A Bad Faith Insurance Claim

Here is one for the insured in Grand Prairie, Fort Worth, Arlington, Dallas, Mansfield, Lancaster, De Soto, Duncanville, Cedar Hill, Pantego, or any other city and town in Texas.
What happens when you are in an accident that is your fault, the other person, who is injured makes a claim against your insurance company for an amount of money that is within your policy limits, the insurance company refuses to pay, the injured person sues you and gets a judgment in excess of your policy limits; Are you liable for the amount of money above what the insurance policy pays?
Answer: It depends! Don’t you just hate it.
The issue here involves what is called the “Stowers Doctrine” which is discussed in more depth in other blogs at this site.
On March 24, 2011, the Texas Court of Appeals, 1st District, issued an opinion where the Stowers Doctrine was at issue. The style of the case is, Edward McDonald v. Home State County Mutual Insurance Company, Paragon Insurance Company, and Paragon Insurance Group. This is an appeal from a district court finding that the insurance companies involved did not do anything wrong and this appeals court affirmed that finding.
On August 4, 2001, McDonald was struck by a vehicle owned and operated by Francisco Rangel while he was walking in the grass along a service road. As a result McDonald suffered serious injuries and was taken directly to Memorial Hermann Hospital for treatment.
Memorial filed a “Notice of Hospital Lien” stating that the accident occurred on August 5, 2001. and McDonald was admitted to the hospital not later than 72 hours after the accident.
Rangel was insured by the Home State and Paragon administered the claim. McDonld’s attorney wrote a settlement demand letter dated June 5, 2002, to Paragon, demanding a stated deadline of June 14, 2002 for Paragon to pay and settle the injury claim. The front page of this demand letter included the following notice:
NOTICE THIS CORRESPONDENCE CONTAINS A SETTLEMENT OFFER WITH RESPECT TO THE ABOVE-REFERENCED CLAIM. PLEASE BE ADVISED, PURSUANT TO THE TERMS HEREIN, THERE IS A TIME LIMIT WITHIN WHICH PARAGON INSURANCE GROUP MAY ACCEPT THIS SETTLEMENT OFFER. THE SETTLEMENT OFFER EXTENDED HEREIN IS THE TYPE WHICH IS COMMONLY KNOWN AS A “STOWERS” OFFER. (it then cites the Stowers case and another related case) PLEASE TAKE NOTICE, IN THE EVENT THAT PARAGON INSURANCE GROUP FAILS TO ACCEPT THIS SETTLEMENT OFFER BY 5:00 P.M. ON FRIDAY JUNE 14, 2002, THIS SETTLEMENT OFFER WILL BE DEEMED TO HAVE BEEN REJECTED BY PARAGON INSURANCE GROUP. FURTHERMORE, ANY COUNTER-OFFER SUBMITTED ON BEHALF OF PARAGON INSURANCE GROUP’S INSURED WILL BE DEEMED AS A REJECTION OF THIS SETTLEMENT OFFER.
After explaining the basis for the demand, the letter stated that full and final settlement of McDonald’s claims could be made “in exchange for payment to Edward McDonald” of the “total amount of liability insurance available to cover your insured in this matter.” The demand specified that the payment to McDonald was to be made “care of the undersigned attorney.”
Upon investigation the adjuster for Paragon learned of the above mentioned hospital lien. Paragon offered to settle for the policy limits but made a condition of the settlement that McDonald would take care of the hospital lien. McDonald refused, the case went to trial and McDonald took a judgment against Rangel for over a million dollars. McDonald then obtained an order turning over Rangel’s right to sue his insurers for failure to settle with McDonald, including any Stowers claim and this lawsuit resulted.
In Texas, insurers have a duty to exercise ordinary care in the settlement of claims to protect their insureds against excess judgments. The Stowers doctrine shifts the risk of an excess judgment from the insured to the insurer by subjecting an insurer to liability for the wrongful refusal to settle a claim against the insured within policy limits. Shifting this risk of an excess judgment onto the insurer is not appropriate unless there is proof that the insurer was presented with a reasonable opportunity to settle within policy limits. Thus a settlement demand triggers an insurer’s Stowers duty to respond if: (1) the claim against the insured is within the scope of coverage; (2) the demand is 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. As a threshold matter, a settlement demand must propose to release the insured fully in exchange for a stated sum of money.
The court cited another court in stating, “Given the tactical considerations inherent in settlement negotiations, an insurer should not be held liable for failing to accept an offer when the offer’s terms and scope are unclear or are the subject of dispute.”
The court went on and pointed out that insurers in Texas have a statutory duty “to attempt in good faith” to effectuate “prompt, fair, and equitable settlement” of claims for which the insurer’s liability has become reasonable clear.
Also relevant here is the lien filed by Hermann Hospital. Since 1933, the Texas Hospital Lien Law has provided a mechanism for hospitals to recover costs incurred in treating people injured in an accident. Per Texas Property Code, Section 55.002(a), “A hospital has a lien on a cause of action or claim of an individual who receives hospital services for injuries caused by an accident that is attributed to the negligence of another person.” In this regard, a release of a cause of action to which a hospital lien has attached is not valid unless:
(1) the charges of the hospital … claiming the lien were paid in full before execution and delivery of the release;
(2) the charges of the hospital … were paid before the execution and delivery of the release to the extent of any full and true consideration paid to the injured individual by or on behalf of the other parties to the release; or (3) the hospital … is a party to the release.
This is found in Section 55.007.
Per Texas common law a hospital has a cause of action against those who pay or receive money in derogation of the hsopital’s rights under the statute.
In this case, McDonald argued that the release of the hospital lien was implicit in the demand letter. He also argued that the wrong date on the hospital lien made it invalid.
The insurers rely on the 1998, Texas Supreme Court case, Trinity Universal Ins. Co. v. Bleeker, which says an offer to settle is not a sufficient Stowers demand unless it expressly acknowledges existing hospital liens and offers the insured a release from them. Here, the settlement demand did not explicitly offer to release any potential claims against Rangel, nor did it make any reference to the resolution of hospital liens. Plus, Memorial could not have been a payee on a check in acceptance of the settlement offer because the demand specifically required payment to be made directly to McDonald and that any counteroffer would constitute a rejection of the opportunity to settle. These express instructions in the settlement demand subjected the insurer to a risk that a settlement on the offered terms would not be a full one.
In this case, because there was not a settlement demand that complied with Texas law for a proper Stowers demand the insurance company was not responsible for the excess judgment.