Insurers Held Responsible Under Doctrine of Negligent Failure to Settle.

American Guarantee and Liability Insurance Co v ACE American Insurance Co – United States Court of Appeals for the Fifth Circuit – Filed December 21, 2020 –

No. 19-20779

London 8th February 2021

This case involved a dispute between Primary and Excess Liability underwriters over the Primary layer underwriter’s handling of the policyholder’s alleged liability.

Whilst the claim related to a personal injury case involving a fatal motor accident, the dispute may be of interest to oil & gas policyholders whose Liability insurance programmes are often layered.

In the case under consideration, ACE underwrote the Primary policy up to US$ 2 million with Excess coverage being provided by American Guarantee and Liability Insurance Co (AGLIC) up to US$ 10 million excess of ACE’s US$ 2 million.

Under Texas law there is a duty upon an insurer “to exercise ordinary care in the settlement of claims to protect its insureds against judgments in excess of policy limits.” The duty originates from the case of G.A. Stowers Furniture Co v Am. Indem. Co. (15 S.W. 2d 544 (Tex. Comm’n App. 1929)).

The Stowers duty upon an insurer is not activated unless the following criteria are met.

• The claim against the Insured is within the scope of coverage.

• There is a demand within the policy limits.

• - 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.

Furthermore, the Stowers duty applies only when “the settlement’s terms [are] clear and undisputed” and the offer “must also be unconditional” and cannot “carry risks of further liability.”

In the personal injury case being considered, the counsel for the survivors of the deceased made three settlement demands, the first for US$ 2 million, the second for US$ 1.9 to US$ 2 million with costs and finally a third attempt to settle at US$ 2 million. None of the demands were accepted by ACE in their capacity as Primary Liability insurer.

The failure to arrive at a settlement with the survivors of the deceased led to a jury returning a verdict of nearly US$ 40 million in favour of the survivors. Allowing for comparative negligence on the part of the deceased, the trial court rendered an adjusted judgment against the policyholder of nearly US$ 28 million. The parties eventually settled for nearly US$ 10 million thus avoiding appellate litigation.

ACE paid its policy limit of US$ 2 million and AGLIC settled the excess amount of nearly US$ 8 million. AGLIC then sued ACE in federal court on the basis that ACE had violated its Stowers duty to its policyholder by rejecting the survivors’ offers to settle. The policyholder thus being held liable for a higher amount which triggered AGLIC’s policy. Hence AGLIC’s action against ACE based upon ACE’s failure to protect the Insured against a judgment in excess of the policy limit.

In the dispute between AGLIC and ACE, the District Court held that the survivors’ three demands were “unconditional, within policy limits, and presented an offer for a full release,” and triggered the Stowers duty of settlement imposed upon ACE. The District Court finding in favour of AGLIC. The Court of Appeals deemed that the survivors’ second settlement offer lacked clarity surrounding the reference to “costs”. However, the Court of Appeals did deem the survivors’ third settlement offer to trigger a Stowers duty on the part of ACE.

Accordingly, the Court of Appeals affirmed the District Court’s judgment against Primary insurer ACE and in favour of Excess insurer AGLIC.

About Trident Oil & Gas Claims Consultants Limited: Trident specialise in providing insurance coverage advice to policyholders from within the oil & gas industry. In particular, Trident offer advice and representation during the preparation, negotiation and settlement of insurance claims. Trident’s experience encompasses exploration, construction and operational risks. www.tridentclaims.co.uk