Last week, the Supreme Court of Texas concluded that the insured could pursue a claim for the insurer’s alleged breach of its contractual obligation to indemnify for the insured’s monetary contribution to third-party settlement, where the insurer opted to settle the third-party claim by paying an amount less than policy limits and required the insured to contribute to the settlement in order to obtain a release.  In In Re Farmers Texas. Cnty. Mutual Ins. Co.., No. 19-0701, 2021 WL 1583878 (Tex., April 23, 2021, mem. op.), Farmers’ insured was involved in an automobile accident and was subsequently sued by the other motorists, who sought damages of $1 million, which was more than the insured’s $500,000 policy limit.  After the mediator proposed that the case settle for $350,000, the plaintiff accepted the proposal, but Farmers made a counteroffer of $250,000 and refused to contribute more. The insured, concerned about her potential liability for damages above her policy limits, paid the additional $100,000, without waiving her right to seek recovery of that payment from Farmers.

The insured then filed suit against Farmer’s seeking reimbursement, alleging claims of negligent failure to settle and breach of contract. The insured claimed that Farmers demanded that she contribute personal funds to settle a potential claim of gross negligence that had not been raised.  She further claimed that the insurance policy provided that Farmers “will pay damages . . . for which any covered person becomes ‘legally responsible’ because of an auto accident.”  In response, Farmers filed a Rule 91a motion to dismiss (no basis in law or fact), asserting that it had no contractual duty to pay damages because the insured had not been held “legally responsible” for any damages.

The issue before the Supreme Court of Texas was “whether an insured who contributes to a within-limits settlement in response to a solicitation or demand by her insurer can bring a claim for reimbursement under Stowers or the insurance policy.”  The court declined to extend the Stowers doctrine to cases in which there is no liability in excess of policy limits.  However, the court concluded that the Stowers doctrine does not preclude a claim against the insurer for breach of contract when the insured alleges that she suffered damages within policy limits. The court reasoned that “a judgment against an insured is not the only manner by which an insured can become legally obligated to pay a claim; a legal obligation can also arise out of a contract, such as a settlement.”  To that end, the release agreement between the plaintiff and insured provided that the claims against the insured would be released for consideration of $350,000: $250,000 to be paid by Farmers and $100,000 to be paid by the insured. Thus, the court concluded that the “settlement establishe[d] that [the insured] was ‘legally responsible’ for damages because of the auto accident.” In the end, the insured could assert a claim against Farmers for breaching its promise to pay the damages for which the settlement made her legally responsible.

Notably, the court stated that its conclusion that the insured alleged facts sufficient to survive Farmers’ Rule 91a motion to dismiss did not mean the insured would succeed in proving Farmers was liable for breach of the policy, as evidence could establish that Farmers' reasons for non-payment implicated other policy provisions or legal doctrines that would prevent liability for breach of contract.  Additionally, the court stated that “we do not hold that insureds who settle third-party claims unilaterally—without the consent or participation of their insurers—are entitled to reimbursement under their policies.” To further clarify its ruling, the court stated: “Farmers structured a within-limits settlement but did not pay it fully, giving rise to a claim whether its consent to settle contingent on the insured's payment breached its duty to indemnify her.” 

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