says that if an insurance company is given the opportunity to settle a case for an amount less than or equal to the policy limits and refuses to do so, then the insurance company and not its insured is responsible for any judgment in excess of the policy limits. The test is, would a reasonable and prudent insurance company go ahead and settle the case, given the facts of the case, rather than expose its policy holder to the risk of a judgment in excess of the policy limits.

There have been several adjustments to this law over the years that involve issues of liens and subrogation interests. Plus the exact language of any offer to settle for an amount equal to or less than the policy limits is scrutinized closely by the courts to see if the offer properly invokes the “Stowers Doctrine”. If this “Stowers Doctrine” is properly taken into account and the claim is not paid by the insurance company then the policy holder has a claim against its insurance company for its conduct in the matter.

Only an Insurance Law Attorney like Mark Humphreys, who keeps up with the changes in this law would be able to fully protect your rights. Give us a call.