The September 11, 2019 decision from the United States District Court for the Southern District of Texas in American Guarantee & Liability Ins. Co. v. ACE American Ins. Co., Civil Action No. 4:18-CV-382, 2019 WL 4316531, should remind all insurers to remain apprised of all developments through trial and to reexamine the settlement valuation when a trial court’s rulings significantly impact the pre-trial assessment.  Excess carriers must also remain engaged throughout litigation and continue to place pressure on the primary carrier to accept reasonable policy limit demands. 

The American Guarantee court evaluated a primary insurer’s duty to accept demands within its layer during a subrogation action brought by one of the excess insurers. The underlying lawsuit stemmed from a bike-against-truck accident where the original plaintiff collided with the Insured’s landscaping truck that was parked in an active lane of traffic.  The original plaintiff sustained significant head injuries and died. 

The Insured maintained an insurance coverage tower that included a $500,000 deductible, a $2,000,000 primary business auto policy, a $10,000,000 excess policy, and a second $40,000,000 excess policy issued by a third insurance carrier that was not involved in the underlying lawsuit.

In its pre-trial report, defense counsel retained by the primary insurer outlined a strong liability case for the Insured, citing physical evidence that the plaintiff injured the top of his head, not his face, which suggested the plaintiff caused the accident by looking down and not paying attention when he crashed into the landscaping truck. Weaknesses included the fact that the driver stopped in an active lane of traffic without warning cones or flashers, and that the cyclist did not have enough time to avoid the truck because the driver “stopped short” by pulling over to do some work. Also, sympathetic testimony was offered regarding both the plaintiff’s commitment to service with local fire departments and regarding the plaintiff’s daughter’s suicide attempt and time spent in a mental health hospital after the accident.

The defense estimated settlement value between $1,250,000-$2,000,000. The primary insurer valued the claim at $600,000 by calculating the reported 30 percent chance of an adverse verdict by the $2,000,000 primary limits of insurance. Despite pressure from the excess carrier during two failed mediation sessions, the primary insurer never offered more than $500,000 before trial. 

On the eve of trial, the plaintiff made a $2,000,000 “Stowers demand” to settle the lawsuit. Under Stowers Furniture Co. v. Am. Indem. Co, 15 S.W.2d 544 (Tex. Comm’n App. 1929), an insured may sue its insurer for damages arising from the insurer’s negligent failure to accept a reasonable settlement offer within policy limits. An insurer’s duty to accept a reasonable settlement offer is triggered when: “(1) the claim against the insured is within the scope of coverage, (2) the demand is within the 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.” Am. Physicians Ins. Exchange v. Garcia, 876 S.W.2d 842, 849 (Tex., 1994). In other states where an insurer’s duty to settle is triggered upon demands to settle within policy limits, the ruling in this case may also be applicable.

During jury deliberations following an 8-day trial, the plaintiff made two additional settlement demands, both within primary limits. Despite several adverse rulings during the trial and the risk of an excess verdict, the primary carrier rejected those demands. Ultimately, the jury awarded nearly $40 million in damages, allocating roughly $27 million to the Insured. After reaching a post-verdict settlement for $9,750,000, of which the excess carrier paid $7,750,000, the excess carrier sued the primary carrier.

The court reviewed the terms of each of the three settlement demands and whether an ordinarily prudent insurer would have (and should have) accepted them under the circumstances. As to the first offer, the court found that the primary insurer acted unreasonably in preparing its $600,000 valuation. The court found that any valuation based solely on an insurer’s limits is contrary to the purpose of Stowers – especially when not focused on the potential loss and excess exposure to the insured. However, the court held that the primary insurer did not act unreasonably by rejecting Plaintiff’s first Stowers demand of $2,000,000. The court found that prior to trial, although there were known risks and weaknesses in the case, a reasonable insurer still could confidently estimate the likelihood of a defense verdict at 70 percent.

Still, the court held the primary insurer did act unreasonably in rejecting the second (a $2,000,000/$1,900,000 “high/low” proposal) and third ($2,000,000) demands after closing arguments.

Critically, the court noted that these demands were presented when the primary insurer was aware of several adverse evidentiary rulings and the admission of other unfavorable evidence during the trial. The court held that a reasonable insurer would have reevaluated the settlement value of the case and determined it had little chance of a defense verdict after all of the trial court’s adverse rulings, particularly those that excluded favorable evidence supporting the insured’s strong defenses. The court ruled the primary insurer breached its obligations under Stowers, and ordered the primary insurer to pay the full settlement amount the excess carrier agreed upon ($9,750,000) with the original plaintiff.

This decision underscores the balancing act between confidence in the pre-trial evaluation and consideration of evidentiary developments through trial and how certain rulings may drastically change the prior assessment. On one hand, rulings like this here arguably place more pressure on primary carriers to accept reasonable settlement demands within policy limits; on the other, the primary carrier could become obligated to pay an excess judgment where a reasonable insurer would have been aware that the verdict would likely far exceed the amount offered.

Excess carriers must continue to place pressure on the primary carrier to settle reasonable claims that can be resolved within the primary carrier’s limits. In the American Guarantee case, the court noted that the excess carrier, defense counsel and the insured were all in agreement that the second and third demands were reasonable. Where the excess carrier can demonstrate a documented history of continued encouragement for the primary layer to settle within its layer, excess insurers will be better positioned to demonstrate that equitable subrogation is warranted.

Valentine Uduebor is a litigator within Taylor|Anderson, LLP’s national litigation practice.  Valentine has successfully litigated more than 50 jury trials and has obtained numerous defense verdicts as lead counsel throughout the State of Texas, where he previously worked as an in-house trial attorney for a Fortune 500 insurance company.  He represents both primary and excess carriers and their insureds in automobile, premises liability, construction, and other civil matters throughout the United States.