The Stowers doctrine in Texas imposes a duty on insurers to settle third party claims against their insured under circumstances that would cause a reasonably prudent uninsured to settle.

Sample Stowers Demand Letter

The theory behind the rule is that it is necessary in order to prevent insurers from “rolling the dice” with the insured’s money.  An example helps explain this concept.  Consider a situation where an insured with $30,000 limits runs a stop sign and causes the death of an innocent child. Under any reasonable evaluation, the insured faces liability exposure greatly in excess the policy limits.  But if the insurance company faces no exposure in excess of the $30,0000 limit, what incentive does it have to tender the entire amount in settlement? An unscrupulous insurer might offer only $29,000 or less in settlement (a tactic known as “shaving”) in an attempt to save money.  The problem with this practice (besides the questionable ethics) is that the insurance company is attempting to save itself $1,000 by risking the financial ruin that would be caused the insured by a large excess judgment.

To prevent situations like the foregoing, the Stowers doctrine imposes the entire amount of any excess judgment on the insurer if the insurer fails to accept a reasonable settlement offer that is within policy limits.

Certain formal elements must be met before the doctrine is triggered.  First, the doctrine imposes no duty on an insurer to make unilateral efforts to settle a case, no matter how serious the exposure.  The insurer need only respond to settlement offers that it receives from the third party.  In order to qualify, the offer must be an unequivocal offer to release the insured from all liability for an amount that is with the limits of the policy that are then available.  The insurer must also be given a reasonable time to respond.

What is a Stowers Demand Letter?

Competent plaintiff’s counsel are adept at drafting demands intended to trigger the Stowers doctrine and thereby put pressure on the insurer to settle.  A demand sent for this purpose is referred to as a “Stowers letter” or “Stowers demand”.  Sometimes the process is described as a verb, as in “You have been Stowerized.”

The duty to settle under Stowers is not absolute.  The insurer need not settle if a reasonable uninsured would not do so.  As a practical matter, however, any jury that considers the issue will be doing so in the context of an excess judgment that has already occurred.  With the benefit of 20-20 hindsight, competent counsel can usually mount a convincing argument that the result was virtually inevitable, or at least predictable.  Although it may have happened, I am not aware of any case in which an insurer successfully defended a Stowers case based on the argument that it would have been unreasonable for it to settle.

Origin of the Stowers Doctrine

The Stowers Doctrine derives its name from the old case of G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex. Com. App 1929). A Stowers employee left his disabled delivery truck in the middle of the street at night. Another vehicle collided with the disabled truck and seriously injured one of the occupants, who sued for $20,000. Stowers had limits with American Indemnity of $5,000.  The case was tried and lost and Stowers ended up with a judgment against it of just over $14,000.  As it turns out, the insurer had an opportunity to settle the case for $4,000 but refused to do so. The court ruled that the insurer, which retained exclusive control over the defense of the case, owed its insured a duty of reasonable care in negotiating settlement of the case.

Evidence in the case pointed to the necessity of the new rule.  There was testimony that it was the standard practice of the insurer never to offer more than one-half of its policy limits in settlement of any case, regardless of the facts and circumstances.

Stowers was represented by Houston attorney Rufus Fulbright. The record is unclear as to whether his young associate Leon Jaworski participated in the case.

Drafting an Effective Stowers Demand

In the absence of such a demand, no extra-contractual liability can be imposed on the insurer.

My experience in this arena arises from having evaluated hundreds of such demand letters on behalf of insurance companies over the years and having defended numerous Stowers cases.

Although there is nothing particularly complex about the elements of an effective Stowers demand, it seems like there is at least one published decision every year in which someone gets it wrong.

Let’s start with what is not required and not recommended (at least by me).  There is no requirement to cite the Stowers case and/or recite the insurer’s duty to its insured at great length.  If per chance you draw one of the few insurance adjusters who has not heard of his employer’s duty under Stowers, why would you want to educate him?  Wait until he blows the deadline, then you can explain it.

Most of the time you’re just wasting space with a canned Stowers lecture.  It can take away from the effectiveness of your letter because it looks like (and usually is) form-letter boilerplate. If you are going to do it, get it right: there is no apostrophe, as in Stower’s.  It is not named after a demand formulated by a Mr. Stower.  It is a demand based on the Stowers doctrine.

Although there are more elements to the Stowers doctrine (e.g., that the claim be covered and that a reasonable insurer would accept it) there are only three required elements for a Stowers demand: (1) that the demand be within available policy limits; (2) that it offer a complete release of liability for the insured; and (3) that the insurer be given a reasonable amount of time to respond.

With regard to the first element, the available limits that count are those of the insurer to which you are making the demand.  A demand that is within the combined limits of a primary and excess carrier will not automatically trigger a duty to settle on the part of  either insurer, nor can you do anything as plaintiff’s counsel to force this issue. Once the primary insurer has tendered its limits to the excess carrier, you can make an effective Stowers demand on the excess carrier. The difficulty here is that you are unlikely to be informed of this event.

The next issue with regard to making a demand within limits is that you need to know  the limits.  If you demand the stated policy limit, you may overshoot because that limit may have been reduced by the payment of claims.  For example, payment of a property damage claim arising out of an auto accident will mean that the stated liability limit is no longer available.  You can make an effective Stowers demand simply by offering to settle “for all available limits”, but this can be risky.  What if the limits have been drastically reduced to almost nothing? If the defendant has assets beyond the policy, my recommendation is to demand a set amount (the lowest amount you are willing to take) or policy limits, whichever is greater.  If the available limits are below your floor, your Stowers demand will not be effective but you will not have given your case away.

 Multiple Claimants Rule

With regard to the second element, the complete release of liability that must be offered relates only to your client and claims arising through him, such as hospital liens.  If there are multiple claimants arising out of a single accident, its not your problem that your demand will exhaust limits and leave the insured unprotected for the other claims.  If your demand is objectively reasonable without regard  to other claims, the insurer has a duty to accept it.  Many adjusters don’t seem to realize this because it seems counterintuitive.  For this reason, a multiple claimant accident can often offer fertile ground for developing a good Stowers case.

Hospital liens always seem to cause the most problems in this area.  Always make the express representation that your demand includes a  release of all such liens, known or unknown, valid or invalid.

The last element usually causes the least problems.  There is an old case that holds that a two-week time limit was reasonable under the facts and this seems to be the standard.  But this is only likely to be rock solid in cases in which the insurer has already had time to investigate the claim.  If your Stowers demand is also the insurer’s first notice of the claim, you should give them a longer time period. Remember that the ultimate purpose of the letter is to make your demand look reasonable and the insurer look unreasonable.  It is counter-productive to this goal to draft a letter that looks like you are trying to trap the insurer in a “gotcha” that requires them to make a snap decision.

Finally, a written demand is not actually required under the doctrine but due to the need to prove that certain elements have been met, only a fool would intentionally make it a practice to rely on oral demands.  Sometimes this can’t be helped, such as where offers are being swapped back and forth in a mediation.  But in this situation, proving you made the demand can be difficult since the parties are bound by confidentiality.  My recommendation is that if your case does not settle at mediation and you want to make sure you have a valid Stowers demand, write a new demand letter after the mediation.  Since the case has been fully vetted at mediation, a very short response deadline should be found to be reasonable.


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