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Insurers Can Still be Liable to an Insured Even After Paying a Negotiated Settlement

Issue:    Can an insurance carrier continue to be liable to the insured for only paying a portion of a negotiated settlement with a third party and soliciting the insured to pay the rest?

Answer:  Yes. The insurance company may not be liable under Stowers because the settlement was within policy limits, but the insurer may still be liable for breach of the duty to indemnify contained in the insurance contract.

In In re Farmers Texas County Mutual Insurance Company, 621 S.W.3d 621 (Tex. 2021), an insured sued its insurer—Farmers—alleging that it negligently failed to settle a claim (i.e. a Stowers claim) and breached the insurance contract by failing to pay the full amount of a negotiated settlement. The insured was sued for damages from a car accident. The insured notified Farmers which provided a defense. The case settled within policy limits for $350,000 based on a mediator’s proposal. Farmers, however, was only willing to offer $250,000 to settle, and according to the insured, Farmers suggested she pay the $100,000 difference. The insured agreed although she expressly reserved her right to seek recovery of her portion of the payment from Farmers.

Farmers filed a Rule 91 motion to dismiss both causes of action based on a failure to state a viable claim as a matter of law. The trial court denied both motions to dismiss and allowed the claims to move forward. Farmers sought mandamus relief from the court of appeals. The court of appeals upheld the trial court as to the breach of contact claim but dismissed the negligent failure to settle claim because the settlement was within policy limits. Both the insured and Farmers then sought mandamus relief from the Texas Supreme Court.

The Texas Supreme Court held that a negligent failure to settle a claim cannot be sustained as a matter of law for a settlement within policy limits. The Court, however, held that a breach of contract claim related to the insurer’s duty to indemnify could be sustained based on the facts alleged in the petition.  The Court remanded the case to the trial court and allowed the case to proceed on the breach of insurance contract claim theory.

The three-judge dissent sets forth arguments that were not made by Farmers but may have been helpful for Farmers.  Namely, the dissent focuses on the language in the policy and the settlement agreement and whether the language triggers the insured being “legally responsible” for the damages. The Court does not disagree with the arguments but points out that Farmers did not make these arguments in its briefing so the Court will not consider them.

Scot Pierce, Esq. is a trial lawyer and transactional attorney.  Click on his picture for his profile page.

Disclaimer: This post contains general opinions and analysis and should not be treated as advice for any specific case.

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